-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VTlf70sAW8O81vy7VtnCiMFKM7dbhwPIMggEQsb6rGFeCT0t354nrNKHSY6LvEF2 T7pRnRSByaiU69/SI/y+4w== 0000950123-03-006387.txt : 20030521 0000950123-03-006387.hdr.sgml : 20030521 20030521161507 ACCESSION NUMBER: 0000950123-03-006387 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030430 FILED AS OF DATE: 20030521 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUNO INC CENTRAL INDEX KEY: 0001019779 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT, NEC [3569] IRS NUMBER: 061159240 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21109 FILM NUMBER: 03714702 BUSINESS ADDRESS: STREET 1: 400 RESEARCH PARKWAY CITY: MERIDEN STATE: CT ZIP: 06450 BUSINESS PHONE: 2032375541 MAIL ADDRESS: STREET 1: 400 RESEARCH PARKWAY CITY: MERIDEN STATE: CT ZIP: 06450 10-Q 1 y86935e10vq.txt CUNO INCORPORATED UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2003 Commission file number 000-21109 CUNO INCORPORATED - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-1159240 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 400 Research Parkway, Meriden, Connecticut 06450 - ------------------------------------------ ------------------------------------ (Address of principal executive offices) (Zip Code) (203) 237-5541 - -------------------------------------------------------------------------------- Registrant's telephone number, including area code Not Applicable - -------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __________ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $0.001 Par Value -- 16,690,059 shares as of April 30, 2003 CUNO INCORPORATED
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Consolidated Statements of Income - Three months ended April 30, 2003 and 2002 1 Consolidated Statements of Income - Six months ended April 30, 2003 and 2002 2 Consolidated Balance Sheets - April 30, 2003 and October 31, 2002 3 Consolidated Statements of Cash Flows - Six months ended April 30, 2003 and 2002 4 Notes to Unaudited Condensed Consolidated Financial Statements 5-10 Independent Accountants' Review Report 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-21 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION Item 4. Submission of Matters to a vote of Security Holders 23 Item 6. Exhibits and Reports on Form 8-K 23-30
CUNO INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except share amounts)
THREE MONTHS ENDED APRIL 30, 2003 2002 ------------ ------------ Net sales $ 69,305 $ 63,116 Less costs and expenses: Cost of products sold 38,027 34,925 Selling, general and administrative 18,238 16,150 Research, development and engineering 3,372 3,696 ------------ ------------ 59,637 54,771 ------------ ------------ Operating income 9,668 8,345 Nonoperating income (expense): Interest expense (134) (111) Interest and other income, net 90 27 ------------ ------------ (44) (84) ------------ ------------ Income before income taxes 9,624 8,261 Income taxes 3,320 2,847 ------------ ------------ Net income $ 6,304 $ 5,414 ============ ============ Basic earnings per common share $ 0.38 $ 0.33 Diluted earnings per common share $ 0.37 $ 0.32 Basic shares outstanding 16,638,881 16,480,817 Diluted shares outstanding 17,014,779 16,962,435
See accompanying notes. -1- CUNO INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except share amounts)
SIX MONTHS ENDED APRIL 30, 2003 2002 ------------ ------------ Net sales $ 135,742 $ 121,753 Less costs and expenses: Cost of products sold 74,710 67,392 Selling, general and administrative expenses 36,027 32,038 Research, development and engineering 7,042 7,121 ------------ ------------ 117,779 106,551 ------------ ------------ Operating income 17,963 15,202 Nonoperating income (expense): Interest expense (281) (241) Interest and other income, net 181 198 ------------ ------------ (100) (43) ------------ ------------ Income before income taxes 17,863 15,159 Provision for income taxes 6,171 5,226 ------------ ------------ Net income $ 11,692 $ 9,933 ============ ============ Basic earnings per common share $ 0.70 $ 0.61 Diluted earnings per common share $ 0.69 $ 0.59 Basic shares outstanding 16,601,152 16,415,606 Diluted shares outstanding 16,956,848 16,852,399
See accompanying notes. -2- CUNO INCORPORATED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share amounts)
APRIL 30, OCTOBER 31, 2003 2002 --------- ----------- ASSETS Current assets Cash and cash equivalents $ 37,662 $ 40,872 Accounts receivable, less allowances for doubtful accounts of $1,416 and $1,406, respectively 55,880 50,862 Inventories, net 29,475 26,173 Deferred income taxes 8,051 7,998 Prepaid expenses and other current assets 5,595 4,233 --------- --------- Total current assets 136,663 130,138 Noncurrent assets Deferred income taxes 1,528 1,482 Intangible assets, net 30,233 28,758 Prepaid pension costs 2,478 - Other noncurrent assets 1,133 1,742 Property, plant and equipment, net 79,156 74,759 --------- --------- Total assets $ 251,191 $ 236,879 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt $ 663 $ 714 Bank loans 11,478 16,374 Accounts payable 19,178 16,256 Accrued payroll and related taxes 11,928 13,633 Other accrued expenses 11,020 10,093 Accrued income taxes 3,195 497 --------- --------- Total current liabilities 57,462 57,567 Noncurrent liabilities Long-term debt, less current portion 216 2,030 Deferred income taxes 5,702 5,924 Retirement benefits 5,568 8,945 --------- --------- Total noncurrent liabilities 11,486 16,899 STOCKHOLDERS' EQUITY Preferred Stock, $.001 par value; 2,000,000 shares authorized, no shares issued - - Common Stock, $.001 par value; 50,000,000 shares authorized, 16,690,059 and 16,566,625 shares issued and outstanding 17 17 Treasury Stock, at cost (2,747 shares) (57) (57) Additional paid-in-capital 48,915 46,375 Unearned compensation (616) (551) Accumulated other comprehensive loss -- Foreign currency translation adjustments 207 (5,533) Minimum pension liability (5,153) (5,153) Change in fair value of derivative financial instruments (85) (8) --------- --------- (5,031) (10,694) Retained earnings 139,015 127,323 --------- --------- Total stockholders' equity 182,243 162,413 --------- --------- Total liabilities and stockholders' equity $ 251,191 $ 236,879 ========= =========
See accompanying notes. -3- CUNO INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
SIX MONTHS ENDED APRIL 30, 2003 2002 -------- -------- OPERATING ACTIVITIES Net income $ 11,692 $ 9,933 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,802 3,913 Noncash compensation recognized under employee stock plans 271 402 Gains on sales of property, plant and equipment (7) (15) Pension funding in excess of expense (5,979) (4,373) Deferred income taxes (148) 1,403 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (2,819) (2,732) Inventories (1,308) 5 Prepaid expenses and other current assets (1,062) (655) Accounts payable and accrued expenses 1,593 1,716 Accrued income taxes 2,623 (1,328) -------- -------- Net cash provided by operating activities 9,658 8,269 INVESTING ACTIVITIES Proceeds from sales of property, plant and equipment 19 74 Acquisition of companies, net of cash acquired (149) (503) Capital expenditures (7,095) (7,645) -------- -------- Net cash used for investing activities (7,225) (8,074) FINANCING ACTIVITIES Principal payments on long-term debt (2,069) (921) Net repayments under short-term bank loans (5,295) (1,242) Proceeds from stock options exercised 762 1,184 -------- -------- Net cash used for financing activities (6,602) (979) Effect of exchange rate changes on cash and cash equivalents 959 196 -------- -------- Net change in cash and cash equivalents (3,210) (588) Cash and cash equivalents -- beginning of period 40,872 25,628 -------- -------- Cash and cash equivalents -- end of period $ 37,662 $ 25,040 ======== ========
See accompanying notes -4- CUNO INCORPORATED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2003 NOTE 1 - BUSINESS AND BASIS OF PRESENTATION CUNO Incorporated (the "Company", "CUNO", or "we") designs, manufactures and markets a comprehensive line of filtration products for the separation, clarification and purification of liquids and gases. Our products, which include proprietary depth filters and semi-permeable membrane filters, are sold in the potable water, healthcare and fluid processing markets throughout the world. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the interim periods set forth herein have been included. The accounts of the Company and all of its subsidiaries are included in the consolidated financial statements. All significant intercompany accounts and transactions are eliminated in consolidation. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in our Form 10-K for the year ended October 31, 2002. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Actual results could differ from those estimates. NOTE 2 - INVENTORIES Inventories consist of the following (amounts in thousands):
APRIL 30, OCTOBER 31, 2003 2002 -------- ---------- Raw materials $ 13,610 $ 11,701 Work-in-process 3,705 3,112 Finished goods 12,160 11,360 -------- -------- $ 29,475 $ 26,173 ======== ========
Inventories are stated at the lower of cost or market. Inventories in the United States are valued primarily by the last-in, first-out (LIFO) cost method. The primary method used for all other inventories is first-in, first-out (FIFO). An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Because these are subject to many factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. 5 NOTE 3 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per common share for the three months ended:
APRIL 30, APRIL 30, 2003 2002 ----------- ----------- NUMERATOR: Net income $ 6,304,000 $ 5,414,000 =========== =========== DENOMINATORS: Weighted average shares outstanding 16,660,341 16,520,621 Issued but unearned restricted shares (21,460) (39,804) ----------- ----------- DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,638,881 16,480,817 =========== =========== Weighted average shares outstanding 16,660,341 16,520,621 Effect of dilutive employee stock options 354,438 441,814 ----------- ----------- DENOMINATOR FOR DILUTED EARNINGS PER SHARE 17,014,779 16,962,435 =========== =========== Basic earnings per share $ 0.38 $ 0.33 Diluted earnings per share $ 0.37 $ 0.32
The following table sets forth the computation of basic and diluted earnings per common share for the six months ended:
APRIL 30, APRIL 30, 2003 2002 ----------- ----------- NUMERATOR: Net income $11,692,000 $ 9,933,000 =========== =========== DENOMINATORS: Weighted average shares outstanding 16,624,447 16,457,231 Issued but unearned restricted shares (23,295) (41,625) ----------- ----------- DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,601,152 16,415,606 =========== =========== Weighted average shares outstanding 16,624,447 16,457,231 Effect of dilutive employee stock options 332,401 395,168 ----------- ----------- DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,956,848 16,852,399 =========== =========== Basic earnings per share $ 0.70 $ 0.61 Diluted earnings per share $ 0.69 $ 0.59
During the first six months of 2003, 68,699 stock options were exercised (net of shares used to pay individual taxes) providing $762,000 in net cash proceeds to the Company. During the first six months of 2002, 106,923 stock options were exercised (net of shares used to pay individual taxes) providing $1,184,000 in net cash proceeds to the Company. In addition, 29,811 shares were used to provide employer matching contributions to our 401(k) plan in 2003. These shares had a fair market value of approximately $1.0 million which is included in Additional paid-in-capital. 6 NOTE 4 - COMPREHENSIVE INCOME Total comprehensive income was comprised of the following (amounts in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net income $6,304 $5,414 $11,692 $ 9,933 Other comprehensive income (loss): Change in minimum pension liability, net of deferred income taxes of $195 -- -- -- 362 Change in fair value of derivative financial instruments, net of deferred income taxes of $18, $8, $103 and $44 (25) (15) (156) 82 Losses (gains) related to derivative financial instruments reclassified into earnings from other comprehensive income, net of deferred income taxes of $13, $7, $58 and $25 17 (12) 79 (45) Foreign currency translation adjustments 3,521 1,131 5,740 152 ------ ------ ------- ------- Total comprehensive income $9,817 $6,518 $17,355 $10,484 ====== ====== ======= =======
The overall weakness in the US dollar, compared to the currencies in which we conduct a large part of our business in, produced the foreign currency translation adjustment amounts above. NOTE 5 - SEGMENT DATA For management reporting and control, the Company is divided into five geographic operating segments as presented below. Each segment has general operating autonomy over its markets. The management for each of our segments operate independent sales and manufacturing organizations that function within an overall corporate framework of strategic initiatives and performance targets. Operating segment data includes the results of all subsidiaries, consistent with the management reporting of these operations. Financial information by geographic operating segments is summarized below (amounts in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2003 2002 2003 2002 ---- ---- ---- ---- NET SALES: Europe $15,627 $12,106 $ 28,713 $ 22,937 Japan 8,659 7,616 16,745 14,538 Asia/Pacific 8,904 6,919 17,662 13,162 Latin America 2,833 3,091 5,197 6,355 ------- ------- -------- -------- Subtotal - Foreign sales 36,023 29,732 68,317 56,992 North America 43,973 42,473 86,875 81,580 Intercompany sales (10,691) (9,089) (19,450) (16,819) ------- ------- -------- -------- $69,305 $63,116 $135,742 $121,753 ======= ======= ======== ========
7
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2003 2002 2003 2002 ---- ---- ---- ---- OPERATING INCOME: North America $6,098 $5,526 $11,329 $ 9,923 Europe 1,414 774 2,210 1,301 Japan 745 646 1,487 1,052 Asia/Pacific 1,148 912 2,340 1,818 Latin America 263 487 597 1,108 ------ ------ ------- ------- Segment total 9,668 8,345 17,963 15,202 ------ ------ ------- ------- Interest expense (134) (111) (281) (241) Other, net 90 27 181 198 ------ ------ ------- ------- Income before income taxes $9,624 $8,261 $17,863 $15,159 ====== ====== ======= =======
Interest expense and other income (expense) have not been allocated to segments. NOTE 6 - INTEREST AND OTHER INCOME (EXPENSE), NET Interest and other income (expense), net consisted of the following (amounts in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2003 2002 2003 2002 ---- ---- ---- ---- Interest income $ 133 $ 133 $ 274 $ 331 Exchange losses (39) (88) (77) (41) Gains on sales of property, plant, and equipment 4 10 7 15 Other, net (8) (28) (23) (107) ------ ------ ------- ------- $ 90 $ 27 $ 181 $ 198 ====== ====== ======= =======
NOTE 7 - NEWLY ISSUED ACCOUNTING STANDARDS In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses issues regarding the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities. This statement requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is effective for all exit or disposal activities initiated after December 31, 2002. We will assess the impact of this Statement when or if an exit plan for an activity exists. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" (FAS 148). This statement amends SFAS No. 123 "Accounting for Stock Based Compensation" (FAS 123) to provide alternative methods of voluntarily transitioning to the fair value based method of accounting for stock-based employee compensation. FAS 148 also amends the disclosure requirements of FAS 123 to require disclosure of the method used to account for stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. We adopted the disclosure provisions of this Statement beginning with the quarter ended April 30, 2003. The annual impact of 8 a change to a fair value model has been previously disclosed in the Company's Annual Report on Form 10-K. We are currently studying this new accounting standard. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (the Interpretation). The Interpretation requires companies to recognize, at inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee and also requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. The Interpretation provides specific guidance identifying the characteristics of contracts that are subject to its guidance in its entirety from those only subject to the initial recognition and measurement provisions. The recognition and measurement provisions of the Interpretation are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements of the Interpretation are effective for interim and annual period financial statements ending after December 15, 2002. There are no additional disclosures related to the adoption of this standard and we will apply the Interpretation prospectively if guarantees are entered into in the future. NOTE 8 - CONTINGENCIES The Company is subject to various legal actions, governmental audits, and proceedings relating to various matters incidental to its business including product liability and environmental claims. While the outcome of such matters cannot be predicted with certainty, in the opinion of management, after reviewing such matters and consulting with our counsel and considering any applicable insurance or indemnifications, any liability which may ultimately be incurred is not expected to materially affect the consolidated financial position, cash flows or results of operations of the Company. NOTE 9 - STOCK OPTIONS AND AWARDS We currently account for our stock option awards under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. No option-based employee compensation cost is reflected in net income, as all options granted under our plans had exercise prices equal to the market value of the underlying common stock on the date of grant. Restricted share grants awarded to employees are included in earnings as an expense over the vesting period of the award. 9 The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net income, as reported $6,304 $5,414 $11,692 $9,933 Add: Stock-based compensation expense included in reported net income, net of income taxes 83 131 176 261 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of income taxes 528 528 1,080 1,039 ------ ------ ------- ------- Pro forma net income $5,859 $5,017 $10,788 $9,155 ====== ====== ======= ====== Earnings per share: Basic - as reported $ 0.38 $ 0.33 $ 0.70 $ 0.61 Basic - pro forma $ 0.35 $ 0.30 $ 0.65 $ 0.56 Diluted - as reported $ 0.37 $ 0.32 $ 0.69 $ 0.59 Diluted - pro forma $ 0.34 $ 0.30 $ 0.64 $ 0.54
NOTE 10 - BENEFIT PLANS The pension assumptions used to determine our October 31, 2002 plan liabilities and the fiscal 2003 pension expense were as follows:
US PLANS JAPAN PLANS -------- ----------- Weighted-average discount rate 7.00% 2.50% Rates of increases in compensation levels 4.00% 2.25% Expected long-term rate of return on assets 9.25% 4.75%
We determine our assumptions based on current economic and market data, as well as expectations of future economic and market data. Included in our analysis are company-specific considerations, such as current and future investment allocations, participant demographics, and employee compensation strategies. Pension expense for fiscal 2003 is determined at the beginning of the fiscal year and expensed ratably throughout the year. The total pension expense to be recognized in 2003 will amount to approximately $1.7 million ($1.6 million in fiscal 2002). We made an incremental cash contribution of $6.0 million in the first quarter of fiscal 2003 and generally make normal cash contributions to the Plans in an amount equivalent to the annual expense. 10 INDEPENDENT ACCOUNTANTS' REVIEW REPORT Stockholders and Board of Directors CUNO Incorporated We have reviewed the accompanying condensed consolidated balance sheet of CUNO Incorporated as of April 30, 2003, and the related condensed consolidated statements of income for the three-month and six-month periods ended April 30, 2003 and 2002 and the condensed consolidated statements of cash flows for the six-month periods ended April 30, 2003 and 2002. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of CUNO Incorporated as of October 31, 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herewith) and in our report dated December 5, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of October 31, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Ernst & Young LLP Hartford, Connecticut May 20, 2003 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis of financial condition and results of operations ("MD&A") is provided as a supplement to the accompanying unaudited interim condensed consolidated financial statements and footnotes to help provide an understanding of our financial position, changes in our financial position and results of our operations. Our MD&A is organized as follows: - COMPANY OVERVIEW. This section provides a general description of our business. - COMPANY RISK FACTORS. This section describes the material risks inherent in our business that investors should be aware of. - CAUTION CONCERNING FORWARD-LOOKING STATEMENTS. This section discusses how certain forward-looking statements made by us throughout the MD&A and elsewhere in this report are based on management's present expectations about future events and are inherently susceptible to uncertainty and changes in circumstances. - CRITICAL ACCOUNTING POLICIES. This section discusses those accounting policies that are both considered important to our financial statements and require significant judgment and estimates on the part of management in their application. - RESULTS OF OPERATIONS. This section provides an analysis of our results of operations for the three and six months ended April 30, 2003 and 2002. In addition, a brief description is provided of transactions and events that impact the comparability of these results. - FINANCIAL POSITION AND LIQUIDITY. This section provides an analysis of our cash position and cash flows, as well as a discussion of our financing arrangements. Other information is presented in Items 3, 4 and elsewhere as follows: - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. This section discusses information about the various market risks we are exposed to as of the end of the latest fiscal period presented. - CONTROLS AND PROCEDURES. This section discusses the conclusions of our executive officer and principal financial officer about the effectiveness of our disclosure controls and procedures. - OTHER INFORMATION. This section describes material developments in the business or markets in which we compete, as well as any other information important to our stakeholders. COMPANY OVERVIEW CUNO is a world leader in the designing, manufacturing and marketing of a comprehensive line of filtration products for the separation, clarification and purification of liquids and gases. Our products, which include proprietary depth filters and semi-permeable membrane filters, are used in the potable water, fluid processing, and healthcare markets. These products, most of which are disposable, effectively remove contaminants that range in size from molecules to sand particles. Our sales are balanced between domestic (approximately 55%) and international markets (approximately 45%). Our objective is to provide high value-added products and premium customer service. Our proprietary manufacturing processes result in products that lower customers' operating expenses and improve the quality of customers' end products by providing longer lasting, higher quality and more efficient filtration products. 12 COMPANY RISK FACTORS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS Approximately 45% of our net sales are derived from international operations. Consequently, our reported financial results may be adversely affected by significant fluctuations in the value of the US dollar in comparison to local currencies in the countries in which we operate outside the US. We manufacture products in Japan, China, Brazil, France, Singapore and Australia. Our international operations may be affected by economic, political and governmental conditions in some of the countries where we have manufacturing facilities or where our products are sold. In addition, changes in economic or political conditions in any of the countries in which we operate could result in unfavorable taxation policies, exchange rates, new or additional currency or exchange controls, governmental regulations, credit risks, or other restrictions being imposed on the operations of the Company or expropriation. PATENTS AND PROPRIETARY TECHNIQUES We have a broad patent portfolio as well as other proprietary information and manufacturing techniques and have applied, and will continue to apply, for patents to protect our technology. The Company's success depends in part upon our ability to protect our technology and proprietary products under US and foreign patent and other intellectual property laws. Trade secrets and confidential know-how which are not patented are protected through confidentiality agreements, contractual provisions and internal Company administrative procedures. There can be no assurance that such arrangements will provide meaningful protection for the Company in the event of any unauthorized use or disclosure. There can be no assurance that third parties will not assert infringement claims against the Company or that a license or similar agreement will be available on reasonable terms in the event of an unfavorable ruling on any such claim. In addition, any such claim may require the Company to incur litigation expenses or subject the Company to liabilities. TECHNOLOGICAL AND REGULATORY CHANGE The filtration and separations industry is characterized by changing technology, competitively imposed process standards and regulatory requirements, each of which influences the demand for our products and services. Changes in legislative, regulatory or industrial requirements or competitive technologies may render certain of our filtration and separations products and processes obsolete. Acceptance of new products may also be affected by the adoption of new government regulations requiring stricter standards. The Company's ability to anticipate changes in technology and regulatory standards and to develop and introduce new and enhanced products successfully on a timely basis are significant factors in our ability to grow and to remain competitive. Similar to all companies, we are also subject to the risks generally associated with new product introductions and applications, including lack of market acceptance, delays in product development and failure of products to operate properly. COMPETITION The filtration and separations markets in which we compete are highly competitive. We compete with many domestic and international companies in the global markets. The principal methods of competition in the markets in which we compete are product specifications, performance, quality, knowledge, reputation, technology, distribution capabilities, service and price. KEY CUSTOMERS AND SUPPLIERS We have multi-year contracts and arrangements in place with several of our major customers and suppliers. These contracts and arrangements help us effectively plan and manage our operations. Since the markets for our products are dynamic, these contracts and arrangements are continually evolving as we are sensitive to the changing needs of our customers and the ongoing performance of our suppliers. There is no assurance, however, that these contracts and arrangements will be renewed, will not be terminated prematurely or revised to take into consideration the evolving nature of our relationships with our customers and suppliers. 13 CAUTION CONCERNING FORWARD-LOOKING STATEMENTS Because we want to provide shareholders with more meaningful and useful information, this annual report contains statements relating to future events and the predicted performance of CUNO Incorporated (the "Company", "CUNO", or "we") which may constitute forward-looking statements, as defined under the Private Securities Litigation Act. We have tried, wherever possible, to identify these "forward looking" statements by using words such as "anticipate," "believe," "estimate," "expect" and similar expressions. These statements reflect our current beliefs and are based on information currently available to us. Accordingly, these statements are subject to risks and uncertainties which could cause our actual results performance or achievements to differ materially from those expressed in, or implied by, these statements. These risks and uncertainties include the following: economic and political conditions in the foreign countries in which we conduct a substantial part of our operations and other risks associated with international operations including taxation policies, credit risk, exchange rate fluctuations and the risk of expropriation; our ability to protect our technology, proprietary products and manufacturing techniques; volumes of shipments of our products, changes in our product mix and product pricing; continuing beneficial relationships with customers; costs of raw materials; the rate of economic and industry growth in the United States and the other countries in which we conduct our business; changes in technology, changes in legislative, regulatory or industrial requirements and risks generally associated with new product introductions and applications; and domestic and international competition in our global markets. We assume no obligation to publicly release revisions to the forward-looking statements to reflect new events or circumstances. CRITICAL ACCOUNTING POLICIES In December 2001 the U.S. Securities and Exchange Commission ("SEC") issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"), encouraging companies to provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and require management to make its most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Based on this definition, our most critical accounting policies include: accounting for depreciation, amortization, employee benefits, income taxes, contingencies, stock based compensation and asset valuation allowances (including those for bad debts and for deferred income tax assets). We also have other key accounting policies, such as our policy for revenue recognition. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our financial statements. Depreciation and amortization - We depreciate our property, plant and equipment using the straight-line method over the estimated useful life of the asset. These periods range as follows: Land improvements 10 - 20 years Buildings and additions 30 - 40 years Machinery and equipment 5 - 20 years Computers and related equipment 3 - 5 years
We amortize our patents and other amortizable intangible assets over their estimated useful lives. The straight line method of amortization is used unless another method is more appropriate and reliable in reflecting the pattern in which the asset provides economic benefits. These periods generally range from 10 - 25 years. We review the carrying values of intangibles and long-lived assets on an annual basis. In addition, in the event that facts and circumstances indicate that the carrying value of intangibles and long-lived assets or other assets may be impaired at any other time, an evaluation is performed. Our evaluations compare the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount. 14 Employee benefits - We account for our pension plans in accordance with SFAS No. 87, "Employer's Accounting for Pensions". In applying this accounting practice, assumptions are made regarding the valuation of benefit obligations and the performance of plan assets. The primary assumptions are as follows: - Weighted average discount rate - this rate is used to estimate the current value of future benefits. This rate is adjusted based on movements in long-term interest rates. - Expected long-term rate of return on assets - this rate is used to estimate future growth in investments and investment earnings. The expected return is based upon a combination of historical market performance and anticipated future returns for a portfolio reflecting the mix of equity, debt and other investments indicative of our plan assets. - Rates of increase in compensation levels - this rate is used to estimate projected annual pay increases, which are used to determine the wage base used to project employees' pension benefits at retirement. We determine these assumptions based on consultations with our outside actuaries and investment advisors. Any variance in the above assumptions could have a significant impact on future recognized pension costs, assets and obligations. Contingencies, claims, assessments -- From time to time, we are involved with contingencies, claims, and assessments. We use both in-house and outside legal counsel to assess the probability of loss. The Company establishes an accrual when the claims and litigation represent a probable loss and the cost can be reasonably estimated. There can be no assurance that the ultimate resolution of these contingencies, claims, and assessments will not differ materially from our estimates. Allowance for Bad Debts -- We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts, the aging of accounts receivable, our history of bad debts, and the general condition of the industry and geographic locations in which we operate. If a major customer's credit worthiness deteriorates, or our customers' actual defaults exceed our historical experience, our estimates could change and impact our reported results. Income Taxes - We estimate and use our expected annual effective income tax rate to accrue income taxes on an interim basis. We update these estimates quarterly. We record valuation allowances to reduce our deferred income tax assets to an amount that we believe is more likely than not to be realized. We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we were to determine that we will not realize all or part of our deferred income tax assets in the future, we would make an adjustment to the carrying value of the deferred income tax asset, which would be reflected as an income tax expense. Conversely, if we were to determine that we will realize a deferred income tax asset, which currently has a valuation allowance, we would reverse the valuation allowance which would be reflected as an income tax benefit in our financial statements. Stock Based Compensation - We currently account for our stock option awards under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. No stock-based employee compensation cost pertaining to stock options is reflected in net income, as all options granted under our plans had exercise prices equal to the market value of the underlying common stock on the date of grant. Restricted share grants awarded to employees are included in earnings as an expense over the vesting period of the award. 15 Revenue Recognition -- We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 requires that four basic criteria be met before revenue can be recognized: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectibility is reasonably assured. We recognize revenue upon determination that all criteria for revenue recognition have been met, which is considered to have occurred upon shipment of the finished product. RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED APRIL 30, 2003 VS. THREE MONTH PERIOD ENDED APRIL 30, 2002 BUSINESS ENVIRONMENT Our operations are affected by global economic and political factors. However, our geographic and market diversity helps limit the impact of any one market or the economy of any single country on our consolidated results. The uncertainty in the North American economy, including conditions in certain markets in which we compete, impacted our consolidated results and is likely to continue to present challenges to our business near term. NET SALES Net sales were $69.3 million in the second quarter of fiscal 2003 representing a 9.8 percent increase over 2002 second quarter sales of $63.1 million. This increase can generally be attributed to an increase in the unit volume of worldwide sales. Had currency values been unchanged from the second quarter of 2002, net sales in the second quarter of 2003 would have been $2.8 million lower, or 5.3 percent greater overall. The following table displays our sales by geographic segment (dollar amounts in thousands):
THREE MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2003 2002 CHANGE CHANGE ---- ---- ------ ------- North America $36,993 $36,858 0.4% 0.4% Europe 12,935 9,603 34.7% 9.5% Japan 8,587 7,538 13.9% 3.1% Asia/Pacific 8,136 6,189 31.5% 19.4% Latin America 2,654 2,928 (9.4%) 29.3% ------- ------- ---- ---- Total sales $69,305 $63,116 9.8% 5.3% ======= ======= ==== ====
North American sales were relatively flat in the second quarter of 2003 as compared to the same quarter in 2002. An overall sluggish economy and particular weakness in some of the residential markets were factors in these results. European sales increased 9.5 percent in local currency as compared to the same period in 2002. Healthcare sales, particularly in the bio-pharmaceutical market, continued their overall strength. Sales in Japan were up 3.1 percent in local currency primarily reflecting a moderate increase in sales to the fluid processing market. Asia/Pacific sales were up 19.4 percent excluding changes in currency values. The increase in Asia/Pacific sales was due primarily to a broad strength in the Australian markets (particularly wine and potable water) as well as strength in the Asian Potable Water and Healthcare markets. Second quarter 2003 Latin American sales increased 29.3 percent due in part to some large, one-time shipments and strength in the Healthcare market. 16 The following table displays our sales by market (dollar amounts in thousands):
THREE MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2003 2002 CHANGE CHANGE ---- ---- ------ ------- Potable Water $31,314 $29,541 6.0% 4.6% Fluid Processing 18,447 16,499 11.8% 4.9% Healthcare 19,544 17,076 14.5% 6.8% ------- ------- ---- --- Total sales $69,305 $63,116 9.8% 5.3% ======= ======= ==== ===
The weak economies in the US and certain international markets (primarily Japan and Latin America) have impacted all of our markets. The Fluid Processing sales increase of 4.9 percent reflects improved conditions in certain end markets. The increase in the Potable Water market was broad geographically, driven largely by strong overseas sales (up 22.7 percent in local currency). Healthcare sales increased 6.8 percent in local currency and continue to benefit from a continued focus by management on competitively favorable product lines and market niches. GROSS PROFIT Gross profit increased $3.1 million to $31.3 million in the second quarter of 2003 from $28.2 million in the second quarter of 2002. Gross profit as a percentage of net sales (gross margin) increased during that same period from 44.7 percent in 2002 to 45.1 percent in 2003. Although we are under pressure to maintain competitive prices with our customers, we pursue various supply-chain management initiatives designed to lower our production costs. In addition, we have ongoing programs to modernize our manufacturing facilities to gain more efficiencies. OPERATING EXPENSES Selling, general and administrative expenses ("SG&A") were up 12.9 percent in the second quarter of 2003 as compared to the same period in 2002. SG&A expenses were 26.3 percent of sales in the second quarter of fiscal 2003 compared to 25.6 percent of sales in the second quarter of fiscal 2002. Because of CUNO's international operations, the weaker US dollar served to increase the consolidated US dollar-reported SG&A expense. Research, development and engineering expenses ("RD&E"), which are incurred primarily in the US, decreased 8.8 percent from 3.7 million to $3.4 million in the second quarter of 2003. In 2003, we received approximately $0.5 million in RD&E cost reimbursements from various new customers. Adjusting for these one-time items, RD&E would have increased 3.7 percent - this reflects our continued focus on the development of new products and technologies. As a percentage of sales, RD&E expenses were 5.5 percent of sales (adjusted for reimbursements above) in the second quarter of fiscal 2003 compared to 5.9 percent of sales in the second quarter of fiscal 2002. OPERATING INCOME As a result of the above, operating income increased $1.3 million, or 15.9 percent, to $9.7 million or 13.9 percent of sales in the second quarter of fiscal 2003 compared to $8.3 million or 13.2 percent of sales in the second quarter of 2002. NON-OPERATING ACTIVITY Interest expense was relatively flat in the second quarter of 2003 compared to the second quarter of 2002. See "Financial Position and Liquidity" below for further discussion of the Company's cash and debt structure. 17 Interest income was flat due to lower average interest rates in the second quarter of 2003, offset by higher average investment levels. INCOME TAXES The Company's effective income tax rate for both the second quarter of 2003 and the second quarter of 2002 was 34.5 percent. Overall, our tax rate is impacted by the change in the mix of income attributed to the various countries in which we do business. SIX MONTH PERIOD ENDED APRIL 30, 2003 VS. SIX MONTH PERIOD ENDED APRIL 30, 2002 NET SALES Net sales were $135.7 million in the first six months of fiscal 2003 representing an 11.5 percent increase over 2002 sales of $121.8 million. This increase can generally be attributed to an increase in the unit volume of worldwide sales. Had currency values been unchanged from the first six months of 2002, net sales in the first six months of 2003 would have been $4.4 million lower, or 7.9 percent greater overall. The following table displays our sales by geographic segment (dollar amounts in thousands):
SIX MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2003 2002 CHANGE CHANGE ---- ---- ------ ------- North America $ 73,887 $ 71,035 4.0% 4.0% Europe 24,056 18,265 31.7% 9.8% Japan 16,566 14,385 15.2% 6.7% Asia/Pacific 16,367 11,930 37.2% 26.1% Latin America 4,866 6,138 (20.7%) 14.4% -------- -------- ----- ---- Total sales $135,742 $121,753 11.5% 7.9% ======== ======== ===== ====
North American sales increased 4.0 percent in the first six months of 2003 as compared to the same period in 2002. Moderately stronger Potable Water and Fluid Processing market sales were responsible for the growth in North America during this time period. Strong growth in sales to OEM customers, direct marketing companies and appliance manufacturers were offset by weakness in the residential markets. European sales increased 9.8 percent in local currency as compared to the same period in 2002. Healthcare sales were particularly strong during this period reflecting greater demand in the pharmaceutical industry. Sales in Japan were up 6.7 percent in local currency primarily reflecting an increase in sales to the Fluid Processing market. Asia/Pacific sales were up 26.1 percent excluding changes in currency values. The increase in Asia/Pacific sales was due primarily to strong sales to the Australian wine industry as well as strength in the Asian Potable Water and Healthcare markets. Latin American sales increased 14.4 percent due in large part to the timing of certain large shipments. The following table displays our sales by market (dollar amounts in thousands):
SIX MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2003 2002 CHANGE CHANGE ---- ---- ------ ------- Potable Water $ 61,695 $ 56,661 8.9% 7.8% Fluid Processing 36,075 31,648 14.0% 8.1% Healthcare 37,972 33,444 13.5% 7.8% -------- -------- ---- --- Total sales $135,742 $121,753 11.5% 7.9% ======== ======== ==== ===
18 The weak economies in the US and certain international markets (primarily Japan) have impacted all of our markets to some extent. The Fluid Processing sales increase of 14.0 percent reflects improved conditions in certain end markets. The strength in the Potable Water market was broad geographically, driven largely by strong overseas sales (up 21.6 percent in local currency). Healthcare sales increased and continue to benefit from a continued focus by management on competitively favorable product lines and market niches. GROSS PROFIT Gross profit increased $6.7 million to $61.0 million in the first six months of 2003 from $54.4 million in the first six months of 2002. Gross profit as a percentage of net sales (gross margin) increased during that same period from 44.6 percent in 2002 to 45.0 percent in 2003. Although we are under pressure to maintain competitive prices with our customers, we pursue various supply-chain management initiatives designed to lower our production costs. In addition, we have ongoing programs to modernize our manufacturing facilities to gain more efficiencies. OPERATING EXPENSES Selling, general and administrative expenses (SG&A) were up 12.5 percent in the first half of 2003 compared to the same period in 2002. SG&A expenses were 26.5 percent of sales in the first six months of fiscal 2003 compared to 26.3 percent of sales in the first six months of fiscal 2002. Because of CUNO's international operations, the weaker US dollar served to increase the consolidated US dollar-reported SG&A expense. Research, development and engineering expenses ("RD&E"), which are incurred primarily in the US, decreased 1.1 percent from $7.1 million to $7.0 million in the first six months of 2003. In 2003, we received approximately $0.5 million in RD&E cost reimbursements from various new customers. Adjusting for these one-time items, RD&E would have increased 5.4 percent - this reflects our continued focus on the development of new products and technologies. As a percentage of sales, RD&E expenses were 5.5 percent of sales (adjusted for reimbursements above) in the first six months of fiscal 2003 compared to 5.8 percent of sales in the first six months of fiscal 2002. OPERATING INCOME As a result of the above, operating income increased $2.8 million, or 18.2 percent, to $18.0 million or 13.2 percent of sales in the first six months of fiscal 2003 compared to $15.2 million or 12.5 percent of sales in the first six months of 2002. NON-OPERATING ACTIVITY Interest expense was relatively flat in the first six months of 2003 compared to the first six months of 2002. See "Financial Position and Liquidity" below for further discussion of the Company's cash and debt structure. Interest income was down due to lower average interest rates in the first quarter of 2003, partially offset by higher average investment levels. INCOME TAXES The Company's effective income tax rate for the first six months of both 2003 and 2002 was 34.5 percent. Our tax rate is impacted by the change in the mix of income attributed to the various countries in which we do business. 19 FINANCIAL POSITION AND LIQUIDITY We assess liquidity in terms of the Company's ability to generate cash to fund our continuing operating and investing activities. Of particular importance to the management of liquidity are cash flows generated by operating activities, capital expenditure levels, and adequate bank financing alternatives. We manage our worldwide cash requirements considering the cost effectiveness of the funds available from the many subsidiaries through which we conduct our business. We believe that our existing cash and cash equivalents position ($37.7 million at April 30, 2003) and available sources of liquidity (approximately $29.8 million of available, unused worldwide short-term lines of credit) are sufficient to meet current and anticipated requirements for the foreseeable future. We do not rely on commercial paper or off-balance sheet financing arrangements for our liquidity needs nor do we have any investments in special purpose entities (SPEs). We continue to invest in R&D to provide future sources of revenue through the development of new products, as well as through additional uses for existing products. Our efforts are spread across the various markets in which we compete, with particular emphasis on new products and technologies in Healthcare and the improvement in design and function of products within Potable Water. We consider R&D and the development of new products and technologies an integral part of our growth strategy and a core competence of the Company. Likewise, we continue to invest in capital expenditures in order to expand and modernize manufacturing facilities around the globe. We currently have plans to expand manufacturing lines in Brazil, China, and France in order to meet product demands around the globe. In addition, new manufacturing lines and processes are being installed in the US to benefit the Water Group, Fluid Processing, and Healthcare operations. Set forth below is selected cash flow data (in thousands of dollars):
Source/(Use) of Cash SIX MONTHS ENDED APRIL 30, 2003 2002 ---- ---- OPERATING ACTIVITIES: Pension funding in excess of expense $(5,979) $ (4,373) Inventories (1,308) 5 Net cash provided by operating activities 9,658 8,269 INVESTING ACTIVITIES: Capital expenditures (7,095) (7,645) Net cash used for investing activities (7,225) (8,074) FINANCING ACTIVITIES: Net change in total debt (7,364) (2,163) Proceeds from stock options exercised 762 1,184 Net cash used for financing activities (6,602) (979)
The funded status of our pension plans is dependent upon many factors, including returns on invested assets and the level of market interest rates. Recent declines in the value of securities traded in equity markets coupled with declines in long-term interest rates have had a negative impact on the funded status of our plans. We made an incremental $6.0 million contribution to our US pension plans in the first quarter of 2003 and an incremental $4.0 million contribution to our US pension plans in the first quarter of 2002 to bolster the funding and earnings capabilities of the plans. The increase of cash of $1.3 million in inventories is primarily in response to the overall increase in sales volumes around the world. 20 Capital expenditures in 2003 primarily relate to the continued focus on expanding and modernizing manufacturing facilities around the globe. More specifically, these expenditures primarily relate to new manufacturing lines in Brazil and the US. The new manufacturing lines and processes being installed in the US will benefit the Water Group, Fluid Processing, and Healthcare operations. During the first six months of 2003, we made certain scheduled payments on long-term debt, as well as prepaid approximately $1.4 million in long term debt. In addition, certain other short term debt instruments were paid down. During the first six months of 2003, 68,699 stock options were exercised (net of shares used to pay individual taxes) providing $0.8 million in net cash proceeds to the Company. During the first six months of 2002, 106,923 stock options were exercised (net of shares used to pay individual taxes) providing $1.2 million in net cash proceeds to the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The overall objective of our financial risk management program is to seek a reduction in the potential negative earnings effects from changes in foreign exchange and interest rates arising from business activities. We manage these financial exposures through operational means and by utilizing available financial instruments. Practices may change as economic conditions change. Foreign Currency Risk Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. We utilize forward foreign exchange contracts to hedge specific exposures relating to intercompany payments, certain firm sales commitments and anticipated, but not yet committed, intercompany sales (primarily parent company export sales to subsidiaries at pre-established US dollar prices) and other specific and identified exposures. The terms of the forward foreign exchange contracts are generally matched to the underlying transaction being hedged, and are typically under one year. Because such contracts are directly associated with identified transactions, they are an effective hedge against fluctuations in the value of the foreign currency underlying the transaction. All of our foreign exchange contracts are accounted for at fair value based on readily available market price quotations. We generally do not hedge overseas sales denominated in foreign currencies or translation exposures. Further, we do not enter into financial instruments for speculation or trading purposes. We utilize bank loans and other debt instruments throughout our worldwide operations. To mitigate foreign currency risk, such debt is generally denominated in the underlying local currency of the affiliate. In certain limited and specific circumstances, we will manage risk by denominating a portion of debt outstanding in a currency other than the local currency. There have been no material changes in the information reported in the Company's Form 10-K for the year ended October 31, 2002 under the "Market Risk Disclosures" section of Management's Discussion and Analysis of Financial Condition and Results of Operations. 21 Contractual Obligations and Commercial Commitments Below is a table detailing, by maturity date, our Contractual Obligations and Commercial Commitments as of October 31, 2002 (amounts in thousands):
OBLIGATIONS AND COMMITMENTS 2003 2004 2005 2006 2007 THEREAFTER TOTAL ----------- ---- ---- ---- ---- ---- ---------- ----- Bank loans $16,374 $ -- $ -- $ -- $ -- $ -- $16,374 Long-term debt 714 862 139 135 131 763 2,744 Operating leases 2,151 1,917 1,470 1,310 1,394 -- 8,242 --------------------------------------------------------------------------- Total $19,239 $2,779 $1,609 $1,445 $1,525 $763 $27,360
See 2003 changes in bank loans and long-term debt detailed on the Consolidated Statements of Cash Flows for the six months ended April 30, 2003. ITEM 4. CONTROLS AND PROCEDURES (a) Our chief executive officer and chief financial officer performed an evaluation of our disclosure controls and procedures as of April 30, 2003 (the "Evaluation Date"). Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed in the reports that we file under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. (b) There have been no significant changes in our internal controls since the Evaluation Date. We are not aware of any significant change in any other factors that could significantly affect our internal controls subsequent to the Evaluation Date. OTHER INFORMATION ARGENTINE PESO DEVALUATION A significant devaluation in the Argentine peso took place in the first quarter of 2002. We have a branch located in Argentina that accounted for less than 1% of consolidated net sales in 2002. Because this branch's operation is not material to our consolidated results, it has only a minimal impact on our overall results of operations. See "Market Risk Disclosures" above. COST OF INSURANCE Partly as a result of the September 11, 2001 terrorist attacks, the cost of insurance has risen substantially and the availability of insurance has become more restrictive. We maintain insurance coverage with such deductibles and self-insurance as considered adequate for our needs. Such coverage reflects market conditions (including cost and availability) existing at the time it is written and the relationship of insurance coverage to self-insurance varies accordingly. We consider the impact of these changes as we continually assess the best way to provide for our insurance needs now and in the future. 22 PART II ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) We held our annual meeting of Stockholders on March 6, 2003. (b) The following individuals were nominated and elected to serve a term of three years as Directors: Mr. Joel B. Alvord. Dr. Charles L. Cooney Mr. John M. Galvin (c) The stockholders voted on the following matters: 1. Election of Directors -- the voting results for each nominee, all of whom were reelected, are as follows:
Name Votes For Votes Withheld Not Voted ---- --------- -------------- --------- Mr. Joel B. Alvord 14,760,451 263,909 1,598,236 Dr. Charles L. Cooney 14,703,747 320,613 1,598,236 Mr. John M. Galvin 14,678,793 345,567 1,598,236
2. A proposal for the approval of the Second Amendment to the 1996 Stock Incentive Plan was approved by a count of 9,367,741 votes for, 4,304,144 votes against, 29,675 votes abstaining, and 2,921,036 shares not voted. 3. A proposal for the approval of the Second Amendment to the Non-Employee Directors' Stock Option Plan was approved by a count of 10,207,083 votes for, 3,461,796 votes against, 32,681 votes abstaining, and 2,921,036 shares not voted. 4. A proposal for the approval of the performance goals in the Executive Management Incentive Plan was approved by a count of 14,551,012 votes for, 437,363 votes against, 35,985 votes abstaining, and 1,598,236 shares not voted. 5. A proposal for the appointment of Ernst & Young LLP as independent auditors was approved by a count of 13,723,552 votes for, 1,283,827 votes against, 16,981 votes abstaining, 1,598,236 shares not voted. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Documents filed as part of this report. Exhibit 15 -- Acknowledgement of Ernst & Young LLP Exhibit 99.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 23 (b) Reports on From 8-K We filed a Report on Form 8-K, dated February 20, 2003, under "Item 5. Other Events," reporting our financial results for the first quarter ended January 31, 2003. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CUNO INCORPORATED Date May 21, 2003 By /s/Mark G. Kachur -------------------- Mark G. Kachur Chairman of the Board of Directors, President and Chief Executive Officer By /s/ Frederick C. Flynn, Jr. --------------------------- Frederick C. Flynn, Jr. Senior Vice President - Finance and Administration, Chief Financial Officer, Controller, and Assistant Secretary 25 CERTIFICATIONS I, Mark G. Kachur, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CUNO Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 21, 2003 /s/ Mark G. Kachur ------------------ Mark G. Kachur Chairman, President and Chief Executive Officer (Principal Executive Officer) 26 CERTIFICATIONS I, Frederick C. Flynn, certify that: 1. I have reviewed this quarterly report on Form 10-Q of CUNO Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 21, 2003 /s/ Frederick C. Flynn, Jr. --------------------------- Frederick C. Flynn, Jr. Senior Vice President, Chief Financial Officer (Principal Financial Officer) 27 EX-15 3 y86935exv15.txt ACKNOWLEDGEMENT OF ERNST & YOUNG LLP EXHIBIT 15 ACKNOWLEDGEMENT OF ERNST & YOUNG LLP May 21, 2003 Stockholders and Board of Directors CUNO Incorporated We are aware of the incorporation by reference in the Registration Statement (Form S-8 No. 333-39763) pertaining to the CUNO Incorporated 1996 Stock Incentive Plan, the CUNO Incorporated Non-Employee Director's Stock Option Plan, and the CUNO Incorporated Savings and Retirement Plan and the Registration Statement (Form S-8 No. 333-54388) pertaining to the CUNO Incorporated 1996 Stock Incentive Plan and the CUNO Incorporated Non-Employee Directors' Stock Option Plan of our report dated May 20, 2003 relating to the unaudited condensed consolidated interim financial statements of CUNO Incorporated that are included in its Form 10-Q for the three-month period ended April 30, 2003. /s/ Ernst & Young LLP Hartford, Connecticut 28 EX-99.1 4 y86935exv99w1.txt CERTIFICATION EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SEC.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CUNO Incorporated (the "Company") on Form 10-Q for the period ended April 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark G. Kachur, Chairman of the Board, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. sec.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ MARK G. KACHUR - ------------------- Mark G. Kachur Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) Date: May 21, 2003 29 EX-99.2 5 y86935exv99w2.txt CERTIFICATION EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SEC.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of CUNO Incorporated (the "Company") on Form 10-Q for the period ended April 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Frederick C. Flynn, Jr., Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. sec.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ FREDERICK C. FLYNN, JR - --------------------------- Frederick C. Flynn, Jr. Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: May 21, 2003 30 -----END PRIVACY-ENHANCED MESSAGE-----