-----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, I/HVzHfxBGvldsxwBDoLg/137viPd5LwBm4vgaVadzghvb5zi2i3+xQ9lCbov6FL 4GTKLRlmnoyNd3mM0CFqqA== 0000950123-04-006578.txt : 20040519 0000950123-04-006578.hdr.sgml : 20040519 20040519160733 ACCESSION NUMBER: 0000950123-04-006578 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040430 FILED AS OF DATE: 20040519 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: 04818772 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 y97635e10vq.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, 2004 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 -- 16,937,675 shares as of April 30, 2004 CUNO INCORPORATED
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Consolidated Statements of Income 1-2 Consolidated Balance Sheets 3 Consolidated Statements of Cash Flows 4 Notes to Unaudited Condensed Consolidated Financial Statements 5-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-26 Item 3. Quantitative and Qualitative Disclosures About Market Risk 27 Item 4. Controls and Procedures 27-28 PART II. OTHER INFORMATION Item 4. Submission of matters to a vote of security holders 29 Item 6. Exhibits and Reports on Form 8-K 30-35
CUNO INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except share and per-share amounts)
THREE MONTHS ENDED APRIL 30, 2004 2003 ------------ ------------ Net sales $ 82,745 $ 69,305 Operating expenses: Cost of products sold 43,676 38,027 Selling, general and administrative 22,510 18,238 Research, development and engineering 4,036 3,372 ------------ ------------ 70,222 59,637 ------------ ------------ Operating income 12,523 9,668 Nonoperating income (expense): Interest expense (87) (134) Interest and other income, net 216 90 ------------ ------------ 129 (44) ------------ ------------ Income before income taxes 12,652 9,624 Income taxes 4,208 3,320 ------------ ------------ Net income $ 8,444 $ 6,304 ============ ============ Basic earnings per common share $ 0.51 $ 0.38 Diluted earnings per common share $ 0.49 $ 0.37 Basic shares outstanding 16,694,466 16,638,881 Diluted shares outstanding 17,214,286 17,014,779
See accompanying notes. -1- CUNO INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except share and per-share amounts)
SIX MONTHS ENDED APRIL 30, 2004 2003 ------------ ------------ Net sales $ 158,154 $ 135,742 Less costs and expenses: Cost of products sold 84,229 74,710 Selling, general and administrative expenses 42,748 36,027 Research, development and engineering 8,225 7,042 ------------ ------------ 135,202 117,779 ------------ ------------ Operating income 22,952 17,963 Nonoperating income (expense): Interest expense (170) (281) Interest and other income, net 366 181 ------------ ------------ 196 (100) ------------ ------------ Income before income taxes 23,148 17,863 Provision for income taxes 7,699 6,171 ------------ ------------ Net income $ 15,449 $ 11,692 ============ ============ Basic earnings per common share $ 0.93 $ 0.70 Diluted earnings per common share $ 0.90 $ 0.69 Basic shares outstanding 16,690,853 16,601,152 Diluted shares outstanding 17,211,187 16,956,848
See accompanying notes. -2- CUNO INCORPORATED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
(unaudited) APRIL 30, OCTOBER 31, 2004 2003 --------- ----------- ASSETS Current assets Cash and cash equivalents $ 59,737 $ 57,603 Accounts receivable, less allowances for doubtful accounts of $1,835 and $1,705, respectively 69,082 59,658 Inventories, net 36,696 31,058 Deferred income taxes 9,156 9,020 Prepaid expenses and other current assets 4,812 4,306 --------- --------- Total current assets 179,483 161,645 Noncurrent assets Deferred income taxes 1,333 1,340 Goodwill 29,379 28,489 Prepaid pension costs 7,943 7,923 Other noncurrent assets 5,232 3,551 Property, plant and equipment, net 88,557 85,060 --------- --------- Total assets $ 311,927 $ 288,008 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt $ 213 $ 849 Bank loans 11,242 11,804 Accounts payable 26,822 20,850 Accrued payroll and related taxes 15,722 17,456 Other accrued expenses 9,430 10,443 Accrued income taxes 5,196 2,558 --------- --------- Total current liabilities 68,625 63,960 Noncurrent liabilities Long-term debt, less current portion 539 401 Deferred income taxes 10,003 9,862 Accrued pension liability 5,631 5,457 Other long term liabilities 391 - --------- --------- Total noncurrent liabilities 16,564 15,720 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, 16,937,675 and 16,863,482 shares issued 17 17 Treasury Stock, at cost (2,747 shares) (57) (57) Additional paid-in-capital 56,771 53,787 Unearned compensation (1,876) (784) Accumulated other comprehensive loss -- Foreign currency translation adjustments 4,340 3,282 Fair value of derivative financial instruments, net 24 13 Minimum pension liability, net (2,049) (2,049) --------- --------- 2,315 1,246 Retained earnings 169,568 154,119 --------- --------- Total stockholders' equity 226,738 208,328 --------- --------- Total liabilities and stockholders' equity $ 311,927 $ 288,008 ========= =========
See accompanying notes. -3- CUNO INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
SIX MONTHS ENDED APRIL 30, 2004 2003 -------- -------- OPERATING ACTIVITIES Net income $ 15,449 $ 11,692 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,417 4,802 Noncash compensation recognized under employee stock plans 412 271 Losses (gains) on sales of property, plant and equipment 30 (7) Pension funding less than (in excess of) expense 171 (5,979) Deferred income taxes 251 (148) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable (8,802) (2,819) Inventories (5,506) (1,308) Prepaid expenses and other current assets (1,207) (1,062) Accounts payable and accrued expenses 3,120 (1,590) Accrued income taxes 2,424 2,623 -------- -------- Net cash provided by operating activities 11,759 6,475 INVESTING ACTIVITIES Proceeds from sales of property, plant and equipment - 19 Acquisition of companies, net of cash acquired (554) (149) Capital expenditures (8,543) (7,095) Other, net (574) - -------- -------- Net cash used for investing activities (9,671) (7,225) FINANCING ACTIVITIES Principal payments on long-term debt (784) (2,069) Principal payments on short-term debt (612) (417) Net borrowings (repayments) under short-term bank loans 83 (1,695) Proceeds from stock options exercised 613 762 -------- -------- Net cash used for financing activities (700) (3,419) Effect of exchange rate changes on cash and cash equivalents 746 959 -------- -------- Net change in cash and cash equivalents 2,134 (3,210) Cash and cash equivalents -- beginning of period 57,603 40,872 -------- -------- Cash and cash equivalents -- end of period $ 59,737 $ 37,662 ======== ========
See accompanying notes. -4- CUNO INCORPORATED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except share and per-share amounts) APRIL 30, 2004 NOTE 1 - ORGANIZATION AND ACCOUNTING POLICIES 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 of America 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 of America for annual financial statements. In the opinion of management, all adjustments which are of a normal recurring nature 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. These interim unaudited financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended October 31, 2003. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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. Certain prior year amounts have been reclassified to conform to current year presentation. INVENTORIES: Inventories are stated at the lower of cost or market. Inventories in the United States of America are primarily valued by the last-in, first-out (LIFO) cost method. The methods used for all other inventories are first-in, first-out (FIFO) and average cost. 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. Accordingly, interim LIFO calculations must necessarily be based on our estimates of expected year-end inventory levels and costs. Because these are subject to many factors beyond management's control, interim results are subject to the final year-end LIFO inventory valuation. Inventories consist of the following:
APRIL 30, OCTOBER 31, 2004 2003 -------- ---------- Raw materials $15,445 $13,112 Work-in-process 4,241 3,992 Finished goods 17,010 13,954 ------- ------- $36,696 $31,058 ======= =======
5 ACCOUNTS PAYABLE At April 30, 2004 and October 31, 2003, approximately $5,175 and $2,294, respectively, representing book overdrafts of cash accounts, were reclassified to accounts payable. OTHER INCOME: Interest and other income (expense), net consisted of the following:
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2004 2003 2004 2003 ------ ------ ------ ------ Interest income $ 181 $ 133 $ 420 $ 274 Exchange gains (losses) 11 (39) (2) (77) (Losses) gains on sale of property, plant and equipment (38) 4 (30) 7 Other, net 62 (8) (22) (23) ----- ----- ----- ----- $ 216 $ 90 $ 366 $ 181 ===== ===== ===== =====
EARNINGS PER SHARE: Basic earnings per common share is based on net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is based on net income divided by the weighted average number of common shares outstanding during the period, including the effect of stock equivalents, where such effect is dilutive. Earnings per share for the three months ended April 30, 2004 and 2003 is calculated as follows:
APRIL 30, APRIL 30, 2004 2003 ------------ ----------- NUMERATOR: Net income $ 8,444 $ 6,304 =========== =========== DENOMINATORS: Weighted average shares outstanding 16,694,466 16,638,881 DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,694,466 16,638,881 =========== =========== Weighted average shares outstanding 16,694,466 16,638,881 Effect of dilutive employee stock options 407,061 354,438 Effect of dilutive restricted shares 112,759 21,460 ----------- ----------- DENOMINATOR FOR DILUTED EARNINGS PER SHARE 17,214,286 17,014,779 =========== =========== Basic earnings per share $ 0.51 $ 0.38 Diluted earnings per share $ 0.49 $ 0.37
Approximately 216,000 and 37,052 shares related to options to purchase common stock and unvested restricted stock were excluded from the computations of diluted earnings per share for the three-months ended April 30, 2004 and 2003, respectively, because the exercise price was greater than the average market price of the common stock during the periods. 6 Earnings per share for the six months ended April 30, 2004 and 2003 is calculated as follows:
APRIL 30, APRIL 30, 2004 2003 ----------- ----------- NUMERATOR: Net income $ 15,449 $ 11,692 =========== =========== DENOMINATORS: Weighted average shares outstanding 16,690,853 16,601,152 DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,690,853 16,601,152 =========== =========== Weighted average shares outstanding 16,690,853 16,601,152 Effect of dilutive employee stock options 407,491 332,401 Effect of dilutive restricted shares 112,843 23,295 ----------- ----------- DENOMINATOR FOR DILUTED EARNINGS PER SHARE 17,211,187 16,956,848 =========== =========== Basic earnings per share $ 0.93 $ 0.70 Diluted earnings per share $ 0.90 $ 0.69
Approximately 216,000 and 48,552 shares related to options to purchase common stock and unvested restricted stock were excluded from the computations of diluted earnings per share for the six-months ended April 30, 2004 and 2003, respectively, because the exercise price was greater than the average market price of the common stock during the periods COMPREHENSIVE INCOME: Total comprehensive income was comprised of the following:
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2004 2003 2004 2003 -------- -------- -------- -------- Net income $ 8,444 $ 6,304 $ 15,449 $ 11,692 Other comprehensive income (loss): Change in fair value of derivative financial instruments, net of deferred income taxes of $189, $18, $69 and $103 302 (25) 100 (156) (Losses) gains related to derivative financial instruments reclassified into earnings from other comprehensive income, net of deferred income taxes of $30, $13, $55 and $58 (47) 17 (89) 79 Foreign currency translation adjustments (2,577) 3,521 1,058 5,740 -------- -------- -------- -------- Total comprehensive income $ 6,122 $ 9,817 $ 16,518 $ 17,355 ======== ======== ======== ========
7 EMPLOYEE STOCK OPTIONS: The Company has stock option plans under which employees and directors have options to purchase Common Stock. The Company applies APB 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option plans. The Company has adopted those provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123) and Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of Statement of Financial Accounting Standards No. 123", which require the disclosure of pro forma effects on net income and earnings per share as if compensation cost had been recognized based upon the fair value method at the date of grant for options awarded. Pro forma information regarding net income and earnings per share is required by FAS 123, which requires that the information be determined as if we had accounted for our employee stock options under the fair-value method of FAS 123. The fair value for the options granted during the following periods were estimated at the date of grant using the Black-Scholes pricing model with the following weighted average assumptions:
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2004 2003 2004 2003 ---- ------ ------ ------ Volatility N/A 30.00% 23.39% 28.80% Risk-free interest rate N/A 3.69% 3.46% 3.69% Expected option life N/A 5 years 5 years 5 years Dividend yield N/A - - -
N/A -- There were no stock option grants during the quarter ended April 30, 2004. The following table illustrates the effect on net income and earnings per share as if compensation cost had been recognized based on the fair value of the options at the grant dates for awards under those plans consistent with FAS 123, as amended, using the Black-Scholes fair value method for option pricing.
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2004 2003 2004 2003 ------ ------ ---------- ---------- Net income, as reported $8,444 $6,304 $ 15,449 $ 11,692 Add: Stock-based compensation expense included in reported net income, net of income taxes 147 83 276 176 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of income taxes 616 528 1,236 1,080 ------ ------ ---------- ---------- Pro forma net income $7,975 $5,859 $ 14,489 $ 10,788 ====== ====== ========== ========== Earnings per share: Basic - as reported $ 0.51 $ 0.38 $ 0.93 $ 0.70 Basic - pro forma $ 0.48 $ 0.35 $ 0.87 $ 0.65 Diluted - as reported $ 0.49 $ 0.37 $ 0.90 $ 0.69 Diluted - pro forma $ 0.46 $ 0.34 $ 0.85 $ 0.64
8 NEWLY ISSUED ACCOUNTING STANDARDS In December 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits". This standard revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans as required by SFAS No. 87, "Employers' Accounting for Pensions", SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". This standard retains the disclosure requirements contained in SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", which it replaces. It requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The provisions of SFAS No. 132 remain in effect until the provisions of SFAS No. 132 (revised 2003) are adopted. SFAS No. 132 (revised 2003) is generally effective for fiscal years ending after December 15, 2003. The interim-period disclosures required by SFAS No. 132 (revised 2003) are effective for interim periods beginning after December 15, 2003 and are reflected herein in Note 3 - Benefit Plans. The Company does not expect the adoption of this standard in fiscal year 2004 to have an impact on the Company's financial position or results of operations. NOTE 2 - GOODWILL AND INTANGIBLE ASSETS Goodwill amounted to $29,379 and $28,489 at April 30, 2004 and October 31, 2003, respectively. The increase in goodwill was primarily driven by changes in foreign exchange rates, as well as an increase associated with two small acquisitions in Europe, which resulted in goodwill of $340. Other intangible assets, which are included in "Other noncurrent assets", amounted to $2,289 and $2,075 at April 30, 2004 and October 31, 2003, respectively. The increase in other intangible assets was related primarily to two small acquisitions in Europe, in which we allocated approximately $480 to intangible assets, relating mainly to customer lists and non-compete agreements. Amortization expense for the three and six-month periods ended April 30, 2004 amounted to $76 and $140, respectively. Other changes reflect the impact of fluctuations in foreign exchange rates. NOTE 3 - BENEFIT PLANS Components of Net Periodic Benefit Cost are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2004 2003 2004 2003 ---- ---- ---- ---- Service cost $ 683 $ 544 $ 1,366 $ 1,088 Interest cost 633 586 1,266 1,172 Expected return on plan assets (823) (885) (1,646) (1,770) Amortization of transition asset 20 18 40 36 Amortization of prior service cost 102 32 204 64 Amortization of net loss 141 140 282 280 ------- ------- ------- ------- Net periodic benefit cost $ 756 $ 435 $ 1,512 $ 870 ======= ======= ======= =======
During the three and six months ended April 30, 2004, employer contributions of $696 and $1,341, respectively, were made to the pension plans. We currently anticipate contributing an additional $1,290 to fund our pension plans in fiscal 2004 for a total expected contribution of $2,631. 9 The pension assumptions used to determine our October 31, 2003 plan liabilities and the fiscal 2004 pension expense are as follows:
US PLANS JAPAN PLANS -------- ----------- Weighted-average discount rate 6.20% 2.00% Rates of increases in compensation levels 4.00% 2.25% Expected long-term rate of return on assets 8.75% 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 2004 is determined at the beginning of the fiscal year and expensed ratably throughout the year. The total pension expense to be recognized in 2004 will amount to approximately $3.0 million ($1.7 million in fiscal 2003). 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. NOTE 4 - ACQUISITIONS In 2004, we completed two acquisitions in Europe for total consideration of $554. The amount of goodwill and other intangible assets recorded in connection with these two acquisitions amounted to $340 and $480, respectively. Neither of these acquisitions had a material impact on the Company's historical financial statements or pro forma operating results. NOTE 5 - SEGMENT DATA Segment information has been prepared in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." CUNO is organized into five geographic segments, as the Company's chief operating decision makers are responsible for managing our global operations based on geographic regions. Our geographic segments include: North America, Europe, Japan, Asia/Pacific and Latin America. Each of these operations are led and managed by a local General Manager who is responsible for the profitability of their respective geographic segment. Each of these geographic operations in turn manufactures and sells products into our three main filtrations markets; potable water, healthcare and fluid processing. Each geographic segment manufactures and sells products in each of the three markets. The geographic segment managers are responsible for managing their respective resources with oversight and review by the CEO. The Company does not present segment information by market as our individual market focus is limited to worldwide sales, with assigned responsibility for expanding worldwide sales within each respective market. 10 Financial information by geographic operating segments is summarized below:
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2004 2003 2004 2003 ---------- ---------- ---------- ---------- NET SALES: Europe $ 20,424 $ 15,627 $ 37,058 $ 28,713 Japan 11,393 8,659 21,214 16,745 Asia/Pacific 11,812 8,904 22,447 17,662 Latin America 3,482 2,833 6,969 5,197 --------- --------- --------- --------- Subtotal - Foreign sales 47,111 36,023 87,688 68,317 North America 50,517 43,973 96,325 86,875 Intercompany sales (14,883) (10,691) (25,859) (19,450) --------- --------- --------- --------- Total net sales $ 82,745 $ 69,305 $ 158,154 $ 135,742 ========= ========= ========= =========
Our sales by market are summarized below:
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2004 2003 2004 2003 ---------- -------- --------- -------- NET SALES: Potable Water $ 37,940 $ 31,314 $ 72,793 $ 61,695 Fluid Processing 21,143 18,447 41,413 36,075 Healthcare 23,662 19,544 43,948 37,972 -------- -------- -------- -------- Total net sales $ 82,745 $ 69,305 $158,154 $135,742 ======== ======== ======== ========
Our operating income by segment is detailed below:
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 2004 2003 2004 2003 -------- -------- -------- -------- OPERATING INCOME: North America $ 6,917 $ 6,098 $ 13,077 $ 11,329 Europe 1,948 1,414 3,073 2,210 Japan 1,448 745 2,506 1,487 Asia/Pacific 1,879 1,148 3,612 2,340 Latin America 331 263 684 597 -------- -------- -------- -------- Segment total 12,523 9,668 22,952 17,963 -------- -------- -------- -------- Interest expense (87) (134) (170) (281) Other, net 216 90 366 181 -------- -------- -------- -------- Income before income taxes $ 12,652 $ 9,624 $ 23,148 $ 17,863 ======== ======== ======== ========
Interest expense and other income (expense) have not been allocated to segments. 11 Our assets by segment are detailed below:
APRIL 30, OCTOBER 31, 2004 2003 ---------- ----------- ASSETS: North America $ 200,197 $ 197,374 Europe 56,550 46,643 Japan 33,293 30,788 Asia/Pacific 26,265 20,531 Latin America 12,347 11,702 General Corporate 59,737 57,604 Eliminations and other (76,462) (76,634) --------- --------- Total Assets $ 311,927 $ 288,008 ========= =========
General corporate assets (principally cash) are not allocated to segments. NOTE 6 - COMMITMENTS AND 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. Currently, we have self-insurance limits for workers' compensation, product liability and employee medical claims. Our workers' compensation policies have per-individual deductible of $350, our product liability policy has a $250 per claim deductible and our medical plan for employees has a stop-loss of $200 per individual. During the second quarter of fiscal 2004, we entered into a new, exclusive distribution agreement with a major retailer. Inclusive with this agreement is a requirement to buy-back certain non-CUNO inventory over the remainder of fiscal 2004. The amount of inventory that we will be required to buy back is based on future levels of such inventory on hand at the time the customer receives the first shipment of CUNO manufactured product. In May 2004, the Company approved certain inventory buybacks in connection with initial customer shipments. The initial maximum purchase under the first phase of this buyback program is approximately $500, which can be reduced by continued sales of the products by the retail customer over an agreed upon timeframe. Additional future amounts of this purchase commitment are not reasonably estimable; furthermore, the fair market value of certain purchased inventory may be below the actual price paid by the Company at the time of purchase. In addition, we expect to spend approximately $1.0 million during the remainder of 2004 to install in-store promotional kiosks to promote these products. 12 NOTE 7 - PRODUCT WARRANTY We warrant our products against defects in design, materials, and workmanship, generally for periods ranging from one to three years. A provision for estimated future costs related to these warranties is recorded on a monthly basis and is included in cost of goods sold. Activity related to the product warranty liability was as follows:
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, 2004 2003 ---------------- ----------- Balance at beginning of year $ 817 $ 785 Provision for warranty obligations 551 818 Settlements made (430) (816) Changes in foreign exchange rates 2 30 ----- ----- Balance at end of year $ 940 $ 817 ===== =====
13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (amounts in thousands, except share and per-share amounts) 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 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, 2004 and 2003, including a brief description 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. 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 approximately balanced between domestic and international markets. 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 filters. 14 COMPANY RISK FACTORS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS Approximately 50% 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. INFLATION Inflation had a negligible effect on our operations. We estimate that inflationary effects, in the aggregate, were generally recovered or offset through increased pricing or cost reductions in all periods presented. 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 15 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. CAUTION CONCERNING FORWARD-LOOKING STATEMENTS Because we want to provide shareholders with more meaningful and useful information, this quarterly 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 The Securities and Exchange Commission ("SEC") defines 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: revenue recognition, accounting for depreciation and amortization, employee benefits, contingencies, allowance for doubtful accounts, income taxes, and stock based compensation. 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. There were no changes in accounting policies or significant changes in accounting estimates during the current period. All of our critical accounting policies and significant estimates have been discussed with the Audit Committee of the Board of Directors. We have not made any significant changes to our critical accounting policies or estimates since year end. Revenue Recognition -- We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104 "Revenue Recognition" ("SAB 104"). SAB 104 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. 16 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
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 - 20 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. 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 and 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 for specific contingencies, claims and assessments when both of the following conditions are present: a loss is deemed probable and the amount of the anticipated loss 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 -- The allowance for doubtful accounts is established to represent our best estimate of the net realizable value of the outstanding accounts receivable balances. We estimate our allowance for doubtful accounts based on past due amounts and historical write-off experience, as well as trends and factors surrounding the credit risk of specific customers. In an effort to identify adverse trends, we perform periodic credit evaluations of our customers and ongoing account balance reviews and agings of receivables. Amounts are considered past due when payment has not been received within the time frame of the credit terms extended. Write-offs are charged directly against the allowance for doubtful accounts and occur only after all collection efforts have 17 been exhausted. Actual write-offs and adjustments could differ from the allowance estimates due to unanticipated changes in the business environment as well as factors and risks surrounding specific customers. 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. We take tax positions in our worldwide corporate income tax filings based on careful interpretations of global statutes, rules, regulations and court decisions that may be applied and interpreted differently by various taxing jurisdictions. These taxing jurisdictions may or may not challenge our application and interpretation of a wide body of tax jurisprudence. However, we do not anticipate that any sustained challenge by any taxing jurisdiction will have a material adverse effect on our financial position or net income. 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. RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED APRIL 30, 2004 VS. THREE MONTH PERIOD ENDED APRIL 30, 2003 OVERVIEW During the second quarter of fiscal 2004, CUNO's sales and net income grew by 19% and 34%, respectively. This growth was positively influenced by the overall weakness of the U.S. Dollar. Sales were particularly strong in all markets within North America reflecting the strengthening U.S. economy. Overseas sales were likewise very strong (up 26 percent), reflecting broad strength in the potable water market and overall strong sales in Japan. Our margins improved due primarily to the benefit of incremental sales volume (ability to spread fixed costs over a higher volume of sales), offset in part by increased structural costs such as pension and depreciation. Going forward, business and market uncertainties may affect results. See "Company Risk Factors" above and Management's Discussion and Analysis in our Annual Report on Form 10-K for the fiscal year ended October 31, 2003 for a full discussion of the key factors which affect our business and operating results. 18 Below is a summary of selected consolidated earnings information:
THREE MONTHS ENDED APRIL 30, 2004 2003 CHANGE ---- ---- ------ Net sales $82,745 $69,305 19.4% Cost of products sold 43,676 38,027 14.9% Gross profit 39,069 31,278 24.9% Gross margin percent 47.2% 45.1% 210 bpt Selling, general and administrative 22,510 18,238 23.4% SG&A as a percent of sales 27.2% 26.3% 90 bpt Operating income 12,523 9,668 29.5% Operating margin 15.1% 13.9% 120 bpt Effective tax rate 33.3% 34.5% 120 bpt Net income $ 8,444 $ 6,304 33.9% Diluted earnings per share $ 0.49 $ 0.37 32.4%
BUSINESS ENVIRONMENT Our geographic and market diversity help limit the impact of any one market or the economy of any single country on our consolidated results. The uncertainty of the economic conditions in various markets and geographic regions in which we compete is likely to continue to present challenges to our business near term. The U.S. Dollar was significantly weaker compared to most of the currencies in countries we conduct business in during the second quarter of 2004 compared to the second quarter of 2003. We translate revenue and expense accounts at the average exchange rates during the periods presented. NET SALES Net sales were $82.7 million in the second quarter of fiscal 2004 representing a 19.4 percent increase over 2003's second quarter sales of $69.3 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 2003, net sales in the second quarter of 2004 would have been $4.7 million lower than the reported sales of $82.7 million, or 12.6 percent greater overall. The following table displays the Company's sales by geographic segment:
THREE MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2004 2003 CHANGE CHANGE ---- ---- ------ ------ North America $41,989 $36,993 13.5% 13.5% Europe 16,100 12,935 24.5% 9.7% Japan 11,135 8,587 29.7% 17.0% Asia/Pacific 10,310 8,136 26.7% 10.5% Latin America 3,211 2,654 21.0% 4.6% ------- ------- ---- ---- Total sales $82,745 $69,305 19.4% 12.6% ======= ======= ==== ====
19 North American sales increased 13.5 percent in the second quarter of 2004 as compared to the same quarter in 2003. All three markets in North America posted strong sales during this time period. Potable water continues to achieve strong sales of its series of filters designed for customers who serve various channels of distribution with final sales to U.S. residential consumers. North American fluid processing and healthcare sales were up, primarily reflecting the overall strengthening of the U.S. economy. European sales increased 9.7 percent in local currency as compared to the same period in 2003. Potable water sales were particularly strong in the quarter reflecting greater demand for our products serving the OEM and appliance markets. Sales in Japan were up 17.0 percent in local currency, led by very strong sales growth in the healthcare market. Asia/Pacific sales were up 10.5 percent excluding changes in currency values reflecting strong sales growth in the potable water market in that region. Second quarter 2004 Latin American sales were up 4.6 percent when expressed in local currency, due primarily to new product sales associated with a relatively new customer in the potable water market, offset by sluggish sales in the healthcare and fluid processing markets due to the difficult economic environment in the region. The following table displays the Company's sales by market:
THREE MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2004 2003 CHANGE CHANGE ---- ---- ------ ------- Potable Water $37,940 $31,314 21.2% 17.4% Fluid Processing 21,143 18,447 14.6% 6.0% Healthcare 23,662 19,544 21.1% 11.1% ------- ------- ---- ---- Total sales $82,745 $69,305 19.4% 12.6% ======= ======= ==== ====
The strength in the potable water market was broad geographically, driven largely by strong overseas sales (up 29.3 percent in local currency) and strong sales growth in North America (up 14.5 percent) associated with OEM customers, direct marketing companies, and appliance manufacturers. Fluid Processing sales were up 10.3 percent in the U.S. due in part to the strengthening economy and were up 3.8 percent overseas on a local currency basis. Healthcare sales were up 12.4 percent in the U.S., reflecting broad geographic strength, and up 10.6 percent overseas. GROSS PROFIT Gross profit increased $7.8 million to $39.1 million in the second quarter of 2004 from $31.3 million in the second quarter of 2003. Gross profit as a percentage of net sales (gross margin) increased during that same period from 45.1 percent in 2003 to 47.2 percent in 2004. This increase is primarily attributable to the overall increase in the volume of sales (sales up 19.4 percent in the quarter), and a lower proportion of fluid processing sales, which generally have lower margins. 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 further gain efficiencies. OPERATING EXPENSES Selling, general and administrative expenses (SG&A) were up 23.4 percent, in excess of the 19.4 percent sales growth rate. However, SG&A expenses were 26.3 percent of sales in the second quarter of fiscal 2003 compared to 27.2 percent of sales in the second quarter of 2004. Because of CUNO's international operations, the weaker U.S. dollar served to increase the consolidated U.S. dollar reported SG&A expense. In addition, increased structural costs (including medical, pension, insurance and depreciation expenses) impacted our overall SG&A expenses. 20 Research, development and engineering expenses (incurred primarily in the U.S. and to a lesser extent in Europe) increased 19.7 percent to $4.0 million in the second quarter of 2004, reflecting our continued focus on the development of new products and technologies. In the second quarter of 2004 and 2003, we received approximately $0.3 million and $0.5 million, respectively, in RD&E cost reimbursements from new customers. Excluding these reimbursements, RD&E would have increased 12.0 percent, reflecting our strong commitment to the development of new products and technologies. As a percentage of sales, RD&E expenses were 5.2 percent of sales in the second quarter of fiscal 2004 compared to 5.5 percent of sales in the second quarter of fiscal 2003 (both percentages are adjusted for reimbursements discussed above). OPERATING INCOME As a result of the above, operating income increased $2.9 million, or 29.5 percent, to $12.5 million or 15.1 percent of sales in the second quarter of fiscal 2004 compared to $9.7 million or 13.9 percent of sales in the second quarter of 2003. Our operating income by segment is detailed below:
THREE MONTHS ENDED APRIL 30, DOLLAR PERCENT 2004 2003 CHANGE CHANGE ---- ---- ------ ------ OPERATING INCOME: North America $ 6,917 $ 6,098 $ 819 13.4% Europe 1,948 1,414 534 37.8% Japan 1,448 745 703 94.4% Asia/Pacific 1,879 1,148 731 63.7% Latin America 331 263 68 25.9% ------- ------- ------- Total $12,523 $ 9,668 $ 2,855 29.5% ------- ------- -------
The increase in operating income in North America was driven by the $5.0 million increase in sales, offset by variable costs and increased structural costs previously discussed. The results of our foreign operations are heavily dependent on the relationship of their functional currency compared to the U.S. Dollar. We translate our foreign revenue and expense accounts into U.S. Dollars using the average exchange rate for the period. European sales increased 9.7 percent on a local currency basis, while the Euro strengthened approximately 12 percent (average second quarter of 2004 versus average second quarter of 2003) - these factors contributed to the increase in Europe's operating income. Sales in Japan were up 17.0 percent on a local currency basis, and the Yen strengthened versus the U.S. Dollar approximately 10 percent quarter over quarter. Asia/Pacific sales were up 10.5 percent quarter over quarter, but the Australian Dollar strengthened approximately 20 percent in comparison (approximately 50 percent of our sales in the region are denominated in Australian Dollars). Local currency sales in Latin America increased 4.6 percent and the Brazilian Real strengthened approximately 14 percent quarter over quarter. INCOME TAXES The Company's effective income tax rate for the second quarter of 2004 was 33.3 percent compared to 34.5 percent in the second quarter of 2003. The decrease in our effective tax rate was driven by the expanded availability and utilization of certain state credits in the U. S. and foreign tax planning initiatives. Also, our tax rate is impacted by the change in the mix of income attributed to the various countries in which we do business. As of April 30, 2004, the Company had a full valuation allowance against approximately $0.9 and $0.3 million of NOLs in China and Germany, respectively. Our China operations are start-up in nature with a history of losses (no profit has been earned since inception in 2001) and our German operation has incurred losses in three out of the past four fiscal years. The remaining countries in which we carry valuation allowances against NOLs are 21 generally operations which are new to CUNO, have a history of losses, or are in volatile economic regions of the world. SIX MONTH PERIOD ENDED APRIL 30, 2004 VS. SIX MONTH PERIOD ENDED APRIL 30, 2003 OVERVIEW During the first six months of fiscal 2004, CUNO's sales and earnings grew at a double-digit pace. This growth was favorably impacted by the overall weakness of the U.S. Dollar, strong sales in the North American potable water market (up 12.2 percent) and overseas sales in general (up 24.9 percent). Our margins continue to improve due primarily to the benefit of incremental sales volume, offset in part by increased structural costs such as pension and depreciation. Going forward, business and market uncertainties may affect results. See "Company Risk Factors" above and Management's Discussion and Analysis in our Annual Report on Form 10-K for the fiscal year ended October 31, 2003 for a full discussion of the key factors which affect our business and operating results. Below is a summary of selected consolidated earnings information:
SIX MONTHS ENDED APRIL 30, 2004 2003 CHANGE ---- ---- ------ Net sales $158,154 $135,742 16.5% Cost of products sold 84,229 74,710 12.7% Gross profit 73,925 61,032 21.1% Gross margin percent 46.7% 45.0% 170 bpt Selling, general and administrative 42,748 36,027 18.7% SG&A as a percent of sales 27.0% 26.5% 50 bpt Operating income 22,952 17,963 27.8% Operating margin 14.5% 13.2% 130 bpt Effective tax rate 33.3% 34.5% 120 bpt Net income $ 15,449 $ 11,692 32.1% Diluted earnings per share $ 0.90 $ 0.69 30.4%
BUSINESS ENVIRONMENT 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 of the economic conditions in various markets and geographic regions in which we compete is likely to continue to present challenges to our business near term. The U.S. Dollar was significantly weaker compared to most of the currencies in countries we conduct business in during the first six months of 2004 compared to the first six months of 2003. We translate revenue and expense accounts at the average exchange rates during the periods presented. NET SALES Net sales were $158.2 million in the first six months of fiscal 2004 representing a 16.5 percent increase over 2003's sales of $135.7 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 2003, net sales in the first six months of 2004 would have been $10.0 million lower than the reported sales of $158.2 million, or 9.2 percent greater overall. 22 The following table displays the Company's sales by geographic segment:
SIX MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2004 2003 CHANGE CHANGE ---- ---- ------ ------ North America $ 80,925 $ 73,887 9.5% 9.5% Europe 29,957 24,056 24.5% 7.4% Japan 20,729 16,566 25.1% 12.3% Asia/Pacific 20,091 16,367 22.8% 6.0% Latin America 6,452 4,866 32.6% 11.6% -------- -------- ---- ---- Total sales $158,154 $135,742 16.5% 9.2% ======== ======== ==== ====
North American sales increased 9.5 percent in the first six months of 2004 as compared to the same period in 2003. Stronger potable water market sales were responsible for the growth in North America during this time period. Potable water continues to achieve strong sales of its series of filters designed for customers who serve various channels of distribution with final sales to US residential consumers. North American fluid processing and healthcare sales increased marginally. European sales increased 7.4 percent in local currency as compared to the same period in 2003. Potable water sales were particularly strong in the period reflecting greater demand for our products serving the OEM and appliance markets. Sales in Japan were up 12.3 percent in local currency led by a strong increase in sales to the healthcare market. Asia/Pacific sales were up 6.0 percent excluding changes in currency values. Sales were especially strong in the fluid processing and water markets in Asia. First half 2004 Latin American sales were up 11.6 percent when expressed in local currency due primarily to new product sales associated with a relatively new customer in the potable water market. The following table displays the Company's sales by market:
SIX MONTHS ENDED CURRENCY APRIL 30, PERCENT ADJUSTED 2004 2003 CHANGE CHANGE ---- ---- ------ ------ Potable Water $ 72,793 $ 61,695 18.0% 14.0% Fluid Processing 41,413 36,075 14.8% 5.2% Healthcare 43,948 37,972 15.7% 5.0% -------- -------- ---- --- Total sales $158,154 $135,742 16.5% 9.2% ======== ======== ==== ===
The strength in the potable water market was broad geographically, driven largely by strong overseas sales (up 21.9 percent in local currency) and strong sales growth in North America (up 12.2 percent) associated with OEM customers, direct marketing companies, and appliance manufacturers. Fluid Processing sales were up 4.7 percent in the U.S. and up 5.4 percent overseas on a local currency basis. Healthcare sales were up 5.9 percent overseas on a local currency basis but up only 3.2 percent in the U.S. due primarily to a reduction in diagnostic sales. GROSS PROFIT Gross profit increased $12.9 million to $73.9 million in the first six months of 2004 from $61.0 million in the first six months of 2003. Gross profit as a percentage of net sales (gross margin) increased during that same period from 45.0 percent in 2003 to 46.7 percent in 2004. This increase is primarily attributable to the overall increase in the volume of sales (sales up 16.5 percent during the period) and a lower proportion of fluid processing sales, which generally have lower margins. 23 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 further gain efficiencies. OPERATING EXPENSES Selling, general and administrative expenses (SG&A) were up 18.7 percent, somewhat in excess of the 16.5 percent sales growth rate. Because of CUNO's international operations, the weaker U.S. dollar served to increase the consolidated U.S. dollar reported SG&A expense. SG&A expenses were 26.5 percent of sales in the first six months of 2003 compared to 27.0 percent of sales in the first six months of 2004. In addition, rising structural costs (such as medical, pension, insurance and depreciation expenses) impacted overall SG&A expenses. For example, pension expenses increased from $0.9 million in the first six months of 2003 to $1.5 million in the first six months of 2004. Research, development and engineering expenses (incurred primarily in the US and to a lesser extent in Europe) increased 16.8 percent to $8.2 million in the first six months of 2004, reflecting our continued focus on the development of new products and technologies. In the second quarter of 2004 and 2003, we received approximately $0.3 million and $0.5 million, respectively, in RD&E cost reimbursements from new customers. Excluding these reimbursements, RD&E would have increased 13.0 percent. As a percentage of sales, RD&E expenses were 5.4 percent of sales in the first six months of fiscal 2004 compared to 5.5 percent of sales in the first six months of fiscal 2003 (both percentages adjusted for reimbursements discussed above). OPERATING INCOME As a result of the above, operating income increased $5.0 million, or 27.8 percent, to $23.0 million or 14.5 percent of sales in the first six months of fiscal 2004 compared to $18.0 million or 13.2 percent of sales in the first six months of 2003. Our operating income by segment is detailed below:
SIX MONTHS ENDED APRIL 30, DOLLAR PERCENT 2004 2003 CHANGE CHANGE ---- ---- ------ ------ OPERATING INCOME: North America $13,077 $11,329 $ 1,748 15.4% Europe 3,073 2,210 863 39.0% Japan 2,506 1,487 1,019 68.5% Asia/Pacific 3,612 2,340 1,272 54.4% Latin America 684 597 87 14.6% ------- ------- ------- Total $22,952 $17,963 $ 4,989 27.8% ------- ------- -------
The increase in operating income in the U.S. was driven by the $7.0 million increase in sales, offset by variable costs and structural costs discussed above. The results of our foreign operations are heavily dependent on the relationship of their functional currency compared to the U.S. Dollar. We translate our foreign revenue and expense accounts into U.S. Dollars using the average exchange rate for the period. European sales increased 7.4 percent on a local currency basis, while the Euro strengthened approximately 14 percent (average first half of 2004 versus average first half of 2003) - these factors drove the increase in Europe's operating income. Sales in Japan were up 12.3 percent on a local currency basis, and the Yen strengthened versus the U.S. Dollar approximately 10 percent quarter over quarter. Asia/Pacific sales were up 6.0 percent on a local currency basis, but the Australian Dollar strengthened approximately 22 percent in comparison (approximately 50 percent of our sales in the region are 24 denominated in Australian Dollars). Local currency sales in Latin America increased 11.6 percent, but operating profits were adversely impacted by increased costs associated with the launch of some new product initiatives. INCOME TAXES The Company's effective income tax rate for the first half of 2004 was 33.3 percent compared to 34.5 percent in the first half of 2003. The decrease in our effective tax rate was driven by the expanded availability and utilization of certain state credits in the U. S. and foreign tax planning initiatives. Also, our tax rate is impacted by the change in the mix of income attributed to the various countries in which we do business. As of April 30, 2004, the Company had a full valuation allowance against approximately $0.9 and $0.3 million of NOLs in China and Germany, respectively. Our China operations are start-up in nature with a history of losses (no profit has been earned since inception in 2001) and our German operation has incurred losses in three out of the past four fiscal years. The remaining countries in which we carry valuation allowances against NOLs are generally operations which are new to CUNO, have a history of losses, or are in volatile economic regions of the world. FINANCIAL POSITION AND LIQUIDITY We assess liquidity in terms of the Company's ability to generate cash to fund our 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 ($59.7 million at April 30, 2004) and available sources of liquidity (approximately $24.3 million of available, uncommitted, 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"), or variable interest entities ("VIEs"). 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 Australia in order to meet product demands around the globe. In addition, new manufacturing lines and processes are being installed in the U.S. to benefit the potable water, fluid processing, and healthcare markets. 25 A summary of Cash Flow section totals follows:
SIX MONTHS ENDED APRIL 30, 2004 2003 ---- ---- CASH PROVIDED BY (USED FOR): Operating activities $ 11,759 $ 6,475 Investing activities (9,671) (7,225) Financing activities (700) (3,419) Effect of exchange rate changes on cash and cash equivalents 746 959
OPERATING ACTIVITIES Net cash provided by operating activities increased by $5,284 due primarily to: - Increased net income of $3,757 in the first half of 2004 - An incremental $6,000 contribution to our US pension plans in the first quarter of 2003 - Timing in the payments of accounts payable and accrued expenses including an increase of $2,881 in book overdrafts - Increases in accounts receivable and inventories due to the overall increase in sales INVESTING ACTIVITIES Net cash used for investing activities increased by $2,446 due primarily to: - Increase in cash paid for acquisitions of $405 - Increase in capital expenditures of $1,448 FINANCING ACTIVITIES Net cash used for financing activities decreased by $2,719 due primarily to: - Decrease in net borrowings under short-term bank loans of $1,778 due primarily to the timing of certain cash payments - Increase in long term debt payments in 2003 of $1,285 The effect of exchange rate changes on cash and cash equivalents decreased $213 due to the fact that the U.S. Dollar strengthened more during the six months ended April 30, 2004 vs. the six months ended April 30, 2003. Contractual Obligations and Commercial Commitments Below is a table detailing, by maturity date, our Contractual Obligations and Commercial Commitments as of October 31, 2003:
OBLIGATIONS AND COMMITMENTS 2004 2005 2006 2007 2008 THEREAFTER - ----------- ---- ---- ---- ---- ------- ---------- Bank loans $11,804 $ -- $ -- $ -- $ -- $ -- Long-term debt 849 143 151 76 10 21 Operating leases 2,895 2,487 2,241 2,011 1,613 -- ------- ------ ------ ------- ------- ---- Total $15,548 $2,630 $2,392 $ 2,087 $ 1,623 $ 21 ======= ====== ====== ======= ======= ====
Also, see fiscal 2004 changes in bank loans and long-term debt detailed on the Consolidated Statements of Cash Flows for the six months ended April 30, 2004. We had no material qualifying long-term purchase obligations 26 at October 31, 2003 and through the interim period in 2004. Our U.S. pension plans require no minimum amount of funding in 2004. We plan to contribute approximately $971 to our Japanese pension plan in fiscal 2004. During the second quarter of fiscal 2004, we entered into a new, exclusive distribution agreement with a major retailer. Inclusive with this agreement is a requirement to buy-back certain non-CUNO inventory over the remainder of fiscal 2004. The amount of inventory that we will be required to buy back is based on future levels of such inventory on hand at the time the customer receives the first shipment of CUNO manufactured product. In May 2004, the Company approved certain inventory buybacks in connection with initial customer shipments. The initial maximum purchase under the first phase of this buyback program is approximately $500, which can be reduced by continued sales of the products by the retail customer over an agreed upon timeframe. Additional future amounts of this purchase commitment are not reasonably estimable; furthermore, the fair market value of certain purchased inventory may be below the actual price paid by the Company at the time of purchase. In addition, we expect to spend approximately $1.0 million during the remainder of 2004 to install in-store promotional kiosks to promote these products. 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 U.S. 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. 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, 2004 (the "Evaluation Date"). Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective and sufficient 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. 27 (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. 28 PART II ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) We held our annual meeting of Stockholders on March 4, 2004. (b) The following individuals were nominated and elected to serve a term of three years as Directors: Mr. Mark G. Kachur Dr. David L. Swift (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. Mark G. Kachur 14,779,977 355,673 1,787,638 Dr. David L. Swift 14,997,794 137,856 1,787,638
2. A proposal for the reapproval of the performance goals in the Executive Management Incentive Plan was approved by a count of 14,433,490 votes for, 668,192 votes against, 33,968 votes abstaining, and 1,787,638 shares not voted. 3. A proposal for the appointment of PricewaterhouseCoopers LLP as independent auditors was approved by a count of 15,005,935 votes for, 93,561 votes against, 36,154 votes abstaining, 1,787,638 shares not voted. 29 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Documents filed as part of this report. Exhibit 31.1 - Certification of Mark G. Kachur pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 - Certification of Frederick C. Flynn, Jr. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K We filed a Report on Form 8-K, dated February 19, 2004, under "Item 7. Financial Statements and Exhibits," reporting our financial results for the quarter ended January 31, 2004. 30 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 19, 2004 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 and Assistant Secretary 31 EX-31.1 2 y97635exv31w1.txt CERTIFICATION EXHIBIT 31.1 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 31-47986] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 19, 2004 /s/ Mark G. Kachur ------------------ Mark G. Kachur Chairman, President and Chief Executive Officer (Principal Executive Officer) 32 EX-31.2 3 y97635exv31w2.txt CERTIFICATION EXHIBIT 31.2 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 31-47986] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 19, 2004 /s/ Frederick C. Flynn, Jr. --------------------------- Frederick C. Flynn, Jr. Senior Vice President and Chief Financial Officer (Principal Financial Officer) 33 EX-32.1 4 y97635exv32w1.txt CERTIFICATION EXHIBIT 32.1 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, 2004 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 19, 2004 34 EX-32.2 5 y97635exv32w2.txt CERTIFICATION EXHIBIT 32.2 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, 2004 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 19, 2004 35 -----END PRIVACY-ENHANCED MESSAGE-----