-----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, KOe7rzZB6qK99jmNUAF9+cA9pAGB/rOKX2SkMHa16l7s07bDx2VVPQxgliU/d5b5 swL9Ua/4FQnG7wlA/bk7XA== 0000950123-05-002146.txt : 20050223 0000950123-05-002146.hdr.sgml : 20050223 20050223162248 ACCESSION NUMBER: 0000950123-05-002146 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050131 FILED AS OF DATE: 20050223 DATE AS OF CHANGE: 20050223 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: 05634599 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 y06085e10vq.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 JANUARY 31, 2005 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 - 17,199,923 shares as of January 31, 2005 CUNO INCORPORATED
PAGE ----- PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Consolidated Statements of Income 1 Consolidated Balance Sheets 2 Consolidated Statements of Cash Flows 3 Notes to Unaudited Condensed Consolidated Financial Statements 4-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-21 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21-22 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 23-28
CUNO INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except share and per-share amounts)
THREE MONTHS ENDED JANUARY 31, 2005 2004 ---------------- ---------------- Net sales $ 99,376 $ 75,409 Less costs and expenses: Cost of products sold 56,930 40,553 Selling, general and administrative expenses 24,664 20,174 Research, development and engineering 4,924 4,189 Amortization expense 653 64 ---------------- ---------------- 87,171 64,980 ---------------- ---------------- Operating income 12,205 10,429 Nonoperating income (expense): Interest expense (523) (83) Interest and other income, net 223 150 ---------------- ---------------- (300) 67 ---------------- ---------------- Income before income taxes 11,905 10,496 Provision for income taxes 4,074 3,491 ---------------- ---------------- Net income $ 7,831 $ 7,005 ================ ================ Basic earnings per common share $ 0.46 $ 0.42 Diluted earnings per common share $ 0.45 $ 0.41 Basic shares outstanding 16,904,543 16,687,240 Diluted shares outstanding 17,380,874 17,215,135
See accompanying notes. -1- CUNO INCORPORATED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share amounts)
JANUARY 31, OCTOBER 31, 2005 2004 --------------- -------------- ASSETS Current assets Cash and cash equivalents $ 16,728 $ 23,359 Accounts receivable, less allowances for doubtful accounts of $2,123 and $2,230, respectively 86,416 89,593 Inventories, net 49,177 47,275 Deferred income taxes 14,733 12,656 Prepaid expenses and other current assets 6,846 5,974 --------------- -------------- Total current assets 173,900 178,857 Noncurrent assets Deferred income taxes 803 892 Goodwill, net 104,197 103,977 Other intangible assets 32,552 32,894 Prepaid pension costs 9,786 9,785 Other noncurrent assets 5,676 4,832 Property, plant and equipment, net 108,831 103,321 --------------- -------------- Total assets $ 435,745 $ 434,558 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt $ 326 $ 276 Bank loans 13,371 11,048 Accounts payable 30,869 33,469 Accrued payroll and related taxes 13,414 20,329 Other accrued expenses 10,309 11,502 Accrued income taxes 3,715 4,539 --------------- -------------- Total current liabilities 72,004 81,163 Noncurrent liabilities Long-term debt, less current portion 70,636 75,569 Deferred income taxes 20,199 16,662 Retirement benefits 4,537 4,396 Other noncurrent liabilities 955 789 --------------- -------------- Total noncurrent liabilities 96,327 97,416 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, 17,199,923 and 17,122,698 shares issued and outstanding 17 17 Treasury Stock, at cost (2,747 shares) (57) (57) Additional paid-in-capital 66,174 63,413 Unearned compensation (3,711) (2,164) Accumulated other comprehensive loss -- Foreign currency translation adjustments 10,406 7,966 Minimum pension liability (386) (386) Change in fair value of derivative financial instruments (50) - --------------- -------------- 9,970 7,580 Retained earnings 195,021 187,190 --------------- -------------- Total stockholders' equity 267,414 255,979 --------------- -------------- Total liabilities and stockholders' equity $ 435,745 $ 434,558 =============== ==============
See accompanying notes. -2- CUNO INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
THREE MONTHS ENDED JANUARY 31, 2005 2004 --------------- --------------- OPERATING ACTIVITIES Net income $ 7,831 $ 7,005 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,891 2,656 Noncash compensation recognized under employee stock plans 260 193 Gains on sales of property, plant and equipment (16) (8) Pension funding less than expense 51 111 Deferred income taxes 1,941 390 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 4,272 275 Inventories (1,295) (1,161) Prepaid expenses and other current assets (2,208) (851) Accounts payable and accrued expenses (10,508) (3,783) Accrued income taxes (1,175) 752 --------------- --------------- Net cash provided by operating activities 3,044 5,579 INVESTING ACTIVITIES Proceeds from sales of property, plant and equipment 26 - Acquisition of companies, net of cash acquired - (554) Capital expenditures (7,543) (3,718) Other, net (308) (83) --------------- --------------- Net cash used for investing activities (7,825) (4,355) FINANCING ACTIVITIES Principal payments on long-term debt (5,039) - Principal payments on short-term debt (160) (78) Proceeds from short-term debt 2,336 - Net (repayments) borrowings under short-term bank loans (204) 199 Proceeds from stock options exercised 846 392 --------------- --------------- Net cash (used for) provided by financing activities (2,221) 513 Effect of exchange rate changes on cash and cash equivalents 371 1,514 --------------- --------------- Net change in cash and cash equivalents (6,631) 3,251 Cash and cash equivalents -- beginning of period 23,359 57,603 --------------- --------------- Cash and cash equivalents -- end of period $ 16,728 $ 60,854 =============== ===============
See accompanying notes. -3- CUNO INCORPORATED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except share and per-share amounts) JANUARY 31, 2005 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, 2004. 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:
JANUARY 31, OCTOBER 31, 2005 2004 ------------ ----------- (unaudited) Raw materials $ 18,435 $ 18,805 Work-in-process 6,415 6,215 Finished goods 24,327 22,255 ---------- --------- $ 49,177 $ 47,275 ========== =========
4 ACCOUNTS PAYABLE At January 31, 2005 and October 31, 2004, approximately $2,101 and $2,478, 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 JANUARY 31, 2005 2004 ----- ----- Interest income $ 172 $ 239 Exchange gains (losses) 11 (13) Gains on sales of property, plant, and equipment 16 8 Other, net 24 (84) ----- ----- $ 223 $ 150 ===== =====
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:
JANUARY 31, JANUARY 31, 2005 2004 ----------- ----------- NUMERATOR: Net income $ 7,831 $ 7,005 =========== =========== DENOMINATORS: weighted average shares outstanding 16,904,543 16,687,240 ----------- ----------- DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,904,543 16,687,240 =========== =========== Weighted average shares outstanding 16,904,543 16,687,240 Effect of dilutive employee stock options 331,697 413,234 Effect of dilutive restricted shares 144,634 114,661 ----------- ----------- DENOMINATOR FOR DILUTED EARNINGS PER SHARE 17,380,874 17,215,135 =========== =========== Basic earnings per share $ 0.46 $ 0.42 Diluted earnings per share $ 0.45 $ 0.41
Approximately 61,536 and 253,197 shares related to options to purchase common stock and unvested restricted stock were excluded from the computations of diluted earnings per share at January 31, 2005 and 2004, respectively, because the exercise price was greater than the average market price of the common stock during the periods. 5 COMPREHENSIVE INCOME: Total comprehensive income was comprised of the following:
THREE MONTHS ENDED JANUARY 31, 2005 2004 -------- -------- Net income $ 7,831 $ 7,005 Other comprehensive loss: Change in fair value of derivative financial instruments, net of deferred income taxes of $25 and $120 (44) (202) Losses related to derivative financial instruments reclassified into earnings from other comprehensive income, net of $4 and $26 tax benefit (6) (42) Foreign currency translation adjustments 2,440 3,635 -------- -------- Total comprehensive income $ 10,221 $ 10,396 ======== ========
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 Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (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 JANUARY 31, 2005 2004 -------- ------- Volatility 34.73% 23.39% Risk-free interest rate 3.65% 3.46% Expected option life 5 years 5 years Dividend yield - -
6 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 JANUARY 31, 2005 2004 --------- --------- Net income, as reported $ 7,831 $ 7,005 Add: Stock-based compensation expense included in reported net income, net of income taxes 171 129 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of income taxes 640 620 --------- --------- Pro forma net income $ 7,362 $ 6,514 ========= ========= Earnings per share: Basic - as reported $ 0.46 $ 0.42 Basic - pro forma $ 0.44 $ 0.39 Diluted - as reported $ 0.45 $ 0.41 Diluted - pro forma $ 0.42 $ 0.38
NEWLY ISSUED ACCOUNTING STANDARD In December 2004, the FASB issued SFAS No. 123(revised 2004), "Share-Based Payment". This standard will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award. This Standard is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. This Standard will apply to all awards granted after the required effective date and to awards modified, repurchased or canceled after that date. We are currently evaluating the requirements and application of this standard and expect the adoption to have an adverse effect on our consolidated statements of income. NOTE 2 - GOODWILL AND INTANGIBLE ASSETS Goodwill amounted to $104,197 and $103,977 at January 31, 2005 and October 31, 2004, respectively. The increase in goodwill is attributable to changes in foreign exchange rates. Other intangible assets amounted to $32,552 and $32,894 at January 31, 2005 and October 31, 2004, respectively. The decrease in the balance of other intangible assets is related primarily to amortization, which amounted to $653 for the three-month period ended January 31, 2005, partially offset by the impact of fluctuations in foreign exchange rates. 7 NOTE 3 - BENEFIT PLANS Components of Net Periodic Benefit Cost are as follows:
THREE MONTHS ENDED JANUARY 31, 2005 2004 ------ ------ Service cost $ 794 $ 683 Interest cost 689 633 Expected return on plan assets (882) (823) Amortization of transition asset 1 20 Amortization of prior service cost 46 102 Amortization of net loss 237 141 ------ ------ Net periodic benefit cost $ 885 $ 756 ====== ======
During the quarter ended January 31, 2005, employer contributions of $834 were made to the pension plans. We currently anticipate contributing an additional $2,456 to fund our pension plans in fiscal 2005 for a total expected contribution of $3,290. The pension assumptions used to determine our October 31, 2004 plan liabilities and the fiscal 2005 pension expense are as follows:
US PLANS JAPAN PLANS -------- ----------- Weighted-average discount rate 6.00% 2.25% 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 2005 is determined at the beginning of the fiscal year and expensed ratably throughout the year. Our estimate of pension expense to be recognized in 2005 is $3.5 million ($3.1 million in fiscal 2004). NOTE 4 - ACQUISITIONS In the first quarter of 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 8 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. Financial information by geographic operating segments is summarized below:
THREE MONTHS ENDED JANUARY 31, 2005 2004 -------- -------- NET SALES: Europe $ 19,490 $ 16,633 Japan 12,362 9,821 Asia/Pacific 12,911 10,635 Latin America 3,564 3,487 -------- -------- Subtotal - Foreign sales 48,327 40,576 North America 64,748 45,808 Intercompany sales (13,699) (10,975) -------- -------- Total net sales $ 99,376 $ 75,409 ======== ========
Our sales by market are summarized below:
THREE MONTHS ENDED JANUARY 31, 2005 2004 ------- ------- NET SALES: Potable Water $52,297 $34,853 Fluid Processing 23,239 20,270 Healthcare 23,840 20,286 ------- ------- Total net sales $99,376 $75,409 ======= =======
Our operating income by segment is detailed below:
THREE MONTHS ENDED JANUARY 31, 2005 2004 -------- -------- OPERATING INCOME: North America $ 6,335 $ 6,159 Europe 1,036 1,126 Japan 2,353 1,058 Asia/Pacific 2,161 1,733 Latin America 320 353 -------- -------- Total operating income 12,205 10,429 -------- -------- Interest expense (523) (83) Other, net 223 150 -------- -------- Income before income taxes $ 11,905 $ 10,496 ======== ========
Interest expense and other income (expense) have not been allocated to segments. 9 Our assets by segment are detailed below:
JANUARY 31, OCTOBER 31, 2005 2004 ----------- ----------- ASSETS: North America $ 347,382 $ 345,359 Europe 60,069 59,605 Japan 38,706 37,100 Asia/Pacific 34,469 31,323 Latin America 14,385 14,047 General Corporate 16,728 23,359 Eliminations and other (75,994) (76,235) --------- --------- Total Assets $ 435,745 $ 434,558 ========= =========
General corporate assets, consisting of 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 deductibles 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. 10 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 months ended January 31, 2005 and 2004, 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. - 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 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. 11 COMPANY RISK FACTORS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS Approximately 44% 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 12 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. Accordingly, revenue is recognized upon delivery to a common carrier when terms are FOB shipping and upon receipt by customer when terms are FOB destination. 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
13 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. Business Acquisitions - Assets and liabilities acquired in a business combination are recorded at their estimated fair values at the acquisition date. In accordance with SFAS 142, goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment testing. The assessment of goodwill involves the estimation of the fair value of reporting units, as defined by SFAS 142. Management completed this annual assessment during the fourth quarter of 2004 based on the best information available as of the date of the assessment, which incorporated management's assumptions about expected future cash flows. Based on this assessment, there was no goodwill impairment in 2004. Future cash flows can be affected by changes in the global economy and local economies, industries and markets in which the Company sells products or services, and the execution of management's plans, particularly with respect to integrating acquired companies. There can be no assurance that future events will not result in impairment of goodwill or other intangible assets. 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 14 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 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. 15 RESULTS OF OPERATIONS THREE MONTH PERIOD ENDED JANUARY 31, 2005 VS. THREE MONTH PERIOD ENDED JANUARY 31, 2004 OVERVIEW During the first three months of fiscal 2005, CUNO's sales and net income grew by 31.8 percent and 11.8 percent, respectively. U. S. Dollar organic sales growth was 19.9 percent and organic sales growth on a local currency basis was 17.0 percent. Sales growth was particularly strong in North America and Japan, and strong overall within the worldwide potable water market. Although our sales increased significantly, our gross margin decreased due primarily to the impact of our recent acquisition of WTC Industries Inc. (WTC). Sales to retailers within the potable water market and sales attributable to WTC generally carry lower gross margins than we have historically reported. 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, 2004 for a full discussion of the key factors which affect our business and operating results. We anticipate increased expenditures associated with compliance efforts surrounding the Sarbanes-Oxley Act of 2002 during the remainder of fiscal 2005. Below is a summary of selected consolidated earnings information:
THREE MONTHS ENDED JANUARY 31, 2005 2004 CHANGE -------- -------- -------- Net sales $ 99,376 $ 75,409 31.8% Cost of products sold 56,930 40,553 40.4% Gross profit 42,446 34,856 21.8% Gross margin percent 42.7% 46.2% 350 bpt Selling, general and administrative 24,664 20,174 22.3% SG&A as a percent of sales 24.8% 26.8% 200 bpt Operating income 12,205 10,429 17.0% Operating margin 12.3% 13.8% 150 bpt Effective tax rate 34.2% 33.3% 90 bpt Net income 7,831 7,005 11.8% Diluted earnings per share $ 0.45 $ 0.41 9.8%
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 weaker compared to most of the currencies in countries we conduct business in during the first quarter of 2005 compared to the first quarter of 2004. We translate revenue and expense accounts at the average exchange rates during the periods presented. NET SALES Net sales were $99.4 million in the first quarter of fiscal 2005 representing a 31.8 percent increase over 2004's first quarter sales of $75.4 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 quarter of 2004, net sales in the first 16 quarter of 2005 would have been $2.2 million lower than the reported sales of $99.4 million, or 28.9 percent greater overall. The following table displays the Company's sales by geographic segment:
THREE MONTHS ENDED CURRENCY JANUARY 31, PERCENT ADJUSTED 2005 2004 CHANGE CHANGE -------- -------- -------- -------- North America $ 56,062 $ 38,938 44.0% 44.0% Europe 16,332 13,857 17.9% 9.8% Japan 12,040 9,594 25.5% 20.9% Asia/Pacific 11,659 9,779 19.2% 14.8% Latin America 3,283 3,241 1.3% (4.3%) -------- -------- Total sales $ 99,376 $ 75,409 31.8% 28.9% ======== ========
North American sales increased 44.0 percent in the first quarter of 2005 as compared to the same quarter in 2004. Sales increased in all North American markets during the quarter, however stronger potable water market sales were largely responsible for this growth. Excluding sales from WTC which we acquired on August 2, 2004, sales in North America would have been up 20.9 percent quarter over quarter. North American fluid processing and healthcare sales increased 13.4 percent and 9.8 percent, respectively, reflecting the overall strength of the economy during this time period. European sales increased 9.8 percent in local currency as compared to the same period in 2004. Sales were generally strong in all European markets, however 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 broadly in all markets and were led by very strong sales of food and beverage filters used in the healthcare market primarily for the filtration of bottled drinks. Asia/Pacific sales were up 14.8 percent in local currency primarily reflecting strong growth of potable water sales within the Asia region. First quarter 2005 Latin American sales were down 4.3 percent when expressed in local currency due primarily to lower sales within the potable water market. The following table displays the Company's sales by market:
THREE MONTHS ENDED CURRENCY JANUARY 31, PERCENT ADJUSTED 2005 2004 CHANGE CHANGE -------- -------- -------- -------- Potable Water $ 52,297 $ 34,853 50.1% 48.8% Fluid Processing 23,239 20,270 14.6% 10.6% Healthcare 23,840 20,286 17.5% 12.9% -------- -------- Total sales $ 99,376 $ 75,409 31.8% 28.9% ======== ========
The strength in the potable water market continues to be broad geographically, driven largely by strong overseas sales (up 16.5 percent in local currency) and strong sales growth in North America (up 57.8 percent) associated with OEM customers, direct marketing companies, and appliance manufacturers. Excluding the impact of WTC, first quarter worldwide water sales were up 23.1 percent on a local currency basis. Fluid Processing sales were up 13.4 percent in North America and up 9.5 percent overseas on a local currency basis. Healthcare sales were up 9.8 percent in North America and up 14.2 percent overseas on a local currency basis. Much of this overseas growth was driven by continued strong sales of food and beverage filters in Japan used primarily for the filtration of bottled drinks. 17 GROSS PROFIT Gross profit increased $7.6 million to $42.4 million in the first quarter of 2005 from $34.9 million in the first quarter of 2004. Gross profit as a percentage of net sales (gross margin) decreased during that same period from 46.2 percent in 2004 to 42.7 percent in 2005. This decrease in gross margin is primarily attributable to a change in our sales mix in the potable water market, including sales of WTC (which we acquired on August 2, 2004 and are included in our 2005 results) and increasing sales to retailers, both of which carry comparatively lower gross margins. OPERATING EXPENSES Selling, general and administrative expenses (SG&A) were up 22.3 percent, less than the 31.8 percent sales growth rate for the quarter. Because of CUNO's international operations, the weaker US dollar served to increase the consolidated US dollar reported SG&A expense. SG&A expenses were 24.8 percent of sales in the first quarter of fiscal 2005 vs. 26.8 percent of sales in the first quarter of fiscal 2004. We continue to face rising structural costs such as medical, pension and depreciation expense, as well as the addition of WTC's expenses included in 2005 results. Research, development and engineering expenses (incurred primarily in the US and to a lesser extent in Europe) increased 17.5 percent to $4.9 million in the first quarter of 2005, reflecting our continued focus on the development of new products and technologies. As a percentage of sales, research, development and engineering expenses were 5.0 percent of sales in the first quarter of fiscal 2005 compared to 5.6 percent of sales in the first quarter of fiscal 2004. OPERATING INCOME As a result of the above, operating income increased $1.8 million, or 17.0 percent, to $12.2 million or 12.3 percent of sales in the first quarter of fiscal 2005 compared to $10.4 million or 13.8 percent of sales in the first quarter of 2004. Our operating income by segment is detailed below:
THREE MONTHS ENDED JANUARY 31, DOLLAR PERCENT 2005 2004 CHANGE CHANGE -------- -------- -------- -------- OPERATING INCOME: North America $ 6,335 $ 6,159 $ 176 2.9% Europe 1,036 1,126 (90) (8.0%) Japan 2,353 1,058 1,295 122.4% Asia/Pacific 2,161 1,733 428 24.7% Latin America 320 353 (33) (9.3%) -------- -------- -------- Total $ 12,205 $ 10,429 $ 1,776 17.0% -------- -------- --------
Operating income in North America increased only modestly compared to the $17.1 million increase in sales. This increase was due to many factors, including: start-up costs of associated with a new plant which is currently being built in Mexico to begin production of certain water products, amortization expense associated with WTC's definite lived amortizable intangible assets, lower gross margins associated with the change in sales mix within the potable water market (as noted above) and other increased structural costs discussed above. 18 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 9.8 percent on a local currency basis, while the Euro strengthened approximately 8 percent (average first quarter of 2005 versus average first quarter of 2004). Increased manufacturing and structural costs were responsible for the reduction in Europe's operating income. Sales in Japan were up 20.9 percent on a local currency basis, and the Yen strengthened versus the U.S. Dollar approximately 4 percent quarter over quarter (allowing fixed costs to be spread over a larger sales base). Sales in 2005 were very strong for food and beverage filters used in the filtration of summer bottled drinks. These sales are dependent on consumer preferences and other external factors. Asia/Pacific sales were up 14.8 percent quarter over quarter, and the Australian Dollar strengthened approximately 4 percent in comparison (approximately 50 percent of our sales in the region are denominated in Australian Dollars). Local currency sales in Latin America decreased 4.3 percent, contributing to the modest decrease in operating income for the quarter. NONOPERATING INCOME (EXPENSE): Interest expense increased from $0.1 million in the first quarter of 2004 to $0.5 million in the first quarter of 2005. This primarily relates to interest expense associated with our variable rate, unsecured revolving credit facility. We had $70 million in outstanding borrowings under this facility at January 31, 2005 and capitalized approximately $0.2 million in interest costs during the first quarter of 2005 in accordance with the provisions of FAS 34, "Capitalization of Interest Cost". INCOME TAXES The Company's effective income tax rate for the first quarter of 2005 was 34.2 percent compared to 33.3 percent in the first quarter of 2004. In 2004, our rate was benefited by a one-time expanded availability and utilization of certain state credits in the U.S. Also, our tax rate is impacted by the change in the mix of income attributed to the various countries in which we do business and various one-time and recurring tax planning initiatives. As of January 31, 2005, the Company had a full valuation allowance against approximately $1.3 million of NOLs in China. Our China operations are start-up in nature with a history of losses (no profit has been earned since inception in 2001). 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 ($16.7 million at January 31, 2005) and available sources of liquidity (approximately $25 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 19 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 are currently in the process of establishing a manufacturing operation in Mexico to meet product demands in the water market. In addition, new manufacturing lines and processes are being installed in the US to benefit the potable water, fluid processing, and healthcare markets. SUMMARY OF CASH FLOWS FOLLOWS:
THREE MONTHS ENDED JANUARY 31, 2005 2004 ------- ------- CASH PROVIDED BY (USED FOR): Operating activities $ 3,044 $ 5,579 Investing activities (7,825) (4,355) Financing activities (2,221) 513 Effect of exchange rate changes on cash and cash equivalents 371 1,514
Net cash provided by operating activities decreased by $2,535 due primarily to: - Increase in deferred income taxes of $1,551 in the first quarter of 2005 - Timing in the payments of accounts payable and accrued expenses - Timing in the collection of accounts receivable (increased sales in the first quarter of 2005 contributed to a source of cash of $4,272 in accounts receivable) - Timing in the payment of income taxes Net cash used for investing activities increased by $3,470 due primarily to: - Decrease in cash paid for acquisitions of $554 - Increase in capital expenditures of $3,825 Net cash used for financing activities increased by $2,734 due primarily to: - Change in net borrowings under short-term bank debt of $2,254 due primarily to the timing of certain cash payments - Paydown of long term debt in 2005 of $5,039 The effect of exchange rate changes on cash and cash equivalents of $371 reflects the continued weakening of the U.S. Dollar in 2005 against the Japanese Yen, Euro and Australian Dollar. 20 Contractual Obligations and Commercial Commitments Below is a table detailing, by maturity date, our Contractual Obligations and Commercial Commitments as of October 31, 2004:
OBLIGATIONS AND COMMITMENTS 2005 2006 2007 2008 2009 THEREAFTER - ---------------- ---------- ---------- ---------- ---------- ---------- ---------- Bank loans $ 11,048 $ -- $ -- $ -- $ -- $ -- Long-term debt 276 242 119 28 75,011 169 Operating leases 3,436 2,904 2,479 1,852 1,700 253 ---------- ---------- ---------- ---------- ---------- ---------- Total $ 14,760 $ 3,146 $ 2,598 $ 1,880 $ 76,711 $ 422 ========== ========== ========== ========== ========== ==========
Also, see fiscal 2005 changes in bank loans and long-term debt detailed on the Consolidated Statements of Cash Flows for the three months ended January 31, 2005. We had no material qualifying long-term purchase obligations at October 31, 2004 and through the interim period in 2005. Our U.S. pension plans require no minimum amount of funding in 2005, however we plan to contribute approximately $3.3 million to our U.S. and Japanese pension plan in fiscal 2005. OTHER INFORMATION Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act") will require the Company to include an internal control report from management in its Annual Report on Form 10-K for the year ended October 31, 2005 and in subsequent reports. The internal control report must include the following: (1) a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of the Company's internal control over financial reporting, (3) management's assessment of the effectiveness of the Company's internal control over financial reporting as of October 31, 2005, including a statement as to whether or not internal control over financial reporting is effective, and (4) a statement that the Company's independent auditors have issued an attestation report on management's assessment of internal controls over financial reporting. Management acknowledges its responsibility for establishing and maintaining internal controls over financial reporting and seeks to continually improve those controls. In addition, in order to achieve compliance with Section 404 of the Act within the required time frame, the Company has been conducting a process to document and evaluate its internal controls over financial reporting. In this regard, the Company has dedicated internal resources, engaged outside consultants and adopted a detailed work plan to: (1) assess and document the adequacy of internal controls over financial reporting; (2) take steps to improve control processes where required; (3) validate through testing that controls are functioning as designed; and (4) implement a continuous reporting and improvement process for internal control over financial reporting. The Company believes its process for documenting, evaluating and monitoring its internal control over financial reporting is consistent with the objectives of Section 404 of the Act. Given the risks inherent in the design and operation of internal controls over financial reporting, the Company can provide no assurance as to its, or its independent auditor's, conclusions at October 31, 2005 with respect to the effectiveness of its internal controls over financial reporting. 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 21 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. 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 January 31, 2005 (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. (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. 22 PART II 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 January 18, 2005, under "Item 1.01 Entry into a material Definitive Agreement", disclosing recent employments agreements with Timothy B. Carney and Mark G. Kachur. 23 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 February 23, 2005 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 24 EX-31.1 2 y06085exv31w1.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: February 23, 2005 /s/ Mark G. Kachur ------------------ Mark G. Kachur Chairman, President and Chief Executive Officer (Principal Executive Officer) 25 EX-31.2 3 y06085exv31w2.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: February 23, 2005 /s/ Frederick C. Flynn, Jr. --------------------------- Frederick C. Flynn, Jr. Senior Vice President and Chief Financial Officer (Principal Financial Officer) 26 EX-32.1 4 y06085exv32w1.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 January 31, 2005 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: February 23, 2005 27 EX-32.2 5 y06085exv32w2.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 January 31, 2005 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: February 23, 2005 28 -----END PRIVACY-ENHANCED MESSAGE-----