<PAGE> 1
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 July 31, 1997 Commission file number 000-21109
CUNO INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 06-1159240
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Research Parkway, Meriden, Connecticut 06450
(Address of principal executive offices) (Zip Code)
(203) 237-5541
Registrant's telephone number, including area code
Not Applicable
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, .001 Par Value -- 15,999,932 shares as of August 31, 1997.
<PAGE> 2
CUNO INCORPORATED
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Statements of Consolidated Income -- Three months ended July 31, 1997 and 1996 1
Statements of Consolidated Income -- Nine months ended July 31, 1997 and 1996 2
Consolidated Balance Sheets -- July 31, 1997 and October 31, 1996 3
Statements of Consolidated Cash Flows -- Nine months ended July 31, 1997 and 1996 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 6
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
</TABLE>
<PAGE> 3
CUNO INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 48,135 $ 48,542
Less costs and expenses:
Cost of products sold 27,440 27,746
Selling, general and administrative expenses 15,227 14,668
Distribution and other nonrecurring costs -- 2,876
------------ ------------
42,667 45,290
------------ ------------
Operating income 5,468 3,252
Nonoperating income (expense):
Interest income 28 39
Interest expense (203) (101)
Exchange (losses) (7) (80)
Gain on sale of assets 31 5
Other (62) (86)
------------ ------------
(213) (223)
------------ ------------
Income before income taxes 5,255 3,029
Provision for income taxes 1,752 2,399
------------ ------------
Net income $ 3,503 $ 630
============ ============
Net income per common share $ 0.22 $ 0.05
Weighted average common shares
outstanding 15,947,363 13,565,922
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE> 4
CUNO INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 139,357 $ 134,636
Less costs and expenses:
Cost of products sold 79,139 79,632
Selling, general and administrative expenses 45,283 41,252
Distribution and other nonrecurring costs -- 2,876
------------ ------------
124,422 123,760
------------ ------------
Operating income 14,935 10,876
Nonoperating income (expense):
Interest income 94 95
Interest expense (1,348) (300)
Exchange gains (losses) 15 (102)
Gain on sale of assets 25 121
Other (101) (180)
------------ ------------
(1,315) (366)
------------ ------------
Income before income taxes 13,620 10,510
Provision for income taxes 4,762 4,778
------------ ------------
Net income $ 8,858 $ 5,732
============ ============
Net income per common share $ 0.61 $ 0.42
Weighted average common shares
outstanding 14,535,773 13,565,922
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE> 5
CUNO INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1997 1996
--------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 3,669 $ 5,244
Accounts and notes receivable (less allowances for
doubtful accounts of $1,449 and $1,133, respectively) 42,145 36,944
Inventories 21,926 19,149
Deferred income taxes 5,291 5,333
Prepaid expenses and other current assets 2,978 1,965
--------- ---------
Total current assets 76,009 68,635
Noncurrent assets
Intangible assets, net 18,293 19,695
Pension assets 1,155 1,174
Other noncurrent assets 492 1,051
Property, plant and equipment, net 47,287 48,201
--------- ---------
Total assets $ 143,236 $ 138,756
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 16,450 $ 10,690
Accounts payable 14,564 12,719
Accrued payrolls and related taxes 7,917 9,084
Accrued expenses 5,789 5,393
Accrued income taxes 2,285 1,360
Current portion of long-term debt 927 962
Dividends payable to related party -- 4,612
Payable to related party 1,064 10,184
--------- ---------
Total current liabilities 48,996 55,004
Noncurrent liabilities
Long-term debt 9,284 33,772
Deferred income taxes 3,292 3,670
Retirement benefits 3,482 3,162
--------- ---------
Total noncurrent liabilities 16,058 40,604
Stockholders' equity
Preferred stock, $.001 par value; 2,000,000 shares
authorized, no shares issued and outstanding -- --
Common Stock, $.001 par value; 50,000,000 shares
authorized, 15,999,932 and 13,774,568 shares outstanding 16 14
Additional paid-in-capital 35,593 6,736
Retained earnings 42,494 33,636
Unearned compensation (2,951) (3,448)
Minimum pension liability adjustment (811) (811)
Translation adjustments 3,841 7,021
--------- ---------
Total stockholders' equity 78,182 43,148
--------- ---------
Total liabilities and stockholders' equity $ 143,236 $ 138,756
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE> 6
CUNO INCORPORATED AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,858 $ 5,732
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Depreciation and amortization 5,417 5,632
(Gain) on sale of property, plant and equipment (25) (121)
Compensation recognized under employee stock plans 1,121 --
Pension costs in excess of funding 497 905
Deferred income taxes (493) (87)
Changes in operating assets and liabilities:
Accounts receivable (6,700) (7,527)
Inventories (3,831) 4,040
Prepaid expenses and other current assets (757) 181
Payables to related party (9,343) (9,149)
Accounts payable and accrued expenses 1,541 5,121
Accrued income taxes 839 (856)
-------- --------
Net cash (used for) provided by operating activities (2,876) 3,871
INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment 143 41
Capital expenditures (4,832) (4,699)
-------- --------
Net cash (used for) investing activities (4,689) (4,658)
FINANCING ACTIVITIES
Proceeds from long-term debt 11,200 --
Principal payments on long-term debt (35,587) (521)
Net borrowings under bank loan agreements 6,851 1,228
Proceeds from issuance of common stock 28,103 --
Dividends paid to related party (4,515) (1,268)
Proceeds from stock options exercised 20 --
Conversion of other assets -- (615)
-------- --------
Net cash provided by (used for) financing activities 6,072 (1,176)
Effect of exchange rate changes on cash and cash equivalents (82) (95)
-------- --------
Net change in cash and cash equivalents (1,575) (2,058)
Cash and cash equivalents -- beginning of period 5,244 6,740
-------- --------
Cash and cash equivalents -- end of period $ 3,669 $ 4,682
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE> 7
CUNO INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 1997
Note A - CUNO Organization and Distribution
On July 29, 1996 the Board of Directors of Commercial Intertech Corp.
("Commercial Intertech" or "Related Party") approved a plan to spin-off
its fluid purification business by declaring a dividend distribution of
100% of the common stock of Cuno Incorporated ("CUNO" or the "Company")
on a pro-rata basis to the holders of Commercial Intertech common
shares (the "Distribution" or "Spin-off"). On September 10, 1996, the
Distribution date, each holder of record of Commercial Intertech common
shares as of the close of business on August 9, 1996, the record date
for the Distribution, received one share of CUNO Common Stock for every
one share of Commercial Intertech common share. No fractional shares of
CUNO were issued.
In connection with the Spin-off, the Company declared dividends of
approximately $35,675,000 payable from the CUNO subsidiaries to the
parent (Commercial Intertech), and immediately prior to the
Distribution, Cuno assumed $30,000,000 of Commercial Intertech's debt
which was accounted for as a dividend.
CUNO and Commercial Intertech have entered into a Tax Allocation
Agreement in connection with the Distribution. In addition, the
companies have entered into a Distribution and Interim Services
Agreement which provides that certain services which have historically
been provided to CUNO by Commercial Intertech will continue to be
provided following the Distribution Date, at rates specified in such
agreement, for a period of up to twelve months.
For further information, refer to CUNO's Form 10 filed with the SEC on
September 10, 1996.
Note B - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles 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 generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended July
31, 1997 are not necessarily indicative of the results that may be
expected for the year ending October 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto
included in CUNO Incorporated's Form 10-K for the year ended October
31, 1996.
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
In February of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share". The Company will adopt this standard, as required, in the first
quarter of its fiscal 1998 year. At that time, the Company will be
required to change the method currently used to compute earnings per
share and to restate all prior periods presented. Had this standard
been adopted in fiscal 1997, the Company would have reported basic
earnings per share of $0.61 for the nine months ended July 31, 1997 and
$0.22 for the three months ended July 31, 1997. The impact of adopting
Statement 128 is not expected to have a material impact on the
Company's reported earnings per share.
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<PAGE> 8
Note C - Earnings per share data
All share and per share information has been retroactively restated to
reflect the Distribution in a manner similar to a stock split. In
determining the weighted average number of common shares outstanding
during the 1996 periods, it was assumed that the shares issued in
conjunction with the reorganization were outstanding during each period
presented. Fully diluted earnings per share is not presented as the
effect of other common stock equivalents was not material.
Note D - Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
July 31, October 31,
1997 1996
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<S> <C> <C>
Raw materials $ 2,735 $ 2,817
Work-in-process 7,794 6,503
Finished goods 11,397 9,829
------- -------
$21,926 $19,149
======= =======
</TABLE>
Inventories are stated at the lower of cost or market. Inventories in
the United States are primarily valued on the last-in, first-out (LIFO)
cost method. The method used for all other inventories is first-in,
first-out (FIFO). An actual valuation of inventory under the LIFO
method can be made only at the end of each year based on the inventory
levels and costs at that time. Accordingly, interim LIFO calculations
must necessarily be based on management's 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.
Note E - Equity Offering
In May 1997, the Company completed an equity offering of approximately
2.2 million shares of common stock. Proceeds to the Company, net of
related costs of the offering, totaled $28.1 million. The proceeds were
used to retire indebtedness and for working capital and general
corporate purposes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTH PERIOD ENDED JULY 31, 1997 VS THREE MONTH PERIOD ENDED JULY 31, 1996
Net Sales. The Company recorded net sales of $48.1 million in the third quarter
of fiscal 1997 representing a (0.8%) decrease over 1996's third quarter
sales of $48.5 million. The strengthening U.S. dollar had a significant
effect on overseas results when translated from local currency into
U.S. dollars. Had currency values been unchanged from the third quarter
of fiscal 1996, sales for the third quarter of fiscal 1997 would have
been $2.0 million higher, or 3.2% greater overall than the same period
in fiscal 1996.
Sales from overseas operations were down $0.6 million or 2.4%, but
increased 5.6% when compared in constant valued U.S. dollars. Local
currency sales in Australia, Asia and Japan all experienced
double-digit increases in the third quarter of 1997.
Gross Profit. Gross profit decreased $0.1 million in the third quarter of fiscal
1997 as compared to the same period in fiscal 1996. The percentage of
gross profit to sales improved from 42.8% to 43.0% over those same
periods. An improvement in the mix of sales in the U.S. provided much
of the gain as the Company continues to expand its sales into the
health care market, as well as introduce new products. Additionally,
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<PAGE> 9
several of the Company's manufacturing operations, most notably the
facility devoted to potable water products in the U.S. and the Calais,
France operation, have demonstrated improved operating efficiency.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $0.6 million, or 3.8%, to $15.2
million in the third quarter of fiscal 1997 from $14.7 million for the
same period of 1996. Much of the increase in operating expenses in the
third quarter of 1997 relate to the expansion of selling resources.
Operating Income. Operating income of $5.5 million in the third quarter of
fiscal 1997 represented a 68.1% improvement over the same period of
fiscal 1996. The operating margin of 11.4% compares favorably to 6.7%
for the same period in 1996. During the third quarter of 1996, the
Company incurred $2.9 million in distribution and other non-recurring
costs associated with the Spin-off. After adjusting for those unusual
expenses, the operating profit for the third quarter of 1996 was $6.1
million and the operating margin 12.6%.
Interest Expense. Interest expense increased to $0.2 million in the third
quarter of 1997 from $0.1 million in the third quarter of fiscal 1996.
The increase in interest expense primarily resulted from the $30.0
million of debt incurred by the Company in conjunction with the
Spin-off. See "Financial Position and Liquidity".
Income Taxes. The Company's effective income tax rate for the third quarter of
1997 was 33.3% as compared to 79.2% during the third quarter of 1996.
The decrease reflects certain distribution and other nonrecurring
costs related to the spin-off incurred in the third quarter of 1996
which were not considered deductible. No such nonrecurring costs were
expensed in 1997.
NINE MONTH PERIOD ENDED JULY 31, 1997 VS NINE MONTH PERIOD ENDED JULY 31, 1996
Net Sales. Net sales increased 3.5% during the first nine months of fiscal 1997
as compared to the same period in fiscal 1996, to $139.4 million from
$134.6 million. The effects of changes in the value of foreign currency
as expressed in U.S. dollars reduced overall sales in the first nine
months of 1997 by $4.9 million. Had changes in foreign currency value
not occurred, sales would have increased by 7.1% over the prior period.
Sales in the U.S. increased 8.2% in the first nine months of fiscal
1997, with the majority of that increase derived from sales in the
health care market. Overseas sales, after adjusting for the unfavorable
impact of currency, increased 6.2% during the first nine months of
fiscal 1997 as compared to the same period in fiscal 1996.
Gross profit. For the first nine months of 1997, the Company recorded a gross
profit margin of 43.2% as compared to 40.9% for the same period in
fiscal 1996. Most of the gain stems from an improved mix of sales in
the U.S., reflecting increased sales into the health care market as
well as increased operating efficiency in manufacturing. Gross margins
have also improved in certain overseas locations, most notably Europe.
Much of the gain in Europe relates to improved product mix and enhanced
operating efficiency.
Selling, General and Administrative Expenses. In the first nine months of fiscal
1997, selling, general and administrative expenses increased 9.8% to
$45.3 million from $41.3 million for the same period in fiscal 1996.
Additionally, the expenses expressed as a percentage of sales increased
to 32.5% in 1997 from 30.6% in 1996. The majority of the increase stems
from a continued expansion of resources in selling, engineering and
research and development.
Operating Income. Operating income increased $4.1 million to $14.9 million
during the first nine months of fiscal 1997 as compared to the same
period of fiscal 1996. This represented a 37.3% improvement. Excluding
$2.9 million in distribution and other non-recurring expenses discussed
above from 1996's results, operating income for the first nine months
of 1997 is 8.6% greater than the same period of 1996, and the 1997 year
to date operating margin of 10.7% compares favorably to 10.2% a year
earlier.
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<PAGE> 10
Interest Expense. Interest expense increased to $1.3 million in the nine month
period of 1997 from $0.3 million in the nine month period of 1996. The
increase in interest expense primarily resulted from the $30.0 million
of debt incurred by the Company in conjunction with the Spin-off. See
"Financial Position and Liquidity".
Income Taxes. The Company's effective income tax rate for the nine month period
of 1997 was 35.0% as compared to 45.5% during the comparable period of
1996. The decrease reflects certain distribution and other nonrecurring
costs related to the spin-off incurred in the third quarter of 1996
which were not considered deductible. No such nonrecurring costs were
expensed in 1997.
FINANCIAL POSITION AND LIQUIDITY
The Company assesses its liquidity in terms of its ability to generate cash to
fund operating and investing activities. Of particular importance in the
management of liquidity are cash flows generated from operating activities,
capital expenditure levels and adequate bank financing options.
Set forth below is selected key cash flow data:
(in thousands of dollars)
<TABLE>
<CAPTION>
Nine months ended
July 31,
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by net income before depreciation,
amortization and noncash compensation $ 15,396 $ 11,364
Inventories (3,831) 4,040
Payables to related party (9,343) (9,149)
INVESTING ACTIVITIES:
Capital expenditures (4,832) (4,699)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 28,103 0
Net decrease in long term debt (24,387) (521)
Dividends paid to related party (4,515) (1,268)
</TABLE>
Inventories increased $3.8 million during the first nine months of 1997 due to a
general growth in worldwide sales and increased volume associated with recent
new product introductions. Related party payments to Commercial Intertech
amounted to $9.3 million during the first nine months of 1997. Such payments
relate to services provided under the Distribution and Interim Services
Agreement established by Commercial Intertech and CUNO to ensure the
availability of services to CUNO by Commercial Intertech during CUNO's first
fiscal year of independence. The increase in net cash provided by net income
before depreciation, amortization and noncash compensation of 35.5% for the
first nine months of 1997 over the comparable period in 1996 reflects the
Company's increased sales volume, improved gross profit margin and reduced
effective income tax rate.
Capital expenditures amounted to $4.8 million for the nine months ended July 31,
1997 which is primarily comprised of new purchases of machinery and equipment
used in manufacturing.
The Company completed an offering of approximately 2.2 million shares of its
common stock which generated net cash proceeds to the Company of $28.1 million.
The proceeds were used to pay down long term debt associated with the Company's
revolving credit facility. In addition, the Company has paid all dividends owed
to Commercial Intertech which arose as part of its recent Spin-off.
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<PAGE> 11
Other selected financial data is as follows:
(amounts in thousands)
<TABLE>
<CAPTION>
July 31, October 31,
1997 1996
---- ----
<S> <C> <C>
Long term debt $ 9,284 $33,772
Stockholders' equity 78,182 43,148
Ratio of long term debt to total capitalization 11% 44%
</TABLE>
The Company manages its worldwide cash requirements with consideration of the
cost effectiveness of the available funds from the many subsidiaries through
which it conducts its business. Management believes that its existing cash
position and other available sources of liquidity are sufficient to meet current
and anticipated requirements for the foreseeable future.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule (submitted electronically herewith)
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter for which this 10-Q is
filed.
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<PAGE> 12
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 September 5, 1997 By /s/ Ronald C. Drabik
-------------------------- -----------------------------
Ronald C. Drabik
Senior Vice President and
Chief Financial Officer
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,669
<SECURITIES> 0
<RECEIVABLES> 43,594
<ALLOWANCES> 1,449
<INVENTORY> 21,926
<CURRENT-ASSETS> 76,009
<PP&E> 97,432
<DEPRECIATION> 50,145
<TOTAL-ASSETS> 143,236
<CURRENT-LIABILITIES> 48,996
<BONDS> 9,284
0
0
<COMMON> 16
<OTHER-SE> 78,166
<TOTAL-LIABILITY-AND-EQUITY> 143,236
<SALES> 48,135
<TOTAL-REVENUES> 48,135
<CGS> 27,440
<TOTAL-COSTS> 27,440
<OTHER-EXPENSES> 15,227
<LOSS-PROVISION> 21
<INTEREST-EXPENSE> 203
<INCOME-PRETAX> 5,255
<INCOME-TAX> 1,752
<INCOME-CONTINUING> 3,503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,503
<EPS-PRIMARY> .22
<EPS-DILUTED> 0
</TABLE>
