<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 April 30, 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 -- 15,998,613 shares as of May 30, 1997.
<PAGE> 2
CUNO INCORPORATED
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Statements of Consolidated Income -- Three months ended April 30, 1997 and 1996 1
Statements of Consolidated Income -- Six months ended April 30, 1997 and 1996 2
Consolidated Balance Sheets -- April 30, 1997 and October 31, 1996 3
Statements of Consolidated Cash Flows -- Six months ended April 30, 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 4. Submission of Matters to a Vote of Security Holders 9
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
APRIL 30,
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 46,383 $ 45,090
Less costs and expenses:
Cost of products sold 26,061 26,630
Selling, general and administrative expenses 14,782 13,472
------------ ------------
40,843 40,102
------------ ------------
Operating income 5,540 4,988
Nonoperating income (expense):
Interest income 30 25
Interest expense (554) (98)
Exchange gains (losses) 48 (12)
Gain (loss) on sale of assets (12) 18
Other 9 (81)
------------ ------------
(479) (148)
------------ ------------
Income before income taxes 5,061 4,840
Provision for income taxes 1,771 1,589
------------ ------------
Net income $ 3,290 $ 3,251
============ ============
Net income per common share $ 0.24 $ 0.24
Weighted average common shares
outstanding 13,850,347 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>
SIX MONTHS ENDED
APRIL 30,
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 91,222 $ 86,094
Less costs and expenses:
Cost of products sold 51,699 51,886
Selling, general and administrative expenses 30,056 26,584
------------ ------------
81,755 78,470
------------ ------------
Operating income 9,467 7,624
Nonoperating income (expense):
Interest income 66 56
Interest expense (1,145) (199)
Exchange gains (losses) 22 (22)
Gain (loss) on sale of assets (6) 116
Other (39) (94)
------------ ------------
(1,102) (143)
------------ ------------
Income before income taxes 8,365 7,481
Provision for income taxes 3,010 2,379
============ ============
Net income $ 5,355 $ 5,102
============ ============
Net income per common share $ 0.39 $ 0.38
Weighted average common shares
outstanding 13,829,978 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>
APRIL 30, OCTOBER 31,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,595 $ 5,244
Accounts and notes receivable (less allowances for
doubtful accounts of $1,409 and $1,133, respectively) 38,409 36,944
Inventories 21,082 19,149
Deferred income taxes 5,576 5,333
Prepaid expenses and other current assets 2,479 1,965
--------- ---------
Total current assets 72,141 68,635
Noncurrent assets
Intangible assets, net 18,757 19,695
Pension assets 1,132 1,174
Other noncurrent assets 248 1,051
Property, plant and equipment, net 46,589 48,201
--------- ---------
Total assets $ 138,867 $ 138,756
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 13,825 $ 10,690
Accounts payable 14,923 12,719
Accrued payrolls and related taxes 8,253 9,084
Accrued expenses 5,118 5,393
Accrued income taxes 2,545 1,360
Current portion of long-term debt 887 962
Dividends payable to related party -- 4,612
Payable to related party 3,501 10,184
--------- ---------
Total current liabilities 49,052 55,004
Noncurrent liabilities
Long-term debt 10,137 33,772
Deferred income taxes 3,443 3,670
Retirement benefits 3,258 3,162
--------- ---------
Total noncurrent liabilities 16,838 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, 15,833,151 and 13,774,568 shares outstanding 16 14
Additional paid-in-capital 33,443 6,736
Retained earnings 38,991 33,636
Unearned compensation (3,398) (3,448)
Minimum pension liability adjustment (811) (811)
Translation adjustments 4,736 7,021
--------- ---------
Total stockholders' equity 72,977 43,148
--------- ---------
Total liabilities and stockholders' equity $ 138,867 $ 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>
SIX MONTHS ENDED
APRIL 30,
1997 1996
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,355 $ 5,102
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Depreciation and amortization 3,560 3,818
Loss (gain) on sale of property, plant and equipment 6 (116)
Compensation recognized under employee stock plans 658 --
Pension costs in excess of funding 582 610
Change in deferred income taxes (662) 730
Changes in operating assets and liabilities:
Accounts receivable (3,291) (3,627)
Inventories (2,961) 2,895
Prepaid expenses and other current assets (180) 87
Payables to related party (7,020) (7,651)
Accounts payable and accrued expenses 2,250 (154)
Accrued income taxes 1,123 65
-------- -------
Net cash (used for) provided by operating activities (580) 1,759
INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment 85 32
Capital expenditures (2,623) (2,408)
-------- -------
Net cash (used for) investing activities (2,538) (2,376)
FINANCING ACTIVITIES
Proceeds from long term debt 9,000 --
Principal payments on long term debt (32,434) (473)
Net borrowings under bank loan agreements 4,319 1,788
Proceeds from issuance of common stock 26,100 --
Dividends paid to related party (4,515) (1,268)
Proceeds from stock options exercised 20 --
Conversion of other assets -- (469)
-------- -------
Net cash provided by (used for) financing activities 2,490 (422)
Effect of exchange rate changes on cash and cash equivalents (21) (180)
-------- -------
Net change in cash and cash equivalents (649) (1,219)
Cash and cash equivalents -- beginning of period 5,244 6,740
-------- -------
Cash and cash equivalents -- end of period $ 4,595 $ 5,521
======== =======
</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
April 30, 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 six-month period ended April 30, 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 the second
quarter of 1997, the Company would have reported basic earnings per share
of $0.39 for the six months ended April 30, 1997 and $0.24 for the three
months ended April 30, 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>
April 30, October 31,
1997 1996
------- -------
<S> <C> <C>
Raw materials $ 2,417 $ 2,817
Work-in-process 6,808 6,503
Finished goods 11,857 9,829
------- -------
$21,082 $19,149
======= =======
</TABLE>
Inventories are stated at the lower of cost of 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 April 1997, the Company completed an equity offering of two million
shares of common stock with an over-allotment option of 300,000 shares.
Proceeds to the Company, net of related costs of the offering, totaled
$26.1 million as of April 30, 1997 for the two million shares issued to
date. 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 APRIL 30, 1997 VS THREE MONTH PERIOD ENDED APRIL 30,
1996
Net Sales. The Company recorded net sales of $46.4 million in the second
quarter of fiscal 1997 representing a 2.9% increase over 1996's second
quarter sales of $45.1 million. The strengthening U.S. dollar had a
significant effect on overseas results when translated from local currency
into U.S. dollars. Had currency value been unchanged from the second
quarter of fiscal 1996, sales for the second quarter of fiscal 1997 would
have been $1.9 million higher, or 7.1% greater overall than the same
period in fiscal 1996.
Sales in the U.S. increased 9.9% over the second quarter of fiscal 1996.
Much of this improvement stemmed from increased sales in the health care
market.
Sales from overseas operations were down .8 million or 3.3%, but increased
4.6% when compared in constant valued U.S. dollars. Local currency sales
in Australia and Brazil were slightly below the prior year while other
overseas regions reported improvements. Sales in Asia increased 14.9% in
local currency while sales in Japan improved by 12.0% in local currency.
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<PAGE> 9
Gross Profit. Gross profit increased $1.9 million in the second quarter of
fiscal 1997 as compared to the same period in fiscal 1996. The percentage
of gross profit to sales improved from 40.9% to 43.8% 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, 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 $1.3 million, or 9.7%, to $14.8
million in the second quarter of fiscal 1997 from $13.5 million for the
same period of 1996. Additionally, the expenses expressed as a percentage
of sales increased in the second quarter of fiscal 1997 to 31.9% from
29.9% in 1996. The increase is due to higher spending for selling,
engineering and research and development expense, especially related to
the Company's emphasis on new product development and introductions.
Operating Income. Operating income of $5.5 million in the second quarter of
fiscal 1997 represented an 11.1% improvement over the same period of
fiscal 1996. The operating margin of 11.9% compares favorably to 11.1% for
the same period in 1996. The improvement in gross margin, discussed above,
provided the majority of the growth in operating margin.
Interest Expense. Interest expense increased to $0.6 million in the second
quarter of 1997 from $0.1 million in the second 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 second quarter of
1997 was 35.0% as compared to 32.8% during the second quarter of 1996. The
increase reflects a change in the mix of income attributed to various
countries and their taxing authorities in which the Company does business.
SIX MONTH PERIOD ENDED APRIL 30, 1997 VS SIX MONTH PERIOD ENDED APRIL 30, 1996
Net Sales. Net sales increased 6.0% during the first half of fiscal 1997 as
compared to the same period in fiscal 1996, to $91.2 million from $86.1
million. The effects of changes in the value of foreign currency as
expressed in U.S. dollars reduced overall sales in the first half of 1997
by $2.9 million. Had changes in foreign currency value not occurred, sales
would have increased by 9.3% over the prior year.
Sales in the U.S. increased 12.5% in the first half of fiscal 1997, with
the majority of that increase derived from sales in the health care
market. Overseas sales, after the unfavorable impact of currency,
increased 0.1% during the first six months of fiscal 1997 as compared to
the same period in fiscal 1996.
Gross profit. For the first six months of 1997, the Company recorded a gross
profit margin of 43.3% as compared to 39.7% 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. 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 six months of fiscal
1997, selling, general and administrative expenses increased 13.1% to
$30.1 million from $26.6 million for the same period in fiscal 1996.
Engineering and research and development expenses increased 15.1% in the
first half of fiscal 1997 while advertising expenses increased 36.6% due
to the introduction of new products. Increases were recorded both
domestically and abroad.
Operating Income. Operating income increased $1.8 million to $9.5 million
during the first half of fiscal 1997 as compared to the same period of
fiscal 1996. This represented a 24.2% improvement . Operating income in
the U.S. was a record for the first half of the year.
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<PAGE> 10
Interest Expense. Interest expense increased to $1.1 million in the six month
period of 1997 from $0.2 million in the six 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 six month period
of 1997 was 36.0% as compared to 31.8% during the six month period of
1996. The increase reflects a change in the mix of income attributed to
various countries and their taxing authorities in which the Company does
business.
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>
Six months ended
April 30,
1997 1996
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Payables to related party $ (7,020) $(7,651)
Net cash provided by operating activities
before related party payables 6,440 9,410
INVESTING ACTIVITIES:
Capital expenditures (2,623) (2,408)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 26,100 0
Net decrease in long term debt (23,434) (473)
Dividends paid to related party (4,515) (1,268)
</TABLE>
Net cash provided by operating activities before related party payments to
Commercial Intertech was $6.4 million and $9.4 million for the six months ended
April 30, 1997 and 1996, respectively. The decrease in cash generated from
operating activities stems primarily from an increase in inventories in the six
month period of 1997 of $3.0 million associated with the general growth of the
business as well as recent new product introductions. Partially offsetting this
use of cash was an increase in accounts payable for the six month period of 1997
of $2.3 million created, in part, by the increased inventory purchases.
Capital expenditures amounted to $2.6 million for the six months ended April 30,
1997 which is primarily comprised of new purchases of machinery and equipment
used in manufacturing.
In April 1997, the Company completed an offering of two million shares of its
common stock which as of April 30, 1997, generated net cash proceeds to the
Company of $26.1 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>
April 30, October 31,
1997 1996
------- -------
<S> <C> <C>
Long term debt $10,137 $33,772
Stockholders' equity 72,977 43,148
Ratio of long term debt to total capitalization 12% 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 4. Submission of Matters to a Vote of Security Holders
(a) The Corporation held its annual meeting of Stockholders on March 27, 1997.
(b) The following individuals were nominated and elected to serve a term of
three years as directors:
Mr. Joel B. Alvord
Dr. Charles L. Cooney
Mr. John M. Galvin.
(c) The stockholders voted on the following matters:
1. Election of Directors - the voting result for each nominee was:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld Broker Nonvotes Not Voted
---- --------- -------------- --------------- ---------
<S> <C> <C> <C> <C>
Mr. Joel B. Alvord 12,041,008 80,593 40,300 1,654,798
Dr. Charles L. Cooney 12,071,496 50,405 40,000 1,654,798
Mr. John M. Galvin 11,838,548 283,353 40,000 1,654,798
</TABLE>
2. A management proposal to approve the CUNO Incorporated 1996 Stock
Incentive Plan was approved by a count of 9,517,828 votes for,
1,600,898 votes against, 246,621 votes abstaining, 796,554 Broker
Nonvotes and 1,654,798 not voted.
3. A proposal for the appointment of Ernst & Young LLP as independent
auditors was approved by a count of 12,050,600 votes for, 43,365
votes against, 27,936 votes abstaining, 40,000 Broker Nonvotes and
1,654,798 not voted.
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 6/6/1997 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> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<EXCHANGE-RATE> 1
<CASH> 4,595
<SECURITIES> 0
<RECEIVABLES> 39,818
<ALLOWANCES> 1,409
<INVENTORY> 21,082
<CURRENT-ASSETS> 72,141
<PP&E> 95,667
<DEPRECIATION> 49,078
<TOTAL-ASSETS> 138,867
<CURRENT-LIABILITIES> 49,052
<BONDS> 10,137
0
0
<COMMON> 16
<OTHER-SE> 72,961
<TOTAL-LIABILITY-AND-EQUITY> 138,867
<SALES> 46,383
<TOTAL-REVENUES> 46,383
<CGS> 26,061
<TOTAL-COSTS> 26,061
<OTHER-EXPENSES> 14,782
<LOSS-PROVISION> 22
<INTEREST-EXPENSE> 554
<INCOME-PRETAX> 5,061
<INCOME-TAX> 1,771
<INCOME-CONTINUING> 3,290
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,290
<EPS-PRIMARY> .24
<EPS-DILUTED> 0
</TABLE>
