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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, 1998
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 -- 16,129,025 shares as of January 31, 1998.
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CUNO INCORPORATED
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<CAPTION>
Page
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Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income -- Three months ended January 31, 1998 and 1997 1
Consolidated Balance Sheets -- January 31, 1998 and October 31, 1997 2
Consolidated Statements of Cash Flows -- Three months ended January 31, 1998 and 1997 3
Notes to Unaudited Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 5
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 7
Signatures 8
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CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
1998 1997
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<S> <C> <C>
Net sales $ 44,020 $ 44,839
Less costs and expenses:
Cost of products sold 25,057 25,638
Selling, general and administrative expenses 12,346 12,623
Research, development and engineering 2,815 2,651
-------- --------
40,218 40,912
-------- --------
Operating income 3,802 3,927
Nonoperating income (expense):
Interest income 33 36
Interest expense (213) (591)
Exchange gains (losses) 94 (26)
Other 179 (42)
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93 (623)
-------- --------
Income before income taxes 3,895 3,304
Provision for income taxes 1,362 1,239
-------- --------
Net income $ 2,533 $ 2,065
======== ========
Basic earnings per common share $ 0.16 $ 0.15
Diluted earnings per common share $ 0.16 $ 0.15
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<TABLE>
<CAPTION>
CUNO INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
JANUARY 31, OCTOBER 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,208 $ 3,416
Accounts receivable (less allowances for
doubtful accounts of $1,497 and $1,420, respectively) 42,312 43,105
Inventories 23,329 22,047
Deferred income taxes 4,902 5,328
Prepaid expenses and other current assets 3,074 2,542
--------- ---------
Total current assets 77,825 76,438
Noncurrent assets
Deferred income taxes 1,553 1,612
Intangible assets, net 18,350 17,923
Pension assets 1,221 1,239
Other noncurrent assets 1,182 584
Property, plant and equipment, net 48,385 48,529
--------- ---------
Total assets $ 148,516 $ 146,325
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 17,214 $ 16,998
Accounts payable 14,201 14,647
Accrued payroll and related taxes 5,948 9,801
Other accrued expenses 6,361 5,527
Accrued income taxes 3,245 2,943
Current portion of long-term debt 858 1,573
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Total current liabilities 47,827 51,489
Noncurrent liabilities
Long-term debt, less current portion 8,508 4,779
Deferred income taxes 3,850 3,990
Retirement benefits 4,156 4,177
--------- ---------
Total noncurrent liabilities 16,514 12,946
Stockholders' equity
Preferred stock, $.001 par value; 2,000,000 shares
authorized, no shares issued -- --
Common stock, $.001 par value; 50,000,000 shares authorized,
16,129,025 and 16,003,694 shares issued and outstanding
(excluding 3,377 and 3,377 shares in treasury) 16 16
Additional paid-in-capital 38,008 35,741
Retained earnings 48,254 45,721
Unearned compensation (4,071) (2,646)
Minimum pension liability (1,208) (1,228)
Foreign currency translation adjustments 3,176 4,286
--------- ---------
Total stockholders' equity 84,175 81,890
--------- ---------
Total liabilities and stockholders' equity $ 148,516 $ 146,325
--------- ---------
See notes to unaudited condensed consolidated financial statements.
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<TABLE>
<CAPTION>
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
THREE MONTHS ENDED
JANUARY 31,
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,533 $ 2,065
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,822 1,779
Gains on sale of property, plant and equipment (303) (4)
Compensation recognized under employee stock plans 452 404
Pension costs in excess of funding 321 --
Deferred income taxes 229 (228)
Changes in operating assets and liabilities:
Accounts receivable 121 (465)
Inventories (872) (1,196)
Prepaid expenses and other current assets (1,086) (604)
Payables to related party -- (3,149)
Accounts payable and accrued expenses (3,274) (2,078)
Accrued income taxes 302 891
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Net cash provided by (used for) operating activities 245 (2,585)
INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment 481 39
Acquisition of companies, net of cash acquired (2,209) --
Capital expenditures (1,777) (1,001)
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Net cash used for investing activities (3,505) (962)
FINANCING ACTIVITIES
Proceeds from long-term debt 3,892 4,000
Principal payments on long-term debt (754) (2,049)
Net borrowings under bank loans 1,078 2,371
Dividends paid to related party -- (2,352)
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Net cash provided by financing activities 4,216 1,970
Effect of exchange rate changes on cash and cash equivalents (164) (81)
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Net change in cash and cash equivalents 792 (1,658)
Cash and cash equivalents -- beginning of period 3,416 5,244
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Cash and cash equivalents -- end of period $ 4,208 $ 3,586
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See notes to unaudited condensed consolidated financial statements.
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CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1998
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
The Company designs, manufactures and markets a comprehensive line of
filtration products for the separation, clarification and purification
of liquids and gases. The Company's products, which include proprietary
depth filters and semi-permeable membrane filters, are sold in the
healthcare, fluid processing and potable water markets throughout the
world.
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 three-month period ended
January 31, 1998 are not necessarily indicative of the results that may
be expected for the year ending October 31, 1998. 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, 1997.
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
NOTE 2 - EARNINGS PER SHARE DATA
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. All
earnings per share amounts for all periods have been presented, and
where necessary restated, to conform with the Statement 128
requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
January 31, January 31,
1998 1997
<S> <C> <C>
NUMERATOR:
Net Income $ 2,533,000 $ 2,065,000
============ ============
DENOMINATOR:
Weighted average shares outstanding 16,057,216 13,809,513
Issued but unearned performance shares (180,155) (215,500)
Issued but unearned restricted shares (26,581) (34,582)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS
PER SHARE 15,850,480 13,559,431
============ ============
Weighted average shares outstanding 16,057,216 13,809,513
Effect of dilutive employee stock options 52,415 51,554
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS
PER SHARE 16,109,631 13,861,067
============ ============
Basic earnings per share $ 0.16 $ 0.15
Diluted earnings per share $ 0.16 $ 0.15
</TABLE>
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NOTE 3 - INVENTORIES
Inventories consist of the following:
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<CAPTION>
January 31, October 31,
1998 1997
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Raw materials $ 8,163 $ 8,167
Work-in-process 3,785 3,661
Finished goods 11,381 10,219
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$23,329 $22,047
======= =======
</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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTH PERIOD ENDED JANUARY 31, 1998 VS THREE MONTH PERIOD ENDED JANUARY
31, 1997
NET SALES
The Company recorded net sales of $44.0 million in the first quarter of
fiscal 1998 representing a (1.8) percent decrease over 1997's first quarter
sales of $44.8 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 first quarter of fiscal 1997, sales for
the first quarter of fiscal 1998 would have been $3.0 million higher, or 4.9
percent greater overall than the same period in fiscal 1997.
Sales from overseas operations were down $0.6 million or 2.8 percent,
but increased 10.7 percent when compared in constant valued U.S. dollars. Local
currency sales in Europe, Australia, and Japan increased 20.6 percent, 20.3
percent, and 5.1 percent, respectively.
GROSS PROFIT
The Company's gross profit decreased $0.2 million in the first quarter
of 1998 over the first quarter of 1997. Gross profit as a percentage of net
sales improved to 43.1 percent from 42.8 percent. This increase, which was
significantly tempered by unfavorable currency rate changes on inventory
purchases from the U.S. parent, is the result of the Company's focused attention
on sales related to higher margin products and continued efforts at productivity
gains and manufacturing cost containment.
OPERATING EXPENSES
Selling, general and administrative expenses decreased $0.3 million in
the first quarter of 1998 over the first quarter of 1997, representing a 2.2
percent decrease. The decrease stems primarily from cost controls especially in
administrative areas. Selling and advertising expenses, largely associated with
the launch of new products, increased $0.3 million, or 3.8 percent, in the first
quarter of 1998. Research, development and engineering expenses increased 6.2
percent in the first quarter of 1998.
5
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OPERATING INCOME
As a result of the above, operating income was approximately level at
$3.8 million or 8.6 percent of sales in the first quarter of 1998 as compared to
$3.9 million or 8.8 percent of sales in the first quarter of 1997.
NONOPERATING ACTIVITY
Interest expense decreased to $0.2 million in the first quarter of 1998
from $0.6 million in the first quarter of fiscal 1997. The decrease in interest
expense primarily results from the decrease in debt associated with the
Company's public offering of common stock in May, 1997. The proceeds were used
to retire indebtedness and for working capital and general corporate purposes.
During the first quarter of 1998, the Company sold a tract of land in Australia,
which was unrelated to the business, for $0.4 million resulting in a gain of
$0.3 million.
INCOME TAXES
The Company's effective income tax rate for the first quarter of 1998
was 35.0% as compared to 37.5% during the first quarter of 1997. The decrease
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.
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.
Set forth below is selected key cash flow data (in thousands of dollars):
Source/(Use) of funds
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THREE MONTHS ENDED
JANUARY 31,
1998 1997
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OPERATING ACTIVITIES:
Net cash provided by net income plus depreciation,
amortization and noncash compensation $ 4,807 $ 4,248
Accounts payable and accrued expenses (3,274) (2,078)
Payables to related party (former parent) -- (3,149)
INVESTING ACTIVITIES:
Capital expenditures (1,777) (1,001)
Acquisition of companies, net of cash acquired (2,209) --
FINANCING ACTIVITIES:
Net change in total debt 4,216 4,322
Dividends paid to related party -- (2,352)
</TABLE>
The net cash provided by net income plus depreciation, amortization and
noncash compensation is an important measurement of cash generated from the
earnings process before significant noncash charges. The increase in net income
plus depreciation, amortization and noncash compensation of 13.2 percent
reflects the Company's increased gross profit margin, reduced selling, general
and administrative expenses, and improved effective income tax rate. No payments
were made to the Company's former parent in the first quarter of 1998 as no
significant level of services have been provided subsequent to October 31, 1997.
6
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Capital expenditures amounted to $1.8 million for the three months
ended January 31, 1998 which is primarily comprised of purchases of machinery
and equipment and the expansion of manufacturing facilities.
During the quarter ended January 31, 1998, the Company completed two
overseas acquisitions, a distribution business and a product line which were
comprised primarily of working capital, for an aggregate purchase price of $2.2
million. These acquisitions have been accounted for as purchases and,
accordingly, the results of their operations are included in the Company's
consolidated statements of operations from the date of acquisition. These
acquisitions would not have materially affected the financial statements of the
Company had the results of their operations been included in the Company's
financial statements of prior periods.
OTHER MATTERS
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statements (SFAS No.
130 and 131) related to reporting comprehensive income and segment disclosures.
The Company plans to adopt these statements upon their applicable effective
dates in fiscal 1999.
COMPLIANCE WITH YEAR 2000
Management has initiated an enterprise-wide program to prepare the
Company's computer systems and applications to be Year 2000 compliant. The
Company expects to incur internal staff costs as well as other expenses related
to infrastructure and facilities enhancements necessary to prepare all of its
systems for the Year 2000. The Company expects to both replace some systems and
upgrade others. Maintenance or modification costs will be expensed as incurred.
The costs of new leased software will be expensed over the term of the lease.
The total cost of this effort is still being evaluated, but is not expected to
be material to the Company. This effort will give the Company the added benefit
of new technology and better functionality for many of its operational and
administrative systems.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as part of this report.
Exhibit 10 - Material Contracts
10.19 First Amendment to Distribution and Interim Services Agreement
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.
7
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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 27, 1998 By /s/ Ronald C. Drabik
---------------------- -----------------------
Ronald C. Drabik
Senior Vice President and
Chief Financial Officer
8
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EXHIBIT 10.19
FIRST AMENDMENT TO DISTRIBUTION
AND INTERIM SERVICES AGREEMENT
THIS FIRST AMENDMENT TO DISTRIBUTION AND INTERIM SERVICES AGREEMENT
(this "Amendment") is made and entered into as of January 27, 1998 by and
between COMMERCIAL INTERTECH CORP., an Ohio corporation ("Commercial Intertech")
and CUNO INCORPORATED, a Delaware corporation ("CUNO").
W I T N E S S E T H:
WHEREAS, Commercial Intertech and CUNO are parties to that certain
Distribution and Interim Services Agreement (the "Agreement") dated as of
September 10, 1996, entered into in connection with the distribution of CUNO
Common Stock (as defined in the Agreement) to the holders of Commercial
Intertech Common Stock (as defined in the Agreement) as part of the spin-off of
CUNO;
WHEREAS, the Agreement sets forth certain agreements relating to the
transactions necessary to effect such distribution of CUNO Common Stock and the
spin-off of CUNO, and certain agreements between the parties in connection with
the conduct of business (and sharing of services) thereafter; and
WHEREAS, Commercial Intertech and CUNO desire to amend the Agreement to
provide that corporate opportunities relating to the Cuno Business (as defined
in the Agreement) shall be the property of CUNO.
NOW, THEREFORE, for the good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Corporate Opportunities. Section 3.09 of the Agreement shall be
amended to provide that corporate opportunities relating to the CUNO Business
shall be the property or corporate opportunity of CUNO, and as such, Section
3.09 shall be deleted in its entirety and replaced with the following:
"SECTION 3.09 Corporate Opportunities. The parties hereto
acknowledge that certain of the director and officers of CUNO or a CUNO
Subsidiary may also be a director or officer of Commercial Intertech or
a Commercial Intertech Subsidiary following the Distribution Date. In
connection with the foregoing, the parties hereto agree that following
the Distribution Date, no opportunity, transaction, agreement or other
arrangement of which an officer or director of Commercial Intertech, a
Commercial Intertech Subsidiary or any other Person in which Commercial
Intertech or any Commercial Intertech Subsidiary acquires a financial
interest, is a party or has knowledge, shall be the
<PAGE> 12
property or corporate opportunity of CUNO or any CUNO Subsidiary,
unless such opportunity, transaction, agreement or other arrangement
relates to the ownership of interests in or the management and
operation of the CUNO Business, in which case such opportunity,
transaction, agreement or other arrangement shall be the property of
CUNO or such CUNO Subsidiary, as appropriate."
2. Definition of CUNO Business. The definition of CUNO Business for
purposes of this Amendment shall be the definition contained in the Agreement,
restated as follows:
"CUNO Business: the fluid purification business conducted, as of the
date of the Agreement, by Commercial Intertech, CUNO and their
respective Subsidiaries through the use of the CUNO Assets, and after
the Distribution Date to be conducted by CUNO and the CUNO
Subsidiaries."
3. Terms; Effect of Amendment. All capitalized terms used in this
Amendment but not otherwise defined herein shall have the meanings given to them
in the Agreement. All other terms and provisions of the Agreement not modified
by this Amendment shall remain in full force and effect.
4. Strict Construction. The language used in this Amendment will be
deemed to the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction will be applied against any party
hereto.
5. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original and all of which, when
taken together, shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties to this Amendment have caused this
Amendment to be duly executed and delivered as of the day and year first above
written.
COMMERCIAL INTERTECH CORP. CUNO INCORPORATED
By: /s/ Gilbert M. Manchester By: /s/ Mark G. Kachur
------------------------- ------------------
Gilbert M. Manchester Mark G. Kachur
Vice President, General Counsel and Chief Executive Officer
Assistant Secretary
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<PERIOD-END> JAN-31-1998
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