<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
<TABLE>
<S> <C>
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2000 Commission file number 000-21109
---------
</TABLE>
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
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Registrant's telephone number, including area code
Not Applicable
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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 -- 16,329,930 shares as of April 30, 2000
<PAGE> 2
CUNO INCORPORATED
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income - Three months ended April 30, 2000 and 1999 1
Consolidated Statements of Income - Six months ended April 30, 2000 and 1999 2
Consolidated Balance Sheets - April 30, 2000 and October 31, 1999 3
Consolidated Statements of Cash Flows - Six months ended April 30, 2000 and 1999 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
<PAGE> 3
CUNO Incorporated
Consolidated Statements of Income (unaudited)
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
2000 1999
---------------- -----------------
<S> <C> <C>
Net sales $ 58,910 $ 54,027
Less costs and expenses:
Cost of products sold 33,436 30,120
Selling, general and administrative expenses 15,742 15,457
Research, development and engineering 3,365 2,955
---------------- -----------------
52,543 48,532
---------------- -----------------
Operating income 6,367 5,495
Nonoperating income (expense):
Interest expense (188) (297)
Other income, net 12 64
---------------- -----------------
(176) (233)
---------------- -----------------
Income before income taxes 6,191 5,262
Provision for income taxes 2,319 1,947
---------------- -----------------
Net income $ 3,872 $ 3,315
================ =================
Basic earnings per common share $ 0.24 $ 0.21
Diluted earnings per common share $ 0.23 $ 0.20
Basic shares outstanding 16,186,989 16,066,882
Diluted shares outstanding 16,623,908 16,259,528
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE> 4
CUNO Incorporated
Consolidated Statements of Income (unaudited)
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Six Months Ended
April 30,
2000 1999
-------------- --------------------
<S> <C> <C>
Net sales $ 116,644 $ 104,653
Less costs and expenses:
Cost of products sold 66,845 60,880
Selling, general and administrative expenses 31,523 29,777
Research, development and engineering 6,500 5,807
-------------- ---------------
104,868 96,464
-------------- ---------------
Operating income 11,776 8,189
Nonoperating income (expense):
Interest expense (429) (655)
Other income, net 116 233
-------------- ---------------
(313) (422)
-------------- ---------------
Income before income taxes 11,463 7,767
Provision for income taxes 4,333 2,864
-------------- ---------------
Net income $ 7,130 $ 4,903
============== ===============
Basic earnings per common share $ 0.44 $ 0.31
Diluted earnings per common share $ 0.43 $ 0.30
Basic shares outstanding 16,174,704 16,034,545
Diluted shares outstanding 16,572,664 16,232,053
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE> 5
CUNO Incorporated
Consolidated Balance Sheets (unaudited)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
------------------ ------------------
Assets
<S> <C> <C>
Current assets
Cash and cash equivalents $ 6,562 $ 6,186
Accounts receivable, less allowances for
doubtful accounts of $1,719 and $1,706, respectively 46,778 50,777
Inventories 28,609 29,246
Deferred income taxes 7,935 8,606
Prepaid expenses and other current assets 2,628 2,434
------------------ ------------------
Total current assets 92,512 97,249
Noncurrent assets
Deferred income taxes 1,436 1,598
Intangible assets, net 24,671 22,567
Other noncurrent assets 2,383 2,576
Property, plant and equipment, net 60,881 60,352
------------------ ------------------
Total assets $ 181,883 $ 184,342
================== ==================
Liabilities and Stockholders' Equity
Current liabilities
Bank loans $ 18,274 $ 19,189
Accounts payable 17,019 16,716
Accrued payroll and related taxes 8,526 11,790
Other accrued expenses 8,462 8,002
Accrued income taxes 3,497 3,750
Current portion of long-term debt 1,605 2,493
------------------ ------------------
Total current liabilities 57,383 61,940
Noncurrent liabilities
Long-term debt, less current portion 5,204 8,761
Deferred income taxes 4,499 4,750
Retirement benefits 4,634 4,317
------------------ ------------------
Total noncurrent liabilities 14,337 17,828
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,
16,329,930 and 16,342,952 shares issued and outstanding
(excluding 4,328 shares in treasury) 16 16
Additional paid-in-capital 40,074 39,779
Unearned compensation (2,301) (2,568)
Accumulated other comprehensive (loss) income --
foreign currency translation adjustments (1,663) 440
Retained earnings 74,037 66,907
------------------ ------------------
Total stockholders' equity 110,163 104,574
------------------ ------------------
Total liabilities and stockholders' equity $ 181,883 $ 184,342
================== ==================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE> 6
CUNO Incorporated
Statements of Consolidated Cash Flows (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
April 30,
2000 1999
---------------- ----------------
<S> <C> <C>
Operating activities
Net income $ 7,130 $ 4,903
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,328 3,995
Noncash compensation recognized under employee stock plans 483 652
Gain on sale of property, plant and equipment (18) (1)
Pension costs in excess of funding 455 391
Deferred income taxes 445 160
Changes in operating assets and liabilities:
Accounts receivable 2,264 1,280
Inventories (376) (797)
Prepaid expenses and other current assets (563) (744)
Accounts payable and accrued expenses (333) (784)
Accrued income taxes (236) 466
---------------- ----------------
Net cash provided by operating activities 13,579 9,521
Investing activities
Proceeds from sales of property, plant and equipment 21 -
Capital expenditures (5,271) (5,644)
Contingent consideration for prior acquisition (2,885) (1,000)
Proceeds from surrender of life insurance policies 569 -
---------------- ----------------
Net cash used for investing activities (7,566) (6,644)
Financing activities
Proceeds from long-term debt 3,800 5,300
Principal payments on long-term debt (8,127) (10,696)
Net (repayments) borrowings under short-term bank loans (184) 1,285
Retirement of Common Stock (1,154) -
Proceeds from stock options exercised 142 118
---------------- ----------------
Net cash used for financing activities (5,523) (3,993)
Effect of exchange rate changes on cash and cash equivalents (114) 61
---------------- ----------------
Net change in cash and cash equivalents 376 (1,055)
Cash and cash equivalents -- beginning of period 6,186 4,433
---------------- ----------------
Cash and cash equivalents -- end of period $ 6,562 $ 3,378
================ ================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
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<PAGE> 7
CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
CUNO Incorporated (the "Company" or "CUNO") 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 six-month period
ended April 30, 2000 are not necessarily indicative of the results that may be
expected for the full year ending October 31, 2000. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Form 10-K for the year ended October 31, 1999.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended:
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
2000 1999
---- ----
NUMERATOR:
<S> <C> <C>
Net income $3,872,000 $3,315,000
========== ==========
DENOMINATORS:
Weighted average shares outstanding 16,321,476 16,216,983
Issued but unearned performance shares
(68,165) (123,790)
Issued but unearned restricted shares
(66,322) (26,311)
-------- --------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,186,989 16,066,882
========== ==========
Weighted average shares outstanding 16,321,476 16,216,983
Effect of dilutive employee stock options 302,432 42,545
---------- ----------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,623,908 16,259,528
========== ==========
Basic earnings per share $ 0.24 $ 0.21
Diluted earnings per share $ 0.23 $ 0.20
</TABLE>
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<PAGE> 8
The following table sets forth the computation of basic and diluted
earnings per share for the six months ended:
<TABLE>
<CAPTION>
APRIL 30, APRIL 30,
2000 1999
---- ----
NUMERATOR:
<S> <C> <C>
Net income $7,130,000 $4,903,000
========== ==========
DENOMINATORS:
Weighted average shares outstanding 16,315,722 16,191,218
Issued but unearned performance shares
(68,694) (128,458)
Issued but unearned restricted shares
(72,324) (28,215)
-------- --------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,174,704 16,034,545
========== ==========
Weighted average shares outstanding 16,315,722 16,191,218
Effect of dilutive employee stock options 256,942 40,835
---------- ----------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,572,664 16,232,053
========== ==========
Basic earnings per share $ 0.44 $ 0.31
Diluted earnings per share $ 0.43 $ 0.30
</TABLE>
NOTE 3 - INVENTORIES
Inventories consist of the following (amounts in thousands):
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
2000 1999
--------- ---------
<S> <C> <C>
Raw materials $12,393 $12,399
Work-in-process 3,080 3,197
Finished goods 13,136 13,650
------- --------
$28,609 $29,246
======= =======
</TABLE>
Inventories are stated at the lower of cost or market. Inventories in
the United States are primarily valued by the last-in, first-out (LIFO) cost
method. The primary 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.
-6-
<PAGE> 9
]NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income was comprised of the following (amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $3,872 $3,315 $7,130 $4,903
Other comprehensive loss - foreign currency
translation adjustments (1,729) (264) (2,103) (2,481)
------- ------ ------- -------
Total comprehensive income $2,143 $3,051 $5,027 $2,422
======= ====== ======= =======
</TABLE>
NOTE 5 - SEGMENT DATA
For management reporting and control, the Company is divided into five
geographic operating segments as presented below. Each segment has general
operating autonomy over its markets.
Operating segment data includes the results of all subsidiaries,
consistent with the management reporting of these operations. Financial
information by geographic operating segments is summarized below (amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES:
North America $38,181 $36,833 $75,766 $69,463
Europe 9,366 10,663 18,199 20,654
Japan 9,931 7,502 18,598 14,351
Asia/Pacific 6,491 6,245 12,653 11,910
Latin America 3,366 2,554 7,458 5,483
Intercompany sales (8,425) (9,770) (16,030) (17,208)
--------- --------- --------- --------
Consolidated $58,910 $54,027 $116,644 $104,653
========= ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING INCOME:
North America $ 3,830 $3,279 $7,284 $4,772
Europe 156 655 202 771
Japan 999 377 1,489 367
Asia/Pacific 921 799 1,820 1,525
Latin America 461 385 981 754
-------- -------- ------- -------
Segment total 6,367 5,495 11,776 8,189
-------- -------- ------- -------
Interest expense (188) (297) (429) (655)
Other income, net 12 64 116 233
-------- -------- ------ -------
Income before income taxes $6,191 $5,262 $11,463 $7,767
======== ======== ======= =======
</TABLE>
Interest expense and other income (expense) have not been allocated to segments.
-7-
<PAGE> 10
NOTE 6 - OTHER INCOME, NET
Other income, net consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income $56 $38 $108 $83
Exchange (losses) gains (43) 18 (23) 231
Gains on sale of
property, plant, and equipment 18 -- 18 1
Other income (expenses) (19) 8 13 (82)
---- --- --- ----
$12 $64 $116 $233
=== === ==== ====
</TABLE>
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<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTH PERIOD ENDED APRIL 30, 2000 VS. THREE MONTH PERIOD ENDED APRIL 30,
1999
NET SALES
The Company had net sales of $58.9 million in the second quarter of
fiscal 2000 representing a 9.0 percent increase over 1999's second quarter sales
of $54.0 million. The majority of this improvement can be attributed to an
increase in the unit volume of worldwide sales. Currency values had an
immaterial effect on consolidated overseas net sales (quarter over quarter) when
translated from local currency into US dollars.
<TABLE>
<CAPTION>
THREE MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2000 1999 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
North America $32,249 $30,793 4.7% 4.7%
Europe 7,871 7,969 (1.2%) 11.7%
Japan 9,681 7,316 32.3% 19.3%
Asia/Pacific 5,770 5,459 5.7% 8.0%
Latin America 3,339 2,490 34.1% 29.5%
---- ------ ------- ------
Total sales $58,910 $54,027 9.0% 9.2%
======= ======= ======= ======
</TABLE>
North American sales increased 4.7 percent in the second quarter as
compared to the same quarter in 1999. The potable water market was responsible
for all of this growth as both the fluid processing and Healthcare markets in
North America had lower sales quarter over quarter. The Water Group (which
addresses the potable water market) continued to record strong sales with its
series of new filters designed for OEM customers who serve various channels of
distribution with final sales to US consumers. Sales in the North American
Healthcare and fluid processing segment were down primarily due to reduced
volume with a major diagnostic customer in the Healthcare industry and delays in
certain projects in the fluid processing segment. Sales in Europe were down 1.2
percent as compared to the same period in 1999, but up 11.7 percent when
expressed in local currency. All three market segments in this region posted
double-digit gains, on a local currency basis, over the comparable period last
year. Sales in Japan were 32.3 percent higher as compared to the same quarter
last year, and 19.3 percent higher when expressed in local currency, primarily
reflecting recovery in the industrial sector of the economy. Asia/Pacific sales
increased by 5.7 percent as compared to the same quarter last year and,
excluding changes in currency values over the period, increased 8.0 percent. The
majority of the increase in Asia/Pacific is due to expanding sales in the
potable water segment and the slowly recovering economy in Southeast Asia.
Second quarter Latin American sales increased 34.1 percent as compared to the
same period in 1999, and 29.5 percent when expressed in local currency. All
three market segments in this region posted strong gains, on a local currency
basis, over the comparable period last year.
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<PAGE> 12
The following table displays the Company's sales by market (amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2000 1999 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Potable Water $24,839 $21,170 17.3% 17.9%
Fluid Processing 19,189 18,012 6.5% 5.9%
Healthcare 14,882 14,845 0.2% 1.0%
------ ------ ---- ----
Total sales $58,910 $54,027 9.0% 9.2%
======= ======= ==== ====
</TABLE>
On a currency adjusted basis, all geographic operating segments
experienced sales increases in the potable water segment. The majority of this
increase was driven by strong sales in North America associated with OEM
customers, direct marketing companies, and appliance manufacturers. Other than
in North America as previously described above, on a currency adjusted basis,
all other geographic operating segments experienced sales increases in the fluid
processing market. These increases reflect the strengthening worldwide demand in
the electronics and oil & gas markets. Sales in the North American Healthcare
segment were down primarily due to reduced volume with a large diagnostics
customer. On a currency adjusted basis, Healthcare sales outside North America
increased 18.9 percent reflecting sound business conditions and a continued
focus by management on competitively favorable niches.
GROSS PROFIT
The Company's gross profit increased $1.6 million to $25.5 million in
the second quarter of 2000 from $23.9 million in the second quarter of 1999.
Gross profit as a percentage of net sales (gross margin) decreased during that
same period from 44.3 percent in 1999 to 43.2 percent in 2000. The primary
factor that contributed to the lower gross margin in 2000 was lower sales volume
in the North American Healthcare market which generally carries a higher margin
than most products in the other markets.
OPERATING EXPENSES
Selling, general and administrative expenses increased $0.3 million or
1.8 percent in the second quarter of 2000 as compared to the second quarter of
1999. Research, development and engineering expenses increased $0.4 million or
13.9 percent in the second quarter as compared to the prior year reflecting the
Company's continued focus on the development of new products and technologies.
All other expense categories reflected minor increases consistent with normal
incentive and inflation-based increases.
OPERATING INCOME
As a result of the above, operating income increased $0.9 million, or
15.9 percent, to $6.4 million or 10.8 percent of sales in the second quarter of
2000 as compared to $5.5 million or 10.2 percent of sales in the second quarter
of 1999.
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<PAGE> 13
NONOPERATING ACTIVITY
Interest expense was down slightly ($0.1 million) quarter over quarter
as the level of debt outstanding decreased. See "Financial Position and
Liquidity" below. As disclosed in Note 6 to the condensed consolidated financial
statements, other income (expenses) was relatively flat quarter over quarter as
no material activity occurred in either of the two quarters.
INCOME TAXES
The Company's effective income tax rate for the second quarter of 2000
was 37.5% compared to 37.0% in the second quarter of 1999. The increase
primarily reflects a change in the mix of income attributed to the various
countries in which the Company does business and their associated tax rates.
SIX MONTH PERIOD ENDED APRIL 30, 2000 VS. SIX MONTH PERIOD ENDED APRIL 30, 1999
NET SALES
The Company had net sales of $116.6 million in the first six months of
fiscal 2000 representing an 11.5 percent increase over 1999's comparable sales
of $104.7 million. The majority of this improvement can be attributed to an
increase in the unit volume of worldwide sales. Had currency values been
unchanged from the first six months of fiscal 1999, net sales for the first six
months of 2000 would have been $2.1 million higher, or 13.3 percent greater
overall than the comparable period in fiscal 1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2000 1999 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
North America $64,376 $58,969 9.2% 9.2%
Europe 15,322 15,699 (2.4%) 11.0%
Japan 18,216 13,987 30.2% 16.9%
Asia/Pacific 11,500 10,645 8.0% 8.6%
Latin America 7,230 5,353 35.1% 57.8%
--------- -------- ----- -----
Total sales $116,644 $104,653 11.5% 13.3%
======== ======== ===== =====
</TABLE>
North American sales increased 9.2 percent in the first six months of
2000 as compared to the same period in 1999. The potable water market was
responsible for all of this growth as sales were relatively flat in both the
fluid processing and healthcare markets in North America. The Water Group
(within the potable water market) continued to record strong sales with its
series of new filters designed for various OEM customers who serve various
channels of distribution with final sales to US consumers. Sales in Europe were
down 2.4 percent as compared to the same period in 1999, but up 11.0 percent
when expressed in local currency. All three market segments in this region
posted gains, on a local currency basis, over the comparable period last year.
Sales in Japan were 30.2 percent higher as compared to the same period last
year, and 16.9 percent higher when expressed in local currency, reflecting
double-digit sales growth in all three markets. Excluding changes in currency
values over the period, Asia/Pacific sales increased by 8.6 percent as compared
to the same period last year. The majority of the increase in Asia/Pacific is
due to the slowly recovering economy in Southeast Asia and strong gains in both
the fluid processing and potable water markets. Latin American sales increased
35.1 percent as compared to the same period in 1999, and 57.8 percent when
expressed in local currency. This increase was driven in part by a large
contract completed and shipped in the first quarter of 2000. In
-11-
<PAGE> 14
addition, all three market segments in this region posted gains, on a local
currency basis, over the comparable period last year.
The following table displays the Company's sales by market (amounts in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED CURRENCY
APRIL 30, PERCENT ADJUSTED
2000 1999 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Potable Water $48,269 $41,641 15.9% 17.1%
Fluid Processing 38,694 35,067 10.3% 12.3%
Healthcare 29,681 27,945 6.2% 9.1%
-------- --------- ------ -----
Total sales $116,644 $104,653 11.5% 13.3%
======== ======== ===== =====
</TABLE>
Although, on a currency adjusted basis, all geographic operating
segments experienced sales increases in the potable water segment, the increase
was primarily driven by strong sales in North America associated to OEM
customers, direct marketing companies, and appliance manufacturers. Similarly,
on a currency adjusted basis, all geographic operating segments experienced
sales increases in the fluid processing market. These increases primarily
reflect the strengthening worldwide demand in the electronics and oil & gas
markets. On a currency adjusted basis, Healthcare sales outside North America
increased 15.5 percent reflecting sound business conditions and a continued
focus by management on competitively favorable niches.
GROSS PROFIT
The Company's gross profit increased $6.0 million to $49.8 million in
the first six months of 2000 from $43.8 million in the first six months of 1999.
Gross profit as a percentage of net sales (gross margin) increased during that
same period from 41.8 percent in 1999 to 42.7 percent in 2000. Several factors
contributed to the lower gross margin in 1999, chief among these were start-up
costs associated with a new product in the Water Group, higher manufacturing
costs in the US membrane operation associated with the introduction of a new
manufacturing process, and pricing pressure on certain products sold in Japan
(all in the first quarter of 1999). Comparatively, these 1999 reductions were
offset by lower sales volume in the North American Healthcare market in the
second quarter of 2000 which generally carry a higher margin than most products
in the other markets.
OPERATING EXPENSES
Selling, general and administrative expenses increased $1.7 million or
5.9 percent in the first six months of 2000 as compared to the first six months
of 1999. Research, development and engineering expenses increased $0.7 million
or 11.9 percent in the first six months of 2000 as compared to the comparable
period in the prior year reflecting the Company's continued focus on the
development of new products and technologies. Selling expenses increased $1.1
million or 6.4 percent due primarily to sales force additions and normal
incentive and inflation-based wage increases. All other expense categories
reflected minor increases consistent with normal incentive and inflation-based
increases.
OPERATING INCOME
As a result of the above, operating income increased $3.6 million, or
43.8 percent, to $11.8 million or 10.1 percent of sales in the first six months
of 2000 as compared to $8.2 million or 7.8 percent of sales in the first six
months of 1999.
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<PAGE> 15
NONOPERATING ACTIVITY
Interest expense was down slightly ($0.2 million) period over period as
the level of debt outstanding decreased. See "Financial Position and Liquidity"
below. As disclosed in Note 6 to the condensed consolidated financial
statements, other income (expenses) was relatively flat quarter over quarter as
no material activity occurred in either of the two quarters.
INCOME TAXES
The Company's effective income tax rate for the first six months of
2000 was 37.8% compared to 36.9% in the first six months of 1999. The increase
primarily reflects a change in the mix of income attributed to the various
countries in which the Company does business and their associated tax rates.
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 to the
management of liquidity are cash flows generated by operating activities,
capital expenditure levels, and adequate bank financing alternatives.
The Company manages its worldwide cash requirements considering the
cost effectiveness of the funds available from the many subsidiaries through
which it conducts its business. Management believes that its existing cash
position and 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):
<TABLE>
<CAPTION>
Source/(Use) of Cash SIX MONTHS ENDED
APRIL 30,
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by net income plus depreciation, amortization
and non-cash compensation $ 11,941 $ 9,550
Accounts receivable 2,264 1,280
Net cash provided by operating activities 13,579 9,521
INVESTING ACTIVITIES:
Capital expenditures (5,271) (5,644)
Contingent consideration for prior acquisition (2,885) (1,000)
Proceeds from surrender value of life insurance policies 569 --
FINANCING ACTIVITIES:
Net change in total debt (4,511) (4,111)
Retirement of Common Stock (1,154) --
</TABLE>
The net cash provided by net income plus depreciation, amortization and
non-cash compensation is an important measurement of cash generated from the
earnings process before significant non-cash charges. Net income plus
depreciation, amortization and non-cash compensation of $11.9 million increased
25 percent in the first six months of 2000 as compared to the same period in
1999 reflecting the Company's increased sales volume and improved operating
profit margin as discussed above. The net
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<PAGE> 16
cash source of $2.3 million generated from accounts receivable reflects the
Company's strong management of worldwide receivables, and compares favorably to
the general increase in sales levels.
Capital expenditures amounted to $5.3 million in the first six months
of 2000 and were primarily comprised of building additions and purchases of
machinery and equipment for the expansion of manufacturing capabilities. In the
second quarter of fiscal 2000, the Company made a contingent consideration
payment of $2.9 million related to the acquisition of Chemical Engineering
Corporation (CEC). This payment was recorded as additional goodwill. There will
be no future contingency payments related to the CEC acquisition. The
acquisition of CEC included certain life insurance policies on key officers of
CEC. In the second quarter of 2000, CUNO elected to surrender these policies for
their cash surrender value upon settlement.
Due largely to the Company's continued strong cash flows from operating
activities ($13.6 million) in the first six months of 2000 and despite capital
expenditures and contingent acquisition payments totaling $8.2 million, the
Company was able to reduce its long-term debt and bank loans by $4.5 million.
During the first quarter of 2000, a significant portion of the Company's
outstanding performance shares vested. In connection therewith, the Company
utilized $1.2 million in cash to pay applicable employee withholding taxes on
the common shares earned in return for shares of the Company's Common Stock then
retired.
OTHER MATTERS
COMPLIANCE WITH YEAR 2000
In prior reports, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its critical computer applications and
those of its suppliers and vendors throughout the year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.
EUROPEAN ECONOMIC AND MONETARY UNION
On January 1, 1999, the Euro became the official currency of the
European Economic and Monetary Union (the "Union"). Companies in the Union may
begin conducting their business operations in the new currency, however, the
previous local currencies in those countries may also continue to be used as
legal tender through January 1, 2002.
The Company has implemented its program to accommodate the new
currency. Software used by the Company at its European facilities is capable of
handling multi-currencies, including the Euro. As such, the Company is able to
accept customer or supplier orders in either the new Euro or the previous local
currency. The Company continues to address the Euro's impact on its operations
(e.g. banking, payroll processing, pricing, currency hedging requirements, etc.)
The estimated costs of any remaining required system modifications and other
operational changes are not expected to be material to the Company.
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<PAGE> 17
MARKET RISK DISCLOSURES
There have been no material changes in the information reported in the
Company's Form 10-K for the year ended October 31, 1999 under the "Market Risk
Disclosures" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
FORWARD LOOKING INFORMATION
The Company wants to provide stockholders and investors with more
meaningful and useful information and therefore, this quarterly report describes
the Company's belief regarding business conditions and the outlook for the
Company, which reflects currently available information. These forward looking
statements are subject to risks and uncertainties which, as described in
Management's Discussion and Analysis in the Company's Annual Report on Form 10-K
for the year ended October 31, 1999, could cause the Company's actual results or
performance to differ materially from those expressed herein. The Company
assumes no obligation to update the information contained in this quarterly
report.
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<PAGE> 18
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 23, 2000.
(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 results for each nominee,
all of whom were reelected, are as follows:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld Not Voted
---- --------- -------------- ---------
<S> <C> <C> <C>
Mr. Joel B. Alvord 13,826,896 137,141 2,357,209
Dr. Charles L. Cooney 13,826,896 137,141 2,357,209
Mr. John M. Galvin 13,785,217 178,820 2,357,209
</TABLE>
2. A proposal for the appointment of Ernst & Young LLP as
independent auditors was approved by a count of 13,948,463
votes for, 7,870 votes against, 7,704 votes abstaining, and
2,357,209 shares not voted.
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as part of this report.
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> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CUNO INCORPORATED
Date May 31, 2000
------------------------------
By /s/ Frederick C. Flynn, Jr.
--------------------------------
Frederick C. Flynn, Jr.
Senior Vice President -
Finance and Administration,
Chief Financial Officer,
Treasurer and Assistant Secretary
By /s/ Timothy B. Carney
--------------------------------
Timothy B. Carney
Vice President, Controller,
and Assistant Secretary
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