SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1996
OR
Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission File No. 1-12714
OSMONICS, INC
(Exact name of registrant as specified in its charter)
Minnesota 41-0955759
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
5951 Clearwater Drive, Minnetonka, MN 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 933-2277
N/A
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
period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for at least 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 practicable date. At
April 29, 1996, 12,807,547 shares of the issuer's Common Stock, $0.01
par value, were outstanding.
OSMONICS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM I. FINANCIAL STATEMENTS
Consolidated Statements of Income - . . . . . . . . 2
For the Three Months Ended
March 31, 1996 and 1995
Consolidated Balance Sheets - . . . . . . . . . . . 3
March 31, 1996 and December 31, 1995
Consolidated Statements of Cash Flows . . . . . . . 4
For the Three Months Ended
March 31, 1996 and 1995
Notes to Consolidated Financial Statements . . . . . 5
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF . . . . . . 6-7
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . 8
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . 8
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
<PAGE>
ITEM I - FINANCIAL STATEMENTS
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Three Months Ended March 31,
1996 1995
Sales $33,229 $26,870
Cost of sales 19,667 14,958
Gross profit 13,562 11,912
Less:
Selling, general and administrative 7,125 6,466
Research, development and engineering 2,081 1,869
Income from operations 4,356 3,577
Other income (expense) 226 507
Income before income taxes 4,582 4,084
Income taxes 1,420 1,284
Net income $ 3,162 $ 2,800
Net income per common share $ 0.25 $ 0.22
Average common shares outstanding 12,792 12,722
<PAGE>
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
March 31, December 31,
1996 1995
ASSETS
Current assets
Cash and cash equivalents $ 2,346 $ 4,361
Marketable securities 23,119 26,307
Trade accounts receivable, net of
allowance for doubtful accounts of
$878 in 1996, and $1,127 in 1995 20,794 20,501
Inventories 26,226 26,227
Deferred tax assets 3,549 3,719
Other current assets 1,456 1,851
Total current assets 77,490 82,966
Property and equipment, at cost
Land and land improvements 2,306 2,310
Building 16,519 15,557
Machinery and equipment 38,442 36,645
Construction in progress 3,195 5,970
66,138 60,482
Less accumulated depreciation and
amortization (28,596) (27,923)
37,542 32,559
Other assets 9,995 9,533
$125,027 $125,058
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 11,078 $ 12,247
Notes payable and current portion
of long-term debt 1,606 1,695
Reserve for discontinued operations 1,957 1,957
Other accrued liabilities 11,320 12,843
Total current liabilities 25,961 28,742
Long-term debt 12,473 12,441
Deferred compensation and other liabilities 228 450
Deferred income taxes 4,825 4,954
Shareholders' equity
Common stock, $0.01 par value
Authorized -- 20,000,000
Issued -- 1996: 12,807,547 and
1995: 12,773,184 shares 129 129
Capital in excess of par value 22,044 21,709
Retained earnings 55,782 52,620
Unrealized gain on marketable securities 3,406 3,694
Foreign currency translation adjustments 179 319
Total shareholders' equity 81,540 78,471
$125,027 $125,058
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
March 31,
Cash flows from:
1996 1995
Operations:
Net income $3,162 $ 2,800
Non-cash items included in net income:
Depreciation and amortization 1,047 814
Deferred income taxes (87) (41)
Gain on sale of investments (164) (191)
Accounts receivable (293) 558
Inventories and other current assets 396 (1,335)
Accounts payable and accrued liabilities (2,692) 478
Net cash provided by operations 1,369 3,083
Investing activities:
Purchase of investments (283) (3,094)
Sale of investments 3,029 321
Purchase of property and equipment (6,068) (845)
Other (320) 142
Cash provided by (used in) investing
activities (3,642) (3,476)
Financing activities:
Reduction of debt (57) (426)
Issuance of Common Stock 335 214
Net cash provided by (used in) financing
activities 278 (212)
Effect of exchange rate changes on cash (20) (164)
Decrease in cash and cash equivalents (2,015) (769)
Cash and cash equivalents -
beginning of year 4,361 9,453
Cash and cash equivalents -
end of quarter $ 2,346 $ 8,684
OSMONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all 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 months ended March 31, 1996, are not
necessarily indicative of the results that may be expected for the year
1996.
These statements should be read in conjunction with the financial
statements and related notes included in the Company's Annual Report to
shareholders and Form 10-K for the year ended December 31, 1995.
<PAGE>
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in thousands except per share amounts)
As an aid to understanding the Company's operating results, the
following table shows the percentage of sales that each income statement
item represents for the three months ended March 31, 1996 and 1995.
Percent of Sales
Three Months Ended
March 31,
1996 1995
Sales 100.0% 100.0%
Cost of sales 59.2 55.7
Gross profit 40.8 44.3
Selling, general and administrative 21.4 24.0
Research, development and engineering 6.3 7.0
Operating expenses 27.7 31.0
Income from operations 13.1 13.3
Other income (expense) 0.7 1.9
Income before income taxes 13.8 15.2
Income taxes 4.3 4.8
Net income 9.5% 10.4%
Sales
Sales of $33,229 for the quarter ended March 31, 1996 increased 23.7%
from the first quarter of 1995. The increase occurred primarily in
capital equipment, which represented 61% of total sales for the first
quarter of 1996. Sales of membrane products and cartridge filters also
showed good growth over the prior year.
Quarterly sales include sales of Western Filter, acquired in
October 1995, but do not include any sales from Desalination Systems,
Inc. (DESAL). It is anticipated that the previously announced merger
with DESAL will be completed in the second quarter of 1996.
Gross Margin
Gross margin decreased from 44.3% of sales in the first quarter of 1995
to 40.8% of sales in the first quarter of 1996. Average gross profit
margins are below the prior year first quarter due in large part to a
change in product sales mix. This is a result of recent acquisitions
and sales strategy changes.
Gross margins also continue to be affected by increased costs that have
not been fully passed on to our customers. Certain raw materials such
as stainless steel and plastic continue to be above anticipated costs.
Also, some non-recurring costs were incurred in the move to newly
completed expansions of the Minnetonka and Phoenix facilities.
Operating Expenses
Operating expenses decreased from 31.0% of sales in the first quarter of
1995 to 27.7% in the first quarter of 1996. Selling, general and
administrative expenses, and research, development and engineering
expense were lower as a percentage of sales in the first quarter of 1996
than in the corresponding period of 1995.
The rate of growth in operating expense slowed to 10.4%, compared to the
sales growth rate of 23.7%. It is believed that the investment in sales
and marketing during the prior years is producing results, and recent
investments in office automation are showing returns in higher
productivity.
Other Income
Other income decreased by $281 from the first quarter of 1995 to the
first quarter of 1996. The decrease results from lower interest income
on a lower investment portfolio, and the inclusion in 1995 of a non-
recurring $200 recovery from an insurance policy.
Income Taxes
The effective tax rate for the first quarter 1996 is 31.0% based on the
forecast for the full year. This compares to 31.4% in the corresponding
period of 1995.
Net Income
Net income for the quarter was $3,162, as compared to $2,800 for the
first quarter of 1995. Net income per share was $0.25 per share, an
increase of 14% over the $0.22 per share reported for the same quarter
last year.
Liquidity and Capital Resources
As of March 31, 1996, the Company had cash, cash equivalents and
marketable securities of $25,465 versus $30,668 at December 31, 1995.
The current ratio was 3.0 at March 31, 1996, as compared to 2.9 at
year-end 1995.
Inventory remained relatively constant during the first quarter of 1996,
compared to year-end 1995.
In the first quarter of 1996, the Company expended $6.1 million on
capital improvements, primarily for the expansion of the Minnetonka and
Phoenix facilities, for office automation and for new product tooling.
The Company believes that its current cash and investments position, its
cash flow from operations, and amounts available from bank credit will
be adequate to meet its anticipated cash needs for working capital,
capital expenditures, and potential acquisitions during the foreseeable
future.
OSMONICS, INC.
PART II
OTHER INFORMATION
Item 5. Other Information
The Company announced in December 1995 the execution of an
agreement in principle to merge with Desalination Systems Inc.
(DESAL) in a stock transaction. The outstanding shares of
DESAL will be exchanged on a share-for-share basis for the
Company's common stock. The transaction is structured to
qualify as a tax-free exchange and a "pooling-of-interests" for
accounting and financial purposes. At current market prices,
the value of the transaction is approximately $30 million. The
transaction is expected to add over $20 million to Osmonics'
1996 sales.
The transaction will require the approval of a definitive
merger agreement by both companies, regulatory approvals, and
the satisfaction of customary closing conditions. Preparation
of the required documents is continuing, and the transaction is
expected to be completed in the second quarter of 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) During the quarter ended March 31, 1996, the Registrant
did not file a Form 8-K report.
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.
Dated: ________________
OSMONICS, INC.
(Registrant)
/s/ L. Lee Runzheimer
L. Lee Runzheimer
Chief Financial Officer
/s/ Howard W. Dicke
Howard W. Dicke
Treasurer and Vice President
Corporate Development
/s/ D. Dean Spatz
D. Dean Spatz
Chief Executive Officer
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