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, 1997
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 30, 1997, 13,932,003 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, 1997 and 1996
Consolidated Balance Sheets - . . . . . . . . . . . 3
March 31, 1997 and December 31, 1996
Consolidated Statements of Cash Flows . . . . . . . 4
For the Three Months Ended
March 31, 1997 and 1996
Notes to Consolidated Financial Statements . . . . . 5
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF . . . . . . 6-8
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . 9
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM I - FINANCIAL STATEMENTS
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Three Months Ended March 31,
1997 1996
Sales $42,313 $39,051
Cost of sales 25,964 23,027
Gross profit 16,349 16,024
Less:
Selling, general and administrative 9,717 8,333
Research, development and engineering 2,786 2,504
Income from operations 3,846 5,187
Other income (expense) (101) 156
Income from continuing operations
before income taxes 3,745 5,343
Income taxes 1,311 1,708
Income from continuing operations 2,434 3,635
Recovery on discontinued operations 325 -
Net income $ 2,759 $ 3,635
Income from continuing operations per
common and common equivalent share $ 0.17 $ 0.25
Recovery on discontinued operations per
common and common equivalent share $ 0.02 -
Net income per common and common
equivalent share $ 0.19 $ 0.25
Average common and common equivalent
shares outstanding 14,516 14,445
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
March 31, December 31,
1997 1996
ASSETS
Current assets
Cash and cash equivalents $ 2,968 $ 5,392
Marketable securities 17,779 19,028
Trade accounts receivable, net of
allowance for doubtful accounts of
$1,102 in 1997, and $907 in 1996 31,176 28,200
Inventories 34,030 32,322
Deferred tax assets 1,767 1,559
Other current assets 1,880 2,026
Total current assets 89,600 88,527
Property and equipment, at cost
Land and land improvements 5,506 5,485
Building 27,475 27,158
Machinery and equipment 52,939 50,045
Construction in progress 4,006 3,438
89,926 86,126
Less accumulated depreciation and
amortization (35,228) (34,332)
54,698 51,794
Other assets 19,865 11,855
$164,163 $152,176
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 11,463 $ 12,511
Current debt 16,891 7,493
Reserve for discontinued operations 1,457 1,957
Other accrued liabilities 15,464 12,560
Total current liabilities 45,275 34,521
Long-term debt 15,764 15,900
Other liabilities 194 196
Deferred income taxes 3,950 3,616
Shareholders' equity
Common stock, $0.01 par value
Authorized -- 50,000,000
Issued -- 1997: 14,215,195 and
1996: 14,193,239 shares 142 142
Capital in excess of par value 23,439 23,128
Retained earnings 74,540 71,781
Treasury Stock (1,184) -
Unrealized gain on marketable securities 2,270 2,864
Foreign currency translation adjustments (227) 28
Total shareholders' equity 98,980 97,943
$164,163 $152,176
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
March 31,
Cash flows from:
1997 1996
Operations:
Net income $ 2,759 $ 3,635
Non-cash items included in net income:
Depreciation and amortization 1,190 1,206
Deferred income taxes 111 (87)
Gain on sale of investments - (164)
Accounts receivable (1,439) (1,262)
Inventories and other current assets 2,371 1,586
Accounts payable and accrued liabilities (4,084) (2,640)
Net cash provided by operations 908 2,274
Investing activities:
Business acquisition
(net of cash acquired) (10,470) -
Purchase of investments (317) (283)
Sale of investments 400 3,029
Purchase of property and equipment (1,350) (6,610)
Other (125) (266)
Cash provided by (used in) investing
activities (11,862) (4,130)
Financing activities:
Increases in debt 9,398 514
Reduction of debt (136) (909)
Issuance of Common Stock 311 335
Purchase of Treasury Stock (1,184) -
Net cash provided by (used in) financing
activities 8,389 (60)
Effect of exchange rate changes on cash 141 (20)
Decrease in cash and cash equivalents (2,424) (1,936)
Cash and cash equivalents -
beginning of year 5,392 4,729
Cash and cash equivalents -
end of quarter $ 2,968 $ 2,793
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, 1997, are not
necessarily indicative of the results that may be expected for the year
1997.
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, 1996.
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, 1997 and 1996.
Percent of Sales
Three Months Ended
March 31,
1997 1996
Sales 100.0% 100.0%
Cost of sales 61.4 59.0
Gross profit 38.6 41.0
Selling, general and administrative 23.0 21.3
Research, development and engineering 6.6 6.4
Operating expenses 29.6 27.7
Income from operations 9.0 13.3
Other income (expense) (0.2) 0.4
Income from continuing operations
before income taxes 8.8 13.7
Income taxes 3.1 4.4
Income from continuing operations 5.7 9.3
Recovery on discontinued operations 0.8 -
Net income 6.5% 9.3%
Sales
Sales of $42,313 for the quarter ended March 31, 1997 increased 8.4%
from the first quarter of 1996. Sales generated internally increased
5.4% on a year-to-year comparison. The acquisition of AquaMatic, Inc.
in late February 1997 contributed an additional 3.0% of the year-to-year
sales increase.
Gross Margin
Gross margin decreased from 41.0% of sales in the first quarter of 1996
to 38.6% of sales in the first quarter of 1997, primarily as a result of
changes in the product line sales mix. Previously announced price
increases on selected product lines are expected to provide modest
favorable impact beginning in the second quarter.
Operating Expenses
Operating expenses increased from 27.7% of sales in the first quarter of
1996 to 29.6% in the first quarter of 1997. The primary increase was in
sales and marketing expenses to fund the expansion of the sales
organization and marketing programs. Part of the increased operating expense
is due to the implementation of the SAP management information
system. The savings from improved systems should begin to be realized
in the latter part of 1997. Reductions in operating expense are being
implemented, in response to the lower average gross margins, and slower
rate of sales growth.
Other Income
Other income was lower by $257,000 for the first quarter of 1997
compared to the first quarter of 1996, primarily due to less gains on
the sale of investments.
Income Taxes
The effective tax rate for the first quarter 1997 was 35% based on the
forecast for the full year. This compares to 32.0% in the corresponding
period of 1996, which benefited from remaining tax credits from the
Autotrol acquisition.
Recovery on Discontinued Operations
The Company recognized $325,000 ($0.02 per share) of after-tax income
from a reduction in the reserve for discontinued operations from the
Autotrol merger after a lawsuit was successfully defended.
Net Income
Net income for the quarter was $2,759, as compared to $3,635 for the
first quarter of 1996. Net income per share was $0.19 per share, a
decrease of 25% from the $0.25 per share reported for the same quarter
last year.
Liquidity and Capital Resources
As of March 31, 1997, the Company had cash, cash equivalents and
marketable securities of $20,747 versus $24,420 at December 31, 1996.
The current ratio was 2.0 at March 31, 1997, as compared to 2.6 at
year-end 1996.
The Company's current debt increased from $7,493 at December 31, 1996 to
$16,891 at March 31, 1997. The increase was due to short-term
borrowings for the AquaMatic acquisition.
The Company announced on March 17, 1997 that its Board of Directors
authorized purchase of up to 1,500,000 shares of the Company's common
stock. In March 1997, the Company purchased 68,600 shares and in April
1997, 220,000 shares.
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.
Private Securities Litigation Reform Act
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in
this Form 10-Q and other materials filed or to be filed with the
Securities and Exchange Commission (as well as information included in
oral or other written statements made or to be made by the Company)
contains statements that are forward-looking. Such statements may
relate to plans for future expansion, business development activities,
other capital spending, financing, or the effects of regulation and
competition. Such information involves important risks and
uncertainties that could significantly affect anticipated results in the
future and, accordingly, such results may differ from those expressed in
any forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, those
relating to product development activities, dependence on existing
management, global economic and market conditions, and changes in
federal or state laws.
OSMONICS, INC.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) (27) Financial Data Schedule
(b) During the quarter ended March 31, 1997 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
GSW/dh
finance/10QMAR)F
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This schedule contains summary financial information extracted from
FORM 10-Q for the quarter ended March 31, 1997, and is qualified in
its entirety by reference to such financial statements.
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