SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1997
OR
o 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 October 31, 1997,
13,934,720 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 and Nine Months Ended
September 30, 1997 and 1996
Consolidated Balance Sheets 3
September 30, 1997 and December 31, 1996
Consolidated Statements of Cash Flows 4
For the Nine Months Ended
September 30, 1997 and 1996
Notes to Consolidated Financial Statements 5
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6-8
PART II. OTHER INFORMATION
ITEM 5. A. NEW BOARD OF DIRECTOR NAMED 9
B. ACQUISITION OF TWO PRODUCT LINES 9
C. SUBSEQUENT EVENT 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 11
ITEM I - FINANCIAL STATEMENTS
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Sales $42,420 $39,493 $126,522 $115,271
Cost of sales 25,466 23,247 76,361 67,776
------ ------ ------ ------
Gross profit 16,954 16,246 50,161 47,495
Less:
Selling, general
and administrative 10,461 8,771 30,383 25,664
Research, development
and engineering 2,676 2,750 8,235 7,930
------ ------ ------ ------
Income from operations 3,817 4,725 11,543 13,901
Other income (expense) (616) 297 (694) 912
------ ------ ------ ------
Income from continuing
operations before
income taxes 3,201 5,022 10,849 14,813
Income taxes 906 1,708 3,526 4,803
------ ------ ------ ------
Income from continuing
operations 2,295 3,314 7,323 10,010
Recovery on discontinued
operations - - 325 -
Net income $ 2,295 $ 3,314 $ 7,648 $10,010
======= ======= ====== =======
Income from continuing
operations per common
and common equivalent
share 0.16 0.23 0.51 0.69
Recovery on discontinued
operations per common
and common equivalent
share - - 0.02 -
Net income per common and
common equivalent share 0.16 0.23 0.53 0.69
Average common shares and
common equivalent
shares outstanding 14,285 14,470 14,360 14,442
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
September 30, December 31,
1997 1996
ASSETS
Current assets
Cash and cash equivalents $ 3,977 $ 5,392
Marketable securities 19,122 19,098
Trade accounts receivable, net of
allowance for doubtful accounts of
$872 in 1997, and $907 in 1996 32,742 28,130
Inventories 33,788 32,322
Deferred tax assets 1,445 1,559
Other current assets 1,708 2,026
------ ------
Total current assets 92,782 88,527
------ ------
Property and equipment, at cost
Land and land improvements 5,383 5,485
Building 29,683 27,158
Machinery and equipment 61,265 50,045
Construction in progress 7 3,438
------- -------
96,338 86,126
Less accumulated depreciation and
amortization (40,878) (34,332)
------- -------
55,460 51,794
Other assets 18,916 11,855
------- -------
$167,158 $152,176
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 12,652 $ 12,511
Notes payable and current portion
of long-term debt 19,697 7,493
Reserve for discontinued operations 1,448 1,957
Other accrued liabilities 14,404 12,560
------ ------
Total current liabilities 48,201 34,521
------ ------
Long-term debt 13,731 15,900
Other liabilities 26 196
Deferred income taxes 4,286 3,616
Shareholders' equity
Common stock, $0.01 par value
Authorized -- 50,000,000
Issued -- 1997: 14,246,034 and
1996: 14,193,239 shares 142 142
Capital in excess of par value 23,928 23,128
Retained earnings 79,429 71,781
Treasury Stock (5,249) -
Unrealized gain on marketable securities 2,896 2,864
Foreign currency translation adjustments (232) 28
------- -------
Total shareholders' equity 100,914 97,943
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
September 30,
Cash flows from:
1997 1996
Operations:
Net income $ 7,648 $ 10,010
Non-cash items included in net income:
Depreciation and amortization 4,118 3,672
Deferred income taxes 434 366
Gain on sale of investments (628) (1,328)
Gain on sale of land - (640)
Accounts receivable (3,005) (1,237)
Inventories and other current assets 2,785 (5,123)
Accounts payable and accrued liabilities (2,634) (4,340)
------ ------
Net cash provided by operations 8,718 1,380
Investing activities:
Business acquisition
(net of cash acquired) (11,970) -
Purchase of investments (1,658) (608)
Sale of investments 2,271 6,311
Purchase of property and equipment (5,167) (12,167)
Disposal of property and equipment 374 1,667
Sale of land - 731
Other 270 (841)
------ ------
Cash provided by (used in) investing
activities (15,880) (4,907)
------ ------
Financing activities:
Addition (reduction) in debt 10,035 (2,071)
Issuance of Common Stock 800 1,162
Purchase of Treasury Stock (5,249) -
Cash restricted for purchase and
construction of equipment (150) 2,034
------ ------
Net cash provided by (used in) financing
activities 5,436 1,125
------ ------
Effect of exchange rate changes on cash 311 17
Decrease in cash and cash equivalents (1,415) (2,385)
Cash and cash equivalents -
beginning of year 5,392 4,729
------ ------
Cash and cash equivalents -
end of quarter $3,977 $2,344
====== ======
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 nine months ended September 30, 1997, are not
necessarily indicative of the results that may be expected for the full
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 data)
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 month and nine-month periods ended September 30, 1997 and 1996.
Percent of Sales Percent of Sales
---------------- ----------------
Three Months Ended Nine Months Ended
September 30 September 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 60.0 58.9 60.4 58.8
---- ---- ---- ----
Gross profit 40.0 41.1 39.6 41.2
Selling, general and
administrative 24.7 22.2 24.0 22.3
Research, development
and engineering 6.3 7.0 6.5 6.9
---- ---- ---- ----
Operating expenses 31.0 29.2 30.5 29.2
---- ---- ---- ----
Income from operations 9.0 11.9 9.1 12.0
Other income (expense) (1.5) 0.8 (0.5) .8
Income from continuing
operations before
income taxes 7.5 12.7 8.6 12.8
Income taxes 2.1 4.3 2.8 4.2
--- ---- --- ----
Income from continuing
operations 5.4 8.4 5.8 8.6
Recovery on discontinued
operations - - .2 -
Net income 5.4% 8.4% 6.0% 8.6%
=== === === ===
Sales
- -----
Sales for the third quarter ended September 30, 1997 of $42,420 increased 7.4%
over sales for the third quarter of 1996. Year-to-date 1997 sales through
September increased 9.8% over the corresponding 1996 level. Sales of equipment
represent 46% and replaceable products 54% of year-to-date sales. Domestic
capital equipment business was slower than anticipated.
Gross Margin
- ------------
Gross margin for the third quarter of 1997 was 40.0% versus 41.1% for the
corresponding period in 1996. The gross margin for the nine months ended
September 30 was 39.6% in 1997 and 41.2% in 1996. The third quarter 1997
result is an improvement from the 39.5% gross margin in the first half of 1997.
Gross margins have been affected by product mix and price competition.
Operating Expenses
- ------------------
Operating expenses increased to 31.0% in the third quarter of 1997 from 29.2%
in the third quarter of 1996. On a year-to-date basis, operating expenses were
30.5% for nine months ending September 30, 1997 versus 29.2% for the same
period last year. Operating expenses as a percent of sales have increased on a
near term basis due to the decline in sales below expected levels, and to the
implementation of a new management information system.
Other Income
- ------------
Other income decreased by $1,606 in the first nine months of 1997 versus the
same period for 1996. Prior year results included a $640 gain on the sale of
land, not repeated in the current year. Net interest expense increased by $595
during the first nine months of 1997 primarily as a result of funding for the
acquisition of AquaMatic during first quarter 1997.
Income Taxes
- ------------
The effective tax rate for the nine months ended September 30, 1997 was 32.5%
based on the forecast for the full year. This compares to 32.4% for the nine
months ending September 30, 1996.
Recovery on Discontinued Operations
- -----------------------------------
The company recognized $325 ($0.02 per share) of after tax income in the first
quarter of 1997 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 ended September 30, 1997 was $2,295 versus $3,314
for the quarter ended September 30, 1996. Net income per common share for the
quarter was $0.16 versus $0.23 for the same period last year. Year-to-date net
income was $7,648 for 1997 versus $10,010 for the same period last year. Net
income per common share year-to-date was $0.53 in 1997 versus $0.69 in 1996.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 1997, the company had cash, cash equivalents and marketable
securities of $23,099 versus $24,490 at December 31, 1996. The current ratio
was 1.9 at September 30, 1997 as compared to 2.6 at year-end 1996.
The company's current debt increased from $7,493 at December 31, 1996 to
$19,697 at September 30, 1997. The increase was primarily 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. The Company
purchased 68,600 shares in first quarter 1997 and 247,500 shares in second
quarter 1997.
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, computer systems conversion, dependence on existing
management, global economic and market conditions, and changes in federal or
state laws.
OSMONICS, INC.
PART II
OTHER INFORMATION
Item 5. OTHER INFORMATION
-----------------
A. New Board of Director Named
---------------------------
The Company announced on October 20, 1997 that William Eykamp has been named to
its Board of Directors. Eykamp is a management consultant and an adjunct
professor of Chemical Engineering at Tufts University in Medford,
Massachusetts.
Eykamp was president and director of Koch Membrane Systems, Inc., Wilmington,
Massachusetts, formerly Abcor, Inc. He has won several professional honors and
awards for his scientific achievements, lectured on ultrafiltration and
membrane technology and is widely published in technical journals. His 40-year
career includes a professorship at the University of California, Berkeley,
where he taught courses in membrane separation and management of innovation.
B. Acquisition of Two Product Lines
--------------------------------
The Company announced during the third quarter the acquisition for cash of two
product lines from ORS Environmental Systems, a division of Sippican, Inc. The
product lines, AccuSensor and ChemSensor, are field-portable, hand-held
screening instruments for on-site testing for certain contaminants in water.
AccuSensor enables quick, on-site measurement of trichloroethylene (TCE) and
other trihalomethanes (THM's). The product requires no special training,
sample preparation or calibration procedures. It features a rugged,
lightweight design for easy portability, and is an ideal screening tool for
bottled water and soft drink production, as well as municipal water treatment
applications.
ChemSensor uses a fiber optic chemical sensor to make accurate, real-time
measurements of semi-volatile and volatile organic compounds (VOC's), the
hazardous by-products from the power, petrochemical, and materials industries.
ChemSensor can be used in monitoring wells, process streams or surface waters
as a fast, inexpensive alternative to laboratory analysis of groundwater
samples.
Both the AccuSensor and ChemSensor products will be manufactured at the
Company's Phoenix facility, along with its current line of water quality
instrumentation products.
C. Subsequent Event
----------------
The Company in October announced a partnership with Fuji Electric (Fuji
Electric Co., Ltd., Japan and Fuji Electric Corp. of America) to manufacture
high concentration ozone generators using proprietary Fuji Electric technology
and components.
The Company receives the rights to manufacture and sell equipment throughout
North America. The parties will cooperatively pursue large ozonation projects
worldwide.
The innovative Microgap technology with enhanced cooling produces 15% weight
concentrations of ozone-effectively doubling the 6% to 8% weight that standard
ozone generators typically achieve.
Fuji has world-leading ozonation technology and the Company has a reputation
for developing and cost-effectively manufacturing complete ozonation solutions
for specific applications. This combination gives the Company a strong entry
to the municipal water treatment market, as well as pulp and paper and other
large-scale oxidation applications.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibit 27 - Financial Data Schedule
(b) During the quarter ended September 30, 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: 14 NOV 97
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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This schedule contains summary financial information extracted from
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