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 June 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 July 31,
1997, 13,915,394 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 Six Months Ended
June 30, 1997 and 1996
Consolidated Balance Sheets - 3
June 30, 1997 and December 31, 1996
Consolidated Statements of Cash Flows 4
For the Six Months Ended
June 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 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS 10
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
ITEM I - FINANCIAL STATEMENTS
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Sales $41,789 $36,727 $84,102 $75,778
Cost of sales 24,931 21,502 50,895 44,529
Gross profit 16,858 15,225 33,207 31,249
Less:
Selling, general
and administrative 10,205 8,560 19,922 16,893
Research, development
and engineering 2,773 2,676 5,559 5,180
Income from operations 3,880 3,989 7,726 9,176
Other income 23 459 (78) 615
Income from continuing operations
before income taxes 3,903 4,448 7,648 9,791
Income taxes 1,310 1,387 2,621 3,095
Income from contin operations 2,593 3,061 5,027 6,696
Recovery on discontin operations - - 325 -
Net income $ 2,593 $ 3,061 $ 5,352 $ 6,696
Income from continuing operations
per common and common
equivalent share 0.18 0.21 0.35 0.46
Recovery on discontinued operations
per common and common equivalent
share - - 0.02 -
Net income per common and
common equivalent share 0.18 0.21 0.37 0.46
Average common shares and
common equivalent
shares outstanding 14,358 14,483 14,450 14,464
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
June 30, December 31,
1997 1996
ASSETS
Current assets
Cash and cash equivalents $ 4,415 $ 5,392
Marketable securities 17,654 19,098
Trade accounts receivable, net of
allowance for doubtful accounts of
$1,019 in 1997, and $907 in 1996 30,794 28,200
Inventories 33,269 32,322
Deferred tax assets 1,767 1,559
Other current assets 1,562 2,026
Total current assets 89,461 88,527
Property and equipment, at cost
Land and land improvements 5,383 5,485
Building 29,434 27,158
Machinery and equipment 55,980 50,045
Construction in progress 4,482 3,438
95,279 86,126
Less accumulated depreciation and
amortization (39,557) (34,332)
55,722 51,794
Other assets 18,877 11,855
$164,060 $152,176
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 9,483 $ 12,511
Notes payable and current portion
of long-term debt 19,777 7,493
Reserve for discontinued operations 1,448 1,957
Other accrued liabilities 15,653 12,560
Total current liabilities 46,361 34,521
Long-term debt 15,797 15,900
Other liabilities 192 196
Deferred income taxes 3,962 3,616
Shareholders' equity
Common stock, $0.01 par value
Authorized -- 50,000,000
Issued -- 1997: 14,231,494 and
1996: 14,193,239 shares 142 142
Capital in excess of par value 23,673 23,128
Retained earnings 77,134 71,781
Treasury Stock (5,249) -
Unrealized gain on marketable securities 2,292 2,864
Foreign currency translation adjustments (244) 28
Total shareholders' equity 97,748 97,943
$164,060 $152,176
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
June 30,
Cash flows from:
1997 1996
Operations:
Net income $ 5,352 6,696
Non-cash items included in net income:
Depreciation and amortization 2,632 2,421
Deferred income taxes 111 214
Gain on sale of investments (560) (715)
Gain on sale of Property, Plant & Equipment (7) -
Gain on sale of land - (640)
Accounts receivable (1,057) (1,364)
Inventories and other current assets 3,450 (1,351)
Accounts payable and accrued liabilities (5,884) (4,001)
Net cash provided by operations 4,037 1,260
Investing activities:
Business acquisition
(net of cash acquired) (10,203) -
Purchase of investments (461) (454)
Sale of investments 1,251 4,823
Purchase of property and equipment (3,491) (9,489)
Disposal of property and equipment 57 -
Sale of land - 731
Other 86 (311)
Cash provided by (used in) investing
activities (12,761) (4,700)
Financing activities:
Increases in debt 12,284 1,913
Reduction of debt (103) (1,288)
Issuance of Common Stock 545 640
Purchase of Treasury Stock (5,249) -
Net cash provided by (used in) financing
activities 7,477 1,265
Effect of exchange rate changes on cash 270 30
Decrease in cash and cash equivalents (977) (2,145)
Cash and cash equivalents -
beginning of year 5,392 4,729
Cash and cash equivalents -
end of quarter $ 4,415 $ 2,584
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 six months ended June 30, 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 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 six-month periods ended June 30, 1997
and 1996.
Percent of Sales Percent of Sales
Three Months Ended Six Months Ended
June 30 June 30,
1997 1996 1997 1996
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 59.7 58.5 60.5 58.8
Gross profit 40.3 41.5 39.5 41.2
Selling, general and administrative 24.4 23.3 23.7 22.3
Research, development
and engineering 6.6 7.3 6.6 6.8
Operating expenses 31.0 30.6 30.3 29.1
Income from operations 9.3 10.9 9.2 12.1
Other income (expense) - 1.2 (0.1) .8
Income from continuing operations
before income taxes 9.3 12.1 9.1 12.9
Income taxes 3.1 3.8 3.1 4.1
Income from continuing operations 6.2 8.3 6.0 8.8
Recovery on discontinued operations - - .4 -
Net income 6.2% 8.3% 6.4% 8.8%
Sales
Sales for the second quarter ended June 30, 1997 of $41,789 increased 13.8%
over sales for the second quarter of 1996. Year-to-date 1997 sales through
June increased 11% over the corresponding 1996 level. Sales of equipment
represent 47% of year-to-date sales. Sales generated internally increased
slightly under 6% on a year-to-year comparison with the remaining growth
resulting from the February 1997 acquisition of AquaMatic.
Gross Margin
Gross margin for the second quarter of 1997 was 40.3% versus 41.5% for the
corresponding period in 1996. The gross margin for the six months ended
June 30 was 39.5% in 1997 and 41.2% in 1996. The second quarter 1997 result
is an improvement from the 38.6% gross margin in first quarter 1997.
Operating Expenses
Operating expenses increased to 31.0% in the second quarter of 1997 from
30.6% in the second quarter of 1996. On a year-to-date basis, operating
expenses were 30.3% for six months ending June 30, 1997 versus 29.1% for the
same period last year. Operating expenses have increased on a short term
basis partly due to the implementation of a new management information system.
Other Income
Other income decreased by $693 in the first six months of 1997 versus the
same period for 1996. Prior year results included a $640 gain on the sale
of land.
Income Taxes
The effective tax rate for the six months ended June 30, 1997 was 34.3% based
on the forecast for the full year. This compares to 31.6% for the six months
ending June 30, 1996. The increase is due to the completed utilization of
tax loss carryforwards and credits from the Autotrol acquisition.
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 June 30, 1997 was $2,593 versus $3,061 for
the quarter ended June 30, 1996. Net income per common share for the quarter
was $0.18 versus $0.21 for the same period last year. Year-to-date net
income was $5,352 for 1997 versus $6,696 for the same period last year. Net
income per common share year-to-date was $0.37 in 1997 versus $0.46 in 1996.
Liquidity and Capital Resources
As of June 30, 1997, the company had cash, cash equivalents and marketable
securities of $22,069 versus $24,420 at December 31, 1996. The current ratio
was 1.9 at June 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
$19,777 at June 30, 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. The Company
purchased 68,600 shares in March 1997, 220,000 shares in April 1997, 20,000
shares in May 1997 and 7,500 shares in June 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 comptetition. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 14, 1997. The
following members were elected to the Company's Board of Directors to hold
office for the ensuing three years:
Nominee In Favor Withheld
D. Dean Spatz 11,867,773 44,785
Verity C. Smith 11,867,015 45,544
Item 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) None
(b) During the quarter ended June 30, 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
FORM 10-Q for the quarter ended June 30, 1997, and is qualified in
its entirety by reference to such financial staements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 4415000
<SECURITIES> 17654000
<RECEIVABLES> 30794000
<ALLOWANCES> 1019000
<INVENTORY> 33269000
<CURRENT-ASSETS> 89461000
<PP&E> 95279000
<DEPRECIATION> 39557000
<TOTAL-ASSETS> 164060000
<CURRENT-LIABILITIES> 46361000
<BONDS> 0
0
0
<COMMON> 142000
<OTHER-SE> 97606000
<TOTAL-LIABILITY-AND-EQUITY> 164060000
<SALES> 41789000
<TOTAL-REVENUES> 41789000
<CGS> 24931000
<TOTAL-COSTS> 24931000
<OTHER-EXPENSES> 12978000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 675000
<INCOME-PRETAX> 3903000
<INCOME-TAX> 1310000
<INCOME-CONTINUING> 2593000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2593000
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
