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UNITED STATES
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 March 31, 2000
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 (State or other jurisdiction of Incorporation or organization) |
41-0955759 (I.R.S. Employer Identification Number) |
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| 5951 Clearwater Drive, Minnetonka, MN (Address of principal executive offices) |
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55343 (Zip Code) |
Registrant's telephone number, including area code (952) 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, 2000, 14,309,245 shares of the issuer's Common Stock, $0.01 par value, were outstanding.
OSMONICS, INC.
INDEX
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| PART I. | FINANCIAL INFORMATION | |||||
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ITEM I. |
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FINANCIAL STATEMENTS |
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Consolidated Statements of Income— For the Three Months Ended March 31, 2000 and 1999 |
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2 |
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Consolidated Balance Sheets— March 31, 2000 and December 31, 1999 |
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3 |
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Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2000 and 1999 |
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4 |
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Notes to Consolidated Financial Statements |
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5 |
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ITEM II. |
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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6-9 |
| PART II. |
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OTHER INFORMATION |
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ITEM 6. |
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EXHIBITS AND REPORTS ON FORM 8-K |
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| SIGNATURES |
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1
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Data)
(UNAUDITED)
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Three Months Ended March 31, |
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2000 |
1999 |
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| Sales | $ | 50,285 | $ | 44,521 | |||
| Cost of sales | 34,001 | 29,152 | |||||
| Gross profit | 16,284 | 15,369 | |||||
| Less: | |||||||
| Selling, general and administrative | 11,573 | 10,332 | |||||
| Research, development and engineering | 2,096 | 1,735 | |||||
| Special charges | 250 | — | |||||
| Income from operations | 2,365 | 3,302 | |||||
| Other income (expense) | 47 | (905 | ) | ||||
| Income before income taxes | 2,412 | 2,397 | |||||
| Income taxes | 820 | 815 | |||||
| Net income | $ | 1,592 | $ | 1,582 | |||
| Earnings per share | |||||||
| Net Income—basic | $ | 0.11 | $ | 0.11 | |||
| Net Income—assuming dilution | $ | 0.11 | $ | 0.11 | |||
| Average shares outstanding |
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| Basic | 14,273 | 14,002 | |||||
| Assuming dilution | 14,333 | 14,140 | |||||
2
OSMONICS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
(UNAUDITED)
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March 31, 2000 |
December 31, 1999 |
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| ASSETS | |||||||
| Current assets | |||||||
| Cash and cash equivalents | $ | 2,213 | $ | 1,807 | |||
| Marketable securities | 14,127 | 14,007 | |||||
| Trade accounts receivable, net of allowance for doubtful accounts of $1,427 in 2000, and $1,315 in 1999 |
40,521 | 35,804 | |||||
| Inventories | 26,551 | 24,350 | |||||
| Deferred tax assets | 4,627 | 4,773 | |||||
| Other current assets | 3,278 | 2,771 | |||||
| Total current assets | 91,317 | 83,512 | |||||
| Property and equipment, at cost | |||||||
| Land and land improvements | 5,358 | 5,358 | |||||
| Building | 31,497 | 31,785 | |||||
| Machinery and equipment | 73,527 | 73,148 | |||||
| 110,382 | 110,291 | ||||||
| Less accumulated depreciation | (52,470 | ) | (51,961 | ) | |||
| 57,912 | 58,330 | ||||||
| Other assets | 51,737 | 52,524 | |||||
| Total assets | $ | 200,966 | $ | 194,366 | |||
| LIABILITIES AND SHAREHOLDERS' EQUITY |
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| Current liabilities | |||||||
| Accounts payable | $ | 15,085 | $ | 15,121 | |||
| Notes payable and current portion of long-term debt | 24,794 | 21,312 | |||||
| Other accrued liabilities | 16,317 | 14,918 | |||||
| Total current liabilities | 56,196 | 51,351 | |||||
| Long-term debt |
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32,056 |
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32,201 |
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| Other liabilities | 12 | 16 | |||||
| Deferred income taxes | 6,256 | 6,256 | |||||
| Shareholders' equity | |||||||
| Common stock, $0.01 par value Authorized—50,000,000 shares Issued—2000: 14,297,459 and 1999: 14,262,130 shares |
143 | 143 | |||||
| Capital in excess of par value | 22,928 | 22,612 | |||||
| Retained earnings | 81,632 | 80,039 | |||||
| Other comprehensive income | 1,743 | 1,748 | |||||
| Total shareholders' equity | 106,446 | 104,542 | |||||
| Total liabilities and shareholders' equity | $ | 200,966 | $ | 194,366 | |||
3
OSMONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(UNAUDITED)
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Three Months Ended March 31, |
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2000 |
1999 |
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| Cash flows from operations: | |||||||
| Net income | $ | 1,592 | $ | 1,582 | |||
| Non-cash items included in net income: | |||||||
| Depreciation and amortization | 2,466 | 2,068 | |||||
| Deferred income taxes | 50 | 142 | |||||
| Gain on sale of investments | (946 | ) | (43 | ) | |||
| Changes in assets and liabilities: (net of business acquisitions) |
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| Accounts receivable | (4,717 | ) | (2,992 | ) | |||
| Inventories | (1,951 | ) | 546 | ||||
| Other current assets | (507 | ) | 2,968 | ||||
| Accounts payable and other liabilities | 1,109 | 909 | |||||
| Net cash (used in) provided by operations | (2,904 | ) | 5,180 | ||||
| Cash flows from investing activities: | |||||||
| Purchase of investments | (959 | ) | (1,675 | ) | |||
| Sale of investments | 2,059 | 1,535 | |||||
| Purchase of property and equipment | (1,386 | ) | (1,241 | ) | |||
| Sales of property and equipment | 94 | — | |||||
| Other | 31 | (461 | ) | ||||
| Cash used in investing activities | (161 | ) | (1,842 | ) | |||
| Cash flows from financing activities: | |||||||
| Proceeds from notes payable and current debt | 3,507 | 98 | |||||
| Reduction of debt | (170 | ) | (1,073 | ) | |||
| Issuance of common stock | 316 | 259 | |||||
| Net cash provided by (used in) financing activities | 3,653 | (716 | ) | ||||
| Effect of exchange rate changes on cash | (182 | ) | (333 | ) | |||
| Increase in cash and cash equivalents | 406 | 2,289 | |||||
| Cash and cash equivalents—beginning of year | 1,807 | 576 | |||||
| Cash and cash equivalents—end of quarter | $ | 2,213 | $ | 2,865 | |||
4
OSMONICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
(UNAUDITED)
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.
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued recently. The Company is currently reviewing the standard and its potential effect on the financial statements.
The Company has the following components of comprehensive income:
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1st Qtr. 2000 |
1st Qtr. 1999 |
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| Net income | $ | 1,592 | $ | 1,582 | |||
| Other comprehensive income (loss), net of tax: | |||||||
| Foreign currency translation adjustments | (182 | ) | (333 | ) | |||
| Unrealized gains / (losses) on securities | 177 | (951 | ) | ||||
| Other comprehensive income (loss), net of tax | (5 | ) | (1,284 | ) | |||
| Comprehensive income | $ | 1,587 | $ | 298 | |||
In fiscal year 1999, the Company recorded special charges of $1,233 for corporate restructuring and consolidation of operations. For the three months ended March 31, 2000, the Company expended $150 for workforce reductions and $175 for facility closing/consolidation costs.
Operating results for the three months ended March 31, 2000, are not necessarily indicative of the results that may be expected for the full year 2000.
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, 1999.
5
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except 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 months ended March 31, 2000 and 1999, respectively.
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Percent of Sales |
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Three Months Ended March 31, |
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2000 |
1999 |
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| Sales | 100.0 | % | 100.0 | % | |
| Cost of sales | 67.6 | 65.5 | |||
| Gross profit | 32.4 | 34.5 | |||
| Selling, general and administrative |
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23.0 |
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23.2 |
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| Research, development and engineering | 4.2 | 3.9 | |||
| Special charges | 0.5 | — | |||
| Operating expenses | 27.7 | 27.1 | |||
| Income from operations |
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4.7 |
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7.4 |
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| Other income (expense) | 0.1 | (2.0 | ) | ||
| Income from continuing operations | |||||
| before income taxes | 4.8 | 5.4 | |||
| Income taxes | 1.6 | 1.8 | |||
| Net income | 3.2 | % | 3.6 | % | |
Sales for the first quarter ended March 31, 2000 of $50,285 increased 12.9% from sales for the first quarter of 1999. The first quarter 2000 Specialty Filtration & Separation, Process Water Treatment and Household Water Treatment segment sales were 42%, 38% and 20% of total sales, respectively. The first quarter 2000 sales increase included $3,322 attributed to the acquisition of Zyzatech Water Systems, Inc. (Zyzatech) on July 1, 1999 and $3,592 (8.1%) attributed to internal growth of existing product offerings. First quarter 1999 included $1,150 in sales from products produced at manufacturing facilities closed in 1999. Globally, the Euro/Africa market had good growth in the first quarter of 2000, while the Asia/Pacific recovery continued to be slow.
Gross margin for the first quarter of 2000 was 32.4% versus 34.5% for the corresponding period in 1999. The decrease in gross margins is primarily due to lower utilization and production issues at certain manufacturing facilities. To reduce excess manufacturing capacity, reduce costs and improve gross margins, one facility was closed on December 31, 1999, and another facility is scheduled for closure in the third quarter 2000. The Company is also relocating certain production and product capabilities in efforts to focus its factories and eliminate duplicate capabilities and the associated cost and overhead structures. One such relocation was completed during the first quarter 2000 and others are ongoing or planned. The production issues identified in 1999 are being addressed and changes have been instituted during the first quarter.
6
Operating expenses increased to 27.7% of sales in the first quarter of 2000 from 27.1% in the first quarter of 1999. The 2000 increase is attributed to the acquisition of Zyzatech in July 1999 and first quarter special charges (see Special Charges discussion). Research and Development expenses increased as planned to 4.2% of sales in the first quarter of 2000 from 3.9% in the first quarter of 1999.
In first quarter 2000, the Company recorded special charges and recoveries that netted to zero. Special charges included a $250 recovery of inventory accruals primarily due to gains recognized on the sale of inventory at the Company's Rockland, Massachusetts manufacturing facility. The special charges also included $250 of workforce reduction severance costs related to the first quarter 2000 restructuring of several corporate functions. The special charges (recovery) are summarized below:
| Corporate restructuring | $ | 250 | ||
| Special inventory recovery related to plant closings | (250 | ) | ||
| Gross special charges (recovery) | $ | — | ||
| Less special inventory recovery—in COS | (250 | ) | ||
| Special charge in operating expense | $ | 250 | ||
Other expense decreased by $952 in the first three months of 2000 versus the same period for 1999. The decrease is primarily the result of a $946 pretax gain ($0.04 per diluted share after tax) recognized on the sale of securities in the first quarter 2000.
The effective tax rate for the three months ended March 31, 2000 was 34.0% based on the forecast for the full year. This rate is comparable to 34.0% in the same period of 1999. However, this represents a significant change from the tax rate percentage recognized in calendar year 1999, due primarily to the non-deductible $3,500 goodwill asset impairment special charge related to AquaMatic products recorded in the fourth quarter 1999.
Net income for the quarter ended March 31, 2000 was $1,592 versus $1,582 for the quarter ended March 31, 1999. Net income per diluted share for the quarter was $0.11 versus $0.11 for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had cash, cash equivalents and marketable securities of $16,340 versus $15,814 at December 31, 1999. The current ratio was 1.6 at both March 31, 2000 and at year end 1999.
The Company's long-term debt remained relatively consistent from December 31, 1999 to March 31, 2000. The Company's current debt increased in the first quarter to fund working capital increases related to the growth in sales. The Company's borrowings outstanding against its $30,000 revolving line of credit increased to $22,000 as of March 31, 2000 compared to $18,500 as of December 31, 1999.
7
In the first quarter 2000, the Company entered into a loan agreement amendment that reduced the Company's unsecured revolving line of credit to $30,000 from $35,000.
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.
The Company designs, manufactures and markets equipment, systems and components used in the processing and handling of fluids. In 2000, the Company changed the focus of its reporting structure from a two segment, product focused structure to a three segment, market focused structure.
The three market segment structure was established to provide strategic leadership within the three major market segments in which the Company conducts business. The new structure was implemented on January 1, 2000. Restatement of 1999 financial results under this method of reporting has been completed and will be disclosed comparatively in financial reports. Restatement of results prior to 1999 under this method of reporting has been deemed impracticable due to the costs and unavailability of certain financial information.
The Specialty Filtration and Separations segment includes products such as filter cartridges, membrane elements, membranes, instruments and laboratory products. The Process Water Treatment segment includes products such as pumps, housings, valves, controls, reverse osmosis/ultrafiltration (RO/UF) machines, ozonators and water treatment systems used for industrial, commercial and municipal applications. The Household Water Treatment segment includes products such as valves, controls and home reverse osmosis membranes used for the residential water purification and water softening market segments. Each segment is currently supported by several manufacturing facilities, a sales force and various corporate functions. The segments do not have separate accounting, sales, administration, purchasing, or manufacturing functions.
The reportable segment information for the first quarter of 2000 and 1999 is as follows (all segment information excludes the impact of special charges in both years):
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First Quarter Ended March 31, |
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2000 |
1999 |
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| Sales: | |||||||
| Specialty Filtration and Separations | $ | 21,097 | $ | 19,509 | |||
| Process Water Treatment | 19,069 | 15,935 | |||||
| Household Water Treatment | 10,119 | 9,077 | |||||
| Net Sales | 50,285 | 44,521 | |||||
| Gross Profit: |
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| Specialty Filtration and Separations | 7,565 | 8,160 | |||||
| Process Water Treatment | 5,154 | 3,839 | |||||
| Household Water Treatment | 3,315 | 3,370 | |||||
| Gross Profit | 16,034 | 15,369 | |||||
| Operating Income: |
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| Specialty Filtration and Separations | 1,491 | 2,352 | |||||
| Process Water Treatment | (68 | ) | (146 | ) | |||
| Household Water Treatment | 942 | 1,096 | |||||
| Operating Income | $ | 2,365 | $ | 3,302 | |||
8
Net sales in all three segments experienced growth in the first quarter ended March 31, 2000 compared to the same quarter of 1999. Specialty Filtration and Separations and Household Water Treatment segments sales growth was primarily internal growth. Process Water Treatment segment growth was primarily the result of the acquisition of Zyzatech on July 1, 1999.
Gross profit margins and operating income in the Specialty Filtration and Separations and Household Water Treatment segments were lower in the first quarter 2000 than the same quarter in 1999. This was primarily related to production issues, including increased manufacturing scrap and variances at certain manufacturing locations.
Gross profit margins in the Process Water Treatment segment for the quarterly comparison period improved. This was primarily the result of benefits realized from the closure of the Company's Rockland, Massachusetts manufacturing facility in the fourth quarter of 1999. Operating income of this segment improved slightly. Most of the gross profit improvement was reinvested in selling and marketing resources in an effort to utilize remaining surplus manufacturing capacity.
Currently, management does not report the balance sheet or any cash-generating measurements by such segments.
The Company's Year 2000 computer testing and contingency planning was successful, as the Company has experienced no problems with systems or customers' accounts as the date changed from 1999 to 2000. The Company will continue to monitor its computer systems, products and services, including interaction with customers, major vendors and suppliers throughout 2000 to address any issues. Although the Company is not aware of any material operational or financial Year 2000 related issues, the Company cannot assure that such issues will not occur.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act 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 statements made or to be made by the Company) contains statements that are forward looking. Such statements may relate to plans for future expansion and acquisitions, business development activities, capital spending, operating expenses, financing, or the effects of regulation, competition and Year 2000 compliance. Such information involves important risks and uncertainties that could significantly affect results in the future. Such results may differ from those expressed in any forward-looking statements made by the Company. These risks and uncertainties include, but are not limited to, those relating to product demand, product development activities, computer systems implementation, Year 2000 compliance, dependence on existing management, global economic and market conditions, and changes in federal or state laws. Investors are referred to the discussion of certain risks and uncertainties associated with forward looking statements contained in the Company's report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1999.
9
OSMONICS, INC.
PART II
OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
10
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: May 10, 2000 | OSMONICS, INC. (Registrant) |
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/s/ KEITH B. ROBINSON Keith B. Robinson Chief Financial Officer |
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/s/ D. DEAN SPATZ D. Dean Spatz Chief Executive Officer |
11
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