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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2003 Commission file number 000-21109
CUNO INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-1159240
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Research Parkway, Meriden, Connecticut 06450
- ------------------------------------------ ------------------------------------
(Address of principal executive offices) (Zip Code)
(203) 237-5541
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
Not Applicable
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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 periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for 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.
Common Stock, $0.001 Par Value -- 16,731,120 shares as of July 31, 2003
CUNO INCORPORATED
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income - Three months ended July 31, 2003
and 2002 1
Consolidated Statements of Income - Nine months ended July 31, 2003
and 2002 2
Consolidated Balance Sheets - July 31, 2003 and October 31, 2002 3
Consolidated Statements of Cash Flows - Nine months ended July 31, 2003
and 2002 4
Notes to Unaudited Condensed Consolidated Financial Statements 5-10
Independent Accountants' Review Report 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21-22
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23-29
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share and per-share amounts)
THREE MONTHS ENDED
JULY 31,
2003 2002
------------ ------------
Net sales $ 74,965 $ 68,932
Less costs and expenses:
Cost of products sold 41,088 37,920
Selling, general and administrative 18,826 17,186
Research, development and engineering 3,855 3,729
------------ ------------
63,769 58,835
------------ ------------
Operating income 11,196 10,097
Nonoperating income (expense):
Interest expense (159) (94)
Interest and other income, net 180 31
------------ ------------
21 (63)
------------ ------------
Income before income taxes 11,217 10,034
Income taxes 3,750 3,405
------------ ------------
Net income $ 7,467 $ 6,629
============ ============
Basic earnings per common share $ 0.45 $ 0.40
Diluted earnings per common share $ 0.44 $ 0.39
Basic shares outstanding 16,685,602 16,525,092
Diluted shares outstanding 17,088,250 16,958,674
See accompanying notes.
-1-
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share and per-share amounts)
NINE MONTHS ENDED
JULY 31,
2003 2002
------------ ------------
Net sales $ 210,707 $ 190,685
Less costs and expenses:
Cost of products sold 115,798 105,312
Selling, general and administrative expenses 54,853 49,224
Research, development and engineering 10,897 10,850
------------ ------------
181,548 165,386
------------ ------------
Operating income 29,159 25,299
Nonoperating income (expense):
Interest expense (440) (335)
Interest and other income, net 361 229
------------ ------------
(79) (106)
------------ ------------
Income before income taxes 29,080 25,193
Provision for income taxes 9,921 8,631
------------ ------------
Net income $ 19,159 $ 16,562
============ ============
Basic earnings per common share $ 1.15 $ 1.01
Diluted earnings per common share $ 1.13 $ 0.98
Basic shares outstanding 16,629,302 16,449,402
Diluted shares outstanding 17,000,649 16,877,245
See accompanying notes.
-2-
CUNO INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
JULY 31, OCTOBER 31,
2003 2002
--------- -----------
Assets
Current assets
Cash and cash equivalents $ 41,952 $ 40,872
Accounts receivable, less allowances for
doubtful accounts of $1,413 and $1,406, respectively 59,382 50,862
Inventories, net 28,527 26,173
Deferred income taxes 8,424 7,998
Prepaid expenses and other current assets 5,421 4,233
--------- ---------
Total current assets 143,706 130,138
Noncurrent assets
Deferred income taxes 1,507 1,482
Intangible assets, net 30,653 28,758
Prepaid pension costs 2,669 --
Other noncurrent assets 1,234 1,742
Property, plant and equipment, net 82,035 74,759
--------- ---------
Total assets $ 261,804 $ 236,879
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 705 $ 714
Bank loans 11,953 16,374
Accounts payable 19,343 16,256
Accrued payroll and related taxes 11,636 13,633
Other accrued expenses 10,455 10,093
Accrued income taxes 4,866 497
--------- ---------
Total current liabilities 58,958 57,567
Noncurrent liabilities
Long-term debt, less current portion 322 2,030
Deferred income taxes 6,119 5,924
Retirement benefits 5,685 8,945
--------- ---------
Total noncurrent liabilities 12,126 16,899
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value; 2,000,000 shares
authorized, no shares issued -- --
Common Stock, $.001 par value; 50,000,000 shares authorized,
16,731,120 and 16,566,625 shares issued and outstanding 17 17
Treasury Stock, at cost (2,747 shares) (57) (57)
Additional paid-in-capital 49,770 46,375
Unearned compensation (698) (551)
Accumulated other comprehensive loss --
Foreign currency translation adjustments 387 (5,533)
Minimum pension liability (5,153) (5,153)
Change in fair value of derivative financial instruments (28) (8)
--------- ---------
(4,794) (10,694)
Retained earnings 146,482 127,323
--------- ---------
Total stockholders' equity 190,720 162,413
--------- ---------
Total liabilities and stockholders' equity $ 261,804 $ 236,879
========= =========
See accompanying notes.
-3-
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
NINE MONTHS ENDED
JULY 31,
2003 2002
-------- --------
Operating activities
Net income $ 19,159 $ 16,562
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,272 5,984
Noncash compensation recognized under employee stock plans 407 603
Gains on sales of property, plant and equipment (13) (16)
Pension funding in excess of expense (5,997) (4,290)
Deferred income taxes (120) 365
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (6,425) (2,827)
Inventories (338) (671)
Prepaid expenses and other current assets (1,009) (1,579)
Accounts payable and accrued expenses 1,140 6,269
Accrued income taxes 4,291 259
-------- --------
Net cash provided by operating activities 18,367 20,659
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 35 80
Acquisition of companies, net of cash acquired (149) (503)
Capital expenditures (12,420) (12,236)
Other, net (339) --
-------- --------
Net cash used for investing activities (12,873) (12,659)
FINANCING ACTIVITIES
Principal payments on long-term debt (2,069) (921)
Net repayments under short-term bank loans (4,650) 122
Proceeds from stock options exercised 1,193 1,564
-------- --------
Net cash (used for) provided by financing activities (5,526) 765
Effect of exchange rate changes on cash and cash equivalents 1,112 202
-------- --------
Net change in cash and cash equivalents 1,080 8,967
Cash and cash equivalents -- beginning of period 40,872 25,628
-------- --------
Cash and cash equivalents -- end of period $ 41,952 $ 34,595
======== ========
See accompanying notes.
-4-
CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2003
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
CUNO Incorporated (the "Company", "CUNO", or "we") designs, manufactures
and markets a comprehensive line of filtration products for the separation,
clarification and purification of liquids and gases. Our products, which include
proprietary depth filters and semi-permeable membrane filters, are sold in the
Potable Water, Healthcare and Fluid Processing markets throughout the world.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for annual financial statements. In the opinion of
management, all adjustments which are of a normal recurring nature considered
necessary for a fair presentation of the financial position and results of
operations for the interim periods set forth herein have been included. The
accounts of the Company and all of its subsidiaries are included in the
consolidated financial statements. All significant intercompany accounts and
transactions are eliminated in consolidation. Operating results for the interim
periods are not necessarily indicative of the results that may be expected for
the full year. These interim unaudited financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
October 31, 2002.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and disclosures made in the accompanying notes to the financial
statements. Actual results could differ from those estimates.
NOTE 2 - INVENTORIES
Inventories consist of the following (amounts in thousands):
JULY 31, OCTOBER 31,
2003 2002
------- -------
Raw materials $12,493 $11,701
Work-in-process 3,823 3,112
Finished goods 12,211 11,360
------- -------
$28,527 $26,173
======= =======
Inventories are stated at the lower of cost or market. Inventories in the
United States are valued primarily by the last-in, first-out (LIFO) cost method.
The primary method used for all other inventories is first-in, first-out (FIFO).
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time. Because
these are subject to many factors beyond management's control, interim results
are subject to the final year-end LIFO inventory valuation.
5
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per common share for the three months ended:
JULY 31, JULY 31,
2003 2002
------------ ------------
NUMERATOR:
Net income $ 7,467,000 $ 6,629,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,708,826 16,556,206
Issued but unearned restricted shares (23,224) (31,114)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,685,602 16,525,092
============ ============
Weighted average shares outstanding 16,708,826 16,556,206
Effect of dilutive employee stock options 379,424 402,468
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 17,088,250 16,958,674
============ ============
Basic earnings per share $ 0.45 $ 0.40
Diluted earnings per share $ 0.44 $ 0.39
The following table sets forth the computation of basic and diluted
earnings per common share for the nine months ended:
JULY 31, JULY 31,
2003 2002
------------ ------------
NUMERATOR:
Net income $ 19,159,000 $ 16,562,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,652,573 16,490,222
Issued but unearned restricted shares (23,271) (40,820)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,629,302 16,449,402
============ ============
Weighted average shares outstanding 16,652,573 16,490,222
Effect of dilutive employee stock options 348,076 387,023
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 17,000,649 16,877,245
============ ============
Basic earnings per share $ 1.15 $ 1.01
Diluted earnings per share $ 1.13 $ 0.98
During the first nine months of 2003, 98,411 stock options were exercised
(net of shares used to pay individual taxes) providing approximately $1.2
million in net cash proceeds to the Company. During the first nine months of
2002, 133,088 stock options were exercised (net of shares used to pay individual
taxes) providing $1.6 million in net cash proceeds to the Company. In addition,
35,404 shares were used to provide employer matching
6
contributions to our 401(k) plan in 2003. These shares had a fair market value
of approximately $1.2 million, which is included in additional paid-in-capital.
NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income was comprised of the following (amounts in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 7,467 $ 6,629 $ 19,159 $ 16,562
Other comprehensive income (loss):
Change in minimum pension liability,
net of deferred income taxes of $195 -- -- -- 362
Change in fair value of derivative
financial instruments, net of income
taxes of $48, $61, $60 and $2 69 (112) (87) 4
Losses (gains) related to derivative
financial instruments reclassified into
earnings from other comprehensive
income, net of income taxes of
$9, $56, $46 and $80 (12) (103) 67 (182)
Foreign currency translation adjustments 180 (640) 5,920 (488)
-------- -------- -------- --------
Total comprehensive income $ 7,704 $ 5,774 $ 25,059 $ 16,258
======== ======== ======== ========
The overall weakness in the US dollar, compared to the currencies in which
we conduct a large part of our business in, produced the foreign currency
translation adjustment amounts above.
NOTE 5 - SEGMENT DATA
For management reporting and control, the Company is divided into five
geographic operating segments as presented below. Each segment has general
operating autonomy over its markets. The management for each of our segments
operate independent sales and manufacturing organizations that function within
an overall corporate framework of strategic initiatives and performance targets.
7
Operating segment data includes the results of all subsidiaries,
consistent with the management reporting of these operations. Financial
information by geographic operating segments is summarized below (amounts in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2003 2002 2003 2002
--------- --------- --------- ---------
NET SALES:
Europe $ 16,704 $ 14,112 $ 45,416 $ 37,049
Japan 8,902 8,445 25,647 22,983
Asia/Pacific 9,221 7,680 26,882 20,842
Latin America 3,296 2,723 8,493 9,077
--------- --------- --------- ---------
Subtotal - Foreign sales 38,123 32,960 106,438 89,951
North America 46,746 45,843 133,623 127,422
Intercompany sales (9,904) (9,871) (29,354) (26,688)
--------- --------- --------- ---------
$ 74,965 $ 68,932 $ 210,707 $ 190,685
========= ========= ========= =========
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2003 2002 2003 2002
-------- -------- -------- --------
OPERATING INCOME:
North America $ 6,716 $ 6,663 $ 18,045 $ 16,683
Europe 1,936 1,225 4,146 2,486
Japan 906 728 2,393 1,759
Asia/Pacific 1,346 1,114 3,686 2,909
Latin America 292 367 889 1,462
-------- -------- -------- --------
Segment total 11,196 10,097 29,159 25,299
-------- -------- -------- --------
Interest expense (159) (94) (440) (335)
Other, net 180 31 361 229
-------- -------- -------- --------
Income before income taxes $ 11,217 $ 10,034 $ 29,080 $ 25,193
======== ======== ======== ========
Interest expense and other income (expense) have not been allocated to
segments.
NOTE 6 - INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net consisted of the following
(amounts in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2003 2002 2003 2002
----- ----- ----- -----
Interest income $ 159 $ 122 $ 433 $ 452
Exchange losses (24) (6) (101) (47)
Gains on sales of property, 6 1 13 16
plant, and equipment
Other, net 39 (86) 16 (192)
----- ----- ----- -----
$ 180 $ 31 $ 361 $ 229
===== ===== ===== =====
8
NOTE 7 - NEWLY ISSUED ACCOUNTING STANDARDS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123" (FAS 148). This statement amends SFAS No. 123 "Accounting for Stock Based
Compensation" (FAS 123) to provide alternative methods of voluntarily
transitioning to the fair value based method of accounting for stock-based
employee compensation. FAS 148 also amends the disclosure requirements of FAS
123 to require disclosure of the method used to account for stock-based employee
compensation and the effect of the method on reported results in both annual and
interim financial statements. We adopted the disclosure provisions of this
Statement beginning with the quarter ended April 30, 2003. The annual impact of
a change to a fair value model has been previously disclosed in the Company's
Annual Report on Form 10-K. We are currently analyzing the alternatives allowed
under this new accounting standard.
NOTE 8 - CONTINGENCIES
The Company is subject to various legal actions, governmental audits, and
proceedings relating to various matters incidental to its business including
product liability and environmental claims. While the outcome of such matters
cannot be predicted with certainty, in the opinion of management, after
reviewing such matters and consulting with our counsel and considering any
applicable insurance or indemnifications, any liability which may ultimately be
incurred is not expected to materially affect the consolidated financial
position, cash flows or results of operations of the Company.
NOTE 9 - STOCK OPTIONS AND AWARDS
We currently account for our stock option awards under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. No option-based employee compensation
cost is reflected in net income, as all options granted under our plans had
exercise prices equal to the market value of the underlying common stock on the
date of grant. Restricted share grants awarded to employees are included in
earnings as an expense over the vesting period of the award.
The following table illustrates the effect on net income and earnings per
share if we had applied the fair value recognition provisions of FAS 123 to
stock-based employee compensation (dollars in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income, as reported $ 7,467 $ 6,629 $ 19,159 $ 16,562
Add: Stock-based compensation expense included in reported
net income, net of income taxes 88 131 264 392
Deduct: Total stock-based compensation expense determined
under fair value based method for all awards, net of
income taxes 526 574 1,606 1,613
---------- ---------- ---------- ----------
Pro forma net income $ 7,029 $ 6,186 $ 17,817 $ 15,341
========== ========== ========== ==========
Earnings per share:
Basic - as reported $ 0.45 $ 0.40 $ 1.15 $ 1.01
Basic - pro forma $ 0.42 $ 0.37 $ 1.07 $ 0.93
Diluted - as reported $ 0.44 $ 0.39 $ 1.13 $ 0.98
Diluted - pro forma $ 0.41 $ 0.36 $ 1.05 $ 0.91
9
NOTE 10 - BENEFIT PLANS
The pension assumptions used to determine our October 31, 2002 plan
liabilities and the fiscal 2003 pension expense are as follows:
US PLANS JAPAN PLANS
Weighted-average discount rate 7.00% 2.50%
Rates of increases in compensation levels 4.00% 2.25%
Expected long-term rate of return on assets 9.25% 4.75%
We determine our assumptions based on current economic and market data, as
well as expectations of future economic and market data. Included in our
analysis are company-specific considerations, such as current and future
investment allocations, participant demographics, and employee compensation
strategies.
Pension expense for fiscal 2003 is determined at the beginning of the
fiscal year and expensed ratably throughout the year. The total pension expense
to be recognized in 2003 will amount to approximately $1.7 million ($1.6 million
in fiscal 2002). We made an incremental cash contribution of $6.0 million in the
first quarter of fiscal 2003 and generally make normal cash contributions to the
Plans in an amount equivalent to the annual expense.
10
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Stockholders and Board of Directors
CUNO Incorporated
We have reviewed the accompanying condensed consolidated balance sheet of CUNO
Incorporated as of July 31, 2003, and the related condensed consolidated
statements of income for the three-month and nine-month periods ended July 31,
2003 and 2002 and the condensed consolidated statements of cash flows for the
nine-month periods ended July 31, 2003 and 2002. These financial statements are
the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of CUNO
Incorporated as of October 31, 2002, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended (not
presented herewith) and in our report dated December 5, 2002, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of October 31, 2002, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Hartford, Connecticut
August 19, 2003
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to the accompanying unaudited
interim condensed consolidated financial statements and footnotes to help
provide an understanding of our financial position, changes in our financial
position and results of our operations. Our MD&A is organized as follows:
- COMPANY OVERVIEW. This section provides a general description of our
business.
- COMPANY RISK FACTORS. This section describes the material risks
inherent in our business that investors should be aware of.
- CAUTION CONCERNING FORWARD-LOOKING STATEMENTS. This section
discusses how certain forward-looking statements made by us
throughout the MD&A and elsewhere in this report are based on
management's present expectations about future events and are
inherently susceptible to uncertainty and changes in circumstances.
- CRITICAL ACCOUNTING POLICIES. This section discusses those
accounting policies that are both considered important to our
financial statements and require significant judgment and estimates
on the part of management in their application.
- RESULTS OF OPERATIONS. This section provides an analysis of our
results of operations for the three and nine months ended July 31,
2003 and 2002. In addition, a brief description is provided of
transactions and events that impact the comparability of these
results.
- FINANCIAL POSITION AND LIQUIDITY. This section provides an analysis
of our cash position and cash flows, as well as a discussion of our
financing arrangements.
Other information is presented in Items 3, 4 and elsewhere as follows:
- QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK. This
section discusses information about the various market risks we are
exposed to as of the end of the latest fiscal period presented.
- CONTROLS AND PROCEDURES. This section discusses the conclusions of
our executive officer and principal financial officer about the
effectiveness of our disclosure controls and procedures.
- OTHER INFORMATION. This section describes material developments in
the business or markets in which we compete, as well as any other
information important to our stakeholders.
COMPANY OVERVIEW
CUNO is a world leader in the designing, manufacturing and marketing of a
comprehensive line of filtration products for the separation, clarification and
purification of liquids and gases. Our products, which include proprietary depth
filters and semi-permeable membrane filters, are used in the potable water,
fluid processing, and healthcare markets. These products, most of which are
disposable, effectively remove contaminants that range in size from molecules to
sand particles. Our sales are balanced between domestic (approximately 55%) and
international markets (approximately 45%). Our objective is to provide high
value-added products and premium customer service. Our proprietary manufacturing
processes result in products that lower customers' operating expenses and
improve the quality of customers' end products by providing longer lasting,
higher quality and more efficient filtration products.
12
COMPANY RISK FACTORS
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Approximately 45% of our net sales are derived from international
operations. Consequently, our reported financial results may be adversely
affected by significant fluctuations in the value of the US dollar in comparison
to local currencies in the countries in which we operate outside the US. We
manufacture products in Japan, China, Brazil, France, Singapore and Australia.
Our international operations may be affected by economic, political and
governmental conditions in some of the countries where we have manufacturing
facilities or where our products are sold. In addition, changes in economic or
political conditions in any of the countries in which we operate could result in
unfavorable taxation policies, exchange rates, new or additional currency or
exchange controls, governmental regulations, credit risks, or other restrictions
being imposed on the operations of the Company or expropriation.
PATENTS AND PROPRIETARY TECHNIQUES
We have a broad patent portfolio as well as other proprietary information
and manufacturing techniques and have applied, and will continue to apply, for
patents to protect our technology. The Company's success depends in part upon
our ability to protect our technology and proprietary products under US and
foreign patent and other intellectual property laws. Trade secrets and
confidential know-how which are not patented are protected through
confidentiality agreements, contractual provisions and internal Company
administrative procedures. There can be no assurance that such arrangements will
provide meaningful protection for the Company in the event of any unauthorized
use or disclosure. There can be no assurance that third parties will not assert
infringement claims against the Company or that a license or similar agreement
will be available on reasonable terms in the event of an unfavorable ruling on
any such claim. In addition, any such claim may require the Company to incur
litigation expenses or subject the Company to liabilities.
TECHNOLOGICAL AND REGULATORY CHANGE
The filtration and separations industry is characterized by changing
technology, competitively imposed process standards and regulatory requirements,
each of which influences the demand for our products and services. Changes in
legislative, regulatory or industrial requirements or competitive technologies
may render certain of our filtration and separations products and processes
obsolete. Acceptance of new products may also be affected by the adoption of new
government regulations requiring stricter standards. The Company's ability to
anticipate changes in technology and regulatory standards and to develop and
introduce new and enhanced products successfully on a timely basis are
significant factors in our ability to grow and to remain competitive. Similar to
all companies, we are also subject to the risks generally associated with new
product introductions and applications, including lack of market acceptance,
delays in product development and failure of products to operate properly.
COMPETITION
The filtration and separations markets in which we compete are highly
competitive. We compete with many domestic and international companies in the
global markets. The principal methods of competition in the markets in which we
compete are product specifications, performance, quality, knowledge, reputation,
technology, distribution capabilities, service and price.
KEY CUSTOMERS AND SUPPLIERS
We have multi-year contracts and arrangements in place with several of our
major customers and suppliers. These contracts and arrangements help us
effectively plan and manage our operations. Since the markets for our products
are dynamic, these contracts and arrangements are continually evolving as we are
sensitive to the changing needs of our customers and the ongoing performance of
our suppliers. There is no assurance, however, that these contracts and
arrangements will be renewed, will not be terminated prematurely or revised to
take into consideration the evolving nature of our relationships with our
customers and suppliers.
13
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
Because we want to provide shareholders with more meaningful and useful
information, this annual report contains statements relating to future events
and the predicted performance of CUNO Incorporated (the "Company", "CUNO", or
"we") which may constitute forward-looking statements, as defined under the
Private Securities Litigation Act. We have tried, wherever possible, to identify
these "forward looking" statements by using words such as "anticipate,"
"believe," "estimate," "expect" and similar expressions. These statements
reflect our current beliefs and are based on information currently available to
us. Accordingly, these statements are subject to risks and uncertainties which
could cause our actual results performance or achievements to differ materially
from those expressed in, or implied by, these statements. These risks and
uncertainties include the following: economic and political conditions in the
foreign countries in which we conduct a substantial part of our operations and
other risks associated with international operations including taxation
policies, credit risk, exchange rate fluctuations and the risk of expropriation;
our ability to protect our technology, proprietary products and manufacturing
techniques; volumes of shipments of our products, changes in our product mix and
product pricing; continuing beneficial relationships with customers; costs of
raw materials; the rate of economic and industry growth in the United States and
the other countries in which we conduct our business; changes in technology,
changes in legislative, regulatory or industrial requirements and risks
generally associated with new product introductions and applications; and
domestic and international competition in our global markets. We assume no
obligation to publicly release revisions to the forward-looking statements to
reflect new events or circumstances.
CRITICAL ACCOUNTING POLICIES
The SEC defines the most critical accounting policies as the ones that are
most important to the portrayal of a company's financial condition and operating
results, and require management to make its most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. Based on this definition, our
most critical accounting policies include: accounting for depreciation and
amortization, employee benefits, income taxes, contingencies, stock based
compensation and asset valuation allowances (including those for bad debts and
for deferred income tax assets). We also have other key accounting policies,
such as our policy for revenue recognition. The methods, estimates and judgments
we use in applying these most critical accounting policies have a significant
impact on the results we report in our financial statements. There were no
changes in accounting policies or significant changes in accounting estimates
during the current period.
Depreciation and amortization - We depreciate our property, plant and
equipment using the straight-line method over the estimated useful life of the
asset. These periods range as follows:
Land improvements 10 - 20 years
Buildings and additions 30 - 40 years
Machinery and equipment 5 - 20 years
Computers and related equipment 3 - 5 years
We amortize our patents and other amortizable intangible assets over their
estimated useful lives. The straight line method of amortization is used unless
another method is more appropriate and reliable in reflecting the pattern in
which the asset provides economic benefits. These periods generally range from
10 - 20 years.
We review the carrying values of intangibles and long-lived assets on an
annual basis. In addition, in the event that facts and circumstances indicate
that the carrying value of intangibles and long-lived assets or other assets may
be impaired at any other time, an evaluation is performed. Our evaluations
compare the estimated future undiscounted cash flows associated with the asset
to the asset's carrying amount.
Employee benefits - We account for our pension plans in accordance with
SFAS No. 87, "Employer's Accounting for Pensions". In applying this accounting
practice, assumptions are made regarding the valuation of benefit obligations
and the performance of plan assets.
14
The primary assumptions are as follows:
- Weighted average discount rate - this rate is used to estimate the
current value of future benefits. This rate is adjusted based on
movements in long-term interest rates.
- Expected long-term rate of return on assets - this rate is used to
estimate future growth in investments and investment earnings. The
expected return is based upon a combination of historical market
performance and anticipated future returns for a portfolio
reflecting the mix of equity, debt and other investments indicative
of our plan assets.
- Rates of increase in compensation levels - this rate is used to
estimate projected annual pay increases, which are used to determine
the wage base used to project employees' pension benefits at
retirement.
We determine these assumptions based on consultations with our
outside actuaries and investment advisors. Any variance in the above assumptions
could have a significant impact on future recognized pension costs, assets and
obligations.
Contingencies, claims, assessments -- From time to time, we are
involved with contingencies, claims, and assessments. We use both in-house and
outside legal counsel to assess the probability of loss. The Company establishes
an accrual when the claims and litigation represent a probable loss and the cost
can be reasonably estimated. There can be no assurance that the ultimate
resolution of these contingencies, claims, and assessments will not differ
materially from our estimates.
Allowance for Bad Debts -- We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. Our allowance for doubtful accounts is based on our
assessment of the collectibility of specific customer accounts, the aging of
accounts receivable, our history of bad debts, and the general condition of the
industry and geographic locations in which we operate. If a major customer's
credit worthiness deteriorates, or our customers' actual defaults exceed our
historical experience, our estimates could change and impact our reported
results.
Income Taxes - We estimate and use our expected annual effective
income tax rate to accrue income taxes on an interim basis. We update these
estimates quarterly. We record valuation allowances to reduce our deferred
income tax assets to an amount that we believe is more likely than not to be
realized. We consider estimated future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a valuation
allowance. If we were to determine that we will not realize all or part of our
deferred income tax assets in the future, we would make an adjustment to the
carrying value of the deferred income tax asset, which would be reflected as an
income tax expense. Conversely, if we were to determine that we will realize a
deferred income tax asset, which currently has a valuation allowance, we would
reverse the valuation allowance which would be reflected as an income tax
benefit in our financial statements.
Stock Based Compensation - We currently account for our stock option
awards under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. No
stock-based employee compensation cost pertaining to stock options is reflected
in net income, as all options granted under our plans had exercise prices equal
to the market value of the underlying common stock on the date of grant.
Restricted share grants awarded to employees are included in earnings as an
expense over the vesting period of the award.
Revenue Recognition -- We recognize revenue in accordance with SEC
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 requires that four basic criteria be met before revenue can
be recognized: 1) there is evidence that an arrangement exists; 2) delivery has
occurred; 3) the fee is fixed or determinable; and 4) collectibility is
reasonably assured. We recognize revenue upon determination
15
that all criteria for revenue recognition have been met, which, based on our
shipping terms, is considered to have occurred upon shipment of the finished
product.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED JULY 31, 2003 VS. THREE MONTH PERIOD ENDED JULY 31,
2002
BUSINESS ENVIRONMENT
Our operations are affected by global economic and political factors.
However, our geographic and market diversity helps limit the impact of any one
market or the economy of any single country on our consolidated results. The
uncertainty in the North American economy, including conditions in certain
markets in which we compete, impacted our consolidated results and is likely to
continue to present challenges to our business near term.
NET SALES
Net sales were $75.0 million in the third quarter of fiscal 2003
representing an 8.8 percent increase over 2002 third quarter sales of $68.9
million. This increase can generally be attributed to an increase in the unit
volume of worldwide sales. Had currency values been unchanged from the third
quarter of 2002, net sales in the third quarter of 2003 would have been $3.3
million lower, or 4.0 percent greater overall.
The following table displays our sales by geographic segment (dollar
amounts in thousands):
THREE MONTHS ENDED CURRENCY
JULY 31, PERCENT ADJUSTED
2003 2002 CHANGE CHANGE
------- ------- ------- ------
North America $40,386 $39,859 1.3% 1.3%
Europe 14,465 11,242 28.7% 7.2%
Japan 8,778 8,354 5.1% 1.4%
Asia/Pacific 8,139 6,865 18.6% 6.9%
Latin America 3,197 2,612 22.4% 31.3%
------- -------
Total sales $74,965 $68,932 8.8% 4.0%
======= =======
North American sales were relatively flat in the third quarter of 2003 as
compared to the same quarter in 2002. An overall sluggish US economy and
particular weakness in Fluid Processing and some of the residential markets
within Potable Water were factors in these results. European sales increased 7.2
percent in local currency as compared to the same period in 2002. Healthcare
sales continued their overall strength, and sales in the Potable Water market
were up significantly. Sales in Japan were up 1.4 percent in local currency
primarily reflecting a moderate increase in sales to the Healthcare market.
Asia/Pacific sales were up 6.9 percent excluding changes in currency values. The
increase in Asia/Pacific sales was due primarily to increased volume in the
Fluid Processing markets as well as strength in the Asian Healthcare markets.
Third quarter 2003 Latin American sales in local currency increased 31.3
percent due primarily to new product sales within the Potable Water market.
16
The following table displays our sales by market (dollar amounts in
thousands):
THREE MONTHS ENDED CURRENCY
JULY 31, PERCENT ADJUSTED
2003 2002 CHANGE CHANGE
------- ------- ------ ------
Potable Water $34,606 $31,133 11.2% 9.2%
Fluid 19,040 18,979 0.3% (6.0%)
Processing
Healthcare 21,319 18,820 13.3% 5.6%
------- -------
Total sales $74,965 $68,932 8.8% 4.0%
======= =======
The weak economies in the US and certain other countries have impacted all
of our markets, although Fluid Processing remains our most cyclical market. The
Fluid Processing sales decrease (in local currency) reflects continued weakness,
primarily in certain US end markets. The increase in the Potable Water market
was broad geographically, driven largely by strong overseas sales (up 28.1
percent in local currency) and moderate growth in North America. Healthcare
sales increased 5.6 percent in local currency and continue to benefit from an
ongoing focus by management on competitively favorable product lines and market
niches.
GROSS PROFIT
Gross profit increased $2.9 million to $33.9 million in the third quarter
of 2003 from $31.0 million in the third quarter of 2002. Gross profit as a
percentage of net sales (gross margin) increased during that same period from
45.0 percent in 2002 to 45.2 percent in 2003. Although we are under pressure to
maintain competitive prices with our customers, we pursue various supply-chain
management initiatives designed to lower our production costs. In addition, we
have ongoing programs to modernize our manufacturing facilities to gain more
efficiencies.
OPERATING EXPENSES
Selling, general and administrative expenses ("SG&A") were up 9.5 percent
in the third quarter of 2003 as compared to the same period in 2002. SG&A
expenses were 25.1 percent of sales in the third quarter of fiscal 2003 compared
to 24.9 percent of sales in the third quarter of fiscal 2002. Because of CUNO's
international operations, the weaker US dollar served to increase the
consolidated US dollar-reported SG&A expense.
Research, development and engineering expenses ("RD&E"), which are
incurred primarily in the US, increased 3.4 percent from $3.7 million to $3.9
million in the third quarter of 2003. As a percentage of sales, RD&E expenses
were 5.1 percent of sales in the third quarter of fiscal 2003 compared to 5.4
percent of sales in the third quarter of fiscal 2002.
OPERATING INCOME
As a result of the above, operating income increased $1.1 million, or 10.9
percent, to $11.2 million or 14.9 percent of sales in the third quarter of
fiscal 2003 compared to $10.1 million or 14.6 percent of sales in the third
quarter of 2002.
NON-OPERATING ACTIVITY
Interest expense was relatively minor in both the third quarter of 2003
and 2002. See "Financial Position and Liquidity" below for further discussion of
the Company's cash and debt structure. Interest income was flat due to lower
average interest rates in the third quarter of 2003, offset by higher average
investment levels.
17
INCOME TAXES
The Company's effective income tax rate for the third quarter of 2003 was
33.4 percent compared to 33.9 percent in the third quarter of 2002. Due to the
wide range of effective tax rates in the countries in which we operate, our tax
rate is impacted by the change in the mix of income attributed to these various
countries.
NINE MONTH PERIOD ENDED JULY 31, 2003 VS. NINE MONTH PERIOD ENDED JULY 31,
2002
NET SALES
Net sales were $210.7 million in the first nine months of fiscal 2003
representing a 10.5 percent increase over 2002 sales of $190.7 million. This
increase can generally be attributed to an increase in the unit volume of
worldwide sales. Had currency values been unchanged from the first nine months
of 2002, net sales in the first nine months of 2003 would have been $7.7 million
lower, or 6.5 percent greater overall.
The following table displays our sales by geographic segment (dollar
amounts in thousands):
NINE MONTHS ENDED CURRENCY
JULY 31, PERCENT ADJUSTED
2003 2002 CHANGE CHANGE
-------- -------- ------ ------
North America $114,273 $110,895 3.0% 3.0%
Europe 38,520 29,507 30.5% 8.9%
Japan 25,345 22,739 11.5% 4.7%
Asia/Pacific 24,509 18,795 30.4% 19.1%
Latin America 8,060 8,749 (7.9%) 19.9%
-------- --------
Total sales $210,707 $190,685 10.5% 6.5%
======== ========
North American sales increased 3.0 percent in the first nine months of
2003 as compared to the same period in 2002. Moderately stronger Potable Water
market sales were responsible for this growth in North America during this time
period. Strong growth in sales to Original Equipment Manufacturers or "OEM"
customers, direct marketing companies and appliance manufacturers were offset by
weakness in the residential markets. European sales increased 8.9 percent in
local currency as compared to the same period in 2002. Healthcare sales were
particularly strong during this period reflecting greater demand in the
pharmaceutical industry, and sales in the Potable Water market were up
significantly. Sales in Japan were up 4.7 percent in local currency despite an
overall weak economy. Asia/Pacific sales were up 19.1 percent excluding changes
in currency values. The increase in Asia/Pacific sales was due primarily to
broad-based strength in sales throughout both Asia and Australia. Latin American
sales increased 19.9 percent due to in large part to overall broad strength in
all markets as well as new product sales within the Potable Water market.
The following table displays our sales by market (dollar amounts in
thousands):
NINE MONTHS ENDED CURRENCY
JULY 31, PERCENT ADJUSTED
2003 2002 CHANGE CHANGE
-------- -------- ------ ------
Potable Water $ 96,301 $ 87,794 9.7% 8.3%
Fluid Processing 55,117 50,627 8.9% 2.8%
Healthcare 59,289 52,264 13.4% 7.1%
-------- --------
Total sales $210,707 $190,685 10.5% 6.5%
======== ========
18
The weak economies in the US and certain other countries (primarily Japan)
have impacted all of our markets to some extent. The strength in the Potable
Water market was broad geographically, driven largely by strong overseas sales
(up 23.8 percent in local currency). The Fluid Processing sales increase of 2.8
percent reflects modest growth and the cyclicality of this market. Healthcare
sales increased 7.1 percent (10.8 percent overseas) and continue to benefit from
an ongoing focus by management on competitively favorable product lines and
market niches.
GROSS PROFIT
Gross profit increased $9.5 million to $94.9 million in the first nine
months of 2003 from $85.4 million in the first nine months of 2002. Gross profit
as a percentage of net sales (gross margin) increased during that same period
from 44.8 percent in 2002 to 45.0 percent in 2003. Although we are under
pressure to maintain competitive prices with our customers, we pursue various
supply-chain management initiatives designed to lower our production costs. In
addition, we have ongoing programs to modernize our manufacturing facilities to
gain more efficiencies.
OPERATING EXPENSES
Selling, general and administrative expenses (SG&A) were up 11.4 percent
in the first nine months of 2003 compared to the same period in 2002. SG&A
expenses were 26.0 percent of sales in the first nine months of fiscal 2003
compared to 25.8 percent of sales in the first nine months of fiscal 2002.
Because of CUNO's international operations, the weaker US dollar served to
increase the consolidated US dollar-reported SG&A expense in 2003.
Research, development and engineering expenses ("RD&E"), which are
incurred primarily in the US, were flat in the first nine months of 2003 versus
the comparable period in 2002. In 2003, we received approximately $0.5 million
in RD&E cost reimbursements from various new customers. Adjusting for these
one-time items, RD&E would have increased 4.7 percent - this reflects our
continued focus on the development of new products and technologies. As a
percentage of sales, RD&E expenses were 5.4 percent of sales (adjusted for
reimbursements above) in the first nine months of fiscal 2003 compared to 5.7
percent of sales in the first nine months of fiscal 2002.
OPERATING INCOME
As a result of the above, operating income increased $3.9 million, or 15.3
percent, to $29.2 million or 13.8 percent of sales in the first nine months of
fiscal 2003 compared to $25.3 million or 13.3 percent of sales in the first nine
months of 2002.
NON-OPERATING ACTIVITY
Interest expense was relatively flat in the first nine months of 2003
compared to the first nine months of 2002. See "Financial Position and
Liquidity" below for further discussion of the Company's cash and debt
structure. Interest income was flat due to lower average interest rates in 2003,
partially offset by higher average investment levels.
INCOME TAXES
The Company's effective income tax rate for the first nine months of 2003
was 34.1 percent compared to 34.3 percent in 2002. Our tax rate is impacted by
the change in the mix of income attributed to the various countries in which we
do business.
19
FINANCIAL POSITION AND LIQUIDITY
We assess liquidity in terms of the Company's ability to generate cash to
fund our continuing operating and investing activities. Of particular importance
to the management of liquidity are cash flows generated by operating activities,
capital expenditure levels, and adequate bank financing alternatives.
We manage our worldwide cash requirements considering the cost
effectiveness of the funds available from the many subsidiaries through which we
conduct our business. We believe that our existing cash and cash equivalents
position ($42.0 million at July 31, 2003) and available sources of liquidity
(approximately $29.8 million of available, unused worldwide short-term lines of
credit) are sufficient to meet current and anticipated requirements for the
foreseeable future. We do not rely on commercial paper or off-balance sheet
financing arrangements for our liquidity needs nor do we have any investments in
special purpose entities (SPEs).
We continue to invest in R&D to provide future sources of revenue through
the development of new products, as well as through additional uses for existing
products. Our efforts are spread across the various markets in which we compete,
with particular emphasis on new products and technologies in Healthcare and the
improvement in design and function of products within Potable Water. We consider
R&D and the development of new products and technologies an integral part of our
growth strategy and a core competence of the Company.
Likewise, we continue to invest in capital expenditures in order to expand
and modernize manufacturing facilities around the globe. We currently have plans
to expand certain international manufacturing lines in order to meet product
demands around the globe. In addition, new manufacturing lines and processes are
being installed in the US to benefit the Water Group, Fluid Processing, and
Healthcare operations.
Set forth below is selected cash flow data (in thousands of dollars):
Source/(Use) of Cash NINE MONTHS ENDED
JULY 31,
2003 2002
-------- --------
OPERATING ACTIVITIES:
Pension funding in excess of expense $ (5,997) $ (4,290)
Accounts receivable (6,425) (2,827)
Accounts payable and accrued expenses 1,140 6,269
Accrued income taxes 4,291 259
Net cash provided by operating activities 18,367 20,659
INVESTING ACTIVITIES:
Capital expenditures (12,420) (12,236)
Net cash used for investing activities (12,873) (12,659)
FINANCING ACTIVITIES:
Net change in total debt (6,719) (799)
Net cash used for financing activities (5,526) 765
The funded status of our pension plans is dependent upon many factors,
including returns on invested assets and the level of market interest rates.
Recent declines in the value of securities traded in equity markets coupled with
declines in long-term interest rates have had a negative impact on the funded
status of our plans. We made an incremental $6.0 million contribution to our US
pension plans in the first quarter of 2003 and an incremental $4.0 million
contribution to our US pension plans in the first quarter of 2002 to bolster the
funding and earnings capabilities of the plans. The increase in accounts
receivable in the first nine months of 2003 relates to the higher level of sales
volume in 2003, and the timing of collections. The increase in accounts payable
and accrued expenses during the first nine months of 2002 primarily relates to
the timing of inventory purchases and cash disbursements.
20
The increase in accrued income taxes in the first nine months of 2003 primarily
relates to the increased profitability of the Company and the timing of payments
to worldwide governments for taxes assessed on that income.
Capital expenditures in 2003 primarily relate to the continued focus on
expanding and modernizing manufacturing facilities around the globe. More
specifically, these expenditures primarily relate to new manufacturing lines in
Brazil and the US. The new manufacturing lines and processes being installed in
the US will benefit the Water Group, Fluid Processing, and Healthcare
operations.
During the first nine months of 2003, we made certain scheduled payments
on long-term debt, as well as prepaid approximately $1.4 million in long term
debt. In addition, certain other short term debt instruments were paid down.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The overall objective of our financial risk management program is to seek
a reduction in the potential negative earnings effects from changes in foreign
exchange and interest rates arising from business activities. We manage these
financial exposures through operational means and by utilizing available
financial instruments. Practices may change as economic conditions change.
Foreign Currency Risk
Our earnings and cash flows are subject to fluctuations due to changes in
foreign currency exchange rates. We utilize forward foreign exchange contracts
to hedge specific exposures relating to intercompany payments, certain firm
sales commitments and anticipated, but not yet committed, intercompany sales
(primarily parent company export sales to subsidiaries at pre-established US
dollar prices) and other specific and identified exposures. The terms of the
forward foreign exchange contracts are generally matched to the underlying
transaction being hedged, and are typically under one year.
Because such contracts are directly associated with identified
transactions, they are an effective hedge against fluctuations in the value of
the foreign currency underlying the transaction. All of our foreign exchange
contracts are accounted for at fair value based on readily available market
price quotations. We generally do not hedge overseas sales denominated in
foreign currencies or translation exposures. Further, we do not enter into
financial instruments for speculation or trading purposes.
We utilize bank loans and other debt instruments throughout our worldwide
operations. To mitigate foreign currency risk, such debt is generally
denominated in the underlying local currency of the affiliate. In certain
limited and specific circumstances, we will manage risk by denominating a
portion of debt outstanding in a currency other than the local currency.
There have been no material changes in the information reported in the
Company's Form 10-K for the year ended October 31, 2002 under the "Market Risk
Disclosures" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
21
Contractual Obligations and Commercial Commitments
Below is a table detailing, by maturity date, our Contractual Obligations
and Commercial Commitments as of October 31, 2002 (amounts in thousands):
OBLIGATIONS AND
COMMITMENTS 2003 2004 2005 2006 2007 THEREAFTER TOTAL
----------- ---- ---- ---- ---- ---- ---------- -----
Bank loans $16,374 $ -- $ -- $ -- $ -- $ -- $16,374
Long-term debt 714 862 139 135 131 763 2,744
Operating leases 2,151 1,917 1,470 1,310 1,394 -- 8,242
------- ------ ------ ------ ------ ---- -------
Total $19,239 $2,779 $1,609 $1,445 $1,525 $763 $27,360
Also, see 2003 changes in bank loans and long-term debt detailed on the
Consolidated Statements of Cash Flows for the nine months ended July 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Our chief executive officer and chief financial officer performed an
evaluation of our disclosure controls and procedures as of July 31, 2003 (the
"Evaluation Date"). Based on that evaluation, our chief executive officer and
chief financial officer concluded that our disclosure controls and procedures
were effective to ensure that the information required to be disclosed in the
reports that we file under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms.
(b) There have been no significant changes in our internal controls since
the Evaluation Date. We are not aware of any significant change in any other
factors that could significantly affect our internal controls subsequent to the
Evaluation Date.
OTHER INFORMATION
ARGENTINE PESO DEVALUATION
A significant devaluation in the Argentine peso took place in the first
quarter of 2002. We have a branch located in Argentina that accounted for less
than 1% of consolidated net sales in 2002. Because this branch's operation is
not material to our consolidated results, it has only a minimal impact on our
overall results of operations. See "Market Risk Disclosures" above.
COST OF INSURANCE
Due to market forces, the cost of insurance has risen substantially and
the availability of insurance has become more restrictive. We maintain insurance
coverage with such deductibles and self-insurance as considered adequate for our
needs. Such coverage reflects market conditions (including cost and
availability) existing at the time it is written and the relationship of
insurance coverage to self-insurance varies accordingly. We consider the impact
of these changes as we continually assess the best way to provide for our
insurance needs now and in the future.
22
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
Exhibit 15 -- Acknowledgement of Ernst & Young LLP
Exhibit 31.1 - Certification of Mark G. Kachur pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certification of Frederick C. Flynn Jr. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 - Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 - Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on From 8-K
We filed a Report on Form 8-K, dated May 21, 2003, under "Item 5. Other Events,"
reporting our financial results for the second quarter ended April 30, 2003.
23
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.
CUNO INCORPORATED
Date August 20, 2003
By /s/Mark G. Kachur
-----------------
Mark G. Kachur
Chairman of the Board of Directors,
President and Chief Executive Officer
By /s/ Frederick C. Flynn, Jr.
---------------------------
Frederick C. Flynn, Jr.
Senior Vice President -
Finance and Administration,
Chief Financial Officer,
Controller, and Assistant Secretary
24