##### 



Exhibit 13 Market Data The Companys Common Stock is quoted on the NASDAQ market under the symbol
CUNO. The following table shows the quarterly high and low prices for the last
two fiscal years ended October 31: Quarter
    
    2004
    
    2003High
    
    Low
    
    High
    
    LowFirst
    
    $
    46.74
    
    
    $
    38.58
    
    
    $
    35.06
    
    
    $
    29.90Second
    
    
    46.22
    
    
    
    40.44
    
    
    
    37.14
    
    
    
    32.06Third
    
    
    53.44
    
    
    
    40.95
    
    
    
    38.85
    
    
    
    33.65Fourth
    
    
    60.44
    
    
    
    51.52
    
    
    
    42.35
    
    
    
    34.51
 As of October 31, 2004 CUNO had approximately 5,500 shareholders of record.




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##### 



Summary of Financial Data(1)
(In Thousands, Except Per Share Data and Ratios) October 31:
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000INCOME DATANet Sales
    
    $
    351,611
    
    
    $
    288,231
    
    
    $
    258,201
    
    
    $
    244,449
    
    
    $
    243,074Gross Profit
    
    
    157,327
    
    
    
    131,010
    
    
    
    115,751
    
    
    
    108,380
    
    
    
    104,485Operating Income
    
    
    49,461
    
    
    
    40,225
    
    
    
    34,885
    
    
    
    30,411
    
    
    
    27,927Income before Income Taxes
    
    
    49,301
    
    
    
    40,147
    
    
    
    34,770
    
    
    
    30,797
    
    
    
    27,595Net Income
    
    
    33,071
    
    
    
    26,796
    
    
    
    22,956
    
    
    
    20,013
    
    
    
    17,447Basic Earnings per Share
    
    
    1.98
    
    
    
    1.61
    
    
    
    1.39
    
    
    
    1.23
    
    
    
    1.08Diluted Earnings per Share
    
    
    1.93
    
    
    
    1.58
    
    
    
    1.36
    
    
    
    1.20
    
    
    
    1.05OTHER FINANCIAL DATATotal Assets
    
    $
    434,558
    
    
    $
    288,008
    
    
    $
    236,879
    
    
    $
    206,043
    
    
    $
    188,899Working Capital
    
    
    97,694
    
    
    
    98,016
    
    
    
    72,571
    
    
    
    55,750
    
    
    
    41,921Net Plant Investment
    
    
    103,321
    
    
    
    85,060
    
    
    
    74,759
    
    
    
    65,595
    
    
    
    63,187Capital Expenditures
    
    
    20,792
    
    
    
    16,318
    
    
    
    17,600
    
    
    
    11,028
    
    
    
    12,143Long-Term Debt
    
    
    75,569
    
    
    
    401
    
    
    
    2,030
    
    
    
    2,893
    
    
    
    3,422Stockholders Equity
    
    
    255,979
    
    
    
    208,328
    
    
    
    162,413
    
    
    
    140,171
    
    
    
    119,518RATIOSGross Profit to Net Sales
    
    
    44.7
    %
    
    
    45.5
    %
    
    
    44.8
    %
    
    
    44.3
    %
    
    
    43.0
    %Operating Income to Net Sales
    
    
    14.1
    %
    
    
    14.0
    %
    
    
    13.5
    %
    
    
    12.4
    %
    
    
    11.5
    %Net Income to Net Sales
    
    
    9.4
    %
    
    
    9.3
    %
    
    
    8.9
    %
    
    
    8.2
    %
    
    
    7.2
    %Effective Income Tax Rate
    
    
    32.9
    %
    
    
    33.3
    %
    
    
    34.0
    %
    
    
    35.0
    %
    
    
    36.8
    %Net Income to Average Stockholders Equity
    
    
    14.2
    %
    
    
    14.5
    %
    
    
    15.2
    %
    
    
    15.4
    %
    
    
    15.6
    %Ratio of Current Assets to Current Liabilities
    
    
    2.2:1
    
    
    
    2.5:1
    
    
    
    2.3:1
    
    
    
    2.0:1
    
    
    
    1.7:1
  (1)
    
    We adopted FASB 142 in 2002. Goodwill amortization was $1,316 and $1,140
in 2001 and 2000, respectively. 5




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##### 



Managements Discussion and Analysis of Financial Condition and Results of Operations 2004  2002  Managements discussion and analysis of financial condition and results of
operations (MD&A) of CUNO Incorporated (the Company, CUNO, or we) is
provided as a supplement to the accompanying 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 of which investors should be aware.
    
    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 years ended October 31, 2004,
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.
    
    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.
    
    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 relatively balanced between
domestic (approximately 53 percent) and international markets (approximately 47
percent). Our objective is to provide high value-added products and premium
customer service. Our proprietary manufacturing processes result in products
with features that lower customers operating expenses and improve the quality
of customers end products. Company Risk Factors Risks Associated with International Operations Approximately 47 percent 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 U.S. dollar in
comparison to local currencies in the countries in which we operate outside the
U.S. We manufacture products in Japan, France, Australia, Asia, Brazil, and
China. 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. 6




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##### 



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 and 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. Inflation Inflation had a negligible effect on our operations during fiscal years 2004,
2003 and 2002. We estimate that inflationary effects, in the aggregate, were
generally recovered or offset through increased pricing or cost reductions in
each fiscal year. 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 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 7




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##### 



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 Securities Exchange Comission (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: revenue recognition, accounting for depreciation and amortization,
employee benefits, contingencies, allowance for doubtful accounts, income
taxes, and stock-based compensation. 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. All of our critical accounting policies have been
discussed with the Audit Committee of the Board of Directors. Revenue Recognition  We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 104 Revenue Recognition(SAB 104). SAB 104
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 that all criteria for revenue recognition
have been met. Accordingly, revenue is recognized upon delivery to a common
carrier when terms are FOB shipping and upon receipt by customer when terms are
FOB destination. 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 yearsBuildings and additions
    
    30  40 yearsMachinery and equipment
    
    5  20 yearsComputers 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 intangible assets and long-lived assets
for impairment 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 time other than during the annual
impairment review, a specific evaluation of the assets or groups of assets is
performed to determine whether any impairment exists. 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. 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
liabilities. 8




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##### 



Business Acquisitions  Assets and liabilities acquired in a business
combination are recorded at their estimated fair values at the acquisition
date. At October 31, 2004, the Company had $103,977 of goodwill, representing
the cost of acquisitions in excess of fair values assigned to the underlying
net assets of acquired companies. In accordance with SFAS 142, goodwill and
intangible assets deemed to have indefinite lives are not amortized but are
subject to annual impairment testing. The assessment of goodwill involves the
estimation of the fair value of reporting units, as defined by SFAS 142.
Management completed this annual assessment during the fourth quarter of 2004
based on the best information available as of the date of the assessment, which
incorporated managements assumptions about expected future cash flows. Based
on this assessment, there was no goodwill impairment in 2004. Future cash
flows can be affected by changes in the global economy and local economies,
industries and markets in which the Company sells products or services, and the
execution of managements plans, particularly with respect to integrating
acquired companies. There can be no assurance that future events will not
result in impairment of goodwill or other intangible assets. 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 for specific contingencies, claims and assessments when both of the
following conditions are present: a loss is deemed probable and the amount of
the anticipated loss 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 Doubtful Accounts  The allowance for doubtful accounts is
established to represent our best estimate of the net realizable value of the
outstanding accounts receivable balances. We estimate our allowance for
doubtful accounts based on past due amounts and historical write-off
experience, as well as trends and factors surrounding the credit risk of
specific customers. In an effort to identify adverse trends, we perform
periodic credit evaluations of our customers and ongoing account balance
reviews and agings of receivables. Amounts are considered past due when payment
has not been received within the time frame of the credit terms extended.
Write-offs are charged directly against the allowance for doubtful accounts
and occur only after all collection efforts have been exhausted. Actual
write-offs and adjustments could differ from the allowance estimates due to
unanticipated changes in the business environment as well as factors and risks
surrounding specific customers. 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. We take tax positions in our worldwide corporate income tax filings based
on careful interpretations of local statutes, rules, regulations and court
decisions that may be applied and interpreted differently by various taxing
jurisdictions. These taxing jurisdictions may or may not challenge our
application and interpretation of a wide body of tax jurisprudence. However, we
do not anticipate that any sustained challenge by any taxing jurisdiction will
have a material adverse effect on our financial position or net income. 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 employee 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. 9




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##### 



Results of Operations Year Ended October 31, 2004 Compared to Year Ended October 31, 2003 Overview During 2004, CUNOs sales and net income grew by 22 percent and 23
percent, respectively. This growth was positively influenced by the overall
weakness of the U.S. dollar; on a currency-adjusted basis 2004 sales increased
17 percent. U.S. sales were up 20 percent  led by the potable water market,
and sales in Japan were up 26 percent in local currency due in large part to
increased sales to bottled drink manufacturers. All overseas sales were very
strong (total overseas sales were up 14 percent in local currency), reflecting
broad strength across all of our geographic segments. Although our sales
increased significantly, our gross margin decreased slightly due primarily to
start-up costs associated with a new distribution agreement involving potable
water products with a major retailer, as well as the impact of the recent
acquisition of WTC Industries Inc. (WTC). Sales to retailers within the
potable water market and sales attributable to WTC generally carry lower gross
margins than historically reported. Below is a summary of selected consolidated earnings information: Year Ended October 31,2004
    
    2003
    
    ChangeNet sales
    
    $
    351,611
    
    
    $
    288,231
    
    
    
    22.0
    %Cost of products sold
    
    
    194,284
    
    
    
    157,221
    
    
    
    23.6
    %Gross profit
    
    
    157,327
    
    
    
    131,010
    
    
    
    20.1
    %Gross margin percent
    
    
    44.7
    %
    
    
    45.5
    %
    
    
    (0.8
    %)Selling, general and administrative
    
    
    89,608
    
    
    
    75,652
    
    
    
    18.4
    %SG&A as a percent of sales
    
    
    25.5
    %
    
    
    26.2
    %
    
    
    (0.7
    %)Operating income
    
    
    49,461
    
    
    
    40,225
    
    
    
    23.0
    %Operating margin
    
    
    14.1
    %
    
    
    14.0
    %
    
    
    0.1
    %Effective tax rate
    
    
    32.9
    %
    
    
    33.3
    %
    
    
    (0.4
    %)Net income
    
    $
    33,071
    
    
    $
    26,796
    
    
    
    23.4
    %Diluted earnings per share
    
    $
    1.93
    
    
    $
    1.58
    
    
    
    22.2
    %
 Business Environment Our geographic and market diversity help limit the impact of any one
market or the economy of any single country on our consolidated results. The
uncertainty of the economic conditions in various markets and geographic
regions in which we compete is likely to continue to present challenges to our
business near term. The U.S. Dollar was weaker compared to most of the
currencies in countries we conduct business in during fiscal 2004 compared to
fiscal 2003. We translate revenue and expense accounts at the average exchange
rates during the periods presented. Net Sales Net sales were $351.6 million in fiscal 2004 representing a 22.0 percent
increase over 2003 sales of $288.2 million. This increase can generally be
attributed to an increase in the unit volume of worldwide sales. Had currency
values been unchanged from fiscal 2003, net sales in fiscal 2004 would have
been $14.2 million lower than the reported sales of $351.6 million and 17.1
percent higher than 2003. The following table displays the Companys sales by geographic segment: Year Ended
    
    
    
    
    
    CurrencyOctober 31,
    
    October 31,
    
    Percent
    
    Adjusted2004
    
    2003
    
    Change
    
    ChangeNorth America
    
    $
    186,854
    
    
    $
    156,294
    
    
    
    19.6
    %
    
    
    19.6
    %Europe
    
    
    62,288
    
    
    
    52,291
    
    
    
    19.1
    %
    
    
    7.4
    %Japan
    
    
    47,250
    
    
    
    34,617
    
    
    
    36.5
    %
    
    
    26.2
    %Asia/Pacific
    
    
    41,366
    
    
    
    34,005
    
    
    
    21.6
    %
    
    
    10.9
    %Latin America
    
    
    13,853
    
    
    
    11,024
    
    
    
    25.7
    %
    
    
    17.7
    %Total sales
    
    $
    351,611
    
    
    $
    288,231
    
    
    
    22.0
    %
    
    
    17.1
    %
 10




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##### 



North American sales increased 19.6 percent in fiscal 2004 as compared to
fiscal 2003. The majority of this increase was attributable to potable water
and reflects sales related to a new, exclusive distribution agreement with a
major retailer. Excluding the sales of WTC , which we acquired on August 2,
2004, sales in North America were up 13.4 percent. North American fluid
processing sales were up 10.1 percent, primarily reflecting the overall
strengthening of the U.S. economy during this period. North American healthcare
sales decreased modestly due primarily to a reduction in diagnostic sales.
European sales increased 7.4 percent in local currency as compared to 2003.
Sales were generally strong in all European markets during the year. Sales in
Japan were up 26.2 percent in local currency, led by very strong sales growth
of food and beverage filters used in the healthcare market primarily for
filtration of summer bottled drinks. Strong fluid processing sales also
contributed to Japans overall sales increase. Asia/Pacific sales were up 10.9
percent excluding changes in currency values, primarily reflecting strong sales
growth in the potable water market in that region. Latin American sales were up
17.7 percent in 2004 when expressed in local currency, due primarily to new
product sales associated with a new customer in the potable water market,
offset by more moderate sales growth in the healthcare market due to the
difficult economic environment in the region. The following table displays our sales by market: Year Ended
    
    
    
    
    
    CurrencyOctober 31,
    
    October 31,
    
    Percent
    
    Adjusted2004
    
    2003
    
    Change
    
    ChangePotable Water
    
    $
    169,910
    
    
    $
    132,938
    
    
    
    27.8
    %
    
    
    25.5
    %Fluid Processing
    
    
    88,058
    
    
    
    74,626
    
    
    
    18.0
    %
    
    
    11.1
    %Healthcare
    
    
    93,643
    
    
    
    80,667
    
    
    
    16.1
    %
    
    
    8.7
    %Total Sales
    
    $
    351,611
    
    
    $
    288,231
    
    
    
    22.0
    %
    
    
    17.1
    %
 The strength in the potable water market was broad geographically, driven
largely by strong overseas sales (up 18.4 percent in local currency) and strong
sales growth in North America (up 27.2 percent) associated with OEM customers,
direct marketing companies, and appliance manufacturers. Excluding the impact
of 2004 sales of WTC , worldwide potable water sales were up 18.3 percent on a
local currency basis. Fluid Processing sales were up 10.1 percent in the U.S.
due in part to the strong economy during the period and were up 11.6 percent
overseas on a local currency basis. Worldwide healthcare sales were up 8.7
percent in local currency, reflecting overseas strength, but down in the U.S.
due to a reduction in diagnostic sales. Gross Profit Gross profit increased $26.3 million to $157.3 million in 2004 from $131.0
million in 2003. Gross profit as a percentage of net sales (gross margin)
decreased during that same period from 45.5 percent in 2003 to 44.7 percent in
2004. This decrease is primarily attributable to start-up costs associated with
a new distribution agreement with a major retailer within potable water and
generally lower gross margins on sales to retailers within the potable water
market, and our recent acquisition of WTC . 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
further gain efficiencies. Operating Expenses Selling, general and administrative expenses (SG&A) were up 18.4 percent, below
the 22.0 percent sales growth rate for the year. SG&A expenses decreased as a
percentage of sales from 26.2 percent in fiscal 2003 to 25.5 percent of sales
in fiscal 2004. Because of CUNOs international operations, the weaker U.S.
dollar serves to increase the consolidated U.S. dollar reported SG&A expense.
In addition, increased structural costs (including medical, pension, insurance
and depreciation expenses) impacted our overall SG&A expenses as well as our
recent acquisition of WTC. Research, development and engineering expenses
(incurred primarily in the U.S. and to a lesser extent in Europe) increased
16.2 percent to $17.4 million in 2004, reflecting our continued focus on the
development of new products and technologies. As a percentage of sales, RD&E
expenses were 4.9
percent of sales in fiscal 2004 compared to 5.2 percent of sales in fiscal
2003. In 2004 and 2003, we received approximately $0.4 and $0.5 million,
respectively, in RD&E cost reimbursements from new customers. There can be no
assurance we will continue to receive such reimbursements from customers in the
future. 11




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##### 



Amortization expense primarily relates to amortizable intangibles acquired as
part of our recent
acquisition of WTC. We are amortizing $28 million of intangibles over a 15 year
life. Other amortization relates to much smaller acquisitions recently
completed. Operating Income As a result of the above, operating income increased $9.2 million, or 23.0
percent, to $49.5 million or 14.1 percent of sales in fiscal 2004 compared to
$40.2 million or 14.0 percent of sales in 2003. Our operating income by segment is detailed below: Year EndedOctober 31,
    
    October 31,
    
    Dollar
    
    Percent2004
    
    2003
    
    Change
    
    ChangeNorth America
    
    $
    25,081
    
    
    $
    25,206
    
    
    ($
    125
    )
    
    
    (0.5
    %)Europe
    
    
    6,197
    
    
    
    5,335
    
    
    
    862
    
    
    
    16.2
    %Japan
    
    
    8,930
    
    
    
    3,354
    
    
    
    5,576
    
    
    
    166.2
    %Asia/Pacific
    
    
    7,517
    
    
    
    5,289
    
    
    
    2,228
    
    
    
    42.1
    %Latin America
    
    
    1,736
    
    
    
    1,041
    
    
    
    695
    
    
    
    66.8
    %Total Operating Income
    
    $
    49,461
    
    
    $
    40,225
    
    
    $
    9,236
    
    
    
    23.0
    %
 Operating income in North America was flat. This was primarily driven by
start-up costs associated with a new distribution agreement with a major
retailer within potable water, initial costs associated with ending certain
distributor relationships within fluid processing (and going direct) and a
reduction in diagnostic sales (which generally carry higher margins). The
results of our foreign operations are heavily dependent on the relationship of
their functional currency compared to the U.S. Dollar. We translate our foreign
revenue and expense accounts into U.S. Dollars using the average exchange rate
for the period. European sales increased 7.4 percent on a local currency basis,
while the Euro strengthened approximately 10 percent (average 2004 versus
average 2003). Sales in Japan were up 26.2 percent on a local currency basis,
and the Yen strengthened 8 percent versus the U.S. Dollar year over year
(allowing fixed costs to be spread over a large sales base). Sales in 2004 were
very strong for food and beverage filters used in the filtration of summer
bottled drinks. These sales are dependent
on consumer preferences and other external factors. Asia/Pacific sales were up
10.9 percent year over year, and the Australian Dollar strengthened
approximately 15 percent in comparison (approximately 50 percent of our sales
in the region are denominated in Australian Dollars). Local currency sales in
Latin America increased 17.7 percent and the Brazilian Real strengthened
approximately 8 percent year over year  these factors helped to increase
operating profit a modest $0.7 million. Income Taxes The Companys effective income tax rate for 2004 was 32.9 percent compared to
33.3 percent in 2003. Our tax rate is impacted by the change in the mix of
income attributed to the various countries in which we do business. As of
October 31, 2004, the Company had a full valuation allowance against
approximately $1.2 and $0.3 million of NOLs in China and Germany, respectively.
Our China operations are start-up in nature with a history of losses (no profit
has been earned since inception in 2001) and our German operation incurred
losses in three out of the past five fiscal years. Generally, other countries
in which we carry valuation allowances against NOLs are generally operations
which are new to CUNO, have a history of losses, or are in volatile economic
regions of the world. On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was
signed into law. In
accordance with the Act, a special one-time dividends received deduction on the
repatriation of certain foreign
earnings is available to U.S. taxpayers. CUNO is currently in the process of
evaluating the effects of this
repatriation provision, however, does not believe that it will have a material
impact on the results of operations,
financial position and cash flows. The FASB is also expected to provide further
guidance in the accounting
treatment for this provision of the Act under Accounting Research Bulletin 43. 12




---



##### 



Year Ended October 31, 2003 Compared to Year Ended October 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. Net Sales Net sales of $288.2 million in fiscal 2003 represented an 11.6 percent increase
over 2002 net sales of $258.2
million. This increase can generally be attributed to an increase in the unit
volume of worldwide sales. Had
currency values been unchanged from fiscal 2002, net sales in 2003 would have
been $276.4 million ($11.8 million
lower), or 7.1 percent greater overall. The following table displays our sales by geographic segment (dollar amounts in
thousands): Year Ended
    
    
    
    CurrencyOctober 31,
    
    October 31,
    
    Percent
    
    Adjusted2003
    
    2002
    
    Change
    
    ChangeNorth America
    
    $
    156,294
    
    
    $
    149,784
    
    
    
    4.3
    %
    
    
    4.3
    %Europe
    
    
    52,291
    
    
    
    40,369
    
    
    
    29.5
    %
    
    
    8.9
    %Japan
    
    
    34,617
    
    
    
    30,648
    
    
    
    13.0
    %
    
    
    6.1
    %Asia/Pacific
    
    
    34,005
    
    
    
    26,179
    
    
    
    29.9
    %
    
    
    17.6
    %Latin America
    
    
    11,024
    
    
    
    11,221
    
    
    
    (1.8
    %)
    
    
    15.2
    %Total sales
    
    $
    288,231
    
    
    $
    258,201
    
    
    
    11.6
    %
    
    
    7.1
    %
 North American sales totaled $156.3 million in 2003, which represented a 4.3
percent increase over sales
of $149.8 million 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 Manufacturer (OEM)
customers, direct marketing companies and appliance manufacturers were tempered
by general weakness in the
residential markets. Healthcare sales improved modestly year over year, while
fluid processing sales were down
slightly due to their more cyclical nature. Our international sales increased $23.5 million or 21.7 percent in 2003 (10.9
percent in local currency)
compared to 2002. 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 6.1 percent in local
currency despite an overall weak economy. Asia/Pacific sales were up 17.6
percent excluding changes in currency
values. The increase in Asia/Pacific sales was due primarily to broad-based
strength in sales among all markets
throughout the region. Latin American sales increased 15.2 percent due to in
large part to overall broad strength
in all markets as well as new product sales within the potable water market in
the latter half of 2003. The following table displays our sales by market (dollars in thousands): Year Ended
    
    
    
    CurrencyOctober 31,
    
    October 31,
    
    Percent
    
    Adjusted2003
    
    2002
    
    Change
    
    ChangePotable Water
    
    $
    132,938
    
    
    $
    119,456
    
    
    
    11.3
    %
    
    
    9.4
    %Fluid Processing
    
    
    74,626
    
    
    
    68,714
    
    
    
    8.6
    %
    
    
    2.1
    %Healthcare
    
    
    80,667
    
    
    
    70,031
    
    
    
    15.2
    %
    
    
    8.0
    %Total Sales
    
    $
    288,231
    
    
    $
    258,201
    
    
    
    11.6
    %
    
    
    7.1
    %
 The unsettled economies in the US and certain other countries (primarily Japan)
throughout much of
fiscal 2003 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 23.6 percent in
local currency). The fluid processing
sales increase of 8.6 percent reflects incremental growth throughout the year,
particularly in the international
markets. Healthcare sales increased 15.2 percent (10.5 percent overseas on a
local currency basis) and continue to
benefit from an ongoing focus by management on competitively favorable product
lines and market niches. 13




---



##### 



Gross Profit Gross profit increased $15.3 million to $131.0 million in 2003 from $115.8
million in 2002. Gross profit
as a percentage of net sales (gross margin) increased during that same period
from 44.8 percent in 2002 to 45.5
percent in 2003. The primary factors which contributed to the increased gross
margin in 2003 were the overall
increase in volume sales and higher mix of sales in healthcare (which generally
carry higher margins). 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 14.5 percent in
2003 compared to fiscal
2002. SG&A expenses were 26.3 percent of sales in fiscal 2003 compared to 25.6
percent of sales in fiscal 2002. We
continued to face rising insurance and other structural costs in fiscal 2003,
and have taken active measures to curb
these costs when prudent. Also, 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,
increased 2.1% in 2003 compared to 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
5.6 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 fiscal 2003
compared to 5.7 percent of sales in fiscal 2002. Operating Income As a result of the above, operating income increased $5.3 million, or 15.3
percent, to $40.2 million or 14.0
percent of sales in fiscal 2003 compared to $34.9 million or 13.5 percent of
sales in fiscal 2002. Non-Operating Activity Interest expense was relatively flat in fiscal 2003 compared to fiscal 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 fiscal 2003 was 33.3 percent
compared to 34.0 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, as well as ongoing , global tax planning initiatives. 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, and to, the many subsidiaries through which we conduct our business. We
believe that our existing cash
and cash equivalents position of $23.4 million at October 31, 2004 and
available sources of liquidity of
approximately $55 million of available, unused worldwide short-term lines of
credit are sufficient to meet current
and anticipated requirements for the foreseeable future. On August 2, 2004 the
Company entered into a $120
million variable rate, unsecured revolving line of credit with a syndicate of
banks. This facility has a maturity date
of August 2, 2009 and all amounts borrowed under this agreement are required to
be paid in full by such date,
unless the agreement is extended through amendment or renegotiation. 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 (SPE), or variable interest entities (VIE). 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. 14




---



##### 



Likewise, we continue to invest in capital expenditures in order to expand and
modernize manufacturing
facilities around the world. We currently have plans to expand certain
international manufacturing lines in order
to meet product demands around the world. In addition, new manufacturing lines
and processes are being
installed in the US to benefit operations. Summary of Cash Flows follows: Year Ended October 31,2004
    
    2003Cash provided by (used for):Operating activities
    
    $
    28,891
    
    
    $
    33,229Investing activities
    
    
    (141,272
    )
    
    
    (16,892
    )Financing activities
    
    
    76,813
    
    
    
    (1,009
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    1,324
    
    
    
    1,403
 Net cash provided by operating activities decreased $4.3 million due primarily
to:  
    
    Increased net income in 2004 of $6.3 million
    
    Decrease in pension funding of approximately $6.3 million
    
    Increased use of cash for accounts receivables and inventories of $12.7 and
$9.6
million, respectively
    
    Increased source of cash from accounts payable and accrued expenses of $10.3 million Net cash used for investing activities increased by $124.4 million due
primarily to:  
    
    Increased use of cash for acquisitions of $119.6 million, net of cash
acquired, primarily
to fund recent WTC Industries Inc. acquisition Net cash provided by financing activities increased by $77.8 million due
primarily to:  
    
    Increase in 2004 net long-term debt of $74.0 million to fund our acquisition
of WTC
Industries, Inc. The effect of exchange rate changes on cash and cash equivalents increased $1.3
million due primarily to
the overall weakness of the US Dollar in 2004, particularly against the
Japanese Yen, Euro and Australian Dollar. Qualitative and Quantitative Disclosure About Market Risk Foreign Currency Risk Approximately 47 percent of our operations consist of sales and manufacturing
activities in foreign
countries. We manufacture a significant portion of our products in the U.S. and
sell some of these products to
affiliated companies overseas. As a result, the Companys financial results
could be significantly affected by factors
such as changes in foreign currency exchange rates or weak economic conditions
in the foreign markets in which
we distribute and sell our products. Our currency exposures vary, but are
concentrated in the Euro, Japanese Yen,
Singapore Dollar, Australian Dollar, British Pound, Brazilian Real, Argentine
Peso, and the Chinese Renminbi. We utilize forward foreign exchange contracts to hedge specific exposures
relating to intercompany
payments (primarily parent company export sales to subsidiaries at
pre-established U.S. Dollar prices) and other
specific and identified exposures. The terms of the forward foreign exchange
contracts are 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. We do not hedge overseas sales denominated
in foreign currencies or
translation exposures. 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 branch or
subsidiary. In certain limited and specific instances, we may manage risk by
denominating a portion of debt
outstanding in a currency other than the local currency. 15




---



##### 



Interest Rate Risk Our interest income and expense are most sensitive to changes in the general
level of U.S. and Japanese
interest rates. In this regard, changes in these interest rates may affect the
interest paid on debt. To mitigate the
impact of fluctuations in U.S. and Japanese interest rates, we periodically
evaluate alternative interest rate
arrangements. As of October 31, 2004, we had $75 million outstanding on a $120 million
unsecured revolving credit
facility, with a variable interest rate based on the LIBOR rate plus 1 percent.
Our interest rate risk on the
outstanding balance of this credit facility is based on future fluctuations in
the LIBOR rate. Below is a table detailing, by maturity date, the Companys debt portfolio and
the estimated interest rates
for the fiscal years ended October 31: Fair2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    Total
    
    ValueBank loans
    
    $
    11,048
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    11,048
    
    
    $
    11,048Avg. Interest Rate
    
    
    0.82
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.82
    %Long-term Debt:Fixed Rate
    
    $
    276
    
    
    $
    242
    
    
    $
    119
    
    
    $
    28
    
    
    $
    75,011
    
    
    $
    169
    
    
    $
    75,845
    
    
    $
    75,845Avg. Interest Rate
    
    
    5.07
    %
    
    
    5.10
    %
    
    
    4.55
    %
    
    
    5.00
    %
    
    
    2.91
    %
    
    
    5.00
    %
    
    
    2.93
    %
 Other Information Section 404 of the Sarbanes-Oxley Act of 2002 (the Act) will require the
Company to include an
internal control report from management in its Annual Report on Form 10-K for
the year ended October 31, 2005
and in subsequent reports. The internal control report must include the
following: (1) a statement of
managements responsibility for establishing and maintaining adequate internal
control over financial reporting,
(2) a statement identifying the framework used by management to conduct the
required evaluation of the
effectiveness of the Companys internal control over financial reporting, (3)
managements assessment of the
effectiveness of the Companys internal control over financial reporting as of
October 31, 2005, including a
statement as to whether or not internal control over financial reporting is
effective, and (4) a statement that the
Companys independent auditors have issued an attestation report on
managements assessment of internal
controls over financial reporting. Management acknowledges its responsibility for establishing and maintaining
internal controls over
financial reporting and seeks to continually improve those controls. In
addition, in order to achieve compliance
with Section 404 of the Act within the required time frame, the Company has
been conducting a process to
document and evaluate its internal controls over financial reporting. In this
regard, the Company has dedicated
internal resources, engaged outside consultants and adopted a detailed work
plan to: (1) assess and document the
adequacy of internal controls over financial reporting; (2) take steps to
improve control processes where required;
(3) validate through testing that controls are functioning as designed; and (4)
implement a continuous reporting
and improvement process for internal control over financial reporting. The
Company believes its process for
documenting, evaluating and monitoring its internal control over financial
reporting is consistent with the
objectives of Section 404 of the Act. Given the risks inherent in the design and operation of internal controls over
financial reporting, the
Company can provide no assurance as to its, or its independent auditors,
conclusions at October 31, 2005 with
respect to the effectiveness of its internal controls over financial reporting. Market Risk Disclosures 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. 16




---



##### 



Contractual Obligations and Commercial Commitments Below is a table detailing, by maturity date, our contractual obligations and
commercial commitments as
of October 31, 2004: Obligations andCommitments
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    ThereafterBank loans
    
    $
    11,048
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt
    
    
    276
    
    
    
    242
    
    
    
    119
    
    
    
    28
    
    
    
    75,011
    
    
    
    169Operating leases
    
    
    3,436
    
    
    
    2,904
    
    
    
    2,479
    
    
    
    1,852
    
    
    
    1,700
    
    
    
    253Total
    
    $
    14,760
    
    
    $
    3,146
    
    
    $
    2,598
    
    
    $
    1,880
    
    
    $
    76,711
    
    
    $
    422
 17




---



##### 



Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors
of CUNO Incorporated: In our opinion, the accompanying consolidated balance sheet and the related
consolidated
statement of income, stockholders equity and cash flows present fairly, in all
material respects, the
financial position of CUNO Incorporated and its subsidiaries at October 31,
2004, and the result of
their operations and their cash flows for the year then ended in conformity
with accounting
principles generally accepted in the United States of America. These financial
statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for
our opinion. PRICEWATERHOUSECOOPER LLP Hartford, Connecticut
December 2, 2004 18




---



##### 



Report of Ernst & Young LLP, Independent Auditors Stockholders and Board of Directors
CUNO Incorporated We have audited the accompanying consolidated balance sheets of CUNO
Incorporated as
of October 31, 2003 and 2002, and the related consolidated statements of
income, stockholders
equity and cash flows for each of the three years in the period ended October
31, 2003. These
financial statements are the responsibility of the Companys management. Our
responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the
United States. Those standards require that we plan and perform the audit to
obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material
respects, the consolidated financial position of CUNO Incorporated at October
31, 2003 and 2002,
and the consolidated results of its operations and its cash flows for each of
the three years in the
period ended October 31, 2003 in conformity with accounting principles
generally accepted in the
United States. As discussed in Note 1 to the financial statements, effective November 1, 2001,
the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill
and Other
Intangible Assets. ERNST & YOUNG LLP Hartford, Connecticut
December 11, 2003 19




---



##### 



Consolidated Statements of Income (in thousands, except share and per-share amounts) Year Ended October 31,2004
    
    2003
    
    2002Net sales
    
    $
    351,611
    
    
    $
    288,231
    
    
    $
    258,201Operating expenses:Cost of products sold
    
    
    194,284
    
    
    
    157,221
    
    
    
    142,450Selling, general and administrative
    
    
    89,608
    
    
    
    75,652
    
    
    
    65,883Research, development and engineering
    
    
    17,400
    
    
    
    14,977
    
    
    
    14,662Amortization expense
    
    
    858
    
    
    
    156
    
    
    
    321302,150
    
    
    
    248,006
    
    
    
    223,316Operating income
    
    
    49,461
    
    
    
    40,225
    
    
    
    34,885Non-operating income (expense):Interest expense
    
    
    (984
    )
    
    
    (540
    )
    
    
    (417
    )Other income, net
    
    
    824
    
    
    
    462
    
    
    
    302(160
    )
    
    
    (78
    )
    
    
    (115
    )Income before income taxes
    
    
    49,301
    
    
    
    40,147
    
    
    
    34,770Income tax expense
    
    
    16,230
    
    
    
    13,351
    
    
    
    11,814Net income
    
    $
    33,071
    
    
    $
    26,796
    
    
    $
    22,956Basic earnings per common share
    
    $
    1.98
    
    
    $
    1.61
    
    
    $
    1.39Diluted earnings per common share
    
    $
    1.93
    
    
    $
    1.58
    
    
    $
    1.36Basic shares outstanding
    
    
    16,729,045
    
    
    
    16,661,101
    
    
    
    16,477,637Diluted shares outstanding
    
    
    17,165,890
    
    
    
    16,987,792
    
    
    
    16,884,585
 See accompanying Notes. 20




---



##### 



Consolidated Balance Sheets(in thousands, except share amounts) October 31,2004
    
    2003AssetsCurrent assetsCash and cash equivalents
    
    $
    23,359
    
    
    $
    57,603Accounts receivable (less allowances for doubtful accounts
of $2,230 and $1,705, respectively)
    
    
    89,593
    
    
    
    59,658Inventories
    
    
    47,275
    
    
    
    31,058Deferred income taxes
    
    
    12,656
    
    
    
    9,020Prepaid expenses and other current assets
    
    
    5,974
    
    
    
    4,306Total current assets
    
    
    178,857
    
    
    
    161,645Noncurrent assetsDeferred income taxes
    
    
    892
    
    
    
    1,340Goodwill
    
    
    103,977
    
    
    
    28,489Other intangible assets, net
    
    
    32,894
    
    
    
    2,075Prepaid pension costs
    
    
    9,785
    
    
    
    7,923Other noncurrent assets
    
    
    4,832
    
    
    
    1,476Property, plant and equipment, net
    
    
    103,321
    
    
    
    85,060Total assets
    
    $
    434,558
    
    
    $
    288,008Liabilities and Stockholders EquityCurrent liabilitiesCurrent portion of long-term debt
    
    $
    276
    
    
    $
    849Short term bank loans
    
    
    11,048
    
    
    
    11,804Accounts payable
    
    
    33,469
    
    
    
    20,519Accrued payroll and related taxes
    
    
    20,329
    
    
    
    17,456Other accrued expenses
    
    
    11,502
    
    
    
    10,443Accrued income taxes
    
    
    4,539
    
    
    
    2,558Total current liabilities
    
    
    81,163
    
    
    
    63,629Noncurrent liabilitiesLong-term debt, less current portion
    
    
    75,569
    
    
    
    401Deferred income taxes
    
    
    16,662
    
    
    
    9,862Accrued pension liability
    
    
    4,396
    
    
    
    5,457Other noncurrent liabilities
    
    
    789
    
    
    
    331Total noncurrent liabilities
    
    
    97,416
    
    
    
    16,051Stockholders EquityPreferred Stock, $.001 par value: 2,000,000 shares authorized;
no shares issued
    
    
    
    
    
    
    Common Stock, $.001 par value: 50,000,000 shares authorized;
17,122,698 and 16,863,482 shares issued
    
    
    17
    
    
    
    17Treasury Stock, at cost (2,747 shares)
    
    
    (57
    )
    
    
    (57
    )Additional paid-in-capital
    
    
    63,413
    
    
    
    53,787Unearned compensation
    
    
    (2,164
    )
    
    
    (784
    )Accumulated other comprehensive income (loss):Foreign currency translation adjustments
    
    
    7,966
    
    
    
    3,282Minimum pension liability, net
    
    
    (386
    )
    
    
    (2,049
    )Change in fair value of derivative financial instruments, net
    
    
    
    
    
    
    13Total accumulated other comprehensive income
    
    
    7,580
    
    
    
    1,246Retained earnings
    
    
    187,190
    
    
    
    154,119Total stockholders equity
    
    
    255,979
    
    
    
    208,328Total liabilities and stockholders equity
    
    $
    434,558
    
    
    $
    288,008
 See accompanying Notes. 21




---



##### 



Consolidated Statements of Stockholders Equity(in thousands) Accumulated
    
    
    
    
    
    TotalAdditional
    
    Unearned
    
    Other Com-
    
    
    
    
    
    Stock-Common
    
    Treasury
    
    Paid-in
    
    Compen-
    
    prehensive
    
    Retained
    
    holdersStock
    
    Stock
    
    Capital
    
    sation
    
    Income(Loss)
    
    Earnings
    
    EquityBalance at October 31, 2001
    
    $
    16
    
    
    $
    (57
    )
    
    $
    42,602
    
    
    $
    (957
    )
    
    $
    (5,800
    )
    
    $
    104,367
    
    
    $
    140,171Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,956
    
    
    
    22,956Other comprehensive incomeForeign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (309
    )
    
    
    
    
    
    
    (309
    )Change in fair value of derivative
financial instruments, net of deferred
income taxes of $36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    49Loss related to derivative financial
instruments reclassified into earnings
from other comprehensive income, net
of $109 tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (151
    )
    
    
    
    
    
    
    (151
    )Minimum pension liability adjustment,
net of deferred income taxes of $2,761
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,483
    )
    
    
    
    
    
    
    (4,483
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,062Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    648
    
    
    
    
    
    
    
    
    
    
    
    648Shares awarded under employee stock plans, net
    
    
    
    
    
    
    
    
    
    
    519
    
    
    
    (242
    )
    
    
    
    
    
    
    
    
    
    
    277Shares issued to employee benefit plans
    
    
    
    
    
    
    
    
    
    
    717
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    717Stock options exercised
    
    
    1
    
    
    
    
    
    
    
    1,664
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,665Tax benefit on stock-based compensation
    
    
    
    
    
    
    
    
    
    
    873
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    873Balance at October 31, 2002
    
    $
    17
    
    
    $
    (57
    )
    
    $
    46,375
    
    
    $
    (551
    )
    
    $
    (10,694
    )
    
    $
    127,323
    
    
    $
    162,413Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,796
    
    
    
    26,796Other comprehensive incomeForeign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,815
    
    
    
    
    
    
    
    8,815Change in fair value of derivative
financial instruments, net of deferred
income taxes of $56
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    77Loss related to derivative financial
instruments reclassified into earnings
from other comprehensive income, net
of deferred income taxes of $40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    
    
    
    
    (56
    )Minimum pension liability adjustment,
net of deferred income taxes of $1,834
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,104
    
    
    
    
    
    
    
    3,104Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,736Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    361
    
    
    
    
    
    
    
    
    
    
    
    361Shares awarded under employee stock plans, net
    
    
    
    
    
    
    
    
    
    
    1,255
    
    
    
    (594
    )
    
    
    
    
    
    
    
    
    
    
    661Shares issued to employee benefit plans
    
    
    
    
    
    
    
    
    
    
    1,407
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,407Stock options exercised
    
    
    
    
    
    
    
    
    
    
    2,821
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,821Tax benefit on stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,929
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,929Balance at October 31, 2003
    
    $
    17
    
    
    $
    (57
    )
    
    $
    53,787
    
    
    $
    (784
    )
    
    $
    1,246
    
    
    $
    154,119
    
    
    $
    208,328Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,071
    
    
    
    33,071Other comprehensive incomeForeign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,684
    
    
    
    
    
    
    
    4,684Change in fair value of derivative
financial instruments, net of deferred
income taxes of $50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85
    
    
    
    
    
    
    
    85Loss related to derivative financial
instruments reclassified into earnings
from other comprehensive income, net
of deferred income taxes of $56
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (98
    )
    
    
    
    
    
    
    (98
    )Minimum pension liability adjustment,
net of deferred income taxes of $1,079
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,663
    
    
    
    
    
    
    
    1,663Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,405Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    649
    
    
    
    
    
    
    
    
    
    
    
    649Shares awarded under employee stock plans, net
    
    
    
    
    
    
    
    
    
    
    2,397
    
    
    
    (2,029
    )
    
    
    
    
    
    
    
    
    
    
    368Shares issued to employee benefit plans
    
    
    
    
    
    
    
    
    
    
    960
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    960Stock options exercised
    
    
    
    
    
    
    
    
    
    
    3,838
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,838Tax benefit on stock-based compensation
    
    
    
    
    
    
    
    
    
    
    2,431
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,431Balance at October 31, 2004
    
    $
    17
    
    
    $
    (57
    )
    
    $
    63,413
    
    
    $
    (2,164
    )
    
    $
    7,580
    
    
    $
    187,190
    
    
    $
    255,979
 See accompanying Notes. 22




---



##### 



Consolidated Statements of Cash Flows (in thousands) Year Ended October 31,2004
    
    2003
    
    2002Operating activitiesNet income
    
    $
    33,071
    
    
    $
    26,796
    
    
    $
    22,956Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    12,146
    
    
    
    9,769
    
    
    
    8,266Noncash compensation recognized under employee stock plans
    
    
    880
    
    
    
    554
    
    
    
    840Loss (gain) on sales of property, plant and equipment
    
    
    304
    
    
    
    (13
    )
    
    
    (1
    )Pension
costs in excess of (less than) funding
    
    
    62
    
    
    
    (6,252
    )
    
    
    (4,435
    )Deferred income taxes
    
    
    1,113
    
    
    
    1,599
    
    
    
    3,805Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    (17,361
    )
    
    
    (4,615
    )
    
    
    (2,031
    )Inventories
    
    
    (11,429
    )
    
    
    (1,845
    )
    
    
    (2,250
    )Accounts payable and accrued expenses
    
    
    8,929
    
    
    
    (1,418
    )
    
    
    1,857Accrued income taxes
    
    
    3,875
    
    
    
    4,898
    
    
    
    3,670Prepaid expenses and other
    
    
    (2,699
    )
    
    
    3,756
    
    
    
    (2,246
    )Net cash provided by operating activities
    
    
    28,891
    
    
    
    33,229
    
    
    
    30,431Investing activitiesProceeds from sales of property, plant and equipment
    
    
    53
    
    
    
    41
    
    
    
    129Acquisition of companies, net of cash acquired
    
    
    (119,752
    )
    
    
    (149
    )
    
    
    (700
    )Capital expenditures
    
    
    (20,792
    )
    
    
    (16,318
    )
    
    
    (17,600
    )Other, net
    
    
    (781
    )
    
    
    (466
    )
    
    
    Net cash used for investing activities
    
    
    (141,272
    )
    
    
    (16,892
    )
    
    
    (18,171
    )Financing activitiesProceeds from long-term debt
    
    
    89,000
    
    
    
    
    
    
    
    Principal payments on long-term debt
    
    
    (15,023
    )
    
    
    (2,069
    )
    
    
    (929
    )Proceeds from short-term debt
    
    
    319
    
    
    
    829
    
    
    
    5,184Principal payments on short-term debt
    
    
    (1,465
    )
    
    
    (1,116
    )
    
    
    (4,770
    )Net borrowings (repayments) under bank loan agreements
    
    
    144
    
    
    
    (1,474
    )
    
    
    1,546Proceeds from stock options exercised
    
    
    3,838
    
    
    
    2,821
    
    
    
    1,664Net cash provided by (used for) financing activities
    
    
    76,813
    
    
    
    (1,009
    )
    
    
    2,695Effect of exchange rate changes on cash and cash equivalents
    
    
    1,324
    
    
    
    1,403
    
    
    
    289Net change in cash and cash equivalents
    
    
    (34,244
    )
    
    
    16,731
    
    
    
    15,244Cash and cash equivalents at beginning of year
    
    
    57,603
    
    
    
    40,872
    
    
    
    25,628Cash and cash equivalents at end of year
    
    $
    23,359
    
    
    $
    57,603
    
    
    $
    40,872Supplemental disclosuresCash paid for:Interest
    
    $
    667
    
    
    $
    306
    
    
    $
    403Income taxes
    
    $
    10,213
    
    
    $
    8,016
    
    
    $
    10,371
 See accompanying Notes. 23




---



##### 



Notes to Consolidated Financial Statements
CUNO Incorporated  NOTE 1  ORGANIZATION AND ACCOUNTING POLICIES Organization: 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. Consolidation: The accounts of CUNO and all of its subsidiaries are included in the
consolidated financial statements. All significant intercompany accounts and
transactions are eliminated in consolidation. The results of operations for
acquisitions including WTC Industries, Inc. and subsidiary (WTC) are included
in the consolidated statement of income from the date of acquisition through
October 31, 2004. We do not have any special purpose entities (SPEs), variable
interest entities (VIEs) or joint venture arrangements. Cash and Cash Equivalents: We consider all highly liquid investments with a maturity of three months
or less, when purchased, to be cash equivalents. Cash equivalents consist of
time deposits in financial institutions. Concentrations of Credit Risk: Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents and
trade accounts receivable. We invest our cash and cash equivalents in
high-quality financial institutions and instruments. Concentrations of credit
risk with respect to trade accounts receivable are limited by the large number
of customers comprising our customer base and their distribution across many
different industries and geographies. Foreign sales were approximately 47
percent of the Companys net sales in 2004, 45 percent in 2003 and 47 percent
in 2002 and are concentrated primarily in Europe, Japan, Australia, and Asia.
For the year ended October 31, 2004, one customer accounted for 13.4 percent of
total net sales and 13.4 percent of total net receivables. Our 2004 sales within Japan amounted to $47,250 and approximately 37
percent of those sales were derived from five distributors. We continually
monitor the status of the receivable balances, including reviewing the
financial condition of the ultimate end customer, as a means to help mitigate
potential collection risk. As of October 31, 2004 we had no other significant
concentrations of credit risk. Recognition of Revenue and Accounts Receivable: We recognize revenue and accounts receivable in accordance with SEC Staff
Accounting Bulletin No. 104 Revenue Recognition(SAB 104). SAB 104 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 that all criteria for revenue recognition have been met.
Accordingly, revenue is recognized upon delivery to a common carrier when terms
are FOB shipping and upon receipt by customer when terms are FOB destination. Shipping and handling costs associated with sales are charged to cost of
sales. Credit is extended to customers based on an evaluation of each
customers financial condition; generally, collateral is not required. Revenues
are presented in the consolidated financial statements net of sales allowances
and discounts. Accounts receivable are presented in the consolidated financial
statements net of the allowance for doubtful accounts. Allowance for Doubtful Accounts: The allowance for doubtful accounts is established to represent our best
estimate of the net realizable value of the outstanding accounts receivable
balances. We estimate our allowance for doubtful accounts based on past due
amounts and historical write-off experience, as well as trends and factors
surrounding the credit risk of specific customers. In an effort to identify
adverse trends, we perform periodic credit evaluations of our customers and
ongoing account balance reviews and agings of receivables. Amounts are
considered past due when payment has not been received within the time frame of
the credit terms extended. Write-offs are charged directly against the
allowance for doubtful accounts and occur only after all collection efforts
have been exhausted. Actual write-offs and adjustments could differ from the
allowance estimates due to unanticipated changes in the business environment as
well as factors and risks surrounding specific customers. 24




---



##### 



Accounts Payable At October 31, 2004 and 2003, approximately $2,478 and $2,294,
respectively, representing book overdrafts of cash accounts, were reclassified
to accounts payable. Inventories: Inventories are stated at the lower of cost or market. Inventories in the
United States are primarily valued by the last-in, first-out (LIFO) cost
method. The method used for all other inventories is first-in, first-out
(FIFO) and average cost methods. Approximately 37 and 43 percent of worldwide
inventories in 2004 and 2003, respectively, are accounted for using the LIFO
method. Inventories as of October 31 consisted of the following: 2004
    
    2003Raw materials
    
    $
    18,805
    
    
    $
    13,112Work in process
    
    
    6,215
    
    
    
    3,992Finished goods
    
    
    22,255
    
    
    
    13,954$
    47,275
    
    
    $
    31,058
 If all inventories were valued by the FIFO method, inventories would have
been $2,665 higher in both 2004 and 2003. Goodwill and Other Intangible Assets: Goodwill represents costs in excess of fair values assigned to the
underlying net assets of acquired companies. Effective November 1, 2001, we
adopted the provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets,(FAS 142) which require that goodwill
and certain other intangible assets with indefinite lives recorded as a result
of business combinations completed after June 30, 2001 not be amortized.
Effective July 1, 2001, additional provisions of FAS 142, which require that
goodwill recorded from business combinations completed on or before June 30,
2001 and certain other intangible assets deemed to have indefinite lives no
longer be amortized, were adopted by the Company. Under FAS 142 Goodwill and
other intangible assets with indefinite lives are subject to annual impairment
tests. Effective July 1, 2001, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 141, Business Combinations,which
require purchase accounting for all business combinations completed after June
30, 2001. See Note 4 for additional information regarding goodwill and other
intangible assets. Property, Plant, and Equipment: Property, plant and equipment are recorded at cost. Buildings and
equipment are depreciated using the straight-line method over their estimated
useful lives, ranging from 10 to 40 years for buildings and 3 to 20 years for
machinery and equipment. All repair and maintenance costs are expensed as
incurred. Impairment of Amortizable Intangible Assets and Long-Lived Assets: We review the carrying values of amortizable intangible assets and
long-lived assets on an annual basis. In addition, in the event that facts and
circumstances indicate that the carrying value of
such intangibles and long-lived assets or other assets may be impaired
during 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. Income Taxes: We use the liability method in measuring the provision for income taxes
and recognizing deferred income tax assets and liabilities in the balance
sheet. Deferred income tax assets and liabilities principally arise from
differences between the tax basis of an asset or liability and its reported
amount in the consolidated financial statements. Deferred income tax balances
are determined using provisions of currently enacted tax laws; the effects of
possible future changes in tax laws or rates are not anticipated. On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was
signed into law. In accordance with the Act, a special one-time dividends
received deduction on the repatriation of certain foreign earnings is available
to U.S. taxpayers. CUNO is currently in the process of evaluating the effects
of this repatriation provision, however, does not believe that it will have a
material impact on the results of operations, financial position and cash
flows. The FASB is also expected to provide further guidance in the accounting
treatment for this provision of the Act under Accounting Research Bulletin 43. 25




---



##### 



Translation of Foreign Currencies: For most international operations, local currencies are considered their
functional currencies. Revenue and expense accounts are translated at the
average exchange rate for the year while all assets and liability accounts are
translated at the exchange rate at the balance sheet date. Resulting
translation adjustments are recorded as a separate component of accumulated
other comprehensive income. Derivative Instruments: We account for derivative instruments under Statement of Financial
Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities,(FAS 133), as
amended. FAS 133 established accounting and reporting standards for derivative
instruments and hedging activities and requires the Company to recognize these
instruments as either assets or liabilities on the balance sheet and measure
them at fair value. Research and Development: Costs associated with the development of new products and improvements to
existing products are charged to operations as incurred. Research and
development costs were $9,708, $7,254, and $7,409 for the year ended October
31, 2004, 2003 and 2002, respectively. In each of the years ended October 31,
2004 and 2003, we received approximately $400 and $500, respectively, in cost
reimbursements from various customers, which were accounted for as a reduction
of research and development expenses. Advertising: Advertising costs are expensed as incurred and included in selling,
general and administrative expenses. Advertising expenses were $3,853, $3,528,
and $3,104 for the years ended October 31, 2004, 2003, and 2002, respectively. Employee Stock Options: 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 had compensation cost been recognized based on the fair value of the
options at the grant dates for awards under those plans consistent with
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation,using the Black-Scholes fair value method for option
pricing. For the Year Ended October 31,2004
    
    2003
    
    2002Net income, as reported
    
    $
    33,071
    
    
    $
    26,796
    
    
    $
    22,956Add: Stock-based compensation expense included in
reported net income, net of income taxes
    
    
    590
    
    
    
    360
    
    
    
    546Deduct: Total stock-based compensation expense
determined under fair value based method for all awards, net
of income taxes
    
    
    2,622
    
    
    
    2,168
    
    
    
    2,208Pro forma net income
    
    $
    31,039
    
    
    $
    24,988
    
    
    $
    21,294Earnings per share:Basic - as reported
    
    $
    1.98
    
    
    $
    1.61
    
    
    $
    1.39Basic - pro forma
    
    $
    1.86
    
    
    $
    1.50
    
    
    $
    1.29Diluted - as reported
    
    $
    1.93
    
    
    $
    1.58
    
    
    $
    1.36Diluted - pro forma
    
    $
    1.81
    
    
    $
    1.47
    
    
    $
    1.26
 26




---



##### 



Other Income: Other income as reported in the accompanying Consolidated Statements of
Income for the years ended October 31 consisted of the following: 2004
    
    2003
    
    2002Interest income
    
    $
    792
    
    
    $
    603
    
    
    $
    603Exchange gains (losses)
    
    
    51
    
    
    
    (137
    )
    
    
    (123
    )(Loss) gains on sales of property, plant and equipment
    
    
    (41
    )
    
    
    13
    
    
    
    1Other income (expenses)
    
    
    22
    
    
    
    (17
    )
    
    
    (179
    )Total
    
    $
    824
    
    
    $
    462
    
    
    $
    302
 Earnings Per Share: The following table sets forth the computation of basic and diluted earnings
per share for the years ended October 31: 2004
    
    2003
    
    2002Numerator:Net income
    
    $
    33,071
    
    
    $
    26,796
    
    
    $
    22,956Denominators:Weighted average shares outstanding
    
    
    16,729,045
    
    
    
    16,661,101
    
    
    
    16,477,637Denominator for basic earnings per share
    
    
    16,729,045
    
    
    
    16,661,101
    
    
    
    16,477,637Weighted average shares outstanding
    
    
    16,729,045
    
    
    
    16,661,101
    
    
    
    16,477,637Effect of dilutive employee stock options
    
    
    263,850
    
    
    
    295,324
    
    
    
    372,969Effect of dilutive restricted shares
    
    
    172,995
    
    
    
    31,367
    
    
    
    33,979Denominator for diluted earnings per share
    
    
    17,165,890
    
    
    
    16,987,792
    
    
    
    16,884,585Basic earnings per share
    
    $
    1.98
    
    
    $
    1.61
    
    
    $

    1.39Diluted earnings per share
    
    $
    1.93
    
    
    $
    1.58
    
    
    $
    1.36
 Approximately 43,454 and 71,674 shares related to options to purchase
common stock and unvested restricted stock were excluded from the computations
of diluted earnings per share for the year ended October 31, 2004 and 2003,
respectively, because the exercise price was greater than the average market
price of the common stock during the periods. Foreign Currency Risk and Derivatives: A significant portion of revenues, earnings and net investments in foreign
affiliates are exposed to changes in foreign currency exchange rates. We seek
to manage our foreign exchange risk in part through operational means,
including managing expected local currency revenues in relation to local
currency costs and local currency assets in relation to local currency
liabilities. Foreign exchange risk is also managed through the use of
derivative financial instruments and foreign currency denominated debt. These
financial instruments serve to protect net income against the impact of the
translation into U.S. dollars of certain foreign exchange denominated
transactions. We utilize forward foreign exchange contracts to hedge specific
exposures relating primarily to export sales with pre-established U.S. dollar
amounts at specified dates. A forward foreign exchange contract obligates the
Company to exchange predetermined amounts of specified foreign currencies at
specified exchange rates on specified dates. We recognize all derivative financial instruments, such as foreign
exchange contracts, in the consolidated financial statements, at fair value,
regardless of the purpose or intent for holding the instrument. Changes in the
fair value of derivative financial instruments are either recognized
periodically in income or in shareholders equity as a component of accumulated
other comprehensive income depending on whether the derivative financial
instrument qualifies for hedge accounting, and if so, whether it qualifies as a
fair value hedge or cash flow hedge. Generally, changes in fair values of
derivatives accounted for as fair value hedges are recorded in income along
with the portions of the changes in the fair values of the hedged items that
relate to the hedged risk(s). Changes in fair values of derivatives accounted
for as cash flow hedges, to the extent they are effective as hedges, 27




---



##### 



are recorded in other comprehensive income net of deferred income taxes. There
were no ineffective hedges for any of the years presented. Changes in fair
values of derivatives not qualifying as hedges are reported in income. Uses of Estimates: The preparation of the accompanying financial statements in conformity
with accounting principles generally accepted in the United States requires us
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Estimates are used when accounting for depreciation, amortization, employee
benefits, contingencies, and asset valuation allowances. 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. Reclassifications: Certain reclassifications have been made to prior year amounts to conform
to current year presentation. NOTE 2 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of October 31 is comprised of the
following: 2004
    
    2003Land and land improvements
    
    $
    6,563
    
    
    $
    6,452Buildings
    
    
    43,617
    
    
    
    39,331Machinery and equipment
    
    
    128,656
    
    
    
    111,774Construction in progress
    
    
    20,005
    
    
    
    15,964198,841
    
    
    
    173,521Less accumulated depreciation
    
    
    95,520
    
    
    
    88,461$
    103,321
    
    
    $
    85,060
 Depreciation expense was $11,288 in 2004, $9,591 in 2003, and $7,945 in
2002. NOTE 3  DEBT On August 2, 2004 the Company entered into a $120,000, variable rate,
unsecured revolving line of credit with a syndicate of banks. This facility
has a maturity date of August 2, 2009 and all amounts borrowed under this
agreement are required to be paid in full by such date, unless the
agreement is extended through amendment or renegotiation. The rate of interest charged on the outstanding loan can, at our option,
be based on either the prime rate or LIBOR. Loans bearing interest at the
LIBOR rate include a margin ranging from 62.25 to 122.5 basis points depending
on our consolidated debt to EBITDA ratio at the time of the borrowing.
Interest is payable quarterly in arrears. Under the agreement, we are required
to pay a commitment fee on the average daily unused portion of the revolving
credit facility. This commitment fee ranges from 12.5 to 25 basis points,
depending on our consolidated debt to EBITDA ratio, and is paid quarterly in
arrears. At October 31, 2004, $75,000 was outstanding under this facility. The loan agreement also contains restrictive financial covenants primarily
related to indebtedness, fixed charge coverage ratio, capital expenditures,
EBITDA (adjusted for certain non-recurring transactions) and net worth. At
October 31, 2004, we are in compliance with these financial covenants, as well
as, all non-financial covenants contained in the loan agreement. 28




---



##### 



Long-term debt amounted to $75,845 and $1,250 at October 31, 2004 and
2003, respectively, and primarily relates to debt instruments used to finance
certain capital expenditures and acquisitions. Principal payments due after
October 31, 2004 are: 2005  $276; 2006  $242; 2007  $119; 2008  $28; 2009
 $75,011 and thereafter  $169. Outstanding short-term bank loans at October 31, 2004 and 2003 of $11,048
and $11,804, respectively, had weighted average interest rates of 0.8 percent
in both years. The bank loans and short-term lines of credit are payable upon
demand and are unsecured. There are no significant commitment fees related to
the bank loans or unused lines of credit, nor any financial or non-financial
covenants. We had available uncommitted, unused short-term lines of credit in various
countries totaling $55,531 at October 31, 2004. Because these lines of credit
are uncommitted, borrowings under the unused short-term lines of credit are
subject to the banks approval. NOTE 4 - GOODWILL AND INTANGIBLE ASSETS Goodwill was $103,977 and $28,489 as of October 31, 2004 and 2003,
respectively. As of October 31, 2004 and 2003, goodwill was allocated to the
reported operating segments as follows: 2004
    
    2003North America
    
    $
    92,301
    
    
    $
    18,018Europe
    
    
    8,824
    
    
    
    7,676Japan
    
    
    973
    
    
    
    973Asia/Pacific
    
    
    1,564
    
    
    
    1,507Latin America
    
    
    315
    
    
    
    315Total:
    
    $
    103,977
    
    
    $
    28,489
 The change in the goodwill balance at October 31, 2004 as compared to
October 31, 2003 is due primarily to the acquisition of WTC on August 2, 2004,
which resulted in recognition of approximately $73,336 of goodwill.
Additionally, during fiscal 2004 we acquired a small water filtration
technology company in the U.S. and two distributors in Europe which resulted in
goodwill of approximately $1,420. The remaining increase is due to the
favorable impact of foreign exchange rates. There were no impairments or
dispositions of goodwill recorded during the years ended October 31, 2004 and
2003. The increase in other intangible assets relates primarily to $28,000 of
customer relationships and technology acquired as a result of the acquisition
of WTC and $3,100 of technology acquired as part of the acquisition of a small
water filtration technology company in the U.S. In both instances, the amount
of purchase price allocated to and amongst other intangible assets was
determined by an independent third party valuation company. The table below presents the gross carrying amount and the accumulated
amortization of our intangible assets other than goodwill as of October 31,
2004: Gross Carrying
    
    Accumulated
    
    Net CarryingAmount
    
    Amortization
    
    AmountCustomer relationships
    
    $
    22,000
    
    
    $
    (367
    )
    
    $
    21,633Technology
    
    
    9,516
    
    
    
    (319
    )
    
    
    9,197Patents/Trademarks
    
    
    2,733
    
    
    
    (1,387
    )
    
    
    1,346Non-compete agreements
    
    
    630
    
    
    
    (170
    )
    
    
    460Customer lists
    
    
    306
    
    
    
    (48
    )
    
    
    258Total
    
    $
    35,185
    
    
    $
    (2,291
    )
    
    $
    32,894
 Amortization of other intangible assets for the year ended October 31,
2004 was $858. The following table presents estimated amortization expense for
the next five fiscal years: 2005
    
    2006
    
    2007
    
    2008
    
    2009Estimated amortization expense
    
    $
    2,416
    
    
    $
    2,404
    
    
    $
    2,304
    
    
    $
    2,278
    
    
    $
    2,264
 29




---



##### 



NOTE 5 - CAPITAL STOCK The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, par value $.001 per share, and 2,000,000 shares of Preferred
Stock, par value $.001 per share. Common Stock Subject to preferences that may be applicable to any outstanding Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. Holders of Common Stock are entitled to one vote per share in all
matters to be voted upon by shareholders. In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of the Companys
liabilities and the liquidation preferences of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive rights and no rights to convert
their Common Stock into any other securities, and there are no redemption
provisions with respect to such shares. All of the outstanding shares of
Common Stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of Preferred Stock which we may issue in
the future. Preferred Stock The authorized class of Preferred Stock may be issued in series from time
to time with such designations, relative rights, priorities, preferences,
qualifications, limitations and restrictions thereof as the Board of Directors
determines. The rights, priorities, preferences, qualifications, limitations
and restrictions of different series of Preferred Stock may differ with respect
to dividend rates, amounts payable on liquidation, voting rights, conversion
rights, redemption provisions, sinking fund provisions and other matters. The
Board of Directors may authorize the issuance of Preferred Stock which ranks
senior to the Common Stock with respect to the payment of dividends and the
distribution of assets upon liquidation. In addition, the Board of Directors
is authorized to fix the limitations and restrictions, if any, upon the payment
of dividends on Common Stock to be effective while any shares of Preferred
Stock are outstanding. Stockholder Rights Plan We have a Stockholder Rights Plan, pursuant to which a preferred share
purchase right (a Right) is associated with, and trades with, each share of
Common Stock outstanding. Each Right, when it becomes exercisable, entitles
its holder to purchase from the Company one-hundredth of a share of Series A
Junior Participating Preferred Stock (Series A Preferred Stock), par value
$.001 per share, of the Company at a price of $60 per one-hundredth share,
subject to adjustment. The Rights are not exercisable until the earlier of (i)
the acquisition of 15 percent or more of the Companys Common Stock by a person
or group of affiliated persons (an Acquiring Person); or (ii) 10 days
following the commencement or announcement of an intention to make a tender or
exchange offer which would result in a person or group becoming an Acquiring
Person. Each holder of a Right will have the right to receive, upon exercise,
the number of shares of Common Stock or one-hundredths of a share of Series A
Preferred Stock having a value (immediately prior to such triggering event)
equal to two times the exercise price of such Right. In the event that the
Company is acquired in a merger or acquisition, as defined, each holder of a
Right shall have the right to receive, upon exercise, common shares of the
acquiring company having a value equal to two times the exercise price of the
Right. The Rights expire on August 8, 2006. NOTE 6 - BENEFIT PLANS We have noncontributory defined benefit plans for most of our U.S.
employees. Pension benefits for the hourly employees covered by these plans
are expressed as a flat benefit rate times years of continuous service.
Benefits for salaried employees are based upon a percentage of the employees
average compensation during the preceding ten years, reduced by 50 percent of
the Social Security Retirement Benefit. The Company funds amounts at least
sufficient to exceed the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, plus such additional amounts as may be
deemed appropriate. We also have contributory defined benefit pension plans covering our
employees in Japan. Benefits under these plans are based on years of service
and compensation in the period immediately preceding retirement. Funding is
predicated on minimum contributions as required by local laws and regulations
plus additional amounts, if any, as may be deemed appropriate. 30




---



##### 



The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheets at October 31, 2004 and 2003 for our U.S. and
Japanese defined benefit pension plans: 2004
    
    2003Projected benefit obligation
    
    $
    (54,979
    )
    
    $
    (49,513
    )Market value of plan assets
    
    
    46,242
    
    
    
    39,687Projected benefit obligation
in excess of plan assets
    
    $
    (8,737
    )
    
    $
    (9,826
    )Unrecognized net loss
    
    
    14,072
    
    
    
    15,802Unrecognized prior service cost
    
    
    699
    
    
    
    286Unrecognized transition obligation
    
    
    7
    
    
    
    84Additional minimum liability
    
    
    (652
    )
    
    
    (3,880
    )Net pension asset
    
    $
    5,389
    
    
    $
    2,466
 Amounts recognized in the Consolidated Balance Sheet consist of: 2004
    
    2003Prepaid pension costs
    
    $
    9,785
    
    
    $
    7,923Accrued pension liability
    
    
    (4,396
    )
    
    
    (5,457
    )Net pension asset
    
    $
    5,389
    
    
    $
    2,466
 The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligation
in excess of plan assets and a minimum pension liability were $12,777, $11,247,
and $9,478, respectively, as of October 31, 2004 and $19,388, $18,231 and
$14,835, respectively, as of October 31, 2003. A summary of the various components of net periodic pension cost for
defined benefit plans and cost information for other plans for the three-year
period is shown below: 2004
    
    2003
    
    2002Defined benefit plans:Service cost
    
    $
    2,778
    
    
    $
    2,174
    
    
    $
    2,035Interest cost
    
    
    2,529
    
    
    
    2,342
    
    
    
    2,124Expected return on plan assets
    
    
    (3,292
    )
    
    
    (3,539
    )
    
    
    (1,350
    )Amortization of:Prior service costs
    
    
    408
    
    
    
    128
    
    
    
    158Net transition asset
    
    
    80
    
    
    
    72
    
    
    
    68Actuarial losses (gains)
    
    
    564
    
    
    
    560
    
    
    
    (1,450
    )Net pension expense
    
    $
    3,067
    
    
    $
    1,737
    
    
    $
    1,585
 A summary of the changes in the projected benefit obligation is shown below: 2004
    
    2003Benefit obligation  beginning of year
    
    $
    49,513
    
    
    $
    41,118Service cost
    
    
    2,778
    
    
    
    2,174Interest cost
    
    
    2,529
    
    
    
    2,342Benefits and expenses paid
    
    
    (2,400
    )
    
    
    (2,038
    )Actuarial assumption changes
    
    
    1,571
    
    
    
    4,566Plan amendments
    
    
    497
    
    
    
    Foreign currency exchange rate changes
    
    
    491
    
    
    
    1,351Benefit obligation  end of year
    
    $
    54,979
    
    
    $
    49,513
 31




---



##### 



A summary of the changes in Plan assets is shown below: 2004
    
    2003Plan assets  beginning of year
    
    $
    39,687
    
    
    $
    27,776Actual return on assets
    
    
    5,608
    
    
    
    5,575Employer contributions
    
    
    3,005
    
    
    
    7,609Benefits and expenses paid
    
    
    (2,400
    )
    
    
    (2,038
    )Foreign currency exchange rate changes
    
    
    342
    
    
    
    765Plan assets  end of year
    
    $
    46,242
    
    
    $
    39,687
 We made an incremental $6,000 contribution to our U.S. pension plans in
2003 to bolster the funding and earnings capabilities of the Plans. 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. Our measurement date for determining the pension liability is
September 30 of each fiscal year. Assumptions used in the accounting for the
defined benefit plans during the fiscal years ended October 31, 2004 and 2003
were: 2004
    
    2003Domestic PlansWeighted-average discount rate
    
    
    6.00
    %
    
    
    6.20
    %Rates of increase in compensation levels
    
    
    4.00
    %
    
    
    4.00
    %Expected long-term rate of return on assets
    
    
    8.75
    %
    
    
    8.75
    %Foreign Plan (Japan)Weighted-average discount rate
    
    
    2.25
    %
    
    
    2.00
    %Rates of increase in compensation levels
    
    
    2.25
    %
    
    
    2.25
    %Expected long-term rate of return on assets
    
    
    4.75
    %
    
    
    4.75
    %
 Due to assumptions inherent in the actuarial computations, it is
reasonably possible that future actual expenses will differ from current
actuarial estimates. Investment management objectives include maintaining an adequate level of
diversification to balance market risk and to provide sufficient liquidity for
near-term payments of benefits accrued under the plan and to pay plan
administrative expenses. The following table presents the target allocation of
pension plan assets for fiscal 2005 and the actual allocation of plan assets as
of October 31, 2004 and 2003: Actual Allocationof Plan AssetsTarget Allocation
    
    October 31,2004
    
    2003Equity securities
    
    
    55-80
    %
    
    
    65
    %
    
    
    62
    %Debt securities
    
    
    27-45
    %
    
    
    35
    %
    
    
    38
    %
 Equity securities include CUNO common stock in the amounts of $2,875 (8
percent of U.S. plan assets) and $1,995 (6 percent of U.S. plan assets) at
October 31, 2004 and 2003, respectively. We expect to contribute approximately $3,325 to the defined benefit
pension plans during fiscal 2005. Estimated future benefit payments for the next 10 years are as follows: 2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010-2014$1,902
    
    $
    2,032
    
    
    $
    2,125
    
    
    $
    2,485
    
    
    $
    2,888
    
    
    $
    18,100
 32




---



##### 



We sponsor a defined contribution plan that provides all U.S. employees of
the Company an opportunity to accumulate funds for their retirement. We
currently match 50 percent of employee contributions up to 6 percent of
qualified wages. Company matching contributions charged to income amounted to
$960, $887, and $799 for the years ended October 31, 2004, 2003 and 2002,
respectively. Company matching contributions are made quarterly in shares of
the Companys Common Stock. NOTE 7 - INCOME TAXES The components of income before income taxes and the provision for income
taxes are summarized as follows: 2004
    
    2003
    
    2002Income before income taxesDomestic
    
    $
    29,717
    
    
    $
    28,848
    
    
    $
    26,132Foreign
    
    
    19,584
    
    
    
    11,299
    
    
    
    8,63849,301
    
    
    
    40,147
    
    
    
    34,770Income taxes (benefit)CurrentDomestic - Federal
    
    
    7,724
    
    
    
    6,735
    
    
    
    4,438- State and local
    
    
    660
    
    
    
    592
    
    
    
    197Foreign
    
    
    6,556
    
    
    
    4,909
    
    
    
    4,25414,940
    
    
    
    12,236
    
    
    
    8,889DeferredDomestic - Federal
    
    
    315
    
    
    
    1,238
    
    
    
    3,338- State and local
    
    
    14
    
    
    
    47
    
    
    
    344Foreign
    
    
    961
    
    
    
    (170
    )
    
    
    (757
    )1,290
    
    
    
    1,115
    
    
    
    2,925Income tax expense
    
    
    16,230
    
    
    
    13,351
    
    
    
    11,814Net IncomeDomestic
    
    
    21,004
    
    
    
    20,236
    
    
    
    17,815Foreign
    
    
    12,067
    
    
    
    6,560
    
    
    
    5,141$
    33,071
    
    
    $
    26,796
    
    
    $
    22,956
 A reconciliation of the statutory U.S. federal rate to the effective income tax
rate follows: 2004
    
    2003
    
    2002Statutory U.S. federal income tax rate
    
    
    35.00
    %
    
    
    35.00
    %
    
    
    35.00
    %State and local taxes on income, net of domestic
federal income tax benefit
    
    
    0.89
    
    
    
    1.03
    
    
    
    1.60Impact of foreign subsidiaries on effective rate
    
    
    0.35
    
    
    
    (0.16
    )
    
    
    (0.50
    )Reversal of valuation allowance
    
    
    (0.54
    )
    
    
    
    
    
    
    Tax credits
    
    
    (0.79
    )
    
    
    (0.87
    )
    
    
    (0.80
    )Prior year tax provision adjustments
    
    
    (0.93
    )
    
    
    (1.39
    )
    
    
    (1.50
    )Other
    
    
    (1.06
    )
    
    
    (0.35
    )
    
    
    0.20Effective income tax rate
    
    
    32.92
    %
    
    
    33.26
    %
    
    
    34.00
    %
 33




---



##### 



Significant components of our deferred income tax liabilities and assets as of
October 31 are as follows : 2004
    
    2003Deferred income tax liabilities:Property, plant and equipment
    
    $
    10,414
    
    
    $
    7,958Pension liability
    
    
    1,902
    
    
    
    750Intangibles
    
    
    10,078
    
    
    
    Total deferred income tax liabilities
    
    
    22,394
    
    
    
    8,708Deferred income tax assets:Foreign currency exchange
    
    
    489
    
    
    
    Employee benefits
    
    
    4,388
    
    
    
    3,504Net operating loss and credit carryforwards
    
    
    9,693
    
    
    
    1,676Other accruals
    
    
    3,425
    
    
    
    3,127Inventories
    
    
    2,091
    
    
    
    1,566Other
    
    
    1,059
    
    
    
    1,009Total deferred income tax assets
    
    
    21,145
    
    
    
    10,882Less: valuation allowance for deferred income tax assets
    
    
    1,865
    
    
    
    1,676Deferred income tax assets, after valuation allowance
    
    
    19,280
    
    
    
    9,206Net deferred income tax (liabilities) assets
    
    $
    (3,114
    )
    
    $
    498
 The increase in the valuation allowance during fiscal 2004 relates to an
additional net operating loss carryforward generated in China, offset by the
utilization of net operating loss carryforwards of $265. Although realization
of the net deferred income tax liability of $3,114 is not assured, management
believes it is more likely than not that all of such net deferred income tax
liabilities will be realized. The amount of the net deferred income tax
liabilities considered realizable, however, could be reduced if estimates of
future taxable income are reduced. The valuation allowance for deferred income
tax assets as of October 31, 2002 was $1,465. On August 2, 2004 we acquired 100 percent of the outstanding common shares
of WTC. Prior to the acquisition, WTC had federal and state net operating loss
carryforwards that have been recorded as a deferred tax asset in WTCs opening
balance sheet. As a result of the change in ownership, these losses will be
subject to limitations under IRC Section 382. No valuation allowance has been
established to offset the deferred tax asset since management believes it is
more likely than not that the deferred income tax asset will be realized. A summary of our net operating loss carryforwards, calculated using tax
laws existing at October 31, 2004, follows: Amount
    
    Jurisdiction
    
    Expiration$
    300
    
    
    Germany
    
    Indefinite1,235
    
    
    China
    
    
    2007 - 2008330
    
    
    Argentina
    
    
    200721,645
    
    
    United States
    
    
    20256,823
    
    
    Minnesota
    
    
    2020$
    30,333
 34




---



##### 



NOTE 8  ACQUISITIONS On August 2, 2004, we acquired 100 percent of the outstanding common
shares of WTC. WTC designs, manufactures and markets water filtration and
purification products for the point-of-use market. The results of operations
of WTC are included in the consolidated financial statements of the Company
beginning August 2, 2004, the date of acquisition. Under the terms of the transaction, CUNO paid WTCs stockholders $39.87 in
cash for each WTC share outstanding. WTC option and warrant holders received a
cash payment based on the difference between $39.87 per share and the exercise
price of their options and warrants. The aggregate consideration for the
outstanding WTC shares (including payments for the settlement of outstanding
stock options and warrants) was approximately $115 million (including the
assumption of approximately $10 million in liabilities). CUNO funded the
acquisition with a combination of existing cash and bank borrowings under a new
five-year, $120 million unsecured revolving credit facility that was arranged
with a syndicate of banks. The aggregate purchase price was $115,193 (net of $569 of cash acquired),
which was funded by approximately $26 million of cash and the issuance of debt
of approximately $89 million. The following table summarizes the estimated
fair value of the assets acquired and liabilities assumed at the date of
acquisition. August 2, 2004Current assets
    
    $
    16,727Property, plant and equipment
    
    
    7,126Other assets
    
    
    389Intangible assets
    
    
    28,000Goodwill
    
    
    73,336Liabilities assumed
    
    
    (10,385
    )Purchase price
    
    $
    115,193
 The $73,336 of goodwill will be attributable to our North American
operating segment, none of which is deductible for tax purposes. Of the
$28,000 of acquired intangible assets, approximately $6,000 was assigned to
purchased technology and approximately $22,000 was assigned to customer
relationships. The estimated useful lives of the acquired intangible assets
are 15 years. The above table excludes three smaller acquisitions that took place during
fiscal 2004 that resulted in the recognition of goodwill and other intangible
asset balances of $1,420 and $3,558, respectively. The following table reflects the operating results of CUNO for the years
ended October 31, 2004 and 2003, on a pro forma basis, which gives effect to
the acquisition as if it had occurred at the beginning of each fiscal year
presented. The pro forma results are not necessarily indicative of the
operating results that would have occurred had the acquisition been effective
as of the beginning of each fiscal year; nor are they intended to be indicative
of results that may occur in the future. The underlying pro forma information
includes the amortization expense associated with the assets acquired, the
Companys financing arrangements, certain purchase accounting adjustments and
related income tax effects. The pro forma results do not include the effects
of synergies and cost reduction initiatives. (unaudited)
    
    Years Ended October 31,2004
    
    2003Net sales
    
    $
    381,582
    
    
    $
    313,874Income before income taxes
    
    
    51,942
    
    
    
    40,495Net income
    
    
    34,712
    
    
    
    29,087Earnings per share:Basic
    
    $
    2.07
    
    
    $
    1.75Diluted
    
    $
    2.02
    
    
    $
    1.71
 35




---



##### 



The pro forma results for 2003 include a benefit of $4,548 resulting from
a reversal of a WTC tax valuation allowance. In fiscal 2002, we completed a product line acquisition in Australia and a
distributor acquisition in Europe for total consideration of $700. The amount
of goodwill and other intangibles recorded in connection with these
acquisitions amounted to $250 and $244, respectively. None of these
acquisitions had a material effect on the Companys historical financial
statements or its pro forma operating results. NOTE 9  SEGMENT FINANCIAL DATA For management reporting and control, the Company is divided into five
geographic operating segments as presented below. Each segment has general
autonomy over its business and local operations. Operating segment data include the results of all subsidiaries, consistent
with the management reporting of these operations. Financial information by
geographic operating segment as of and for each of the years ended October 31
is summarized below: 2004
    
    2003
    
    2002Net sales:Europe
    
    $
    76,289
    
    
    $
    62,267
    
    
    $
    50,845Japan
    
    
    48,258
    
    
    
    35,102
    
    
    
    30,950Asia/Pacific
    
    
    47,087
    
    
    
    36,843
    
    
    
    28,861Latin America
    
    
    15,073
    
    
    
    11,496
    
    
    
    11,629Subtotal - Foreign Sales
    
    
    186,707
    
    
    
    145,708
    
    
    
    122,285North America
    
    
    218,826
    
    
    
    183,308
    
    
    
    172,432Elimination of intercompany sales
    
    
    (53,922
    )
    
    
    (40,785
    )
    
    
    (36,516
    )Consolidated
    
    $
    351,611
    
    
    $
    288,231
    
    
    $
    258,201
 Each geographic operating segment primarily sells its products to external
customers within its country of domicile. All of our operating segments sell
the same types of products within our three principle markets. One of our customers accounted for approximately 13.4 percent of fiscal
2004 sales and 14.3 percent of fiscal 2003 sales. We believe that no other
customer accounted for more than five percent of sales. 2004
    
    2003
    
    2002Operating income:North America
    
    $
    25,081
    
    
    $
    25,206
    
    
    $
    23,032Europe
    
    
    6,197
    
    
    
    5,335
    
    
    
    3,523Japan
    
    
    8,930
    
    
    
    3,354
    
    
    
    2,365Asia/Pacific
    
    
    7,517
    
    
    
    5,289
    
    
    
    4,053Latin America
    
    
    1,736
    
    
    
    1,041
    
    
    
    1,912Segment total
    
    
    49,461
    
    
    
    40,225
    
    
    
    34,885Interest expense
    
    
    (984
    )
    
    
    (540
    )
    
    
    (417
    )Other income, net
    
    
    824
    
    
    
    462
    
    
    
    302Income before income taxes
    
    $
    49,301
    
    
    $
    40,147
    
    
    $
    34,770
 36




---



##### 



Segment operating income consists of net sales less operating expenses.
Interest expense and other income, net have not been allocated to segments. 2004
    
    2003
    
    2002Assets:North America
    
    $
    345,359
    
    
    $
    197,374
    
    
    $
    154,132Europe
    
    
    59,605
    
    
    
    46,643
    
    
    
    35,226Japan
    
    
    37,100
    
    
    
    30,788
    
    
    
    28,043Asia/Pacific
    
    
    31,323
    
    
    
    20,531
    
    
    
    15,368Latin America
    
    
    14,047
    
    
    
    11,702
    
    
    
    7,679General Corporate
    
    
    23,359
    
    
    
    57,604
    
    
    
    40,872Eliminations and other
    
    
    (76,235
    )
    
    
    (76,634
    )
    
    
    (44,441
    )Consolidated
    
    $
    434,558
    
    
    $
    288,008
    
    
    $
    236,879
 General corporate assets (principally cash) are not allocated to
segments. Eliminations and other is primarily comprised of intercompany receivables
and investments in subsidiaries, both of which are eliminated in our
consolidated financial statements. 2004
    
    2003
    
    2002Capital Expenditures:North America
    
    $
    12,055
    
    
    $
    10,999
    
    
    $
    12,752Europe
    
    
    1,897
    
    
    
    2,311
    
    
    
    840Japan
    
    
    513
    
    
    
    264
    
    
    
    576Asia/Pacific
    
    
    5,275
    
    
    
    933
    
    
    
    864Latin America
    
    
    1,052
    
    
    
    1,811
    
    
    
    2,568Consolidated
    
    $
    20,792
    
    
    $
    16,318
    
    
    $
    17,600
 2004
    
    2003
    
    2002Depreciation and Amortization:North America
    
    $
    8,690
    
    
    $
    7,120
    
    
    $
    6,337Europe
    
    
    1,280
    
    
    
    976
    
    
    
    690Japan
    
    
    663
    
    
    
    605
    
    
    
    521Asia/Pacific
    
    
    910
    
    
    
    731
    
    
    
    543Latin America
    
    
    603
    
    
    
    337
    
    
    
    175Consolidated
    
    $
    12,146
    
    
    $
    9,769
    
    
    $
    8,266
 We sell our products in three principle markets. The potable water market
includes applications designed for residential, commercial, and food service
customers. The fluid processing market includes customers in industries as
diverse as chemical, petrochemical, oil and gas, paints and resins, and
electronics. The healthcare market customers include food & beverage providers
which require absolute clarity and stability of their products and
pharmaceutical and biotechnology companies which require cost-efficient
filtration and high levels of purity for production of sterile, contaminate
free drugs and diagnostic test kits. Our sales by market are summarized for each of the years ended October
31: 2004
    
    2003
    
    2002Net sales:Potable Water
    
    $
    169,910
    
    
    $
    132,938
    
    
    $
    119,456Fluid Processing
    
    
    88,058
    
    
    
    74,626
    
    
    
    68,714Healthcare
    
    
    93,643
    
    
    

    80,667
    
    
    
    70,031Consolidated
    
    $
    351,611
    
    
    $
    288,231
    
    
    $
    258,201
 37




---



##### 



NOTE 10 - STOCK OPTIONS AND AWARDS We have a stock option and award plan which allows for granting a number
of stock incentive instruments, including non-qualified and incentive stock
options, restricted stock, performance shares and stock appreciation rights
which may be granted as part of a stock option or as a separate right to the
holders of any rights previously granted. The plan, as amended, permits the
granting of such stock awards of up to 3,200,000 shares of Common Stock.
Accordingly, such shares have been authorized and reserved. Vesting requirements and terms of options are determined by the Companys
Board of Directors on the date of grant. Typically, options vest over a three
year period and have a maximum term of ten years. Approximately 675,000 shares
of Common Stock are reserved for issuance to employees and non-employee
directors under the provisions of these option and award plans as of October
31, 2004. Awards of restricted shares totaled 45,580, 16,250, and 7,250 in the
years ended October 31, 2004, 2003, and 2002, respectively. The weighted
average price of the awards was $46.93, $36.56, and $33.36 for the years ended
October 31, 2004, 2003, and 2002, respectively. When rights or awards are
granted, associated compensation expense is accrued from the date of the grant
to the date such options or awards are exercisable. Shares earned under the
plan are based on a formula which may be adjusted at the discretion of the
Companys Compensation Committee. A summary of stock option activity follows: Options
    
    Exercise PriceOutstanding at October 31, 2001
    
    
    1,008,196
    
    
    $
    7.94 - $30.06Options granted
    
    
    221,253
    
    
    
    29.15 - 37.19Options exercised
    
    
    (162,725
    )
    
    
    14.13 - 21.50Options forfeited
    
    
    (13,750
    )
    
    
    14.13 - 29.15Outstanding at October 31, 2002
    
    
    1,052,974
    
    
    
    7.94 -  37.19Options granted
    
    
    225,750
    
    
    
    33.00 - 37.90Options exercised
    
    
    (221,411
    )
    
    
    7.94 -  27.88Options forfeited
    
    
    (500
    )
    
    
    20.38Outstanding at October 31, 2003
    
    
    1,056,813
    
    
    
    14.13 - 37.90Options granted
    
    
    263,000
    
    
    
    40.66 - 60.44Options exercised
    
    
    (194,007
    )
    
    
    14.13 - 34.64Options forfeited
    
    
    (3,375
    )
    
    
    29.15 - 43.79Outstanding at October 31, 2004
    
    
    1,122,431
    
    
    
    14.13 - 60.44
 The weighted-average grant-date fair value of options granted was $14.60,
$11.07, and $14.60 in the years ended October 31, 2004, 2003, and 2002,
respectively. The following table summarizes information concerning currently
outstanding options: Options Outstanding
    
    Options ExercisableWeighted-Range of
    
    
    
    
    
    Average
    
    Weighted-
    
    
    
    
    
    Weighted-Exercise
    
    Number
    
    Remaining
    
    Average
    
    Number
    
    AveragePrices
    
    Outstanding
    
    Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$  5  $15
    
    
    57,850
    
    
    
    3.90
    
    
    $
    14.22
    
    
    
    57,850
    
    
    $
    14.2215    25
    
    
    189,850
    
    
    
    4.40
    
    
    
    18.53
    
    

    
    189,850
    
    
    
    18.5325    35
    
    
    550,731
    
    
    
    7.10
    
    
    
    30.15
    
    
    
    275,978
    
    
    
    28.5435    45
    
    
    291,500
    
    
    
    8.90
    
    
    
    42.25
    
    
    
    17,750
    
    
    
    36.4845    55
    
    
    28,500
    
    
    
    9.70
    
    
    
    51.96
    
    
    
    
    
    
    
    55    65
    
    
    4,000
    
    
    
    9.90
    
    
    
    58.39
    
    
    
    
    
    
    
    1,122,431
    
    
    
    7.00
    
    
    $
    31.16
    
    
    
    541,428
    
    
    $
    23.76
 38




---



##### 



Pro forma information regarding net income and earnings per share is
required by SFAS 123 (see Note 1), which requires that the information be
determined as if we had accounted for our employee stock options under the
fair-value method of SFAS 123. The fair value for these options was estimated
at the date of grant using the Black-Scholes pricing model with the following
weighted average assumptions: 2004
    
    2003
    
    2002Volatility
    
    
    29.72
    %
    
    
    29.51
    %
    
    
    49.99

    %Risk-free interest rates
    
    
    3.45
    %
    
    
    3.57
    %
    
    
    4.24
    %Expected option life
    
    5 years
    
    5 years
    
    5 yearsDivided yield
    
    
    
    
    
    
    
    
    
    
    
 The risk-free interest rate is based on short-term treasury bill rates.
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS We used the following methods and assumptions in estimating our fair value
disclosures of financial instruments: Cash and cash equivalents: The carrying amounts reported for cash and cash equivalents approximate
fair value. Long and short-term debt: The carrying amounts of our borrowings under our short-term credit
agreements approximate their fair value. The fair values of the long-term debt
are estimated using discounted cash flow analysis, based on our incremental
borrowing rates for similar types of borrowing arrangements. The fair value of
our long-term debt approximates its carrying value because of the variable
interest rate of the majority of the debt. The carrying amounts and fair values of our financial instruments follows
(dollars in thousands): October 31,2004
    
    2003Carrying Value
    
    Fair Value
    
    Carrying Value
    
    Fair ValueCash and cash equivalents
    
    $
    23,359
    
    
    $
    23,359
    
    
    $
    57,603
    
    
    $
    57,603Bank loans
    
    
    11,048
    
    
    
    11,048
    
    
    
    11,804
    
    
    
    11,804Long-term debt
    
    
    75,845
    
    
    
    75,845
    
    
    
    1,250
    
    
    
    1,220
 The carrying amounts of accounts receivable and accounts payable and
accrued expenses approximate fair value because of the short-term nature of
those transactions. Foreign currency exchange contracts: We utilize forward foreign exchange contracts to hedge specific or
anticipated exposures
relating to intercompany payments (primarily parent company export sales
to subsidiaries at pre-established U.S. dollar prices) and other specific and
identified exposures. The terms of the forward foreign exchange contracts are
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. At October 31, 2004, we held forward foreign exchange contracts with
notional amounts totaling $9,739. The fair market value (gain or loss) on these
contracts was not significant as of October 31, 2004. At October 31, 2003, we held forward foreign exchange contracts with
notional amounts totaling $21,368 (of which $14,285 settled in November 2003
and related to planned intercompany transactions) and forward foreign exchange
contracts designated as cash flow hedges with notional amounts totaling $6,600.
The fair market value (gain or loss) on these contracts was not significant as
of October 31, 2003. At October 31, 2002, we held forward foreign exchange contracts with
notional amounts totaling $6,210 and forward foreign exchange contracts
designated as cash flow hedges with notional amounts totaling $4,950. The fair
market value (gain or loss) on these contracts was not significant as of
October 31, 2002. 39




---



##### 



NOTE 12 - CONTINGENCIES We are, from time to time, subject to various legal actions, governmental
audits, and proceedings relating to various matters incidental to our 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 our consolidated
financial position, cash flows or results of operations. We have certain lease agreements for various facilities and equipment.
Rent expense under operating leases was approximately $2,200 in 2004, $1,729
in 2003, and $2,220 in 2002. Future minimum lease payments under noncancellable operating leases with
an initial term of one year or more at October 31, 2004 were as
follows: 2005 
$3,436; 2006  $2,904; 2007  $2,479; 2008  $1,852;
and 2009  $1,700. Currently, we have self-insurance limits for workers compensation,
product liability and employee medical claims. Our workers compensation
policies have per-individual deductibles of $350, our product liability policy
has a $250 per claim deductible and our medical plan for employees has a
stop-loss of $200 per individual. NOTE 13 - PRODUCT WARRANTY We warrant our products against defects in design, materials, and
workmanship, generally for periods ranging from one to three years. A
provision for estimated future costs related to these warranties is recorded on
a monthly basis and is included in cost of goods sold. Activity related to the
product warranty liability was as follows: Year Ended October 31,2004
    
    2003Balance at beginning of year
    
    $
    817
    
    
    $
    785Provision for warranty obligations
    
    
    1,026
    
    
    
    818Settlements made
    
    
    (868
    )
    
    
    (816
    )Assumed acquisition related liability
    
    
    169
    
    
    
    Changes in foreign exchange rates
    
    
    12
    
    
    
    30Balance at end of year
    
    $
    1,156
    
    
    $
    817
 NOTE 14 - QUARTERLY DATA (unaudited) A summary of our quarterly data follows: First
    
    Second
    
    Third
    
    Fourth
    
    Total2004Net sales
    
    $
    75,409
    
    
    $
    82,745
    
    
    $
    89,945
    
    
    $
    103,512
    
    
    $
    351,611Gross profit
    
    
    34,856
    
    
    
    39,069
    
    
    
    39,670
    
    
    
    43,732
    
    
    
    157,327Net income
    
    
    7,005
    
    
    
    8,444
    
    
    
    8,603
    
    
    
    9,019
    
    
    
    33,071Basic earnings per share
    
    $
    0.42
    
    
    $
    0.51
    
    
    $
    0.51
    
    
    $
    0.55
    
    
    $
    1.98Diluted earnings per share
    
    $
    0.41
    
    
    $
    0.49
    
    
    $
    0.50
    
    
    $
    0.52
    
    
    $
    1.932003Net sales
    
    $
    66,437
    
    
    $
    69,305
    
    
    $
    74,965
    
    
    $
    77,524
    
    
    $
    288,231Gross profit
    
    
    29,754
    
    
    
    31,278
    
    
    
    33,877
    
    
    
    36,101
    
    
    
    131,010Net income
    
    
    5,388
    
    
    
    6,304
    
    
    
    7,467
    
    
    
    7,637
    
    
    
    26,796Basic earnings per share
    
    $
    0.33
    
    
    $
    0.38
    
    
    $
    0.45
    
    
    $
    0.46
    
    
    $
    1.61Diluted earnings per share
    
    $
    0.32
    
    
    $
    0.37
    
    
    $
    0.44
    
    
    $
    0.44
    
    
    $
    1.58
 Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
necessarily equal the total for the year. 40




---



##### 



Report of Independent Registered Public Accounting Firm
On
Financial Statement Schedule To the Stockholders and Board of Directors
of CUNO Incorporated: Our audit of the consolidated financial
statements referred to in our
report dated December 2, 2004 appearing in the 2004 Annual Report to
Shareholders of CUNO Incorporated (which report and consolidated
financial statements are incorporated by reference in this Annual Report
on Form 10-K) also included an audit of the financial statement schedule
listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. /s/ PricewaterhouseCoopers LLP Hartford, Connecticut
December 2, 2004




---



##### 



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS CUNO INCORPORATED
YEARS ENDED OCTOBER 31, 2004, 2003, and 2002 COLUMN A
    
    COLUMN B
    
    COLUMN C
    
    COLUMN D
    
    COLUMN EADDITIONSBalance at
    
    
    
    
    
    Charged to Other
    
    
    
    
    
    Balance atBeginning
    
    Charged to Costs
    
    Accounts -
    
    
    
    
    
    EndDescription
    
    of Period
    
    And Expenses
    
    Describe
    
    Deductions
    
    of PeriodYear ended October 31, 2004Deducted from asset accounts:Allowance for doubtful
accounts receivable
    
    $
    1,705,530
    
    
    $
    538,086
    
    
    $
    102,123
    (D)
    
    $
    115,887
    (A)
    
    $
    2,229,852Valuation allowance for
deferred income tax
assets
    
    $
    1,676,000
    
    
    $
    527,000
    (B)
    
    $
    (73,000)
    (D)
    
    $
    265,000
    (C)
    
    $
    1,865,000Year ended October 31, 2003Deducted from asset accounts:Allowance for doubtful
accounts receivable
    
    $
    1,406,268
    
    
    $
    355,615
    
    
    $
    176,839
    (D)
    
    $
    233,192
    (A)
    
    $
    1,705,530Valuation allowance for
deferred income tax
assets
    
    $
    1,465,000
    
    
    $
    211,000
    (B)
    
    $
    0
    
    
    $
    0
    
    
    $
    1,676,000Year ended October 31, 2002Deducted from asset accounts:Allowance for doubtful
accounts receivable
    
    $
    1,336,490
    
    
    $
    279,134
    
    
    $
    13,272
    (D)
    
    $
    222,629
    (A)
    
    $
    1,406,268Valuation allowance for
deferred income tax
assets
    
    $
    116,000
    
    
    $
    1,349,000
    (B)
    
    $
    0
    
    
    $
    0
    
    
    $
    1,465,000
  (A)
    
    Uncollectible accounts written off, net of recoveries.(B)
    
    Establishment of valuation allowance for operating loss carryforwards.(C)
    
    Net operating loss carryforwards utilized.(D)
    
    Changes in foreign currency. S-1