Osmonics, Inc. reported sales of $51.7 million for the second quarter ended June 30, 2001, an increase of 3.2 percent compared to sales of $50.1 million for the second quarter 2000. Net income totaled $1.2 million for the second quarter 2001 compared to $1.8 million for the second quarter of 2000. Earnings per share, on a fully diluted basis, for the quarter ended June 30, 2001 were $0.08 compared to $0.13 for the second quarter of 2000, which included a $1.1 million ($0.05 per fully diluted share) gain on sales of securities.
Earnings for the second quarter ended June 30, 2001 were reduced by $0.5 million for the impact of foreign exchange and $0.2 million for severance charges related to workforce reductions. These two items reduced fully diluted earnings per share by $0.03. Adjusted for these two items, earnings per share on a fully diluted basis would have been $0.11 for the second quarter ended June 30, 2001.
Sales for the six months ended June 30, 2001 totaled $105.0 million, a 3.8 percent increase over $101.2 million recorded in the comparable period in 2000. Earnings per share, on a fully diluted basis, for the first half of 2001 were $0.27 compared to $0.24 in the prior year. Earnings per share included securities gains of $1.0 million ($0.04 per diluted share) in 2001 and $2.1 million ($0.10 per diluted share) in 2000. Earnings for the first six months of 2001 were reduced by $1.1 million ($0.05 per diluted share) due to the impact of foreign exchange translation. There was no foreign exchange impact in the first six months of 2000. Excluding the impacts of securities gains and foreign exchange, earnings per diluted share would have been $0.27 for the first six months of 2001 compared to $0.14 for the first six months of 2000, representing an increase of 92.9 percent from operations.
Commenting on the results for the quarter and year-to-date periods, D. Dean Spatz, chairman and chief executive officer, said, "We continue to make progress toward our goals, despite economic softness in certain sectors of the marketplace and continued volatility in foreign currencies. Our sales teams are working hard to overcome the slowing economy, especially the significant drop in consumer spending apparent in our Household Water Group results. Our Household Water Group was also the most affected by foreign currency exchange rates.
"Despite the economic slowdown, we still are actively developing new products and recently received a patent for a unique hydrophilic PES (polyethersulfone) microfiltration membrane for biotechnology applications. In addition to this microfiltration development, we have applied for a series of patents on what we believe will be a significant breakthrough with a new material for thin film composite reverse osmosis and nanofiltration membranes.
"Our new lines of market-specific standardized reverse osmosis equipment have helped us increase order rates in equipment, primarily in the power and municipal markets. These pre-engineered machines support lower cost and shorter delivery cycles, which contributed to the sales increases and improved gross margins in the Process Water Group. Orders in backlog for municipal water desalination include a $3.7 million system for the Brazos River District southwest of Fort Worth, Texas, to reduce excess minerals and a $1.6 million system for Ottawa, Illinois, to remove radium from their water supply. It appears the Safe Drinking Water Act of 1996, regulating public drinking water systems, is beginning to motivate local water boards to improve their water to meet EPA standards. It is estimated that there are over 25,000 small- and medium-sized water facilities that need to comply with this act."
Sales in the Filtration & Separations Group increased 2.2 percent to $20.5 million in the second quarter of 2001 compared to $20.1 million in the second quarter of 2000, reflecting slower activity in the industrial manufacturing sector. Because of slower than expected sales growth, gross profit declined slightly for the second quarter from $7.7 million in 2000 to $7.2 million in 2001.
On a year-to-date basis, sales in the Filtration & Separations Group increased 2.9 percent to $42.6 million from $41.4 million in the prior year. This includes a $1.7 million reduction in sales to Safety-Kleen from 2000 to 2001. Excluding Safety-Kleen, sales in this group have increased 7.5 percent for the first six months of the year. For the first six months ended June 30, 2001, this segment had gross profit of $16.1 million, up 5.8 percent over $15.3 million for the same period last year. This increase is primarily due to a favorable sales mix in membrane element products, and overcomes higher utility costs of $0.4 million ($0.02 per fully diluted share) in California. We are seeing a slight increase in activity for this Group, but cannot be certain if it is sustainable.
The Process Water Group reported an increase in sales of 12.0 percent to $22.3 million for the second quarter ended June 30, 2001 from $19.9 million for the same period in 2000. Gross profit increased to $6.5 million from $5.1 million for the same periods. Sales increased by 12.2 percent to $44.3 million from $39.4 million for the six months ended June 30, 2001 compared to the prior year. Gross profit increased $2.2 million over the same time period with gross margins improving from 26.0 percent in 2000 to 28.2 percent in 2001. The gross profit and margin improvements are primarily due to increased sales volume, improved utilization of manufacturing capacity and cost reductions resulting from year 2000 restructurings and plant closures.
Sales in the Household Water Group decreased by $1.0 million currency adjusted (10 percent) in the second quarter ended June 30, 2001 from $10.2 million in 2000 to $9.2 million in 2001. The decrease in sales is the result of the continued economic slowdown and customer inventory adjustments. Adjusted for currency, gross profit declined for the same period to $2.7 million in 2001 from $3.1 million in 2000. On a local currency basis, sales for six months ended June 30, 2001 decreased by $2.0 million from $20.4 million in 2000 to $18.4 million in 2001, and gross profit declined by $0.8 million from $6.4 million in 2000 to $5.6 million in 2001. The decline in profitability is primarily related to the reduced sales volume and resultant lower utilization of manufacturing capacity. As a result, the Household Water Group moved to reduce its staff and management levels to match the current and anticipated business needs and recorded one-time severance charges of $0.2 million in the second quarter of 2001.
The total corporate backlog of unfilled orders at June 30, 2001 was $25.0 million, an increase of $0.7 million from March 31, 2001 and an increase of $0.3 million from one year ago. The Process Water Groups backlog has not significantly changed from March 31, 2001, while both the Filtration & Separations and Household Water Groups backlogs are up slightly.
Cash flow from operations for the second quarter ended June 30, 2001 totaled $2.2 million, bringing total cash flow from operations to $3.1 million for the first half of 2001, an improvement of $6.7 million from the first half of 2000. This cash flow plus $2.1 million provided from the sale of investments was used to fund $4.3 million of capital expenditures focused on cost reduction and improved efficiency.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for the second quarter ended June 30, 2001 was $5.1 million, bringing EBITDA for the first half of 2001 to $12.6 million, up 5.6 percent compared to $11.9 million for the first half of 2000.
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