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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
---- SECURITIES EXCHANGE ACT OF 1934
For the transition from to
----------- -----------
Commission File No. 027222
CFC INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3434526
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 State Street, Chicago Heights, Illinois 60411
Registrant's telephone number, including
area code: (708) 891-3456
Indicated by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES ( X ) NO ( )
As of April 29, 2003, the Registrant had issued and outstanding 3,877,919 shares
of Common Stock, par value $.01 per share, and 512,989 shares of Class B Common
Stock, par value $.01 per share.
CFC INTERNATIONAL, INC.
INDEX TO FORM 10-Q
Page
----
Part I - Financial Information:
Item 1 - Financial Statements
Consolidated Balance Sheets - March 31, 2003 and
December 31, 2002.................................... 5
Consolidated Statements of Income for the three months
ended March 31, 2003 and March 31, 2002.............. 6
Consolidated Statements of Cash Flows for the
three months ended March 31, 2003
and March 31, 2002................................... 7
Notes to Consolidated Financial Statements............. 8-11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 11-14
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk......................................... 15
Item 4 - Controls and Procedures.......................... 15
Part II - Other Information:
Item 6 - Exhibits and Reports on Form 8-K................. 16
Signatures.............................................. 17
Special Note on Forward-Looking Statements
The Company believes that certain statements contained in this report and in the
future filings by the Company with the Securities and Exchange Commission and in
the Company's written and oral statements made by or with the approval of an
authorized executive officer that are not historical facts constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and the
Company intends that such forward-looking statements be subject to the safe
harbors created thereby.
The words and phrases "looking ahead," "is confident," "should be," "will,"
"predicted," "believe," "plan," "intend," "estimates," "likely," "expect" and
"anticipate" and similar expressions identify forward-looking statements.
These forward-looking statements reflect the Company's current views with
respect to future events and financial performance, but are subject to many
uncertainties and factors relating to the Company's operations and business
environment which may affect the accuracy of forward-looking statements and
cause the actual results of the Company to be materially different from any
future results expressed or implied by such forward-looking statements. As a
result, in some future quarter the Company's operating results may fall below
the expectations of securities analysts and investors. In such an event, the
trading price of the Company's common stock would likely be materially and
adversely affected. Many of the factors that will determine results of
operations are beyond the Company's ability to control or predict.
Some of the factors that could cause or contribute to such differences include:
o The effect of continuing unfavorable economic conditions on market growth
trends in general and the impact on the Company's customers, the demand for
the Company's products and services, and the Company's ordinary sources of
supply in particular;
o Risks inherent in international operations, including possible economic,
political or monetary instability and its impact on the level and
profitability of foreign sales;
o Uncertainties relating to the Company's ability to consummate its business
strategy, including the unavailability of suitable acquisition candidates,
or the Company's inability to finance future acquisitions or successfully
realize synergies and cost savings from the integration of acquired
businesses;
o Changes in the costs and availability of raw materials and the Company's
ability to adjust selling prices to reflect those changes;
o The Company's reliance on existing senior management and the impact of the
loss of any of those persons or its inability to continue to identify, hire
and retain qualified management personnel;
o Uncertainties relating to the Company's ability to develop and distribute
new proprietary products to respond to market needs in a timely manner and
the Company's ability to continue to protect its proprietary product
information and technology;
o The Company's ability to continue to successfully identify and implement
productivity improvements and cost reduction initiatives;
o The Company's reliance on a small number of significant customers;
o Uncertainties relating to the Company's ability to continue to compete
effectively with other producers of specialty transferable coatings and
producers of alternative products with greater financial and management
resources;
o Control of the Company by a principal stockholder; and
o The effects of acts of terrorism and armed conflicts on the Company's
operations, demands for products and sources of supply.
The risks included here are not exhaustive. The Company operates in a very
competitive and rapidly changing environment. New risk factors emerge from time
to time and it is not possible for the Company to predict all such risk factors,
nor can the Company assess the impacts of all such risk factors on its business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
The Company has no obligation to revise or update these forward-looking
statements to reflect events or circumstances that arise after April 24, 2003 or
to reflect the occurrence of anticipated events.
Investors should also be aware that while the Company does, from time to time,
communicate with securities analysts, it is against the Company's policy to
disclose to them any material non-public information or other confidential
commercial information. Accordingly, investors should not assume that the
Company agrees with any statement or report issued by any analyst irrespective
of the content of the statement or report. Thus, to the extent that reports
issued by securities analysts contain any projections, forecasts or opinions,
such reports are not the Company's responsibility.
Part I
Item 1. Financial Statements
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS AT
MARCH 31, 2003 AND DECEMBER 31, 2002
March 31, December 31,
2003 2002
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 5,630,725 $ 5,990,077
Accounts receivable, less allowance
for doubtful accounts of $967,000 (2003)
and $618,000 (2002) .......................... 10,335,682 8,996,995
Inventories:
Raw materials ................................ 3,031,301 3,234,290
Work in process .............................. 1,732,778 1,690,762
Finished goods ............................... 5,315,853 5,887,549
----------- -----------
10,079,932 10,812,601
Prepaid expenses and other
current assets................................ 991,461 638,571
Deferred income tax assets...................... 761,724 675,000
----------- -----------
Total current assets ......................... 27,799,524 27,113,244
----------- -----------
Property, plant and equipment, net ............. 25,554,838 25,214,867
Deferred income tax assets ..................... 2,143,584 2,143,584
Intangible assets, net ......................... 3,908,494 3,980,000
Other assets ................................... 137,044 154,861
----------- -----------
Total assets ................................. $59,543,484 $58,606,556
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt............... $ 7,336,794 $ 6,388,157
Accounts payable................................ 3,165,803 3,158,400
Accrued compensation and benefits............... 1,291,950 1,862,138
Accrued expenses and other current liabilities.. 3,638,626 3,526,013
----------- -----------
Total current liabilities..................... 15,433,173 14,934,708
Deferred income tax liabilities................. 2,204,321 2,204,321
Long-term debt, net of current portion.......... 15,071,225 15,097,682
----------- -----------
Total liabilities........................... 32,708,719 32,236,711
----------- -----------
STOCKHOLDERS' EQUITY:
Voting Preferred Stock, par value
$.01 per share, 750 shares authorized,
no shares issued and outstanding.............. - -
Common stock, $.01 par value, 10,000,000
shares authorized; shares issued of
4,440,048 (2003) and 4,437,075 (2002)......... 44,402 44,371
Class B common stock, $.01 par value,
750,000 shares authorized; 512,989 shares
issued and outstanding ....................... 5,130 5,130
Additional paid-in capital...................... 12,141,855 12,130,587
Retained earnings............................... 16,997,571 16,751,153
Accumulated other comprehensive income ......... 304,210 97,007
----------- -----------
29,493,168 29,028,248
Less - 565,867 treasury shares of
common stock, at cost......................... (2,658,403) (2,658,403)
----------- -----------
26,834,765 26,369,845
Total liabilities and stockholders' equity.... $ 59,543,484 $ 58,606,556
============ =============
The accompanying notes are an integral part of the consolidated
financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Three Months Ended March 31,
2003 2002
---- ----
(Unaudited)
Net sales .................................. $ 15,709,847 $ 14,841,680
------------ ------------
Cost of goods sold (excluding
depreciation and amortization
below) ................................... 10,179,940 9,469,565
Selling, general and administrative
expenses ................................. 3,308,203 3,207,243
Research and development expenses .......... 529,181 513,361
Depreciation and amortization expense ...... 1,078,294 902,709
------------ ------------
Total operating expenses ................... 15,095,618 14,092,878
------------ ------------
Operating income ........................... 614,229 748,802
Interest expense ........................... 266,991 329,815
Other income ............................... (7,320) (200,419)
Income before income taxes ................. 354,558 619,406
Provision for income taxes ................. 108,140 197,500
Net income ................................. $ 246,418 $ 421,906
============ ============
Basic earnings per share..................... $ 0.06 $ 0.10
Diluted earnings per share................... $ 0.06 $ 0.10
The accompanying notes are an integral part of the consolidated
financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
(Unaudited)
Cash flows from operating activities:
Net income ................................... $ 246,418 $ 421,906
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ........... 1,209,549 902,709
Deferred income taxes ................... 306,367 (31,993)
Gain on sale of land and building ....... -- (191,158)
Changes in assets and liabilities:
Accounts receivable, net .............. (1,206,623) 692,896
Inventories, net ...................... 876,737 30,873
Other current assets .................. (525,800) (198,611)
Other assets .......................... 17,817 --
Accounts payable ...................... (22,632) (217,774)
Accrued compensation and benefits ..... (688,399) 117,903
Accrued expenses and other
current liabilities .................. (194,081) (103,337)
----------- -----------
Net cash provided by operating activities ...... $ 19,353 $ 1,423,414
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment .... (858,585) (264,168)
Proceeds from sale of land and building ...... -- 455,334
----------- -----------
Net cash (used in) provided by
investing activities ......................... (858,585) 191,166
----------- -----------
Cash flows from financing activities:
Proceeds from revolving loan ................. 779,089 693,007
Repayments of revolving loan ................. (3,261) (628,745)
Proceeds from term loan ...................... 122,545 --
Repayments of term loans ..................... (361,915) (419,834)
Issuance of common stock ..................... 11,298 17,138
Repurchase of common stock for treasury shares -- (137,100)
----------- -----------
Net cash provided by (used in)
financing activities ......................... 547,756 (475,534)
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents ......................... (67,876) (44,776)
----------- -----------
(Decrease) increase in cash and
cash equivalents ............................. (359,352) 1,094,270
Cash and cash equivalents:
Beginning of period ............................ 5,990,077 2,492,595
----------- -----------
End of Period .................................. $ 5,630,725 $ 3,586,865
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
(Unaudited)
Note 1. Basis of Presentation
In the opinion of management, the accompanying unaudited interim consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the consolidated financial
position of CFC International, Inc. (the Company), and its wholly-owned
subsidiaries, as of March 31, 2003 and December 31, 2002, the consolidated
results of income for the three months ended March 31, 2003 and 2002, and
consolidated statements of cash flows for the three months ended March 31, 2003
and 2002.
The unaudited interim consolidated financial statements included herein have
been prepared pursuant to the rules and regulations for reporting on Form 10-Q.
Accordingly, certain information and footnote disclosures normally accompanying
the annual consolidated financial statements have been omitted. The interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
latest annual report on Form 10-K.
Results for an interim period are not necessarily indicative of results for the
entire year and such results are subject to year-end adjustments and an annual
independent audit.
Certain prior period amounts in the statements of operations have been
reclassified to conform to current period presentation. These reclassifications
had no effect on the previously reported amounts of income before income taxes
or net income.
Note 2. Earnings Per Share
March 31, 2003 March 31, 2002
------------------------- ------------------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic Earnings per Share... $246,418 4,386,146 $.06 $421,906 4,459,313 $.10
Effect of Dilutive
Securities:
Options exercisable....... 6,174 1,335
Convertible debt.......... 12,000 95,237 15,000 119,047
-------- --------- -------- ---------
Diluted Earnings per Share. $258,418 4,487,557 $.06 $436,906 4,579,695 $.10
======== ========= ======== =========
Note 3. Business Segments and International Operations
The Company and its subsidiaries operate in a single business segment, which is
the formulating and manufacturing of chemically complex, multi-layered
functional coatings. The Company produces five primary types of coating
products. Net sales (in millions) for each of these products for the three
months ended March 31, 2003 and 2002 were as follows:
2003 2002
------------------ ---------------
Net Net
Sales % Sales %
Holographic Products $ 3.2 20.2 $ 2.4 16.0
Printed Products 4.8 30.8 4.9 33.2
Pharmaceutical Products 3.0 19.1 2.8 18.9
Security Products 1.8 11.2 2.0 13.5
Specialty Pigmented &
Other Simulated Metal Products 2.9 18.7 2.7 18.4
----- ----- ----- -----
Total $15.7 100.0 $14.8 100.0
========= ===== ===== =====
The following is sales by geographic area for the three months ended March 31,
2003 and 2002 and long-lived asset information as of March 31, 2003 and December
31, 2002:
Sales (In Thousands) 2003 2002
------------- ------------
United States $ 7,281 $ 8,093
Europe 6,248 4,812
Other Foreign 2,181 1,937
------------- ------------
Total $15,710 $14,842
============= ============
Long-Lived Assets (In Thousands) 2003 2002
(In Thousands)
------------- ------------
United States $18,102 $18,543
Europe 11,498 10,807
------------- ------------
Total $29,600 $29,350
============= ============
Europe and other foreign revenue are based on the country in which the customer
is domiciled.
Note 4. Quarterly Restatements
In conjunction with the adoption of SFAS No. 142 during fiscal 2002, management
initially assessed the useful economic life for its holographic base coat
process and worldwide holographic rights to have an indefinite life. However,
during the third quarter of 2002, the Company concluded that amortization should
continue to be recorded for those assets under SFAS No. 142. As a result, in the
third quarter of 2002 the Company recorded amortization of $70,785, or $43,376
net of income taxes, and has continued to record amortization over the remaining
useful life. The Company filed amended Form 10-Q/A's for the quarter ended March
31, 2002 and June 30, 2002 to reflect the amortization ($70,785 in each quarter)
of these intangibles. Other than the change in the amortization life of goodwill
from 15 years to indefinite, no other useful lives of intangibles were changed
in connection with the adoption of SFAS No. 142. All intangible assets, other
than goodwill are amortized using a straight line method and assume no residual
values. Goodwill and intangibles are reviewed for impairment on an annual basis.
Note 5. Comprehensive Income
The Company's total comprehensive income was as follows:
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Net income.............................................. $246,418 $421,906
Plus (minus) foreign currency translation adjustment.... 207,203 (318,225)
-------- ---------
Total comprehensive income...............................$453,621 $103,681
======== =========
Note 6. Contingencies
From time to time, the Company is subject to legal proceedings and claims which
arise in the normal course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not have a
material adverse effect on the Company's consolidated financial condition,
results of operations or cash flows.
Note 7. Derivative Instruments
On April 4, 2003, the Company executed two interest rate swap agreements to fix
the interest rates on the Company's U.S. term loans. The Company entered into
these agreements to reduce the risk of adverse changes in variable interest
rates. The notional amounts were $4,606,324 (with a fixed rate of 4.43%), and
$2,303,840 (with a fixed rate of 4.82%) on April 4, 2003. The swap agreements
terminate on January 31, 2008. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. These derivatives do not qualify
for hedge accounting and accordingly, the Company will record these derivative
instruments and the associated assets or liabilities at their fair values with
the related gains or losses recorded as other income or expense in the
consolidated statements of income.
Note 8. Supplemental Pro Forma Information
The Company currently accounts for stock based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Had the Company accounted for stock
based compensation in accordance with Statement of Financial Accounting
Standards No. 123 (SFAS No. 123) "Accounting for Stock-Based Compensation," the
Company would have reported the following pro forma amounts for the quarter
ended March 31, 2003 and March 31, 2002:
2003 2002
---- ----
Net income as reported........................ $246,418 $421,906
Pro forma adjustment - additional
compensation expense had
SFAS No. 123 been adopted, net of tax....... (14,945) (19,256)
--------- ---------
Pro forma net income.......................... $231,973 $402,650
========= =========
Basic and diluted earnings per share
as reported................................. $0.06 $0.10
Pro forma effect of compensation expense...... (0.01) (0.01)
--------- ---------
Pro forma basic and diluted earnings
per share................................... $0.05 $0.09
========= =========
Note 9. Plant Backfire
In February 2002, the Company's Germany operations were negatively impacted by a
backfire that limited the availability of a six-station coating press. As a
result, the press operated at suboptimal levels until late summer 2002. The
Company filed a claim with its insurance carrier seeking reimbursement of
damages including business interruption from margins lost due to the constraint
capacity. During 2002, the Company received $451,000 for reimbursement of
damages and $2.6 million for business interruption from the insurance carrier
and has settled its claim. The $347,000 of proceeds has been reflected as a
reduction of costs of goods sold in the first quarter 2002 statement of
operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
The Company formulates, manufactures and sells chemically-complex, transferable,
multi-layer coatings for use in many diversified markets, such as holographic
packaging and authentication seals, furniture and building products,
pharmaceutical products and transaction cards (including credit cards, debit
cards, ATM cards and access cards), and intaglio printing.
The Company's cost of goods sold reflects all direct product costs and direct
labor, quality control, shipping and receiving, maintenance, process engineering
and plant management, and excludes depreciation and amortization which are shown
separately. Selling, general and administrative expenses are primarily composed
of sales representatives' salaries and related expenses, commissions to sales
representatives, advertising costs, management compensation, and audit and legal
expense. Research and development expenses include salaries of technical
personnel and experimental materials.
Results of Operations
- ---------------------
The following table sets forth, certain items from the Company's consolidated
financial statements as a percentage of net sales for the periods presented:
Three Months Ended
March 31,
----------------
2003 2002
---- ----
(Unaudited)
Net sales ........................... 100.0% 100.0%
------ ------
Cost of goods sold .................. 64.8 63.8
Selling, general and administrative.. 21.0 21.6
Research and development ............ 3.4 3.5
Depreciation and amortization ....... 6.9 6.1
------ ------
Total operating expenses ............ 96.1 95.0
------ ------
Operating income .................... 3.9 5.0
Interest expense .................... 1.6 2.2
Other income ........................ -- (1.3)
------ ------
Income before taxes ................. 2.3 4.1
Provision for income taxes .......... 0.7 1.3
------ ------
Net income .......................... 1.6% 2.8%
====== ======
Quarter Ended March 31, 2003 Compared to Quarter Ended March 31, 2002
- ---------------------------------------------------------------------
Net sales for the quarter ended March 31, 2003 increased 5.8% to $15.7 million,
from $14.8 million for the quarter ended March 31, 2002. The Euro strengthened
23% compared to the U.S. dollar, and as a result sales increased approximately
$1.1 million in the first quarter of 2003. In addition, strong European
holographic security sales accounted for an increase of $500,000. These
increases were offset by weak domestic sales in printed products and weaker
security sales, each as described below. Holographic product sales increased
33.5% to $3.2 million for the quarter ended March 31, 2003, compared to $2.4
million for the quarter ended March 31, 2002. This increase is primarily due to
strong demand in both holographic security products in Europe and domestic
packaging. Printed product sales decreased 1.7% to $4.8 million, from $4.9
million primarily due to soft domestic printed products markets. Pharmaceutical
product sales increased 6.9% to $3.0 million for the quarter ended March 31,
2003, from $2.8 million for the quarter ended March 31, 2002. Pharmaceutical
product sales increased primarily in Europe in anticipation of the war in Iraq.
Security product (mag stripe, signature panels, and tipping products for credit
cards, intaglio-printed products and gift cards) sales decreased 11.8% to $1.8
million, from $2.0 million. This decrease was primarily a result of sales of
gift card products to a major retailer ordered in 2001 that were not shipped
until the first quarter of 2002. Gift card orders in the fourth quarter of 2002
were all shipped in 2002; therefore there was no comparable spillover in 2003.
Sales of specialty pigmented and other simulated metal products increased 7.3%
to $2.9 million, from $2.7 million, primarily due to the back fire in Germany
that constrained European capacity beginning in February 2002.
Cost of goods sold for the quarter ended March 31, 2003 increased 7.5% to $10.2
million, from $9.5 million for the quarter ended March 31, 2002. This increase
was primarily due to the increase in sales. The cost of goods sold as a
percentage of net sales for the quarter ended March 31, 2003 increased to 64.8%
from 63.8% for the quarter ended March 31, 2002 primarily due to the business
interruption insurance proceeds of $347,000 received in March 2002, which was
recorded as a reduction in cost of goods sold.
Selling, general, and administrative expenses for the quarter ended March 31,
2003 increased 3.1% to $3.3 million from $3.2 million for the quarter ended
March 31, 2002. This increase is due primarily to the strength of the Euro
against the U.S. dollar. As a percent of net sales these costs were 21.0% for
the quarter ended March 31, 2003, and 21.6% for the quarter ended March 31,
2002. The decrease in percentage is due to the higher sales volume.
Research and development expenses for the quarter ended March 31, 2003 increased
3.1% to $529,000 from $513,000 for the quarter ended March 31, 2002. Research
and development expenses for the quarter ended March 31, 2003 decreased as a
percentage of net sales, to 3.4% from 3.5% for the quarter ended March 31, 2002.
This decrease in percentage was due to the higher sales volume.
Depreciation and amortization expenses for the quarter ended March 31, 2003
increased 19.5% to $1.1 million from $0.9 million for the quarter ended March
31, 2002. This increase was primarily due to the depreciation on additional
fixed assets, and the strength of the Euro in translation of European
depreciation. Depreciation and amortization expense as a percentage of net sales
for the quarter ended March 31, 2003, increased to 6.9% from 6.1% for the
quarter ended March 31, 2002 for the same reasons.
Total operating expenses for the quarter ended March 31, 2003 increased 7.1% to
$15.1 million from $14.1 million for the quarter ended March 31, 2002. This
increase in total operating expenses is primarily due to higher cost of sales
caused by an increase in sales and the strength of the Euro against the U.S.
dollar. Total operating expenses for the quarter ended March 31, 2003 increased
as a percentage of net sales to 96.1% from 95.0% for the quarter ended March 31,
2002. This increase is due to the reasons noted above.
Operating income for the quarter ended March 31, 2003 decreased 18.0% to
$614,000, from $749,000 for the quarter ended March 31, 2002. The decrease in
operating income is due primarily due to the reasons noted above. Operating
income for the quarter ended March 31, 2003 decreased as a percentage of net
sales to 3.9% from 5.0% for the quarter ended March 31, 2002. This decrease is
due primarily to the reasons noted above.
Interest expense for the quarter ended March 31, 2003 decreased 19.0% to
$267,000, from $330,000 for the quarter ended March 31, 2002. This decrease was
due primarily to lower rates of interest on the Company's debt due to the new
loan agreement put in place on January 31, 2002.
Other income for the quarter ended March 31, 2003 decreased to $7,000 from
$200,000 for the quarter ended March 31, 2002. This decrease is a result of the
income on the one-time event of the sale of an older manufacturing site in
Goppingen, Germany included in the prior year's quarter.
The effective income tax rate for the quarter ended March 31, 2003 is 30.5%
versus 31.9% for the same period in 2002. The primary reasons for the
differences are due to the effects of income tax rates on foreign income and
certain tax credits and permanent differences in the United States.
Net income for the quarter ended March 31, 2003 decreased 41.6% to $246,000,
from $422,000 for the quarter ended March 31, 2002. This decrease in net income
was due primarily to the factors as discussed above.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital increased by $0.2 million during the quarter. The
primary reasons were an increase of $1.3 million in customer receivables (due in
large part to seasonally lower sales in December 2002 compared to higher sales
in March 2003), and an increase of $0.4 million in prepaid and an increase in
deferred assets of $0.1 million, offset by an increase in current liabilities of
$0.5 million (composed of an increase in short-term borrowings of $1.0 million
(due primarily to the strength of the Euro), which was reduced by payment of
year-end incentives), and a decrease of $0.4 million in cash, and by a decrease
of $0.7 million in inventories.
2003 Amendments to Bank Financings. On January 31, 2003, the Company's credit
agreement with its main bank, which provides for revolving credits and two term
loans, was extended to April 1, 2005. The Company's main revolving loan was also
renewed through April 1, 2005. Term Loan "A" monthly principal and interest
installments remain at $20,431, however the final balloon payment was extended
to November 1, 2008, and the interest rate now floats at prime (4.25% at
December 31, 2002) per annum. Term Loan "B" was also renewed. The prepayment
penalty of $122,000 was rolled into the principal, and the monthly principal
payments and interest were changed to $81,117 and the final balloon payment was
extended to February 1, 2008. The interest rate was changed to float at prime
(4.25% at December 31, 2002) per annum. The Company had a one time option to
convert the above two loans to a fixed rate of interest. On April 4, 2003, the
Company locked in Term Loan "A" at a fixed interest rate of 4.43%, and Term Loan
"B" at a fixed interest rate of 4.82% utilizing swap agreements.
At March 31, 2003, the Company had available $10.4 million under the revolving
credit agreement maintained with the Company's primary bank. This agreement,
which expires April 1, 2005, is collateralized by the Company's trade accounts
receivables and inventories. The Company believes that the net cash provided by
operating activities and amounts available under the revolving credit agreement
are sufficient to finance the Company's growth and future capital requirements.
The Company does not have any material commitments to purchase capital assets as
of March 31, 2003.
The Company's cash provided by operations decreased $1.4 million during the
first quarter of 2003. The primary reasons were an increase of $2.0 million in
operating net assets plus a decrease in net income of $0.2 million offset by an
increase of $0.3 million in deferred tax assets, plus an increase of $0.3
million in depreciation and amortization, plus $0.2 million for the gain on the
sale of land and building in 2002.
Euro Conversion
- ---------------
Member countries of the European Union have established fixed conversion rates
between their existing currencies ("legacy currencies") and one common currency,
the Euro. Since January 1, 2002, the new Euro-denominated notes and coins are in
circulation and legacy currencies have been withdrawn from circulation. The
Company has a manufacturing facility located in a member country (Germany), and
the conversion to the Euro has eliminated currency exchange rate risk for
transactions among the member countries, which for the Company primarily
consists of payments to suppliers. In addition, because the Company uses
foreign-denominated debt to meet its financial requirements and to reduce its
foreign currency risks, certain of these financial instruments are denominated
in Euro to finance European activities. The Company addressed all issues
involved with converting to the new currency, and the conversion did not have a
significant impact on its financial position, results of operations or cash
flows. At March 31, 2003, the Company had total assets of $19.8 million and net
assets of $6.6 million invested in Europe.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use derivative financial instruments to address currency or
commodity pricing risks. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments held by the
Company for which it is practicable to estimate that value. The carrying amount
of cash equivalents approximates their fair value because of the short maturity
of those instruments. The estimated fair value of accounts receivable
approximated its carrying value at March 31, 2003 and December 31, 2002 based
upon analysis of their collectability and net realizable value. The estimated
fair value of the Company's long-term debt approximated its carrying value at
March 31, 2003 and December 31, 2002, based upon market prices for the same or
similar type of financial instrument. The Company minimizes its exposure to the
impact of fluctuation in foreign exchange rates in situations for certain sales
for products sold in Europe but manufactured in the U.S. through the movement of
production of those products to Europe. There are no other activities of the
Company where management believes exchange rates have a material impact with
respect to the underlying transactions. In January 2003, the Company renewed its
main loan agreements. The two main domestic loans, Term Loan A and Term Loan B
were renewed at a floating prime rate of interest with a one-time option to lock
in a fixed rate of interest. The Company exercised its option to convert to a
fixed rate of interest on Term Loan A at 4.82% on the principle balance of
$2,303,840, and Term Loan B at 4.43% on the principle balance of $4,606,324 on
April 4, 2003.
Item 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures upon which these financial statements and management
discussion are based. Based on their evaluation, which was completed within 90
days prior to this report, our principal executive officer and principal
financial officer have concluded that these controls and procedures are
effective and appropriate to ensure the correctness and completeness of this
annual report. There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date our evaluation was completed.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits
99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
b. Reports on Form 8-K
Other than previously reported, no reports on Form 8-K were filed in
the three month period ended March 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on April 29, 2003.
CFC INTERNATIONAL, INC.
Dennis W. Lakomy
Executive Vice President,
Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)
Certifications
I, Roger F. Hruby, Chairman and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CFC
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: April 29, 2003
/s/___________________Roger F. Hruby
Roger F. Hruby
Chairman, Chief Executive Officer
Certifications
I, Dennis W. Lakomy, Executive Vice President, Chief Financial Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of CFC
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: April 29, 2003
/s/___________________Dennis W. Lakomy
Dennis W. Lakomy
Executive Vice President,
Chief Financial Officer