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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 June 30, 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 ( )
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.
YES ( ) NO ( X )
As of July 29, 2003, the Registrant had issued and outstanding 3,880,260 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 - June 30, 2003 and
December 31, 2002...................................... 5
Consolidated Statements of Operation for the
three (3) months and for the six (6) months
ended June 30, 2003 and June 30, 2002.................. 6
Consolidated Statements of Cash Flows for the
six (6) months ended June 30, 2003 and June 30, 2002... 7
Notes to Consolidated Financial Statements............... 8-11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 12-17
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk........................................ 18
Item 4 - Controls and Procedures........................... 18
Part II - Other Information:
Item 6 - Exhibits and Reports on Form 8-K.................. 19
Signatures................................................. 20
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 July 29, 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
JUNE 30, 2003 AND DECEMBER 31, 2002
June 30, December 31,
2003 2002
---- ----
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents .................. $ 6,214,595 $ 5,990,077
Accounts receivable, less
allowance for doubtful accounts
of $587,000 (2003) and
$618,000 (2002) .......................... 11,180,585 8,996,995
Inventories net:
Raw materials ............................ 3,370,945 3,234,290
Work in process .......................... 2,073,081 1,690,762
Finished goods ........................... 5,074,251 5,887,549
----------- -----------
10,518,277 10,812,601
Prepaid expenses and other
current assets ........................... 1,006,422 638,571
Deferred income tax assets.................. 769,425 675,000
----------- -----------
Total current assets ..................... 29,689,304 27,113,244
----------- -----------
Property, plant and equipment, net ......... 26,177,166 25,214,867
Deferred income tax assets ................. 2,241,515 2,143,584
Intangible assets, net ..................... 3,836,988 3,980,000
Other assets ............................... 122,532 154,861
----------- -----------
Total assets ............................. $62,067,505 $58,606,556
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........... $ 7,723,267 $ 6,388,157
Accounts payable............................ 3,262,428 3,158,400
Accrued compensation and benefits........... 1,571,598 1,862,138
Accrued expenses and other current
liabilities............................... 4,499,584 3,526,013
------------ ------------
Total current liabilities................. 17,056,877 14,934,708
------------ ------------
Deferred income tax liabilities............. 2,204,322 2,204,321
Fair value of interest rate swap............ 178,081 -
Long-term debt, net of current portion...... 15,144,250 15,097,682
------------ ------------
Total liabilities......................... 34,583,530 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 4,443,786 (2003)
and 4,437,075 (2002)...................... 44,439 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.................. 12,157,666 12,130,587
Retained earnings........................... 17,107,731 16,751,153
Accumulated other comprehensive income ..... 827,412 97,007
----------- ------------
30,142,378 29,028,248
Less - 565,867 treasury shares of
common stock, at cost..................... (2,658,403) (2,658,403)
------------ ------------
27,483,975 26,369,845
------------ ------------
Total liabilities and
stockholders' equity..................... $62,067,505 $58,606,556
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 2003 AND 2002
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales ............... $16,689,920 $14,430,984 $32,399,767 $29,272,664
----------- ----------- ----------- -----------
Cost of goods sold
(excluding depreciation
and amortization shown
below ................. 10,966,879 9,323,568 21,146,819 18,793,133
Selling, general and
administrative
expenses ............. 3,513,301 3,207,794 6,821,504 6,415,037
Research and development
expenses .............. 554,787 517,922 1,083,968 1,031,283
Depreciation and
amortization .......... 1,084,259 959,924 2,162,553 1,862,633
----------- ----------- ----------- -----------
Total operating expenses. 16,119,226 14,009,208 31,214,844 28,102,086
----------- ----------- ----------- -----------
Operating income ........ 570,694 421,776 1,184,923 1,170,578
Other (income) expenses:
Interest expense ...... 241,758 326,297 508,749 656,112
Interest income ....... (355) (14,949) (355) (14,949)
Other income .......... (7,320) (7,320) (14,640) (207,739)
Interest rate swap
valuation provision.. 178,081 -- 178,081 --
----------- ----------- ----------- -----------
412,164 304,028 671,835 433,424
----------- ----------- ----------- -----------
Income before income
taxes ................ 158,530 117,748 513,088 737,154
Provision for income
taxes................. 48,370 23,017 156,510 220,517
----------- ----------- ----------- -----------
Net income ............. $ 110,160 $ 94,731 $ 356,578 $ 516,637
=========== =========== =========== ===========
Basic earnings
per share............. $ 0.03 $ 0.02 $ 0.08 $ 0.12
Diluted earnings
per share............. $ 0.03 $ 0.02 $ 0.08 $ 0.12
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Six Months Ended June 30,
---------------------------
2003 2002
---- ----
(Unaudited) (Unaudited)
Cash flow from operating activities:
Net income ................................... $ 356,578 $ 516,637
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization .......... 2,425,548 1,862,633
Deferred income taxes .................. 329,006 --
Interest rate swap ..................... 178,081 --
Gain on sale of land and building ...... -- (191,158)
Changes in assets and liabilities:
Accounts receivable .................. (1,796,133) 481,788
Inventories .......................... 653,856 553,229
Prepaid and other current assets ..... (594,583) --
Other current assets ................. 32,329 (697,215)
Accounts payable ..................... 17,362 (596,674)
Accrued compensation and benefits .... (438,030) 350,386
Accrued expenses and other
current liabilities ................ 582,998 (40,636)
----------- -----------
Net cash provided by operating activities ...... $ 1,747,012 $ 2,238,990
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment ... (1,705,510) (1,006,041)
Proceeds from sale of land and building ...... -- 455,334
----------- -----------
Net cash used in investing activities .......... (1,705,510) (550,707)
----------- -----------
Cash flows from financing activities:
Proceeds from term loans ..................... 122,545 --
Repayment of revolver ........................ (66,305) (1,518,257)
Proceeds from revolver ....................... 879,962 1,031,923
Repayments of term loans ..................... (737,322) (730,235)
Repurchase of shares ......................... -- (141,150)
Proceeds from issuance of stock .............. 27,146 34,477
----------- -----------
Net cash provided by (used in)
financing activities ......................... 226,026 (1,323,242)
----------- -----------
Effect of exchange rate changes on
cash and cash equivalents .................... (43,010) 319,705
----------- -----------
Increase in cash and cash equivalents .......... 224,518 684,746
Cash and cash equivalents:
Beginning of period ............................ 5,990,077 2,492,595
----------- -----------
End of period .................................. $ 6,214,595 $ 3,177,341
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
(Unaudited)
Note 1. Basis of Presentation
In the opinion of management, the accompanying unaudited 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
June 30, 2003 (unaudited) and December 31, 2002 (audited), the consolidated
results of operations for the three (3) months and six (6) months ended June 30,
2003 and 2002 (unaudited) respectively, and consolidated statements of cash
flows for the six (6) months ended June 30, 2003 and 2002 (unaudited).
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
independent audit.
Certain prior year amounts have been reclassified to conform to current year
presentation. These reclassifications had no effect on the previously reported
amounts of income before income taxes or net income.
Note 2. Earnings Per Share
Three Months Ended
--------------------------- -----------------------------
June 30, 2003 June 30, 2002
--------------------------- -----------------------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic Earnings
Per Share:
Income available
to Common
Stockholders.... $110,160 4,390,497 $.03 $ 94,731 4,448,374 $.02
Effect of Dilutive
Securities:
Options
exercisable..... 13,837 3,075
Convertible debt. 12,000 95,237 15,000 119,047
-------- --------- ---- -------- --------- ----
Diluted Earnings
per Share........ $122,160 4,499,571 $.03 $109,731 4,570,496 $.02
======== ========= ==== ======== ========= ====
Six Months Ended
--------------------------- -----------------------------
June 30, 2003 June 30, 2002
--------------------------- -----------------------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic Earnings
Per Share:
Income available
to Common
Stockholders.... $356,578 4,388,834 $.08 $516,637 4,446,007 $.12
Effect of Dilutive
Securities:
Options
exercisable 10,005 2,194
Convertible debt. 24,000 95,237 30,000 119,047
-------- --------- ---- -------- --------- ----
Diluted Earnings
per Share....... $380,578 4,494,076 $.08 $546,637 4,567,248 $.12
======== ========= ==== ======== ========= ====
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. Sales for each of these products (in millions) for the three months
ended June 30, 2003 and 2002, and the six months ended June 30, 2003 and 2002
are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
2003 % 2002 % 2003 % 2002 %
---- - ---- - ---- - ---- -
Holographic Products ........ $ 4.9 29.2 $ 2.5 17.2 $ 8.1 24.8 $ 4.9 16.6
Printed Products ............ 4.5 26.7 4.8 33.2 9.3 28.7 9.7 33.2
Pharmaceutical Products ..... 2.9 17.5 2.8 19.4 5.9 18.3 5.6 19.1
Security Products ........... 1.4 8.7 1.7 12.1 3.2 9.9 3.7 12.8
Specialty Pigmented and Other
Simulated Metal Products .. 3.0 17.9 2.6 18.1 5.9 18.3 5.3 18.3
----- ---- ----- ---- ----- ---- ----- ----
Total ....................... $16.7 100.0 $14.4 100.0 $32.4 100.0 $29.2 100.0
===== ===== ===== ===== ===== ===== ===== =====
The following is sales by geographic area for the three months and six months
ended June 30, 2003 and 2002 and long-lived asset information as of June 30,
2003 and December 31, 2002:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
Net Sales (In Thousands) 2003 2002 2003 2002
---- ---- ---- ----
United States .......... $ 7,416 $ 8,107 $14,697 $16,200
Europe ................. 5,923 4,451 12,171 9,263
Other Foreign .......... 3,351 1,873 5,532 3,810
------- ------- ------- -------
Total .................. $16,690 $14,431 $32,400 $29,273
======= ======= ======= =======
June 30, December 31,
Long Lived Assets (In Thousands) 2003 2002
---- ----
United States .......................... $17,675 $18,543
Europe ................................. 12,462 10,807
------- -------
Total .................................. $30,137 $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 Six Months Ended
June 30, June 30,
--------------------- -----------------------
2003 2002 2003 2002
---- ---- ---- ----
Net earnings.................... $110,160 $ 94,731 $ 356,578 $ 516,637
Plus: foreign currency
translation adjustment........ 523,202 1,406,091 730,405 1,087,866
-------- ---------- ---------- ----------
Total comprehensive income...... $633,362 $1,500,822 $1,086,983 $1,604,503
======== ========== ========== ==========
Note 6. Contingencies and Commitments
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.
The Company has no material commitments to purchase capital assets as of June
30, 2003.
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 has recorded 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 six months
ended June 30, 2003 and June 30, 2002:
Three Months Ended Six Months Ended
-------------------- ----------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income as reported....... $110,160 $94,731 $356,578 $516,637
Pro forma adjustment -
additional compensation
expense had SFAS No. 123
been adopted, net of tax.... (12,860) (17,232) (27,805) (36,488)
--------- -------- --------- ---------
Pro forma net income......... $ 97,300 $77,499 $328,773 $480,149
========= ======== ========= =========
Basic and diluted earnings
per share as reported...... $0.03 $0.02 $0.08 $0.12
Pro forma effect of
compensation expense....... 0.00 0.00 0.00 (0.01)
--------- -------- --------- ---------
Pro forma basic and
diluted earnings per share. $0.03 $0.02 $0.08 $0.11
========= ======== ========= =========
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 and $740,000 of proceeds has been
reflected as a reduction of costs of goods sold in the first quarter and second
quarter 2002 statement of operations, respectively.
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. Selling, general and administrative expenses are primarily
composed of sales representatives' salaries and related expenses, commissions to
sales representatives, advertising costs, management compensation, and corporate
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 Six Months
Ended Ended
June 30, June 30,
-------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales .................................. 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Cost of goods sold
(excluding depreciation and
amortization shown below) ................. 65.7 64.6 65.3 64.2
Selling, general and administrative ........ 21.1 22.2 21.0 21.9
Research and development ................... 3.3 3.6 3.3 3.5
Depreciation and amortization .............. 6.5 6.7 6.7 6.4
------ ------ ------ ------
Total operating expenses ................... 96.6 97.1 96.3 96.0
------ ------ ------ ------
Operating income ........................... 3.4 2.9 3.7 4.0
Interest expense ........................... 1.4 2.3 1.6 2.2
Interest income ............................ -- (0.1) -- (0.1)
Other income ............................... -- (0.1) -- (0.7)
Interest rate swap
valuation provision ...................... 1.1 -- .5 --
------ ------ ------ ------
Income before taxes ........................ 0.9 0.8 1.6 2.5
Provision for income taxes ................. 0.3 0.1 0.5 0.7
------ ------ ------ ------
Net income ................................. 0.6% 0.7% 1.1% 1.8%
====== ====== ====== ======
Quarter Ended June 30, 2003 Compared to Quarter Ended June 30, 2002
- -------------------------------------------------------------------
Net sales for the quarter ended June 30, 2003, increased 15.7 percent to $16.7
million, up from $14.4 million for the quarter ended June 30, 2002. The Euro
appreciated in value 23.0 percent compared to the U.S. dollar, and as a result
sales increased approximately $1.1 million, in the second 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 described below. Holographic products
sales increased 96.2 percent to $4.9 million for the quarter ended June 30,
2003, compared to $2.5 million for the quarter ended June 30, 2002. This
increase was primarily due to an increase in security label sales to a chip
manufacturer and increased sales of holographic packaging. Printed products
sales for these periods decreased 7.1 percent to $4.5 million, down from $4.8
million, primarily due a continued softness in the furniture market.
Pharmaceutical product sales for these periods increased 4.7 percent to $2.9
million, from $2.8 million, primarily due to strong European sales. Security
products (magnetic stripes, signature panels and tipping products for credit
cards, and intaglio-printed products) sales decreased 17.0 percent to $1.4
million, from $1.7 million. This decrease was primarily a result of
substantially lower sales of intaglio-printed documents to a foreign government
in 2003, as compared to 2002. Sales of simulated metal and other pigmented
products increased 14.3 percent to $3.0 million for the quarter ended June 30,
2003, up from $2.6 million for the quarter ended June 30, 2002 primarily due to
reduced sales in the prior year quarter as a result of the disruption in
servicing European customers in February 2002 caused by a flash fire on the
rotogravure press in Germany. This press had five of its six stations up and
running on April 2, 2002. The sixth station became operable on June 10, 2002.
During the periods in which these stations were inoperable, many products had to
be routed to alternative machines for production, resulting in strained
capacity, lower production, and, consequently, lower sales.
Cost of goods sold for the quarter ended June 30, 2003, increased 17.6 percent
to $11.0 million, up from $9.3 million for the quarter ended June 30, 2002. This
increase was primarily due to the impact of higher sales as discussed above.
Cost of goods sold for the quarter ended June 30, 2003 increased as a percentage
of net sales to 65.7 percent, from 64.6 percent for the quarter ended June 30,
2002. The second quarter of 2002 reflects insurance proceeds of $740,000
received in the second quarter, which approximated lost margin on sales. The
second quarter of 2003 also includes higher material costs.
Selling, general, and administrative expenses for the quarter ended June 30,
2003, increased 9.5 percent to $3.5 million, up from $3.2 million for the
quarter ended June 30, 2002. This increase was primarily income from a
settlement of past sales tax liabilities with the Illinois Department of Revenue
resulting from the recordation of in that quarter due to a reduction in selling,
general and administrative expenses in the second quarter of 2002. Selling,
general, and administrative expenses for the quarter ended June 30, 2003
decreased as a percentage of net sales to 21.1 percent, down from 22.2 percent
for the quarter ended June 30, 2002 due to higher sales.
Research and development expenses for the quarter ended June 30, 2003, increased
7.1 percent to $555,000 from $518,000 for the quarter ended June 30, 2002.
Research and development expenses for the quarter ended June 30, 2003, decreased
as a percentage of net sales to 3.3 percent from 3.6 percent for the quarter
ended June 30, 2002. This decrease in expense was primarily due to the impact of
higher sales.
Depreciation and amortization expenses for the quarter ended June 30, 2003,
increased 13.0 percent to $1,084,000 from $960,000 for the quarter ended June
30, 2002. This increase was primarily due to an increase in capital spending.
Depreciation and amortization expenses for the quarter ended June 30, 2003,
decreased as a percentage of net sales to 6.5 percent from 6.7 percent for the
quarter ended June 30, 2002 primarily due to higher sales offset by higher
depreciation expense.
Total operating expenses for the quarter ended June 30, 2003 increased 15.1
percent to $16.1 million from $14.0 million for the quarter ended June 30, 2002.
The increase in total operating expenses is due to the reasons noted above
previously in this quarter. Total operating expenses for the quarter ended June
30, 2003 decreased as a percentage of net sales to 96.6 percent from 97.1
percent for the quarter ended June 30, 2002. This decrease is due to the reasons
noted above.
Operating income for the quarter ended June 30, 2003, increased 35.3 percent to
$571,000, up from $422,000 for the quarter ended June 30, 2002. The increase in
operating income is primarily a result of the reasons noted above. Operating
income for the quarter ended June 30, 2003, increased as a percentage of net
sales to 3.4 percent, up from 2.9 percent for the quarter ended June 30, 2002.
This increase is a result of the reasons noted above.
Interest expense for the quarter ended June 30, 2003, decreased 25.9 percent to
$242,000, from $326,000 for the quarter ended June 30, 2002. This decrease
primarily was due to lower interest rates in 2003 from the same period in 2002
as a result of the Company refinancing some of its debt.
Interest income for the quarter ended June 30, 2003, decreased to $400 from
$15,000 for the quarter ended June 30, 2002. This decrease was primarily related
to interest received on an income tax refund in June 2002.
Interest rate swap valuation provision for the quarter ended June 30, 2003,
increased to $178,000 from zero in the quarter ended June 30, 2002. This
increase represents the negative value of a swap agreement entered into by the
Company in April 2003. It is the Company's intention to utilize this swap until
its maturity. This will result in the Company reversing this provision as
principal payments are made. Interest rate swap valuation provision for the
quarter ended June 30, 2003 increased as a percentage of sales to 1.1 percent
from zero for the quarter ended June 30, 2002. This increase is a result of the
reasons noted above.
Income taxes for the quarter ended June 30, 2003, increased 110.1 percent to
$48,000, up from $23,000 for the quarter ended June 30, 2002. The increase in
income taxes were primarily caused by the increase in taxable income due to the
reasons described above.
Net income increased 16.3 percent to $110,000 in the quarter ended June 30,
2003, from $95,000 for the quarter ended June 30, 2002. This increase in net
income is primarily due to the increase in taxable income noted previously.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
- -------------------------------------------------------------------------
Net sales for the six months ended June 30, 2003, increased 10.7 percent to
$32.4 million, up from $29.3 million for the six months ended June 30, 2002. The
Euro appreciated in value 23.0 percent compared to the U.S. dollar, and as a
result sales increased approximately $2.1 million in the first half 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 described below. Holographic product
sales increased 65.5 percent to $8.0 million for the six months ended June 30,
2003, compared to $4.9 million for the six months ended June 30, 2002. This
increase was due increased sales of security labels and packaging sales. Printed
product sales for these periods decreased 4.4 percent to $9.3 million, down from
$9.7 million, primarily due to softness in the furniture industry.
Pharmaceutical product sales for these periods increased 5.8 percent to $5.9
million, up from $5.6 million. These increases are primarily the result of
increased sales in Europe due to the war in Iraq. Security products (magnetic
stripe, signature panels and tipping products for credit cards, and
intaglio-printed products) sales decreased 14.2 percent to $3.2 million, down
from $3.7 million in the first half of 2002. This decrease was primarily due to
intaglio-printed documents to a foreign government that are not as strong this
year when compared to last year. Sales of simulated metal and other pigmented
products increased 10.7 percent to $5.9 million for the six months ended June
30, 2003, from $5.3 million in the first six months of 2002. This increase is
primarily due to reduced sales in the prior year period resulting from the 2002
disruption in servicing European customers due to the February flash fire on the
rotogravure press in Germany. This press had five of the six stations up and
running on April 2, 2002. The sixth station became operable the middle of June
2002. During the periods in which these stations were inoperable, many products
had to be routed to alternative machines for production, resulting in strained
capacity, lower production, and, consequently, lower sales.
Cost of goods sold for the six months ended June 30, 2003, increased 12.5
percent to $21.1 million from $18.8 million for the six months ended June 30,
2002. This increase was primarily due to higher sales and the resultant higher
costs of sales. In addition, in the second quarter of 2002 the Company received
$1,087,000 in income from business interruption insurance proceeds reflected as
a reduction in cost of goods sold. Cost of goods sold for the six months ended
June 30, 2003, increased as a percent of net sales to 65.3 percent, from 64.2
percent for the six months ended June 30, 2002. This increase in percentage was
primarily due to income from insurance proceeds of $1,087,000 received in 2002,
which approximated lost margin on sales.
Selling, general, and administrative expenses for the six months ended June 30,
2003, increased 6.3 percent to $6.8 million from $6.4 million for the six months
ended June 30, 2002. This increase was primarily due to a reduction in expenses
for the prior year period as a result of income from a settlement of past sales
tax liabilities with the Illinois Department of Revenue in June 2002 in the
amount of $300,000. Selling, general, and administrative expenses for the six
months ended June 30, 2003, decreased as a percent of net sales to 21.0 percent,
from 21.9 percent for the six months ended June 30, 2002. This decrease in
percentage was primarily due to higher sales.
Research and development expenses for the six months ended June 30, 2003,
increased 5.1 percent to $1.1 million from $1.0 million for the six months ended
June 30, 2002 primarily due to the impact of an increase of resource in the
holographic lab. Research and development expense for the six months ended June
30, 2003, decreased as a percentage of net sales, to 3.3 percent from 3.5
percent for the six months ended June 30, 2002. This decrease as a percentage of
net sales was due to higher sales.
Depreciation and amortization expenses for the six months ended June 30, 2003,
increased 16.1 percent to $2.2 million from $1.9 million for the six months
ended June 30, 2002, primarily due to depreciation on newly acquired fixed
assets. Depreciation and amortization expense for the six months ended June 30,
2003, increased as a percentage of net sales, to 6.7 percent from 6.4 percent
for the six months ended June 30, 2002 due to the reasons noted above.
Total operating expenses for the six months ended June 30, 2003 increased 11.1
percent to $31.2 million from $28.1 million for the six months ended June 30,
2002. The increase in total operating expenses is due to the reasons noted
above. Total operating expenses for the six months ended June 30, 2003 increased
as a percentage of net sales to 96.3 percent from 96.0 percent for the six
months ended June 30, 2002. This increase is due to the reasons noted above.
Operating income for the six months ended June 30, 2003, increased 1.2 percent
to $1,185,000, up from $1,170,000 for the six months ended June 30, 2002. The
increase in operating income is primarily due to the reasons noted above.
Operating income for the six months ended June 30, 2003 decreased as a
percentage of net sales to 3.7 percent from 4.0 percent for the six months ended
June 30, 2002. This decrease is primarily due to the reasons noted above.
Interest expense for the six months ended June 30, 2003, decreased 22.5 percent
to $509,000, down from $656,000 for the six months ended June 30, 2002. This
decrease was primarily due to lower interest rates in 2003 as a result of the
Company refinancing some of its debt.
Interest income for the six months ended June 30, 2003, decreased to $400 from
$15,000 for the six months ended June 30, 2002. This decrease was primarily
related to interest received on an income tax refund in June 2002.
Other income for the six months ended June 30, 2003 decreased to $15,000 from
$208,000 for the six months ended June 30, 2002. This decrease is primarily the
result of the gain on sale of an older manufacturing site in Goppingen, Germany
in January 2002.
Interest rate swap valuation provision for the six months ended June 30, 2003,
increased to $178,000 from zero for the six months ended June 30, 2002. This
increase represents the negative value of a swap agreement entered into by the
Company in April 2003. The Company will reverse this reserve as principal
payments are made. Interest rate swap valuation provision for the six months
ended June 30, 2003 increased as a percentage of sales to 0.5 percent from zero
for the six months ended June 30, 2002. This increase is due to the reasons
noted above.
Income taxes for the six months ended June 30, 2003, decreased to $156,000, up
from $221,000 for the six months ended June 30, 2002. The decrease in income
taxes were primarily caused by the decrease in taxable income due to the reasons
noted above.
Net income for the six months ended June 30, 2003, decreased to $357,000, down
from $517,000 for the six months ended June 30, 2002. This decrease in net
income is primarily due to the reasons noted above.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital increased by $0.5 million during the first half of
2003. The primary reasons are increases of $2.2 million in customer receivables,
$0.2 million in cash and $0.5 million in prepaid and other current assets,
offset by an increase in current portion of long-term debt of $1.3 million
(primarily resulting from long-term revolving debt falling into current debt due
to the April 1, 2003 renewal of the revolving credit agreement maintained with
the Company's primary bank), $0.8 million in accounts payable, accrued
compensation and benefits, accrued expenses and other accrued liabilities, and a
decrease of $0.3 million in inventories.
At June 30, 2003, the Company had available $8.9 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 has no material commitments to purchase capital assets as of June
30, 2003.
The Company's cash provided by operations decreased $0.5 million during the
first six months of 2003. The primary reasons were an increase of $1.6 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 $0.6
million in depreciation and amortization, plus $0.2 million for the gain on the
sale of land and building in 2002, plus $0.2 million for the initial recording
of value of derivative reserve.
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 June 30, 2003, the Company had total assets of $21.4 million and net
assets of $8.9 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 June 30, 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
June 30, 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 executed two interest rate swap
agreements to the fixed interest rate on Term Loan A at 4.82% on the principal
balance of $2,303,840, and Term Loan B at 4.43% on the principal balance of
$4,606,324 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.
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
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 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 June 30, 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 July 29, 2003.
CFC INTERNATIONAL, INC.
Dennis W. Lakomy
-----------------------------------
Executive Vice President,
Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)