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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 September 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. 0-27222
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
-------------------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including
area code: (708) 891-3456
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter 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 by Rule 12b-2 of the Exchange Act).
YES ( ) NO ( X )
As of November 05, 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
Pages
-----
Part I - Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2003
and December 31, 2002..................................... 5
Consolidated Statements of Operations for the three (3)
months and for the nine (9) months ended September 30, 2003
and September 30, 2002.................................... 6
Consolidated Statements of Cash Flows for the
nine (9) months ended September 30, 2003
and September 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 Risks........................................ 18
Item 4. Controls and Procedures.............................. 18
Part II - Other Information
Item 6. Exhibits and Report on Form 8-K...................... 19
Signatures.................................................... 20
Certifications................................................ 21-26
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 the continuing unfavorable economic conditions on market
growth trends in general and on the Company's customers and the demand for
the Company's products and services 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 raw material costs and the Company's ability to adjust selling
prices;
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; and
o Control of the Company by a principal stockholder.
The risks included here are not exhaustive. We operate in a very competitive and
rapidly changing environment. New risk factors emerge from time to time and it
is not possible for us to predict all such risk factors, nor can we assess the
impacts of all such risk factors on our 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. We have no obligation to revise or
update these forward-looking statements to reflect events or circumstances that
arise after November 05, 2003 or to reflect the occurrence of anticipated
events.
Investors should also be aware that while we do, from time to time, communicate
with securities analysts, it is against our policy to disclose to them any
material non-public information or other confidential commercial information.
Accordingly, investors should not assume that we agree 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 our responsibility.
Part I - Financial Information
Item 1. Financial Statements
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS AT
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
September 30, December 31,
2003 2002
---- ----
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents .................... $ 5,334,628 $ 5,990,077
Accounts receivable, less allowance
for doubtful accounts of $647,000
(2003) and $618,000 (2002) ................. 10,494,037 8,996,995
Inventories net:
Raw materials .............................. 3,668,209 3,234,290
Work in process ............................ 2,047,633 1,690,762
Finished goods ............................. 5,562,349 5,887,549
------------- --------------
11,278,191 10,812,601
Prepaid expenses and other current
assets....................................... 825,086 638,571
Deferred income tax assets.................... 798,209 675,000
------------- --------------
Total current assets........................ 28,730,151 27,113,244
------------- --------------
Property, plant and equipment, net............ 25,936,628 25,214,867
Deferred income tax assets ................... 2,241,515 2,143,584
Intangible assets, net ....................... 3,765,482 3,980,000
Other assets ................................. 112,520 154,861
------------- --------------
Total assets................................ $ 60,786,296 $ 58,606,556
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt............. $ 7,897,460 $ 6,388,157
Accounts payable.............................. 4,094,003 3,158,400
Accrued compensation and benefits............. 1,131,787 1,862,138
Accrued expenses and other current liabilities. 3,655,062 3,526,013
--------------- --------------
Total current liabilities................... 16,778,312 14,934,708
--------------- --------------
Deferred income tax liabilities............... 2,204,321 2,204,321
Fair value of interest rate swap.............. 106,810 -
Long-term debt, net of current portion........ 14,277,773 15,097,682
--------------- --------------
Total liabilities......................... 33,367,216 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 4,446,127 (2003)
and 4,437,075 (2002)......................... 44,462 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..................... 12,167,569 12,130,587
Retained earnings.............................. 16,791,304 16,751,153
Accumulated other comprehensive income ........ 1,069,018 97,007
--------------- --------------
30,077,483 29,028,248
Less - 565,867 treasury shares of common stock,
at cost...................................... (2,658,403) (2,658,403)
--------------- --------------
27,419,080 26,369,845
--------------- --------------
Total liabilities and stockholders' equity.. $ 60,786,296 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002
Three Months Ended 09/30, Nine Months Ended 09/30,
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales.... $15,073,709 $16,649,223 $47,473,476 $45,921,887
Cost of goods
sold (excluding
depreciation
and amortization
shown below). 10,466,949 10,271,749 31,613,768 29,064,882
Selling, general
and administrative
expenses..... 3,190,818 3,485,204 10,012,322 9,900,241
Research and
development
expenses..... 539,996 537,771 1,623,964 1,569,054
Depreciation and
amortization
expense........ 1,093,759 1,042,271 3,256,312 2,904,904
------------- ------------- ------------- -------------
Total operating
expenses... 15,291,522 15,336,995 46,506,366 43,439,081
------------- ------------- ------------- -------------
Operating income
(loss)....... (217,813) 1,312,228 967,110 2,482,806
Other (income)
expense:
Interest expense. 314,174 330,385 822,923 986,497
Interest income.. - - (355) (14,949)
Interest swap
valuation... (71,271) - 106,810 -
Other income.. (5,400) (10,999) (20,040) (218,738)
------------- -------------- -------------- -------------
Total other
(income) expense,
net............ 237,503 319,386 909,338 752,810
------------- -------------- -------------- -------------
Income (loss)
before income
taxes ........ (455,316) 992,842 57,772 1,729,996
Provision (benefit)
for income taxes.. (138,889) 318,336 17,621 538,853
------------- -------------- -------------- -------------
Net income (loss). ($316,427) $674,506 $ 40,151 $ 1,191,143
============= ============== ============== =============
Basic earnings
(loss) per share.. ($ 0.07) $0.15 $0.01 $0.27
Diluted earnings
(loss) per share.. ($ 0.07) $0.15 $0.01 $0.27
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002
Nine Months Ended 09/30,
-------------------------------------
2003 2002
---- ----
(Unaudited) (Unaudited)
Cash flow from operating activities:
Net income....... $ 40,151 $1,191,143
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortization.. 3,440,814 2,926,929
Valuation of derivative........ 106,810 -
Gain on sale of land and building. - (191,158)
Deferred income tax provision..... 332,662 157,142
Changes in assets and liabilities:
Accounts receivable, net..........(1,038,863) (1,048,577)
Inventories, net.................. (62,021) 654,293
Prepaid and other current assets.. (746,026) (249,670)
Other assets...................... 42,341 246,585
Accounts payable.................. 844,740 381,536
Accrued compensation and benefits. (877,841) 549,566
Accrued expenses and other current
liabilities...................... (269,060) (136,390)
----------------- -----------------
Net cash provided by operating
activities..............................$ 1,813,707 $ 4,481,399
----------------- -----------------
Cash flows from investing activities:
Additions to property, plant
and equipment...................... (2,049,272) (2,044,049)
Proceeds from sale of land
and building....................... - 455,334
----------------- -----------------
Net cash (used in) investing activities.. (2,049,272) (1,588,715)
----------------- -----------------
Cash flows from financing activities:
Repayment of revolver................ (577,500) (2,099,903)
Proceeds from revolver............... 1,119,708 1,924,347
Proceeds from term loans............. 122,545 -
Repayments of term loans............. (1,165,659) (1,469,600)
Repurchase of shares................. - (366,822)
Proceeds from issuance of stock...... 37,073 49,047
----------------- -----------------
Net cash (used in) financing activities.. (463,833) (1,962,931)
----------------- -----------------
Effect of exchange rate changes on
cash and cash equivalents............... 43,949 320,658
----------------- -----------------
(Decrease)/increase in cash and cash
equivalents............................. (655,449) 1,250,411
Cash and cash equivalents:
Beginning of period...................... 5,990,077 2,492,595
----------------- -----------------
End of period............................$ 5,334,628 $ 3,743,006
================= =================
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(Unaudited)
Note 1. Basis of Presentation
In the opinion of management, the accompanying interim unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of September 30, 2003 and December 31, 2002 (audited), the results of
operations for the three (3) months and nine (9) months ended September 30, 2003
and 2002, and statements of cash flows for the nine (9) months ended September
30, 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
independent audit.
Note 2. Earnings Per Share
Three Months Ended
--------------------------------------------------------
September 30, 2003 September 30, 2002
------------------------ ------------------------
Income Per Income Per
(Loss) Shares Share (Loss) Shares Share
------- ------- ------ ------- ------- -------
Basic earnings
(loss) per share:
Income (loss)
available to Common
Stockholders........ ($316,427) 4,393,223 ($.07) $674,506 4,418,598 $.15
Effect of Dilutive
Securities:
Options exercisable - 3,918
Convertible debt 12,000 95,237
---------- --------- -------- ---------- -------- ------
Diluted earnings
(loss) per share.....($316,427) 4,393,223 ($.07) $686,506 4,517,753 $.15
========== ========= ======== ========== ========= ======
Nine Months Ended
--------------------------------------------------------
September 30, 2003 September 30, 2002
------------------------ ------------------------
Per Per
Income Shares Share Income Shares Share
------- ------ ----- ------ ------ -----
Basic earnings
per share:
Income available to
CommonStockholders... $ 40,151 4,390,434 $.01 $1,191,143 4,437,262 $.27
Effect of Dilutive
Securities:
Options exercisable. - 2,776
Convertible debt... - - 42,000 111,110
---------- --------- -------- ---------- --------- ------
Diluted earnings
per share............ $ 40,151 4,390,434 $.01 $1,233,143 4,551,148 $.27
========== ========= ======== ========== ========= ======
For the three and nine months ended September 30, 2003, the effect of the
convertible debt would be antidilutive and as such is excluded from the
calculation in the table above.
Note 3. Business Segments and International Operations
The Company operates 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 for each of
these products (in millions) for the three months and nine months ended
September 30, 2003 and 2002 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ------------ ----------- -----------
Net Net Net Net
Sales % Sales % Sales % Sales %
----- - ----- - ----- - ----- -
Holographic Products... $3.7 24.4 $2.9 17.5 $11.7 24.7 $7.8 16.9
Printed Products....... 3.6 24.0 4.0 24.2 12.9 27.2 13.7 30.0
Pharmaceutical Products. 2.7 17.8 2.6 15.6 8.6 18.1 8.2 17.8
Security Products...... 2.4 15.9 4.1 24.7 5.6 11.8 7.9 17.1
Simulated Metal and
Other Pigmented
Product.............. 2.7 17.9 3.0 18.0 8.6 18.2 8.3 18.2
----- ----- ----- ----- ----- ----- ----- -----
Total................. $15.1 100.0 $16.6 100.0 $47.4 100.0 $45.9 100.0
===== ===== ===== ===== ===== ===== ===== =====
The following is sales information by geographic area for the three months and
nine months ended September 30, 2003 and 2002, and long lived asset information
as of September 30, 2003 and December 31, 2002:
Three months ended Nine months ended
September 30, September 30,
------------------------ --------------------------
Net Sales (In Thousands) 2003 2002 2003 2002
---- ---- ---- ----
United States....... $7,278 $10,004 $21,974 $26,204
Europe.............. 5,533 4,431 17,704 13,694
Other Foreign....... 2,263 2,214 7,795 6,024
---------- ----------- ----------- ----------
Total............... $15,074 $16,649 $47,473 $45,922
========== =========== =========== ==========
Long Lived Assets
(In Thousands) September 30, 2003 December 31, 2002
------------------ -----------------
United States....... $17,210 $18,543
Europe.............. 12,605 10,807
------------------ -----------------
Total............... $29,815 $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 an amended Form 10-Q/A for each of the quarters
ended March 31, 2002 and June 30, 2002 to reflect the amortization ($70,785 in
each quarter) of these intangibles. Other than the change in the amortization
life of goodwill from 15 years to indefinite, no other useful lives of
intangibles were changed in connection with the adoption of SFAS No. 142. All
intangible assets, other than goodwill are amortized using a straight line
method and assume no residual values. Goodwill and intangibles are reviewed for
impairment on an annual basis.
Note 5. Comprehensive Income
The Company's total comprehensive income (loss) was as follows:
Three Months Ended September 30,
2003 2002
---- ----
Net income (loss)....................... ($ 316,427) $ 674,506
Foreign currency
translation adjustment................ 241,606 (9,263)
Total comprehensive -------------- --------------
income (loss)......................... ($ 74,821) $ 665,243
============== ==============
Nine Months Ended September 30,
2003 2002
---- ----
Net income.............................. $ 40,151 $1,191,143
Foreign currency
translation adjustment................ 972,011 1,078,603
-------------- --------------
Total comprehensive income.............. $1,012,162 $2,269,746
============== ==============
Note 6. Contingencies and Commitments
From time to time, the Company is subject to legal proceedings and claims that
arise in the normal course of business. In September 2003, the Company was
notified by one of its pigment suppliers that the Company had received batches
of pigment since August 2002 containing more than the maximum regulatory limit
of PCB's. The Company hired an independent laboratory to conduct independent
testing, and has reviewed the situation with its advisors and notified all
customers who use products containing this pigment. The Company has received
assurance from the supplier that the supplier will reimburse the Company for any
costs it incurs in connection with this matter. 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 commitments to purchase capital assets as of September 30, 2003
in the amount of $1.4 million.
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 operations.
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 three and
nine months ended September 30, 2003 and September 30, 2002:
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
09/30/03 09/30/02 09/30/03 09/30/02
-------------- ------------ ------------- ------------
Net income (loss)
as reported ($316,427) $674,506 $40,151 $1,191,143
Pro forma
adjustment -
additional
compensation expense
had SFAS No. 123
been adopted,
net of tax (16,433) ( 20,791) (44,238) (57,279)
-------------- ------------- --------------- ------------
Pro forma net
income (loss) ($332,860) $653,715 ($4,087) $1,133,864
============== ============== =============== ============
Diluted earnings
(loss) per share
as reported ($0.07) $0.15 $0.01 $0.27
Pro forma effect
of compensation
expense (0.01) (0.01) (0.01) (0.01)
-------------- -------------- --------------- ------------
Pro forma diluted
earnings (loss)
per share ($0.08) $0.14 $0.00 $0.26
============== ============== =============== ============
Note 9. Net Operating Loss Tax Asset
Our German business has generated cumulative tax net operating loss carry
forwards (NOL's) totaling 6.3 million Euros through September 30, 2003. These
NOL's are being carried forward to offset future taxable income in Germany. The
Company has recorded cumulative deferred tax assets of 2.3 million Euros as of
September 30, 2003 relating to the benefit of these NOL's. At present time the
unused NOL's have no expiration date. Although realization of the deferred tax
asset is not assured, the Company has concluded that it is more likely than not
that the tax asset will be realized principally based upon a prudent and
feasible business and tax planning strategy which shifts production to our plant
in Germany and also after considering benefits realized from cost reduction
measures the Company has already taken including closing the UK manufacturing
plant and reducing employee headcount. If the Company concludes that as a result
of actions planned or taken, that the operating results in Germany can not
achieve profitability, or if there are changes to the Germany tax law, the
Company may need to adjust the value of the deferred tax assets resulting in a
reduction to income in the period in which such determination is made.
Note 10. 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, $740,000 and $786,000 of proceeds has
been reflected as a reduction of costs of goods sold in the first, second and
third 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 Ended Nine Months Ended
September 30, September 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).................... 69.4 61.7 66.6 63.3
Selling, general and
administrative............ 21.1 20.9 21.1 21.6
Research and development.... 3.6 3.2 3.4 3.4
Depreciation and amortization 7.3 6.3 6.9 6.3
--------- ---------- --------- ----------
Total operating expenses.... 101.4 92.1 98.0 94.6
--------- ---------- --------- ----------
Operating income (loss)..... (1.4) 7.9 2.0 5.4
Interest expense and other.. 1.6 1.9 1.9 1.6
--------- ---------- --------- ----------
Income (loss) before taxes.. (3.0) 6.0 0.1 3.8
Provision (benefit) for income
taxes..................... (0.9) 1.9 0.0 1.2
--------- ---------- --------- ----------
Net income (loss)........... (2.1 %) 4.1 % 0.1 % 2.6 %
========= ========== ========= ==========
Quarter Ended September 30, 2003 Compared to Quarter Ended September 30, 2002
- -----------------------------------------------------------------------------
Net sales for the quarter ended September 30, 2003 decreased 9.5% to $15.1
million, from $16.6 million for the quarter ended September 30, 2002. The Euro
appreciated in value 15% compared to the U.S. dollar, and as a result, increased
sales approximately $0.7 million in the third quarter of 2003. Holographic
products sales increased 26.2% to $3.7 million for the quarter ended September
30, 2003, compared to $2.9 million for the quarter ended September 30, 2002.
This increase was primarily due to increased volumes for existing customers and
new applications of the Company's holographic security and authentication
products. Printed products sales decreased 10.1% to $3.6 million, compared to
$4.0 million for the same quarter in the prior year. This decrease was a result
of continued softness in the manufactured housing and furniture markets.
Pharmaceutical products sales during these same periods increased 3.4% to $2.7
million, from $2.6 million, primarily due to increased demand worldwide.
Security products (magstripe, signature panels and tipping products for credit
cards, intaglio-printed products and gift cards) sales for these same periods
decreased 41.9% to $2.4 million from $4.1 million. This decrease was primarily
the result of the decrease of gift cards sales. Sales of simulated metal and
other pigmented products for these periods decreased 10.0% to $2.7 million, from
$3.0 million, primarily due to the soft European economy, offset by an increase
in the strength of the Euro compared to the U.S. dollar.
Cost of goods sold for the quarter ended September 30, 2003 increased 1.9% to
$10.5 million, from $10.3 million for the quarter ended September 30, 2002. This
increase was primarily due to the favorable effect on comparable 2002 costs of
the recovery in the third quarter of 2002 of certain incremental costs in
Germany through business interruption insurance proceeds totaling $786,000 for
lost production resulting from a damaged production machine during 2002, and
product mix resulting in higher costs due to shorter runs in the company's
printed products during 2003. Certain costs were recovered. The cost of goods
sold as a percentage of net sales for the quarter ended September 30, 2003
increased to 69.4% from 61.7% for the quarter ended September 30, 2002 primarily
due to the reasons noted above and sales mix.
Selling, general and administrative expenses for the quarter ended September 30,
2003 decreased 8.4% to $3.2 million, from $3.5 million for the quarter ended
September 30, 2002, primarily due to the consolidation of the U.K. office and
warehouse into Germany. Selling, general and administrative expenses for the
quarter ended September 30, 2003 increased as a percentage of net sales to 21.1%
from 20.9% for the quarter ended September 30, 2002. This increase in percentage
was primarily due to the impact of lower sales in 2003.
Research and development expenses for the quarter ended September 30, 2003
increased 0.4% to $540,000 from $538,000 for the quarter ended September 30,
2002. This increase was primarily due to cost of living adjustment. Research and
development expense for the quarter ended September 30, 2003 increased as a
percentage of net sales to 3.6% from 3.2% for the quarter ended September 30,
2002 and was primarily caused by the impact of lower sales in 2003.
Depreciation and amortization expenses for the quarter ended September 30, 2003
increased 4.9% to $1,094,000 from $1,042,000 for the quarter ended September 30,
2002. This increase was primarily due to an increase in depreciation due to
capital spending. Depreciation and amortization expense as a percentage of net
sales for the quarter ended September 30, 2003 increased to 7.3% from 6.3% for
the quarter ended September 30, 2002, primarily due to the additional capital
spending plus the impact of lower sales in 2003.
Total operating expenses for the quarter ended September 30, 2003 decreased 0.3%
to $15,292,000 from $15,337,000 for the quarter ended September 30, 2002. This
decrease in total operating expenses is due to the reasons described in the
paragraphs relating to sales, costs and expenses noted above. Total operating
expenses for the quarter ended September 30, 2003 increased as a percentage of
net sales to 101.4% from 92.1% for the quarter ended September 30, 2002. This
increase is due to the reasons described in the paragraphs relating to sales,
costs and expenses noted above, plus the impact of lower sales in 2003.
Operating income for the quarter ended September 30, 2003, decreased 116.6% to a
loss of ($218,000), down from $1.3 million for the quarter ended September 30,
2002. The decrease in operating income is primarily a result of the above
reasons described above in the paragraphs relating to sales, costs and expenses.
Operating income for the quarter ended September 30, 2003, decreased as a
percentage of net sales to (1.4%) (loss) from 7.9% for the quarter ended
September 30, 2002. This decrease is a result of the above reasons described
above in the paragraphs relating to sales, costs and expenses.
Interest expense for the quarter ended September 30, 2003 decreased 4.9% to
$314,000, from $330,000 for the quarter ended September 30, 2002. This decrease
in interest expense is primarily due to lower interest rates.
Interest rate swap valuation provision for the quarter ended September 30, 2003,
increased to a $71,000 benefit from zero in the quarter ended September 30,
2002. This increase represents the change in 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. Interest rate swap valuation provision for the quarter
ended September 30, 2003 increased as a percentage of sales to 0.5% from zero
for the quarter ended September 30, 2002. This increase is a result of the
reasons noted above.
Provision (benefit) for income taxes for the quarter ended September 30, 2003,
decreased 143.6% to a benefit of ($139,000), down from a provision of $318,000
for the quarter ended September 30, 2002. The change in the effective tax rate
for the quarter ended September 30, 2003 to 30.5% versus 32.1% for the quarter
ended September 30, 2002 did not have a significant impact.
Net income decreased 146.9% to a loss of ($316,000) for the quarter ended
September 30, 2003, from income or $675,000 for the quarter ended September 30,
2002. This decrease is net income is primarily due to the reasons noted above.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
2002
- ----
Net sales for the nine months ended September 30, 2003 increased 3.4% to $47.4
million, from $45.9 million for the nine months ended September 30, 2002. The
Euro appreciated in value 21.0% compared to the U.S. dollar, and as a result,
increased sales approximately $2.9 million for the nine months ended September
30, 2003. Holographic product sales increased 50.8% to $11.7 million for the
nine months ended September 30, 2003, compared to $7.8 million for the nine
months ended September 30, 2002, primarily due to an increase in demand due to
new applications for holographic products. Printed product sales decreased 6.0%
to $12.9 million, from $13.7 million, primarily due to the decrease in demand in
manufactured housing and the furniture markets. Pharmaceutical product sales for
this
period increased 5.0% to $8.6 million from $8.2 million, primarily due to
increased sales in Europe, offset by softer domestic demand. Security product
(magnetic stripe, signature panels and tipping products for transaction cards,
intaglio-printed products and gift cards) sales for these periods decreased
28.7% to $5.6 million, from $7.9 million. This decrease comes primarily from
decreased sales of gift cards. Sales of simulated metal and other pigmented
products for these periods increased 3.3% to $8.6 million, from $8.3 million in
the first nine months of 2002. This increase is primarily due to the strength of
the Euro compared to the U.S. dollar.
Cost of goods sold for the nine months ended September 30, 2003 increased 8.8%
to $31.6 million, from $29.1 million for the nine months ended September 30,
2002. This increase was primarily due to higher sales in 2003, product mix in
2003 resulting in higher costs due to shorter runs sizes in the Company's
printed products, and the favorable effect on comparable 2002 costs resulting
from the recovery of certain incremental costs in Germany through business
interruption proceeds totaling $1.9 million in the first nine months of 2002 for
lost production from a backfire that damaged a production machine in the first
quarter 2002. Cost of goods sold for the nine months ended September 30, 2003
increased as a percentage of net sales to 66.6% from 63.3% for the nine months
ended September 30, 2002. This increase was primarily due to the income from
insurance proceeds in 2002.
Selling, general and administrative expenses for the nine months ended September
30, 2003 increased 1.1% to $10.0 million from $9.9 million for the nine months
ended September 30, 2002. This increase in expenses was primarily due to the
favorable effect on comparable 2002 expenses of a $300,000 benefit related to a
settlement of past sales tax liabilities with the State of Illinois in 2002.
Selling, general and administrative expenses for the nine months ended September
30, 2003 decreased as a percentage of net sales to 21.1% from 21.6% for the nine
months ended September 30, 2002, primarily due to the reasons noted above.
Research and development expenses for the nine months ended September 30, 2003
increased 3.5% to $1,624,000, from $1,569,000 for the nine months ended
September 30, 2002. This increase in expenses was primarily due to higher
personnel costs. Research and development expense for the nine months ended
September 30, 2003 and for the nine months ended September 30, 2002, as a
percentage of net sales, remained the same at 3.4%, primarily due to higher
personnel costs offset by a higher sales volume.
Depreciation and amortization expenses for the nine months ended September 30,
2003 increased 12.1% to $3.3 million, from $2.9 million for the quarter ended
September 30, 2002. This increase was primarily due to an increase in
depreciation due to capital spending. Depreciation and amortization expense as a
percentage of net sales for the nine months ended September 30, 2003 increased
to 6.9% from 6.3% for the nine months ended September 30, 2002 primarily due to
the reasons noted in the prior sentence above partially offset by higher sales
volume.
Total operating expenses for the nine months ended September 30, 2003 increased
7.1% to $46.5 million from $43.4 million for the nine months ended September 30,
2002. The increase is due to the reasons noted above. Total operating expenses
for the nine months ended September 30, 2003 increased as a percentage of net
sales to 98.0% from 94.6% for the nine months ended September 30, 2002. This
increase is due to the reasons noted above.
Operating income for the nine months ended September 30, 2003 decreased 61.0% to
$1.0 million, from $2.5 million for the nine months ended September 30, 2002.
The decrease in operating income is primarily due to the reasons described above
in the paragraphs relating to sales, costs and expenses. Operating income for
the nine months ended September 30, 2003 as a percentage of net sales decreased
to 2.0% from 5.4% for the nine months ended September 30, 2002. This decrease is
primarily due to the reasons described above reasons described above in the
paragraphs relating to sales, costs and expenses.
Interest expense for the nine months ended September 30, 2003 decreased 16.6% to
$0.8 million, from $1.0 million for the nine months ended September 30, 2002.
This decrease was primarily due to lower interest rates.
Interest income for the nine months ended September 30, 2003, decreased to $355
from $15,000 for the nine months ended September 30, 2002. This decrease was
primarily related to the company receiving interest on an income tax refund in
2002.
Other income for the nine months ended September 30, 2003 decreased to $20,000
from $219,000 for the nine months ended September 30, 2002. This decrease is
primarily the result of the gain on sale of a manufacturing facility in
Goppingen, Germany in the first quarter of 2002.
Interest rate swap valuation provision for the nine months ended September 30,
2003, increased to $107,000 provision from zero in the nine months ended
September 30, 2002. This increase represents the change in 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. Interest rate swap valuation
provision for the nine months ended September 30, 2003 increased as a percentage
of sales to 0.2% from zero for the nine months ended September 30, 2002. This
increase is a result of the reasons noted above.
Income taxes for the nine months ended September 30, 2003, decreased 96.7% to
$18,000, down from $539,000 for the nine months ended September 30, 2002. The
decrease in the effective tax rate for the nine months ended September 30, 2003
to 30.5% from 32.1% during the nine months ended September 30, 2002 did not have
a significant impact. The decrease in income taxes was primarily caused by the
decrease in operating income described above.
Net income for the nine months ended September 30, 2003, decreased to $40,000,
down from $1.2 million for the nine months ended September 30, 2002. This
decrease in net income is primarily due to the reasons described above reasons
described above in the paragraphs relating to sales, costs and expenses.
Liquidity and Capital Resources
- -------------------------------
The Company's cash flow from operations decreased by $2.7 million to $1.5
million in 2003 from $4.5 million in 2002 primarily due to a decrease in net
income of $1.1 million, and a decrease of working capital of $1.3 million, which
was partially offset by an increase in depreciation and amortization of $0.4
million. Working capital decreased by $1.3 million during the first nine months
of 2003 as compared to the same period in 2002. The primary reasons for this
decrease are an increase in current portion of debt of $1.9 million, an increase
of $0.3 million in accounts payable, a decrease of $0.1 million in customer
receivables, and a decrease of $2.4 million in prepaid and other current assets,
offset by an increase of $1.6 million in inventories, a decrease of $0.4 million
accrued compensation and benefits and other accrued expenses, and an increase of
$1.6 million in cash.
Four German business has generated cumulative tax net operating loss carry
forwards (NOL's) totaling 6.3 million Euros through September 30, 2003. These
NOL's are being carried forward to offset future taxable income in Germany. The
Company has recorded cumulative deferred tax assets of 2.3 million Euros as of
September 30, 2003 relating to the benefit of these NOL's. At present time the
unused NOL's have no expiration date. Although realization of the deferred tax
asset is not assured, the Company has concluded that it is more likely than not
that the tax asset will be realized principally based upon a prudent and
feasible business and tax planning strategy which shifts production to our plant
in Germany and also after considering benefits realized from cost reduction
measures the Company has already taken including closing the UK manufacturing
plant and reducing employee headcount. If the Company concludes that as a result
of actions planned or taken, that the operating results in Germany can not
achieve profitability, or if there are changes to the Germany tax law, the
Company may need to adjust the value of the deferred tax assets resulting in a
reduction to income in the period in which such determination is made.
At September 30, 2003, the Company had available $8.7 million under the
revolving credit agreement maintained with the company's primary bank. This
agreement, which matures April 1, 2005, is collateralized by the Company's trade
accounts receivables and inventories. The Company expects to renew its loan
revolving credit agreements in the normal course prior to the maturity date. 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 commitments to
purchase capital assets as of September 30, 2003 in the amount of $1.4 million.
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 September 30, 2003, the Company had total assets of $60.8 million and
net assets of $27.2 million invested in Europe.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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 September 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 September 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.
As required by Rule 13a-15 under the Exchange Act, the Company has carried out
an evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this report. This
evaluation was carried out under the supervision and with the participation of
the Company's management, including our Chief Executive Officer and our Chief
Financial Officer. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this report. There were no
changes in the Company's internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during
the quarter ended September 30, 2003 that have materially affected, or that are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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 September 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 November 05, 2003.
CFC INTERNATIONAL, INC.
Dennis W. Lakomy
----------------------------------
Executive Vice President,
Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)