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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, 2004
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 October 26, 2004, the Registrant had issued and outstanding 3,884,970
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 - September 30, 2004 and
December 31, 2003........................................... 5
Consolidated Statements of Operations for the three (3) months
and for the nine (9) months ended September 30, 2004
and September 30, 2003...................................... 6
Consolidated Statements of Cash Flows for the nine (9) months
ended September 30, 2004 and September 30, 2003............. 7
Notes to Consolidated Financial Statements.................... 8-12
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 13-18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk. 19
Item 4 - Controls and Procedures.................................... 19
Part II - Other Information:
Item 6 - Exhibits and Reports on Form 8-K........................... 20
Signatures.......................................................... 21
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 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 terrorism and armed conflicts on the Company's operations,
demands for products and sources of supply.
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 October 25, 2004 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
Item 1. Financial Statements
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS AT
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
September 30, December 31,
2004 2003
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 9,145,438 $ 5,555,025
Restricted cash ................................ 306,072 117,622
Accounts receivable, less allowance
for doubtful accounts and
customer credits of $1,501,000 (2004)
and $1,767,000 (2003) ........................ 13,190,921 9,821,047
Inventories:
Raw materials ................................ 3,330,662 4,488,351
Work in process .............................. 2,525,750 1,858,727
Finished goods ............................... 8,312,599 6,703,633
----------- ----------
14,169,011 13,050,711
Prepaid expenses and
other current assets.......................... 1,032,889 856,153
Deferred income tax assets...................... 1,080,474 915,493
----------- -----------
Total current assets ......................... 38,924,805 30,316,051
----------- -----------
Property, plant and equipment, net ............. 27,130,714 28,116,892
Deferred income tax assets ..................... 3,204,130 3,280,891
Intangible assets, net ......................... 3,483,298 3,695,899
Other assets ................................... 239,339 105,078
----------- -----------
Total assets ................................. $72,982,286 $65,514,811
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt............... $11,471,939 $ 9,716,066
Accounts payable................................ 4,859,727 4,769,539
Accrued compensation and benefits............... 2,979,388 1,032,115
Accrued expenses and other current liabilities.. 5,616,594 4,273,938
----------- -----------
Total current liabilities..................... 24,927,648 19,791,658
----------- -----------
Deferred income tax liabilities................. 2,605,288 2,680,247
Fair value of interest rate swap................ 435 47,783
Long-term debt, net of current portion.......... 14,298,906 15,066,109
----------- -----------
Total liabilities............................. 41,832,277 37,585,797
----------- -----------
COMMITMENTS AND CONTINGENCIES...................
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 and
outstanding of 4,450,837 (2004) and
4,446,127 (2003) ............................. 44,509 44,462
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...................... 12,196,959 12,167,569
Retained earnings............................... 19,537,644 16,589,249
Accumulated other comprehensive income.......... 2,024,170 1,781,007
----------- -----------
33,808,412 30,587,417
Less - 565,867 treasury shares of
common stock, at cost ........................ (2,658,403) (2,658,403)
----------- -----------
31,150,009 27,929,014
----------- -----------
Total liabilities and stockholders' equity.... $72,982,286 $65,514,811
=========== ===========
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, 2004 AND 2003
Three Months Ended 09/30, Nine Months Ended 09/30,
------------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales .................. $21,717,862 $15,073,709 $61,897,338 $47,473,476
Cost of goods sold
(excluding depreciation
and amortization shown
below) .................... 13,842,067 10,466,949 39,928,751 31,613,768
Selling, general and
administrative expenses ... 3,671,693 3,190,818 11,220,299 10,012,322
Research and development
expenses .................. 787,097 539,996 2,184,059 1,623,964
Depreciation and amortization
expense ................... 1,238,188 1,093,759 3,593,336 3,256,312
----------- ----------- ----------- -----------
Total operating expenses .... 19,539,045 15,291,522 56,926,445 46,506,366
----------- ----------- ----------- -----------
Operating income (loss) ..... 2,178,817 (217,813) 4,970,893 967,110
Other (income) expense:
Interest expense, net ..... 307,721 314,174 894,113 822,568
Interest swap valuation ... 49,074 (71,271) (47,348) 106,810
Rental income ............. (49,885) (5,400) (118,267) (20,040)
----------- ----------- ----------- -----------
Total other expense, net .... 306,910 237,503 728,498 909,338
----------- ----------- ----------- -----------
Income (loss) before
income taxes .............. 1,871,907 (455,316) 4,242,395 57,772
Provision (benefit) for
income taxes .............. 571,001 (138,889) 1,294,000 17,621
----------- ----------- ----------- -----------
Net income (loss) ...........$ 1,300,906 $ (316,427) $ 2,948,395 $ 40,151
=========== =========== =========== ==========
Basic earnings (loss)
per share................. $0.30 $(0.07) $0.67 $0.01
Diluted earnings (loss)
per share................. $0.29 $(0.07) $0.66 $0.01
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, 2004 AND 2003
Nine Months Ended
September 30,
---------------------------
2004 2003
---- ----
(Unaudited) (Unaudited)
Cash flow from operating activities:
Net income ...................................... $ 2,948,395 $ 40,151
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ............. 3,628,463 3,440,814
Valuation of derivative ................... (47,348) 106,810
Issuance of stock to officer .............. 29,437 --
Deferred income tax provision ............. (246,976) 332,662
Changes in assets and liabilities:
Accounts receivable, net ................ (3,451,874) (1,038,863)
Inventories, net ........................ (1,187,063) (62,021)
Prepaid and other current assets ........ (171,528) (746,026)
Other assets ............................ (134,261) 42,341
Accounts payable ........................ 119,654 844,740
Accrued compensation and benefits ....... 2,009,391 (877,841)
Accrued expenses and other
current liabilities ................... 1,234,198 (269,060)
----------- -----------
Net cash provided by operating activities ......... $ 4,730,488 $ 1,813,707
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment ...... (2,554,727) (2,049,272)
----------- -----------
Net cash used in investing activities ............. (2,554,727) (2,049,272)
----------- -----------
Cash flows from financing activities:
Repayment of revolver ........................... (2,549,225) (577,500)
Proceeds from revolver .......................... 2,781,391 1,119,708
Proceeds from term loans ........................ 3,713,317 122,545
Repayments of term loans ........................ (4,800,593) (1,165,659)
Proceeds from IRB ............................... 2,000,000 --
Proceeds from issuance of stock ................. -- 37,073
----------- -----------
Net cash provided by (used in)
financing activities ............................ 1,144,890 (463,833)
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents ............................ 458,212 43,949
----------- -----------
Increase/(decrease) in cash and
cash equivalents ................................ 3,778,863 (655,449)
Cash and cash equivalents
(including restricted cash):
Beginning of period ............................... 5,672,647 5,990,077
----------- -----------
End of period ..................................... $ 9,451,510 $ 5,334,628
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(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
September 30, 2004 (unaudited) and December 31, 2003 (audited), the consolidated
results of operations for the three months and nine months ended September 30,
2004 and 2003 (unaudited) respectively, and consolidated statements of cash
flows for the nine months ended September 30, 2004 and 2003 (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
-----------------------------------------------------
September 30, 2004 September 30, 2003
------------------------ -------------------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic Earnings Per Share:
Income available to
Common Stockholders.....$1,300,906 4,395,399 $0.30 ($316,427) 4,303,233 ($0.07)
Effect of Dilutive
Securities:
Options exercisable.... - 45,033 - -
Convertible debt....... 6,950 47,617 (0.01) - -
---------- --------- ----- --------- --------- ------
Diluted Earnings
per Share...............$1,307,856 4,488,049 $0.29 ($316,427) 4,303,233 ($0.07)
========== ========= ===== ========== ========= ======
Nine Months Ended
-----------------------------------------------------
September 30, 2004 September 30, 2003
------------------------ -------------------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic Earnings Per Share:
Income available to
Common Stockholders.... $2,948,395 4,393,966 $0.67 $40,151 4,390,434 $0.01
Effect of Dilutive
Securities:
Options exercisable... - 41,158 - -
Convertible debt...... 27,800 63,490$(0.01) - -
-------- --------- ---- -------- --------- ----
Diluted Earnings
per Share............. $2.976,195 4,498,614 $0.66 $40,151 4,390,434 $0.01
======== ========= ===== ======== ========= =====
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 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 September 30, 2004 and 2003, and the nine months ended September 30, 2004
and 2003 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net Net Net Net
Sales % Sales % Sales % Sales %
----- - ----- - ----- - ----- -
Holographic Products .... $ 5.0 22.9 $ 3.7 24.4 $13.6 21.9 $11.7 24.7
Printed Products ........ 9.2 42.3 3.6 24.0 23.1 37.3 12.9 27.2
Pharmaceutical Products . 3.2 14.9 2.7 17.8 9.0 14.5 8.6 18.1
Security Products ....... 1.8 8.3 2.4 15.9 7.3 11.9 5.6 11.8
Simulated Metal and Other
Pigmented Products .... 2.5 11.6 2.7 17.9 8.9 14.4 8.6 18.2
----- ----- ----- ----- ----- ----- ----- -----
Total ................... $21.7 100.0 $15.1 100.0 $61.9 100.0 $47.4 100.0
===== ===== ===== ===== ===== ===== ===== =====
The following is sales by geographic area for the three months and nine months
ended September 30, 2004 and 2003 and long-lived asset information as of
September 30, 2004 and December 31, 2003:
Three months ended Nine months ended
September 30, September 30,
----------------------- ----------------------
Net Sales (In Thousands) 2004 2003 2004 2003
---- ---- ---- ----
United States .......... $11,757 $ 7,278 $32,603 $21,974
Europe ................. 6,752 5,533 19,797 17,704
Other Foreign .......... 3,209 2,263 9,497 7,795
------- ------- ------- -------
Total .................. $21,718 $15,074 $61,897 $47,473
======= ======= ======= =======
Long Lived Assets
(In Thousands) September 30, 2004 December 31, 2003
------------------ ----------------
United States .......................... $18,641 $18,543
Europe ................................. 12,212 10,807
------- -------
Total .................................. $30,853 $29,350
======= =======
Europe and other foreign revenue are based on the country in which the customer
is domiciled.
Note 4. Debt Financing
On August 25, 2004, the Company utilized an Illinois Revenue Bond (IRB) to
permanently finance the acquisition of the land and building bordering its
Chicago Heights, Illinois facility. The face amount of the IRB is $2.0 million.
At closing, $1,760,000 was drawn. The Company used the proceeds to repay
borrowings under its revolving credit agreement. The IRB carries a weekly
floating interest rate based on the remarketing agent surveying the market to
determine the rate necessary to remarket bonds at par. On September 30, 2004,
the rate was 1.50%. The IRB will amortize $100,000 annually over 20 years. The
Company also extended the maturity date of its revolving credit agreement with
its main domestic bank to April 1, 2006, and increased the maximum availability
under the borrowing revolving credit agreement increased to $8.0 million from
$5.5 million. This agreement bears interest at prime. The Company also extended
its European revolving credit agreement to April 1, 2006, and reduced its
maximum borrowings availability under this revolving loan agreement to $6.0
million from $8.4 million. This note bears interest at 1.0% over Euro overnight
index average.
Note 5. Comprehensive Income
The Company's total comprehensive income was as follows:
Three Months Ended September 30,
--------------------------------
2004 2003
---- ----
Net income (loss)........................ $1,300,906 ($316,427)
Foreign currency translation adjustment.. 267,876 241,606
---------- ----------
Total comprehensive income (loss)........ $1,568,782 ($ 74,821)
========== ==========
Nine Months Ended September 30,
-------------------------------
2004 2003
---- ----
Net income............................... $2,948,395 $ 40,151
Foreign currency translation adjustment.. 243,163 972,011
---------- ----------
Total comprehensive income............... $3,191,558 $1,012,162
========== ==========
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
September 30, 2004.
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 three and
nine months ended September 30, 2004 and June 30, 2003:
Three Months Ended Nine Months Ended
--------------------- --------------------
09/30/04 09/30/03 09/30/04 09/30/03
-------- -------- -------- --------
Net income (loss) as reported...... $1,300,906 ($316,427) $2,948,395 $40,151
Pro forma adjustment - additional
compensation expense had
SFAS No. 123 been adopted,
net of tax....................... (16,296) (16,433) (48,887) (44,238)
----------- --------- ----------- --------
Pro forma net income (loss)........ $1,284,610 ($332,860) $2,899,508 ($4,087)
Diluted earnings (loss) per share
as reported...................... $0.29 ($0.07) $0.66 $0.01
Pro forma effect of
compensation expense ............ 0.00 (0.01) (0.01) (0.01)
----------- --------- ----------- --------
Pro forma diluted earnings (loss)
per share ....................... $0.29 ($0.08) $0.65 $0.00
Note 9. Net Operating Loss Tax Asset
Our German business has generated cumulative tax net operating loss carry
forwards (NOLs) totaling 7.2 million Euros through September 30, 2004. These
NOLs are being carried forward to offset future taxable income in Germany. The
Company has recorded cumulative deferred tax assets of $3.2 million as of
September 30, 2004 relating to the benefit of these NOLs. At present time the
unused NOLs 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, and accordingly no valuation allowance has
been provided. This is principally based upon a prudent and feasible business
strategy which shifts production to the Company's plant in Germany and also
after considering benefits realized from cost reduction measures the Company has
already taken including closing the UK finishing operations and warehouse 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
and maintain profitability, or if there are changes to the Germany tax law, the
Company may need to adjust the value of the Company's deferred tax assets
resulting in a reduction to income in the period in which such determination is
made.
Note 10. Stock Issuance to Officer
On August 20, 2004, the Compensation Committee of the Board of Directors granted
4,710 shares of non-registered company voting common stock to Mr. Gregory
Jehlik, President and Chief Executive Officer, in consideration for his
contributions to the Company. The Company recorded a compensation charge for the
fair market value of the stock of approximately $29,000 in conjunction with this
grant.
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,
----------------- -----------------
2004 2003 2004 2003
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales .................................. 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Cost of goods sold (excluding
depreciation and amortization
shown below) ............................. 63.8 69.4 64.5 66.6
Selling, general and administrative ........ 16.9 21.1 18.2 21.1
Research and development ................... 3.6 3.6 3.5 3.4
Depreciation and amortization .............. 5.7 7.3 5.8 6.9
------ ------ ------ ------
Operating income (loss) ................... 10.0 (1.4) 8.0 2.0
Interest expense and other ................. 1.4 1.6 1.2 1.9
------ ------ ------ ------
Income (loss) before taxes ................ 8.6 (3.0) 6.8 0.1
Provision (benefit) for income taxes ....... 2.6 (0.9) 2.0 0.0
------ ------ ------ ------
Net income (loss) ......................... 6.0% (2.1 )% 4.8% 0.1%
====== ======= ====== ======
Quarter Ended September 30, 2004 Compared to Quarter Ended September 30, 2003
- -----------------------------------------------------------------------------
Net sales for the quarter ended September 30, 2004 increased 44.1% to $21.7
million, from $15.1 million for the quarter ended September 30, 2003. The Euro
appreciated in value 8% compared to the U.S. dollar, and as a result, increased
sales approximately $0.4 million in the third quarter of 2004. Holographic
products sales increased 35.1% to $5.0 million for the quarter ended September
30, 2004, compared to $3.7 million for the quarter ended September 30, 2003.
This increase was primarily due to increased volumes for existing customers and
new applications of the Company's HoloLam Plus(TM), patent applied for. HoloLam
Plus is a full-face holographic laminate for transaction cards that offers a new
method to produce material that is a registered full face holographic image on
transaction cards. Printed products sales increased 153.3% to $9.2 million,
compared to $3.6 million for the same quarter in the prior year. This increase
was primarily due to an increase in market share domestically as a result of a
major competitor withdrawing from the market. Pharmaceutical products sales
during these same periods increased 20.7% to $3.2 million, from $2.7 million,
primarily due to increased demand worldwide. Security products (mag stripe,
signature panels and tipping products for credit cards, intaglio-printed
products and gift cards) sales for these same periods decreased 24.1% to $1.8
million from $2.4 million. This decrease was primarily the result of the slower
ramp up of gift cards which should be made up in the fourth quarter. Sales of
simulated metal and other pigmented products for these periods decreased 11.6%
to $2.5 million, from $2.7 million, primarily due to the sluggish European
economy, offset by the strength of the Euro compared to the U.S. dollar, and the
strength of domestic sales.
Cost of goods sold for the quarter ended September 30, 2004 increased 32.2% to
$13.8 million, from $10.5 million for the quarter ended September 30, 2003. This
increase was primarily due to the impact of higher sales as discussed above. The
cost of goods sold as a percentage of net sales for the quarter ended September
30, 2004 decreased to 63.8% from 69.4% for the quarter ended September 30, 2003
primarily due to the reasons noted above and leveraging fixed production costs
over a larger sales base.
Selling, general and administrative expenses for the quarter ended September 30,
2004 increased 15.1% to $3.7 million, from $3.2 million for the quarter ended
September 30, 2003, due to the Company adding sales and marketing resources and
the strength of the Euro compared to the U.S. dollar. Selling, general and
administrative expenses for the quarter ended September 30, 2004 decreased as a
percentage of net sales to 16.9% from 21.1% for the quarter ended September 30,
2003. This decrease in percentage was primarily due to the impact of higher
sales.
Research and development expenses for the quarter ended September 30, 2004
increased 45.8% to $787,000 from $540,000 for the quarter ended September 30,
2003. This increase was primarily due to an increase in wages and related
performance incentives. Research and development expense for the quarter ended
September 30, 2004 and for the quarter ended September 30, 2003 remained the
same at 3.6%.
Depreciation and amortization expenses for the quarter ended September 30, 2004
increased 13.2% to $1,238,000 from $1,094,000 for the quarter ended September
30, 2003. This increase was primarily due to an increase in depreciation
associated with additional capital spending. Depreciation and amortization
expense as a percentage of net sales for the quarter ended September 30, 2004
decreased to 5.7% from 7.3% for the quarter ended September 30, 2003, primarily
due to higher sales in 2004.
Operating income for the quarter ended September 30, 2004, increased to income
of $2.2 million, from a loss of ($218,000) for the quarter ended September 30,
2003. The increase 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, 2004, increased as a
percentage of net sales to 10.0% from a loss of (1.4%) for the quarter ended
September 30, 2003. This increase is a result of the above.
Interest expense, net for the quarter ended September 30, 2004 decreased 2.1% to
$308,000, from $314,000 for the quarter ended September 30, 2003. This decrease
in interest expense is primarily due to increased borrowings to finance the
purchase of the land and building bordering the Company's Chicago Heights
facility, offset by lower interest rates.
Rental (income), net for the quarter ended September 30, 2004, increased to
$50,000, from $5,000 for the quarter ended September 30, 2003. This increase in
rental income is primarily due to the rent being paid on the newly acquired land
and building bordering the Company's Chicago Heights facility, by the former
owner as they phase out of the property.
Interest rate swap valuation provision for the quarter ended September 30, 2004,
increased to a provision of $49,000, from a $71,000 benefit in the quarter ended
September 30, 2003. 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, 2004 increased as a percentage of
sales to 0.2% from (0.5%) for the quarter ended September 30, 2003. This
increase is a result of the reasons noted above.
Provision (benefit) for income taxes for the quarter ended September 30, 2004,
decreased 511.1% to a provision of $571,000, from a benefit of ($139,000) for
the quarter ended September 30, 2003. The effective tax rate for the quarters
ended September 30, 2004 and 2003 were both 30.5%.
Net income increased 511.1% to $1.3 million for the quarter ended September 30,
2004, from a loss of ($316,000) for the quarter ended September 30, 2003. This
increase is net income is primarily due to the reasons noted above.
Nine Months Ended September 30, 2004
Compared to Nine Months Ended September 30, 2003
- ------------------------------------------------
Net sales for the nine months ended September 30, 2004 increased 30.4% to $61.9
million, from $47.4 million for the nine months ended September 30, 2003. The
Euro appreciated in value 10.1% compared to the U.S. dollar, and as a result,
increased sales approximately $1.6 million for the nine months ended September
30, 2004. Holographic product sales increased 15.8% to $13.6 million for the
nine months ended September 30, 2004, compared to from $11.7 for the nine months
ended September 30, 2003, primarily due to an increase in demand due to new
applications for holographic products. Printed product sales increased 78.5% to
$23.1 million, from $12.9 million, primarily due to an increase in market share
domestically as a result of a major competitor withdrawing from the market.
Pharmaceutical product sales for this period increased 4.6% to $9.0 million,
from $8.6 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 increased 30.6% to $7.3 million, from $5.6 million. This
increase comes primarily from increased sales of gift cards. Sales of simulated
metal and other pigmented products for these periods increased 3.7% to $8.9
million, from $8.6 million in the first nine months of 2003. This increase is
primarily due to the strength of the Euro compared to the U.S. dollar for
European sales and the increase in domestic sales.
Cost of goods sold for the nine months ended September 30, 2004 increased 26.3%
to $39.9 million, from $31.6 million for the nine months ended September 30,
2003. This increase was primarily due to higher sales in 2004. Cost of goods
sold for the nine months ended September 30, 2004 decreased as a percentage of
net sales to 64.5% from 66.6% for the nine months ended September 30, 2003. This
decrease was primarily due to better utilization of the Company's fixed
manufacturing costs and higher productivity offset by higher material costs.
Selling, general and administrative expenses for the nine months ended September
30, 2004 increased 12.1% to $11.2 million, from $10.0 million for the nine
months ended September 30, 2003. This increase in expenses was primarily due to
hiring and relocation of personnel, plus the strength of the Euro against the
U.S. dollar. Selling, general and administrative expenses for the nine months
ended September 30, 2004 decreased as a percentage of net sales to 18.2% from
21.1% for the nine months ended September 30, 2003, primarily due to the reasons
noted above.
Research and development expenses for the nine months ended September 30, 2004
increased 34.5% to $2.2 million, from $1.6 million for the nine months ended
September 30, 2003. This increase in expenses was primarily due to an increase
in wages and related performance incentives. Research and development expenses
for the nine months ended September 30, 2004 increased as a percentage of net
sales to 3.5%, from 3.4% for the nine months ended September 30, 2003, primarily
due to higher personnel costs offset by a higher sales volume.
Depreciation and amortization expenses for the nine months ended September 30,
2004 increased 10.3% to $3.6 million, from $3.3 million for the quarter ended
September 30, 2003. This increase was primarily due to an increase in
depreciation associated with additional capital spending. Depreciation and
amortization expense as a percentage of net sales for the nine months ended
September 30, 2004 decreased to 5.8% from 6.9% for the nine months ended
September 30, 2003, primarily due to higher sales in 2004.
Operating income for the nine months ended September 30, 2004 increased 414.0%
to $5.0 million, from $1.0 million for the nine months ended September 30, 2003.
The increase 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, 2004 as a percentage of net sales increased
to 8.0% from 2.0% for the nine months ended September 30, 2003. This increase is
primarily due to the reasons described above reasons described above.
Interest expense, net for the nine months ended September 30, 2004 increased
8.7% to $0.9 million, from $0.8 million for the nine months ended September 30,
2003. This increase was primarily due to increased borrowings to finance the
purchase of the land and building bordering the Company's Chicago Heights
facility offset by lower interest rates.
Rental (income), net for the nine months ended September 30, 2004, increased to
$118,000, from $20,000 for the nine months ended September 30, 2003. This
increase in rental income is primarily due to the rent being paid on the newly
acquired land and building bordering the Company's Chicago Heights facility, by
the former owner as they phase out of the property.
Interest rate swap valuation provision for the nine months ended September 30,
2004, decreased to a $47,000 benefit, from a $107,000 provision in the nine
months ended September 30, 2003. This decrease 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, 2004 decreased as a percentage
of sales to 0.1% from 0.2% for the nine months ended September 30, 2003. This
decrease is a result of the reasons noted above.
Income taxes for the nine months ended September 30, 2004, increased to $1.3
million, from $18,000 for the nine months ended September 30, 2003. The increase
in the effective tax rate for both the nine months ended September 30, 2004 and
2003 was 30.5%. The increase in income taxes was primarily due to the increase
in income discussed above.
Net income for the nine months ended September 30, 2004, increased to $2.9
million, up from $40,000 for the nine months ended September 30, 2003. This
increase 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 working capital increased by $3.5 million during the first nine
months of 2004. The primary reasons are increases of $3.4 million in customer
receivables, $1.1 million in inventories, $3.8 million in cash and $0.2 million
in prepaid and other current assets and deferred assets of $0.2 million, offset
by an increase in current portion of long-term debt of $1.8 million (primarily
resulting from converting some long-term debt into short-term debt), and $3.4
million in accounts payable, accrued compensation and benefits, accrued expenses
and other accrued liabilities.
At September 30, 2004, the Company had available $6.8 million under the
revolving credit agreement maintained with the Company's primary bank. This
agreement, which expires April 1, 2006, 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 September 30, 2004.
The Company's cash provided by operations increased $2.9 million during the
first nine months of 2004. The primary reasons were an increase of $2.9 million
in net income, plus an increase of $2.9 million in accrued compensation and
benefits, a decrease of $0.6 million in prepaid and other assets, an increase of
$0.2 million in depreciation, an increase of $1.5 million in accrued expenses an
other liabilities, offset by an increase in accounts receivable of $2.4 million,
an increase of $1.1 million in inventories, an increase of $0.2 million in other
assets, an increase of $0.6 million in deferred income taxes, a decrease of $0.7
million in accounts payable and a $0.2 million decrease in valuation of
derivative.
Debt Financing
- --------------
On August 25, 2004, the Company utilized an Illinois Revenue Bond (IRB) to
permanently finance the acquisition of the land and building bordering its
Chicago Heights, Illinois facility. The face amount of the IRB is $2.0 million.
At closing, $1,760,000 was drawn. The Company used the proceeds to repay
borrowings under its revolving credit agreement. The IRB carries a weekly
floating interest rate based on the remarketing agent surveying the market to
determine the rate necessary to remarket bonds at par. On September 30, 2004,
the rate was 1.50%. The IRB will amortize $100,000 annually over 20 years. The
Company also extended the maturity date of its revolving credit agreement with
its main domestic bank to April 1, 2006, and increased the maximum availability
under borrowing. The revolving credit agreement increased to $8.0 million from
$5.5 million. This agreement bears interest at prime. The Company also extended
its European revolving credit agreement to April 1, 2006, and reduced its
revolving loan agreement to $6.0 million from $8.4 million. This note bears
interest at 1.0% over Euro overnight index average.
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, 2004, the Company had total assets of $29.0 million and
net assets of $15.6 million invested in Europe.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use derivative financial instruments to address currency or
commodity pricing risks. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments held by the
Company for which it is practicable to estimate that value. The carrying amount
of cash equivalents approximates their fair value because of the short maturity
of those instruments. The estimated fair value of accounts receivable
approximated its carrying value at September 30, 2004 and December 31, 2003
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, 2004 and December 31, 2003, 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
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 pursuant to Securities Exchange Act Rule 13a-15(d) as of
September 30, 2004. Based on their evaluation, our principal executive officer
and principal financial officer have concluded that the Company's controls and
procedures were effective as of September 30, 2004. There were no significant
changes in our internal controls or in other factors that could significantly
affect these controls in the third quarter of 2004.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits
10.1(a) Bond Purchase Agreement dated August 25, 2004 between
the Company and LaSalle Capital Markets, a division of
ABN AMRO Financial Services, Inc.
10.1(b) Letter of Credit Agreement dated July 1, 2004 between
the Company and LaSalle National Bank Association.
10.1(c) Loan Agreement dated July 1, 2004 between the Company
and the Illinois Finance Authority.
31.1 Certification of CEO required by Rule 13a-14(a) or
Rule 15d-14(a) of the Security and Exchange Act of 1934.
31.2 Certification of CFO required by Rule 13a-14(a)
or Rule 15d-14(a) of the Security and Exchange Act of 1934.
32.1 Certification of CEO required by Rule 13a-14(a)
or Rule 15d-14(a) of the Security and Exchange Act of 1934
and Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO required by Rule 13a-14(a)
or Rule 15d-14(a) of the Security and Exchange Act of 1934
and Section 906 of the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
In addition to those reports previously disclosed by the Company,
during the fiscal third quarter of 2004, and through the date of this
filing, the Company filed:
- A Report on Form 8-K dated October 1, 2004, reporting on
Item 5.02 (Departure of Directors or Principal Officers;
Election of Directors; Appointment of Principal Officers)
and Item 9.01(Financial Statements and Exhibits) in connection
with the appointment of Gregory Jehlik as Chief Executive
Officer of the Company; and
- A Report on Form 8-K dated October 25, 2004, reporting on
Item 2.02 (Results of Operations and Financial Condition) and
Item 9.01(Financial Statements and Exhibits) in connection with
the release of the Company's earnings for the third quarter.
In accordance with General Instruction B of Form 8-K, this
Report on Form 8-K is not deemed to be "filed" for purposes
of Section 18 of the Securities Exchange Act of 1934
(the "Exchange Act"), and is not subject to the liabilities of
that section. We are not incorporating, and will not
incorporate by reference, such Report into the Quarterly Report
on Form 10-Q for the quarter ended September 30, 2004, or any
other filing under the Securities Act of 1933 or the Exchange
Act.
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 October 26, 2004.
CFC INTERNATIONAL, INC.
-----------------------------------
Dennis W. Lakomy
Executive Vice President,
Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)