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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- --------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
- --------- 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 May 9 2005, the Registrant had issued and outstanding 3,998,233 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 - March 31, 2005
and December 31, 2004......................................... 5
Consolidated Statements of Operations for the three months
ended March 31, 2005 and March 31, 2004....................... 6
Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and March 31, 2004....................... 7
Notes to Consolidated Financial Statements...................... 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 11-14
Item 3. Quantitative and Qualitative Disclosures about
Market Risks................................................... 15
Item 4. Controls and Procedures.................................. 15-16
Item 5. Other Information, Common Stock Repurchases.............. 16
Part II - Other Information
Item 6. Exhibits and Report on Form 8-K.......................... 16
Signatures..................................................... 17
Certifications................................................. 18-23
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 May 9 2005 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
MARCH 31, 2005 AND DECEMBER 31, 2004
March 31, December 31,
2005 2004
---- ----
Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 3,084,131 $ 4,554,699
Restricted cash ................................ 306,380 306,271
Accounts receivable, less allowance
for doubtful accounts and customer
credits of $1,454,000 (2005) and
$1,320,000 (2004) ............................ 13,211,049 12,547,380
Inventories:
Raw materials ................................ 4,887,483 4,958,900
Work in process .............................. 2,493,251 3,160,195
Finished goods ............................... 10,434,380 9,590,043
----------- ------------
17,815,114 17,709,138
Prepaid expenses and other current assets ...... 369,442 387,231
Deferred income tax assets...................... 1,171,268 1,002,559
----------- ------------
Total current assets ......................... 35,957,384 36,507,278
----------- ------------
Property, plant and equipment, net ............. 27,730,315 28,602,311
Deferred income tax assets ..................... 3,517,612 3,528,686
Goodwill ....................................... 1,029,462 1,029,462
Intangible assets, net ......................... 2,322,578 2,393,466
Other assets ................................... 269,817 266,806
Fair value of interest rate swap ............... 104,874 39,553
----------- ------------
Total assets ................................. $70,932,042 $72,367,562
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt............... $ 5,398,488 $ 5,625,085
Accounts payable................................ 4,845,732 6,802,792
Accrued compensation and benefits............... 1,400,837 1,427,215
Accrued bonuses................................. 181,622 2,056,778
Income taxes payable - current and deferred..... 1,721,758 1,554,641
Accrued expenses and other current liabilities.. 4,713,315 3,473,356
----------- ------------
Total current liabilities..................... 18,261,751 20,939,867
----------- ------------
Deferred income tax liabilities................. 3,221,756 3,229,584
Long-term debt, net of current portion.......... 15,012,665 15,698,791
----------- ------------
Total liabilities............................. 36,496,172 39,868,242
----------- ------------
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 of 4,580,276 (2005)
and 4,513,111 (2004).......................... 45,804 45,132
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...................... 13,701,317 12,822,575
Retained earnings............................... 22,715,396 21,215,235
Accumulated other comprehensive income.......... 905,183 1,188,860
----------- ------------
37,372,830 35,276,932
Less - 582,542 (2005) and 574,171(2004)
treasury shares of common stock, at cost ..... (2,936,960) (2,777,612)
----------- ------------
34,435,870 32,499,320
----------- ------------
Total liabilities and stockholders' equity..... $70,932,042 $72,367,562
=========== ============
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31, 2004 AND 2003
Three Months Ended March 31,
2005 2004
---- ----
(Unaudited)
Net sales ...................................... $ 22,988,838 $ 20,824,297
Cost of goods sold (excluding depreciation and
amortization shown below) ...................... 14,403,381 13,024,195
Selling, general and administrative expenses ... 3,922,303 3,826,369
Research and development expenses .............. 704,030 608,116
Depreciation and amortization expenses ......... 1,174,432 1,338,681
------------ ------------
Total operating expenses ....................... 20,204,146 18,797,361
------------ ------------
Operating income ............................... 2,784,692 2,026,936
Other (income) expense:
Interest expense ........................... 278,983 299,136
Interest income ............................ (5,266) (545)
(Gain) loss on interest rate swap .......... (65,321) 66,462
Other income (rental income) ............... (33,306) (28,012)
Foreign currency exchange loss ............. 277,456 24,702
------------ ------------
Total other expense, net ....................... 452,546 361,743
------------ ------------
Income before income taxes ..................... 2,332,146 1,665,193
Provision for income taxes ..................... 831,986 511,190
------------ ------------
Net income ..................................... $ 1,500,160 $ 1,154,003
============ ============
Basic earnings per share ....................... $ 0.33 $ 0.26
Diluted earnings per share ..................... $ 0.33 $ 0.26
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 2004 AND 2003
Three Months Ended March 31,
----------------------------
2005 2004
---- ----
(Unaudited)
Cash flows from operating activities:
Net income ...................................... $ 1,500,160 $ 1,154,003
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............. 1,220,835 1,373,808
Interest rate swap valuation .............. (65,321) 66,462
Loss on disposition of assets ............. 32,704 --
Tax benefit of stock options .............. 213,895 --
Deferred income taxes ..................... (343,863) (216,068)
Changes in assets and liabilities:
Accounts receivable, net ................ (869,088) (3,101,554)
Inventories, net ........................ (456,332) (38,967)
Prepaid and other current assets ........ 17,790 91,844
Other assets ............................ (3,011) 5,994
Accounts payable ........................ (1,911,491) (38,714)
Accrued compensation and benefits ....... 241,815 303,355
Accrued bonus ........................... (1,875,156) 363,019
Income taxes payable .................... 411,763 963,240
Accrued expenses and other
current liabilities ................... 1,375,190 (830,668)
----------- -----------
Net (used in) cash provided by operating activities $ (556,511) $ 95,754
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment ....... (825,978) (1,879,205)
----------- -----------
Cash used in investing activities ................. (825,978) (1,879,205)
----------- -----------
Cash flows from financing activities:
Proceeds from revolving loan .................... 766,345 2,400,000
Repayments of revolving loan .................... (500,000) (1,043,940)
Proceeds from term loan ......................... -- 3,255,024
Repayments of term loans ........................ (445,430) (3,480,404)
Proceeds from exercise of stock options ......... 332,054 --
Repurchase of treasury shares ................... (159,348) --
----------- -----------
Net (used in) cash provided by financing activities (6,379) 1,130,680
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents ............................ (81,699) 290,721
----------- -----------
Decrease in cash and cash equivalents ............. (1,470,568) (362,050)
Cash and cash equivalents:
Beginning of period ............................... 4,554,699 5,672,647
----------- -----------
End of Period ..................................... $ 3,084,131 $ 5,310,597
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(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 March 31, 2005 and December 31, 2004 (audited), the results of
operations for the three months ended March 31, 2005 and 2004, and statements of
cash flows for the three months ended March 31, 2005 and 2004.
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
The table below provides the reconciliation of the numerator and denominator in
computing earnings per share and also gives effect to the restatement described
in Note 10.
Three Months Ended
--------------------------------------------------------
March 31, 2005 March 31, 2004
-------------------------- ---------------------------
Per Per
Income Shares Share Income Shares Share
------ ------ ----- ------ ------ -----
Basic earnings per
share:
Income available to
Common Stockholders..$1,500,160 4,488,861 $0.33 $1,154,003 4,393,249 $0.26
Effect of Dilutive
Securities:
Options exercisable.. 123,000 29,269
Convertible debt..... 108 794 - 10,425 71,427 -
---------- --------- ----- ---------- --------- -----
Diluted earnings
per share............$1,500,268 4,612,655 $0.33 $1,164,428 4,493,945 $0.26
========== ========= ===== ========== ========= =====
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 thousands) for the three months ended March 31, 2005 and 2004
were as follows:
Three Months Ended March 31,
2005 2004
----------------- -----------------
Net Net
Net Sales (In Thousands) Sales % Sales %
------- ----- ------- -----
Holographic Products .... $ 4,430 19.3 $ 4,137 19.9
Printed Products ........ 8,727 37.9 7,785 37.4
Pharmaceutical Products . 3,920 17.1 3,157 15.1
Security Products ....... 2,677 11.6 2,204 10.6
Simulated Metal and Other
Pigmented Products .... 3,235 14.1 3,541 17.0
------- ----- ------- -----
Total ................... $22,989 100.0 $20,824 100.0
======= ===== ======= =====
The following is sales information by geographic area for the three months ended
March 31, 2005 and 2004, and long lived asset information as of March 31, 2005
and December 31, 2004:
Three months ended
March 31,
-------------------------------
Net Sales (In Thousands) 2005 2004
---- ----
United States........................ $12,360 $10,855
Europe............................... 7,187 6,851
Other Foreign........................ 3,442 3,118
-------------- --------------
Total................................ $22,989 $20,824
============== ==============
Long-Lived Assets
(In Thousands) March 31, 2005 December 31, 2004
-------------- -----------------
United States.................. $18,945 $19,117
Europe......................... 12,514 13,215
---------------- ---------------
Total.......................... $31,457 $32,332
================ ===============
Europe and other foreign revenue are based on the country in which the customer
is domiciled.
Note 4. Comprehensive Income
The Company's total comprehensive (loss) income was as follows:
Three Months Ended March 31,
----------------------------
2005 2004
---- ----
Net income...................................... $1,500,160 $ 1,154,003
Foreign currency translation adjustment......... (283,677) (63,079)
----------- ------------
Total comprehensive income..................... $1,261,483 $ 1,090,924
=========== ============
Note 5. 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 the opinion of management, the amount
of ultimate liability with respect to these actions will not have a material
adverse effect on the Company's consolidated financial condition, results of
operations or cash flows.
Note 6. 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. 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 7. 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 months
ended March 31, 2005 and 2004:
Three Months Ended
----------------------------
03/31/05 03/31/04
---------- ------------
Net income as reported ...................... $1,500,160 $1,154,003
Pro forma adjustment - additional
compensation expense had SFAS No. 123
been adopted, net of tax .................. (60,411) (16,296)
----------- -----------
Pro forma net income......................... $1,439,749 $1,137,707
=========== ===========
Basic earnings per share as reported ........ $0.33 $0.26
Pro forma effect of compensation expense..... (0.01) 0.00
----------- -----------
Pro forma basic earnings per share........... $0.32 $0.26
=========== ===========
Diluted earnings per share as reported ...... $0.33 $0.26
Pro forma effect of compensation expense..... (0.01) (0.01)
----------- -----------
Pro forma diluted earnings per share......... $0.32 $0.25
============ ===========
Note 8. Net Operating Loss Tax Asset
Our German business has generated cumulative tax net operating loss carry
forwards (NOLs) totaling 7.0 million Euros at March 31, 2005. These NOLs are
being carried forward to offset future taxable income in Germany. The Company
has recorded cumulative deferred tax assets of $3.5 million as of March 31, 2005
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. If the Company concludes that as a
result of actions planned or taken, that the operating results in Germany can
not maintain profitability, or if there are changes to the German 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.
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, but excludes depreciation and amortization. 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
March 31,
--------------------------
2005 2004
---- ----
(Unaudited)
Net sales ................................................ 100.0% 100.0%
------ ------
Cost of goods sold (excluding depreciation and
amortization shown below) ............................. 62.7 62.6
Selling, general and administrative ...................... 17.1 18.4
Research and development ................................. 3.1 2.9
Depreciation and amortization ............................ 5.0 6.4
------ ------
Total operating expenses ................................. 87.9 90.3
------ ------
Operating income ......................................... 12.1 9.7
Interest expense and other ............................... 0.8 1.6
Foreign currency exchange loss ........................... 1.2 0.1
------ ------
Income before taxes ...................................... 10.1 8.0
Provision for income taxes ............................... 3.6 2.5
------ ------
Net income ............................................... 6.5% 5.5%
====== ======
Quarter Ended March 31, 2005 Compared to Quarter Ended March 31, 2004
Net sales for the quarter ended March 31, 2005 increased 10.4% to $23.0 million,
from $20.8 million for the quarter ended March 31, 2004. The Euro strengthened
6.1% compared to the U.S. dollar and as a result sales increased approximately
$0.3 million in the first quarter of 2005. Holographic product sales increased
7.1% to $4.4 million for the quarter ended March 31, 2005, compared to $4.1
million for the quarter ended March 31, 2004. This increase is primarily due to
strong European demand in packaging. Printed product sales increased 12.1% to
$8.7 million, from $7.8 million primarily due to an increase in the Company's
domestic market share as a result of a major competitor withdrawing from the
market. Pharmaceutical product sales increased 24.2% to $3.9 million for the
quarter ended March 31, 2005, from $3.2 million for the quarter ended March 31,
2004. Pharmaceutical product sales increased globally as the Company's customers
expanded their penetration. Security product (mag stripe, signature panels, and
tipping products for credit cards, intaglio-printed products and gift cards)
sales increased 21.4% to $2.7 million, from $2.2 million. This increase is
primarily due to holographic magnetic stripe products in the amount of $263,000.
Sales of specialty pigmented and other simulated metal products decreased 8.6%
to $3.2 million, from $3.5 million, primarily due to the Company exiting low
margin business offset by the increase in the strength of the Euro.
Cost of goods sold for the quarter ended March 31, 2005 increased 10.6% to $14.4
million, from $13.0 million for the quarter ended March 31, 2004. This increase
was primarily due to the increase in sales. The cost of goods sold as a
percentage of net sales for the quarter ended March 31, 2005 increased to 62.7%
from 62.5% for the quarter ended March 31, 2004 primarily due to higher labor
costs of $469,000, offset by improved productivity and better utilization of the
Company's fixed manufacturing costs.
Selling, general, and administrative expenses for the quarter ended March 31,
2005 increased 2.5% to $3.9 million, from $3.8 million for the quarter ended
March 31, 2004. This increase is due primarily to the strength of the Euro
against the U.S. dollar of $69,000. As a percent of net sales these costs were
17.1% for the quarter ended March 31, 2005, and 18.4% for the quarter ended
March 31, 2004. The decrease in percentage is primarily due to the higher sales
volume.
Research and development expenses for the quarter ended March 31, 2005 increased
15.8% to $704,000, from $608,000 for the quarter ended March 31, 2004. This
increase is primarily due to an increase of incentive payment accruals. Research
and development expenses for the quarter ended March 31, 2005 increased as a
percentage of net sales, to 3.1% from 2.9% for the quarter ended March 31, 2004.
This increase in percentage was primarily due to higher costs offset by higher
sales volume.
Depreciation and amortization expenses for the quarter ended March 31, 2005
decreased 12.3% to $1,174,000, from $1,339,000 for the quarter ended March 31,
2004. This decrease was primarily due to assets being fully depreciated.
Depreciation and amortization expense as a percentage of net sales for the
quarter ended March 31, 2005, decreased to 5.0% from 6.4% for the quarter ended
March 31, 2004 primarily due to the higher sales volume.
Operating income for the quarter ended March 31, 2005 increased 37.4% to $2.8
million, from $2.0 million for the quarter ended March 31, 2004. The increase in
operating income is due primarily due to the reasons noted above. Operating
income for the quarter ended March 31, 2005 increased as a percentage of net
sales to 12.1% from 9.7% for the quarter ended March 31, 2004. This increase is
due primarily to the reasons noted above.
Interest expense for the quarter ended March 31, 2005 decreased 9.8% to $279,000
from $299,000, for the quarter ended March 31, 2004. This decrease was due
primarily to the Company's repayment of revolving loans.
Other income for the quarter ended March 31, 2005 increased to $33,300 from
$28,000 for the quarter ended March 31, 2004. This increase is due primarily to
rental income from the acquired Chicago Heights property in February 2004.
The loss on foreign currency exchange for the quarter ended March 31, 2005
increased 1,023.2% to a loss of $277,000 from a loss of $25,000 for the quarter
ended March 31, 2004. This was a result of the weakening of the Euro against the
U.S. dollar.
The effective income tax rate increased to 35.7%, representative of a more
normal effective tax rate for the quarter ended March 31, 2005 from 30.5% for
the quarter ended March 31, 2004.
Net income for the quarter ended March 31, 2005 increased 30.0% to $1.5 million,
from $1.2 million for the quarter ended March 31, 2004. This increase in net
income was due primarily to the factors affecting sales, income and expenses, as
discussed above.
Liquidity and Capital Resources
The Company's cash flow from operations decreased by $0.7 million from a use of
cash of $557,000 in 2005 compared to cash being provided by operations of
$96,000 in 2004 primarily due to the payment of accrued bonuses offset by an
increase in net income of $346,000. Working capital increased by $2.1 million
during the first three months of 2005 as compared to $0.5 million during the
first three months of 2004. The primary reasons for this increase are an
increase of $0.6 million in customer receivables, an increase in inventories of
0.1 million, an increase in deferred income tax assets of $0.1 million, a
decrease in current portion of debt of $0.2 million due to the repayment and
permanent funding of the new Chicago Heights facility, offset by a decrease in
accounts payable accrued compensation and benefits and other accrued expenses of
$2.4 million and a decrease of $1.5 million in cash.
Our German business has generated cumulative tax net operating loss carry
forwards (NOLs) totaling 7.0 million Euros at March 31, 2005. These NOLs are
being carried forward to offset future taxable income in Germany. The Company
has recorded cumulative deferred tax assets of $3.5 million as of March 31, 2005
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. During the first quarter of
operations for 2005, the German operations generated a taxable profit excluding
currency losses. If the Company concludes that as a result of actions planned or
taken, that the operating results in Germany can not maintain profitability, or
if there are changes to the German 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.
At March 31, 2005, the Company had available $11.9 million under the revolving
credit agreement maintained with the Company's primary bank. This agreement,
which matures April 1, 2006, 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 had no material
commitments to purchase capital assets as of March 31, 2005.
Euro Conversion
Member countries of the European Union have established fixed conversion rates
between their existing currencies ("legacy currencies") and one common currency,
the Euro. Since January 1, 2002, the new Euro-denominated notes and coins are in
circulation and legacy currencies have been withdrawn from circulation. The
Company has a manufacturing facility located in a member country (Germany), and
the conversion to the Euro has eliminated currency exchange rate risk for
transactions among the member countries, which for the Company primarily
consists of payments to suppliers. In addition, because the Company uses
foreign-denominated debt to meet its financial requirements and to reduce its
foreign currency risks, certain of these financial instruments are denominated
in Euro to finance European activities. The Company addressed all issues
involved with converting to the new currency, and the conversion did not have a
significant impact on its financial position, results of operations or cash
flows. At March 31, 2005, the Company had total assets of $28.7 million and net
assets of $8.7 million invested in Europe.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments held by the Company for which it is
practicable to estimate that value. The carrying amount of cash equivalents
approximates their fair value because of the short maturity of those
instruments. The estimated fair value of accounts receivable approximated its
carrying value at March 31, 2005 and December 31, 2004 based upon analysis of
their collectability and net realizable value. The estimated fair value of the
Company's long-term debt approximated its carrying value at March 31, 2005 and
December 31, 2004, 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
the interest rate at LIBOR plus 1.5%. The Company executed two interest rate
swap agreements to fix the 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. 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. The Company
does not use derivative financial instruments to address currency or commodity
pricing risks.
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
provide reasonable assurances that information required to be disclosed in
reports filed with the SEC pursuant to the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Commission and that such information is
accumulated and communicated to the Company's Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), as appropriate, to allow timely decisions
regarding required disclosures. Under the supervision and with the participation
of the Company's management, including the CEO and CFO, the Company conducted an
evaluation of the overall effectiveness of the Company's disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered
by this report.
The evaluation of the Company's disclosure controls and procedures by the CEO
and the CFO included a review of the controls' objectives and design, the
operation of the controls, and the effect of the controls on the information
presented in this Quarterly Report. The Company's management, including the CEO
and CFO, does not expect that disclosure controls and procedures can or will
prevent or detect all errors and all fraud, if any, because there are inherent
limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. As a result, a control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Also,
projections of any evaluation of the disclosure controls and procedures to
future periods are subject to the risk that the disclosure controls and
procedures may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A significant deficiency is defined as a control deficiency, or combination of
deficiencies, that adversely affects the Company's ability to initiate,
authorize, record, process or report external financial data reliably in
accordance with generally accepted accounting principles, such that there is
more than a remote likelihood that a misstatement of the Company's financial
statements that is more than inconsequential will not be prevented or detected.
A material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or detected.
Item 5. OTHER INFORMATION, COMMON STOCK REPURCHASES
The following chart summarizes Common Stock repurchases for the three months
ended March 31, 2005:
(c) (d)
Total Maxiumum
number number
(a) shares of of shares
Total purchased that may
number (b) as yet be
of Average part of purchased
shares price publicly under
For the three months ended repur- paid per announced plans or
March 31, 2005 chased share plan programs
January 1, 2005 to January 31, 2005 ..... 6,500 $17.00 - -
February 1, 2005 to February 28, 2005 ... 2,375 $15.42 - -
March 1, 2005 to March 31, 2005.......... 34,471 $21.31 - -
------ ------ ---------- ---------
Total.................................... 43,346 $17.91 - -
====== ====== ========== =========
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 Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of CFO pursuant to 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 first quarter of 2005 and through the date of this filing, the Company
filed a Report on Form 8-K dated May 2, 2005, reporting on Item 1.01 (Entry into
a Material Definitive Agreement), Item 2.02 (Results of Operations and Financial
Condition), Item 8.01 (Other Events) and Item 9.01(Financial Statements and
Exhibits). In accordance with General Instruction B of Form 8-K, the Report
submitted to the Securities and Exchange Commission under Item 2.02 of 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 any 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 May 9, 2005.
CFC INTERNATIONAL, INC.
------------------------------------------
Dennis W. Lakomy
Executive Vice President,
Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)