11
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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
Registrants telephone number, including
area code: (708) 891-3456
Indicated by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d)
of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was
required to file such reports), and
(2) has been subject to such filing
requirements for the past 90 days.
YES ( X ) NO ( )
As of July 31, 1997, the Registrant had issued and
outstanding 3,996,206 shares of Common Stock, par value $.01
per share, and 523,404 shares of Class B Common Stock, par
value $.01 per share.
CFC INTERNATIONAL, INC.
INDEX TO FORM 10-Q
Page
Part I - Financial Information:
Item 1 - Financial Statements
Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996
3
Consolidated Statements of Income for the three (3)
months and for the six (6)
months ended June 30, 1997 and June 30, 1996 4
Consolidated Statements of Cash Flows for the six (6)
months ended
June 30, 1997 and June 30, 1996 5
Notes to Consolidated Financial Statements 6
Item 2 - Managements Discussion and Analysis of Financial
Condition and
Results of Operations 7-9
Part II - Other Information:
Item 5 - Other Information 10
Item 6 - Exhibits and Reports on Form 8-K 10
Signatures 11
Part I
Item 1. Financial Statements
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET AT
JUNE 30, 1997 AND DECEMBER 31, 1996
June
30, December 31,
1997
1996
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,891,303 $927,703
Accounts receivable, less allowance for doubtful accounts of
$559,701 and
$565,000 respectively 6,288,619 5,996,657
Employee receivable 256,600 220,833
Inventories:
Raw materials 1,515,442 837,307
Work in process 1,656,183 1,086,308
Finished goods 5,471,829 5,142,558
8,643,454 7,066,173
Prepaid expenses and other current assets 853,590
392,593
Deferred income taxes 651,141 663,520
Total current assets 18,584,707 15,267,479
Property, plant and
equipment, net 11,879,696 10,866,717
Other assets 375,348 5
61,085
Restricted Cash 166,399
1,510,827
Total assets 31,006,150
28,206,108
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ..................... $350,531
$
368,124
Accounts payable 3,235,383 2,558,486
Accrued environmental liability 300,000 244,937
Accrued bonus 410,109
200,290
Accrued vacation 272,405
236,422
Accrued corporate income taxes 327,996
263,251
Other accrued expenses and current liabilities 794,472
761,256
Total current liabilities 5,690,896 4,632,766
Deferred income taxes 1,785,740 1,785,740
Long-term debt 5,503,556 5,564,027
Minority interest in CFC Applied Holographics 1,232,547
1,145,240
Total liabilities 14,212,739 13,127,773
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;
4,152,348
and 4,132,605 shares issued at June 30, 1997 and December 31,
1996
respectively 41,522 41,326
Class B common stock, $.01 par value, 750,000 shares
authorized; 523,404
and 534,030 shares issued and outstanding at June 30, 1997
and December 31, 1996 respectively 5,234
5,340
Additional paid-in capital 10,223,129
10,139,248
Retained earnings 6,808,961
5,110,647
Cumulative translation adjustment (95,100) (27,891)
16,983,746
15,268,670
Less 156,142 treasury shares of common stock, at cost at June
30, 1997 and
December 31, 1996 (190,335)
(190,335)
16,793,411
15,078,335
CONTINGENCIES
Total liabilities and stockholders equity $31,006
,150 $ 28,206,108
The accompanying notes are an integral part of the financial
statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS
ENDED
JUNE 30, 1997 AND 1996, RESPECTIVELY
Three Months Ended June 30, Six
Months Ended June 30,
1997 1996 1997
1996 (Unaudited)
(Unaudited)
Net sales $9,998,497$ 9,885,634 $
19,808,545
$ 19,426,131
Cost of goods sold 6,236,758 5,702,229
12,017,321 11,336,958
Gross profit 3,761,739 4,183,405
7,791,224 8,089,173
Marketing and selling expenses 1,052,554 902,101
2,271,807 1,825,521
General and administrative expenses 1,146,417 985,176
1,845,909 1,904,309
Research and development expenses 369,222 314,420 679,332
633,011
Patent litigation expenses 0 36,889 0 36,889
2,568,193 2,238,586
4,797,048 4,399,730
Operating income 1,193,546 1,944,819
2,994,176 3,689,443
Other (income) expenses:
Interest 87,906 62,019 164,348 122,457
Miscellaneous 35,791 1,070 (37,484) 16,527
123,697 63,089 126,864 138,984
Income before income taxes and minority interest
1,069,849
1,881,730 2,867,312 3,550,459
Provision for income taxes 393,595 705,794
1,081,691
1,351,734
676,254 1,175,936
1,785,621
2,198,725
Minority interest expense of CFC Applied Holographics (9,368)
(69,109) (87,307) (69,109)
Net income $666,886 $1,106,827
1,698,314
2,129,616
Net income per share $ 0.15 $ 0.24 $ 0.38$
0.47
Weighted average number of common stock and common stock
equivalents 4,531,277
4,519,734 4,524,355 4,508,779
The accompanying notes are an integral part of the financial
statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 RESPECTIVELY
Six Months Ended
June 30,
1997
1996
(Unaudited)
Cash flow from operating activities:
Net income $1,698,314 $
2,129,616
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,043,795
758,143
Minority interest in CFC Applied Holographics
87,307 69,109
Changes in assets and liabilities:
Accounts receivable (330,813)
(152,325)
Inventories
(1,610,297)
(961,310)
Employee receivable (35,767)
(57,988)
Prepaid expenses and other current assets
(340,257)
(191,509)
Accounts payable 677,063
325,571
Accrued bonus 209,819
(288,288)
Accrued expenses and other current liabilities
235,194 (829,282)
Net cash provided by operating activities
1,634,358
801,737
Cash flows from investing activities:
Decrease in restrictive cash additions to property, plant and
equipment (2,014,412)
(1,021,638)
Decrease (increase) in restricted cash investment
1,344,428 (3,396,658)
Net cash used in (provided by) investing activities
669,984 (4,418,296)
Cash flows from financing activities:
Proceeds from revolving credit agreements 0
3,670,000
Repayments of revolving credit agreements 0
(3,686,496)
Repayment of term loans (30,611)
(55,752)
Repayment of capital lease (47,452)
(33,911)
Borrowing under IRB
3,855,000
Proceeds from minority interest payments
(142,036)
Issuance of stock 83,971 26,955
Distributions to stockholders 0 (800
,000)
Net cash provided by financing activities 5,909
2,833,760
Effect of exchange rate changes on cash and cash equivalents
(6,683) (35,680)
Increase (decrease) in cash and cash eqivalents
963,600
(818,479)
Cash and cash equivalents:
Beginning of period 927,703 916,480
End of Period $1,891,303 $
98,001
The accompanying notes are an integral part of the financial
statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS JUNE 30,
1997 AND 1996
(Unaudited)
1. 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 financial position of the Company as of
June 30, 1997 and December 31, 1996, the results of operations
for the three (3) months and six (6) months ended June 30, 1997
and 1996, and statements of cash flows for the three (3) months
and six (6) months ended June 30, 1997 and 1996.
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 independent audit.
2. In February, 1997 the Financial Accounting Standards
Board (FASB) issued Statement No. 128, Earnings Per Share,
which is effective for periods ending after December 15, 1997.
Adoption of FASB No. 128 is not expected to have a material
impact on the Companys results of operations.
3. In June, 1997 the FASB issued Statement No. 130, Reporting
Comprehensive Income, which is effective for periods beginning
after December 15, 1997. Adoption of FASB No. 130 is not
expected to have a significant impact on the Companys
consolidated financial statements.
4. In June, 1997 the FASB issued Statement No. 131,
Disclosures about Segments of an Enterprise and Related
Information, which is effective for periods beginning after
December 15, 1997. The Company is currently evaluating the
impact that this statement will have on their consolidated
financial statements.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Overview
The Company formulates, manufactures, and sells
chemically-
complex, transferable multi-layer coatings for use in
many
diversified markets such as furniture and building
products, pharmaceutical products, transaction cards
(including credit
cards, debit cards, ATM cards, and access cards), and
on
holographic authentication seals. The Companys net
sales
increased 66.1% from $22.4 million in 1992 to $37.2 million
in
1996. During that period, the Company realized sales
dollar
growth in all of its major product lines. The
Companys
operating income more than doubled over this four-year
period,
increasing from $1.8 million, or 8.0% of net sales in 1992
to
$5.1 million, or 13.6% of net sales in 1996.
The Company has experienced, and expects to
continue
experiencing, shifts in the relative sales and growth of
its
various products over time. The Company believes that
such
shifts are in the ordinary course of business and are
indicative of its focus on specific niche markets. During
the period from
1992 to 1996, printed products sales rose from 19.6% to 39.3%
of net sales. Pharmaceutical products sales declined from 26.2%
in 1992 to21.2% of net sales in 1996 due to the growth of
other
product lines. Actual pharmaceutical product sales
increased
from $5.9 million in 1992 to $7.9 million in 1996, or an
increase of 35.5% over that four-year period. Security
products sales increased from 6.9% in 1992 to 10.3% of
net sales in 1996.
Holographic products grew from 3.5% in 1992 to 11.6% of net
sales in 1996.
The Companys gross profit reflects all direct product costs
and direct labor, quality control, shipping and
receiving,
maintenance, process engineering, plant management, and
a
substantial portion of the Companys depreciation
expense.
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, related depreciation, and experimental materials.
Results of Operation
The following table sets forth, for the periods
indicated,
certain items from the Companys consolidated
financial
statements as a percentage of net sales for such period.
Six Months Ended
Quarter Ended June 30,
June 30,
1997 1996 1997
1996
(unaudited) (unaudited)
Net sales 100.0% 100.0% 100.0%
100.0%
Cost of sales 62.4 57.7 60.7
58.4
Gross profit 37.6 42.3 39.3
41.6
Selling, general and administrative 22.0
19.4 20.8 19.3
Research and development 3.7 3.2
3.4
3.3
Operating income 11.9 19.7
15.1
19.0
Interest expense and other 1.2 .6
0.6
0.7
Income before taxes and minority interest
10.7
19.1 14.5 18.3
Provision for income taxes 3.9 7.1
5.5
7.0
Minority interest .1
.7 0.4 0.3
Net income 6.7% 11.3%
8.6% 11.0%
Quarter Ended June 30, 1997 Compared to Quarter Ended June 30,
1996
Net sales for the quarter ended June 30, 1997 increased 1.1%
to
$10.0 million, from $9.9 million for the quarter ended June
30, 1996. Printed products sales increased 8.7% to $4.2 million,
from $3.8 million primarily due to an increase in the Companys
market share. Pharmaceutical products sales increased 10.2%
to $2.1 million, from $1.9 million, primarily due to growth in
the export market.Security products (magstripe, signature
panels, and
tipping products for credit cards) sales decreased 3.6%
to
$1,093,000, from $1,134,000. This decrease comes primarily
from the average selling price declining in signature panels.
Sales of simulated metal and other pigmented products
decreased 22.4% to
$1.5 million, from $1.9 million, as CFC exited markets in which
it could not derive its historic margins. Holographic products
sales increased 4.6% to $1,144,000 for the quarter ended June
30, 1997, compared to $1,094,000 for the quarter ended
June 30, 1996, primarily due to the increased sales to
SmithKline Beecham for holographic packaging for its
Aquafresh whitening
formula
toothpaste and to Intel for authentication seals for the
Pentium Microprocessor.
Gross profit for the quarter ended June 30, 1997 decreased
10.1%
to $3.8 million, from $4.2 million for the quarter ended June
30, 1996. The decrease in gross profit was attributable to less
than forecasted growth in sales and an increase in overtime
costs and fixed costs related to the expansion to house and
operate the Companys new rotogravure printing press. The gross
profit margin for the quarter ended June 30, 1997 decreased to
37.6% from 42.3%
for the quarter ended June 30, 1996. Although the Company does
not fully allocate all costs on a product line basis, the
Company believes that its gross profit margin typically
is not
substantially different for any of its major product categories.
Selling, general, and administrative expenses for the quarter
ended June 30, 1997 increased 14.3% to $2,199,000 from $1,924,000
for the quarter ended June 30, 1996. Selling, general, and
administrative expenses for the quarter ended June 30, 1997
increased as a percentage of net sales to 22.0% from 19.4% for
the quarter ended June 30, 1996. This increase in percentage
was primarily due to the additional investment in resources in
the Pacific Rim and are time sales promotion related expenses.
Research and development expenses for the quarter ended June
30, 1997 increased 3.7% to $369,222 from $314,420 for the
quarter ended June 30, 1996. Research and development expense
for the quarter ended June 30, 1997 increased as a percentage
of net sales, to 3.7% from 3.2% for the quarter ended June 30,
1996. This increase in percentage was primarily due to an
increase in R & D operating expenses.
Operating income for the quarter ended June 30, 1997 decreased
38.6% to $1.2 million, from $1.9 million for the quarter ended
June 30, 1996. Operating income for the quarter ended June 30,
1997 decreased as a percentage of net sales to 11.9% from 19.7%
for the quarter ended June 30, 1996. This decrease is
primarily due to the decrease in gross profit and an increase
in selling expenses.
Interest expense for the quarter ended June 30, 1997
increased 41.7% to $87,906, from $62,019 for the quarter
ended June 30, 1996. This increase was primarily due to the
financing of the new, eight- station, rotogravure printing
press to service the printed products market.
Income taxes for the quarter ended June 30, 1997 decreased
to $394,000 from $706,000 for the quarter ended June 30,
1996. This was primarily the result of the decrease in
operating income.
Net income for the quarter ended June 30, 1997 decreased
39.7%
to $667,000, from $1,107,000 for the quarter ended June
30, 1996. This decrease in net income is primarily due
to the decrease in operating income.
Six months Ended June 30, 1997 Compared to Six months
Ended June 30, 1996
Net sales for the six months ended June 30, 1997 increased
2.0%
to $19.8 million, from $19.4 million for the six months
ended June 30, 1996. Printed product sales increased 10.4%
to $8.0 million, from $7.3 million primarily due to an
increase in the Companys market share. Pharmaceutical
product sales increased 1.1% to
$4,212,000 from $4,164,000, primarily due
to
international growth in the second quarter of 1997.
Security
product (magnetic stripe, signature panels, and
tipping
products for transaction cards) sales increased 5.6%
to
$2,093,000, from $1,982,000. This increase comes
primarily from strong sales of the Companys magstripe
product line. Sales of simulated metal and other pigmented
products decreased 18.4% to $2.9 million, from $3.6 million,
as CFC continues to focus on larger, higher margin
accounts in this category. Holographic product sales
increased 4.8% to $2.5 million for the six months ended
June 30, 1997, compared to $2.4 million for the six months
ended June 30, 1996, primarily due to the increased sales
to SmithKline Beecham for holographic packaging for its
Aquafresh whitening formula toothpaste and to Intel for
authentication seals for the Pentium Microprocessor.
Gross profit for the six months ended June 30, 1997
decreased 3.7% to $7.8
million, from $8.1 million for the six months
ended June 30, 1996. The decrease in gross profit
was attributable to less than forecasted growth in sales
and an increase in overtime costs and fixed costs as
related to the expansion to house and operate the new
printing press and depreciation of the same. The gross
profit margin for the six months ended June 30, 1997
decreased to 39.3% from 41.6%
for
the six months ended June 30, 1996. Although the Company
does not fully allocate all costs on a product line
basis, the Company believes that its gross profit margin
typically is not substantially different for any of
its major
product
categories.
Selling, general, and administrative expenses for the
six months ended June 30, 1997 increased 9.3% to $4.1 million
from $3.8 million for the six months ended June 30, 1996.
Selling, general, and administrative expenses for the six
months ended June 30, 1997 increased as a percentage of net
sales to 20.8%
from 19.4% for the six months ended June 30, 1996.
This
increase in percentage was primarily due to the
additional investment in resources in the Pacific Rim.
Research and development expenses for the six months ended
June
30, 1997 increased 7.3% to $679,332 from $633,011 for the
six months ended June 30,1996. Research and development
expense
for the six months ended June 30, 1997 increased as
a percentage of net sales, to 3.4% from 3.3% for the six
months ended June 30, 1996. This increase in percentage was
primarily due to an increase in R & D operating expenses.
Operating income for the six months ended June 30,
1997 decreased 18.8% to $3.0 million, from $3.7 million for
the six months ended June 30, 1996. Operating income for
the six months ended June 30, 1997 decreased as a
percentage of net sales to 15.1%
from 18.9% for the six months ended June 30,
1996. This decrease is primarily due to a decrease in
gross
profit and an increase in selling expenses in the Pacific
Rim and Europe.
Interest expense for the six months ended June 30,
1997 increased 34.2% to $164,348, from $122,457 for
the six months
ended June 30, 1996. This increase was primarily due to
the financing of the new, eight-station, rotogravure printing
press to service the printed products market.
Income taxes for the six months ended June 30, 1997
decreased to $1.1 million from $1.4 million for the six months
ended June 30, 1996.This was primarily the result of the
decrease in
operating income.
Net income for the six months ended June 30, 1997
decreased 20.3% to $1.7 million, from $2.1 million for the
six months ended June 30, 1996. This decrease in net income
is primarily due to the decrease in operating income.
Liquidity and Capital Resources
Working capital, consisting predominately of inventories
and receivables, increased from $10.6 million at December 31,
1996 to $12.9 million at June 30, 1997. This increase was
primarily caused by a $292,000 increase in trade
receivables due to growth in the Companys export business,
which is typically sold with longer terms and an
increase in inventory of $1,577,000
primarily to support printed products. Cash
increased from $927,703 at December 31, 1996 to $1,891,303
at June 30, 1997, primarily due to cash flow from
operating activities. Investment in equipment was financed
primarily by use of the restrictive cash proceeds from the
Illinois Revenue Bond offering.
During the first six months of 1997, the Company made
no borrowings against the revolving credit agreement
maintained with the Companys primary bank. This agreement,
which expires April 1, 1998, provides for unsecured
borrowings. The Company believes that it has sufficient
capital resources from funds generated from operations as
well as available borrowing facilities to support its
future capital needs.
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 August 1, 1997.
CFC INTERNATIONAL, INC.
Dennis W. Lakomy
Vice President, Chief
Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)
/s/
Jeffrey E. Norby
Controller
(Principal Accounting Officer)