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, 1998
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 ( )
As of October 31, 1998, the Registrant had issued and outstanding
3,953,123 shares of Common Stock, par value $.01 per share, and
518,169 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, 1998
and December 31, 1997.................................. 3
Consolidated Statements of Income for the three (3)
months and for the nine (9) months ended
September 30, 1998 and September 30, 1997............... 4
Consolidated Statements of Cash Flows for the nine
(9) months ended September 30, 1998 and
September 30, 1997...................................... 5
Notes to Consolidated Financial Statements.............. 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 7-10
Part II - Other Information:
Signatures................................................... 11
Part I
Item 1. Financial Statements
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET AT
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
September 30, December 31,
1998 1997
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 3,271,124 $ 1,841,070
Accounts receivable, less allowance for doubtful
accounts of $567,000 and $612,000 respectively 8,699,098 6,631,516
Employee receivable ............................ 142,141 253,928
Inventories:
Raw materials .............................. 1,536,785 1,358,258
Work in process ............................ 1,137,220 1,825,356
Finished goods ............................. 5,273,020 5,447,990
------------ ------------
7,947,025 8,631,604
Prepaid expenses and other current assets ...... 765,352 644,578
Deferred income taxes .......................... 641,977 641,977
------------ ------------
Total current assets ....................... 21,466,717 18,644,673
------------ ------------
Property, plant and equipment, net ............. 15,371,077 15,095,897
Other assets ................................... 1,653,789 1,758,269
------------ ------------
Total assets ............................... $ 38,491,583 $ 35,498,839
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .............. $ 660,361 $ 716,079
Accounts payable ............................... 2,721,154 3,122,580
Accrued environmental liability ................ 244,937 244,937
Accrued bonus .................................. 639,360 76,065
Accrued vacation ............................... 250,555 304,730
Other accrued expenses and current liabilities . 2,230,901 1,187,390
------------ ------------
Total current liabilities ................... 6,747,268 5,651,781
------------ ------------
Deferred income taxes .......................... 1,974,942 1,974,942
Long-term debt ................................. 7,648,311 7,869,419
Minority interest in CFC Applied Holographics .. 1,526,165 1,435,371
------------ ------------
Total liabilities ........................... 17,896,686 16,931,513
------------ ------------
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; 4,224,350 and 4,218,226
shares issued at September 30, 1998
and December 31, 1997, respectively .......... 42,243 42,182
Class B common stock, $.01 par value,
750,000 shares authorized; 518,169
shares issued and outstanding at
September 30, 1998 and December 31, 1997,
respectively ................................. 5,182 5,182
Additional paid-in capital ..................... 10,530,389 10,464,985
Retained earnings .............................. 11,179,986 8,331,850
Cumulative translation adjustment .............. (216,852) (86,160)
------------ ------------
21,540,948 18,758,039
Less 273,346 and 193,837 treasury shares
of common stock, at cost at
September 30, 1998 and December 31, 1997
respectively ................................. (946,051) (190,713)
------------ ------------
20,594,897 18,567,326
CONTINGENCIES
Total liabilities and stockholders' equity ..... $ 38,491,583 $ 35,498,839
============ ============
The accompanying notes are an integral part of
the financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997, RESPECTIVELY
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales .............. $ 12,463,874 $ 10,926,765 $ 38,236,121 $ 30,735,310
Cost of goods sold ..... 7,825,132 6,766,936 24,034,559 18,794,389
------------ ------------ ------------ ------------
Gross profit ........... 4,638,742 4,159,829 14,201,562 11,940,921
------------ ------------ ------------ ------------
Marketing and selling
expenses ............. 1,313,603 1,152,144 3,978,979 3,423,951
General and
administrative
expenses ............. 1,212,238 1,006,631 3,554,147 2,852,540
Research and
development
expenses ............. 433,221 332,886 1,195,611 1,002,086
------------ ------------ ------------ ------------
2,959,062 2,491,661 8,728,737 7,278,577
------------ ------------ ------------ ------------
Operating income ....... 1,679,680 1,668,168 5,472,825 4,662,344
Other (income) expenses:
Interest ........... 143,885 125,389 481,808 289,737
Miscellaneous ...... 114,401 8,380 39,200 (29,104)
------------ ------------ ------------ ------------
258,286 133,769 521,008 260,633
------------ ------------ ------------ ------------
Income before income
taxes and minority
interest ............. 1,421,394 1,534,399 4,951,817 4,401,711
Provision for income
taxes ................ 501,586 601,308 1,743,690 1,682,999
------------ ------------ ------------ ------------
919,808 933,091 3,208,127 2,718,712
Minority interest
expense of CFC
Applied Holographics . 88,899 102,530 359,991 189,837
------------ ------------ ------------ ------------
Net income ............. $ 830,909 $ 830,561 $ 2,848,136 $ 2,528,875
Basic earnings ......... $ 0.19 $ 0.18 $ 0.64 $ 0.56
Diluted earnings per
share ................ $ 0.18 $ 0.18 $ 0.62 $ 0.53
The accompanying notes are an integral part of
the financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997 RESPECTIVELY
Nine Months Ended
September 30,
----------------------------
1998 1997
---- ----
(Unaudited)
Cash flow from operating activities:
Net income .................................. $ 2,848,136 $ 2,528,875
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .......... 1,399,377 1,516,105
Minority interest in CFC Applied
Holographics .......................... 90,794 189,837
Changes in assets and liabilities:
Accounts receivable .................. (2,844,534) (1,140,654)
Inventories .......................... 320,863 (1,477,942)
Other current assets ................. 803,815 (282,344)
Accounts payable ..................... 312,265 195,149
Accrued vacation ..................... (54,026) 47,395
Accrued bonus ........................ 566,766 229,071
Accrued expenses and other current
liabilities ......................... 596,354 453,341
----------- -----------
Net cash provided by operating activities ..... $ 4,039,810 $ 2,258,833
----------- -----------
Cash flows from investing activities:
Additions to property, plant and
equipment .................................. (1,723,991) (2,792,870)
Decrease in restricted cash investment
-- 1,510,827
Cash paid for acquired business ............. -- (1,758,327)
----------- -----------
Net cash used in (provided by)
investing activities ........................ (1,723,991) (3,040,370)
----------- -----------
Cash flows from financing activities:
Proceeds from revolving credit
agreement .................................. -- 2,540,719
Proceeds from term loan ..................... -- (437,676)
Repayment of term loans ..................... (221,108) (58,487)
Repayment of capital lease ................ (55,718) (66,491)
Net proceeds/distribution of employee
loans ................................... (891) --
Issuance of stock ......................... 65,465 119,367
Distributions to stockholders ............. (645,495) --
----------- -----------
Net cash provided by (used in)
financing activities ........................ (857,747) 2,097,432
----------- -----------
Effect of exchange rate changes on
cash and cash equivalents ................... (28,018) (3,146)
----------- -----------
Increase (decrease) in cash and
cash equivalents ............................ 1,430,054 1,312,749
Cash and cash equivalents:
Beginning of period ........................... 1,841,070 927,703
=========== ===========
End of Period ................................. 3,271,124 2,240,452
=========== ===========
The accompanying notes are an integral part of
the financial statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(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 financial position of the Company
as of September 30, 1998 and December 31, 1997, the results of operations for
the three (3) months and nine (9) months ended September 30, 1998 and 1997, and
statements of cash flows for the nine (9) months ended September 30, 1998 and
1997.
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.
Note 2. Adoption of New Accounting Standard
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income." This statement requires that
all items recognized under accounting standards as components of comprehensive
income be reported in an annual financial statement that is displayed with the
same prominence as other annual financial statements. This Statement also
requires that an entity classify items of other comprehensive income by their
nature in an annual financial statement. For example, other comprehensive income
may include foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale. Annual financial statements for prior periods will be
reclassified, as required. The Company's total comprehensive income was as
follows:
Nine Months Ended Sept. 30,
---------------------------
1998 1997
---- ----
Net earnings.......................................... $2,848,136 $2,528,875
Less: foreign currency translation adjustment........ 130,692 129,881
Total comprehensive income............................ $2,717,444 $2,398,994
Note 3. Earnings Per Share
September 30, 1998 September 30, 1997
------------------ ------------------
Per Per
Income Shares Share Income Shares Share
Basic Earnings Per Share:
Income available to
Common Stockholders...... $2,848,136 4,467,396 $.64 $2,528,875 4,533,532 $.56
Effect of Dilutive
Securities:
Options exercisable..... 5,574 4,392
Convertible debt........ 80,090 208,035 9,000 214,286
Diluted Earnings
per Share............... $2,928,226 4,681,005 $.62 $2,537,875 4,752,210 $.53
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 furniture and
building products, pharmaceutical products, transaction cards (including credit
cards, debit cards, ATM cards and access cards), and on holographic packaging,
authentication seals and security documents. The Company's net sales increased
from $25.3 million in 1993 to $42.3 million in 1997. During that period, the
Company realized sales dollar growth in all of its major product lines. The
Company's operating income more than doubled over this five-year period,
increasing from $2.8 million, or 11.2% of net sales in 1993 to $6.1 million, or
14.3% of net sales in 1997.
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 1993
to 1997, printed products sales rose from 22.9% to 38.0% of net sales.
Pharmaceutical products sales declined from 25.6% in 1993 to 19.1% of net sales
in 1997 due to the growth of other product lines. Actual pharmaceutical product
sales increased from $6.5 million in 1993 to $8.1 million in 1997, or an
increase of 24.6% over that five-year period. Security products sales increased
from 6.7% in 1993 to 16.0% of net sales in 1997. Holographic products grew from
8.5% in 1993 to 13.4% of net sales in 1997, primarily due to authentication
sales and consumer products packaging.
The Company's 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 Company's 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 Operations
- ---------------------
The following table sets forth, for the periods indicated, certain items from
the Company's consolidated financial statements as a percentage of net sales for
such period.
Quarter ended Sept.30, Nine Months Ended Sept.30,
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales ...................... 100.0% 100.0% 100.0% 100.0%
Cost of sales .................. 62.8 61.9 62.9 61.1
Gross profit ................... 37.2 38.1 37.1 38.9
Selling, general and
administrative ............... 20.2 19.8 19.7 20.4
Research and development ....... 3.5 3.0 3.1 3.3
Operating income ............... 13.5 15.3 14.3 15.2
Interest expense and other ..... 2.1 1.3 1.4 0.9
Income before taxes and minority
interest ..................... 11.4 14.0 12.9 14.3
Provision for income taxes ..... 4.0 5.5 4.6 5.5
Minority interest .............. 0.7 0.9 0.9 0.6
Net income ..................... 6.7% 7.6% 7.4% 8.2%
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997
- -----------------------------------------------------------------------------
Net sales for the quarter ended September 30, 1998 increased 14.1% to $12.5
million, from $10.9 million for the quarter ended September 30, 1997. Printed
products sales increased 14.1% to $4.5 million, from $4.0 million primarily due
to an increase in the Company's market share. Pharmaceutical products sales
increased 11.7% to $2.3 million, from $2.1 million, primarily due to increased
penetration in the European market. Security products (magstripe, signature
panels, and tipping products for credit cards and intaglio-printed products)
sales increased 37.3% to $2.5 million, from $1.8 million. This increase comes
primarily from sales increases in intaglio printed documents as a result of the
acquisition of Northern Bank Note Company ("Northern Bank Note") in September
1997. Sales of simulated metal and other pigmented products decreased 23.2% to
$1.1 million, from $1.4 million, as CFC exited markets in which it could not
derive its historic margins. Holographic products sales increased 20.9% to $2.0
million for the quarter ended September 30, 1998, compared to $1.7 million for
the quarter ended September 30, 1997, primarily due to the increased demand for
eye-catching holographic packaging.
Gross profit for the quarter ended September 30, 1998 increased 11.5% to $4.6
million, from $4.2 million for the quarter ended September 30, 1997. The
increase in gross profit was attributable to growth in sales noted above. The
gross profit margin for the quarter ended September 30, 1998 decreased to 37.2%
from 38.1% for the quarter ended September 30, 1997. This decrease is a result
of an increase in holographic packaging jobs, which have a lower margins,
compared to holographic security jobs. 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 except for subcontracted holographic sales discussed below.
Selling, general and administrative expenses for the quarter ended September 30,
1998 increased 17.0% to $2.5 million from $2.2 million for the quarter ended
September 30, 1997. This increase in expenses was primarily due to the Northern
Bank Note acquisition completed in September 1997. Selling, general and
administrative expenses for the quarter ended September 30, 1998 increased as a
percentage of net sales to 20.2% from 19.8% for the quarter ended September 30,
1997, also due to the Northern Bank Note acquisition. This increase in expense
was primarily due to Northern Bank Note's sales staff.
Research and development expenses for the quarter ended September 30, 1998
increased 30.1% to $433,000 from $333,000 for the quarter ended September 30,
1997. This increase in expense was primarily due to an increase in R & D,
holographic staffing and relocation of the laboratory. Research and development
expense for the quarter ended September 30, 1998 increased as a percentage of
net sales to 3.5% from 3.0% for the quarter ended September 30, 1997.
Operating income for the quarter ended September 30, 1998 increased 0.7% to
$1,680,000, from $1,668,000 for the quarter ended September 30, 1997. Operating
income for the quarter ended September 30, 1998 decreased as a percentage of net
sales to 13.5% from 15.3% for the quarter ended September 30, 1997. This
decrease is primarily due to higher selling, general and administrative
expenses.
Interest expense for the quarter ended September 30, 1998 increased 14.8% to
$144,000, from $125,000 for the quarter ended September 30, 1997. This increase
was primarily due to the financing of the acquisition of Northern Bank Note.
Other expenses for the quarter ended September 30, 1998 increased to $114,000
from $8,000 for the quarter ended September 30, 1997. This increase was the
result of relocating the Oxnard design studio.
Income taxes for the quarter ended September 30, 1998 decreased to $502,000
from $601,000 for the quarter ended September 30, 1997. This was the result of
the decrease in taxable income.
As a result of the above, net income for the quarter ended September 30,
1998 amounted to $831,909 compared to $831,561 for the quarter ended September
30, 1997.
Nine months Ended September 30, 1998 Compared to Nine months
- -------------------------------------------------------------
Ended September 30, 1997
- ------------------------
Net sales for the nine months ended September 30, 1998 increased 24.4% to $38.2
million, from $30.7 million for the nine months ended September 30, 1997.
Printed product sales increased 12.6% to $13.5 million, from $12.0 million
primarily due to an increase in the Company's market share. Pharmaceutical
product sales increased 7.3% to $6.8 million from $6.3 million, primarily due to
the inventory build up for a substantial Baxter Healthcare acquisition in Italy
during the first quarter of 1998. Security product (magnetic stripe, signature
panels and tipping products for transaction cards, and intaglio-printed
documents) sales increased 96.8% to $7.7 million, from $3.9 million. This
increase comes primarily from increased sales revenue resulting from the
Northern Bank Note acquisition in September 1997. Sales of simulated metal and
other pigmented products decreased 15.5% to $3.6 million, from $4.3 million, as
CFC continues to focus on larger, higher margin accounts in this category.
Holographic product sales increased 55.6% to $6.6 million for the nine months
ended September 30, 1998, compared to $4.2 million for the nine months ended
September 30, 1997, primarily due to the increased sales of holographic
packaging material for a major beverage company and other eye-catching
holographic packaging applications.
Gross profit for the nine months ended September 30, 1998 increased 18.9% to
$14.2 million, from $11.9 million for the nine months ended September 30, 1997.
The increase in gross profit was primarily due to the increase in sales. The
gross profit margin for the nine months ended September 30, 1998 decreased to
37.1% from 38.9% for the nine months ended September 30, 1997. This decrease in
gross profit as a percentage of net sales was primarily caused by the need to
subcontract $600,000 of holographic sales in the second quarter 1998 to meet
customer delivery requirements, which resulted in a 10% gross margin. To prevent
this from reoccurring, the Company has ordered another holographic embosser and
anticipates its installation in the fourth quarter of this year. 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 except for the above noted subcontracted
sales.
Selling, general and administrative expenses for the nine months ended September
30, 1998 increased 20.0% to $7.5 million from $6.3 million for the nine months
ended September 30, 1997. This increase in expense was primarily due to the
Northern Bank Note acquisition. Selling, general and administrative expenses for
the nine months ended September 30, 1998 decreased as a percentage of net sales
to 19.7% from 20.4% for the nine months ended September 30, 1997 due to the
increase in net sales compared to selling, general and administrative expenses.
Research and development expenses for the nine months ended September 30, 1998
increased 19.3% to $1,196,000 from $1,002,000 for the nine months ended
September 30, 1997. This increase in expenses was primarily due to an increase
in R&D holographic resources. Research and development expense for the nine
months ended September 30, 1998 decreased as a percentage of net sales, to 3.1%
from 3.3% for the nine months ended September 30, 1997.
Operating income for the nine months ended September 30, 1998 increased 17.4% to
$5.5 million, from $4.7 million for the nine months ended September 30, 1997.
Operating income for the nine months ended September 30, 1998 decreased as a
percentage of net sales to 14.3% from 15.2% for the nine months ended September
30, 1997. This decrease is primarily due to a decrease in gross profit as a
percentage of sales and an increase in selling, general and administrative
expenses explained in the foregoing.
Interest expense for the nine months ended September 30, 1998 increased 66.3% to
$482,000, from $290,000 for the nine months ended September 30, 1997. This
increase was primarily due to the financing of the Northern Bank Note
acquisition.
Income taxes for the nine months ended September 30, 1998 increased 3.6% to
$1,744,000 from $1,683,000 for the nine months ended September 30, 1997. This
was primarily the result of the increase in operating income.
As a result of the foregoing, net income for the nine months ended
September 30, 1998 increased 12.6% to $2.8 million, from $2.5 million for
the nine months ended September 30, 1997.
Liquidity and Capital Resources
- -------------------------------
Working capital, consisting predominately of inventories and receivables,
increased from $13.0 million at December 31, 1997 to $14.7 million at September
30, 1998. This increase was primarily caused by a $2.1 million increase in trade
receivables due to growth in the Company's sales, offset by a decrease in
inventory of $700,000 primarily due to better asset utilization. Cash increased
from $1.8 million at December 31, 1997 to $3.3 million at September 30, 1998,
primarily due to strong cash flow from operating activities.
During the first nine months of 1998, the Company made no borrowings against the
revolving credit agreement maintained with the Company's primary bank. This
agreement, which expires April 1, 1999, 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.
Year 2000 Readiness
- -------------------
The Company has completed the majority of the work required to upgrade its
computerized systems for Year 2000 compliance. It is fully expected that all
systems will be converted by the end of the first quarter of 1999. The Company
expects the total costs of this conversion to be less than $200,000. The Company
is in the process of polling all significant suppliers to determine their
preparedness for Year 2000. It is expected that this data will be collected and
determinations completed by the end of the first quarter of 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned; thereunto duly authorized, on November ___, 1998.
CFC INTERNATIONAL, INC.
Dennis W. Lakomy
Vice President, Chief Financial Officer,
Secretary, and Treasurer
(Principal Financial Officer)
Jeffrey E. Norby
Controller
(Principal Accounting Officer)