13
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, DC 20549
FORM 10Q
(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, 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
363434526
(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) 8913456
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 April 30, 1998, the Registrant had issued and
outstanding 3,947,438 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 10Q
Page
Part I Financial Information:
Item 1 Financial Statements
Consolidated Balance Sheets March 31, 1998 and
December 31, 1997
3
Consolidated Statements of Income for the three (3)
months ended March 31, 1998 and March 31, 1997 4
Consolidated Statements of Cash Flows for the three (3)
months
ended March 31, 1998 and March 31, 1997 5
Notes to Consolidated Financial Statements 67
Item 2 Managements Discussion and Analysis of Financial
Condition and
Results of Operations 811
Part II Other Information:
Item 6 Exhibits and Reports on Form 8K 12
Signatures 12
Exhibit Index 13
Part I
Item 1. Financial Statements
CFC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS AT
MARCH 31, 1998 AND DECEMBER 31, 1997
March
31, December 31,
1998
1997
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,268,670
$1,841,070
Accounts receivable, less allowance for doubtful accounts of
$742,000 and
$612,000 respectively 6,719,584 6,631,516
Employee receivable 144,085 253,928
Inventories:
Raw materials 1,840,231 1,358,258
Work in process 1,588,252 1,825,356
Finished goods 4,812,450 5,447,990
8,240,933 8,631,604
Prepaid expenses and other current assets 699,468
644,578
Deferred income taxes 641,977 641,977
Total current assets 19,714,717 18,644,673
PROPERTY, PLANT AND
EQUIPMENT, NET 15,066,364 15,095,897
Other assets 1,721,900 1
,758,269
Total assets 36,502,981 35,498,839
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Current portion of longterm debt ..................... $697,914 $
716,079
Accounts payable 3,338,257 3,122,580
Accrued environmental liability 244,937
244,937
Accrued bonus 374,350
76,065
Accrued vacation 304,152
304,730
Other accrued expenses and current liabilities 1,368,804
1,187,390
Total current liabilities 6,328,414 5,651,781
DEFERRED INCOME TAXES 1,974,942
1,974,942
LONGTERM DEBT 7,841,543
7,869,419
MINORITY INTEREST IN CFC APPLIED HOLOGRAPHICS 1,575,295
1,435,371
Total liabilities 17,720,194 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
4,220,784
and 4,218,226 shares issued at March 31, 1998 and December 31,
1997 42,208 42,182
Class B common stock, $.01 par value, 750,000 shares
authorized, 518,169
shares issued and outstanding at March 31, 1998 and December
31, 1997 5,182 5,182
Additional paidin capital 10,492,304
10,464,985
Retained earnings 9,369,442
8,331,850
Cumulative translation adjustment (180,298) (86,160)
19,728,838
18,758,039
Less 273,346 and 193,837 treasury shares of common stock, at
cost
at March 31, 1998 and December 31, 1997 (946,051)
(190,713)
18,782,787 18,567,326
CONTINGENCIES _ _
Total liabilities and stockholders equity $36,502
,981 $ 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 ENDED MARCH 31, 1998 AND 1997
Three Months Ended
March 31,
1998
1997
(Unaudited)
Net sales $12,661,137 $
9,810,048
Cost of goods sold 7,796,135
5,780,563
Gross profit 4,865,002
4,02
9,485
Marketing and selling expenses 1,358,197
1,066,083
General and administrative expenses 1,114,042
852,662
Research and development expenses 366,247
310,1
10
2,838,486
2,228,855
Operating income 2,026,516
1,800,630
Other (income) expenses:
Interest 165,165
76,442
Miscellaneous 19,463
(73,275)
184,628
3,167 Income before income taxes and minority interest
1,841,888 1,797,463
Provision for income taxes 664,392
688,096
1,177,496
1,109,367
Minority interest in income of CFC Applied Holographics
(139,904) (77,939)
Net Income $1,037,592
$
1,031,428
Basic earnings per share $ 0.23 $
0.23
Diluted earnings per share $ 0.23 $
0.23
The accompanying notes are an integral part of the
financial statements.
CFC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Three Months
Ended March 31,
1998
1997
(Unaudited)
Cash flow from operating activities:
Net income $1,037,592 $1,031
,428
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 574,893
521,740
Minority interest in CFC Applied
Holographics 139,924 77,939
Changes in assets and liabilities:
Accounts receivable (121,285)
(471,779)
Inventories
480,852
(186,848)
Prepaid expenses and other current assets
(137,317) (90,503)
Accounts payable 320,773
(37
6,901)
Accrued vacation (534)
30,169
Accrued bonus 298,981
22,610
Accrued expenses and other current liabilities
18,372 291,105
Net cash provided by operating activities
2,612,251
848,960
Cash flows from investing activities:
Additions to property, plant and equipment (508,744)
(387,047)
Decrease in restricted cash investment _
512,137
Net cash (used in)/provided by investing activities
(508,744) 125,090
Cash flows from financing activities:
Repayment of term loans (27,876)
(2,735)
Repayment of capital lease (18,165)
(17,573)
Net proceeds and disbursements of loans to employees
(5,288) (20,797)
Proceeds from issuance of stock 27,345 44,340
Purchase of treasury stock (645,495) _
Net cash (used in)/provided by financing activities
(669,479) 3,235
Effect of exchange rate changes on cash and cash equivalents
(6,428) (12,036)
Increase in cash and cash eqivalents 1,427,600
965,249
Cash and cash equivalents:
Beginning of period 1,841,070
927,703
End of Period $3,268,670 $
1,892,952
The accompanying notes are an integral part of the financial
statements.
CFC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(Unaudited)
Note 1. Basis of Presentation
In the opinion of management, the accompanying unaudited
interim consolidated financial statements contain all
adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of CFC
International, Inc. (the Company) as of March 31, 1998 and
December 31, 1997, the results of operations for the three (3)
months ended March 31, 1998 and 1997, and statements of cash
flows for the three (3) months ended March 31, 1998 and 1997.
The unaudited interim consolidated financial statements
included herein have been prepared pursuant to the rules and
regulations for reporting on Form 10Q. 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 Companys latest annual report on
Form 10K.
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 than 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 availableforsale. Annual financial statements for prior
periods will be reclassified, as required. The Companys total
comprehensive income was as follows:
Three Months Ended
March 31, 1998
1997
Net earnings $1,037,592 $
1,031,428
Less: foreign currency translation adjustment 94,138
120,880
Total comprehensive income $ 943,454 $
910,548
Note 3. Earnings Per Share
March 31, 1998 March 31, 1997
Per
Per
Income Shares Sha Income Shares
Sha
re
re
Basic Earnings Per
Share:
Income available $1,037,5 4,465,60 $.2 $1,031,4 4,517,43
$.2
to Common 92 8 3 28 5 3
Stockholders
Effect of Dilutive
Securities:
Options
exercisable 7,227 14,442
Convertible debt
27,000 214,286
Diluted Earnings $1,064,5 4,687,12 $.2 $1,031,4 4,531,87
$.2
per Share 92 1 3 28 7 3
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company formulates, manufactures, and sells chemicallycomplex,
transferable multilayer 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 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 Companys operating income more than doubled over this fiveyear
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 24.9% over that fiveyear 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 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 Operations
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.
Quarter Ended March 31,
1998 1997
Net sales 100.0% 100.0%
Cost of sales 61.6 58.9
Gross profit 38.4 41.1
Selling, general and administrative 19.5 19.5
Research and development 2.9 3.2
Operating income 16.0 18.4
Interest expense and other 1.5 .1
Income before taxes and minority interest 14.5
18.3
Provision for income taxes 5.2 7.0
Minority interest 1.1 .8
Net income 8.2% 10.5%
Quarter Ended March 31, 1998 Compared to Quarter Ended March
31, 1997
Net sales for the quarter ended March 31, 1998 increased 29.1%
to $12.6 million, from $9.8 million for the quarter ended March
31, 1997. Printed product sales increased 15.5% to $4.5
million, from $3.9 million primarily due to an increase in the
Companys market share. Pharmaceutical product sales increased
12.1% to $2.3 million, from $2.1 million, primarily due to an
increase in Baxter Healthcares European business. Security
product (magstripe, signature panels, and tipping products for
credit cards) sales increased 160.0% to $2.6 million, from $1.0
million. This increase comes primarily from strong sales of the
Companys magstripe product line, and $1.1 million of intaglio
printed documents as a result of the Northern Bank Note
acquisition in September of 1997. Sales of simulated metal and
other pigmented products decreased 6.7% to $1.4 million, from
$1.5 million, as CFC exited markets in which it could not
derive its historic margins. Holographic product sales
increased 30.9% to $1.8 million for the quarter ended March 31,
1998, compared to $1.4 million for the quarter ended March 31,
1997, primarily due to the increased sales to Graphic Packaging
for holographic material for a major beverage company.
Gross profit for the quarter ended March 31, 1998 increased
20.7%
to $4.9 million, from $4.0 million for the quarter ended March
31, 1997. The increase in gross profit was attributable to the
growth in sales. The gross profit margin for the quarter ended
March 31, 1998 decreased to 38.4% from 41.1% for the quarter
ended March 31, 1997. This decrease was primarily caused by
higher labor costs resulting from the increased overtime
required to meet higher sales levels. 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 March 31, 1998 increased 28.8% to $2.5 million from $1.9
million for the quarter ended March 31, 1997. This increase was
primarily due to the additional $400,000 in operating expenses
due to the Northern Bank Note acquisition. Selling, general,
and administrative expenses for the quarters ended March 31,
1998 and March 31, 1997 was unchanged at 19.5% of net sales.
Research and development expenses for the quarter ended March
31, 1998 increased 18.1% to $366,247 from $310,110 for the
quarter ended March 31, 1997. Research and development
expenses for the quarter ended March 31, 1998 decreased as a
percentage of net sales, to 2.9% from 3.2% for the quarter
ended March 31, 1997. This decrease in percentage was primarily
due to the increase in net sales.
Operating income for the quarter ended March 31, 1998 increased
12.5% to $2.0 million, from $1.8 million for the quarter ended
March 31, 1997. The increase in operating income is primarily
due to the increase in net sales. Operating income for the
quarter ended March 31, 1998 decreased as a percentage of net
sales to 16.0% from 18.4% for the quarter ended March 31, 1997.
This decrease is primarily due to a decrease in gross profit as
a percentage of net sales, as explained above.
Interest expense for the quarter ended March 31, 1998 increased
116.1% to $165,165, from $76,442 for the quarter ended March
31, 1997. This increase was primarily due to the financing of
the Northern Bank Note acquisition, and the cost to finance the
new printing press.
Income taxes for the quarter ended March 31, 1998 decreased to
$664,000 from $688,000 for the quarter ended March 31, 1997.
The provision decreased to 5.2% of sales for the quarter ended
March 31, 1998 from 7.0% of sales for the quarter ended March
31, 1997 due to the decrease in operating income as a
percentage of sales. The effective rate decreased to 39.0% for
the quarter ended March 31, 1998 from 40.0% for the quarter
ended March 31, 1997 due to a combination of factors including
the source of taxable income and the current assessment of
outstanding tax issues.
Net income for the quarter ended March 31, 1998 increased .6%
to $1,037,592, from $1,031,428 for the quarter ended March 31,
1997. This increase in net income is primarily due to the
increase in operating income.
Liquidity and Capital Resources
Working capital, consisting predominately of inventories and
receivables, increased from $13.0 million at December 31, 1997
to $13.4 million at March 31, 1997. This increase was
primarily caused by an increase in cash. Cash increased from
$1.8 million at December 31, 1997 to $3.3 million at March 31,
1997, primarily due to cash generated by the Companys
operations. This increase was offset by a $400,000 decrease in
inventory and a $700,000
increase in current liabilities.
During the first quarter of 1998, the Company made no
borrowings against the revolving credit agreement maintained
with the Companys primary bank. This agreement, which expires
April 1, 1999, provides for borrowings of specified percentages
of eligible accounts receivable and inventories, with the total
not to exceed $4,500,000. The Company believes that the net
cash provided by operating activities and amounts available
under the revolving credit agreement are sufficient to finance
the Companys growth.
Recently Issued Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information. The statement requires the
Company to report financial and descriptive information about
its reportable segments, determined using the management
approach (i.e., internal management reporting), in interim and
yearend financial statements. The statement is effective for
the year ending December 31, 1998. Interim disclosures are
not required in the year of adoption.
The Company has not yet determined the impact that SFAS No. 131
will have on its financial statements.
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 1, 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) EXHIBIT INDEX
EXHIBIT 10.1
Purchase Agreement dated March 1, 1998, between the Company
and Baxter Healthcare Corporation.
EXHIBIT 27
Financial Data Schedule
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