CTI Industries Corporation — Q2 2013 Form 10-Q
Issuer and period: The filing is for CTI Industries Corporation, not the “YUNHONG GREEN CTI LTD.” named in the request metadata. It covers the quarter and six months ended June 30, 2013; the interim financial statements are unaudited. CTI makes and sells balloon products, packaging films, pouches, and related products.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $13.03 million | $11.82 million | $26.38 million | $25.62 million |
| Gross profit / margin | $2.48 million / 19.0% | $2.35 million / 19.9% | $5.46 million / 20.7% | $5.45 million / 21.3% |
| Operating income / margin | $291,000 / 2.2% | $13,000 / 0.1% | $821,000 / 3.1% | $856,000 / 3.3% |
| Net income (loss), consolidated | ($56,000) | ($96,000) | $65,000 | $313,000 |
| Net income (loss) attributable to CTI | ($56,000) | ($78,000) | $74,000 | $311,000 |
| Basic and diluted EPS | ($0.02) | ($0.02) | $0.02 | $0.10 |
| Operating cash flow | Not separately stated | Not separately stated | $1.65 million | $743,000 |
Q2 sales rose 10.3%, while first-half sales increased 2.9%. First-half capital spending was $956,000; financing activities used $582,000. Cash increased by $108,000 in the first half, ending at $459,000.
Liquidity, debt, and financial position
- At June 30, current assets were $26.23 million and current liabilities were $14.68 million, for working capital of $11.54 million. Management reported $3.0 million available under the revolving credit facility.
- The balance sheet reports a $5.88 million line of credit, $349,000 of current notes payable, $7.67 million of long-term notes payable, $1.12 million of subordinated officer notes, and $155,000 of capital lease obligations. It also reports $449,000 of checks written in excess of bank balance.
- Total assets were $36.82 million, compared with $37.75 million at December 31, 2012. Total equity was $12.39 million.
- Management said financing and internally generated funds should cover working-capital needs for at least 12 months. The company reported compliance with revised lender covenants at June 30, 2013.
Material changes and management commentary
- Q2 sales growth was led by pouches and vacuum-sealing products, up 83.9% to $3.09 million; the open-top pouch, roll, and machine category accounted for most of the increase. The Ziploc-branded line was available in approximately 6,000 retail outlets by quarter-end.
- First-half pouch sales rose 39.0% to $5.02 million. Latex balloon sales increased 7.2% to $6.00 million, while metalized balloon sales declined 1.0% to $12.34 million and film-product sales declined 23.2% to $2.18 million.
- Cost of sales rose to 81.0% of Q2 sales from 80.1%; management cited $93,000 of Q2 rebate costs. First-half cost of sales was 79.3% of sales versus 78.7% a year earlier.
- Operating income improved sharply in Q2, but the company still recorded a net loss, primarily amid $206,000 interest expense and a $171,000 foreign-currency transaction loss. For the first half, interest and foreign-currency losses contributed to total other expense of $695,000, versus $340,000 in the prior-year period.
- Interest expense increased, in part due to the $5 million BMO Equity financing entered into in July 2012, bearing 11.5% interest. In April 2013, amendments changed leverage covenant requirements and definitions and required fees of $20,000 and $12,500. No formal revenue or earnings forecast is provided.
Risks, contingencies, and unusual items
- Customer concentration: The top three customers represented 50.1% of first-half sales, and the top ten represented 70.0%. Two customers each exceeded 10% of first-half sales; together they accounted for 42.1%. Film sales were particularly concentrated, with approximately 97.6% of first-half laminated-film sales to one principal customer.
- Foreign exchange and supply: The company does not hedge foreign-currency transaction exposure; Q2 and first-half 2013 included currency transaction losses. Management also attributed some metalized-balloon sales weakness to limited helium supply and sales timing.
- Financing and covenants: Liquidity depends significantly on bank financing. Covenant requirements were amended, and management’s 12-month liquidity expectation depends on availability of financing and internally generated cash.
- Related parties: The filing discloses payments to businesses associated with the CEO and legal services from a firm associated with the president/CFO, as well as related-party loans and leasing arrangements.
- Legal matters: The company reports claims arising in the ordinary course of business; management did not expect their resolution to materially affect financial position or results. Part II lists no legal proceedings.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for CTI Industries Corporation, despite the different company name in the request metadata.
- Track whether pouch-line retail distribution converts into sustained sales and profitability, and whether customer concentration changes.
- Review available revolver capacity, debt maturities and costs, and continued compliance with amended lender covenants.
- Assess the persistence of gross-margin pressure, foreign-exchange losses, and helium supply constraints.
- Reconcile the balance-sheet line-of-credit amount with management’s separate disclosure of the Harris revolving balance and facility availability; the filing does not clearly explain the difference.