CTI Industries Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 19, 2019. The filing identifies the registrant as CTI Industries Corporation (NASDAQ: CTIB), which differs from the company name in the request metadata.
Business context and results
CTI designs, manufactures and distributes balloons, packaging films and flexible containers, and sells vacuum-sealing and home-organization products. It operates primarily as one business segment, with operations in the United States, Mexico and Europe.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $12.41M | $15.98M | $24.94M | $29.96M |
| Gross profit / margin | $2.54M / 20.5% | $3.80M / 23.7% | $4.53M / 18.2% | $6.66M / 22.2% |
| Operating income (loss) | $0.34M | $0.85M | $(0.40)M | $0.70M |
| Net income (loss) attributable to CTI | $(3.09)M | $0.25M | $(3.98)M | $(0.21)M |
| Basic and diluted EPS | $(0.81) | $0.07 | $(1.04) | $(0.06) |
Q2 sales declined about 22% year over year; first-half sales fell about 17%. The $3.0M non-cash charge recorded in Q2 in anticipation of divesting or liquidating Clever Container and two European sales subsidiaries drove much of the reported net loss. Interest expense was $0.52M in Q2 and $1.06M for the first half.
Cash flow, liquidity and debt
- First-half operating cash flow was $2.58M, versus cash used of $0.27M a year earlier. The cash-flow statement includes a $3.0M source from other non-current assets, alongside cash benefits from lower receivables and higher trade payables; the reported operating cash flow should therefore be assessed for sustainability.
- Cash was $0.18M at June 30, down from $0.43M at December 31, 2018. Working capital was $1.94M, compared with $2.80M at year-end.
- Current liabilities were $29.38M and current assets were $31.32M. The balance sheet reported a $12.43M revolving-credit balance and $4.52M of current notes payable. Long-term debt was reclassified as current because of covenant noncompliance.
- On August 1, 2019, PNC issued a default and reservation-of-rights letter. Further advances were at the bank’s discretion; CTI said it had no assurance of continued funding. Management disclosed substantial doubt about the company’s ability to continue as a going concern.
Changes, outlook and risks
- Foil-balloon sales fell 24% in Q2 and 20% in the first half, with management citing helium supply shortages and higher pricing. Latex-balloon sales also declined. First-half vacuum-sealing sales rose 18%; management said a newer smaller-format machine sold well and customers largely accepted tariff-related price increases.
- Sales were concentrated: the top three customers represented 61.3% of Q2 sales and 57.3% of first-half sales. Two customers each exceeded 10% of sales.
- Management is pursuing financing, a possible facility sale-leaseback, covenant resolution and a simpler corporate structure. A previously attempted major capital transaction did not produce a commitment. The filing provides no formal earnings or revenue guidance and says financing plans may not succeed.
- CTI announced plans to divest its interest in Clever Container and eliminate two European sales subsidiaries; the transactions were not complete as of the filing. The company also considered changes to its corporate structure, including whether to remain public, without reaching a conclusion.
- The independent auditor resigned in April 2019. This quarterly report was prepared without auditor review, and the company said it might amend the filing after hiring a replacement auditor.
- CTI adopted ASC 842 lease accounting in 2019, recording lease right-of-use assets and liabilities. Management concluded disclosure controls were effective at June 30 after additional procedures addressing a previously reported internal-control material weakness.
Important facts for investors to verify
- Whether PNC continued making advances, and whether CTI cured covenant defaults or obtained replacement financing after the August 1 notice.
- Whether financing, a sale-leaseback or subsidiary divestitures were completed, and their proceeds and effects on liquidity and consolidation.
- What drove the $3.0M other non-current-asset cash-flow item and the related $3.0M expense/reserve, and whether the operating cash flow is repeatable.
- Whether a replacement auditor was engaged and whether the company amended or obtained a review of this 10-Q.
- Whether sales, gross margins, helium supply and customer concentration improved after June 30.