CTI Industries Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing identifies the registrant as CTI Industries Corporation; the request metadata names YUNHONG GREEN CTI LTD.
Business context
CTI designs, manufactures and distributes novelty balloons, film and packaging products, flexible containers, and vacuum-sealing products. Operations span the United States, Mexico, Europe and the United Kingdom. The company reports one primary business segment.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $13.621 million | $13.159 million | $28.596 million | $28.079 million |
| Gross profit / margin | $3.520 million / 25.8% | $3.026 million / 23.0% | $7.509 million / 26.3% | $6.523 million / 23.2% |
| Operating income (loss) | $250,000 | ($56,000) | $1.169 million | $270,000 |
| Net income (loss) attributable to CTI | $52,000 | ($122,000) | $336,000 | ($77,000) |
| Basic EPS | $0.02 | ($0.04) | $0.10 | ($0.02) |
Q2 consolidated net loss was $83,000, despite income attributable to CTI of $52,000, because the noncontrolling interest recorded a $135,000 loss. For the six-month period, consolidated net income was $255,000 and CTI-attributable income was $336,000.
For the six months, operating cash flow was $3.480 million, compared with $11,000 a year earlier. Investing used $194,000 and financing used $3.225 million, primarily reflecting a $2.086 million reduction in the revolving line and $263,000 of long-term debt repayments. Cash increased $54,000 to $204,000.
At June 30, total current assets were $30.201 million and current liabilities $18.448 million, giving working capital of $11.753 million. Total assets were $39.950 million and equity $12.609 million. Reported current and long-term debt and capital leases totaled approximately $19.1 million, excluding the $506,000 warrant liability. The balance sheet reports a $10.072 million line of credit; MD&A separately states BMO Harris revolving borrowings of $9.581 million. The filing text does not clearly reconcile these values. Available revolver capacity was $777,000.
Changes versus prior comparable periods
- Sales rose 3.5% in Q2 and 1.8% for the first half. Gross margin improved in both periods, which management attributed mainly to improved Mexico subsidiary margins, lower natural latex prices, product mix and manufacturing efficiencies.
- First-half operating income increased to $1.169 million from $270,000; CTI-attributable results shifted from a first-half loss to income.
- Product mix shifted: first-half vacuum-sealing sales increased 13.3% to $5.464 million and other sales rose to $3.288 million, including home-container products and Candy Blossoms/Candy Loons. Latex balloon sales fell 23.0% to $4.608 million.
- First-half interest expense increased to $717,000 from $519,000. Selling and advertising/marketing expenses also increased, partly due to the consolidated variable-interest entity and warranty/return costs for vacuum-sealing products.
Outlook, risks and unusual items
- Management believes available credit and internally generated funds will meet working-capital needs for at least the next 12 months. No quantified earnings or revenue guidance is provided.
- Liquidity depends significantly on bank financing. The company reported compliance with financial covenants at June 30, 2015, after prior amendments and waivers; the BMO Equity loan bears 11.5% interest. BMO Harris facility maturity is July 2017.
- Customer concentration is significant: the two largest customers represented 29.4% and 12.9% of first-half sales, and together accounted for 44.7% of net receivables at June 30. Top ten customers generated 66.9% of first-half sales.
- Foreign exchange is a risk: first-half foreign-currency translation reduced other comprehensive income by $463,000, and management cited peso weakness as a factor in lower Mexican balloon sales. The interest-rate swap expired in September 2014.
- Management disclosed ordinary-course legal claims but did not expect a significant effect. The filing lists no applicable additional risk factors. Controls and procedures were reported effective, with no material change in internal control over financial reporting.
- Related-party matters include legal fees paid to a law firm with which the president is associated, officer-affiliated leasing arrangements, and sales to Clever Container, partly owned by the CEO and president’s investment entities. Clever Container receivables were $498,000 at June 30, 2015.
Investor verification priorities
- Reconcile the $10.072 million balance-sheet line of credit with MD&A’s $9.581 million BMO Harris revolver balance and confirm total borrowing availability and covenant headroom.
- Assess customer concentration, receivable collectability and exposure to the two customers representing 44.7% of receivables.
- Determine whether gross-margin improvement and growth in vacuum-sealing and other products are sustainable, considering latex balloon declines and warranty/return costs.
- Review cash conversion and liquidity: operating cash flow benefited from lower receivables and higher payables, while cash remained $204,000 and unused revolver availability was $777,000.
- Evaluate debt service costs, related-party transactions and the effect of foreign currency movements on earnings and equity.