CTI Industries Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. The filing identifies the registrant as CTI Industries Corporation, not YUNHONG GREEN CTI LTD.; verify the filing-to-company match.
Business context
CTI designs, manufactures and distributes novelty balloons, packaging films and flexible containers, and sells vacuum-sealing and home-organization products. It operates primarily as one business segment, with facilities in Illinois and Mexico. Results are unaudited interim results and may not indicate full-year performance.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $13.48m | $14.88m | $42.83m | $43.48m |
| Gross profit | $3.41m | $4.11m | $11.17m | $11.61m |
| Gross margin | 25.3% | 27.6% | 26.1% | 26.7% |
| Operating income | $72k | $713k | $922k | $1.88m |
| Net income (loss) attributable to CTI | ($180k) | $209k | ($257k) | $546k |
| Basic and diluted EPS | ($0.05) | $0.06 | ($0.07) basic; ($0.07) diluted | $0.17 basic; $0.16 diluted |
Consolidated net loss, including noncontrolling interests, was $200k for Q3 and $238k for the nine months. Interest expense was $359k for Q3 and $1.07m year to date. Foreign-currency translation reduced comprehensive income by $236k in Q3 and $840k year to date.
For the nine months, operating cash flow was negative $255k, versus positive $3.39m in 2015. Investing activities provided $140k, including equipment sale-leaseback proceeds; financing activities provided $440k. Cash was $624k at September 30. Inventory rose to $22.94m from $17.87m at year-end, while trade payables rose to $7.42m from $4.27m.
Current assets were $36.30m and current liabilities $24.97m, yielding reported working capital of $11.33m. The balance sheet reports $10.36m of line-of-credit debt, $1.75m of current notes payable and $5.36m of long-term notes payable, among other debt and obligations. Management separately reports BMO Harris balances of $9.94m on the revolver, $1.73m on the mortgage and $134k on the equipment loan; the difference between the reported revolver figures should be reconciled. The company stated $2.83m remained available under its revolving facility.
Changes and business drivers
- Q3 sales fell 9.4% year over year; nine-month sales fell 1.5%. Q3 operating income declined sharply and the company moved from profit to loss.
- Foil balloon sales increased 17.6% in Q3 and 10.4% year to date. Latex balloon sales fell 28.2% and 14.4%, respectively, attributed to peso weakness, reduced Latin American sales and production shortfalls.
- Vacuum-sealing product sales declined 34.8% in Q3 and 22.1% year to date, largely because a major customer stopped buying zippered pouches. Home-organization sales grew 14.9% in Q3 and 57.7% year to date.
- Cost of sales increased as a percentage of revenue, with management citing lower latex balloon margins related to the Mexican peso. Selling expenses rose year to date, primarily from Clever Container consultant commissions.
Liquidity, outlook and notable items
Management said fourth-quarter orders for vacuum-sealing systems exceeded $8m and anticipated at least $17m of 2016 branded-system sales, compared with $10.62m in 2015. It expected significant fourth-quarter inventory and payable reductions and receivable increases as large vacuum-system and balloon orders were fulfilled. Management believed available financing and internally generated funds would meet working-capital needs for at least 12 months; this is an expectation, not a guarantee.
The revolving commitment was temporarily increased to $14m through February 28, 2017, with an expanded inventory borrowing-base cap through November 2016 and amended leverage covenant limits. The company reported covenant compliance at September 30. Officers advanced $900k in short-term working capital at 6% interest to finance inventory for a substantial November order; repayment is subordinated to bank and BMO Equity obligations, subject to specified permissions.
A July stock placement generated approximately $638k in net proceeds and included warrants. The company disclosed customer concentration: two customers represented 45.7% of Q3 sales, and the top three represented 53.9%. Legal claims arising in the ordinary course were not expected by management to materially affect financial position or results.
Management reported that an equipment sale-leaseback accounting error at its Mexico subsidiary was identified and corrected before the financial statements were completed. New control procedures were implemented, and management concluded disclosure controls were effective as of September 30, 2016. The filing says the company was evaluating the impact and adoption approach for the new revenue-recognition standard; it did not provide quantified guidance for future results.
Important facts for investors to verify
- Confirm that this CTI Industries filing is the intended filing for YUNHONG GREEN CTI LTD.
- Reconcile the $10.36m balance-sheet line of credit with management’s $9.94m BMO revolver balance and verify current borrowing availability and amended facility terms.
- Track fulfillment, collections and margins on the large fourth-quarter orders, including whether forecast 2016 vacuum-system sales were achieved.
- Assess inventory turnover and the effect of the $5.60m year-to-date inventory cash use on liquidity and operating cash flow.
- Monitor customer concentration, loss of the zippered-pouch customer, Mexican-peso exposure, and production capacity and execution.
- Review debt covenant compliance, upcoming maturities and obligations to officers, and follow up on the remediated control weakness.