CTI Industries Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011; filed November 14, 2011. The filing identifies the registrant as CTI Industries Corporation, which is the entity covered by the financial statements.
Business context
The company designs, manufactures and distributes novelty balloons, packaging films and flexible pouches. Packaging films are produced in Illinois and latex balloons in Mexico; products are sold in the U.S. and internationally. Results are unaudited interim results and may not indicate full-year performance.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net sales | $11.731 million, up 7.0% year over year | $36.393 million, approximately flat year over year |
| Gross profit and margin | $2.270 million; 19.3%, versus 20.5% | $6.810 million; 18.7%, versus 22.5% |
| Operating income and margin | $324,000; 2.8%, versus $509,000 and 4.6% | $1.072 million; 2.9%, versus $2.358 million and 6.5% |
| Net income attributable to CTI; diluted EPS | $18,000; $0.01, versus $243,000; $0.08 | $329,000; $0.10, versus $1.449 million; $0.49 |
| Operating cash flow | Not presented by quarter in this filing | $(244,000), versus $2.924 million provided |
Quarterly consolidated net income was $648,000; the higher amount attributable to CTI reflects the $17,000 net loss attributable to noncontrolling interests. Nine-month cost of sales rose to 81.3% of revenue from 77.5%. Cash capital spending was $796,000 for the nine months.
Balance sheet, debt and liquidity
- At September 30, cash was $438,000, current assets $22.668 million and current liabilities $17.656 million, for working capital of $5.012 million and a current ratio of about 1.28. Working capital was $3.474 million at December 31, 2010.
- Inventory increased to $12.621 million from $10.368 million at year-end; accounts receivable declined to $7.251 million from $8.534 million.
- The balance sheet reports a $7.606 million line of credit, $4.100 million of notes payable (current and long-term, excluding officer and affiliate notes), and additional officer and affiliate notes. Harris loan balances were reported as $7.445 million revolving, $2.201 million mortgage and $1.098 million equipment debt. The company said $1.137 million remained available under its revolver.
- Management said funding from internally generated cash and bank facilities should meet working-capital needs through the remainder of 2011 and 2012. The company was in compliance with its Harris financial covenants at September 30, 2011.
Changes, outlook and principal risks
- Sales were mixed by product. Third-quarter pouch sales increased 69.4% and latex balloon sales 17.4%; film-product sales fell 24.9% and metalized balloon sales declined 0.7%. For the nine months, latex balloon sales increased 16.7%, while film products, pouches and metalized balloons declined.
- Management attributed margin pressure to higher input and freight costs: latex costs rose about 28.8%, plastic sheeting and resin averaged 19% higher, and shipping expense rose 28.3% in the first nine months versus 2010. Price increases had not fully offset the increases. Management cited further pricing, a shift toward higher-margin products, and sourcing or hedging efforts; it reported some improvement in cost of sales as a share of revenue from Q2 to Q3.
- Interest-rate swap entered July 1 covered $6.780 million of Harris borrowings and was described as fixing the rate on covered balances at 4.65%. A $158,000 decline in swap value contributed to third-quarter interest expense; the filing reports a $158,000 fair-value liability. The derivative disclosures’ hedge-designation descriptions are not consistent.
- Customer concentration remains material: the largest customer represented 28.2% of nine-month sales, and the top ten represented 70.9%. About 92% of nine-month laminated-film sales went to one principal customer. Management also cited lost U.K. balloon-customer business as a source of lower metalized-balloon sales.
- Liquidity depends significantly on bank financing and the revolving facility. Inventory growth contributed to negative operating cash flow. The company also faces foreign-currency translation exposure; nine-month other comprehensive loss from translation was $324,000. Management disclosed routine-course legal claims but did not expect them to have a significant effect. No formal earnings guidance was provided.
Important facts for investors to verify
- Reconcile the nine-month 2010 sales comparison: the financial statements report $36.337 million, while MD&A states $36.377 million.
- Confirm the swap’s accounting designation and reconcile the reported fair-value movement and interest expense across the derivative note and management discussion.
- Monitor the company’s ability to recover margins through pricing or lower input costs, and the effects of customer concentration and the loss of U.K. business.
- Track inventory, operating cash generation, revolver availability and compliance with loan covenants, particularly given reliance on bank financing.