Northern Technologies International Corporation — Q1 FY2019 10-Q
Reporting period: Three months ended November 30, 2018; compared with the three months ended November 30, 2017, unless otherwise stated. NTIC develops and sells corrosion-prevention products and services under ZERUST and bio-based, compostable products under Natur-Tec, alongside income and service fees from joint ventures.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Total net sales | $14.09 million | $11.54 million |
| Gross profit | $4.63 million | $3.65 million |
| Operating income | $1.89 million | $1.28 million |
| Net income attributable to NTIC | $1.50 million; diluted EPS $0.32 | $1.08 million; diluted EPS $0.24 |
| Operating cash flow | $(0.74) million | $(1.43) million |
- Sales increased 22.1%. ZERUST sales rose 5.6% to $10.07 million, including oil-and-gas sales of $986,173 versus $283,842. Natur-Tec sales nearly doubled, up 99.9% to $4.03 million.
- Gross margin improved to 32.9% from 31.7%; cost of goods sold declined to 67.1% of sales from 68.3%. Management cited higher sales and lower raw-material costs for ZERUST industrial products.
- Equity income from joint ventures increased 15.1% to $2.00 million. Joint-venture sales, which are not consolidated in NTIC’s sales, rose 7.0% to $30.48 million. Service fees from joint ventures fell 5.2% to $1.43 million.
- Operating expenses rose 10.0% to $6.18 million, primarily due to personnel costs. Income tax expense increased to $256,000 from $105,000.
- Cash and cash equivalents were $4.52 million at November 30, 2018; available-for-sale securities were $1.71 million. Working capital was $24.17 million. Total assets were $63.32 million and total current liabilities were $6.19 million.
- No borrowings were outstanding under the $3.0 million revolving credit line; NTIC was in compliance with its covenants. The facility maturity was extended to January 7, 2020. Cash dividends were $0.12 per share, versus $0.10 in the prior-year quarter.
Changes, outlook and risks
- Operating cash use narrowed year over year, but remained negative. The company cited inventory growth, receivables and accrued-liability movements; investing cash inflow of $1.46 million largely reflected sales of securities, while financing cash use was $393,000, including dividends.
- Management expects fiscal 2019 R&D spending of $3.2–$3.5 million and capital expenditures of approximately $600,000–$900,000. It expects to continue investing in China, R&D, oil-and-gas corrosion applications and Natur-Tec, but did not provide sales or earnings guidance.
- Management believes available liquidity, operating cash flows, joint-venture distributions and financing access will be sufficient for at least 12 months. Future dividends are not guaranteed; additional financing, if pursued, may be unavailable on acceptable terms or dilute shareholders.
- Results may fluctuate with joint-venture performance and the timing of oil-and-gas and Natur-Tec sales. Management also noted potential second-quarter seasonality from the Chinese New Year, North American holidays and colder weather. Oil prices, raw-material costs, foreign exchange, international operations and market acceptance are additional risks; NTIC does not hedge foreign-currency exposure.
- The company adopted ASC 606 on September 1, 2018, with no impact on prior financial statements or opening retained earnings. The filing says it was still assessing the effects of the upcoming lease standard.
- A lawsuit concerning alleged breaches of duty and contracts related to former China joint venture Tianjin Zerust remained unresolved; NTIC could not reasonably estimate any recovery. Management stated ordinary-course legal matters were not expected to materially affect results, financial position or cash flows.
- Natur-Tec India’s minority owner contributed $134,034, reducing NTIC’s ownership from 90% to 75%. NTIC also sought shareholder ratification of a previously approved increase in authorized common shares; it said no additional shares would be issued or reserved unless ratified.
Important facts for investors to verify
- Whether sales growth—especially Natur-Tec and oil-and-gas sales—continues, and how volatile quarterly demand affects earnings.
- Joint-venture profitability, dividend distributions and collections of joint-venture receivables; three ventures accounted for 71.3% of trade joint-venture receivables.
- Working-capital trends, inventory growth and the conversion of reported earnings into operating cash flow.
- Fiscal 2019 investment spending, dividend decisions and compliance with the credit facility’s covenants and terms.
- Outcome of the Tianjin Zerust litigation and the shareholder vote on ratification of the authorized-share amendment.