Northern Technologies International Corporation — Q1 FY2015 Form 10-Q
Reporting period: Three months ended November 30, 2014; comparative period is the three months ended November 30, 2013. Financial statements are unaudited. NTIC develops and sells corrosion-prevention products and services under ZERUST and biobased/compostable products under Natur-Tec, through subsidiaries, distributors and joint ventures.
Financial highlights
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total net sales | $7.21 million | $6.31 million | Up 14.3% |
| Gross profit | $2.41 million | $2.15 million | Up 11.9% |
| Gross margin | 33.4% | 34.1% | Down 0.7 percentage points |
| Operating income | $1.64 million | $1.51 million | Up 8.1% |
| Net income attributable to NTIC | $1.01 million | $0.86 million | Up 17.4% |
| Diluted earnings per share | $0.22 | $0.19 | Up $0.03 |
| Net cash used in operating activities | $0.47 million | $0.21 million | Greater cash use |
- ZERUST sales grew 8.5% to $6.24 million; Natur-Tec sales grew 74.3% to $0.98 million. Oil-and-gas ZERUST sales were $0.50 million, up 28.6%.
- Cost of goods sold rose 15.6%, faster than sales; management attributed the lower gross margin primarily to a larger share of lower-margin Natur-Tec sales.
- Joint-venture equity income rose 12.5% to $1.61 million, while service fees from joint ventures increased 1.1% to $2.13 million. Joint-venture sales themselves declined 1.8% to $29.12 million.
- Cash and cash equivalents were $2.60 million and available-for-sale securities were $4.02 million at November 30. Working capital was $17.06 million, down from $17.85 million at August 31, 2014. Total assets were $53.05 million and current liabilities were $3.56 million.
- NTIC had no borrowings on its $3.0 million revolving credit facility and no term debt reported. The facility was extended after quarter-end to January 7, 2016; NTIC reported covenant compliance.
Changes, outlook and risks
- China restructuring: Effective December 31, 2014, NTIC terminated its Chinese joint-venture arrangement and plans to conduct business through its wholly owned NTIC China subsidiary. The filing says NTIC invested $500,000 during Q1 and anticipated investing a further $1.5 million during the remainder of FY2015. NTIC incurred about $225,000 of direct termination and start-up expenses in Q1.
- Beginning in Q2, consolidation of NTIC China is expected to increase reported sales, cost of goods sold and operating expenses, while reducing equity income and service-fee income from joint ventures. Management cautioned that customer transition is uncertain, prior sales and income levels may not be maintained, and results—particularly Q2—may be volatile. No loss on liquidation was anticipated at the time of filing.
- Management expected FY2015 research and development spending of $4.0–$4.5 million and capital expenditures of approximately $0.5–$0.6 million. It stated existing liquidity and expected cash sources should fund operations and planned investment for at least 12 months. No specific earnings or revenue guidance was provided.
- Operating cash flow was negative despite higher net income, principally reflecting joint-venture equity income, lower accrued liabilities and working-capital movements. Investing cash flow was positive largely because of $1.50 million in securities-sale proceeds; financing cash flow included a $560,000 dividend to a non-controlling interest.
- Comprehensive income attributable to NTIC was a loss of $197,000, versus income of $1.37 million a year earlier, mainly reflecting a $1.28 million foreign-currency translation loss. NTIC does not hedge foreign-exchange exposure; it also faces plastic-resin cost risk and interest-rate exposure if it borrows.
- Other key risks include reliance on joint ventures and their distributions, quarterly variability in oil-and-gas and Natur-Tec sales, customer and market acceptance, international operations and currency movements, competition, and raw-material availability and pricing. Management reported no material change to previously disclosed risk factors apart from the China-related risk.
- The company reported no applicable legal proceedings and said ordinary-course claims were not expected to materially affect results, financial position or cash flows. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether NTIC China retains former joint-venture customers and approaches prior sales and profitability, and how start-up costs and consolidation affect subsequent quarters.
- Whether revenue growth translates into improved margins and operating cash flow, given lower gross margin and Q1 cash use.
- The sustainability and cash realization of joint-venture earnings, service fees and distributions, including the impact of losing the China joint venture.
- Actual FY2015 R&D, capital expenditure and China investment versus management’s estimates, and any need for additional financing.
- Exposure to foreign-currency movements, particularly following the reported translation loss, and developments in the company’s other material operating risks.