Northern Technologies International Corporation — Q2 FY2014 Form 10-Q
Business context and period. The filing covers the three and six months ended February 28, 2014; the quarter is the second quarter of fiscal 2014. NTIC develops and sells corrosion-prevention products and services under ZERUST and biodegradable-plastics products under Natur-Tec. It also earns equity income and service fees from a network of 21 joint ventures; joint-venture sales are not included in NTIC’s consolidated net sales.
Financial performance
- Revenue: Consolidated net sales were $6.22 million for the quarter, up 18.5% year over year, and $12.53 million for six months, up 18.9%. ZERUST sales grew 17.9% for the quarter and 18.9% year to date; Natur-Tec sales grew 23.9% and 18.6%, respectively. Six-month ZERUST oil-and-gas sales rose to $792,720 from $374,790.
- Joint ventures: Equity income was $1.40 million for the quarter and $2.82 million for six months, increases of 22.6% and 23.1%. Service fees were $2.06 million and $4.17 million, up 16.2% and 15.2%.
- Profit and margins: Gross profit was $2.17 million for the quarter and $4.32 million for six months. Gross margin was 34.8% and 34.5%, compared with 30.7% and 30.5% in the prior-year periods. Operating income was $1.65 million and $3.17 million. Net income attributable to NTIC was $1.03 million ($0.22 diluted EPS) and $1.88 million ($0.41 diluted EPS), versus $0.43 million ($0.10) and $0.82 million ($0.18).
- Cash flow: Six-month operating cash flow was negative $1.46 million, compared with negative $3.45 million a year earlier. Investing activities provided $5.02 million, primarily from $5.22 million of joint-venture dividends. Financing activities used $0.87 million, chiefly for debt repayment. Cash increased by $2.68 million to $7.00 million.
- Liquidity and debt: Working capital was $17.69 million at February 28, 2014, versus $13.27 million at August 31, 2013. NTIC repaid its $933,413 term loan in full; no borrowings were outstanding. Its $3.0 million revolving credit facility was extended to January 7, 2015, and the company reported covenant compliance.
- Balance sheet: Total assets were $50.82 million and total equity was $48.13 million at February 28, 2014. Joint-venture investments stood at $22.65 million.
Changes, outlook and risks
- Management attributed higher sales to demand from new and existing customers, including growth in oil and gas and Natur-Tec products. Lower cost of goods sold as a share of sales primarily reflected prior-year start-up costs for a new customer.
- Operating expenses increased, including research and development, which rose 20.9% to $2.24 million for six months. Management expects fiscal 2014 R&D spending of $3.8–$4.0 million and capital expenditures of approximately $0.6–$1.0 million.
- Management provided no specific revenue or earnings guidance. It expects quarterly results to remain volatile due to joint-venture performance and uneven timing of oil-and-gas and Natur-Tec sales. Oil-and-gas sales can involve lengthy trials and sales cycles.
- NTIC said existing cash, operating cash flows, joint-venture dividends and fees, and available financing should fund operations and planned investments for at least 12 months. It may seek debt or equity financing for growth opportunities; availability and terms are not assured, and equity financing could dilute shareholders.
- Key exposures include reliance on joint-venture fees and dividends, foreign-currency movements (not hedged), resin costs, customer and market acceptance, competition, and dependence on distributors and suppliers, including a single source for base bioplastics resins. Management noted no legal proceeding it believed presented a reasonable possibility of material loss. Disclosure controls were assessed as effective, with no material change in internal control reported.
- Unusual item: NTIC agreed to sell its indirect interest in German joint venture Mütec; $177,273 was due to the company at February 28, 2014. The filing also reports $5.22 million in joint-venture dividends received during the six-month period.
Important facts for investors to verify
- Whether joint-venture earnings and dividends remain sustainable, and whether dividend timing can support cash needs given negative operating cash flow.
- Whether ZERUST oil-and-gas growth converts into recurring sales despite long sales cycles and quarterly variability.
- Whether Natur-Tec growth, including the contribution from the newly formed India subsidiary, can be sustained.
- Whether planned R&D and capital spending deliver growth without reducing margins or liquidity.
- How foreign exchange, raw-material costs, customer concentration, and reliance on joint ventures and key suppliers affect future results.