Northern Technologies International Corporation (NTIC) — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended February 28, 2015; comparisons are with the corresponding 2014 periods. NTIC develops and sells corrosion-prevention products and services under ZERUST and biobased/compostable products under Natur-Tec, operating through subsidiaries, joint ventures, distributors and agents in more than 60 countries.
Financial performance
| Metric | Three months ended Feb. 28, 2015 | Three months ended Feb. 28, 2014 | Six months ended Feb. 28, 2015 | Six months ended Feb. 28, 2014 |
|---|---|---|---|---|
| Net sales | $6.73 million | $6.22 million | $13.94 million | $12.53 million |
| Gross profit / gross margin | $2.07 million / 30.8% | $2.17 million / 34.8% | $4.48 million / 32.1% | $4.32 million / 34.5% |
| Operating income | $138,000 | $1.65 million | $1.78 million | $3.17 million |
| Net income (loss) attributable to NTIC | $(129,000) | $1.03 million | $880,000 | $1.88 million |
| Diluted earnings (loss) per share | $(0.03) | $0.22 | $0.19 | $0.41 |
Revenue growth reflected higher demand for both product lines. ZERUST sales rose 4.1% for the quarter and 6.4% for the six months; Natur-Tec sales rose 42.3% and 56.9%, respectively. Natur-Tec’s lower margins contributed to higher cost of goods sold as a share of sales. Joint-venture equity income increased 5.7% for the quarter and 9.1% year to date, but service-fee income fell 51.7% and 24.9%, largely due to the China transition and lower joint-venture sales.
Cash flow and liquidity: Six-month operating cash flow was $392,000, down from $3.75 million. Investing activities provided $990,000, principally from sales of marketable securities; financing activities used $438,000, including a $560,000 dividend to a non-controlling interest. Cash ended at $3.37 million. Working capital was $17.84 million, approximately unchanged from August 31, 2014. Available-for-sale securities were $3.52 million.
Debt and balance sheet: No borrowings were outstanding under the $3.0 million revolving credit facility. Total assets were $50.10 million and total liabilities were $2.54 million at February 28, 2015. The facility was extended to January 7, 2016; NTIC reported compliance with covenants, while noting the bank waived a technical default related to delivery of quarterly compliance certificates.
Material changes and unusual items
- NTIC ended its Tianjin Zerust joint-venture arrangements effective December 31, 2014, began liquidation, and started operating through wholly owned NTIC China. Tianjin Zerust is now carried at carrying value rather than accounted for under the equity method.
- The China transition generated approximately $883,000 of start-up, legal and personnel expenses during the six months. NTIC China also incurred reported losses of approximately $358,000 during that period. Management cautioned that customer transition may take several quarters and that the new subsidiary may not match the former venture’s sales or income.
- Foreign-currency translation produced a $3.26 million loss for the six-month period, primarily reflecting U.S. dollar strengthening against the euro and other currencies. NTIC does not hedge its foreign-currency exposure.
- Management reclassified dividends received from equity-method joint ventures from investing to operating cash flows for all periods presented; this did not affect earnings or equity.
Outlook, risks and contingencies
- Management expects operating results to remain volatile, particularly during the remaining fiscal 2015 quarters, due to China’s transition, joint-venture performance, and variable oil-and-gas and Natur-Tec sales. It expects future sales and costs of goods sold to increase with China consolidation, while joint-venture equity income and service fees are expected to decline. No assurance was given that NTIC China will replace the former venture’s results.
- NTIC expects to spend $4.0–$4.2 million on research and development in fiscal 2015 and approximately $500,000–$600,000 on capital expenditures during the remainder of the year. It expects existing resources and anticipated cash flows to fund operations for at least 12 months, but says additional financing may be pursued for growth opportunities and may not be available on acceptable terms.
- On March 23, 2015, NTIC and NTI Asean sued two individuals over alleged breaches related to Tianjin Zerust. The potential recovery could not yet be reasonably estimated. Management said it did not then anticipate a material loss or impairment, but gave no assurance against one.
- Other significant risks include reliance on joint-venture fees and distributions, foreign-exchange exposure, resin costs and supply, long sales cycles in oil and gas, market acceptance and competition. Management reported no material change to previously disclosed risk factors other than the China-related risk.
- The board authorized up to $3.0 million of common-stock repurchases; no shares were repurchased during the quarter.
Important facts for investors to verify
- Whether NTIC China can retain and transition Tianjin Zerust customers, and the ultimate costs, timing and outcome of the liquidation and litigation.
- Whether revenue growth can improve profitability given lower Natur-Tec margins, elevated China-related expenses and declining joint-venture fees.
- Cash conversion and collection trends: joint-venture trade receivables averaged 133 days outstanding and service-fee receivables 134 days, according to management.
- Exposure to foreign-currency movements, especially the euro, and the effect on reported comprehensive income and joint-venture returns.
- Execution of fiscal 2015 R&D and capital-spending plans, and any borrowing or equity financing required to fund growth or repurchases.