Northern Technologies International Corporation — Q1 FY2014 10-Q
Business context and period: The filing covers the three months ended November 30, 2013, compared with the three months ended November 30, 2012. NTIC develops corrosion-prevention products and services (ZERUST) and bioplastics (Natur-Tec), operating directly and through subsidiaries and 21 joint ventures. Joint ventures are generally accounted for under the equity method rather than consolidated.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Consolidated net sales | $6.31 million | $5.29 million | +19.2% |
| Gross profit / gross margin | $2.15 million / 34.1% | $1.60 million / 30.2% | Margin +3.9 percentage points |
| Operating income | $1.51 million | $0.87 million | +73.3% |
| Net income attributable to NTIC | $0.86 million | $0.39 million | +120.4% |
| Diluted EPS | $0.19 | $0.09 | +$0.10 |
| Net cash used in operating activities | $0.21 million | $1.47 million | Cash use narrowed |
- ZERUST sales increased 19.9% to $5.75 million; Natur-Tec sales increased 12.8% to $0.56 million. Oil-and-gas ZERUST sales rose 203.5% to $0.39 million, although management cautioned that this business is volatile and has long sales cycles.
- Joint-venture equity income rose 23.7% to $1.43 million, and service fees from joint ventures rose 14.3% to $2.11 million. Joint-venture sales increased 7.8% to $29.66 million.
- Cost of goods sold was 65.9% of sales, down from 69.8%, primarily because the prior-year period included start-up costs for a new customer. Operating expenses rose 12.0% to $4.17 million, including R&D expense up 21.4% to $1.14 million.
- At November 30, cash was $3.91 million, working capital $13.22 million, and current assets $17.64 million against current liabilities of $4.42 million. Total assets were $51.78 million. Debt included a $0.91 million term loan and no borrowings on the $3.0 million revolving credit facility. The term loan was repaid in full on January 3, 2014; the credit line maturity was extended to January 7, 2015.
- Cash declined $0.41 million during the quarter. Investing activities used $0.21 million and financing activities provided $0.01 million. The filing attributes operating cash use mainly to joint-venture equity income and working-capital investment.
Changes, outlook, and risks
- Revenue, gross profit, operating income, and parent-attributable net income all increased year over year. Management attributed earnings growth mainly to higher North American gross profit and improved joint-venture results.
- Management expected an approximately $4.62 million dividend from EXCOR in Q2 FY2014. It forecast FY2014 R&D spending of $3.8–$4.0 million and capital expenditures of approximately $0.6–$1.0 million. It said available cash, operating flows, joint-venture distributions and fees, and financing access should fund operations and commitments for at least 12 months.
- Management expected Italian Natur-Tec resin sales to improve during the remainder of FY2014, anticipating implementation of Italy’s ban on non-biodegradable shopping bags by early calendar 2014. The filing also notes prior delays and legal challenges, so this expectation is uncertain.
- NTIC agreed to sell its indirect interest in Mütec GmbH and recorded a $50,000 impairment because the purchase price was below book value. In connection with the transaction, Mütec’s owner borrowed $168,000 from NTIC, repayable over four years without interest.
- Key risks include dependence on joint-venture performance and distributions, oil-and-gas and Natur-Tec sales variability, economic and automotive-market conditions, foreign-exchange exposure (not hedged), resin costs and supply, competition, and long sales cycles. Management expects quarterly earnings to remain volatile. No legal proceeding was identified as reasonably likely to cause a material loss; NTIC reported compliance with debt covenants.
Most important facts for investors to verify
- Whether the anticipated $4.62 million EXCOR dividend was received and how it affected subsequent cash and liquidity.
- Whether ZERUST growth, particularly in oil and gas, and Natur-Tec’s expected Italian-market recovery continued; these sales can be uneven.
- Joint-venture earnings, service-fee collections, and receivables: service-fee receivables increased $0.37 million during the quarter, and management reported elevated days outstanding for some joint-venture balances.
- The impact of ongoing R&D and capital spending, as well as the $50,000 Mütec impairment and related $168,000 loan.