Northern Technologies International Corporation (NTIC) — Q3 FY2017 10-Q
Business context and reporting period. The unaudited quarter ended May 31, 2017; year-to-date figures cover the nine months from September 1, 2016. NTIC develops and sells corrosion-prevention products and services under ZERUST and compostable bioplastic products under Natur-Tec. It reports two segments and also earns equity income and service fees from unconsolidated joint ventures.
Financial performance and position
| Metric | Three months ended May 31, 2017 | Nine months ended May 31, 2017 |
|---|---|---|
| Net sales | $10.22 million; +17.7% year over year | $28.67 million; +22.4% |
| Gross profit / gross margin | $3.45 million / 33.7% | $9.41 million / 32.8% |
| Operating income / operating margin | $1.73 million / 16.9% | $2.86 million / 10.0% |
| Net income attributable to NTIC | $1.35 million; diluted EPS $0.30 | $2.04 million; diluted EPS $0.45 |
| Equity income from joint ventures | $1.69 million | $4.34 million |
- Revenue mix: ZERUST sales were $8.37 million for the quarter and $23.68 million year to date. Natur-Tec sales were $1.85 million and $4.99 million, respectively. Nine-month sales to the oil and gas industry were $1.29 million, up 4.7%; quarterly sales in that market fell 34.4% to $336,000.
- Cash flow: Nine-month operating cash flow was $2.83 million, versus $3.05 million a year earlier. Investing used $2.40 million, including purchases of available-for-sale securities and capital expenditures; financing used $309,000. Cash increased $105,000 to $3.50 million.
- Liquidity and debt: Current assets were $24.64 million and current liabilities $4.79 million at May 31. Cash was $3.50 million and available-for-sale securities $3.76 million. No borrowings were outstanding on the $3.0 million revolving facility; NTIC reported covenant compliance. Working capital calculated from the balance sheet was $19.85 million.
- Other balance-sheet items: Total assets were $54.00 million; joint-venture investments were $18.90 million. Total equity was $49.21 million. The company repurchased and retired 14,525 shares during the nine months.
Changes versus the prior comparable period
- Nine-month attributable net income rose to $2.04 million from $575,000, while diluted EPS increased to $0.45 from $0.13. Management attributed the improvement mainly to higher gross profit, partially offset by higher operating expenses.
- Sales growth reflected increased demand from existing and new customers, higher Natur-Tec sales, and increased sales to joint ventures. Nine-month ZERUST sales rose 21.1%; Natur-Tec sales rose 29.0%.
- Gross margin improved year over year: cost of goods sold was 67.2% of sales for the nine months, compared with 68.0%. Management cited higher sales and lower raw-material costs for ZERUST industrial products.
- Nine-month operating expenses increased 7.5% to $14.83 million. Selling expense rose 49.0%, while research and development expense fell 36.8% as resources shifted toward selling and general and administrative activities.
- Joint-venture equity income increased 20.6% to $4.34 million for the nine months. NTIC received $5.18 million in joint-venture dividends, down from $5.45 million.
Outlook, risks, contingencies, and notable items
- Management said available cash, forecast operating cash flow, anticipated joint-venture distributions and fees, and financing availability should fund operations and planned needs for at least 12 months. This is not earnings guidance; the filing provides no full-year revenue or profit forecast.
- For fiscal 2017, NTIC expected research and development spending of $2.7 million to $2.9 million and capital expenditures of approximately $800,000 to $900,000. It planned continued investment in China, R&D, marketing, oil and gas applications, and Natur-Tec.
- Management cautioned that quarterly results may remain volatile, particularly because of joint-venture performance, Chinese operations, oil and gas sales, and the timing of Natur-Tec orders. Oil prices and lengthy customer trial and sales cycles can affect oil and gas demand.
- Risks include foreign-exchange exposure (NTIC does not hedge), plastic-resin prices, dependence on joint-venture dividends and fees, competition, international operations, and market acceptance of newer products.
- NTIC continued litigation concerning its former Tianjin Zerust joint venture in China; management could not reasonably estimate any recovery. A separate lawsuit against Cortec was refiled in Ohio after the Minnesota court dismissed the claims without prejudice. Cortec’s counterclaim was dismissed; discovery was due by September 4, 2017, with trial set for a two-week standby period beginning September 18, 2017. Litigation expenses increased approximately $254,000 year to date.
- The fiscal 2017 management bonus accrual was $600,000 for the nine months, compared with $215,000 in the prior-year period. The filing also reports an accumulated impairment conclusion that the former Tianjin Zerust investment’s fair value was zero as of August 31, 2016.
Important facts for investors to verify
- Reconcile the working-capital disclosure: MD&A states both $19,853,912 and $19,858,912; the balance-sheet calculation is $19,853,912.
- Track collection timing and receivables: trade receivables excluding joint ventures rose $1.43 million from August 2016, and average days outstanding increased to 61; joint-venture receivable days were reported at 138, largely due to South Korea.
- Monitor whether ZERUST industrial and Natur-Tec growth offsets volatility in oil and gas sales, and whether the shift from R&D to selling activity translates into profitable growth.
- Follow developments and potential costs or recoveries in the China and Cortec litigation, as well as the status of Tianjin Zerust liquidation.
- Assess continued access to and renewal of the revolving facility, joint-venture distributions, and the effect of foreign-currency movements on reported results.