Northern Technologies International Corporation — Q3 FY2018 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2018. The company develops and sells corrosion-prevention products and services under ZERUST and biobased, compostable products under Natur-Tec. It operates through consolidated subsidiaries and equity-method joint ventures; joint venture sales are not included in NTIC’s consolidated net sales.
Financial results
| Metric | Three months ended May 31, 2018 | Nine months ended May 31, 2018 | Comparable 2017 period |
|---|---|---|---|
| Net sales | $12.92 million, up 26.4% | $36.68 million, up 28.0% | $10.22 million; $28.67 million |
| Gross profit | $4.33 million; 33.5% margin | $12.19 million; 33.2% margin | $3.45 million; $9.41 million |
| Operating income | $2.45 million | $5.98 million | $1.73 million; $2.86 million |
| Net income attributable to NTIC | $2.14 million; diluted EPS $0.46 | $4.56 million; diluted EPS $0.98 | $1.35 million; $2.04 million; diluted EPS $0.30 and $0.45 |
| Operating cash flow | Nine-month cash use of $142,000 | Nine-month cash provided of $2.83 million |
For the nine months, ZERUST sales rose 27.1% to $30.10 million and Natur-Tec sales rose 31.9% to $6.58 million. Equity income from joint ventures increased 33.4% to $5.79 million; NTIC also recorded $4.62 million in service fees from joint ventures. The joint ventures themselves reported $90.20 million in nine-month sales, which are not consolidated as NTIC sales.
Balance sheet, liquidity and capital
- At May 31, cash and cash equivalents were $4.61 million and available-for-sale securities were $3.28 million. Working capital was $22.81 million, versus $21.17 million at August 31, 2017.
- Current assets were $29.16 million and current liabilities $6.35 million. NTIC had no borrowings on its $3.0 million revolving credit facility and reported compliance with its covenants. The facility maturity was extended to January 7, 2019.
- Cash declined $1.75 million from fiscal year-end. Higher receivables, inventory and prepaid expenses contributed to operating cash use; trade receivables excluding joint ventures rose $2.78 million.
- NTIC paid dividends of $0.30 per share during the nine months. The board intends to continue quarterly dividends, but future declarations are not assured.
Changes, outlook and risks
- Growth reflected stronger ZERUST demand, new customers in North America and China, and higher Natur-Tec finished-product sales. Oil-and-gas ZERUST sales rose 10.2% year to date, but management cautioned that orders and revenue in this market can be volatile and sales cycles long.
- Operating expenses rose 12.1% year to date, including higher personnel costs and a $780,000 increase in management bonus accruals. Expenses as a share of sales declined as revenue grew faster.
- Nine-month tax expense included a provisional, noncash $700,000 charge to remeasure deferred tax balances following the Tax Cuts and Jobs Act. The company’s deemed-repatriation tax estimate was $489,000, expected to be offset by foreign tax credit carryforwards; tax accounting remained subject to further analysis, including GILTI provisions.
- Management said operating results may remain volatile, particularly because of joint venture performance, oil-and-gas and Natur-Tec sales, and changes in Chinese operations. It expects to spend $3.2–$3.6 million on R&D and approximately $500,000–$600,000 on capital expenditures in fiscal 2018, and believes available resources will fund operations for at least 12 months.
- Key risks include dependence on joint ventures and their distributions, foreign-currency exposure (not hedged), resin costs, competition, market acceptance and lengthy sales cycles. A lawsuit in China involving alleged breaches related to the former Tianjin Zerust joint venture remains pending; potential recovery is not reasonably estimable.
- The company said it intends to seek stockholder ratification of the amendment increasing authorized common shares from 10 million to 15 million, after uncertainty arose about broker voting disclosed in the proxy statement. It said it would not issue or reserve the additional shares unless ratification is approved.
Important facts for investors to verify
- Reconcile the net-income-attributable figures: the financial statements report $2,142,752 for the quarter and $4,559,225 for nine months, while the MD&A contains inconsistent figures.
- Track conversion of reported earnings into cash, especially receivables, inventory and dividend receipts from joint ventures.
- Monitor joint venture results and distributions, China-related operations and litigation, and the status of the authorized-share ratification.
- Follow the final accounting effects of tax reform and the timing and volatility of oil-and-gas and Natur-Tec sales.