Northern Technologies International Corporation — Q1 FY2018 10-Q
Reporting period: Three months ended November 30, 2017; comparative period ended November 30, 2016. The unaudited statements consolidate the company and its majority-owned subsidiaries; joint ventures are accounted for under the equity method. NTIC develops corrosion-prevention products and services under ZERUST and biobased, compostable products under Natur-Tec.
Financial performance and position
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total net sales | $11.54 million | $9.70 million | +19.0% |
| Gross profit | $3.65 million | $3.09 million | +18.3% |
| Gross margin | 31.7% | 31.8% | Down 0.1 percentage point |
| Operating income | $1.28 million | $0.53 million | More than doubled |
| Net income attributable to NTIC | $1.08 million; $0.24 diluted EPS | $0.30 million; $0.07 diluted EPS | Up $0.79 million |
| Operating cash flow | $(1.43) million | $(0.92) million | Higher cash use |
- ZERUST sales increased 17.8% to $9.53 million; Natur-Tec sales increased 24.6% to $2.02 million. Sales to unaffiliated customers, excluding joint ventures, rose 22.6%, while sales to joint ventures fell 27.7%.
- Equity income from joint ventures rose 36.7% to $1.74 million, and service fees from joint ventures rose 14.6% to $1.51 million. Joint venture sales, which are not included in NTIC’s consolidated sales, increased 17.8% to $28.50 million.
- Operating expenses increased 9.0% to $5.62 million. Selling expense rose 27.5% and R&D expense rose 24.3%; G&A expense declined 10.2%. Management cited higher personnel and selling costs and a $220,000 increase in the management bonus accrual.
- At November 30, cash and cash equivalents were $4.63 million, available-for-sale securities $3.77 million, working capital $20.38 million, and total assets $58.20 million. Cash declined from $6.36 million at August 31, 2017. Accounts payable and accrued liabilities increased during the quarter.
- No borrowings were outstanding on the $3.0 million revolving credit facility; NTIC reported compliance with its covenants. The facility maturity was extended to January 7, 2019 after quarter-end. Separately, the company had $88,831 of performance-based letters of credit with another bank.
Material changes, outlook and risks
- Growth was driven by higher demand from existing and new customers, including in North America and China, and by Natur-Tec finished-product sales. ZERUST industrial sales rose 34.0%, but oil-and-gas sales fell 62.0% to $283,842, partly reflecting a $410,000 order recognized in the prior-year quarter.
- Management expects quarterly results to remain volatile, particularly due to joint venture and subsidiary performance, changing Chinese operations, and variable oil-and-gas and Natur-Tec sales. Oil-and-gas sales may be affected by oil prices, lengthy customer sales cycles, and order timing. NTIC also noted potential second-quarter seasonality from the Chinese New Year, North American holidays, and lower winter corrosion activity.
- For FY2018, management anticipates R&D spending of $3.0–$3.4 million and capital expenditures of approximately $0.3–$0.6 million. It expects available cash, securities, operating cash flows, joint venture distributions and fees, and financing access to fund operations and planned investments for at least 12 months. No earnings or revenue guidance was provided.
- The December 22, 2017 Tax Cuts and Jobs Act may affect results, cash flows and financial condition. NTIC was evaluating the impact, including deferred-tax remeasurement and a deemed repatriation tax; amounts were not yet practicably quantifiable, with adjustments expected to be analyzed and recorded in Q2 FY2018.
- Key exposures include foreign currency movements (which NTIC does not hedge), resin input costs, markets served, reliance on joint ventures and distributors, and execution of emerging businesses. Management said the quarter’s operating results are not necessarily indicative of full-year results.
- NTIC and its majority-owned subsidiary are pursuing a lawsuit in China relating to alleged breaches of duties and agreements involving the former Tianjin Zerust joint venture. The filing says it is too early to estimate any recovery. Management said other ordinary-course claims were not expected to materially affect results, financial position or cash flows.
Important facts for investors to verify
- Whether sales growth and improved earnings persist, especially given weaker oil-and-gas sales and management’s warning of volatility.
- Whether negative operating cash flow reverses; monitor receivables, inventory, and collection times, including joint venture receivables.
- Joint venture profitability, distributions and service fees, which materially contribute to NTIC’s reported earnings and cash generation.
- The eventual tax effects of the Tax Cuts and Jobs Act and any deferred-tax or repatriation adjustments.
- Developments in China, including the former joint venture litigation and the effect of changing Chinese operations.
- Future dividend decisions: the board declared $0.10 per share payable December 21, 2017, but stated that future dividends are not guaranteed.