Northern Technologies International Corporation — Q2 FY2017 Form 10-Q
Business context and reporting period. The unaudited quarter and six months ended February 28, 2017 are the second quarter and first half of the fiscal year. NTIC sells corrosion-prevention products and services under ZERUST and bio-based, compostable products under Natur-Tec. Its results also depend substantially on equity-method joint ventures; their sales are not included in NTIC’s consolidated sales.
Financial performance and position
| Metric | Three months ended Feb. 28, 2017 | Six months ended Feb. 28, 2017 |
|---|---|---|
| Net sales | $8.74 million, up 13.5% | $18.44 million, up 25.2% |
| Gross profit / gross margin | $2.87 million / 32.9% | $5.96 million / 32.3% |
| Operating income (loss) | $0.61 million | $1.13 million |
| Net income attributable to NTIC | $0.39 million; diluted EPS $0.09 | $0.68 million; diluted EPS $0.15 |
| Equity income from joint ventures | $1.38 million | $2.66 million |
- Sales growth reflected increased ZERUST industrial sales and Natur-Tec sales. For the six months, ZERUST sales rose 23.9% to $15.31 million and Natur-Tec sales rose 32.4% to $3.13 million.
- Cost of goods sold fell as a share of sales to 67.1% for the quarter and 67.7% for the six months, versus 68.4% and 68.9% in the prior-year periods. Selling costs rose 52.3% for the quarter and 42.8% for the six months; R&D expense declined 33.4% and 34.6%, respectively.
- At February 28, cash and cash equivalents were $3.05 million, available-for-sale securities $0.75 million, working capital $15.36 million, and total assets $51.79 million. Working capital was down from $16.95 million at August 31, 2016.
- Six-month operating cash flow was negative $0.82 million, compared with positive $1.25 million a year earlier. Investing cash flow was positive $0.81 million, mainly from securities sales; financing cash flow was negative $0.32 million. Cash declined $0.35 million to $3.05 million.
- No borrowings were outstanding on the $3.0 million revolving credit facility. The company reported compliance with its covenants. Current liabilities were $4.96 million; no material long-term debt was reported.
- Six-month comprehensive loss attributable to NTIC was $0.32 million, despite positive net income, chiefly reflecting foreign-currency translation losses.
Changes, outlook and key risks
- NTIC returned to profitability versus the prior-year quarter and six-month period, both of which reported net losses attributable to NTIC. Management attributed the improvement primarily to higher gross profit, partly offset by higher operating expenses.
- Joint-venture equity income increased 45.2% for the quarter and 37.2% for the six months. Joint ventures’ aggregate six-month sales were $47.16 million, up from $42.00 million; this is not consolidated NTIC revenue.
- Management expects fiscal 2017 R&D spending of $2.2–$2.8 million and capital expenditures of approximately $0.7–$0.8 million. It expects to invest in China, R&D, and marketing for oil-and-gas and Natur-Tec opportunities. No full-year revenue or earnings guidance was provided.
- Management believes available cash, operating cash flows, joint-venture distributions and fees, and financing availability should fund operations and planned uses for at least 12 months. It noted additional financing may be sought for growth opportunities, with no assurance of availability or acceptable terms.
- Management cautioned that quarterly results may remain volatile due to joint-venture performance, oil-and-gas sales, Natur-Tec order timing, and changes in Chinese operations. Oil prices, market demand, seasonality, foreign-exchange movements, resin costs, and reliance on joint ventures are cited risks. NTIC does not hedge foreign-currency exposure.
- NTIC’s former China joint venture, Tianjin Zerust, is being liquidated; the company reported its investment at zero and has received no liquidation proceeds. Litigation against former partner-related individuals continues, and any recovery cannot be reasonably estimated. A Minnesota court dismissed NTIC’s and NTI Asean’s claims against Cortec in February 2017; reconsideration was denied in March, and the company was evaluating options.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing states no material change in contractual obligations.
Important facts for investors to verify
- Whether the sales and margin improvement continues, particularly given higher selling expense and negative operating cash flow in the first half.
- Cash conversion, customer collections, and joint-venture receivable exposure: trade receivables excluding joint ventures increased, and their average days outstanding rose to 65.
- Joint-venture earnings, distributions and service fees, including dependence on EXCOR; distributions are not solely at NTIC’s discretion.
- Progress and potential financial effects of the Tianjin Zerust liquidation and both China- and Cortec-related litigation. The filing gives no clear recovery value.
- The legal-proceedings narrative refers to a motion dated “November 23, 2017,” which is inconsistent with this April 2017 filing; verify the intended date and chronology.
- Oil-and-gas demand, Natur-Tec market acceptance, foreign-exchange and raw-material exposure, and availability of the revolving facility after its January 7, 2018 maturity.