Northern Technologies International Corporation — Q3 FY2016 10-Q
Reporting period: Quarter and nine months ended May 31, 2016; interim financial statements are unaudited. The company develops and markets corrosion-prevention products and services under ZERUST and biobased, compostable products under Natur-Tec. Its results include consolidated subsidiaries and equity-method income from joint ventures.
Financial performance and position
| Metric | Three months ended May 31, 2016 | Nine months ended May 31, 2016 |
|---|---|---|
| Total net sales | $8.69 million, up 4.9% | $23.42 million, up 5.4% |
| Gross profit / gross margin | $2.91 million / 33.5% | $7.50 million / 32.0% |
| Operating income | $1.23 million, versus $1.18 million | $1.11 million, versus $2.96 million |
| Net income attributable to NTIC | $917,373, versus $905,435; diluted EPS $0.20 | $575,233, versus $1.79 million; diluted EPS $0.13 versus $0.39 |
- Nine-month sales growth was driven by higher Natur-Tec sales and increased ZERUST sales, particularly through NTIC China. Natur-Tec sales rose 23.9% to $3.87 million; ZERUST sales rose 2.4% to $19.55 million.
- Nine-month equity income from joint ventures fell 25.1% to $3.60 million, and service fees from joint ventures fell 14.1% to $3.81 million. Management cited lower joint-venture profitability, currency effects, weaker European activity, and the Tianjin Zerust transition and liquidation.
- Operating expenses rose 2.6% year over year for the nine-month period, including higher R&D spending. R&D expense was $3.35 million, up 12.8%.
- Cash and cash equivalents were $4.63 million at May 31, 2016, and available-for-sale securities were $2.24 million. Working capital was $18.39 million. Net cash provided by operating activities was $3.05 million, compared with $36,221 in the prior-year period.
- Total assets were $52.77 million; current liabilities were $3.95 million. No borrowings were outstanding under the $3.0 million revolving credit facility. The company reported compliance with its debt covenants; facility maturity was extended to January 7, 2017.
Changes, outlook and notable risks
- The sharp nine-month decline in attributable earnings chiefly coincided with reduced joint-venture contributions and transition-related costs, despite higher consolidated sales. Quarterly attributable earnings were slightly higher year over year.
- Management said existing cash, forecast operating cash flow, joint-venture distributions and available financing should fund operations and planned investments for at least 12 months. No overall earnings or revenue guidance is provided. The company expected fiscal 2016 R&D spending of $4.0–$4.4 million and capital expenditures of approximately $100,000–$150,000 for the remainder of the year.
- Management expects quarterly results to remain volatile, particularly due to Chinese operations, joint-venture performance, oil-and-gas sales and Natur-Tec order timing. Low oil prices may delay customer purchases; oil-and-gas sales often have lengthy sales cycles.
- NTIC had terminated its Tianjin Zerust joint venture arrangements and was pursuing liquidation and litigation in China, as well as litigation against Cortec Corporation in Minnesota. Recovery in the China litigation could not be reasonably estimated. The company had not received Tianjin Zerust financial information beyond November 2014; it reported a $1.88 million investment at carrying value and identified a possible maximum impairment of about $114,000 on a related receivable.
- Other risks include foreign-currency movements (the company does not hedge), weaker European markets and possible Brexit-related effects on joint ventures, resin costs, and dependence on joint-venture distributions and fees. Management did not expect pending matters to materially affect results, financial position or cash flows, but outcomes remain uncertain.
Most important facts for investors to verify
- Whether NTIC China can retain and grow former Tianjin Zerust customers and whether liquidation, litigation or limited information leads to asset impairments or recoveries.
- Whether joint-venture income and service fees stabilize, given their substantial contribution to reported earnings and the year-to-date decline.
- Whether Natur-Tec growth and ZERUST demand, including oil-and-gas sales, continue at a pace sufficient to offset market and order volatility.
- Whether working-capital collections improve: NTIC reported average outstanding days of 106 for non-joint-venture trade receivables and 183 for joint-venture service-fee receivables.
- Whether cash generation, liquidity and covenant compliance remain adequate as the company funds China operations, R&D and market development; the credit line was due to mature in January 2017.