Northern Technologies International Corporation (NTIC) — Q3 FY2015 Form 10-Q
Reporting period: Fiscal quarter and nine months ended May 31, 2015. The interim financial statements are unaudited. NTIC develops corrosion-prevention products and services under the ZERUST brand and biobased and compostable products under Natur-Tec, selling through subsidiaries, distributors, agents and joint ventures.
Key financial results
| Metric | Three months ended May 31, 2015 | Nine months ended May 31, 2015 | Prior-year comparison |
|---|---|---|---|
| Total net sales | $8.28 million | $22.22 million | Up 19.6% and 14.2%, respectively |
| Gross profit / gross margin | $2.68 million / 32.4% | $7.16 million / 32.2% | Margins were 32.5% and 33.8%, respectively |
| Operating income / margin | $1.18 million / 14.3% | $2.96 million / 13.3% | Operating income was $1.77 million and $4.93 million |
| Net income attributable to NTIC | $905,000; diluted EPS $0.20 | $1.79 million; diluted EPS $0.39 | Down 7.6% and 37.7%; prior diluted EPS was $0.21 and $0.63 |
| Operating cash flow | Not presented by quarter | $36,000 | $6.70 million in the prior-year period |
Liquidity and debt: At May 31, cash and cash equivalents were $3.79 million, available-for-sale securities $2.53 million, and working capital $17.30 million. Working capital was $17.85 million at August 31, 2014. The company had no borrowings on its $3.0 million revolving credit line and reported compliance with its covenants. The line matures January 7, 2016; a technical default relating to delivery of quarterly compliance certificates was waived when the bank extended the facility.
Cash flow and balance sheet: Nine-month investing cash flow was positive $1.76 million, principally from $2.99 million in securities-sale proceeds, partly offset by $1.10 million of capital expenditures. Financing cash flow was negative $403,000, including a $560,000 distribution to non-controlling interest. Total assets were $51.87 million and total equity $48.35 million. No material debt balance was reported.
Material changes versus the prior comparable periods
- ZERUST sales rose 18.1% in the quarter and 10.4% year to date; Natur-Tec sales rose 29.3% and 45.0%. Nine-month oil-and-gas ZERUST sales increased 32.5% to $1.38 million, although management cautioned that these sales can vary considerably by quarter.
- Despite higher sales, nine-month net income attributable to NTIC declined, reflecting Chinese joint-venture changes and related costs. Fees for services to joint ventures fell 28.2% year to date to $4.43 million, while equity income from joint ventures increased 8.8% to $4.81 million.
- Cost of goods sold rose faster than sales year to date, and gross margin declined, partly because Natur-Tec products generally carry lower margins than traditional ZERUST products. Operating expenses increased 10.0% to $13.44 million.
- Foreign-currency translation produced a $3.70 million nine-month loss; comprehensive loss attributable to NTIC was $1.59 million, compared with comprehensive income of $3.36 million in the prior-year period.
Outlook, risks and unusual items
- NTIC terminated its Tianjin Zerust China joint-venture agreements effective December 31, 2014, began liquidation proceedings and shifted China operations to wholly owned NTIC China. The transition led to $1.138 million in nine-month startup, legal and personnel expenses; NTIC China itself recorded a $585,000 loss. Management expects near-term operating volatility and lower future joint-venture income and service fees, and cannot assure that former customers or prior sales and income levels will transfer to NTIC China.
- Management expected available liquidity, operating cash flows, joint-venture distributions and financing availability to fund operations and planned investment for at least 12 months. It anticipated investing in China, research and development, oil-and-gas marketing and Natur-Tec. Fiscal 2015 R&D spending was expected to total $4.0–$4.4 million; remaining-year capital expenditures were estimated at $200,000–$300,000.
- NTIC filed lawsuits in China against two individuals associated with the former joint venture and in Minnesota against Cortec Corporation. The potential recovery in the China action could not be reasonably estimated. Management said any liability from other claims was not expected to materially affect results, financial position or cash flows.
- Management reported no impairment of the Tianjin investment through May 31 and did not then anticipate material collection or inventory-recovery issues, while noting no assurance. Other key exposures include foreign-exchange movements (which NTIC does not hedge), plastic-resin prices, joint-venture performance and distributions, and market acceptance and order timing for newer products.
- The board authorized repurchases of up to $3.0 million of common stock in January 2015; the company reported no share repurchases during the quarter.
Important facts for investors to verify
- Progress and costs of the Tianjin Zerust liquidation, outcomes of the related lawsuits, and NTIC China’s ability to retain customers and rebuild sales and profitability.
- Whether operating cash generation recovers from the low $36,000 reported for the nine-month period, and how inventory, receivables and joint-venture distributions affect liquidity.
- Whether gross margins and operating income stabilize as product mix changes and China operations transition.
- Exposure to currency movements, especially the euro, and the resulting impact on reported comprehensive income and joint-venture economics.
- Execution and funding of planned R&D, capital expenditures and any share repurchases; management’s stated outlook is subject to significant uncertainty and quarterly volatility.