Northern Technologies International Corporation — Q3 FY2014 Form 10-Q
Reporting period: Fiscal quarter and nine months ended May 31, 2014; unaudited. NTIC develops corrosion-prevention products and services marketed primarily as ZERUST and biodegradable plastics marketed as Natur-Tec. Its consolidated results include majority-owned subsidiaries but exclude equity-method joint ventures.
Financial performance
| Metric | Three months ended May 31, 2014 | Nine months ended May 31, 2014 | Prior-year comparison |
|---|---|---|---|
| Net sales | $6.92 million | $19.45 million | Up 17.8% and 18.5%, respectively |
| Gross profit | $2.25 million | $6.57 million | Up from $1.82 million and $5.04 million |
| Gross margin | 32.5% | 33.8% | Up from 31.0% and 30.7% |
| Operating income | $1.77 million | $4.93 million | Up from $1.49 million and $3.34 million |
| Net income attributable to NTIC | $980,217 | $2.86 million | Up 5.7% and 63.5%, respectively |
| Diluted EPS attributable to NTIC | $0.21 | $0.63 | $0.21 and $0.39, respectively |
ZERUST sales increased 10.6% for the quarter and 15.9% year to date; Natur-Tec sales increased 102.4% and 44.4%. Nine-month ZERUST oil-and-gas sales were $1.04 million, up 114.1% from the prior-year period. Joint-venture equity income was $1.59 million for the quarter and $4.42 million year to date; service fees from joint ventures were $2.00 million and $6.17 million.
Operating expenses rose 11.5% year to date to $12.22 million, including increased selling, administrative, and R&D spending. R&D expense was $3.34 million for nine months. The company’s reported sales exclude sales made by its joint ventures.
Cash, liquidity, and debt
- Cash and cash equivalents were $8.55 million at May 31, 2014, versus $4.31 million at August 31, 2013. Working capital increased to $18.47 million from $13.27 million.
- Operating cash flow was negative $607,041 for the nine months, improving from negative $3.05 million a year earlier. Investing activities provided $6.82 million, primarily from $7.31 million of joint-venture dividends. Financing activities used $1.99 million.
- The $933,413 term loan was repaid in full in January 2014. No amount was outstanding on the $3.0 million revolving credit facility; it matures January 7, 2015. NTIC reported covenant compliance.
- Current assets were $22.28 million and current liabilities $3.81 million at period end.
Management outlook, risks, and notable items
- Management expects fiscal 2014 R&D spending of $4.0–$4.4 million net of anticipated reimbursements and approximately $500,000 of capital expenditures for the year, mainly laboratory expansion and equipment.
- Management believes cash, expected operating cash flows, joint-venture distributions and service fees, and available financing will fund operations and planned investments for at least 12 months. It may seek debt or equity financing for growth opportunities; availability and terms are not assured, and equity financing could dilute shareholders.
- Management cautioned that quarterly earnings may remain volatile due to joint-venture performance and uneven timing of oil-and-gas and Natur-Tec orders. Oil-and-gas sales can involve long trial and adoption cycles. Other disclosed risks include dependence on joint ventures and automotive markets, foreign-exchange exposure (not hedged), resin costs and supply, competition, and international operations.
- NTIC reported no legal proceeding it believed had a reasonable possibility of material loss. It bought the remaining 50% interest in a Singapore joint venture for $110,988, bringing ownership to 100%, and agreed to sell its indirect interest in Mütec GmbH; $163,499 was due to NTIC on that transaction at May 31.
- Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether growth in ZERUST and Natur-Tec sales, especially oil-and-gas sales, persists given order timing and lengthy customer adoption cycles.
- Joint-venture earnings, service fees, and dividend distributions: these materially contribute to results and cash availability, while NTIC generally does not control JV dividend decisions.
- Why operating cash flow remained negative despite higher earnings, and whether receivables, inventory, and accrued liabilities convert to cash as expected.
- Progress on planned R&D and capital spending, and whether the credit facility is renewed or additional financing is needed.
- Potential effects of foreign exchange, raw-material costs and supply, customer concentration, and the effective tax rate on future margins and earnings.