Northern Technologies International Corporation — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended May 31, 2013. Unaudited consolidated results include NTI Asean beginning September 1, 2012, following NTIC’s increase in ownership to 60%; comparisons with 2012 are therefore not fully like-for-like for certain joint-venture-related items.
Financial performance
| Metric | Three months ended May 31, 2013 | Prior-year period | Nine months ended May 31, 2013 | Prior-year period |
|---|---|---|---|---|
| Total net sales | $5.88 million | $7.80 million | $16.42 million | $17.61 million |
| Gross profit | $1.82 million | $3.66 million | $4.94 million | $6.78 million |
| Gross margin | 31.0% | 46.9% | 30.1% | 38.5% |
| Operating income | $1.49 million | $2.44 million | $3.34 million | $4.16 million |
| Net income attributable to NTIC | $927,112 | $1.45 million | $1.75 million | $3.02 million |
| Diluted EPS | $0.21 | $0.33 | $0.39 | $0.68 |
| Cash flow from operating activities | Not presented for quarter | Not presented for quarter | $(3.05) million | $(1.17) million |
- ZERUST sales, the dominant product category, declined 25.0% for the quarter and 8.1% year to date. Natur-Tec sales fell 21.5% for the quarter but rose 9.0% year to date.
- Equity income from joint ventures was $1.44 million for the quarter and $3.73 million year to date, down 21.0% and 15.3%, respectively. Service fees from joint ventures rose to $1.92 million and $5.54 million, respectively, partly reflecting NTI Asean consolidation.
- Cash was $3.18 million at May 31, 2013, down from $4.14 million at August 31, 2012. Current assets were $15.90 million and current liabilities $2.76 million. The balance sheet implies working capital of $13.14 million.
- Debt included a $952,444 principal balance on the headquarters term loan; no borrowings were outstanding on the $3.0 million revolving credit line. The term loan matures January 2016. NTIC reported compliance with debt covenants at quarter-end.
Changes, outlook, and risks
- Lower sales largely reflected the absence of a $2.3 million Petrobras order recorded in the prior-year quarter. A $3.7 million Phase 3 Petrobras contract had been signed, but no product had been delivered through May 31. Management expected smaller orders during the remainder of fiscal 2013 and fiscal 2014 rather than one large order by fiscal year-end.
- Cost of goods sold rose to 69.0% of sales for the quarter and 69.3% year to date, versus 53.1% and 61.5%. Management attributed the increase to prior-year higher-margin oil-and-gas sales and temporary production and shipping costs for a new customer, which it expected to normalize in fiscal Q4.
- Management expected fiscal 2013 research and development spending of $3.8–$4.0 million, net of anticipated reimbursements, and capital expenditures of approximately $1.2–$1.3 million. It anticipated $750,000 in total life-insurance proceeds related to a former officer: $500,000 received and an additional $250,000 expected.
- Management said available cash, operating cash flows, joint-venture distributions and fees, and financing availability should fund operations and planned investment for at least 12 months. It anticipated another extension of the revolving credit line before its January 8, 2014 maturity; the filing gives no assurance the extension or any future financing will be available on acceptable terms.
- Key risks include dependence on joint-venture performance and distributions, variable Petrobras and oil-and-gas orders, long sales cycles, international currency exposure (not hedged), raw-material costs, and customer and distributor demand. The filing reported no legal proceeding believed reasonably likely to result in a material loss. Disclosure controls were assessed as effective.
Important facts to verify
- Reconcile management’s working-capital figures: one passage states $13,304,534, while the balance sheet and another MD&A passage support $13,136,534.
- Confirm nine-month income before tax: the financial statements report $3,323,460, while one MD&A passage states $3,232,460.
- Track Petrobras order timing and delivery, including whether the Phase 3 contract generates sales in fiscal 2013 or fiscal 2014.
- Assess the comparability and underlying performance of NTI Asean and other joint-venture income and service fees after the consolidation change.
- Monitor operating cash use, receivables and inventory growth, the credit-line extension, and whether production costs normalize as management expected.