Northern Technologies International Corporation — Q1 FY2013 Form 10-Q
Reporting period: Three months ended November 30, 2012; financial statements are unaudited. NTIC develops corrosion-prevention products and services, principally under ZERUST, and bio-based compostable products under Natur-Tec. It sells in more than 55 countries, including through a network of joint ventures.
Financial results
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $5.292 million | $4.832 million |
| Gross profit | $1.601 million | $1.623 million |
| Operating income | $874,000 | $1.033 million |
| Income before tax | $893,000 | $1.041 million |
| Consolidated net income | $759,000 | $935,000 |
| Net income attributable to NTIC | $390,000; $0.09 diluted EPS | $959,000; $0.22 diluted EPS |
| Operating cash flow | $(1.474) million | $(1.786) million |
- Sales rose 9.5%. ZERUST sales increased 7.7% to $4.795 million; Natur-Tec sales increased 30.8% to $496,000.
- Gross profit declined 1.3%, and gross margin narrowed to approximately 30.2% from 33.6%, as cost of goods sold grew faster than sales. Management attributed higher production and shipping costs partly to temporary supplier and product-transition effects.
- Operating income fell about 15%; NTIC-attributable net income fell 59.4%. Operating expenses increased 9.9% to $3.728 million, including higher joint-venture support and R&D costs. Equity income from joint ventures fell 15.0% to $1.154 million, while service fees from joint ventures rose 27.7% to $1.846 million.
- Cash and equivalents were $6.819 million at November 30, up from $4.138 million at August 31, 2012. Working capital was $15.307 million, versus $10.060 million at fiscal year-end. Operating cash use reflected, among other items, increased inventory and receivables; investing cash provided $4.153 million, including $2.676 million of joint-venture dividends and $1.613 million of cash from ASEAN consolidation.
- Debt consisted of a term loan with $990,503 principal outstanding; no borrowings were outstanding on the $3 million revolving credit facility. The term loan matures January 2016. The company reported compliance with debt covenants at quarter-end.
Material changes, outlook and risks
- Effective September 1, 2012, NTIC increased its ownership of NTI Asean from 50% to 60% in exchange for license rights and began consolidating the holding company. The change affects comparability: ASEAN fees and expenses are consolidated in the current quarter, while the prior-year quarter used equity-method accounting. NTIC reported no income-statement impact from remeasuring the previously held interest.
- After quarter-end, on December 11, 2012, PNC extended the revolving credit facility’s maturity from January 9, 2013 to January 8, 2014 and waived a technical default relating to delivery of quarterly compliance certificates.
- NTIC signed a Phase 3 Petrobras contract in Q1 to supply $3.7 million of ZERUST products. The filing describes oil-and-gas sales as subject to lengthy sales cycles and customer trials; it does not provide a delivery schedule for this contract.
- Management expects fiscal 2013 R&D spending of $3.8–$4.0 million net of anticipated reimbursements and capital expenditures of about $1.0 million. It expects available cash, future operating cash flows, joint-venture distributions and fees, and financing availability to cover needs for at least 12 months. No specific revenue or earnings guidance is provided.
- Management cautions that quarterly earnings may remain volatile due to joint-venture results and variable sales of oil-and-gas ZERUST and Natur-Tec products. Risks include weaker global and European markets, automotive demand, foreign exchange movements, raw-material costs, competition, market acceptance, and reliance on joint ventures, distributors and suppliers. NTIC does not hedge its foreign-currency exposure.
- NTIC reported no legal proceeding believed to present a reasonably possible material loss, and management concluded disclosure controls were effective. The filing reports no material change in internal control other than the ASEAN consolidation.
Important facts for investors to verify
- Track gross-margin recovery and whether management’s characterization of higher production and shipping costs as temporary is borne out.
- Assess the quality and timing of joint-venture receivables: trade receivables from joint ventures averaged 164 days outstanding at quarter-end, and service-fee receivables averaged 115 days.
- Monitor the actual delivery, revenue recognition and cash collection associated with the $3.7 million Petrobras Phase 3 contract, as well as the broader oil-and-gas sales pipeline.
- Review ASEAN consolidation effects on future reported fees, expenses, earnings attributable to NTIC, and non-controlling interests; reported results are not directly comparable with the prior-year quarter.
- Confirm ongoing compliance with loan covenants and the status of the revolving facility following the certificate-delivery waiver.