Business context and reporting period
Northern Technologies International Corporation (NTIC) filed this unaudited Form 10-Q for the fiscal quarter ended May 31, 2012, its third quarter of fiscal 2012. The filing also reports results for the nine months ended May 31, 2012, compared with the same periods in 2011. NTIC develops corrosion-prevention products and services sold mainly under ZERUST, and bio-based and biodegradable plastics sold under Natur-Tec. It operates directly and through subsidiaries and a network of joint ventures; joint ventures are not consolidated.
Financial performance and position
| Metric | Three months ended May 31, 2012 | Nine months ended May 31, 2012 |
|---|---|---|
| Total net sales | $7.805 million, up 53.0% | $17.611 million, up 26.0% |
| Gross profit | $3.661 million; gross margin 46.9% | $6.778 million; gross margin 38.5% |
| Operating income | $2.438 million | $4.163 million |
| Net income attributable to NTIC | $1.454 million; diluted EPS $0.33 | $3.019 million; diluted EPS $0.68 |
For comparison, prior-year sales were $5.101 million and $13.977 million, gross margins were 32.2% and 34.5%, and NTIC-attributable net income was $1.024 million and $2.872 million, respectively. Operating income includes equity income and service fees from joint ventures.
- Sales growth reflected increased Zerust Brazil sales, including deliveries under Petrobras contracts, higher Natur-Tec sales, and growth in ZERUST packaging and services. ZERUST represented about 92% of company sales; Natur-Tec sales grew 138.4% for the quarter and 104.1% year to date.
- Gross margin improved, primarily because Zerust Brazil sold a higher mix of higher-margin products. Joint venture equity income was $1.823 million for the quarter, up 5.7%, and $4.405 million year to date, down 3.2%. Joint venture service-fee income fell 54.8% for the quarter and 22.3% year to date.
- Operating cash flow was negative $1.173 million for the nine months, versus negative $1.813 million a year earlier. Investing cash flow was positive $2.517 million, including $3.046 million of joint venture dividends; financing cash flow was positive $0.013 million. Cash increased $1.200 million to $4.466 million.
- At May 31, 2012, working capital was $11.367 million, total assets $40.928 million, and total equity $36.108 million. Note payable totaled about $1.029 million; no borrowings were outstanding on the $3.0 million revolving credit line.
Changes, outlook, risks and unusual items
- Compared with the prior year, the quarter’s main improvement was higher direct sales and gross margin. Year-to-date earnings growth was more modest, as lower joint venture service fees and equity income partly offset direct business growth.
- During the quarter, HNTI shareholders waived $985,204 of past-due service fees. NTIC reversed $492,602 of fees and recorded a corresponding increase in equity income; the mutual waiver did not directly affect combined NTIC/HNTI earnings and was intended to strengthen HNTI working capital. HNTI also recorded a $605,000 write-down of a Polymer Energy unit; NTIC recognized its 50% share, $302,500, as lower joint venture income year to date.
- Foreign currency translation reduced NTIC-attributable comprehensive income by $2.563 million year to date. Management cited weaker European joint venture sales amid the European sovereign debt crisis and currency movements.
- Management expected fiscal 2012 research and development spending of $3.9–$4.1 million, net of anticipated reimbursements, and capital expenditures of about $1.2 million, primarily for laboratory expansion and equipment. No specific full-year revenue or earnings guidance is provided.
- Management believed available cash, operating flows, joint venture distributions and financing capacity would fund operations and planned needs for at least 12 months. It anticipated renewing the credit line before its January 9, 2013 expiration; future borrowing or equity financing for growth was possible, with no assurance of availability or acceptable terms.
- Risks include dependence on joint venture performance and distributions, quarterly earnings volatility, long sales cycles for oil-and-gas and emerging products, automotive and global economic conditions, currency movements, competition, and raw-material availability and prices. NTIC does not hedge foreign currency exposure.
- The term loan and credit line carry financial and other covenants; NTIC reported compliance at May 31, 2012. A technical failure to deliver a November 2011 compliance certificate had been waived in January 2012. The filing reports no legal proceeding with a reasonably possible material loss. In June 2012, NTIC and HNTI’s other 50% owner each agreed to receive additional HNTI equity in exchange for $484,000 of service-fee receivables.
Important facts for investors to verify
- Whether sales and improved gross margin—especially Brazil and Petrobras-related sales—are sustainable beyond the reported period.
- Collection and timing of joint venture receivables: NTIC reported average outstanding days of 162 for joint venture trade receivables and 242 for service-fee receivables.
- Whether joint venture earnings, distributions and service fees recover, given weaker reported joint venture sales and the HNTI fee waiver and asset write-down.
- Actual fiscal 2012 R&D and capital spending, and renewal terms for the $3.0 million credit facility.
- Effects of currency movements, the European economic environment, raw-material costs and the long sales cycles for newer products.