Northern Technologies International Corporation — Q1 FY2012 Form 10-Q
Reporting period: Three months ended November 30, 2011; comparative period ended November 30, 2010. Balance-sheet comparisons are against August 31, 2011. NTIC develops and sells corrosion-prevention products and services, primarily under ZERUST, and bio-based/compostable products under Natur-Tec. It operates internationally through subsidiaries, distributors and joint ventures; joint ventures are accounted for using the equity method and are not consolidated.
Financial performance and position
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Consolidated net sales | $4.832 million | $4.098 million | +17.9% |
| Gross profit / gross margin | $1.623 million / 33.6% | $1.408 million / 34.3% | Margin down 0.7 percentage points |
| Operating income | $1.033 million | $1.029 million | +0.3% |
| Income before tax | $1.041 million | $1.017 million | +2.4% |
| Net income attributable to NTIC | $959,000 | $900,000 | +6.6% |
| Diluted EPS | $0.22 | $0.21 | Up $0.01 |
| Equity income from joint ventures | $1.358 million | $1.695 million | -19.9% |
| Fees for services to joint ventures | $1.445 million | $1.452 million | -0.4% |
- ZERUST sales were $4.453 million, up 14.9%; Natur-Tec sales were $379,000, up 70.2%. The latter represented 7.9% of company sales, versus 5.4% a year earlier. Sales excluding joint ventures increased 24.1%, while sales to joint ventures declined 15.0%, primarily due to shipment timing.
- Cost of goods sold rose 19.3% and reached 66.4% of sales, versus 65.7%. Management cited shipping, production overhead and raw-material cost increases, as well as greater Natur-Tec sales, which generally carry lower margins.
- Operating expenses declined 3.8% to $3.393 million. R&D expense fell 31.8% to $814,000, partly reflecting higher contract reimbursements ($197,000 versus $26,000).
- Joint ventures’ aggregate sales were $28.795 million, up 6.3%, but their aggregate net income fell to $2.539 million from $3.170 million. EXCOR, NTIC’s largest joint venture, was the main source of the decline in NTIC’s equity income.
Liquidity and debt: Cash and cash equivalents were $3.407 million at November 30, versus $3.266 million at August 31. Working capital was $11.360 million, up from $9.086 million. Current assets were $14.328 million and current liabilities $2.969 million. Notes payable totaled approximately $1.067 million, including $76,000 current; no amount was drawn on the $3.0 million revolving line at quarter-end. The term loan is secured by company assets and bears interest at LIBOR plus 2.15%.
Cash flow: Operating activities used $1.786 million, compared with $1.993 million used in the prior-year quarter. Investing activities provided $1.936 million, mainly from $2.031 million in joint-venture dividends; financing activities provided $3,000. Cash increased by $141,000 to $3.407 million. The operating cash outflow reflected equity-method income, working-capital investment and reductions in payables and accruals; equity income is not itself cash received.
Material changes, outlook and risks
- Revenue growth and slightly lower operating expenses supported modestly higher earnings, but lower joint-venture income and a reduced gross margin constrained improvement. Foreign-currency translation produced a $1.178 million loss, resulting in a $243,000 comprehensive loss despite positive net income.
- Management expected to spend $4.3–$4.5 million on FY2012 R&D, net of expected contract reimbursements, and approximately $1.2 million on capital expenditures, primarily laboratory expansion and equipment. It planned continued investment in oil-and-gas corrosion applications and bioplastics.
- Management believed cash, operating cash generation, joint-venture distributions and financing availability would fund operations and commitments for at least 12 months. It cautioned that quarterly earnings may remain volatile because of joint-venture results and uneven sales of newer products. Oil-and-gas sales may require lengthy trials and customer adoption cycles.
- Credit facility event: The $3.0 million revolving facility had been scheduled to mature January 10, 2012. On January 10, 2012, PNC agreed to extend maturity to January 9, 2013 and waive a technical default for failure to deliver the November 30, 2011 compliance certificate. The facility’s other terms remained unchanged. The loan agreements require a minimum 1.10:1 fixed-charge coverage ratio; management expected covenant compliance for the rest of FY2012.
- Risks cited include dependence on joint-venture earnings and discretionary dividends, automotive-market health, foreign-exchange movements (not hedged), resin costs and availability, competition, and market acceptance and long sales cycles for newer products. NTIC also disclosed extended payment arrangements with its India joint venture and that it was considering converting up to $600,000 of service-fee receivables from that venture into equity.
- Management reported no legal proceeding believed likely to result in a material loss. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Key facts investors should verify
- Whether joint-venture profitability, dividend decisions and payments—particularly from EXCOR and the India venture—support future earnings and cash availability.
- Collection progress and terms for India-related product and service receivables, including the proposed conversion of up to $600,000 of fees receivable into equity.
- Compliance with the 1.10:1 fixed-charge coverage covenant after the certificate-delivery default was waived, and the facility’s extended maturity and availability.
- Whether revenue growth can offset gross-margin pressure, and whether Natur-Tec and oil-and-gas initiatives achieve durable commercial adoption.
- Delivery of the stated FY2012 R&D and capital-expenditure plans, and the impact of foreign-currency movements and raw-material costs.