Business Context and Reporting Period
Company: Northern Technologies International Corp (NTIC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2011 (Nine months ended May 31, 2011)
Business Overview: NTIC develops and markets proprietary environmentally beneficial products, primarily corrosion prevention technologies (ZERUST®), bio-plastic compounds (Natur-Tec®), and waste-to-fuel conversion equipment. The company operates globally through a network of 26 joint ventures and direct sales. A significant accounting change occurred in the fourth quarter of fiscal 2010 with the consolidation of its Brazilian subsidiary, Zerust Prevenção de Corrosão S.A. (Zerust Brazil), which impacts year-over-year comparability.
Key Financial Metrics
| Metric (Nine Months Ended May 31) | 2011 | 2010 |
|---|---|---|
| Total Net Sales | $13,977,337 | $8,825,078 |
| Gross Profit | $4,821,549 | $3,054,033 |
| Operating Income | $3,427,997 | $1,562,869 |
| Net Income Attributable to NTIC | $2,872,369 | $1,734,314 |
| Diluted EPS | $0.66 | $0.41 |
| Cash and Cash Equivalents (May 31, 2011) | $2,676,921 | $1,776,162 (Aug 31, 2010) |
| Working Capital (May 31, 2011) | $8,905,217 | $5,918,923 (Aug 31, 2010) |
| Total Debt (Note Payable) | $1,104,682 | $1,144,922 (Aug 31, 2010) |
Note: Gross margin for the nine months ended May 31, 2011, was approximately 34.5%.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net sales increased 58.4% year-over-year. This was driven by a 56.8% increase in ZERUST® sales and a 97.1% increase in Natur-Tec® sales. The consolidation of Zerust Brazil contributed significantly to these figures.
- Profitability: Net income attributable to NTIC increased 65.6%. Operating income more than doubled, rising from $1.56 million to $3.43 million.
- Joint Venture Performance: Equity in income of joint ventures increased 56.4% to $4.55 million, and fees for services provided to joint ventures increased 30.1% to $4.48 million, reflecting a 39.3% increase in total net sales of the joint venture network.
- Operating Expenses: Total operating expenses increased 32.9%, primarily due to the consolidation of Zerust Brazil, increased personnel costs, and a higher accrual for management bonuses ($1.19 million vs. $0.57 million in the prior period).
- Cash Flow: Net cash used in operating activities was $1.81 million, compared to $1.25 million in the prior period. This usage was offset by $2.29 million in net cash provided by investing activities, largely due to $2.77 million in dividends received from joint ventures.
Guidance, Outlook, and Risks
- Outlook: Management anticipates quarterly net income will remain subject to significant volatility due to the performance of joint ventures and the cyclical nature of sales into the oil and gas industry and Natur-Tec® bioplastics.
- R&D Investment: NTIC anticipates spending between $4.0 million and $4.5 million on research and development for the full fiscal year 2011 (net of reimbursements).
- Key Contracts: A $2.6 million contract with Petrobras for ZERUST® FlangeSaver™ products is expected to be fulfilled primarily in fiscal 2012.
- Liquidity: The company maintains a $3.0 million revolving line of credit with no outstanding balance as of May 31, 2011. A term loan of approximately $1.1 million (refinanced in Jan 2011) matures in 2016.
- Risks: Key risks include dependence on joint venture success and dividend distributions, foreign currency exchange rate fluctuations (exposure to Euro, Yen, Rupee, etc.), raw material price volatility, and the lengthy sales cycles associated with the oil and gas sector.
Investor Verification Checklist
- Joint Venture Dividends: Verify the sustainability of the $2.77 million in dividends received from joint ventures, as NTIC does not control dividend decisions.
- Zerust Brazil Consolidation: Confirm the impact of the new consolidation of the Brazilian subsidiary on future comparability and working capital requirements.
- Oil & Gas Sales Cycle: Assess the timeline for revenue recognition from the Petrobras contract and other oil and gas initiatives, which are noted to have long sales cycles.
- Receivables Aging: Review the aging of receivables from joint ventures, which averaged 124 days outstanding as of May 31, 2011, driven largely by the Indian joint venture.
- Debt Covenants: Monitor compliance with the minimum fixed charge coverage ratio of 1.10:1.00 required by the loan agreements.