Northern Technologies International Corporation — Form 10-Q
Reporting period: Fiscal quarter and six months ended February 28, 2018; filed April 16, 2018. NTIC sells corrosion-prevention products and services under ZERUST and bio-based and compostable products under Natur-Tec. It operates through subsidiaries and a network of joint ventures, whose sales are not consolidated, although NTIC records its share of their earnings and service fees.
Financial performance
| Metric | Three months ended Feb. 28, 2018 | Six months ended Feb. 28, 2018 |
|---|---|---|
| Total net sales | $12.21 million; up 39.7% year over year | $23.76 million; up 28.8% |
| Gross profit (gross margin) | $4.20 million (34.4%); prior-year margin 32.9% | $7.86 million (33.1%); prior-year margin 32.3% |
| Operating income | $2.24 million; prior year $0.61 million | $3.53 million; prior year $1.13 million |
| Net income attributable to NTIC | $1.33 million; diluted EPS $0.29 | $2.42 million; diluted EPS $0.52 |
| Operating cash flow | Used $0.52 million in the six-month period, versus $0.82 million used in the prior-year period |
- Quarter sales growth reflected higher ZERUST industrial sales, sales to joint ventures, and Natur-Tec sales. Six-month ZERUST sales rose 28.8% and Natur-Tec sales rose 28.9%.
- Joint venture income was $1.81 million for the quarter and $3.55 million for six months; service fees from joint ventures were $1.61 million and $3.12 million, respectively. These amounts are distinct from the joint ventures’ own sales.
- Operating expenses rose 11.2% for the quarter and 10.1% year to date, but declined as a share of sales. Management cited increased personnel costs, including a higher management-bonus accrual, alongside lower general and administrative costs.
Balance sheet, liquidity and capital
- At February 28, cash and cash equivalents were $5.07 million, available-for-sale securities $3.27 million, and current assets $28.92 million. Current liabilities were $6.72 million; working capital calculated from these balance-sheet figures was $22.19 million.
- The MD&A also states working capital of $22.24 million in one passage, while another states $22.19 million. The filing text therefore contains a discrepancy; verify the reported working-capital figure.
- No borrowings were outstanding on the $3.0 million revolving credit facility. Its maturity was extended to January 7, 2019. NTIC reported compliance with its covenants. Total equity was $53.91 million.
- Cash declined $1.29 million from August 31, 2017. The company paid $0.91 million in dividends on its common stock during the six months and declared $0.10 per share quarterly dividends. Future dividends are not assured.
Outlook, risks and unusual items
- No specific revenue or earnings forecast was provided. Management expects fiscal 2018 research and development spending of $3.0–$3.4 million and capital expenditures of approximately $0.3–$0.6 million.
- Management expects quarterly results to remain volatile, citing joint venture performance, oil-and-gas sales, Natur-Tec demand, and changes in Chinese operations. Oil-and-gas sales can fluctuate with order timing and oil prices; six-month sales to that sector fell 9.4% to $0.86 million.
- Operating cash flow was negative despite net income, reflecting working-capital needs and the noncash accounting for equity-method joint venture income. Trade receivables excluding joint ventures increased $2.40 million from August 2017, and inventories increased $1.67 million.
- The Tax Cuts and Jobs Act prompted a provisional, noncash $0.70 million tax charge in the quarter to remeasure deferred tax assets and liabilities. The six-month effective tax rate was 26.5%, versus 21.3% a year earlier. A provisional $0.489 million deemed-repatriation tax was expected to be offset by foreign tax credit carryforwards; tax accounting remained subject to further analysis.
- NTIC and its majority-owned subsidiary have pending litigation in China concerning alleged breaches of duties and contractual commitments related to former joint venture Tianjin Zerust. The filing says any recovery cannot yet be reasonably estimated. Management said other claims and legal actions were not expected to materially affect results, financial position, or cash flows.
- NTIC does not hedge foreign-currency exposure and also faces plastic-resin price risk. It intends to seek shareholder ratification of an amendment increasing authorized common shares from 10 million to 15 million because of uncertainty about broker voting; it says it will not issue or reserve the additional shares unless ratification is approved.
Investor verification points
- Reconcile the two working-capital figures in MD&A against the balance sheet.
- Track whether receivables and inventory convert into cash, and whether operating cash flow improves.
- Monitor the provisional tax accounting, including the deferred-tax remeasurement and repatriation-tax offset.
- Check subsequent performance of joint ventures and Chinese operations, and developments in the Tianjin Zerust litigation.
- Confirm shareholder ratification of the authorized-share amendment and the board’s future dividend decisions.