Northern Technologies International Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended November 30, 2016; unaudited results compared with the three months ended November 30, 2015. Balance-sheet comparisons are with August 31, 2016.
Business context
NTIC develops and sells corrosion-prevention products and services under the ZERUST brand and biobased, compostable products under Natur-Tec. It operates through subsidiaries and a network of 20 active joint-venture arrangements. Joint-venture sales are not consolidated, although NTIC records equity income and service fees from those ventures.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Total net sales | $9.70 million | $7.02 million |
| Gross profit | $3.09 million | $2.15 million |
| Gross margin | 31.8% | 30.6% |
| Operating income (loss) | $525,466 | $(85,591) |
| Net income (loss) attributable to NTIC | $297,639 | $(234,351) |
| Diluted earnings (loss) per share | $0.07 | $(0.05) |
| Net cash used in operating activities | $(924,426) | $(750,248) |
- Sales rose 38.1%. ZERUST sales increased 35.2% to $8.08 million; Natur-Tec sales increased 54.5% to $1.62 million. Oil-and-gas ZERUST sales were $746,331, up 119.4%.
- Equity income from joint ventures increased 29.5% to $1.27 million. Service fees from joint ventures declined 11.4% to $1.32 million, despite 10.7% growth in joint-venture sales.
- Operating expenses increased 9.6% to $5.15 million. Selling and G&A expenses rose, while R&D expense fell 36.0% to $642,522. Management attributed the shift partly to redirecting resources toward selling and administration for Natur-Tec and oil-and-gas products.
- Foreign-currency translation generated a $1.25 million other comprehensive loss; comprehensive loss attributable to NTIC was $904,491.
Liquidity, debt and cash flows
- At November 30, cash and cash equivalents were $2.53 million and available-for-sale securities were $1.75 million. Working capital was $15.88 million, down from $16.95 million at August 31.
- Total current assets were $20.00 million and current liabilities were $4.12 million. NTIC reported no borrowings on its $3.0 million revolving credit facility and said it was compliant with its covenants.
- Operating cash use was $924,426. Investing activities provided $327,105, mainly from securities sales; financing activities used $238,757, including a $200,000 distribution to a non-controlling interest and stock repurchases. Cash declined $866,134 during the quarter.
- On January 11, 2017, the company extended the credit facility’s maturity to January 7, 2018. Management said available resources should fund operations and planned investments for at least 12 months, but additional financing may be considered and could be dilutive.
Outlook, risks and notable items
- Management expects fiscal 2017 R&D spending of $2 million to $3 million and capital expenditures of approximately $200,000 to $400,000.
- Management cautioned that quarterly results may remain volatile, particularly because of joint-venture performance, oil-and-gas sales, Natur-Tec order timing and changes in China operations. It also noted possible second-quarter seasonality related to Chinese New Year, North American holidays and colder weather.
- NTIC recorded approximately $636,000 of expenses related to China operations, the former Tianjin Zerust joint venture, litigation, receivables reserves, inventory write-offs and impairment. It said China-related results may remain volatile.
- Litigation involving the former China joint venture remains unresolved; the company could not reasonably estimate a potential recovery. A separate Minnesota case against Cortec Corporation had a settlement conference scheduled for May 2017 and a trial block scheduled for July–August 2017.
- Other disclosed exposures include foreign-exchange movements (not hedged), plastic-resin commodity prices, oil prices, customer and market demand, joint-venture dependence, and competition. Management stated that operating results for this quarter are not necessarily indicative of the full fiscal year.
- On January 11, 2017, NTIC entered a five-year consulting agreement with Bioplastic Polymers LLC and director Ramani Narayan, Ph.D., for Natur-Tec-related services at $12,000 per month. The filing describes this as superseding prior oral arrangements.
Important facts for investors to verify
- Whether sales growth and improved profitability persist, especially in China, oil and gas, and Natur-Tec.
- Cash conversion and working-capital trends: NTIC reported positive net income but negative operating cash flow, with trade receivables excluding joint ventures up $699,421 from August 31.
- Joint-venture earnings, fee income, distributions and collection timing; NTIC does not control whether or when many ventures pay dividends.
- Developments and potential financial effects of the Tianjin Zerust and Cortec litigation.
- Terms and governance of the director-related consulting agreement, and the company’s actual spending against its R&D and capital-expenditure expectations.