Northern Technologies International Corporation — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended February 29, 2016; comparisons are to the three and six months ended February 28, 2015. The company develops corrosion-prevention products and services under ZERUST and biobased, compostable plastics under Natur-Tec. Its business is reported in those two segments and depends materially on a network of international joint ventures.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $7.705 million, up 14.5% | $14.729 million, up 5.6% |
| Gross profit / margin | $2.437 million / 31.6% | $4.586 million / 31.1% |
| Operating income (loss) | $(35,096), versus $137,793 | $(120,687), versus $1.775 million |
| Net income (loss) attributable to NTIC | $(107,789), versus $(128,644) | $(342,140), versus $879,621 |
| Operating cash flow | $1.249 million for six months, versus $392,041 |
ZERUST sales rose 10.4% for the quarter and 2.8% for the six months. Natur-Tec sales increased 39.7% and 23.2%, respectively, led by finished-product sales in North America and India. Six-month gross margin was 31.1%, down from 32.1%; management attributed cost-of-goods-sold movements primarily to raw-material cost variations.
Joint-venture income fell 35.4% for the quarter and 37.2% for the six months, to $953,000 and $1.936 million. Service fees from joint ventures declined 2.4% and 21.5%. Management cited lower venture profitability and sales, foreign-exchange effects, weaker European manufacturing, and the wind-down of the former China venture.
Financial position and liquidity
- At February 29, 2016, cash and cash equivalents were $2.531 million and available-for-sale securities were $2.733 million; working capital was $17.481 million, up from $15.604 million at August 31, 2015.
- Total assets were $50.0 million; current liabilities were $2.745 million. No corporate debt was outstanding. The company had a $3.0 million revolving credit facility, extended to January 7, 2017, and was in compliance with its covenants.
- Six-month cash flow: operating activities provided $1.249 million; investing activities used $1.081 million; financing activities used $236,000. Operating cash flow benefited principally from $4.055 million of joint-venture dividends.
Changes, outlook, and risks
- Revenue growth did not translate into improved six-month earnings: NTIC moved from $879,621 of attributable income to a $342,140 loss, reflecting materially lower joint-venture contributions and ongoing expenses, including costs related to China.
- NTIC incurred approximately $1.418 million in the first six months on China operations, termination and liquidation of Tianjin Zerust, and related matters. The company cautioned that results may remain volatile as it transitions Chinese business to its wholly owned subsidiary.
- Management expects fiscal 2016 research and development spending of $4.0–$4.4 million and capital expenditures of approximately $400,000–$450,000 for the remainder of the fiscal year. It provided no specific revenue or earnings guidance. Management believes available resources will fund operations and planned investment for at least 12 months, while noting additional financing may be considered and could be dilutive.
- Oil-and-gas ZERUST sales were $717,570 for the six months, down 18.3%; management cited low oil prices as a possible factor. Sales into this market have long sales cycles and are expected to fluctuate. Natur-Tec sales may also vary with order timing.
- NTIC’s indirect investment in Tianjin Zerust was carried at $1.884 million; the company estimated potential impairment exposure of approximately $1.130 million, plus approximately $114,000 exposure on a receivable. It had not received financial information from Tianjin Zerust since November 2014 and reported no impairment charge for the period.
- Litigation related to Tianjin Zerust is pending in China and Minnesota. Any recovery in the China action could not be reasonably estimated; management said any liability, if any, on claims was not expected to materially affect results, financial position, or cash flows.
- Foreign-exchange exposure is material and unhedged; plastic-resin costs are exposed to commodity-price changes. Foreign-currency translation reduced comprehensive income for the six-month period.
Key investor verification points
- Reconcile six-month attributable loss per share: the financial statements report $(0.08) basic and diluted, while MD&A states $(0.07) diluted.
- Assess whether growth in consolidated product sales can offset falling joint-venture income and service fees, and review the health and cash distributions of the joint-venture network.
- Track the China transition, litigation, collectability of the Tianjin Zerust investment and receivable, and any future impairment charges.
- Monitor oil-and-gas demand, Natur-Tec order variability, foreign exchange, raw-material costs, and the company’s planned R&D and capital spending.
- Review the filing’s noted reporting details: the net-income-per-share reconciliation gives prior-period six-month attributable income of $876,621, whereas the statements report $879,621.