Northern Technologies International Corporation — Q2 FY2013 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2013; comparisons are to the periods ended February 29, 2012. Amounts are unaudited unless stated otherwise.
Business context
NTIC develops and markets corrosion-prevention products and services under ZERUST and biodegradable plastics under Natur-Tec. It sells directly and through subsidiaries, distributors and joint ventures. The filing reports two product segments: ZERUST and Natur-Tec. NTIC began consolidating NTI Asean in fiscal 2013 after increasing its ownership from 50% to 60%; this affects year-over-year comparability for joint-venture-related items.
Financial highlights
| Metric | Three months | Six months |
|---|---|---|
| Total net sales | $5.25 million, up 5.5% | $10.54 million, up 7.5% |
| Gross profit / margin | $1.61 million / 30.7% | $3.21 million / 30.5% |
| Operating income | $970,000, up from $692,000 | $1.84 million, up from $1.72 million |
| Consolidated net income | $745,000, versus $604,000 | $1.50 million, versus $1.54 million |
| Net income attributable to NTIC | $434,000; diluted EPS $0.10, down from $606,000 and $0.14 | $824,000; diluted EPS $0.18, down from $1.56 million and $0.35 |
ZERUST sales increased 3.1% for the quarter and 5.3% year to date. Natur-Tec sales rose 32.8% and 31.8%, respectively, supported by U.S. distributor growth. For the six-month period, equity income from joint ventures declined 11.2% to $2.29 million, while fees for services to joint ventures increased 31.9% to $3.62 million. Consolidated sales growth was partly offset at the earnings-per-share level by higher operating expenses, income taxes and income attributable to non-controlling interests.
Six-month operating cash flow was negative $3.45 million, compared with negative $2.79 million. Working-capital movements included increased inventory and receivables and reduced payables and accrued liabilities; reported operating cash flow also reflects the deduction of equity-method joint-venture income. Investing cash flow was positive $4.35 million, including $2.95 million of joint-venture dividends and cash acquired through NTI Asean consolidation. Financing cash flow was negative $779,000, including an $873,000 distribution to a non-controlling interest. Cash increased $124,000 to $4.26 million.
At February 28, 2013, working capital was $14.59 million, total assets were $45.44 million and total equity was $42.20 million. Debt principal was approximately $971,000, including $77,000 current; the $3.0 million revolving credit line was undrawn. Gross margin was 30.7% for the quarter versus 30.0% a year earlier, and 30.5% year to date versus 31.8%.
Changes, outlook and risks
- NTI Asean’s consolidation adds its operations to current-year results, whereas it was accounted for under the equity method in the prior-year comparison. The company obtained the additional 10% interest in exchange for license rights; management reported no income-statement impact from remeasuring the previously held interest.
- Management said six-month production and shipping costs increased temporarily as new suppliers ramped up for new products and applications. It expects to spend $3.8–$4.0 million on fiscal 2013 R&D and approximately $1.0 million on capital expenditures.
- Petrobras signed a $3.7 million Phase 3 product contract in fiscal Q1. Management now expects a series of smaller orders during the rest of fiscal 2013 and fiscal 2014, rather than one large order before fiscal year-end.
- Management believes existing cash, future operating cash flows, joint-venture distributions and available financing will fund operations and planned needs for at least 12 months. It may seek debt or equity financing for growth opportunities; availability and terms are not assured.
- Key risks include dependence on joint-venture performance and discretionary distributions, currency movements (which NTIC does not hedge), economic conditions including Europe and the U.S. automotive market, raw-material costs, competition, and lengthy sales cycles and market acceptance for oil-and-gas and Natur-Tec products. NTIC expects quarterly earnings to remain volatile.
- The $3.0 million credit line was extended to January 8, 2014; the bank also waived a technical default related to late quarterly compliance certificates. NTIC reported compliance with debt covenants at February 28, 2013 and no material legal proceeding or material loss exposure.
- Management concluded disclosure controls were effective. It reported no material change in internal control over financial reporting other than the NTI Asean consolidation.
Investor verification points
- Track whether Petrobras Phase 3 orders arrive on the revised timetable and how much revenue NTIC recognizes from them.
- Assess underlying earnings and cash generation separately from NTI Asean consolidation, non-controlling interests, joint-venture equity income and dividend receipts.
- Monitor collection of joint-venture service fees and receivables, inventory growth, and the continued use of operating cash.
- Verify whether the anticipated temporary production-cost increases ease, and whether planned R&D and capital spending remain within management’s estimates.
- Review the credit-line maturity, covenant compliance and any future financing needs, particularly if growth investments exceed internally generated funds.