Northern Technologies International Corporation — Q2 FY2012 Form 10-Q
Reporting period: Three and six months ended February 29, 2012; comparisons are to the periods ended February 28, 2011. The company develops corrosion-prevention products and services (ZERUST) and bio-based/biodegradable products (Natur-Tec), selling directly and through a network of joint ventures. Joint ventures are not consolidated; NTIC records equity income, service fees, and sales to them.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Net sales | $4.97m | $4.78m | $9.81m | $8.88m |
| Gross profit / margin | $1.49m / 30.0% | $1.77m / 37.1% | $3.12m / 31.8% | $3.18m / 35.8% |
| Operating income | $0.69m | $1.16m | $1.72m | $2.19m |
| Net income attributable to NTIC | $0.61m | $0.95m | $1.56m | $1.85m |
| Diluted EPS | $0.14 | $0.22 | $0.35 | $0.42 |
- Sales rose 4.1% in Q2 and 10.5% year to date. Natur-Tec sales grew 100.0% in Q2 and 84.3% year to date, while ZERUST sales were essentially flat in Q2 and up 6.8% year to date.
- Cost of goods sold rose faster than sales; management cited higher shipping, production overhead and raw-material costs, as well as Natur-Tec’s lower margins. Operating income fell about 40% in Q2 and 21% year to date.
- Joint-venture equity income increased 8.4% in Q2 but declined 8.6% year to date. Service fees from joint ventures fell 7.4% and 3.9%, respectively; management cited currency weakness and variable JV performance.
- Six-month operating cash flow was negative $2.79m, versus negative $2.42m a year earlier. Investing cash flow was positive $2.87m, principally from $3.04m of JV dividends. Cash increased $69,436 to $3.34m.
- At February 29, 2012, working capital was $11.87m, total assets $39.27m, and total equity $35.71m. The balance sheet reported approximately $1.05m of note payable, including current and long-term portions; management stated term-loan principal outstanding was $1.14m. The $3.0m revolving facility had no borrowings outstanding.
Changes, outlook and risks
- Gross margin contracted year over year, despite sales growth. R&D expense declined 14.8% year to date to $1.79m; management expects fiscal 2012 R&D spending of $4.0m–$4.2m, net of anticipated contract reimbursements.
- NTIC reported that Zerust Brazil delivered the remaining $2.5m of Petrobras Phase 2 products in March 2012, with revenue expected in fiscal Q3. Oil-and-gas sales cycles are described as lengthy, with one- to two-year trials possible.
- Management expects approximately $1.2m of fiscal 2012 capital expenditures, mainly for laboratory expansion and equipment. It believes cash, operating flows, JV distributions and financing availability will fund operations for at least 12 months, but notes future financing may be needed and could be unavailable or dilutive.
- PNC extended the revolving line’s maturity to January 9, 2013, and waived a technical default for failure to deliver a November 30, 2011 compliance certificate. NTIC expected to comply with covenants during the remainder of fiscal 2012; the minimum fixed-charge coverage covenant is 1.10:1.00.
- Key exposures include JV earnings and dividend variability, foreign-exchange movements (not hedged), European economic conditions, automotive-market health, resin prices, competition, and acceptance and distribution of emerging products. Management also noted delayed enforcement of Italy’s plastic-bag restrictions could defer Natur-Tec demand.
- One customer represented 28.9% of non-JV trade receivables at the prior-year comparison date; three JVs represented 60.0% of JV trade receivables at February 29, 2012. The filing reports no legal proceeding believed to present a reasonable possibility of material loss. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether Petrobras delivery is recognized as expected in Q3 and whether subsequent oil-and-gas orders develop beyond the announced contract.
- Whether Natur-Tec’s rapid sales growth can continue while improving its relatively low product margins.
- Collection timing and credit exposure for JV receivables, including the disclosed extended payment arrangements with the India JV.
- Future JV profitability, dividends and service-fee trends, including the effects of currency movements and European conditions.
- Cash conversion and the company’s ability to meet planned R&D and capital spending while remaining within loan covenants.