Northern Technologies International Corporation (NTIC) — Form 10-Q
Reporting period: Three and nine months ended May 31, 2023; filed July 13, 2023. Financial statements are unaudited. NTIC sells corrosion-prevention products and services under ZERUST and bio-based compostable products under Natur-Tec. Its consolidated sales do not include sales made by its equity-method joint ventures.
Financial performance
| Metric | Three months ended May 31, 2023 | Three months ended May 31, 2022 | Nine months ended May 31, 2023 | Nine months ended May 31, 2022 |
|---|---|---|---|---|
| Net sales | $20.97 million | $18.96 million | $59.19 million | $53.91 million |
| Gross profit; gross margin | $7.69 million; 36.7% | $6.24 million; 32.9% | $20.45 million; 34.5% | $16.93 million; 31.4% |
| Operating income | $2.37 million | $1.82 million | $4.49 million | $3.53 million |
| Net income attributable to NTIC | $1.53 million | $1.00 million | $2.91 million | $5.68 million |
| Diluted earnings per share | $0.16 | $0.11 | $0.30 | $0.59 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $3.51 million | $1.78 million |
- Quarterly sales rose 10.6%; nine-month sales rose 9.8%. ZERUST sales grew 11.4% for the quarter and 9.4% year to date. Natur-Tec sales grew 7.8% and 11.3%, respectively.
- ZERUST oil-and-gas sales increased 32.7% in the quarter and 77.6% year to date, though management cautions that large orders and oil-price conditions can make this business volatile.
- Lower raw-material costs and a higher contribution from oil-and-gas products supported gross-margin improvement. Operating expenses increased 12.8% for the quarter and 12.1% year to date, mainly due to personnel, professional services, travel, and startup costs for a subsidiary assuming a former Taiwan joint venture’s operations.
- Nine-month parent-company earnings fell 48.7%, chiefly because the prior-year period included a $3.95 million nonrecurring gain from the Zerust India acquisition. Excluding that gain, the comparison is materially different; the filing does not provide a full adjusted earnings measure.
Balance sheet, debt and liquidity
- At May 31, 2023, cash and cash equivalents were $6.20 million, working capital was $23.74 million, and total assets were $87.31 million, versus $5.33 million, $23.17 million, and $86.19 million, respectively, at August 31, 2022.
- Debt included $5.20 million drawn on a $10 million senior secured revolving facility and $2.81 million of China subsidiary term loans. The revolving facility matures January 6, 2024; China loans mature after one year and carry 3.25% interest. NTIC reported compliance with debt covenants at May 31.
- The revolving facility requires a minimum fixed-charge coverage ratio of 1.25 to 1.00 and restricts dividends or repurchases if they would cause default. The filing does not state the amount of unused capacity after accounting for letters of credit.
- Net cash provided by operations was $3.51 million; investing activities used $2.68 million, including $2.61 million of property and equipment purchases; financing activities provided $0.08 million. Cash increased $0.86 million over the nine-month period.
- NTIC paid $1.97 million in common-stock dividends in the first nine months and declared $0.07 per share for each of the three quarters. No shares were repurchased.
Outlook, risks and notable items
- Management believes available cash, operating cash flows, joint-venture distributions and fees, and financing arrangements will fund operations and planned uses of capital for at least 12 months. This assessment should be considered alongside the January 2024 revolving-facility maturity.
- Management expects fiscal 2023 capital expenditures of approximately $2.6 million to $3.1 million, primarily for a new warehouse, equipment and facility improvements. NTIC bought an adjacent 26,000-square-foot Minnesota building for $1.2 million and expects about $1.0 million in renovations.
- Management says supply-chain disruptions and inflation may persist through the remainder of fiscal 2023. Raw-material availability and costs, China demand and operations, COVID-related effects, currency movements, and the Russia-Ukraine war’s commodity-price effects remain risks. NTIC does not hedge foreign-exchange exposure.
- China demand remained soft year to date but improved in the third quarter after restrictions were lifted. The company also flagged ongoing quarterly earnings volatility from joint ventures, oil-and-gas orders and Natur-Tec sales.
- Management expects no material effect on results, financial position or cash flows from disclosed ordinary-course legal matters. Disclosure controls were deemed effective; the filing reports no material internal-control change other than continued integration of Zerust India controls.
Important facts for investors to verify
- How NTIC will renew, repay or replace the revolving facility before its January 2024 maturity, and its ongoing compliance with the fixed-charge coverage covenant.
- Whether gross-margin improvement is sustainable if raw-material costs or supply conditions worsen, and how much growth depends on volatile oil-and-gas orders.
- The cash timing and reliability of joint-venture distributions and service fees relative to reported equity-method income.
- Progress and costs of the Taiwan subsidiary transition, planned warehouse renovations, and other fiscal 2023 capital spending.
- Developments in China demand, supply-chain exposure, and foreign-currency effects; NTIC reports that it does not hedge currency risk.