Northern Technologies International Corporation (NTIC) — Q3 FY2022 Form 10-Q
Reporting period: Three and nine months ended May 31, 2022; filed July 8, 2022. NTIC develops corrosion-prevention products and services under ZERUST and bio-based, compostable products under Natur-Tec. Its results include two reportable segments and equity-method income from joint ventures, whose sales are not consolidated.
Financial performance
| Metric | Three months ended May 31, 2022 | Year-over-year | Nine months ended May 31, 2022 | Year-over-year |
|---|---|---|---|---|
| Total net sales | $18.96 million | Up 23.0% | $53.91 million | Up 31.5% |
| Gross profit / gross margin | $6.24 million / 32.9% | Margin down from 34.2% | $16.93 million / 31.4% | Margin down from 34.1% |
| Operating income | $1.82 million | Down from $2.58 million | $3.53 million | Down from $6.06 million |
| Net income attributable to NTIC | $1.00 million; diluted EPS $0.11 | Down from $2.05 million; $0.21 | $5.68 million; diluted EPS $0.59 | Up from $4.63 million; $0.47 |
| Operating cash flow | Not presented by quarter in this filing | $1.78 million | Up from $1.05 million |
- ZERUST sales were $14.45 million for the quarter and $41.99 million year to date; Natur-Tec sales were $4.52 million and $11.92 million, respectively. Growth in both segments reflected increased demand and the consolidation of Zerust India.
- Cost of goods sold rose to 67.1% of sales for the quarter and 68.6% year to date, versus 65.8% and 65.9%. Management attributed margin pressure to higher raw-material, labor, and shipping costs.
- Joint-venture equity income declined 32.9% for the quarter and 36.6% year to date. Joint-venture sales, reported separately from NTIC consolidated sales, fell 16.8% and 10.9%, respectively.
Financial position and cash flows
- At May 31, cash and cash equivalents were $6.12 million, down from $7.68 million at August 31, 2021. Working capital was $24.73 million, versus $25.23 million.
- Current assets were $38.97 million and current liabilities were $14.24 million. Inventories increased to $13.87 million from $11.11 million.
- NTIC had $4.70 million outstanding on its revolving credit facility, with no balance at August 31, 2021. The facility was $7.00 million through August 16, 2022, then reverted to $5.00 million, and matured January 7, 2023. NTIC reported covenant compliance.
- Year-to-date investing cash use was $6.53 million, including the Zerust India acquisition; financing provided $2.63 million, principally from credit-line borrowings. The acquisition’s cash purchase price was $6.25 million.
Material changes, outlook, and risks
- NTIC acquired the remaining 50% of Zerust India effective September 1, 2021, for $6.25 million and now consolidates the business. The resulting $3.95 million remeasurement gain boosted nine-month pretax income; it was a non-recurring accounting gain. Zerust India contributed $7.26 million of revenue and $0.66 million of net income since acquisition.
- Despite year-to-date sales growth, quarterly NTIC-attributable net income fell, primarily due to higher product costs, weaker joint-venture results, and higher operating expenses. The year-to-date earnings increase included the acquisition gain.
- Management expected softer sales to persist through at least Q4 FY2022 and supply-chain disruptions, shipping delays, raw-material cost increases, and inflationary pressures to continue into FY2023. It expected cost-recovery actions to benefit margins, with some improvement already seen in Q3. No full-year revenue or earnings guidance was provided.
- Management estimated FY2022 capital expenditures of approximately $2.2–$2.5 million, primarily for NTIC China headquarters renovation and equipment. It believed available cash, operating cash flows, joint-venture distributions and fees, and financing would fund needs for at least 12 months.
- Key uncertainties include COVID-related demand and operating disruptions, persistent supply constraints and inflation, foreign-exchange exposure (not hedged), commodity prices, joint-venture performance, and volatility in oil-and-gas and Natur-Tec sales. Oil-and-gas orders may be lumpy and depend partly on oil prices. NTIC terminated its Russia joint venture in May 2022 and said the termination was not material.
- Management said ordinary-course legal matters were not expected to materially affect results, financial position, or cash flows. Disclosure controls were assessed as effective; internal-control changes primarily involved integrating Zerust India.
Important facts for investors to verify
- How much of reported growth reflects Zerust India consolidation versus underlying demand, and whether the acquisition’s contribution and integration progress continue.
- Whether pricing and other mitigation actions offset raw-material, labor, and freight inflation, and whether gross margins recover.
- Joint-venture sales, profitability, distributions, and receivable collection; NTIC reported average joint-venture trade-receivable days outstanding of 86, up from 24 days at the prior fiscal year-end.
- Credit-facility availability, benchmark interest rate, covenants, and refinancing or repayment plans ahead of the January 2023 maturity. The filing’s debt note references a Bloomberg short-term bank yield index plus 2.50%, while its market-risk discussion references LIBOR plus 2.50%.
- Cash conversion and working-capital needs, including rising inventory and receivables, alongside dividends and planned capital spending.