Northern Technologies International Corporation (NTIC) — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended February 28, 2022. The quarter is NTIC’s second fiscal quarter; comparisons are with the periods ended February 28, 2021. Amounts are in U.S. dollars.
Business context and reporting period
NTIC develops and sells corrosion-prevention products and services under ZERUST and bio-based, compostable plastics under Natur-Tec. It operates internationally through subsidiaries, distributors and joint ventures. The filing covers the quarter and first half of fiscal 2022; interim results are not necessarily indicative of full-year results.
Effective September 1, 2021, NTIC acquired the remaining 50% of its Indian joint venture, Zerust India, for $6.25 million and began consolidating it. As a result, current-period sales and expenses include Zerust India, while its prior-period results were reflected through joint-venture income.
Financial performance and liquidity
| Metric | Three months ended Feb. 28, 2022 | Six months ended Feb. 28, 2022 | Comparable 2021 period |
|---|---|---|---|
| Total net sales | $16.75 million, +31.0% | $34.94 million, +36.7% | $12.78 million; $25.56 million |
| Gross profit | $4.98 million | $10.69 million | $4.25 million; $8.72 million |
| Gross margin | 29.8% (vs. 33.3%) | 30.6% (vs. 34.1%) | Prior-period margins shown in parentheses |
| Operating income | $445,000 (vs. $1.77 million) | $1.71 million (vs. $3.48 million) | |
| Net income attributable to NTIC | $183,000; diluted EPS $0.02 | $4.68 million; diluted EPS $0.48 | $1.31 million / $0.13; $2.57 million / $0.26 |
| Operating cash flow | Not separately presented for the quarter | $2.12 million | $1.96 million for six months |
Six-month net income includes a $3.95 million noncash remeasurement gain from the Zerust India acquisition. The gain was recorded in the first half, not the three-month quarter, in the statements of operations. Excluding that gain, the year-to-date earnings comparison is materially different; the filing does not present adjusted earnings as a non-GAAP measure.
ZERUST sales rose 27.6% in the quarter and 34.3% for six months; Natur-Tec sales rose 45.3% and 46.3%, respectively. Management attributes growth to the acquisition and increased demand. Joint-venture equity income fell 51.9% for the quarter and 38.7% for six months; joint-venture sales also declined.
Cost of goods sold increased faster than sales, reaching 70.2% of sales in the quarter and 69.4% for six months, versus 66.7% and 65.9% in the prior-year periods. Management cited raw-material inflation, higher labor and shipping costs. Operating expenses increased 14.4% for the quarter and 17.0% for six months.
At February 28, 2022, cash was $7.49 million, working capital was $25.33 million, and current assets were $38.60 million against current liabilities of $13.27 million. The company had $4.20 million outstanding on its revolving credit line, compared with no balance at August 31, 2021. The facility was maintained at up to $5 million under the terms described in the filing; NTIC reported compliance with its debt covenants. Cash declined by $193,000 from fiscal year-end.
Six-month investing cash outflow was $5.79 million, principally reflecting the Zerust India acquisition, capital expenditures and patent investments. Financing cash inflow was $2.79 million, including $4.20 million of credit-line borrowings, offset in part by dividends. NTIC paid dividends of $0.14 per share in the first half.
Changes, outlook, risks and unusual items
- The Zerust India acquisition added $4.68 million of revenue and $497,000 of net income from the acquisition date through February 28, 2022. It also produced $3.95 million of acquisition-related remeasurement gain. Customer-relationship intangibles of $6.35 million are amortized over 15 years; goodwill recorded was $4.78 million.
- Management expected sales softness related to the pandemic to continue through at least Q3 FY2022 and anticipated supply-chain and inflationary pressures to persist through the fiscal year. It said planned actions to pass cost increases to customers might not benefit results until the second half of fiscal 2022.
- There is no specific full-year revenue or earnings guidance in the filing. NTIC estimated FY2022 capital expenditures of approximately $2.2–$2.5 million and stated that available liquidity and expected cash generation should fund operations and planned uses for at least 12 months.
- Key risks include COVID-19 effects on demand and operations; shipping delays, freight costs and raw-material availability and pricing; foreign-exchange exposure (which NTIC does not hedge); joint-venture performance; and volatility in oil-and-gas and Natur-Tec sales. Oil-and-gas sales can be seasonal and depend partly on oil prices and customer project timing.
- NTIC was in the process of terminating its Russia joint venture and said it did not expect the termination to be material. It also disclosed that the Russia-Ukraine conflict could worsen inflation, supply-chain, market and geopolitical risks; broader effects were uncertain.
- 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 during the quarter related to integrating Zerust India.
Investor facts to verify
- Separate underlying operating performance from the $3.95 million acquisition remeasurement gain, and confirm the quarter-versus-year-to-date timing of that gain.
- Track whether NTIC can recover higher raw-material, labor and freight costs through pricing, and whether gross margins stabilize.
- Monitor Zerust India’s contribution to consolidated sales, earnings and cash generation against the acquisition’s financing and amortization costs.
- Review credit-line availability, maturity and covenants as amendments changed the facility’s capacity over time; $4.20 million was drawn at quarter-end.
- Assess the trajectory of joint-venture income and distributions, oil-and-gas orders, Natur-Tec demand, and the effects of supply disruptions and geopolitical developments.