Northern Technologies International Corporation (NTIC) — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended May 31, 2020. Unaudited consolidated results; comparisons are with the corresponding 2019 periods. NTIC develops and sells corrosion-prevention products and services under ZERUST and bio-based compostable products under Natur-Tec, alongside its investments in international joint ventures.
Key financial results
| Metric | Three months ended May 31, 2020 | Nine months ended May 31, 2020 |
|---|---|---|
| Total net sales | $9.745 million, down 34.6% year over year | $37.610 million, down 11.1% |
| Gross profit / gross margin | $3.246 million / 33.3% (prior-year margin 31.9%) | $12.619 million / 33.6% (prior-year margin 31.7%) |
| Operating income (loss) | $(0.717) million | $1.565 million |
| Net income (loss) attributable to NTIC | $(0.965) million; $(0.11) per diluted share | $0.427 million; $0.05 per diluted share |
| Operating cash flow | Not presented as a quarterly figure | $3.013 million, compared with $2.717 million |
Quarterly net sales fell to $9.745 million from $14.893 million, and NTIC swung from attributable net income of $1.482 million to a loss. For the nine-month period, attributable earnings fell from $4.381 million to $0.427 million. The filing attributes the deterioration mainly to pandemic-related demand declines, including lower sales and joint-venture earnings.
Segments and joint ventures
- ZERUST: Sales were $7.357 million in the quarter, down 27.0%, and $26.323 million for nine months, down 10.0%. Nine-month oil-and-gas sales were $2.013 million, down 9.6%.
- Natur-Tec: Sales were $2.388 million in the quarter, down 50.4%, and $11.287 million for nine months, down 13.5%. The filing cites lower North American and India finished-product sales and pandemic-related demand weakness.
- Joint ventures: NTIC’s equity income declined 56.8% to $0.812 million in the quarter and 38.1% to $3.467 million for nine months. Combined joint-venture sales were down 32.4% in the quarter and 20.3% for nine months. Joint-venture sales are not included in NTIC’s consolidated net sales.
Cost of goods sold declined as a percentage of sales to 66.7% for the quarter and 66.4% for nine months. Management attributed the improvement mainly to a lower share of Natur-Tec sales, which have lower gross margins than traditional ZERUST industrial products. Operating expenses were $5.651 million for the quarter, down 10.2%, and $18.011 million for nine months, up 0.8%.
Liquidity, cash flow and debt
- At May 31, 2020, cash and cash equivalents were $5.051 million and available-for-sale securities were $5.451 million. Working capital was $28.135 million, versus $25.461 million at August 31, 2019.
- Current assets were $32.605 million and current liabilities $4.470 million. Total assets were $64.531 million; total equity was $59.746 million.
- Nine-month operating cash flow was $3.013 million; investing cash flow was $(2.337) million and financing cash flow was $(1.318) million. Cash declined by $0.806 million from the fiscal year-end balance.
- No borrowings were outstanding under the $3.0 million revolving credit line, which was extended to January 7, 2021. NTIC reported compliance with its covenants. The filing also reports $0.089 million of performance-based letters of credit with another bank.
Outlook, risks and notable items
- NTIC withdrew and suspended its specific fiscal 2020 guidance because of COVID-19 uncertainty. Management expected the pandemic to materially adversely affect business, results and financial condition in the fourth quarter and beyond; the duration and financial impact could not be reasonably estimated.
- Facilities were generally operating, often at reduced capacity; China and India facilities had temporary closures earlier in the fiscal year. Management identified demand, customer and supplier operations, supply-chain stability and transportation as ongoing uncertainties.
- The quarterly cash dividend was temporarily suspended in April 2020. No dividend was declared for the quarter ended May 31; the duration of the suspension and future dividends were uncertain.
- Despite suspended full-year guidance, management estimated fiscal 2020 R&D spending of $3.5–$3.7 million and capital expenditures of approximately $0.5–$0.6 million.
- Other risks include quarterly variability in joint-venture earnings and distributions, volatile oil-and-gas sales, foreign-exchange exposure (not hedged), resin input costs, and pandemic-related customer and supplier disruptions. Management stated it believed existing resources and expected cash flows would fund operations for at least 12 months.
- NTIC recorded a loss on disposal of property, equipment and patents of $0.174 million for the nine-month period. A lawsuit concerning the former Tianjin Zerust joint venture remained unresolved; NTIC could not estimate any recovery. Management said other claims and legal actions were not expected to materially affect results, financial position or cash flows.
- Adoption of lease accounting resulted in recognition of approximately $0.6 million of lease assets and liabilities. At May 31, lease liabilities totaled $0.451 million.
Important facts for investors to verify
- Whether demand and production recover, and the resulting effect on ZERUST, Natur-Tec and joint-venture earnings.
- Whether joint ventures continue to generate earnings and cash distributions sufficient to support NTIC’s cash flows.
- How cash, securities, inventory and receivable collections evolve amid lower sales; inventory increased from $10.489 million at August 31, 2019 to $12.081 million.
- Whether and when the quarterly dividend is reinstated, and whether management’s 12-month liquidity assessment remains valid.
- Developments in the Tianjin Zerust litigation and any future estimate of potential recovery.