Northern Technologies International Corporation (NTIC) — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended February 29, 2020; filed April 8, 2020. NTIC sells corrosion-prevention products and services under ZERUST and bio-based, compostable products under Natur-Tec, through subsidiaries and joint ventures.
Financial performance
| Metric | Three months ended Feb. 29, 2020 | Three months ended Feb. 28, 2019 | Six months ended Feb. 29, 2020 | Six months ended Feb. 28, 2019 |
|---|---|---|---|---|
| Net sales | $13.23 million | $13.32 million | $27.87 million | $27.41 million |
| Gross profit | $4.55 million | $4.03 million | $9.37 million | $8.66 million |
| Operating income | $0.70 million | $1.79 million | $2.28 million | $3.67 million |
| Net income attributable to NTIC | $0.18 million | $1.40 million | $1.39 million | $2.90 million |
| Diluted earnings per share | $0.02 | $0.15 | $0.15 | $0.31 |
- Quarterly sales fell 0.6%; six-month sales rose 1.7%. Gross margin improved to 34.4% for the quarter and 33.6% for six months, from 30.3% and 31.6%, respectively. NTIC attributed the improvement largely to a greater proportion of higher-margin ZERUST oil-and-gas sales.
- Quarterly and six-month operating expenses rose 19.7% and 6.8%, respectively. Joint-venture equity income fell 20.7% for the quarter and 28.6% for six months; service fees from joint ventures also declined.
- ZERUST sales were $9.02 million for the quarter (down 1.0%) and $18.97 million for six months (down 1.1%). Natur-Tec sales were $4.22 million (up 0.3%) and $8.90 million (up 8.1%), respectively. Six-month ZERUST oil-and-gas sales grew 18.2% to $1.59 million.
- For the six months, operating cash flow was $4.21 million, versus $0.26 million a year earlier. Investing cash outflow was $3.29 million and financing cash outflow was $1.15 million. Operating cash flow included $5.56 million of dividends received from joint ventures.
Financial position and liquidity
- At February 29, 2020, cash and equivalents were $5.63 million, available-for-sale securities $6.51 million, current assets $36.11 million and current liabilities $6.68 million. Working capital was $29.43 million, up from $25.46 million at August 31, 2019.
- NTIC had no borrowings on its $3.0 million revolving credit facility and was in compliance with its covenants. The facility maturity was extended to January 7, 2021. The company reported $88,831 in performance-based letters of credit with another bank.
- Total assets were $67.78 million and total equity was $60.79 million. The company declared quarterly dividends of $0.065 per share during the period, versus $0.06 in the prior-year periods.
Outlook, risks and notable items
- COVID-19: NTIC said the pandemic had reduced demand in China and other parts of Asia; NTIC China was suspended from January 18 through February 28, 2020. At filing, its India location was under government shutdown through April 15. Management anticipated significantly lower global demand and a likely material adverse effect on business, results and financial condition from fiscal Q3 onward; the amount and duration were not estimable.
- Management expects continued earnings volatility related to joint-venture performance, oil-and-gas sales and Natur-Tec sales. It forecast fiscal 2020 research and development spending of $3.5 million–$3.7 million and capital expenditures of approximately $0.5 million–$0.7 million. No earnings or revenue guidance was provided.
- Management believed available cash, securities, operating cash flows, joint-venture distributions and financing capacity would be adequate for at least 12 months, while noting that additional financing may be pursued for growth and might not be available on acceptable terms.
- Other risks include dependence on joint ventures and their dividend decisions, foreign-exchange exposure (not hedged), plastic-resin costs, and the volatility and long sales cycles of oil-and-gas markets. A long-running lawsuit involving the former Tianjin Zerust joint venture remained unresolved; NTIC could not reasonably estimate any recovery.
- NTIC adopted the new lease standard on September 1, 2019, recognizing approximately $0.6 million of lease assets and liabilities. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Subsequent quarterly results and cash flows, especially the scale and duration of COVID-19 effects on NTIC, its suppliers, customers and joint ventures.
- Whether joint-venture income and dividend distributions recover, and how lower JV sales affect NTIC’s fee income and liquidity.
- Whether improved gross margins persist as product mix changes, while selling and personnel expenses remain elevated.
- Execution and sales variability in oil and gas and Natur-Tec, including the impact of oil prices and customer order timing.
- Capacity to maintain dividends and planned investment under the pandemic’s effects; future dividends are not guaranteed.