Northern Technologies International Corporation (NTIC) — Q1 FY2023 10-Q
Reporting period: Three months ended November 30, 2022; comparative period ended November 30, 2021. The statements are unaudited. NTIC develops corrosion-prevention products and services under ZERUST® and bio-based and compostable products under Natur-Tec®.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $19.95 million | $18.19 million | +9.7% |
| Gross profit / gross margin | $6.35 million / 31.8% | $5.70 million / 31.3% | Margin +0.5 percentage points |
| Operating income | $0.83 million | $1.27 million | -34.5% |
| Net income attributable to NTIC | $0.50 million | $4.49 million | -88.8% |
| Diluted earnings per share | $0.05 | $0.46 | Down $0.41 |
| Cash from operating activities | $2.00 million | $3.32 million | Down $1.32 million |
Sales growth reflected higher demand and targeted price increases. ZERUST sales rose 6.6% to $15.37 million; Natur-Tec sales rose 21.6% to $4.58 million. ZERUST oil-and-gas sales increased 66.9% to $1.62 million. Gross margin improved modestly as price increases and higher-margin oil-and-gas sales partly offset raw-material, labor and freight costs.
Profit comparisons are significantly affected by a one-time $3.95 million gain recognized in Q1 FY2022 when NTIC acquired the remaining interest in Zerust India; no comparable gain occurred in the current quarter. Current-quarter operating income also reflected higher operating expenses, including personnel, travel, professional services and startup costs for a majority-owned Taiwan subsidiary. Joint-venture equity income declined 13.5% to $1.19 million, while joint-venture sales fell 8.5% to $24.73 million.
Cash, debt and liquidity
- Cash and equivalents were $6.07 million at November 30, 2022, up from $5.33 million at August 31, 2022. Working capital was $25.41 million, versus $23.17 million.
- Operating cash flow was $2.00 million; investing activities used $0.45 million, primarily for equipment and patents; financing activities used $0.73 million, including $0.66 million in common-stock dividends.
- Inventory declined to $15.24 million from $16.34 million. Trade receivables excluding joint ventures increased $0.26 million from fiscal year-end.
- Borrowings under the PNC revolving line were $5.45 million at November 30, 2022, compared with $5.90 million at August 31, 2022. The average borrowing rate was 5.80% in the quarter, versus 2.57% in the prior-year quarter. NTIC reported compliance with its debt covenants.
- On January 6, 2023, NTIC replaced the PNC agreement with a JPMorgan Chase senior secured revolving facility of up to $10 million, maturing January 6, 2024, including a $5 million letter-of-credit sublimit. The agreement requires a minimum 1.25:1 fixed-charge coverage ratio and restricts dividends or repurchases if they would cause a default.
Outlook, commentary and risks
- Management believes available cash, operating cash flow, joint-venture distributions and financing will be adequate for operations and planned needs for at least the next 12 months. Fiscal 2023 capital expenditures are expected to be approximately $1.2–$1.5 million.
- Management expects supply-chain disruption, longer lead times, elevated shipping and raw-material costs, and inflation to continue to some degree during fiscal 2023; inflationary pressure was expected to persist into at least Q2. The duration and financial impact are not reliably estimable.
- COVID-related restrictions in China continued to soften demand there. NTIC also cited geopolitical uncertainty, including the Russia-Ukraine war, as affecting costs and joint-venture profitability.
- Quarterly results may remain volatile because of joint-venture performance, oil-and-gas order timing, and Natur-Tec demand. Management noted potential Q2 seasonality from Chinese New Year, North American holidays and lower winter corrosion activity.
- NTIC does not hedge its foreign-currency exposure. Other risks include resin-price changes, international operations, competition, long sales cycles and reliance on joint ventures and distributors. Management stated that ordinary-course legal matters were not expected to materially affect results, financial position or cash flows.
- The board declared a $0.07-per-share dividend for the quarter. Future dividends are not guaranteed and are subject to financial conditions and financing-agreement restrictions.
Important facts for investors to verify
- How much of the sales and margin improvement is sustainable after price increases, and how costs and supply disruptions evolve.
- Whether joint-venture earnings and distributions recover, given lower joint-venture sales and equity income.
- Oil-and-gas sales and Natur-Tec growth, including the effects of order timing and seasonality on quarterly results.
- Borrowings, interest costs and compliance with the JPMorgan facility’s financial covenant and dividend restrictions.
- The filing reports November 30 shares outstanding as 9,366,358 on the balance sheet, but 9,336,357 in the equity rollforward; verify the correct period-end figure. The cover page reports 9,366,358 shares outstanding as of January 12, 2023.