Northern Technologies International Corporation (NTIC) — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended May 31, 2021; comparative periods ended May 31, 2020. NTIC develops corrosion-prevention products and services under ZERUST and bio-based, compostable products under Natur-Tec. Its results also include equity income and service fees from unconsolidated joint ventures.
Financial performance
- Revenue: Q3 net sales were $15.42 million, up 58.2%; nine-month sales were $40.98 million, up 9.0%. ZERUST sales rose 68.3% in Q3 and 24.9% year to date. Natur-Tec sales increased 27.3% in Q3 but fell 28.3% year to date.
- Profit: Q3 operating income was $2.58 million versus an operating loss of $0.72 million a year earlier. Net income attributable to NTIC was $2.05 million, or $0.21 per diluted share, compared with a $0.97 million loss, or $0.11 loss per share. Nine-month attributable net income was $4.63 million, or $0.47 per diluted share, versus $0.43 million, or $0.05 per diluted share.
- Joint ventures: Equity income was $2.03 million in Q3 and $5.78 million for nine months, up 150.5% and 66.7%, respectively. Service-fee income was $1.59 million and $4.39 million. Joint-venture sales themselves are not consolidated as NTIC sales.
- Margins and expenses: Gross margin was 34.2% in Q3 versus 33.3%; year-to-date margin was 34.1% versus 33.6%. Operating expenses were $6.31 million in Q3, up 11.7%, and $18.09 million year to date, up 0.4%. Management attributed improved cost of goods sold as a percentage of sales primarily to product mix.
- Cash flow: Nine-month operating cash flow was $1.05 million, down from $3.01 million. Investing cash outflow was $0.40 million; financing cash outflow was $1.31 million. Cash declined $0.52 million to $5.88 million.
- Liquidity and debt: Working capital was $29.68 million. Current assets were $37.23 million and current liabilities $7.55 million. NTIC had $5.13 million in available-for-sale securities and no borrowings on its $3.0 million revolving credit facility; it reported compliance with loan covenants. Lease liabilities totaled about $0.49 million.
- Capital returns: NTIC reinstated its quarterly dividend in January 2021 and declared two $0.065-per-share dividends during the nine-month period. No shares were repurchased.
Changes, outlook, and risks
- Management linked the sales and earnings recovery primarily to increased demand as markets rebounded from COVID-19 disruptions. Joint-venture sales increased 70.2% in Q3 and 28.1% year to date, supporting higher equity income.
- COVID-19 continued to affect demand, production capacity, supply chains, and operations. Management expected adverse effects to continue through the remainder of FY2021 and possibly beyond, particularly for Natur-Tec products and some international operations.
- Oil-and-gas sales can be volatile because of oil-market conditions, long customer sales cycles, and the timing of large orders. Foreign-exchange exposure is unhedged; plastic resins are a key commodity-price exposure. NTIC also depends materially on joint-venture performance and distributions.
- Management expected FY2021 research and development spending of $4.0–$4.3 million and capital expenditures of approximately $6.8–$7.0 million. A real-estate and building purchase in China was expected at approximately RMB 40.0 million (about $6.2 million); the filing says the purchase agreement was executed in FY2021’s fourth quarter.
- Management believed available resources and expected operating cash flows, joint-venture distributions, service fees, and financing capacity would fund operations and planned investments for at least 12 months. Future dividends are not assured. No earnings guidance was provided.
- Management said ordinary-course legal matters were not expected to materially affect results, financial position, or cash flows. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the recovery in ZERUST demand and joint-venture earnings persists, and how much earnings depend on those ventures.
- Whether Natur-Tec sales recover from the year-to-date decline and continued COVID-related pressure.
- Cash conversion and working-capital trends, particularly higher trade receivables and amounts due from joint ventures.
- Funding, timing, and execution of the planned China property purchase and stated FY2021 capital-spending program.
- The sustainability of the reinstated dividend given cash flows, investment needs, and ongoing pandemic and market risks.