Northern Technologies International Corporation (NTIC) — Q1 FY2024 Form 10-Q
Reporting period: Three months ended November 30, 2023, compared with the three months ended November 30, 2022. Balance-sheet amounts are as of November 30, 2023, compared with August 31, 2023. NTIC sells corrosion-prevention products and services under ZERUST and bio-based, compostable products under Natur-Tec, through subsidiaries, distributors and joint ventures.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $20.18 million | $19.95 million |
| Gross profit | $7.33 million | $6.35 million |
| Gross margin | 36.3% | 31.8% |
| Operating income | $1.38 million | $0.83 million |
| Net income attributable to NTIC | $0.90 million; $0.09 diluted EPS | $0.50 million; $0.05 diluted EPS |
| Operating cash flow | $3.08 million | $2.00 million |
| Capital expenditures and patent investment | $0.42 million cash outflow | $0.45 million cash outflow |
- Sales increased 1.1%. ZERUST sales rose 0.2% to $15.41 million; Natur-Tec sales rose 4.2% to $4.78 million.
- Cost of goods sold fell 5.5%, and gross margin improved, principally because of lower overall raw-material prices and actions to pass cost increases to customers.
- Operating expenses increased 5.2% to $8.31 million. Management attributed the increase mainly to personnel costs, professional services and travel; research and development expense declined 12.0%.
- Joint-venture equity income decreased 7.3% to $1.10 million, and joint-venture sales decreased 4.7% to $23.56 million. Lower EXCOR earnings, associated with a customer loss and softer regional demand, were partly offset by higher earnings at other joint ventures. Service fees from joint ventures increased 5.7% to $1.25 million.
Financial position, debt and liquidity
- Cash and cash equivalents were $6.09 million; working capital was $22.42 million, down from $22.95 million at August 31, 2023. Current assets were $38.27 million and current liabilities were $15.85 million.
- Outstanding borrowings totaled approximately $5.81 million: $3.00 million on the revolving credit facility and $2.81 million on NTIC China term loans. The revolver provides up to $10.0 million, is secured, and carries floating-rate interest. China term loans bear 3.25% interest and are secured by an office building.
- NTIC renewed the revolving credit facility on January 5, 2024, extending maturity to January 6, 2025; other terms were unchanged. NTIC reported compliance with debt covenants at November 30, 2023.
- Management believes existing cash, operating cash flow, joint-venture distributions and fees, and available financing will be sufficient for at least the next 12 months. The company expects fiscal 2024 capital expenditures of approximately $1.6 million to $2.1 million, primarily for ERP software, equipment and facility improvements.
- The company paid a $0.07-per-share dividend during the quarter. Future dividends are not assured and remain subject to board decision and financing restrictions.
Outlook, risks and notable disclosures
- Management expects quarterly earnings to remain volatile, notably because of joint-venture performance, oil-and-gas order timing, and Natur-Tec sales. Oil-and-gas sales fell 7.4% in the quarter; management cited orders not shipped before quarter-end and cautioned that this business is subject to significant quarterly swings.
- Management expects second-quarter sales may be affected by the Chinese New Year, the North American holiday season and lower winter corrosion activity. It also expects inflation and global supply-chain disruptions to continue to weigh on results to some extent.
- Key risks include foreign-exchange exposure (which NTIC does not hedge), raw-material and resin prices, international operations and geopolitical conditions, competition, and reliance on joint ventures, distributors and suppliers. Management cited the Russia-Ukraine war and related energy-price effects as contributors to weaker EXCOR demand and profitability.
- Disclosure controls and procedures were deemed ineffective at quarter-end because of a previously reported material weakness in controls over assessing recognition of employee retention credit income. NTIC had restated previously issued fiscal 2023 interim financial statements in connection with this accounting matter and is implementing remediation procedures.
- Management stated that ordinary-course legal matters were not expected to materially affect results, financial position or cash flows. Adoption of the expected-credit-loss standard had no material impact.
Important facts for investors to verify
- Whether the ERC-related material weakness has been fully remediated, and whether the revised controls operate effectively.
- Whether gross-margin improvement from lower input costs is sustainable, particularly if raw-material prices or inflation rise.
- Subsequent performance of EXCOR and other joint ventures, including collections: joint-venture trade receivables rose, and average days outstanding increased to 83 days from 34 days at fiscal year-end.
- Timing and conversion of oil-and-gas orders, and the pace of Natur-Tec demand and planned investment.
- Execution and spending for the expected $1.6 million–$2.1 million fiscal 2024 capital program, as well as liquidity and covenant headroom under floating-rate debt.
- Foreign-currency, geopolitical and supply-chain developments that could affect reported earnings and joint-venture results.