Northern Technologies International Corporation (NTIC) — Q1 FY2021 10-Q
Reporting period: Three months ended November 30, 2020. Comparative period: three months ended November 30, 2019. NTIC develops and sells corrosion-prevention products and services under ZERUST and bio-based, compostable products under Natur-Tec, and earns income and fees from its joint-venture network.
Financial performance and liquidity
- Revenue: Consolidated net sales were $12.78 million, down 12.7% year over year. ZERUST sales rose 2.7% to $10.22 million; Natur-Tec sales fell 45.4% to $2.56 million.
- Profit: Gross profit was $4.47 million, down 7.5%. Operating income was $1.72 million, up 8.6%. Net income was $1.41 million; net income attributable to NTIC was $1.26 million, or $0.13 per diluted share, versus $1.21 million and $0.13 per diluted share.
- Margins: Gross margin was approximately 34.9%, compared with 33.0% a year earlier; cost of goods sold declined to 65.1% of sales from 67.0%. The mix shift away from lower-margin Natur-Tec sales supported gross margin.
- Joint ventures: Equity income increased 41.1% to $1.83 million. Joint-venture sales, which are not included in NTIC’s consolidated net sales, increased 5.2% to $26.78 million.
- Cash flow: Operating activities provided $1.60 million, compared with $1.57 million used in the prior-year quarter. Investing activities used $1.18 million; financing activities provided $36,000. Cash increased $550,000 to $6.95 million.
- Liquidity and debt: Working capital was $28.17 million. Cash and available-for-sale securities totaled $13.34 million. No amounts were drawn on the $3.0 million revolving credit facility; NTIC reported compliance with its covenants. Balance-sheet liabilities included operating lease obligations; the filing reports no outstanding borrowings.
- Other metrics: Total assets were $69.21 million at November 30, 2020, versus $66.07 million at August 31, 2020. No dividend was declared in the quarter; the quarterly dividend remained suspended.
Material changes versus the prior-year quarter
- Sales declined primarily due to pandemic-related demand weakness, especially in Natur-Tec finished products in North America and India. Natur-Tec demand was also affected by reduced activity in apparel and at venues, restaurants, campuses, and offices.
- ZERUST sales increased, supported by China and oil-and-gas demand, partly offset by softer North American demand. Oil-and-gas sales were $563,000, up 8.0%.
- Joint-venture income increased on higher joint-venture sales and profitability. Operating expenses were nearly flat at $5.91 million; R&D expense rose 11.9% to $1.08 million.
- Income tax expense increased to $379,000 from $264,000, largely due to foreign operations. NTIC maintained a full valuation allowance against U.S. deferred tax assets.
Outlook, risks, and unusual items
- Management expects COVID-19 to continue weighing on demand, sales, and earnings during the remainder of fiscal 2021 and possibly beyond; the duration and impact remain uncertain. Some facilities operated at reduced capacity, and supply-chain and customer disruptions remain risks.
- NTIC expects fiscal 2021 R&D spending of $3.9–$4.1 million and capital expenditures of approximately $600,000–$900,000. These are spending expectations, not earnings guidance.
- Management expects sufficient liquidity for at least the next 12 months, based on cash, securities, forecast operating cash flows, joint-venture distributions and fees, and financing availability. Future financing, if needed, may not be available on acceptable terms and could dilute shareholders.
- Quarterly results may be volatile due to joint-venture performance, oil-and-gas order timing and oil prices, and Natur-Tec demand. Other risks include foreign-exchange exposure, resin costs, competition, and international operations. NTIC does not hedge foreign-currency risk.
- On December 21, 2020, after quarter-end, NTIC amended its PNC credit agreement, including revising the interest-rate terms, extending maturity to January 7, 2022, and changing covenant mechanics. No facility borrowings were outstanding at quarter-end.
- The quarterly dividend suspension has no stated end date. Management said ordinary-course legal matters were not expected to materially affect results, financial position, or cash flows.
Important facts for investors to verify
- Whether the sharp Natur-Tec sales decline persists and how demand recovery affects segment mix and gross margin.
- Whether ZERUST growth in China and oil and gas can offset softer demand elsewhere, considering long sales cycles and order volatility.
- Joint-venture earnings, cash distributions, and receivable collection trends; NTIC’s equity-method income is distinct from cash received.
- COVID-19, supply-chain, foreign-exchange, and raw-material developments, along with actual R&D and capital spending versus management’s expectations.
- Any changes to the credit facility, covenant compliance, dividend policy, or need for additional financing.