Northern Technologies International Corporation (NTIC) — Q1 FY2022 Form 10-Q
Reporting period: Three months ended November 30, 2021, compared with the three months ended November 30, 2020. NTIC develops corrosion-prevention products and services under ZERUST and bio-based, compostable products under Natur-Tec. Its business includes consolidated subsidiaries and equity-method joint ventures.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total net sales | $18.19 million | $12.78 million | +42.4% |
| Gross profit | $5.70 million | $4.47 million | +27.7% |
| Gross margin | 31.3% | 34.9% | Down 3.6 percentage points |
| Operating income | $1.27 million | $1.72 million | −26.2% |
| Net income attributable to NTIC | $4.49 million | $1.26 million | Includes $3.95 million acquisition remeasurement gain |
| Diluted EPS | $0.46 | $0.13 | Increase largely reflects acquisition gain |
| Operating cash flow | $3.32 million | $1.60 million | +107.3% |
- ZERUST sales increased 41.1% to $14.42 million; Natur-Tec sales increased 47.3% to $3.77 million. ZERUST oil-and-gas sales were $971,816, up 72.7%.
- Cost of goods sold rose 50.2%, faster than sales; it increased to 68.7% of sales from 65.1%, with management citing higher raw-material and labor costs.
- Joint-venture equity income fell 24.7% to $1.37 million. Joint ventures’ own sales were $27.02 million, up 0.9%; those sales are not consolidated as NTIC revenue.
Financial position and liquidity
- At November 30, 2021, cash and cash equivalents were $8.05 million, working capital was $25.88 million, and total assets were $83.24 million.
- Current liabilities were $11.39 million. NTIC had $2.50 million outstanding on its $5.0 million revolving credit line; it reported compliance with debt covenants. The line’s stated maturity was February 22, 2022.
- On January 4, 2022, NTIC extended the facility maturity to January 7, 2023. The facility was to decrease from $5.0 million to $3.0 million beginning February 23, 2022. The filing describes the interest benchmark as daily BSBY in its debt note, but refers to LIBOR in its market-risk discussion.
- Operating cash flow was supported in part by $5.04 million of joint-venture dividends received. Investing cash use was $5.43 million, principally including the Zerust India acquisition; financing cash inflow was $1.83 million, including $2.50 million of credit-line borrowings. Cash increased by $0.37 million.
Material changes and unusual items
- Effective September 1, 2021, NTIC acquired the remaining 50% of Zerust India for $6.25 million in cash, making it a wholly owned consolidated subsidiary. Zerust India contributed $2.45 million of revenue and $292,528 of net income after acquisition.
- Revaluing NTIC’s previously held interest generated a $3.95 million gain in earnings. The gain substantially increased reported net income; operating income declined year over year.
- The purchase-price allocation was preliminary. A subsequent revision disclosed in Item 5 increased goodwill by $913,000, increased deferred tax liabilities by $774,000, and reduced intangible assets by $139,000 versus the allocation in the January 6 earnings release.
- NTIC declared and paid a quarterly dividend of $0.07 per share; no dividend was declared in the comparable prior-year quarter.
Outlook, risks and contingencies
- NTIC said COVID-related demand softness was expected to persist through at least Q2 FY2022. It also reported shipping delays and container shortages, longer raw-material lead times, higher input and labor costs, and expected supply-chain disruption and inflationary pressure to continue through FY2022.
- Management expected its actions to address inflation to begin benefiting results in the second half of FY2022. It anticipated FY2022 capital expenditures of approximately $2.2 million to $2.5 million. No specific revenue or earnings guidance was provided.
- Management stated existing cash, expected operating cash flows, joint-venture distributions and available financing should fund operations and planned uses for at least 12 months. It also warned that additional financing, if needed, may be unavailable on acceptable terms or could dilute shareholders.
- Results may fluctuate with joint-venture performance and distributions, oil-and-gas order timing and oil prices, Natur-Tec demand, foreign exchange, and seasonal factors. NTIC does not hedge its foreign-currency exposure.
- Management said ordinary-course legal matters were not expected to materially affect results, financial position or cash flows. Disclosure controls were assessed as effective; integration of Zerust India’s internal controls was underway.
Important facts for investors to verify
- How much of reported earnings growth is attributable to the one-time, noncash $3.95 million remeasurement gain, and how Zerust India performs as a consolidated subsidiary.
- The finalized acquisition purchase-price allocation and the effect of the disclosed revision on goodwill, deferred taxes and future amortization.
- Whether supply-chain, freight, raw-material and labor cost pressures ease as anticipated, and whether margins recover in the second half of FY2022.
- Credit-line availability and terms after the post-quarter amendment, including the planned reduction in capacity and the benchmark-rate reference inconsistency in the filing.
- The sustainability of joint-venture earnings and dividend distributions, given their importance to operating cash flow.