Northern Technologies International Corporation (NTIC) — Q1 FY2020 Form 10-Q
Business context and period. The unaudited quarter ended November 30, 2019, compared with the three months ended November 30, 2018. NTIC develops and sells corrosion-prevention products and services under ZERUST and bio-based, compostable products under Natur-Tec. It operates through subsidiaries and a network of joint ventures; joint ventures are accounted for using the equity method, not consolidated. Share and per-share figures reflect the June 2019 two-for-one stock split.
Financial performance and liquidity
- Revenue: $14.63 million, up 3.8% year over year. Natur-Tec sales rose 16.2% to $4.68 million; ZERUST sales fell 1.1% to $9.95 million.
- Profit: Gross profit was $4.83 million, up 4.2%; gross margin was approximately 33.0%, versus 32.9%. Operating income was $1.58 million, down 16.2%; operating margin was approximately 10.8%, versus 13.4%. Net income attributable to NTIC was $1.21 million, or $0.13 per diluted share, versus $1.50 million, or $0.16.
- Joint ventures: Equity income declined 35.4% to $1.29 million, while service fees fell 4.9% to $1.36 million. Joint-venture net sales, which are not NTIC consolidated revenue, decreased 16.5% to $25.46 million.
- Cash flow: Operating activities used $1.57 million, compared with $0.74 million used a year earlier. Investing activities provided $0.35 million and financing activities used $0.56 million. Cash declined $1.75 million to $4.11 million.
- Liquidity and debt: Working capital was $25.25 million, versus $25.46 million at August 31, 2019. Cash plus available-for-sale securities totaled $7.09 million. NTIC had no borrowings under its $3.0 million revolving credit facility and was in compliance with covenants. The facility maturity was extended to January 7, 2021 after quarter-end.
- Other measures: R&D expense was $0.96 million, up 10.3%. The company declared a quarterly dividend of $0.065 per share, compared with $0.06 in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue growth was led by Natur-Tec finished-product sales in North America and India. ZERUST oil-and-gas sales declined 47.2% to $0.52 million; industrial ZERUST sales rose 2.9%.
- Joint-venture results weakened, including EXCOR equity income of $0.82 million versus $1.52 million. Management attributed the decline primarily to lower demand and sales at existing customers.
- Operating expenses decreased 4.5% to $5.90 million, mainly due to lower personnel costs and cost-control actions. General and administrative expense declined 17.9%, partly offset by higher R&D and selling expenses.
- Net income attributable to NTIC fell 19.0%, reflecting weaker joint-venture operations despite higher gross profit and lower operating expenses.
Outlook, risks, and unusual items
- Management expects fiscal 2020 R&D spending of $3.6–$3.9 million and capital expenditures of approximately $0.6–$0.9 million. It gave no specific full-year revenue or earnings guidance.
- Management believes available liquidity, expected operating cash flows, joint-venture distributions and fees, and financing resources will fund operations and commitments for at least 12 months. It may seek additional debt or equity financing for growth; availability and terms are not assured.
- Management expects quarterly earnings to remain volatile, particularly due to joint-venture performance, oil-and-gas sales and Natur-Tec sales. Oil-and-gas orders may be affected by oil prices, long sales cycles and order timing. The filing also cites international, foreign-exchange, resin-cost, customer-demand, competition and supplier risks; NTIC does not hedge foreign-exchange exposure.
- Management noted possible second-quarter seasonality from the Chinese New Year, North American holidays and lower winter corrosion activity.
- Adoption of lease accounting (ASC 842) on September 1, 2019 resulted in recognition of approximately $0.60 million in right-of-use assets and lease liabilities. At November 30, total operating lease liabilities were $0.60 million.
- A lawsuit involving NTIC, NTI Asean and individuals associated with former joint venture Tianjin Zerust remains pending in China. NTIC could not reasonably estimate any recovery; management stated ordinary-course claims are not expected to materially affect results, financial position or cash flows.
- NTIC reported effective disclosure controls. It identified no material change in internal control over financial reporting other than implementation of controls related to the new lease standard.
Important facts for investors to verify
- Whether Natur-Tec growth can continue and offset weaker ZERUST oil-and-gas demand and lower joint-venture earnings.
- How working-capital movements, particularly receivables, inventory and accrued liabilities, affect cash generation in subsequent quarters.
- Joint-venture sales, profitability, distributions and the timing and collectability of related receivables and service fees.
- Progress and potential outcomes of the Tianjin Zerust litigation and liquidation-related matters; any recovery remains uncertain.
- Actual fiscal 2020 R&D and capital spending, dividend decisions, and continued compliance with revolving-credit covenants.