Northern Technologies International Corporation (NTIC) — Q3 FY2019 Form 10-Q
Reporting period: Three and nine months ended May 31, 2019; comparative periods ended May 31, 2018. Financial statements are unaudited. NTIC develops and sells corrosion-prevention products and services under ZERUST and bio-based, compostable plastics under Natur-Tec. Its joint ventures are accounted for using the equity method, so their sales are not consolidated.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Net sales | $14.89 million | $12.92 million | $42.30 million | $36.68 million |
| Gross profit | $4.75 million | $4.33 million | $13.42 million | $12.19 million |
| Gross margin | 31.9% | 33.5% | 31.7% | 33.2% |
| Operating income | $1.77 million | $2.45 million | $5.45 million | $5.98 million |
| Net income attributable to NTIC | $1.48 million | $2.14 million | $4.38 million | $4.56 million |
| Diluted earnings per share | $0.16 | $0.23 | $0.46 | $0.49 |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $2.72 million | $(0.14) million |
- Sales mix: Q3 sales grew 15.2%; nine-month sales grew 15.3%. Natur-Tec sales increased 89.5% in Q3 and 98.4% year to date, reaching $4.82 million and $13.05 million, respectively. ZERUST sales fell 2.9% in Q3 and 2.8% year to date, to $10.08 million and $29.25 million.
- Profitability: Lower gross margin reflected a greater share of Natur-Tec sales, which carry lower margins than traditional ZERUST industrial products. Q3 operating income and NTIC-attributable net income declined despite sales growth, as joint-venture results weakened and operating expenses increased.
- Joint ventures: Equity income was $1.88 million in Q3, down 16.4%, and $5.60 million for nine months, down 3.4%. Joint-venture sales declined 11.8% in Q3 and 4.7% year to date. Service fees from joint ventures also decreased.
- Cash and liquidity: At May 31, cash and cash equivalents were $5.22 million, available-for-sale securities $2.54 million, working capital $25.69 million, and current liabilities $6.67 million. Cash increased $1.06 million from August 31, 2018. Nine-month investing cash flow was $(0.04) million and financing cash flow was $(1.65) million, including $1.64 million of common-stock dividends paid.
- Debt: No borrowings were outstanding on the $3.0 million revolving credit facility. The facility matures January 7, 2020; NTIC reported compliance with its covenants. The company also reported $88,831 of performance-based letters of credit.
- Dividends and equity: NTIC declared quarterly dividends of $0.06 per share during the first nine months, compared with $0.05 per share in the prior-year periods. Per-share data reflect a subsequent two-for-one stock split.
Changes, outlook, and risks
- Growth was led by Natur-Tec finished products in North America and India. ZERUST oil-and-gas sales rose 56.9% year to date to $2.23 million, but management cautioned that orders are volatile, sales cycles can be long, and oil prices and order timing can affect quarterly results. ZERUST industrial sales were lower, primarily due to weaker demand in North America and China.
- Management expected fiscal 2019 research and development spending of $3.4–$3.6 million and capital expenditures of approximately $0.75–$0.90 million; $0.72 million of capital expenditures had been incurred through May 31. The filing provides no formal revenue or earnings guidance.
- Management believed available cash, securities, operating cash flows, joint-venture distributions and fees, and financing capacity would be sufficient for at least the next 12 months. It also noted that additional borrowing or debt/equity financing might be considered for growth opportunities, with no assurance of availability on acceptable terms.
- Management expects quarterly earnings to remain subject to volatility from joint-venture performance, oil-and-gas sales, and Natur-Tec sales. Other cited exposures include foreign exchange (not hedged), plastic-resin costs, international operations, competition, customer and market demand, and dependence on joint ventures and distribution partners.
- The prior-year nine-month tax expense included a $700,000 one-time, noncash provisional charge related to U.S. tax reform; the lower current-period tax expense partly offset operating and joint-venture headwinds. NTIC reported no material effect from ordinary-course claims and legal actions, but said it could not reasonably estimate any recovery in its China-related lawsuit concerning the former Tianjin Zerust joint venture.
- After quarter-end, the company declared a two-for-one stock split, distributed June 28, 2019 to holders of record June 17. NTIC adopted ASC 606 in fiscal 2019 with no material impact on prior statements or retained earnings.
Important facts for investors to verify
- Whether Natur-Tec growth can continue and how its lower-margin sales mix affects consolidated gross margin.
- Whether ZERUST industrial demand stabilizes and oil-and-gas growth converts into repeatable revenue despite long sales cycles and order volatility.
- Joint-venture sales, earnings, distributions, service fees, and collection timing, including the concentration of joint-venture receivables.
- Execution against the stated fiscal 2019 R&D and capital-expenditure ranges, and the basis for management’s 12-month liquidity assessment.
- Developments in the Tianjin Zerust litigation and any resulting recovery or financial impact; the filing does not provide a clear estimate of potential recovery.