Northern Technologies International Corporation (NTIC) — Form 10-Q Summary
Reporting period: Second quarter and six months ended February 29, 2024; comparisons are with the corresponding periods ended February 28, 2023. Financial statements are unaudited. NTIC develops corrosion-prevention products and services under ZERUST and bio-based, compostable products under Natur-Tec, selling in more than 65 countries through subsidiaries, distributors and joint ventures.
Financial results and position
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $20.84 million, up 14.1% | $41.02 million, up 7.3% |
| Gross profit / gross margin | $8.34 million / 40.0%; prior-year margin 34.5% | $15.67 million / 38.2%; prior-year margin 33.1% |
| Operating income | $2.21 million, versus $0.81 million | $3.58 million, versus $1.64 million |
| Net income attributable to NTIC | $1.70 million; diluted EPS $0.17, versus $0.41 million and $0.04 | $2.60 million; diluted EPS $0.27, versus $0.91 million and $0.09 |
- Sales mix: ZERUST sales were $15.22 million for the quarter (+5.3%) and $30.62 million for six months (+2.7%). Natur-Tec sales were $5.62 million (+47.5%) and $10.40 million (+23.9%), respectively.
- Joint ventures: Equity income was $1.18 million for the quarter (+4.4%) and $2.28 million for six months (−1.6%). Joint-venture sales, which are not consolidated in NTIC’s net sales, declined 7.9% and 6.3%, respectively. The six-month decline in equity income primarily reflected lower EXCOR earnings.
- Cash flow: Six-month operating cash flow was $5.64 million, versus $2.20 million. Investing cash use was $1.51 million and financing cash use was $4.76 million. Cash decreased $0.57 million to $4.84 million.
- Liquidity: Working capital was $23.98 million, compared with $22.95 million at August 31, 2023. Current assets were $37.33 million and current liabilities $13.36 million.
- Debt: At February 29, NTIC had $1.19 million drawn on its $10 million revolving facility and $2.78 million in China term loans. The revolver maturity was extended to January 6, 2025; the facility has floating-rate borrowing costs and financial covenants. NTIC reported covenant compliance. The China loans bear 3.25% interest, are secured by an office building and mature one year after their 2023 issuance, subject to extension.
- Other: NTIC declared $0.14 per share in dividends during the six months. It spent $1.44 million on capital expenditures and expects fiscal 2024 capital expenditures of approximately $1.6–$2.1 million. Total assets were $87.31 million and total equity $71.95 million.
Material changes and management commentary
- Management attributed sales growth primarily to higher Natur-Tec demand and increased ZERUST oil-and-gas sales, with industrial ZERUST sales described as stable. Natur-Tec represented 25.4% of six-month sales, up from 22.0%.
- Gross margin improved as a share of sales, primarily due to lower raw-material costs and savings from bringing some finished-goods production in-house. Operating expenses rose 7.3% for six months, chiefly due to personnel costs and related expenses.
- EXCOR’s lower sales and earnings were attributed to a lost customer and softer regional demand associated with higher energy prices and other effects linked to the Russia-Ukraine war. Results also face variability from foreign exchange, commodity prices and joint-venture performance.
- Management believes cash, operating cash generation, joint-venture distributions and available financing will fund operations and planned investments for at least 12 months. It expects continued investment in subsidiaries, joint ventures, R&D, marketing, oil-and-gas applications and Natur-Tec. No specific earnings or revenue guidance is provided.
- Management expects quarterly results to remain volatile, particularly due to oil-and-gas order timing, Natur-Tec demand and joint-venture results. Inflation and worldwide supply-chain disruption may continue to weigh on earnings; the filing also cites seasonality, international exposure and unhedged foreign-currency risk.
Risks, contingencies and unusual items
- Control weakness: Management concluded disclosure controls and procedures were ineffective at period-end because of a previously reported material weakness in assessing when employee retention credit (ERC) income could be recognized. The issue led to restatements of certain fiscal 2023 interim statements. Remediation steps are underway, but management says the weakness is not yet fully remediated.
- Contingencies: NTIC is subject to ordinary-course legal claims. Management stated that any related liability, if any, was not expected to materially affect results, financial position or cash flows.
- Other exposures: Risks include dependence on joint ventures and distributors, raw-material availability and resin prices, competition, lengthy oil-and-gas sales cycles, geopolitical and trade disruptions, and foreign-currency movements. Management says fiscal 2024 earnings may also be affected by inflation and supply-chain issues.
Investor verification priorities
- Track whether Natur-Tec growth and improved consolidated margins continue, and whether lower input costs persist.
- Monitor joint-venture sales, EXCOR performance, receivables collection and the timing and amount of dividend distributions.
- Confirm extension or repayment arrangements for the China term loans as their stated one-year maturities approach, and monitor revolving-credit availability and covenant compliance.
- Assess progress in remediating the ERC-related material weakness and the reliability of future reporting controls.
- Compare actual fiscal 2024 capital spending with the $1.6–$2.1 million estimate and monitor the board’s future dividend decisions.