Northern Technologies International Corporation (NTIC) — Q2 FY2023 Form 10-Q
Business context and reporting period. The quarter ended February 28, 2023, the second quarter of NTIC’s fiscal year ending August 31, 2023. NTIC develops and sells corrosion-prevention products and services under ZERUST® and bio-based, compostable products under Natur-Tec®. It operates through subsidiaries and joint ventures and reports ZERUST and Natur-Tec as its two segments. Joint ventures are not consolidated; NTIC records its share of their income and service fees.
Financial performance and position
| Metric | Three months ended February 28, 2023 | Six months ended February 28, 2023 |
|---|---|---|
| Net sales | $18.27 million; up 9.1% year over year | $38.22 million; up 9.4% year over year |
| Gross profit and margin | $6.40 million; 35.0% | $12.76 million; 33.4% |
| Operating income | $1.29 million | $2.12 million |
| Net income attributable to NTIC | $885,248; diluted EPS $0.09 | $1.39 million; diluted EPS $0.14 |
| Operating cash flow | Not separately presented for the quarter | $2.20 million |
Gross margin improved year over year from 29.8% to 35.0% for the quarter and from 30.6% to 33.4% year to date. The filing attributes the improvement mainly to price increases and a higher contribution from oil-and-gas sales, which have higher margins. Six-month capital expenditures were $1.87 million; operating cash flow less capital expenditures was approximately $0.33 million.
At February 28, 2023, cash was $5.45 million, working capital was $24.00 million, and total assets were $86.71 million. NTIC had $7.10 million drawn on a $10.0 million secured revolving credit facility, maturing January 6, 2024. It reported compliance with the facility’s covenants, including a minimum 1.25 fixed-charge coverage ratio. The filing says management believes available resources will fund operations and planned needs for at least 12 months.
Material changes versus the prior comparable period
- Quarterly ZERUST sales increased 10.2% to $14.46 million; Natur-Tec sales increased 5.0% to $3.81 million. Six-month sales grew 8.3% for ZERUST and 13.4% for Natur-Tec.
- ZERUST oil-and-gas sales rose 212.4% in the quarter to $1.81 million and 121.1% year to date to $3.43 million, from lower prior-year levels.
- Quarterly NTIC-attributable income rose from $182,847 to $885,248, reflecting higher gross profit and joint-venture income, partly offset by higher expenses. Six-month attributable income fell from $4.68 million to $1.39 million, largely because the prior-year period included a $3.95 million nonrecurring remeasurement gain related to the Zerust India acquisition.
- Operating expenses increased 11.7% for the quarter and 11.8% year to date, driven mainly by personnel, professional-services and travel costs, and startup costs for a majority-owned subsidiary assuming a former Taiwan joint venture’s operations.
- Joint-venture equity income increased 22.3% for the quarter but only 0.9% year to date. Joint-venture sales were up 3.6% for the quarter and down 2.7% for the six months.
Outlook, risks, and unusual items
- Management expects inflationary pressures to persist at least through Q3 FY2023 and supply-chain disruptions to continue to some degree through the remainder of FY2023. The company reports longer raw-material lead times, supplier changes, and elevated shipping costs; the potential financial impact and duration are not estimable.
- COVID-related disruption continued during the first half, particularly in China, although demand there improved in Q2 after restrictions were lifted. NTIC also cites the Russia-Ukraine war, commodity-price volatility, and China-related political, trade, and operating risks.
- Oil-and-gas sales, Natur-Tec demand, and joint-venture earnings may fluctuate significantly from quarter to quarter. Oil-and-gas sales can depend on large, irregular orders and oil-market conditions; the business may involve lengthy sales cycles.
- NTIC expects fiscal 2023 capital expenditures of approximately $2.0 million to $2.5 million, including about $700,000 for renovations to a newly purchased adjacent 26,000-square-foot building. The $1.2 million property purchase closed February 28, 2023.
- A subsequent event: on April 7, 2023, NTIC China entered a one-year RMB 10 million (approximately $1.45 million) secured revolving credit facility at 3.25% annual interest.
- Management said ordinary-course legal matters were not expected to materially affect results, financial position, or cash flows. No share repurchases occurred during the six months; dividends declared were $0.14 per share.
Important facts for investors to verify
- Reconcile the six-month sales figure: the financial statements report $38,223,591, while one MD&A table prints $38,233,591; the financial-statement figure is used above.
- Monitor the $7.10 million revolving-credit balance, January 2024 maturity, floating-rate exposure, covenant compliance, and the effect of dividends and capital spending on liquidity.
- Assess whether gross-margin gains from pricing and oil-and-gas mix can persist amid inflation, supply constraints, and volatile order timing.
- Track joint-venture receivables and cash distributions. NTIC reported a temporary increase in joint-venture receivable days outstanding due to a large order and stated that the order was subsequently collected; three joint ventures accounted for 68.1% of joint-venture trade receivables at period end.
- Distinguish recurring earnings from the prior-year $3.95 million acquisition-related gain when comparing year-to-date profit.