Northern Technologies International Corporation — Q2 FY2019 Form 10-Q
Reporting period: Fiscal quarter and six months ended February 28, 2019; comparisons are with the corresponding 2018 periods. Financial statements are unaudited. NTIC sells corrosion-prevention products and services under ZERUST and bio-based, compostable products under Natur-Tec, through subsidiaries and a global joint-venture network.
Financial performance
| Metric | Three months ended Feb. 28, 2019 | Three months ended Feb. 28, 2018 | Six months ended Feb. 28, 2019 | Six months ended Feb. 28, 2018 |
|---|---|---|---|---|
| Total net sales | $13.32 million (+9.0%) | $12.21 million | $27.41 million (+15.4%) | $23.76 million |
| Gross profit | $4.03 million | $4.20 million | $8.66 million | $7.86 million |
| Gross margin | 30.3% | 34.4% | 31.6% | 33.1% |
| Operating income | $1.79 million | $2.24 million | $3.67 million | $3.53 million |
| Net income attributable to NTIC | $1.40 million; $0.30 diluted EPS | $1.33 million; $0.29 diluted EPS | $2.90 million; $0.61 diluted EPS | $2.42 million; $0.52 diluted EPS |
| Equity income from joint ventures | $1.72 million | $1.81 million | $3.72 million | $3.55 million |
| Fees for services to joint ventures | $1.44 million | $1.61 million | $2.87 million | $3.12 million |
- Sales mix: Natur-Tec sales rose 108% for the quarter to $4.21 million and 104% year to date to $8.24 million, principally on higher finished-product sales in North America and India. ZERUST sales fell 10.6% for the quarter to $9.11 million and 2.8% year to date to $19.17 million, reflecting weaker demand from existing customers; six-month oil-and-gas sales nevertheless increased 55.7% to $1.34 million.
- Margins and earnings: Cost of goods sold rose faster than sales, lowering gross margin; management attributed this mainly to Natur-Tec’s larger share of revenue and its lower margins versus traditional ZERUST industrial products. Quarterly operating income declined despite higher sales. NTIC-attributable net income rose year over year, but the comparison benefited from a $700,000 one-time tax charge recorded in the prior-year quarter under the Tax Reform Act. Current-period effective tax rates were 13.7% for the quarter and 13.6% year to date.
- Cash flow: Six-month operating cash flow was $262,153, versus cash used of $516,199 a year earlier. Inventory growth and lower accrued liabilities were significant uses of operating cash. Investing activities provided $1.58 million, mainly from sales of available-for-sale securities; financing activities used $1.14 million, including $1.09 million in shareholder dividends.
- Liquidity and debt: At February 28, 2019, cash was $4.94 million, available-for-sale securities $1.23 million, working capital $24.18 million, and current liabilities $6.61 million. Cash plus securities totaled $6.16 million. No borrowings were outstanding under the $3.0 million revolving credit facility; NTIC reported covenant compliance. The facility maturity was extended to January 7, 2020.
Changes, outlook, and risks
- Compared with the prior-year quarter, total sales grew but gross profit and operating income declined. Year-to-date sales and gross profit increased, while operating income rose modestly. The company increased its quarterly dividend to $0.12 per share from $0.10 a year earlier.
- Management expects fiscal 2019 research and development spending of $3.4–$3.6 million and capital expenditures of approximately $0.6–$0.9 million. It expects continued investment in China, R&D, oil-and-gas corrosion prevention, and Natur-Tec, but did not quantify those other investments. Management believes available liquidity, operating cash flows, joint-venture distributions and fees, and financing access will be adequate for at least 12 months. Future dividends are not assured.
- Quarterly results may fluctuate with joint-venture profitability and distributions, oil-and-gas order timing and oil prices, Natur-Tec sales, and demand in end markets. Management said the second fiscal quarter was affected by the long Chinese New Year, the North American holiday season, and reduced corrosion activity during colder weather.
- NTIC does not hedge foreign-currency exposure; it also faces plastic-resin price risk. It may seek additional debt or equity financing for growth opportunities, with no assurance of availability or acceptable terms. The filing identifies risks involving international operations, joint-venture dependence, competition, suppliers, and market acceptance of newer products.
- A lawsuit concerning alleged breaches of duties related to former China joint venture Tianjin Zerust remains pending; NTIC could not reasonably estimate any recovery. Management said other ordinary-course claims were not expected to materially affect results, financial position, or cash flows.
- NTIC adopted ASC 606 on September 1, 2018 using the modified retrospective method; adoption had no impact on revenue recognition or retained earnings. The company was assessing the effect of the new lease standard, expected to apply beginning in fiscal 2020.
Important facts for investors to verify
- Whether Natur-Tec growth can continue and improve margins, and whether ZERUST demand—particularly in industrial and oil-and-gas markets—recovers.
- Whether the shift in product mix, inventory buildup, and working-capital needs affect cash generation in subsequent quarters.
- How much of year-to-date earnings growth reflects operating performance versus the prior-year one-time tax charge.
- Future joint-venture earnings, service fees, and dividend distributions, including their timing and currency exposure.
- Developments in the Tianjin Zerust litigation and any subsequent assessment of potential recovery or loss.
- Actual fiscal 2019 R&D and capital spending, and the impact of adopting lease-accounting requirements.