Northern Technologies International Corporation (NTIC) — Q3 FY2024 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2024. Amounts are in U.S. dollars. The company develops corrosion-prevention products and services under ZERUST and bio-based, compostable products under Natur-Tec; it also earns equity income and service fees from joint ventures.
Financial performance
| Metric | Three months ended May 31, 2024 | Year over year | Nine months ended May 31, 2024 | Year over year |
|---|---|---|---|---|
| Net sales | $20.69 million | Down 1.4% | $61.71 million | Up 4.3% |
| Gross profit / margin | $7.89 million / 38.2% | Margin up from 36.1% | $23.57 million / 38.2% | Margin up from 34.2% |
| Operating income | $1.52 million | Down from $1.91 million | $5.11 million | Up from $3.55 million |
| Net income attributable to NTIC | $0.98 million; $0.10 diluted EPS | Down from $1.06 million; $0.11 EPS | $3.57 million; $0.36 diluted EPS | Up from $1.97 million; $0.20 EPS |
| Joint-venture operations: equity income plus service fees | $2.61 million | Down 3.6% | $7.44 million | Down 0.3% |
For the nine-month period, net cash from operating activities was $7.58 million, versus $3.51 million a year earlier. Investing used $2.60 million, primarily for property and equipment and patents; financing used $4.59 million, including dividends and line-of-credit repayments. Cash increased by $0.39 million to $5.79 million.
At May 31, 2024, working capital was $23.18 million (current assets $37.90 million; current liabilities $14.79 million). Total debt was approximately $4.75 million: $1.99 million outstanding on the revolving facility and $2.76 million in China term loans. The company reported $72.57 million in total equity. Its $10 million secured revolving facility matures January 6, 2025; NTIC stated it complied with debt covenants.
Changes and management commentary
- Quarterly sales fell mainly because of lower ZERUST demand. ZERUST sales declined 7.8% to $14.84 million, including a 31.9% drop in oil-and-gas sales. Natur-Tec sales rose 20.1% to $5.85 million.
- Nine-month sales growth was driven by Natur-Tec, up 22.5% to $16.25 million; ZERUST declined 1.0% to $45.46 million. Natur-Tec represented 26.3% of nine-month sales, versus 22.4% in the prior-year period.
- Lower raw-material costs and insourcing improved gross margin. Operating expenses rose 7.1% in the quarter and 7.3% year to date, largely from personnel, travel, and professional-services costs.
- Joint-venture sales declined 2.7% for the quarter and 5.1% year to date. Management cited weaker demand and a lost customer at EXCOR in Germany, with regional softness linked in part to higher energy prices and the Russia-Ukraine war.
- Management expects earnings to remain exposed to inflation and supply-chain disruption, and quarterly results to vary with joint-venture performance, oil-and-gas orders, and Natur-Tec demand. It believes available cash, operating cash flow, joint-venture distributions and fees, and financing capacity will cover needs for at least 12 months. Planned investment areas include subsidiaries and joint ventures, R&D, marketing, oil-and-gas applications, and Natur-Tec.
- NTIC spent $2.52 million on capital expenditures in the first nine months, primarily facility improvements and ERP implementation. The filing also states expected fiscal-2024 capital expenditures of approximately $0.6 million to $1.1 million; that forecast appears inconsistent with reported spending to date and merits clarification.
Risks, contingencies, and controls
- Management reported disclosure controls were not effective at May 31, 2024 because of a previously disclosed material weakness involving the probability assessment for employee retention credit (ERC) income. NTIC restated previously issued 2023 interim financial statements after determining ERC income recognition was premature; remediation steps were in progress.
- The company identified ERP implementation as a new risk: delays, added costs, or deficiencies could disrupt inventory management, customer fulfillment, or operations.
- Other cited exposures include foreign exchange (not hedged), resin prices, floating-rate debt, international operations, supply-chain and geopolitical disruption, and sales volatility. Joint-venture trade receivables rose to $0.59 million from $0.19 million at August 31, 2023; average days outstanding increased to 127 from 34, primarily due to Thailand and South Korea balances.
- Management stated ordinary-course legal matters were not expected to materially affect results, financial position, or cash flows. No material impact was reported from adoption of the expected-credit-loss accounting standard.
Important facts for investors to verify
- Whether the ERC-related material weakness has been remediated and controls are operating effectively.
- Whether ERP implementation remains on schedule and within budget, and clarification of the stated fiscal-2024 capital-expenditure forecast.
- Collection progress on joint-venture receivables and whether elevated days outstanding persist.
- Renewal or refinancing plans for the revolving facility before its January 2025 maturity, and continued covenant compliance.
- Trends in North American ZERUST demand, oil-and-gas order timing, Natur-Tec growth, and EXCOR performance.
- The MD&A gives quarterly income before tax as $1,487,722, while the financial statements report $1,478,722; verify the correct figure.