Northern Technologies International Corporation — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2021; compared with the corresponding periods ended February 29, 2020. NTIC develops corrosion-prevention products and services under ZERUST and bio-based, compostable products under Natur-Tec. Its 19 active joint ventures are accounted for using the equity method and are not consolidated.
Financial performance and position
- Revenue: Q2 net sales were $12.78 million, down 3.4%; first-half sales were $25.56 million, down 8.3%. ZERUST sales rose 14.1% in Q2 and 8.1% for the half, while Natur-Tec sales fell 40.8% and 43.2%, respectively.
- Profit: Q2 net income attributable to NTIC was $1.31 million ($0.13 diluted EPS), versus $0.18 million ($0.02). First-half attributable income was $2.57 million ($0.26 diluted EPS), versus $1.39 million ($0.15).
- Margins: Gross margin was 33.3% in Q2 versus 34.4% a year earlier; first-half gross margin was 34.1% versus 33.6%. Operating margin was approximately 13.8% in Q2 versus 5.3%, and 13.6% for the half versus 8.2%.
- Joint ventures: Equity income increased 41.1% to $1.92 million in Q2 and $3.75 million for the first half. Joint-venture sales, which are not included in NTIC’s consolidated sales, grew 19.6% and 12.2%, respectively. NTIC received $3.32 million in joint-venture dividends during the half.
- Cash flow: First-half operating cash flow was $1.96 million, down from $4.21 million. Investing activities used $0.91 million and financing activities used $0.76 million. Cash increased $0.39 million to $6.79 million.
- Liquidity and debt: Working capital was $29.47 million; cash plus available-for-sale securities totaled $12.70 million. NTIC had no borrowings on its $3.0 million revolving credit facility and reported compliance with its covenants. The facility matures January 7, 2022. Total operating lease liabilities were approximately $0.60 million.
- Balance sheet: Total assets were $71.12 million and total equity was $62.69 million at February 28, 2021.
Changes and management commentary
- Profit improved despite lower consolidated sales, primarily due to higher joint-venture income and lower operating expenses. Q2 operating expenses fell 9.2%; first-half expenses fell 4.7%.
- ZERUST growth, particularly in China, offset part of the decline in Natur-Tec and oil-and-gas sales. Oil-and-gas revenue fell 66.2% in Q2 and 41.8% for the first half, with management citing demand and order-timing volatility.
- Management attributed weaker sales to COVID-19-related demand softness, production constraints and customer disruptions. It expected adverse effects to continue through the rest of FY2021 and possibly beyond, but said the pandemic’s duration and financial impact could not be predicted.
- The quarterly cash dividend, suspended in April 2020, was reinstated at $0.065 per share and paid in February 2021. Future dividends are not assured.
- Management expected FY2021 research and development spending of $3.9–$4.1 million and capital expenditures of approximately $0.8–$1.0 million. It stated that available resources should fund operations and planned needs for at least 12 months.
Risks, contingencies and unusual items
- Key risks include the continuing effects of COVID-19 on demand, operations and supply chains; reliance on joint-venture performance and distributions; volatile oil-and-gas and Natur-Tec sales; foreign-exchange movements; and the cost and availability of plastic resins. NTIC does not hedge foreign-currency risk.
- Management reported no legal matters expected to materially affect results, financial position or cash flows. Three joint ventures accounted for 72.1% of trade receivables from joint ventures at period-end.
- The filing says the company’s disclosure controls were effective and reports no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Natur-Tec demand and the markets affected by COVID-19 recovered as restrictions eased, and whether ZERUST growth continued beyond China.
- Joint-venture earnings, cash distributions and receivable collections; equity-method income is not the same as cash received.
- Oil-and-gas order timing and the trajectory of the company’s significant sales declines in that business.
- The filing’s MD&A gives cash of $6,778,535 in one passage, while the balance sheet and cash-flow statement report $6,788,535. Confirm the correct amount.
- Some MD&A ZERUST sales figures differ from the financial statements and segment note. Reconcile the disclosures before relying on the detailed product figures.