Northern Technologies International Corporation (NTIC) — FY2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended August 31, 2020 (not calendar-year Q4 alone). NTIC develops and sells corrosion-prevention products and services under ZERUST and compostable and bio-based plastics under Natur-Tec, operating in more than 60 countries. It reports two segments and accounts for 19 joint ventures using the equity method; joint-venture sales to their customers are not included in NTIC’s consolidated net sales.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total consolidated net sales, including sales to joint ventures | $47.64 million | $55.75 million |
| Gross profit / gross margin | $16.03 million / 33.6% | $17.78 million / 31.9% |
| Operating income / operating margin | $1.59 million / 3.3% | $6.59 million / 11.8% |
| Income (loss) before tax | $1.74 million | $6.66 million |
| Income tax expense / effective tax rate | $2.67 million / 153.7% | $0.84 million / 12.7% |
| Net income (loss) attributable to NTIC | $(1.34) million; $(0.15) per diluted share | $5.21 million; $0.55 per diluted share |
| Net cash from operating activities | $4.91 million | $5.48 million |
| Cash and cash equivalents | $6.40 million | $5.86 million |
| Available-for-sale securities | $5.54 million | $3.57 million |
| Working capital | $27.10 million | $25.46 million |
- Sales by segment: ZERUST revenue was $34.47 million, down 9.7%; Natur-Tec revenue was $13.16 million, down 25.1%. Oil-and-gas sales rose 2.0% to $2.78 million.
- Joint ventures: Equity income fell 40.9% to $4.27 million and service fees declined 19.5% to $4.61 million. Joint-venture sales were $87.03 million, down 24.1%; EXCOR sales fell to $32.55 million from $47.02 million.
- Cash flow and investment: Investing activities used $2.78 million, including purchases of securities and capital assets; financing activities used $1.52 million, principally dividends. Capital expenditures were $0.71 million.
- Debt and liquidity: No borrowings were outstanding under the $3.0 million revolving credit facility at year-end, and NTIC reported compliance with covenants. Current assets were $33.20 million and current liabilities $6.10 million. Operating lease liabilities totaled $0.66 million.
Material changes versus FY2019
- Consolidated sales decreased 14.5%, reflecting lower demand during the COVID-19 pandemic. Sales to unaffiliated customers declined 14.1%; sales to joint ventures declined 24.3%.
- Gross margin improved to 33.6% from 31.9%, primarily because oil-and-gas products, which generally carry higher margins, made up a larger share of sales. Lower sales and reduced joint-venture contributions nevertheless drove operating income sharply lower.
- NTIC moved from attributable net income of $5.21 million to a $1.34 million loss. Higher tax expense was a major factor, alongside lower sales and joint-venture income.
- Cash from operations fell to $4.91 million from $5.48 million. Working capital increased, supported in part by dividend suspension, collections, and joint-venture distributions.
Outlook, risks and unusual items
- Management withdrew/suspended specific full-year financial guidance amid COVID-19 uncertainty and said the pandemic was expected to significantly adversely affect FY2021 sales and earnings. The precise duration and financial impact were not estimable.
- NTIC suspended its quarterly cash dividend after declaring $0.065 per share in each of the first two FY2020 quarters. Reinstatement is not assured. Management planned FY2021 R&D spending of $3.9–$4.1 million and capital expenditures of approximately $0.6–$0.9 million.
- A $1.63 million tax valuation-allowance impact contributed to FY2020 tax expense. At August 31, 2020, the total valuation allowance against deferred tax assets was $11.56 million; management concluded domestic deferred tax assets were more likely than not not realizable.
- Key risks include prolonged COVID-19 disruption, dependence on joint-venture fees and dividends, lower demand in automotive and other end markets, volatile oil prices and long oil-and-gas sales cycles, competition and margin pressure, limited suppliers for bioplastic resins, and foreign-exchange exposure. NTIC does not hedge foreign-currency risk.
- NTIC’s $3.0 million credit facility was scheduled to mature January 7, 2021; the filing anticipated annual renewal but did not establish that renewal had occurred. The facility references LIBOR or the bank’s prime rate.
- NTIC and its subsidiary have a pending China lawsuit relating to the former Tianjin Zerust joint venture. The company could not reasonably estimate any recovery. Management stated other ordinary-course claims were not expected to materially affect results, financial position, or cash flows.
- The audited financial statements received an unqualified opinion. Management concluded disclosure controls and internal control over financial reporting were effective as of August 31, 2020; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- How FY2021 demand and margins evolved after the filing, especially across Natur-Tec, traditional ZERUST, and oil-and-gas sales.
- Whether joint-venture earnings, service fees, and cash distributions recover, and the continuing exposure to EXCOR and other major partners.
- Whether the credit facility was renewed beyond its January 2021 maturity and whether liquidity or covenant conditions changed.
- Whether the suspended dividend was reinstated and how deferred-tax-asset realizability and expiring tax credits developed.
- Any material updates to the Tianjin Zerust litigation, supply constraints, or COVID-related operating disruptions.