Northern Technologies International Corporation (NTIC) — FY2019 Form 10-K
Reporting period: Fiscal year ended August 31, 2019. This is an annual filing, not a standalone fourth-quarter report. NTIC develops corrosion-prevention products and services under ZERUST and bio-based, compostable plastics under Natur-Tec; it operates internationally through subsidiaries, distributors, and 21 unconsolidated joint ventures.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Total net sales | $55.75 million | $51.42 million | +8.4% |
| Gross profit / gross margin | $17.78 million / 31.9% | $17.26 million / 33.6% | Margin down 1.7 percentage points |
| Operating income / operating margin | $6.59 million / 11.8% | $8.02 million / 15.6% | Operating income down 17.8% |
| Net income attributable to NTIC | $5.21 million; $0.55 diluted EPS | $6.70 million; $0.72 diluted EPS | Down 22.3% |
| Operating cash flow | $5.48 million | $0.61 million | Improved |
| Cash and available-for-sale securities | $9.42 million | $7.46 million | Increased |
| Working capital | $25.46 million | $22.84 million | Increased |
| Total assets / total equity | $67.51 million / $59.67 million | $63.55 million / $55.82 million | Both increased |
Revenue mix: ZERUST sales fell 7.7% to $38.17 million (68.5% of sales), reflecting weaker demand in industrial markets, North America, and China. Oil-and-gas sales declined 11.1% to $2.73 million. Natur-Tec sales rose 74.9% to $17.58 million (31.5% of sales), led by finished products in North America and India.
Joint ventures: NTIC recorded $7.23 million of equity income and $5.73 million of service fees, both below FY2018. Joint-venture sales were $114.64 million, down 4.5%; these sales are not included in NTIC’s consolidated net sales. EXCOR contributed $5.42 million of NTIC’s joint-venture equity income, making it a significant source of earnings.
Cash, debt, and liquidity: Cash from operations was supported in part by $5.04 million of dividends received from joint ventures. Investing activities used $1.34 million; financing activities used $2.39 million, primarily for shareholder dividends. NTIC had no borrowings under its $3.0 million revolving credit facility at year-end and reported compliance with its covenants. The facility was scheduled to mature January 7, 2020. Current liabilities were $7.84 million.
Changes, outlook, and material matters
- Sales growth was driven by Natur-Tec, but its lower margins increased cost of goods sold to 68.1% of sales from 66.4%. Gross profit increased modestly while operating income and NTIC-attributable earnings declined, reflecting higher operating expenses and reduced joint-venture operations.
- Income tax expense was $0.84 million, with a 12.7% effective rate versus 10.8% in FY2018. FY2018 included a one-time provisional tax-reform adjustment. NTIC reported valuation allowances against foreign tax credit and certain federal and state tax credit carryforwards.
- Management expected FY2020 research and development spending of $3.6–$3.9 million and capital expenditures of approximately $0.6–$0.9 million. It said existing liquidity and anticipated operating cash flows, joint-venture fees, and distributions should fund needs for at least 12 months. The filing text does not provide a clear numerical FY2020 revenue or earnings forecast.
- Management expects earnings to remain volatile due to joint-venture results, oil-and-gas order timing, and Natur-Tec sales. Oil-and-gas sales have long sales cycles and may fluctuate with oil prices; Natur-Tec growth is exposed to pricing pressure and limited base-resin supply.
- Other important exposures include dependence on joint-venture fees and dividends—which NTIC does not control—foreign exchange movements (not hedged), raw-material costs and availability, competition and margin pressure, international trade and regulatory risks, and reliance on contract manufacturers. The LIBOR phaseout could require renegotiation of the credit facility.
- NTIC and its majority-owned subsidiary continue to pursue a China lawsuit concerning the former Tianjin Zerust joint venture; management could not reasonably estimate any recovery. Management said routine other litigation was not expected to materially affect results or financial condition.
- The Board declared a two-for-one stock split in June 2019; share and per-share figures in the filing reflect the split. FY2019 dividends totaled $0.24 per share; a $0.065 quarterly dividend was declared after year-end. No shares were repurchased during FY2019.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of August 31, 2019.
Key facts for investors to verify
- Whether Natur-Tec growth can continue without further gross-margin erosion, and how much growth is concentrated in finished products or particular geographies.
- Whether ZERUST demand stabilizes, including oil-and-gas order conversion, and how lower industrial sales and competitive pricing affect margins.
- Joint-venture performance, cash distributions, fee collections, and the concentration of equity income in EXCOR; also monitor joint-venture receivable aging.
- Renewal or replacement terms for the revolving credit facility due to mature in January 2020, plus the effects of lease-accounting adoption. NTIC estimated adoption would add $0.5–$0.75 million to both assets and liabilities.
- Potential resolution and financial outcome of the Tianjin Zerust litigation, which has no estimable recovery disclosed.
- Cash conversion and inventory: inventory rose to $10.49 million, while operating cash flow improved substantially year over year.