Northern Technologies International Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended August 31, 2016. Although the request refers to 2016 Q4, this filing reports annual results; standalone fourth-quarter financial results are not clearly provided in the supplied filing text.
Business context
NTIC develops and sells corrosion-prevention products and services under ZERUST, and biobased and compostable resin compounds and finished products under Natur-Tec. It operates internationally through subsidiaries and a network of joint ventures. Joint-venture sales are not included in NTIC’s consolidated net sales, though NTIC records its share of joint-venture income and fees for services.
Financial results and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total consolidated net sales | $32.93 million | $30.32 million |
| Gross profit | $10.61 million; 32.2% margin | $9.77 million; 32.2% margin |
| Operating income | $1.28 million | $3.15 million |
| Net income (loss) attributable to NTIC | $(0.87) million; $(0.19) per diluted share | $1.79 million; $0.38 per diluted share |
| Operating cash flow | $2.06 million | $(0.76) million |
| Cash and cash equivalents | $3.40 million | $2.62 million |
| Available-for-sale securities | $2.24 million | $2.03 million |
| Working capital | $16.95 million | $15.60 million |
| Debt outstanding | None; $3.00 million revolving facility available | None |
Cost of goods sold remained 67.8% of sales. The company reported $4.74 million of equity income from joint ventures and $5.14 million in joint-venture service fees. Total assets were $51.07 million and total equity was $47.08 million at year-end. Operating cash flow improved year over year; investing and financing activities used $0.995 million and $0.270 million, respectively.
Material changes versus FY2015
- Consolidated net sales grew 8.6%; sales excluding joint ventures rose 9.9% to $30.21 million.
- ZERUST sales increased 5.9% to $27.58 million, primarily reflecting increased demand in China. Natur-Tec sales rose 25.1% to $5.36 million, driven mainly by finished products in North America and India.
- Oil-and-gas sales fell 7.8% to $1.74 million amid lower oil prices and constrained customer budgets.
- Joint-venture equity income declined 20.1% to $4.74 million; service fees fell 10.1% to $5.14 million. Joint-venture sales fell 8.5% to $90.65 million, with weaker European conditions cited.
- NTIC recorded a $1.88 million impairment of its former Tianjin Zerust investment, reducing its carrying value to zero. The filing also identifies a $114,636 reserve against Tianjin Zerust receivables and a $198,887 inventory write-off.
Outlook, risks and unusual items
- Management expected FY2017 R&D spending of $2–3 million, down from $4.72 million in FY2016, primarily because some work was reclassified to selling, general and administrative expense. Expected FY2017 capital expenditures were approximately $200,000–$400,000.
- Management said existing cash, forecast operating cash flows, expected joint-venture distributions and fees, and financing availability should fund operations and planned needs for at least 12 months. Future investment levels in China and growth initiatives were not specified; additional borrowing or equity financing may be considered.
- NTIC reported approximately $3.41 million in FY2016 expenses related directly or indirectly to establishing NTIC China, the Tianjin Zerust separation and liquidation, litigation, receivable and inventory reserves/write-offs, and impairment. This is a broad aggregate and should not be added to the separately disclosed impairment without checking the underlying expense classifications.
- NTIC ended its Tianjin Zerust joint-venture arrangements and now conducts China operations through its wholly owned subsidiary. The company said transition of customers may take time and results may remain volatile. It is pursuing litigation in China against the former partner and spouse, and in Minnesota against Cortec Corporation; recovery amounts were not estimable in the filing.
- Key risks include reliance on joint-venture fees and dividends that NTIC does not control, competition and margin pressure, lengthy oil-and-gas sales cycles, oil-price sensitivity, limited suppliers of bioplastic base resins, foreign-exchange exposure (not hedged), and international operating and legal risks. NTIC cited no material adverse outcome from routine litigation, but the major China-related cases remain unresolved.
- The company had a $1.106 million order backlog at August 31, 2016, expected generally to be realized in FY2017’s first quarter. It had no borrowings on its $3 million revolver and was compliant with its covenants at year-end. The board did not anticipate common-stock dividends in the near future.
Important facts for investors to verify
- Track NTIC China’s sales, profitability, customer transition, and the financial and legal status of Tianjin Zerust; assess any subsequent developments in both pending lawsuits.
- Confirm the composition and cash implications of the reported approximately $3.41 million China-related expense aggregate, including the impairment, receivable reserve, and inventory write-off.
- Monitor joint-venture performance, especially EXCOR, which generated $3.53 million of NTIC’s $4.74 million FY2016 equity income, and the timing and amount of future dividends.
- Test whether Natur-Tec growth and oil-and-gas market development can improve earnings without weakening margins or requiring materially more capital.
- Review liquidity and receivable/inventory trends, the renewal and availability of the revolving facility, foreign-currency movements, and tax-credit valuation allowances.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective as of August 31, 2016; the auditor did not provide an internal-control attestation.