Northern Technologies International Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended August 31, 2012, with comparison to fiscal 2011. This is an annual filing, not a standalone fourth-quarter report. Amounts are in U.S. dollars.
Business context
NTIC develops and sells corrosion-prevention products and services under the ZERUST brand and bio-based, biodegradable products under Natur-Tec. It operates in more than 55 countries through direct sales, distributors, a Brazilian majority-owned subsidiary and 23 joint ventures. Joint ventures are accounted for under the equity method, so their sales are not included in NTIC’s consolidated revenue.
Financial results and position
| Metric | FY2012 | FY2011 | Change / context |
|---|---|---|---|
| Consolidated net sales | $22.78 million | $19.53 million | Up 16.7%; includes $2.55 million of sales to joint ventures |
| Sales excluding joint ventures | $20.23 million | $16.59 million | Up 21.9% |
| Gross profit | $8.25 million | $6.76 million | Gross margin about 36.2%, versus 34.6% |
| Operating income | $4.57 million | $4.63 million | Down about 1.2% |
| Income before taxes | $4.62 million | $4.70 million | As reported in the audited statements |
| Net income attributable to NTIC | $3.45 million | $3.90 million | Down 11.6%; diluted EPS $0.78 versus $0.89 |
| Operating cash flow | $(0.39) million | $(1.14) million | Cash used in both years |
| Cash and cash equivalents | $4.14 million | $3.27 million | At August 31 |
| Working capital | $10.06 million | $9.09 million | Based on balance-sheet current assets less current liabilities |
| Debt | $1.01 million term loan | $1.09 million term loan | No borrowings on the $3.0 million revolving facility |
ZERUST generated $20.97 million, or 92.1% of consolidated sales, up 13.1%. Natur-Tec sales were $1.81 million, up 84.0%, but remained 7.9% of sales and had lower margins than ZERUST. Cost of goods sold declined to 63.8% of sales from 65.4%, primarily reflecting a more favorable product mix at Zerust Brazil. Joint-venture equity income was nearly flat at $5.52 million; service-fee income fell 24.6% to $4.62 million.
Joint ventures recorded $111.83 million of sales, down 6.2% from $119.28 million. Their sales are not consolidated. NTIC received $3.06 million in joint-venture dividends, which supported investing cash flow; operating cash flow remained negative, partly because equity-method income is not itself cash received and working capital used cash.
Material changes, outlook and risks
- Management attributed growth to Zerust Brazil, increased ZERUST packaging and service sales, and Natur-Tec distributor growth. Brazilian oil-and-gas sales rose to $2.47 million from $1.00 million.
- Petrobras expanded its Phase 2 order by $657,000 to $3.1 million during FY2012. In early FY2013, Zerust Brazil signed a Phase 3 supply contract valued at $3.7 million. Management cautioned that oil-and-gas sales can be volatile and typically involve long trials and adoption cycles.
- Management expected FY2013 research and development spending of $3.5–$3.8 million, net of anticipated contract reimbursements, and capital expenditures of about $1.2 million, primarily for laboratory expansion and equipment. No specific FY2013 revenue or earnings guidance is provided in the filing.
- The $3.0 million revolving credit facility was due to mature January 9, 2013; NTIC expected to seek renewal. A technical covenant default relating to a compliance certificate for November 2011 had been waived in January 2012. The company reported compliance with debt covenants at August 31, 2012.
- Notable items included a mutual waiver of $985,204 in past-due HNTI service fees, resulting in a $492,602 fee reversal and corresponding increase in NTIC’s joint-venture equity income. HNTI also recorded a $905,000 write-down of a Polymer Energy unit; NTIC’s share reduced equity income by $452,500.
- FY2012 income tax expense was $1.04 million versus $706,000, and the effective rate rose to 22.3% from 15.0%. NTIC recorded valuation allowances against certain federal and Minnesota research credits and foreign tax credit carryforwards.
- Key risks include reliance on joint-venture fees and discretionary dividends, concentration in corrosion-prevention products, weaker European demand and currency exposure, pricing competition, long oil-and-gas sales cycles, limited suppliers for bioplastic resins and other inputs, and reliance on contract manufacturers. NTIC does not hedge foreign-currency risk. About 61% of joint-venture sales were to European customers.
- Management reported effective disclosure controls and internal control over financial reporting as of August 31, 2012. The independent auditor issued an unqualified opinion on the financial statements but did not attest to internal control effectiveness. NTIC reported no legal proceeding believed to present a reasonable possibility of material loss.
Important facts for investors to verify
- Confirm the audited FY2012 income-before-tax comparison: the statements report $4.62 million for FY2012 and $4.70 million for FY2011, while one MD&A passage gives a different FY2011 comparator.
- Track cash conversion, receivables and inventory, and whether operating cash flow turns positive; FY2012 net income exceeded operating cash flow.
- Verify renewal of the revolving credit facility after its January 9, 2013 maturity and review its covenants and availability.
- Assess whether joint-venture sales, service fees and dividend distributions recover, particularly in Europe, and whether HNTI’s fee waiver and asset write-down have further effects.
- Monitor conversion of Petrobras and other oil-and-gas opportunities into repeat revenue, and Natur-Tec growth, margins and resin supply availability.