Northern Technologies International Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended August 31, 2017. This is an annual report, not a standalone fourth-quarter report. NTIC develops corrosion-prevention products and services under ZERUST and compostable/biobased plastics under Natur-Tec. It operates through consolidated subsidiaries and 20 joint ventures, which are accounted for using the equity method.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total net sales, including sales to joint ventures | $39.57 million | $32.93 million |
| Gross profit | $13.25 million | $10.61 million |
| Operating income | $4.60 million | Approximately $1.28 million |
| Net income (loss) attributable to NTIC | $3.42 million; diluted EPS $0.75 | $(0.87) million; diluted EPS $(0.19) |
| Cash from operating activities | $5.74 million | $2.06 million |
| Cash and cash equivalents | $6.36 million | $3.40 million |
| Available-for-sale securities | $3.77 million | $2.24 million |
- Sales increased 20.1%. ZERUST sales rose 18.9% to $32.79 million; Natur-Tec sales rose 26.6% to $6.78 million. ZERUST represented 82.9% of consolidated sales.
- Gross margin was 33.5%, versus 32.2% in FY2016; cost of goods sold declined to 66.5% of sales from 67.8%. Management attributed improvement partly to lower raw-material costs for ZERUST industrial products.
- Joint-venture equity income was $5.90 million, up 24.3%; service fees from joint ventures were $5.45 million, up 6.1%. The ventures reported combined sales of $101.26 million, which are not included in NTIC’s consolidated sales.
- Net income rebounded from the prior-year loss, which included a $1.88 million impairment of the Tianjin Zerust investment. Selling expense rose 48.4% to $9.28 million; R&D expense fell 38.4% to $2.91 million as resources shifted toward selling and general and administrative activities.
- Working capital was $21.17 million, compared with $16.95 million. Current assets were $26.07 million and current liabilities $4.89 million. Total equity was $51.72 million.
- NTIC had no borrowings on its $3.0 million revolving credit facility at year-end and was in compliance with its covenants. The facility matured January 7, 2018; the filing said renewal was anticipated, not assured.
Cash, capital allocation, and outlook
- Operating cash flow increased to $5.74 million, substantially supported by $6.38 million of dividends received from joint ventures. Investing activities used $2.61 million, including securities purchases and $0.92 million of capital expenditures; financing activities used $0.23 million.
- Management said available cash, securities, projected operating cash flows, and expected joint-venture fees and distributions should fund operations and planned needs for at least 12 months. NTIC also noted it might seek additional debt or equity financing for growth, with no assurance of acceptable terms or availability.
- For FY2018, NTIC expected R&D spending of $2.5–$3.0 million and capital expenditures of approximately $0.3–$0.6 million. No specific FY2018 revenue or earnings guidance is provided in the supplied filing text.
- Management expects continued volatility in quarterly results, particularly from joint-venture performance, oil-and-gas sales, Natur-Tec orders, and changes in China operations. Oil-and-gas sales were $1.72 million, down 1.1%; management cited constrained customer budgets amid volatile crude prices and cautioned that sales cycles can include multi-year trials.
- No FY2017 cash dividend was declared during the year. On November 20, 2017, the board declared a $0.10-per-share dividend, payable December 21, 2017, and stated an intention to consider regular quarterly dividends; future payments remain subject to board discretion and business conditions.
Material developments, risks, and contingencies
- The China transition remains a significant uncertainty. NTIC terminated its Tianjin Zerust joint-venture arrangements in 2014, moved to wholly owned operations in China, and is pursuing liquidation and litigation against the former partner and spouse. The filing says any recovery cannot be reasonably estimated. The investment was fully impaired in FY2016.
- In separate litigation related to Tianjin Zerust, all claims against Cortec were dismissed with prejudice on September 20, 2017; NTIC chose not to appeal. Management anticipated that related expenses would no longer adversely affect results after FY2018’s first quarter.
- Joint ventures are important to earnings and liquidity, but NTIC generally does not control dividend decisions. EXCOR accounted for $4.19 million of FY2017 equity income of $5.90 million, making it the largest individual joint-venture contribution.
- Key risks include foreign-currency exposure (NTIC does not hedge), dependence on joint-venture fees and distributions, intense competition and pricing pressure, long oil-and-gas sales cycles, limited or sole-source suppliers and resin availability, and sensitivity to economic conditions in automotive and international markets. Natur-Tec also faces uncertain market adoption and lower margins than ZERUST.
- NTIC reported $1.02 million of accrued bonuses at year-end, versus $0.45 million a year earlier. Other disclosed matters include ongoing China litigation and routine claims; management did not expect other claims to materially affect results, financial position, or cash flows. The filing also reports a related-party consulting payment of $137,666 and royalties of $10,136 to an entity owned by a company director.
- The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded internal control over financial reporting was effective as of August 31, 2017; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether FY2018 growth and margins can be sustained, particularly given the sharp increase in selling expense and Natur-Tec’s lower-margin profile.
- Cash conversion and the timing and reliability of joint-venture distributions; distinguish NTIC’s reported sales from the much larger sales of unconsolidated joint ventures.
- Renewal and terms of the $3.0 million credit facility after its stated January 2018 maturity.
- Progress and potential recovery in the Tianjin Zerust liquidation litigation, and any continuing costs or operational effects in China.
- Evidence of oil-and-gas market adoption, including customer trials converting to recurring orders, and the pace of Natur-Tec customer and distributor growth.
- Foreign-exchange, raw-material supply, and joint-venture risks, including the concentration of earnings in EXCOR and NTIC’s lack of currency hedging.