Northern Technologies International Corporation (NTIC) — FY2015 Form 10-K
Business context and reporting period. Fiscal year ended August 31, 2015; this is an annual report, not a standalone fourth-quarter filing. NTIC develops corrosion-prevention products and services under ZERUST and biobased and compostable plastics under Natur-Tec. Its results include majority-owned subsidiaries, while 19 joint ventures are generally accounted for using the equity method.
Key financial results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total net sales, including sales to joint ventures | $30.32 million | $26.83 million |
| Gross profit / gross margin | $9.77 million / 32.2% | $9.02 million / 33.6% |
| Operating income | $3.15 million | $6.69 million |
| Net income | $2.52 million | $5.54 million |
| Net income attributable to NTIC | $1.79 million; $0.38 diluted EPS | $4.11 million; $0.90 diluted EPS |
| Cash from operating activities | $(0.76) million | $7.42 million |
ZERUST sales rose 9.2% to $26.04 million and represented 85.9% of consolidated sales. Natur-Tec sales grew 43.6% to $4.28 million, or 14.1% of sales. Oil-and-gas ZERUST sales increased 10.9% to $1.89 million. Joint-venture sales, which are not included in NTIC’s consolidated net sales, were $99.03 million, down from $118.85 million.
Cost of goods sold increased to 67.8% of sales from 66.4%; management attributed the margin pressure primarily to the higher mix of lower-margin Natur-Tec products. Operating income fell 52.9% and NTIC-attributable net income fell 56.4%, despite sales growth.
Balance sheet, liquidity and debt
- At August 31, 2015, cash and cash equivalents were $2.62 million and available-for-sale securities were $2.03 million, compared with $2.48 million and $5.52 million, respectively, a year earlier.
- Working capital was $15.60 million, down from $17.85 million. Current assets were $19.28 million and current liabilities $3.67 million.
- No borrowings were outstanding under the $3.0 million revolving credit facility. The company reported compliance with its covenants; the facility matured January 7, 2016, and NTIC expected annual renewal.
- There was no long-term debt at year-end. Operating cash flow was negative, principally reflecting working-capital movements; inventory increased to $7.47 million from $5.96 million.
- Investing activities provided $1.90 million, primarily from sales of securities; financing activities used $0.87 million. Capital expenditures were $1.44 million.
Material changes, outlook and risks
- China transition: NTIC terminated its Tianjin Zerust joint-venture agreements effective December 31, 2014 and began conducting China operations through wholly owned NTIC China. Fiscal 2015 included approximately $1.64 million of related start-up, legal and operating expenses. Management warned of volatile results and said customer transition may take several quarters; it cannot assure that NTIC China will attain the former venture’s sales or income.
- Joint-venture income and fees: Equity income was nearly unchanged at $5.94 million, but fees for services to joint ventures declined 29.8% to $5.72 million. Management expected future equity income and fees to be lower following the China change. EXCOR accounted for $4.09 million of equity income, making NTIC’s results significantly dependent on that venture.
- China assets and litigation: NTIC reported a $1.88 million carrying value for its investment in Tianjin Zerust and noted limited recent financial information from the venture. The company said it had not identified an impairment trigger at year-end but estimated potential impairment exposure of up to approximately $1.13 million on the investment, in addition to possible impairment of a receivable. Lawsuits concerning the former venture and its alleged conduct were pending; recovery was not estimable.
- Management outlook: NTIC expected liquidity from cash, operating cash flows, joint-venture distributions and fees, and financing availability to be adequate for at least 12 months. It planned continued investment in China, research and development, oil-and-gas corrosion solutions and Natur-Tec. FY2016 capital spending was estimated at $200,000–$400,000. The filing gives differing R&D spending estimates—$4.0–$4.5 million in the business section and $4.0–$4.4 million in MD&A—so the stated range is not consistent.
- Other risks: Results depend on joint-venture fees, dividends and equity earnings, which NTIC does not control and which fluctuate. Other disclosed exposures include foreign-currency movements (not hedged), competition and pricing pressure, long oil-and-gas sales cycles, commodity and limited-supplier risks for resin, economic conditions, and concentrated customer/market exposure. Management said low oil prices could constrain customers’ capital budgets.
- Unusual item: Foreign-currency translation loss was $3.84 million in FY2015, contributing to comprehensive loss attributable to NTIC of $1.65 million despite positive net income attributable to NTIC.
Management and the independent auditor concluded that internal control over financial reporting was effective as of August 31, 2015. The auditor issued an unqualified opinion on the consolidated financial statements. NTIC did not anticipate a near-term common-stock dividend.
Investor verification points
- Track NTIC China’s customer migration, operating losses and cash needs, and progress and potential recovery in the Tianjin Zerust litigation and liquidation.
- Verify the recoverability of the Tianjin investment and receivable, and monitor any impairment charges or new information from the former venture.
- Assess recurring cash generation against reported earnings, particularly the negative FY2015 operating cash flow and increased inventory.
- Monitor EXCOR and other joint ventures’ performance, fee collections and dividend decisions, including the effect of currency changes on reported results.
- Compare future margins and growth by product line, especially Natur-Tec’s lower margins and the lengthy oil-and-gas sales cycle; clarify the inconsistent FY2016 R&D estimate.