Northern Technologies International Corporation — FY2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended August 31, 2013; it is not a standalone fourth-quarter filing. NTIC develops corrosion-prevention products and services, principally under ZERUST, and bio-based and compostable plastics under Natur-Tec. It operates directly and through subsidiaries, distributors, and 23 joint ventures. Joint ventures are generally accounted for under the equity method, so their sales are not included in NTIC’s consolidated net sales.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Consolidated net sales | $22.50 million | $22.78 million | Down 1.2% |
| Gross profit / gross margin | $7.03 million / 31.2% | $8.25 million / 36.2% | Margin down about 5.0 percentage points |
| Operating income | $4.96 million | $4.57 million | Up 8.6% |
| Income before taxes | $5.62 million | $4.62 million | Up 21.7% |
| Net income attributable to NTIC | $3.37 million; $0.75 diluted EPS | $3.45 million; $0.78 diluted EPS | Down 2.4% |
| Cash from operating activities | Used $1.25 million | Used $0.39 million | Greater cash use |
| Cash and working capital at year-end | $4.31 million / $13.27 million | $4.14 million / $10.06 million | Working capital increased |
ZERUST sales were $20.46 million, down 2.5%, and represented 90.9% of consolidated sales. Natur-Tec sales were $2.04 million, up 12.9%, and represented 9.1%. The annual effective tax rate was 15.4%, compared with 22.3% in FY2012. Other income included $750,000 of life-insurance proceeds following the death of a former officer.
NTIC’s share of joint-venture income was $5.24 million, down 5.1%. Fees for services to joint ventures rose 59.1% to $7.35 million, partly because NTI Asean became consolidated in FY2013. Joint ventures reported aggregate sales of $113.19 million, up from $111.83 million, but those sales are not NTIC consolidated sales.
Liquidity, debt, and financial position
At August 31, 2013, total assets were $49.05 million and total equity was $44.53 million. The company had $933,414 outstanding on its secured term loan, due January 2016, and no borrowings on its $3.0 million revolving credit line. The line was scheduled to mature January 8, 2014; management expected a further extension. NTIC reported compliance with debt covenants at year-end and expected to remain compliant in FY2014.
Operating cash outflow primarily reflected joint-venture earnings that were not received as cash, higher receivables and inventories, and reductions in certain accrued liabilities. Investing cash inflow of $3.03 million included $3.16 million of joint-venture dividends and $1.61 million of cash from consolidating NTI Asean, partly offset by $1.49 million of capital expenditures. Management believed available cash, operating cash flows, joint-venture distributions and fees, and financing arrangements would fund needs for at least 12 months.
Material changes and developments
- Sales to unaffiliated customers decreased 2.5%, mainly due to lower ZERUST sales in Brazil. Zerust Brazil sales fell to $2.39 million from $4.54 million; its oil-and-gas sales in Brazil fell to $537,268 from $2.47 million.
- Cost of goods sold rose to 68.8% of sales from 63.8%. Management cited lower sales of higher-margin oil-and-gas products and temporary production and shipping costs for a new customer; it said the temporary costs normalized in the fourth quarter.
- Operating expenses increased 6.0%, including higher selling, general and administrative, and joint-venture support expenses. Research and development expense was $3.82 million, slightly below FY2012.
- On September 1, 2012, NTIC increased its NTI Asean ownership to 60% in exchange for intellectual-property rights and began consolidating the entity. The change affected reported service-fee income and noncontrolling interest.
- During fiscal 2013, Zerust Brazil signed a Phase 3 Petrobras contract for $3.7 million of ZERUST products; $347,000 had been delivered by year-end. The filing says postponed fulfillment of an oil-and-gas contract contributed to revenue below budget.
Outlook, risks, and other notable matters
- Management expected FY2014 research and development spending of $3.8–$4.0 million and capital expenditures of approximately $400,000–$600,000. NTIC planned continued investment in oil-and-gas corrosion solutions and Natur-Tec products; the filing provides no specific FY2014 sales or earnings forecast in the supplied text.
- NTIC said oil-and-gas sales can involve one- to multi-year trials and slow customer integration, creating volatility and uncertainty. Its Petrobras order’s delivery pace and conversion into revenue are key execution factors.
- Major risks include reliance on joint-venture fees and dividends that NTIC does not control; exposure to European economic conditions and foreign currencies; competition and pricing pressure; dependence on contract manufacturers and limited-source resin suppliers; and uncertain adoption of bioplastics. NTIC does not hedge foreign-currency risk.
- Foreign tax-credit and research-credit carryforwards were substantially offset by valuation allowances; approximately $285,800 of foreign tax credits were due to expire by August 31, 2014. NTIC reported $170,000 of unrecognized tax benefits.
- Management reported effective disclosure controls and internal control over financial reporting at year-end. The independent auditor gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness. NTIC reported no legal proceeding with a reasonable possibility of material loss.
- NTIC reported $959,000 accrued for FY2013 bonuses. Despite Adjusted EBITOI reaching only 60% of budget, the board approved bonuses, citing the postponed oil-and-gas contract. The company did not anticipate paying common-stock dividends in the near future.
Important facts for investors to verify
- Progress and remaining deliveries under the $3.7 million Petrobras Phase 3 contract, and whether the delayed oil-and-gas revenue materialized.
- Whether gross margins recover as temporary production costs normalize and the mix of higher-margin oil-and-gas sales changes.
- Collection of joint-venture receivables and sustainability of service fees and dividends, which are significant to NTIC’s earnings and liquidity.
- Renewal of the revolving credit line before its January 8, 2014 maturity, and continued compliance with its covenants.
- Cash conversion, particularly operating cash flow, receivable days, and inventory growth; FY2013 operating cash flow was negative despite reported net income.
- Execution of the Natur-Tec production transition and the commercial effect of expected Italian compostable-bag regulation.