Northern Technologies International Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended August 31, 2018; comparisons are with FY2017. This is an annual filing, not a standalone fourth-quarter report.
Business context
NTIC develops corrosion-prevention products and services under the ZERUST brand and biobased, compostable plastics under Natur-Tec. It operates in more than 60 countries through subsidiaries, distributors and 20 joint ventures. Subsidiaries are consolidated; joint ventures are accounted for under the equity method, so their sales are not included in NTIC’s consolidated net sales.
Financial performance and position
| Metric | FY2018 / year-end | FY2017 / comparison |
|---|---|---|
| Total consolidated net sales | $51.42 million | $39.57 million; up 30.0% |
| ZERUST sales | $41.37 million; up 26.2% | $32.79 million |
| Natur-Tec sales | $10.05 million; up 48.2% | $6.78 million |
| Oil and gas sales | $3.07 million; up 78.3% | $1.72 million |
| Gross profit / gross margin | $17.26 million / 33.6% | $13.25 million / 33.5% |
| Operating income | $8.02 million | $4.60 million |
| Net income attributable to NTIC | $6.70 million; diluted EPS $1.43 | $3.42 million; diluted EPS $0.75 |
| Equity income from joint ventures | $7.53 million | $5.90 million |
| Fees for services to joint ventures | $6.14 million | $5.45 million |
| Cash from operating activities | $0.61 million | $5.74 million |
| Cash and available-for-sale securities | $7.46 million | $10.13 million |
| Working capital | $22.84 million | $21.17 million |
Operating cash flow was weak relative to earnings, principally amid higher receivables, inventory and prepaid expenses. Trade receivables from unaffiliated customers rose $4.08 million; average days outstanding increased 15 days to 75. Capital expenditures were $0.68 million, making operating cash flow less capital expenditures approximately negative $0.07 million.
NTIC reported total assets of $63.55 million and equity of $55.82 million at year-end. It had no borrowings under its $3.0 million revolving credit facility; the filing states that facility matured January 7, 2019. No other material debt balance is reported in the supplied financial statements.
Changes, outlook and key risks
- Growth reflected increased ZERUST demand, new customers in North America and China, and stronger Natur-Tec sales. Consolidated sales to joint ventures decreased 9.8% to $2.91 million, attributed primarily to shipment timing.
- Joint-venture sales were $120.06 million, up 18.6%, but are not consolidated as product sales. EXCOR contributed $5.55 million of NTIC’s $7.53 million equity income, making performance and distributions from this partner particularly important.
- Operating expenses increased 14.5% to $22.91 million, including higher personnel costs and a $1.14 million increase in the management bonus accrual. R&D expense was $3.52 million.
- The Tax Cuts and Jobs Act resulted in $632,523 of FY2018 tax expense from remeasurement of deferred tax assets. A $604,000 deemed repatriation tax was offset by foreign tax credit carryforwards, with no net income-tax expense from that item.
- Management expected FY2019 R&D spending of $3.2–$3.6 million and capital expenditures of approximately $0.6–$0.9 million. It said available resources should fund operations and expected commitments for at least 12 months, while noting additional financing might be pursued for growth. The filing provides no clear numeric FY2019 revenue or earnings guidance.
- Management anticipated continued quarterly earnings volatility from joint-venture results, oil-and-gas and Natur-Tec order timing, and changes in Chinese operations. Key risks include reliance on joint-venture fees and discretionary dividends, customer collection delays, competition and margin pressure, limited resin suppliers, international and currency exposure, and lengthy oil-and-gas sales cycles. NTIC does not hedge foreign-exchange risk.
- A lawsuit concerning the former Tianjin Zerust China joint venture seeks recovery for alleged breaches and self-dealing; NTIC said it could not reasonably estimate any recovery. Routine other litigation was not expected by management to have a material effect.
- The Board declared quarterly FY2018 dividends of $0.10 per share and subsequently declared $0.12 per share in October 2018. NTIC reported effective internal controls and received an unqualified audit opinion on its financial statements and internal control.
Important facts for investors to verify
- Track collection of receivables and conversion of reported earnings into operating cash flow, especially in China and India.
- Assess reliance on joint ventures and EXCOR, including whether equity income is translated into cash fees and dividends.
- Confirm the status and terms of the revolving credit facility after its stated January 2019 maturity.
- Review developments in the Tianjin Zerust dispute and the former venture’s anticipated liquidation.
- Reconcile the filing’s differing descriptions of NTIC’s ownership of Natur-Tec India: 75% in the subsidiary listing versus 90% in the non-controlling-interest note.
- Evaluate remaining tax-credit carryforwards, valuation allowances and expirations, as well as the sustainability of the increased dividend.