10-Q: Northern Technologies International Reports Steep Profit Decline Amid Rising Costs and Joint Venture Weakness

Northern Technologies International Corporation (NTIC) reported a significant drop in net income and diluted EPS for the three and nine months ended May 31, 2025, despite a slight increase in consolidated net sales, primarily due to higher operating expenses and reduced contributions from joint ventures.

Summary

• Consolidated net sales increased by 4.0% to $21,508,563 for the three months ended May 31, 2025, and by 0.3% to $61,919,022 for the nine months ended May 31, 2025, compared to the respective prior year periods.
• ZERUST product sales increased 6.0% for the three months to $15,728,637, driven by industrial demand, but decreased slightly by 0.3% for the nine months to $45,316,457 due to a 13.5% decline in ZERUST oil & gas sales.
• Natur-Tec product sales decreased 1.2% for the three months to $5,779,926 but increased 2.2% for the nine months to $16,602,565, primarily due to higher demand for apparel packaging in India and new customer applications.
• Net income attributable to NTIC plummeted by 87.5% to $121,775 ($0.01 diluted EPS) for the three months and by 68.7% to $1,117,185 ($0.12 diluted EPS) for the nine months ended May 31, 2025.
• Equity in income from joint ventures decreased significantly by 30.5% for the three months and 26.0% for the nine months, primarily due to decreased sales and profitability at most joint ventures, including EXCOR.
• Total operating expenses rose by 7.6% for the three months and 7.9% for the nine months, driven by increased personnel, travel, and professional fees related to strategic investments in ZERUST oil and gas marketing and IT infrastructure.
• The company recognized $1,139,756 in other income during the nine months ended May 31, 2025, from Employee Retention Credits (ERC), which is a one-time benefit.
• Cash dividends declared per common share were reduced to $0.01 for the quarter ended May 31, 2025, compared to $0.07 in the prior year quarter.
• Working capital decreased to $21,661,715 as of May 31, 2025, from $23,682,276 as of August 31, 2024.
• Net cash provided by operating activities decreased to $3,808,450 for the nine months ended May 31, 2025, from $7,583,905 in the prior year period.
• The Credit Facility with JPMorgan Chase Bank, N.A. was amended on July 8, 2025, to increase availability from $8.0 million to $10.0 million, with an extended maturity date of January 5, 2026.
• NTIC China secured two new term loans totaling RMB 20,000,000 (USD $2.78 million) with China Construction Bank Corporation, maturing in April and May 2026, respectively.

Sentiment

Score: 3

Explanation: The overall sentiment is negative due to a substantial decline in net income and diluted EPS, significant decreases in joint venture contributions, and rising operating expenses. While sales saw a modest increase and there was a one-time tax credit benefit, core profitability deteriorated. The reduction in quarterly dividends further reinforces a cautious outlook.

Positives

• Consolidated net sales increased by 4.0% for the three months ended May 31, 2025, primarily due to increased demand for ZERUST products.
• ZERUST industrial net sales grew by 7.1% for the three months and 1.3% for the nine months, driven by increased demand for North American ZERUST industrial products.
• Natur-Tec net sales increased by 2.2% for the nine months ended May 31, 2025, attributed to higher demand for apparel packaging from major brands in India and the launch of new customer applications.
• The market for biodegradable plastics is expanding globally, driven by increasing environmental awareness, regulatory support, and demand for eco-friendly alternatives.
• Received a one-time Employee Retention Credit (ERC) payment of $1,139,756 during the nine months ended May 31, 2025, which contributed to other income.
• Earned $181,529 in interest income related to the ERC payments, contributing to a significant increase in total interest income.
• Cash and cash equivalents increased to $6,773,401 as of May 31, 2025, from $4,952,184 as of August 31, 2024.
• The company was in compliance with all covenants under its Credit Agreement as of May 31, 2025.
• The Credit Facility with JPMorgan Chase Bank, N.A. was increased from $8.0 million to $10.0 million on July 8, 2025, enhancing liquidity.
• Management believes existing cash, forecasted cash flows, and financing arrangements will be adequate to fund operations for at least the next 12 months.
• Joint ventures traditionally operate with minimal debt and are self-financed, limiting the company's exposure to their financial risks.

Negatives

• Net income attributable to NTIC decreased significantly by 87.5% for the three months and 68.7% for the nine months ended May 31, 2025.
• Diluted earnings per share (EPS) fell from $0.10 to $0.01 for the three months and from $0.36 to $0.12 for the nine months ended May 31, 2025.
• Operating income decreased by 43.1% for the three months and 67.9% for the nine months ended May 31, 2025.
• Equity in income from joint ventures decreased by 30.5% for the three months and 26.0% for the nine months, primarily due to reduced sales and profitability at joint ventures.
• Total joint venture operations decreased by 12.9% for the three months and 14.3% for the nine months.
• Net sales at the joint ventures, which are not consolidated, decreased by 9.3% for the three months and 8.0% for the nine months.
• Total operating expenses increased by 7.6% for the three months and 7.9% for the nine months, driven by higher selling, general, and administrative expenses.
• General and administrative expenses increased by 18.6% for the three months and 13.8% for the nine months, due to increased professional services, travel, and personnel expenses.
• Interest expense increased significantly by 170.4% for the three months and 69.4% for the nine months due to increased average outstanding borrowings.
• Natur-Tec sales decreased by 1.2% for the three months, attributed to timing, seasonal variations in Asia, and a temporary reduction in shipments to a major resin customer.
• ZERUST oil & gas net sales decreased by 5.3% for the three months and 13.5% for the nine months due to decreased demand.
• Cash dividends declared per common share were temporarily adjusted down to $0.01 for the fiscal 2025 third quarter dividend, a significant reduction from prior quarters.
• Working capital decreased by $2,020,561 from August 31, 2024, to May 31, 2025.
• Net cash provided by operating activities decreased by $3,775,455 for the nine months ended May 31, 2025, compared to the prior year period.
• Net cash used in investing activities increased by $776,947 for the nine months ended May 31, 2025, primarily due to investments in intangible assets and property and equipment.

Risks

• Changes to trade regulation, quotas, duties, or tariffs, including those imposed by the U.S. and other geopolitical environments, may negatively impact business, operating results, and financial condition.
• Current worldwide economic conditions, including inflation, recessionary indicators, and turmoil in global credit, financial, and banking markets, could adversely affect the company and its business partners.
• Slowdowns within the automotive industry and the ongoing shift towards electric vehicles may impact ZERUST product demand.
• Worldwide disruptions in supply chains could adversely affect the company's business, operating results, and financial condition.
• Ongoing wars and sanctions against Russia by U.S. and European governments may affect energy prices and commodity price fluctuations, potentially decreasing margins.
• Operations in China carry risks, including trade issues from increasing tensions between the U.S. and China and the implementation of higher tariffs.
• Sales of ZERUST products and services to the oil and gas industry and Natur-Tec products are subject to significant volatility, leading to quarterly earnings fluctuations.
• International operations expose the company to fluctuations in foreign currency exchange rates, import duties, taxes, and tariffs.
• Dependence on the success of joint ventures and the fees and dividend distributions received from them poses a risk.
• Maintaining relationships with joint ventures, especially in light of anticipated succession planning issues, and risks associated with possible future acquisitions of joint venture interests.
• Fluctuations in the cost and availability of raw materials, particularly plastic and bioplastic resins, due to supply chain disruptions and government sanctions.
• The success and market acceptance of emerging new businesses and products, such as ZERUST oil and gas and Natur-Tec bioplastics, are uncertain due to lengthy sales processes and competition.
• The enforcement or lack thereof of rules and regulations favorable to the market for biodegradable plastics could impact Natur-Tec's growth.
• Reliance on distributors, independent sales representatives, and suppliers could pose operational risks.
• Oil prices, which may be affected by ongoing geopolitical conflicts, could impact sales of ZERUST products to the oil and gas industry.
• Compliance with a wide variety of international, federal, state, and local laws, rules, taxes, and regulations, including environmental, health, safety, and tax laws, may incur expenses or penalties.
• Unforeseen product quality issues or production expenses in connection with new customers and products.
• Rapid advancements in artificial intelligence (AI) technologies may disrupt the industry and affect competitive position if the company fails to adapt effectively.
• Loss of or changes in executive management or key employees, and the need to hire and train local support, could impact operations.
• Pending and future litigation could adversely affect the company's financial condition and operating results.
• Reliance on intellectual property rights and the risk of infringement of others' intellectual property rights.
• Changes in generally accepted accounting principles and the effect of new accounting pronouncements.
• The effect of extreme weather conditions on operating results.
• Reliance upon management information systems and risks associated with the recent implementation of a new Enterprise Resource Planning (ERP) system.

Future Outlook

The company anticipates that its sales of ZERUST products and services into the oil and gas industry will continue to remain subject to significant volatility from quarter to quarter. Earnings are expected to continue to be adversely affected by inflation and worldwide supply chain disruptions. Quarterly net income is also expected to remain volatile due to the financial performance of subsidiaries and joint ventures, and sales fluctuations in ZERUST oil and gas and Natur-Tec bioplastics. The company expects to spend approximately $200,000 to $300,000 on capital expenditures for the remainder of fiscal 2025, primarily for ERP software implementation and equipment/facility improvements. The Credit Facility is anticipated to be renewed annually for the foreseeable future.

Management Comments

• The increase in consolidated net sales for the three-month comparison was primarily due to increased sales and demand for ZERUST products.
• The increase in consolidated net sales for the nine-month comparison was primarily due to increased sales and demand for Natur-Tec products, partially offset by decreased sales of ZERUST products.
• The decrease in Natur-Tec sales for the three-month comparison was primarily due to a combination of timing and seasonal variations in demand in Asia, and a temporary reduction in shipments to a major resin customer due to one-time tooling changes.
• The increase in Natur-Tec sales for the nine-month comparison was primarily due to higher demand for apparel packaging from major brands in India, and the launch of new customer applications.
• The decreases in equity in income from joint ventures were primarily due to decreases in net sales at most joint ventures.
• The increases in total operating expenses were primarily due to strategic investments in ZERUST oil and gas marketing and sales efforts, including personnel expenses and corresponding benefits, as well as increased travel and professional fees.
• The decrease in net income attributable to NTIC was primarily due to the increases in operating expenses and decreases in income from our joint venture operations, and was partially offset by the one-time ERC payment.
• The company anticipates that its earnings will continue to be adversely affected to some extent by inflation and worldwide supply chain disruptions, among other factors.
• The company believes that a combination of its existing cash and cash equivalents, forecasted cash flows from future operations, anticipated distributions of earnings, anticipated fees for services provided to its joint ventures, and funds available through existing or anticipated financing arrangements will be adequate to fund its existing operations for at least the next 12 months.
• The company has determined to temporarily adjust its quarterly dividend to $0.01 per share effective with its fiscal 2025 third quarter dividend in light of the current global environment.

Industry Context

The company operates in the corrosion prevention and bioplastics industries. Demand for ZERUST products is tied to the health of the automotive, construction, agriculture, and mining markets. The oil and gas industry segment for ZERUST products faces long sales cycles and significant quarterly volatility. The market for biodegradable plastics (Natur-Tec) is expanding globally, driven by increasing environmental awareness, regulatory support for sustainable materials, and growing demand for eco-friendly alternatives, particularly in packaging and consumer goods. This trend is supported by government policies and advancements in biodegradable technology. The company notes that ongoing wars and sanctions, particularly against Russia, have affected energy prices and commodity price fluctuations, impacting margins for both the company and its joint ventures. Tariffs and geopolitical tensions, especially between the U.S. and China, continue to pose challenges.

Comparison to Industry Standards

• Specific comparable companies, projects, or results are not detailed in the document for direct assessment against global benchmarks.

Corporate Governance

Legal Proceedings

• The company is subject to various claims and legal actions in the ordinary course of its business.
• Management believes that the amount of liability, if any, with respect to these matters will not materially affect the company's consolidated results of operations, financial position, or cash flows as of May 31, 2025.

Stakeholder Impact

• Shareholders: Experienced a significant decrease in net income and diluted EPS, and a temporary reduction in quarterly cash dividends from $0.07 to $0.01 per share, indicating reduced returns.
• Employees: Increased personnel expenses due to expansion in the ZERUST oil and gas sales team and increased general and administrative personnel expenses.
• Customers: Demand for ZERUST industrial products increased, while ZERUST oil & gas demand decreased. Natur-Tec saw increased demand in some areas but temporary reductions in others due to tooling changes.
• Suppliers: Affected by fluctuations in raw material costs (plastic and bioplastic resins) and worldwide supply chain disruptions.
• Creditors: The company increased its outstanding line of credit and secured new term loans, but remains in compliance with all loan covenants, indicating continued access to credit.

Next Steps

• Continue strategic investments in ZERUST oil and gas marketing and sales efforts.
• Monitor and mitigate inflationary pressures caused by tariffs through targeted price increases, supplier diversification, cost reductions, and manufacturing optimization.
• Expand into and penetrate other markets for ZERUST corrosion prevention technologies, particularly the oil and gas industry.
• Strengthen and expand the North American distribution network for finished Natur-Tec bioplastic products.
• Continue investment in new product development, transitioning new product initiatives into commercialization.
• Final implementation of the Enterprise Resource Planning (ERP) software system and purchase of new equipment and facility improvements.
• Evaluate and potentially acquire remaining ownership interests of joint ventures or form new subsidiaries to assume joint venture operations.
• Anticipate annual renewal of the Credit Facility with JPMorgan Chase Bank, N.A.

Key Dates

Recommendation

Keywords

Corrosion Prevention, Bioplastics, ZERUST, Natur-Tec, SEC Filing, 10-Q, Financial Results, Joint Ventures, Operating Expenses, Net Income, Dividends, Supply Chain, Tariffs, Oil and Gas Industry, Sustainable Materials, Employee Retention Credit