10-Q: NTIC Q1 Net Income Falls, ZERUST Sales Up 11.9%

Northern Technologies International Corporation reported a 9.2% increase in consolidated net sales for Q1 fiscal 2026, driven by ZERUST and Natur-Tec products, despite a significant drop in net income attributable to NTIC.

Summary

• Consolidated net sales increased 9.2% to $23,308,881 for the three months ended November 30, 2025, compared to $21,338,393 in the prior year.
• Net income attributable to NTIC decreased to $237,819 ($0.03 per diluted share) for the three months ended November 30, 2025, from $561,091 ($0.06 per diluted share) in the prior year.
• ZERUST product sales increased 11.9% to $17,316,196, driven by increased demand in oil & gas (up 58.1%) and industrial products (up 6.9%).
• Natur-Tec product sales increased 2.2% to $5,992,685.
• Cost of goods sold as a percentage of net sales increased to 64.0% from 61.7%, primarily due to slightly higher raw material prices and discounts on selling prices.
• Equity in income from joint ventures increased 8.2% to $1,222,116, partly due to tax planning modifications in fee structures for two joint ventures.
• Fees for services provided to joint ventures decreased 16.7% to $1,069,257, also due to tax planning modifications.
• Total operating expenses increased 2.9% to $9,741,367, driven by strategic investments in ZERUST oil and gas marketing, personnel, travel, and professional fees.
• Interest expense increased to $199,966 from $120,220 due to increased outstanding average borrowings.
• Cash and cash equivalents decreased to $6,389,809 as of November 30, 2025, from $7,250,523 as of August 31, 2025.
• A three-year offshore oil and gas production asset preservation contract with an estimated total value of approximately R$70 million (US$13.1 million) was secured by Zerust Brazil, expected to ramp during fiscal 2026 and run through calendar 2028.
• The Credit Agreement with JPMorgan Chase Bank was renewed, extending the maturity date from January 5, 2026, to February 5, 2027.
• Cash dividends declared per common share decreased to $0.01 for the current quarter from $0.07 in the prior year's comparable quarter.

Sentiment

Score: 4

Explanation: While net sales showed growth across both segments and a significant oil & gas contract was secured for future periods, the substantial decline in net income attributable to NTIC, coupled with rising cost of goods sold, increased operating expenses, and higher interest expenses, indicates a challenging quarter for profitability. The reduction in cash dividends also reflects a more conservative financial stance.

Positives

• Consolidated net sales increased 9.2% to $23,308,881 for the three months ended November 30, 2025.
• ZERUST product sales grew 11.9% to $17,316,196, with ZERUST oil & gas sales up 58.1% to $2,393,678 and industrial sales up 6.9% to $14,922,518.
• Natur-Tec product sales increased 2.2% to $5,992,685.
• Equity in income from joint ventures increased 8.2% to $1,222,116.
• Secured a significant three-year offshore oil and gas production asset preservation contract in Brazil valued at approximately R$70 million (US$13.1 million), expected to positively impact future sales.
• The credit facility with JPMorgan Chase Bank was renewed, extending its maturity to February 5, 2027, indicating continued lender confidence.
• Entered into a preferred supplier agreement with a leading specialized distributor for foodservice and industrial packaging, expected to translate into higher Natur-Tec sales growth in fiscal 2026.

Negatives

• Net income attributable to NTIC decreased significantly by 57.6% to $237,819 from $561,091 year-over-year.
• Diluted EPS decreased from $0.06 to $0.03.
• Cost of goods sold as a percentage of net sales increased to 64.0% from 61.7%, primarily due to higher raw material prices and selling price discounts.
• Total income from joint venture operations decreased 5.1% to $2,291,373.
• Fees for services provided to joint ventures decreased 16.7% to $1,069,257.
• Total operating expenses increased 2.9% to $9,741,367.
• Interest expense increased 66.3% to $199,966 due to increased outstanding average borrowings.
• Cash and cash equivalents decreased by $860,714 during the quarter.
• Cash dividends declared per common share decreased substantially to $0.01 from $0.07.
• Incurred additional costs related to tariffs, which are expected to continue throughout fiscal 2026.
• Experienced a decrease in net income at the EXCOR joint venture in Germany.

Risks

• Changes to trade regulation, quotas, duties, or tariffs, caused by changing U.S. and geopolitical environments.
• The effect of current worldwide economic conditions, including inflation, recessionary indicators, and turmoil in global credit, financial, and banking markets.
• Slowdowns within the automotive industry and decreased exports due to tariffs, and the evolution of the automotive industry towards electric vehicles.
• Worldwide disruption in supply chains.
• Disruptions to distribution channels for products and to customers, suppliers, and subcontractors.
• Effects of the ongoing war between Russia and Ukraine and sanctions on energy prices and commodity price fluctuations, which have decreased margins and joint venture profitability.
• Operations in China and risks associated with increasing tensions between the U.S. and China, including higher tariffs.
• Variability in sales of ZERUST oil and gas products and Natur-Tec products, and equity income of joint ventures, leading to quarterly earnings fluctuations.
• Risks associated with international operations and exposure 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.
• Ability to maintain relationships with joint ventures, especially in light of anticipated succession planning issues, and risks associated with possible future acquisitions of remaining ownership interests.
• Fluctuations in the cost and availability of raw materials, including resins and other commodities, due to higher demand, freight costs, supply chain disruptions, and government sanctions.
• The success of and risks associated with emerging new businesses and products, particularly ZERUST oil and gas and Natur-Tec products, and the often lengthy sales process involved.
• Ability to introduce new products and services that respond to changing market conditions and customer demand.
• Market acceptance of existing and new products, especially in light of existing and new competitive products.
• Maturation of certain existing markets for ZERUST products and services and the ability to grow market share and succeed in penetrating other existing and new markets.
• Increased competition, especially with respect to ZERUST products and services, and the effect on pricing, net sales, and margins.
• The enforcement or lack thereof of rules and regulations favorable to the market for biodegradable plastics and policy reversals.
• Reliance upon and relationships with distributors, independent sales representatives, and joint ventures.
• Reliance upon suppliers.
• Oil prices, which may affect sales of ZERUST products and services to the oil and gas industry, and which may be impacted by geopolitical conflicts.
• Zerust Brazil's ability to perform and realize revenue and other benefits under its three-year offshore oil and gas production asset preservation contract.
• The costs and effects of complying with laws and regulations and changes in tax, fiscal, government, and other regulatory policies.
• Unforeseen product quality or other problems in the development, production, and usage of new and existing products.
• Unforeseen production expenses incurred in connection with new customers and new products.
• Rapid advancements in artificial intelligence (AI) technologies, which may disrupt the industry and adversely affect competitive position, customer expectations, and operational performance.
• Loss of or changes in executive management or key employees and the need to hire and train local support.
• Ability of management to manage around unplanned events.
• Pending and future litigation.
• Reliance on intellectual property rights and the absence of infringement of the intellectual property rights of others.
• Changes in applicable laws or regulations and failure to comply.
• Changes in generally accepted accounting principles and the effect of new accounting pronouncements.
• Fluctuations in the effective tax rate.
• 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 system.

Future Outlook

The company expects its three-year offshore oil and gas production asset preservation contract in Brazil, valued at approximately US$13.1 million, to ramp up during fiscal 2026 and run through calendar 2028, which is anticipated to materially and positively affect future quarterly sales and operating results. Higher Natur-Tec sales growth is expected in fiscal 2026 due to a new preferred supplier agreement. Management anticipates continued adverse effects on earnings from inflation and worldwide supply chain disruptions, as well as ongoing costs related to tariffs throughout fiscal 2026. Quarterly net income is expected to remain volatile. The company plans to continue strategic investments in its ZERUST oil and gas and Natur-Tec businesses, as well as in its subsidiaries and joint ventures, and expects to spend $2.0 million to $2.5 million on capital expenditures in fiscal 2026. Net sales in the second fiscal quarter may be adversely affected by seasonal factors like Chinese New Year and the North American holiday season.

Management Comments

• Management has implemented, and expects to continue to implement, proactive measures to mitigate inflationary and supply chain pressures resulting from tariffs through a combination of supplier diversification, regional sourcing initiatives, cost-reduction programs, and manufacturing optimization.
• Management continues to monitor global trade developments and evaluate opportunities to further reduce its exposure to tariffs by localizing production and developing alternative sourcing options where practicable.
• Management believes that NTIC China's exposure to tariffs, including those imposed by the United States, is limited.
• NTIC 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 as sales are recognized.
• NTIC anticipates that its earnings will continue to be adversely affected to some extent by inflation and worldwide supply chain disruptions, among other factors.
• NTIC anticipates that its quarterly net income will continue to remain subject to significant volatility primarily due to the financial performance of its subsidiaries and joint ventures, sales of its ZERUST products and services into the oil and gas industry, and sales of its Natur-Tec bioplastics products, which sales fluctuate more on a quarterly basis than the traditional ZERUST business.
• Reducing debt through positive operating cash flow and improving working capital efficiencies is a strategic focus for fiscal 2026.

Industry Context

The market for biodegradable plastics is expanding worldwide, driven by increasing environmental awareness, regulatory support for sustainable materials, and growing demand for eco-friendly alternatives, particularly in packaging, agriculture, and consumer goods. Demand for ZERUST products is closely tied to the health of the automotive, construction, agriculture, and mining markets. The oil and gas industry presents a significant opportunity for corrosion prevention solutions due to its infrastructure's susceptibility to corrosion. The company acknowledges that rapid advancements in artificial intelligence (AI) technologies could disrupt the industry and impact its competitive position if not effectively adapted.

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, individually or in the aggregate, will not materially affect the company's consolidated results of operations, financial position, or cash flows as of November 30, 2025.

Related Party Transactions

• Sales to joint ventures are included in segment and geographic information.
• Fees for services provided to joint ventures are recognized as income.
• Dividends are received from joint ventures.
• Equity in income from joint ventures is recognized.

Stakeholder Impact

• Shareholders: Experienced a significant decrease in net income and diluted EPS, and a substantial reduction in cash dividends declared per share ($0.01 vs $0.07). However, the company secured a large future contract and is expanding its Natur-Tec distribution, offering potential for future growth.
• Employees: Increased personnel expenses and stock-based compensation indicate continued investment in the workforce.
• Customers: Increased demand for ZERUST and Natur-Tec products, along with a new major oil & gas contract and a preferred supplier agreement for Natur-Tec, suggest strong customer relationships and new business opportunities.
• Suppliers: The company notes higher raw material prices and supply chain disruptions, indicating potential pressures on suppliers and the company's efforts to diversify sourcing.
• Creditors: The company was in compliance with all debt covenants, and the renewal of its primary credit facility and new term loans indicate stable relationships with lenders.

Next Steps

• Ramp-up of the three-year offshore oil and gas production asset preservation contract in Brazil during fiscal 2026.
• Continued implementation of proactive measures to mitigate inflationary and supply chain pressures from tariffs.
• Monitoring global trade developments and evaluating opportunities to reduce tariff exposure by localizing production and developing alternative sourcing options.
• Continued investment in Zerust India, NTIC China, NTI Europe, joint ventures, research and development, oil and gas marketing, and Natur-Tec bio-plastics business during the remainder of fiscal 2026.
• Potential acquisition of remaining ownership interests of joint ventures or formation of new subsidiaries.
• Anticipated capital expenditures of $2.0 million to $2.5 million in fiscal 2026 for new buildings/warehouses in India and Brazil, and equipment/facility improvements in the U.S.
• Evaluation of disclosure approach for ASU 2023-09 and anticipated adoption for the annual period starting September 1, 2025.
• Evaluation of the effect of ASU 2024-03 on consolidated financial statement disclosures.
• Anticipated extension of NTIC China term loans for an additional one-year period.

Key Dates

Recommendation

While Northern Technologies International Corporation demonstrated solid top-line growth in net sales and secured a significant future contract in the oil and gas sector, the substantial decline in net income and diluted EPS is a concern. This profitability erosion is driven by higher cost of goods sold, increased operating expenses, and rising interest expenses. The reduction in the quarterly dividend also signals a more cautious financial stance. The long-term potential from the ZERUST oil & gas contract and Natur-Tec expansion is positive, but current quarter profitability issues and ongoing inflationary/tariff pressures warrant a 'Hold' recommendation until there's clearer evidence of improved earnings and margin stability. The stock is not a 'buy' given the current profitability challenges, but the growth in sales and future contract prevent a 'sell' recommendation.

Keywords

Corrosion prevention, ZERUST, Natur-Tec, Biodegradable plastics, Biopolymer resins, SEC 10-Q, Quarterly report, Financial results, Joint ventures, Oil and gas industry, Supply chain, Tariffs, Global trade, Manufacturing, Specialty chemicals, Sustainable packaging