Northern Technologies Balances Strong Sales Against Weak Margins

Northern Technologies International ((NTIC)) has held its Q1 earnings call. Read on for the main highlights of the call.

Northern Technologies International’s latest earnings call painted a picture of a company enjoying robust sales momentum but wrestling with profitability pressures. Management framed the quarter as a period of transition: record consolidated revenue, standout growth in several key segments, and a major contract win contrasted with weaker margins, lower earnings, and tighter liquidity. Executives stressed that recent investments and operational tweaks are laying the groundwork for stronger, higher‑margin growth through fiscal 2026, even as current profit metrics lag the topline gains.

Record Consolidated Net Sales Signal Solid Demand

Northern Technologies posted consolidated net sales of $23.3 million for the first quarter of fiscal 2026, up 9.2% year over year and marking its strongest annual growth rate since 2024. Management highlighted this as evidence of broad-based demand across the portfolio, with multiple businesses delivering record or near‑record performance. For investors, the key takeaway is that the company is clearly not struggling to find revenue; its challenges are more about converting that growth into stronger profits.

ZERUST Oil & Gas Delivers Breakout Growth and a Major Contract

The ZERUST Oil & Gas segment emerged as one of the quarter’s standouts, reaching Q1 record net sales of $2.4 million, a 58.1% jump from a year earlier and the second straight quarter above the $2 million mark. The biggest strategic win came from ZERUST Brazil, in which Northern Technologies holds an 85% stake, securing a major FPSO corrosion-protection contract valued at roughly $13 million over the next three to four years. Management expects this contract to ramp meaningfully through fiscal 2026 and into 2028, positioning Oil & Gas as a key driver of higher-margin growth and long-term revenue visibility.

NTIC China Outperforms on Domestic Strength

NTIC China, a wholly owned subsidiary, delivered one of the strongest growth profiles in the group, with net sales rising 23.5% to $4.9 million. Management attributed this performance primarily to robust domestic Chinese demand, noting that the business has limited exposure to U.S. tariffs compared with many industrial peers. This insulation from trade friction, combined with underlying market growth, has made China a bright spot in the portfolio and a core pillar of the company’s international expansion strategy.

Natur-Tec Hits Quarterly Record with Sequential Rebound

Natur-Tec, the company’s bioplastics division, recorded quarterly sales of $6.0 million, a new Q1 record and up 2.2% year over year. Importantly, Natur-Tec sales rose 16.5% sequentially from the prior quarter, underscoring a meaningful rebound in demand. Higher North American sales and progress on larger opportunities, including compostable food packaging initiatives, fueled the gains. Management framed Natur-Tec as a key growth vector aligned with sustainability trends, with its recent momentum suggesting improving scale and contribution to overall revenue diversity.

Joint Venture Sales Grow, but Profit Contribution Slips

Joint ventures, which are not consolidated into reported net sales, generated $24.5 million in revenue, up 2.9% from a year earlier and reflecting improved demand across multiple partners. However, joint venture operating income declined 5.1% year over year, weighing on the company’s income from affiliates. Management cited softness at one German joint venture, which saw a mid‑single‑digit sales decline that offset strength in other geographies. While JV sales trends are positive, the profitability dip underscores regional variability and the importance of a recovery in Europe for this income stream.

Profitability Under Pressure Despite Multiple Revenue Records

The most notable disconnect in the quarter was between strong topline performance and weaker bottom-line results. GAAP net income fell to $238,000, down about 57.6% from $561,000 in the prior-year quarter, with earnings per share dropping to $0.03 from $0.06. On a non-GAAP basis, adjusted net income was $344,000, or $0.04 per share, versus $667,000, or $0.07, a roughly 48.4% decline. Management acknowledged that timing, operational issues, and ongoing investments are compressing near-term profitability, even as key segments generate record sales.

Gross Margin Compression Driven by Temporary Operational Issues

Gross margin was another area of concern. Gross profit as a percentage of net sales slipped to 36.0% from 38.3% a year earlier, a 2.3‑percentage‑point drop. Executives pointed to a temporary supplier lead time issue as a primary driver of the margin compression, implying that some of the pressure was operational rather than structural. They reiterated expectations for sequential gross margin improvement as these issues resolve and as higher-margin businesses such as ZERUST Oil & Gas and certain international operations grow as a share of the mix.

Operating Expenses Rise, Challenging Operating Leverage

Total operating expenses climbed to $9.7 million, up 2.9% year over year. The increase was driven mainly by higher selling, general and administrative costs, partially offset by reduced research and development spending. While expense growth trailed sales growth this quarter, the absolute rise in opex, combined with weaker gross margins, pressured operating income. Management framed the spending as strategic, focused on scaling sales, operations, and higher-margin offerings, but acknowledged the need to hold operating expenses relatively flat going forward to restore operating leverage.

Strategic Push Toward Profitability and Operating Leverage

Throughout the call, management emphasized a sharper strategic focus on profitability and operating leverage. The company is investing in operations and processes aimed at improving efficiency, while concentrating growth efforts on higher-margin segments like ZERUST Oil & Gas, NTIC China, and Natur-Tec. The goal is to have quarterly sales grow faster than operating expenses, allowing more of the incremental revenue to fall to the bottom line. Executives expressed confidence that these actions, together with resolving temporary cost headwinds, will drive sequential margin gains and stronger earnings through fiscal 2026.

Balance Sheet: Modest Debt Reduction, Tighter Liquidity

Northern Technologies closed the quarter with working capital of $19.4 million and cash and equivalents of $6.4 million, both down from $20.4 million and $7.3 million, respectively, at the end of August 2025. The 4.9% decline in working capital and 12.3% drop in cash highlight some tightening in near-term liquidity. Total debt stood at $12.0 million, slightly lower than $12.2 million three months earlier, but included $9.1 million drawn on the revolving credit facility, underscoring meaningful reliance on short-term borrowings. Even so, the board’s decision to declare a quarterly cash dividend of $0.01 per share signals management’s confidence in the company’s cash-generation prospects.

Profitability Lagging in the Face of Topline Strength

Taken together, the quarter showcased a familiar tension: Northern Technologies is clearly winning new business and accelerating sales across several strategic platforms, yet net income is not keeping pace. Multiple revenue records and healthy growth from Oil & Gas, China, Natur-Tec, and joint ventures have not yet translated into robust earnings growth. The company attributes this gap to temporary margin headwinds, regional JV softness, and strategic investments that are still in the ramp-up phase. Investors will be watching closely to see whether the promised operating leverage starts to appear in coming quarters as these pressures ease.

Guidance and Outlook: Betting on Margin Recovery and Growth

Looking ahead, management reiterated expectations for higher year-over-year sales and improving profitability through fiscal 2026. The growth engine is expected to be powered by continued strength in ZERUST Oil & Gas, underpinned by the roughly $13 million Brazil FPSO contract, ongoing momentum in NTIC China, and further gains at Natur-Tec. Joint venture sales, up 2.9% in Q1 despite lower JV operating income, are projected to benefit from anticipated European stimulus and regional recoveries. The company guided for sequential gross margin improvements from the Q1 level of 36%, and pledged to keep operating expenses relatively flat so that revenue growth outpaces cost increases. Management also expects positive operating cash flow to support debt reduction and better working capital metrics over time, aiming to gradually improve the balance sheet while growing earnings from the modest non-GAAP Q1 base of $344,000.

In summary, Northern Technologies’ earnings call presented a nuanced story: a company with strong and diversified revenue momentum, promising growth engines, and a clear strategy to enhance profitability, but one that is currently grappling with margin compression, softer JV profit contributions, and tighter liquidity. If management can deliver on its plans to stabilize costs, improve gross margins, and capitalize on key contracts and regional growth, the current disconnect between sales and earnings could narrow, offering upside for investors willing to look beyond the near-term pressure points.