Earnings call transcript: Northern Technologies Q3 2025 misses EPS expectations

Northern Technologies (NASDAQ:NTIC) reported its third-quarter earnings for fiscal year 2025, revealing a significant shortfall in earnings per share (EPS) compared to market forecasts. The company posted an EPS of $0.02, falling short of the anticipated $0.18, marking an 88.89% negative surprise. Revenue also missed expectations, coming in at $21.5 million against a forecast of $23.2 million. According to InvestingPro data, the stock has declined nearly 38% over the past six months, with today’s pre-market trading showing a further 1.6% drop, reflecting investor disappointment. Analysis suggests the company is currently trading below its Fair Value, presenting a potential opportunity for value investors.

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Key Takeaways

• Northern Technologies’ EPS fell significantly short of market expectations.
• Revenue growth was 4% year-over-year, but below forecast.
• The stock price dropped 1.6% in pre-market trading following the earnings report.
• The company is focusing on strategic investments and debt reduction.
• The oil and gas market shows potential for future growth.

Company Performance

Northern Technologies reported a modest revenue increase of 4% to $21.5 million compared to the same quarter last year. Despite an improvement in gross margin to 38.4%, net income dropped sharply to $122,000 from $977,000 the previous year. InvestingPro data reveals the company maintains a healthy current ratio of 2.18 and operates with a moderate debt-to-equity ratio of 0.12, indicating strong financial stability despite current challenges. The company’s focus on strategic investments and growth in the oil and gas sector is evident, though it has yet to translate into significant financial gains.

Financial Highlights

• Revenue: $21.5 million, up 4% year-over-year
• EPS: $0.02, down from $0.18 forecasted
• Gross margin: 38.4%, up 20 basis points
• Net income: $122,000, down from $977,000 last year
• Operating expenses: Increased by 7.6% to $9.7 million

Earnings vs. Forecast

The company reported a substantial miss in its EPS, achieving only $0.02 against a forecast of $0.18, which represents an 88.89% negative surprise. Revenue also fell short of expectations, with a 7.28% miss. This deviation from forecasts highlights challenges in meeting market expectations and indicates potential operational inefficiencies or external pressures.

Market Reaction

Following the earnings announcement, Northern Technologies’ stock price decreased by 1.6% in pre-market trading. The stock, which has traded between $6.75 and $15.09 over the past 52 weeks, is currently reflecting investor concerns over the earnings miss. InvestingPro’s Financial Health Score indicates a "GOOD" overall rating, with particularly strong scores in profitability metrics. The broader market reaction suggests a cautious outlook on the company’s near-term performance, though analysts maintain a consensus "Buy" rating with a $13 price target.

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Outlook & Guidance

Despite the disappointing earnings, Northern Technologies remains optimistic about future growth, particularly in the oil and gas sector. The company expects improvements in the fourth quarter and fiscal 2026, driven by strategic investments and geographical expansion. However, guidance revisions for the coming quarters indicate continued challenges, with modest EPS forecasts.

Executive Commentary

CEO Patrick Lynch expressed confidence in the company’s strategic direction, stating, "We are confident in the direction we are headed." CFO Matt Wolfsfeldt highlighted the profitability of the Chinese market, emphasizing its role in the company’s growth strategy. An unnamed executive mentioned advancements in compostable packaging, indicating potential for innovation-driven growth.

Risks and Challenges

• Economic pressures in European markets could impact sales.
• Increased operating expenses may strain profitability.
• The company faces challenges in meeting aggressive growth targets.
• Market volatility in oil and gas could affect future performance.
• Supply chain disruptions could impact production and delivery.

Q&A

During the earnings call, analysts inquired about the company’s oil and gas technology advantages, the profitability of the Chinese market, and innovations in compostable packaging. The management reiterated its focus on strategic investments and market expansion, addressing concerns about short-term financial performance.

Full transcript - Northern Technologies (NTIC) Q3 2025:

Conference Operator: Good day, and thank you for standing by, and welcome to the NTIC Third Quarter twenty twenty five Earnings Conference Call and Webcast. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising that your hand is raised.

To withdraw your question, please press 11 again. Please be advised that today’s conference is being recorded. As part of the discussion today, the representatives from NTIC will be making certain forward looking statements regarding NTIC’s future financial and operating results as well as their business plans, objectives and expectations. Please be advised that these forward looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and that NTIC desires to avail itself of the protections of the Safe Harbor for these statements. Please also be advised that the actual results could differ materially from those stated or implied by the forward looking statements due to certain risks and uncertainties, including those described in NTIC’s most recent and annual report on Form 10 ks, subsequent quarterly reports on Form 10 Q, and recent press releases.

Please read these reports and other future filings that NTIC will make with the SEC. NTIC disclaims any duty to update or revise its forward looking statements. I would now like to hand the conference call over to your speaker today, Patrick Lynch. Please go ahead.

Patrick Lynch, CEO, NTIC: Good morning. I’m Patrick Lynch, NTIC’s CEO, and I’m here with Matt Wolfsfeldt, NTIC’s CFO. Please note that a press release regarding our third quarter fiscal twenty twenty five financial results was issued earlier this morning and is available at ntic.com. During today’s call, we will review various key aspects of our third quarter fiscal twenty twenty five financial results, provide a brief business update, and then conclude with a question and answer session. Please note that when we discuss year over year performance, we are referring to the third quarter of our fiscal twenty twenty five in comparison to the third quarter of last fiscal year.

For the third quarter of fiscal twenty twenty five, we delivered both sequential and year over year growth in consolidated net sales, reflecting strength across many aspects of our business despite ongoing global economic uncertainty. This performance underscores the dedication of our team and our continued focus on supporting existing customers, expanding global relationships, and scaling in high growth markets. Gross margin was a particular highlight in the quarter, reaching 38.4, an increase on both a sequential and year over year basis, which reflects the differentiated value we provide our global customer base. At the same time, macroeconomic pressures, especially in Europe, continue to weigh on the profitability of many of our joint ventures. Additionally, as part of our long term growth strategy, we continue to make planned investments in our oil and gas business, which contributed to higher operating expenses.

While macroeconomic pressures and higher operating expenses have impacted third quarter and year to date profitability, we expect improvements in the fourth quarter and continued progress in fiscal twenty twenty six. So with this overview, let’s examine the drivers for the third quarter in more detail. For the third quarter ended 05/31/2025, our total consolidated net sales increased 4% to $21,500,000 as compared to the third quarter ended 05/31/2024. Broken down by business unit, this included a 7.1% increase in Xerus Industrial’s net sales, partially offset by a 5.3% decrease in ZERUST Oil and Gas net sales and a 1.2 decrease in Natur Tec net sales. Turning to our joint venture sales, which we do not consolidate in our financial statements.

Total net sales for the fiscal twenty twenty five third quarter by our joint ventures decreased year over year by 12.9% to 2,300,000 We believe the third quarter year over year decline in joint venture sales reflects the continued impacts of high energy prices and regional economic pressures in the European economy, as well as increased uncertainty related to US trade and economic policies and the potential impacts this will have on global supply chains. We are closely monitoring trends across our European markets for signs of stabilization following years of subdued demand as governments begin to implement targeted economic stimulus packages. We expect any economic recovery these stimulus packages may lead to, especially in Germany, to have a positive impact on our joint venture operating income in future periods. Improving sales trends at our wholly owned NTSC China subsidiary continue. Fiscal twenty twenty five third quarter net sales at NTSC China increased by 27.4% to $4,500,000 the second highest quarterly revenue NTIC has achieved since we transitioned to a wholly owned subsidiary in fiscal twenty fifteen.

Recent NTIC China sales demonstrate growing demand in this geography. The majority of current NTSC China sales are for domestic Chinese consumption, and therefore, we believe NTSC China’s exposure to U. S. Tariffs is limited. We expect demand in China will continue to improve in fiscal twenty twenty five, helping to support higher incremental sales and profitability in this market.

In addition, we are committed to the long term opportunities the Chinese market provides, our industrial and bioplastic segments, and we continue to take steps to enhance our operations in this geography. As a result, we continue to believe China will likely become a a significant geographic market for us in the future. Now, moving on to Zeros Oil and Gas. Zeros Oil and Gas sales were $1,300,000 compared to $1,400,000 in the same period last year. Seasonality and the timing of orders can impact quarterly comparisons, which is why we encourage investors to look at Cerus oil and gas sales on a trailing twelve month basis.

Cerus oil and gas sales were $8,600,000 for the trailing twelve month period ended 05/31/2025, a 15.4% increase from $7,400,000 for the trailing twelve month period ended 05/31/2024. As we continue to invest in building our ZERUST oil and gas sales team and other resources to support future growth, the size and number of opportunities continue to expand among both new and existing customers, which today still focus primarily on protecting above ground oil storage tanks and pipeline casings from corrosion. The nature of this industry will always cause certain fluctuations in ZERUST oil and gas sales. Nevertheless, we still expect to see ZERUST oil and gas sales and profitability to improve sequentially in the fourth quarter of fiscal twenty twenty five and improve significantly next fiscal year as we leverage these investments and rein in operating expense growth. Turning to our Natur Tec bioplastics business.

Natur Tec sales were $5,800,000 representing a 1.2% year over year decline in Natur Tec sales. As expected, Natur Tec sales rebounded sequentially and increased 16.5% over the fiscal twenty twenty five second quarter. While we continue to monitor the near term impact tariffs may have on our Natur Tec sales, the long term market opportunities remain strong. In addition, US organic diversion mandates and waste management rules are created at the local municipality and state levels. We do not expect changes in US federal priorities to impact local US demand for our compostable solutions.

We are also working on several larger opportunities for our Natur Tec solutions that we believe hold significant promise to significantly benefit our sales in the coming quarters. While fiscal twenty twenty five has been more challenging than we expected at the beginning of the fiscal year, we remain steadfast on pursuing a profit focused multi year strategic growth plan. We are confident in the direction we are headed. Before I turn the call over to Matt, I want to acknowledge the hard work and dedication of our global team of both employees and joint venture partners. Our success and our ability to navigate more complex economic periods are a direct result of their efforts.

With this overview, let me now turn the call over to Matt Woolsfield to summarize our financial results for the fiscal twenty twenty five third quarter.

Matt Wolfsfeldt, CFO, NTIC: Thanks, Patrick. Compared to the prior fiscal year period, NTIC’s consolidated net sales increased 4% in the third quarter of fiscal twenty twenty five to $21,500,000 because of the trends Patrick reviewed in his prepared remarks. Sales across our global joint ventures decreased 9.3% in the third quarter. Joint venture operating income decreased 12.9% compared to the prior fiscal year period, primarily due to a decrease in equity income from joint ventures, which was primarily driven by lower sales at most of NTIC’s joint ventures. Total operating expenses for fiscal twenty twenty five third quarter increased 7.6% compared to the prior fiscal year period to $9,700,000 primarily due to increased personnel costs and strategic investments we’re making to support expected growth in the second half of the year within our oil and gas business.

As a percentage of net sales, operating expenses were 44.9% for the third quarter compared to 43.4% for the prior fiscal year period. Gross profit as a percentage of net sales was 38.4% during the three months ended 05/31/2025, compared to 38.2% during the prior fiscal year period. The 20 basis point increase was primarily a result of a more profitable mix of sales and our ongoing efforts to improve gross margin. NTIC reported net income of $122,000 or $01 per diluted share for the fiscal twenty twenty five third quarter compared to $977,000 or $0.10 per diluted share for the fiscal twenty twenty four third quarter. For the fiscal twenty twenty five third quarter, NTIC’s non GAAP adjusted net income was $228,000 or $02 per diluted share compared to the non GAAP adjusted income of $1,100,000 or $0.11 per diluted share for the fiscal twenty twenty four third quarter.

A reconciliation of GAAP to non GAAP financial measures is available in our third quarter fiscal year twenty twenty five earnings press release that was issued this morning. As of 05/31/2025, working capital is 21,700,000 including $6,800,000 in cash and cash equivalents compared to $23,700,000 including $5,000,000 in cash and cash equivalents as of 08/31/2024. As of 05/31/2025, we had outstanding debt of $10,100,000 This included $7,400,000 in borrowings under our existing revolving line of credit compared to $4,300,000 as of 08/31/2024. Despite the recent increase in our revolving line of credit from 8,000,000 to $10,000,000 to allow for future flexibility, reducing debt through positive operating cash flow and improving working capital efficiencies will be a strategic focus for the remainder of fiscal twenty twenty five and into fiscal twenty twenty six. We generated $3,800,000 in operating cash flow for the nine months ended 05/31/2025.

At quarter end, the company had $27,100,000 of investments in joint ventures, of which 49.7% or $13,500,000 was in cash, with the remaining balance primarily invested in other working capital. During the fiscal twenty twenty five third quarter, NTIC’s Board of Directors declared a quarterly cash dividend of $01 per common share that was payable on 05/14/2025, to stockholders of record on 04/30/2025. Recall, we temporarily adjusted our quarterly dividend to $01 per share as a part of our disciplined approach to managing our cash and navigating through this dynamic global environment. To conclude our prepared remarks, we remain committed to our long term growth opportunities. We are confident that our strategic priorities and financial discipline will drive sustainable growth, improving profitability and value for our shareholders.

With this overview, Patrick and I are happy to take your questions.

Conference Operator: Our first question will be coming from Tim Clarkson of Van Clemens. Your line is open Tim.

Tim Clarkson, Analyst, Van Clemens: Hey guys, improved quarter. It’s sometimes hard to tell with when you’re focused just on net earnings. So I was looking at the pretax operational profits from the previous quarter versus this and there’s a significant improvement from second quarter, obviously.

Matt Wolfsfeldt, CFO, NTIC: Yes. No, it certainly was better, and I certainly think we’re trending now and headed in the right direction. I mean, looking across kind of all the different business units, just about every business unit took a step forward going from Q2 to Q3.

Tim Clarkson, Analyst, Van Clemens: Good. Hey, so just on a big picture basis, when you look at this oil and gas thing, when you’re trying to get one of these guys to switch from the older technologies to your newer technology, Now on the front end, is your technology cheaper on the front end?

Unnamed Executive, Executive, NTIC: Compared to traditional methods, yes.

Tim Clarkson, Analyst, Van Clemens: Yeah. Yep. You know, the electrolysis stuff.

Unnamed Executive, Executive, NTIC: I’m sorry. I didn’t understand what you were saying there.

Tim Clarkson, Analyst, Van Clemens: Yeah. So I mean, if it you know, let’s say that you’re a customer and you’re looking to switch, you know, from the older technology, which uses the, you know, the electricity deal. Yeah. Yeah. Or and and you’re gonna switch to this new technology I mean on just on the front end is it is it cheaper or more expensive or about the same on the on the front end when you’re trying to treat the tanks

Unnamed Executive, Executive, NTIC: it’s much easier installation and it’s much easier installation and basically you’re spending a lot less money and it’s getting the protection and you’re getting and ours works better for a longer period of time.

Tim Clarkson, Analyst, Van Clemens: Oh sure, mean there’s no question about the long term but you’re dealing with you know humans have a tendency to be kind of insect like and you know if the benefits are in ten years for all these people, know that’s just an eternity, but at least if on the front end it’s easier and you save money, you know that’s a that’s a benefit immediately that they can, justify the switch and and then of course you know the longer term benefits are way more significant, but that’s important. Now, what’s the in general on a quarter to quarter basis, what’s the additional spending that you’re doing on sales this year versus last year? What’s what’s the additional amount of money you guys are spending per quarter on on on the sales effort for the for the oil and gas?

Unnamed Executive, Executive, NTIC: You’re you’re talking primarily about personnel, really, in terms of that staff in various

Tim Clarkson, Analyst, Van Clemens: Yeah.

Unnamed Executive, Executive, NTIC: Regions around the world that have experience in the oil and gas industry and in the kinds of areas that we like, and that should basically make our customer conversion happen faster.

Tim Clarkson, Analyst, Van Clemens: Right. But what would be the total incremental cost that we’re putting up front, the investments we’re making right now per quarter versus what we’re doing a year ago before we started making this big rollout with the sales expense?

Matt Wolfsfeldt, CFO, NTIC: Well, Timothy, if you look at it, if you look back to like our fiscal ’twenty three, fiscal ’twenty four from an oil and gas standpoint, in North America, we averaged about $4,000,000 In the current year, we’re projected to spend about $5,300,000 So we’ve got about $1,300,000 of additional, say, investment in personnel that we’ve done over the past twelve plus months.

Tim Clarkson, Analyst, Van Clemens: So but that $1,300,000 that’s over a twelve month period, not over a quarterly Correct. Right, so it’d be $3,400,000 maybe per quarter is the additional expenses on the oil and gas. Yes. Right, right. And then of course the other issue is there’s a, you know, it’s a business that’s clumpy so that you’ll see a lot of the results in one quarter versus another quarter.

Matt Wolfsfeldt, CFO, NTIC: Yeah, and I think you’ll certainly see a step up in revenue kind of going from Q3 to Q4 as well from an oil and gas standpoint, kind of where we are in the quarter so far and expectations of backlogs and things like that, certainly would expect Q4 to be stronger than Q3 from an oil and gas standpoint.

Tim Clarkson, Analyst, Van Clemens: Right. Now switching to China, that was a strong quarter for those guys. I mean, China now profitable?

Matt Wolfsfeldt, CFO, NTIC: China is profitable and China has been profitable for some time. What’s nice is that we’re seeing, you know, China as a standalone. You know, if I look back over the past, you know, three years, it certainly is a nice trend line from a revenue standpoint. I mean, if I look back to kind of the lows that we saw kind of coming out of COVID in our fiscal twenty three, you know, first quarter, second quarter, third quarter, where we’re at like, you know, $2.62800000.0 in revenue per quarter, you know, now putting forth a quarter of 4,200,000.0, you know, shows significant growth in that region. So it is profitable.

It is contributing. You know, and it looks like what the Chinese are doing from a, you know, stimulating their economy standpoint that we are, you know, kind of also increasing our revenues accordingly.

Unnamed Executive, Executive, NTIC: Yes. Remember, this is primarily domestic consumption in China, not for export.

Tim Clarkson, Analyst, Van Clemens: Right. Right. Now the the electric cars, I mean, do they still need the some of the, technology you have to prevent rust and corrosion?

Unnamed Executive, Executive, NTIC: Yes. Just less of it than the traditional combustion engine.

Tim Clarkson, Analyst, Van Clemens: Yeah. Rust, but they’re making a hell of a lot of electric cars. On

Patrick Lynch, CEO, NTIC: a per far basis, yes, it’s less, but if they’re making a hell

Unnamed Executive, Executive, NTIC: of lot of cars, you can use a lot more material obviously.

Tim Clarkson, Analyst, Van Clemens: Yeah, yeah. Okay, well good. I’m good. Last question on the compostable stuff. What’s new there?

Is business pretty much as usual? Or are there any exciting new areas you’re seeing on the compostable side?

Unnamed Executive, Executive, NTIC: Well, there’s one project we’re working on. It’s a little too early to talk about revenues. I mean, historically, one of problems you had with the compostable packaging is the water vapor transmission rate is pretty high. I mean, the plastic is pretty permeable, so there’s limits to what you can actually package in it on a convenient basis. Now say that we, at least in the laboratory, have managed to fix that problem, there is a possibility of scaling that up and finding significant applications in food packaging that way.

We’re right now looking to do some, soon start some scale up production in area. And we probably will see revenues if all works out in the next two years or so.

Tim Clarkson, Analyst, Van Clemens: Great. Okay, thanks. I’m done. Thank you.

Conference Operator: And one moment for our next question. Our next question will be coming from Gus Richard of Northland Capital Markets. Your line is open.

Gus Richard, Analyst, Northland Capital Markets: Hey, good morning. I had a couple questions. I just want to walk through the strength in the gross margin. When I look at it on a sequential basis, mix really doesn’t imply gross margin should be up as much year on year. It’s right in the right ballpark.

And I’m just wondering, was just Q2 a weak gross margin quarter? Or what were the drivers sequentially and the improvement?

Matt Wolfsfeldt, CFO, NTIC: Yeah, I think you certainly saw Q2 as being a weak quarter. I think you also see kind of the continued improvement that we’re making and trying to as efficient and effective as we can with the products that we’re selling. So, it’s kind of combination of both, Gus.

Gus Richard, Analyst, Northland Capital Markets: Got it. And then it looks like you’re hiring heavily for oil and gas. I’m just wondering, you know, is this to harvest new customers? Is it to service new regions? If you could explain sort of where you’re going there, that’d be helpful.

Unnamed Executive, Executive, NTIC: It’s a combination of things. We’re looking to cover broader geographies and also go after applications.

Gus Richard, Analyst, Northland Capital Markets: Geographies and applications?

Unnamed Executive, Executive, NTIC: Yes. I mean, we’re now building up our presence in The Middle East specifically, but we’re also getting, I mean, new opportunities in South America and Africa.

Gus Richard, Analyst, Northland Capital Markets: Got it. And then the last one for me. You talked about Nature Tech some large opportunities, and I was just wondering if you could kind of give us a sense on relative size and timing of those opportunities.

Unnamed Executive, Executive, NTIC: I was just mentioning with Tim a second ago, the project that we’re working on right now is trying to find applications in compostable plastics in food packaging. And historically, it’s been the problem is that the compostable plastics are too permeable, so it can’t contain gases and liquids and still be compostable. We think we’ve found a way of solving that problem, and now we’re trying to figure out can you scale it up, and if so, what food applications can you be going after? But we have some significant interest in that area, so we’re very confident that we should be able to develop something interesting over the next year or two.

Gus Richard, Analyst, Northland Capital Markets: Got it. Got it. Helpful. Thank you very much.

Conference Operator: And I would now like to turn the conference back to Patrick for closing remarks.

Unnamed Executive, Executive, NTIC: Thank you very much for calling today. Hope you have a nice week.

Conference Operator: And this concludes today’s conference call. Thank you for participating. You may now disconnect.

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