Record Sales, Margin Shock: NTIC's Middle East Cost Squeeze

A record quarter, a margin shock

Northern Technologies International (NTIC) posted its strongest top line ever in fiscal Q3 2026, with consolidated net sales up 12.6% to $24.2 million. The growth was powered by a 72.3% surge in ZERUST oil and gas sales and a 5% gain in Natur-Tec, which both set quarterly records. Yet the company swung to a net loss of $263,000 as gross margin collapsed by 477 basis points to 33.6%. “Strong global demand and increasing adoptions of our ZERUST corrosion prevention and Natur-Tec bioplastic solutions, drove quarterly consolidated sales to new record highs.” — G. Patrick Lynch, Chief Executive Officer (CEO) · 2026-07-09 “Disruptions to shipping through the Strait of Hormuz during the quarter caused by recent increased conflict levels in The Middle East contributed to a significant increase in our raw material costs.” — G. Patrick Lynch, Chief Executive Officer (CEO) · 2026-07-09 That shock to raw material cost is the crux of the quarter.

Management asserts the pressure is temporary. “We expect gross margin to improve sequentially in the fourth quarter of fiscal 26.” — Matthew C. Wolsfeld, Chief Financial Officer (CFO) · 2026-07-09 The company is pushing through pricing actions and procurement initiatives, and has already seen polyethylene prices ease back to pre-crisis levels.

Oil and gas: the engine now above $10M

The oil and gas business cracked a milestone: trailing twelve-month sales exceeded $10 million for the first time. The third quarter itself brought $2.2 million, a 72% year-over-year jump. This follows four consecutive quarters above $2 million. The growth is broad-based—Middle East, North America, India, and China—and reflects both new and existing customers. increasing adoptions of VCI solutions are driving a healthier pipeline of opportunities, including above-ground storage tanks, pipeline casings, and offshore rigs.

This is a confirmation of a theme management has been building for years. On the April call, CFO Matt Wolsfeld described the shift: “We are at a point now with oil and gas where it is a transition from the work that we have been doing behind the scenes to really focusing on closing business and adding revenue to the top line that will ultimately flow down to an earnings-per-share standpoint.” — Matt Wolsfeld, Chief Financial Officer (CFO) · 2026-04-09 The trajectory is clear: gas numbers are finally translating into profit.

The commodity drag and Natur-Tec's new pushes

The gross margin erosion was almost entirely a raw material phenomenon. Polyethylene prices, a key input for both ZERUST and Natur-Tec, spiked more than 30% on Hormuz-related shipping risk.

The big issue that we had was the gross margin impact with polyethylene prices increasing by 30-plus percent.

Against that backdrop, Natur-Tec continues to innovate. The company announced a collaboration with Bayer to develop compostable seedling cups for nurseries in India, and was selected for the International Fresh Produce Association's packaging innovation program. food packaging remains the long-term growth story, with volume growth in Natur-Tec running at 10-12% even as revenue grew only 5% due to price concessions. The margin pressure in Natur-Tec is a separate challenge, as CFO Wolsfeld noted in Q&A: "for a lot of the commodity based trash bag liner revenue... it is a cost sensitive price sensitive business."

The company's ability to manage costs will be tested. “We are not coming in as saying the reason why that we did not make money this quarter is because we increased our expenses and we made all the investments.” — Matthew Wolsfeld, CFO · 2026-01-08 Instead, they're holding expenses flat and letting revenue growth drive margin expansion. The sale of the Beachwood, Ohio facility for $1.15 million will add liquidity and streamline operations, and management is using AI tools to gain better visibility into customer-level profitability.

The fundamental picture is mixed. Gross margin has deteriorated from a 2024 peak near 40% to 35.7% in the latest quarter, reflecting both the temporary raw material shock and longer-term mix shift toward lower-margin commodity Natur-Tec products. The company's net cash position has swung to negative $5 million as debt has increased, but the expected facility sale and improved Q4 profitability should help.

Outlook

NTIC expects Q4 to be its strongest quarter of the year. With raw material costs normalizing and oil and gas momentum building, the company believes its record sales can finally convert to meaningful earnings. The near-term risk is whether the Middle East situation destabilizes again, but management's confidence is backed by a backlog that already includes orders invoiced in June.

The macro backdrop aligns: global transcripts are full of Strait of Hormuz mentions, but NTIC is one of the few small-caps that has directly translated that turmoil into a cost story—and expects to pass it through. For investors, the question is whether the recovery is as quick as promised.