Press release

Nortech Systems Reports First Quarter Results and Actions to Reduce Facility Costs

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Nortech Systems Incorporated (Nasdaq: NSYS) (“Nortech” or, the “Company”), a leading provider of engineering and manufacturing solutions for complex electromedical and electromechanical products serving the medical, industrial and defense markets, reported first quarter ended March 31, 2024 financial results.

2024 Q1 Highlights:

  • Net sales of $34.2 million, down 1.9% from Q1 2023.

  • Net income increased to $765 thousand, or $0.26 per diluted share, compared with net income of $681 thousand or $0.23 per diluted share, in Q1 2023.

  • Gross margin of 15.9%, up 20 basis points from gross margin of 15.7% in the same prior-year quarter.

  • Earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.637 million, compared with EBITDA of $1.559 million in the prior year.

  • Signed new $15 million cash flow line of credit agreement.

  • 90-day backlog of $35.2 million as of March 31, 2024, consistent with the prior year-end level.

Management Commentary

“We posted solid results in the first quarter of 2024 and continued to improve margins and manage expenses,” said Jay D. Miller, President and CEO of Nortech. “As a result, we are generating improved net income and EBITDA in the quarter as compared with the same quarter in 2023.”

“Our dedicated Nortech employees worldwide embody our corporate values, including teamwork, excellence, commitment, integrity and innovation,” Miller noted. “While we measure employee engagement success with a number of metrics, we are pleased to see continued high employee retention and high employee engagement. Most recently, 230 of our North American employees participated in the American Cancer Society “FIT2Be Cancer Free” challenge.”

“As we further look for opportunities to optimize our expense structure and plant capacity utilization, we are consolidating our Minnesota facilities. This morning we announced the decision to consolidate production of our wire and cable products for the Aerospace and Defense industry to our Bemidji, Minnesota facility. The shift in production is expected to be completed by the end of 2024, at which time the Company will close the Blue Earth, Minnesota facility. In the spirit of taking the best care of our employees as possible, all Blue Earth employees will be extended job offers at our other Minnesota facilities. We sincerely hope to keep them all.”

“Further, we are consolidating the square footage of our Maple Grove, Minnesota headquarters and engineering facility by almost 30 percent. This reduction reflects our current and future space needs which have been heavily influenced by the Company’s hybrid remote work arrangements.”

2024 First Quarter

($ in thousands)

Q1 24

Q1 23

% Change

Net sales

$34,215

$34,888

(1.9) %

Gross profit

$5,448

$5,484

(0.7) %

Operating expenses

$4,293

$4,431

(3.1) %

Net income

$765

$681

12.3 %

EBITDA

$1,637

$1,558

5.1 %

In the first quarter of 2024, net sales totaled $34.2 million. This represents a 1.9% decrease from net sales of $34.9 million in the first quarter of 2023. For the first quarter, gross profit totaled $5.4 million, or 15.9% of net sales, compared with gross profit of $5.5 million, or 15.7%, in the prior year. First quarter 2024 operating expenses totaled $4.3 million, a 3.1% decrease from the prior year operating expenses of $4.4 million.

GAAP net income totaled $765 thousand, or $0.26 per diluted share, in the current quarter, up from GAAP net income of $681 thousand, or $0.23 per diluted share, in the same prior-year quarter. EBITDA totaled $1.637 million, a 5.1% increase from EBITDA of $1.558 million in the same prior-year quarter.

Conference Call

The Company will hold a live conference call and webcast at 3:00 p.m. central time on Wednesday, May 16, 2024, to discuss the Company’s 2024 first quarter results. The call will be hosted by Jay D. Miller, Chief Executive Officer and President and Andrew D. C. LaFrence, Chief Financial Officer. To access the live audio conference call, US participants may call 888-506-0062 and international participants may call 973-528-0011. Participant Access Code: 945063. Participants may also access the call via webcast at: https://www.webcaster4.com/Webcast/Page/2814/50447.

About Nortech Systems Incorporated

Nortech Systems is a leading provider of design and manufacturing solutions for complex electromedical devices, electromechanical systems, assemblies, and components. Nortech primarily serves the medical, aerospace & defense, and industrial markets. Its design services span concept development to commercial design, and include medical device, software, electrical, mechanical, and biomedical engineering. Its manufacturing and supply chain capabilities are vertically integrated around wire/cable/interconnect assemblies, printed circuit board assemblies, as well as system-level assembly, integration, and final test. Headquartered in Maple Grove, Minn., Nortech currently has seven manufacturing locations and design centers across the U.S., Latin America, and Asia. Nortech Systems is traded on the NASDAQ Stock Market under the symbol NSYS. Nortech’s website is www.nortechsys.com.

Forward-Looking Statements

This press release contains forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995 including without limitation statements regarding future financial results, expense management, effects of consolidation of our facilities, and continued high performance of personnel. While this release is based on management’s best judgment and current expectations, actual results may differ materially from those expressed or implied and involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation: (1) commodity cost increases coupled with challenges in raising prices and/or customer pressure to reduce prices; (2) supply chain disruptions leading to shortages of critical components; (3) volatility in market conditions which may affect demand for the Company’s products; (4) increased competition; (5) changes in the reliability and efficiency of operating facilities or those of third parties; (6) risks related to the availability of labor; (7) the unanticipated loss of any key member of senior management; (8) geopolitical, economic, financial and business conditions; (9) the Company’s ability to steadily improve manufacturing output and product quality throughout the remainder of 2024 or (10) the impact of global health epidemics on our customers, employees, manufacturing facilities, suppliers, the capital markets and our financial condition. Some of the above-mentioned factors are described in further detail in the section entitled “Risk Factors” in our annual and quarterly reports, as applicable. You should assume the information appearing in this document is accurate only as of the date hereof, or as otherwise specified, as our business, financial condition, results of operations and prospects may have changed since such date. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the United States Securities and Exchange Commission, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.

Reconciliation of Generally Accepted Accounting Principles (“GAAP”) Measures to Non-GAAP Financial Measure

EBITDA is a non-GAAP financial measure used by management that we believe provides useful information to investors because it reflects ongoing performance excluding certain non-recurring items during comparable periods and facilitates comparisons between peer companies since interest, taxes, depreciation, and amortization can differ greatly between different organizations as a result of differing capital structures and tax strategies. EBITDA is defined as net income (loss) plus interest expense, plus income tax expense plus depreciation expense and amortization expense. EBITDA should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. It is not a measurement of our financial performance under GAAP and should not be considered an alternative to revenue or net income, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA has limitations as an analytical metric, and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP.

 

 

THREE MONTHS ENDED

 

 

MARCH 31,

CONDENSED INCOME STATEMENTS

 

2024

 

2023

(in thousands USD, except share and per share amounts)

 

 

 

 

 

 

Net sales

 

$

34,215

 

 

$

34,888

 

Cost of goods sold

 

 

28,767

 

 

 

29,404

 

 

 

 

 

 

 

 

Gross profit

 

 

5,448

 

 

 

5,484

 

Operating expenses:

 

 

 

 

 

 

Selling expenses

 

 

805

 

 

 

890

 

General and administrative expenses

 

 

3,170

 

 

 

3,265

 

Research and development expenses

 

 

318

 

 

 

276

 

Total operating expenses

 

 

4,293

 

 

 

4,431

 

Income from operations

 

 

1,155

 

 

 

1,053

 

Other expense

 

 

 

 

 

 

Interest expense

 

 

(167

)

 

 

(110

)

Total other expense

 

 

(167

)

 

 

(110

)

Income before income taxes

 

 

988

 

 

 

943

 

Income tax expense

 

 

223

 

 

 

262

 

Net income

 

$

765

 

 

$

681

 

 

 

 

 

 

 

 

Income per common share:

 

 

 

 

 

 

Basic

 

$

0.28

 

 

$

0.25

 

Weighted average number of common shares outstanding – basic

 

 

2,741,345

 

 

 

2,692,033

 

 

 

 

 

 

 

 

Diluted

 

$

0.26

 

 

$

0.23

 

Weighted average number of common shares outstanding – dilutive

 

 

2,907,291

 

 

 

2,903,635

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

 

(183

)

 

 

40

 

Comprehensive income, net of tax

 

$

582

 

 

$

721

 

CONDENDSED BALANCE SHEETS

($ in thousands)

 

MARCH 31,

2024

 

DECEMBER 31,

2023

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$

4,028

 

 

$

960

 

Restricted cash

 

 

 

 

 

715

 

Accounts receivable, less allowances of $292 and $358, respectively

 

 

16,051

 

 

 

19,279

 

Inventories, net

 

 

22,951

 

 

 

21,660

 

Contract assets

 

 

14,194

 

 

 

14,481

 

Prepaid assets and other assets

 

 

1,892

 

 

 

1,698

 

Total current assets

 

 

59,116

 

 

 

58,793

 

Property and equipment, net

 

 

6,134

 

 

 

6,513

 

Operating lease assets, net

 

 

7,339

 

 

 

6,917

 

Deferred tax assets

 

 

2,640

 

 

 

2,641

 

Other intangible assets, net

 

 

223

 

 

 

263

 

Total assets

 

$

75,452

 

 

$

75,127

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of finance lease obligations

 

$

296

 

 

$

356

 

Current portion of operating lease obligations

 

 

1,235

 

 

 

1,033

 

Accounts payable

 

 

15,217

 

 

 

15,924

 

Accrued payroll and commissions

 

 

4,771

 

 

 

4,138

 

Customer deposits

 

 

3,139

 

 

 

4,068

 

Other accrued liabilities

 

 

1,063

 

 

 

1,063

 

Total current liabilities

 

 

25,721

 

 

 

26,582

 

Long-term liabilities:

 

 

 

 

 

 

Long-term line of credit

 

 

6,170

 

 

 

5,815

 

Long-term finance lease obligations, net of current portion

 

 

168

 

 

 

209

 

Long-term operating lease obligations, net of current portion

 

 

6,977

 

 

 

6,763

 

Other long-term liabilities

 

 

410

 

 

 

414

 

Total long-term liabilities

 

 

13,725

 

 

 

13,201

 

Total liabilities

 

 

39,446

 

 

 

39,783

 

Shareholders’ equity:

 

 

 

 

 

 

Preferred stock, $1 par value; 1,000,000 shares authorized; 250,000 shares issued and outstanding

 

 

250

 

 

 

250

 

Common stock – $0.01 par value; 9,000,000 shares authorized; 2,747,678 and 2,740,178 shares issued and outstanding, respectively

 

 

27

 

 

 

27

 

Additional paid-in capital

 

 

17,009

 

 

 

16,929

 

Accumulated other comprehensive loss

 

 

(715

)

 

 

(532

)

Retained earnings

 

 

19,435

 

 

 

18,670

 

Total shareholders’ equity

 

 

36,006

 

 

 

35,344

 

Total liabilities and shareholders’ equity

 

$

75,452

 

 

$

75,127

 

 

 

THREE MONTHS ENDED

CONDENSED CASH FLOW STATEMENTS

 

MARCH 31,

($ in thousands)

 

2024

 

2023

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

765

 

 

$

681

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

482

 

 

 

505

 

Compensation on stock-based awards

 

 

80

 

 

 

99

 

Change in inventory reserves

 

 

76

 

 

 

32

 

Change in accounts receivable allowances

 

 

(66

)

 

 

(32

)

Other, net

 

 

(4

)

 

 

(15

)

Changes in current operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

3,215

 

 

 

(206

)

Inventories

 

 

(1,400

)

 

 

1,075

 

Contract assets

 

 

287

 

 

 

(823

)

Prepaid expenses and other current assets

 

 

(328

)

 

 

(600

)

Accounts payable

 

 

(8

)

 

 

(1,799

)

Accrued payroll and commissions

 

 

640

 

 

 

1,244

 

Customer deposits

 

 

(926

)

 

 

1,315

 

Other accrued liabilities

 

 

15

 

 

 

242

 

Net cash provided by operating activities

 

 

2,828

 

 

 

1,718

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Proceeds from sale of property and equipment

 

 

9

 

 

 

 

Purchases of property and equipment

 

 

(744

)

 

 

(496

)

Net cash used in investing activities

 

 

(735

)

 

 

(496

)

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from line of credit

 

 

32,768

 

 

 

31,133

 

Payments to line of credit

 

 

(32,394

)

 

 

(32,145

)

Principal payments on financing leases

 

 

(100

)

 

 

(96

)

Stock option exercises

 

 

 

 

 

35

 

Net cash provided by (used in) financing activities

 

 

274

 

 

 

(1,073

)

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(14

)

 

 

3

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

2,353

 

 

 

152

 

Cash and cash equivalents – beginning of period

 

 

1,675

 

 

 

2,481

 

Cash and cash equivalents – end of period

 

$

4,028

 

 

$

2,633

 

THREE MONTHS ENDED

March 31,

2024

2023

RECONCILIATION OF NET INCOME TO EBITDA

($ in thousands)

Net Income

$

765

$

681

Interest

167

110

Taxes

223

262

Depreciation

442

465

Amortization

40

40

EBITDA

$

1,637

$

1,558

There are no material adjustments to EBITDA in 2022 or 2023.

Adjustments to EBITDA in 2021 include ($ in thousands):

  • In the third quarter of 2021, we recognized $5,209 related to the CARES Act Employee Retention Credit (ERC) as a reduction of costs of goods sold of $4,670, selling expense of $125, and general and administrative expense of $414. Nortech received ERC cash payment in two installments, the first in December 2022 and the second in May 2023.

  • CARES Act Paycheck Protection Program (PPP) loan forgiveness gain of $6,170 recorded in the fourth quarter of 2021.

  • Restructuring expense in 2021 of $327 related to the consolidation of our printed circuit board production capabilities into our center of excellence in Mankato, Minnesota and closure of our Merrifield, Minnesota plant.

  • Gain on sale of assets in 2021 of $141 related to the closure of our Merrifield, Minnesota plant.

  • Loss on abandonment of intangible assets in 2021 of $560 related to abandonment of the Devicix tradename.

($ in millions)

Last Twelve Months (LTM) Ended in Quarter

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Q2 2023

Q3 2023

Q4 2023

Q1 2024

Net Sales

$

102.5

$

105.5

$

115.2

$

123.8

$

126.1

$

132.0

$

134.1

$

138.3

$

140.8

$

138.9

$

139.3

$

138.7

 

 

 

Gross Profit $ – Adjusted

 

8.8

 

10.3

 

11.2

 

13.7

 

15.1

 

18.1

 

20.5

 

21.9

 

22.4

 

21.4

 

23.1

 

23.1

Gross Margin % – Adjusted

 

8.6%

 

9.7%

 

9.7%

 

11.0%

 

12.0%

 

13.7%

 

15.3%

 

15.8%

 

15.9%

 

15.4%

 

16.6%

 

16.6%

 

 

 

EBITDA – Adjusted

$

(2.0)

$

(0.7)

$

(0.2)

$

1.9

$

2.5

$

4.2

$

5.8

$

6.7

$

6.8

$

6.0

$

8.0

$

8.1