# Nortech Systems Inc: Form 10-Q for the period ended Mar 31, 2020

- Company: [Nortech Systems Inc](/companies/nsys.md) (CIK 722313)
- Form: 10-Q
- Filed: 2020-05-13
- Accepted by EDGAR: May 13, 2020, 16:37 ET
- Period: 2020-03-31
- Accession: 0001437749-20-010598
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/722313/000143774920010598/nsys20200331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/722313/000143774920010598/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-01-01 to 2020-03-31 | $27.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-01-01 to 2020-03-31 | $24.4m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-01-01 to 2020-03-31 | $3.0m | us-gaap:GrossProfit |
| Operating income | 3 months, 2020-01-01 to 2020-03-31 | $391.0k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-01-01 to 2020-03-31 | $224.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-01-01 to 2020-03-31 | $30.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-01-01 to 2020-03-31 | $137.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-01-01 to 2020-03-31 | $0.05 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-01-01 to 2020-03-31 | $0.05 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-01-01 to 2020-03-31 | 2,668,590 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2020-01-01 to 2020-03-31 | $466.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2020-01-01 to 2020-03-31 | $65.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2020-03-31 | $730.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-03-31 | $45.5m | us-gaap:AssetsCurrent |
| Total assets | at 2020-03-31 | $63.1m | us-gaap:Assets |
| Current liabilities | at 2020-03-31 | $23.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-03-31 | $43.0m | us-gaap:Liabilities |
| Long-term debt | at 2020-03-31 | $3.1m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-03-31 | $444.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-03-31 | $20.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 13,064 characters.

### Overview

We are a Maple Grove, Minnesota based leading provider of design and manufacturing solutions for complex electromechanical systems, assemblies and components. We primarily serve the medical aerospace and defense, and industrial markets. Our design services span concept development to commercial design, and include software, electrical, mechanical, and biomedical engineering. Our manufacturing and supply chain capabilities are vertically integrated around wire, cable and interconnect assemblies, printed circuit board assemblies, as well as system-level assembly, integration and final test. We maintain facilities in Bemidji, Blue Earth, Mankato, Merrifield, and Milaca, Minnesota; Monterrey, Mexico; and Suzhou, China. All of our facilities are certified to one or more of the ISO/AS standards, including 9001, AS9100 and 13485, with most having additional certifications based on the needs of the customers they serve.

### Results of Operations

The following table presents statements of operations data as percentages of total net sales for the periods indicated:

|  | Three Months Ended March 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net Sales | 100.0% | 100.0% |
| Cost of Goods Sold | 89.0 | 89.5 |
| Gross Profit | 11.0 | 10.5 |
| Selling Expenses | 2.3 | 2.7 |
| General and Administrative Expenses | 7.3 | 8.1 |
| Income (Loss) from Operations | 1.4 | (0.3) |
| Interest Expense | (0.8) | (0.9) |
| Income (Loss) Before Income Taxes | 0.6 | (1.2) |
| Income Tax Expense | 0.1 | 0.1 |
| Net Income (Loss) | 0.5% | (1.3%) |

17

### Net Sales

Net sales were $27.4 million in the first quarter of 2020, as compared to $28.2 million in the first quarter of the prior year, a decrease of $0.8 million or 2.6%. Net sales results were varied by markets, the medical market increased by $0.5 million or 3.5% with medical devices accounting for the increase. The industrial market sector was down $1.7 million or 18.6% in the first quarter of 2020 as compared to the same quarter of 2019. Net sales from the aerospace and defense markets increased by $0.4 million or 10.0% in the first quarter of 2020 as compared to the first quarter of 2019.

Net sales by our major industry markets for the three months ended March 31, 2020 and 2019 were as follows (in thousands):

|  | Three months Ended March 31, |
| --- | ---: |
|  | 2020 2019% |
|  | $$ Change |
| Medical | 15,461 14,939 3.5 |
| Industrial | 7,309 8,981 (18.6) |
| Aerospace and Defense | 4,670 4,245 10.0 |
| Total Net Sales | 27,440 28,165 (2.6) |

Net sales by timing of transfer of goods and services for the three ended March 31, 2020 is as follows (in thousands):

|  | Three Months Ended March 31, 2020 Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market |
| --- | ---: | ---: | ---: | ---: |
| Medical | $13,703 | $1,061 | $697 | $15,461 |
| Industrial | 6,016 | 970 | 323 | 7,309 |
| Aerospace and Defense | 4,317 | 134 | 219 | 4,670 |
| Total net sales | $24,036 | $2,165 | $1,239 | $27,440 |

18

Net sales by timing of transfer of goods and services for the three ended March 31, 2019 is as follows (in thousands):

|  | Three Months Ended March 31, 2019 Product/ Service Transferred Over Time | Product Transferred at Point in Time | Noncash Consideration | Total Net Sales by Market |
| --- | ---: | ---: | ---: | ---: |
| Medical | $14,495 | $35 | $409 | $14,939 |
| Industrial | 8,140 | 597 | 244 | 8,981 |
| Aerospace and Defense | 4,103 | 20 | 122 | 4,245 |
| Total net sales | $26,738 | $652 | $775 | $28,165 |

### Backlog

Our 90-day shipment backlog as of March 31, 2020 was $27.5 million, a 0.8% increase from the beginning of the quarter and a 12.5% decrease from the prior year. Backlog for our medical customers has decreased 1.6% from the beginning of the quarter and decreased 17.0% from the prior year. Our industrial customers’ backlog increased 11.1% from the beginning of the quarter and decreased 21.9% from the prior year. The aerospace and defense backlog decreased 2.6% from the beginning of the quarter and increased 13.0% from the prior year. Our backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.

90-day shipment backlog by our major industry markets are as follows (in thousands):

|  | Shipment Backlog as of the Period Ended March 31, 2020 | December 31, 2019 | March 31, 2019 |
| --- | ---: | ---: | ---: |
| Medical | $14,330 | $14,564 | $17,256 |
| Industrial | 6,352 | 5,716 | 8,130 |
| Aerospace and Defense | 6,812 | 6,994 | 6,027 |
| Total 90-Day Backlog | $27,494 | $27,274 | $31,413 |

Our 90-day backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases. These variables cause inconsistencies in comparing the backlog from one period to the next. Our total shipment backlog was $53.0 million for both periods ended March 31, 2020 and March 31, 2019.

### Gross Profit

Gross profit as a percent of net sales 11.0% and 10.5% for the three months ended March 31, 2020 and 2019, respectively. This increase in gross profit as a percent of net sales is mainly due to product and customer mix.

### Selling Expense

Selling expenses for the three months ended March 31, 2020 and 2019 was $0.6 million or 2.3% of sales and $0.8 million or 2.7% of sales, respectively. The decrease in selling expenses for 2020 is due to lower headcount and consulting costs.

### General and Administrative Expense

General and administrative expenses for the three months ended March 31, 2020 and 2019, were $2.0 million or 7.3% of sales and $2.3 million or 8.1% of sales, respectively. This decrease is due to lower headcount and consulting costs.

### Income (Loss) before Income Taxes

First quarter 2020 income from operations was $0.2 million compared to a loss of $0.3 million for the first quarter in 2019.

### Income Taxes

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three months ended March 31, 2020 and 2019 was 18% and (4%), respectively.

### Net Income (Loss)

Net income for the three months ended March 31, 2020 was $0.1 million or $0.05 per basic and diluted common share and a net loss for the three months ended March 31, 2019 of $0.4 million or $(0.14) per basic and diluted common share.

### Liquidity and Capital Resources

Net cash provided by operating activities for the three months ended March 31, 2020 was $0.5 million. The increase in accounts payable positively impacted cash flows, partially offset by an increase in accounts receivable. Net cash used in investing of $0.1 million for the three months ended March 31, 2020.

We have satisfied our liquidity needs over the past several years with cash flows generated from operations and a bank operating line of credit. We have a credit agreement with Bank of America (BofA) which was entered into on June 15, 2017 and amended on December 29, 2017 and provides for a line of credit arrangement of $16.0 million that expires on June 15, 2022. The credit arrangement also has a $5.0 million real estate term note outstanding with a maturity date of June 15, 2022.

Both the line of credit and real estate term notes are subject to fluctuations in the LIBOR rates. The line of credit and real estate term notes with BofA contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all of our assets.

On March 31, 2020, we had outstanding advances of $10.3 million under the line of credit and unused availability of $4.1 million supported by our borrowing base. We believe our financing arrangements and cash flows to be provided by operations will be sufficient to satisfy our future working capital needs. Our working capital was $21.7 million and $21.1 million as of March 31, 2020 and December 31, 2019, respectively.

The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than (i) 1.0 to 1.0 for the three months ending December 31, 2019, six months ending March 31, 2020, nine months ending June 30, 2020 and twelve months ending September 30, 2020 and each fiscal quarter end thereafter. The Company met the covenants for the three months ended March 31.2020.

On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A. (the “Promissory Note”), which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which; funds were received on April 22, 2020. The Promissory Note has a term of 2 years with a 1% per annum interest rate. Payments are deferred for 6 months from the date of the Promissory Note and we can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations. Any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis.

### Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.

### Critical Accounting Policies and Estimates

Our significant accounting policies and estimates are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019. Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate. Actual results could differ from these estimates.

### Forward-Looking Statements

Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

|  |  |
| --- | --- |
| ♦ | Volatility in the marketplace which may affect market supply, demand of our products or currency exchange rates; |
| ♦ | Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing; |
| ♦ | Changes in the reliability and efficiency of our operating facilities or those of third parties; |
| ♦ | Risks related to availability of labor; |
| ♦ | Increases in certain raw material costs such as copper and oil; |
| ♦ | Commodity and energy cost instability; |
| ♦ | Risks related to FDA noncompliance; |
| ♦ | The loss of a major customer; |
| ♦ | General economic, financial and business conditions that could affect our financial condition and results of operations; |
| ♦ | Increased or unanticipated costs related to compliance with securities and environmental regulation; |
| ♦ | Disruption of global or local information management systems due to natural disaster or cyber-security incident; |
| ♦ | Outbreaks of epidemic, pandemic, or contagious diseases, such as the recent novel coronavirus that affect our operations, our customers' operations or our suppliers' operations. |

The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us. Discussion of these factors is also incorporated in Part I, Item 1A, “Risk Factors,” and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

## Controls and procedures

As filed, 1,430 characters.

### Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of these disclosure controls and procedures as of the date of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.

### Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 1,993 characters.

We are affected by the risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended under the heading “Part I – Item 1A.Risk Factors.” Other than as noted below, there have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2019.

### Paycheck Protection Program Promisorry Note

On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A. (the “Promissory Note”), which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which; funds were received on April 22, 2020. On April 23, 2020, the Small Business Administration (“SBA”) issued new guidance that questioned whether a public company with substantial market value and access to capital markets would qualify to participate in the PPP under the CARES Act. Subsequently, on April 28, 2020, the secretary of the Treasury and SBA announced that the government will review all PPP loans of more than $2 million for which a borrower applies for forgiveness. Should we be audited or reviewed by the U.S. Department of Treasury as a result of filing an application for forgiveness or otherwise, such audit or review could result in legal and reputational costs as well as significant use of management time. In addition, if we are audited and receive an adverse or negative finding in such audit, we could be required to return up to the full amount of the Promissory Note, which would reduce our liquidity by such amount and potentially subject us to fines and penalties.

Filed May 13, 2020.
Source: SEC EDGAR, the filing index for accession 0001437749-20-010598. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.