# Nortech Systems Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [Nortech Systems Inc](/companies/nsys.md) (CIK 722313)
- Form: 10-Q
- Filed: 2023-11-14
- Accepted by EDGAR: Nov 14, 2023, 16:17 ET
- Period: 2023-09-30
- Accession: 0001437749-23-031982
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/722313/000143774923031982/nsys20230930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/722313/000143774923031982/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $33.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $103.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $28.1m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $87.0m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $5.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $16.3m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $314.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $907.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $1.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $3.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $130.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $365.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | −$213.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $389.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $1.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $2.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.42 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.87 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.44 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.93 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 2,888,679 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 2,887,889 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $2.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $1.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-09-30 | $699.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $52.6m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $66.0m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $23.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $35.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $30.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 14,861 characters.

### Overview

We are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical, Aerospace & Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services. Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, higher-level assemblies, and other box builds for a wide range of industries. We serve three major markets within the EMS industry: Aerospace and Defense, Medical, and the Industrial market, which includes industrial capital equipment, transportation, vision, agriculture, oil and gas. We maintain facilities in Bemidji, Blue Earth, Mankato, 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 September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net Sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Cost of Goods Sold | 84.1 | 82.1 | 84.2 | 84.4 |
| Gross Profit | 15.9 | 17.9 | 15.8 | 15.6 |
| Selling Expenses | 2.8 | 2.7 | 2.7 | 2.8 |
| General and Administrative Expenses | 8.8 | 8.4 | 9.0 | 8.5 |
| Research and Development Expenses | 0.9 | 1.3 | 0.9 | 1.2 |
| Gain on Sale of Property and Equipment | 0.0 | 0.0 | 0.0 | 0.0 |
| Income from Operations | 3.4 | 5.5 | 3.2 | 3.1 |
| Interest Expense | (0.4) | (0.3) | (0.4) | (0.3) |
| Income Before Income Taxes | 3.0 | 5.2 | 2.8 | 2.8 |
| Income Tax (Benefit) Expense | (0.6) | 0.8 | 0.4 | 0.4 |
| Net Income | 3.6% | 4.4% | 2.4% | 2.4% |

22

### Net Sales

Net sales for the three months ended September 30, 2023 and 2022 were $33.4 million and $35.3 million, respectively, a decrease of $1.9 million or 5%. The decrease in net sales relates to demand fluctuations as customers work through inventory. The three months ended September 30, 2022 benefited from significant pricing actions ahead of material cost increases that contributed to record-high revenue in that period.

Net sales for the nine months ended September 30, 2023 and 2022 were $103.3 million and $98.5 million, respectively, an increase of $4.8 million or 5%. The increase in net sales is due to continued strong demand across our medical, industrial and defense market, and the impact of pricing actions taken in the second half of 2022.

Net sales by our major industry markets for the three months ended September 30, 2023 and 2022 were as follows (in millions):

|  | Three months Ended September 30, 2023 | 2022 | % Change | Nine months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Medical | $17.8 | $20.5 | (13.2) | $59.8 | $54.3 | 10.1 |
| Industrial | 10.5 | 10.9 | (3.7) | 29.0 | 29.0 | - |
| Aerospace and Defense | 5.1 | 3.9 | 30.8 | 14.5 | 15.2 | (4.6) |
| Total Net Sales | $33.4 | $35.3 | (5.4) | $103.3 | $98.5 | 4.9 |

### Backlog

Our 90-day shipment backlog as of September 30, 2023 was $33.8 million, a 1% decrease from the beginning of the quarter and a 8% decrease from September 30, 2022. Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be shipped within 180 days.

Our 90-day order backlog by market has decreased when compared to the prior quarter and the same period of the prior year. As the supply chain continues to normalize, lead times are reducing and customers are starting to return to their pre-pandemic ordering practices 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.

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

|  | 90 Day Backlog as of the Period Ended September 30 2023 | June 30 2023 | September 30 2022 |
| --- | ---: | ---: | ---: |
| Medical | $16.8 | $18.3 | $22.8 |
| Industrial | 9.7 | 9.7 | 8.3 |
| Aerospace and Defense | 7.3 | 6.3 | 5.8 |
| Total 90-Day Backlog | $33.8 | $34.3 | $36.9 |

Our total order backlog as of September 30, 2023 was $102.3 million, a 1% increase from $101.0 million the beginning of the quarter and a 1% decrease from September 30, 2022. Our total backlog remains strong.

Total order backlog by our major industry markets are as follows (in millions):

|  | Total Backlog as of the Period Ended September 30 2023 | June 30 2023 | September 30 2022 |
| --- | ---: | ---: | ---: |
| Medical | $51.4 | $51.9 | $58.4 |
| Industrial | 19.7 | 21.0 | 22.8 |
| Aerospace and Defense | 31.2 | 28.1 | 22.1 |
| Total Backlog | $102.3 | $101.0 | $103.3 |

The 90-day and total backlog at September 30, 2023 contain the contract asset value of $11.7 million which has been recognized as revenue.

### Gross Profit

Gross profit as a percent of net sales was 15.9% and 15.8% for the three and nine months ended September 30, 2023, respectively. Gross profit as a percent of net sales was 17.9% and 15.6% for the three and nine months ended September 30, 2022, respectively. The decrease in gross profit as a percentage of net sales for the three months ended September 30, 2023 compared to the same period of the prior year relates to decreased plant utilization, product mix, as well as continued material and labor cost inflation.

### Selling Expense

Selling expenses for the three and nine months ended September 30, 2023 were $0.9 million or 2.8% of sales and $2.8 million or 2.7% of sales, respectively. Selling expenses for the three and nine months ended September 30, 2022 were $1.0 million or 2.7% of sales and $2.8 million or 2.8% of sales, respectively.

### General and Administrative Expense

General and administrative expenses for the three and nine months ended September 30, 2023 were $3.0 million or 8.9% of sales and $9.3 million or 9.0% of sales, respectively. General and administrative expenses for the three and nine months ended September 30, 2022 were $2.9 million or 8.4% of net sales and $8.3 million or 8.5% of net sales, respectively. The increase in general and administrative expense was mainly due to higher wages and professional fees.

### Research and Development Expense

Research and development expenses for the three and nine months ended September 30, 2023 were $0.3 or 0.9% of net sales and $0.9 million or 0.9% of net sales, respectively. Research and development expenses for the three and nine months ended September 30, 2022 were $0.5 or 1.3% of net sales and $1.2 million or 1.2% of net sales, respectively.

### Income From Operations

Income from operations was $1.1 million and $3.3 million for the three and nine months ended September 30, 2023, respectively. Income from operations was $1.9 million and $3.1 million for the three and nine months ended September 30, 2022. The decrease in income from operations for the comparable three month periods relates to the decreased revenue and gross margin in the third quarter of 2023.

### Interest Expense

Interest expense was $0.1 million for both the three months ended September 30, 2023 and 2022. Interest expense was $0.4 and $0.3 million for the nine months ended September 30, 2023 and 2022, respectively.

### 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 and nine months ended September 30, 2023 was (21%) and 13%, respectively. Our effective tax rate for the three and nine months ended September 30, 2022 was 16% and 15%, respectively. The primary drivers of the change in the effective tax rate for both the three and nine month periods relates to the change in valuation allowance on the United States deferred tax assets due to return to provision adjustments partially offset by increased taxes on foreign entities.

### Net Income

Net income for the three months ended September 30, 2023 was $1.2 million or $0.44 per basic common share and $0.42 per diluted common share. Net income for the three months ended September 30, 2022 was $1.5 million or $0.57 per basic common share and $0.53 per diluted common share. The decrease in net income for the three month period was driven by the decrease in sales and gross margin.

Net income for the nine months ended September 30, 2023 was $2.5 million or $0.93 per basic and $0.87 per diluted common share. Net income for the nine months ended September 30, 2022 was $2.4 million or $0.89 per basic common share and $0.83 per diluted common share. The increase in net income for the nine month period was driven by the higher revenue and lower effective tax rate.

### Liquidity and Capital Resources

We believe that our existing financing arrangements, anticipated cash flows from operations and cash on hand will be sufficient to satisfy our working capital needs for the next twelve months, capital expenditures and debt repayments.

### Credit Facility

We have a credit agreement with Bank of America, which was entered into on June 15, 2017 and provides for a line of credit arrangement of $16,000 that expires on June 15, 2026.

Under the amended Bank of America credit agreement signed December 31, 2021, the line of credit is subject to variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 8.2% and 5.2% as of September 30, 2023 and December 31, 2022, respectively. We had borrowings on our line of credit of $4.6 million and $6.9 million outstanding as of September 30, 2023 and December 31, 2022, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings. The line of credit is shown net of debt issuance costs of $34 thousand and $44 thousand on the consolidated balance sheet for the periods ended September 30, 2023 and December 31, 2022, respectively.

The line of credit with Bank of America contains 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 Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0, for the twelve months ending December 31, 2020 and each Fiscal Quarter end thereafter subject only during a trigger period commencing when our availability under our line is less than $2.0 million until availability is above that amount for 30 days. The Company met the covenants for the period ended September 30, 2023.

At September 30, 2023, we had unused availability under our line of credit of $7.5 million supported by our borrowing base. The line is secured by substantially all of our assets.

### 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, 2022. 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;

♦ Supply chain disruption and unreliability;

♦ Lack of supply of sufficient human resources to produce our products;

♦ 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;

♦ 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-K 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, 2022.

## 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, 600 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.” 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, 2022.

Filed Nov 14, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-031982. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.