# Nortech Systems Inc: Form 10-Q for the period ended Mar 31, 2024

- Company: [Nortech Systems Inc](/companies/nsys.md) (CIK 722313)
- Form: 10-Q
- Filed: 2024-05-14
- Accepted by EDGAR: May 14, 2024, 16:16 ET
- Period: 2024-03-31
- Accession: 0001437749-24-016630
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/722313/000143774924016630/nsys20240331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/722313/000143774924016630/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $34.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-01-01 to 2024-03-31 | $28.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2024-01-01 to 2024-03-31 | $5.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2024-01-01 to 2024-03-31 | $318.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | $1.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-01-01 to 2024-03-31 | $167.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $223.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | $765.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.26 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.28 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 2,908,457 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | $2.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-01-01 to 2024-03-31 | $744.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2024-03-31 | $4.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-03-31 | $59.1m | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-31 | $75.5m | us-gaap:Assets |
| Current liabilities | at 2024-03-31 | $25.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-03-31 | $39.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-03-31 | $36.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 15,441 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, complex higher-level assemblies and other box builds for a wide range of industries. We serve three major markets within the EMS industry: Medical, Aerospace and Defense, and the Industrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and gas. As of March 31, 2024, we have facilities in Minnesota: Bemidji, Blue Earth, Mankato, Milaca and Maple Grove. We also have facilities in Monterrey, Mexico and Suzhou, China.

### Results of Operations

*Net Sales.* Net sales for the three months ended March 31, 2024 and 2023 were $34,215 thousand and $34,888 thousand, respectively, a decrease of $673 thousand or 2%. The following is a summary of net sales by our major industry markets:

*(in thousands)*

|  | Three Months Ended March 31, 2024 | 2023 | Increase (Decrease) |  |
| --- | ---: | ---: | ---: | ---: |
| Medical | $20,282 | $21,372 | $(1,090) | (5.1)% |
| Industrial | 8,073 | 9,472 | (1,399) | (14.8)% |
| Aerospace and defense | 5,860 | 4,044 | 1,816 | 44.9% |
| **Total net sales** | $34.215 | $34,888 | $(673) | (1.9)% |

- *Medical: Net sales to our medical customers were $20,282 thousand in the first quarter of 2024, a 5.1% decrease from $21,372 thousand in the prior-year quarter.* The decrease in net sales relates to demand fluctuations as customers work through inventory.
- *Industrial: Net sales to our industrial customers were $8,073 thousand in the first quarter of 2024, a 14.8% decrease from $9,472 thousand in the prior-year quarter.* The decrease in net sales relates to demand fluctuations as customers work through inventory.
- *Defense: Net sales to our aerospace and defense customers were $5,860 thousand in the first quarter of 2024, a 44.9% increase from $4,044 thousand in the prior-year quarter.* The increase in net sales relates to increasing demand in the aerospace and defense market and improved access to component parts which allowed increased manufacturing production.

*Backlog.* Our 90-day shipment backlog as of March 31, 2024 was $35,213 thousand, level with the beginning of the quarter and a 4.1% increase from March 31, 2023. 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 total order backlog as of March 31, 2024 was $86,001 thousand, a 6.2% decrease from $91,684 thousand at the beginning of the quarter and a 13.0% decrease from March 31, 2023. As the supply chain continues to normalize, lead times are reducing and customers are returning to their pre-pandemic ordering practices, which has resulted in a decrease in our backlog. Our 90-day order backlog by market has remained flat when compared to the prior quarter and increased relative to the same period of the prior year. More recently we are also noting, similar to many other contract manufactures, reduced visibility to revenues in the next several quarters as compared with order patterns in the prior-year quarters as customers are balancing their inventories and therefore, deferring the placement of some orders.

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

*(in thousands)*

|  | March 31, 2024 90 Day | Total | December 31, 2023 90 Day | Total | March 31, 2023 90 Day | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Medical | $16,995 | $40,201 | $18,107 | $47,593 | $20,587 | $49,817 |
| Industrial | 8,200 | 15,184 | 8,644 | 13,857 | 7,776 | 20,530 |
| Aerospace and defense | 10,018 | 30,616 | 8,416 | 30,234 | 5,355 | 28,458 |
| **Total backlog** | $35,213 | $86,001 | $35,167 | $91,684 | $33,718 | $98,805 |

The 90-day and total backlog as of March 31, 2024 contain the contract asset value of $14,194 thousand which has been recognized as net sales.

#### Operating Costs and Expenses.

Net sales, cost of goods sold, gross margin, and operating costs were as follows:

*(Dollars in thousands)*

|  | Three Months Ended March 31, 2024 | 2023 | Increase/(Decrease) |  |  |
| --- | ---: | ---: | ---: | --- | ---: |
| Net sales | $34,215 | $34,888 | $(673) |  | (2.0)% |
| Cost of goods sold | 28,767 | 29,404 | (637) |  | (2.0)% |
| Gross profit | 5,448 | 5,484 | (36) |  | (2.0)% |
| Gross margin percentage (1) | 15.9% | 15.7% | 20 | bpc(2) |  |
| Selling expenses | 805 | 890 | (85) |  | (11.1)% |
| % of Net sales | 2.3% | 2.6% |  |  |  |
| General and administrative expenses | 3,170 | 3,265 | (96) |  | 3.0% |
| % of Net sales | 9.3% | 9.5% |  |  |  |
| Research &development expense | 318 | 276 | 42 |  | 0.0% |
| % Net sales | 0.9% | 0.8% |  |  |  |
| Operating income | 1,155 | 1,053 | 102 |  | 9.1% |
| % Net sales | 3.4% | 3.0% |  |  |  |

*(1)* Gross margin percentage is defined as gross profit as a percentage of net sales.

*(2)* Basis points change in gross margin percentage.

*Gross profit and gross margins.* Gross profit as a percent of net sales was 15.9% for the three months ended March 31, 2024. Gross profit as a percent of net sales was 15.7% for the three months ended March 31, 2023. The 20-basis point increase in gross profit as a percentage of net sales for the three months ended March 31, 2024 compared to the same period of the prior year relates primarily to favorable product mix and was net of a $178 thousand, or 16 basis points, catch-up accrual for Mexican statutory benefits.

*Selling expenses.* Selling expenses for the three months ended March 31, 2024 were $805 thousand or 2.3% of net sales. Selling expenses for the three months ended March 31, 2023 were $890 thousand or 2.6% of net sales. This decrease was driven by the lower revenue in the comparison periods.

*General and administrative expenses.* General and administrative expenses for the three months ended March 31, 2024 were $3,170 thousand or 9.3% of net sales. General and administrative expenses for the three months ended March 31, 2023 were $3,265 thousand or 9.5% of net sales.

*Research and development expense.* Research and development expenses were $318 and $276, or 0.9% and 0.8% of net sales, in the three months ended March 31, 2024 and 2023, respectively.

*Operating income.* Operating income for the three months ended March 31, 2024 was $1,155 thousand or 3.4% of net sales. Operating income for the three months ended March 31, 2023 was $1,053 thousand or 3.0% of net sales.

#### Other expense

*Interest expense.* Interest expense was $167 thousand for the three months ended March 31, 2024 and $110 thousand for the three months ended March 31, 2023. This increase was driven by higher interest rates. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements.

*Income taxes.* We reported income tax expense of $223 thousand and $262 thousand for the three months ended March 31, 2024 and 2023, respectively. Our effective tax rate was 22.6% and 27.8% for the three months ended March 31, 2024 and 2023, respectively. The decrease in the effective tax rate is attributable to the application of a valuation allowance during the three-month period ended March 31, 2023 and inclusion of estimated research and development tax credits in the three months ended March 31, 2024, partially offset by increased taxes on foreign entities.

### Cash Flow Operating Results

The following is a summary of cash flow results:

*(in thousands)*

| Cash provided by (used in): | Three Months Ended March 31, 2024 | 2023 |
| --- | ---: | ---: |
| Operating activities | $2,828 | $1,718 |
| Investing activities | (735) | (496) |
| Financing activities | 274 | (1,073) |
| Effect of exchange rates on changes in cash and cash equivalents | (14) | 3 |
| Net change in cash and cash equivalents | $2,353 | $152 |

17

*Operating Activities.* Cash provided by operating activities was $2,828 thousand in the first three months of 2024, compared with cash provided of $1,718 thousand in the same prior-year period. Significant changes in operating assets and liabilities affecting cash flows during these periods included:

- Cash provided by accounts receivable and contract assets was $3,502 thousand in the current-year quarter as compared with cash usage of $1,029 thousand in the same prior-year quarter. The improved cash flow in the current year was due to an expected increase in cash collections due to higher sales and the timing of customer payments in the fourth quarter of 2023 as compared with the fourth quarter of 2022.
- Cash used in inventory was $1,400 thousand in the current-year quarter as compared with cash provided of $1,075 thousand in the prior-year quarter. The increase in the current-year period cash usage was the result of procurement requirements related to a higher 90-day shipment backlog versus the prior-year quarterly period and normal timing variances of inventory purchases.
- Cash provided by changes in accounts payable and accruals was $632 thousand in the current-year period as compared with cash usage of $555 thousand, primarily related to the timing of cash payments.
- Cash used in customer deposits was $926 thousand in the current-year quarter as compared with cash provided of $1,315 thousand in the prior-year period. This was driven by decreased lead times in the supply chain.

*Investing Activities.* Cash used in investing activities was $735 thousand in the first three months of 2024, compared with cash used of $496 thousand in the same prior-year period, both primarily for capital expenditures.

*Financing Activities.* Cash provided by financing activities was $274 thousand in the first three months of 2024, compared with cash used of $1,073 thousand in the same prior-year period. The improvement in cash provided by operating activities resulted from the timing of line of credit repayments.

### 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 had a credit agreement with Bank of America, which was entered into on June 15, 2017 and provided for a line of credit arrangement of $16 million that was to expire on June 15, 2026.

On February 29, 2024, we replaced the asset backed line of credit agreement with a $15 million Senior Secured Revolving Line of Credit with Bank of America (the “Revolver”). The Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also known as “SOFR”, plus a defined margin. If the Company prepays SOFR borrowings before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement. The Company is required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.

The Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage ratio, both of which are defined in the Revolver agreement. The Company met the covenants for the period ended March 31, 2024. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding borrowings. The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027.

Amounts borrowed on the Revolver are subject to variations in the SOFR index rate. Under the prior credit agreement with Bank of America, the line of credit borrowing availability was restricted by a defined asset borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 9.4% and 8.3% as of March 31, 2024 and December 31, 2023, respectively. We had borrowings on our line of credit of $6.2 million and $5.8 million outstanding as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024 we had unused availability on the line of credit of $8.8 million.

### 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.

### 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-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, 2023.

## 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, 2023.

Filed May 14, 2024.
Source: SEC EDGAR, the filing index for accession 0001437749-24-016630. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.