# Nortech Systems Inc: Form 10-Q for the period ended Jun 30, 2024

- Company: [Nortech Systems Inc](/companies/nsys.md) (CIK 722313)
- Form: 10-Q
- Filed: 2024-08-08
- Accepted by EDGAR: Aug 8, 2024, 16:16 ET
- Period: 2024-06-30
- Accession: 0001493152-24-030781
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/722313/000149315224030781/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/722313/000149315224030781/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-04-01 to 2024-06-30 | $33.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2024-01-01 to 2024-06-30 | $68.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-04-01 to 2024-06-30 | $29.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2024-01-01 to 2024-06-30 | $58.0m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2024-04-01 to 2024-06-30 | $4.6m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2024-01-01 to 2024-06-30 | $10.1m | us-gaap:GrossProfit |
| Research and development | 3 months, 2024-04-01 to 2024-06-30 | $291.0k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2024-01-01 to 2024-06-30 | $609.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2024-04-01 to 2024-06-30 | $344.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2024-01-01 to 2024-06-30 | $1.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-04-01 to 2024-06-30 | $165.0k | us-gaap:InterestExpenseNonoperating |
| Interest expense | 6 months, 2024-01-01 to 2024-06-30 | $332.0k | us-gaap:InterestExpenseNonoperating |
| Income tax | 3 months, 2024-04-01 to 2024-06-30 | $22.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2024-01-01 to 2024-06-30 | $245.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-04-01 to 2024-06-30 | $157.0k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2024-01-01 to 2024-06-30 | $922.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-04-01 to 2024-06-30 | $0.05 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2024-01-01 to 2024-06-30 | $0.32 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | $0.06 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2024-01-01 to 2024-06-30 | $0.34 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-04-01 to 2024-06-30 | 2,935,671 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2024-01-01 to 2024-06-30 | 2,922,113 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2024-01-01 to 2024-06-30 | −$1.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2024-01-01 to 2024-06-30 | $1.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2024-06-30 | $1.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-06-30 | $59.2m | us-gaap:AssetsCurrent |
| Total assets | at 2024-06-30 | $76.3m | us-gaap:Assets |
| Current liabilities | at 2024-06-30 | $23.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-06-30 | $40.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-06-30 | $36.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 17,831 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 June 30, 2024, we have facilities in Minnesota: Bemidji, Blue Earth, Mankato, Milaca and Maple Grove (corporate office). We also have facilities in Monterrey, Mexico and Suzhou, China. In May, 2024, we announced the closure of our Blue Earth facility by the end of 2024 and moving its operations to our Bemidji facility.

All dollar amounts are stated in thousands of U.S. dollars.

### Results of Operations

*Net Sales.* Net sales for the three months ended June 30, 2024 and 2023 were $33,891 and $35,021, respectively, a decrease of $1,130 or 3.2%. Net sales for the six months ended June 30, 2024 and 2023 were $68,106 and $69,909, respectively, a decrease of $1,803 or 2.6%. The following is a summary of net sales by our major industry markets:

|  | Three Months Ended June 30, 2024 | 2023 | Increase (Decrease) |  |
| --- | ---: | ---: | ---: | ---: |
| Medical | $17,871 | $20,607 | $(2,736) | (13.3)% |
| Industrial | 9,385 | 9,059 | 326 | 3.6% |
| Aerospace and defense | 6,635 | 5,355 | 1,280 | 23.9% |
| **Total net sales** | $33,891 | $35,021 | $(1,130) | (3.2)% |

|  | Six Months Ended June 30, 2024 | 2023 | Increase (Decrease) |  |
| --- | ---: | ---: | ---: | ---: |
| Medical | $36,976 | $41,979 | $(5,003) | (11.9)% |
| Industrial | 18,977 | 18,531 | 446 | 2.4% |
| Aerospace and defense | 12,153 | 9,399 | 2,754 | 29.3% |
| **Total net sales** | $68,106 | $69,909 | $(1,803) | (2.6)% |

- Medical: Net sales to our medical customers decreased $2,736, or 13.3%, in the three months ended June 30, 2024 as compared with the same period in 2023, and $5,002, or 11.9%, in the six months ended June 30, 2024 as compared with the same period in 2023. The decrease was primarily due to inventory re-balancing with existing customers, timing of customer product launches and lower average sales prices in anticipation of moving several programs for one customer to our Monterrey, Mexico facility.
- Industrial: Net sales to our industrial customers increased $326, or 3.6%, in the three months ended June 30, 2024 as compared with the same period in 2023, and $446, or 2.4%, in the six months ended June 30, 2024 as compared with the same period in 2023. The increase in net sales was primarily due to stronger demand with existing customers.
- Defense: Net sales to our aerospace and defense customers were up $1,280, or 23.9%, in the three months ended June 30, 2024 as compared with the same period in 2023, and $2,754, or 29.3% in the six months ended June 30, 2024 as compared with the same period in 2023. The increase in net sales relates to increasing demand in the aerospace and defense market, and improved supply chain availability of component materials.

*Backlog.* Our 90-day shipment backlog as of June 30, 2024 was $30,095, down 14.5% from March 31, 2024, and 12.2% from the prior-year comparable quarter end. 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 June 30, 2024 was $73,296, a 14.8% decrease from the prior quarter end and a 27.4% decrease from the prior-year comparable quarter end. As the supply chain lead times have normalized, customers are returning to their pre-pandemic ordering practices, which has resulted in a decrease in our backlog. More recently we are also noting reduced visibility to revenues in the next several quarters as customers are rebalancing their inventories and, therefore, deferring the placement of some orders.

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

|  | June 30, 2024 90 Day | Total | March 31, 2024 90 Day | Total | June 30, 2023 90 Day | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Medical | $15,906 | $34,450 | $16,995 | $40,201 | $18,283 | $51,925 |
| Industrial | 6,398 | 11,423 | 8,200 | 15,184 | 9,702 | 21,037 |
| Aerospace and defense | 7,791 | 27,423 | 10,018 | 30,616 | 6,283 | 28,056 |
| **Total backlog** | $30,095 | $73,296 | $35,213 | $86,001 | $34,268 | $101,018 |

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The 90-day and total backlog as of June 30, 2024 includes orders already recognized in net sales and included in the contract asset value of $14,957.

#### Operating Costs and Expenses.

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

|  | Three Months Ended June 30, 2024 | 2023 | Increase/(Decrease) |  |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $33,891 | $35,021 | $(1,130) | (3.2)% |
| Cost of goods sold | 29,274 | 29,547 | (273) | (0.9)% |
| Gross profit | 4,617 | 5,474 | (857) | (15.7)% |
| Gross margin percentage (1) | 13.6% | 15.6% | (200 ) bpc(2) |  |
| Selling | 909 | 953 | (44) | (4.7)% |
| % of Net sales | 2.7% | 2.7% |  |  |
| General and administrative | 2,982 | 3,105 | (123) | (4.0)% |
| % of Net sales | 8.8% | 8.9% |  |  |
| Restructuring charges | 91 | - | 91 | -% |
| % of Net sales | 0.2% | -% |  |  |
| Research and development | 291 | 317 | (26) | (8.2)% |
| % of Net sales | 0.9% | 0.9% |  |  |
| Operating income | 344 | 1,099 | (755) | (68.7)% |
| % of Net sales | 1.0% | 3.1% |  |  |

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

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

|  | Six Months Ended June 30, 2024 | 2023 | Increase/(Decrease) |  |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $68,106 | $69,909 | $(1,803) | (2.6)% |
| Cost of goods sold | 58,041 | 58,951 | (910) | (1.5)% |
| Gross profit | 10,065 | 10,958 | (893) | (8.1)% |
| Gross margin percentage (1) | 14.8% | 15.7% | (90 ) bpc(2) |  |
| Selling | 1,714 | 1,843 | (129) | (7.0)% |
| % of Net sales | 2.5% | 2.6% |  |  |
| General and administrative | 6,152 | 6,370 | (218) | (3.4)% |
| % of Net sales | 9.0% | 9.1% |  |  |
| Restructuring charges | 91 | - | 91 | -% |
| % of Net sales | 0.2% | -% |  |  |
| Research and development | 609 | 593 | 16 | 2.7% |
| % of Net sales | 0.9% | 0.8% |  |  |
| Operating income | 1,499 | 2,152 | (653) | (30.3)% |
| % of Net sales | 2.3% | 3.1% |  |  |

*(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 13.6% and 15.6% for the three months ended June 30, 2024 and 2023, respectively. Gross profit as a percent of net sales was 14.8% and 15.7% for the six months ended June 30, 2024 and 2023, respectively. The decrease in gross profit as a percentage of net sales in the 2024 periods as compared with the same prior-year periods was the result of lower net sales, as discussed above, and reduced facility utilization.

*Selling expenses.* Selling expenses as measured as a percent of net sales, were relatively flat in the three and six months ended June 30, 2024 and 2023.

*General and administrative expenses.* General and administrative expenses decreased in the 2024 periods as compared with the 2023 periods as the result of lower incentive compensation accruals in the current-year periods, and ,as a percent of net sales, remained relatively flat.

*Restructuring charges*. Restructuring charges were $91 in the three and six months ended June 30, 2024 for accrued employee retention bonuses for our facility consolidation and closure of our Blue Earth facility. We expect to incur approximately $800 of cash restructuring costs, including employee retention and facility moving cost in 2024, of which substantially all are expected to be incurred and paid by December 2024.

*Operating income.* Operating income for the three months ended June 30, 2024 and 2023 were $344 or 1.0% of net sales, and $1,099 or 3.1% of net sales, respectively. Operating income for the six months ended June 30, 2024 and 2023 were $1,499 or 2.3% of net sales and $2,152 or 3.1% of net sales, respectively. Decreases in both periods were driven by the decrease in net sales and resulting gross margin.

#### Other expense

*Interest expense.* Interest expense was $165 and $125 for the three months ended June 30, 2024 and 2023, respectively. Interest expense was $332 and $235 for the six months ended June 30, 2024 and 2023, respectively. This increase was driven by higher borrowings under our line of credit arrangement. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements.

*Income taxes.* Our effective tax rate for the three and six months ended June 30, 2024 was 12% and 21%. Our effective tax rate for the three and six months ended June 30, 2023 was 35% and 31%. The decrease in the effective tax rate is attributable to the application of a valuation allowance during the three and six month periods ended June 30, 2023 and inclusion of estimated research and development tax credits in the three and six months ended June 30, 2024, partially offset by increased taxes on foreign entities.

### Cash Flow Operating Results

The following is a summary of cash flow results:

| Cash provided by (used in): | Six Months Ended June 30, 2024 | 2023 |
| --- | ---: | ---: |
| Operating activities | $(1,458) | $281 |
| Investing activities | (1,011) | (956) |
| Financing activities | 2,343 | 144 |
| Effect of exchange rates on changes in cash and cash equivalents | (7) | (35) |
| Net change in cash and cash equivalents | $(133) | $(566) |

*Operating Activities.* Cash used in operating activities was $1,458 in the first six months of 2024, compared with cash provided of $281 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 $1,214 in the six months ended June 30, 2024 as compared with cash usage of $3,200 in the same prior-year period. The improved cash flow in the current year was due 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 $1,288 in the six months ended June 30, 2024 as compared with cash provided of $1,350 in the prior-year period. The increase in the current-year period cash usage was the result of normal timing variances of inventory purchases and timing of product shipments and increased inventory levels to support the transition of manufacturing from our Blue Earth facility to our Bemidji plant.

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- Cash used by changes in accounts payable was $2,546 in the current-year period as compared with cash provided of $586 in the same prior-year period, primarily related to the timing of cash payments.
- Cash provided by customer deposits was $1,385 in the six months ended June 30, 2024 as compared with cash used of $195 in the same prior-year period which is driven by timing of customer deposits received before the quarter end.

*Investing Activities.* Cash used in investing activities was $408 in the first six months of 2024, compared with cash used of $956 in the same prior-year period, both primarily for capital expenditures.

*Financing Activities.* Cash provided by financing activities was $2,343 in the first six months of 2024, compared with cash provided of $144 in the same prior-year period. The increase in cash provided by financing activities resulted from the cash used for working capital in the six months ended June 30, 2024.

### 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 $16,000 that was to expire on June 15, 2026.

On February 29, 2024, we replaced the asset backed line of credit agreement with a $15,000 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 June 30, 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. We were in compliance with all the financial covenants related to this agreement as of and for the period ended June 30, 2024, except for the covenant related to operating expense contributions to our Mexican operations in excess of the amounts allowed under the Revolver. We have received a waiver of this event of default from the bank.

Under the amended Bank of America credit agreement signed February 29, 2024, the line of credit is 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 8.0% and 8.3% as of June 30, 2024 and December 31, 2023, respectively. We had borrowings on our line of credit of $8,360 and $5,846 outstanding as of June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024 we had unused availability on the line of credit of $6,440.

### 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-K are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligation 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 Aug 8, 2024.
Source: SEC EDGAR, the filing index for accession 0001493152-24-030781. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.