Nortech Systems Inc: Form 10-Q for the period ended Sep 30, 2025

Overview

We are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical Device, Medical Imaging, Aerospace and 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. As of December 31, 2024, we have facilities in Minnesota: Bemidji, Mankato, Milaca and Maple Grove as well as facilities in Monterrey, Mexico and Suzhou, China. We closed our facility in Blue Earth, Minnesota in December 2024 and sold this facility on July 24, 2025.

Our net sales are derived from complex designed products built to the customers’ specifications. The products we manufacture are engineered and designed products that require sophisticated manufacturing support. Quality, on-time delivery, and reliability are of utmost importance. Our goal is to expand and diversify our customer base by focusing on sales and marketing efforts that fit our value-added service, early engagement design, and development strategy. We continue to focus on lean manufacturing initiatives, quality and on-time delivery improvements to increase asset utilization, reduce lead times and provide competitive pricing.

Our strategic investments have positioned us to capitalize on growth opportunities in the medical and defense markets and improve our competitiveness by expanding our global footprint. Our industrial and defense markets are focused on improving our asset utilization and profitability while transforming to a value-added, solution-sell business model that supports early engagement, design for manufacturability and rapid prototyping.

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

Restructuring Activities

In fiscal year 2024, the Company initiated a restructuring plan related to the closure of its Blue Earth, MN facility. During the three and nine months ended September 30, 2025, the Company incurred restructuring charges related to staff reductions and activities related to the Blue Earth facility closure. The costs of these restructuring programs totaled $837, of which $266 was recorded in the nine months ended September 30, 2025 and $571 was recorded in the prior fiscal year. We did not record any amounts related to restructuring in the three months ended September 30, 2025. These costs are included in restructuring charges on the condensed consolidated statements of operations. These charges relate to employee severance and facility closure costs. We do not expect significant additional expenses related to this plan.

Results of Operations

Net Sales. Net sales for the three months ended September 30, 2025 and 2024 were $30,482 and $31,407, respectively, a comparative period decrease of $925 or 2.9%. Net sales for the nine months ended September 30, 2025 and 2024 were $88,052 and $99,513, respectively, a comparative period decrease of $11,461 or 11.5%. Net sales in the three and nine months ended September 30, 2025 were negatively impacted by delays in Aerospace and Defense customer approvals of products transferred from our Blue Earth facility to our Bemidji facility as well as manufacturing and plant utilization inefficiencies related to the movement of various production between plants. Over the past two quarters, we have improved our manufacturing efficiencies as we complete product transfers between plants and realize improved manufacturing yields and productivity. The following is a summary of net sales by our major industry markets:

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• Medical Device: Net sales to our medical customers decreased $139, or 1.6%, in the three months ended September 30, 2025 as compared with the same period in 2024 and $2,522, or 9.5%, in the nine months ended September 30, 2025 as compared with the same period in 2024. The decrease was primarily due to inventory re-balancing with existing customers and timing of customer product launches as well as lower productivity as we managed our facility consolidation primarily in the first quarter of 2025.
• Medical Imaging: Net sales to our Medical Imaging customers increased $832, or 8.7%, in the three months ended September 30, 2025 as compared with the same period in 2024 and $1,143, or 4.2%, in the nine months ended September 30, 2025 as compared with the same period in 2024. The increase was primarily due to higher sales volume to existing customers as well as new program awards.
• Industrial: Net sales to our industrial customers decreased $222, or 2.6%, in the three months ended September 30, 2025 as compared with the same period in 2024 and $3,970, or 14.4%, in the nine months ended September 30, 2025 as compared with the same period in 2024. The decrease in net sales was primarily due to customer order delays and part shortages.
• Aerospace and Defense: Net sales to our aerospace and defense customers decreased $1,396, or 28.3%, in the three months ended September 30, 2025 as compared with the same period in 2024 and $6,112, or 34.2%, in the nine months ended September 30, 2025 as compared with the same period in 2024. The decrease in net sales in the quarterly comparison primarily relates to higher over time revenue in the third quarter of 2024 due from increased production in anticipation of the closure of the Blue Earth facility. The decrease in net sales in the year-to-date comparison relates to delays in customer approvals as we have consolidated this business into our Bemidji facility and higher over time revenue in the third quarter of 2024 due from increased production in anticipation of the closure of the Blue Earth facility.

Backlog. Our 90-day shipment backlog as of September 30, 2025 was $31,322, an increase of 17.8% from $26,592 at the beginning of the quarter, and a 5.7% increase from September 30, 2024. 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 September 30, 2025, was $77,292, representing a 1.4% decrease from $78,351 at the beginning of the quarter and a 10.8% increase compared to the same period in the prior year; this year over year growth was primarily driven by an increase in Aerospace and Defense orders.

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

The 90-day and total backlog as of September 30, 2025 includes orders already recognized in net sales and included in the contract asset value of $15,328.

Operating Costs and Expenses.

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

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

(2) Basis points change in gross margin percentage.

(3) During the first quarter of 2025, the Company modified the responsibilities and reporting relationships of certain customer-facing managers. As a result of these organizational changes, the related costs, which were previously classified as cost of sales, are now reported as selling expenses to better reflect the nature of the activities performed.

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

(2) Basis points change in gross margin percentage.

(3) During the first quarter of 2025, the Company modified the responsibilities and reporting relationships of certain customer-facing managers. As a result of these organizational changes, the related costs, which were previously classified as cost of sales, are now reported as selling expenses to better reflect the nature of the activities performed.

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Gross profit and gross margins. Gross profit as a percentage of net sales was 16.5% and 12.2% for the three months ended September 30, 2025, and 2024, respectively. Gross profit as a percentage of net sales was 14.7% and 14.0% for the nine months ended September 30, 2025, and 2024, respectively. The increase in gross profit as a percentage of net sales in the quarterly and year to date comparison periods was the result of improved plant utilization primarily from our restructuring activities and favorable sales mix.

Selling expenses. Selling expenses, as measured as a percentage of net sales, were 4.0% and 2.7% for the three months ended September 30, 2025, and 2024, respectively. Selling expenses, as measured as a percentage of net sales, were 4.1% and 2.6% for the nine months ended September 30, 2025, and 2024, respectively. In 2025, we realigned the reporting structure of our customer facing managers from plant operations to business development. As a result, this increase is a result of this realignment from cost of sales as well as the impact of fixed costs on a lower revenue base.

General and administrative expenses. General and administrative expenses, as measured as a percentage of net sales, were 8.5% and 9.4% for the three months ended September 30, 2025 and 2024, respectively, and 9.2% and 9.1% for the nine months ended September 30, 2025 and 2024, respectively. General and administrative expenses decreased in the quarterly and year to date 2025 periods by $358 and $1,006, respectively, as compared with the 2024 periods primarily as the result of lower incentive compensation accruals in the current year.

Restructuring charges. Restructuring charges were $0 and $266 in the three and nine months ended September 30, 2025, respectively. During the first quarter of 2025, we incurred $235 of severance charges for a February 2025 reduction in force to align staffing to our forecasted net sales and $31 of expenses related to our closed Blue Earth facility. Restructuring charges were $176 and $267 in the three and nine months ended September 30, 2024, respectively, for accrued employee retention bonuses for our facility consolidation and closure of our Blue Earth facility.

Operating (loss) income. Operating income was $945 for the three months ended September 30, 2025 or 3.1% of net sales and operating loss was $(467) or (1.5)% of net sales for the three months ended September 30, 2024. This increase was driven by the improved gross margin and lower incentive compensation expense. Operating income was $74 or 0.1% of net sales for the nine months ended September 30, 2025 and was $1,032 or 1.0% of net sales for the nine months ended September 30, 2024. The decrease was driven by the decrease in net sales and resulting gross margin.

Interest expense. Interest expense was $273 and $216 for the three months ended September 30, 2025 and 2024, respectively. Interest expense was $744 and $548 for the nine months ended September 30, 2025 and 2024, 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 nine months ended September 30, 2025 was 122% and (71)%, respectively. Our effective tax rate for the three and nine months ended September 30, 2024 was 8% and 62%, respectively. The primary drivers of the change in effective tax rate were changes in pretax income (loss) and taxes on foreign entities.

In the third quarter of 2025, the One Big Beautiful Bill Act (“OBBBA”) restored the Company’s ability to immediately deduct domestic research and development expenses. The Company has prepared its tax provision for three and nine-months ending September 30, 2025 assuming it will take advantage of this provision of the OBBBA. As a result, the Company currently estimates that it will incur a U.S. tax loss for the Company in 2025, which will temporarily limit the Company’s ability to deduct interest expense and would impact the ability to claim foreign tax deductions and credits under the GILTI provisions of the US tax code. The impact to the GILTI results in a permanent unfavorable impact to the overall tax rate for the quarter and year-to-date periods in 2025. The Company plans to continue to review the impact of the OBBBA, and the various elections, including the Company’s deduction of research and development expense, to optimize tax cash payments, along with overall tax expense.

Cash Flow Operating Results

The following is a summary of cash flow results:

Operating Activities. Cash used in operating activities was $2,865 in the first nine months of 2025, compared with $3,043 in the same prior-year period. Significant changes in operating assets and liabilities affecting cash flows during these periods included:

• Cash used by accounts receivable and contract assets was $5,411 in the nine months ended September 30, 2025 as compared with cash provided of $2,150 in the same prior-year period. The use of cash in the nine months ended September 30, 2025 is largely due to timing of customer shipments and cash collections. The cash provided in the prior year was due to an expected increase in cash collections due to higher sales and the timing of customer payments, partially offset by an increase in contract assets to support future customer shipments.
• Cash provided by inventory was $2,823 in the nine months ended September 30, 2025 as compared with cash used of $922 in the prior-year period. The decrease in the current-year period cash usage was the result of normal timing variances of inventory purchases and timing of product shipments as well as the results of our plan to reduce inventory balances in 2025.

Investing Activities. Cash used in investing activities was $13 in the first nine months of 2025, compared with $971 in the same prior-year period. The increase in proceeds from sale of property and equipment of $504 in the nine months ended September 30, 2025 compared with $9 in the same prior-year period was primarily due to the sale of the Blue Earth property and equipment.

Financing Activities. Cash provided by financing activities was $3,218 in the first nine months of 2025 and $3,561 in the same prior-year period. The cash provided by financing activities in both periods resulted from the line of credit advances for working capital and operations.

Liquidity and Capital Resources

In the preparation of the Company's financial statements, U.S. GAAP requires the Company to assess its ability to continue as a going concern. This analysis includes a number of factors including the Company's ability to repay debt which matures within one year of the issuance date of the Company's financial statements, as well as management's plan to mitigate any such considerations. The Company's Revolver, which has $12,030 outstanding as of September 30, 2025, matures on August 31, 2026, and the Company has not completed its plan to refinance this debt as of the issuance date of these financial statements. Pursuant to U.S. GAAP, this raises substantial doubt about the Company’s ability to continue as a going concern. The Company is executing a plan to refinance the maturing cash-flow-based Revolver to an asset-backed line of credit. As of the date of issuance of these financial statements, the Company has received non-binding asset-backed financing term sheets from multiple lenders and engaged a financial advisor to assist in the refinancing process. Based on these proposals and the Company’s available assets, management believes it is probable that the refinancing will be effectively implemented before the maturity of the Revolver and will mitigate the conditions that raise substantial doubt. Accordingly, the Company has concluded that substantial doubt is alleviated. Based on the planned refinancing arrangement, anticipated operating cash flows, and cash on hand, we believe we will have sufficient liquidity to satisfy our working capital needs, capital expenditures and debt repayments for the next twelve months. We were in compliance with financial covenants related to adjusted EBITDA for the third quarter of 2025.

On February 29, 2024, we entered into 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. These ratios are calculated based on trailing twelve-month results. 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 not in compliance with financial covenants related to the maximum operating expense contributions to our Mexican operations in the first and second quarters of 2024. We have received a waiver of this event of default from the bank. On March 27, 2025, we amended (the “First Amendment”) the Revolver to waive our non-compliance with the leverage ratio and minimum fixed charge ratio as of December 31, 2024, and March 31, 2025. Provisions of the First Amendment relating to the Company’s compliance with these ratios were replaced with provisions of the Second Amendment (described below). Provisions of the First Amendment relating to minimum EBITDA requirements of the Company were replaced with provisions of the Second Amendment (described below). Provisions of the First Amendment requiring the Company to maintain unrestricted cash and Revolver availability (collectively, “Liquidity”) at specified levels were replaced with provisions of the Second Amendment (described below). The First Amendment requires the Company to provide incremental monthly reporting and increased the Company’s borrowing rate by one percent until the Company is in compliance with the original terms of the Revolver. The First Amendment increases the borrowing rate for revolving loans by 100 basis points.

On May 14, 2025, we further amended (the “Second Amendment”) the Revolver, which amended the First Amendment in part, to defer the Company’s compliance with the leverage ratio and minimum fixed charge ratio until the fourth quarter of 2025 at which time the Company must maintain (a) a leverage ratio of 2.5 times for the year ended December 31, 2025 and for each twelve-month quarterly reporting period thereafter; and (b) a minimum fixed charge coverage ratio to 1.25 times for the year ended December 31, 2025 and for each twelve-month quarterly reporting period thereafter. The Company must also maintain adjusted EBITDA (earnings before interest, taxes depreciation and amortization), as defined in the Revolver, as of the end of the second quarter of 2025 of at least $1,000, the third quarter of 2025 of at least $1,300 and the fourth quarter of 2025 and each quarter thereafter of at least $1,600. In addition, the Second Amendment requires the Company to always maintain Liquidity of at least $2,500. The Second Amendment shortened the duration of the Revolver to June 30, 2026 and increases the borrowing rate by 25 basis points.

On July 29, 2025, we amended the Revolver (the “Third Amendment”) to extend the expiration of the Revolver to August 31, 2026. We have recorded the outstanding Revolver amount of $12,030 as a current liability on the condensed consolidated balance sheets.

The Revolver, as amended, bears interest at a weighted-average interest rate of 8.0% and 7.7% as of September 30, 2025 and December 31, 2024, respectively. We had borrowings on our line of credit of $12,030 and $8,695 outstanding as of September 30, 2025 and December 31, 2024, respectively. As of September 30, 2025, we had unused availability on the line of credit of $2,970, which is subject to a month end cap based on the previously noted minimum Liquidity.

The Company had an interim funding agreement with a bank related to deposits made on equipment purchases funded through a finance lease when the equipment was received and operational. The equipment was received, and the lease agreements were finalized during the second quarter of 2025. As of September 30, 2025, we have no amounts outstanding on the interim funding agreement for equipment.

Net sales in the first two quarters of 2025 and fourth quarter of 2024 were negatively impacted by delays in Aerospace and Defense customer approvals of products transferred from our Blue Earth facility to our Bemidji facility as well as manufacturing and plant utilization inefficiencies related to the movement of various production between plants. Over the past two quarters, we have improved our manufacturing efficiencies as we complete product transfers between plants and realize improved manufacturing yields and productivity. The Company implemented plant optimization activities and cost-cutting initiatives in the first two quarters of 2025 to address losses. As a result of these activities, we have realized combined income from operations of $1,687 over the past two quarters. These actions plus continued efforts to improve manufacturing efficiencies and the planned reduction in inventory levels are intended to drive reduced borrowings during the fourth quarter of 2025.

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.

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. 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 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, 2024.

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.

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, 2024, except as set forth below.

If we fail to comply with the covenants contained in our credit agreement, we may be unable to secure additional financing and repayment obligations on our outstanding indebtedness may be accelerated.

Our credit agreement contains financial and operating covenants with which we must comply. Effective as of February 29, 2024, we entered into a new credit agreement with Bank of America (the “Revolver”.) Our Revolver contains financial and operating covenants with which we must comply. Our compliance with these covenants is dependent on our financial results, which are subject to fluctuation as described elsewhere in these risk factors. We were not in compliance with financial covenants related to the maximum operating expense contributions to our Mexican operations in the first and second quarters of 2024. We received a waiver of the Mexican operating expenses event of default from the bank in August 2024.

On March 27, 2025, we signed the First Amendment to the Revolver to waive the leverage ratio and minimum charge coverage ratio events of default as of December 31, 2024 and March 31, 2025 and to further defer the Company’s compliance with these ratios until the third quarter of 2025, and reset compliance thresholds for our covenant ratios for 2025. The First Amendment also set minimum EBITDA levels for the second, third and fourth quarters and increased the borrowing rate by 100 basis points. On May 14, 2025, we signed the Second Amendment to the Revolver to defer the Company’s compliance with the leverage ratio and minimum charge coverage ratio until the fourth quarter. The Second Amendment also modified downward the minimum EBITDA levels for the second, third and fourth quarters and shortened the duration of the Revolver to June 30, 2026 and further increased the borrowing rate by 25 basis points. For the fiscal quarter ending December 31, 2025, the Consolidated Leverage Ratio of the Company may not be greater than 2.50/1.00 given the Company EBITDA loss in the first quarter of 2025. On July 29, 2025, we signed the Third Amendment to the Revolver delaying expiration of the Revolver to August 31, 2026.

We have included the Amendment No. 1 to Credit Agreement, Waiver, and Consent, Amendment No. 2 to Credit Agreement and Amendment No. 3 to Credit Agreement as exhibits to this filing and any description of that document contained in this risk factor is only a summary and is qualified by its entirety by the filed documents. If we fail to comply with the covenants in the future or if our lender does not agree to waive any future non-compliance, we may be unable to borrow funds and any outstanding indebtedness could become immediately due and payable, which could materially harm our business.

Impairment of Our Long-Lived Assets Could Adversely Affect Our Results of Operations and Financial Condition.

We evaluate long-lived assets, primarily property and equipment, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value.

As of September 30, 2025, the Company’s common stock was trading at a value less than the Company’s net equity value. As such, the Company evaluated future undiscounted cash flows and determined that no long-lived asset impairment was required as of September 30, 2025. If the fair value of our other long-lived assets is less than their carrying value, we may be required to record a non-cash impairment charge, which could be material. Such charges could negatively impact our results of operations, potentially affect our compliance with debt covenants, and reduce the perceived value of our Company. There can be no assurance that future reviews of long-lived assets will not result in impairment charges, particularly in periods of market or economic volatility.