# Nortech Systems Inc: Form 10-Q for the period ended Mar 31, 2025

- Company: [Nortech Systems Inc](/companies/nsys.md) (CIK 722313)
- Form: 10-Q
- Filed: 2025-05-14
- Accepted by EDGAR: May 14, 2025, 16:01 ET
- Period: 2025-03-31
- Accession: 0001641172-25-010251
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/722313/000164117225010251/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/722313/000164117225010251/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2025-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2025-01-01 to 2025-03-31 | $26.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2025-01-01 to 2025-03-31 | $23.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2025-01-01 to 2025-03-31 | $3.1m | us-gaap:GrossProfit |
| Research and development | 3 months, 2025-01-01 to 2025-03-31 | $326.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2025-01-01 to 2025-03-31 | −$1.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2025-01-01 to 2025-03-31 | $214.0k | us-gaap:InterestExpenseNonoperating |
| Income tax | 3 months, 2025-01-01 to 2025-03-31 | −$511.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2025-01-01 to 2025-03-31 | −$1.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2025-01-01 to 2025-03-31 | −$0.48 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2025-01-01 to 2025-03-31 | −$0.48 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2025-01-01 to 2025-03-31 | 2,760,929 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2025-01-01 to 2025-03-31 | −$2.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2025-01-01 to 2025-03-31 | $268.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2025-03-31 | $1.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2025-03-31 | $57.3m | us-gaap:AssetsCurrent |
| Total assets | at 2025-03-31 | $73.5m | us-gaap:Assets |
| Current liabilities | at 2025-03-31 | $20.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2025-03-31 | $40.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2025-03-31 | $32.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 21,058 characters.

### 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. We closed our facility in Blue Earth, Minnesota in December 2024 and are currently seeking to sell this facility. We also have facilities in Monterrey, Mexico and Suzhou, China.

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 upmost 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 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 quarter ended March 31, 2025, the Company had restructuring charges related to staff reductions and activities related to the Blue Earth facility closure. The total estimated cost of these restructuring programs is approximately $850, of which $571 was recorded in the prior fiscal year. 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 March 31, 2025 and 2024 were $26,895 and $34,215, respectively, a decrease of $7,320 or 21.4%. Net sales in the first quarter of 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. We expect these matters to be positively resolved over the next two quarters. The following is a summary of net sales by our major industry markets:

|  | Three Months Ended March 31, 2025 | 2024 | Increase (Decrease) |  |
| --- | ---: | ---: | ---: | ---: |
| Medical Device | $8,070 | $10,738 | $(2,668) | (24.8)% |
| Medical Imaging | 8,588 | 9,544 | (956) | (10.0)% |
| Industrial | 6,945 | 8,073 | (1,128) | (14.0)% |
| Aerospace and Defense | 3,292 | 5,860 | (2,568) | (43.8)% |
| **Total net sales** | $26,895 | $34,215 | $(7,320) | (21.4)% |

- Medical Device: Net sales to our medical customers decreased $2,668, or 24.8%, in the three months ended March 31, 2025 as compared with the same period in 2024. The decrease was primarily due to inventory re-balancing with existing customers, timing of customer product launches and lower productivity as we managed our facility consolidation.
- Medical Imaging: Net sales to our Medical Imaging customers decreased $956, or 10.0%, in the three months ended March 31, 2025 as compared with the same period in 2024. The decrease was primarily due to inventory re-balancing with existing customers, timing of customer product launches and lower manufacturing productivity arising from the transfer of production between facilities.
- Industrial: Net sales to our industrial customers decreased $1,128, or 14.0%, in the three months ended March 31, 2025, as compared with the same period in 2024. The decrease in net sales was primarily due to customer order delays and part shortages.
- Defense: Net sales to our aerospace and defense customers were down $2,568, or 43.8%, in the three months ended March 31, 2025, as compared with the same period in 2024. The decrease in net sales relates to delays in customer approvals as we have consolidated this business into our Bemidji facility.

*Backlog.* Our 90-day shipment backlog as of March 31, 2025 was $26,742, an increase of 1.1% from $26,451 at the beginning of the quarter, and a 24.1% decrease from March 31, 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 March 31, 2025, was $68,332, a 3.8% increase from $65,852 at the beginning of the quarter and a 20.5% decrease from the prior-year comparable quarter end as some customers are requesting much shorter order lead times, which has resulted in a decrease in our backlog. As we develop deep strategic partnerships with these customers, we have agreed to these shorter lead times. 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. In addition, several of our Aerospace and Defense customers are delaying orders until they approve the move of production at our Bemidji facility. We expect the majority of those approvals to be completed by the end of the second quarter of 2025.

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

|  | March 31, 2025 90 Day | Total | December 31, 2024 90 Day | Total | March 31, 2024 90 Day | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Medical Device | $5,735 | $19,925 | $6,953 | $21,706 | $8,365 | $27,504 |
| Medical Imaging | 7,526 | 10,020 | 7,168 | 10,353 | 8,630 | 12,697 |
| Industrial | 5,999 | 10,005 | 5,173 | 7,306 | 8,200 | 15,184 |
| Aerospace and Defense | 7,482 | 28,382 | 7,157 | 24,487 | 10,018 | 30,616 |
| **Total backlog** | $26,742 | $68,332 | $26,451 | $65,852 | $35,213 | $86,001 |

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The 90-day and total backlog as of March 31, 2025 includes orders already recognized in net sales and included in the contract asset value of $13,404.

#### Operating Costs and Expenses.

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

|  | Three Months Ended March 31, 2025 | 2024 | Increase/(Decrease) |  |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $26,895 | $34,215 | $(7,320) | (21.4)% |
| Cost of goods sold (3) | 23,817 | 28,767 | (4,950) | (17.2)% |
| Gross profit | 3,078 | 5,448 | (2,370) | (43.5)% |
| Gross margin percentage (1) | 11.4% | 15.9% | (450) bpc(2) |  |
| Selling (3) | 1,184 | 805 | 379 | 47.1% |
| % of Net sales | 4.4% | 2.3% |  |  |
| General and administrative | 2,915 | 3,170 | (255) | (8.0)% |
| % of Net sales | 10.8% | 9.3% |  |  |
| Research and development | 326 | 318 | 8 | 2.5% |
| % of Net sales | 1.2% | 0.9% |  |  |
| Restructuring charges | 266 | - | 266 | -% |
| % of Net sales | 0.9% | -% |  |  |
| Operating (loss) income | (1,613) | 1,155 | (2,768) | (239.7)% |
| % of Net sales | (6.0)% | 3.4% |  |  |

*(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 three months ended March 31, 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.

*Gross profit and gross margins.* Gross profit as a percent of net sales was 11.4% and 15.9% for the three months ended March 31, 2025, and 2024, respectively. The decrease in gross profit as a percentage of net sales in the 2025 period as compared with the same prior-year period was the result of lower net sales, as discussed above, reduced facility utilization and decreased manufacturing productivity.

*Selling expenses*. Selling expenses, as measured as a percent of net sales, was 4.4% and 2.3% for the three months ended March 31, 2025, and 2024, respectively. This increase is a result of realignment of our customer facing managers that were previously included in cost of sales to selling expense as well as the impact of fixed costs on a lower revenue base.

*General and administrative expenses.* General and administrative expenses decreased in the 2025 period as compared with the 2024 period as the result of lower incentive compensation accruals in the current year.

*Restructuring charges*. Restructuring charges were $266 in the three months ended March 31, 2025 for severance charges for a February 2025 reduction in force to align staffing to our forecasted net sales of $235 and expenses related to our closed Blue Earth facility of $31.

*Operating (loss) income.* Operating loss for the three months ended March 31, 2025 was ($1,613) or (6.0)% of net sales. Operating income for the three months ended March 31, 2024 was $1,155 or 3.4% of net sales. Decrease in the period was driven by the decrease in net sales and resulting gross margin.

*Interest expense.* Interest expense was $214 and $167 for the three months ended March 31, 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 ended March 31, 2025 was 28.0%. Our effective tax rate for the three months ended March 31, 2024 was 22.6%. The primary drivers of the increase in effective tax rate were changes in pretax (loss) income and an increase in the GILTI inclusion.

### Cash Flow Operating Results

The following is a summary of cash flow results:

| Cash provided by (used in): | Three Months Ended March 31, 2025 | 2024 |
| --- | ---: | ---: |
| Operating activities | $(2,930) | $2,828 |
| Investing activities | (268) | (735) |
| Financing activities | 3,446 | 274 |
| Effect of exchange rates on changes in cash and cash equivalents | (2) | (14) |
| Net change in cash and cash equivalents | $246 | $2,355 |

*Operating Activities.* Cash used in operating activities was $2,930 in the first three months of 2025, compared with cash provided of $2,828 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 was $814 in the three months ended March 31, 2025 as compared with cash provided of $3,215 in the same prior-year period. The use of cash in the three months ended March 31, 2025 is largely due to timing of customer shipments and cash collections. The cash provided in the prior year was due an expected increase in cash collections due to higher sales and the timing of customer payments.
- Cash provided by inventory was $487 in the three months ended March 31, 2025 as compared with cash used of $1,400 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. We plan to actively reduce inventory balances over the next several quarters.
- Cash used by changes in accounts payable was $1,441 in the current-year period as compared with cash used of $8 in the same prior-year period, primarily related to the timing of cash payments.

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*Investing Activities.* Cash used in investing activities was $268 in the first three months of 2025, compared with cash used of $735 in the same prior-year period, both primarily for capital expenditures.

*Financing Activities.* Cash provided by financing activities was $3,446 in the first three months of 2025, compared with cash provided of $274 in the same prior-year period. The increase in cash provided by financing activities resulted from the line of credit advances for working capital and operations in the three months ended March 31, 2025.

### 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, capital expenditures and debt repayments for the next twelve months.

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 also 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.

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 accelerated the expiration of the Revolver to June 30, 2026 and increases the borrowing rate by 25 basis points.

The Revolver, as amended, bears interest at a weighted-average interest rate of 7.2% and 7.7% as of March 31, 2025 and December 31, 2024, respectively. We had borrowings on our line of credit of $11,955 and $8,695 outstanding as of March 31, 2025 and December 31, 2024, respectively. As of March 31, 2025, we had unused availability on the line of credit of $3,045, which is subject to a month end cap based on the previously noted minimum Liquidity.

The Company has an interim funding agreement as of March 31, 2025 with a bank related to deposits made on equipment purchases that will be funded through a finance lease when the equipment is received and operational. As of March 31, 2025 we have $563 outstanding on the interim funding agreement for equipment.

Net sales in the first quarter 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. We expect these matters to be resolved over the next two quarters. The Company has implemented plant optimization activities and our cost cutting initiatives in the first quarter of 2025 to address losses. These actions plus the planned reduction in inventory levels are intended to drive reduced borrowings during the remainder of 2025. The Company believes it has sufficient capital and liquidity to operate its business for at least twelve months from the filing of this Form 10-Q.

### 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; and |
| ♦ | 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, 2024.

## 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, 2024.

Filed May 14, 2025.
Source: SEC EDGAR, the filing index for accession 0001641172-25-010251. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.