Nortech Systems Inc 10-Q for FY2021 Q3
Nortech Systems Inc (NSYS)
About this 10-Q
Nortech Systems Inc filed this 10-Q on November 10, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $29.45M
- up 11.7% from $26.36M a year earlier
- Net income
- $3.56M
- up 80.5% from net income of $1.97M a year earlier
- Diluted EPS
- $1.24
- up 69.9% from $0.73 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
NORTECH SYSTEMS INCORPORATED
Commission file number
State of Incorporation:
IRS Employer Identification No.
Executive Offices:
Telephone number: (
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | Accelerated Filer ☐ |
| | Smaller Reporting Company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Number of shares of $.01 par value common stock outstanding at November 5, 2021 was
TABLE OF CONTENTS
| PAGE | |||
| PART I - FINANCIAL INFORMATION |
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| Item 1 |
- Financial Statements |
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| Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) |
3 |
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| Condensed Consolidated Balance Sheets |
4 |
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| Condensed Consolidated Statements of Cash Flows |
5 |
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| Condensed Consolidated Statements of Shareholders’ Equity |
6 |
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| Condensed Notes to Consolidated Financial Statements |
7-16 |
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| Item 2 |
- Management's Discussion and Analysis of Financial Condition And Results of Operations |
17-22 |
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| Item 3 |
- Quantitative and Qualitative Disclosures About Market Risk |
22 |
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| Item 4 |
- Controls and Procedures |
23 |
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| PART II - OTHER INFORMATION |
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| Item 1 |
- Legal Proceedings |
24 |
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| Item 1A. |
- Risk Factors |
24 |
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| Item 2 |
- Unregistered Sales of Equity Securities, Use of Proceeds |
24 |
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| Item 3 |
- Defaults on Senior Securities |
24 |
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| Item 4 |
- Mine Safety Disclosures |
24 |
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| Item 5 |
- Other Information |
24 |
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| Item 6 |
- Exhibits |
25 |
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| SIGNATURES |
26 |
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PART I
ITEM 1. FINANCIAL STATEMENTS
| NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) |
| (UNAUDITED) |
| (IN THOUSANDS, EXCEPT SHARE DATA) |
| THREE MONTHS | NINE MONTHS | |||||||||||||||
| ENDED | ENDED | |||||||||||||||
| SEPTEMBER 30, | SEPTEMBER 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net Sales | $ | $ | $ | $ | ||||||||||||
| Cost of Goods Sold | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Selling Expenses | ||||||||||||||||
| General and Administrative Expenses | ||||||||||||||||
| Research and Development | ||||||||||||||||
| Restructuring | ||||||||||||||||
| Loss on Abandonment of Intangible Asset | ||||||||||||||||
| Gain on Sale of Assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Operating Expenses | ( | ) | ||||||||||||||
| Income From Operations | ||||||||||||||||
| Other Expense | ||||||||||||||||
| Interest Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income Before Income Taxes | ||||||||||||||||
| Income Tax Expense | ||||||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| Net Income Per Common Share - Basic | $ | $ | $ | $ | ||||||||||||
| Weighted Average Number of Common Shares Outstanding - Basic | ||||||||||||||||
| Net Income Per Common Share - Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted Average Number of Common Shares Outstanding - Diluted | ||||||||||||||||
| Other Comprehensive Income | ||||||||||||||||
| Foreign Currency Translation Gain (Loss) | ( | ) | ||||||||||||||
| Comprehensive Income, Net of Tax | $ | $ | $ | $ | ||||||||||||
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
| NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED BALANCE SHEETS |
| (IN THOUSANDS, EXCEPT SHARE DATA) |
| SEPTEMBER 30, | DECEMBER 31, | |||||||
| 2021 | 20201 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Restricted Cash | ||||||||
| Accounts Receivable, less allowances of and | ||||||||
| Employee Retention Credit Receivable | ||||||||
| Inventories, Net | ||||||||
| Contract Assets | ||||||||
| Income Taxes Receivable | ||||||||
| Prepaid Expenses and Other Current Assets | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment, Net | ||||||||
| Operating Lease Assets | ||||||||
| Other Intangible Assets, Net | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current Liabilities | ||||||||
| Current Maturities of Line of Credit | $ | $ | ||||||
| Current Maturities of Long-Term Debt | ||||||||
| Current Portion of Finance Lease Obligations | ||||||||
| Current Portion of Operating Lease Obligations | ||||||||
| Accounts Payable | ||||||||
| Accrued Payroll and Commissions | ||||||||
| Other Accrued Liabilities | ||||||||
| Income Tax Payable | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Liabilities | ||||||||
| Long-Term Line of Credit | ||||||||
| Long-Term Debt, Net | ||||||||
| Long Term Finance Lease Obligations, Net | ||||||||
| Long-Term Operating Lease Obligations, Net | ||||||||
| Other Long-Term Liabilities | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Shareholders' Equity | ||||||||
| Preferred Stock, par value; Shares Authorized: Shares Issued and Outstanding | ||||||||
| Common Stock - par value; Shares Authorized: and Shares Issued and Outstanding, respectively | ||||||||
| Additional Paid-In Capital | ||||||||
| Accumulated Other Comprehensive Loss | ( | ) | ( | ) | ||||
| Retained Earnings | ||||||||
| Total Shareholders' Equity | ||||||||
| Total Liabilities and Shareholders' Equity | $ | $ | ||||||
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
1 The balance sheet at December 31, 2020 has been derived from the audited financial statements at that date
| NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (UNAUDITED) |
| (IN THOUSANDS) |
| NINE MONTHS ENDED | ||||||||
| SEPTEMBER 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net Income | $ | $ | ||||||
| Adjustments to Reconcile Net Income to Net Cash | ||||||||
| (Used In) Provided by Operating Activities | ||||||||
| Depreciation and Amortization | ||||||||
| Compensation on Stock-Based & Equity Awards | ||||||||
| Change in Accounts Receivable Allowance | ||||||||
| Change in Inventory Reserves | ( | ) | ||||||
| Loss on Abandonment of Intangible Asset | ||||||||
| Gain on Disposal of Property and Equipment | ( | ) | ( | ) | ||||
| Changes in Current Operating Items | ||||||||
| Accounts Receivable | ||||||||
| Employee Retention Credit Receivable | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Contract Assets | ( | ) | ||||||
| Prepaid Expenses and Other Current Assets | ( | ) | ||||||
| Income Taxes | ||||||||
| Accounts Payable | ( | ) | ||||||
| Accrued Payroll and Commissions | ( | ) | ||||||
| Other Accrued Liabilities | ( | ) | ||||||
| Net Cash Used In Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Proceeds from Sale of Property and Equipment | ||||||||
| Purchase of Intangible Asset | ( | ) | ( | ) | ||||
| Purchases of Property and Equipment | ( | ) | ( | ) | ||||
| Net Cash (Used In) Provided By Investing Activities | ( | ) | ||||||
| Cash Flows from Financing Activities | ||||||||
| Net Change in Line of Credit | ( | ) | ||||||
| Proceeds from Long-term Debt | ||||||||
| Principal Payments on Long-Term Debt | ( | ) | ( | ) | ||||
| Principal Payments on Finance Leases | ( | ) | ( | ) | ||||
| Stock Option Exercises | ||||||||
| Net Cash Provided By (Used In) Financing Activities | ( | ) | ||||||
| Net Change in Cash | ( | ) | ||||||
| Cash - Beginning of Period | ||||||||
| Cash - Ending of Period | $ | $ | ||||||
| Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets | ||||||||
| Cash | $ | $ | ||||||
| Restricted Cash | ||||||||
| Total cash and restricted cash reported in the condensed consolidated statements of cash flows | $ | $ | ||||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
| Cash Paid During the Period for Interest | $ | $ | ||||||
| Cash Paid (Refunded) During the Period for Income Taxes | $ | ( | ) | $ | ||||
| Supplemental Noncash Investing and Financing Activities: | ||||||||
| Property and Equipment Purchases in Accounts Payable | $ | $ | ||||||
| Property Acquired under Operating Lease | $ | $ | ||||||
| Equipment Acquired under Finance Lease | $ | $ | ||||||
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
| NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES |
| CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY |
| (UNAUDITED) |
| (IN THOUSANDS) |
| Preferred |
Common |
Additional |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Total Shareholders' Equity |
|||||||||||||||||||
| BALANCE JUNE 30, 2020 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
| Net Income |
||||||||||||||||||||||||
| Foreign currency translation adjustment |
||||||||||||||||||||||||
| Compensation on stock-based awards |
||||||||||||||||||||||||
| BALANCE SEPTEMBER 30, 2020 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
| BALANCE DECEMBER 31, 2019 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
| Net Income |
||||||||||||||||||||||||
| Foreign currency translation adjustment |
||||||||||||||||||||||||
| Compensation on stock-based awards |
||||||||||||||||||||||||
| BALANCE SEPTEMBER 30, 2020 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
| BALANCE JUNE 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
| Net Income |
||||||||||||||||||||||||
| Foreign currency translation adjustment |
( |
) | ( |
) | ||||||||||||||||||||
| Stock option exercises |
||||||||||||||||||||||||
| Compensation on stock-based awards |
||||||||||||||||||||||||
| BALANCE SEPTEMBER 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
| BALANCE DECEMBER 31, 2020 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
| Net Income |
||||||||||||||||||||||||
| Foreign currency translation adjustment |
||||||||||||||||||||||||
| Stock option exercises |
||||||||||||||||||||||||
| Compensation on stock-based awards |
||||||||||||||||||||||||
| BALANCE SEPTEMBER 30, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these condensed consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition
Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts. Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.
Stock-Based Awards
Following is the status of all stock options as of September 30, 2021:
| Shares | Weighted- Average Exercise Price Per Share | Weighted- Average Remaining Contractual Term (in years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding - January 1, 2021 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Cancelled | ( | ) | ||||||||||||||
| Outstanding - September 30, 2021 | $ | $ | ||||||||||||||
| Exercisable - September 30, 2021 | $ | $ | ||||||||||||||
In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of
Total compensation expense related to stock options for the three and nine months ended September 30, 2021 was $
In November 2010, the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (“2010 Plan”). The total number of Equity Appreciation Right Units (“Units”) that can be issued under the 2010 Plan shall not exceed an aggregate of
Net Income per Common Share
For the three and nine months ended September 30, 2021, stock options of
Restricted Cash
Cash and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. The September 30, 2021 balance included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day.
Accounts Receivable and Allowance for Doubtful Accounts
Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives customer deposits. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable have been reduced by an allowance for doubtful accounts of $
Employee Retention Credit (ERC) and Payroll Tax Deferral
We qualified for Employee Retention Credits on qualified wages paid in the first and second quarters of 2021 and filed for both credits as of the date of this filing. We recognize government grants for which there is a reasonable assurance of compliance with grant conditions and receipt of credits. During the three and nine months ended September 30, 2021, there was $
The CARES Act allowed for the deferral of the employer portion of social security taxes incurred through the end of calendar 2020. As of September 30, 2021, there was $
Inventories, Net
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Costs include material, labor, and overhead required in the warehousing and production of our products. Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.
Inventories are as follows:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Raw Materials | $ | $ | ||||||
| Work in Process | ||||||||
| Finished Goods | ||||||||
| Reserves | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized, while maintenance and minor repairs are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operations. Leasehold improvements are depreciated over the shorter of their estimated useful lives or their remaining lease terms. All other property and equipment are depreciated by the straight-line method over their estimated useful lives.
Other Intangible Assets
Other intangible assets at September 30, 2021 and December 31, 2020 are as follows:
| Customer Relationships | Trade Names | Patents | Total | |||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | $ | ||||||||||||
| Additions | ||||||||||||||||
| Amortization | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ||||||||||||
| Additions | ||||||||||||||||
| Amortization | ( | ) | ( | ) | ( | ) | ||||||||||
| Abandonment Loss | ( | ) | ( | ) | ||||||||||||
| Balance at September 31, 2021 | $ | $ | $ | $ | ||||||||||||
In the three months ended September 30, 2021, we determined the fair value of the Devicix tradename was more likely than not be zero based on management’s best estimate and recognized a $
Intangible assets are amortized on a straight-line bases over their estimated useful lives. The weighted average remaining amortization period of our intangible assets is
Amortization expense for the three and nine months ended September 30, 2021 was $
Estimated future annual amortization expense (not including projects in process) related to these assets is approximately as follows (in thousands):
| Year | Amount | |||
| Remainder of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Total | $ | |||
Reclassification
Certain reclassifications have been made to the prior year’s consolidated financial statements to enhance comparability with the current year’s financial statements. As a result, certain line items have been amended in the statement of operations. Comparative figures have been adjusted to conform to the current year’s presentation.
The items were reclassified as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2020 | September 30, 2020 | |||||||||||||||
| Previously | After | Previously | After | |||||||||||||
| Cost of Goods Sold | $ | $ | $ | $ | ||||||||||||
| General and Administrative Expenses | ||||||||||||||||
Accounting Pronouncements Issued But Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments,” which amends the guidance on the impairment of financial instruments. The amendments in this update removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance removes all current recognition thresholds and introduces the new current expected credit loss (“CECL”) model which will require entities to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is based upon expected losses rather than incurred losses. The amendments in this update are effective for periods beginning after December 15, 2022; early adoption is permitted. We are currently evaluating the impact of this guidance on our financial condition and results of operations.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform. ASU 2020-04 provides optional guidance for a limited period of time to ease potential accounting impact associated with transitioning away from reference rates that are expected to be discontinued, such as LIBOR. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 can be adopted as of March 12, 2020 and are effective through December 31, 2022. We do not currently have any contracts that have been changed to a new reference rate, we will continue to evaluate our contracts and the effects of this standard on our condensed consolidated financial statements prior to adoption.
NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintain our excess cash balances in checking accounts at primarily financial institutions, in the United States and in China. The account in the United States may at times exceed federally insured limits. Of the $
We have certain customers whose revenue individually represented 10% or more of net sales, or whose accounts receivable balances individually represented 10% or more of total accounts receivable. For the three months ended September 30, 2021, customers accounted for
At September 30, 2021,
Export sales represented approximately
NOTE 3. REVENUE
Revenue recognition
Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.
The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. If these requirements are not met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately
Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and costs. We estimate profit on these agreements as the difference between total estimated revenue and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on anticipated selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated profit.
On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in revenue as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has no impact on overall profitability.
Contract Assets
Contract assets, recorded as such in the Condensed Consolidated Balance Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the nine months ended September 30, 2021 was as follows (in thousands):
| Nine Months Ended September 30, 2021 | ||||
| Outstanding at January 1, 2021 | $ | |||
| Increase (decrease) attributed to: | ||||
| Transferred to receivables from contract assets recognized | ( | ) | ||
| Product transferred over time | ||||
| Outstanding at September 30, 2021 | $ |
We expect substantially all the remaining performance obligations for the contract assets recorded as of September 30, 2021, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within
The following tables summarize our net sales by market for the three and nine months ended September 30, 2021 and 2020 (in thousands):
| Three Months Ended September 30, 2021 | ||||||||||||||||
| Product/ | Product | Noncash | Total Net Sales | |||||||||||||
| Medical | $ | $ | $ | $ | ||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Industrial | ||||||||||||||||
| Total Net Sales | $ | $ | $ | $ | ||||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||
| Product/ | Product | Noncash | Total Net Sales | |||||||||||||
| Medical | $ | $ | $ | $ | ||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Industrial | ||||||||||||||||
| Total Net Sales | $ | $ | $ | $ | ||||||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||
| Product/ | Product | Noncash | Total Net Sales | |||||||||||||
| Medical | $ | $ | $ | $ | ||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Industrial | ||||||||||||||||
| Total Net Sales | $ | $ | $ | $ | ||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||
| Product/ | Product | Noncash | Total Net Sales | |||||||||||||
| Medical | $ | $ | $ | $ | ||||||||||||
| Aerospace and Defense | ||||||||||||||||
| Industrial | ||||||||||||||||
| Total Net Sales | $ | $ | $ | $ | ||||||||||||
NOTE 4. FINANCING ARRANGEMENTS
We have a credit agreement with Bank of America which was entered into on June 15, 2017, which was amended five separate occasions on December 29, 2017, August 13, 2019, November 12, 2019, August 27, 2020, and December 1, 2020 and provides for a line of credit arrangement of $
Under the Bank of America credit agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate. Our line of credit bears interest at a weighted-average interest rate of
The line of credit and real estate term notes with Bank of America contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all of our assets.
The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than
The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At September 30, 2021, we had unused availability under our line of credit of $
On April 15, 2020, we entered into the Promissory Note, which provides for an unsecured loan of $
NOTE 5. LEASES
We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from to years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants. At September 30, 2021, we do not have material lease commitments that have not commenced.
The components of lease expense were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Lease Cost | ||||||||||||||||
| Operating Lease Cost | $ | $ | $ | $ | ||||||||||||
| Finance Lease Interest Cost | ||||||||||||||||
| Finance Lease Amortization Expense | ||||||||||||||||
| Total Lease Cost | $ | $ | $ | $ | ||||||||||||
Supplemental balance sheet information related to leases was as follows:
| September 30 | December 31 | ||||||||
| Balance Sheet Location | 2021 | 2020 | |||||||
| Assets | |||||||||
| Operating Lease Assets | Operating Lease Assets | $ | $ | ||||||
| Finance Lease Assets | Property and Equipment, Net | ||||||||
| Total Leased Assets | $ | $ | |||||||
| Liabilities | |||||||||
| Current | |||||||||
| Current Operating Lease Liabilities | Current Portion of Operating Lease Obligations | $ | $ | ||||||
| Current Finance Lease Liabilities | Current Portion of Finance Lease Obligations | ||||||||
| Noncurrent | |||||||||
| Long-Term Operating Lease Liabilities | Long-Term Operating Lease Obligations, Net | ||||||||
| Long Term Finance Lease Liabilities | Long Term Finance Lease Obligations, Net | ||||||||
| Total Lease Liabilities | $ | $ | |||||||
Supplemental cash flow information related to leases was as follows:
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating Leases | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||
| Right-of-use assets obtained in exchange for lease obligations | $ | $ | ||||||
Maturities of lease liabilities were as follows:
| Operating | Finance Leases | Total | ||||||||||
| Remaining 2021 | $ | $ | $ | |||||||||
| 2022 | ||||||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| Thereafter | ||||||||||||
| Total Lease Payments | $ | $ | $ | |||||||||
| Less: Interest | ( | ) | ( | ) | ( | ) | ||||||
| Present Value of Lease Liabilities | $ | $ | $ | |||||||||
The lease term and discount rate at September 30, 2021 were as follows:
| Weighted-Average Remaining Lease Term (Years) | ||||
| Operating Leases | ||||
| Finance Leases | ||||
| Weighted-Average Discount Rate | ||||
| Operating Leases | % | |||
| Finance Leases | % |
NOTE 6. INCOME TAXES
On a quarterly basis, we estimate what our effective tax rate will be for the full year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction.
The effective tax rate for the three months ended September 30, 2021 was
NOTE 7. RESTRUCTURING CHARGES
During the first nine months of 2021, we recorded restructuring charges of $
The sale of the Merrifield facility was completed in July 2021. We recognized a gain on the sale of assets related to the restructure of $
NOTE 8. RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2021, we did business with Printed Circuits, Inc. which was
David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. Mr. Kunin also was a consultant to Abilitech, which relationship ended on March 1, 2021. During 2020, Mr. Kunin earned $
David Kunin, our Chairman, is a small minority owner (less than
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a Maple Grove, Minnesota based full-service electronics manufacturing services (“EMS”) contract manufacturer of wire and cable assemblies, printed circuit board assemblies, higher-level assemblies and box builds for a wide range of industries. We provide value added engineering services and technical support including design, testing, prototyping and supply chain management to customers mainly in the medical, aerospace and defense, and industrial equipment markets. We maintain facilities in Bemidji, Blue Earth, Mankato, and Milaca, Minnesota; Monterrey, Mexico; and Suzhou, China. All of our facilities are certified to one or more of the ISO/AS standards, including 9001, AS9100 and 13485, with most having additional certifications based on the needs of the customers they serve.
Recent Developments
Global Pandemic
In March 2020, the World Health Organization recognized the outbreak of a novel coronavirus (“COVID-19”) as a pandemic. While the COVID-19 pandemic has had an impact on our operations, we have been able to continue to operate our manufacturing facilities and provide essential services to our customers. Additionally, in an effort to protect the health and safety of our employees and in compliance with state regulations, we have instituted a work-from-home policy for employees who can perform their job functions offsite, implemented social distancing requirements and other measures to allow manufacturing and other personnel essential to production to continue work within our manufacturing facilities.
The full extent to which COVID-19 will directly or indirectly impact our business, financial condition, and results of operations will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. The ultimate impact of COVID-19 depends on factors beyond our knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects. As a result, we are unable to estimate the extent to which COVID-19 will negatively impact our financial results or liquidity.
We will continue to assess the current and potential impacts of the COVID-19 pandemic on our business, financial condition, and results of operations. We actively manage our cash and working capital to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.
Facility Consolidation
To further improve operational efficiencies and lower overhead costs, the Company approved on August 7, 2020, the closure of our Merrifield, Minnesota, production facility, shifting wire and cable assembly, system-level assembly and printed circuit board (PCB) manufacturing to Nortech’s other Minnesota locations. The Merrifield production facility consolidation was completed in the first quarter of 2021 and impacted approximately 42 employees, who were offered positions at other Nortech facilities in Minnesota. We entered into an agreement on February 23, 2021 with a third-party agent to sell our facility in Merrifield, MN and some related assets. The sale closed in the third quarter of 2021.
Paycheck Protection Program (PPP) and Employee Retention Credit (ERC)
In the third quarter of 2021, we applied for forgiveness for the $6.1 million Promissory Note under the PPP. We will continue to treat this Promissory Note as debt until forgiveness is granted, any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis.
In addition, we applied for the ERC for qualified wages paid in the first and second quarters of 2021 and expect to receive approximately $5.2 million in fiscal 2021 or 2022. The ERC was recorded as a reduction of the associated payroll and benefit costs on the consolidated statements of operations for the three and nine months ended September 30, 2021 and as Employee Retention Credit Receivable on the consolidated balance sheet at September 30, 2021 (see Note 1.)
Results of Operations
The following table presents statements of operations data as percentages of total net sales for the periods indicated:
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Net Sales |
100.0 | % |
100.0 | % |
100.0 | % |
100.0 | % |
||||||||
| COGS |
72.7 | 92.6 | 83.9 | 90.1 | ||||||||||||
| Gross Profit |
27.3 | 7.4 | 16.1 | 9.9 | ||||||||||||
| Selling Expenses |
1.5 | 2.3 | 2.1 | 2.4 | ||||||||||||
| General and Administrative Expenses |
6.9 | 9.4 | 8.9 | 8.3 | ||||||||||||
| R&D Expenses |
0.5 | - | 0.4 | - | ||||||||||||
| Restructuring Charges |
0.1 | - | 0.4 | - | ||||||||||||
| Gain on Sale of Fixed Assets |
(0.3 | ) | (14.5 | ) | (0.2 | ) | (4.8 | ) | ||||||||
| Income from Operations |
18.6 | 10.3 | 4.5 | 3.9 | ||||||||||||
| Other Expenses |
(0.4 | ) | (0.5 | ) | (0.4 | ) | (0.7 | ) | ||||||||
| Income Before Income Taxes |
18.2 | 9.8 | 4.2 | 3.3 | ||||||||||||
| Income Tax Expense |
4.2 | 2.3 | 0.8 | 0.8 | ||||||||||||
| Net Income |
14.0 | % |
7.5 | % |
3.4 | % |
2.5 | % |
||||||||
Net Sales
Net sales were $29.5 million in the third quarter of 2021, as compared to $26.4 million in the third quarter of the prior year, an increase of $3.1 million or 11.7%. The increase was driven primarily by net sales to the industrial market which increased by $3.4 million or 58.0% in the third quarter of 2021 as compared to the third quarter of 2020.
Net sales were $81.7 million in the nine months ended 2021, as compared to $80.3 million in the prior year, an increase of $1.4 million or 1.8%. Net sales results were varied by markets. The medical market increased by $2.8 million, or 6.2% and the industrial market increased by $3.8 million of sales or 17.2%, while net sales from the aerospace and defense markets decreased $5.0 million or 32%.
Net sales by our major EMS industry markets for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):
| Three Months Ended |
Nine Months Ended |
|||||||||||||||||||||||
| September 30, |
September 30, |
|||||||||||||||||||||||
| 2021 |
2020 |
% Change |
2021 |
2020 |
% Change |
|||||||||||||||||||
| Medical |
$ | 16,978 | $ | 14,218 | 19.4 | % |
$ | 45,389 | $ | 42,753 | 6.2 | % |
||||||||||||
| Aerospace and Defense |
3,092 | 6,206 | (50.2 | )% |
10,540 | 15,509 | (32.0 | )% |
||||||||||||||||
| Industrial |
9,382 | 5,938 | 58.0 | % |
25,777 | 22,001 | 17.2 | % |
||||||||||||||||
| $ | 29,452 | $ | 26,362 | 11.7 | % |
$ | 81,706 | $ | 80,263 | 1.8 | % |
|||||||||||||
Net sales by timing of transfer of goods and services for the three and nine months ended September 30, 2021 is as follows (in thousands):
| Three Months Ended September 30, 2021 |
||||||||||||||||
| Product/ |
Product |
Noncash |
Total Net Sales |
|||||||||||||
| Medical |
$ | 13,762 | $ | 2,933 | $ | 282 | $ | 16,977 | ||||||||
| Aerospace and Defense |
2,883 | 144 | 65 | 3,092 | ||||||||||||
| Industrial |
7,468 | 1,757 | 158 | 9,383 | ||||||||||||
| Total Net Sales |
$ | 24,113 | $ | 4,834 | $ | 505 | $ | 29,452 | ||||||||
| Nine Months Ended September 30, 2021 |
||||||||||||||||
| Product/ |
Product |
Noncash |
Total Net Sales |
|||||||||||||
| Medical |
$ | 35,497 | $ | 8,876 | $ | 1,017 | $ | 45,390 | ||||||||
| Aerospace and Defense |
9,685 | 527 | 327 | $ | 10,539 | |||||||||||
| Industrial |
20,385 | 4,832 | 560 | $ | 25,777 | |||||||||||
| Total Net Sales |
$ | 65,567 | $ | 14,235 | $ | 1,904 | $ | 81,706 | ||||||||
Net sales by timing of transfer of goods and services for the three and nine months ended September 30, 2020 is as follows (in thousands):
| Three Months Ended September 30, 2020 |
||||||||||||||||
| Product/ Service Transferred Over Time |
Product Transferred at Point in Time |
Noncash Consideration |
Total Net Sales by Market |
|||||||||||||
| Medical |
$ | 10,960 | $ | 1,853 | $ | 1,405 | $ | 14,218 | ||||||||
| Aerospace and Defense |
5,525 | 16 | 665 | 6,206 | ||||||||||||
| Industrial |
4,527 | 791 | 620 | 5,938 | ||||||||||||
| Total Net Sales |
$ | 21,012 | $ | 2,660 | $ | 2,690 | $ | 26,362 | ||||||||
| Nine Months Ended September 30, 2020 |
||||||||||||||||
| Product/ Service Transferred Over Time |
Product Transferred at Point in Time |
Noncash Consideration |
Total Net Sales by Market |
|||||||||||||
| Medical |
$ | 35,835 | $ | 4,454 | $ | 2,464 | $ | 42,753 | ||||||||
| Aerospace and Defense |
14,160 | 396 | 953 | 15,509 | ||||||||||||
| Industrial |
17,434 | 3,354 | 1,213 | 22,001 | ||||||||||||
| Total Net Sales |
$ | 67,429 | $ | 8,204 | $ | 4,630 | $ | 80,263 | ||||||||
Backlog
Our 90-day shipment backlog as of September 30, 2021 was $38.9 million, an increase of 12.0% from the beginning of the quarter and a 68.3% increase as compared to the prior year. Backlog for our medical customers has increased 4.2% from the beginning of the quarter and increased 71.3% from the prior year. The aerospace and defense backlog increased 43.3% from the beginning of the quarter and 26.7% from the prior year. Our industrial customers’ backlog increased 7.9% from the beginning of the quarter and increased 119.3% from the prior year. This backlog consists of firm purchase orders we expect to ship in the next 90 days.
90-day shipment backlog by our major EMS industry markets are as follows (in thousands):
| Shipment Backlog as of the Period Ended |
||||||||||||
| September 30, |
June 30, |
September 30, |
||||||||||
| 2021 |
2021 |
2020 |
||||||||||
| Medical |
$ | 19,666 | $ | 18,879 | $ | 11,483 | ||||||
| Aerospace and Defense |
8,568 | 5,981 | 6,764 | |||||||||
| Industrial |
10,657 | 9,874 | 4,860 | |||||||||
| $ | 38,891 | $ | 34,734 | $ | 23,108 | |||||||
Our 90-day backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases. These variables cause inconsistencies in comparing the backlog from one period to the next. Our total shipment backlog was $78.6 million at September 30, 2021 compared to $45.7 million at September 30, 2020.
Gross Profit
Gross profit as a percent of net sales for the three months ended September 30, 2021 and 2020 was 27.3% and 7.4%, respectively. Gross profit as a percentage of sales for the nine months ended September 30, 2021 and 2020 was 16.1% and 9.9%, respectively. The gross profit improvement relates primarily to the $4.7 million reduction in payroll and medical expenses related to the ERC and increased utilization as a result of the increase in sales.
Selling Expense
Selling expenses for the three months ended September 30, 2021 and 2020 was $0.4 million or 1.5% of sales and $0.6 million or 2.3% of sales, respectively. Selling expense for the nine months ended September 30, 2021 and 2020 was $1.7 million or 2.1% of sales and $1.9 million or 2.4% of sales, respectively. The decrease in selling expense for both the three and nine months ended September 30, 2021 compared to the same periods in the prior year relates primarily to the reduction in payroll and medical expenses of $0.1 million due to the ERC.
General and Administrative Expense
General and administrative expenses for the three months ended September 30, 2021 and 2020 were $2.0 million or 6.9% of sales and $2.5 million or 9.4% of sales, respectively. General and administrative expenses for the nine months ended September 30, 2021 and 2020 were $7.2 million or 8.9% of sales and $6.7 million or 8.3% of sales, respectively. The decrease in general and administrative expenses for the three months ended September 30, 2021 compared to the same period of 2020 relates primarily to the reduction in payroll and medical expenses of $0.4 million related to the ERC. The increase in general and administrative expenses for the nine months ended September 30, 2021 compared to the same period of 2020 relates primarily to an increase in professional service fees.
Research and Development Expense
Research and development expenses for the three months ended September 30, 2021 were $0.1 million or 0.5% of sales. Research and development expenses for the nine months ended September 30, 2021 were $0.3 million or 0.4% of sales. There were minimal to no research and development expenses for the three and nine months ended September 30, 2020.
Restructuring Charges
Restructuring charges for the three months ended September 30, 2021 were approximately $23 thousand or 0.1% of sales. Restructuring charges for the nine months ended September 30, 2021 was $0.3 million or 0.4% of sales. There were no restructuring charges for the three and nine months ended September 30, 2020. The restructuring charges are due to the closure of the Merrifield facility.
Loss on Abandonment of Intangible Asset
Abandonment charges for the three and nine months ended September 30, 2021 were approximately $0.6 million. There were no abandonment charges for the three and nine months ended September 30, 2020. The charges relate to the abandonment of the Devicix tradename.
Income Taxes
On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three and nine months ended September 30, 2021 was 26.0% and 22.8%, respectively, and the rate for the three and nine months ended September 30, 2020 was 22.8% and 24.3%, respectively.
Net Income
Net income for the three months and net loss for the nine months ended September 30, 2021 was $3.6 million and $2.2 million, respectively. Net income for the three and nine months ended September 30, 2020 was $2.0 million. Net income for the three and nine months ended September 30, 2021 was affected by the reduction in payroll and benefit expense for the ERC, while the three and nine months ended September 30, 2020 included a $3.8 million gain on sale of assets.
Liquidity and Capital Resources
Our 2021 sales were impacted by the ongoing COVID-19 pandemic and the related supply chain and workforce shortages. Due to the inherent uncertainty of this evolving situation, we are unable at this time to predict the likely impact of the COVID-19 pandemic on our future operations which has led to indicators of an inability to continue as a going concern. However, these indicators have been mitigated by our focus on reducing costs and minimizing capital expenditures. In addition, we believe that cash provided by operations, funds available under the credit agreement with Bank of America, N.A. (BofA), funds expected to be received for the ERC and cash on hand will be adequate to meet our liquidity needs, including working capital, capital expenditures, and debt payment obligations.
Net cash used by operating activities for the nine months ended September 30, 2021 was $2.9 million. Increases in working capital due to the higher sales and backlog drove the use of cash by operating activities, primarily in increased inventory of $5.8 million.
We have a credit agreement with Bank of America (BofA) which was entered into on June 15, 2017 and amended on December 29, 2017 and provides for a line of credit arrangement of $16.0 million that expires on June 15, 2022. The credit arrangement also has a $5.0 million real estate term note outstanding with a maturity date of June 15, 2022. We expect to extend the agreement past June 15, 2022.
Both the line of credit and real estate term notes are subject to fluctuations in the LIBOR rates. The line of credit and real estate term notes with BofA contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all of our assets.
The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0, for the twelve months ending December 31, 2020 and each Fiscal Quarter end thereafter subject only during a trigger period commencing when our availability under our line is less than $2,000 until availability is above that amount for 30 days due to amendment to our agreement dated in December of 2020. The Company met the covenants for the period ended September 30, 2021.
The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At September 30, 2021, we had outstanding advances of $6.0 million and we had unused availability under our line of credit of $5.8 million, supported by our borrowing base. We believe our financing arrangements and cash flows to be provided by operations will be sufficient to satisfy our future working capital needs.
On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A. (the “Promissory Note”), which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which; funds were received on April 22, 2020. The Promissory Note has a term of 2 years with a 1% per annum interest rate. Payments are deferred for 6 months from the date of the Promissory Note and we can apply for forgiveness of the Promissory Note after 60 days. Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations. We applied for forgiveness in the third quarter of 2021, any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis.
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies and Estimates
Our significant accounting policies and estimates are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020. Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate. Actual results could differ from these estimates.
Forward-Looking Statements
Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
| ♦ |
Volatility in the marketplace which may affect market supply, demand of our products or currency exchange rates; |
|
| ♦ |
Supply chain disruption and unreliability due to COVID-19; |
|
| ♦ |
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, 2020.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4. CONTROLS AND PROCEDURES
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.
PART II
ITEM 1. LEGAL PROCEEDINGS
We are subject to various legal proceedings and claims that arise in the ordinary course of business.
ITEM 1A. RISK FACTORS
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.” Other than as noted below, 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, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As of September 30, 2021, our share repurchase program has expired, and no additional amounts are available for repurchase.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits
| 31.1* |
| 31.2* |
| 32* |
| 101* |
Financial statements from the quarterly report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Condensed Notes to Condensed Consolidated Financial Statements. |
| 104 |
Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
*Filed herewith
Signatures
-------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Nortech Systems Incorporated and Subsidiaries |
|||
| --------------------------------------------------------- |
|||
| Date: November 10, 2021 |
by /s/ Jay D. Miller |
||
| Jay D. Miller |
|||
| Chief Executive Officer and President |
|||
| Nortech Systems Incorporated |
|||
| Date: November 10, 2021 |
by /s/ Christopher D. Jones |
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| Christopher D. Jones |
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| Vice President and Chief Financial Officer |
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| Nortech Systems Incorporated |
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