Nortech Systems Inc 10-Q for FY2023 Q1
Nortech Systems Inc (NSYS)
About this 10-Q
Nortech Systems Inc filed this 10-Q on May 10, 2023, covering the quarter ended March 31, 2023 (FY2023 Q1).
Headline figures
Quarter ended March 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $34.89M
- up 13.6% from $30.71M a year earlier
- Net income
- $681K
- up 393.5% from net income of $138K a year earlier
- Diluted EPS
- $0.23
- up 360.0% from $0.05 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
State of Incorporation:
IRS Employer Identification No.
Executive Offices:
Telephone number: (
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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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 and post 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.
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Large Accelerated Filer ☐ |
Accelerated Filer ☐ |
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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 May 5, 2023 was
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION |
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PAGE |
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Item 1 - Financial Statements |
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Condensed Consolidated Statements of Operations and Comprehensive Income |
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 |
7 |
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Condensed Notes to Consolidated Financial Statements |
8-19 |
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Item 2 - Management's Discussion and Analysis of Financial Condition And Results of Operations |
20-25 |
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Item 3 - Quantitative and Qualitative Disclosures About Market Risk |
26 |
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Item 4 - Controls and Procedures |
26 |
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PART II - OTHER INFORMATION |
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Item 1 - Legal Proceedings |
27 |
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Item 1A.- Risk Factors |
27 |
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Item 2 - Unregistered Sales of Equity Securities, Use of Proceeds |
27 |
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Item 3 - Defaults on Senior Securities |
27 |
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Item 4 - Mine Safety Disclosures |
27 |
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Item 5 - Other Information |
27 |
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Item 6 - Exhibits |
28 |
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SIGNATURES |
29 |
PART
ITEM 1. FINANCIAL STATEMENTS
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME |
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(UNAUDITED) |
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(IN THOUSANDS, EXCEPT SHARE DATA) |
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THREE MONTHS ENDED |
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MARCH 31, |
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2023 |
2022 |
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Net Sales |
$ | $ | ||||||
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Cost of Goods Sold |
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Gross Profit |
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| Operating Expenses | ||||||||
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Selling Expenses |
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General and Administrative Expenses |
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Research and Development Expenses |
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Gain on Sale of Assets |
( |
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Total Operating Expenses |
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Income From Operations |
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| Other Expense | ||||||||
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Interest Expense |
( |
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| Income Before Income Taxes | ||||||||
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Income Tax Expense (Benefit) |
( |
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Net Income |
$ | $ | ||||||
| Net Income Per Common Share: | ||||||||
| Basic (in dollars per share) | $ | $ | ||||||
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Weighted Average Number of Common Shares Outstanding - Basic (in shares) |
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| Diluted (in dollars per share) | $ | $ | ||||||
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Weighted Average Number of Common Shares Outstanding - Diluted (in shares) |
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| Other comprehensive income | ||||||||
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Foreign currency translation |
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| Comprehensive income, net of tax | $ | $ | ||||||
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED BALANCE SHEETS |
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(IN THOUSANDS, EXCEPT SHARE DATA) |
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MARCH 31, |
DECEMBER 31, |
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2023 |
2022(1) | |||||||
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(Unaudited) |
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| ASSETS | ||||||||
| Current Assets | ||||||||
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Cash |
$ | $ | ||||||
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Restricted Cash |
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Accounts Receivable, less allowances of $ |
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Employee Retention Credit Receivable |
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Inventories, Net |
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Contract Assets, less allowances of $ |
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Prepaid Expenses |
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Total Current Assets |
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Property and Equipment, Net |
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Operating Lease Assets |
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Other Intangible Assets, Net |
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Total Assets |
$ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current Liabilities | ||||||||
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Current Portion of Finance Lease Obligations |
$ | $ | ||||||
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Current Portion of Operating Lease Obligations |
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Accounts Payable |
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Accrued Payroll and Commissions |
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Income Taxes Payable |
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Customer Deposits |
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| Other Accrued Liabilities | ||||||||
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Total Current Liabilities |
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| Long-Term Liabilities | ||||||||
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Long Term Line of Credit |
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Long Term Finance Lease Obligations, Net |
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Long-Term Operating Lease Obligations, Net |
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Other Long-Term Liabilities |
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Total Long-Term Liabilities |
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| Total Liabilities | ||||||||
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Commitments and Contingencies |
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| Shareholders' Equity | ||||||||
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Preferred Stock, $ |
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Common Stock - $ |
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Additional Paid-In Capital |
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Accumulated Other Comprehensive Loss |
( |
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Retained Earnings |
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Total Shareholders' Equity |
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Total Liabilities and Shareholders' Equity |
$ | $ | ||||||
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
(1) The balance sheet at December 31, 2022 has been derived from the audited financial statements at that date
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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(UNAUDITED) |
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(IN THOUSANDS) |
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THREE MONTHS ENDED |
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MARCH 31, |
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2023 |
2022 |
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| CASH FLOWS PROVIDED BY OPERATING ACTIVITIES | ||||||||
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Net Income |
$ | $ | ||||||
| Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: | ||||||||
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Depreciation and Amortization |
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Compensation on Stock-Based Awards |
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Change in Inventory Reserves |
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Other, Net |
( |
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| Changes in Current Operating Items | ||||||||
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Accounts Receivable |
( |
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| Inventories | ( |
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Contract Assets |
( |
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Prepaid Expenses and other Curent Assets |
( |
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Income Taxes |
( |
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Accounts Payable |
( |
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Accrued Payroll and Commissions |
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Customer Deposits |
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Other Accrued Liabilities |
( |
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Net Cash Provided By Operating Activities |
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| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Proceeds from Sale of Property and Equipment | ||||||||
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Purchases of Property and Equipment |
( |
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Net Cash Used In Investing Activities |
( |
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| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
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Proceeds from Line of Credit |
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| Payments to Line of Credit | ( |
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Principal Payments on Financing Leases |
( |
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Stock Option Excercises |
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Net Cash Used In Financing Activities |
( |
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Effect of Exchange Rate Changes on Cash |
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Net Change in Cash and Cash Equivalents |
( |
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| Cash and Cash Equivalents - Beginning of Year | ||||||||
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Cash and Cash Equivalents - End of Year |
$ | $ | ||||||
| Reconciliation of cash and restricted cash reported within the consolidated balance sheets | ||||||||
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Cash |
$ | $ | ||||||
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Restricted Cash |
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Total Cash and restricted cash reported in the consolidated statements of cash flows |
$ | $ | ||||||
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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(UNAUDITED) |
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(IN THOUSANDS) |
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THREE MONTHS ENDED |
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MARCH 31, |
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2023 |
2022 |
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| Supplemental Disclosure of Cash Flow Information: | ||||||||
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Cash Paid During the Period for Interest |
$ | $ | ||||||
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Cash Paid During the Period for Income Taxes |
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| Supplemental Noncash Investing and Financing Activities: | ||||||||
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Property and Equipment Purchases in Accounts Payable |
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See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
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NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY |
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(UNAUDITED) |
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(IN THOUSANDS) |
| Accumulated | ||||||||||||||||||||||||
| Additional | Other |
Total |
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| Preferred | Common | Paid-In | Comprehensive | Retained | Shareholders' | |||||||||||||||||||
| Stock | Stock | Capital | Income (Loss) | Earnings | Equity | |||||||||||||||||||
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BALANCE DECEMBER 31, 2021 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
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Net Income |
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Foreign currency translation adjustment |
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Stock option exercises |
- | - | - | |||||||||||||||||||||
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Compensation on stock-based awards |
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BALANCE MARCH 31, 2022 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
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BALANCE DECEMBER 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
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Net Income |
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Foreign currency translation adjustment |
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Stock option exercises |
- | - | - | - | ||||||||||||||||||||
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Compensation on stock-based awards |
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Cumulative adjustment related to the adoption of ASC 326 |
( |
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BALANCE MARCH 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Shares |
Weighted- Average Exercise Price Per Share |
Weighted- Average Remaining Contractual Term (in years) |
Aggregate Intrinsic Value |
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Outstanding - January 1, 2023 |
$ | |||||||||||||||
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Granted |
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Exercised |
( |
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Cancelled |
( |
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Outstanding - March 31, 2023 |
$ | $ | ||||||||||||||
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Exercisable - March 31, 2023 |
$ | $ | ||||||||||||||
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March 31, |
December 31, |
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2023 |
2022 |
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Raw Materials |
$ | $ | ||||||
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Work in Process |
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Finished Goods |
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Reserves |
( |
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Total |
$ | $ | ||||||
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Customer Relationships |
Patents |
Total |
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Balance at January 1, 2022 |
$ | $ | $ | |||||||||
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Additions |
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Amortization |
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Balance at December 31, 2022 |
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Amortization |
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Balance at March 31, 2023 |
$ | $ | $ | |||||||||
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Year |
Amount |
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Remainder of 2023 |
$ | |||
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2024 |
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2025 |
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2026 |
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Thereafter |
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Total |
$ | |||
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Condensed Consolidated Statements of Cash Flows |
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March 31, 2022 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
As reported |
Adjustment |
As revised |
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Net Proceeds from Line of Credit |
( |
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Proceeds from Line of Credit |
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Payments to Line of Credit |
( |
) | ( |
) | ||||||||
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Principal Payments on Long-Term Debt |
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Principal Payments on Financing Leases |
( |
) | ( |
) | ||||||||
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Stock Option Exercises |
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Net Cash Provided by Financing Activities |
( |
) | - | ( |
) | |||||||
NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, accounts receivable, and contract asset. With regard to cash, we maintain our excess cash balances in checking accounts at primarily two financial institutions, one in the United States and one 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, whose accounts receivable balances individually represented 10% or more of gross accounts receivable, or whose contract asset balances individually represetend 10% or more of contract assets. customer accounted for
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. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred. 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 Consolidated Balance Sheet, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the three months ended March 31, 2023 was as follows (in thousands):
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Balance outstanding at December 31, 2022 |
$ | |||
| Increase (decrease) attributed to: | ||||
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Amounts transferred over time to contract assets |
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Allowance for current expected credit losses |
( |
) | ||
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Amounts invoiced during the period |
( |
) | ||
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Balance outstanding at March 31, 2023 |
$ |
We expect substantially all of the remaining performance obligations for the contract assets recorded as of March 31, 2023, 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 ended March 31, 2023 and 2022, respectively:
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Three Months Ended March 31, 2023 |
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Product/ Service Transferred Over Time |
Product Transferred at Point in Time |
Noncash Consideration |
Total Net Sales by Market |
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Medical |
$ | $ | $ | $ | ||||||||||||
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Industrial |
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Aerospace and Defense |
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Total net sales |
$ | $ | $ | $ | ||||||||||||
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Three Months Ended March 31, 2022 |
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Product/ Service Transferred Over Time |
Product Transferred at Point in Time |
Noncash Consideration |
Total Net Sales by Market |
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Medical |
$ | $ | $ | $ | ||||||||||||
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Industrial |
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Aerospace and Defense |
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Total net sales |
$ | $ | $ | $ | ||||||||||||
NOTE 4. FINANCING ARRANGEMENTS
We have a credit agreement with Bank of America, which was entered into on June 15, 2017 and provides for a line of credit arrangement of $
Under the amended Bank of America credit agreement signed December 31, 2021, the line of credit is subject to variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of
The line of credit with Bank of America contains 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 Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than
At March 31, 2023, we had unused availability under our line of credit 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 March 31, 2023, we do not have material lease commitments that have not commenced.
The components of lease expense were as follows:
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March 31, |
March 31, |
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Lease Cost |
2023 |
2022 |
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Operating lease cost |
$ | $ | ||||||
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Finance lease interest cost |
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Finance lease amortization expense |
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Total lease cost |
$ | $ | ||||||
Supplemental balance sheet information related to leases was as follows:
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Balance Sheet Location |
March 31, 2023 |
December 31, 2022 |
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| Assets | |||||||||
|
Operating lease assets |
Operating lease assets | $ | $ | ||||||
|
Finance lease assets |
Property, Plant and Equipment | ||||||||
| Total leased assets | $ | $ | |||||||
Supplemental cash flow information related to leases was as follows:
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March 31, |
March 31, |
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2023 |
2022 |
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Operating leases |
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Cash paid for amounts included in the measurement of lease liabilities |
$ | $ | ||||||
Maturities of lease liabilities were as follows:
|
Operating Leases |
Finance Leases |
Total |
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Remaining 2023 |
$ | $ | $ | |||||||||
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2024 |
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2025 |
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2026 |
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2027 |
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Therafter |
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Total lease payments |
$ | $ | $ | |||||||||
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Less: Interest |
( |
) |
( |
) | ( |
) |
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|
Present value of lease liabilities |
$ | $ | $ | |||||||||
The lease term and discount rate at March 31, 2023 were as follows:
| Weighted-average remaining lease term (years) | ||||
|
Operating leases |
||||
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Finance leases |
||||
| Weighted-average discount rate | ||||
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Operating leases |
% |
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|
Finance leases |
% |
NOTE 6. 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 months ended March 31, 2023 and 2022 was
NOTE 7. EMPLOYEE RETENTION CREDIT
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC.
During the year ended December 31, 2022, we received payment on the Employee Retention Credit for the first quarter of 2021 of $
NOTE 8. RELATED PARTY TRANSACTIONS
David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. Mr. Kunin also was a consultant to Abilitech through March 1, 2021. In the three months ended March 31, 2023 and 2022, Abilitech paid the Company $
David Kunin, our Chairman, is a minority owner (less than %) of Marpe Technologies, LTD an early-stage medical device company dedicated to the early detection of skin cancer through full body scanners. Mr. Kunin is also a member of the Board of Directors of Marpe Technologies. The Company worked with Marpe Technologies to apply for a grant from the Israel-United States Binational Industrial Research and Development Foundation, a legal entity created by Agreement between the Government of the State of Israel and the Government of the United States of America (“BIRD Foundation”). The parties were successful in receiving approval for a $
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical, Aerospace & Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services. Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, higher-level assemblies, and other box builds for a wide range of industries. We serve three major markets within the EMS industry: Aerospace and Defense, Medical, and the Industrial market, which includes industrial capital equipment, transportation, vision, agriculture, oil and gas. 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.
Results of Operations
The following table presents statements of operations data as percentages of total net sales for the periods indicated:
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Three Months Ended |
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March 31, |
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2023 |
2022 |
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Net Sales |
100.0 |
% |
100.0 |
% |
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Cost of Goods Sold |
84.3 | 86.8 | ||||||
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Gross Profit |
15.7 | 13.2 | ||||||
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Selling Expenses |
2.6 | 2.7 | ||||||
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General and Administrative Expenses |
9.3 | 8.9 | ||||||
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Research and Development Expenses |
0.8 | 1.1 | ||||||
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Gain on Sale of Property and Equipment |
0.0 | (0.1 | ) | |||||
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Income from Operations |
3.0 | 0.6 | ||||||
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Interest Expense |
(0.3 | ) | (0.3 | ) | ||||
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Income Before Income Taxes |
2.7 | 0.3 | ||||||
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Income Tax (Benefit) Expense |
0.7 | (0.2 | ) | |||||
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Net Income |
2.0 |
% |
0.5 |
% |
||||
Net Sales
Net sales were $34.9 million in the first quarter of 2023, as compared to $30.7 million in the first quarter of the prior year, an increase of $4.2 million or 13.7% that was driven primarily due to higher production volume as well as price increases to counteract higher material and labor cost.
Net sales by our major industry markets for the three months ended March 31, 2023 and 2022 were as follows (in millions):
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Three months Ended March 31, |
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2023 |
2022 |
% Change |
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Medical |
$ | 21.4 | $ | 15.2 | 40.8 | |||||||
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Industrial |
9.5 | 8.7 | 9.2 | |||||||||
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Aerospace and Defense |
4.0 | 6.8 | (41.2 | ) | ||||||||
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Total Net Sales |
$ | 34.9 | $ | 30.7 | 13.7 | |||||||
Net sales by timing of transfer of goods and services for the three ended March 31, 2023 is as follows (in millions):
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Three Months Ended March 31, 2023 |
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Product/ Service Transferred Over Time |
Product Transferred at Point in Time |
Noncash Consideration |
Total Net Sales by Market |
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Medical |
$ | 15.7 | $ | 5.1 | $ | 0.6 | $ | 21.4 | ||||||||
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Industrial |
6.6 | 2.4 | 0.5 | 9.5 | ||||||||||||
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Aerospace and Defense |
3.4 | 0.5 | 0.1 | 4.0 | ||||||||||||
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Total net sales |
$ | 25.7 | $ | 8.0 | $ | 1.2 | $ | 34.9 | ||||||||
Net sales by timing of transfer of goods and services for the three ended March 31, 2022 is as follows (in millions):
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Three Months Ended March 31, 2022 |
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Product/ Service Transferred Over Time |
Product Transferred at Point in Time |
Noncash Consideration |
Total Net Sales by Market |
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Medical |
$ | 9.8 | $ | 4.9 | $ | 0.5 | $ | 15.2 | ||||||||
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Industrial |
6.5 | 1.8 | 0.4 | 8.7 | ||||||||||||
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Aerospace and Defense |
6.1 | 0.4 | 0.3 | 6.8 | ||||||||||||
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Total net sales |
$ | 22.4 | $ | 7.1 | $ | 1.2 | $ | 30.7 | ||||||||
Backlog
Our 90-day shipment backlog as of March 31, 2023 was $33.8 million, a 5.8% decrease from the beginning of the quarter and a 4.5% decrease from March 31, 2022. Our 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 90-day order backlog by market has remained relatively constant when compared to the same period of the prior year. 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.
90-day shipment backlog by our major industry markets are as follows (in millions):
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90 Day Backlog as of the Period Ended |
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March 31, |
December 31, |
March 31, |
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2023 |
2022 |
2022 |
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Medical |
$ | 20.6 | $ | 21.7 | $ | 19.7 | ||||||
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Industrial |
7.8 | 9.1 | 9.7 | |||||||||
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Aerospace and Defense |
5.4 | 5.1 | 6.0 | |||||||||
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Total 90-Day Backlog |
$ | 33.8 | $ | 35.9 | $ | 35.4 | ||||||
Our total order backlog as of March 31, 2023 was $98.8 million, a 5.1% decrease from $104.1 million at December 31, 2022. Our total backlog remains strong, however customers are returning to their pre-pandemic ordering practices as the global supply chain improves.
Total order backlog by our major industry markets are as follows (in millions):
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Total Backlog as of the Period Ended |
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March 31, |
December 31, |
March 31, |
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2023 |
2022 |
2022 |
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Medical |
$ | 49.8 | $ | 57.1 | $ | 58.5 | ||||||
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Industrial |
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20.5 | 22.5 | 19.1 | ||||||||
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Aerospace and Defense |
28.5 | 24.5 | 20.0 | |||||||||
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Total 90-Day Backlog |
$ | 98.8 | $ | 104.1 | $ | 97.6 | ||||||
The 90-day and total backlog at March 31, 2023 contain the contract asset value of $10.8 million which has been recognized as revenue.
Gross Profit
Gross profit as a percent of net sales was 15.7% and 13.2% for the three months ended March 31, 2023 and 2022, respectively. The gross profit improvement relates primarily to price increases in response to material and labor cost inflation and higher production volume which increased plant utilization.
Selling Expense
Selling expenses for the three months ended March 31, 2023 and 2022 was $0.9 million or 2.6% of sales and $0.8 million or 2.7% of sales, respectively.
General and Administrative Expense
General and administrative expenses for the three months ended March 31, 2023 and 2022 were $3.3 million or 9.3% of sales and $2.7 million or 8.9% of sales, respectively. The increase in general and administrative expense was mainly due to higher professional fees and higher cost of labor.
Research and Development Expense
Research and development expenses were $0.3 million for both the three months ended March 31, 2023 and 2022.
Income From Operations
Income from operations was $1.1 million and $0.2 million for the three months ended March 31, 2023 and 2022, respectively. The increase in income from operations was driven by the increase in sales and gross margin as a percent of sales, primarily due to price increases in response to material and labor cost inflation.
Interest Expense
Interest expense was $110 thousand and $98 thousand for the three months ended March 31, 2023 and 2022, respectively. The increase in interest expense relates to increased interest rates on the line of credit in the first quarter of 2023 compared to the first quarter of 2022.
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 months ended March 31, 2023 and 2022 was 28% and (94)%, respectively. The primary drivers of the change in the effective tax rate relates to an increase in the valuation allowance on US deferred tax assets and taxes on foreign entities.The prior year income tax benefit was attributable to the US loss compared to book income on foreign entities and expected US book income for the year.
Net Income
Net income for the three months ended March 31, 2023 was $681 thousand or $0.25 per basic common share and $0.23 per diluted common share. Net income for the three months ended March 31, 2022 was $138 thousand or $0.05 per basic and diluted common share. The increase in net income was driven by the increase in sales and gross margin as a percent of sales, primarily due to price increases in response to material and labor cost inflation.
Liquidity and Capital Resources
We believe that our existing financing arrangements, anticipated cash flows from operations, funds expected to be received for the ERC and cash on hand will be sufficient to satisfy our working capital needs for the next twelve months, capital expenditures and debt repayments.
Credit Facility
We have a credit agreement with Bank of America, which was entered into on June 15, 2017 and provides for a line of credit arrangement of $16,000 that expires on June 15, 2026.
Under the amended Bank of America credit agreement signed December 31, 2021, the line of credit is subject to variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 7.3% and 5.2% as of March 31, 2023 and December 31, 2022, respectively. We had borrowings on our line of credit of $5.9 million and $6.9 million outstanding as of March 31, 2023 and December 31, 2022, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings. The line of credit is shown net of debt issuance costs of $41 thousand and $44 thousand on the consolidated balance sheet for the periods ended March 31, 2023 and December 31, 2022, respectively.
The line of credit with Bank of America contains 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 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 $2.0 million until availability is above that amount for 30 days. The Company met the covenants for the period ended March 31, 2023.
At March 31, 2023, we had unused availability under our line of credit of $5.9 million supported by our borrowing base. The line is secured by substantially all of our assets.
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, 2022. 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.
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Volatility in the marketplace which may affect market supply, demand of our products or currency exchange rates; |
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Supply chain disruption and unreliability; |
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Lack of supply of sufficient human resources to produce our products; |
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Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing; |
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Changes in the reliability and efficiency of our operating facilities or those of third parties; |
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Increases in certain raw material costs such as copper and oil; |
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Commodity and energy cost instability; |
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Risks related to FDA noncompliance; |
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The loss of a major customer; |
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General economic, financial and business conditions that could affect our financial condition and results of operations; |
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Increased or unanticipated costs related to compliance with securities and environmental regulation; |
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Disruption of global or local information management systems due to natural disaster or cyber-security incident; |
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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 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, 2022.
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.” 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, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
As of March 31, 2023, 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
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31.1* |
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31.2* |
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32* |
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101* |
Financial statements from the quarterly report on Form 10-Q for the quarter ended March 31, 2023, formatted in 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. |
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104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
*Filed herewith
Signatures
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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
------------------------------------------------------------
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Date: May 10, 2023 |
by /s/ Jay D. Miller |
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Jay D. Miller |
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Chief Executive Officer and President |
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Nortech Systems Incorporated |
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Date: May 10, 2023 |
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 |
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
I, Jay D. Miller, certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Nortech Systems, Inc. and Subsidiary; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and |
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d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: May 10, 2023 |
By: |
/s/ Jay D. Miller |
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Jay D. Miller |
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Chief Executive Officer and President |
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Nortech Systems Incorporated |
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934
I, Christopher D. Jones, certify that:
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1. |
I have reviewed this quarterly report on Form 10-Q of Nortech Systems, Inc. and Subsidiary; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and |
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d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: May 10, 2023 |
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 |
Exhibit 32
Written Statement of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Jay D. Miller, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2023 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 10, 2023
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By: |
/s/ Jay D. Miller |
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Jay D. Miller |
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Chief Executive Officer and President |
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Nortech Systems Incorporated |
Written Statement of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Christopher D. Jones, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2023 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 10, 2023
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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 |