Nortech Systems Reports First Quarter Results and Actions to Reduce Facility Costs

Rhea-AI Summary

Nortech Systems (NASDAQ: NSYS) reported its financial results for Q1 2024, with net sales of $34.2 million, a 1.9% decrease from the previous year. However, net income rose to $765,000, or $0.26 per diluted share, a 12.3% increase from Q1 2023. Gross margin improved slightly to 15.9%, and EBITDA was $1.637 million, up 5.1% year-over-year. Operational expenses saw a 3.1% decline, totaling $4.3 million. Notably, the company secured a new $15 million cash flow line of credit and maintained a backlog of $35.2 million. To optimize costs, Nortech plans to consolidate its facilities in Minnesota, closing the Blue Earth location and reducing the Maple Grove headquarters by 30%.

Positive

• Net income increased by 12.3% to $765,000 year-over-year.
• EBITDA rose by 5.1% to $1.637 million.
• Gross margin improved to 15.9%.
• Operating expenses decreased by 3.1% to $4.3 million.
• Secured a new $15 million cash flow line of credit.
• Maintained a 90-day backlog of $35.2 million.

Negative

• Net sales decreased by 1.9% to $34.2 million.
• Gross profit slightly declined from $5.484 million to $5.448 million.

Insights

Financial Analyst

As a financial analyst, it's important to highlight the nuanced yet significant financial metrics from Nortech Systems' Q1 2024 results. Net sales decreased by 1.9 compared to Q1 2023, suggesting a minor but notable dip in revenue. However, despite this decline, net income rose by 12.3, showcasing improved profitability. This improvement is underscored by an increase in EBITDA by 5.1, which indicates better operational efficiency and cost management.

The decision to consolidate facilities reflects a strategic effort to cut costs and optimize resources. While this might involve short-term expenses related to relocation and consolidation, it could potentially lead to long-term savings and improved margins. Investors should consider both the immediate financial impact of these changes and the longer-term benefits of enhanced operational efficiency.

The new $15 million cash flow line of credit agreement provides additional liquidity, which is a positive sign of financial stability. This financial maneuver ensures the company has adequate resources to manage cash flow needs and potentially fund growth initiatives or tackle unforeseen challenges.

Investors should note the gross margin improvement, albeit slight, from 15.7 to 15.9. This indicates productive cost management and efficiency in converting revenue into profit. The backlog of $35.2 million serves as a promising indicator of sustained demand in the upcoming quarters.

Market Research Analyst

From a market research perspective, Nortech Systems operates in the highly competitive and specialized sectors of medical, aerospace and defense, which tend to have rigorous quality requirements and steady demand. The company’s decision to consolidate production of wire and cable products in the Bemidji, Minnesota facility is indicative of an attempt to streamline operations and enhance specialization. For an investor, this move signals a strategic alignment towards improving efficiency and reducing overhead costs.

The consolidation of their Maple Grove headquarters and engineering facilities by 30 is another significant action. Such steps are often guided by a shift towards more flexible, remote-working arrangements, reducing the need for physical office space. This can lead to substantial cost savings without compromising innovation or productivity.

Additionally, Nortech’s active participation in community and employee engagement initiatives like the “FIT2Be Cancer Free” challenge can contribute positively to the company’s reputation and employee morale, factors which are increasingly important in modern corporate evaluations.

The stable backlog figure underscores a steady demand pipeline, important for forecasting future revenue stability. Investors should keep an eye on how effectively the company leverages its streamlined operations to maintain or grow this backlog, which would demonstrate successful implementation of their consolidation strategy.

MINNEAPOLIS--(BUSINESS WIRE)-- Nortech Systems Incorporated (Nasdaq: NSYS) (“Nortech” or, the "Company"), a leading provider of engineering and manufacturing solutions for complex electromedical and electromechanical products serving the medical, industrial and defense markets, reported first quarter ended March 31, 2024 financial results.

2024 Q1 Highlights:

• Net sales of $34.2 million, down 1.9% from Q1 2023.
• Net income increased to $765 thousand, or $0.26 per diluted share, compared with net income of $681 thousand or $0.23 per diluted share, in Q1 2023.
• Gross margin of 15.9%, up 20 basis points from gross margin of 15.7% in the same prior-year quarter.
• Earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.637 million, compared with EBITDA of $1.559 million in the prior year.
• Signed new $15 million cash flow line of credit agreement.
• 90-day backlog of $35.2 million as of March 31, 2024, consistent with the prior year-end level.

Management Commentary

“We posted solid results in the first quarter of 2024 and continued to improve margins and manage expenses,” said Jay D. Miller, President and CEO of Nortech. “As a result, we are generating improved net income and EBITDA in the quarter as compared with the same quarter in 2023.”

“Our dedicated Nortech employees worldwide embody our corporate values, including teamwork, excellence, commitment, integrity and innovation,” Miller noted. “While we measure employee engagement success with a number of metrics, we are pleased to see continued high employee retention and high employee engagement. Most recently, 230 of our North American employees participated in the American Cancer Society “FIT2Be Cancer Free” challenge.”

“As we further look for opportunities to optimize our expense structure and plant capacity utilization, we are consolidating our Minnesota facilities. This morning we announced the decision to consolidate production of our wire and cable products for the Aerospace and Defense industry to our Bemidji, Minnesota facility. The shift in production is expected to be completed by the end of 2024, at which time the Company will close the Blue Earth, Minnesota facility. In the spirit of taking the best care of our employees as possible, all Blue Earth employees will be extended job offers at our other Minnesota facilities. We sincerely hope to keep them all.”

“Further, we are consolidating the square footage of our Maple Grove, Minnesota headquarters and engineering facility by almost 30 percent. This reduction reflects our current and future space needs which have been heavily influenced by the Company’s hybrid remote work arrangements.”

2024 First Quarter

($ in thousands)	Q1 24	Q1 23	% Change
Net sales	$34,215	$34,888	(1.9) %
Gross profit	$5,448	$5,484	(0.7) %
Operating expenses	$4,293	$4,431	(3.1) %
Net income	$765	$681	12.3 %
EBITDA	$1,637	$1,558	5.1 %

In the first quarter of 2024, net sales totaled $34.2 million. This represents a 1.9% decrease from net sales of $34.9 million in the first quarter of 2023. For the first quarter, gross profit totaled $5.4 million, or 15.9% of net sales, compared with gross profit of $5.5 million, or 15.7%, in the prior year. First quarter 2024 operating expenses totaled $4.3 million, a 3.1% decrease from the prior year operating expenses of $4.4 million.

GAAP net income totaled $765 thousand, or $0.26 per diluted share, in the current quarter, up from GAAP net income of $681 thousand, or $0.23 per diluted share, in the same prior-year quarter. EBITDA totaled $1.637 million, a 5.1% increase from EBITDA of $1.558 million in the same prior-year quarter.

Conference Call

The Company will hold a live conference call and webcast at 3:00 p.m. central time on Wednesday, May 16, 2024, to discuss the Company's 2024 first quarter results. The call will be hosted by Jay D. Miller, Chief Executive Officer and President and Andrew D. C. LaFrence, Chief Financial Officer. To access the live audio conference call, US participants may call 888-506-0062 and international participants may call 973-528-0011. Participant Access Code: 945063. Participants may also access the call via webcast at: https://www.webcaster4.com/Webcast/Page/2814/50447.

About Nortech Systems Incorporated

Nortech Systems is a leading provider of design and manufacturing solutions for complex electromedical devices, electromechanical systems, assemblies, and components. Nortech primarily serves the medical, aerospace & defense, and industrial markets. Its design services span concept development to commercial design, and include medical device, software, electrical, mechanical, and biomedical engineering. Its manufacturing and supply chain capabilities are vertically integrated around wire/cable/interconnect assemblies, printed circuit board assemblies, as well as system-level assembly, integration, and final test. Headquartered in Maple Grove, Minn., Nortech currently has seven manufacturing locations and design centers across the U.S., Latin America, and Asia. Nortech Systems is traded on the NASDAQ Stock Market under the symbol NSYS. Nortech's website is www.nortechsys.com.

Forward-Looking Statements

This press release contains forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995 including without limitation statements regarding future financial results, expense management, effects of consolidation of our facilities, and continued high performance of personnel. While this release is based on management's best judgment and current expectations, actual results may differ materially from those expressed or implied and involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation: (1) commodity cost increases coupled with challenges in raising prices and/or customer pressure to reduce prices; (2) supply chain disruptions leading to shortages of critical components; (3) volatility in market conditions which may affect demand for the Company's products; (4) increased competition; (5) changes in the reliability and efficiency of operating facilities or those of third parties; (6) risks related to the availability of labor; (7) the unanticipated loss of any key member of senior management; (8) geopolitical, economic, financial and business conditions; (9) the Company's ability to steadily improve manufacturing output and product quality throughout the remainder of 2024 or (10) the impact of global health epidemics on our customers, employees, manufacturing facilities, suppliers, the capital markets and our financial condition. Some of the above-mentioned factors are described in further detail in the section entitled "Risk Factors" in our annual and quarterly reports, as applicable. You should assume the information appearing in this document is accurate only as of the date hereof, or as otherwise specified, as our business, financial condition, results of operations and prospects may have changed since such date. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the United States Securities and Exchange Commission, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.

Reconciliation of Generally Accepted Accounting Principles (“GAAP”) Measures to Non-GAAP Financial Measure

EBITDA is a non-GAAP financial measure used by management that we believe provides useful information to investors because it reflects ongoing performance excluding certain non-recurring items during comparable periods and facilitates comparisons between peer companies since interest, taxes, depreciation, and amortization can differ greatly between different organizations as a result of differing capital structures and tax strategies. EBITDA is defined as net income (loss) plus interest expense, plus income tax expense plus depreciation expense and amortization expense. EBITDA should be considered in addition to, not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. It is not a measurement of our financial performance under GAAP and should not be considered an alternative to revenue or net income, as applicable, or any other performance measures derived in accordance with GAAP and may not be comparable to other similarly titled measures of other businesses. EBITDA has limitations as an analytical metric, and you should not consider it in isolation or as a substitute for analysis of our operating results as reported under GAAP.

		THREE MONTHS ENDED
		MARCH 31,
CONDENSED INCOME STATEMENTS		2024				2023
(in thousands USD, except share and per share amounts)
Net sales		$	34,215			$	34,888
Cost of goods sold			28,767				29,404
Gross profit			5,448				5,484
Operating expenses:
Selling expenses			805				890
General and administrative expenses			3,170				3,265
Research and development expenses			318				276
Total operating expenses			4,293				4,431
Income from operations			1,155				1,053
Other expense
Interest expense			(167	)			(110	)
Total other expense			(167	)			(110	)
Income before income taxes			988				943
Income tax expense			223				262
Net income		$	765			$	681
Income per common share:
Basic		$	0.28			$	0.25
Weighted average number of common shares outstanding - basic			2,741,345				2,692,033
Diluted		$	0.26			$	0.23
Weighted average number of common shares outstanding - dilutive			2,907,291				2,903,635
Other comprehensive income
Foreign currency translation (loss) gain			(183	)			40
Comprehensive income, net of tax		$	582			$	721

CONDENDSED BALANCE SHEETS ($ in thousands)		MARCH 31, 2024				DECEMBER 31, 2023
ASSETS
Current assets:
Cash		$	4,028			$	960
Restricted cash			-				715
Accounts receivable, less allowances of $292 and $358, respectively			16,051				19,279
Inventories, net			22,951				21,660
Contract assets			14,194				14,481
Prepaid assets and other assets			1,892				1,698
Total current assets			59,116				58,793
Property and equipment, net			6,134				6,513
Operating lease assets, net			7,339				6,917
Deferred tax assets			2,640				2,641
Other intangible assets, net			223				263
Total assets		$	75,452			$	75,127
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of finance lease obligations		$	296			$	356
Current portion of operating lease obligations			1,235				1,033
Accounts payable			15,217				15,924
Accrued payroll and commissions			4,771				4,138
Customer deposits			3,139				4,068
Other accrued liabilities			1,063				1,063
Total current liabilities			25,721				26,582
Long-term liabilities:
Long-term line of credit			6,170				5,815
Long-term finance lease obligations, net of current portion			168				209
Long-term operating lease obligations, net of current portion			6,977				6,763
Other long-term liabilities			410				414
Total long-term liabilities			13,725				13,201
Total liabilities			39,446				39,783
Shareholders’ equity:
Preferred stock, $1 par value; 1,000,000 shares authorized; 250,000 shares issued and outstanding			250				250
Common stock - $0.01 par value; 9,000,000 shares authorized; 2,747,678 and 2,740,178 shares issued and outstanding, respectively			27				27
Additional paid-in capital			17,009				16,929
Accumulated other comprehensive loss			(715	)			(532	)
Retained earnings			19,435				18,670
Total shareholders’ equity			36,006				35,344
Total liabilities and shareholders’ equity		$	75,452			$	75,127

		THREE MONTHS ENDED
CONDENSED CASH FLOW STATEMENTS		MARCH 31,
($ in thousands)		2024				2023
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	765			$	681
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			482				505
Compensation on stock-based awards			80				99
Change in inventory reserves			76				32
Change in accounts receivable allowances			(66	)			(32	)
Other, net			(4	)			(15	)
Changes in current operating assets and liabilities:
Accounts receivable			3,215				(206	)
Inventories			(1,400	)			1,075
Contract assets			287				(823	)
Prepaid expenses and other current assets			(328	)			(600	)
Accounts payable			(8	)			(1,799	)
Accrued payroll and commissions			640				1,244
Customer deposits			(926	)			1,315
Other accrued liabilities			15				242
Net cash provided by operating activities			2,828				1,718
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment			9				-
Purchases of property and equipment			(744	)			(496	)
Net cash used in investing activities			(735	)			(496	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit			32,768				31,133
Payments to line of credit			(32,394	)			(32,145	)
Principal payments on financing leases			(100	)			(96	)
Stock option exercises			-				35
Net cash provided by (used in) financing activities			274				(1,073	)
Effect of exchange rate changes on cash			(14	)			3
Net change in cash and cash equivalents			2,353				152
Cash and cash equivalents - beginning of period			1,675				2,481
Cash and cash equivalents - end of period		$	4,028			$	2,633

			THREE MONTHS ENDED March 31,
			2024		2023
RECONCILIATION OF NET INCOME TO EBITDA
($ in thousands)
Net Income		$	765	$	681
Interest			167		110
Taxes			223		262
Depreciation			442		465
Amortization			40		40
EBITDA		$	1,637	$	1,558

There are no material adjustments to EBITDA in 2022 or 2023.

Adjustments to EBITDA in 2021 include ($ in thousands):

• In the third quarter of 2021, we recognized $5,209 related to the CARES Act Employee Retention Credit (ERC) as a reduction of costs of goods sold of $4,670, selling expense of $125, and general and administrative expense of $414. Nortech received ERC cash payment in two installments, the first in December 2022 and the second in May 2023.
• CARES Act Paycheck Protection Program (PPP) loan forgiveness gain of $6,170 recorded in the fourth quarter of 2021.
• Restructuring expense in 2021 of $327 related to the consolidation of our printed circuit board production capabilities into our center of excellence in Mankato, Minnesota and closure of our Merrifield, Minnesota plant.
• Gain on sale of assets in 2021 of $141 related to the closure of our Merrifield, Minnesota plant.
• Loss on abandonment of intangible assets in 2021 of $560 related to abandonment of the Devicix tradename.

($ in millions)	Last Twelve Months (LTM) Ended in Quarter
	Q2 2021			Q3 2021			Q4 2021			Q1 2022			Q2 2022			Q3 2022			Q4 2022			Q1 2023			Q2 2023			Q3 2023			Q4 2023			Q1 2024
Net Sales	$	102.5		$	105.5		$	115.2		$	123.8		$	126.1		$	132.0		$	134.1		$	138.3		$	140.8		$	138.9		$	139.3		$	138.7
Gross Profit $ - Adjusted		8.8			10.3			11.2			13.7			15.1			18.1			20.5			21.9			22.4			21.4			23.1			23.1
Gross Margin % - Adjusted		8.6%			9.7%			9.7%			11.0%			12.0%			13.7%			15.3%			15.8%			15.9%			15.4%			16.6%			16.6%
EBITDA - Adjusted	$	(2.0)		$	(0.7)		$	(0.2)		$	1.9		$	2.5		$	4.2		$	5.8		$	6.7		$	6.8		$	6.0		$	8.0		$	8.1

 

View source version on businesswire.com: https://www.businesswire.com/news/home/20240516526389/en/

Andrew D. C. LaFrence

Chief Financial Officer and Senior Vice President of Finance

alafrence@nortechsys.com

952-345-2243

Source: Nortech Systems Incorporated

FAQ

What were Nortech Systems' net sales in Q1 2024?

Nortech Systems reported net sales of $34.2 million in Q1 2024, a 1.9% decrease from the same quarter in 2023.

How did Nortech Systems' net income perform in Q1 2024?

Nortech Systems' net income increased to $765,000, or $0.26 per diluted share, a 12.3% rise compared to Q1 2023.

What is the gross margin reported by Nortech Systems in Q1 2024?

The gross margin for Nortech Systems in Q1 2024 was 15.9%, up from 15.7% in Q1 2023.

What was Nortech Systems' EBITDA for Q1 2024?

Nortech Systems reported an EBITDA of $1.637 million for Q1 2024, a 5.1% increase from Q1 2023.

What actions is Nortech Systems taking to reduce facility costs?

Nortech Systems is consolidating its Minnesota facilities, closing the Blue Earth location and reducing the Maple Grove headquarters by 30%.

What is the 90-day backlog for Nortech Systems as of March 31, 2024?

As of March 31, 2024, Nortech Systems had a 90-day backlog of $35.2 million.