Revenue Up 13.6% from Prior Year;
Gross Margin Expansion of 2.5 Percentage Points from the First
Quarter 2022
Nortech Systems Incorporated (Nasdaq: NSYS), a leading provider
of engineering and manufacturing solutions for complex
electromedical and electromechanical products serving the medical,
industrial and defense markets, reported 2023 first quarter results
for the period ended March 31, 2023.
2023 First Quarter
Highlights:
- Revenue of $34.9 million, up 13.6% from the first quarter of
2022.
- GAAP net income of $0.7 million, or $0.23 per diluted share,
compared to GAAP net income of $0.1 million, or $0.05 per diluted
share, in the first quarter of 2022.
- Gross margin of 15.7%, up 2.5 percentage points from gross
margin of 13.2% in the first quarter of 2022.
- Adjusted earnings before interest, taxes, depreciation, and
amortization (EBITDA) of $1.5 million, up from adjusted EBITDA of
$0.6 million in the first quarter of 2022.
- Last Twelve Months (LTM) revenue $138 million and adjusted
EBITDA $6.7 million
Management Commentary
“We are pleased with the strong year-over-year growth we saw in
the first quarter of 2023,” said Jay D. Miller, President & CEO
of Nortech Systems. “For the past eight quarters, on an adjusted
basis, we posted year-over-year quarterly growth in four key
metrics: sales, gross profit, gross margin and EBITDA. Delivering
these impressive results only happens through the skill and
dedication of all our team members. Their invaluable contributions
deserve the utmost appreciation and respect.”
“Everyone at Nortech is focused on delivering high-quality
products and solutions for our customers, frequently under tight
deadlines,” explained Miller. “Our strategic plan is built on four
key drivers: taking great care of our employees; delivering quality
products on time to our customers; supporting our customers with
continual innovation; and driving shareholder value through
profitable growth. Guided by these principles, we are successfully
evolving to better serve a wide range of medical, industrial and
defense firms, from Fortune 100 multinationals to regional U.S.
manufacturers. To effectively partner with the customers of today
and the future, Nortech is making strategic investments in
developing next-generation technologies.
2023 First Quarter Results (in
thousands)
Q1 23
Q1 22
Change
Revenue
$ 34,888
$30,711
13.6%
Gross Profit $
$5,484
$4,044
35.6%
Gross Margin %
15.7%
13.2%
2.5 pts
Adjusted EBITDA
$1,558
$640
143.4%
In Q1 2023, revenue totaled $34.9 million. This represents a
13.6% increase from revenue of $30.7 million in the first quarter
of 2022. Net income totaled $0.7 million, or $0.23 per diluted
share, in Q1 2023, up from net income of $0.1 million, or $0.05 per
diluted share, in Q1 2022.
In the first quarter of 2023, gross profit totaled $5.5 million,
or 15.7% of revenue, compared to gross profit of $4.0 million, or
13.2% of revenue, in the prior-year quarter.
First quarter 2023 operating expenses totaled $4.4 million, a
14.3% increase from first quarter 2022 operating expenses of $3.9
million. The increase in year-over-year operating expense was
primarily driven by investments in IT and HR systems.
First quarter 2023 EBITDA totaled $1.5 million, a 143% increase
over adjusted EBITDA of $0.6 million in the first quarter of 2022
and a 33% increase from the prior quarter. The year-over-year
increase in adjusted EBITDA resulted primarily from the previously
discussed revenue increase and gross margin expansion in the same
period.
Outlook
“Looking ahead to the remainder of 2023, many of our customers
are expressing guarded optimism that the U.S. recessionary landing
will be on the softer side. They are feeling more confident in
their inventory levels and they are gradually returning to more
normal ordering patterns as component availability improves and
lead times become more predictable,” commented Miller. “We always
monitor an array of leading indicators for signals about future
bookings and backlog and we’ll respond appropriately if customer
demand declines.”
“Although Nortech will strive to maintain the strong momentum we
have built, individual quarters could be affected by outside
factors that might include timing fluctuations, customer shipments,
and supply chain issues,” Miller explained. “Consequently, we
prefer to gauge the long-term success of our strategy on a rolling
twelve-month basis to normalize quarterly variability. We added a
new chart to our financial tables at the end of this press release
that provides more historical context for key financial
metrics.”
Conference Call
The Company will hold a live conference call and webcast at 4:00
p.m. central time on Thursday, May 11, 2023, to discuss the
Company's 2023 first quarter results. The call will be hosted by
Jay Miller, Chief Executive Officer and President and Chris Jones,
Chief Financial Officer. To access the live audio conference call,
U.S. participants may call 877-545-0523 and international
participants may call 973-528-0016. Participant Access Code:
629822. Participants may also access the call via webcast at:
https://www.webcaster4.com/Webcast/Page/2814/48227.
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
Systems 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 our financial results for the remainder of
2023, our ability to deliver quality products on time to our
customers, to support our customers with continual innovation, and
to drive shareholder value through profitable growth; our ability
to obtain and retain Fortune 100 multinationals as well as regional
U.S. manufacturers as customers; our ability to provide continual
innovation to our customers; and that achievement of ESG goals will
deliver business benefits well beyond compliance. 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) engineering challenges with new products,
technologies, and innovations; (2) our ability to secure
intellectual property rights with respect to new products,
technologies, and innovations; (3) supply chain disruptions leading
to parts shortages for critical components; (4) volatility in
market conditions which may affect market supply of, and demand
for, the company's products; (5) increased competition; (6) changes
in the reliability and efficiency of operating facilities or those
of third parties; (7) risks related to the availability of labor;
(8) commodity cost increases coupled with our inability to raise
prices charged to our customers; (9) general economic, financial,
and business conditions that could affect the company's financial
condition and results of operations; (10) macroeconomic headwinds
that negatively impact the markets Nortech serves. 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.
(In thousands, except share data)
THREE MONTHS ENDED
March 31, INCOME STATEMENT 2023 2022
Net Sales $
34,888
$
30,711
Cost of Goods Sold
29,404
26,667
Gross Profit
5,484
4,044
15.7
%
13.2
%
Operating Expenses
Selling Expenses
890
833
General and Administrative Expenses
3,265
2,729
Research and Development Expenses
276
328
Gain on Sale of Assets
(15
)
Total Operating Expenses
4,431
3,875
Income from Operations
1,053
169
Other Expense
Interest Expense
(110
)
(98
)
Income Before Income Taxes
943
71
Income Tax Expense (Benefit)
262
(67
)
Net Income $
681
$
138
Net Income Per Common Share - Basic $
0.25
$
0.05
Weighted Average Number of Common Shares Outstanding - Basic
2,692,033
2,680,731
Net Income Per Common Share - Diluted $
0.23
$
0.05
Weighted Average Number of Common Shares Outstanding - Diluted
2,903,635
2,871,901
BALANCE SHEET
March 31, 2023
December 31, 2022
Cash
$
1,267
$
1,027
Restricted Cash
1,366
1,454
Accounts Receivable
16,219
15,975
Employee Retention Credit Receivable
2,650
2,650
Inventories, Net
21,344
22,438
Contract Assets
10,790
9,982
Prepaid Expenses and Other Current Assets
1,933
1,334
Property and Equipment, Net
6,543
6,408
Operating Lease Assets
7,561
7,850
Other Intangible Assets, Net
382
422
Total Assets
$
70,055
$
69,540
Accounts Payable
$
13,082
$
14,792
Lease Obligations, Finance & Operating, Net
9,286
9,659
Accrued Payroll and Commissions
6,048
4,803
Customer deposits
4,830
3,515
All Other Liabilities
2,059
1,838
Line of Credit
5,845
6,853
Shareholders’ Equity
28,905
28,080
Total Liabilities and Shareholders’ Equity
$
70,055
$
69,540
CASH FLOW STATEMENT
March 31, 2023
March 31, 2022
Cash Flows from Operating Activities Net Income $
681
$
138
Depreciation and Amortization
505
486
Compensation on Stock-Based Awards
99
48
Change in Inventory Reserves
32
97
Other, Net
(48
)
23
Changes in Current Operating Items
Accounts Receivable
(207
)
(188
) Inventories
1,075
(1,852
) Contract Assets
(823
)
585
Prepaid Expenses and Other Assets
(599
)
(263
) Income Taxes
114
(168
) Accounts Payable
(1,799
)
1,302
Accrued Payroll and Commissions
1,244
845
Customer Deposits
1,314
456
All Other Operating Items
130
(18
) Net Cash Provided By Operating Activities $
1,718
$
1,491
Cash Flows from Investing Activities
Proceeds from Sale of Property and Equipment
-
15
Purchase of Property and Equipment
(496
)
(529
) Net Cash Used In Investing Activities $
(496
)
$
(514
)
Cash Flows from Financing Activities
Proceeds from Line of Credit
31,133
26,986
Payments to Line of Credit
(32,145
)
(28,420
) Principal Payments on Financing Leases
(96
)
(184
) Stock Option Exercises
35
33
Net Cash Used In Financing Activities $
(1,073
)
$
(1,585
)
Effect of Exchange Rate Changes on Cash
Net Change in Cash $
152
$
(608
) Cash - Beginning of Period
2,481
2,225
Cash - Ending of Period $
2,633
$
1,617
Reconciliation of 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.
There are no adjustments to EBITDA in 2023.
Adjustments to EBITDA in 2022 include:
- Gain on sale of assets for $15
Adjustments to EBITDA in 2021 include:
- 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.
Adjustments to EBITDA in 2020 include:
- In the third quarter of 2020, we recognized a $3,821 gain on
the sale/leaseback of our Bemidji and Mankato facilities.
- In the fourth quarter of 2020, we recognized a $2,375 loss on
goodwill impairment.
THREE MONTHS ENDED
March 31, RECONCILIATION TO ADJUSTED EBITDA
2023 2022 Net Income $
681
$
138
Interest expense
110
98
Income tax expense (benefit)
262
(67
) Depreciation & amortization expense
505
486
Gain on sale of asset
(15
) Adjusted EBITDA $
1,558
$
640
Last Twelve Months (LTM) Ended in Quarter Q1 2021
Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2
2022 Q3 2022 Q4 2022 Q1 2023 Net Sales
98.7
102.5
105.5
115.2
123.8
126.1
132.0
134.1
138.3
Gross profit $ - Adjusted
8.0
8.8
10.3
11.2
13.7
15.1
18.1
20.5
21.9
Gross margin %
8.1
%
8.6
%
9.7
%
9.7
%
11.0
%
12.0
%
13.7
%
15.3
%
15.8
%
EBITDA - Adjusted
(2.3
)
(2.0
)
(0.7
)
(0.2
)
1.9
2.5
4.2
5.8
6.7
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version on businesswire.com: https://www.businesswire.com/news/home/20230509006282/en/
Chris Jones, CFO cjones@nortechsys.com 952-345-2244
Nortech Systems (NASDAQ:NSYS)
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