Nortech Systems Incorporated (NASDAQ:NSYS) Q1 2023 Earnings Call Transcript

Nortech Systems Incorporated (NASDAQ:NSYS) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Greetings. Welcome to Nortech’s First Quarter 2023 Earnings Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, Chris Jones, Chief Financial Officer at Nortech. You may begin.

Chris Jones: All right. Thanks, Paul, and I’d also like to welcome everyone to today’s conference call. Jay is going to begin today’s call with a review of our business, current trends and our strategic planning process. Then I’ll review Nortech’s Q1 2023 financial results before turning it back over to Jay for his closing comments. And then we will open it up to all of you for questions. Before we continue, please note that statements made during this call and Q&A sessions may be forward-looking regarding expected revenue, earnings, future plans, opportunities and other company expectations. These estimates, plans and other forward-looking statements involve unknown and known risks and uncertainties that may cause actual results to differ materially from those expressed or implied in this call.

These risks, including those that are detailed in our most recent Form 10-Q may be amended or supplemented. The statements made during this conference call are based upon information known by Nortech as of the date and time of this call, and we assume no obligation to update the information in today’s call. You can find Nortech’s complete safe harbor statements in our SEC filings. And with that, I will turn it over to Jay for his opening comments.

Jay Miller: Thank you, Chris, and good afternoon, everyone. We appreciate you joining us. We are very pleased with our first quarter financial results, including strong year-over-year growth. In fact, for the past eight quarters, Nortech has posted year-over-year quarterly growth in four key metrics: sales, gross profit, gross margin and EBITDA. Chris will go into more financial details later in the call. During our last quarterly call back in March, I talked in some detail about Nortech’s value proposition. For any new listeners today, I’ll just touch on a few of the key points. We manufacture low-volume, high-mix electromechanical systems, including complex cable assemblies, printed circuit boards, also known as PCBs, and other components inside boxes or housings.

Our solutions provide critical connections with our customers’ products, transmitting power and data and oftentimes both. And in some cases, we manufacture the whole product. We serve a wide range of medical, industrial and defense firms from Fortune 100 multinationals and OEMs to smaller regional U.S. manufacturers and start-ups. Geographically, we have successfully expanded our own global footprint over the years to now include the U.S., Mexico and China. This 3-tier cost structure, coupled with lean manufacturing principles help keep us cost-competitive and responsive to customers around the world. Nortech is a high-touch business. Our skilled team members provide hands-on expertise while also leveraging sophisticated equipment in production and testing.

Our people are a key element to Nortech’s competitive advantage, and they deserve our deep gratitude and admiration, particularly for their efforts during the pandemic and supply chain disruptions. One of the privileges of being Nortech’s President and CEO is the opportunity to meet our people at our locations around the world. Whenever and wherever I talk to Nortech team members, I’m impressed by their strong desire to provide excellence to our customers. Our people are justifiably proud of their efforts and results, and I am very proud of them. Next, I’d like to reiterate the key goals of Nortech’s strategic plan developed and regularly refined by our management team and overseen by our Board. Taking care of our people is foundational for all the reasons I mentioned earlier.

This care involves ongoing training, support, recognition and professional development. We also want Nortech to be a positive influence and contribute in the communities where we operate. Second, we must take care of our customers, consistently providing the high-quality complex solutions they and, in turn, their customers rely on. We strive for world-class performance levels following well-established quality management systems like ISO 1345 and AS9100, for example. Third, Nortech is carefully investing in strategic innovation, engineering new technologies and products that can uniquely differentiate us to our customers, including advanced fiber optic and the Internet of Things, also known as IoT, solutions. We are in the early phases of Nortech’s environmental, social and governance or ESG journey guided by industry best practices, outside experts and our Board of Directors.

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Our leadership team and Board of Directors believes executing against select ESG goals will deliver business benefits well beyond compliance and proactively position Nortech for sustained growth with the help and support of our employees, customers and suppliers. More on that later. The fourth pillar of our strategic plan focuses on our financial results and driving shareholder value. For example, we are pleased that our 16.5% revenue increase during fiscal 2022 exceeded the 9.5 percentage average revenue growth among the world’s 50 largest EMS firms as published last month by Manufacturing Market Insider. For a more in-depth financial discussion, I’ll now turn it back over to Chris. Chris?

Chris Jones: All right. Thanks, Jay. All right, in the next few minutes, I’m going to provide some details of our financial performance in the 2023 first quarter but I would — all right. Now let me take a minute to highlight a new chart we added to the press release, and which includes — we’re going to include each quarter going forward. It provides eight quarters of trailing 12-month historical data and four key metrics cited earlier, sales, gross profit, gross margin and EBITDA. So I wanted to add this chart because we know there are individual quarters that can be affected by outside factors and these might include timing fluctuations, customer shipments, supply chain issues. Any of these during a given reporting cycle could temporarily disrupt our momentum.

Nortech also reported numerous nonrecurring items in 2020 and 2021, including PPP loan forgiveness, a gain on sale and leaseback, goodwill impairment and other items. Those nonrecurring items are listed in our press release, and they are excluded from our adjusted gross profit, gross margin and EBITDA. The LTM charts also show a dramatic turnaround from our lowest quarter in Q1 of 2021, two years ago. At that time, our LTM revenue was $99 million, gross profit was $8 million, gross margin was 8.1% and EBITDA was negative $2.3 million. For the 12 months just ended March of 2023, our revenue is now $138 million, gross profit is $22 million, gross margin is 15.8% and EBITDA is $6.7 million. Nortech’s finances are healthier on every metric. All right, switching gears to this quarter’s financial performance.

As Jay noted, progress was made on several key performance areas with quarterly revenue up nearly 14% from the prior year period. Again, we’re particularly pleased with this revenue momentum as the quarter’s year-over-year growth continues and comes on a strong prior year comparable. We also saw sustainable year-over-year backlog levels, year-over-year gross margin expansion of 256 basis points and solid growth in net income and EBITDA. In the quarter, revenue totaled $34.9 million. This is a 13.6% increase on revenue of $30.7 million in the first quarter of 2021 — sorry, 2022 and was in line with our prior quarter, as I mentioned earlier. The first quarter revenue was driven by growth in our medical and industrial categories. In the first quarter, the medical category was up $6.1 million or 40% as compared to 2022 with the majority of the increase coming from medical component products.

And in the first quarter, revenue in the industrial market was up $800,000 or 9% from the prior year. Our quarterly gross profit totaled $5.5 million or 15.7% gross margin compared to a gross profit of $4 million or 13.1% in the prior year quarter. First quarter operating expenses totaled $4.4 million, a 14% increase from the first quarter operating expenses of $3.9 million and flat on a sequential basis. During the quarter, general and administrative costs increased by $500,000 primarily driven by investments in IT and HR systems. Net income totaled $681,000 or $0.23 per diluted share in Q1, up from net income of $138,000 or $0.05 per diluted share in Q1 of 2022. I also do have good news to add about our employee retention credit payments.

So in December, we did receive our first payment on the ERC. And at March 31, 2023, on the balance sheet, we did have a receivable of $2.7 million, and we are pleased to report that, that second IRS payment did arrive on May 1, so we’ll report that cash inflow net of $1.2 million in deferred payroll tax payments in our Q2 results. Moving on to the rest of the balance sheet and the cash flow statement. In the first quarter of 2023, cash provided by operating activities was $1.7 million compared to $1.5 million in the prior year period. During the quarter, decreases in working capital due to increased shipments drove positive operating cash flow. Inventory levels declined to $21.3 million, down from $22.4 million in the prior quarter due to less pressure to respond to global supply chain challenges.

Receivables on March 31 were $16 million, relatively flat to the prior quarter. And we ended the first quarter of 2023 with $5.8 million of borrowings and $5.9 million availability on our $16 million line of credit with Bank of America. At March 31, 2023, cash and cash equivalents totaled $2.6 million, about flat to the prior quarter. We believe that our existing financing arrangements and anticipated cash flows from operations will be sufficient to satisfy our working capital needs in 2023 as well as any capital expenditures and debt repayments. We believe we have created a solid financial base to take this company into the future. So on a final note, let me reiterate our top financial priorities in 2023. They’re winning new business bookings, expanding gross margins, growing EBITDA and strengthening our balance sheet.

We believe we will create shareholder value through these actions by delivering sustainable free cash flow growth. Our last eight quarters of year-over-year results demonstrates that our approach is working. And with that, I will turn it back over to Jay for his closing comments.

Jay Miller: Thank you, Chris. Before we open the call for your questions, I’d like to briefly share my thoughts on our ESG initiatives. According to the electronics trade association, IPC, the leading companies in our industry are highly intentional about their ESG priorities. Goals related to climate change and energy use are currently garnering the most attention. Nortech intends to lead and not follow with ESG. In the early phases of this journey, we are looking more at the environmental and social categories. As a public company, we believe we are further along with our governance than many private firms in our industry and supply chain. Generally speaking, the overall ESG process consists of four ambitious elements, baselining, peer analysis, stakeholder engagement and evaluation and determination.

We are taking the long view in strengthening our company for the future. In the short term, however, we are also focusing on maximizing financial results for our shareholders. We believe these long- and short-term goals can be balanced. They are not mutually exclusive. With our ESG initiatives, we are committed to leveraging industry best practices, tapping outside experts for guiding and harnessing the collective experience and expertise of our Board and company leadership. I speak for our entire leadership team in saying we believe succeeding with ESG goals will provide Nortech with the clear business benefits beyond simple compliance. Our ESG efforts will also serve to proactively position us favorably with our employees, customers and suppliers.

Related to this topic, we’re watching to see the disclosure actions that the SEC may take later this year related to the company’s climate initiatives, both for Nortech and our supply chain and our customers. Regardless of specific government actions, we believe companies both upstream and downstream from Nortech will be looking for partners that are in tune with these goals and making progress toward achieving them. That concludes our presentation, and we’ll now open the call for your questions, and we’d strongly encourage any questions you may have.

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Q&A Session

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Operator:

Jay Miller: Very good, Paul, thank you. And thanks to everyone for joining us today. We obviously feel very good about our first quarter results. We look forward to talking to you again next in August with our second quarter 2023 results. And with that, I’ll hand things back to Chris. Chris?

Chris Jones: All right. Thanks, Jay, and I will also end with our safe harbor statement. So as I mentioned at the beginning of the call, please note that statements made during this call were forward-looking regarding expected revenue, earnings, future plans, opportunities and other company expectations. These estimates, plans and other forward-looking statements involve unknown and known risks and uncertainties that may cause actual results to differ materially from those expressed or implied on this call. These risks, including those that are detailed in our most recent Form 10-Q may be amended or implemented. Statements made during this conference call are based upon information known by Nortech as of the date and time of this call, and we assume no obligation to update the information in today’s call. You can find Nortech’s complete safe harbor statements in our SEC filings. Thank you, and have a good evening.

Operator: Thank you. This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.

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