Nortech Systems Incorporated (NASDAQ:NSYS) Q3 2025 Earnings Call Transcript

Nortech Systems Incorporated (NASDAQ:NSYS) Q3 2025 Earnings Call Transcript November 13, 2025

Operator: Good afternoon, ladies and gentlemen, and welcome to the Nortex Systems Incorporated Third Quarter twenty twenty five Earnings Conference Call. With me on the line today are Jay Miller, President and Chief Executive Officer and Andrew LaFrance, chief financial officer and senior vice president of finance. All lines have been placed on a listen only mode, and the call will be open for questions and comments. Following the management presentation. At this time, it is my pleasure to turn the call over to Andy LaFrentz. Thank you, Paul. I would also like to welcome everyone to today’s conference call. Jay will begin the call with a review of our operations, recent developments,

Andy LaFrentz: and business outlook Then I will review Nortech’s third quarter twenty twenty five financial results before any before turning it back over to Jay for his closing comments. Then we will open up the call for your questions. Before we continue, please note statements made during this call may be forward looking regarding expected net sales, operating results, 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 include those that are detailed in our most recent SEC filings, may be amended or supplemented.

The statements made during this call call. are based upon information known by Nortech as of the date and time of this And we assume no obligation to update the information in today’s call. You can find Nortech’s complete safe harbor statements in our safe in our SEC filings. And now with that, I will turn it over to Jay for his opening comments. Jay?

Q&A Session

Jay Miller: Thank you, Andy, and good afternoon, everyone. We’re glad you could join us today.

Andy LaFrentz: I’m very proud of our team’s execution and our positive third quarter results which reflect continued evidence of our restructuring efforts and cost discipline are paying off. During the quarter, we realized increase increased manufacturing efficiencies across customer programs transferred to new plants which are driving planned sustained performance improvement as we experience a continued positive mix shift from new product introduction to first builds of recurring production. While we have incremental work to do in this area, we have made significant progress over the past several quarters to realize the benefits of our streamlining and long term cost structuring initiatives. The entire Nortech leadership team is proud of the hard work and execution of our employees.

We continue to closely monitor the on again, off again imposition of tariffs. We continue to see strong quoting activity as many of our customers are evaluating nearshore manufacturing strategies for both North America and China. We believe we are currently very well positioned in our North American footprint as our Monterey Maquiladora operations and Minnesota facilities work under the framework of the USMCA. While the tariffs with Mexico remain uncertain, it’s important to note Nortec is not the importer of record into The United States for goods produced in Mexico as we operate under a Makilodora structure for our customers. This materially reduces our direct exposure to these tariffs. In situations where we incur tariffs on imported components, are working closely with our customers to pass these costs through.

All in all, we are working hard and have all hands on deck to proactively monitor the shifting landscape. Trade policies, uncertainties in the current geopolitical environment. We have recently completed two regulatory milestones to further support our long term strategy. First, our Monterrey, Mexico facility has achieved a s 9,100 d certification. The a s 9,100 standard builds upon the ISO 9,001 framework. Adding stringent requirements specific to the aerospace industry. Earning this certification understands NOR nor underscores Nortech’s capability to deliver complex high reliability products for demanding applications. Enhancing its service offerings to both current and prospective clients in the aerospace and industrial markets. Achieving AS 9,100 D certification in our Monterey facility is a significant milestone for Nortech, and the direct reflection of our team’s dedication to quality, and operational excellence.

Second, we have successfully completed our CMMC two point o certification to support our US Department of of Defense customers in advance of the newly effective government contracting cyber requirements. Operationally, we are continuing to work to execute our strategy to partner closely with customers to drive shorter lead times tailored on time delivery strategies, high quality standards, along with deeper customer partnerships that are fundamental to our long term growth. We We now have several customers with programs that resolve in shipment within days of order dates resulting in world class service and on time delivery metrics. Further, our ability to manage build cycles for these programs create consistent manufacturing processes which are also delivering leading quality metrics.

Finally, I’d like to note that while our lead times have become shorter for many customers, we continue to see strength in our customer backlog. As we noted in our 10 ks filing this morning, our customer backlog was $77,300,000 as of 09/30/2025. Next, I’ll turn it over to Andy for a more in-depth look at our financial results. Andy? Thank you, Jay. In the next few minutes, I’ll provide certain details of our financial performance in the 2025. I would encourage you to review our form 10 excuse me, Form eight ks containing our press release and non GAAP measures as well as our quarterly report on Form 10 Q filed earlier this morning with the US Securities and Exchange Commission. As continued theme, we have historically noted

Jay Miller: our

Andy LaFrentz: individual quarterly performance can be affected by outside factors. These might include timing fluctuations, including seasonal fluctuations, customer shipments, and supply chain issues, any of which could materially impact a particular quarter either positively or negatively. Consequently, we believe it’s important to review our business on a twelve month basis rather focusing on quarterly performance. This approach will help to normalize these potential anomalies and offer a better gauge of our strategies long term success. So today, while I focus most of my comments on our third quarter results, I will spend some time reviewing trailing twelve months results for the business. Net sales for the 2025 totaled $3,500,000 This represents a 2.9% decrease from net sales of $31,400,000 in the 2024.

Net sales in the 2025 were negatively impacted by a $1,400,000 decrease aerospace and defense net sales as a result of increased production in the last 2024 and the anticipation of moving aerospace and defense manufacturing from our Bulwark facility to our Bemidji facility and to a lesser extent, the continued delay of certain defense customer product approvals. As Jay noted, we made significant headway with the transfer of customer programs in the first nine months of twenty twenty five and this contributed to an 8.7% or $832,000 increase medical imaging net sales in the current quarter as compared with the same quarter in 2024. As Jay also noted, we have a strong customer backlog at the end of the third quarter. Which arrived at $77,300,000 This is consistent with our customer backlog at 06/30/2025.

2025 gross profit totaled $5,000,000 or point 5% of net sales compared with gross profit of $3,800,000 or 12.2% of net sales in the same prior year quarter. The increase in gross profit as a percentage of net sales in the current year period was a result of increased facility utilization increased manufacturing productivity, and a change in the reporting structure of our custom managers from operations to a sales function which more than offset lower sales. Operating expenses, excluding restructuring charges for the third quarter, were down $46,000 as compared with the prior year period as a result of higher selling expenses from the alignment of our customer facing managers with sales function. This increase was more than offset by lower payroll costs due to lower headcount and expense management.

We incurred a $176,000 of restriction cost in the prior year period. As we focus on earnings before interest tax, depreciation, and amortization, or EBITDA, as a key performance metric for management and our investors we generally have not spent time discussing our income tax expense in our quarterly calls. Given the size of the income tax expense for the current quarter, we are providing some color. Income tax expense in the 2025 was $818,000 as compared to $56,000 in the 2024. As a result of our pretax income of $672,000 for the current quarter, That was more than offset with income tax expense resulting in a net loss of a $146,000. In the 2025, the One Big Beautiful Bill Act was signed by the president. This bill restored the company’s ability to immediately deduct domestic research and development expenses, The company has prepared its tax revision for the three and nine months ending 09/30/2025 assuming you will take advantage of this provision of the new tax bill.

As a result, the company currently estimates it will incur a US tax loss for the company in 2025, which will temporarily limit the ability of the company to deduct expense and would impact our ability to claim foreign tax deductions and credits under the GILTI provisions of The US tax code. The impact to the GILTI calculation results in a permanent unfavorable impact to the overall tax rate for the quarter and year to date periods. The company plans to continue to review the impact of the new tax bill in the various elections, including the company deduction of research and development expenses in the fourth quarter twenty five to optimize tax cash payments along with overall tax expense for 2025. Turning to the balance sheet as of 09/30/2025, cash flow of $1,300,000, up from $916,000 as of 12/31/2024.

The fluctuation in cash balances reflects the timing of cash receipts and expenditures. Distributions of earnings from our Chinese operations and credit line borrowings, which aggravated $12,000,000 as of the end of the quarter. Accounts receivable as of 09/30/2025 were $18,800,000 up from $14,900,000 as of September excuse me, 12/31/2024. And this increase was largely due to the timing of shipments. Inventories were $18,400,000 as of 09/30/2025, as compared with $21,600,000 as of the December reflecting a planned decrease in our inventory balances during 2025. Our contract asset, which represents revenue earned but not yet built customers, increased to $15,300,000 as of 09/30/2025 as compared with their $800,000 as of 12/31/2024. This increase reflects the timing of customer shipments and our focus on increased production to reduce raw material balances optimize plant operations, and provide ready to ship inventory to certain customers to reduce lead times.

Moving to the cash flow statement, for the nine months ended 09/30/2025, net cash used in operating activities totaled $2,900,000. As compared with $3,000,000 used in the same period in 2024. The timing of revenue shipments as well as and vendor payments impacted operating cash flows for the periods. As noted above, we use EBITDA as well as adjusted EBITDA which does not reflect restructuring charges as key performance indicators to manage our business. While EBITDA and adjusted EBITDA are not GAAP measures, we believe these provide meaningful information regarding underlying core business financial performance. In the press release, we have provided a reconciliation of our financial performance determined in accordance with US generally accepted accounting principles and EBITDA as well as adjusted EBITDA.

For the quarter ended 09/30/2025, adjusted EBITDA was $1,300,000 as compared with a $143,000 in the same period in 2024. This significant improvement in adjusted EBITDA from the prior year quarter reflects the positive impacts of our restructuring activities as well as improved efficiencies and productivity in our manufacturing facilities as noted in Jay’s prior comments. In our press release issued today, we presented non GAAP results, including trailing twelve months financial data and EBITDA. For the twelve month period ended 09/30/2025, net sales were a $116,700,000. As compared with $135,600,000 for the twelve month period ended 09/30/2024. In adjust in addition addition, adjusted EBITDA for the twelve month period ended 09/30/2025 was $700,000 as compared with $5,900,000 for the twelve month period ended 09/30/2024.

As we have noted over the past year, we have experienced revenue and resulting earning headwinds from the change in customer ordering patterns in the knuckle device customers post COVID rebalancing of inventory levels, and delays in aerospace and defense for programs moved from blue earth to Bemidji. We firmly believe that we have overcome these headwinds as demonstrated by our financial results over the past two quarters and are very optimistic about the remainder of 2025 and 2026. Our top financial prior priorities remain unchanged. First, we’re extremely focused on continuing to strengthen our balance sheet including our plan to to further reduce our inventory investments in 2025 as well as close a new asset backed line of credit in early twenty twenty six.

Next, we are focusing on driving efficiencies in our manufacturing processes especially for those programs we have transferred over the past year to new facilities. To deliver sustainable, long term EBITDA growth as well as driving improvements in free cash flow. Believe our performance over the past few quarters reflects the outcome of our hard work. With that, I’ll turn it back over to Jay for his closing comments. Jay? Thanks, Andy. Before we open the call up to your questions, I want to highlight once again three related areas that together serve our customers and help advance Northex corporate stewardship. Nortech’s engineering expertise, product innovation focus, and sustainability plans. As for engineering expertise, we have a dedicated engineering services team focused on optimizing manufacturability, serviceability, supply chain risk mitigation, and cost efficiency for our customers.

Our three tiered cost structure across The US, Mexico and China allows us to quickly adapt our global engineering resources to fit our customers’ changing needs. A core goal of our long term strategic plan focuses on unique innovation This is somewhat unusual for most contract manufacturers. Nortech’s engineering capabilities and innovation skills advance our research and development activities, especially in fiber optic technology including power over fiber. By transmitting power over optical fiber cable, NORTEC eliminates the need for a separate local power source on cables that are used in medical devices and imaging where electromagnetic interference or EMI, must be minimized. Additionally, in satellites, aircraft, or military fiber can deliver power to isolated or shielded components, where EMI is also a concern.

At the simplest level, the vast majority of Nortex products provide custom, complex, custom digital connectivity solutions that transmit data and power in various applications. These components, in turn, enable connected devices and sensors to collect, parse, transmit, and receive data. More and more often today, that data is being evaluated and analyzed using human intelligence as well as combined artificial and human intelligence for improved performance. Data management for our customers and for their customers. For Nortech, we see AI capabilities as a clear opportunity to streamline and improve our processes. Make our employees more productive, and serve our customers better. Our pivot to more fiber optic technology improves product performance for our customers by offering unparalleled speed and reliability.

It also aligns with global sustainability goals we share with many of those

Jay Miller: customers.

Andy LaFrentz: When compared with traditional copper, fiber optics offer dramatic environmental benefits both during production and operations, including improved energy efficiency and less material usage. While significantly decreasing the carbon footprint of the complex cables we manufacture. Nortech’s aerospace and defense customers are exploring fiber optic technology due to these key advantages. Reduced size, weight, and power requirements, immunity to electromagnetic magnetic interference, and greater ruggedization in harsh environments. Harsh environments, of course, are very common for aerospace and defense applications. Nortech has a proud history of serving these customers’ unique needs dating back roughly thirty years. It’s the smallest of our four core markets by net sales, but is our fastest growing segment, and it’s very important for both diversification and future growth.

Our contributions to our national defense are a source of great pride for the NORTEC team. Every year we make a point of recognizing Nortech’s veterans, and all the veterans in our families and communities as we did this past Tuesday on Veterans Day. Most of the cables we produce today for aerospace and defense applications are traditional cable cables common in legacy defense systems such as shipboard missile launchers for the Navy. In conversations with our aerospace and defense customers, we see increasing interest in more modern warfare components such as ruggedized fiber optics, MT, 38 triple nine connectors, which would be applied in wearable technology and tethered drones among other uses. Nortech is well positioned to capitalize on this increase increasing interest with our advanced fiber optic capabilities.

Our technologies align perfectly with the industry’s move toward more efficient, and reliable fiber optic solutions to provide AMI immune high speed data transmission and power delivery in all in one cape hybrid cable. By integrating digital diagnostics with fiber optic cables, we are able to generate real time cable and system performance data. These digital diagnostic cables advance our customers’ ability to monitor their systems and devices, to evolve from preventing preventive maintenance to predictive maintenance to minimize downtime and costs. Our intellectual property in fiber optic and digital technologies, Nortech is well aligned with projected future demand for fiber products. We’re also taking a forward looking stance on materials.

Shifting focus from copper to fiber to mitigate cost pressures and align with our long term strategy to produce lighter, faster, more sustainable and more affordable technology. In closing, we are excited about technological developments across all of our markets and expect them to support continued sales momentum in 2025 and beyond. Aided by stabilization in the supply chain and customer orders. As we wrap up our prepared remarks, let me summarize three takeaways from today’s call. First, we are operationally and financially realizing positive results from our restructuring activities in 2024 and early twenty twenty five. Second, we remain cautiously optimistic of our positioning in the near shoring landscape. And finally, we are making investments in our capabilities to leverage future growth.

We’ll now open up the line open up the call for your questions. Paul? Go ahead and open up the lines.

Operator: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. You may press 2 if you would like to remove your question from the queue. The star keys. One moment please while we poll for questions. Once again, that’s 1 if there are any questions today. And there were no questions from the line. And I will now turn the call back to Jay Miller closing remarks.

Andy LaFrentz: Thank you, Paul, and thanks to everyone for joining us today. We look forward to talking to you in March when we report our fourth quarter twenty twenty five results. Again, thank you, and goodbye.

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