UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
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 as of May 6, 2024 was
TABLE OF CONTENTS
| PART I – FINANCIAL INFORMATION | |||
| PAGE | |||
| Item 1 | - | Financial Statements | |
| Condensed Consolidated Statements of Operations and Comprehensive Income | 3 | ||
| Condensed Consolidated Balance Sheets | 4 | ||
| Condensed Consolidated Statements of Cash Flows | 5-6 | ||
| Condensed Consolidated Statements of Shareholders’ Equity | 7 | ||
| Condensed Notes to Consolidated Financial Statements | 8-15 | ||
| Item 2 | - | Management’s Discussion and Analysis of Financial Condition And Results of Operations | 15 |
| Item 3 | - | Quantitative and Qualitative Disclosures About Market Risk | 19 |
| Item 4 | - | Controls and Procedures | 20 |
| PART II – OTHER INFORMATION | |||
| Item 1 | - | Legal Proceedings | 21 |
| Item 1A. | - | Risk Factors | 21 |
| Item 2 | - | Unregistered Sales of Equity Securities, Use of Proceeds | 21 |
| Item 3 | - | Defaults on Senior Securities | 21 |
| Item 4 | - | Mine Safety Disclosures | 21 |
| Item 5 | - | Other Information | 21 |
| Item 6 | - | Exhibits | 22 |
| SIGNATURES | 23 | ||
PART
ITEM 1. FINANCIAL STATEMENTS
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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THREE MONTHS ENDED |
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MARCH 31, |
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2024 |
2023 |
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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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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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Total other expense |
( |
) | ( |
) | ||||
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Income before income taxes |
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Income tax expense |
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Net income |
$ | $ | ||||||
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Income per common share: |
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Basic |
$ | $ | ||||||
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Weighted average number of common shares outstanding - basic |
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Diluted |
$ | $ | ||||||
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Weighted average number of common shares outstanding - dilutive |
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Other comprehensive income |
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Foreign currency translation (loss) gain |
( |
) | ||||||
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Comprehensive income, net of tax |
$ | $ | ||||||
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2024 AND DECMEBER 31, 2023
(IN THOUSANDS, EXCEPT SHARE DATA)
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MARCH 31, 2024 |
DECEMBER 31, 2023(1) |
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ASSETS |
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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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Inventories, net |
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Contract assets |
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Prepaid assets and other assets |
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Total current assets |
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Property and equipment, net |
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Operating lease assets, net |
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Deferred tax assets |
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Other intangible assets, net |
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Total assets |
$ | $ | ||||||
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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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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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 of current portion |
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Long-term operating lease obligations, net of current portion |
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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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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 as of December 31, 2023 has been derived from the consolidated audited financial statements at that date.
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
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THREE MONTHS ENDED |
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MARCH 31, |
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2024 |
2023 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by (used in) 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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Change in accounts receivable allowances |
( |
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Other, net |
( |
) | ( |
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Changes in current operating assets and liabilities: |
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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 current assets |
( |
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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 |
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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 exercises |
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Net cash provided by (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 period |
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Cash and cash equivalents - end of period |
$ | $ | ||||||
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Reconciliation of cash and restricted cash reported within the condensed 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 condensed consolidated statements of cash flows |
$ | $ | ||||||
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
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THREE MONTHS ENDED |
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MARCH 31, |
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2024 |
2023 |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
$ | $ | ||||||
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Cash paid 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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Operating lease assets acquired under operating lease |
$ | $ | ||||||
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements.
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
(IN THOUSANDS)
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Accumulated |
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Additional |
Other |
Total |
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Preferred Stock |
Common Stock |
Paid-In |
Comprehensive |
Retained |
Shareholders’ |
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Shares |
Amount |
Shares |
Amount |
Capital |
Loss |
Earnings |
Equity |
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Balance as of 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 (Current expected credit loss) |
( |
) | ( |
) | ||||||||||||||||||||||||||||
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Balance as of March 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||||||
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Balance as of December 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||||||
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Net income |
- | - | ||||||||||||||||||||||||||||||
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Foreign currency translation adjustment |
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||
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Compensation on stock-based awards |
- | - | ||||||||||||||||||||||||||||||
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Issuance for stock-based awards |
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Balance as of March 31, 2024 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||||||
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
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the Company has omitted footnote disclosures that would substantially duplicate the disclosures contained in the Company’s audited consolidated financial statements. These unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements for the year ended December 31, 2023, and notes thereto included in our Annual Report on Form 10-K as filed with the SEC.
The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. All dollar amounts are stated in thousands of U.S. dollars.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated financial statements. Estimates also affect the reported amounts of net sales and expenses during each reporting period. Significant items subject to estimates and assumptions include the valuation allowance for inventories, accounts receivable allowances, realizability of deferred tax assets and long-lived asset recovery. Actual results could differ from those estimates.
Recently Issued New Accounting Standards
In November 2023, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting Topic (280): Improvements to Reportable Segment Disclosure. The ASU supplements reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its Consolidated Financial Statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU enhances the transparency and decision usefulness of income tax disclosures and is effective for annual periods beginning after December 15, 2024 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this ASU on its Consolidated Financial Statements and related disclosures.
Out‐of‐Period Correction
During the first quarter of 2024, we identified an error that understated our accrued liabilities by approximately $
Inventories
Inventories are as follows:
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March 31, |
December 31, |
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2024 |
2023 |
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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 inventories |
$ | $ | ||||||
Other Intangible Assets
Other intangible assets as of March 31, 2024 and December 31, 2023 are as follows:
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Customer Relationships |
Patents |
Total |
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Balances as of January 1, 2023 |
$ | $ | $ | |||||||||
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Amortization |
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Balances as of December 31, 2023 |
$ | $ | $ | |||||||||
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Amortization |
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Balances as of March 31, 2024 |
$ | $ | $ | |||||||||
Intangible assets are amortized on a straight-line basis over their estimated useful lives. The weighted average remaining amortization period of our intangible assets is
Amortization expense of finite life intangible assets for both the three months ended March 31, 2024 and 2023 was $
As of March 31, 2024, estimated future annual amortization expense (except projects in process) related to these assets is as follows:
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Year |
Amount |
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2024 |
$ | |||
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2025 |
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2026 |
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2027 |
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2028 |
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Thereafter |
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Total |
$ | |||
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 assets. With regard to cash, we maintain our excess cash balances in checking accounts at primarily two financial institutions, in the United States and in China. The account in the United States may at times exceed federally insured limits. The Company’s $
We have certain customers whose revenue individually represented 10% or more of net sales, or whose accounts receivable balances individually represented 10% or more of gross accounts receivable. customers accounted for
As of March 31, 2024, customers represented approximately
Contract assets for customers accounted for
Export sales from the U.S. represented approximately
NOTE 3. REVENUE
Revenue Recognition
Revenue under contract manufacturing agreements that was recognized over time accounted for approximately
Contract Assets
Contract assets, recorded as such in the Condensed 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, 2024 were as follows:
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Balances as of January 1, 2024 |
$ | |||
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Increase (decrease) attributed to: |
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Amounts transferred over time to contract assets |
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Amounts invoiced during the period |
( |
) | ||
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Balance outstanding as of March 31, 2024 |
$ |
We expect substantially all of the remaining performance obligations for the contract assets recorded as of March 31, 2024, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.
The following tables summarize our net sales by market for the three months ended March 31, 2024 and 2023, respectively:
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Three Months Ended March 31, 2024 |
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Product/ Service Transferred Over Time |
Product Transferred at Point in Time |
Noncash Consideration1 |
Total Net Sales by Market |
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Medical |
$ | $ | $ | $ | ||||||||||||
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Aerospace and defense |
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Industrial |
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Total net sales |
$ | $ | $ | $ | ||||||||||||
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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 Consideration1 |
Total Net Sales by Market |
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Medical |
$ | $ | $ | $ | ||||||||||||
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Aerospace and defense |
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Industrial |
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Total net sales |
$ | $ | $ | $ | ||||||||||||
1
NOTE 4. FINANCING ARRANGEMENTS
We had a credit agreement with Bank of America, which was entered into on June 15, 2017 and provides for a line of credit arrangement of $
On February 29, 2024, we replaced the asset backed line of credit agreement with a $
The Revolver requires the Company to maintain no more than
Amounts borrowed on the Revolver are subject to variations in the SOFR index rate. Under the prior credit agreement with Bank of America, the line of credit borrowing availability was restricted by a defined asset borrowing base, and interest was based on 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 is shown net of debt issuance costs 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. As of March 31, 2024, 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 |
2024 |
2023 |
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|
Operating lease cost |
$ | $ | ||||||
|
Finance lease interest cost |
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Finance lease amortization expense |
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Total lease cost |
$ | $ | ||||||
Supplemental condensed consolidated balance sheet information related to leases was as follows:
|
Balance Sheet Location |
March 31, 2024 |
December 31, 2023 |
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Assets |
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Finance lease assets |
Property and equipment, net |
$ | $ | ||||||
|
Operating lease assets |
Operating lease assets, net |
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Total leased assets |
$ | $ | |||||||
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Liabilities |
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Current |
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|
Current finance lease liabilities |
Current portion of finance lease obligations |
$ | $ | ||||||
|
Current operating lease liabilities |
Current portion of operating lease obligations |
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Noncurrent |
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Long-term finance lease liabilities |
Long-term finance lease liabilities, net of current portion |
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Long-term operating lease liabilities |
Long-term operating lease obligations, net of current portion |
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|
Total lease liabilities |
$ | $ | |||||||
Supplemental condensed consolidated statement of cash flows information related to leases was as follows:
|
March 31, |
March 31, |
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|
2024 |
2023 |
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Operating Leases |
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Cash paid for amounts included in the measurement of lease liabilities |
$ | $ | ||||||
|
Property acquired under operating lease |
$ | $ | ||||||
Future payments of lease liabilities as of March 31, 2024 were as follows:
|
Operating Leases |
Finance Leases |
Total |
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|
2024 |
$ | $ | $ | |||||||||
|
2025 |
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2026 |
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2027 |
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|
2028 |
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|
Thereafter |
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|
Total lease payments |
$ | $ | $ | |||||||||
|
Less: imputed interest |
( |
) |
( |
) | ( |
) |
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|
Present value of lease liabilities |
$ | $ | $ | |||||||||
The lease term and discount rate as of March 31, 2024 were as follows:
|
Weighted-average remaining lease term (years) |
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|
Operating leases |
||||
|
Finance leases |
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|
Weighted-average discount rate |
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|
Operating leases |
% |
|||
|
Finance leases |
% |
NOTE 6. STOCK BASED AWARDS
Stock-based compensation expense was reported as follows in the condensed consolidated statements of operations within General and Administration expenses of $
Stock Options
In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of
There were stock options granted during both the three months ended March 31, 2024 and 2023.
Total compensation expense related to stock options was $
Following is the status of option activity for the three months ended and as of March 31, 2024:
|
Shares |
Weighted- Average Exercise Price Per Share |
Weighted- Average Remaining Contractual Term |
Aggregate Intrinsic Value |
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|
Outstanding – December 31, 2023 |
$ | $ | ||||||||||||||
|
Granted |
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Exercised |
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Forfeited |
( |
) | ||||||||||||||
|
Outstanding – March 31, 2024 |
$ | $ | ||||||||||||||
|
Exercisable on March 31, 2024 |
$ | $ | ||||||||||||||
Restricted Stock Units
During the periods ended March 31, 2024 and 2023, we granted
Following is the status of restricted stock activity for the three months ended and as of March 31, 2024:
|
Shares |
Weighted- Average Remaining Contractual Term |
Aggregate Intrinsic Value |
||||||||||
|
Outstanding – December 31, 2023 |
$ | |||||||||||
|
Granted |
||||||||||||
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Vested |
( |
) | ||||||||||
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Forfeited |
||||||||||||
|
Outstanding – March 31, 2024 |
$ | |||||||||||
NOTE 7. NET INCOME PER SHARE DATA
Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding using the treasury stock method during the period. The Company’s potentially dilutive common shares are those that result from dilutive common stock options and non-vested stock relating to restricted stock units.
The calculation of diluted income per share excluded
|
Three Months Ended March 31, |
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(In thousands) |
2024 |
2023 |
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|
Basic weighted average shares outstanding |
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|
Dilutive effect of outstanding stock options and non-vested restricted stock units |
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|
Diluted weighted average shares outstanding |
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NOTE 8. 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.
Our effective tax rate for the three months ended March 31, 2024 was
NOTE 9. PAYROLL TAX DEFERRAL
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law which allowed for the deferral of the employer portion of social security taxes incurred through the end of calendar 2020. During the year ended December 31, 2023, the Company remitted $
NOTE 10. RELATED PARTY TRANSACTIONS
David Kunin, our Chairman, is a minority owner of Abilitech Medical, Inc. We have accounts receivable related to Abilitech of $
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 has an agreement 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 Conditions 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, complex higher-level assemblies and other box builds for a wide range of industries. We serve three major markets within the EMS industry: Medical, Aerospace and Defense, and the Industrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and gas. As of March 31, 2024, we have facilities in Minnesota: Bemidji, Blue Earth, Mankato, Milaca and Maple Grove. We also have facilities in Monterrey, Mexico and Suzhou, China.
Results of Operations
Net Sales. Net sales for the three months ended March 31, 2024 and 2023 were $34,215 thousand and $34,888 thousand, respectively, a decrease of $673 thousand or 2%. The following is a summary of net sales by our major industry markets:
| Three Months Ended March 31, | ||||||||||||||||
| (in thousands) | 2024 | 2023 | Increase (Decrease) | |||||||||||||
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Medical |
$ | 20,282 | $ | 21,372 | $ | (1,090 | ) | (5.1 | )% | |||||||
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Industrial |
8,073 | 9,472 | (1,399 | ) | (14.8 | )% | ||||||||||
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Aerospace and defense |
5,860 | 4,044 | 1,816 | 44.9 | % | |||||||||||
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Total net sales |
$ | 34.215 | $ | 34,888 | $ | (673 | ) | (1.9 | )% | |||||||
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Medical: Net sales to our medical customers were $20,282 thousand in the first quarter of 2024, a 5.1% decrease from $21,372 thousand in the prior-year quarter. The decrease in net sales relates to demand fluctuations as customers work through inventory. |
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Industrial: Net sales to our industrial customers were $8,073 thousand in the first quarter of 2024, a 14.8% decrease from $9,472 thousand in the prior-year quarter. The decrease in net sales relates to demand fluctuations as customers work through inventory. |
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Defense: Net sales to our aerospace and defense customers were $5,860 thousand in the first quarter of 2024, a 44.9% increase from $4,044 thousand in the prior-year quarter. The increase in net sales relates to increasing demand in the aerospace and defense market and improved access to component parts which allowed increased manufacturing production. |
Backlog. Our 90-day shipment backlog as of March 31, 2024 was $35,213 thousand, level with the beginning of the quarter and a 4.1% increase from March 31, 2023. Our 90-day 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 total order backlog as of March 31, 2024 was $86,001 thousand, a 6.2% decrease from $91,684 thousand at the beginning of the quarter and a 13.0% decrease from March 31, 2023. As the supply chain continues to normalize, lead times are reducing and customers are returning to their pre-pandemic ordering practices, which has resulted in a decrease in our backlog. Our 90-day order backlog by market has remained flat when compared to the prior quarter and increased relative to the same period of the prior year. More recently we are also noting, similar to many other contract manufactures, reduced visibility to revenues in the next several quarters as compared with order patterns in the prior-year quarters as customers are balancing their inventories and therefore, deferring the placement of some orders.
90-day shipment and total backlog by our major industry markets are as follows (in thousands):
| (in thousands) | March 31, 2024 | December 31, 2023 | March 31, 2023 | |||||||||||||||||||||
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90 Day |
Total |
90 Day |
Total |
90 Day |
Total |
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Medical |
$ | 16,995 | $ | 40,201 | $ | 18,107 | $ | 47,593 | $ | 20,587 | $ | 49,817 | ||||||||||||
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Industrial |
8,200 | 15,184 | 8,644 | 13,857 | 7,776 | 20,530 | ||||||||||||||||||
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Aerospace and defense |
10,018 | 30,616 | 8,416 | 30,234 | 5,355 | 28,458 | ||||||||||||||||||
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Total backlog |
$ | 35,213 | $ | 86,001 | $ | 35,167 | $ | 91,684 | $ | 33,718 | $ | 98,805 | ||||||||||||
The 90-day and total backlog as of March 31, 2024 contain the contract asset value of $14,194 thousand which has been recognized as net sales.
Operating Costs and Expenses.
Net sales, cost of goods sold, gross margin, and operating costs were as follows:
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Three Months Ended March 31, |
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(Dollars in thousands) |
2024 |
2023 |
Increase/(Decrease) |
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Net sales |
$ | 34,215 | $ | 34,888 | $ | (673 | ) | (2.0 | )% | ||||||||
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Cost of goods sold |
28,767 | 29,404 | (637 | ) | (2.0 | )% | |||||||||||
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Gross profit |
5,448 | 5,484 | (36 | ) | (2.0 | )% | |||||||||||
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Gross margin percentage (1) |
15.9 | % | 15.7 | % | 20 |
bpc(2) |
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Selling expenses |
805 | 890 | (85 | ) | (11.1 | )% | |||||||||||
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% of Net sales |
2.3 | % | 2.6 | % | |||||||||||||
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General and administrative expenses |
3,170 | 3,265 | (96 | ) | 3.0 | % | |||||||||||
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% of Net sales |
9.3 | % | 9.5 | % | |||||||||||||
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Research &development expense |
318 | 276 | 42 | 0.0 | % | ||||||||||||
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% Net sales |
0.9 | % | 0.8 | % | |||||||||||||
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Operating income |
1,155 | 1,053 | 102 | 9.1 | % | ||||||||||||
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% Net sales |
3.4 | % | 3.0 | % | |||||||||||||
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(1) |
Gross margin percentage is defined as gross profit as a percentage of net sales. |
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(2) |
Basis points change in gross margin percentage. |
Gross profit and gross margins. Gross profit as a percent of net sales was 15.9% for the three months ended March 31, 2024. Gross profit as a percent of net sales was 15.7% for the three months ended March 31, 2023. The 20-basis point increase in gross profit as a percentage of net sales for the three months ended March 31, 2024 compared to the same period of the prior year relates primarily to favorable product mix and was net of a $178 thousand, or 16 basis points, catch-up accrual for Mexican statutory benefits.
Selling expenses. Selling expenses for the three months ended March 31, 2024 were $805 thousand or 2.3% of net sales. Selling expenses for the three months ended March 31, 2023 were $890 thousand or 2.6% of net sales. This decrease was driven by the lower revenue in the comparison periods.
General and administrative expenses. General and administrative expenses for the three months ended March 31, 2024 were $3,170 thousand or 9.3% of net sales. General and administrative expenses for the three months ended March 31, 2023 were $3,265 thousand or 9.5% of net sales.
Research and development expense. Research and development expenses were $318 and $276, or 0.9% and 0.8% of net sales, in the three months ended March 31, 2024 and 2023, respectively.
Operating income. Operating income for the three months ended March 31, 2024 was $1,155 thousand or 3.4% of net sales. Operating income for the three months ended March 31, 2023 was $1,053 thousand or 3.0% of net sales.
Other expense
Interest expense. Interest expense was $167 thousand for the three months ended March 31, 2024 and $110 thousand for the three months ended March 31, 2023. This increase was driven by higher interest rates. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements.
Income taxes. We reported income tax expense of $223 thousand and $262 thousand for the three months ended March 31, 2024 and 2023, respectively. Our effective tax rate was 22.6% and 27.8% for the three months ended March 31, 2024 and 2023, respectively. The decrease in the effective tax rate is attributable to the application of a valuation allowance during the three-month period ended March 31, 2023 and inclusion of estimated research and development tax credits in the three months ended March 31, 2024, partially offset by increased taxes on foreign entities.
Cash Flow Operating Results
The following is a summary of cash flow results:
|
Three Months Ended March 31, |
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(in thousands) |
2024 |
2023 |
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Cash provided by (used in): |
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Operating activities |
$ | 2,828 | $ | 1,718 | ||||
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Investing activities |
(735 | ) | (496 | ) | ||||
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Financing activities |
274 | (1,073 | ) | |||||
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Effect of exchange rates on changes in cash and cash equivalents |
(14 | ) | 3 | |||||
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Net change in cash and cash equivalents |
$ | 2,353 | $ | 152 | ||||
Operating Activities. Cash provided by operating activities was $2,828 thousand in the first three months of 2024, compared with cash provided of $1,718 thousand in the same prior-year period. Significant changes in operating assets and liabilities affecting cash flows during these periods included:
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Cash provided by accounts receivable and contract assets was $3,502 thousand in the current-year quarter as compared with cash usage of $1,029 thousand in the same prior-year quarter. The improved cash flow in the current year was due to an expected increase in cash collections due to higher sales and the timing of customer payments in the fourth quarter of 2023 as compared with the fourth quarter of 2022. |
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Cash used in inventory was $1,400 thousand in the current-year quarter as compared with cash provided of $1,075 thousand in the prior-year quarter. The increase in the current-year period cash usage was the result of procurement requirements related to a higher 90-day shipment backlog versus the prior-year quarterly period and normal timing variances of inventory purchases. |
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Cash provided by changes in accounts payable and accruals was $632 thousand in the current-year period as compared with cash usage of $555 thousand, primarily related to the timing of cash payments. |
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Cash used in customer deposits was $926 thousand in the current-year quarter as compared with cash provided of $1,315 thousand in the prior-year period. This was driven by decreased lead times in the supply chain. |
Investing Activities. Cash used in investing activities was $735 thousand in the first three months of 2024, compared with cash used of $496 thousand in the same prior-year period, both primarily for capital expenditures.
Financing Activities. Cash provided by financing activities was $274 thousand in the first three months of 2024, compared with cash used of $1,073 thousand in the same prior-year period. The improvement in cash provided by operating activities resulted from the timing of line of credit repayments.
Liquidity and Capital Resources
We believe that our existing financing arrangements, anticipated cash flows from operations 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 had a credit agreement with Bank of America, which was entered into on June 15, 2017 and provided for a line of credit arrangement of $16 million that was to expire on June 15, 2026.
On February 29, 2024, we replaced the asset backed line of credit agreement with a $15 million Senior Secured Revolving Line of Credit with Bank of America (the “Revolver”). The Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also known as “SOFR”, plus a defined margin. If the Company prepays SOFR borrowings before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement. The Company is required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.
The Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage ratio, both of which are defined in the Revolver agreement. The Company met the covenants for the period ended March 31, 2024. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding borrowings. The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027.
Amounts borrowed on the Revolver are subject to variations in the SOFR index rate. Under the prior credit agreement with Bank of America, the line of credit borrowing availability was restricted by a defined asset borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 9.4% and 8.3% as of March 31, 2024 and December 31, 2023, respectively. We had borrowings on our line of credit of $6.2 million and $5.8 million outstanding as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024 we had unused availability on the line of credit of $8.8 million.
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.
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-Q 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, 2023.
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, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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
.
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, 2024, formatted in iXBRL: (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.
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Nortech Systems Incorporated and Subsidiaries |
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Date: May 14, 2024 |
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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 | |||
| Date: May 14, 2024 | by /s/ Andrew D. C. LaFrence | ||
| Andrew D. C. LaFrence | |||
| Chief Financial Officer and Senior Vice President of Finance | |||
| Nortech Systems Incorporated | |||