Nortech Systems(NSYS) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements Nortech Systems reported a 6.1% decrease in net sales but achieved a net income for the nine months ended September 30, 2020, largely due to a gain on asset sale Condensed Consolidated Statements of Operations (Unaudited) | Metric | Three Months Ended Sep 30, 2020 ($ Thousands) | Three Months Ended Sep 30, 2019 ($ Thousands) | Nine Months Ended Sep 30, 2020 ($ Thousands) | Nine Months Ended Sep 30, 2019 ($ Thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $26,362 | $30,058 | $80,263 | $85,515 | | Gross Profit | $1,646 | $3,635 | $7,092 | $8,921 | | Income (Loss) From Operations | $2,709 | $713 | $3,149 | $(600) | | Net Income (Loss) | $1,971 | $413 | $1,985 | $(1,502) | | Diluted EPS ($) | $0.73 | $0.16 | $0.74 | $(0.56) | Condensed Consolidated Balance Sheets (Unaudited) | Metric | Sep 30, 2020 ($ Thousands) | Dec 31, 2019 ($ Thousands) | | :--- | :--- | :--- | | Total Current Assets | $40,817 | $43,284 | | Total Assets | $59,957 | $61,410 | | Total Current Liabilities | $18,246 | $22,232 | | Total Liabilities | $37,831 | $41,434 | | Total Shareholders' Equity | $22,126 | $19,976 | Condensed Consolidated Statements of Cash Flows (Unaudited) | Metric | Nine Months Ended Sep 30, 2020 ($ Thousands) | Nine Months Ended Sep 30, 2019 ($ Thousands) | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(99) | $(233) | | Net Cash Provided By (Used In) Investing Activities | $5,597 | $(822) | | Net Cash (Used In) Provided By Financing Activities | $(4,464) | $2,063 | Condensed Notes to Consolidated Financial Statements The notes detail accounting policies, key financial events, including a major customer, a sale-leaseback transaction, and a PPP loan - The majority of revenue (approximately 80% for Q3 2020 and 84% for the first nine months of 2020) is recognized over time under contract manufacturing agreements[44] - A single customer with two divisions accounted for approximately 24% of net sales for the nine months ended September 30, 2020, and 37% of total accounts receivable as of that date[39] - In Q3 2020, the company completed a sale and leaseback of its Bemidji and Mankato, Minnesota manufacturing facilities, receiving net proceeds of approximately $6.0 million and recording a gain of $3.8 million[31] - On April 15, 2020, the company received an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program (PPP) with a 1% interest rate and a 2-year term[56] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue declined due to COVID-19, but operating income improved from a sale-leaseback gain, with liquidity managed through cost controls - The company is a full-service electronics manufacturing services (EMS) contract manufacturer serving the aerospace and defense, medical, and industrial equipment markets[63] - The COVID-19 pandemic has impacted operations, but all manufacturing facilities have remained operational, with work-from-home policies and safety measures implemented for essential on-site staff[64] - To improve operational efficiency, the company approved the closure of its Merrifield, Minnesota production facility, expected to be complete by December 31, 2020[67] Net Sales by Market | Market | Q3 2020 ($ Thousands) | Q3 2019 ($ Thousands) | % Change | YTD 2020 ($ Thousands) | YTD 2019 ($ Thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Medical | $14,218 | $17,043 | (16.6)% | $42,753 | $46,006 | (7.1)% | | Industrial | $5,938 | $8,623 | (31.1)% | $22,001 | $26,290 | (16.3)% | | Aerospace and Defense | $6,206 | $4,392 | 41.3% | $15,509 | $13,219 | 17.3% | | Total Net Sales | $26,362 | $30,058 | (12.3)% | $80,263 | $85,515 | (6.1)% | 90-Day Shipment Backlog by Market | Market | Sep 30, 2020 ($ Thousands) | Sep 30, 2019 ($ Thousands) | | :--- | :--- | :--- | | Medical | $11,484 | $17,778 | | Industrial | $4,860 | $8,334 | | Aerospace and Defense | $6,764 | $5,909 | | Total 90-Day Backlog | $23,108 | $32,021 | - Liquidity is being managed through cost reductions, minimizing capital expenditures, and funds from a Bank of America credit agreement, a PPP loan, and a sale-leaseback transaction[85][89] - As of September 30, 2020, the company had $8.6 million of unused availability under its line of credit[85][89] Quantitative and Qualitative Disclosures About Market Risk This section is not applicable for the reporting period - The company has indicated that this disclosure is not applicable[98] Controls and Procedures Management concluded disclosure controls were effective as of September 30, 2020, with no material changes to internal controls - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[99] - No changes in internal control over financial reporting occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls, except for those related to the adoption of the new lease standard (ASC 842)[100] PART II - OTHER INFORMATION Legal Proceedings The company is subject to various legal proceedings and claims arising in the ordinary course of business - The company is subject to various legal proceedings and claims that arise in the ordinary course of business[102] Risk Factors Material risks include ongoing COVID-19 impacts and potential regulatory scrutiny of the Paycheck Protection Program loan - The COVID-19 pandemic is adversely affecting and is expected to continue to affect operations, supply chains, financial condition, and results of operations, leading to reduced sales, supply chain disruption, and reduced customer demand[104] - The company faces risk of regulatory scrutiny from the Small Business Administration (SBA) and U.S. Department of Treasury for its $6.1 million PPP loan[106] - An adverse finding could require repayment of the loan and potentially subject the company to fines and penalties[106] Unregistered Sales of Equity Securities and Use of Proceeds The company's share repurchase program expired as of September 30, 2020 - The company's share repurchase program expired as of September 30, 2020[108] Defaults on Senior Securities There were no defaults on senior securities during the reporting period - None[109] Mine Safety Disclosures This section is not applicable to the company - Not applicable[110] Other Information The company reports no other information for this item - None[111] Exhibits Exhibits filed include the Q3 2020 Earnings Release, CEO/CFO certifications, and XBRL financial data - Exhibits filed include the Q3 2020 Earnings Release, CEO/CFO certifications, and XBRL financial data[113]