Nortech Systems(NSYS) - 2021 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents Nortech Systems' unaudited condensed consolidated financial statements, including statements of operations, balance sheets, cash flows, shareholders' equity, and detailed accounting notes for periods ended September 30, 2021 and 2020 Key Financial Highlights (in thousands) | Metric | Q3 2021 | Q3 2020 | % Change (QoQ) | 9M 2021 | 9M 2020 | % Change (YoY) | | :-------------------------------- | :------ | :------ | :------------- | :------ | :------ | :------------- | | Net Sales | $29,452 | $26,362 | 11.7% | $81,706 | $80,263 | 1.8% | | Gross Profit | $8,041 | $1,962 | 309.8% | $13,187 | $7,927 | 66.4% | | Net Income | $3,557 | $1,971 | 80.5% | $2,188 | $1,985 | 10.2% | | Net Income Per Common Share - Basic | $1.33 | $0.74 | 79.7% | $0.82 | $0.75 | 9.3% | | Net Income Per Common Share - Diluted | $1.24 | $0.73 | 69.9% | $0.78 | $0.74 | 5.4% | Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | % Change | | :-------------------------- | :----------- | :----------- | :------- | | Total Assets | $66,513 | $57,634 | 15.4% | | Total Liabilities | $45,477 | $38,916 | 16.8% | | Total Shareholders' Equity | $21,036 | $18,718 | 12.4% | | Current Assets | $51,134 | $41,037 | 24.6% | | Current Liabilities | $32,881 | $19,536 | 68.3% | Cash Flow Highlights (in thousands) | Metric | 9M 2021 | 9M 2020 | Change | | :------------------------------------ | :------ | :------ | :----- | | Net Cash Used In Operating Activities | $(2,852) | $(99) | $(2,753) | | Net Cash (Used In) Provided By Investing Activities | $(621) | $5,597 | $(6,218) | | Net Cash Provided By (Used In) Financing Activities | $1,352 | $(4,464) | $5,816 | | Net Change in Cash | $(2,121) | $1,034 | $(3,155) | | Cash - Ending of Period | $1,443 | $1,694 | $(251) | - Employee Retention Credit (ERC): Recognized $5,209k related to ERC as a reduction of associated costs (cost of goods sold, selling, and general and administrative expenses) for the nine months ended September 30, 2021[27] - Intangible Asset Abandonment: Recognized a $560k loss on abandonment of the Devicix tradename in the three months ended September 30, 2021[32] - Customer Concentration: For Q3 2021, two customers accounted for 36% of net sales, and at September 30, 2021, two customers represented approximately 36% of total accounts receivable[42] - PPP Loan: Applied for forgiveness of the $6,077k Promissory Note under the Paycheck Protection Program in the third quarter of 2021[57] - Covenant Compliance: The company met all covenants under its credit agreement with Bank of America for the period ended September 30, 2021[55] Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Condensed Consolidated Balance Sheets Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Shareholders' Equity Condensed Notes to Consolidated Financial Statements NOTE 1. Summary of Significant Accounting Policies NOTE 2. Concentration of Credit Risk and Major Customers NOTE 3. Revenue NOTE 4. Financing Arrangements NOTE 5. Leases NOTE 6. Income Taxes NOTE 7. Restructuring Charges NOTE 8. Related Party Transactions Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations Management discusses the company's financial condition and results of operations, covering business overview, recent developments, operating performance, liquidity, capital resources, and critical accounting policies - Business Overview: Nortech Systems is a full-service electronics manufacturing services (EMS) contract manufacturer, providing wire and cable assemblies, PCB assemblies, and box builds, primarily serving the medical, aerospace and defense, and industrial equipment markets[72] - COVID-19 Impact: Operations continued with safety measures, but the full extent of the pandemic's impact on business, financial condition, and results remains uncertain due to ongoing supply chain and workforce shortages[73][74] - Facility Consolidation: The closure of the Merrifield, Minnesota production facility was completed in Q1 2021, with manufacturing shifted to other Minnesota locations[76] - Government Aid: Applied for forgiveness of the $6.1 million PPP Promissory Note in Q3 2021 and expects to receive approximately $5.2 million in Employee Retention Credits (ERC) for Q1 and Q2 2021, which reduced payroll and benefit costs[77][78] Net Sales by Market (in thousands) | Market | Q3 2021 | Q3 2020 | % Change (QoQ) | 9M 2021 | 9M 2020 | % Change (YoY) | | :-------------------- | :------ | :------ | :------------- | :------ | :------ | :------------- | | Medical | $16,978 | $14,218 | 19.4% | $45,389 | $42,753 | 6.2% | | Aerospace and Defense | $3,092 | $6,206 | (50.2)% | $10,540 | $15,509 | (32.0)% | | Industrial | $9,382 | $5,938 | 58.0% | $25,777 | $22,001 | 17.2% | | Total Net Sales | $29,452 | $26,362 | 11.7% | $81,706 | $80,263 | 1.8% | 90-day Shipment Backlog by Market (in thousands) | Market | Sep 30, 2021 | Jun 30, 2021 | Sep 30, 2020 | % Change (QoQ) | % Change (YoY) | | :-------------------- | :----------- | :----------- | :----------- | :------------- | :------------- | | Medical | $19,666 | $18,879 | $11,483 | 4.2% | 71.3% | | Aerospace and Defense | $8,568 | $5,981 | $6,764 | 43.3% | 26.7% | | Industrial | $10,657 | $9,874 | $4,860 | 7.9% | 119.3% | | Total Backlog | $38,891 | $34,734 | $23,108 | 12.0% | 68.3% | - Gross Profit Margin: Improved significantly to 27.3% in Q3 2021 (from 7.4% in Q3 2020) and 16.1% in 9M 2021 (from 9.9% in 9M 2020), primarily due to the $4.7 million ERC reduction in payroll and medical expenses and increased utilization[86] - Operating Expenses: Selling expenses decreased due to ERC. General and administrative expenses decreased in Q3 2021 due to ERC but increased in 9M 2021 due to higher professional service fees. Research and development expenses were $0.3 million for 9M 2021, up from minimal expenses in 2020[87][88][89] - Liquidity and Capital Resources: Management believes cash from operations, available funds under the Bank of America credit agreement, expected ERC funds, and cash on hand will be adequate to meet liquidity needs, despite ongoing COVID-19 uncertainties. Net cash used in operating activities for 9M 2021 was $2.9 million, driven by increased working capital and inventory[94][95] Overview Recent Developments Results of Operations Net Sales Backlog Gross Profit Selling Expense General and Administrative Expense Research and Development Expense Restructuring Charges Loss on Abandonment of Intangible Asset Income Taxes Net Income Liquidity and Capital Resources Off-Balance Sheet Arrangements Critical Accounting Policies and Estimates Forward-Looking Statements Item 3. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to the company, though various market risks like volatility, supply chain disruptions, and raw material cost instability are implicitly relevant - Not Applicable: The company states that quantitative and qualitative disclosures about market risk are not applicable[107] - Identified Market Risks (from surrounding text): - Volatility in market supply, demand, or currency exchange rates - Supply chain disruption and unreliability due to COVID-19 - Lack of sufficient human resources - Increased competition or OEMs ceasing outsourcing - Increases in raw material costs (e.g., copper, oil) - Commodity and energy cost instability - General economic, financial, and business conditions - Outbreaks of epidemic, pandemic, or contagious diseases[107] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures, concluding they were effective, with no material changes in internal control over financial reporting during the quarter - Disclosure Controls and Procedures: Management, with the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures and concluded they were effective as of the end of the reporting period[108] - Internal Control Over Financial Reporting: There were no material changes in internal control over financial reporting during the most recently completed fiscal quarter[109] Evaluation of Disclosure Controls and Procedures Changes in Internal Control Over Financial Reporting PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is subject to various legal proceedings and claims that arise in the ordinary course of business - The company is subject to various legal proceedings and claims that arise in the ordinary course of business[112] Item 1A. Risk Factors This section refers to risk factors from the 2020 Annual Report on Form 10-K, noting no material changes other than those specified - Refers to risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020[113] - No material changes in risk factors from the Annual Report on Form 10-K, other than as noted[113] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds The company's share repurchase program has expired, and no additional amounts are available for repurchase as of September 30, 2021 - The share repurchase program expired as of September 30, 2021, with no additional amounts available for repurchase[114] Item 3. Defaults on Senior Securities There are no defaults on senior securities to report - No defaults on senior securities[115] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[116] Item 5. Other Information There is no other information to report under this item - No other information[117] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the Chief Executive Officer and Chief Financial Officer, and financial statements formatted in Inline XBRL - Exhibits include CEO and CFO certifications (31.1, 31.2, 32), financial statements in Inline XBRL (101), and the Cover Page Interactive Data File (104)[119] SIGNATURES