Nortech Systems(NSYS) - 2023 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Nortech Systems reported $34.9 million net sales and $681 thousand net income for Q1 2023, with assets at $70.1 million Condensed Consolidated Statements of Operations and Comprehensive Income The company reported a significant increase in net sales and net income for Q1 2023 compared to the prior year Q1 2023 vs Q1 2022 Statement of Operations (in thousands, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Sales | $34,888 | $30,711 | | Gross Profit | $5,484 | $4,044 | | Income From Operations | $1,053 | $169 | | Net Income | $681 | $138 | | Basic EPS | $0.25 | $0.05 | | Diluted EPS | $0.23 | $0.05 | - Net sales increased by 13.7% year-over-year, from $30.7 million to $34.9 million[8] - Net income significantly increased to $681 thousand in Q1 2023, compared to $138 thousand in Q1 2022[8] Condensed Consolidated Balance Sheets Total assets increased to $70.1 million, inventories decreased, and shareholders' equity grew to $28.9 million Balance Sheet Highlights (in thousands) | Metric | March 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $55,569 | $54,860 | | Inventories, Net | $21,344 | $22,438 | | Total Assets | $70,055 | $69,540 | | Total Current Liabilities | $27,449 | $26,398 | | Total Liabilities | $41,150 | $41,460 | | Total Shareholders' Equity | $28,905 | $28,080 | - Inventories decreased from $22.4 million at year-end 2022 to $21.3 million as of March 31, 2023[10] Condensed Consolidated Statements of Cash Flows Operating cash flow remained positive, contributing to a net increase in cash and cash equivalents for the quarter Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Cash Provided By Operating Activities | $1,718 | $1,491 | | Net Cash Used In Investing Activities | ($496) | ($514) | | Net Cash Used In Financing Activities | ($1,073) | ($1,585) | | Net Change in Cash and Cash Equivalents | $152 | ($608) | - Cash and cash equivalents increased by $152 thousand during Q1 2023, ending the period at $2.63 million[12] Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity increased to $28.91 million, primarily driven by the net income reported for the quarter - Total shareholders' equity increased from $28.08 million at the end of 2022 to $28.91 million as of March 31, 2023[15] - The increase in shareholders' equity was primarily driven by net income of $681 thousand for the quarter[15] Condensed Notes to Consolidated Financial Statements Key notes include revenue recognition, customer concentration, CECL adoption, and line of credit details - The majority of revenue (74% in Q1 2023) is recognized over time from contract manufacturing agreements with enforceable payment rights[52] - One major customer accounted for 29% of net sales for the three months ended March 31, 2023, and 24% of gross accounts receivable[47] - The company adopted the new Current Expected Credit Losses (CECL) standard on January 1, 2023, resulting in a $30 thousand decrease to retained earnings[39][42] - As of March 31, 2023, the company had $5.9 million in borrowings on its line of credit and $5.9 million of unused availability[59][62][97] Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations Management attributes Q1 2023 net sales growth to higher production and price increases, improving gross margin, with backlog decreasing Results of Operations Net sales increased 13.7% due to higher production and price adjustments, improving gross profit margin and significantly raising net income - Net sales increased 13.7% to $34.9 million in Q1 2023, driven by higher production volume and price increases to counteract higher material and labor costs[77] Net Sales by Market (in millions) | Market | Q1 2023 | Q1 2022 | % Change | | :--- | :--- | :--- | :--- | | Medical | $21.4 | $15.2 | 40.8% | | Industrial | $9.5 | $8.7 | 9.2% | | Aerospace and Defense | $4.0 | $6.8 | (41.2)% | | Total Net Sales | $34.9 | $30.7 | 13.7% | - Gross profit as a percent of net sales improved to 15.7% in Q1 2023 from 13.2% in Q1 2022, primarily due to price increases and higher production volume[82] - Net income for Q1 2023 was $681 thousand ($0.23 per diluted share), a significant increase from $138 thousand ($0.05 per diluted share) in Q1 2022[90] Backlog Total order backlog decreased to $98.8 million as customers returned to pre-pandemic ordering practices - The 90-day shipment backlog was $33.8 million as of March 31, 2023, a 4.5% decrease from March 31, 2022[79] - Total order backlog as of March 31, 2023, was $98.8 million, a 5.1% decrease from the end of 2022, reflecting a return to pre-pandemic ordering practices[80] Total Order Backlog by Market (in millions) | Market | Mar 31, 2023 | Dec 31, 2022 | Mar 31, 2022 | | :--- | :--- | :--- | :--- | | Medical | $49.8 | $57.1 | $58.5 | | Industrial | $20.5 | $22.5 | $19.1 | | Aerospace and Defense | $28.5 | $24.5 | $20.0 | | Total Backlog | $98.8 | $104.1 | $97.6 | Liquidity and Capital Resources Existing financing, operating cash flows, and ERC funds are expected to cover working capital needs for the next twelve months - The company believes existing financing, cash flows from operations, and expected ERC funds will be sufficient to satisfy working capital needs for the next twelve months[91] - The company has a $16 million line of credit with Bank of America expiring in June 2026, with $5.9 million borrowed and $5.9 million unused availability as of March 31, 2023[93][94][97] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company has indicated that this item is not applicable - Not applicable[105] Item 4. Controls and Procedures Management concluded disclosure controls were effective, with no material changes in internal control over financial reporting - Based on an evaluation as of March 31, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[106] - No changes occurred in the company's internal control over financial reporting during the first quarter that have materially affected, or are reasonably likely to materially affect, these controls[107] PART II - OTHER INFORMATION Item 1. 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[109] Item 1A. Risk Factors There have been no material changes in the risk factors from those disclosed in the prior Annual Report on Form 10-K - There have been no material changes in risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[110] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company's share repurchase program expired as of March 31, 2023, with no additional amounts available for repurchase - The company's share repurchase program has expired as of March 31, 2023[111] Other Items (3, 4, 5) No defaults on senior securities, mine safety disclosures, or other material information to report for the period - Item 3, Defaults on Senior Securities: None[112] - Item 4, Mine Safety Disclosures: Not applicable[113] - Item 5, Other Information: None[114] Item 6. Exhibits The report includes CEO and CFO certifications and financial statements in XBRL format as required exhibits - Exhibits filed include CEO and CFO certifications pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act[116] - Financial statements for the quarter ended March 31, 2023, are provided in XBRL format[116]