Record Revenue Up 20% from Prior
Year
Nortech Systems Incorporated (Nasdaq: NSYS) (the "Company"), a
leading provider of engineering and manufacturing solutions for
complex electromedical and electromechanical products serving the
medical, industrial and defense markets, reported 2022 third
quarter results for the period ended September 30, 2022.
2022 Third Quarter
Highlights
- Revenue of $35.3 million, up 19.8% compared to the third
quarter of 2021.
- Gross margin of 17.9%, up 6.5 percentage points compared to
adjusted gross margin of 11.4% in the third quarter of 2021.
- Earnings before interest, taxes, depreciation and amortization
(EBITDA) of $2.4 million, up threefold from adjusted EBITDA of $0.7
million in the third quarter of 2021.
- Quarter-end backlog of $103 million, up more than 31% compared
to the backlog as of September 30, 2021.
- Received a patent for its Flex Faraday Xtreme™ technology, a
flexible printed circuit for reliable transmission of
high-frequency signals.
Management Commentary
“We are pleased to report improved results over the last four
quarters – both on the top and bottom lines. Our dedicated global
team members deserve continued credit for their focused efforts to
manage inventory and optimize supply chain operations across the
U.S., Mexico, and China,” said Jay D. Miller, Chief Executive
Officer and President.
2022 Third Quarter and Year-to-Date
Results (in thousands)
Q3 22
Q3 21 - Adjusted
Percentage Change
YTD 2022
YTD 2021 - Adjusted
Percentage Change
Revenue
$35,276
$29,452
19.8%
$98,505
$81,706
20.6%
Gross Profit
$6,328
$3,371
87.7%
$15,376
$8,518
80.5%
Gross Margin
17.9%
11.4%
6.5 pts
15.6%
10.4%
5.2 pts
EBITDA
$2,417
$735
228%
$4,564
$149
--
Q3 2022 revenue totaled $35.3 million. This represents a 19.8%
increase from Q3 2021 revenue of $29.5 million. For the first three
quarters of 2022, revenue totaled $98.5 million, a 20.6% increase
from the same period of 2021. Net income totaled $1.5 million, or
$0.53 per diluted share, in Q3 2022, down from net income of $3.6
million, or $1.24 per diluted share, in Q3 2021.
Net income in the third quarter of 2021 included several
non-recurring items: $5.2 million for the Employee Retention Credit
(ERC), $560,000 expense for the Devicix trade name abandonment, and
$93,000 gain on sale of the Merrifield facility. As a reminder, the
Company filed an ERC application with the IRS in the third quarter
of 2021 and recognized a one-time $5.2 million reduction to payroll
tax expense. The Company has not received ERC funds as of the date
of this press release.
In the third quarter of 2022, gross profit totaled $6.3 million,
or 17.9%, compared to gross profit of $8.0 million, or 27.3%, in
the prior-year quarter. Cost of goods sold in Q3 2021 included $4.7
million of the ERC with the remaining $540,000 credit reported in
SG&A. Excluding the ERC, adjusted Q3 2021 gross profit totaled
$3.4 million, or 11.4%. Through the first nine months of 2022,
gross profit of $15.4 million, or 15.6%, was up from gross profit
of $13.2 million, or 16.1%, in the first nine months of 2021.
Excluding the ERC, YTD 2021 gross profit would have totaled $8.5
million, or 10.4%. Gross profit improvement was primarily due to
pricing increases implemented to overcome inflationary cost
pressures coupled with higher plant volumes and improved operating
efficiencies.
Third quarter 2022 operating expenses totaled $4.4 million, up
from $4.0 million in the previous quarter and a 38% increase from
third quarter 2021 adjusted operating expenses of $3.2 million. The
increase in year-over-year operating expense was driven in part by
$475,000 in third quarter 2022 research and development costs
compared to $141,000 in the prior-year quarter. Third quarter 2022
R&D expense reflects continued investment in new technologies,
such as the Active Optical Xtreme (AOX) cable platform announced
earlier this year and the previously highlighted Flex Faraday
Xtreme (FFX) technology. Also, a year-over-year increase of
$385,000 in Q3 2022 selling expenses supported the $5.8 million
increase in revenue for the quarter. For the first nine months of
2022, operating expenses totaled $12.2 million, up 21.9% from
operating expenses of $10.0 million in the first three quarters of
2021. In addition to R&D, Nortech is investing in upgrading
essential IT, HR, and analytical capabilities.
Third quarter 2022 EBITDA totaled $2.4 million, a threefold
increase over adjusted EBITDA of $0.7 million in the third quarter
of 2021. For the first nine months of 2022, EBITDA totaled $4.6
million, a significant increase from breakeven adjusted EBITDA
through the first nine months of 2021. Both the quarter and
nine-month increases resulted from the previously discussed revenue
increases during the respective periods.
Business Outlook
“We are optimistic about a strong finish to this year and
carrying that momentum into 2023,” noted Miller. “Monthly bookings
remain strong and the markets we serve are anticipating continued
growth in 2023. That said, we are carefully monitoring potential
macroeconomic headwinds. Nortech will take action as needed to
adapt to changing market conditions while we continue to deliver
the highest quality products to our mission-critical medical,
industrial, and defense customers,” Miller concluded.
Conference Call
The Company will hold a live conference call and webcast at 4:00
p.m. central time on Thursday, November 10, 2022, to discuss the
Company's 2022 third quarter and year-to-date financial results.
The call will be hosted by Jay Miller, Chief Executive Officer and
President and Chris Jones, Chief Financial Officer. To access the
live audio conference call, US participants may call 888-506-0062
and international participants may call 973-528-0011. Participant
Access Code: 776272. Participants may also access the call via
webcast at: https://www.webcaster4.com/Webcast/Page/2814/46617
About Nortech Systems
Incorporated
Nortech Systems is a leading provider of design and
manufacturing solutions for complex electromedical devices,
electromechanical systems, assemblies, and components. Nortech
Systems primarily serves the medical, aerospace & defense, and
industrial markets. Its design services span concept development to
commercial design, and include medical device, software,
electrical, mechanical, and biomedical engineering. Its
manufacturing and supply chain capabilities are vertically
integrated around wire/cable/interconnect assemblies, printed
circuit board assemblies, as well as system-level assembly,
integration, and final test. Headquartered in Maple Grove, Minn.,
Nortech currently has seven manufacturing locations and design
centers across the U.S., Latin America, and Asia. Nortech Systems
is traded on the NASDAQ Stock Market under the symbol NSYS.
Nortech's website is www.nortechsys.com.
Forward-Looking
Statements
This press release contains forward-looking statements made
pursuant to the safe harbor provision of the Private Securities
Litigation Reform Act of 1995 including without limitation
statements regarding bookings, future financial results or trends
in financial results, market growth, our ability to adjust pricing
to combat inflation, revenue and growth contributions due to new
products, technologies and innovations, backlog trends, and
customer demand. While this release is based on management's best
judgment and current expectations, actual results may differ
materially from those expressed or implied and involve a number of
risks and uncertainties. Important factors that could cause actual
results to differ materially from the forward-looking statements
include, without limitation: (1) engineering challenges with new
products, technologies and innovations; (2) our ability to secure
intellectual property rights with respect to new products,
technologies, and innovations; (3) supply chain disruptions leading
to parts shortages for critical components; (4) volatility in
market conditions which may affect market supply of and demand for
the company's products; (5) increased competition; (6) changes in
the reliability and efficiency of operating facilities or those of
third parties; (7) risks related to the availability of labor; (8)
commodity cost increases coupled with our inability to raise prices
charged to our customers; (9) general economic, financial, and
business conditions that could affect the company's financial
condition and results of operations; (10) macroeconomic headwinds
that negatively impact the markets Nortech serves; (11) foreign
exchange risk related to the company’s operations in China. Some of
the above-mentioned factors are described in further detail in the
section entitled "Risk Factors" in our annual and quarterly
reports, as applicable. You should assume the information appearing
in this document is accurate only as of the date hereof, or as
otherwise specified, as our business, financial condition, results
of operations and prospects may have changed since such date.
Except as required by applicable law, including the securities laws
of the United States and the rules and regulations of the United
States Securities and Exchange Commission, we undertake no
obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or
otherwise, to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
Reconciliation of Non-GAAP Financial
Measure
EBITDA is a non-GAAP financial measure. EBITDA is defined as net
income (loss) plus interest expense, net, plus income tax expense
plus depreciation expense and amortization expense. EBITDA should
be considered in addition to, not as a substitute for, or superior
to, financial measures calculated in accordance with GAAP. It is
not a measurement of our financial performance under GAAP and
should not be considered as alternatives to revenue or net income,
as applicable, or any other performance measures derived in
accordance with GAAP and may not be comparable to other similarly
titled measures of other businesses. EBITDA has limitations as an
analytical tool and you should not consider it in isolation or as a
substitute for analysis of our operating results as reported under
GAAP. EBITDA does not reflect the impact of certain cash charges
resulting from matters we consider not to be indicative of ongoing
operations and other companies in our industry may calculate EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
THREE MONTHS ENDED
NINE MONTHS ENDED
September 30,
September 30,
INCOME STATEMENT
Unaudited
Unaudited
Unaudited
Unaudited
2022
2021
2022
2021
Net Sales $
35,276
$
29,452
$
98,505
$
81,706
Cost of Goods Sold
28,948
21,411
83,129
68,519
Gross Profit
6,328
8,041
15,376
13,187
17.9
%
27.3
%
15.6
%
16.1
%
Operating Expenses Selling Expenses
959
449
2,752
1,741
General and Administrative Expenses
2,949
2,045
8,346
7,247
Research and Development Expenses
475
141
1,154
348
Restructuring Expenses
-
23
-
319
Loss on Abandonment of Intangible Assets
560
560
Gain on Sale of Assets
-
(93
)
(15
)
(176
)
Total Operating Expenses
4,383
3,125
12,237
10,039
Income from Operations
1,945
4,916
3,139
3,148
Other Expense Interest Expense
(122
)
(112
)
(337
)
(314
)
Income Before Income Taxes
1,823
4,804
2,801
2,834
Income Tax Expense
289
1,247
411
646
Net Income $
1,534
$
3,557
$
2,391
$
2,188
Net Income Per Common Share - Basic $
0.57
$
1.33
$
0.89
$
0.82
Weighted Average Number of Common Shares Outstanding - Basic
2,686,884
2,665,682
2,683,594
2,662,066
Net Income Per Common Share - Diluted $
0.53
$
1.24
$
0.83
$
0.78
Weighted Average Number of Common Shares Outstanding - Diluted
2,899,526
2,880,073
2,886,073
2,806,958
BALANCE SHEET September 30, 2022 December
31, 2021 Unaudited Audited Cash $
1,300
$
643
Restricted Cash
792
1,582
Accounts Receivable
15,497
14,548
Employee Retention Credit Receivable
5,209
5,209
Inventories, Net
23,610
19,434
Contract Assets
9,886
8,698
Prepaid Expenses and Other Current Assets
1,851
1,660
Property and Equipment, Net
6,457
5,833
Operating Lease Assets
8,079
8,983
Other Intangible Assets, Net
433
501
Total Assets $
73,114
$
67,091
Accounts Payable $
14,701
$
12,710
Lease Obligations, Finance & Operating, Net
9,939
11,255
Accrued Payroll and Commissions
5,116
4,045
Customer Deposits
3,870
2,936
All Other Liabilities
1,479
1,074
Line of Credit
9,826
8,959
Shareholders’ Equity
28,183
26,111
Total Liabilities and Shareholders’ Equity $
73,114
$
67,091
CASH FLOW STATEMENT NINE MONTHS ENDED
September 30, 2022 September 30, 2021 Cash Flows
from Operating Activities Unaudited Unaudited Net
Income $
2,391
$
2,188
Depreciation and Amortization
1,440
1,506
Compensation on Stock-Based Awards
234
201
Change in Accounts Receivable Allowance
(71
)
18
Change in Inventory Reserves
(54
)
(959
)
Loss on Abandonment of Intangible Asset
-
560
Gain on Disposal of Assets
(15
)
(176
)
Employee Retention Credit Receivable
-
(5,209
)
Changes in Current Operating Items Accounts Receivable
(1,115
)
1,686
Inventories
(4,402
)
(5,755
)
Contract Assets
(1,188
)
(2,246
)
Prepaid Expenses and Other Assets
(213
)
(276
)
Accounts Payable
1,659
2,901
Accrued Payroll and Commissions
1,071
1,537
All Other Operating Items
1,262
1,172
Net Cash Used In Operating Activities $
1,000
$
(2,852
)
Cash Flows from Investing Activities Proceeds from
Sale of Property and Equipment
15
626
Purchase of Intangible Asset
(43
)
(49
)
Purchase of Property and Equipment
(1,687
)
(1,198
)
Net Cash Used In Investing Activities $
(1,715
)
$
(621
)
Cash Flows from Financing Activities Net Change in
Line of Credit
857
2,681
Principal Payments on Long-Term Debt
-
(873
)
Principal Payments on Financing Leases
(336
)
(492
)
Stock Option Exercises
51
36
Debt Issuance Costs
10
-
Net Cash Provided By Financing Activities $
582
$
1,352
Net Change in Cash $
(133
)
$
(2,121
)
Cash - Beginning of Period
2,225
3,564
Cash - Ending of Period $
2,092
$
1,443
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30, RECONCILIATION TO
ADJUSTED EBITDA Unaudited Unaudited
Unaudited Unaudited
2022
2021
2022
2021
Net Income $
1,534
$
3,557
2,391
2,188
Interest expense
122
112
337
314
Tax expense
289
1,247
411
646
Depreciation & amortization expense
472
538
1,440
1,506
Loss on Abandonment of Intangible Assets
-
560
-
560
Employee Retention Credit Income
-
(5,209
)
-
(5,209
)
Restructuring expense
-
23
-
319
Gain on asset sale
-
(93
)
(15
)
(176
)
Adjusted EBITDA $
2,417
$
735
4,564
149
THREE MONTHS ENDED September 30, Q3 2021
INCOME STATEMENT - ADJUSTED
Unaudited
Unaudited
As Reported
Adjusted*
2021
2021
Net Sales $
29,452
$
29,452
Cost of Goods Sold
21,411
26,080
Gross Profit
8,041
3,372
% of net sales
27.3
%
11.4
%
Operating Expenses Selling Expenses
449
574
General and Administrative Expenses
2,045
2,459
Research and Development Expenses
141
141
Restructuring Expenses
23
-
Loss on Abandonment of Intangible Assets
560
-
Gain on Sale of Assets
(93
)
-
Total Operating Expenses
3,125
3,174
Income from Operations
4,916
197
% of net sales
16.7
%
0.7
%
* Adjusted to exclude non-recurring events: Employee
Retention Credit, Restructuring Loss on Abandonment of Intangible
Assets, and Gain on Sale of Assets
View source
version on businesswire.com: https://www.businesswire.com/news/home/20221109006073/en/
Chris Jones, CFO cjones@nortechsys.com 952-345-2244
Nortech Systems (NASDAQ:NSYS)
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