Fourth Quarter Revenue Up 6.5% from Prior
Year; Gross Margin Improvement of 6.3 percentage points to
14.3%
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 fourth
quarter and full year results for the period ended December 31,
2022.
2022 Fourth Quarter and Full Year
Highlights
- Fourth quarter 2022 revenue of $35.6 million, up 6.4% compared
to the fourth quarter of 2021.
- Full year revenue of $134.1 million, up 16.5% from 2021.
- Fourth quarter gross margin of 14.3%, up 6.3 percentage points
from gross margin of 8.0% in the fourth quarter of 2021.
- Full year earnings before interest, taxes, depreciation, and
amortization (EBITDA) of $5.8 million, up from the ($0.2) million
EBITDA loss in the prior year period.
- Quarter-end backlog of $104.0 million on December 31, 2022, up
9.6% compared to December 31, 2021.
Management Commentary
“Our double-digit revenue growth last year – culminating with
both a record quarter and record year in revenue – is a credit to
excellent collaboration among our dedicated employees, suppliers
and customers,” stated Jay D. Miller, President & CEO of
Nortech Systems. “Fourth quarter revenue growth is notable in light
of the strong revenue level for the same period in 2021. I want to
thank the entire Nortech team for their contributions to this
achievement.”
“Throughout 2022, we saw a gradual improvement in supply chain
bottlenecks and component lead times,” noted Mr. Miller. “These
improvements enabled customers to slowly reduce their inventory
levels. Our operations are designed to be responsive to fluctuating
demand and economic forces, facilitated by our inventory management
technology and experienced supply chain personnel.”
“For our key strategic customers, across medical, industrial and
defense markets, Nortech’s team members build complex products and
perform highly technical services, often on tight deadlines,”
Miller commented, “Effectively executing this low-volume, high-mix
model differentiates us while helping our customers achieve
world-class quality, delivery and competitiveness.”
2022 Fourth Quarter and Full Year
Results (in thousands)
Q4 22
Q4 21
Change
Full Year 2022
Full Year 2021
Change
Revenue
$35,617
$33,462
6.4%
$134,123
$115,168
16.5%
Gross Profit
$5,103
$2,677
90.6%
$20,480
$11,195
(Note 1)
82.9%
Gross Margin
14.3%
8.0%
6.3 pts
15.3%
9.7%
(Note 1)
5.6 pts
EBITDA
$1,226
($374)
+$1,600
$5,806
($241)
+$6,047
Note 1 - Full year 2021 gross profit
included $4.7 million in CARES Act Employee Retention Credits
(ERC). Net of the ERC, full year 2021 adjusted gross profit would
have totaled $11.2 million or 9.7%.
In the fourth quarter 2022, revenue totaled $35.6 million, a
6.4% increase from revenue in the fourth quarter of 2021. For the
full year 2022, revenue totaled $134.1 million, a 16.5% increase
from revenue in the prior year. In the fourth quarter of 2022,
gross profit totaled $5.1 million, or 14.3%, compared to gross
profit of $2.7 million, or 8.0%, in the fourth quarter of 2021. For
the full year 2022, gross profit totaled $20.5 million, or 15.3%,
compared to gross profit of $15.9 million, or 13.8%, in 2021. Full
year 2021 gross profit included $4.7 million in CARES Act Employee
Retention Credits (ERC). Net of the ERC, full year 2021 adjusted
gross profit would have totaled $11.2 million or 9.7%. Gross profit
improvement was primarily due to pricing increases implemented to
overcome inflationary costs as well as higher plant volumes and
improved operating efficiencies.
Fourth quarter 2022 operating expenses totaled $4.4 million,
flat compared to the prior quarter and a 22.6% increase from fourth
quarter 2021 operating expenses of $3.6 million. The increase in
year-over-year operating expenses was primarily driven by two
expense categories. Research and development costs increased
$174,000 to support new technologies, such as the Active Optical
Extreme (AOXTM) cable platform, improved digital data capabilities
and sustainability programs. Also, a year-over-year increase of
$347,000 in fourth quarter 2022 sales engineering expenses helped
enable the increase in revenue. For the full year 2022, operating
expenses totaled $16.6 million, up 22.1% from operating expenses of
$13.6 million in 2021. In addition to R&D, sales engineering,
and labor inflation, Nortech is investing in upgrading essential
IT, HR, and analytical capabilities.
Full year 2022 income tax expense was $1.5 million compared to
$0.9 million in 2021. The effective tax rate for fiscal 2022 and
2021 was 42% and 12%, respectively. Our 2022 tax rate was driven by
the increase in the valuation allowance from the Tax Cuts and Jobs
Act requirement to capitalize and amortize research and
experimental expenditures in 2022. Our tax rate in 2021 was driven
by the nontaxable PPP loan forgiveness.
Fourth quarter 2022 EBITDA totaled $1.2 million, a significant
increase over an EBITDA loss of ($0.4) million in the fourth
quarter of 2021. For the full year 2022, EBITDA totaled $5.8
million, a $6 million increase from an EBITDA loss of ($0.2)
million in 2021. Both the fourth quarter and full-year increases
resulted primarily from the previously discussed revenue and gross
profit increases offset by investments in operating
capabilities.
Business Outlook
“We are confident in progress Nortech has made as a team over
the past four years,” stated Mr. Miller. “We have built a solid
financial platform, and Nortech’s gross margin, cash flow, and
balance sheet are all healthier. We have invested in our people and
enhanced our inclusive culture. We are also carefully investing our
engineering resources to develop and sell innovative proprietary
products that can complement and enhance our customers’ offerings.
Those foundational capability improvements give us confidence in
Nortech’s future growth opportunities.”
Conference Call
The Company will hold a live conference call and webcast at 8:00
a.m. central time on Friday, March 17, 2023, to discuss the
Company's 2022 fourth quarter and full year 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: 929400. Participants may also access the call via
webcast at: https://www.webcaster4.com/Webcast/Page/2814/47724
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 used by management that
we believe provides useful information to investors because it
reflects ongoing performance excluding certain non-recurring items
during comparable periods and facilitates comparisons between peer
companies since interest, taxes, depreciation, and amortization can
differ greatly between different organizations as a result of
differing capital structures and tax strategies. 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 an alternative 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 metric and you should not consider it in isolation or as
a substitute for analysis of our operating results as reported
under GAAP.
Adjustments to EBITDA in 2021 include (in thousands):
- In the third quarter of 2021, we recognized $5,209 related to
the CARES Act Employee Retention Credit (ERC) as a reduction of
costs of goods sold of $4,670, selling expense of $125, and general
and administrative expense of $414.
- CARES Act Paycheck Protection Program (PPP) loan forgiveness
gain of $6,170 recorded in the fourth quarter of 2021.
- Restructuring expense in 2021 of $327 related to the
consolidation of our printed circuit board production capabilities
into our center of excellence in Mankato, Minnesota and closure of
our Merrifield, Minnesota plant.
- Gain on sale of assets in 2021 of $141 related to the closure
of our Merrifield, Minnesota plant.
- Loss on abandonment of intangible assets in 2021 of $560
related to abandonment of the Devicix tradename.
THREE MONTHS ENDED TWELVE MONTHS ENDED
INCOME STATEMENT December 31,
December 31,
(in thousands)
2022 2021 2022
2021 Net Sales $
35,617
$
33,462
$
134,123
$
115,168
Cost of Goods Sold
30,514
30,785
113,643
99,304
Gross Profit
5,103
2,677
20,480
15,864
14.3
%
8.0
%
15.3
%
13.8
%
Operating Expenses
Selling Expenses
967
620
3,719
2,361
General and Administrative Expenses
3,079
2,755
11,425
10,002
Research and Development Expenses
309
135
1,463
483
Restructuring Expenses
-
8
-
327
Loss on Abandonment of Intangible Assets
-
560
Gain on Sale of Property and Equipment
-
36
(15
)
(141
)
Total Operating Expenses
4,355
3,554
16,592
13,592
Income (Loss) from Operations
748
(877
)
3,888
2,272
Other (Expense) Income
PPP Loan Forgiveness Gain
-
6,171
-
6,171
Interest Expense
(74
)
(116
)
(411
)
(430
)
Income Before Income Taxes
674
5,178
3,477
8,013
Income Tax Expense
1,057
212
1,467
859
Net Income (Loss) $
(383
)
$
4,966
$
2,010
$
7,154
Net Income (Loss) Per Common
Share - Basic $
(0.14
)
$
1.86
$
0.75
$
2.68
Weighted Average Number of
Common Shares Outstanding - Basic
2,685,378
2,664,586
2,685,378
2,664,586
Net Income (Loss) Per Common
Share - Diluted $
(0.14
)
$
1.76
$
0.70
$
2.54
Weighted Average Number of Common Shares Outstanding - Diluted
2,685,378
2,821,523
2,891,285
2,821,523
TWELVE MONTHS ENDED
BALANCE SHEET
December 31, 2022
December 31, 2021
(in thousands)
Cash $
1,027
$
643
Restricted Cash
1,454
1,582
Accounts Receivable
15,975
14,548
Employee Retention Credit Receivable
2,650
5,209
Inventories, Net
22,438
19,434
Contract Assets
9,982
8,698
Prepaid Expenses and Other Current Assets
1,333
1,660
Property and Equipment, Net
6,408
5,833
Operating Lease Assets
7,850
8,983
Other Intangible Assets, Net
422
501
Total Assets $
69,540
$
67,091
Accounts Payable $
14,792
$
12,710
Lease Obligations, Finance & Operating, Net
9,659
11,254
Accrued Payroll and Commissions
4,803
4,045
Customer Deposits
3,407
2,937
All Other Liabilities
1,946
1,074
Line of Credit
6,853
8,959
Shareholders’ Equity
28,080
26,111
Total Liabilities and Shareholders’ Equity $
69,540
$
67,091
THREE MONTHS ENDED
TWELVE MONTHS ENDED
RECONCILIATION TO ADJUSTED EBITDA
December 31,
December 31,
(in thousands)
2022
2021
2022
2021
Net Income $
(383
)
$
4,966
$
2,010
$
7,154
Interest expense
74
116
411
430
Tax expense
1,057
212
1,467
859
Depreciation & amortization expense
478
495
1,918
1,949
Loss on Abandonment of Intangible Assets
-
-
-
560
PPP Loan Forgiveness Gain
-
(6,171
)
-
(6,171
)
Employee Retention Credit Income
-
-
-
(5,209
)
Gain on Sale of Asset
-
-
-
(141
)
Restructuring expense
-
8
-
327
Adjusted EBITDA $
1,226
$
(374
)
$
5,806
$
(242
)
View source
version on businesswire.com: https://www.businesswire.com/news/home/20230316005644/en/
Chris Jones, CFO cjones@nortechsys.com 952-345-2244
Nortech Systems (NASDAQ:NSYS)
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