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Nortech Systems Announces 2022 Third Quarter Results

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

 

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