Q3 2021 Nortech Systems Inc Earnings Call

Good day, ladies and gentlemen, and welcome to the Q3 2021 North Texas Systems, Inc. Earnings Conference call. All lines have been placed on a listen only mode and the floor will be open for questions and comments following the presentation.

You should require assistance throughout the conference. Please press star zero on your telephone keypad to reach a live operator at this time. It is my pleasure to turn the floor over to your host Chris Johns Sir the floor is yours.

Thank you and good afternoon, and welcome to North Tech systems third quarter 2021 Conference call I'm, Chris Jones, Senior Vice President and CFO and with me is our president and CEO J Miller.

I'll begin today's call with a brief introduction and then I'll review <unk> Q3 financial results before turning it back over to Jay for his comments on the quarter.

At the end, we'll open it up for questions.

Before we continue please note that statements made during this call and Q&A session. Maybe forward looking regarding expected revenue earnings future plans opportunities and other company expectations.

These estimates plans and other forward looking statements involve unknown and known risks and uncertainties that may cause actual results to differ materially from those expressed or implied on this call.

These risks, including those that are detailed in our most recent annual report on Form 10-K may be amended or supplemented the statements made during this conference call are based upon information known to Nortek as of the date and time of this call and we assume no obligation to update the information in today's call you can find nor text complete safe Harbor.

Statements in our SEC filings.

And with that I will turn it over to Jay for his opening comments.

Thank you, Chris I'd like to begin the call today by recognizing some of that some people who are very important in our tax past and future success.

First and foremost it's critical to say thank you all our frontline workforce. They are the key people in the plants, making mission critical products and parts for our medical military and industrial customers.

They've been working overtime for most of Q2, and Q3, 2020 one to scale up production and I greatly appreciate their tireless efforts during these extremely challenging circumstances.

I'm very proud of everyone in the North tech facilities in Bemidji, Bluer, Mankato Maple Grove, and the lack of Minnesota as well as our people in Monterrey, Mexico and Suzhou China.

Thanks to our customers for their confidence in us a record $79 million backlog at September as a testament to their trust that we will continue to do everything possible to deliver them quality products on time.

We take this responsibility very seriously and we work hard every day to take great care of our customers.

Thanks to our suppliers for their resourcefulness and hard work.

In overcoming this unprecedented global unprecedented global supply chain challenges, it's a team effort and we sincerely appreciate their partnership.

I also want to thank our board of directors for their constant support during a very difficult 22 months since Nortek first encountered COVID-19 in China in January 2020.

Our board never wavered from the guiding principle that the health and safety of our frontline workers was our highest priority.

Finally, I want to thank all of our shareholders for being patient with us as we worked hard to fix some of the <unk> fundamentals, while battling COVID-19.

Q3, and Q4 of 2020 in Q1 of 2021 were rough quarters.

But we're very proud of our Q2 and our Q3 21 results.

Rest assured our tech is significantly stronger now than we were in 2020 and our future has never been brighter.

Now I will turn it over to Chris to review the Q3 financials.

Thanks Jay.

So in the spirit of thanks. Thank you I want to recognize it today is that trends day, 11, 11, and I'm a former member of the U S. Navy. So today is very meaningful to me personally and it's also really meaningful that I work here at North Tech systems with manufacturers parts that literally are mission critical that people who are on the front lines of our core markets. So our medical customers arent Dr.

Real customers in our aerospace and defense customers. So I also want to say, thank you to all of them on veterans day.

Turning to revenue I think sequentially is the best way to look at North Texas results in 2021 and in the first quarter as Jane mentioned that was that was a rough quarter at $22 million and it was a low point of demand in this fiscal year for US there is a COVID-19 downturn.

We recovered in the second quarter to $32 million and now we just finished our third quarter at $29 $5 million and that compares year over year to $26.4 million in the third quarter of 2020. So that's a 12 almost a 12% year over year.

Increase in revenue, we do expect to continue that growth.

Quarter on quarter growth in Q4 and throughout each quarter of 2022.

Now I also want to highlight three nonrecurring items that are.

That occurred in Q3 2021.

We applied for the employee retention credit and that's where qualified wages paid in the first and second quarters of 2021, and we expect to receive approximately $5 $2 million in Q4 or in 2022 Trc was recorded as a reduction of payroll and benefit costs of $4 seven of that reduction going to cost of goods and the remaining five.

<unk> thousand of that $5 2 million to SG&A the.

The company has not received the ERC refund from the IRS yet.

And we do have a $5 $2 million receivable on the balance sheet.

Second in Q1 of 2021, Nortek completed the consolidation of our Merrifield, Minnesota production facility.

Into our PCB center of excellence, and Mankato, Minnesota and in Q3 of 2021, we closed on the sale of that merrifield plant and the equipment for approximately $600000.

We use those cash proceeds to pay down long term debt.

And third in Q3, we determined that the fair value of the device X trade name was zero and we recognized a $560000 noncash loss on the abandonment of that intangible asset.

Those were three.

Typically large nonrecurring items in the third quarter. So turning to net income which includes those items. We reported net income of $3 6 million or $1 24 per diluted share in the third quarter and this compares to $2 million or <unk> 73 per diluted share in the same period last year.

So in addition to those three nonrecurring items in our third quarter. This year. We also had one.

Comparable peer one item in our comparable period from Q3 of last year. When we completed a sale leaseback transaction on our Bemidji and Mankato, Minnesota facilities and that netted approximately $6 million in cash that was also used to pay down debt last year in the third quarter, but we did record a $3 $8 million gain on assets in the third quarter last year.

Sure.

Moving onto the balance sheet and cash flow. So operating cash flow was a use of $2 $9 million for the first nine months of 2021.

Compared to a point $1 million used in the nine months and the first nine months of 2020.

So operating cash flow reflects nor teck's investment and higher inventory levels to meet increased customer demand and mitigate supply chain risk.

Inventory levels were offset by lower accounts receivable is nortek maximizes, our participation and our customers low cost of capital supply chain finance programs.

We ended the third quarter was $6 million of borrowing on our line of credit and we had $5 $8 million availability on our ABL.

As I mentioned earlier the combination of the sale leaseback in Q3 of 2020, coupled with the proceeds from closing the merrifield sale has enabled nortek to almost completely pay off our non PPP long term debt.

So regarding the $6 million PPP loan in the third quarter of 2021, we applied for forgiveness with the SBA, we have not yet received notice that our forgiveness application has been approved so we will continue to treat the PPP loan is as debt on the balance sheet until forgiveness is granted and we will issue a press release when we see when we received notice from the <unk>.

B E.

So I'll wrap up the financial section by highlighting our top priority in 2022.

We're competing we're committed to building and operating model post COVID-19 that deliver sustainable free cash flow growth.

And we're confident that that the one time cash from programs like the PPP, the ERC and supply chain financing.

Coupled with disciplined operational execution in R&D innovation will enable north tech to realize that goal.

And with that I'll turn it back over to Jay for his comments during the quarter. Thanks again, Chris.

We're all we're very pleased with the steady improvements, we're making on many fronts as with all global manufacturers. We are battling component shortages in many areas chips sensors connectors cables power supplies et cetera.

Lead times are long and delivery dates can be unreliable operations team had been working aggressively to overcome these challenges at the same time. Our teams are building new supply chain capabilities to ensure we are getting stronger everyday to scale, our plants to meet future demand.

We take great pride in the fact that we have such strong supplier relationships.

Growth company and every day, we're focused on finding innovative ways, new ways to improve our ability to deliver high quality products on time to meet growing demand grow revenue and improve profitability.

Speaking of growth and future demand, our backlog and bookings are both at record levels in Q3, and that's a trend we see continuing in Q4 and September 30th our backlog with $79 million, an increase of $33 million or 72% increase versus September of 2020.

As I mentioned earlier that rising backlog represents an encouraging vote of confidence from our customers that bodes well for growth throughout 2022.

In addition to building stronger supply chain capabilities I'm also very enthusiastic about the innovative new technologies, nor tech has been developing.

We are pivoting, our engineering talented toward talent toward R&D investments and initiatives to develop custom.

Customized solutions for our customers' most challenging wire and cable interconnect problems are engineers love challenging problems and building powered smart cables that can leverage critical digital data represents a differentiating capability that north, Texas developing that will help our customers compete better and stay on the cutting edge of new did.

<unk> data opportunities 2023 and beyond.

Our team is passionate about our R&D and they are inspired about developing these new technologies.

We're confident this will enable <unk> to grow topline revenue expand margins improve free cash flow and create lasting shareholder value with that I'll conclude our prepared remarks. This afternoon, and we'll open it up for questions.

Thank you the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time questions will be taken in the order they will ever see if at anytime. Your question has been answered you can't remove yourself from the queue by pressing one again, ladies and gentlemen, if you do have a question. Please press star one on your couch.

Phone keypad at this time, please hold while we poll for questions.

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Thank you very much.

Yeah.

No.

Thanks, everybody. Thank you very much for taking the time to listen to us and we look forward to.

Our first quarter.

2021 conference call. Thank you.

Thank you. This concludes today's conference call. We thank you for your participation you may disconnect. Your lines at this time and have a great day.

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