Q2 2023 Nortech Systems Incorporated Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the North Texas system second quarter 2023 earnings Conference call.

With me on the line today are J, Miller, President and Chief Executive Officer, and Allen Nordstrom acting Chief Financial Officer.

All lines have been placed on a listen only mode and the call will be opened for questions and comments following the management presentation.

At this time it is my pleasure to turn the call over to Alan Nordstrom.

Thank you Holly I'd like to welcome everyone to today's conference call. Jim will begin this call with a review of our review of our business and current trends in several strategic initiatives that I'll review <unk> Q2, 2023 financial results.

Turning it back over to Jay for his closing comments, then we will open up the call for your questions.

But before we continue please note that statements made during this call and Q&A session, maybe forward looking statements with the meaning within the meaning of the private Securities Litigation Reform Act.

Forward looking statements include expected revenue gross profit gross margin EBITDA free cash flow net income financial performance future plans developing technology opportunities and other company expectations. These estimates plans and other forward looking statements involve unknown.

In 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 Form 10-K, and most recent Form 10-Q filed with the SEC may be amended or supplemented. These statements made during this conference call are based upon information known by <unk> as of the date and time of this call.

No obligation to update the information in today's call you can find an opex complete safe Harbor statements in our SEC filings with that ill turn it over to Jay for his opening comments.

Thank you Alan and good afternoon, everyone. We appreciate you joining us I know, we have some employees listening in as well and I'd like to start off my remarks by thanking all of our global and our tech team members and very proud to lead such a dedicated team here in Minnesota as well as in Mexico, and China committed to serving our customers.

During difficult times like the global pandemic and subsequent supply chain disruptions.

I have confidence in our team members' willingness and ability to consistently deliver outstanding performance that helps differentiate nortek from our competition.

Also on behalf of the entire North Tech team I want to express appreciation for North, Texas. Many supplier partners worked closely with US as we serve our mission critical medical industrial and defense customers, we truly could not do our jobs without these strong relationships with our supplier partners.

Yeah.

Right at the beginning please note these key takeaways from this call.

Our bookings remain very strong and our backlog is continuing to decline.

Revenue continues to grow and our profitability is growing even faster in fact over the previous 10 quarters last 12 month revenue has grown by over 40%.

Meanwhile, our last 12 months gross profit adjusted for onetime events has nearly tripled and our I guess, our adjusted gross margin percentage has roughly doubled.

Most importantly, our last 12 month adjusted EBITDA has improved by over $9 million.

From a negative $2 $3 million to a positive $6 8 million.

Humbly, we have to admit that's pretty amazing trend.

Turning now more specifically to our second quarter performance, we continued to achieve solid results in <unk> and revenue EBITDA bookings and backlog even over a strong prior year comparisons.

Bookings came in at the highest level over the past four quarters at $37 million.

Our total backlog topped $100 million, which continues to surpass our expectations as the post pandemic and supply chain crisis market is stabilizing.

With strong bookings, we are resetting your expectations back to steady backlog growth sooner than we had anticipated. This of course is great news.

In recent quarters when supply chain challenges were more acute certain customers ordered parts ahead, which meant that we shipped more in those quarters than we would have otherwise now those customers are working down their inventories, which means we shipped a little less in the second quarter generally that we would've otherwise history indicates that these factors tend to.

Balance out.

And we are guardedly optimistic that the pendulum is starting to swing back.

Looking ahead at the rest of 2023, our positive results at the halfway Mark support the upbeat outlook that our large customers in particular are communicating they are expecting a pretty solid year with an outlook I would characterize as cautiously optimistic.

One major customer recently decided sited increasing global demand is the key driver of that revenue increase.

Okay.

Beyond 2023, there is still some shared uncertainty about next year, including wondering what a possible recession might look like and how long. It could last however, recent macroeconomic news is encouraging such as sustained labor market strength and easing inflation.

This news is influenced higher GDP predictions for the remainder of 202023 by some economists and the economy seems on track for a relatively soft landing.

Yeah.

In this dynamic global economy, and industry, nor <unk> relatively small size compared to much larger EMS firms can be an advantage, we are more nimble and better able to adjust more quickly to changing conditions and market forces.

I'll conclude my opening comments with two examples of North, Texas, agility and prudent approach.

First strategic innovation.

To stay ahead of market trends and better serve our customers. We are carefully investing in new technologies that can differentiate nortek and provide a competitive advantage. Two examples include the active optical extreme and flex fairly extreme platforms.

To help foster innovation like this nortek establish the science and Technology Committee of our board several years ago.

The existing suite of this board Committee makes Nortek somewhat unique indeed, just 56 fortune 500 companies have such committees. According to a wall Street Journal article in May of 2023.

It was gratifying to be included in this article with Nortek recognized for our focus on innovation and its impact on winning new business.

The article noted that nor tech stock price and more than doubled in the past three years far exceeding the 44% gain in the S&P 500.

Second Nortek is committed to.

<unk> being a better steward of our planet as I mentioned on our last call. We are proactively steering our focus on environmental social and governance or ESG objectives.

And our initial baseline steps our U S plants are initiating measurement.

Of Nortek scope, one and scope two emissions, which encompass both direct emissions and indirect emissions from energy we purchase.

While focusing on our planet's long term future through ESG efforts and long term and the long term value of Nortek. We simultaneously, we remain committed to optimizing quarterly financial returns for our shareholders. We firmly believe that the object. These objectives can coexist and also mutually enhance each other.

We also expect that aligning with ESG goals will become an increasingly will become increasingly crucial for business in our chosen markets.

Before I hand, the call back off to Alan for our financial review I should mentioned in our search for <unk> next Chief Financial Officer is underway.

We believe we are in a good position right now with our financial reporting structure and procedures in place Alan it's filling the interim CFO role very Capably and the finance and accounting team is operating at a very high level.

We are taking necessary, we are taking the necessary time to make the right hire realizing next CFO will play a vital role in supporting our growth plans.

Now for more in depth financial discussion I'll turn the call back over to Alan.

Thank you Jay and thanks, everyone for joining us today.

In the next few minutes I'll provide a certain details of our financial performance in the 2023 second quarter, but I would encourage you to review our latest Form 10-Q, which we filed earlier as it contains far more information about our business operations and financial performance than we will cover on this call.

Before I begin our financial review I would like to take a minute to again highlight the new charter we added to our press release last quarter, and which we will include each quarter going forward. It provides 10 quarters of LTM or last 12 month historical data for four key metrics sales gross profit dollars gross margin percent and EBITA.

As we've pointed out in the past, we believe that our individual quarters can be affected by other factors.

It might include timing fluctuations customer shipments and supply chain issues.

Any of these during a given reporting cycle contemporary disrupt our momentum.

Consequently, we believe it is more appropriate to review of our business on a longer term 12 month basis, rather than a straight calendar year. This approach will help normalize these potential anomalies and offer a better gauge of our company's long term success.

So switching to our second quarter financial performance as Jay noted, we made progress in several key performance areas with quarterly revenue up nearly 8% from the prior year period again, we're particularly pleased by this revenue momentum as this quarter's year over year growth continues to come out of a strong prior year comparable.

We also saw sustained year over year backlog levels increases in year over year gross margin and solid levels of net income and EBITDA.

Over the past several quarters, we have taken necessary steps to create a firm financial platform that can be flexible and respond quickly to changing macro a macroeconomic conditions. While we are constantly vigilant to the negative impacts of inflation. We are encouraged as our customers are reporting fewer supply chain disruptions and were more optimistic give.

The continued sales momentum we saw in the second quarter.

Evidence of this renewed sense of optimism can be found in our total backlog level last quarter and a new record level of bookings total backlog continues to exceed 100 million coupled with the strong bookings bookings levels and our solid foundation. We are confident that we can maintain momentum into the second half of the year.

Increased shipments during the quarter that resulted in orders moving through the pipeline quicker and causing backlog levels to start reaching a steady state in the near term, we expect Buck backlog levels remained relatively constant with future growth coming from accelerated contributions from both new and existing customers as well as technology innovations.

And the balance of my comments I'll review key areas, which drove our second quarter financial performance.

<unk> first a review of certain factors impacting our income statement second selected items, which influenced <unk> cash flow statement.

Lastly, a brief review of the balance sheet.

As usual if you have specific questions about these items or any of our quarterly financial results I'll be happy to address them during the Q&A portion of this afternoon's call.

In Q2, 2023 near record or near record revenue totaled $35 million. This represents a seven seven increase from revenue of $32 5 million in the second quarter of 2022.

And it was up slightly from the prior quarter, which increased with increases coming from higher volume and previous pricing actions.

Again this performance was particularly noteworthy as it compares to a strong performance in the prior year period.

In fact, we've been able to sustain revenue growth over the trailing 12 month period, despite the stronger historical comparable.

<unk> second quarter of 2023 revenue performance was driven by growth in our medical as well as our aerospace and defense categories.

In the second quarter, the medical market was up to up to $1 million or 11, 2% as compared to 2022 with the majority of the increase coming from medical component products and.

In the second quarter revenue from the aerospace and defense market was up $829000 or 18% from the prior year.

Okay.

Included in the financial performance for the current year gross profit totaled <unk> 5 million or 15, 6% compared to gross profit of $5 million or 15, 4% in the prior year quarter.

Second quarter 2023, operating expenses totaled $4 4 million, a 10% increase from from the second quarter of 2022 operating expenses of $4 million and flat on a sequential basis.

The $396000 increase in year over year operating expenses, driven primarily by a $437000 increase in second quarter general and administrative expenses from the prior year quarter the.

The majority of the increase in year over year G&A costs were due to higher professional fees and increased labor costs.

Finally, we had a reduction of 34000 in the year over year research and development costs we.

We believe that this level of investment of investment was sufficient to support new technologies, such as the <unk> cable platform in the flux through the extreme technology.

As a result of our performance in the second quarter of 2023 net income totaled 635000, or <unk> 22 per diluted share in line with the prior year quarter and second quarter of 2022.

Through the first half of 2023 net income totaled $1 3 billion versus 800 produced 7000 in the prior year first half.

Also all employee retention credits or ERC had been received as of June 32023, and our balance sheet and cash flow statements reflect that.

Next in the second quarter of 2023 net cash used by operating activities was $1 4 million.

Receivables at June 30 of 2023 were $17 4 million up from receivables of $16 2 million in the prior quarter and $16 billion at year end.

This is in line with the seasonal pattern that we've seen a volatile over the past couple of years.

In the first half of the year has been typically marked by higher receivable levels, while cash collections accelerated during the summer months and so.

Second half receivable levels decline.

During the second quarter increased shipments as well as less pressure to respond to global supply chain shortages kept inventory levels up $21 1 million relatively flat to prior year reporting levels and down from $22 4 million at December 31, 2022.

We ended the second quarter of 2023 with a $5 3 billion of borrowing capacity under $60 million line of credit with Bank of America. This credit agreement is important in giving north has the flexibility to manage through the headwinds we have experienced in the last few years and the previously mentioned seasonal fluctuations.

And our receivables receivables balances.

Yes.

At June 32023, cash and equivalents totaled $1 9 million down from $2 5 million at the end of the prior year.

However, we believe that our existing financing arrangements anticipated cash flows from operations and cash on hand.

It will be sufficient to satisfy our working capital needs in 2023, as well as any capital expenditures and debt repayments. We are confident that we have created a solid financial base to take this company into the future.

First we are extremely focused on continuing to strengthen our balance sheet and mitigate impacts we may see from changes in the economic environment or seasonality.

Now we will take further advantage of opportunities to align our operations and infrastructure and infrastructure with the market demand that we're seeing in order to deliver sustainable free cash flow growth.

Our our covenants.

Our confidence in the results from the gross margin momentum we saw in 2022 that has sustained thus far in 2023.

Coupled with disciplined lean operation execution in R&D R&D innovation, we believe <unk> can deliver on our objectives with that I'll turn it back over to Jay first of all the comments.

Thanks, Alan earlier in this call I mentioned, our efforts around two key initiatives innovation and ESG.

Conclude my remarks by citing these other initiatives, the internet of things or Iot and artificial intelligence or AI.

We know there are opportunities for nortek leverage Iot and AI applications to enhance our services efficiency and financial scalability.

While chat GBT is getting most of the media headlines AI and machine learning and Iot have actually been around for a number of years, but the opportunities that awareness of Iot and AI is potentially are certainly ramping up.

As with our ESG approach, we intend to lead and not just follow with Iot and AI.

What good Iot and AI implementation look like in North, Texas terms, we're in the early stages, but here are some applications our team will be analyzing.

For improved quality control AI and Iot can be leveraged proactively in the detection of manufacturing issues to ensure better product performance and customer satisfaction.

For enhanced engineering support Iot and AI can streamline and design assistance, we offer customers for their PCB as in higher level assemblies, followed by accelerating our production setup.

When future component charges happened Iot and AI can help us more quickly identify and source substitute parts.

By harnessing the potential of Iot and AI nortek, not only accelerate manufacturing processes and improve product quality, but also expand our services and reinforce nor to reinforce <unk> competitive advantages.

Okay.

Finally, before our Q&A session. The key takeaways I noted earlier bear repeating our bookings remained very strong and our backlog has continued to decline.

Revenue continues to grow and our profitability has grown even faster.

Over the previous 12 10 quarters trailing 12 month revenue has grown by over 40%.

Meanwhile, our last 12 months gross profit adjusted for onetime events has nearly tripled.

Our adjusted gross margin percentage has roughly doubled most.

Most importantly, our last 12 month adjusted EBITDA has improved by over $9 million from a negative $2 3 million.

To a positive $6 8 million.

We're very proud of these numbers.

That concludes our presentation.

And now we will open the call up for questions operator.

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Thank you Holly and thanks to everyone for joining us today.

Look forward to talking to you next in November with our third quarter 2023 results.

Thank you and goodbye.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

Goodbye.