Q3 2023 Nortech Systems Incorporated Earnings Call

Okay.

Greetings and welcome to <unk> third quarter 2023 earnings call. At this time, all participants are in a listen only mode.

Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.

I will now turn the conference over to your host Alan Nordstrom acting CFO, Jack Allen you may begin.

Alright, Thank you Paul I'd like to welcome everyone to today's conference call. Jay will begin begin today's call with a review of our operations recent developments and business outlook.

I'll review <unk> third quarter 2023 financial results before I hand, it back over to Jay for his closing comments.

Open up the call for your questions. Please note that we're still working through the final steps with our independent auditors and we will file the Form 10-Q, and those steps have been completed.

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 the expectation is.

Plans and other forward looking statements.

Known and unknown 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-Q will be.

Ended or supplemental.

The statements made during this conference call are based upon information known.

But in our judgment as of the date and time of this call and we assume no obligation to.

Update the information in today's call.

North, Texas complete Safe Harbor statements.

Don.

And with that I'll turn it over to you Jerry for your opening comments. Thank you Alan and good afternoon, everyone. We're glad you could join us today.

As usual I'd like to start by thanking our more than 750 employees worldwide.

Dedicated efforts. These people are truly our tax most important competitive advantage.

Our team members work hard every day to deliver the mission critical electrical components higher level assemblies.

<unk> finished products and engineering services, our customers rely on.

Today, I'd like to especially recognize team members at our two international facilities.

Alan and I are speaking to you from North Texas facility in Monterrey, Mexico about 1500 miles south of our Minneapolis headquarters. This week, we held our quarterly board of directors meeting here, that's been a great opportunity for our board to see our Monterrey team in action.

Our 77000 square foot facility opened in 2018 newly built and outfitted to our specifications for additional engineering resources enhanced manufacturer workflow nor.

North, Texas operating in Mexico since 2002.

Our other international team members are in Suzhou, just west of Shanghai, and the Eastern Coast of China, where it's already Thursday morning.

There are about 6800 miles away from North Texas headquarters. This facility opened in 2016 and encompasses a 60000 square feet.

By the way nor Tech first started in China in 1999 with an operating partnership.

We're very proud we were very proud to announce last month at our Suzhou facility recently received class III medical device certification from China's National Medical products administration for serving the Asian market. Our Suzhou team members, who worked very hard to achieve this prestigious certification which is.

<unk> is the highest level of safety and effectiveness.

This is a shining example of how ignore tax reputation for superior quality and customer service continues to grow around the world. Thanks to our employees' efforts.

This is a significant achievement for <unk> and our medical customers in the Asia Pacific region, both existing and potential with China is the largest market.

According to Mckinsey report published earlier this year, China's growing med tech market could more than double by 2030 with 90% annual spending increases expected. This decade under the government's healthy China 2030 plan.

Healthcare spending as a percentage of GDP in China is on track to match that or some developed European countries.

For nor Tac I should add to the medical market is our largest and fastest growing over the past five years, our medical revenues rose nearly 70% to $76 million in 2022 accounting for 57% of our total revenue last year.

This was up from $45 million or 40% of total revenue in 2018.

Meanwhile, we continue to see steady long term growth without a defense and industrial customers.

Turning next to our third quarter results, our teams focused execution across China, Mexico, and the U S health Nortek increase our gross margins sequentially and maintain EBITDA levels in the third quarter.

As previously discussed on these calls we anticipate customer demand levels will sometimes fluctuate based on factors like inventory adjustments and other timing issues.

We saw this influences third quarter revenue has a few customers requesting that we delayed shipments to them, while they were working through inventory they built up during the Covid pandemic.

From our ongoing dialogue with these customers, we expect to be the issue to be resolved in the near term.

In the third quarter year over year comparisons were also challenging because the prior year period set all time quarterly margin records as we saw the benefits of implementing significant pricing actions ahead of material cost increases.

However that situation has since normalized a bit with gross margins consistently running in the mid teens.

For this recent third quarter, our backlog levels remained healthy we continue to find the promising opportunities with a diverse array of medical industrial and defense customers, including many fortune 500 companies.

One indicator of this positive momentum is the fact that our trailing 12 months revenue increased more than 5% from the prior trailing 12 month period.

Given all these factors, we expect to finish 2023 strong U S economy seems to be gradually improving economies recently surveyed a survey by the Wall Street journal lowered their forecast at probability of a reception recession within the next year and raised GDP outlook.

Consequently, we remain guardedly optimistic about the end of 2023 or 2024 business outlook and long term prospects beyond 2024.

We believe that nor teck's future is bright this confidence comes from the combination of our diverse customer base solid financial platform and hard working team members.

Now I will turn it over to Alan for more in depth look at our third quarter and nine month financials Alan Thanks.

Thank you and the next few minutes I'll provide some details of our financial performance in the 'twenty to 'twenty three the third quarter, but I also encourage you to review our latest Form 10-Q when filed as it contains far more information about our business operations and financial performance than we will cover on this call.

As we've pointed out in the past, we believe that our individual quarters can be affected by outside factors. These might include timing fluctuations customer shipment and supply chain issues.

Any of these during any given their importance cycled through temporarily disrupt our momentum.

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

So switching to our third quarter financial performance.

As noted earlier.

Also related to demand levels to fluctuate as customers work through inventory.

We saw this influenced third quarter revenue levels. However, we expect this issue to get resolved in the near term.

Also the year over year decline largely results from last year's record high third quarter revenue levels that were boosted by significant pricing actions in the period ahead of material cost increases yes.

We see sustained year over year backlog level sequential gross margin expansion and solid levels of net income and EBITDA.

And the balance of my comments I will review key areas, which drove our third quarter financial performance.

<unk> first a review of certain factors impacting our income statement second selected items, which influenced no tax cash flow statement and 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 Q3, 2023 revenue totaled $33 4 million. This represents a five 4% decline from revenue of $35 3 million in the third quarter of 2022, yes, its still up nearly 5% on a year to date basis.

This performance is particularly noteworthy as it compares to driving results in the respective prior year periods.

Fact, we've been able to achieve substantial revenue growth over the trailing 12 month period, despite stronger historical comparison.

North, Texas year to date 'twenty to 'twenty three revenue performance was driven by growth in our medical category, while our industrial and aerospace and defense categories remained relatively consistent over the period for the first nine months of 2023, the medical market was up $5 5 million or 10, 1% as compared to the first nine months.

2022 with the majority of the increase coming from the from medical component products for the year to date period revenue from the industrial category was 29 million unchanged from the prior year, while the aerospace and defense market totaled $14 5 million down slightly from $15 2 million in prior year.

Included in our financial performance for the year to date period of 2023 gross margin gross profit totaled $16 3 million or 15, 8% compared to gross profit of $15 4 million or 15, 6% in the prior year period.

Third quarter 2023, operating expenses totaled $4 2 million or $4 3 million up four 3% decrease from the third quarter 'twenty to operating expense of $4 4 million.

The $188000 decrease in year over year operating expense was driven primarily by a $161000 reduction in third quarter product research and development expenses.

Despite the decline in year over year R&D expenses.

We believe that this level of investment is sufficient to support new technology.

As a result of performance in the third quarter net income through the first nine months of 2023 and totaled $2 5 million or 87 cents per diluted share compared to $2 4 million or 83 cents per diluted share for the first nine months of 2022.

Moving to the balance sheet and cash flow statement.

First through the first nine months of 2023 net cash provided by operating activities totaled $2 to $2 2 million more than double the level generated with a similar 2022 period.

During the third quarter as a result of previously outlined for the slowdown in customer demand inventory levels of $21 5 million was up from the prior quarter inventories yet remain down from inventory of $22 4 million at December 31, 2022.

Receivables at September 32023 were $60 million down from $17 4 million in the prior quarter and unchanged from $16 million at December 31, 2022.

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

The first half of the year isn't typically marked by higher receivable levels.

Cash collections accelerated during the summer months and second half receivables receivable levels decline because ultimately we believe it will generate modest levels of free cash flow going forward.

We ended the third quarter of 2023 was $7 5 million of borrowing capacity under 16 million line of credit with Bank of America.

This president agreement is important in giving more time and flexibility to manage through the headwinds we are experiencing experience in the last few years.

As Lee mentioned seasonal fluctuations with the University of Warsaw and collection.

At September 30 between September 32023 in cash and equivalents totaled $1 1 million down from $1 9 million at the end of the prior quarter.

I'll leave that our existing financing arrangements and just read in cash flows from operations and cash on hand will be sufficient to satisfy our working capital needs for the remainder of 2023 as well as any capital expenditures and debt repayments.

And if I don't know, let me reiterate that our top financial priorities for 2023 remains unchanged first we're extremely focused on continuing to strengthen our balance sheet and mitigate impacts we may see some changes in the economic environment for seasonality next we'll take further advantage of opportunities to align our operations and infra.

Structure with the market demand there that we are seeing to deliver sustainable free cash flow growth.

<unk> results from growth much momentum we saw in 2022.

Sustained thus far in 2023.

With disciplined lean operations execution expense knowledge management, and R&D innovation, we believe nortek and deliver on our objective with that I'll turn it back over to Jay for his closing comments. Thanks again, Alan before we open the call up to your questions. There are three topics I'd like to touch on inflation ESG.

And our taxpayer comparisons.

First over the past couple of years, Unfortunately inflation, that's nothing new.

We've been carefully managing through its impact on both wages and raw materials for wages. Our team members received across the board pay increases. This past April we feel strongly about taking care of the financial wellbeing of our team members and their families by the way I should add that staffing levels are good across all north Texas locations as.

The company, we addressed inflation somewhat early including the price increases we made during the third quarter of 2022 and calculating these price adjustments, we considered both inflation trends and the fact that our pricing for certain technologies and surfaces was not in line with the market.

Because of timing issues for price increases relative to expense recognition quarterly margin comparisons will fluctuate.

However, if you look at the trailing 12 month chart. We included in our press release. It shows a tremendous expansion of gross margin levels over the past two years.

Going forward, we expect gross margins will continue to increase through a combination of strategic pricing actions and operational improvements.

Second our S. ESG efforts, environmental social and governance continue to fall and methodical and measured approach.

By our long term vision, we are in the early stages of activities, specifically baseline measurements for nor type submissions, both direct and indirect through our supplier partners partners, we expect to post ESG updates to the Nortek website in early 2024.

Being proactive with ESG positions nortek, well with our own customers many of which are already actively engaged in ESG efforts.

Early on this call I mentioned, the growing importance of the medical market for North, Texas This market, including the larger life Science health care section sector.

Is the most engaged and preparing for future, yes, G to quota disclosure requirements. According to a Deloitte survey published late last year over 70% of such customers are actively involved.

And finally for our industry and comparisons with North Tech peers. We've described on past calls how we operate under a low volume high mix business model.

We make a wide array of complex highly technical assemblies, sometimes at a relatively low quantities.

Most of the large publicly traded electronic manufacturing systems firms like Fox Con at Jabil and benchmark as a reverse high volume low mix think cell phone smart watches and personal computers.

These are very different products and the ones. We manufacture that include things like complete medical devices as a as well as very complex cable systems with printed circuit boards for the defense and industrial markets.

However, all EMS companies operate.

And a similar macroeconomic environment and face related challenges and industry trends.

According to data from new researching new venture research published by the trade organization IPC. The global EMS market in 2022 grew by three 2% by contrast, nor tax substantially outpaced the industry. Our goal remains to outperform our peer group both in terms of revenue and profit.

Ability.

And finally today I want to express my sincere gratitude to our dedicated shareholders for their support and loyalty. Many I've been with Nortek for decades, I hope all our shareholders share that team's enthusiasm for <unk> direction, and our vision aspiring to be the global market leader in the digital connectivity and data management engineering and manufacturing.

Great.

Along with delivering on this vision I can speak for Marc.

Management team team members of the board of directors, the saying that Nortek also remains firmly committed to delivering positive financial value for our shareholders.

That concludes our presentation and now we will open the call up for your questions. Paul It was up in the life.

Thank you at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

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Once again that will be star one if you wish to ask a question at this time one moment. Please while we poll for questions.

And once again Thats star one if you wish to ask a question at this time star one if you wish to submit a question at this time.

And there were no questions from the lines I would now like to hand, the call back to Jay Miller for closing remarks.

Thank you Paul and thanks to everyone for joining US today, we look forward to talking to you next March when we present, our fourth quarter 2023 results.

Thank you again and goodbye.

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

Yeah.