Q4 2023 Nortech Systems Inc Earnings Call
Speaker Change: Good afternoon, ladies and gentlemen, and welcome to the Nortec Systems Incorporated fourth quarter and full year 2023 earnings conference call.
Speaker Change: With me on the line today are Jay Miller, President and Chief Executive Officer, and Andrew LaFrance, Chief Financial Officer and Senior Vice President of Finance.
Speaker Change: All lines have been placed on a listen only mode and the call will be open for questions and comments following the management presentation.
Speaker Change: At this time, it is my pleasure to turn the call over to Andrew LaFrance.
Andrew LaFrance: Thank you, John. I'd also like to welcome everyone to today's conference call. Jay will begin the call with a review of our operations, recent developments, and business outlook. Then I will review Nortec's fourth quarter and full year 2023 financial results before turning it back over to Jay for his closing comments. Then we will open up the call for your questions.
Andrew LaFrance: Before we continue, please note that statements made during this call may be forward-looking statements regarding expected net sales, earnings,
Andrew LaFrance: future plans, opportunities, and other company expectations.
Andrew LaFrance: These estimates, plans, and other forward-looking statements involve unknown and known risks and uncertainties that may cause actual results to differ maternally from those expressed
Andrew LaFrance: or implied on this call. These risks, including those that are detailed in our most recent Form 10-K filed today, may be amended or supplemented. The statements made during this call
Andrew LaFrance: are based upon information known by Nortek as of the date and time of this call, and we assume no responsibility or obligation to update the information in today's call.
Andrew LaFrance: You can find Nortek's complete safe harbor statement in our recent SEC filings.
Andrew LaFrance: And now with that, I'll turn the call over to Jay for his opening comments.
Jay Dean Miller: Thank you, Andy, and good afternoon, everyone.
Jay Dean Miller: We're glad you could join us today. Since this is Andy's first conference call with Nortek, I'd like to take a minute and officially welcome him. Andy joined us in December as CFO and Senior VP of Finance, bringing a wealth of knowledge and experience. He's held C-suite positions with several public and private companies.
Jay Dean Miller: and has served on a number of corporate and non-profit boards.
Jay Dean Miller: and he also spent a number of years on the audit side as partner as a partner at KPMG. Nortek is very fortunate to have Andy on the team.
Jay Dean Miller: Along with overseeing Nortek's financial operations, Andy will assist our leadership team and board of directors with strategic planning.
Jay Dean Miller: As I've mentioned on past calls, strategic planning at Nortec is an ongoing, iterative process integrated into our DNA. Our strategic plan is not something we just dust off every three years before filing in a way. We work on it diligently every year and take the process very seriously.
Jay Dean Miller: Foundational to Nortek strategic planning is an employee first mindset. Our employees are our most valuable assets and Nortek strategic plan reflects that. We would not have delivered our strong 2023 financial results with our team members outstanding contributions and the whole Nortek team deserves our sincere appreciation.
Jay Dean Miller: While financial and operational improvements are measured on income and cash flow statements, balance sheets, and spreadsheets, it's much harder to quantify NorTech's culture and values.
Jay Dean Miller: but the whole team creates the right environment where such quantitative improvements can be realized. Everything starts and ends with how our employees live out Nortec's values of teamwork, excellence, commitment, innovation, and integrity every day.
Jay Dean Miller: Touching briefly on our financial results now, we posted record net sales for the fourth quarter and the fiscal year 2023, along with continued improvements in gross margin.
Jay Dean Miller: We work carefully with our customers as strategic partners to adjust pricing as needed to reflect market conditions and supply chain realities.
Jay Dean Miller: Our EBITDA levels were also solid at $3.2 million for the fourth quarter and $8 million for the year.
Jay Dean Miller: Overall, we're seeing encouraging normalization trends and supply chain and customer ordering practices, factors that had influenced our unusually high backlog levels a year ago. While we're not completely back to what it was, what was considered normal, we believe these situations have mostly stabilized.
Jay Dean Miller: In Supply Chain Dynamics, the concept of nearshoring is gaining attention recently. According to a January article by the Global Electronics Trade Association, IPC, last year Mexico surpassed China for the first time in 20 years by contributing the highest percentage of U.S. imports from any country.
Jay Dean Miller: We have seen this trend at Nortec as well.
Jay Dean Miller: Our three-tiered global strategy of manufacturing in the U.S., Mexico, and China gives Nortec customers flexibility in improving their own competitiveness.
Jay Dean Miller: We can move production around based on factors like cost, operational requirements, quality control, and intellectual property concerns.
Jay Dean Miller: Our customer teams and engineers evaluate each customer's needs to determine the most suitable location, which may also change over the course of a product's lifecycle.
Jay Dean Miller: In terms of China, as I mentioned on past calls, much of our production work there is built in country for country, a nearshoring approach to better serve our customers in the global market, including reduced shipping costs.
Jay Dean Miller: To support Nortex global operations, including our work with large multinational customers, we started a commercial banking relationship with Bank of America in 2017. We appreciate the flexibility this line of credit has provided as well as the endorsement of our strategic direction by a world banking leader.
Jay Dean Miller: Recently we made a change to the structure of that agreement in order to better support our operational needs. Annie will give you more details in a few minutes.
Jay Dean Miller: On a final note, I'd like to recognize an important transition in our executive team. Congratulations and thank you to Kurt Steichen who retired late last year after nearly 20 years at Nortec, most recently as Senior VP of Business Operations.
Jay Dean Miller: During his tenure, Kurt played a key role in Nortec's growth, both the expansion of our full-service solutions offerings and significant increase in our medical market sales.
Jay Dean Miller: Previously, Corey is with Benchmark Electronics for nearly 24 years, most recently as Vice President of Strategic Accounts.
Jay Dean Miller: Benchmark is a recognized world leader in our industry, operating multiple facilities across the Americas, Asia, and Europe.
Jay Dean Miller: They were the 13th largest EMS provider in 2022.
Jay Dean Miller: Given that background and his ability to build and lead sales teams, we are very pleased to have Corey join our leadership team.
Jay Dean Miller: Next I'll turn it over to Andy for a more in-depth look at our financial results. Andy?
Andy: Thank you, Jay. First, I'd like to acknowledge the tremendous team at Nortec. When I started in early December, I had very high expectations based upon my interview process. I can report that our leadership team, employees, and culture are top-notch.
Andy: In the next few minutes, I will provide certain details of our financial performance in 2023, but I would encourage you to review our press release and recently filed Form 10-K, as it contains more information about our business operations and financial performance than we will cover on this call today.
Andy: As we have pointed out in the past, we believe that our individual quarters can be affected by outside factors. These might include timing, fluctuations, customer shipments, and supply chain issues. Any of these could materially impact a particular quarter, either positively or negatively.
Andy: Consequently, we believe it is more appropriate to review our business on a 12-month basis rather than focusing on quarterly performance. This approach will help normalize these potential anomalies and offer a better gauge of our strategy's long-term success.
Speaker Change: So today I will focus most of my comments on our full year results.
Speaker Change: As Jay noted earlier
Speaker Change: In 2023, we anticipated demand levels to fluctuate as customers continue to work through their respective inventories. We saw this influence in the third quarter net sales levels. However, we were pleased to see this issue begin to resolve in the fourth quarter.
Speaker Change: A year-over-year increase in fourth quarter net sales helped us to drive nearly 4% increase in net sales for all of 2023 from the prior year. Additionally, we did see sustained year-over-year 90-day backlog levels, gross margin expanse, and solid levels of net income in the EBITDA.
Speaker Change: In the balance of my comments, I will review key areas which drove our 2023 financial performance. They include, first, a review of certain factors impacting our income statement.
Speaker Change: Second, selected items which influences Nortek's cash statement. And lastly, a brief review of the balance sheet.
Speaker Change: As usual, if you have specific questions about these items or any of our quarterly or annual financial results, I will be happy to address them during our Q&A portion of this afternoon's call.
Speaker Change: In Q4 2023, net sales totaled $36.1 million. This represents a 1.2% increase from the net sales of $35.6 million in the fourth quarter of 2022 and is up approximately 8% on a sequential quarterly basis.
Speaker Change: This performance is particularly noteworthy as it comes to strong results in the respective prior periods. In 2023, net sales totaled $139.3 million, up nearly 4% from the prior year.
Speaker Change: Nortec's full year 2023 net sales performance is driven by growth in all three of our major industry categories medical, aerospace, and defense
Speaker Change: as well as industrial. For the year, the medical market was up by 2.8 million dollars or 3.7 percent as compared with 2022, with the majority of the increase coming from medical component products.
Speaker Change: For the year, net sales from the aerospace and defense category totaled $20.5 million, a 5.1% increase from the prior year.
Speaker Change: And next sales from Nortex Industrial category were $40.1 million, up $3.6 million from the prior year.
Speaker Change: Included in the financial performance for the full year 2023, gross profit was $23.1 million, or 16.6%, compared with gross profit of $20.5 million, or 15.3% in the prior year.
Speaker Change: Operating expenses totaled $17.2 million, a 3.4% increase from 2022 operating expense of $16.6 million.
Speaker Change: The $559,000 increase in year-over-year operating expense was driven primarily by a $929,000 increase in general and administrative expenses as we incurred merit wage increases plus investments in our back office infrastructure to create efficiencies.
Speaker Change: This was offset by a $121,000 reduction in 2023 excelling expenses and a $264,000 decrease in product research and development costs.
Speaker Change: Despite the decline in year-over-year R&D expenses, we believe that this level of investment is sufficient to support new RDX technologies.
Speaker Change: Based on our historical continued and consistent profitability over the past several years in our forecasts of future performance
Speaker Change: Fourth quarter 2023 GAAP net income, including a non-cash income tax benefit of $2.6 million was related to the reversal of a previously established Deferred Income Tax Valuation Allowance.
Speaker Change: As a result of our performance in the fourth quarter and the non-cash income tax benefit, net income in 2023 totaled $6.9 million, or $2.38 per diluted share, compared with $2 million, or $0.70 per diluted share in 2022.
Speaker Change: Adjusted for the non-cash income tax benefit, net income wouldn't have totaled $4.3 million or $1.48 per share, more than double the level of net income in 2022.
Speaker Change: [inaudible]
Speaker Change: As known in our press release distributed this afternoon, we are using
Speaker Change: Earnings before interest, tax, depreciation, amortization, or EBITDA as a key performance indicator to manage your business.
Speaker Change: In the press release, we have provided a reconciliation of our financial performance determined in accordance with GAAP and EBITDA. For the year ended December 31, 2023, EBITDA increased 38.2% to $8 million, compared with $5.8 million for 2022.
Speaker Change: This increase is largely due to increased sales.
Speaker Change: Moving to the ballot sheet and cash flow statement. First, for the year ended December 31st, 2023, net cash provided by operating activities totaled 1.8 million dollars.
Speaker Change: During the fourth quarter, as a result of the previously outlined normalization in the slowdown in customer demand, inventory levels of $21.7 million were materially unchanged from the prior quarter and down from $22.4 million as of December 31, 2022.
Speaker Change: Receivables as of December 31st, 2023 were at $19.7 million, up from receivables of $16 million as of December 31st, 2022. This is in line with our strong fourth quarter sales and the timing of customer payments.
Speaker Change: Our contract asset, which represents revenue earned but not yet billed to customers, increased to $14.5 million as of December 31, 2023, as compared with $10 million at the end of 2022.
Speaker Change: This increase reflects the timing of customer shipments and the strong fourth quarter net sales.
Speaker Change: As a reminder, the majority of our net sales are generated from products contractually manufactured specifically to a customer's unique application, and as such, we recognize revenue in accordance with the U.S. GAAP as we produce these products.
Speaker Change: We ended the fourth quarter with 9.4 million dollars of borrowing capacity on our line of credit.
Speaker Change: We recently replaced our asset-backed line of credit with a cashflow-backed, $15 million senior security revolving line of credit, which will expire at the end of February 2027. The new revolver allows for borrowings at a defined rate.
Speaker Change: or at one, three, or six month secured overnight finance rate or SOFR plus a defined margin. We believe that over time, this arrangement will be more beneficial to Nortec and provide greater flexibility in supporting our ongoing operations.
Speaker Change: Our evolution to a cash flow credit facility is a result of Nortek's focus on strengthening of its balance sheet and delivering sustained EBITDA growth.
Speaker Change: For a more detailed explanation of this new agreement, please see our explanation in the 2023-10-K.
Speaker Change: As of December 31, 2023, cash and cash equivalents totaled $1.7 million, up from $1.1 million at the end of the prior quarter and down from $2.5 million at the end of the prior year. The fluctuation in cash balances reflects timing of cash receipts.
Speaker Change: expenditures combined with the timing of line of credit borrowings and repayments.
Speaker Change: On a final note, our top financial priorities for 2024 remain unchanged.
Speaker Change: First, we are extremely focused on continuing to strengthen our balance sheet. Next, we will take further advantage of opportunities to align our operations and infrastructure with market demand that we are seeing to deliver sustainable EBITDA growth, as well as driving improvements in free cash flow. Our confidence
Speaker Change: Our confidence results from growing momentum as we saw in 2023. Coupled with disciplined lean operations, execution, expense management, and R&D innovation, we believe Nord Tech can deliver on our objectives.
Speaker Change: With that, I will turn it back over to Jay for his closing remarks. Jay?
Jay Dean Miller: Thanks Andy. Before we open the call to your questions, I want to touch on three related areas that together serve our customers and help advance Nortek's corporate stewardship. Our engineering expertise, product innovation, and sustainability plans.
Jay Dean Miller: For engineering expertise, we have a dedicated engineering services team that is focused on enhancing manufacturability and serviceability.
Jay Dean Miller: supply chain risk mitigation, and cost efficiency for our customers.
Jay Dean Miller: Earlier in this call, I mentioned the benefits of our three-tier cost structure across the U.S., Mexico, and China, and how we can quickly adapt our global resources to fit our customers' changing needs.
Jay Dean Miller: Nortex engineering capabilities also further our research and development activities with advancements like the expanded beam extreme fiber optic technology or EBX that we announced in January.
Jay Dean Miller: EBX is designed for digital data transmission and offers improved speed, reliability, and security when compared to traditional copper.
Jay Dean Miller: At the simplest level, the vast majority of Nortek's products provide digital connectivity solutions that transmit data and power in various applications. As you may know, the Internet of Things, or IoT, integrates a variety of electronic components such as microcontrollers, sensors, actuators, and connectivity modules.
Jay Dean Miller: These components, in turn, enable IoT-connected devices to collect, parse, transmit, and receive data. More and more today, that data is being evaluated and analyzed using artificial intelligence for improved performance and data management for our customers as well as for their customers.
Jay Dean Miller: More data means needs better data pipelines and that's where Nortek comes in. Technologies like our EBX smart cables help collect and distribute this data faster, more cost-effectively, and more securely across these sophisticated networks.
Jay Dean Miller: We see strong opportunities for growth here. For example, industrial IoT applications are expected to experience impressive double digit annual growth from 2023 to 2030 according to Fortune Business Insights.
Jay Dean Miller: Our pivot to more fiber optic technology improves product performance for our customers by offering unparalleled speed and reliability. It also aligns with the sustainability goals we share with many of those customers.
Jay Dean Miller: When compared with traditional fiber or traditional copper, fiber optics offers significant environmental benefits during both production and operation, including improved energy efficiency and less material usage, while decreasing the carbon footprint of complex cables we manufacture.
Jay Dean Miller: For example, aerospace and defense customers are adopting fiber optic technology due to these key advantages. Reduce size, weight, and power requirements. Immunity to electromagnetic interference. Improve security and greater durability in harsh environments.
Jay Dean Miller: Harsh environments of course are very common in aerospace and defense applications. Nortek has a proud history of serving these customers unique needs dating back roughly 30 years.
Jay Dean Miller: It's the smallest of our three core markets by net sales, but very important for our diversification. Our contributions to our national defense are a source of great pride for Nortec employees.
Jay Dean Miller: The majority of our aerospace and defense cables are still traditional black round and molded type common in legacy defense systems, such as shipboard missile launchers.
Jay Dean Miller: but we are looking to the future with fiber optics and evolving along with our customers.
Jay Dean Miller: In closing, we are excited about technological developments across all of our markets and expect them to support our continued sales momentum in 2024, aided by stabilization in supply chain and customer orders.
Jay Dean Miller: Last month IPC cited improving sentiment among global electronics manufacturers with stronger demand and shipments reported in January.
Jay Dean Miller: Our progress over these quarters, over recent quarters, confirms that outlook.
Jay Dean Miller: Now we'll open up the call to your questions. John, please open the lines.
John: Absolutely, thank you. At this time we will be conducting a question and answer session.
John: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue.
John: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
John: One moment please while we poll for questions.
John: Once again, please press star 1 if you have a question or a comment.
John: Once again, that's star one. If you have a question or a comment, and we do have a question coming from Thor Mickelson, private investor, Thor, please proceed.
Thor Mickelson: Door, your line is live.
Thor Mickelson: Jay and Andrew, congratulations on a great quarter. We really appreciate that. Thank you. This is a question for Jay. Congratulations, Jay, on your five-year anniversary with Nortec. As a shareholder, I'm delighted for your tenure at Nortec. Could you please briefly comment on what you've seen Nortec accomplish in these last five years, your perspectives on that and where you see Nortec going now?
Jay Dean Miller: Yeah, thank you, Cora. Thor, that's a really good question and I appreciate it. Look, the businesses...
Jay Dean Miller: the business has changed quite a bit in the past five years, but what has not changed is the dedication and the focus of the employees here. We have great employees. We have great customers. We have great supplier partners. And candidly, it was for those reasons why I took the job to begin with.
Jay Dean Miller: Now we've gotten a lot more disciplined about managing our balance sheet, we've done a lot as you've seen, we've done a lot of cleanup of our balance sheet over the past five years and now we're much more on a growth trajectory. Our expectation is that we will take it from here, our expectation is we'll continue to grow the top line and candidly we'll grow the bottom line faster.
Jay Dean Miller: I am very confident this team can do that. I mentioned in my remarks, our strategic planning process, which we take very, very seriously, and we execute very, very, we're very focused on the execution of that plan. We very seldom, if ever, deviate from our strategic plan. Now,
Jay Dean Miller: plans are never perfect and we have to make adjustments along the way but this team has proven that it can make great adjustments along the way to deliver good top-line growth and and really good bottom-line growth. So look, I'm thrilled with how things have gone. If I look back at where I thought we would be
Jay Dean Miller: five years from the time I took this business. Candidly, I don't think we, I would have thought we would have made this much progress and I didn't know anything about COVID and I didn't, we didn't predict a global supply chain crisis. So the fact that this business has.
Jay Dean Miller: done so well through COVID, in fact, gotten stronger through COVID in a lot of ways, and managed the global supply chain crisis as gracefully as it has. I can't tell you, I couldn't be any more proud of the people at Nortec for what they've done.
Speaker Change: So thanks for the question.
Speaker Change: This may be a question for Andrew or Jay to jump in, but...
Speaker Change: Looking at the margin for this last gross margin, if I'm reading that correctly, I'm seeing there's a 300 basis point improvement over the last quarter. And I see generally your operating expenses have been well controlled. Could you comment on what drove, if that's correct, is what drove and what's been driving you? We mentioned last quarter, you were expecting improved gross margins.
Speaker Change: Is there something happening there?
Speaker Change: Yeah.
Speaker Change: That's a really good question, Thor. A combination of things that really drove it. One is just an increase of revenue coming our fixed cost structure was was helpful.
Speaker Change: As we did note in earlier calls, we have been really hyper-focused on folks on costs and also customer relationships and making sure that we are
Speaker Change: Sending those costs back to customers when we've had supply costs. So I think it's a combination of us
Speaker Change: getting in front of some historical cost curves, but as importantly, understanding the leverage of the business, especially, you know, a couple of years out here from some consolidation of our plant. So it really just was everybody was operating well. We had a minor mix improvement as well in the fourth quarter, but the team, John Linden's team, just operated very, very well and executed.
Speaker Change: And do you think that's sustainable? I mean, you're even doing a path here, but is that continuous?
Speaker Change: Why, you know, Jay had a very important...
Speaker Change: Yeah, Jay had a very important concept here is that, you know, since he's been here there's been continuous improvement in terms of
Speaker Change: the stability of the balance sheet and the performance metrics. And one of the things that's really become important for us is our ability to manage this business.
Speaker Change: and we will continue to look for opportunities to expand the margin. We are, as you all know, hitting also the other side of the curve here where you know, we're starting to see some limited cases of deflation and some of our costs, but we'll keep in front of those, make sure we manage our customer relationships so that we can eventually continue to drive more volume through the facilities, which is really the key to drive those margins up.
Speaker Change: Maybe just one last question. I was surprised Jay you talked about improved sales. I've not heard you talking a lot about sales as much, but you're seeing some improved sales and it looks like your backlog is improving.
Speaker Change: A lot of other operators are seeing challenges brewing off inventory. So you're seeing perhaps an inflection point here?
Jay Dean Miller: Yeah, I mean, we've seen that too, by the way, and Andy touched on that. I think we both touched on that in the remarks. I mean, we've seen...
Jay Dean Miller: our backlog kind of normalized. Candidly, we expected our backlog would have, when I say normalized, gotten back to a more regular level. It obviously took off and went up quite a bit during COVID. And as we were experiencing global supply chain crisis, but actually we've seen a little less.
Jay Dean Miller: of that, you know, I'll use quotes, normalization than we expected. I, look, I think we're, we have proven that we can execute better than most of our competitors.
Jay Dean Miller: We have challenges. We face challenges every day, but we manage those challenges pretty darn well.
Jay Dean Miller: And, you know, it is our expectation that we're going to close more business, not only from existing customers, but also from a number of new customers, which we are, we are, have been reasonably successful at doing. I'm very proud of the business development team.
Jay Dean Miller: I'm very proud, as I mentioned in the comments, that we transitioned so gracefully from Kurt Steichen to Corey Hancock that went, you know, even better than I could have imagined, and that team is doing a great job right now. And, you know, of course, we expect more out of them moving forward.
Speaker Change: Thank you so much. Congratulations.
Speaker Change: Yeah, thank you, Thor.
Speaker Change: If there are any remaining questions, please indicate so by pressing star 1 on your touchtone phone.
Speaker Change: Okay, it looks like we have no further questions in queue. I'd like to turn the floor back to Jay Miller for any closing remarks.
Jay Dean Miller: Thank you, John. And thanks to everyone for joining us today. We look forward to talking to you in May. We'll report our first quarter 2024 results. Again, thank you and goodbye.