NORTECH SYSTEMS INC
For the period ended Sep 30, 2024. Filed Nov 7, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Sep 30, 2024 · Filed Nov 7, 2024
NSYS$11.20+6.7%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-06-30; filed 2024-08-08.
0001493152-24-030781
Item 2. - Management’s Discussion and Analysis of Financial Condition And Results of OperationsCurrent report: 10-Q
Period ended 2024-09-30; filed 2024-11-07.
0001493152-24-043920
Item 2. - Management’s Discussion and Analysis of Financial Condition And Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 37 previous paragraphs and 39 current paragraphs.
20 unchanged; 15 reworded; 3 added; 2 removed; 0 previous and 1 current paragraphs rearranged.
Tables are not compared: 12 previous and 11 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (3)
Current report
Income taxes. Our effective tax rate for the three and nine months ended September 30, 2024 was 8% and 62%, respectively. Our effective tax rate for the three and nine months ended September 30, 2023 was (21%) and 13%, respectively. The primary drivers of the change in rate relate to changes in pretax book income and the 2023 U.S. federal provision to return adjustments recorded in the third quarter of 2024, partially offset by realization of deferred tax assets in the 2024 periods as the Company removed its valuation allowance in the fourth quarter of 2023.
Current report
The Company has an interim funding agreement as of September 30, 2024 with a bank related to $317 of deposits made on equipment purchases that will be funded through a finance lease when the equipment is received and operational. As of September 30, we have $317 outstanding on the interim funding agreement for equipment we expect to receive in the fourth quarter of 2024.
Current report
The line of credit is shown net of debt issuance costs of $42 and $31 on the condensed consolidated balance sheet as of September 30, 2024 and December 31, 2023, respectively.
Removed paragraphs (2)
Previous report
Selling expenses. Selling expenses as measured as a percent of net sales, were relatively flat in the three and six months ended June 30, 2024 and 2023.
Previous report
Income taxes. Our effective tax rate for the three and six months ended June 30, 2024 was 12% and 21%. Our effective tax rate for the three and six months ended June 30, 2023 was 35% and 31%. The decrease in the effective tax rate is attributable to the application of a valuation allowance during the three and six month periods ended June 30, 2023 and inclusion of estimated research and development tax credits in the three and six months ended June 30, 2024, partially offset by increased taxes on foreign entities.
Reworded paragraphs (15)
Previous wording
*Net Sales.*Net sales for the three months ended June 30, 2024 and 2023 were $33,891 and $35,021, respectively, a decrease of $1,130 or 3.2%. Net sales for the six months ended June 30, 2024 and 2023 were $68,106 and $69,909, respectively, a decrease of $1,803 or 2.6%. The following is a summary of net sales by our major industry markets:
Current wording
*Net Sales.*Net sales for the three months ended September 30, 2024 and 2023 were $31,407 and $33,369, respectively, a decrease of $1,962 or 5.9%. Net sales for the nine months ended September 30, 2024 and 2023 were $99,513 and $103,278, respectively, a decrease of $3,765 or 3.6%. The following is a summary of net sales by our major industry markets:
Previous wording
*Backlog.*Our 90-day shipment backlog as of June 30, 2024 was $30,095, down 14.5% from March 31, 2024, and 12.2% from the prior-year comparable quarter end. Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be shipped within 180 days.
Current wording
*Backlog.*Our 90-day shipment backlog as of September 30, 2024 was $29,631, down 1.5% from June 30, 2024, and 12.3% from the prior-year comparable quarter end. Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be shipped within 180 days.
Previous wording
Our total order backlog as of June 30, 2024 was $73,296, a 14.8% decrease from the prior quarter end and a 27.4% decrease from the prior-year comparable quarter end. As the supply chain lead times have normalized, customers are returning to their pre-pandemic ordering practices, which has resulted in a decrease in our backlog. More recently we are also noting reduced visibility to revenues in the next several quarters as customers are rebalancing their inventories and, therefore, deferring the placement of some orders.
Current wording
Our total order backlog as of September 30, 2024 was $69,770, a 4.8% decrease from the prior quarter end and a 31.8% decrease from the prior-year comparable quarter end. As the supply chain lead times have normalized, customers are returning to their pre-pandemic ordering practices, which has resulted in a decrease in our backlog. We continue to experience reduced visibility to revenues in the next several quarters as customers are rebalancing their inventories and, therefore, deferring the placement of some orders.
Previous wording
90-day shipment and total backlog by our major industry markets are as follows:
Current wording
90-day and total shipment backlog by our major industry markets are as follows:
Previous wording
The 90-day and total backlog as of June 30, 2024 includes orders already recognized in net sales and included in the contract asset value of $14,957.
Current wording
The 90-day and total backlog as of September 30, 2024 includes orders already recognized in net sales and included in the contract asset value of $15,058.
Previous wording
*Gross profit and gross margins.*Gross profit as a percent of net sales was 13.6% and 15.6% for the three months ended June 30, 2024 and 2023, respectively. Gross profit as a percent of net sales was 14.8% and 15.7% for the six months ended June 30, 2024 and 2023, respectively. The decrease in gross profit as a percentage of net sales in the 2024 periods as compared with the same prior-year periods was the result of lower net sales, as discussed above, and reduced facility utilization.
Current wording
*Gross profit and gross margins.*Gross profit as a percent of net sales was 12.2% and 15.9% for the three months ended September 30, 2024 and 2023, respectively. Gross profit as a percent of net sales was 14.0% and 15.8% for the nine months ended September 30, 2024 and 2023, respectively. The decrease in gross profit as a percentage of net sales in 2024 as compared with the same prior-year periods was the result of lower net sales, as discussed above, and corresponding lower operating leverage from reduced production at a number of our manufacturing facilities.
Previous wording
General and administrative expenses. General and administrative expenses decreased in the 2024 periods as compared with the 2023 periods as the result of lower incentive compensation accruals in the current-year periods, and ,as a percent of net sales, remained relatively flat.
Current wording
General and administrative expenses. General and administrative expenses decreased slightly in the 2024 periods as compared with the 2023 periods as the result of lower incentive compensation accruals in the current-year periods.
Previous wording
Restructuring charges. Restructuring charges were $91 in the three and six months ended June 30, 2024 for accrued employee retention bonuses for our facility consolidation and closure of our Blue Earth facility. We expect to incur approximately $800 of cash restructuring costs, including employee retention and facility moving cost in 2024, of which substantially all are expected to be incurred and paid by December 2024.
Current wording
Restructuring charges. Restructuring charges were $176 and $267 in the three and nine months ended September 30, 2024, respectively, for accrued employee retention bonuses for our facility consolidation and closure of our Blue Earth facility. We expect to incur approximately $800 of cash restructuring costs, including employee retention and facility moving cost in 2024, of which substantially all are expected to be incurred and paid by December 2024.
Previous wording
*Operating income.*Operating income for the three months ended June 30, 2024 and 2023 were $344 or 1.0% of net sales, and $1,099 or 3.1% of net sales, respectively. Operating income for the six months ended June 30, 2024 and 2023 were $1,499 or 2.3% of net sales and $2,152 or 3.1% of net sales, respectively. Decreases in both periods were driven by the decrease in net sales and resulting gross margin.
Current wording
*Operating income.*Operating (loss) income for the three months ended September 30, 2024 and 2023 were $(467) or (1.5)% of net sales, and $1,124 or 3.4% of net sales, respectively. Operating income for the nine months ended September 30, 2024 and 2023 were $1,032 or 1.0% of net sales and $3,276 or 3.2% of net sales, respectively. Decreases in both periods were driven by the decrease in net sales and resulting gross margin.
Previous wording
*Interest expense.*Interest expense was $165 and $125 for the three months ended June 30, 2024 and 2023, respectively. Interest expense was $332 and $235 for the six months ended June 30, 2024 and 2023, respectively. This increase was driven by higher borrowings under our line of credit arrangement. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements.
Current wording
*Interest expense.*Interest expense was $216 and $130 for the three months ended September 30, 2024 and 2023, respectively. Interest expense was $548 and $365 for the nine months ended September 30, 2024 and 2023, respectively. This increase was driven by higher borrowings under our line of credit arrangement. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements.
Previous wording
*Operating Activities.*Cash used in operating activities was $1,458 in the first six months of 2024, compared with cash provided of $281 in the same prior-year period. Significant changes in operating assets and liabilities affecting cash flows during these periods included:
Current wording
*Operating Activities.*Cash used in operating activities was $3,043 in the first nine months of 2024, compared with cash provided of $2,181 in the same prior-year period. Significant changes in operating assets and liabilities affecting cash flows during these periods included:
Previous wording
Investing Activities. Cash used in investing activities was $408 in the first six months of 2024, compared with cash used of $956 in the same prior-year period, both primarily for capital expenditures.
Current wording
Investing Activities. Cash used in investing activities was $971 in the first nine months of 2024, compared with cash used of $1,121 in the same prior-year period, both primarily for capital expenditures.
Previous wording
*Financing Activities.*Cash provided by financing activities was $2,343 in the first six months of 2024, compared with cash provided of $144 in the same prior-year period. The increase in cash provided by financing activities resulted from the cash used for working capital in the six months ended June 30, 2024.
Current wording
*Financing Activities.*Cash provided by financing activities was $3,561in the first nine months of 2024, compared with cash used of $2,388 in the same prior-year period. The increase in cash provided by financing activities resulted from the cash used for working capital in the nine months ended September 30, 2024.
Previous wording
The Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage ratio, both of which are defined in the Revolver agreement. The Company met the covenants for the period ended June 30, 2024. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding borrowings. The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027. We were in compliance with all the financial covenants related to this agreement as of and for the period ended June 30, 2024, except for the covenant related to operating expense contributions to our Mexican operations in excess of the amounts allowed under the Revolver. We have received a waiver of this event of default from the bank.
Current wording
The Revolver requires the Company to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage ratio, both of which are defined in the Revolver agreement. The Company met the covenants for the period ended September 30, 2024. There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of outstanding borrowings. The Revolver contains certain covenants which, among other things, require the Company to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027. We were in compliance with all the financial covenants related to this agreement as of and for the period ended September 30, 2024, except for the covenant related to operating expense contributions to our Mexican operations in the first and second quarters of 2024 in excess of the amounts allowed under the Revolver. We received a waiver of this event of default from the bank in August 2024.
Previous wording
Under the amended Bank of America credit agreement signed February 29, 2024, the line of credit is subject to variations in the SOFR index rate. Under the prior credit agreement with Bank of America, the line of credit borrowing availability was restricted by a defined asset borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 8.0% and 8.3% as of June 30, 2024 and December 31, 2023, respectively. We had borrowings on our line of credit of $8,360 and $5,846 outstanding as of June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024 we had unused availability on the line of credit of $6,440.
Current wording
Under the amended Bank of America credit agreement signed February 29, 2024, the line of credit is subject to variations in the SOFR index rate. Under the prior credit agreement with Bank of America, the line of credit borrowing availability was restricted by a defined asset borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 7.9% and 8.3% as of September 30, 2024 and December 31, 2023, respectively. We had borrowings on our line of credit of $9,550 and $5,846 outstanding as of September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024 we had unused availability on the line of credit of $5,450.
Rearranged current paragraphs (1)
Current report — wording carried from elsewhere
Selling expenses. Selling expenses were decreased slightly in the three and nine months ended September 30, 2024 and 2023 as the result of lower incentive compensation accruals in the current-year periods.