NORTECH SYSTEMS INC

Previous wording

We are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical Device, Medical Imaging, Aerospace and Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services. Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, complex higher-level assemblies and other box builds for a wide range of industries. As of December 31, 2024, we have facilities in Minnesota: Bemidji, Mankato, Milaca and Maple Grove. We closed our facility in Blue Earth, Minnesota in December 2024 and sold this facility on July 24, 2025. We also have facilities in Monterrey, Mexico and Suzhou, China.

Current wording

We are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical Device, Medical Imaging, Aerospace and Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services. Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, complex higher-level assemblies and other box builds for a wide range of industries. As of December 31, 2024, we have facilities in Minnesota: Bemidji, Mankato, Milaca and Maple Grove as well as facilities in Monterrey, Mexico and Suzhou, China. We closed our facility in Blue Earth, Minnesota in December 2024 and sold this facility on July 24, 2025.

Previous wording

Our strategic investments have positioned us to capitalize on growth opportunities in the medical markets and improve our competitiveness by expanding our global footprint. Our industrial and defense markets are focused on improving our asset utilization and profitability while transforming to a value added, solution-sell business model that supports early engagement, design for manufacturability and rapid prototyping.

Current wording

Our strategic investments have positioned us to capitalize on growth opportunities in the medical and defense markets and improve our competitiveness by expanding our global footprint. Our industrial and defense markets are focused on improving our asset utilization and profitability while transforming to a value-added, solution-sell business model that supports early engagement, design for manufacturability and rapid prototyping.

Previous wording

In fiscal year 2024, the Company initiated a restructuring plan related to the closure of its Blue Earth, MN facility. During the three and six months ended June 30, 2025, the Company incurred restructuring charges related to staff reductions and activities related to the Blue Earth facility closure. The costs of these restructuring programs totaled $837, of which $266 was recorded in the six months ended June 30, 2025 and $571 was recorded in the prior fiscal year. We did not record any amounts related to restructuring in the three months ended June 30, 2025. These costs are included in restructuring charges on the condensed consolidated statements of operations. These charges relate to employee severance and facility closure costs. We do not expect significant additional expenses related to this plan.

Current wording

In fiscal year 2024, the Company initiated a restructuring plan related to the closure of its Blue Earth, MN facility. During the three and nine months ended September 30, 2025, the Company incurred restructuring charges related to staff reductions and activities related to the Blue Earth facility closure. The costs of these restructuring programs totaled $837, of which $266 was recorded in the nine months ended September 30, 2025 and $571 was recorded in the prior fiscal year. We did not record any amounts related to restructuring in the three months ended September 30, 2025. These costs are included in restructuring charges on the condensed consolidated statements of operations. These charges relate to employee severance and facility closure costs. We do not expect significant additional expenses related to this plan.

Previous wording

*Net Sales.*Net sales for the three months ended June 30, 2025 and 2024 were $30,675 and $33,891, respectively, a comparative period decrease of $3,216 or 9.5%. Net sales for the six months ended June 30, 2025 and 2024 were $57,570 and $68,106, respectively, a comparative period decrease of $10,536 or 15.5%. Net sales in the three and six months ended June 30, 2025 were negatively impacted by delays in Aerospace and Defense customer approvals of products transferred from our Blue Earth facility to our Bemidji facility as well as manufacturing and plant utilization inefficiencies related to the movement of various production between plants. 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, 2025 and 2024 were $30,482 and $31,407, respectively, a comparative period decrease of $925 or 2.9%. Net sales for the nine months ended September 30, 2025 and 2024 were $88,052 and $99,513, respectively, a comparative period decrease of $11,461 or 11.5%. Net sales in the three and nine months ended September 30, 2025 were negatively impacted by delays in Aerospace and Defense customer approvals of products transferred from our Blue Earth facility to our Bemidji facility as well as manufacturing and plant utilization inefficiencies related to the movement of various production between plants. Over the past two quarters, we have improved our manufacturing efficiencies as we complete product transfers between plants and realize improved manufacturing yields and productivity. 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, 2025 was $26,592, a decrease of 0.6% from $26,742 at the beginning of the quarter, and an 11.6% decrease from June 30, 2024. 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, 2025 was $31,322, anin crease of 17.8% from $26,592 at the beginning of the quarter, and a 5.7% increase from September 30, 2024. 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, 2025, was $78,351, representing a 14.7% increase from $68,332 at the beginning of the quarter and a 6.9% increase compared to the same period in the prior year; this growth was primarily driven by large medical device orders.

Current wording

Our total order backlog as of September 30, 2025, was $77,292, representing a 1.4% decrease from $78,351 at the beginning of the quarter and a 10.8% increase compared to the same period in the prior year; this year over year growth was primarily driven by an increase in Aerospace and Defense orders.

Previous wording

The 90-day and total backlog as of June 30, 2025 includes orders already recognized in net sales and included in the contract asset value of $14,984.

Current wording

The 90-day and total backlog as of September 30, 2025 includes orders already recognized in net sales and included in the contract asset value of $15,328.

Previous wording

*Gross profit and gross margins.*Gross profit as a percent of net sales was 15.8% and 13.6% for the three months ended June 30, 2025, and 2024, respectively. Gross profit as a percent of net sales was 13.7% and 14.8% for the six months ended June 30, 2025, and 2024, respectively. The increase in gross profit as a percentage of net sales in the quarterly comparison period was the result of improved plant utilization and favorable sales mix. The decrease in gross profit as a percentage of net sales in the year-to-date comparison period was the result of lower net sales and reduced facility utilization in the first three months of this year as well as reduced manufacturing efficiencies due to customer program movements between facilities.

Current wording

*Gross profit and gross margins.*Gross profit as a percentage of net sales was 16.5% and 12.2% for the three months ended September 30, 2025, and 2024, respectively. Gross profit as a percentage of net sales was 14.7% and 14.0% for the nine months ended September 30, 2025, and 2024, respectively. The increase in gross profit as a percentage of net sales in the quarterly and year to date comparison periods was the result of improved plant utilization primarily from our restructuring activities and favorable sales mix.

Previous wording

Selling expenses. Selling expenses, as measured as a percent of net sales*,was 3.9% and 2.7% for the three months ended June 30, 2025, and 2024, respectively. Selling expenses, as measured as a percent of net sales,*was 4.1% and 2.5% for the six months ended June 30, 2025, and 2024, respectively. In 2025, we realigned the reporting structure of our customer facing managers from operations to business development. As a result, this increase is a result of the realignment as well as the impact of fixed costs on a lower revenue base.

Current wording

Selling expenses. Selling expenses, as measured as a percentage of net sales*,were 4.0% and 2.7% for the three months ended September 30, 2025, and 2024, respectively. Selling expenses, as measured as a percentage of net sales,*were 4.1% and 2.6% for the nine months ended September 30, 2025, and 2024, respectively. In 2025, we realigned the reporting structure of our customer facing managers from plant operations to business development. As a result, this increase is a result of this realignment from cost of sales as well as the impact of fixed costs on a lower revenue base.

Previous wording

General and administrative expenses. General and administrative expenses, as measured as a percent of net sales, was 8.4% and 8.8% for the three months ended June 30, 2025 and 2024, respectively, and 9.6% and 9.0% for the six months ended June 30, 2025 and 2024, respectively. General and administrative expenses decreased in the quarterly and year to date 2025 periods by $393 and $648, respectively, as compared with the 2024 periods primarily as the result of lower incentive compensation accruals in the current year.

Current wording

General and administrative expenses. General and administrative expenses, as measured as a percentage of net sales, were 8.5% and 9.4% for the three months ended September 30, 2025 and 2024, respectively, and 9.2% and 9.1% for the nine months ended September 30, 2025 and 2024, respectively. General and administrative expenses decreased in the quarterly and year to date 2025 periods by $358 and $1,006, respectively, as compared with the 2024 periods primarily as the result of lower incentive compensation accruals in the current year.

Previous wording

Restructuring charges. Restructuring charges were $0 and $266 in the three and six months ended June 30, 2025, respectively. During the first quarter of 2025, we incurred $235 of severance charges for a February 2025 reduction in force to align staffing to our forecasted net sales and $31 of expenses related to our closed Blue Earth facility. 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.

Current wording

Restructuring charges. Restructuring charges were $0 and $266 in the three and nine months ended September 30, 2025, respectively. During the first quarter of 2025, we incurred $235 of severance charges for a February 2025 reduction in force to align staffing to our forecasted net sales and $31 of expenses related to our closed Blue Earth facility. 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.

Previous wording

Operating (loss) income. Operating income was $742 for the three months ended June 30, 2025 or 2.4% of net sales and was $344 or 1.0% of net sales for the three months ended June 30, 2024. This increase was driven by the improved gross margin and lower incentive compensation expense. Operating loss was ($871) or (1.5)% of net sales for the six months ended June 30, 2025 and operating income was $1,499 or 2.3% of net sales for the six months ended June 30, 2024. The decrease was driven by the decrease in net sales and resulting gross margin.

Current wording

Operating (loss) income. Operating income was $945 for the three months ended September 30, 2025 or 3.1% of net sales and operating loss was $(467) or (1.5)% of net sales for the three months ended September 30, 2024. This increase was driven by the improved gross margin and lower incentive compensation expense. Operating income was $74 or 0.1% of net sales for the nine months ended September 30, 2025 and was $1,032 or 1.0% of net sales for the nine months ended September 30, 2024. The decrease was driven by the decrease in net sales and resulting gross margin.

Previous wording

*Interest expense.*Interest expense was $257 and $165 for the three months ended June 30, 2025 and 2024, respectively. Interest expense was $471 and $332 for the six months ended June 30, 2025 and 2024, 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 $273 and $216 for the three months ended September 30, 2025 and 2024, respectively. Interest expense was $744 and $548 for the nine months ended September 30, 2025 and 2024, 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

Income taxes. Our effective tax rate for the three and six months ended June 30, 2025 was 35% and 25%. Our effective tax rate for the three and six months ended June 30, 2024 was 12% and 21%. The primary drivers of the increase in effective tax rate were changes in pretax (loss) income and taxes on foreign entities.

Current wording

Income taxes. Our effective tax rate for the three and nine months ended September 30, 2025 was 122% and (71)%, respectively. Our effective tax rate for the three and nine months ended September 30, 2024 was 8% and 62%, respectively. The primary drivers of the change in effective tax rate were changes in pretax income (loss) and taxes on foreign entities.

Previous wording

Operating Activities. Cash used in operating activities was $2,773 in the first six months of 2025, compared with $1,458 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 $2,865 in the first nine months of 2025, compared with $3,043 in the same prior-year period. Significant changes in operating assets and liabilities affecting cash flows during these periods included:

Previous wording

*Financing Activities.*Cash provided by financing activities was $2,858 in the first six months of 2025 and $2,343 in the same prior-year period. The cash provided by financing activities in both periods resulted from the line of credit advances for working capital and operations.

Current wording

*Financing Activities.*Cash provided by financing activities was $3,218 in the first nine months of 2025 and $3,561 in the same prior-year period. The cash provided by financing activities in both periods resulted from the line of credit advances for working capital and operations.

Previous wording

We believe that our existing financing arrangements, anticipated cash flows from operations and cash on hand will be sufficient to satisfy our working capital needs, capital expenditures and debt repayments for the next twelve months.

Current wording

In the preparation of the Company's financial statements, U.S. GAAP requires the Company to assess its ability to continue as a going concern. This analysis includes a number of factors including the Company's ability to repay debt which matures within one year of the issuance date of the Company's financial statements, as well as management's plan to mitigate any such considerations. The Company's Revolver, which has $12,030 outstanding as of September 30, 2025, matures on August 31, 2026, and the Company has not completed its plan to refinance this debt as of the issuance date of these financial statements. Pursuant to U.S. GAAP, this raises substantial doubt about the Company’s ability to continue as a going concern. The Company is executing a plan to refinance the maturing cash-flow-based Revolver to an asset-backed line of credit. As of the date of issuance of these financial statements, the Company has received non-binding asset-backed financing term sheets from multiple lenders and engaged a financial advisor to assist in the refinancing process. Based on these proposals and the Company’s available assets, management believes it is probable that the refinancing will be effectively implemented before the maturity of the Revolver and will mitigate the conditions that raise substantial doubt. Accordingly, the Company has concluded that substantial doubt is alleviated. Based on the planned refinancing arrangement, anticipated operating cash flows, and cash on hand, we believe we will have sufficient liquidity to satisfy our working capital needs, capital expenditures and debt repayments for the next twelve months. We were in compliance with financial covenants related to adjusted EBITDA for the third quarter of 2025.

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. These ratios are calculated based on trailing twelve-month results. 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 not in compliance with financial covenants related to the maximum operating expense contributions to our Mexican operations in the first and second quarters of 2024. We have received a waiver of this event of default from the bank. On March 27, 2025, we amended (the “First Amendment”) the Revolver to waive our non-compliance with the leverage ratio and minimum fixed charge ratio as of December 31, 2024, and March 31, 2025. Provisions of the First Amendment relating to the Company’s compliance with these ratios were replaced with provisions of the Second Amendment (described below). Provisions of the First Amendment relating to minimum EBITDA requirements of the Company were replaced with provisions of the Second Amendment (described below). Provisions of the First Amendment requiring the Company to maintain unrestricted cash and Revolver availability (collectively, “Liquidity”) at specified levels were replaced with provisions of the Second Amendment (described below). The First Amendment also requires the Company to provide incremental monthly reporting and increased the Company’s borrowing rate by one percent until the Company is in compliance with the original terms of the Revolver. The First Amendment increases the borrowing rate for revolving loans by 100 basis points.

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. These ratios are calculated based on trailing twelve-month results. 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 not in compliance with financial covenants related to the maximum operating expense contributions to our Mexican operations in the first and second quarters of 2024. We have received a waiver of this event of default from the bank. On March 27, 2025, we amended (the “First Amendment”) the Revolver to waive our non-compliance with the leverage ratio and minimum fixed charge ratio as of December 31, 2024, and March 31, 2025. Provisions of the First Amendment relating to the Company’s compliance with these ratios were replaced with provisions of the Second Amendment (described below). Provisions of the First Amendment relating to minimum EBITDA requirements of the Company were replaced with provisions of the Second Amendment (described below). Provisions of the First Amendment requiring the Company to maintain unrestricted cash and Revolver availability (collectively, “Liquidity”) at specified levels were replaced with provisions of the Second Amendment (described below). The First Amendment requires the Company to provide incremental monthly reporting and increased the Company’s borrowing rate by one percent until the Company is in compliance with the original terms of the Revolver. The First Amendment increases the borrowing rate for revolving loans by 100 basis points.

Previous wording

On July 29, 2025, we amended the Revolver (the “Third Amendment”) to extend the expiration of the Revolver to August 31, 2026. We have recorded the outstanding Revolver amount of $11,615 as long term on the condensed consolidated balance sheets based on extension in the signed Third Amendment.

Current wording

On July 29, 2025, we amended the Revolver (the “Third Amendment”) to extend the expiration of the Revolver to August 31, 2026. We have recorded the outstanding Revolver amount of $12,030 as a current liability on the condensed consolidated balance sheets.

Previous wording

The Revolver, as amended, bears interest at a weighted-average interest rate of 7.8% and 7.7% as of June 30, 2025 and December 31, 2024, respectively. We had borrowings on our line of credit of $11,615 and $8,695 outstanding as of June 30, 2025 and December 31, 2024, respectively. As of June 30, 2025, we had unused availability on the line of credit of $3,385, which is subject to a month end cap based on the previously noted minimum Liquidity.

Current wording

The Revolver, as amended, bears interest at a weighted-average interest rate of 8.0% and 7.7% as of September 30, 2025 and December 31, 2024, respectively. We had borrowings on our line of credit of $12,030 and $8,695 outstanding as of September 30, 2025 and December 31, 2024, respectively. As of September 30, 2025, we had unused availability on the line of credit of $2,970, which is subject to a month end cap based on the previously noted minimum Liquidity.

Previous wording

The Company had an interim funding agreement with a bank related to deposits made on equipment purchases funded through a finance lease when the equipment was received and operational. The equipment was received and the lease agreements were finalized during the three months ended June 30, 2025. As of June 30, 2025, we have no amounts outstanding on the interim funding agreement for equipment.

Current wording

The Company had an interim funding agreement with a bank related to deposits made on equipment purchases funded through a finance lease when the equipment was received and operational. The equipment was received, and the lease agreements were finalized during the second quarter of 2025. As of September 30, 2025, we have no amounts outstanding on the interim funding agreement for equipment.

Previous wording

Net sales in the first two quarters of 2025 and fourth quarter of 2024 were negatively impacted by delays in Aerospace and Defense customer approvals of products transferred from our Blue Earth facility to our Bemidji facility as well as manufacturing and plant utilization inefficiencies related to the movement of various production between plants. We expect these matters to be resolved over the next two quarters. The Company has implemented plant optimization activities and cost cutting initiatives in the first two quarters of 2025 to address losses. These actions plus continued efforts to improve manufacturing efficiencies in the remainder of 2025 and the planned reduction in inventory levels are intended to drive reduced borrowings during the remainder of 2025. The Company believes it has sufficient capital and liquidity to operate its business for at least twelve months from the filing of this Form 10-Q.

Current wording

Net sales in the first two quarters of 2025 and fourth quarter of 2024 were negatively impacted by delays in Aerospace and Defense customer approvals of products transferred from our Blue Earth facility to our Bemidji facility as well as manufacturing and plant utilization inefficiencies related to the movement of various production between plants. Over the past two quarters, we have improved our manufacturing efficiencies as we complete product transfers between plants and realize improved manufacturing yields and productivity. The Company implemented plant optimization activities and cost-cutting initiatives in the first two quarters of 2025 to address losses. As a result of these activities, we have realized combined income from operations of $1,687 over the past two quarters. These actions plus continued efforts to improve manufacturing efficiencies and the planned reduction in inventory levels are intended to drive reduced borrowings during the fourth quarter of 2025.