NORTECH SYSTEMS INC
For the period ended Mar 31, 2025. Filed May 14, 2025.
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.
Mar 31, 2025 · Filed May 14, 2025
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 2024-09-30; filed 2024-11-07.
0001493152-24-043920
Item 2. - Management’s Discussion and Analysis of Financial Condition And Results of OperationsCurrent report: 10-Q
Period ended 2025-03-31; filed 2025-05-14.
0001641172-25-010251
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 39 previous paragraphs and 42 current paragraphs.
14 unchanged; 20 reworded; 8 added; 5 removed; 0 previous and 0 current paragraphs rearranged.
Tables are not compared: 11 previous and 8 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 (8)
Current report
Our net sales are derived from complex designed products built to the customers’ specifications. The products we manufacture are engineered and designed products that require sophisticated manufacturing support. Quality, on-time delivery, and reliability are of upmost importance. Our goal is to expand and diversify our customer base by focusing on sales and marketing efforts that fit our value-added service, early engagement design, and development strategy. We continue to focus on lean manufacturing initiatives, quality and on-time delivery improvements to increase asset utilization, reduce lead times and provide competitive pricing.
Current report
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 report
Restructuring Activities
Current report
In fiscal year 2024, the Company initiated a restructuring plan related to the closure of its Blue Earth, MN facility. During the quarter ended March 31, 2025, the Company had restructuring charges related to staff reductions and activities related to the Blue Earth facility closure. The total estimated cost of these restructuring programs is approximately $850, of which $571 was recorded in the prior fiscal year. These charges relate to employee severance and facility closure costs. We do not expect significant additional expenses related to this plan.
Current report
Selling expenses. Selling expenses, as measured as a percent of net sales*,*was 4.4% and 2.3% for the three months ended March 31, 2025, and 2024, respectively. This increase is a result of realignment of our customer facing managers that were previously included in cost of sales to selling expense as well as the impact of fixed costs on a lower revenue base.
Current report
Restructuring charges. Restructuring charges were $266 in the three months ended March 31, 2025 for severance charges for a February 2025 reduction in force to align staffing to our forecasted net sales of $235 and expenses related to our closed Blue Earth facility of $31.
Current report
On May 14, 2025, we further amended (the “Second Amendment”) the Revolver, which amended the First Amendment in part, to defer the Company’s compliance with the leverage ratio and minimum fixed charge ratio until the fourth quarter of 2025 at which time the Company must maintain (a) a leverage ratio of 2.5 times for the year ended December 31, 2025 and for each twelve-month quarterly reporting period thereafter; and (b) a minimum fixed charge coverage ratio to 1.25 times for the year ended December 31, 2025 and for each twelve-month quarterly reporting period thereafter. The Company must also maintain adjusted EBITDA (earnings before interest, taxes depreciation and amortization), as defined in the Revolver, as of the end of the second quarter of 2025 of at least $1,000, the third quarter of 2025 of at least $1,300 and the fourth quarter of 2025 and each quarter thereafter of at least $1,600. In addition, the Second Amendment requires the Company to always maintain Liquidity of at least $2,500. The Second Amendment accelerated the expiration of the Revolver to June 30, 2026 and increases the borrowing rate by 25 basis points.
Current report
Net sales in the first quarter 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 our cost cutting initiatives in the first quarter of 2025 to address losses. These actions plus 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.
Removed paragraphs (5)
Previous report
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.
Previous report
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 report
Other expense
Previous report
*Credit Facility.*We had a credit agreement with Bank of America, which was entered into on June 15, 2017 and provided for a line of credit arrangement of $16,000, that was to expire on June 15, 2026.
Previous 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.
Reworded paragraphs (20)
Previous wording
ITEM 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations
Current wording
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Previous wording
We are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical, Aerospace & 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. We serve three major markets within the EMS industry: Medical, Aerospace and Defense, and the Industrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and gas. As of September 30, 2024, we have facilities in Minnesota: Bemidji, Blue Earth, Mankato, Milaca and Maple Grove (corporate office). We also have facilities in Monterrey, Mexico and Suzhou, China. In May, 2024, we announced the closure of our Blue Earth facility by the end of 2024 and moving its operations to our Bemidji facility.
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. We closed our facility in Blue Earth, Minnesota in December 2024 and are currently seeking to sell this facility. We also have facilities in Monterrey, Mexico and Suzhou, China.
Previous 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:
Current wording
*Net Sales.*Net sales for the three months ended March 31, 2025 and 2024 were $26,895 and $34,215, respectively, a decrease of $7,320 or 21.4%. Net sales in the first quarter of 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. We expect these matters to be positively resolved over the next two quarters. The following is a summary of net sales by our major industry markets:
Previous 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.
Current wording
*Backlog.*Our 90-day shipment backlog as of March 31, 2025 was $26,742, an increase of 1.1% from $26,451 at the beginning of the quarter, and a 24.1% decrease from March 31, 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 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.
Current wording
Our total order backlog as of March 31, 2025, was $68,332, a 3.8% increase from $65,852 at the beginning of the quarter and a 20.5% decrease from the prior-year comparable quarter end as some customers are requesting much shorter order lead times, which has resulted in a decrease in our backlog. As we develop deep strategic partnerships with these customers, we have agreed to these shorter lead times. 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. In addition, several of our Aerospace and Defense customers are delaying orders until they approve the move of production at our Bemidji facility. We expect the majority of those approvals to be completed by the end of the second quarter of 2025.
Previous wording
90-day and total shipment backlog by our major industry markets are as follows:
Current wording
90-day shipment and total backlog by our major industry markets are as follows:
Previous 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.
Current wording
The 90-day and total backlog as of March 31, 2025 includes orders already recognized in net sales and included in the contract asset value of $13,404.
Previous 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.
Current wording
*Gross profit and gross margins.*Gross profit as a percent of net sales was 11.4% and 15.9% for the three months ended March 31, 2025, and 2024, respectively. The decrease in gross profit as a percentage of net sales in the 2025 period as compared with the same prior-year period was the result of lower net sales, as discussed above, reduced facility utilization and decreased manufacturing productivity.
Previous 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.
Current wording
General and administrative expenses. General and administrative expenses decreased in the 2025 period as compared with the 2024 period as the result of lower incentive compensation accruals in the current year.
Previous 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.
Current wording
*Operating (loss) income.*Operating loss for the three months ended March 31, 2025 was ($1,613) or (6.0)% of net sales. Operating income for the three months ended March 31, 2024 was $1,155 or 3.4% of net sales. Decrease in the period was driven by the decrease in net sales and resulting gross margin.
Previous 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.
Current wording
*Interest expense.*Interest expense was $214 and $167 for the three months ended March 31, 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 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 wording
Income taxes. Our effective tax rate for the three ended March 31, 2025 was 28.0%. Our effective tax rate for the three months ended March 31, 2024 was 22.6%. The primary drivers of the increase in effective tax rate were changes in pretax (loss) income and an increase in the GILTI inclusion.
Previous 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:
Current wording
*Operating Activities.*Cash used in operating activities was $2,930 in the first three months of 2025, compared with cash provided of $2,828 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 $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.
Current wording
Investing Activities. Cash used in investing activities was $268 in the first three months of 2025, compared with cash used of $735 in the same prior-year period, both primarily for capital expenditures.
Previous 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.
Current wording
*Financing Activities.*Cash provided by financing activities was $3,446 in the first three months of 2025, compared with cash provided of $274 in the same prior-year period. The increase in cash provided by financing activities resulted from the line of credit advances for working capital and operations in the three months ended March 31, 2025.
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 for the next twelve months, capital expenditures and debt repayments.
Current 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.
Previous wording
On February 29, 2024, we replaced the asset backed line of credit agreement with a $15,000 Senior Secured Revolving Line of Credit with Bank of America (the “Revolver”). The Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also known as “SOFR,” plus a defined margin. If the Company prepays SOFR borrowings before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement. The Company is required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.
Current wording
On February 29, 2024, we entered into a $15,000 Senior Secured Revolving Line of Credit with Bank of America (the “Revolver”). The Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also known as “SOFR,” plus a defined margin. If the Company prepays SOFR borrowings before their contractual maturity, the Company has agreed to compensate the bank for lost margin, as defined in the Revolver agreement. The Company is required to quarterly pay a 20-basis point fee on the unused portion of the Revolver.
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 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.
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 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.
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 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.
Current wording
The Revolver, as amended, bears interest at a weighted-average interest rate of 7.2% and 7.7% as of March 31, 2025 and December 31, 2024, respectively. We had borrowings on our line of credit of $11,955 and $8,695 outstanding as of March 31, 2025 and December 31, 2024, respectively. As of March 31, 2025, we had unused availability on the line of credit of $3,045, which is subject to a month end cap based on the previously noted minimum Liquidity.
Previous wording
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 wording
The Company has an interim funding agreement as of March 31, 2025 with a bank related to deposits made on equipment purchases that will be funded through a finance lease when the equipment is received and operational. As of March 31, 2025 we have $563 outstanding on the interim funding agreement for equipment.