Nortech Systems Incorporated (NASDAQ:NSYS) is a Minnesota-based full-service global EMS contract manufacturer serving the Medical, Aerospace & Defense, and Industrial markets. The company demonstrated resilience in the face of evolving market conditions, posting solid financial results in the first quarter of 2024 while also taking strategic actions to optimize its operational footprint.

Financials

For the full year 2023, Nortech reported annual net income of $6,874,000 on revenue of $139,332,000, with annual operating cash flow of $1,769,000 and free cash flow of $485,000. In the first quarter of 2024, the company generated net sales of $34,215,000, a 1.9% decrease from the prior-year period. This top-line performance was driven by a 5.1% decline in medical sales, a 14.8% decrease in industrial sales, and a 44.9% increase in aerospace and defense sales.

The company's gross margin for the first quarter of 2024 was 15.9%, a 20-basis point improvement compared to the same period in 2023. This margin expansion was primarily attributable to favorable product mix, partially offset by a $178,000 catch-up accrual for Mexican statutory benefits. Operating expenses decreased 3.1% year-over-year, contributing to a 9.1% increase in operating income to $1,155,000, or 3.4% of net sales.

Nortech's 90-day shipment backlog as of March 31, 2024, was $35,213,000, relatively flat compared to the beginning of the quarter and a 4.1% increase from the prior-year period. However, the company's total order backlog decreased 6.2% sequentially and 13.0% year-over-year to $86,001,000, as customers have been balancing their inventories and deferring some order placements.

In terms of geographic diversification, Nortech's export sales from the U.S. represented approximately 3% and 4% of net sales for the first quarters of 2024 and 2023, respectively. The company maintains a global manufacturing footprint with facilities in the United States, Mexico, and China, allowing it to serve customers' evolving needs and adapt to changing market dynamics.

Business Overview

Nortech's business overview can be divided into three key segments:

Medical

: This segment accounted for 59.2% of the company's first-quarter 2024 net sales. The 5.1% year-over-year decline in medical sales was primarily due to demand fluctuations as customers worked through inventory levels.

Aerospace and Defense

: This segment contributed 17.1% of first-quarter 2024 net sales, representing a 44.9% increase from the prior-year period. The growth in this market was driven by increasing demand and improved access to component parts, which enabled increased manufacturing production.

Industrial

: Accounting for 23.6% of first-quarter 2024 net sales, the industrial segment experienced a 14.8% decrease compared to the same period in 2023, also due to demand fluctuations and customer inventory adjustments.

Liquidity

Nortech's financial position remains solid, with $4,028,000 in cash and cash equivalents as of March 31, 2024, and $8,780,000 in available borrowing capacity under its $15,000,000 revolving credit facility. The company's current ratio stood at 2.3, and its quick ratio was 1.41, indicating a strong liquidity position.

Recent Developments

In terms of capital allocation, Nortech's top financial priorities for 2024 include continuing to strengthen its balance sheet, aligning operations and infrastructure with market demand to drive sustainable EBITDA growth, and improving free cash flow. To this end, the company recently announced the closure of its Blue Earth, Minnesota, production facility by the end of 2024, with the associated manufacturing being shifted to its Bemidji, Minnesota, location. Additionally, Nortech has signed an amendment to reduce the square footage of its Maple Grove, Minnesota, headquarters and engineering facility by approximately 30%. These facility optimization initiatives are expected to result in annual savings of at least $1.6 million starting in 2025.

Nortech's engineering expertise, product innovation, and sustainability efforts also play a key role in its long-term strategy. The company's dedicated engineering services team focuses on enhancing manufacturability, supply chain risk mitigation, and cost efficiency for its customers. Recent advancements, such as the Expanded Beam Xtreme (EBX) fiber optic technology, demonstrate Nortech's commitment to developing innovative solutions that address the growing demand for faster, more reliable data transmission in various applications, including industrial IoT.

Furthermore, Nortech's pivot towards fiber optic technology aligns with its sustainability goals, as fiber optics offer significant environmental benefits compared to traditional copper, including improved energy efficiency and reduced carbon footprint during both production and operation.

Outlook

Looking ahead, Nortech remains cautiously optimistic about the market outlook, citing the improving sentiment among global electronics manufacturers and stronger demand and shipments reported in January 2024. However, the company has also noted reduced visibility to bookings in the next several quarters compared to the prior-year periods, as customers balance their inventories and defer some order placements.

Conclusion

Nortech Systems Incorporated has demonstrated its ability to navigate the evolving market landscape, delivering solid financial results in the first quarter of 2024 while taking strategic actions to optimize its operational footprint and position the company for long-term success. The company's diversified business model, engineering expertise, and focus on innovation and sustainability position it well to capitalize on growth opportunities in the Medical, Aerospace & Defense, and Industrial sectors.