Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
NSYS > SEC Filings for NSYS > Form 10-Q on 4-Nov-2011All Recent SEC Filings

Show all filings for NORTECH SYSTEMS INC

Form 10-Q for NORTECH SYSTEMS INC


4-Nov-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview:

We are a Wayzata, Minnesota based full-service Electronics Manufacturing Services (EMS) contract manufacturer of wire and cable assemblies, printed circuit board assemblies, higher-level assemblies and box builds for a wide range of industries. We provide value added services and technical support including design, testing, prototyping and supply chain management to customers mainly in the Aerospace and Defense, Medical, and Industrial Equipment markets. We maintain manufacturing facilities in Baxter, Bemidji, Blue Earth, Mankato, Merrifield, and Milaca, Minnesota; Augusta, Wisconsin; and Monterrey, Mexico.


Table of Contents

Summary of Results:

In the third quarter we continued to see growth in revenue from our recent acquisitions offset in party by some shortfalls in sales and orders from our existing industrial customers. We attribute this to continued uncertainty in the overall economy and buyers being more cautious about placing orders and carrying excess inventory. For the quarter ended September 30, 2011, we reported net sales of $28.3 million compared to $26.0 million reported in the same quarter of 2010, a 9% improvement. For the nine months ended September 30, 2011, we reported net sales of $85.1 million compared to $72.4 million reported for the first nine months of 2010, an increase of 18%. Our 90-day backlog decreased 4% from the start of the quarter to $21.9 million as of September 30, 2011. This compares to $23.5 million for the same period last year.

Gross profit improved in the third quarter as a result of favorable product and service mix, along with cost and efficiency initiatives at our newly acquired operations. Our gross profit in the third quarter of 2011 was 11.6% compared to 11.1% in the third quarter of 2010. Gross profit in the first nine months of 2011 was 11.4% compared to 11.9% in the first nine months of 2010.

Income from operations totaled $0.4 million and $0.2 million for the three months ended September 30, 2011 and 2010, respectively. Income from operations totaled $1.0 million for the each of the nine months ended September 30, 2011 and 2010.

Net income for the third quarter of 2011 totaled $0.2 million or $0.07 per diluted common share. Net income for the nine months ended September 30, 2011 totaled $1.0 million or $0.35 per diluted common share; $0.4 million or $0.15 per diluted common share excluding the bargain purchase gain of $0.5 million, net of tax. Net income totaled $0.1 million and $0.4 million for the three and nine months ended September 30, 2010.

Our cash position improved in the third quarter as we extended terms with key suppliers. Cash provided from operating activities was $2.5 million in the third quarter of 2011. Cash used in operating activities for the nine months ended September 30, 2011 was $2.2 million compared to cash provided by operating activities of $1.6 million for the same nine month period in 2010.

(1.) Results of Operations:

The following table presents statements of income data as percentages of total net sales for the periods indicated:


Table of Contents

                                        Three Months Ended      Nine Months Ended
                                           September 30            September 30
                                        2011         2010        2011        2010
Net Sales                                 100.0 %      100.0 %    100.0 %     100.0 %
Cost of Goods Sold                         88.4         88.9       88.6        88.1
Gross Profit                               11.6         11.1       11.4        11.9

Selling Expenses                            3.2          3.0        3.2         3.2
General and Administrative Expenses         6.9          7.5        7.0         7.4
Income from Operations                      1.5          0.6        1.2         1.3

Bargain Purchase Gain                       0.0          0.0        0.9         0.0
Other Income (Expense), Net                (0.5 )        0.2       (0.5 )      (0.3 )
Income Before Income Taxes                  1.0          0.8        1.6         1.0

Income Tax Expense                          0.3          0.3        0.5         0.5
Net Income                                  0.7 %        0.5 %      1.1 %       0.5 %

Net Sales:

We reported net sales of $28.3 million and $26.0 million for the three months ended September 30, 2011 and 2010, respectively, a 9% increase. Net sales for the nine months ended September 30, 2011 and 2010 were $85.1 million and $72.4 million, respectively, an 18% increase. The 2011 net sales were impacted by our two recent acquisitions which added $5.2 million and $15.9 million of net sales for the three and nine months ended September 30, 2011, respectively.

Net sales by industry markets for the three and nine month periods ended September 30, 2011 and 2010 are as follows:

                           Three Months Ended         Nine Months Ended
                              September 30               September 30
                         2011     2010      %       2011     2010      %
(in thousands)            $        $      Change     $        $      Change
Aerospace and Defense    3,774    3,930       (4 ) 10,949   12,003       (9 )
Medical                  8,503    7,004       21   24,293   18,965       28
Industrial              16,055   15,023        7   49,871   41,425       20
Total Sales             28,332   25,957        9   85,113   72,393       18

Net sales to our Aerospace and Defense customers for the three months ended September 30, 2011 were slightly lower than last year due to production delays. The decrease for the nine months ended September 30, 2011 was related to late approval of the Federal Government's funding of 2011 defense programs. The increase in net sales to our Medical customers of $1.5 million for the three months ended September 30, 2011 was primarily due to growth in our existing customer base of $0.8 million and the Mankato acquisition which generated an additional $0.7 million in additional net sales. The increase in net sales to our Medical customers of $5.3 million for the nine months ended September 30, 2011 is primarily due to the


Table of Contents

Mankato and Milaca acquisitions, which added $2.4 million and $2.6 million, respectively. The Mankato acquisition also positively impacted net sales to Industrial customers by $4.6 million and $11.4 million for the three and nine months ending September 30, 2011, respectively, offset by shortfalls to our existing Industrial customers being impacted by an overall uncertain economy.

Backlog:

Our 90-day order backlog as of September 30, 2011 was approximately $21.9 million, compared to approximately $22.8 million at the beginning of the quarter and $23.5 million at September 30, 2010. Backlog by industry market is shown below.

                            Backlog as of the Quarter Ended
                          September 30             June 30          %
(in thousands)                2011                  2011          Change
Aerospace and Defense   $           5,384     $           4,025       34
Medical                             6,077                 6,314       (4 )
Industrial                         10,438                12,445      (16 )
Total Backlog           $          21,899     $          22,784       (4 )

The overall 90 day backlog is down from the start of the quarter due to continued uncertainty in the economy, especially as it relates to our Medical and Industrial customers. Our Aerospace and Defense backlog has increased in the second half of the year as funding is now available to complete the 2011 defense projects.

Gross Profit:

Gross profit percentage for the three months ended September 30, 2011 and 2010 was 11.6% and 11.1% of net sales, respectively. Gross profit percentage for the nine months ended September 30, 2011 and 2010 was 11.4% and 11.9%, respectively. In the third quarter we started to see margin improvements due to favorable product mix, price adjustments and cost reduction initiatives which resulted in gross profit improvement over the first six months of 2011.

General and Administrative Expense:

Our general and administrative expenses were $2.0 million or 6.9% of net sales and $1.9 million or 7.5% of net sales for the three months ended September 30, 2011 and 2010, respectively. General and administrative expenses were $6.0 million or 7.0% of net sales and $5.4 million or 7.4% of net sales for the nine months ended September 30, 2011 and 2010, respectively. The increase in general and administrative dollars spent in 2011 is primarily attributed to additional personnel and related costs incurred as a result of our recent acquisitions. The decrease in general and administrative expense as a percent of net sales is due to the leveraging effect on the increased revenue.

Other Income (Expense):

Other expense for the three months ended September 30, 2011 was $0.1 million compared to other income of $0.1 million for the three months ended September 30, 2010. The increase in


Table of Contents

other expense relates primarily to higher interest expense and less miscellaneous income. Other income for the nine months ended September 30, 2011 was $0.3 million, while other expense for the nine months ended September 30, 2010 was $0.2 million. The other income for the first nine months of 2011 is primarily due to recognizing a bargain purchase gain of $0.8 million from the Mankato acquisition in the first quarter of 2011, offset in part by higher interest expense.

Income Taxes:

Our effective tax rate for the three and nine months ended September 30, 2011 was 35% and 31%, respectively, compared with 42% and 52% for the three and nine months ended September 30, 2010, respectively. The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three and nine months ended September 30, 2011 and 2010 are as follows:

                                        Three Months Ended       Nine Months Ended
                                           September 30            September 30
                                         2011         2010       2011        2010
Statutory federal tax provision       $    96,000   $ 71,000   $ 473,000   $ 261,000
State income taxes                          8,000      8,000      41,000      24,000
Income tax credits                        (20,000 )   (2,000 )   (52,000 )    (6,000 )
NOL carryback true up                           -          -                 111,000
Tax authority closing agreement                 -          -     (96,000 )         -
Reserve for uncertain tax positions         5,000          -      95,000           -
Other                                       9,000     16,000     (26,000 )     8,000
Income tax expense                    $    98,000   $ 93,000   $ 435,000   $ 398,000

Liquidity and Capital Resources:

We have satisfied our liquidity needs over the past several years through revenue generated from operations and an operating line of credit through WFB. We also have real estate and equipment term loans. Both the line of credit and real estate term note are subject to fluctuations in the LIBOR rates. The line of credit, real estate term note, and equipment loans with WFB contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all of our assets. On September 30, 2011, we had an outstanding balance of $9.3 million under the line of credit and unused availability of $4.0 million supported by our borrowing base. We also have $1.0 million available under a 2011 capital expenditure term loan agreement. We believe our financing arrangements and cash flows provided by operations will be sufficient to satisfy our future working capital needs.

Our working capital of $11.8 million as of September 30, 2011 decreased from $13.1 million at December 31, 2010 mainly due to increased usage of our line of credit and current maturities of long term debt of $4.9 million and increased accounts payable and accruals of $3.4 million, partially offset by increased inventories of $5.3 million and increased accounts receivable of $2.1


Table of Contents

million. $4.0 million of the inventory increase and all of the accounts receivable is attributable to operations at our new Mankato facility.

Net cash used in operating activities for the nine months ended September 30, 2011 was $2.2 million. The cash flow used in operations for the nine months ended September 30, 2011 is primarily the result of working capital requirements needed to support the Mankato operations, which included the purchase of approximately $4.0 million of inventory. Beginning in the third quarter of 2011, we are back to generating cash from operating activities. The cash provided from operating activities for the three months ended September 30, 2011 was $2.5 million, mainly attributed to an increase in accounts payable of $2.2 million resulting from extending terms with our large suppliers.

Net cash used in investing activities of $1.6 million for the nine months ended September 30, 2011 is comprised of $0.6 million in property and equipment purchases to support the business and $1.0 million for the Mankato operation acquisition (see Note 6).

Net cash provided by financing activities for the nine months ended September 30, 2011 was $3.6 million, mainly due to the increase in borrowing on the line of credit and notes payable of $5.0 million, in the aggregate, required to fund the Mankato acquisition and growth, partially offset by debt payments of $1.4 million.

Critical Accounting Policies and Estimates

Our significant accounting policies and estimates are summarized in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010. There have been no significant changes in these critical accounting policies since December 31, 2010. Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate. Actual results could differ from these estimates.

Forward-Looking Statements:

Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements generally will be accompanied by words such as "anticipate," "believe," "estimate," "expect," "forecast," "intend," "possible," "potential," "predict," "project," or other similar words that convey the uncertainty of future events or outcomes. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:


Table of Contents

Volatility in the marketplace which may affect market supply and demand for our products;

          Increased competition;

          Changes in the reliability and efficiency of operating facilities or
those of third parties;

          Risks related to availability of labor;

          Increase in certain raw material costs such as copper;

          Commodity and energy cost instability;

          General economic, financial and business conditions that could affect
our financial condition and results of operations;

          Successful integration of recent acquisitions

The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us. Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

Please refer to forward-looking statements and risks as previously disclosed in our report on Form 10-K for the fiscal year ended December 31, 2010.

  Add NSYS to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for NSYS - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.