Q4 2023 Nortech Systems Inc Earnings Call
Participants
Andrew LaFrence; Chief Financial Officer & Senior Vice President - Finance; Nortech Systems Inc
Jay Miller; President & Chief Executive Officer; Nortech Systems Inc
Thor Mickelson
Presentation
Operator
(audio in progress) are Jay Miller, President and Chief Executive Officer; and Andrew Lafrence, Chief Financial Officer and Senior Vice President of Finance. (Operator Instructions)
At this time, it is my pleasure to turn the call over to Andrew Lafrence.
Andrew LaFrence
Thank you, John. I'd also like to welcome everyone to today's conference call. Jay will begin the call with a review of our operations, recent developments and business outlook. Then I will review Nortech's fourth quarter and full-year 2023 financial results before turning it back over to Jay for his closing comments, then we will open up the call for your questions.
Before we continue, please note that statements made during this call may be forward-looking statements regarding expected net sales, earnings, future plans, opportunities and other company expectations. These estimates, plans and other forward-looking statements involve unknown and known risks and uncertainties that may that may cause actual results to differ materially from those expressed or implied on this call. These risks, including those are detailed in our most recent Form 10-K filed today, may be amended or supplemented.
The statements made during this call are based upon information known by Nortech as of the date and time of this call, and we assume no responsibility or obligation to update information in today's call. You can find Nortech's complete Safe Harbor statement in our recent SEC filings.
And now with that, I'll turn the call over to Jay for his opening comments.
Jay Miller
Thank you, Andy, and good afternoon, everyone. We're glad you could join us today. Since this is Andy's first conference call with Nortech, I'd like to take a minute and officially welcome him, and he joined us in December as CFO and Senior VP of Finance, bringing a wealth of knowledge and experience. He's held C-suite positions with several public and private companies and he's served on a number of corporate and non profit boards.
And he also spent a number of years on the audit side as partner as a partner at KPMG, Nortek is very fortunate to have Andy on the team along with overseeing Nortech's Financial Operations, and he will assist our leadership team and Board of Directors with Strategic Planning.
As I've mentioned on past calls, strategic planning at Nortech is an ongoing iterative process integrated into our DNA. Our strategic plan is not something we just dust off every three years before filing in a way. We work on it diligently every year and take the process very seriously.
Foundational to Nortech's strategic planning is an employee-first mindset. Our employees are our most valuable assets, and Nortech's strategic plan reflects that. We would not have delivered our strong 2023 financial results with our team members' outstanding contributions, and the whole Nortech team deserves our sincere appreciation while financial and operational improvements are measured on income and cash flow statements, balance sheets and spreadsheets. It's much harder to quantify Nortech's culture and values, but the whole team creates the right environment where such quantitative improvements can be realized. Everything starts and ends with how our employees live out, Nortech's values of teamwork, excellence, commitment, innovation and integrity every day.
Touching briefly on our financial results. Now we posted record net sales for the fourth quarter and the fiscal year 2023, along with continued improvements in gross margin. We work carefully with our customers as strategic partners to adjust pricing as needed to reflect market conditions and supply chain realities.
Our EBITDA levels were also solid at $3.2 million for the fourth quarter and $8 million for the year. Overall, we're seeing encouraging normalization trends in supply chain and customer ordering practices, factors that had influence our unusually high backlog levels a year ago while we're not completely back to what it was what was considered normal. We believe these situations have mostly stabilized in supply chain dynamics. The concept of near-shoring is gaining attention recently according to a January article by the global electronics trade association, IPC. last year, Mexico surpassed China for the first time in 20 years by contributing the highest percentage of U.S. imports from any country. We have seen this trend at Nortek as well. Our three-tiered global strategy of manufacturing in the U.S., Mexico and China gives Nortek customers flexibility and improving their own competitiveness, we can move production around based on factors like cost, operational requirements, quality control, and intellectual property concerns. Our customer teams and engineers evaluate each customer's needs to determine the most suitable location, which may also change over the course of a product's lifecycle.
In terms of China, as I mentioned on past calls, much our production much of our production work there is built in-country for country, a near-shoring approach to better serve our customers and the global market, including reduced shipping costs to support Nortek's global operations, including our work with large multinational customers. We started a commercial banking relationship with Bank of America in 2017. We appreciate the flexibility. This line of credit has provided as well as the endorsement of our strategic direction by a world banking leader. Recently, we made a change to the structure of that agreement in order to better support our operational needs. And I will give you more details in a few minutes.
On a final note, I'd like to recognize an important transition in our executive team. Congratulations and thank you to Curt's taken who retired late last year after North after nearly 20 years at Nortek, most recently as Senior VP of Business Operations during his tenure occurred played a key role in Nortek's growth, both the expansion of our full-service solutions offerings and significant improved increase in our medical market sales.
Stepping into Phil Kurtz role as Corey Hancock, who joined us last spring as Vice President of Sales and Business Development. Previously, Corey is with Benchmark Electronics for nearly 24 years, most recently as Vice President of Strategic Accounts, benchmark as a recognized world leader in our industry, operating multiple facilities across the Americas, Asia and Europe. They were the 13th largest EMS provider in 2022. Given that background and his ability to build and lead sales teams, we are very pleased to have Corey join our leadership team.
Next, I'll turn it over to Andy for a more in-depth look at our financial results. Andy?
Andrew LaFrence
Thank you, Jay. First, I would like to acknowledge the tremendous team at Nortech. When I started in early December, I had very high expectations. Based upon my interview process. I shall report that our leadership team employees and culture are top-notch.
In the next few minutes, I will provide certain details of our financial performance in 2023 by will encourage you to review our press release and recently filed Form 10 K as it contains more information about our business operations and financial performance than we will cover on the call today.
As we have pointed out in the past, we believe that our individual quarters can be affected by outside factors. These may include timing fluctuations, customer shipments and supply chain issues. Any of these could materially impact a particular quarter, either positively or negatively. Consequently, we believe is more appropriate to review our business on a 12-month basis rather than focusing on quarterly performance. This approach will help normalize these potential anomalies and offer a better gauge of our strategies long-term success.
So today, I will focus most of my comments on our full year results. As Jay noted earlier, in 2020, three, we anticipated demand levels to fluctuate as customers continued to work through their respective inventories. We saw this influence in the third quarter net sales levels. However, we were pleased to see this issue begin to resolve in the fourth quarter. Our year-over-year increase in fourth quarter net sales help us to drive nearly 4% increase in net sales for all of 2023 from the prior year. Additionally, we did see sustained year-over-year 90 day backlog levels, gross margin expansion and solid levels of net income and EBITDA and the balance of my comments, I will review key areas, which drove our 2023 financial performance. They include, first, our view of certain factors and impact in our income statement. Second, selected items which influences Nortek's cash statement.
And lastly, a brief review of the balance sheet. As usual, if you have specific questions about these items or any of our quarterly or annual financial results. I will be happy to address them during our Q&A portion of this afternoon's call.
In Q4 2023, net sales totaled $36.1 million. This represents a 1.2% increase from the net sales of $35.6 million in the fourth quarter of 2022 and is up approximately 8% on a sequential quarterly basis. This performance is particularly noteworthy as it comes to strong results in the respective prior periods.
In 2023, net sales totaled $139.3 million, up nearly 4% from the prior year. Nortek's full year 2023 net sales performance was driven by growth in all three of our major industry categories. Medical aerospace and defense as well as industrial. For the year, the medical market was up by $2.8 million, 3.7% as compared with 2022 with the majority of the increase coming from medical component products for the year, net sales from the aerospace and defense category totaled $20.5 million, a 5.1% increase from the prior year. And net sales from Nortek's industrial category were $40.1 million, up $3.6 million from the prior year. Included in the financial performance for the full year 2023, gross profit was $23.1 million or 16.6% compared with gross profit of $20.5 million, or 15.3% in the prior year. Operating expenses totaled $17.2 million, a 3.4% increase from 2022 operating expense of $16.6 million. The $559,000 increase in year-over-year operating expense was driven primarily by a $929,000 increase in general and administrative expenses as we incurred merit wage increases, plus investments in our back office infrastructure to create efficiencies. This was offset by a $121,000 reduction in 2023 selling expenses and a $264,000 decrease in product research and development costs. Despite the decline in year-over-year R&D expenses, we believe that this level of investment is sufficient to support new RDX Technologies based on our historical continued and consistent profitability over the past several years in our forecast of future performance Fourth Quarter 2023 GAAP net income, including non cash income tax benefit included a non-cash income tax benefit of 2.6 million related to the reversal of a previously previously established deferred income tax valuation allowance as a result of our performance in the fourth quarter and noncash income tax benefit, net income in 2023 totaled $6.9 million or $2.38 per diluted share compared with 2 million or $0.7 per diluted share in 2022. Adjusted for the noncash income tax benefit net income would have totaled $4.3 million or $1.48 per share, more than double the level of net income in 2022. As noted in our press release distributed this afternoon. We are using earnings before interest, tax, depreciation and amortization, our EBITDA as a key performance indicator to manage our business. In the press release, we have provided a reconciliation of our financial performance determined in accordance with GAAP and EBITDA.
Further for the year ended December 31, 2023, EBITDA increased 38.2% to $8 million compared with $5.8 million for 2022. This increase is largely due to increased sales.
Moving to the balance sheet and cash flow statement first from for the year ended December 31, 2023, net cash provided by operating activities totaled $1.8 million during the fourth quarter as a result of the previously outlined normalization in the slowdown in customer demand. Inventory levels of $21.7 million were materially unchanged from the prior quarter and down from $22.4 million as of December 31, 2022. Receivables as of December 31, 2023, were 19.7 million, up from receivables of $16 million as of December 31, 2022. This is in line with our strong fourth quarter sales and the timing of customer payments. Our contract asset, which represents revenue earned, but not yet billed to customers increased to $14.5 million as of December 31, 2023, as compared with $10 million at the end of 2022. This increase reflects the timing of customer shipments and the strong fourth quarter sales of quarter net sales. As a reminder, the majority of our net sales are generated from products contractually manufactured specifically to a customer's unique application. And as such, we recognize revenue in accordance with US GAAP as we produce these products.
We ended the fourth quarter with $9.4 million of borrowing capacity on our line of credit. We recently placed our asset backed line of credit with a cash flow backed $15 million senior secured revolving line of credit, which will expire at the end of February 2027. The new revolver allows for borrowings at a defined rate or at one three or six months secured overnight by finance rate of our sulfur plus a defined margin. We believe that overtime this arrangement will be more beneficial to Nortek and provide greater flexibility in supporting our ongoing operations.
Our evolution to a cash flow credit facility as a result of Nortek's focus on strengthening of its balance sheet and delivering sustained EBITDA growth. For a more detailed explanation of this new agreement, please see our explanation in the 2023 10 K.
As of December 31st, 2023, cash and cash equivalents totaled $1.7 million, up from $1.1 million at the end of the prior quarter and down from $2.5 million at the end of the prior year. Fluctuation in cash balances reflects timing of cash receipts expenditures combined with the timing of line of credit borrowings and repayments.
On a final note, our top financial priorities for 2024 remain unchanged. First, we are extremely focused on continuing to strengthen our balance sheet.
Next, we will take further advantage of opportunities to align our operations and infrastructure with market demand that we are seeing to deliver sustainable EBITDA growth as well as driving improvements in free cash flow, our confidence when Covance results from growing momentum as we saw in 2023, coupled with disciplined lean operations, execution, expense management and R&D innovation we believe Nortek can deliver on our objectives.
With that, I will turn it back over to Jay for his closing remarks. Jay?
Jay Miller
Thanks, Andy. Before we open the call to your questions. I want to touch on three related areas that together serve our customers and help advance Nortek's corporate stewardship, our engineering expertise, product innovation and sustainability plans for engineering expertise. We have a dedicated engineering services team that is focused on enhancing manufacturability and serviceability, supply chain, risk mitigation and cost efficiency for our customers. Earlier in this call, I mentioned the benefits of our three tier cost structure across the U.S., Mexico and China and how we can quickly adapt our global resources to fit our customers' changing needs.
Nortech's engineering capabilities also further our research and development activities with advancements like the expanded beam extreme fiber-optic technology or EBX that we announced in January, AVX's designed for digital data transmission and offers improved speed, reliability and security when compared to traditional copper. At the simplest level, the vast majority of Nortech's products provide digital connectivity solutions that transmit data and power in various applications. As you may know the Internet of Things or IoT integrates a variety of electronic components components such as microcontrollers, sensors, actuators and connectivity modules. These components in turn enable IoT connected devices to collect parcels transmit and receive data more and more today, that data is being evaluated and analyzed using artificial intelligence for improved performance and data management for our customers as well as for their customers, more data means need better data pipelines, and that's where Nortech comes in technologies like REBX. mark cables helps collect and distribute this data faster, more cost effectively and more securely across these sophisticated networks. We see strong opportunities for growth here. For example, industrial IoT applications are expected to experience impressive double digit annual growth from 2023 to 2030 according to the Fortune. According to Fortune business insights, our pivot to more fiber-optic technology improves product performance for our customers by offering unparalleled speed and reliability. It also aligns with the sustainability goals we share with many of those customers when compared with traditional fiber. Traditional copper fiber optics offers significant environmental benefits during both production and operation, including improved energy efficiency and less material usage while decreasing the carbon footprint of complex cables we manufacture. For example, aerospace and defense customers are adopting fiber-optic technology due to these to these key advantages, reduce size, weight and power requirements, immunity to electronic electromagnetic interference, improve security and greater durability in harsh environments. Harsh environments, of course, are very common in aerospace and defense applications. Nortech has a proud history of serving these customers. Unique needs needs dating back roughly 30 years. It's the smallest of our three core markets by net sales, but very important for our diversification, our contributions to our national defense, our source of great pride for Nortech employees. The majority of our aerospace and defense cables are still traditional black round and molded type common in legacy defense systems such as shipboard missile launchers, but we are looking to the future with fiberoptics and evolving along with our customers.
In closing, we are excited about technological developments across all of our markets and expect them to support our continued sales momentum in 2020 for aid by stabilization in supply chain and customer orders.
Last month, IPC cited improving sentiment among among global electronics manufacturers with stronger demand and shipments reported in January. Our progress over these quarters over recent quarters confirms that outlook.
Now we'll open up the call to your questions. John, please open the lines lines.
Question and Answer Session
Operator
(Operator Instructions) Thor Mickelson, Private Investor.
Thor Mickelson
Jay and Andrew, congratulations on a great quarter. We really appreciate that. Thank you. Miss a question for Jay. Congratulations, Jay, on your five-year anniversary with Nortech. As a shareholder, I'm delighted for your tenure at Nortech. Could you please briefly comment on what you've seen Nortech accomplished in these last five years, your perspectives on that and where you see Nortech going now?
Jay Miller
Yeah. Thank you, Thor. That's a really good question and I appreciate it and look at the businesses. The business has changed quite a bit in the past five years.
But what has not changed is the dedication and the focus of the employees here. We have great employees. We have great customers. We have great supplier partners. And candidly, it was for those reasons why I took the job to begin with.
Now we've gotten a lot more disciplined about managing our balance sheet. We've done a lot as you've seen, we've done a lot a cleanup of our balance sheet over the past five years on and now we're much more on a growth trajectory. Our expectation is that we will take it from here on our expectation is we'll continue to grow the top line and candidly, we'll grow the bottom line faster. And I am very confident this team can can do that.
I mentioned in my remarks, our strategic planning process, which we take very, very seriously, and we execute very very, we're very focused on the executed that execution of that plan. We were very seldom, if ever deviate from our strategic plan. No plans are never perfect. And we have to make adjustments along the way. But this team has proven that it can make great adjustments along the way to deliver good top-line growth and really good bottom-line growth.
So I'm thrilled with how things have gone. If I look back at where I thought we would be five years from the time I took this business and candidly, I don't think we I would have thought we would have made this much progress. And I didn't know anything about COVID and 18, we didn't predict the global supply chain crisis. So the fact that this business has done so well through COVID, in fact, gotten stronger through COVID and a lot of ways on and manage the global supply chain crisis crisis as gracefully as it has. I can't tell you I couldn't be any more proud of the people at Nortech for what they've done. So thanks for the question.
Thor Mickelson
This maybe a question for Andrew, or Jay jump in. But looking at the margin for this last year, gross margin. If I if I'm reading that correctly, I'm seeing there's a 300-basis-point improvement over the last quarter, and I see generally your operating expenses have been well controlled. Could you comment on what drove first corrective, what drove and what's been driving? You mentioned last quarter you're expecting improved gross margins? Is there some scale in counting there?
Andrew LaFrence
Yeah, really good question, Thor. A combination of things that really drove a one is just an increase of revenue cover our fixed cost structure was was helpful. As we did note on in earlier calls, we have been really hyper-focused on on folks on costs and also customer relationships and making sure that we are sending those cost back to customers where we've had supply costs. So I think it's a combination of us getting in front of some historical cost curves and but as importantly, understand the leverage of the business, especially, you know, couple of years out here for us from some consolidation of our plants. So it really just was everybody was operating well, we had a minor mix improvement as well in the fourth quarter. But the team John and his team just operated very, very well and executed.
Thor Mickelson
And do you think that's sustainable? I mean, you're even doing a path here because if that continues, why would you have a range of core?
Andrew LaFrence
Yes, Jay, and a very important concept here is that since he's been here. There's been continuous improvement in terms of the stability of the balance sheet and the performance metrics and and one of the things that's really become important for us is our ability to manage this business and we will continue to look for opportunities to expand the margin. We are, as you well know, hitting also the other side of the curve here where we're starting to see some limited cases and deflation and some of our costs. But we'll keep and file those, make sure we manage our customer relationships so that so that we can eventually continue to drive more volume through the facilities, which is really the key to drive those margins up.
Thor Mickelson
And maybe just one last question. I was surprised to hear. You talked about improved sales. I've not heard you talking a lot about sales as much that you're seeing from improved sales and looks like your backlog is improving a lot of other operators are seeing challenges burning off inventory. So you're seeing perhaps an inflection point here.
Jay Miller
Yeah. I mean, we've seen that too, by the way. And Andy touched on that, I think we both subset out of it in the remarks. I mean, we've seen our backlog kind of normalize. And candidly, we expected our backlog would have we'd have when I say normalized, you know, gotten back to a more regular level. It obviously took off and went up quite a bit during during COVID as we were experiencing global supply chain crisis.
But actually, we've seen a little less of that loss, I'll use quotes, normalization, than we expected. And I look, I think we're we have proven that we can execute better than most of our competitors. And we have challenges. We face challenges every day, but we manage those challenges pretty darn well on. And that's our expectation that we're going to close more business, not only from existing customers, but also from a number of new customers which we are. We are they have been reasonably successful at doing. I'm very proud of the business development team. I'm very proud, as I mentioned in the comments that we transitioned So gracefully from Kurt's, taken it to Corey Hancock that that went even better than I could have that Imagine, and that team is doing a great job right now. And of course, we expect more out of them moving forward.
Thor Mickelson
Thank you so much. Congratulations.
Jay Miller
Yeah. Thank you, Thor.
Operator
(Operator Instructions) Okay, looks like we have no further questions in queue. I'd like to turn the floor back to Jay Miller for any closing remarks.
Jay Miller
Thank you, John, and thanks to everyone for joining us today, and we look forward to talking to you in May when we report our first full quarter of 2024 results. Again, thank you and goodbye.
Operator
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Andrew LaFrence
Thanks, John.
Jay Miller
Thanks, John.
Operator
Thank you, gentlemen. Take care.
