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Nortech Systems Inc – ‘10-Q’ for 9/30/19

On:  Tuesday, 11/12/19, at 4:11pm ET   ·   For:  9/30/19   ·   Accession #:  1437749-19-22464   ·   File #:  0-13257

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

11/12/19  Nortech Systems Inc               10-Q        9/30/19   50:4.3M                                   RDG Filings/FA

Quarterly Report   —   Form 10-Q   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    474K 
 2: EX-10.2     Material Contract                                   HTML     33K 
 3: EX-31.1     Certification -- §302 - SOA'02                      HTML     23K 
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36: R1          Document And Entity Information                     HTML     47K 
15: R2          Condensed Consolidated Statements of Operations     HTML     79K 
                and Comprehensive Income (Loss) (Unaudited)                      
22: R3          Condensed Consolidated Balance Sheets (Current      HTML    130K 
                Period Unaudited)                                                
49: R4          Condensed Consolidated Balance Sheets (Current      HTML     38K 
                Period Unaudited) (Parentheticals)                               
37: R5          Condensed Consolidated Statements of Cash Flows     HTML    119K 
                (Unaudited)                                                      
18: R6          Condensed Consolidated Statements of Shareholders'  HTML     53K 
                Equity (Unaudited)                                               
23: R7          Note 1 - Summary of Significant Accounting          HTML    132K 
                Policies                                                         
50: R8          Note 2 - Concentration of Credit Risk and Major     HTML     27K 
                Customers                                                        
35: R9          Note 3 - Revenue                                    HTML     65K 
33: R10         Note 4 - Financing Arrangements                     HTML     50K 
44: R11         Note 5 - Leases                                     HTML     88K 
25: R12         Note 6 - Income Taxes                               HTML     21K 
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34: R14         Note 1 - Summary of Significant Accounting          HTML    102K 
                Policies (Tables)                                                
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20: R17         Note 5 - Leases (Tables)                            HTML     89K 
32: R18         Note 1 - Summary of Significant Accounting          HTML     78K 
                Policies (Details Textual)                                       
46: R19         Note 1 - Summary of Significant Accounting          HTML     52K 
                Policies - Stock Option Activity (Details)                       
27: R20         Note 1 - Summary of Significant Accounting          HTML     29K 
                Policies - Inventories (Details)                                 
13: R21         Note 1 - Summary of Significant Accounting          HTML     37K 
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                Expense (Details)                                                
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                (Details)                                                        
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‘10-Q’   —   Quarterly Report
Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Table of Contents
"Part I -- Financial Information
"Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
"Condensed Consolidated Balance Sheets
"Condensed Consolidated Statements of Cash Flows
"Condensed Consolidated Statements of Shareholders' Equity
"Condensed Notes to Consolidated Financial Statements
"Item 2 -- Management's Discussion and Analysis of Financial Condition And Results of Operations
"Item 3 -- Quantitative and Qualitative Disclosures About Market Risk
"Part Ii -- Other Information
"Item 1 -- Legal Proceedings
"Item 1A. -- Risk Factors
"Item 2 -- Unregistered Sales of Equity Securities, Use of Proceeds
"Item 4 -- Mine Safety Disclosures
"Signatures

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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

OR

 

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to          

 

NORTECH SYSTEMS INCORPORATED

 

Commission file number 0-13257

 

State of Incorporation: Minnesota

 

IRS Employer Identification No. 41-1681094

 

Executive Offices: 7550 Meridian Circle N., Suite # 150, Maple Grove, MN 55369

 

Telephone number: (952) 345-2244

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.01 per share

NSYS

NASDAQ Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer ☐

 

Accelerated Filer ☐

Non-accelerated Filer ☒

 

Smaller Reporting Company ☒

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐    

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒

 

Number of shares of $.01 par value common stock outstanding at November 8, 2019 was 2,657,314.

 

1

 

 

TABLE OF CONTENTS

 

  PAGE

PART I - FINANCIAL INFORMATION

 

   
  Item 1  -  Financial Statements  
     
 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

3

     
 

Condensed Consolidated Balance Sheets

4

     
 

Condensed Consolidated Statements of Cash Flows

5

     
 

Condensed Consolidated Statements of Shareholders’ Equity

6

     
 

Condensed Notes to Consolidated Financial Statements

7-17

     
  Item 2  -  Management's Discussion and Analysis of Financial Condition And Results of Operations 18-23
     
  Item 3  -  Quantitative and Qualitative Disclosures About Market Risk 23
     
  Item 4  -  Controls and Procedures 24
     

PART II - OTHER INFORMATION

 
     
 

Item 1  -  Legal Proceedings

25

     
 

Item 1A.  -  Risk Factors

25

     
 

Item 2  -  Unregistered Sales of Equity Securities, Use of Proceeds

25

     
 

Item 3  -  Defaults on Senior Securities

25

     
 

Item 4  -  Mine Safety Disclosures

25

     
 

Item 5  -  Other Information

25

     
 

Item 6  -  Exhibits

26

     

SIGNATURES

27

 

2

Table of Contents

 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

 

   

THREE MONTHS ENDED

   

NINE MONTHS ENDED

 
   

SEPTEMEBR 30,

   

SEPTEMBER 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net Sales

  $ 30,058     $ 29,558     $ 85,515     $ 84,543  
                                 

Cost of Goods Sold

    26,423       26,171       76,594       74,311  
                                 

Gross Profit

    3,635       3,387       8,921       10,232  
                                 

Operating Expenses

                               

Selling Expenses

    589       717       2,147       2,792  

General and Administrative Expenses

    2,333       2,021       7,374       6,177  
                                 

Total Operating Expenses

    2,922       2,738       9,521       8,969  
                                 

Income (Loss) From Operations

    713       649       (600 )     1,263  
                                 

Other Expense

                               

Interest Expense

    (256 )     (170 )     (780 )     (551 )
                                 

Income (Loss) Before Income Taxes

    457       479       (1,380 )     712  
                                 

Income Tax Expense

    44       115       122       350  
                                 

Net Income (Loss)

  $ 413     $ 364     $ (1,502 )   $ 362  
                                 

Net Income (Loss) Per Common Share:

                               
                                 

Basic (in dollars per share)

  $ 0.16     $ 0.14     $ (0.56 )   $ 0.13  

Weighted Average Number of Common Shares Outstanding - Basic (in shares)

    2,657,911       2,680,684       2,667,754       2,698,950  
                                 

Diluted (in dollars per share)

  $ 0.16     $ 0.14     $ (0.56 )   $ 0.13  

Weighted Average Number of Common Shares Outstanding - Diluted (in shares)

    2,657,911       2,682,901       2,667,754       2,702,503  
                                 

Other comprehensive income (loss)

                               

Foreign currency translation

    (56 )     (83 )     (56 )     (137 )

Comprehensive income (loss), net of tax

  $ 357     $ 281     $ (1,558 )   $ 225  

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

3

Table of Contents

 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

 

   

SEPTEMBER 30,

   

DECEMBER 31,

 
   

2019

    2018(1)  

 

 

(Unaudited)

         
ASSETS              

Current Assets

               

Cash

  $ 160     $ 480  

Restricted Cash

    1,794       467  

Accounts Receivable, less allowances of $323 and $222

    20,135       20,093  

Inventories

    16,941       17,004  

Contract Assets

    7,211       6,431  

Prepaid Expenses and Other Current Assets

    2,019       1,381  

Total Current Assets

    48,260       45,856  
                 

Property and Equipment, Net

    9,710       10,178  

Operating Lease Assets

    5,018       -  

Goodwill

    2,375       2,375  

Other Intangible Assets, Net

    1,397       1,523  

Other Non Current Assets

    19       28  

Total Assets

  $ 66,779     $ 59,960  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current Liabilities

               

Current Maturities of Long-Term Debt

  $ 444     $ 780  

Current Portion of Finance Lease Obligation

    476       337  

Current Portion of Operating Lease Obligations

    841       -  

Accounts Payable

    18,384       18,142  

Accrued Payroll and Commissions

    2,626       2,747  

Other Accrued Liabilities

    2,845       2,886  

Total Current Liabilities

    25,616       24,892  
                 

Long-Term Liabilities

               

Long Term Line of Credit

    12,430       9,264  

Long-Term Debt, Net

    3,295       3,624  

Long Term Finance Lease Obligation, Net

    1,168       951  

Long-Term Operating Lease Obligation, Net

    4,517       -  

Other Long-Term Liabilities

    118       139  

Total Long-Term Liabilities

    21,528       13,978  
                 

Total Liabilities

    47,144       38,870  
                 

Commitments and Contingencies

               
                 

Shareholders' Equity

               

Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding

    250       250  

Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,686,328 and 2,739,250 Shares Issued and Outstanding, respectively

    27       27  

Additional Paid-In Capital

    15,713       15,610  

Accumulated Other Comprehensive Loss

    (289 )     (233 )

Retained Earnings

    3,934       5,436  

Total Shareholders' Equity

    19,635       21,090  

Total Liabilities and Shareholders' Equity

  $ 66,779     $ 59,960  

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

(1) The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date

 

4

Table of Contents

 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

 

   

NINE MONTHS ENDED

 
   

SEPTEMBER 30,

 
   

2019

   

2018

 

Cash Flows From Operating Activities

               

Net (Loss) Income

  $ (1,502 )   $ 362  

Adjustments to Reconcile Net (Loss) Income to Net Cash

               

Provided by (Used in) Operating Activities

               

Depreciation and Amortization

    1,648       1,655  

Compensation on Stock-Based Awards

    226       80  

Deffered Taxes

    1       1  

Change in Accounts Receivable Allowance

    101       (5 )

Change in Inventory Reserves

    285       118  

Changes in Operating Assets and Liabilities:

               
Changes in Current Operating Items                

Accounts Receivable

    (158 )     (1,619 )

Inventories

    (237 )     (1,959 )

Contract Assets

    (780 )     (617 )

Prepaid Expenses and Other Current Assets

    (641 )     (278 )

Accounts Payable

    663       4,913  

Accrued Payroll and Commissions

    (120 )     (374 )

Other Accrued Liabilities

    281       287  

Net Cash (Used in) Provided by Operating Activities

    (233 )     2,564  

Cash Flows from Investing Activities

               

Proceeds from Sale of Property and Equipment

    -       17  

Purchase of Intangible Asset

    (37 )     (3 )

Purchases of Property and Equipment

    (785 )     (999 )

Net Cash Used in Investing Activities

    (822 )     (985 )

Cash Flows from Financing Activities

               

Net Change in Line of Credit

    3,165       (445 )

Principal Payments on Long-Term Debt

    (728 )     (819 )

Principal Payments on Finance Leases

    (251 )     (231 )

Stock option exercises

    7       -  

Share Repurchases

    (130 )     (229 )

Net Cash Provided By (Used In) Financing Activities

    2,063       (1,724 )
                 

Effect of Exchange Rate Changes on Cash

    (2 )     (1 )
                 

Net Change in Cash

    1,006       (146 )

Cash - Beginning of Period

    948       779  
                 

Cash - Ending of Period

  $ 1,954     $ 633  
                 

Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets

               

Cash

  $ 160     $ 397  

Restricted Cash

    1,794       236  

Total cash and restricted cash reported in the condensed consolidated statements of cash flows

  $ 1,954     $ 633  
                 

Supplemental Disclosure of Cash Flow Information:

               

Cash Paid During the Period for Interest

  $ 739     $ 507  

Cash Paid (Refunded) During the Period for Income Taxes

    (83 )     167  
                 

Supplemental Noncash Investing and Financing Activities:

               

Property and Equipment Purchases in Accounts Payable

    30       304  

Equipment Acquired under Finance Lease

    607       100  

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

5

Table of Contents

 

 

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)

(IN THOUSANDS)

 

   

Preferred

   

Common

   

Additional

Paid-In

   

Accumulated

Other

Comprehensive

   

Retained

Income

   

Total Shareholders'

Equity

 
                                                 

BALANCE JUNE 30, 2018

    250       27       15,619       (155 )     5,268       21,009  

Net Income

    -       -       -       -       364       364  

Cumulative Adjustment

    -       -       -       -       -       -  

Foreign currency translation adjustment

    -       -       -       (83 )     -       (83 )

Compensation on stock-based awards

    -       -       35       -       -       35  

Share repurchases

    -       -       (42 )     -       -       (42 )
                                                 

BALANCE SEPTEMBER 30, 2018

  $ 250     $ 27     $ 15,612     $ (238 )   $ 5,632     $ 21,283  
                                                 

BALANCE DECEMBER 31, 2017

    250       27       15,760       (101 )     3,889       19,825  

Net Income

    -       -       -       -       362       362  

Cumulative Adjustment

    -       -       -       -       1,381       1,381  

Foreign currency translation adjustment

    -       -       -       (137 )     -       (137 )

Compensation on stock-based awards

    -       -       80       -       -       80  

Share repurchases

    -       -       (228 )     -       -       (228 )
                                                 

BALANCE SEPTEMBER 30, 2018

  $ 250     $ 27     $ 15,612     $ (238 )   $ 5,632     $ 21,283  
                                                 
                                                 

BALANCE JUNE 30, 2019

  $ 250     $ 27     $ 15,682     $ (233 )   $ 3,521     $ 19,247  

Net Income

    -       -       -       -       413       413  

Foreign currency translation adjustment

    -       -       -       (56 )     -       (56 )

Compensation on stock-based awards

    -       -       35       -       -       35  

Share repurchases

    -       -       (4 )     -       -       (4 )
                                                 

BALANCE SEPTEMBER 30, 2019

  $ 250     $ 27     $ 15,713     $ (289 )   $ 3,934     $ 19,635  
                                                 

BALANCE DECEMBER 31, 2018

  $ 250     $ 27     $ 15,610     $ (233 )   $ 5,436     $ 21,090  

Net Loss

    -       -       -       -       (1,502 )     (1,502 )

Foreign currency translation adjustment

    -       -       -       (56 )     -       (56 )

Stock option exercises

    -       -       7       -       -       7  

Compensation on stock-based awards

    -       -       226       -       -       226  

Share repurchases

    -       -       (130 )     -       -       (130 )
                                                 

BALANCE SEPTEMBER 30, 2019

  $ 250     $ 27     $ 15,713     $ (289 )   $ 3,934     $ 19,635  

 

See Accompanying Condensed Notes to Condensed Consolidated Financial Statements

 

6

Table of Contents

 

CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

 

 

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these condensed consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.

 

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

Revenue Recognition

Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts. Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

 

7

 

Stock-Based Awards

Following is the status of all stock options as of September 30, 2019:

 

   

Shares

   

Weighted-

Average

Exercise

Price Per

Share

   

Weighted-

Average

Remaining

Contractual

Term

(in years)

   

Aggregate

Intrinsic Value

(in thousands)

 

Outstanding - January 1, 2019

    224,750     $ 3.44                  

Granted

    186,200       4.31                  

Exercised

    (2,250 )     3.20                  

Cancelled

    (109,700 )     3.50                  

Outstanding - September 30, 2019

    299,000     $ 3.96       9.13     $ -  

Exercisable - September 30, 2019

    26,867     $ 3.41       8.46     $ -  

 

 

The 2005 Plan has not been renewed, and therefore no further grants may be made under the 2005 Plan. In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. There were 16,700 and 186,200 stock options granted during the three and nine months ended September 30, 2019, respectively.

 

Total compensation expense was $35 for both the three ended September 30, 2019 and 2018, and $110 and $80 for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was $403 of unrecognized compensation which will vest over the next 3.13 years.

 

In November 2010, the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (“2010 Plan”). The total number of Equity Appreciation Right Units (“Units”) that can be issued under the 2010 Plan shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015. The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date. Unit redemption payments under the 2010 Plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date. The Units are adjusted to market value for each reporting period.

 

During the nine months ended September 30, 2019, 100,000 units were granted in the first quarter. During the three and nine months ended September 30, 2018, no units were granted.

 

Total compensation expense related to vested outstanding Units based on the estimated appreciation over their remaining terms was $0 for both the three and nine months ended September 30, 2019 and 2018.

 

During the nine months ended September 30, 2019, there were 25,000 shares awarded that vested immediately that had expense of $116 during the first quarter.

 

8

 

Net Income (Loss) per Common Share

For the three months ended September 30, 2019, all stock options are deemed to be antidilutive and, therefore, were not included in the computation of income per common share amount. For the nine months ended September 30, 2019, the Company reported a net loss and all stock options are deemed to be antidilutive and, therefore, were not included in the computation of loss per common share amount. For both the three months and nine months ended September 30, 2018, 2,217 and 3,553 stock options, respectively, were included in the computation of diluted income per common share amount as their impact were dilutive.

 

Share Repurchase Program

We had a $250 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 1,245 and 32,985 shares in the open market transactions totaling $4 and $130 for the three months and nine months ended September 30, 2019, respectively. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted from additional paid-in capital. As of September 30, 2019, our share repurchase program has expired, and no additional amounts are available for repurchase.

 

Restricted Cash

Cash and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. The September 30, 2019 balance included lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day. As of September 30, 2019, we had no outstanding letters of credit.

 

Accounts Receivable and Allowance for Doubtful Accounts

Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable at both the three months ended and nine months ended September 30, 2019 have been reduced by an allowance for doubtful accounts of $323 at September 30, 2019 and $222 at December 31, 2018.

 

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Costs include material, labor, and overhead required in the warehousing and production of our products. Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.

 

 

Inventories are as follows:

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Raw Materials

  $ 17,036     $ 16,769  

Work in Process

    1,105       1,015  

Finished Goods

    198       332  

Reserves

    (1,398 )     (1,112 )
                 

Total

  $ 16,941     $ 17,004  

 

9

 

Other Intangible Assets

Other intangible assets at September 30, 2019 and December 31, 2018 are as follows:

 

           

September 30, 2019

 
           

Gross

                 
           

Carrying

   

Accumulated

   

Net Book

 
   

Years

   

Amount

   

Amortization

   

Value

 

Customer Relationships

    9     $ 1,302     $ 615     $ 687  

Intellectual Property

    3       100       86       14  

Trade Names

    20       814       173       641  

Patents

    7       55       -       55  

Totals

          $ 2,271     $ 874     $ 1,397  

 

 

           

December 31, 2018

 
           

Gross

                 
           

Carrying

   

Accumulated

   

Net Book

 
   

Years

   

Amount

   

Amortization

   

Value

 

Customer Relationships

    9     $ 1,302     $ 506     $ 796  

Intellectual Property

    3       100       61       39  

Trade Names

    20       814       143       671  

Patents

    7       17       -       17  

Totals

          $ 2,233     $ 710     $ 1,523  

 

 

Amortization expense for the three and nine months ended September 30, 2019 was $55 and $164, respectively.

 

Estimated future annual amortization expense (not including projects in process) related to these assets is approximately as follows (in thousands):

 

Year

 

Amount

 

Remainder of 2019

  $ 55  

2020

    191  

2021

    185  

2022

    185  

2023

    185  

Thereafter

    541  

Total

  $ 1,342  

 

10

 

Impairment of Goodwill and Other Intangible Assets

In accordance with ASC 350, Goodwill and Other Intangible Assets, goodwill is not amortized but is required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. We test impairment annually as of October 1st. No events were identified during the nine months ended September 30, 2019 that would require us to test for impairment. In testing goodwill for impairment, we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than it carrying value, then the goodwill is determined to be impaired. In the event that goodwill is impaired, an impairment charge to earnings would become necessary.

 

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment and intangible assets, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value. No impairment expense was recorded during the three and nine months ended September 30, 2019 and 2018, respectively.

 

Recently Adopted Accounting Standards

 

On January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842). This ASU requires lessees to recognize lease assets and lease liabilities on the balance sheet. Under the new guidance, lessor accounting is largely unchanged. We have elected to adopt the standard on the modified retrospective basis. We have also elected the package of practical expedients, which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we have elected the short-term lease recognition whereby we will not recognize operating lease related assets or liabilities for leases with a lease term less than one year. We did not elect the hindsight practical expedient to determine the reasonably certain term of existing leases.

 

The impact of adopting the new lease standard was the recognition of $5,731 of lease assets and lease liabilities related to our operating leases. The adoption of the new lease standard had no impact to our Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows or Condensed Consolidated Statements of Shareholders’ Equity.

 

 

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintain our excess cash balances in checking accounts at primarily two financial institutions, one in the United States and one in China. The account in the United States may at times exceed federally insured limits. Of the $160 in cash at September 30, 2019, approximately $105 was held at banks located in China. We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.

 

Our largest customer has two divisions that together accounted for 10% or more of our net sales during the three and nine months ended September 30, 2019 and 2018. One division accounted for approximately 19% and 21% of net sales for the three and nine months ended September 30, 2019, respectively, and approximately 20% for both the three and nine months ended September 30, 2018. The other division accounted for approximately 3% of net sales for both the three months and nine months ended September 30, 2019, and approximately 1% net sales for the three and nine months ended September 30, 2018. Together they accounted for approximately 22% and 24% of net sales for the three and nine months ended September 30, 2019, respectively, and approximately 21% of net sales for both the three and nine months ended September 30, 2018. Accounts receivable from the customer at September 30, 2019 and December 31, 2018 represented approximately 28% and 16% of our total accounts receivable, respectively.

 

11

 

Export sales represented approximately 9% and 20% of net sales for the three months ended September 30, 2019 and 2018, respectively. Export sales represented 15% and 19% of net sales for the nine months ended September 30, 2019 and 2018, respectively.

 

 

NOTE 3. REVENUE

 

Revenue recognition

Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.

 

Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.

 

The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. If these requirements are not met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 91% of our revenue for both the three and nine months ended September 30, 2019. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.

 

Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and costs. We estimate profit on these agreements as the difference between total estimated revenue and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on anticipated selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgements on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated profit.

 

On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in revenue as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has no impact on overall profitability.

 

12

 

Contract Assets

Contract assets, recorded as such in the Condensed Consolidated Balance Sheets, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the three and nine months ended September 30, 2019 was as follows (in thousands):

 

Nine Months Ended September 30, 2019

       

Outstanding at January 1, 2019

  $ 6,431  

Increase (decrease) attributed to:

       

Transferred to receivables from contract assets recognized

    (4,923 )

Product transferred over time

    5,703  

Outstanding at September 30, 2019

  $ 7,211  

 

 

We expect substantially all the remaining performance obligations for the contract assets recorded as of September 30, 2019, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.

 

The following tables summarize our net sales by market for the three and nine months ended September 30, 2019 (in thousands):

 

   

Three Months Ended September 30, 2019

 
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Medical

  $ 14,399     $ 1,661     $ 983     $ 17,043  

Industrial

    7,279       822       522       8,623  

Aerospace and Defense

    3,978       133       281       4,392  

Total net sales

  $ 25,656     $ 2,616     $ 1,786     $ 30,058  

 

 

   

Nine Months Ended September 30, 2019

 
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Medical

  $ 42,039     $ 1,914     $ 2,053     $ 46,006  

Industrial

    22,847       2,297       1,146       26,290  

Aerospace and Defense

    12,236       375       608       13,219  

Total net sales

  $ 77,122     $ 4,586     $ 3,807     $ 85,515  

 

 

 

 

 

NOTE 4. FINANCING ARRANGEMENTS

 

We have a credit agreement with Bank of America which was entered into on June 15, 2017 and amended effective December 29, 2017 and provides for a line of credit arrangement of $16,000 that expires on June 15, 2022. The credit arrangement also has a $5,000 real estate term note outstanding with a maturity date of June 15, 2022.

 

13

 

Under the Bank of America credit agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate. Our line of credit bears interest at a weighted-average interest rate of 5.4% and 4.3% as of September 30, 2019 and 2018, respectively. We had borrowings on our line of credit of $12,430 and $9,264 outstanding as of September 30, 2019 and December 31, 2018, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.

 

The line of credit and real estate term notes with Bank of America 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.

 

The Bank of America credit agreement as amended provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quarters ending December 31, 2018. As of September 30, 2019, we did not meet the fixed charge coverage ratio which was waived by BofA in the third amendment to the credit agreement received on November 8, 2019.

 

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At September 30, 2019, we had unused availability under our line of credit of $3,523, supported by our borrowing base. The line is secured by substantially all of our assets.

 

As part of the July 1, 2015 Devicix acquisition we entered into two unsecured subordinated promissory notes payable to the seller in the principal amounts of $1,000 and $1,300, which was fully paid off during the first half of 2019.

 

In the second quarter of 2019, our China operations entered into a line of credit arrangement with China Construction Bank which provides for a line of credit arrangement of 6,000,000 Renminbi (RMB) that expires on April 3, 2021. This line of credit bears an interest rate of 6% and we had no amounts outstanding as of September 30, 2019.

 

14

 

Long-term debt at September 30, 2019 and December 30, 2018 consisted of following:

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Real estate term notes bearing interest at one-month LIBOR + 2.25% (4.4% and 4.8% as of September 30, 2019 and December 31, 2018, respectively) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets.

  $ 3,880     $ 4,253  
                 

Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019

    -       156  
                 

Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019

    -       203  
      3,880       4,612  
                 

Discount on Devicix Notes Payable

    -       (23 )

Debt issuance Costs

    (141 )     (185 )
                 

Total long-term debt

    3,739       4,404  

Current maturities of long-term debt

    (444 )     (780 )

Long-term debt - net of current maturities

  $ 3,295     $ 3,624  

 

 

 

 

NOTE 5. LEASES

 

We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from one to five years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants. At September 30, 2019, we do not have material lease commitments that have not commenced.

 

15

 

The components of lease expense were as follows:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 

Lease Cost

 

2019

   

2019

 

Operating lease cost

  $ 253     $ 785  

Finance lease interest cost

    21       54  

Finance lease amortization expense

    65       196  

Total lease cost

  $ 339     $ 1,035  

 

 

Supplemental balance sheet information related to leases was as follows:

 

 

Balance Sheet Location

 

September 30, 2019

 

Assets

         

Operating lease assets

Operating lease assets

  $ 5,018  

Finance lease assets

Property, Plant and Equipment

    1,834  

Total leased assets

    6,852  
           

Liabilities

         

Current

         

Current operating lease liabilities

Current Portion of Operating Lease Obligations

    841  

Current finance lease liabilities

Current Portion of Finance Lease Obligations

    476  

Noncurrent

         

Long-term operating lease liabilities

Long Term Operating Lease Liabilities, Net

    4,517  

Long term finance lease liabilities

Long Term Finance Lease Obligations, Net

    1,168  

Total lease liabilities

  $ 7,002  

 

Supplemental cash flow information related to leases was as follows:

 

   

Nine Months Ended September 30,

 
   

2019

 

Operating leases

       

Cash paid for amounts included in the measurement of lease liabilities

  $ 555  

Right-of-use assets obtained in exchange for lease obligations

  $  

 

16

 

Maturities of lease liabilities were as follows:

 

   

Operating

Leases

   

Finance Leases

   

Total

 

Remaining 2019

  $ 191     $ 133     $ 324  

2020

    858       534       1,392  

2021

    722       534       1,256  

2022

    726       359       1,085  

2023

    738       138       876  

Thereafter

    3,381       102       3,483  

Total lease payments

  $ 6,616     $ 1,800     $ 8,416  

Less: Interest

    (1,258

)

    (156 )     (1,414

)

Present value of lease liabilities

  $ 5,358     $ 1,644     $ 7,002  

 

The lease term and discount rate at June 30, 2019 were as follows:

 

Weighted-average remaining lease term (years)

       

Operating leases

    7.6  

Finance leases

    3.4  

Weighted-average discount rate

       

Operating leases

    4.8

%

Finance leases

    5.4

%

 

Rent expense for our operating leases the three and nine months ended September 30, 2018 as accounted under ASC 840, Leases, was $297 and $951, respectively.

 

The future minimum lease commitments as of December 31, 2018, under ASC 840 are as follows:

 

   

Operating Leases

 

2019

  $ 1,024  

2020

    858  

2021

    722  

2022

    726  

2023

    738  

Thereafter

    3,380  

Total minimum obligations

  $ 7,448  

 

 

 

NOTE 6. INCOME TAXES

 

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three and nine months ended September 30, 2019 was 10% and (9%), respectively and our effective tax rate for the three and nine months ended September 30, 2018 was 24% and 49%, respectively.

 

17

 

 

 

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

 

Overview

 

We are a Maple Grove, 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 engineering 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 facilities in Bemidji, Blue Earth, Eden Prairie, Mankato, Merrifield, and Milaca, Minnesota; Monterrey, Mexico; and Suzhou, China. All of our facilities are certified to one or more of the ISO/AS standards, including 9001, AS9100 and 13485, with most having additional certifications based on the needs of the customers they serve.

 

Results of Operations

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
    September 30,     September 30,  
   

2019

   

2018

   

2019

   

2018

 

Net Sales

    100.0

%

    100.0

%

    100.0

%

    100.0

%

Cost of Goods Sold

    87.9       88.5       89.6       87.9  

Gross Profit

    12.1       11.5       10.4       12.1  
                                 

Selling Expenses

    2.0       2.4       2.5       3.3  

General and Administrative Expenses

    7.7       6.8       8.6       7.3  

Income from Operations

    2.4       2.3       (0.7 )     1.5  
                                 

Other Expenses

    (0.9 )     (0.7 )     (0.9 )     (0.7 )

Income (Loss) Before Income Taxes

    1.5       1.6       (1.6 )     0.8  
                                 

Income Tax Expense

    0.1       0.4       0.2       0.4  

Net Income (Loss)

    1.4

%

    1.2

%

    (1.8 %)     0.4

%

 

 

Net Sales

 

Net sales were $30.1 million in the third quarter of 2019, as compared to $29.6 million in the third quarter of the prior year, an increase of $0.5 million or 1.7%. Net sales results were varied by markets; the medical market increased by $2.7 million or 19.3% with medical devices accounting for the increase. The industrial market decreased by $2.5 million or 22.3% of sales in the third quarter of 2019 as compared to the same quarter of 2018. Net sales from the aerospace and defense markets increased by $0.2 million or 5.0% of sales in the third quarter of 2019 as compared to the third quarter of 2018.

 

Net sales were $85.5 million in the nine months ended 2019, as compared to $84.5 million in the prior year, an increase of $1.0 million or 1.1%.  Net sales results were varied by markets; the medical market increased by 9.1 million, or 24.9% with medical device accounting for 84.5% of the increase and medical component products the remaining 15.5%. The industrial market decreased by $8.0 million of sales or 23.3% for the nine months ended September 30, 2019 as compared to the same period of 2018. Net sales from aerospace and defense markets remained flat in the nine months ended September 30, 2019 as compared to the same period of 2018.

 

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Table of Contents

 

Net sales by our major EMS industry markets for the three and nine months ended September 30, 2019 and 2018 were as follows (in thousands):

 

   

Three months Ended September 30,

   

Nine Months Ended September 30,

 
   

2019

$

   

2018

$

   

%

Change

   

2019

$

   

2018

$

   

%

Change

 

Medical

    17,043       14,280       19.3       46,006       36,838       24.9  

Industrial

    8,623       11,094       (22.3 )     26,290       34,261       (23.3 )

Aerospace and Defense

    4,392       4,184       5.0       13,219       13,444       (1.7 )

Total Net Sales

    30,058       29,558       1.7       85,515       84,543       1.1  

 

 

Net sales by timing of transfer of goods and services for the three and nine months ended September 30, 2019 is as follows (in thousands):

 

   

Three Months Ended September 30, 2019

 
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Medical

  $ 14,399     $ 1,661     $ 983     $ 17,043  

Industrial

    7,279       822       522       8,623  

Aerospace and Defense

    3,978       133       281       4,392  

Total net sales

  $ 25,656     $ 2,616     $ 1,786     $ 30,058  

 

 

   

Nine Months Ended September 30, 2019

 
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Medical

  $ 42,039     $ 1,914     $ 2,053     $ 46,006  

Industrial

    22,847       2,297       1,146       26,290  

Aerospace and Defense

    12,236       375       608       13,219  

Total net sales

  $ 77,122     $ 4,586     $ 3,807     $ 85,515  

 

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Table of Contents

 

Net sales by timing of transfer of goods and services for the three and nine months ended September 30, 2018 is as follows (in thousands):

 

    Three Months Ended September 30, 2018     
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Medical

  $ 13,461     $ 151     $ 668     $ 14,280  

Industrial

    9,486       1,116       492       11,094  

Aerospace and Defense

    3,931       50       203       4,184  

Total net sales

  $ 26,878     $ 1,317     $ 1,363     $ 29,558  

 

 

   

Nine Months Ended September 30, 2018

 
   

Product/ Service

Transferred

Over Time

   

Product

Transferred at

Point in Time

   

Noncash

Consideration

   

Total Net Sales

by Market

 

Medical

  $ 34,513     $ 720     $ 1,605     $ 36,838  

Industrial

    29,698       3,165       1,398       34,261  

Aerospace and Defense

    12,675       170       599       13,444  

Total net sales

  $ 76,886     $ 4,055     $ 3,602     $ 84,543  

 

 

Backlog

 

Our 90-day shipment backlog as of September 30, 2019 was $32 million, a 2.0% increase from the beginning of the quarter and a 15.6% increase from the prior year. Backlog for our medical customers has increased 6.4% from the beginning of the quarter and increased 37.8% from the prior year. Our industrial customers’ backlog increased 6.0% from the beginning of the quarter and decreased 10.2% from the prior year. The aerospace and defense backlog decreased 13.5% from the beginning of the quarter and increased 6.9% from the prior year. Our backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.

 

90-day shipment backlog by our major EMS industry markets are as follows (in thousands):

 

   

Shipment Backlog as of the Period Ended

 
   

September 30,

   

June 30,

   

September 30,

 
   

2019

   

2019

   

2018

 

Medical

  $ 17,778     $ 16,701     $ 12,902  

Industrial

    8,334       7,863       9,279  

Aerospace and Defense

    5,909       6,833       5,530  

Total 90-Day Backlog

  $ 32,021     $ 31,397     $ 27,711  

 

 

Our 90-day backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases. These variables cause inconsistencies in comparing the backlog from one period to the next. Our total shipment backlog was $58.1 million at September 30, 2019 compared to $43.1 million at the end of September 30, 2018.

 

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Table of Contents

 

Gross Profit

 

Gross profit as a percent of net sales for the three months ended September 30, 2019 and 2018 was 12.1% and 11.5%, respectively, driven by favorable product mix. Gross profit as a percentage of sales for the nine months ended September 30, 2019 and 2018 was 10.4% and 12.1%, respectively. The decline in gross profit in the year to date comparison was driven by product mix and operational inefficiencies due to component shortages.

 

Selling Expense

 

Selling expenses for the three months ended September 30, 2019 and 2018 was $0.6 million or 2.0% of sales and $0.7 million or 2.4% of sales, respectively. Selling expense for the nine months ended September 30, 2019 and 2018 was $2.1 million or 2.5% of sales and $2.8 million or 3.3% of sales, respectively. The decrease in both the three and nine month periods is due to lower sales incentives and timing of events.

 

General and Administrative Expense

 

General and administrative expenses for the three months ended September 30, 2019 and 2018 were $2.3 million or 7.7% of sales and $2.0 million or 6.8% of sales, respectively. General and administrative expenses for the nine months ended September 30, 2019 and 2018 were $7.4 million or 8.6% of sales and $6.2 million or 7.3% of sales, respectively. The increase in both comparisons was due to additional spend related to our recently implemented ERP system and one-time expenditures to improve operations.

 

Income (Loss) from Operations

 

Third quarter 2019 income from operations was $0.7 million compared to $0.6 million for the third quarter in 2018. Loss from operations for the first nine months in 2019 was $0.6 million as compared to income of $1.3 million for the same comparable period in 2018.  The decrease to a loss from operations for the period was due to the gross profit decline and higher general and administrative expenses.

 

Income Taxes

 

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three and nine months ended September 30, 2019 was 10% and (9%) and the rate for the three and nine months ended September 30, 2018 was 24% and 49%, respectively.

 

Net Income (Loss)

 

Net income for the three months ended September 30, 2019 and September 30, 2018 was $0.4 million. Net loss for the nine months ended September 30, 2019 was $1.5 million and net income for the nine months ended September 30, 2018 was $0.4 million.

 

21

Table of Contents

 

Liquidity and Capital Resources

 

Net cash used in operating activities for the nine months ended September 30, 2019 was $0.2 million. Net cash provided by operating activities for the nine months ended September 30, 2018 was $2.6 million driven by the net income net of the noncash adjustment of depreciation and amortization, along with an increase in accounts payable, partially offset by an increase in accounts receivable and inventories.

 

We have satisfied our liquidity needs over the past several years with cash flows generated from operations and a bank operating line of credit. We have a credit agreement with Bank of America (BofA) which was entered into on June 15, 2017 and amended on December 29, 2017 and provides for a line of credit arrangement of $16.0 million that expires on June 15, 2022. The credit arrangement also has a $5.0 million real estate term note outstanding with a maturity date of June 15, 2022.

 

Both the line of credit and real estate term notes are subject to fluctuations in the LIBOR rates. The line of credit and real estate term notes with BofA 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, 2019, we had outstanding advances of $12.4 million under the line of credit and unused availability of $3.5 million supported by our borrowing base. We believe our financing arrangements and cash flows to be provided by operations will be sufficient to satisfy our future working capital needs. Our working capital was $22.7 million and $20.7 million as of September 30, 2019 and December 31, 2018, respectively.

 

The BofA credit agreement as amended provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quarters ending December 31, 2018. As of September 30, 2019, we did not meet the fixed charge coverage ratio which was waived by BofA in the third amendment to the credit agreement received on November 8, 2019.

 

Off-Balance Sheet Arrangements

 

We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.

 

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, 2018. 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.

 

22

Table of Contents

 

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:

 

 

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

 

 

 

 

Volatility in the marketplace which may affect market supply and demand for our products or currency exchange rates;

 

 

 

 

Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing;

 

 

 

 

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 and oil;

 

 

 

 

Commodity and energy cost instability;

 

 

 

 

Risks related to quality, regulatory, securities laws and debt covenant noncompliance;

 

 

 

 

Loss of a major customer or changes to customer orders;

 

 

 

 

Increased or unanticipated costs related to compliance with securities and environmental regulation; and

 

 

 

 

Disruption of global or local information management systems due to natural disaster or cyber-security incident.

 

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. Discussion of these factors is also incorporated in Part I, Item 1A, “Risk Factors,” and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

23

Table of Contents

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of these disclosure controls and procedures as of the date of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

Except for the implementation of certain internal controls related to the adoption of the new lease standard (ASC 842), there was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

 

24

Table of Contents

 

PART II

 

 

ITEM 1. LEGAL PROCEEDINGS

 

We are subject to various legal proceedings and claims that arise in the ordinary course of business.

 

ITEM 1A. RISK FACTORS

 

We are affected by the risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended under the heading “Part I – Item 1A.Risk Factors.” Other than as noted below, there have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018.

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The table below sets forth information regarding the repurchases we made of our common stock during the periods indicated.

 

Period

 

Total Number of

Shares Purchased

   

Average Price

Paid Per

Share

   

Total Number of

Shares Purchased as

Part of Publicly

Announced Plan

   

Maximum Dollar Value

of Shares that May

Yet Be Purchased

Under the Plan

 

July 1 - July 31, 2019

    1,029     $ 3.94       1,029     $ 33,508  

August 1 - August 30, 2019

    216     $ 3.90       216     $ 32,644  

September 1 - September 30, 2019

    -     $ -       -     $ -  

Total

    1,245     $ 3.93       1,245     $ -  

 

As of September 30, 2019, our share repurchase program has expired, and no additional amounts are available for repurchase.

  

 

ITEM 3. DEFAULTS ON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

25

Table of Contents

 

ITEM 6. EXHIBITS

 

Exhibits

 

  10.2* Third Amendment to Loan and Security Agreement and Waiver.
     
 

31.1*

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

 

 

31.2*

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

 

 

32*

Certification of the Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101*

Financial statements from the quarterly report on Form 10-Q for the quarter ended September 30, 2019, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Condensed Notes to Condensed Consolidated Financial Statements.

 

 

 

*Filed herewith

 

26

Table of Contents

 

Signatures

---------------

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

Nortech Systems Incorporated and Subsidiaries

------------------------------------------------------------

 

 

 

Date: November 12, 2019

by /s/ Jay D. Miller

 

Jay D. Miller

Chief Executive Officer and President

Nortech Systems Incorporated

   
Date: November 12, 2019 

by /s/ Constance M. Beck

 

Constance M. Beck

Vice President and Chief Financial Officer

Nortech Systems Incorporated

 

27


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
6/15/22
4/3/21
12/31/1910-K,  SD
Filed on:11/12/19
11/8/19
For Period end:9/30/19
8/30/19
7/31/19
7/1/19
6/30/1910-Q
1/1/193,  4
12/31/1810-K,  SD
12/30/18
9/30/1810-Q
6/30/1810-Q
12/31/1710-K,  SD
12/29/178-K
6/15/178-K
7/1/158-K
3/11/1510-K,  3,  8-K
 List all Filings 


3 Subsequent Filings that Reference this Filing

  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 3/17/23  Nortech Systems Inc.              10-K       12/31/22   74:6.8M                                   RDG Filings/FA
 3/17/22  Nortech Systems Inc.              10-K       12/31/21   77:6.8M                                   RDG Filings/FA
 3/23/21  Nortech Systems Inc.              10-K       12/31/20   73:5.7M                                   RDG Filings/FA
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