Nortech Systems Inc (NSYS) 2008 Q4 法說會逐字稿

Greetings and welcome to the Nortech fourth quarter 2008 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Rich Wasielewski. Thank you. Mr. Wasielewski, you may begin.

Good morning. And welcome to Nortech's 2008 fourth quarter conference call. I'm Rich Wasielewski, Vice President and CFO, and with me today is Nortech's President and CEO, Mike Degen. Following my brief introduction, Mike will offer some comments on the fourth quarter and fiscal year, recent developments, and industry trends. I will review our financial results before we open up the call for questions.

Before we begin, please be advised that statements made during the course of this call that are not historical are forward looking in nature. These include statements regarding the company's future growth and financial results and any statements containing words like believes, anticipates, expects, or similar words. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause actual results to differ materially from these statements.

The current economic conditions in the United States and around the world could adversely affect our financial results. Demand for our products and services depends upon worldwide economic conditions, including but not limited to overall economic growth rates, construction, consumer spending, financial availability, employment rates, interest rates, inflation, consumer confidence, and defense spending levels, and the profits, capital spending and liquidity of industrial companies. A continued recession in the economy in the markets that we serve could further cause our OEM customers to reduce spending levels resulting in rescheduling, program delays, cancellation of orders of products and services, and have an adverse effect on our business and financial results. For more detailed discussions of these risk factors and uncertainties, please see our filings with the Securities and Exchange Commission.

I would now like to turn the call over to Mike Degen. Mike?

Thanks, Rich. Good morning, everyone. Along with summarizing our 2008 financial results, we look forward to sharing with you about how Nortech Systems is managing through these challenging economic times. Yesterday we reported record net sales of $121.9 million for 2008, an increase of 3.2%. Our sales growth during 2008 was led by the defense sector, along with the medical, cable, and wire customers which offset softness in our industrial customer base. Net income increased 11% to $1.8 million or $0.64 per diluted common share.

I'd like to point out that 2008 operating profits and net income were impacted by a $337,000 increase in the reserve for doubtful accounts for a past due customer in the fourth quarter. Excluding this late revenue adjustment, 2008 net income would have been higher by $0.07 per share or $0.71 per diluted share for the year.

We are pleased with our 2008 financial results in a year that began with high commodity and energy costs and finished with an economic downturn. Our strong balance sheet and liquidity position will serve us well here in 2009.

During the first week of March, I was on the road visiting with Nortech employees at all eight of our facilities across Minnesota, Iowa, and Wisconsin, and by conference call with our Mexico facility. I informed them that Nortech is in a good position to withstand the current downturn and that we will emerge stronger whenever the inevitable turnaround begins. I reminded them, we've got the best people and organization in the EMS industry to handle this situation. We've got a great customer base servicing the medical, defense, and industrial markets. A customer base that's generated six years of record setting revenue growth for Nortech. And we have a solid banking partner in Wells Fargo that understands our business model and our commitment to a strong balance sheet and working capital position which is so critical during these tough times.

Over the past several months, EMS industry analysts have been adjusting their 2009 revenue forecasts downward. The analysts double digit growth rate predictions in early 2008 have now been revised downward to single digit declines compared with 2008. We definitely concur with this changing outlook. We started feeling the effects in the fourth quarter and began implementing several cost cutting and cost avoidance initiatives to help offset the anticipated revenue declines. Some of the major actions taken include a reduction in officer salary and bonus plans, a freeze on all new hires, a freeze on company wide wage increases, a reduction in work force and hours to more closely align with demand, and reduced spending levels across the board. Although these adjustments are needed at this time, I assure you that our management team is being aggressive in the marketplace and looking for new opportunities, opportunities that come from winning business from financially troubled and weak competition and from OEMs looking to outsource during these times to reduce costs and improve their working capital positions.

Of our three core markets that we serve, defense, medical, and industrial, defense is probably making the most headlines in recent months with speculation about President Obama's defense budget and its future impact. Next month when the President's detailed budget proposal goes to congress, we'll all know more of the specifics. Even then, the military procurement process is very protracted, and we don't expect to see sudden changes. Our aerospace systems operation serves this market and the market size is determined by the Department of Defense budget. The latest long range forecast I've seen expects national defense outlays to peak at $675 billion in 2009, up from $607 billion in 2008. For 2010, the forecast drops to $590 billion, followed by $560 billion in 2011.

The other markets will be impacted by the overall economy, with the medical markets to a lesser extent. We've carved out a very well respected niche with our defense customers and are beginning to pursue additional services within this customer base.

Rich will now give you more detail about our 2008 financial results, financial priorities for 2009, and our current outlook. Rich?

Thanks, Mike. Now we'll look more closely at our fourth quarter and fiscal financial performance. For the 2008 fiscal year, we reported record net sales of $121.9 million, an increase of 3.2%. In the fourth quarter, we reported $27 million in net sales, a decline of 8% as we began experiencing the effects of the economy downturn. Our fiscal year sales increase was led by aerospace systems operation, up 11%. Our commercial and industrial cable and wire business grew 8%, primarily due to our medical customers. These increases helped offset a decline of 8% in our commercial, industrial printed circuit board assembly businesses, as these industrial customers are getting hit the hardest by the poor economic conditions.

Our 90 day backlog on December 31, 2008, was approximately $18.2 million, down 30% from the $26.2 million at the start of the fourth quarter, and 33% down from the same time last year. The reductions can be attributed to several factors, including the economic slowdown, the current mix of orders, and an improved past due condition. For the year, our gross profit margin was 13.8% of net sales, compared to 13.7% in the prior year. The fourth quarter gross margin percent fell off to 12.2% of net sales as we began to experience the economic downturn.

As Mike mentioned earlier, we are adjusting our resources and capacity plans, as well as reducing all discretionary spending to align with our lower customer demands. In addition, we are counting on our investments in our lean focused initiatives to eliminate waste and costs from our business processes. These actions are being taken to mitigate the impact on gross margin.

In 2008, our selling expenses were $5.8 million or 4.7% of net sales compared to $5.1 million and 4.4% in 2007. Our selling expenses are in line with our strategy of, again, investing in selling support, customer service, and marketing programs. We have remained fairly aggressive with funding our sales efforts to our current quoting activity levels and pipeline opportunities.

Our 2008 general and administrative were $7.6 million, or 6% of net sales. This is the same as last year. The 2008 G&A expenses includes a $337,000 increase in the reserve for doubtful accounts for a past due customer booked in the fourth quarter. We are taking additional action to minimize bad debt exposure during this economic downturn.

We reported operating income of $173,000 for the fourth quarter compared to $1.1 million for the fourth quarter of 2007. Quarterly net income totaled $77,000 or $0.03 per diluted common share compared to $0.19 per diluted common share for the fourth quarter of 2007. For the year, operating income was $3.5 million, was down slightly from $3.6 million reported in 2007, but the net income for 2008 fiscal year increased 11% to $1.8 million or $0.64 per diluted common share compared with $0.58 the prior year.

As we move on to the balance sheet and liquidity, I'd like to report that interest expense for the fourth quarter was $162,000, down 46% from the prior year. I'm sorry, for the quarter. For the prior year, we were down 37% due to lower interest rates and borrowings. Our outstanding line of credit balance at the end of the year was $4.4 million, a reduction of $1.2 million from the beginning of the year, and $3.8 million from the end of the third quarter. The unused available balance increased to over $8 million.

Our working capital was $15.8 million on December 31, 2008, up $1 million from the beginning of the year primarily due to higher tax related assets and the paydown of our line of credit. Net cash generated from operating activities for the fiscal year was $4 million compared to $4.3 million in 2007. Another good year for cash flow. There was $3.6 million of cash provided from net income and noncash items such as depreciation. The other $400,000 of cash provided from other operating activities came mainly from a decrease in accounts receivable of $2.2 million and an increase of inventories of $1.8 million.

Cash used for purchase of capital equipment in 2008 was $2.3 million compared to $1.5 million last year. We also used cash of $1.8 million in financing activities to pay down our long term debt and our line of credit. We believe that our financial agreements with Wells Fargo and the anticipated cash flow from operations will be sufficient to satisfy our working capital needs, capital expenditures, investments and debt repayments for the foreseeable future.

This concludes my financial review. Now we'll open up the call for questions.

Ladies and gentlemen, we'll now be conducting a question and answer session. (Operator Instructions) It appears we have no questions. I'd like to turn the floor over to Mr. Mike Degen for any closing comments.

If there are no questions this morning, we'll wrap up today's fourth quarter call. Thanks to everyone for joining in and for your continued interest in Nortech Systems. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and we thank you for your participation.