Nortech Systems Inc (NSYS) 2009 Q2 法說會逐字稿

Greetings and welcome to the Nortech second quarter 2009 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

As reminder this conference is being recorded. It is now my pleasure to introduce your host, Rich Wasielewski, Vice President and CFO for Nortech. Thank you Mr. Wasielewski, you may now begin.

Good morning and welcome to Nortech Systems second quarter conference call. I am Rich Wasielewski, Vice president and CFO. With me today is Nortech's President and CEO, Mike Degen.

Following my brief introduction, Mike will offer some comments on the second quarter, recent developments and the overall EMS industry. I will then 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. This include statements regarding the Company's future growth and financial results and any statement 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 worldwide economic conditions could adversely affect our financial results. Demand for our products and service depend upon and not including but not limited to overall economic growth rates, construction, consumer spending, finance availability, consumer confidence, defense spending; and the profits, capital spending in liquidity of our industrial companies.

A continued recession in the economy and in the markets that we serve could further cause our OEM customers to reduce spending levels, resulting in reschedules, program delays or canceled orders of our products and service; having an adverse effect on our business and our financial results. For a more detailed discussion of these risks 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 second quarter financial results, we will update you about Nortech's continuing response to the difficult economic conditions and also the latest EMS industry projections.

The cost reduction and cash management initiatives we undertook in the first quarter bore fruit in the second quarter as we saw notable improvements in both operating profits and cash flow. Rich will go into those numbers a bit later.

However, those initiatives were not enough. The continued economic slowdown impacted our customers and our operations deeply, requiring further more fundamental changes. Therefore in the second quarter, we restructured our capacity to better match expected demand. We took two primary actions.

First we began relocating personnel and production operations from our aerospace systems facility in Fairmont, Minnesota to our facility in Blue, Earth Minnesota 16 miles away. The Blue Earth facility is significantly larger at 140,000 square feet and was underutilized. In Fairmont we manufactured in three different buildings totaling 52,000 square feet and this multi-building arrangement lacked certain efficiencies.

Second, in June we announced the closing of our facility in Garner, Iowa. We are in the process of consolidating those operations which are primarily printed circuit board assembly work to our facility in Merrifield, Minnesota.

Both of these actions are expected to be completed by the end of August. These restructuring decisions were tough because they impacted very good people. Nortech's greatest asset has always been our dedicated and skilled employees. However, all these steps were taken to ensure our company's long-term health and viability.

And while these steps taken during the first half of 2009 were necessary in the short term, we do not believe that reducing costs is the single path to profitability. Nortech has a long history of success dating back to 1990 and we know that a dual strategy of cost management initiatives and sales growth is necessary to thrive and grow.

That's why we're committed to maintaining our marketing and sales infrastructure, focused on servicing our existing customers and winning new business despite this challenging economy. On the financial side, we have maintained a strong balance sheet and working capital position. Our solid banking relationship with Wells Fargo is helping us navigate successfully through these tough times.

Earlier this week, we announced a second amended and restated credit agreement with Wells Fargo Bank which provides a $12 million line of credit through June 2010 and a real estate term note maturing in May 2012. The covenants and performance requirements in this new arrangement are better related to our current business and financial position.

We expect this new financing arrangement and our anticipated cash flows from operations to satisfy our working capital needs going forward. This agreement is an important step in continuing to build confidence in both our customer and supplier base.

The economic downturn has affected the EMS industry overall. The latest figures I have seen from [electronic trend] publications predict industry revenues will decline by 6.6% this year. However, recovery is expected to start in 2010 with growth rates increasing. They forecast 8.2% growth in 2010, 10.3% in 2011, 14.4% in 2012 and 15.9% in 2013.

The same analyst from also claims that the trend of OEMs choosing low-cost regions over high-cost regions is starting to wane as labor cost differences are being increasingly offset by total production costs including transportation and logistics. For our specific business model, offshore competition has never been as strong as say for EMS providers who provide consumer electronics.

Our specialty is low-volume production of a high variety of products. Most OEM customers with this type of product mix prefer working with local or regional EMS providers like Nortech who can offer quick turnaround and hands-on customer service and support.

We are committed to continuous improvement, including our lean manufacturing initiative. We are very good at what we do and have strong relationships with many major OEMs who value our expertise. That customer loyalty along with our committed employees will continue to serve us well.

In closing, I believe Nortech Systems is going to be well positioned when the economic recovery starts. We are on track with continued operational improvements that are impacting our bottom line, we strengthened our financial position with our new banking agreement; we maintain a loyal, diverse customer base across our three core markets -- industrial, defense and medical.

Now I'll turn it back over to Rich for an in-depth look at our second-quarter results. Rich?

Thanks Mike. We reported net sales of $19.9 million for the second quarter, down just under 8% from the first quarter sales, showing some signs that we may be hitting the bottom of the economic downturn.

The $19.9 million in net sales was 38% below the same quarter last year. Our aerospace and printed circuit board assembly operations were both down about 37% and the cable wire operations was down 40% from last year quarter levels.

Although we are still experiencing reduced order quantity and rescheduling, it's to a lesser extent than the past three quarters. Our customers continue to watch their inventory levels closely and remain cautious in their buying practices, trying hard to match purchases closer to the demand.

Our 90-day backlog as of June 30 was approximately $14 million compared to approximately $15 million at the beginning of the quarter and approximately $18 million at the start of the year. Our gross profit for the quarter was 6% of net sales compared to 4% in first quarter and 14% for the second quarter of 2008.

We again were heavily impacted by our volume shortfalls and underutilization of our manufacturing facilities. We took a number of cost reduction actions in the first quarter that helped improve the gross profit percent even with slightly lower volume.

We began to address the excess capacity issues in the second quarter with the consolidation efforts Mike mentioned earlier. The capacity restructuring activities are scheduled to be completed in the third quarter and we should begin to experience the full impact starting in the fourth.

Selling expenses in the second quarter were $1.1 million, down 20% to both the first quarter of 2009 and the second quarter last year. Selling expense dollars are down due to cost controls and lower commissions from the decline in revenue.

Our intent is to maintain our salesforce infrastructure and marketing initiatives during the economic downturn. We are committed to a high level of customer service and remain confident that we can take advantage of the opportunities to expand our customer base at this time. Many OEMs are looking to further outsource and consolidate their supplier base to reduce cost and risks in the supply chain.

Our fixed general and administrative expenses were $1.5 million in the quarter compared to $1.9 million reported last year, a $400,000, 21% decrease for the quarter and down $1.1 million or 26% for the six months year-to-date timeframe. The expense reductions were the result of reduced personnel and cuts in all discretionary spending accounts.

We took a $645,000 pretax restructuring and impairment charge in the quarter as a result of operations closing in Iowa and the consolidation of the aerospace assembly production. Other expenses netted $194,000 for the quarter, the same as last year. There was some movement in the higher interest rates but that was more than offset by the lower borrowing levels.

Our loss from operations for the second quarter was $1.6 million excluding the restructuring charges. This is a 26% improvement over the first quarter operating losses on 8% less sales.

The reporting operating loss for the second quarter including the charges was $2.2 million compared to a $1.1 million operating profit in the second quarter of last year. On income taxes, we experienced an income tax benefit of $867,000 in the quarter and for the six months the benefit is $1.8 million.

The net loss for the second quarter was $1.5 million or $0.56 per diluted common share compared to a net income of $600,000 or $0.20 per share reported last year. For the six months, our net loss is $2.8 million. The impact of the one-time restructuring charges and impairment were per diluted share was $0.14. That's being reported in the second quarter. That is $0.14 for the second quarter and six months as well.

I'd like to move over to the balance sheet and liquidity. We continue to satisfy our liquidity needs through revenues generated from operations and an operating line of credit through the new agreement just signed with Wells Fargo. On June 30, 2009 we had an outstanding balance of $6.4 million on the line of credit and unused availability of 3.4 supported by our current borrowing base levels.

As a result of the waiver connected to the new finance agreement signed August 6, we were compliant with all financial requirements and as a result, we reclassified all long-term debt outstanding that was reported as current at the end of the first quarter back to long-term as of June 30, 2009. In terms of operating cash flow, we have seen some positive trends in the recent months.

We have been operating cash flow positive for several months and for the second quarter ended June 30, the net cash flow provided by operations activities was on the plus side by $1.3 million compared to net cash used in the first quarter of 3.1. We will continue focusing on strengthening our working capital position and cash flow management throughout our fiscal 2009.

Net cash used in operating activities for the six months was $1.8 million which is down $200,000 from the $202 million of net cash used last year for the same six-month period. The cash used is a result of the year-to-date loss of 2.8, a positive non-cash adjustment for depreciation, amortization items of $1 million and then there were no impacts from operating assets and liabilities -- from changes in operating assets and liabilities.

We decreased inventory in the six months by 3.8 and receivables by 1.2 and this was offset by paying payables of 2.9, taxes of 1.6 and other accruals of 0.5. Net cash used in investing activities of $200,000 was for equipment purchases compared to $1.1 million last year for the same timeframe as we carefully monitor our capital spending. Net cash provided from financing activities for the six months was $2 million, consisting primarily of our line of credit advances and equipment loan and these were offset by principal payments.

In summary of the events and results of the second quarter, we saw some positive trends in stability compared to the prior two quarters. Revenues appear to be approaching the bottom.

We've seen EMS industry forecasts that were flat in 2010 increase to some positive growth. Our operating profits are improving as a result of the cost reduction efforts and the effects of the consolidations are just beginning.

A new banking agreement is in place to support our recovery. And finally, the positive operating cash flow generated goes a long way in building confidence for all Nortech stakeholders. Now we'll turn the call over for questions. Operator?

(Operator Instructions) Richard Dearnly, Longport Partners.

Have the operations -- have the positive cash flows stayed -- continued into July and August?

We anticipate that to happen. Again as I mentioned in my call here, the effects of the consolidation hasn't taken place just yet. So we definitely -- our goal is definitely to stay cash neutral and positive if we can. But I think we will see -- personally I think we will see a good news item coming up with the consolidation efforts.

What do you -- what is the guess on what that is going to save?

We put some numbers to it. We are looking at a potential 2 to 3% improvement in the gross margin as a result of that.

I see. What happened to the terms of the bank agreement with the renegotiation and then the waiver?

You say what happened to the terms?

Yes, I suppose your interest rates went up?

Oh yes. We got hit with a few percentage points. Not as bad as we thought actually. We had good news and I think the bank took into consideration our performance over the last five years and that we are all hoping just like they are that this is a bump in the road for these last couple of quarters.

But we did go up. You will see our 10-Q that's going to be filed tomorrow and the current interest rate was LIBOR -- the old agreement was LIBOR at 30 days plus anywhere between 1.75 and 2.75 and the current agreement is LIBOR at 90 days plus 5 points.

Okey-doke, thank you.

(Operator Instructions) We appear to have no further questions.

Well if there are no further questions, thanks for joining in either by telephone or by Web and for your continual interest in Nortech Systems and have a great day.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.