Nortech Systems Inc (NSYS) 2009 Q4 法說會逐字稿

Greetings and welcome to the Nortech fourth-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 a 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 begin.

Thank you and good morning and welcome to Nortech Systems fourth-quarter 2009 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, along with the current trends in the EMS industry. I will then review our financial results before we open up the call for questions.

As we begin, please be advised that statements made during this call may be forward looking in nature. This includes statements regarding the Company's future growth and financial results, and statements containing words like believes, anticipates, expects and 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 can adversely affect our financial results. Demand for our products and services depend on worldwide economic conditions. They include, but are not limited to the overall economic growth rates; construction; customer spending; consumer spending; financial availability; employment rates; interest rates; inflation; consumer confidence; defense spending; capital spending; and the liquidity in industrial companies. For more detailed discussions of these risks, factors and uncertainties please see our 10-K filing that we filed yesterday with the Securities and Exchange Commission.

I will now turn the call over to Mike Degen. Mike?

Thanks, Rich. Good morning and thank you for joining us. In the next few minutes, I will give an overview of our financial results, outline our initiatives for 2010, and describe some of the trends affecting our industry. Look back for a moment, 2009 was a very tough year for Nortech as it was for many companies. It was truly the most difficult business year I've ever experienced. Our industry, the EMS industry, has never seen such a steep, rapid decline. Best thing to be said about 2009 is that it's over. We navigated through the storm and we've moved on to 2010. I believe our actions and restructuring efforts have strengthened our Company as we move forward. I'm pleased to say that Nortech's financial results and the EMS industry trends are both improving.

A year ago, during the first quarter of 2009, we responded to dramatically-lower customer demand by undertaking significant cost reduction and cash management initiatives. As the recession persisted, we consolidated plants and restructured capacity and resources during the second and third quarters. By September the actions taken started providing the benefits and savings projected. These initiatives resulted in a positive operating cash flow of $3.4 million in the last ten months of 2009. We also returned to profitability, with operating profits of $8,500 in the fourth quarter compared to a $2.1 million operating loss in the first quarter of 2009 and we did this on 8% less sales than in the first quarter. Yesterday, we reported net sales of $79.9 million for 2009m down 34% from 2008.

Looking at the major markets we serve, we saw our aerospace and defense sales decline 42%. This was primarily due to several major contracts that were completed and the timing of new replacement business. The economy hurt our industrial customers the hardest., with sales down 38% from 2008 levels. Sales to our medical customers were less impacted by the economy, down only 18%, as these customers adjusted their inventory levels and reduced their forecasts to match demand. In spite of these dramatic declines in revenue, we are pleased to report we did not suffer any significant loss of customers during this period. Our net sales for the fourth quarter of 2009 were $19.9 million, down 26% from the fourth quarter of 2008, although sales increased 6% sequentially over the third quarter as customer demand began picking up late in the year. From the end of third quarter September 30th until year end, our 90-day backlog increased 25% to $17.7 million. These are positive signs of growth and recovery.

Our return to operating profitability took several quarters as we adjusted our plant capacities and cost structures to the lower customer demand. We closed three of our nine manufacturing facilities in the second and third quarters of 2009, which positively impacted our gross profits throughout the year. The gross profit for the first quarter was 3.9%, the second quarter improved to 5.5%, the third quarter to 8.7% and the fourth quarter gross profit was 11.3% and that returned us to profitability at the operating level. For the year, we reported an EPS loss of $1.40, which includes $1 million in restructuring costs, or $0.22 per share. The good news is the fourth quarter EPS loss was reduced to $0.05 a share as the restructuring benefits began to gain traction. I'd like to conclude my financial recap of 2009 by pointing out our successful efforts in cash conservation and cash management. I mentioned earlier that we generated a positive cash flow of $3.4 million for the last ten months of the year in a very tough economic environment. Our performance helped secure our new banking arrangement in August, which better fits our financial situation.

Looking at the industry it's expected that 2010 we'll see a revenue growth between 3% and 7% according to the forecast of industry analyst firms. The global electronics trade association IPC, tracks the book-to-bill ratio in our industry comparing supply and demand. This ratio was below one parity level from December 2008 until November of 2009 when it returned to parity and in December of 2009 rose to 1.05. Any ratio above parity shows demand exceeding supply and is a positive indicator for future sales. Driving this top-line expansion growth are industries like semiconductors. Gartner Group forecasts worldwide, semiconductor revenue to increase almost 20% this year, the trend that more US OEMs will be choosing regional manufacturing partners here at home rather than overseas.

We're starting 2010 in a much stronger position than a year ago, both in terms of industry outlook and Nortech customer demand. Nortech's management remains committed to our strategic goals for increasing our sales at a rate that outpaces the industry average and to have our profits increase at our higher rate than our sales. While many macro indicators are turning positive, we remain cautious in 2010. We're focusing on improving customer service, conserving cash, watching our discretionary spending and investing wisely. One way we're lowering our cost structure is by aggressively leveraging our lean initiatives. The culture change began in 2006 and is gaining momentum each year, fostering employee involvement throughout the Company at a time when we need it most. We're showing measurable improvements in many key areas, including quality and on-time delivery. Considering the challenges we faced last year, we can point to the lean, focused projects that played a significant role in returning us to operating profitability. Our Company is committed to lean and the elimination of nonvalue activity throughout the Company and we will continue to expand the training and development at all levels of our organization.

Now Rich will give you a few additional comments on our financial results. Rich?

Thanks, Mike. As reported, net sales were $79.9 million for fiscal-year 2009 and $19.9 million for the fourth quarter, a 6% increase over the third-quarter results. Our 90-day order backlog on December 31, 2009 was approximately $17.7 million, up 25% from the $14.2 million at the start of the fourth quarter, and just under the $18.2 million orders for the same time last year. The increases in customer order demand is a positive sign that our customers are feeling more confident in their forecasts and business outlooks. We're seeing less cancellations and the order changes are more move-in and accelerated requests more than move-out. With the backlog increases and the sequential growth, we're beginning to see some upward movement that might indicate the third quarter being the bottom of the downturn for many of our customers. Our fourth quarter gross margin of 11.3% of net sales continues to improve and is slightly lower than the 11.5% for the fourth quarter of 2008. We still have some upside in the gross margin once all of the savings and plant yield initiatives are met.

For the year, our gross profit margin was 7.2% of net sales compared to 13.8% last year. The fourth quarter results show our improvement throughout the year. Our SG&A expenses for the year were $11.3 million, down $2.1 million, or 23%,l and in the fourth quarter, the SG&A expenses were $2.2 million and lower by $869,000, or 28% to 2008 levels. We continue to monitor our spending and our goal is to leverage this expense as the revenue returns. We did book $968,000, a restructuring charges in the year related to the capacity consolidations, all in the first three quarters. For the year, we reported an operating loss of $5.5 million and an operating profit of $8,500 in the fourth quarter. Therefore, 100% of the operating losses were experienced in the first three quarters as we adjusted our capacity and cost structures to lower customer demand levels, the same for the 2009 total year net loss of $3.8 million. All but the fourth quarter loss of $145,000 was booked in the first nine months.

Unfortunately, it took several quarters to adjust to the lower customer demand and shed our excess capacity and related costs, but the fourth quarter results confirm the actions taken were right and necessary. The Company is now poised to take advantage as the economy begins to recover. Although the earnings took time to adjust to the lower revenue levels, our management team moved quickly to adjust to the economic downturn by focusing on areas we could control and that was our cash and asset management. After burning $4.3 million in operating cash flow for the first two months of 2009, our management teams began a full-court press on cash conservation and asset management. Their efforts generate a positive cash flow in the last ten months of $3.4 million, as Mike mentioned previously.

We accomplished that by reducing inventory by almost $5 million year over year. We collected our receivables on time and with $100,000 less bad debt write-offs than the previous year. Our accounts receivable days outstanding ended the year at 56 days after a first quarter high point of 70 days outstanding. Our accounts payable outstanding ended the year at 38 days compared to 39 days at the end of last year. We worked with our suppliers throughout the year, communicating our payment timing and in many cases, upon request we were able to get the suppliers to extend terms. Just a great performance in a tough economic year and it didn't go unnoticed by our Wells Fargo bankers.

We entered into a second amended and restated credit agreement with them on August 6th that provided the flexibility for the current financial conditions. Our line of credit balance at the end of the year was $5.5 million with availability of additional $5.4 million supported by our borrowing base. This meets our internal Company goal of 50% availability to properly support the business and handle any growth in the working capital, if needed. We believe that our financial arrangements with Wells Fargo Bank and anticipated cash flows from operations will be sufficient to satisfy our liquidity requirements for the foreseeable future. Our 2010 cash flow will get a $2 million positive impact from our 2009 tax filing. We're going to get that done as soon as possible, of course. Another plus from the cash management performance was favorable interest expense. Interest expense for the fourth quarter was $127,000 and it was down 22% from a year ago. And for the year, in total, interest expense of $512,000 was down $190,000, or 27%. Our plan is calling for more of the same in 2010 in terms of cash and asset management. Our entire team is committed to build on the momentum of the fourth quarter results.

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

Thank you. (Operator Instructions). Our first question is from Richard Dearnly with Longport Partners. Please proceed with your question.

Good morning.

Hi, Richard.

How's everything? It sounds better. How much of the gross margin improvement through the year was due to closing the three plants?

Good morning, Richard. This is Mr. Rich, how you doing?

Okay.

Just about all of it. It was all utilization -- under utilization and capacity and unabsorbed plants.

Got you.

And the consolidation -- I mentioned earlier that the consolidation effort still has some opportunity in it at the gross margin level.

In what areas?

Yield primarily. Whenever you consolidate plants, you create a different mix in the plants, --

Right.

-- different material flow. Those are all now getting stabilized. We're seeing the benefits but there's still more to come.

While we're talking about measurements here, you said -- Mike said you're leveraging lean manufacturing and they've made dynamic contributions. Could you put some metrics on your on-time delivery change through the year and some quality measures that you use?

Richard, this is Mike. Yes. I don't know that I can state them exactly but I'll give you a -- a general sense for delivery improvement is in the order of probably 25% from the mid 60s to the mid 80s roughly. In terms of the way that we measure the improvement in quality, we measure it really two ways. The defective parts per million that we deliver externally to our customers, that one improved slightly but didn't change a lot, where the major effect happened was its sister measurement, which is defective parts per million internally. So, in other words, we did a very good job of not transferring any quality issues that we may have had to our customers, but we incurred -- some scrap and rework were incurred so we didn't send them out. That scrap and rework improvement was roughly about 30% during 2009.

30% of what?

This is Rich. The scrap and rework ranges differently by plant. I'd say the overall scrap and rework is between 2% and 3%, so, a 30% improvement on --

Oh, so it improved. Okay.

About one percentage point or a little bit less.

And then back to Rich, since I haven't looked at the internals of the P&L, the difference between operating income and pretax in the fourth quarter went from $86,000 last year to $215,000 this year. What was the change there?

The operating profits and this is fourth quarter?

Yes.

Just give me a second to pull that up. The primary difference is expenses related to the agreements. [Wells were] -- in the agreement that we currently have there are several audits and documentation fees and legal fees that was associated with that agreement

I see. Okay, thank you.

Thank you. (Operator Instructions). Gentlemen, there are no further questions in queue at this time. I'd like to turn the call back over to you for closing comments.

Thank you. If there are no further 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. Thank you and have a great day.

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