Nortech Systems Inc (NSYS) 2010 Q2 法說會逐字稿

Greetings and welcome to the Nortech second quarter 2010 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, you may 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 and current industry trends. I will then review our financial results for the quarter and six months before we open the call up 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 any statements containing the words like, believes, anticipates, expect, and similar words. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that which may cause actual results to differ materially from these statements.

The 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 the overall economic growth rates in construction, consumer spending, financing availability, employment rates, interest rates, inflation, consumer confidence, defense spending, capital spending and liquidity of industrial companies.

For more details and discussions on these risk factors and uncertainties, please see our most recent 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, and thank you for joining us. Our second-quarter results show that we are maintaining the positive momentum we've demonstrated now for four consecutive quarters. Since the second quarter of 2009 which represented the trough of this recession for Nortech, we've continued to post improvements in sales, backlog and operating income.

Our second-quarter sales of $24.7 million increased 24% over the second quarter of 2009 and 14% from the first quarter of 2010. Customer confidence is improving as is evidenced by our increased quoting activity, new business wins and higher backlog levels.

Our 90 day backlog position was $21.3 million on June 30, 2010 up 12% from the start of the quarter and 50% from the same period in 2009. Our reported operating income of $500,000 in the second quarter is 49% better than our first quarter and a significant improvement over the $2.2 million operating loss for last year's second quarter which included strip restructuring costs.

We are still managing our business and investments with caution with a careful eye on the pace of economic recovery. Last year's restructuring activities along with other cost reduction initiatives started gaining traction during the second half of 2009.

The benefits from these efforts are showing up in this year's results. We feel that the experience of 2009 has made us a stronger more disciplined company in terms of cash, costs and asset management.

The industry is also becoming more optimistic. A year ago during the second quarter conference call, I cited analyst predictions that overall EMS industry revenues would decrease 7 to 8% in 2009 with a recovery beginning in 2010.

Fast forward 12 months and that recovery is indeed underway. One bell weather indicator is the health of the global semiconductor business and 2010 is expected to see the largest annual revenue growth in the industry history in dollar terms. We have customers that manufacture capital equipment for this industry.

The two latest EMS industry forecasts I've seen from IDC and New Venture Research are calling for compound annual growth rates between 8 and 12% from 2010 to 2014. Our objective remains to exceed the industry overall growth rate and we set a good pace so far in 2010.

I will conclude my remarks by reiterating two noteworthy transactions announced during the second quarter that have longer-term implications. The first is in addition to our medical market service offering.

On May 4 we purchased an electronics manufacturer in Milaca, Minnesota that specializes in medical devices. This acquisition expands our capabilities and offers additional revenue potential in this high-growth sector.

We are currently making some necessary investments to help maximize this potential for the long-run. Yesterday our Board of Directors met at the Milaca facility, had an excellent tour and really are anticipating that this will be a very positive addition to our portfolio of offerings.

Secondly, on May 27 we entered into a new three-year financing arrangement with Wells Fargo Bank providing us an operating line of credit through May 2013. These strategic transactions were possible as a direct result of actions and efforts taken by our organization the past 12 months and our performance during that time.

We are committed to taking advantage of opportunities like these to grow and strengthen our Company for the long-term. Now Rich will give you some further details on our financial results.

Thanks, Mike. I would like to start my review with the financial highlights of the second quarter. They are the increase in sales of 24% over last year and 12% over Q1. Gross profit margins continued to improve and operating profits are up significantly to prior year.

In addition, Mike mentioned two financial transactions that were completed in the second quarter. The extension of our line of credit to 2013 and the acquisition of the Milaca medical device operations, reporting net sales of $24.7 million for second quarter and $46.5 million for the six months year to date.

This increase was led by sales to industrial and medical customers which rose 72% and 80% respectively over the second quarter 2009. Industrial and medical sectors in particular are showing increased buying confidence aided by some macroeconomic stabilization.

Both of these categories were hard hit last year and are recovering nicely. The medical device acquisition we announced in May provided $874,000 in sales for the second quarter.

Sales to our aerospace defense customers were down 55% from the second quarter of 2009. Last year we continue to completed several large multi-year contracts and we've been working hard to refill our pipeline.

We are beginning to see signs of recovery and stabilization in this customer base. Our aerospace defense backlog is up 8% over the start of the quarter and we've won several new programs from new and existing customers over the past year.

Overall, our Company's 90 day backlog was $21.3 million on June 30, up 12% from $19 million at the beginning of the quarter and up 53% from $13.9 million a year ago. Our medical customers backlog was up 45% and now includes our new Milaca medical device customers while our industrial customers remain at the same levels as at the start of the quarter.

Gross profits, we continue to see gross profit improvements aided by the increase in sales and the associate leveraging. We feel our costs are now more closely in line with our customer demand.

For the second quarter our gross profits were 12.6% of net sales, up 12.1% from the first quarter and 5.5% in the second quarter of 2009. The year-to-date gross margin's running 12.4%.

Looking at the selling expenses, we had selling expenses in the quarter of $766,000 or 3.1% of net sales compared to $1.1 million or 5.7% for the second quarter of last year. The year-to-date selling expenses were roughly 3.3% of net sales.

The expenses are down in this category due to lower spending levels, a mix of lower commissionable sales and reduced payroll related expense. General and admin expenses as a percent of sales were relatively flat at 7.5% for both the quarter and six months.

For the second quarter of 2010, expenses were $1.9 million. This compares to $1.5 million for the second quarter of 2009. For the six months, G&A expense was $3.4 million and $3.1 million compared to 2009.

In the other expense category, it was $93,000 for the second quarter. This was down approximately $100,000 from last year due to lower interest rates and borrowings and exchange calculation fluctuations.

Income tax for the three months ended June 30 was $245,000 and $305,000 for the six months. The quarter experienced a higher tax rate than normal due to a true-up in adjustment to the 2009 tax refund.

We received $2.4 million of cash refund on July 3 on our 2009 tax filings. We do expect the annual effective tax rate to come in at approximately 36% compared to 37% last year.

Operating and net income both showed significant improvements over the prior year. Our operating income for the second quarter was $485,000, up 49% from the previous quarter and compared to an operating loss of $2.2 million in the second quarter of 2009.

We reported a $0.05 diluted common share profit compared to last year's second-quarter loss of $0.56. On a six-month basis, we were at $0.09 per diluted common share of profit compared to a $1.04 of diluted common share loss last year.

Moving on 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 Wells Fargo.

As stated earlier, we entered into a third amendment and restated credit and security agreement with Wells Fargo. This provides a $12 million line of credit through May 31, 2013 and a real estate note maturing on May 31, 2012. This agreement supports and builds upon the significant progress we have made in the last 12 to 18 months.

On June 30, we had an outstanding balance on the line of credit of $6.8 million. This was reduced by a large portion of the $2.4 million tax refund received on July 3.

We also paid down $1 million on our long-term debt. Looking at cash flow, the net cash provided by operations for the six months ended June 30 was $0.4 million compared to $1.8 million of cash used the prior year.

The cash flow provided by operations for the six months is a result of our net income which is approximately $0.2 million, $0.9 million of non-cash adjustments such as depreciation and amortization, increases in inventory of $1.9 million and accounts receivable of $2.3 million were mostly offset by increases in accounts payable and accruals of 3.2 and a decrease in prepaid income tax receivables. The inventory and accounts receivable's working capital increases are directly related to the increased volume reported earlier.

Net cash used in investing activities was $0.6 million for the six months. We used $0.2 million for property and equipment purchases to support the business and $0.4 million for the Milaca operation acquisition.

Net cash provided by activities for the six months was $0.7 million due to an increase in the line of credit of 1.3 and that was partially offset by the debt repayment of $0.6 million. These second-quarter financial results continue to build positive momentum that started in the fourth quarter of 2009. These comments -- again, this is the end of my financial review. I would now like to open the call for questions. Operator, please open the lines.

(Operator Instructions) Richard Dearnly, Longport Partners.

The acquisition, we might as well do some color, more color on that. You said it cost about $400,000 and contributed $874,000 in the quarter.

What was their run rate of sales in the last 12 months? And is there an earnout or anything there or -- and what do you anticipate the CapEx needs are there that you referenced? And what was their contribution to the backlog? And then anything else you might want to add?

Richard, this is Mike. Let me take a whack at some of them and Rich will probably have to jump in and bail me out on some of the financials.

Understand.

Some of the financial numbers. Our anticipated run rate is in about the $600,000 to $800,000 per month rate when we get up to speed and we are anticipating that that rate will be probably in the $600,000 area for the third quarter and $800,000 for the fourth quarter.

We are anticipating that while you could pick whatever number you want, pick the third quarter number and annualize it and I think that is about $7.2 million, and if you take the $800,000 number, that's about (multiple speakers) about $8.4 million -- so we are pleased with that. In terms of the -- as we stated I think in our press release, when we talked about the Milaca acquisition, we expect that to be accretive to our financials certainly in 2011 and the way things are currently going, I would anticipate that it will make some contribution to 2010 too.

Longer term in terms of CapEx, I think we have plenty of capacity and plenty of facility capability in Milaca currently to handle that level of business. So we are not looking at any significant CapEx. Of course we're going to have to invest some money from a working capital standpoint as the business ratchets up.

So the investment is working capital and maybe sales and --

And some R&D expenses. Again, they were in a distressed situation and for many years, at least the last three years, and they needed to invest and support the business and they didn't do -- obviously they didn't do it to the level they needed it.

I think more importantly, certainly the financials are very important. But I think more importantly is the overall strategy.

This takes us to a new level for our Company in terms of final device manufacturing. We have FDA certification in the facility.

We have the capability to build Class III medical devices and we are starting out with a pretty nice customer base and then Nortech has a number of medical customers which we're anticipating will add to the portfolio in Milaca. So you have those things from a sales strategy standpoint and then all of those devices have printed circuit board assemblies and cables in them and we certainly have a demonstrated capability to provide those.

So I think overall, it's not only the benefit that we're going to gain out of Milaca. It will tend to ratchet up the demands on our wire harness and cable factories and our printed circuit board assembly factories. And it takes us to a new level and a notch above where we have been typically operating.

Well, it's (multiple speakers) sorry, go ahead.

Go ahead, Rich. I was just going to finish up if you got farther up. I've got an answer for you on your backlog.

Oh, okay. Fire away.

Okay, the backlog, it started the quarter at $19 million without the Milaca. We ended at 21.3 which is about $2.3 million higher and Milaca accounts for about 1.8 of that. And as far as the increase in medical, that's about 66% of that 45% increase.

If aero was down 55% and this was $800,000 of the $4.8 million sales increase, I mean, that's a -- medical where we're really going is -- and you noted that industrial was -- had a flat backlog, I think?

Yes, they were pretty flat.

Is that the -- semiconductor inventories and whatnot have sort of built and things are slowing down there then. Is that making it through to the equipment people yet?

There is still confidence in there but there's not as much confidence -- I think given all the macro things that have been talked about health and medical, that seems to be the segment that is growing. If you look at any of the forecasts, they're outgrowing the industry.

The industry I think is sluggish. It recovered and rebounded and we feel it is -- they built back inventory and that was always our theory, to keep a close eye on the industrial side, and now it's proven out that they have replenished their inventory levels from that steep drop of last year and now they're kind of maintaining.

And then on the aerospace and defense side, even though the DOD continues to increase, it's a different war in Afghanistan than it was in Iraq. We were very much tied to the vehicles in the Iraq war area and now in Afghanistan it's much more soldier ammunition type programs.

The other point I would make, Richard -- this is Mike. The other point I would make is that in the industrial sector, the semiconductor business has been extremely strong in terms of increases. So that offsets some flat or maybe some downturns -- a little bit of a downturn in some of the other "industrial performance" but the semiconductor equipment demand has been very, very strong.

You said that SG&A was down because of less commission sales.

Selling expenses.

Is that because the national accounts are selling more or what --?

Primarily the growth in the medical comes out of our big account, the GE account, which was one of our top accounts. And that is a house account and there's no commissions related to that.

Okay, thank you.

Thank you, Dick. Have a good day.

Same for you all.

(Operator Instructions) Gentlemen, there are no further questions at this time.

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

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