Nortech Systems Inc (NSYS) 2018 Q1 法說會逐字稿

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  • Operator

  • Greetings, and welcome to the Nortech First Quarter 2018 Conference Call.

  • (Operator Instructions) As a reminder, this conference is being recorded.

  • I would now like to turn the conference over to your host, Connie Beck, Vice President and CFO.

  • Constance Beck - VP & CFO

  • Thank you.

  • Good morning, and welcome to Nortech Systems' First Quarter 2018 Conference Call.

  • With me today is our President and CEO, Rich Wasielewski.

  • I'm going to start today's call by going over our financial results, which we released on Friday morning.

  • Then I'll turn it over to Rich for additional comments on the first quarter results and last week's annual shareholder meeting.

  • Finally, we'll open it up for questions.

  • At the annual meeting, all of the proposals up for shareholder vote passed, including the slates of directors, by approximately 90% of the vote.

  • Further details will be in our 8-K filing.

  • Before I continue, please note that the statements made during this call and Q&A session may be forward-looking regarding expected revenue, earnings, future plans, opportunities and other company expectations.

  • These estimates, plans and other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied on this call.

  • These risks include those that are detailed in our most recent Annual Report and Form 10-K and may be amended or supplemented.

  • The statements made during this conference call are based upon information known to Nortech as of the date and time of this call.

  • We assume no obligation to update the information in today's call.

  • You can find Nortech's complete safe harbor statements in our SEC filings.

  • Turning to our first quarter results.

  • Our first quarter 2018 net sales as reported were $26.4 million, which compares to $28.3 million for the first quarter of 2017, a decline of $1.9 million or 7%.

  • Our first quarter 2018 net sales include approximately $700,000 of additional revenue recognized due to our adoption of new FASB accounting standards this fiscal year.

  • Under the new standards, revenue is recognized when the customer obtains control of the product or service.

  • Based on the nature of the contract manufacturing and services we provide to our customers, a substantial portion of our revenue is now recognized over time concurrent with the performance of the manufacturing or service rather than the historical method of recognizing revenue at a point in time upon completion or shipment.

  • Our prior year reported amounts were not required to be restated to be comparable.

  • Our Form 10-Q includes more details and disclosures.

  • On a pro forma basis, our first quarter net sales were $25.7 million.

  • This is a $200,000 sequential increase from the fourth quarter of 2017.

  • In year-over-year comparisons, our revenue results vary by market.

  • Medical sales decreased by $3.5 million or 26%.

  • The decline was evenly split between custom medical component products and medical devices.

  • Industrial sales rose slightly, up $200,000.

  • Aerospace and defense sales increased by $1.5 million or 45%.

  • At March 31, 2018, our 90-day shipment backlog was $21.9 million.

  • This is up 13% from the beginning of the quarter.

  • Medical backlog climbed over 50% sequentially from the fourth quarter, as several large medical customers began working through their on-hand inventory level.

  • Aerospace and defense backlog increased 5% sequentially, and industrial backlog increased 12% sequentially, primarily from reduced orders from our semiconductor capital equipment and transportation customers.

  • Our gross margin percentage for the first quarter of 2018 was 11.5%, up 60 basis points from the prior year first quarter, and up over 300 basis points from the 8.4% gross margin in the fourth quarter of 2017.

  • Because of new revenue recognition policies, we recognized $1 million of revenue related to non-cash considerations, which is recorded at 0 margin.

  • This impacted our gross margin negatively by over 40 basis points.

  • The year-over-year gross margin improvement resulted from product mix, increased plant utilization and getting our costs in line with current demand levels.

  • Our selling expense for the first quarter was $1 million or 3.8% of sales, versus $1.2 billion or 4.3% of sales for the prior year period.

  • G&A expenses were consistent at $2.1 million, or approximately 8% of sales for the first quarter of 2018 and 2017.

  • Our first quarter operating profit comparisons are impacted by a onetime gain of $354,000 in the first quarter of 2017 from the sale of our Augusta, Wisconsin facility last year.

  • When you exclude this onetime gain from the sale, our operating loss in the first quarter of 2017 would have been $233,000.

  • This would compare with an operating loss of $120,000 we reported in the first quarter of 2018.

  • This represents an improvement of $113,000 in operating profit on $2.6 million less in revenue on a pro forma basis.

  • Despite an operating loss, we incurred tax expense because of our foreign operations and related minimum taxes generated from the recently-enacted U.S. tax reform.

  • As a result, we reported a net loss of $391,000 or $0.14 per share compared to a loss of $15,000 or $0.01 per share for the prior year period.

  • Moving onto the balance sheet.

  • Our liquidity comes from operational cash flow and a credit facility with Bank of America Merrill Lynch of up to $21 million for working capital and equipment term loans, with an additional $20 million accordion option in place to fund potential growth opportunities or expansion, new R&D and technology activities and strategic acquisitions.

  • Cash provided by operations was $542,000 for the first quarter compared with $255,000 of cash used in the first quarter of 2017.

  • Cash flows were positively impacted by the non-cash add-back of depreciation and amortization, along with the increased accrued liabilities, decreased inventory and contract assets.

  • This was partially offset by an increase in accounts receivable.

  • We ended the first quarter with $3.9 million available on our line of credit.

  • This compares to $4.2 million at the end of the fourth quarter.

  • As we mentioned in our March call, our ability to react to early indicators and backlog tracking at the end of 2017 has enabled us to minimize the profitability impact in Q4 and Q1 by focusing on costs and cash management.

  • This concludes my financial overview.

  • I'll turn it over to Rich for his comments.

  • Richard G. Wasielewski - President, CEO & Inside Director

  • Thanks, Connie.

  • Good morning, everyone.

  • It's hard to believe that it's been 6 weeks since our March 2018 year-end conference call.

  • And here now, we're almost halfway through the 2018 year.

  • Summarizing our first quarter results.

  • Our Q1 revenue was on par with expectations.

  • Industrial sales are up slightly, aided by the improving economy.

  • Our industrial sales historically tracked with the economy in the EMS industry.

  • Defense sales rose 45% in the quarter from strong defense spending in new programs.

  • The 26% decline in medical revenue year-over-year relates to customer on-hand inventory.

  • Inventory corrections started in the fourth quarter of last year and has slowly but steadily worked through the buildup, evidenced by our medical backlog rising over 50% since the start of the year.

  • Gross profits, operating income, cash are heading in the right direction, as is our overall backlog, up 13% in the beginning of the year.

  • With the cost adjustments and an increase in revenue, we expect to return to profitability in the second half of this year.

  • To initiate growth in 2018, there's been a renewed focus on sales and marketing.

  • Internally, branding, lead gen, sales coverage, account performance and product support, all have been revitalized with goals and tracking metrics.

  • The macro-economy and EMS industries are both currently trending favorable for 2018.

  • The medical EMS market offers the strongest growth outlook with 7% compounded annual growth expected.

  • For the EMS industry overall, New Venture Research forecasts 5% growth in 2018 for Americas.

  • And U.S. economy is improving its 2018 outlook, now closer to 3% GDP growth forecasted for the whole year, along with increasing DoD budgets projected for the next several years.

  • Our actions in the current trends have us optimistic, but 2018 isn't without its challenges.

  • The 2 main concerns we face today are our electronic components shortages and all types of talent shortages; technical and manufacturing.

  • We have action plans and initiatives underway for both.

  • We are communicating with our supply chain and sources daily, and working through the issues with our customers as well.

  • And in the talent front, internships, apprenticeships and certification programs are all underway on the people side, in addition to employees' training and development.

  • Longer term, increased investments in system support and automation will complement these efforts.

  • Connie mentioned last week we had our annual meeting here at our Maple Grove, Minnesota corporate offices.

  • We shared our 2020 vision for increasing shareholder value by continuing to transform Nortech through globalization, growing our medical market, evolving our traditional contract manufacturing business to provide increased value, and building an innovative R&D culture.

  • We highlighted our investments in operations, automations and facilities, and discussed profitability coming off our 2017 results.

  • Sustainable profit, for us, in our EMS industry requires consistent top line growth and operational execution.

  • We've consistently executed at a high operating level, but our quarter volatility has been a major factor in our profitability.

  • Our sales and marketing efforts are focused on lead gen and growing the pipeline.

  • Top line growth is the key to smoothing out the quarterly volatility.

  • We also recognized the service of 2 outstanding, long-tenured directors that retired this year from our board; Richard Perkins and Ken Larson.

  • Perkins has been a director for 25 years and made a huge impact on Nortech's growth and development.

  • In 2012, his board service earned him recognition for Lifetime Achievement by Twin Cities Business.

  • Perk's board services spanned 20 companies over 3 decades.

  • Nortech was fortunate to have one of the longest tenured board assignments.

  • Ken Larson put in an impressive 16 years of Board of Directors service with Nortech.

  • After leading a strong growth at Polaris as President and Chief Operating Officer, Ken has received the recognition from Twin Cities as an Outstanding Board of Director.

  • Nortech will miss both of these fine gentlemen.

  • Taking their place are 2 new directors, who both bring strong credentials.

  • Jay Miller brings us a broad background in medical technology companies, both as an executive and a board member.

  • Dr. Steven Rosenstone is a former Chancellor of Minnesota State Colleges and Universities, bringing a strong academic awareness and HR experience, needed to attract the right talent in addition to his business support over the years.

  • With their addition, our board has evolved significantly, welcoming all new members over the past 3 years.

  • Also, I should mention, today is Bill Murray's last day as a board member.

  • His seat will be discussed in the August meeting.

  • He has taken a position that will no longer allow him to be a board member for Nortech.

  • In addition to the board, there's been a considerable amount of change at Nortech with our personnel, operations, markets and growth opportunities these past several years.

  • Selectively, it is providing momentum that gives us optimism and a bright future.

  • We further emphasized our strategies are in place, including the global footprint, medical market presence, and value-added engineering services.

  • We need to build on these strategies, delivering a return on our investments and on our plans.

  • We reinforce to our shareholders that's our commitment and responsibility.

  • That concludes our remarks this morning.

  • We'll now open it up for questions.

  • Operator, please open the lines.

  • Operator

  • (Operator Instructions) Our first question comes from the line of Sheldon Grodsky from Grodsky Associates.

  • Sheldon Grodsky

  • Can you make any comments on how your young Chinese operation is doing?

  • Richard G. Wasielewski - President, CEO & Inside Director

  • Yes.

  • We did make a comment of it, I believe at the last conference call and at the Annual Meeting.

  • It's been a real winner for us.

  • It's paid back on a cash flow basis in its second year.

  • The ability to move product and do it at a per unit contribution as opposed to a gross margin percentage has really paid off.

  • Everybody wins that way.

  • The customer wins for the lower costs that are associated with it.

  • And we win both dollar-wise and percentage-wise.

  • But I would say that we did approximately 3% of our sales there last year.

  • And this year, it could be in the 5% and 6% range.

  • Sheldon Grodsky

  • Has there been any issues regarding well, the trade friction as far as the Chinese operation is concerned?

  • Richard G. Wasielewski - President, CEO & Inside Director

  • Well, we -- that's yet to be played out.

  • As far as our -- our situation is that everything we do in China is for the China market.

  • It would have more impact on our OEMs sending back to the United States, which given the 2 OEMs that -- 2 or 3 OEMs that we currently are dealing with, global OEMs, they are making things in North America for North America concept.

  • So it will be more -- consumption.

  • So it would be NAFTA that will be more of an issue in North America.

  • But in Asia, most of the stuff that we're making for the OEMs is going either to Europe or India or the Asian markets itself.

  • So I don't believe that, that will be a big issue in the near future.

  • I think it -- how it affects the local markets there, dealing with the United States, will have a bigger impact.

  • Operator

  • (Operator Instructions) Our next question comes from the line of Sam Robotsky from SCR Asset Management.

  • Sam Robotsky

  • I am new to Nortech, so excuse me if I ask questions that -- to educate me a little better.

  • The first half, you talk about being profitable in the second half, and I assume you expect to be profitable for the year.

  • And as far as the current quarter, is that -- look like that might be the second quarter to be profitable, too, or?

  • Richard G. Wasielewski - President, CEO & Inside Director

  • Well, it is -- the trends with the backlog bode well for the second quarter.

  • The question is on the shortages, and whether or not we can get everything that we have on the books out the door.

  • It's going to be close, but again, we don't, generally, Sam, give out earnings -- we give out our expectations.

  • And it probably would be more like the third and fourth quarter before profitability comes to bear.

  • Sam Robotsky

  • And so -- but for the whole year, you expect to be profitable after the first half?

  • Richard G. Wasielewski - President, CEO & Inside Director

  • Yes.

  • I believe that's what we're expecting, but that's a long ways away right now.

  • It's definitely the third and fourth quarter is looking promising.

  • Is it going to offset the first and second quarter?

  • It's too early to tell.

  • Sam Robotsky

  • Okay.

  • And as far as the shortage of product to complete, how much inventory -- your inventory is down from December to March, but are you -- is there a certain proportion of inventory you carried that you're concerned about being to complete and ship out?

  • And in essence, if you had all the parts that you needed to ship the inventory and make the product you need to make, what would be normal inventory for you to carry?

  • Richard G. Wasielewski - President, CEO & Inside Director

  • The shortages are not having that big an impact on the inventory at this point.

  • We got to -- we all have to be careful in the industry don't start reporting shortage of parts.

  • That's one thing I know the distributors and the manufacturers are concerned about.

  • We just need to get good forecasts out there and hold steady.

  • And we're working closely again with our customers to make sure that we don't inflate those numbers across the board.

  • I think it's easier for me to say that in April, our sales were impacted between $250,000 and $500,000 by parts shortages.

  • And I think that's the first-- although we've been having about 3 quarters of problems with shortages, it hasn't impacted us as much as it did in April, so it did jump up and it made me talk to you guys a little bit about it today, to show that there is some risk.

  • I think it's just a matter of upside for us at this point because we're -- our backlog is going up, and again, the impact will be felt on the upside.

  • And if we don't have any problems -- we're going to have problems in shortages, that -- it's globalized right now.

  • The manufacturers are refusing to increase capacity and it's going to be something, give and take, every month.

  • So how soon we return to profitability?

  • That's why I'm hedging a little bit to get out there past what we already think we can do.

  • Sam Robotsky

  • Okay.

  • And when I looked at the 10-Q that was filed, it indicated that you bought some stock.

  • Was these in the open market or any private transactions?

  • And do you expect to increase your buying of the stock as the stock is lower than at the time you bought the stock?

  • Richard G. Wasielewski - President, CEO & Inside Director

  • Yes.

  • I -- it's under our plan.

  • Connie, is it the 13D plan that we put out there?

  • Constance Beck - VP & CFO

  • Yes.

  • Richard G. Wasielewski - President, CEO & Inside Director

  • And it's all controlled by plan, and it's also been reported out there.

  • So if you look up the reporting documents, you'll see that, that's all planned.

  • We have no control over this.

  • We have an upside on price.

  • That can be changed.

  • But we have not changed it since its inception.

  • Sam Robotsky

  • My understanding is there was $250,000 that you were to buy, and you've completed not all of it, but significant portion.

  • Do you expect to increase that size?

  • Is that a…

  • Richard G. Wasielewski - President, CEO & Inside Director

  • The expectation is to get approval and keep doing it at about $250,000 a year.

  • Sam Robotsky

  • A year.

  • Okay.

  • So if you complete that, before the end of the year, you'll wait to the next year to buy stock?

  • Richard G. Wasielewski - President, CEO & Inside Director

  • It's not on a calendar basis.

  • It's -- I think we just finished it in March -- July?

  • Unidentified Company Representative

  • June.

  • Richard G. Wasielewski - President, CEO & Inside Director

  • June.

  • June 30 was the end of the year, 12 months.

  • So it will start up again in July.

  • Sam Robotsky

  • So there was no private transaction.

  • It was all publicly...

  • Richard G. Wasielewski - President, CEO & Inside Director

  • That's correct.

  • It was all public, all planned.

  • Sam Robotsky

  • Okay, okay.

  • And you spoke of the questions that took place at the Annual Meeting on May 9. Is there any -- how long did the meeting last?

  • Do you have some kind of summary of what transpired, to share?

  • Richard G. Wasielewski - President, CEO & Inside Director

  • I pretty much presented that today in summary.

  • We have our -- we start off -- Connie goes through the business, official business plan, and the voting recap, see if anybody else had anything else to say.

  • We closed the business.

  • I did a recap, pretty much verbatim of what I gave you today.

  • And then we recognized the board as well.

  • There was a -- we have had special guests over the last 5 years.

  • We've had -- in the last 5 years, we've had our #1 employee, who's in (inaudible) and she is retiring this year, that started 38 years ago working associated with Nortech.

  • Then there was a distributor that came in on a supply chain, which would've been a good one for this year given the electronics components.

  • The [Professor Hoy] from [Nextera] presented at one of our programs.

  • We had an international flavor to our Annual Meeting last year.

  • And this year, being that we had a new service from Bank of America, we invited Bank of America just to discuss the current trends in global situation going out there in the economy.

  • So that's pretty much what we did at the meeting, and took some questions.

  • And I pretty much answered the questions that were brought up at the meeting.

  • Sam Robotsky

  • Okay.

  • That's great.

  • I'm trying to understand more about your company, where it's going, and sort of get more familiar, and I'll...

  • Richard G. Wasielewski - President, CEO & Inside Director

  • Feel free to give me a call.

  • Operator

  • There are no more questions at this time.

  • I would now like to turn the call back to management.

  • Richard G. Wasielewski - President, CEO & Inside Director

  • If there are no further questions, we'll conclude this call.

  • Thanks for joining us today and your interest in Nortech.

  • We look forward to updating you in the future.

  • Have a great day, everyone.

  • Operator

  • This concludes today's conference.

  • You may disconnect your lines at this time.

  • Thank you for your participation.