Nortech Systems Incorporated 2020 Form 10-K Summary
Business context and reporting period
Nortech Systems Incorporated is a single-segment electronic manufacturing services provider serving Medical, Aerospace and Defense, and Industrial customers. It provides engineering, prototyping, testing, supply-chain, manufacturing, and post-market services from facilities in the United States, Mexico, and China. This filing covers the fiscal year ended December 31, 2020; the filing text does not provide a separate standalone fourth-quarter income statement.
The company had 628 full-time and 71 part-time or temporary employees at December 31, 2020. Its largest customer accounted for 23.4% of 2020 net sales, compared with 22.5% in 2019.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $104.1 million | $116.3 million | Down 10.5% |
| Gross profit | $8.5 million | $12.6 million | Down $4.1 million |
| Gross margin | 8.1% | 10.8% | Down 270 basis points |
| Operating income (loss) | $(0.6) million | $0.2 million | Declined $0.8 million |
| Net loss | $(1.5) million | $(1.2) million | Loss increased $0.3 million |
| Diluted loss per share | $(0.58) | $(0.46) | Loss increased |
| Cash flow from operations | $1.4 million | $1.0 million | Increased $0.4 million |
| Capital expenditures | $0.5 million | $0.7 million | Decreased |
| Cash and restricted cash | $3.6 million | $0.7 million | Increased $2.9 million |
Medical sales were $55.1 million, down 12.0%; Industrial sales were $28.4 million, down 20.0%; and Aerospace and Defense sales were $20.6 million, up 13.2%. The 90-day backlog declined to $24.3 million from $27.3 million, while total shipment backlog declined to $48.7 million from $50.1 million.
At December 31, 2020, total assets were $57.6 million and total shareholders’ equity was $18.7 million. Accounts receivable were $15.6 million, inventories were $13.9 million, and inventory reserves were $2.2 million. The allowance for doubtful accounts was $0.3 million.
Debt, liquidity, and cash flow
Borrowings under the Bank of America line of credit were $3.3 million at December 31, 2020, compared with $10.1 million at December 31, 2019. Unused borrowing availability was $8.1 million, compared with $4.1 million in the prior year. The line has a $16.0 million capacity and expires June 15, 2022; it is secured by substantially all company assets.
Long-term debt included a $6.1 million Paycheck Protection Program loan and a $1.1 million real estate term note, net of debt issuance costs. Scheduled long-term debt maturities were $1.2 million in 2021 and $5.9 million in 2022. The company reported compliance with its credit agreement covenants at December 31, 2020.
Operating cash flow was supported by working-capital reductions, including a $3.0 million decrease in accounts receivable. Investing cash flow of $5.5 million primarily reflected $6.0 million of proceeds from a sale-leaseback transaction involving the Bemidji and Mankato facilities. Financing activities used $4.0 million, primarily for debt repayment. Total lease liabilities were $11.4 million at year-end.
Management stated that available operating cash flow, cash on hand, credit availability, the PPP proceeds, and sale-leaseback proceeds were expected to meet liquidity needs for at least the next 12 months from the financial statement release date. However, management also disclosed indicators of an inability to continue as a going concern due to pandemic-related uncertainty, mitigated by cost reductions, reduced capital spending, and working-capital management.
Material changes and unusual items
- COVID-19 reduced demand, disrupted supply chains and shipping, and reduced workforce availability. The company continued operating its manufacturing facilities as an essential business.
- The company recorded a $2.4 million goodwill impairment charge, fully impairing remaining goodwill. The impairment followed a COVID-19-related deterioration in operating results and a reassessment to a single reporting unit.
- The company recorded a $3.8 million gain on the sale-leaseback of the Bemidji and Mankato facilities.
- Gross margin fell because of lower sales against a fixed-cost base and increased inventory reserves, partly related to the Merrifield facility closure.
- General and administrative expense decreased to $8.0 million from $9.6 million, primarily because of prior-year one-time operating-improvement spending and subsequent cost reductions.
- The company approved closure of its Merrifield, Minnesota production facility, with consolidation expected to be completed in the first quarter of 2021 and approximately 60 employees affected. A February 2021 agreement contemplated selling the facility and related assets in the second quarter of 2021 near carrying value, although completion and proceeds were not guaranteed.
- No cash dividends were declared or paid, and management did not expect to pay dividends in the foreseeable future.
Guidance, outlook, commentary, and risks
The filing provides no quantitative revenue or earnings guidance. Management emphasized continued focus on medical-market growth, lean manufacturing, operational efficiency, asset utilization, supply-chain management, and a shift toward higher-value solution-based services. The company continues to consider acquisitions, mergers, and joint ventures.
The company expected all or a significant portion of the $6.1 million PPP loan to be forgiven and planned to apply for forgiveness in the second or third quarter of 2021. An adverse SBA or Treasury review could require repayment of up to the full amount, reducing liquidity and potentially resulting in penalties.
Principal risks include continued COVID-19 effects, customer concentration, component shortages and higher material or freight costs, order cancellations and excess inventory, competitive pricing pressure, regulatory compliance for medical and defense products, foreign operations and currency exposure, covenant compliance, cyber and information-technology disruptions, environmental liabilities, and the ability to retain skilled employees. The company also disclosed majority ownership by the Kunin family, which may limit the influence of other shareholders.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective; as a smaller reporting company, the company was not required to obtain an external audit opinion on internal control effectiveness.
Most important facts for investors to verify
- Whether COVID-19-related demand, backlog, supply-chain disruptions, and margin pressure improved after December 31, 2020.
- The status and final forgiveness amount of the $6.1 million PPP loan, including any required repayment or related review.
- Completion, proceeds, and operating effects of the Merrifield facility closure and planned asset sale.
- Compliance with the Bank of America credit agreement, borrowing-base availability, and debt maturities through June 2022.
- Whether the 23.4% customer concentration changed and whether the company secured replacement or diversified demand.
- The sustainability of positive operating cash flow given the 2020 benefit from working-capital reductions and sale-leaseback proceeds.
- Whether goodwill impairment and inventory reserves indicate continuing pressure on forecast revenue, margins, and asset recoverability.