Nortech Systems Incorporated — FY2021 Form 10-K Summary
Business context and reporting period
Nortech Systems Incorporated is a global electronic manufacturing services provider serving Medical, Aerospace and Defense, and Industrial OEM customers. It provides engineering, prototyping, testing, supply-chain management, manufacturing, repair, and post-market services for complex medical devices, printed circuit board assemblies, wire and cable assemblies, and electromechanical systems. Operations are located in Minnesota, Mexico, and China.
The filing covers the fiscal year ended December 31, 2021, with comparison to the year ended December 31, 2020. Although the request identifies 2021 Q4, this Form 10-K reports full-year results; it does not provide a separate fourth-quarter income statement.
Financial performance and key metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Net sales | $115.2 million | $104.1 million |
| Gross profit | $15.9 million; 13.8% margin | $9.7 million; 9.3% margin |
| Income (loss) from operations | $2.3 million | $(0.6) million |
| Income (loss) before taxes | $8.0 million | $(1.2) million |
| Net income (loss) | $7.2 million | $(1.5) million |
| Basic / diluted EPS | $2.68 / $2.54 | $(0.58) / $(0.58) |
| Cash flow from operating activities | $(4.5) million | $1.4 million |
| Capital expenditures | $1.3 million | $0.5 million |
| Cash and restricted cash | $2.2 million | $3.6 million |
Sales increased 10.7%. Medical revenue rose 14.5% to $63.0 million and Industrial revenue rose 25.0% to $35.5 million, while Aerospace and Defense revenue declined 19.4% to $16.6 million. The largest customer represented 26.9% of 2021 sales, compared with 23.4% in 2020.
Gross margin improved primarily because of $5.2 million of Employee Retention Credits recognized as reductions of operating costs and improved utilization from higher sales. Operating income also benefited from the ERC and higher volume. General and administrative expense increased to $10.0 million from $9.3 million, primarily due to higher professional fees.
Year-end total assets were $67.1 million and shareholders’ equity was $26.1 million. Inventories increased to $19.4 million from $13.9 million, largely to address supply-chain shortages and support higher backlog. Contract assets increased to $8.7 million from $5.9 million.
Debt, liquidity, and cash flow
At December 31, 2021, borrowings under the Bank of America revolving credit facility were approximately $9.0 million, compared with $3.3 million at December 31, 2020. The facility has a $16.0 million commitment, was renewed through June 15, 2026, bears interest at a weighted-average rate of 3.5%, and is secured by substantially all company assets. Unused availability was $3.5 million, supported by the borrowing base.
The company had no long-term debt at year-end 2021, compared with $7.1 million of long-term debt at year-end 2020. Finance lease obligations totaled $1.5 million and operating lease liabilities totaled $9.7 million. The company was in compliance with its credit covenants at December 31, 2021.
Operating cash flow was negative because working capital investments increased, particularly inventory of approximately $4.6 million and contract assets of approximately $2.8 million. Financing activities provided $3.9 million, primarily from increased revolver borrowings. Management stated that financing arrangements, expected operating cash flows, anticipated ERC receipts, and cash on hand should be sufficient for working capital, capital expenditures, and debt repayments.
Material changes versus the prior comparable period
- Revenue increased $11.1 million, driven by Medical and Industrial markets; Aerospace and Defense declined.
- Gross margin expanded 450 basis points to 13.8%.
- The company moved from a $1.5 million net loss to $7.2 million of net income.
- Results included a $6.2 million gain from forgiveness of the Paycheck Protection Program loan and accrued interest. This was a nonrecurring benefit.
- The company recognized $5.2 million of Employee Retention Credits, also a significant nonrecurring or non-operating-period benefit to reported costs.
- Goodwill impairment declined to zero from $2.4 million in 2020. Goodwill had been fully impaired in 2020.
- The Merrifield, Minnesota facility consolidation was completed in the first quarter of 2021, generating $0.3 million of restructuring charges and reducing the workforce by approximately 42 employees.
- The company recorded a $0.6 million loss on abandonment of the Devicix tradename.
- Cash flow from operations deteriorated from positive $1.4 million to negative $4.5 million as inventory and contract assets increased.
- 90-day backlog increased 51.9% to $36.9 million, while total shipment backlog increased to $95.0 million from $48.7 million.
Guidance, outlook, risks, and unusual items
The filing does not provide quantitative revenue, earnings, margin, or cash-flow guidance. Management expects liquidity to be adequate and intends to continue investing in value-added engineering, supply-chain capabilities, lean manufacturing, and Medical-market growth. Backlog was substantially higher at year-end, but management cautioned that backlog comparisons vary with order size, manufacturing delays, inventory programs, contract terms, and customer delivery schedules.
- COVID-19 continued to affect demand, workforce availability, shipping, and supply chains. The company cannot estimate the pandemic’s ultimate impact.
- Global component shortages, extended lead times, freight disruptions, material-cost inflation, and elevated inventory could pressure margins and liquidity or result in excess and obsolete inventory.
- Customer concentration is significant; the largest customer accounted for 26.9% of sales and 19.3% of accounts receivable at year-end.
- Failure to comply with credit covenants could restrict borrowing or accelerate repayment obligations, although the company was compliant at year-end.
- Foreign operations in Mexico and China expose the company to currency, political, regulatory, trade, labor, transportation, intellectual-property, and geopolitical risks.
- Medical-device operations are subject to FDA Quality System Regulation requirements, and U.S. facilities supporting defense customers are ITAR compliant.
- Cybersecurity incidents, information-system failures, environmental liabilities, product-liability claims, customer insolvency, and difficulties hiring skilled labor could materially affect results.
- The Kunin family owns a majority of the common stock and can substantially influence board composition, corporate policies, financing, dividends, and extraordinary transactions.
- No cash dividends were declared or paid in 2021 or 2020, and the company does not expect to pay dividends in the foreseeable future.
- The company has an IRS audit of its 2018 income-tax return pending and maintains a $0.05 million gross unrecognized tax benefit.
Most important facts for an investor to verify
- Separate recurring operating profitability from the $6.2 million PPP forgiveness gain and $5.2 million ERC benefit.
- Assess whether inventory, contract assets, and backlog convert into cash without material write-downs or customer cancellations.
- Review revolver availability, borrowing-base calculations, covenant compliance, interest-rate exposure, and the 2022 amendment pledging the ERC receivable.
- Evaluate the sustainability of the improved gross margin after supply-chain, labor, freight, and commodity-cost pressures.
- Monitor the concentration and credit quality of the largest customer and the company’s ability to diversify Aerospace and Defense revenue.
- Review related-party transactions involving the Kunin family and affiliated companies, as well as majority shareholder control.
- Confirm the status and collection timing of the $5.2 million ERC receivable and any related tax or regulatory risks.