Price Graph
Price
Yield
These terms and conditions govern your use of the website alphaminr.com and its related services.
These Terms and Conditions (“Terms”) are a binding contract between you and Alphaminr, (“Alphaminr”, “we”, “us” and “service”). You must agree to and accept the Terms. These Terms include the provisions in this document as well as those in the Privacy Policy. These terms may be modified at any time.
Your subscription will be on a month to month basis and automatically renew every month. You may terminate your subscription at any time through your account.
We will provide you with advance notice of any change in fees.
You represent that you are of legal age to form a binding contract. You are responsible for any
activity associated with your account. The account can be logged in at only one computer at a
time.
The Services are intended for your own individual use. You shall only use the Services in a
manner that complies with all laws. You may not use any automated software, spider or system to
scrape data from Alphaminr.
Alphaminr is not a financial advisor and does not provide financial advice of any kind. The service is provided “As is”. The materials and information accessible through the Service are solely for informational purposes. While we strive to provide good information and data, we make no guarantee or warranty as to its accuracy.
TO THE EXTENT PERMITTED BY APPLICABLE LAW, UNDER NO CIRCUMSTANCES SHALL ALPHAMINR BE LIABLE TO YOU FOR DAMAGES OF ANY KIND, INCLUDING DAMAGES FOR INVESTMENT LOSSES, LOSS OF DATA, OR ACCURACY OF DATA, OR FOR ANY AMOUNT, IN THE AGGREGATE, IN EXCESS OF THE GREATER OF (1) FIFTY DOLLARS OR (2) THE AMOUNTS PAID BY YOU TO ALPHAMINR IN THE SIX MONTH PERIOD PRECEDING THIS APPLICABLE CLAIM. SOME STATES DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL OR CERTAIN OTHER DAMAGES, SO THE ABOVE LIMITATION AND EXCLUSIONS MAY NOT APPLY TO YOU.
If any provision of these Terms is found to be invalid under any applicable law, such provision shall not affect the validity or enforceability of the remaining provisions herein.
This privacy policy describes how we (“Alphaminr”) collect, use, share and protect your personal information when we provide our service (“Service”). This Privacy Policy explains how information is collected about you either directly or indirectly. By using our service, you acknowledge the terms of this Privacy Notice. If you do not agree to the terms of this Privacy Policy, please do not use our Service. You should contact us if you have questions about it. We may modify this Privacy Policy periodically.
When you register for our Service, we collect information from you such as your name, email address and credit card information.
Like many other websites we use “cookies”, which are small text files that are stored on your computer or other device that record your preferences and actions, including how you use the website. You can set your browser or device to refuse all cookies or to alert you when a cookie is being sent. If you delete your cookies, if you opt-out from cookies, some Services may not function properly. We collect information when you use our Service. This includes which pages you visit.
We use Google Analytics and we use Stripe for payment processing. We will not share the information we collect with third parties for promotional purposes. We may share personal information with law enforcement as required or permitted by law.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
NORTECH SYSTEMS INCORPORATED
Commission file number 0-13257
State of Incorporation: Minnesota
IRS Employer Identification No. 41-1681094
Executive Offices: 7550 Meridian Circle N., Suite # 150, Maple Grove, MN 55369
Telephone number: (952) 345-2244
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large Accelerated Filer o |
|
Accelerated Filer o |
|
Non-accelerated Filer x |
|
Smaller Reporting Company x |
|
Emerging growth company o |
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Number of shares of $.01 par value common stock outstanding at May 2, 2019 was 2,684,672.
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class: |
|
Trading Symbol(s) |
|
Name of each exchange on which registered: |
|
Common Stock, par value $.01 per share |
|
NSYS |
|
NASDAQ Capital Market |
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
|
|
|
THREE MONTHS ENDED |
|
||||
|
|
|
MARCH 31, |
|
||||
|
|
|
2019 |
|
2018 |
|
||
|
|
|
|
|
|
|
||
|
Net Sales |
|
$ |
28,165 |
|
$ |
26,447 |
|
|
|
|
|
|
|
|
||
|
Cost of Goods Sold |
|
25,204 |
|
23,419 |
|
||
|
|
|
|
|
|
|
||
|
Gross Profit |
|
2,961 |
|
3,028 |
|
||
|
|
|
|
|
|
|
||
|
Operating Expenses |
|
|
|
|
|
||
|
Selling Expenses |
|
761 |
|
1,039 |
|
||
|
General and Administrative Expenses |
|
2,304 |
|
2,109 |
|
||
|
Total Operating Expenses |
|
3,065 |
|
3,148 |
|
||
|
|
|
|
|
|
|
||
|
Loss From Operations |
|
(104 |
) |
(120 |
) |
||
|
|
|
|
|
|
|
||
|
Other Expense |
|
|
|
|
|
||
|
Interest Expense |
|
(245 |
) |
(172 |
) |
||
|
|
|
|
|
|
|
||
|
Loss Before Income Taxes |
|
(349 |
) |
(292 |
) |
||
|
|
|
|
|
|
|
||
|
Income Tax Expense |
|
14 |
|
99 |
|
||
|
|
|
|
|
|
|
||
|
Net Loss |
|
$ |
(363 |
) |
$ |
(391 |
) |
|
|
|
|
|
|
|
||
|
Loss Per Common Share - Basic and Diluted |
|
$ |
(0.14 |
) |
$ |
(0.14 |
) |
|
|
|
|
|
|
|
||
|
Weighted Average Number of Common Shares Outstanding - Basic and Diluted |
|
2,659,859 |
|
2,720,609 |
|
||
|
|
|
|
|
|
|
||
|
Other comprehensive loss |
|
|
|
|
|
||
|
Foreign currency translation |
|
56 |
|
72 |
|
||
|
Comprehensive loss, net of tax |
|
$ |
(307 |
) |
$ |
(319 |
) |
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
|
|
|
MARCH 31, |
|
DECEMBER 31, |
|
||
|
|
|
2019 |
|
2018 (1) |
|
||
|
|
|
(Unaudited) |
|
|
|
||
|
ASSETS |
|
|
|
|
|
||
|
Current Assets |
|
|
|
|
|
||
|
Cash |
|
$ |
310 |
|
$ |
480 |
|
|
Restricted Cash |
|
427 |
|
467 |
|
||
|
Accounts Receivable, less allowances of $246 and $222 |
|
23,092 |
|
20,093 |
|
||
|
Inventories |
|
15,984 |
|
17,004 |
|
||
|
Contract Assets |
|
8,584 |
|
6,431 |
|
||
|
Prepaid Expenses and Other Current Assets |
|
2,133 |
|
1,381 |
|
||
|
Total Current Assets |
|
50,530 |
|
45,856 |
|
||
|
|
|
|
|
|
|
||
|
Property and Equipment, Net |
|
9,886 |
|
10,178 |
|
||
|
Operating Lease Assets |
|
5,388 |
|
— |
|
||
|
Goodwill |
|
2,375 |
|
2,375 |
|
||
|
Other Intangible Assets, Net |
|
1,469 |
|
1,523 |
|
||
|
Other Non Current Assets |
|
28 |
|
28 |
|
||
|
Total Assets |
|
$ |
69,676 |
|
$ |
59,960 |
|
|
|
|
|
|
|
|
||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
||
|
Current Liabilities |
|
|
|
|
|
||
|
Current Maturities of Long-Term Debt |
|
$ |
586 |
|
$ |
780 |
|
|
Current Portion of Finance Lease Obligations |
|
359 |
|
337 |
|
||
|
Current Portion of Operating Lease Obligations |
|
811 |
|
— |
|
||
|
Accounts Payable |
|
21,140 |
|
18,142 |
|
||
|
Accrued Payroll and Commissions |
|
2,136 |
|
2,747 |
|
||
|
Other Accrued Liabilities |
|
3,112 |
|
2,886 |
|
||
|
Total Current Liabilities |
|
28,144 |
|
24,892 |
|
||
|
|
|
|
|
|
|
||
|
Long-Term Liabilities |
|
|
|
|
|
||
|
Long Term Line of Credit |
|
11,294 |
|
9,264 |
|
||
|
Long-Term Debt, Net |
|
3,513 |
|
3,624 |
|
||
|
Long-Term Finance Lease Obligation, Net |
|
864 |
|
951 |
|
||
|
Long-Term Operating Lease Liabilities, Net |
|
4,813 |
|
— |
|
||
|
Other Long-Term Liabilities |
|
118 |
|
139 |
|
||
|
Total Long-Term Liabilities |
|
20,602 |
|
13,978 |
|
||
|
|
|
|
|
|
|
||
|
Total Liabilities |
|
48,746 |
|
38,870 |
|
||
|
|
|
|
|
|
|
||
|
Commitments and Contingencies |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Shareholders’ Equity |
|
|
|
|
|
||
|
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding |
|
250 |
|
250 |
|
||
|
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,684,672 and 2,663,049 Shares Issued and Outstanding, respectively |
|
27 |
|
27 |
|
||
|
Additional Paid-In Capital |
|
15,757 |
|
15,610 |
|
||
|
Accumulated Other Comprehensive Loss |
|
(177 |
) |
(233 |
) |
||
|
Retained Earnings |
|
5,073 |
|
5,436 |
|
||
|
Total Shareholders’ Equity |
|
20,930 |
|
21,090 |
|
||
|
Total Liabilities and Shareholders’ Equity |
|
$ |
69,676 |
|
$ |
59,960 |
|
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
(1) The balance sheet at December 31, 2018 has been derived from the audited financial statements at that date.
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
|
|
|
THREE MONTHS ENDED |
|
||||
|
|
|
MARCH 31, |
|
||||
|
|
|
2019 |
|
2018 |
|
||
|
Cash Flows From Operating Activities |
|
|
|
|
|
||
|
Net Loss |
|
$ |
(363 |
) |
$ |
(391 |
) |
|
Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities |
|
|
|
|
|
||
|
Depreciation and Amortization |
|
570 |
|
561 |
|
||
|
Compensation on Stock-Based Awards |
|
160 |
|
20 |
|
||
|
Deferred Taxes |
|
— |
|
(1 |
) |
||
|
Change in Accounts Receivable Allowance |
|
24 |
|
— |
|
||
|
Change in Inventory Reserves |
|
51 |
|
183 |
|
||
|
Changes in Current Operating Items |
|
|
|
|
|
||
|
Accounts Receivable |
|
(3,001 |
) |
(762 |
) |
||
|
Inventories |
|
985 |
|
229 |
|
||
|
Contract Assets |
|
(2,154 |
) |
308 |
|
||
|
Prepaid Expenses and Other Current Assets |
|
(819 |
) |
81 |
|
||
|
Accounts Payable |
|
3,209 |
|
317 |
|
||
|
Accrued Payroll and Commissions |
|
(611 |
) |
(579 |
) |
||
|
Other Accrued Liabilities |
|
511 |
|
576 |
|
||
|
Net Cash (Used in) Provided by Operating Activities |
|
(1,438 |
) |
542 |
|
||
|
Cash Flows from Investing Activities |
|
|
|
|
|
||
|
Purchase of Intangible Asset |
|
— |
|
(4 |
) |
||
|
Purchases of Property and Equipment |
|
(396 |
) |
(288 |
) |
||
|
Net Cash Used in Investing Activities |
|
(396 |
) |
(292 |
) |
||
|
Cash Flows from Financing Activities |
|
|
|
|
|
||
|
Net Change in Line of Credit |
|
2,030 |
|
146 |
|
||
|
Principal Payments on Long-Term Debt |
|
(328 |
) |
(222 |
) |
||
|
Principal Payments on Finance Leases |
|
(65 |
) |
(82 |
) |
||
|
Share Repurchases |
|
(13 |
) |
(126 |
) |
||
|
Net Cash Provided by (Used in) Financing Activities |
|
1,624 |
|
(284 |
) |
||
|
|
|
|
|
|
|
||
|
Effect of Exchange Rate Changes on Cash |
|
— |
|
46 |
|
||
|
|
|
|
|
|
|
||
|
Net Change in Cash |
|
(210 |
) |
12 |
|
||
|
Cash - Beginning of Period |
|
947 |
|
779 |
|
||
|
|
|
|
|
|
|
||
|
Cash - Ending of Period |
|
$ |
737 |
|
$ |
791 |
|
|
|
|
|
|
|
|
||
|
Reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets |
|
|
|
|
|
||
|
Cash |
|
$ |
310 |
|
$ |
466 |
|
|
Restricted Cash |
|
427 |
|
325 |
|
||
|
Total restricted cash reported in the condensed consolidated statements of cash flows |
|
$ |
737 |
|
$ |
791 |
|
|
|
|
|
|
|
|
||
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
||
|
Cash Paid During the Period for Interest |
|
$ |
224 |
|
$ |
139 |
|
|
|
|
|
|
|
|
||
|
Supplemental Noncash Investing and Financing Activities: |
|
|
|
|
|
||
|
Property and Equipment Purchases in Accounts Payable |
|
78 |
|
68 |
|
||
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
(IN THOUSANDS)
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
||||||
|
|
|
|
|
|
|
Additional |
|
Other |
|
|
|
Total |
|
||||||
|
|
|
Preferred |
|
Common |
|
Paid-In |
|
Comprehensive |
|
Retained Income |
|
Shareholders’ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
BALANCE DECEMBER 31, 2017 |
|
250 |
|
27 |
|
15,760 |
|
(101 |
) |
3,889 |
|
19,825 |
|
||||||
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
(391 |
) |
(391 |
) |
||||||
|
Cumulative Adjustment |
|
— |
|
— |
|
— |
|
— |
|
1,382 |
|
1,382 |
|
||||||
|
Foreign currency translation adjustment |
|
— |
|
— |
|
— |
|
72 |
|
— |
|
72 |
|
||||||
|
Compensation on stock-based awards |
|
— |
|
— |
|
20 |
|
— |
|
— |
|
20 |
|
||||||
|
Share repurchases |
|
— |
|
— |
|
(126 |
) |
— |
|
— |
|
(126 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
BALANCE MARCH 31, 2018 |
|
$ |
250 |
|
$ |
27 |
|
$ |
15,654 |
|
$ |
(29 |
) |
$ |
4,880 |
|
$ |
20,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
BALANCE DECEMBER 31, 2018 |
|
$ |
250 |
|
$ |
27 |
|
$ |
15,610 |
|
$ |
(233 |
) |
$ |
5,436 |
|
$ |
21,090 |
|
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
(363 |
) |
(363 |
) |
||||||
|
Foreign currency translation adjustment |
|
— |
|
— |
|
— |
|
56 |
|
— |
|
56 |
|
||||||
|
Compensation on stock-based awards |
|
— |
|
— |
|
160 |
|
— |
|
— |
|
160 |
|
||||||
|
Share repurchases |
|
— |
|
— |
|
(13 |
) |
— |
|
— |
|
(13 |
) |
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
BALANCE MARCH 31, 2019 |
|
$ |
250 |
|
$ |
27 |
|
$ |
15,757 |
|
$ |
(177 |
) |
$ |
5,073 |
|
$ |
20,930 |
|
See Accompanying Condensed Notes to Condensed Consolidated Financial Statements
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these condensed consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the condensed consolidated financial statements, giving due consideration to materiality. Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition
Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts. Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Loss. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.
Stock-Based Awards
Following is the status of all stock options as of March 31, 2019:
|
|
|
Shares |
|
Weighted-
Share |
|
Weighted-
|
|
Aggregate
|
|
||
|
Outstanding - January 1, 2019 |
|
224,750 |
|
$ |
3.44 |
|
|
|
|
|
|
|
Granted |
|
137,500 |
|
4.53 |
|
|
|
|
|
||
|
Exercised |
|
— |
|
— |
|
|
|
|
|
||
|
Cancelled |
|
(23,250 |
) |
3.85 |
|
|
|
|
|
||
|
Outstanding - March 31, 2019 |
|
339,000 |
|
$ |
3.85 |
|
9.12 |
|
$ |
298 |
|
|
Exercisable - March 31, 2019 |
|
36,166 |
|
$ |
3.46 |
|
7.71 |
|
$ |
46 |
|
The 2005 Plan has not been renewed, and therefore no further grants may be made under the 2005 Plan. In May 2017, the shareholders approved the 2017 Stock Incentive Plan which authorized the issuance of 350,000 shares. There were 137,500 stock options granted during the three months ended March 31, 2019.
Total compensation expense related to stock options for the three months ended March 31, 2019 and 2018 was $43 and $20, respectively. As of March 31, 2019, there was $402 of unrecognized compensation which will vest over the next 3.29 years.
In November 2010, the Board of Directors adopted the Nortech Systems Incorporated Equity Appreciation Rights Plan (“2010 Plan”). The total number of Equity Appreciation Right Units (“Units”) that can be issued under the 2010 Plan shall not exceed an aggregate of 1,000,000 Units as amended and restated on March 11, 2015. The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement unless terminated earlier. Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date. Unit redemption payments under the 2010 Plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date. The Units are adjusted to market value for each reporting period.
During the three months ended March 31, 2019, there were 100,000 Units granted. Total compensation expense (income) related to the vested outstanding Units based on the estimated appreciation over their remaining terms was $0 for the three months ended March 31, 2019 and 2018, respectively.
During the three months ended March 31, 2019, there were 25,000 restricted shares awarded that vested immediately that had expense of $116.
Net Loss per Common Share
For both the three months ended March 31, 2019 and 2018, the Company reported a net loss and all stock options are deemed to be antidilutive and, therefore, were not included in the computation of loss per common share amount.
Share Repurchase Program
As of March 31, 2019, we have a $250 share repurchase program which was authorized by our Board of Directors in August 2017. Under this repurchase program, we repurchased 3,377 shares in open market transactions totaling $13 for the three months ended March 31, 2019. The par value of repurchased shares is deducted from common stock and the excess repurchase price over par value is deducted from additional paid-in capital.
Segment Reporting Information
All of our operations fall under the contract manufacturing segment within the electronic manufacturing Services industry. We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements. We share resources for sales, marketing, engineering, supply chain, information services, human resources, payroll, and all corporate accounting functions. Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.
Restricted Cash
Cash and cash equivalents classified as restricted cash on our condensed consolidated balance sheets are restricted as to withdrawal or use under the terms of certain contractual agreements. The March 31, 2019 balance included cash collateral required to be held against our corporate employee purchasing card program and lockbox deposits that are temporarily restricted due to timing at the period end. The lockbox deposits are applied against our line of credit the next business day. As of March 31, 2019, we had no outstanding letters of credit.
Accounts Receivable and Allowance for Doubtful Accounts
Credit is extended based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. The amounts of trade accounts receivable at both March 31, 2019 and December 31, 2018 have been reduced by an allowance for doubtful accounts of $246 and $222, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. Costs include material, labor, and overhead required in the warehousing and production of our products. Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.
Inventories are as follows:
|
|
|
March 31, |
|
December 31, |
|
||
|
|
|
2019 |
|
2018 |
|
||
|
Raw Materials |
|
$ |
16,197 |
|
$ |
16,769 |
|
|
Work in Process |
|
698 |
|
1,015 |
|
||
|
Finished Goods |
|
252 |
|
332 |
|
||
|
Reserves |
|
(1,163 |
) |
(1,112 |
) |
||
|
|
|
|
|
|
|
||
|
Total |
|
$ |
15,984 |
|
$ |
17,004 |
|
Other Intangible Assets
Other intangible assets at March 31, 2019 and December 31, 2018 are as follows:
|
|
|
|
|
March 31, 2019 |
|
|||||||
|
|
|
|
|
Gross |
|
|
|
|
|
|||
|
|
|
|
|
Carrying |
|
Accumulated |
|
Net Book |
|
|||
|
|
|
Years |
|
Amount |
|
Amortization |
|
Value |
|
|||
|
Customer Relationships |
|
9 |
|
$ |
1,302 |
|
$ |
542 |
|
$ |
760 |
|
|
Intellectual Property |
|
3 |
|
100 |
|
69 |
|
31 |
|
|||
|
Trade Names |
|
20 |
|
814 |
|
153 |
|
661 |
|
|||
|
Patents |
|
7 |
|
17 |
|
— |
|
17 |
|
|||
|
Totals |
|
|
|
$ |
2,233 |
|
$ |
764 |
|
$ |
1,469 |
|
|
|
|
|
|
December 31, 2018 |
|
|||||||
|
|
|
|
|
Gross |
|
|
|
|
|
|||
|
|
|
|
|
Carrying |
|
Accumulated |
|
Net Book |
|
|||
|
|
|
Years |
|
Amount |
|
Amortization |
|
Value |
|
|||
|
Customer Relationships |
|
9 |
|
$ |
1,302 |
|
$ |
506 |
|
$ |
796 |
|
|
Intellectual Property |
|
3 |
|
100 |
|
61 |
|
39 |
|
|||
|
Trade Names |
|
20 |
|
814 |
|
143 |
|
671 |
|
|||
|
Patents |
|
7 |
|
17 |
|
— |
|
17 |
|
|||
|
Totals |
|
|
|
$ |
2,233 |
|
$ |
710 |
|
$ |
1,523 |
|
Amortization expense for the three months ended March 31, 2019 and March 31, 2018 was $54 and $55, respectively.
Estimated future annual amortization expense (not including projects in process) related to these assets is approximately as follows:
|
Year |
|
Amount |
|
|
|
Remainder of 2019 |
|
$ |
165 |
|
|
2020 |
|
191 |
|
|
|
2021 |
|
185 |
|
|
|
2022 |
|
185 |
|
|
|
2023 |
|
185 |
|
|
|
Thereafter |
|
541 |
|
|
|
Total |
|
$ |
1,452 |
|
Impairment of Goodwill and Other Intangible Assets
In accordance with ASC 350, Goodwill and Other Intangible Assets , goodwill is not amortized but is required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value. We test impairment annually as of October 1 st . No events were identified during the three months ended March 31, 2019 that would require us to test for impairment. In testing goodwill for impairment, we perform a quantitative impairment test, including computing the fair value of the reporting unit and comparing that value to its carrying value. If the fair value is less than its carrying value, then the goodwill is determined to be impaired. In the event that goodwill is impaired, an impairment charge to earnings would become necessary.
Impairment Analysis
We evaluate long-lived assets, primarily property and equipment and intangible assets, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value. No impairment expense was recorded during the three months ended March 31, 2019 or 2018.
Recently Adopted Accounting Standards
On January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842). This ASU requires lessees to recognize lease assets and lease liabilities on the balance sheet. Under the new guidance, lessor accounting is largely unchanged. We have elected to adopt the standard on the modified retrospective basis. We have also elected the package of practical expedients, which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs. In addition, we have elected the short-term lease recognition whereby we will not recognize operating lease related assets or liabilities for leases with a lease term less than one year. We did not elect the hindsight practical expedient to determine the reasonably certain term of existing leases.
The impact of adopting the new lease standard was the recognition of $5,731 of lease assets and lease liabilities related to our operating leases. The adoption of the new lease standard had no impact to our Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Cash Flows or Condensed Consolidated Statements of Equity.
NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable. With regard to cash, we maintain our excess cash balances in checking accounts at primarily two financial institutions, one in the United States and one in China. The account in the United States may at times exceed federally insured limits. Of the $310 in cash at March 31, 2019, approximately $276 was held at banks located in China. We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.
Our largest customer has two divisions that together accounted for 10% or more of our net sales during the three months ended March 31, 2019 and 2018. One division accounted for approximately 23% and 19% of net sales for the three months ended March 31, 2019 and 2018, respectively. The other division accounted for approximately 3% and 1% of net sales for the three months ended March 31, 2019 and 2018, respectively. Together they accounted for approximately 26% and 20% of net sales for the three months ended March 31, 2019 and 2018, respectively. Accounts receivable from the customer at March 31, 2019 and December 31, 2018 represented approximately 25% and 16% of our total accounts receivable, respectively.
Export sales represented approximately 19% of net sales for the three months ended March 31, 2019 and 2018.
NOTE 3. REVENUE
Revenue recognition
Our revenue is comprised of product, engineering services and repair services. All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation, as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services. As such, revenue is recorded net of returns, allowances and customer discounts. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. Shipping and handling costs are included in cost of goods sold.
The majority of our revenue is derived from the transfer of goods produced under contract manufacturing agreements which have no alternative use and we have an enforceable right to payment for our performance completed to date. Our performance obligations within our contract manufacturing agreements are generally satisfied over time as the goods are produced based on customer specifications and we have an enforceable right to payment for the goods produced. If these requirements are not met, the revenue is recognized at a point in time, generally upon shipment. Revenue under contract manufacturing agreements that was recognized over time accounted for approximately 91% of our revenue for the three months ended March 31, 2019 and 2018. Revenues under these agreements are generally recognized over time using an input measure based upon the proportion of actual costs incurred.
Accounting for contract manufacturing agreements involves the use of various techniques to estimate total revenue and costs. We estimate profit on these agreements as the difference between total estimated revenue and expected costs to complete the performance obligation within the terms of the agreement and recognize the respective profit as the goods are produced. The estimates to determine the profit earned on the performance obligation are based on anticipated selling prices and historical cost of goods sold and represent our best judgement at the time. Changes in judgments on these above estimates could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of associated profit.
On occasion our customers provide materials to be used in the manufacturing process and the fair value of the materials is included in revenue as noncash consideration at the point in time when the manufacturing process commences along with the same corresponding amount recorded as cost of goods sold. The inclusion of noncash consideration has no impact on overall profitability.
Contract Assets
Contract assets, recorded as such in the Condensed Consolidated Balance Sheets, consist of unbilled amounts related to revenue recognized over time. Significant changes in the contract assets balance during the three months ended March 31, 2019 was as follows (in thousands):
|
Outstanding at January 1, 2019 |
|
$ |
6,431 |
|
|
Increase (decrease) attributed to: |
|
|
|
|
|
Transferred to receivables from contract assets recognized |
|
(4,012 |
) |
|
|
Product transferred over time |
|
6,165 |
|
|
|
Outstanding at the end of period |
|
$ |
8,584 |
|
We expect substantially all of the remaining performance obligations for the contract assets recorded as of March 31, 2019, to be transferred to receivables within 90 days, with any remaining amounts to be transferred within 180 days. We bill our customers upon shipment with payment terms of up to 120 days.
The following table summarizes our net sales by market for the three months ended March 31, 2019:
|
|
|
Product/
|
|
Product
|
|
Noncash
|
|
Total Net
|
|
||||
|
Aerospace and Defense |
|
$ |
4,103 |
|
$ |
20 |
|
$ |
122 |
|
$ |
4,245 |
|
|
Medical |
|
14,495 |
|
35 |
|
409 |
|
$ |
14,939 |
|
|||
|
Industrial |
|
8,140 |
|
597 |
|
244 |
|
8,981 |
|
||||
|
Total net sales |
|
$ |
26,738 |
|
$ |
652 |
|
$ |
775 |
|
$ |
28,165 |
|
The following table summarizes our net sales by market for the three months ended March 31, 2018:
|
|
|
Product/
|
|
Product
|
|
Noncash
|
|
Total Net
|
|
||||
|
Aerospace and Defense |
|
$ |
4,623 |
|
$ |
48 |
|
$ |
195 |
|
$ |
4,866 |
|
|
Medical |
|
9,434 |
|
482 |
|
405 |
|
10,321 |
|
||||
|
Industrial |
|
9,992 |
|
843 |
|
425 |
|
11,260 |
|
||||
|
Total net sales |
|
$ |
24,049 |
|
$ |
1,373 |
|
$ |
1,025 |
|
$ |
26,447 |
|
NOTE 4. FINANCING ARRANGEMENTS
We have a credit agreement with Bank of America which was entered into on June 15, 2017 and amended effective December 29, 2017 and provides for a line of credit arrangement of $16,000 that expires on June 15, 2022. The credit arrangement also has a $5,000 real estate term note outstanding with a maturity date of June 15, 2022.
Under the Bank of America credit agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate. Our line of credit bears interest at a weighted-average interest rate of 5.6% and 3.0% as of March 31, 2019 and 2018, respectively. We had borrowings on our line of credit of $11,294 and $9,264 outstanding as of March 31, 2019 and December 31, 2018. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.
The line of credit and real estate term notes with Bank of America contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all of our assets.
The Bank of America credit agreement as amended provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quarters ending December 31, 2018.
The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. At March 31, 2019, we had unused availability under our line of credit of $4,706, supported by our borrowing base. The line is secured by substantially all of our assets.
As part of the July 1, 2015 Devicix acquisition we entered into two unsecured subordinated promissory notes payable to the seller in the principal amounts of $1,000 and $1,300. The $1,000 promissory note has a four-year term, bearing interest at 4% per annum, requiring monthly principal and interest payments of $23 and is subject to offsets if certain revenue levels are not met. The $1,300 promissory note has a four-year term and bears interest at 4% per annum, requiring monthly principal and interest payments of $29 and is not subject to offset.
Long-term debt at March 31, 2019 and December 31, 2018 consisted of the following:
|
|
|
March 31, |
|
December 31, |
|
||
|
|
|
2019 |
|
2018 |
|
||
|
Real estate term notes bearing interest at one-month LIBOR + 2.25% (4.8% as of March 31, 2019 and December 31, 2018) maturing June 15, 2022 with monthly payments of approximately $41 plus interest secured by substantially all assets. |
|
$ |
4,129 |
|
$ |
4,253 |
|
|
|
|
|
|
|
|
||
|
Devicix Acquistion Note 1 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019 |
|
67 |
|
156 |
|
||
|
|
|
|
|
|
|
||
|
Devicix Acquistion Note 2 payable to DeLange Holdings bears interest rate of 4.0% per annum, maturing July 1, 2019 |
|
87 |
|
203 |
|
||
|
|
|
4,283 |
|
4,612 |
|
||
|
|
|
|
|
|
|
||
|
Discount on Devicix Notes Payable |
|
(13 |
) |
(23 |
) |
||
|
Debt issuance Costs |
|
(172 |
) |
(185 |
) |
||
|
|
|
|
|
|
|
||
|
Total long-term debt |
|
4,098 |
|
4,404 |
|
||
|
Current maturities of long-term debt |
|
(586 |
) |
(780 |
) |
||
|
Long-term debt - net of current maturities |
|
$ |
3,512 |
|
$ |
3,624 |
|
NOTE 5. LEASES
We have operating leases for certain manufacturing sites, office space, and equipment. Most leases include the option to renew, with renewal terms that can extend the lease term from one to five years or more. Right-of-use lease assets and lease liabilities are recognized at the commencement date based on the present value of the remaining lease payments over the lease term which includes renewal periods we are reasonably certain to exercise. Our leases do not contain any material residual value guarantees or material restrictive covenants. At March 31, 2019, we do not have material lease commitments that have not commenced.
The components of lease expense were as follows:
|
|
|
Three Months Ended March 31, |
|
|
|
Lease Cost |
|
2019 |
|
|
|
Operating lease cost |
|
$ |
274 |
|
|
Finance lease interest cost |
|
17 |
|
|
|
Finance lease amortization expense |
|
65 |
|
|
|
Total lease cost |
|
$ |
356 |
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
Balance Sheet Location |
|
March 31, 2019 |
|
|
|
Assets |
|
|
|
|
|
|
|
Operating lease assets |
|
Operating lease assets |
|
$ |
5,387 |
|
|
Finance lease assets |
|
Property, Plant and Equipment |
|
1,358 |
|
|
|
Total leased assets |
|
|
|
6,745 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
Current operating lease liabilities |
|
Current Portion of Operating Lease Obligations |
|
811 |
|
|
|
Current finance lease liabilities |
|
Current Portion of Finance Lease Obligations |
|
359 |
|
|
|
Noncurrent |
|
|
|
|
|
|
|
Long-term operating lease liabilities |
|
L-T Operating Lease Liabilities, Net |
|
4,813 |
|
|
|
Long term finance lease liabilities |
|
L-T Finance Lease Obligations, Net |
|
864 |
|
|
|
Total lease liabilities |
|
|
|
$ |
6,847 |
|
Supplemental cash flow information related to leases was as follows:
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
2019 |
|
|
|
Operating leases |
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities |
|
$ |
107 |
|
|
Right-of-use assets obtained in exchange for lease obligations |
|
$ |
— |
|
Maturities of lease liabilities were as follows:
|
|
|
Operating Leases |
|
Finance Leases |
|
Total |
|
|||
|
Remaining 2019 |
|
$ |
671 |
|
$ |
320 |
|
$ |
991 |
|
|
2020 |
|
858 |
|
398 |
|
1,256 |
|
|||
|
2021 |
|
722 |
|
398 |
|
1,120 |
|
|||
|
2022 |
|
726 |
|
223 |
|
949 |
|
|||
|
2023 |
|
738 |
|
2 |
|
740 |
|
|||
|
Thereafter |
|
3,380 |
|
— |
|
3,380 |
|
|||
|
Total lease payments |
|
$ |
7,095 |
|
$ |
1,341 |
|
$ |
8,436 |
|
|
Less: Interest |
|
(1,471 |
) |
(118 |
) |
(1,589 |
) |
|||
|
Present value of lease liabilities |
|
$ |
5,624 |
|
$ |
1,223 |
|
$ |
6,847 |
|
The lease term and discount rate at March 31, 2019 were as follows:
|
|
|
March 31, |
|
|
|
|
2019 |
|
|
Weighted-average remaining lease term (years) |
|
|
|
|
Operating leases |
|
8.3 |
|
|
Finance leases |
|
3.7 |
|
|
Weighted-average discount rate |
|
|
|
|
Operating leases |
|
4.8 |
% |
|
Finance leases |
|
5.4 |
% |
Rent expense for our operating leases the three months ended March 31, 2018 as accounted under ASC 840, Leases , was $335.
The future minimum lease commitments as of December 31, 2018, under ASC 840 are as follows:
|
|
|
Operating Leases |
|
|
|
2019 |
|
$ |
1,024 |
|
|
2020 |
|
858 |
|
|
|
2021 |
|
722 |
|
|
|
2022 |
|
726 |
|
|
|
2023 |
|
738 |
|
|
|
Thereafter |
|
3,380 |
|
|
|
Total minimum obligations |
|
$ |
7,448 |
|
NOTE 6. INCOME TAXES
On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three months ended March 31, 2019 and 2018 was (4%) and (34%), respectively. Our effective tax rate for the year ended December 31, 2019 is expected to be 19% compared to 64% for the year ended December 31, 2018. The decrease in rate mainly relates to: (1) a higher ratio of projected annual pre-tax book income compared to permanent differences; (2) the Company’s ability to reduce the impact of global intangible low-taxed income (“GILTI”).
NOTE 7. RELATED PARTY TRANSACTIONS
During 2016, the Company entered into a consulting arrangement with a company co-owned by Matt Mahmood, who became the Chief Operating Officer of the Company on May 20, 2017 and who resigned from the Company on October 5, 2018. For the three months ended March 31, 2019 and 2018, expenses were incurred in the amounts of $0, and $12 respectively.
On February 22, 2018, the Company entered into a Consulting Agreement with Crosscourt Group, LLC, a limited liability company owned and managed by William Murray, formerly an independent director of the Company. Mr. Murray resigned from this position in May 2018. The term of the Consulting Agreement was three months and ended in the second quarter of 2018. The Company is paying severance benefits per his employment and separation agreements of $235 over 12 months, to be paid in full during 2019, which was fully expensed in the fourth quarter of 2018.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a Maple Grove, Minnesota based full-service electronics manufacturing services (“EMS”) contract manufacturer of wire and cable assemblies, printed circuit board assemblies, higher-level assemblies and box builds for a wide range of industries. We provide value added engineering services and technical support including design, testing, prototyping and supply chain management to customers mainly in the aerospace and defense, medical, and industrial equipment markets. We maintain facilities in Bemidji, Blue Earth, Eden Prairie, Mankato, Merrifield, and Milaca, Minnesota; Monterrey, Mexico; and Suzhou, China. All of our facilities are certified to one or more of the ISO/AS standards, including 9001, AS9100 and 13485, with most having additional certifications based on the needs of the customers they serve.
Results of Operations
The following table presents statements of operations data as percentages of total net sales for the periods indicated:
|
|
|
Three Months Ended |
|
||
|
|
|
March 31, |
|
||
|
|
|
2019 |
|
2018 |
|
|
Net Sales |
|
100.0 |
% |
100.0 |
% |
|
Cost of Goods Sold |
|
89.5 |
|
88.5 |
|
|
Gross Profit |
|
10.5 |
|
11.5 |
|
|
|
|
|
|
|
|
|
Selling Expenses |
|
2.7 |
|
3.9 |
|
|
General and Administrative Expenses |
|
8.1 |
|
8.0 |
|
|
Loss from Operations |
|
(0.3 |
) |
(0.4 |
) |
|
|
|
|
|
|
|
|
Other Expenses |
|
(0.9 |
) |
(0.7 |
) |
|
Loss Before Income Taxes |
|
(1.2 |
) |
(1.1 |
) |
|
|
|
|
|
|
|
|
Income Tax Expense (Benefit) |
|
0.1 |
|
0.4 |
|
|
Net Loss |
|
(1.3 |
)% |
(1.5 |
)% |
Net Sales
Net sales were $28.2 million in the first quarter of 2019, as compared to $26.4 million in the first quarter of the prior year, an increase of $1.8 million or 6.5%. Net sales results were varied by markets, the medical market increased by $4.6 million or 44.7% with medical component products accounting for 60% of the increase and medical devices the remaining 40%. The industrial market sector was down $2.3 million or 20.2% in the first quarter of 2019 as compared to the same quarter of 2018. Net sales from the aerospace and defense markets decreased by $0.6 million or 12.8% in the first quarter of 2019 as compared to the first quarter of 2018.
Net sales by our major EMS industry markets for the three months ended March 31, 2019 and 2018 were as follows (in thousands):
|
|
|
March 31, |
|
% |
|
||||
|
|
|
2019 |
|
2018 |
|
Change |
|
||
|
Aerospace and Defense |
|
$ |
4,245 |
|
$ |
4,866 |
|
(12.8 |
) |
|
Medical |
|
14,939 |
|
10,321 |
|
44.7 |
|
||
|
Industrial |
|
8,981 |
|
11,260 |
|
(20.2 |
) |
||
|
Total Net Sales |
|
$ |
28,165 |
|
$ |
26,447 |
|
6.5 |
|
Net sales by timing of transfer of goods and services for the three months ended March 31, 2019 is as follows (in thousands):
|
|
|
Product/
|
|
Product
|
|
Noncash
|
|
Total Net
|
|
||||
|
Aerospace and Defense |
|
$ |
4,103 |
|
20 |
|
122 |
|
$ |
4,245 |
|
||
|
Medical |
|
14,495 |
|
35 |
|
409 |
|
14,939 |
|
||||
|
Industrial |
|
8,140 |
|
597 |
|
244 |
|
8,981 |
|
||||
|
Total Net sales |
|
$ |
26,738 |
|
$ |
652 |
|
$ |
775 |
|
$ |
28,165 |
|
Net sales by timing of transfer of goods and services for the three months ended March 31, 2018 is as follows (in thousands):
|
|
|
Product/
|
|
Product
|
|
Noncash
|
|
Total Net
|
|
||||
|
Aerospace and Defense |
|
$ |
4,623 |
|
$ |
48 |
|
$ |
195 |
|
$ |
4,866 |
|
|
Medical |
|
9,434 |
|
482 |
|
405 |
|
10,321 |
|
||||
|
Industrial |
|
9,992 |
|
843 |
|
425 |
|
11,260 |
|
||||
|
Total Net sales |
|
$ |
24,049 |
|
$ |
1,373 |
|
$ |
1,025 |
|
$ |
26,447 |
|
Backlog
Our 90-day shipment backlog as of March 31, 2019 was $31.4 million, a 14.8% increase from the beginning of the quarter and a 43.2% increase as compared to the prior year. Backlog for our medical customers has increased 20.8% from the beginning of the quarter and increased 80.6% compared to the prior year. The aerospace and defense backlog increased 0.6% from the beginning of the quarter and increased 15.5% from the prior year. Our industrial customers’ backlog increased 14.7% from the beginning of the quarter and increased 13.5% from the prior year. Our backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.
90-day shipment backlog by our major EMS industry markets are as follows (in thousands):
|
|
|
Shipment Backlog as of the Quarter Ended |
|
|||||||
|
|
|
March 31, |
|
December 31, |
|
March 31, |
|
|||
|
|
|
2019 |
|
2018 |
|
2018 |
|
|||
|
Aerospace and Defense |
|
$ |
6,027 |
|
$ |
5,993 |
|
$ |
5,220 |
|
|
Medical |
|
17,256 |
|
14,285 |
|
9,556 |
|
|||
|
Industrial |
|
8,130 |
|
7,088 |
|
7,166 |
|
|||
|
Total Backlog |
|
$ |
31,413 |
|
$ |
27,366 |
|
$ |
21,942 |
|
Our 90-day backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases. These variables cause inconsistencies in comparing the backlog from one period to the next.
Gross Profit
Gross profit as a percent of net sales 10.5% and 11.5% for the three months ended March 31, 2019 and 2018, respectively. This decline in gross profit as a percent of net sales is mainly due to product and customer mix.
Selling Expense
Selling expenses for the three months ended March 31, 2019 and 2018 was $0.8 million or 2.7% of sales and $1.0 million or 3.9% of sales, respectively. The decrease in selling expenses for 2019 is due to lower sales incentives.
General and Administrative Expense
General and administrative expenses for the three months ended March 31, 2019 and 2018, were $2.3 million or 8.1% of sales and $2.1 million or 8.0% of sales, respectively.
Loss from Operations
First quarter 2019 loss from operations was less than $0.1 million compared to a loss of $0.1 million for the first quarter in 2018.
Income Taxes
On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate. As the year progresses, we refine our estimate based on the facts and circumstances, including discrete events, by each tax jurisdiction. Our effective tax rate for the three months ended March 31, 2019 and 2018 was (4%) and (34%), respectively. Our effective tax rate for the year ended December 31, 2019 is expected to be 19% compared to 64% for the year ended December 31, 2018. The decrease in rate mainly relates to: (1) a higher ratio of projected annual pre-tax book income compared to permanent differences; (2) the Company’s ability to reduce the impact of global intangible low-taxed income (“GILTI”).
Net Loss
Net loss for the three months ended March 31, 2019 and 2018 was $0.4 million or $0.14 per basic and diluted common share.
Liquidity and Capital Resources
Net cash used by operating activities for the three months ended March 31, 2019 was $1.4 million. The increase in accounts receivable and contract assets negatively impacted cash flows, partially offset by an increase in accounts payable and decrease in inventory.
Net cash used in investing activities of $0.4 million for the three months ended March 31, 2019, was the result of property and equipment purchases to support the business.
We have satisfied our liquidity needs over the past several years with cash flows generated from operations and a bank operating line of credit. We have a credit agreement with Bank of America (BofA) which was entered into on June 15, 2017 and amended on December 29, 2017 and provides for a line of credit arrangement of $16.0 million that expires on June 15, 2022. The credit arrangement also has a $5.0 million real estate term note outstanding with a maturity date of June 15, 2022.
Both the line of credit and real estate term notes are subject to fluctuations in the LIBOR rates. The line of credit and real estate term notes with BofA contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. The availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line of credit is secured by substantially all of our assets.
On March 31, 2019, we had outstanding advances of $11.3 million under the line of credit and unused availability of $4.7 million supported by our borrowing base. We believe our financing arrangements and cash flows to be provided by operations will be sufficient to satisfy our future working capital needs. Our working capital was $22.4 million and $20.7 million as of March 31, 2019 and December 31, 2018, respectively.
The Bank of America credit agreement as amended provides for, among other things, a fixed charge coverage ratio of not less than (i) 1.0 to 1.0 for each period of four fiscal quarters, commencing with the period of four fiscal quarters ending December 31, 2018.
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies and Estimates
Our significant accounting policies and estimates are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018. Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate. Actual results could differ from these estimates.
Forward-Looking Statements
Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes. Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate. Forward-looking statements involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:
· General economic, financial and business conditions that could affect our financial condition and results of operations;
· Volatility in the marketplace which may affect market supply and demand for our products or currency exchange rates;
· Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing;
· Changes in the reliability and efficiency of operating facilities or those of third parties;
· Risks related to availability of labor;
· Increase in certain raw material costs such as copper and oil;
· Commodity and energy cost instability;
· Risks related to quality, regulatory, securities laws and debt covenant noncompliance;
· Loss of a major customer or changes to customer orders;
· Increased or unanticipated costs related to compliance with securities and environmental regulation; and
· Disruption of global or local information management systems due to natural disaster or cyber-security incident.
The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us. Discussion of these factors is also incorporated in Part I, Item 1A, “Risk Factors,” and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements. All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements. We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.
Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). These controls and procedures are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation of these disclosure controls and procedures as of the date of the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
Except for the implementation of certain internal controls related to the adoption of the new lease standard (ASC 842), there was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We are subject to various legal proceedings and claims that arise in the ordinary course of business.
We are affected by the risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition or operating results or could cause our actual results to differ materially from our expectations are described in our annual report on Form 10-K for the fiscal year ended under the heading “Part I — Item 1A.Risk Factors.” There have been no material changes in the risk factors from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below sets forth information regarding the repurchases we made of our common stock during the periods indicated.
|
Period |
|
Total Number
|
|
Average
|
|
Total Number of
|
|
Maximum Dollar
|
|
||
|
January 1 - January 31, 2019 |
|
3,377 |
|
$ |
3.87 |
|
3,377 |
|
$ |
153,148 |
|
|
February 1 - February 28, 2019 |
|
— |
|
$ |
— |
|
— |
|
$ |
153,148 |
|
|
March 1 - March 31, 2019 |
|
— |
|
$ |
— |
|
— |
|
$ |
153,148 |
|
|
Total |
|
3,377 |
|
$ |
3.87 |
|
3,377 |
|
$ |
153,148 |
|
As of March 31, 2019, we had a $250,000 share repurchase program with $153,148 remaining under this program.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
|
Exhibits |
|
|
|
31.1* |
|
|
|
|
|
|
|
31.2* |
|
|
|
|
|
|
|
32* |
|
|
101* |
|
Financial statements from the quarterly report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss, (iii) Condensed Consolidated Statements of Cash Flows, and (iv) the Condensed Notes to Condensed Consolidated Financial Statements. |
*Filed herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Nortech Systems Incorporated and Subsidiaries
|
Date: May 15, 2019 |
by |
/s/ Jay D. Miller |
|
|
|
|
|
|
Jay D. Miller |
|
|
|
Chief Executive Officer and President |
|
|
|
Nortech Systems Incorporated |
|
|
|
|
|
|
Date: May 15, 2019 |
by |
/s/ Constance M. Beck |
|
|
|
|
|
|
Constance M. Beck |
|
|
|
Vice President and Chief Financial Officer |
|
|
|
Nortech Systems Incorporated |
|
No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
|---|
| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
|---|
No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
|---|