What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-12 compared with 2020-08-11 · 69 added, 64 removed, 106 unchanged (56% of the section changed)

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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, Mankato, Merrifield, and Milaca, Minnesota;

We maintain facilities in Bemidji, Blue Earth, Mankato, Maple Grove, Merrifield, and Milaca, Minnesota;

Monterrey, Mexico;

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We will continue to assess the potential impact of the COVID-19 pandemic on our business, financial condition, and results of operations.

Sale and L easeback Agreement

We have entered into sale and leaseback agreements with Essjay Investment Company, LLC (“Essjay”) relating to the Company’s manufacturing facilities in Bemidji and Mankato, Minnesota.

Nortech and Essjay are expected to close during the Company’s fiscal third quarter, subject to final documentation and other customary closing conditions.

The Company expects net proceeds from the sale, excluding expenses and expected taxes, of approximately $5 million.

The Company intends to use net proceeds to pay down debt, provide additional liquidity for initiatives and strengthen the Company’s financial position.

At closing, the Company will enter into a lease agreement for the Bemidji and Mankato, Minnesota facilities for an initial 15-year term, with multiple renewal options.

We continue to actively manage our cash and working capital to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times.

Facility Consolidation

To further improve operational efficiencies and lower overhead costs, the Company approved on August 7, 2020, the closure of our Merrifield, Minnesota, production facility, shifting wire and cable assembly, system-level assembly and printed circuit board (PCB) manufacturing to Nortech’s other Minnesota locations.

The Merrifield production facility consolidation is expected to be complete on or before December 31, 2020, and will impact approximately 60 employees, who will be offered positions at other Nortech facilities in Minnesota.

As of September 30, 2020, this closure did not qualify for held for sale nor discontinued operations accounting.

Results of Operations

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of Goods Sold

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General and Administrative Expenses

Income from Operations

Gain on Sale of Property and Equipment

Income (Loss) from Operations

Other Expenses

(Loss) Income Before Income Taxes

Income Tax Expense (Benefit)

Net (Loss) Income

Net sales were $26.5 million in the second quarter of 2020, as compared to $27.3 million in the second quarter of the prior year, a decrease of $0.8 million or 3.0%.

Net sales results were varied by markets, the medical market decreased by $0.7 million or 4.7% with medical devices accounting for most of that decrease.

Net sales from the aerospace and defense markets increased by $0.3 million or 7.1% in the second quarter of 2020 as compared to the second quarter of 2019.

The industrial market decreased by $0.5 million or 5.8% of sales in the second quarter of 2020 as compared to the same quarter of 2019.

Net sales were $53.9 million in the six months ended 2020, as compared to $55.5 million in the prior year, a decrease of $1.6 million or 2.8%.

Net sales results were varied by markets, the medical market decreased by $0.2 million, or 0.8%.

Net sales from the aerospace and defense markets increased $0.9 million or 9.8%.

The industrial market decreased by $2.2 million of sales or 12.4%

Net sales by our major EMS industry markets for the three and six months ended June 30, 2020 and 2019 were as follows (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Income (Loss) Before Income Taxes

Income Tax Expense

Net Income (Loss)

Net sales were $26.4 million in the third quarter of 2020, as compared to $30.1 million in the third quarter of the prior year, a decrease of $3.7 million or 12.3% that was driven in part by the COVID-19 pandemic.

Net sales results were varied by markets;

the medical market decreased by $2.8 million or 16.6% with medical devices accounting for the largest portion of the decrease.

The industrial market decreased by $2.7 million or 31.1% of sales in the third quarter of 2020 as compared to the same quarter of 2019.

Net sales from the aerospace and defense markets increased by $1.8 million or 41.3% of sales in the third quarter of 2020 as compared to the third quarter of 2019.

Net sales were $80.3 million in the nine months ended 2020, as compared to $85.5 million in the prior year, a decrease of $5.3 million or 6.1% that was driven in part by the COVID-19 pandemic.

Net sales results were varied by markets;

the medical market decreased by $3.3 million, or 7.1% with medical device accounting for 45.6% of the decrease and medical component products the remaining 54.4%.

The industrial market decreased by $4.3 million of sales or 16.3% for the nine months ended September 30, 2020 as compared to the same period of 2019.

Net sales from aerospace and defense markets increased by $2.3 million of sales or 17.3% for the nine months ended September 30, 2020 as compared to the same period of 2019.

Net sales by our major EMS industry markets for the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands):

Three months Ended September 30,

Nine Months Ended September 30,

Aerospace and Defense

Total Net Sales

Net sales by timing of transfer of goods and services for the three and six months ended June 30, 2020 is as follows (in thousands):

Three Months Ended June 30, 2020

Net sales by timing of transfer of goods and services for the three and nine months ended September 30, 2020 is as follows (in thousands):

Three Months Ended September 30, 2020

Product/ Service

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Total net sales

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Product/ Service

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Point in Time

Consideration

Noncash Consideration

Total Net Sales

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Total net sales

Net sales by timing of transfer of goods and services for the three and six months ended June 30, 2019 is as follows (in thousands):

Three Months Ended June 30, 2019

Net sales by timing of transfer of goods and services for the three and nine months ended September 30, 2019 is as follows (in thousands):

Three Months Ended September 30, 2019

Product/ Service

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Total net sales

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

Product/ Service

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Total net sales

Our 90-day shipment backlog as of June 30, 2020 was $23.3 million, a decrease of 15.3% from the beginning of the quarter and a 25.8% decrease as compared to the prior year.

Our 90-day shipment backlog as of September 30, 2020 was $23 million, a 0.8% decrease from the beginning of the quarter and a 27.8% decrease from the prior year.

Backlog for our medical customers has decreased 4.2% from the beginning of the quarter and decreased 35.4% from the prior year.

The aerospace and defense backlog increased 1.3% from the beginning of the quarter and increased 1.0% from the prior year.

Our industrial customers’ backlog decreased 30.7% from the beginning of the quarter and decreased 44.0% from the prior year.

Our backlog consists of firm purchase orders we expect to ship in the next 90 days.

Our industrial customers’ backlog increased 10.4% from the beginning of the quarter and decreased 41.7% from the prior year.

The aerospace and defense backlog decreased 2.0% from the beginning of the quarter and increased 14.5% 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 Period Ended

September 30,

Aerospace and Defense

Total Backlog

Total 90-Day Backlog

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.

Our total shipment backlog was $46.6 million at June 30, 2020 compared to $58.7 million at the end of June 30, 2019.

Gross profit as a percent of net sales for the three months ended June 30, 2020 and 2019 was 9.2% and 8.5%, respectively.

Gross profit as a percentage of sales for the six months ended June 30, 2020 and 2019 was 10.1% and 9.5%, respectively.

The increase in gross profit in both comparisons was driven by product mix.

Our total shipment backlog was $45.7 million at September 30, 2020 compared to $58.1 million at the end of September 30, 2019.

This decrease was driven in part to the impact of COVID-19.

Gross profit as a percent of net sales for the three months ended September 30, 2020 and 2019 was 6.2% and 12.1%, respectively.

Gross profit as a percentage of sales for the nine months ended September 30, 2020 and 2019 was 8.8% and 10.4%, respectively.

The decrease in both comparisons was driven by lower sales on a fixed cost base in part due to the impact of COVID-19 and increased inventory reserves.

Selling Expense

Selling expenses for the three months ended June 30, 2020 and 2019 was $0.7 million or 2.7% of sales and $0.8 million or 2.9% of sales, respectively.

Selling expense for the six months ended June 30, 2020 and 2019 was $1.4 million or 2.5% of sales and $1.6 million or 2.8% of sales, respectively.

The decrease in both the three and six month periods is due cost reduction measures taken in prior year.

Selling expenses for the three months ended September 30, 2020 and 2019 was $0.6 million or 2.3% of sales and $0.6 million or 2.0% of sales, respectively.

Selling expense for the nine months ended September 30, 2020 and 2019 was $1.9 million or 2.4% of sales and $2.1 million or 2.5% of sales, respectively.

General and Administrative Expense

General and administrative expenses for the three months ended June 30, 2020 and 2019 were $1.7 million or 6.3% of sales and $2.7 million or 10.0% of sales, respectively.

General and administrative expenses for the six months ended June 30, 2020 and 2019 were $3.7 million or 6.8% of sales and $5.0 million or 9.1% of sales, respectively.

The decrease in both comparisons was due to higher spend in the prior year related one-time expenditures to improve operations in 2019 and the benefits of those cost reduction measures in 2020.

General and administrative expenses for the three months ended September 30, 2020 and 2019 were $2.2 million or 8.2% of sales and $2.3 million or 7.7% of sales, respectively.

General and administrative expenses for the nine months ended September 30, 2020 and 2019 were $5.8 million or 7.2% of sales and $7.4 million or 8.6% of sales, respectively.

The decrease in the year to date comparison was due to higher spend in the prior year related one-time expenditures to improve operations in 2019 and the benefits of those cost reduction measures in 2020.

Gain on Sale of Property and Equipment

The gain on sale of property and equipment was $3.8 million in the three and nine months ended September 30, 2020.

This gain was due to the sale leaseback transaction we completed in the period relating to the manufacturing facilities in Bemidji and Mankato, Minnesota.

Income (Loss) from Operations

Second quarter 2020 Income from operations was $0.1 million compared to loss of $1.2 million for the second quarter in 2019.

Income from operations for the first six months in 2019 was $0.4 million as compared to loss of $1.3 million for the same comparable period in 2019.

The increase in income from operations in both comparison periods was due to increased gross margin as a percent of sales and the decreased administrative expenses due to largely to cost reduction measures taken in the prior year.

Third quarter 2020 income from operations was $2.7 million compared to $0.7 million for the third quarter in 2019.

Income from operations for the first nine months in 2020 was $3.1 million as compared to a loss of $0.6 million for the same comparable period in 2019.

The increase in the income from operations in both comparisons was due to the gain on sale of property and equipment of $3.8 million partially offset by lower gross profit.

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 and six months ended June 30, 2020 was (3.2%) and 65.0%, respectively, and the rate for the three and six months ended June 30, 2019 was (4%).

Our effective tax rate for the three and nine months ended September 30, 2020 was 24% and our effective tax rate for the three and nine months ended September 30, 2019 was 10% and (9%), respectively.

Net Income (Loss)

Net loss for the three and net income for the six months ended June 30, 2020 was $0.1 million and $0.0 million, respectively.

Net loss for the three months ended June 30, 2019 was $1.6 million and for six month ended June 30, 2019 was $1.9 million.

Net income for the three months ended September 30, 2020 and September 30, 2019 was $2.0 and $0.4 million, respectively.

Net income for the nine months ended September 30, 2020 was $2.0 million and net loss for the nine months ended September 30, 2019 was $1.5 million.

Liquidity and Capital Resources

Our second quarter sales and shipment backlog were impacted by the COVID-19 pandemic.

Our third quarter sales and shipment backlog were impacted by the COVID-19 pandemic.

However, our focus on reducing costs, minimizing capital expenditures, and managing working capital mitigated the impact on liquidity.

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However, we believe that cash provided by operations, funds available under the credit agreement with Bank of America, N.A.

(BofA), funds available under a Promissory Note with BofA (“Promissory Note”) pursuant to the Paycheck Protection Program under the Coronavirus Aid and cash on hand will be adequate to meet our liquidity needs, including working capital, capital expenditures, and debt payment obligations.

Net cash provided by operating activities for the six months ended June 30, 2020 was $0.5 million.

Earnings adjusted for depreciation and amortization of $1.1 million drove the cash provided offset by an increase in working capital.

Net cash used in operating activities for the six months ended June 30, 2019 was $2.2 million.

The increase in accounts receivable and unbilled revenue and decrease in accounts payable drove this cash outflow, partially offset by a decrease in inventory.

(BofA), funds available under a Promissory Note with BofA (“Promissory Note”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, funds received from our sales leaseback transaction and cash on hand will be adequate to meet our liquidity needs, including working capital, capital expenditures, and debt payment obligations.

Net cash used in operating activities for the nine months ended September 30, 2020 and September 30, 2019 was $0.1 million and $0.2 million, respectively.

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 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.

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.

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The line of credit is secured by substantially all of our assets.

On June 30, 2020, we had outstanding advances of $4.4 million under the line of credit and unused availability of $8.3 million supported by our borrowing base.

On September 30, 2020, we had outstanding advances of $2.5 million under the line of credit and unused availability of $8.6 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 $21.8 million and $21.1 million as of June 30, 2020 and December 31, 2019, respectively.

Our working capital was $22.6 million and $21.1 million as of September 30, 2020 and December 31, 2019, respectively.

The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than (i) 1.0 to 1.0 for the three months ending December 31, 2019, six months ending March 31, 2020, nine months ending June 30, 2020 and twelve months ending September 30, 2020 and each fiscal quarter end thereafter.

The Company met the covenants for the six months ended June 30, 2020.

On April 15, 2020, we entered into a Promissory Note, which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which;

funds were received on April 22, 2020.

The Company met the covenants for the nine months ended September 30, 2020.

The Promissory Note has a term of 2 years with a 1% per annum interest rate.

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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, 2019.

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, 2019, and the risks set forth in PART II, ITEM 1A below.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis