What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2021-03-23 compared with 2020-03-19 · 245 added, 6 removed, 33 unchanged (88% of the section changed)

6 unchanged sentences

Stock price comparisons (NASDAQ):

During the Three Months Ended Low High

During the Three Months Ended

8 unchanged sentences

Issuer Purchase of Equity Securities

The $250,000 share repurchase program, authorized by our Board of Directors in August 2017, expired in July 2018 with no authorized repurchases remaining under this program.

Under this repurchase program, we repurchased 55,199 shares totaling $194,420 during the year ended December 31, 2018.

In August 2018, the Board of Directors approved an additional $250,000 share repurchase program.

Under this repurchase program, we repurchased 32,769 and 21,002 shares totaling $130,376 and $81,329 during the year ended December 31, 2019 and 2018, respectively.

In August 2018, the Board of Directors approved a $250,000 share repurchase program.

Under this repurchase program, we repurchased zero shares and 32,769 shares totaling $0 and $130,376 during the years ended December 31, 2020 and 2019, respectively.

As of December 31, 2020, this share repurchase plan has expired.

The table below sets forth information regarding repurchases we made of our common stock under the $250,000 share repurchase program authorized in August 2018 during the periods indicated.

Average Price

Paid Per Share

Total Number of

Shares Purchased

as Part of Publicly

Announced Plan

Maximum Dollar

Value of Shares that

Value of Shares

that May Yet be

Purchased Under

8 unchanged sentences

As a smaller reporting company, we are not required to provide the information required by this Item.

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

We are a Minnesota, United States based full-service global EMS contract manufacturer in the Medical, Aerospace & Defense and Industrial markets offering a full range of value-added engineering, technical and manufacturing services and support including project management, design, testing, prototyping, manufacturing, supply chain management and post-market services.

Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, higher-level assemblies, and other box builds for a wide range of industries.

We serve three major markets within the EMS industry:

Aerospace and Defense, Medical, and the Industrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and gas.

As of December 31, 2020, we have facilities in Minnesota:

Bemidji, Blue Earth, Mankato, Merrifield, Milaca and Maple Grove.

We also have facilities in Monterrey, Mexico and Suzhou, China.

Our revenue is derived from complex designed products built to the customers’ specifications.

The products we manufacture are engineered and designed products that require sophisticated manufacturing support.

Quality, on time delivery, and reliability are of upmost importance.

Our goal is to expand and diversify our customer base by focusing on sales and marketing efforts that fit our value-added service, early engagement design, and development strategy.

We continue to focus on lean manufacturing initiatives, quality and on-time delivery improvements to increase asset utilization, reduce lead times and provide competitive pricing.

Our strategic investments have positioned us to capitalize on growth opportunities in the medical markets and improve our competitiveness by expanding our global footprint.

Our industrial and defense markets are focused on improving our asset utilization and profitability while transforming to a value added, solution-sell business model that supports early engagement, design for manufacturability and rapid prototyping.

Recent Developments

Global Pandemic

In March 2020, the World Health Organization recognized the outbreak of a novel coronavirus (“COVID-19”) as a pandemic.

While the COVID-19 pandemic has had an impact on our operations, we have been able to continue to operate our manufacturing facilities and provide essential services to our customers.

Additionally, in an effort to protect the health and safety of our employees and in compliance with state regulations, we have instituted a work-from-home policy for employees who can perform their job functions offsite, implemented social distancing requirements and other measures to allow manufacturing and other personnel essential to production to continue work within our manufacturing facilities, and suspended all non-essential employee travel.

The full extent to which COVID-19 will directly or indirectly impact our business, financial condition, and results of operations will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets.

The ultimate impact of COVID-19 depends on factors beyond our knowledge or control, including the duration and severity of the outbreak, as well as third-party actions taken to contain its spread and mitigate its public health effects.

As a result, we are unable to estimate the extent to which COVID-19 will negatively impact our financial results or liquidity.

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

We 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 in the first quarter of 2021, and will impact approximately 60 employees, who were offered positions at other Nortech facilities in Minnesota.

As of December 31, 2020, this closure did not qualify for held for sale nor discontinued operations accounting.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with U.S.

Generally Accepted Accounting Principles (“U.S.

The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of our consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods presented, as well as our disclosures of contingent assets and liabilities.

On an on-going basis, we evaluate our estimates and assumptions, including, but not limited to, goodwill impairment testing, long-lived assets impairment, allowance for doubtful accounts and inventory reserves.

We base our estimates and assumptions on our historical experience and on various other information available to us at the time that these estimates and assumptions are made.

We believe that these estimates and assumptions are reasonable under the circumstances and form the basis for our making judgments about the carrying values of our assets and liabilities that are not readily apparent from other sources.

Actual results and outcomes could differ from our estimates primarily due to incorrect sales forecasting.

We utilize a pipeline generated by our sales team and speak directly with all departments regarding estimates and assumptions.

If, for any reason, those estimates, and assumptions vary substantially it would also impact our financial results.

Our significant accounting policies are described in “Note 1 – Summary of Significant Accounting Policies,” in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

We believe that the following discussion addresses our critical accounting policies and reflects those areas that require more significant judgments and use of estimates and assumptions in the preparation of our consolidated financial statements.

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 Income.

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.

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 1st.

In testing goodwill for impairment we perform a quantitative or qualitative 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.

To the extent the carrying amount of goodwill exceeds the implied goodwill, the difference is the amount of the goodwill impairment.

Prior to completing the quantitative analysis described above, we have the option to perform a qualitative assessment of goodwill for impairment to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets.

If we conclude the fair value is more likely than not less than the carrying value, we perform the quantitative analysis.

Otherwise, no further testing is needed.

In our annual impairment test in 2020, we performed a quantitative analysis based on the triggering event caused by the COVID-19 impact on our results using discounted cash flows and market approach which is based on the guideline public company method.

Discounted cash flow models include assumptions related to our product revenue, gross margins, operating margins and other assumptions.

We took a goodwill impairment of $2.4 million, the total amount of remaining goodwill, in 2020.

See Note 4, Goodwill and Other Intangible Assets .

Long-Lived Assets Impairment

We evaluate long-lived assets, primarily property and equipment, 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.

In 2020, we did evaluate that there was a trigger event, largely driven by the impacts of COVID-19, that indicated that the carrying amount of the asset group may not be recoverable.

We performed the recoverability test and determined there was no impairment.

See Note 4, Goodwill and Other Intangible Assets.

Allowance for Doubtful Accounts

When evaluating the adequacy of the allowance for doubtful accounts, we analyze accounts receivable, historical write-offs of bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms.

We maintain an allowance for doubtful accounts at an amount estimated to be sufficient to provide adequate protection against losses resulting from collecting less than full payment on outstanding accounts receivable.

An amount of judgment is required when assessing the ability to realize accounts receivable, including assessing the probability of collection and the current credit-worthiness of each customer.

If the financial condition of our customers was to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for uncollectible accounts may be required.

We believe the reserve is adequate for any exposure to loss in the December 31, 2020 accounts receivable.

At December 31, 2020, our allowance for doubtful accounts was $0.3 million.

Inventory Reserves

Inventory reserves are maintained for the estimated value of the inventory that may have a lower value than stated or quantities in excess of future production needs.

We have an evaluation process to assess the value of the inventory that is slow moving, excess or obsolete on a quarterly basis.

We evaluate our inventory based on current usage and the latest forecasts of product demand and production requirements from our customers.

We believe the total reserve at December 31, 2020 of $2.2 million is adequate.

Operating Results

The following table presents our statements of operations data as percentages of total net sales for the years indicated:

Cost of Goods Sold

Selling Expenses

General and Administrative Expenses

Impairment of Goodwill

Gain on Sale of Property and Equipment

(Loss) Income from Operations

Interest Expense

Loss Before Income Taxes

Income Tax Expense

Our net sales in 2020 were $104.1 million, compared to $116.3 million in 2019, a decrease of $12.2 million or 10.5% that was driven primarily by the COVID-19 pandemic in our medical and industrial markets.

The medical market decreased by $7.5 million or 12.0% with medical devices accounting for 31% of the decrease and medical component products 69% of the decrease.

The industrial market decreased by $7.1 million or 20.0% in 2020 as compared to 2019.

Net sales from the aerospace and defense markets increased by $2.4 million or 13.2% in 2020 as compared to 2019.

Net sales by our major EMS industry markets for the years ended December 31, 2020 and 2019 were as follows:

(in millions)

Aerospace and Defense

Total Net Sales

Net sales by timing of transfer of goods and services for years ended December 31, 2020 and 2019 are as follows (in millions):

Year Ended December 31, 2020

Product/ Service

Transferred Over

Transferred at

Consideration

Aerospace and Defense

Total net sales

Year Ended December 31, 2019

Product/ Service

Transferred Over

Transferred at

Consideration

Aerospace and Defense

Total net sales

Our 90-day backlog at December 31, 2020 decreased to $24.3 million as compared to $27.3 million at the end of 2019.

The 90-day backlog by our major EMS industry markets are as follows:

Backlog as of the Year Ended

(in millions)

Aerospace and Defense

Total Backlog

Our 90-day backlog varies due to order size, manufacturing delays, inventory programs, contract terms and conditions and changes in timing of customer delivery schedules and releases.

These variables cause inconsistencies in comparing the backlog from one period to the next.

Our total shipment backlog was $48.7 million at December 31, 2020 compared to $50.1 million at the end of December 31, 2019.

Our gross profit as a percentage of net sales was 8.1% and 10.8% for the years ended December 31, 2020 and 2019, respectively.

The decline in gross profit as a percent of sales was driven by lower sales on a fixed cost base in part due to the impact of COVID-19 and increased inventory reserves partially due to the closure of the Merrifield facility.

Selling expenses were $2.5 million, or 2.4% of net sales, for the year ended December 31, 2020 and $2.7 million, or 2.3% of net sales, for the year ended December 31, 2019.

General and Administrative

General and administrative expenses were $8.0 million, or 7.7% of net sales, for the year ended December 31, 2020 and $9.6 million, or 8.3% of net sales, for the year ended 2019.

The decrease 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.

Impairment of Goodwill

The loss on impairment of goodwill was $2.4 million in the year ended December 31, 2020.

In our impairment test of goodwill in the fourth quarter of 2020, we concluded that goodwill was impaired due to a significant reduction of results from operations during the fourth quarter of 2020 largely a result of the COVID-19 pandemic.

See Note 4, Goodwill and Other Intangible Assets .

Gain on Sale of Property and Equipment

The gain on sale of property and equipment was $3.8 million in the year ended December 31, 2020.

This gain was due to the sale leaseback transaction we completed in 2020 relating to the manufacturing facilities in Bemidji and Mankato, Minnesota.

(Loss) Income from Operations

Our loss from operations for the 2020 fiscal year was $0.6 million, a decrease of $0.8 million from the 2019 fiscal year of $0.2 million income, due an impairment of goodwill of $2.4 million and lower gross profit, partially offset by the gain on sale of property and equipment of $3.8 million.

Interest Expense

Interest expense for the year ended December 31, 2020 was $0.6 million, compared with $1.0 million for the year ended December 31, 2019 due largely to lower borrowing on line of credit from the proceeds on the sale leaseback transaction and funds received to the Paycheck Protection Program under the Coronavirus Aid discussed in Liquidity .

Income tax expense for the year ended December 31, 2020 was $0.3 million.

Income tax expense for the year ended December 31, 2019 was $0.4 million.

The effective tax rate for fiscal 2020 and 2019 was 25.1% and 49.9%, respectively.

Our 2020 tax rate was driven by the nontaxable goodwill impairment loss, the tax on global intangible low-taxed income provisions and additional valuation allowance created due to more deferred tax assets generated in 2020.

Our 2019 tax rate was driven by additional valuation allowance created due to more deferred tax assets generated in 2019 and the tax on global intangible low-taxed income provisions.

The statutory reconciliation for the years ended December 31, 2020 and 2019 is as follows (in millions):

Statutory Rate

State Income Tax

Effect of foreign operations

Uncertain tax benefits, including federal benefit for state reserves

Change in State Deferred Rate

Valuation allowance

US Permanent differences

Federal Tax Credits

Global Intangible Low-Taxed Income Effect

Return to provision - credits, perm diffs

Deferred Adjustment

Goodwill Impairment

Our net loss in 2020 was $1.5 million or $(0.57) per diluted common share.

Our net loss in 2019 was $1.2 million or $(0.46) per diluted common share.

Liquidity and Capital Resources

Our 2020 sales and shipment backlog were impacted by the ongoing COVID-19 pandemic.

Due to the inherent uncertainty of this evolving situation, we are unable at this time to predict the likely impact of the COVID-19 pandemic on our future operations which has led to indicators of an inability to continue as a going concern.

However, these indicators have been mitigated by our focus on reducing costs, minimizing capital expenditures, and managing working capital.

In addition, 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, 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 for at least the next 12 months from the financial statement release date.

Credit Facility

We have a credit agreement with Bank of America which was entered into on June 15, 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 4.0% and 5.5% as of December 31, 2020 and 2019, respectively.

We had borrowings on our line of credit of $3,328 and $10,088 outstanding as of December 31, 2020 and December 31, 2019, respectively.

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 provides for, among other things, a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0, for the twelve months ending December 31, 2020 and each Fiscal Quarter end thereafter subject only during a trigger period commencing when our availability under our line is less than $2,000 until availability is above that amount for 30 days due to amendment to our agreement dated in December of 2020.

The Company met the covenants for the period ended December 31, 2020.

The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender.

At December 31, 2020 and 2019, we had unused availability under our line of credit of $8,131 and $4,148, respectively, supported by our borrowing base.

The line is secured by substantially all of our assets.

On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A.

(the “Promissory Note”), which provides for an unsecured loan of $6,077 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 Promissory Note has a term of 2 years with a 1% per annum interest rate.

Payments are deferred for 10 months after the end of the Promissory Note covered period (which is defined as 24 weeks after the date of the loan) and we can apply for forgiveness of the Promissory Note after 60 days.

Forgiveness of the Promissory Note will be determined in accordance with the provisions of the Cares Act and applicable regulations.

Any principal and interest amounts outstanding after the determination of amounts forgiven will be repaid on a monthly basis.

We expect that all or a significant portion of the Promissory Note will be forgiven;

we plan to apply for forgiveness in the second or third quarter of 2021 before the application deadline.

In the second quarter of 2019, our China operations entered into a line of credit arrangement with China Construction Bank which provides for a line of credit arrangement of 6,000,000 Renminbi (RMB) that will expire on April 3, 2021.

This line of credit bears an interest rate of 6% and we had no amounts outstanding as of December 31, 2020.

Cash flows for the years ended December 31, 2020 and 2019 are summarized as follows:

(in thousands)

Cash flows provided by (used in):

Operating activities

Investing activities

Financing activities

Effect of exchange rate changes on cash

Net change in cash

Cash provided by operating activities for the year ended December 31, 2020 was $1.4 million and for the year ended December 31, 2019 was $1.0 million, both comprised primarily of net loss adjusted by the noncash add back of depreciation and amortization and other non-cash charges.

The year-over-year increase in cash provided by operating activities is due to the decrease in working capital driven by reduction of accounts receivable of $3.0 million.

Net cash provided by investing activities was $5.5 million for the year ended December 31, 2020 and net cash used in investing activities was $0.8 million for the year ended December 31, 2019, respectively.

Cash provided by investing activities in 2020 was due to the $6.0 million received from our sales leaseback transaction.

Net cash used in financing activities in 2020 and 2019 of $4.0 million and $0.5 million, respectively.

The cash used in 2020 consisted primarily of net the paydown of debt from in funds received from our sales leaseback.

Off-Balance Sheet Arrangements

We do not have any significant off-balance sheet arrangements.

Forward-Looking Statements

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

We may also make forward-looking statements in other reports filed with the SEC, in materials delivered to stockholders and in press releases.

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:

Volatility in the marketplace which may affect market supply, demand of 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 our operating facilities or those of third parties;

Risks related to availability of labor;

Increases in certain raw material costs such as copper and oil;

Commodity and energy cost instability;

Risks related to FDA noncompliance;

The loss of a major customer;

General economic, financial and business conditions that could affect our financial condition and results of operations;

Increased or unanticipated costs related to compliance with securities and environmental regulation;

Disruption of global or local information management systems due to natural disaster or cyber-security incident;

Outbreaks of epidemic, pandemic, or contagious diseases, such as the recent novel coronavirus that affect our operations, our customers' operations or our suppliers' operations.

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-K 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.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARIES

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

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-K

Item 5. Market for Registrant’s Common Equity