What changed in this filing

/stocks — the workspaceLOADING

Item 5. Market for Registrant’s Common Equity

2023-03-17 compared with 2022-03-17 · 68 added, 80 removed, 184 unchanged (45% of the section changed)

36 unchanged sentences

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 was completed in the first quarter of 2021, and impacted approximately 60 employees, who were offered positions at other Nortech facilities in Minnesota.

This closure did not qualify for held for sale nor discontinued operations accounting.

Critical Accounting Policies and Estimates

1 unchanged sentence

Generally Accepted Accounting Principles (“U.S.

GAAP”). 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, long-lived assets impairment, allowance for doubtful accounts and inventory reserves.

GAAP”). 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, valuation allowance for inventories, allowance for doubtful accounts, realizability of deferred tax assets and long-lived asset impairment testing.

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.

1 unchanged sentence

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 –

Our accounting policies are described in “Note 1 –

Summary of Significant Accounting Policies,”

15 unchanged sentences

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 triggering 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 at December 31, 2020.

In 2021, we evaluated that we did not have a triggering event occur.

See Note 4, Goodwill and Other Intangible Assets.

Allowance for Doubtful Accounts

3 unchanged sentences

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, 2021 accounts receivable.

At December 31, 2021, our allowance for doubtful accounts was $0.3 million.

Inventory Reserves

2 unchanged sentences

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, 2021 of $1.3 million is adequate.

Operating Results

4 unchanged sentences

Restructuring Expenses

Impairment of Goodwill

Loss on Abandonment of Intangible Asset

Gain on Sale of Property and Equipment

(Income) Loss from Operations

Income from Operations

Interest Expense

PPP Loan Forgiveness

Income (Loss) Before Income Taxes

Income Before Income Taxes

Income Tax Expense

Net Income (Loss)

Our net sales in 2021 were $115.2 million, compared to $104.1 million in 2020, an increase of $11.1 million or 10.7% that was driven by increases in our industrial and medical markets.

Our net sales in 2022 were $134.1 million, compared to $115.2 million in 2021, an increase of $18.9 million or 16.4% that was driven by increases in all of our markets.

The industrial market increased by $3.2 million or 9.0% in 2022 as compared to 2021.

The medical market increased by $12.8 million or 20.3% with medical devices accounting for 6% of the increase and medical component products 94% of the increase.

Net sales from the aerospace and defense markets decreased by $4.0 million or 19.4% in 2021 as compared to 2020.

The overall revenue improvement was primarily due to higher production volume resulting from actions to scale the direct labor workforce and strengthen the supply chain for parts.

Net sales by our major EMS industry markets for the years ended December 31, 2021 and 2020 were as follows:

(in millions)

Net sales from the aerospace and defense markets increased by $2.9 million or 17.5% in 2022 as compared to 2021.

These increases were driven by increased demand as well as price increases to counteract higher material and labor cost.

We have also taken actions to scale the direct labor workforce and strengthen the supply chain for parts.

Net sales by our major EMS industry markets for the years ended December 31, 2022 and 2021 were as follows (in millions):

Aerospace and Defense

4 unchanged sentences

Transferred Over

Transferred at

Consideration

4 unchanged sentences

Transferred Over

Transferred at

Consideration

1 unchanged sentence

Total net sales

Our 90-day backlog at December 31, 2021 increased to $36.9 million as compared to $24.3 million at the end of 2020.

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

Backlog as of the Year Ended

(in millions)

Our 90-day order backlog as of December 31, 2022 was $35.9 million as compared to $36.9 million at the end of 2021.Our 90-day 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.

Our 90-day order backlog by market has remained relatively constant when compared to the prior year.

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.

90-day shipment backlog by our major industry markets are as follows (in millions):

90 Day Backlog as of the

Year Ended December 31,

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 $95.0 million at December 31, 2021 compared to $48.7 million at the end of December 31, 2020.

Our total order backlog as of December 31, 2022 was $104.1 million, a 9.6% increase from $95.0 million at December 31, 2021.

Our total backlog remains strong as our biggest customers are placing orders into the future to secure supply of critical components, in particular for those with long lead times.

Total order backlog by our major industry markets are as follows (in millions):

Total Backlog as of the

Year Ended December 31,

Aerospace and Defense

Total Backlog

The 90-day and total backlog at December 31, 2022 contain the contract asset value of $10.0 million which has been recognized as revenue.

Our gross profit as a percentage of net sales was 15.3% and 13.8% for the years ended December 31, 2022 and 2021, respectively.

The gross profit improvement relates primarily to the $4.7 million reduction in payroll and medical expenses related to the ERC and from an increase in utilization as a result of the sales increase.

The gross profit improvement relates primarily to price increases in response to material and labor cost inflation and higher production volume which increased plant utilization.

The prior year gross profit as a percentage of net sales benefited from the $4.7 million reduction in payroll and medical expenses related to the Employee Retention Credit (“ERC”).

Selling expenses were $3.7 million, or 2.8% of net sales, for the year ended December 31, 2022 and $2.4 million, or 2.0% of net sales, for the year ended December 31, 2021.

The increase in selling expense is driven by an increase in sales engineering expenses to support the increased sales.

General and Administrative

General and administrative expenses were $11.4 million, or 8.5% of net sales, for the year ended December 31, 2022 and $10.0 million, or 8.7% of net sales, for the year ended 2021.

The increase in general and administrative expenses compared to the prior year relates to an increase in professional service fees.

General and administrative expenses for the twelve months ended December 31, 2022 were up $1.4 million mainly due to higher professional fees and higher cost of labor;

the twelve months ended December 31, 2021 includes a $0.4 million reduction in payroll and medical expenses related to the ERC.

Restructuring Charges

Restructuring charges related to the closure of the Merrifield facility were $0.3 million or 0.3% of net sales for year ended December 31, 2021.

There were no restructuring charges for the year ended December 31, 2022.

Restructuring charges related to the closure of the Merrifield facility were $0.3 million or 0.3% of net sales for year ended December 31, 2021.

Research and Development Expense

Research and development expenses were $0.5 million or 0.4% of sales for the year ended December 31, 2021.

There were minimal to no research and development expenses for the year ended December 31, 2020.

Impairment of Goodwill

The loss on impairment of goodwill was $0 and $2.4 million for the years ended December 31, 2021 and 2020, respectively.

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 .

Research and development expenses were $1.5 million or 1.1% of sales for the year ended December 31, 2022 and $0.5 million or 0.4% of sales for the year ended 2021.

We have several projects in process with estimated completion dates within the next two to five years. 

Loss on Abandonment of Intangible Asset

Abandonment charges were approximately $0.6 million or 0.5% of net sales for the year ended December 31, 2021.

There were no abandonment charges for the year ended December 31, 2022.

Abandonment charges were approximately $0.6 million or 0.5% of net sales for the year ended December 31, 2021.

The charges relate to the abandonment of the Devicix tradename.

Gain on Sale of Property and Equipment

The gain on sale of property and equipment was $0.1 million and $3.8 million for the years ended December 31, 2021 and 2020, respectively.

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

Income (Loss) from Operations

Our income from operations for the 2021 fiscal year was $2.3 million, an increase of $2.9 million from the 2020 fiscal year loss of $0.6 million.

Income from operations was positively affected by the 2021 employee retention credits of $5.2 million along with increased utilization as a result of increased sales.

Income from Operations

Our income from operations for the 2022 fiscal year was $3.9 million, an increase of $1.6 million from the 2021 fiscal year income of $2.3 million.

The increase in income from operations was driven by the increase in gross profit.

Income from operations in the 2021 fiscal year was positively affected by the 2021 employee retention credits of $5.2 million.

Interest Expense

Interest expense for the year ended December 31, 2021 was $0.4 million, compared with $0.6 million for the year ended December 31, 2020.

Interest expense for the year ended December 31, 2022 and December 31, 2021 was $0.4 million in each period.

Paycheck Protection Program (PPP) Loan Forgiveness

In the fourth quarter of 2021, we received forgiveness from the Small Business Association (SBA) for the $6.1 million Promissory Note under the PPP.

We recorded a PPP loan forgiveness gain of $6.2 million which is included in other income (expense) on the consolidated statement of operations and other comprehensive income (loss) for the year ended December 31, 2021.

Income tax expense for the year ended December 31, 2021 was $0.9 million.

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

We recorded a PPP loan forgiveness gain of $6.2 million, including interest forgiven, which is included in other income (expense) on the consolidated statement of operations and other comprehensive income (loss) for the year ended December 31, 2021.

Income tax expense was $1.5 million and $0.9 million for the years ended December 31, 2022 and 2021, respectively.

The effective tax rate for fiscal 2022 and 2021 was 42% and 12%, respectively.

Our 2022 tax rate was driven by the increase in the valuation allowance from the Tax Cuts and Jobs Act requirement to capitalize and amortize research and experimental expenditures in 2022.

Our 2021 tax rate was driven by the nontaxable PPP loan forgiveness.

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 deferred tax assets generated in 2020.

The statutory reconciliation for the years ended December 31, 2021 and 2020 is as follows (in millions):

The statutory reconciliation for the years ended December 31, 2022 and 2021 is as follows (in thousands):

Statutory Rate

1 unchanged sentence

Effect of foreign operations

Withholding Tax

Change in State Deferred Rate

5 unchanged sentences

Return to provision - credits, perm diffs

Goodwill Impairment

Net Income (Loss)

Our net income in 2021 was $7.2 million or $2.54 per diluted common share and $2.68 per basic common share.

Our net loss in 2020 was $1.5 million or $(0.58) per diluted and basic common share.

Our net income in 2022 was $2.0 million or $0.70 per diluted common share and $0.75 per basic common share.

Our net income in 2021 was $7.2 million or $2.54 per diluted and $2.68 per basic common share.

Liquidity and Capital Resources

We believe that our existing financing arrangements, anticipated cash flows from operations, funds expected to be received for the ERC and cash on hand will be sufficient to satisfy our working capital needs, capital expenditures and debt repayments.

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 was to expire on June 15, 2022.

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 million that was to expire on June 15, 2022.

On December 31, 2021, we renewed the credit agreement through June 15, 2026.

3 unchanged sentences

There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.

The line of credit is shown net of debt issuance costs of $57 thousand on the consolidated balance sheet for the year ended December 31, 2021.

The line of credit with Bank of America contains certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures. 

In addition, the credit agreement does not expire within one year, the Company is not in violation of the covenants and the Company expects Bank of America to be capable of honoring the financing arrangement.

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, 2022 and each Fiscal Quarter end thereafter subject only during a trigger period commencing when our availability under our line is less than $2.0 million until availability is above that amount for 30 days.

2 unchanged sentences

The line is secured by substantially all of our assets.

In the first quarter of 2022, we amended our credit agreement to include the Employee Retention Credit Receivable as security in our line of credit which improves our unused availability.

During 2022, we amended our credit agreement to include the Employee Retention Credit Receivable as security in our line of credit which improves our unused availability which expired on January 15, 2023.

On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A., which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program (“PPP”) 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 loan was accounted for as debt until November 3, 2021 when the $6.1 million loan and $0.1 million accrued interest was fully forgiven by the SBA.

As a result, we recorded a PPP loan forgiveness gain of $6.2 which is included in other income (expense) on the consolidated statements of operations and other comprehensive income (loss) for the year ended December 31, 2021.

Our China operation has a financing agreement with China Construction Bank which provides for a line of credit arrangement of 10,000,000 Renminbi (RMB) (approximately 1.6 million USD) that will expire on June 22, 2022.

This line of credit bears an interest rate of 4.5% and we had no amounts outstanding as of December 31, 2021 and 2020.

Our China operation has a financing agreement with China Construction Bank which provides for a line of credit arrangement of 10,000,000 Renminbi (RMB) (approximately 1.5 million USD) that will expire on August 18, 2023.

We had no amounts outstanding as of December 31, 2022 and 2021.

Cash flows for the years ended December 31, 2022 and 2021 are summarized as follows:

4 unchanged sentences

Financing activities

Effect of exchange rate changes on cash

Net change in cash

Cash used in operating activities for the year ended December 31, 2021 was $4.6 million compared to cash provided by operations of $1.4 million for the year ended December 31, 2020.

Increases in working capital due to higher sales backlog as well as actions taken to address the global supply chain shortages drove the use of cash from operating activities, primarily increased inventories of $4.6 million.

Net cash used in investing activities was $0.7 million for the year ended December 31, 2021 and net cash provided by investing activities was $5.5 million for the year ended December 31, 2020, respectively.

Cash used in investing activities in 2021 relates primarily to the purchase of $1.3 million of property and equipment offset by the sale of $0.6 million of property and equipment related to the Merrifield plant closure.

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

Net cash provided by financing activities in 2021 of $3.9 million consisted primarily of increased borrowing on the line of credit of $5.7 million offset by payments on long-term debt and capital leases or $1.7 million.

The cash used of $3.8 million in 2020 consisted primarily of the paydown of debt from funds received from our sales leaseback.

Cash provided by operating activities for the year ended December 31, 2022 was $5.4 million compared to cash used in operations of $4.6 million for the year ended December 31, 2021.

In 2022, the cash provided by operating activities was driven by results from operations.

In 2021, increases in working capital due to higher sales backlog as well as actions taken to address the global supply chain shortages drove the use of cash from operating activities, primarily increased inventories of $4.6 million.

Net cash used in investing activities was $2.4 million for the year ended December 31, 2022 and net cash used in investing activities was $0.7 million for the year ended December 31, 2021.

Cash used in investing activities in 2022 relates primarily to the purchase of $2.4 million of property and equipment.

Cash used in investing activities in 2021 relates primarily to the purchase of $1.3 million of property and equipment offset by the proceeds from the sale of $0.6 million of property and equipment related to the Merrifield plant closure.

Net cash used in financing activities in 2022 of $2.7 million consisted primarily of net payments on the line of credit of $2.1 million and capital lease payments of $0.6 million.

The cash provided by financing activities in 2021 of $3.9 million consisted primarily of increased borrowing on the line of credit of $5.7 million offset by payments on long-term debt and capital leases of $1.7 million.

Forward-Looking Statements

17 unchanged sentences

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;

17 unchanged sentences

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