Item 1. Business
Item
1. Business
General
Nortech
Systems Incorporated, (“the Company”, “we”, “our”) organized in December 1990, is a provider of engineering
design and manufacturing solutions for complex electromedical devices, electromechanical systems, assemblies and components headquartered
in Maple Grove, Minnesota, a suburb of Minneapolis, Minnesota. We maintain facilities and operations in Minnesota in the United States;
Monterrey, Mexico; and Suzhou, China.
We
offer a full range of value-added engineering, technical and manufacturing services and support including project management, designing,
testing, prototyping, manufacturing, supply chain management and post-market services. Our manufacturing and engineering services include
complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies,
complex higher-level assemblies and other box builds for a wide range of industries. In the design phase, we provide technical support,
subject matter expertise in design for manufacturing and testing capabilities that allow our customer programs to get to production faster
while meeting both their quality and cost requirements.
Our
breadth of manufacturing, technical expertise and experience make us attractive to our broad customer base. Our customers are original
equipment manufacturers (“OEMs”) in the Medical Device, Medical Imaging, Aerospace and Defense and Industrial markets. The
diversity in the markets we serve is an advantage to mitigate the effects of fluctuations from the economy and competition. Our customers
rely on our experience and capabilities in manufacturing and supply chain to manage and reduce total overall cost over the life cycle
of their products. This requires a strong relationship with our customers based on a trusting partnership as we perform as an extension
of their operations. Most of our net sales are derived from products built to the customer’s unique design specifications.
Our quality systems and processes are based on ISO standards with all facilities certified to at least one of the following: ISO 9001,
ISO 13485 or AS9100. These certifications and registrations provide our customers assurance of our capabilities and proven processes.
Our Milaca operation is a U.S. Food and Drug Administration (“FDA”) registered facility, and our Suzhou operation is a China
National Medical Imaging Administration certified facility. In addition to industry standard certifications, we actively manage quality
metrics throughout product life cycle at all levels of the organization to provide real-time, pro-active support to our customers and
their projects. Process validation is performed through the strict phases of installation qualification, operation qualification and
performance qualification.
Business
Segment
The
Company operates in the Medical Device, Medical Imaging, Aerospace and Defense, and Industrial markets with over 50% of its net
sales coming from the medical-related markets. All of our operations fall under the Contract Manufacturing segment within the
Electronic Manufacturing Services (“EMS”) industry. We strategically direct production between our various manufacturing
facilities based on a number of considerations to best meet our customers’ needs. Our plants generate net sales over several
of the markets the Company serves. We share resources for sales, marketing, engineering, supply chain, information services, human
resources, payroll, and all corporate accounting functions. Our financial information is evaluated regularly on a consolidated basis
by the chief operating decision maker in assessing performance and allocating resources.
3
Business
Strategy
The
EMS industry has evolved into a dynamic, high-tech, regulated global electronics contract services industry. We continue to expand our
capabilities and footprint to better meet these changing market requirements. Along with offering technical expertise in our quality
processes, engineering design applications and testing, we continue to transform our business model from one that is less transactional,
and price/commodity driven to a solution-based model. Our model is focused on value-added customer and supplier-managed inventory solutions
and the underlying cost drivers throughout the global supply chain. We continue to pursue strategic opportunities that may include acquisitions,
mergers, and/or joint ventures with complementary companies to expand our service offering, advance our competitive edge, grow our customer
base and increase net sales. Our strategic objectives and our history have been based on both organic and acquired growth.
We
are committed to quality, cost effectiveness and responsiveness to customer requirements. To achieve these objectives, we have invested
in equipment, plant capacity studies, people, enterprise resource planning systems, lean manufacturing and supply chain management techniques
at our facilities. We have also invested in fiber optic technologies to provide a lighter weight, data-driven and environmentally cleaner solution
to our customers. We are committed to continuous improvement and have invested in training our people to identify and act on improvement
opportunities. We maintain a diversified customer base and expand into other capabilities and services when there is a fit with our core
competencies and strategic vision.
Marketing
We
concentrate our marketing efforts in the Medical Device, Medical Imaging, Aerospace and Defense, and Industrial markets. Our marketing
strategy emphasizes our breadth, expertise and experience in each of our markets. Our expertise helps our customers save time and money
and also reduces their risks. The breadth of our manufacturing, supply chain, engineering services and complete turnkey solutions assist
our customers in getting their products to market quickly while managing the total cost solution. Our strength is managing low to moderate
volume components and assemblies with high mix customer demand. This requires us to have close customer relationships and operational
flexibility to manage the variation of product demands.
Our
customer emphasis continues to be on companies that require an electronic manufacturing partner with a high degree of manufacturing and
quality sophistication, including statistical process control, statistical quality control, ISO standards, military specifications, AS9100
and FDA facility registration. We continue efforts to penetrate our existing customer base and expand market opportunities with participation
in industry forums and selected trade shows. We target customers who value proven manufacturing performance, design, project management
and application engineering expertise and who value the flexibility to manage the supply chain of a high mix of products and services.
We market our services through a mix of traditional marketing outreach, a specialized business development team and in limited circumstances,
independent manufacturers’ representatives. For more information on our marketing and service offerings see our website at www.nortechsys.com.
The information on our Company’s website is not part of this filing.
Sources
and Availability of Materials
We
currently purchase most of our electronic components globally and directly from electronic component manufacturers and large electronic
distributors. During the COVID pandemic, we, like many other companies in our industries, experienced significant supply chain and shipping
disruptions. More recently, we are experiencing shifts in customer order patterns as they seek to reduce fulfillment times, which requires
changes to our procurement strategies and inventory investments. We attempt to overcome these changes through advanced supply chain solutions
we develop in partnership with our customers, a commitment to strong supplier partnerships and risk management tools.
4
Major
Customers
One
customer individually, accounted for at 27.7% of net sales for the year ended December 31, 2024, and two customers, individually, accounted
for 25.7% and 10.3%, respectively, of net sales for the year ended December 31, 2023.
Patents
and Licenses
Our
success depends on our technical expertise, trade secrets, supply chain and manufacturing skills. During the normal course of business,
we obtain or develop proprietary product requiring licensing, patent, copyright or trademark protection.
Competition
The
contract manufacturing EMS industry’s competitive makeup includes small closely held contract manufacturing companies, large global
full-service contract manufacturers, company-owned in-house manufacturing facilities and foreign contract manufacturers. We do not believe
that the small closely held operations pose a significant competitive threat in the markets and customers we serve, as they generally
do not have the complete manufacturing and engineering services or capabilities required by our target customers. We believe the larger
global full service and foreign manufacturers are more focused on higher volume customer engagements and we do not see them as our primary
competition. We continue to see opportunities with OEM companies that have their own in-house electronic manufacturing capabilities as
they evaluate their internal costs and investments against outsourcing to contract manufacturers like us. We see trends of the low volume,
high mix customer demand going to a regional supply base. This is a good fit with our operations in US, Mexico and China. We continue
to study and investigate other regions and global alternatives to meet our competitive challenges and customer requirements.
Research
and Development
We
perform research and development for customers on an as requested, project and program basis for development of conceptual
engineering and design activities as well as products moving into production. We spent approximately $1.2 million on product
research and development in each of the years ended December 31, 2024 and 2023. We continue to explore opportunities
for developing proprietary manufacturing methods or products, particularly in complex wire and cable interconnect
technologies.
Environmental
Law Compliance
We
believe that our manufacturing facilities are currently operating in compliance with local, state, and federal environmental laws. We
plan to continue acquiring environmentally efficient equipment and incurring the expenditures we deem necessary for compliance with applicable
laws. Expenditures relating to compliance for operating facilities incurred in the past have not significantly affected our capital expenditures,
earnings or competitive position.
Government
Regulation
As
a medical device manufacturer, we have additional compliance requirements. We are required to register with the FDA and are subject to
periodic inspection by the FDA for compliance with the FDA’s Quality Management System Regulation (“QMSR”) requirements,
which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation
procedures. Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic
inspections and product field monitoring by the FDA. To support the quality requirements of our Aerospace and Defense market customers,
all our US locations are International Traffic in Arms Regulations (“ITAR”) compliant.
5
Human
Capital Resources
We
have 701 full-time and 43 part-time/temporary employees as of December 31, 2024, none which are covered by union agreements. Manufacturing
personnel, including direct, indirect support and sales functions, comprise 657 employees, while general administrative employees total
44.
Foreign
Operations and Export Sales from Our Domestic Operations
We
have leased manufacturing facilities in Monterrey, Mexico and Suzhou, China. Monterrey, Mexico has approximately $687,000 and $747,000
in long-term assets, and $1,758,000 and $2,123,000 of net operating lease assets as of December 31, 2024 and 2023, respectively. Suzhou,
China has approximately $812,000 and $861,000 in long-term assets, and $685,000 and $278,000 of net operating lease assets as of December
31, 2024 and 2023, respectively. Export sales from our U.S. domestic operations represented 3.4% and 4.1% of net sales for the years
ended December 31, 2024 and 2023, respectively.
Available
Information
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports are available
free of charge, as soon as reasonably practicable, after we electronically file such material with, or furnish it to, the United States
Securities and Exchange Commission (“SEC”). These reports are available on our website at http://www.nortechsys.com
and on the SEC’s website at http://www.sec.gov . Information included on our website is not deemed to be incorporated into
this Annual Report on Form 10-K.