Nortech Systems Incorporated (NSYS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Nortech Systems Annual Meeting. I'd like to turn the meeting over to Connie Beck, Chief Financial Officer, Vice President of Finance and Corporate Secretary. The floor is yours.

Good afternoon, everyone, and welcome to the Nortech Systems Annual Shareholder Meeting. We're scheduled to begin at 3:00 p.m., so I will now call this meeting to order. We're pleased to host the annual meeting virtually via Lumi. Following my introduction, I will oversee the official business portion of the meeting. I'll then turn it over to our Chairman, David Kunin; and our President and CEO, Jay Miller, who will give a corporate update. And then we'll open it up for questions. At this time, I'd like to acknowledge the other members of our company's executive officer team who are also present virtually. We have Heidi Grange, Senior Vice President of Human Resources; John Lindeen, Senior Vice President of Global Operations; and Curt Steichen, Senior Vice President of Sales. Next, I'd like to acknowledge some of our key business partners who are also present. From our public accounting firm, Baker Tilly, we have Steve Stensrud. From our legal firm, Insitu Law, we have Mark Hooley. From Bank of America, we have [ Brian Ross ] and Brian Conole. Also present at this meeting are the 5 nominees to our Board of Directors: Kathleen Iverson, Chair of our Audit Committee; David Kunin, Chairman; Ryan McManus, Chair of our Nominating and Corporate Governance Committee and also Chair of our newly formed Science and Technology Committee; Jay Miller, President and CEO; and Steven Rosenstone, Chair of our Compensation and Talent Committee. After those introductions and before our corporate presentation, next, we're going to take care of the formal business portion of the meeting. The record date for this annual meeting was March 18, 2020. The holders of the company's common stock at the close of business on that day were entitled to notice and are entitled to vote on the matters brought before this meeting. I have been informed that a majority of the shares entitled to vote at the meeting are either represented in person or by proxy. And accordingly, a quorum is present. EQ Shareowner Services has been appointed to act as the inspector of election for this meeting. The proposals to be voted upon at this meeting are: number one, to elect 5 members of the Board of Directors to serve for a 1-year term and until their successors are elected and qualified; number two, to approve on an advisory basis the compensation of our named executive officers; and number three, to approve the ratification of the appointment of the independent registered public accounting firm, Baker Tilly Virchow Krause, LLP. If you have already voted by proxy, you do not need to vote again. If you are voting at this meeting, you can do so now by clicking on the Vote button. Please note that if your shares are held of record by a broker, bank or other nominee and you wish to vote now, you are required to have a legal proxy issued in your name from the record holder. That legal proxy will need to be attached to the e-mail along with your virtual ballot. [Voting]

I declare the polls closed, and we can proceed with announcing the preliminary results. We have been informed by the inspector of election that the preliminary vote report shows that the following director nominees have been elected by the required shareholder vote: Kathleen Iverson, David Kunin, Ryan McManus, Jay Miller and Steven Rosenstone. And the requisite approvals have been obtained for the advisory approval of the compensation of our named executive officers and the ratification of the appointment of the independent registered public accounting firm. Ballots and proxies for this meeting will be filed with the company's records, and a certificate of the inspector of election will be attached to the minutes of this meeting. Is there any unfinished or new business for discussion? There being no other formal business to be brought before the meeting, the formal portion of this meeting is now concluded and adjourned. I'll now turn it over to our company's Chairman, David Kunin.

Thank you, Connie. I assume that everyone can hear me. I really am also going to pass the baton here to Jay Miller. But before I do, let me first welcome everybody. These are not -- these are unusual circumstances, of course, and thank you for taking the time to be a part of this. And in this strange new way, we'll hopefully have just as successful an annual meeting as we've had in the past. We are just past the 1-year anniversary of Jay Miller taking over as President and CEO from the long-time really friend and companion. Wasielewski was a tremendous leader of this company for a long period of time, and his pass off to Jay was quite professionally handled on all sides and well done. And now we're a year in to Jay's leadership of the company. Connie has not been with us even 2 years so far. So really, the very senior management team, and you mentioned Heidi, who's joined us quite recently and a lead in our computerization, has also joined us quite recently. And so we really have an overhaul, not just of the Board level seats that existed. This is a new Board in the last -- since the Board that I joined 6 years ago. And now with new great additions to the senior management team to complement Curt Steichen and John Lindeen and the other strong players, [ Steve Czeck ], who really have been important parts of the management team that Jay has really built, what I think of as great team chemistry. The company has really transitioned, and the energy inside of the business is very dedicated. And these are tough times, and nobody expected these times. And there's been a lot of challenging things that they -- but in some ways, the management team, as I've seen it, has grown through these times and has come closer together. And the Board process, I know, has been very diligent through this time of transition and in this COVID-19. And I couldn't be prouder of the work that they've been doing here. But rather than just rant on, let me pass it to Jay who will describe our strategic plan and a number of other things in this meeting. But before I do, let me just make sure that I emphasize, Jay, you're -- we -- Jay and I knew each other from college. We have stayed friends for all through the years, but we ran into each other again here through this experience. And we've gotten to know each other a ton better. We traveled to Israel together this year and got to know each other very well through that experience. And I couldn't be prouder really of the way the transition of the management team happened here and the kind of fabulous team chemistry that you've created through not just the time of the last year of transition, but especially in these last couple of months where the COVID-19 and even going back to the challenges we had in our China plants 3 months ago when the height of the pandemic was more over there than here. But we've handled the transition well. Jay, you and your team are running a great company. And I think you'll see that as Jay tries to describe the transition that we've made in management and in our strategic plan and how that's executing itself even despite these challenging times.

David, thank you very, very much for that very kind and humbling introduction. I want to thank you too for your leadership on the Board of Directors as well as the rest of the members of the Board of Directors very much. I also want to thank everyone for taking the time to join us today on this call, and I'm looking forward to giving everybody at least a high-level overview of our strategic plan. Before I do that, I want Connie just to walk through, again, at a high-level financial results for 2019, and then I'll take it back over and go through corporate presentation.

Thank you, Jay. Our net sales in 2019 were $116.3 million compared to $113.4 million in 2018. This is an increase of $2.9 million or 2.6%. Sales in the medical market increased by $12.6 million or 25.2%, with medical devices accounting for 140% of the increase while medical component products decreased 40%. The industrial market sales decreased by $9.6 million or 21.3% in 2019 compared to 2018. Sales from the aerospace and defense markets decreased by $0.1 million or 0.6% in 2019. Our gross profit as a percentage of net sales was 10.8% and 11.7% for the years ended December 31, 2019, and 2018, respectively. The decline in gross profit in 2019 was driven by product mix, which primarily was in the first half of the year and operational inefficiencies due to component shortages. Operating expenses for 2019 were slightly higher when compared to 2018, primarily due to additional expenses incurred related to our worldwide ERP implementation, offset partially by a decrease in selling expenses. Our net loss in 2019 was $1.2 million or $0.46 per diluted common share. Net income in 2018 was $0.2 million or $0.06 per diluted share. We were pleased with our improvements in margin and operating income for the last half of the year. Revenue for 2019 met our expectations, and backlog remains strong at $49.7 million as of the end of 2019 versus $45 million at the end of 2018. I'll turn it back over to you, Jay.

Very good, Connie. Thank you very much. I hope you all know that Nortech Systems is a leading provider of design and manufacturing solutions for complex electromechanical systems, assemblies and components. Nortech primarily serves the medical, aerospace and defense and industrial markets. Our design services span concept development to commercial design and includes software, electrical, mechanical and biomedical engineering. Nortech. Our mission is that Nortech, in partnership with our medical, industrial and defense customers, use intelligence, innovation, speed and global expertise to provide manufacturing and engineering solutions. This enables our customers to be leaders in digital connectivity and data management to achieve their business goals. Nortech strives to be a premier workplace that fosters valued relationships internally and in our communities. Our vision is that Nortech will be the market-leading global go-to company in innovative digital connectivity and data management, manufacturing and engineering solutions. Nortech has a very strong corporate culture that focuses on our people, our customers and our supply chain partners. A number of our important cultural values include being nimble and innovative, community outreach, results oriented, strongly focused on teamwork, excellence, open, candid communication and high performance at all levels. If you're following along in the slides, I'm at Slide 8 right now, the Nortech organization. I won't go through this in a whole lot of detail other than to recognize David Kunin, our Chairman; Kitty Iverson; Steven Rosenstone; and Ryan McManus also on the Board of Directors. And on Slide 9, the leadership team. The leadership team, as you might imagine, has gone through quite a bit over the past year or so with a new CEO. We've made some additions. We've made a number of important changes to the organization. I'm very, very, very proud of this team. It's a very experienced, strong and diverse, in many ways, team. I want to acknowledge Connie, our CFO; John Lindeen, our Senior Vice President of Operations; Curt Steichen, our Senior Vice President of Sales; Heidi Grange, our Senior Vice President of HR; Michael Schnabel, our Senior Director of QA and RA; Cathy Vold, our Senior Director of Marketing; [ Steve Czeck ], our Senior Director of IT -- of Engineering; and [ Geoff Rich ], our Senior Director of IT. It's a fantastic team, and I'm very, very proud of them for all the things they've done over the past year and for all the things that they're already doing this year. On Slide 10, just shows a pie chart of the markets that we're focused on. So if you look at the $417 billion market opportunity overall for -- in the markets that we're in, contract manufacturing, we're focused on the health care space, primarily industrial and aerospace and defense. And just those 3 markets alone over the -- in the near future will combine to be over $100 billion worth of opportunity. So these are big markets that we are participating in, and there is a long way for us to grow our business. On Slide 11, just shows our locations. We have the proper registrations, certifications at each of these locations, specifically around specific areas of excellence, centers of excellence specifically. Maple Grove is our headquarters, where we do the vast majority of our engineering services. Bemidji is our center of excellence for complex harness cable -- harnesses and cables; Blue Earth, our center of excellence on the defense side; Mankato, our center of excellence for PCBs; Milaca, our center of excellence for medical devices; Merrifield, our center of excellence in the industrial space; and then Monterrey, Mexico and Suzhou, China that focus primarily on medical and industrial and make us a very strong global business. On Slide 11, the question -- answers the question, why Nortech? We feel strongly that Nortech is a world-class engineering services, low-volume, high-mix manufacturer of complex cable assemblies, box builds, PCBAs with manufacturing plants and global manufacturing plants in the U.S., specifically in Minnesota; Monterrey, Mexico; and Suzhou, China. Where we're -- where we differentiate ourselves is certainly in engineering and manufacturing services. So not only do we do engineering work for companies and more and more often for medical device start-up companies that help get them off the ground, help get them products that are regulatory/FDA-cleared so that they can get those products to market, but we can seamlessly then help those companies on the manufacturing side with a tried and true supply chain and global manufacturing, if that's what those companies are looking for. We are -- we focus on low-volume, high-mix businesses overall. We are world-class in terms of complex wire harnesses and interconnect solutions, world-class in terms of electromechanical box build devices and controlled systems overall and world-class in terms of PCBAs. And then, of course, as I've mentioned a couple of times, we are global. We've got plants in the U.S., give us broad reach, plants in Mexico, plants in -- and a plant in China as well. So a few of our 2019 achievements. 2019 was a year of very significant change for Nortech. We're very proud of our accomplishments and our progress in terms -- toward our long-term goals. And I only list a few of the major accomplishments from last year. As Connie mentioned in the financials, we made a significant investment in our -- a new ERP, Epicor, which was completed in July. Now our -- all of our manufacturing plants and engineering services plants globally are on 1 ERP. That is not a small undertaking. It's very complex, very expensive in terms of time and effort. But the good news is now more than 6 months after final implementation, we are getting more out of the ERP than we're putting into it. It's become a very, very valuable and important tool, and we make changes and improvements to it every day to help it make us more productive. We completed a move in Monterrey, Mexico from an older plant to a much nicer, larger, newer plant. It gives us the opportunity to expand our business in Mexico, again, a very significant undertaking that we completed last year. We went through a very rigorous strategic planning process. I'll talk about this year's goals. But last year, we went through a very rigorous strategic planning process, updated our mission, vision and cultural values. And in fact, this year, we further improved those. We rolled out an employee satisfaction survey, which has been extremely helpful in terms of understanding what our employees are looking for and what we can do to help, including a new health care plan that we have rolled out. We have -- as Connie mentioned before, we've formally created a Science and Technology Committee on the Board of Directors, and most of the members of the leadership team are intimately involved in that committee to help us stay on the cutting-edge in terms of new technologies around digitization and communication for our customers. We can make our customers more competitive. If our customers are more competitive, they get more market share. If they get more market share, we get more business, and our business grows. We've got -- as you saw, our leadership team on -- a number of people on the leadership team, including newer people for QA/RA, IT, marketing, program management, HR and supply chain. I think the team is very, very strong. And as I mentioned before, I'm very, very proud of them. We had -- after a third -- after a second quarter last year that we knew it was going to be tough because we were in the middle of finalizing the Monterrey move, we were in the middle of finalizing the ERP implementation. We knew that was going to be a tough quarter. We got to that quarter and we got to it, I think, gracefully because in the second half of the year, we did more than $61 million in revenue, and we showed $1.5 million in operating income. Overall revenue for last year, as Connie mentioned, over $116 million, one of the 2 best years in the company's history. And we generated $2.7 million in EBITDA, which is quite a feat given where we were after the second quarter. So in the 2020 to 2026 goals, as I mentioned before, we go through a very rigorous strategic planning process. This year, we have 4 high-level goals, and these are 4 goals that we can focus on intimately so that we can deliver and do a great job with each of these goals. The first one is to focus on our people and our communities. We feel strongly that if we take good care of our people, we attract the right kind of people. We offer the right kind of benefits and pay for our people, and we take care of our communities that those people will take care of us, all of us, most of us in this call, as shareholders. Delivering high-quality, profitable products and services on time, we've got a number of subgoals around that. I'll go into a few of them. Develop strategic digital connectivity and data management technologies, that is really the focus of the science and technology team that we -- I alluded to earlier and then driving profitability and Nortech's value. A little more detail on each of these, starting on Slide 15. First of all, focusing on our people and our communities. We've got plans in place to retain and develop our people, our valued employees, creating more effective organizational design with clear career paths and building our leadership bench. We've got very talented people. What we want to do is we want to develop those people because someday the people at the next level down are going to be doing our jobs, the jobs of the leadership team today. We need to continue to attract new talent and create a strong and diverse talent pipeline. Delivering high-quality products and services on time. We have worked on creating better processes and metrics to improve customer service. Now with the new ERP, that is significantly easier to track and to measure. Complete productivity tool implementations in a broad range of areas, not just in the ERP, but in program management, in HR, et cetera, so -- our CRM so that we can do a better job of tracking and reporting. And driving plant synergies and Nortech centers of excellence. As I mentioned earlier, we are going to continue to reinforce the centers of excellence that we have in each of our plants. And then work to strengthen our balance sheet to maximize cash flows, and that is to work diligently to drive down debt and have more access to cash. The third strategic goal, to develop strategic digital connectivity and data management technologies. I could spend an hour just talking about this particular goal because it's a lot of fun. It's very interesting. It's a ton of work. That team is doing a terrific job of focusing our business on new technologies, as I mentioned before, that can help our customers to innovate themselves and hopefully, they gain more market share. Because again, if they gain more market share, they have to buy more product from us. We will build more product, and we will help them innovate going forward. We are going to continue to drive strategic technologies that fit our areas of expertise well. We're going to focus very seriously on a few technologies and implementing those technologies and driving those technologies into a broad range of products for our customers. And we're also going to focus much more on marketing than we have in the past and helping the sales team to drive the overall sales engine to drive more business into Nortech. The fourth strategic goal really is to drive profitability and Nortech's value. We've got very serious financial goals that we think about every day and we expect to deliver. And then we're preparing to help drive Nortech's share price moving forward with a more robust Investor Relations strategy going forward towards the end of the year to go into 2021. So with that, it's very high-level overview of the strategic plan. But with that, that concludes this part of the presentation. And I guess we'll open the floor to any questions if there are any questions. As I say to the employees, don't be shy, you can ask anything you want. There don't seem to be any questions. We'll give everyone another 15 seconds or so to ask any questions, type in any questions anyone might have. If not, thank you very much. I want to take the opportunity again to thank David and the Board of Directors and my team for doing such a terrific job in 2019 and so far here in the first quarter of this year. With that, we can hand it back to the moderator. Thank you.

Ladies and gentlemen, this concludes today's meeting. You may now disconnect. Everyone, have a great day.