Nortech Systems Incorporated ($NSYS)

Good afternoon, ladies and gentlemen, and welcome to the Nortech Systems Incorporated First Quarter 2026 Earnings Call. With me on the line today are Jay Miller, President and Chief Executive Officer; and Andrew LaFrence. Chief Financial Officer and Senior Vice President of Finance. [Operator Instructions] And the call will be opened for questions and comments following the management presentation. At this time, it is my pleasure to turn the call over to Andy LaFrence.

Thank you, Mike. I would also like to welcome everyone to today's conference call. Jay will begin the call with a review of our operations, recent developments and business outlook. Then I will review Nortech's First quarter 2026 financial results before turning it back to Jay for his closing comments, then we will open up the call for your questions. . Before we continue, please note statements made during this call may be forward-looking regarding expected net sales, operating results, future plans, opportunities and other company expectations. These estimates, plans and other forward-looking statements involve unknown and known risks and uncertainties that may cause actual results to differ materially from those expressed or implied on this call -- and may be amended -- and those risks, including those detailed in our most recent SEC filings may be amended or supplemented. The statements made during this call are based upon information known by Nortech as of the date and time of this call, and we assume no obligation to update the information in today's call. You can find Nortech's complete safe harbor statement in our SEC filings. And with that, I will turn the call over to Jay for his opening comments. Jay?

Thank you, Andy, and good afternoon, everyone. We're glad you could join us today. The first quarter is our fourth consecutive quarter of positive operating and EBITDA results, reflecting the positive execution of our strategic restructuring initiatives in late 2024 and early 2025. This contributed to a $1.7 million improvement in income from operations in the first quarter of 2026 as compared with the same quarter in 2025. We continue to see positive trends in several operating performance indicators, including gross margins, cost management, quality and customer backlog. During the quarter, we continued the trend of increased manufacturing efficiencies across customer programs transferred to more geographically desirable plants which are driving planned sustained performance improvements as we experienced a continued positive mix shift from new product introduction first builds to recurring production. We believe our quality metrics are world-class, especially within the low-volume, high-mix market space, where we believe we are head and shoulders better than our competitors. Gross margins increased 410 basis points in the first quarter of 2026 as compared with the first quarter of 2025. Our customer backlog continues to be a bright spot as confirmed purchase orders grow. We increased our backlog as of May 31, 2026 to $90.8 million, an increase of 17.4% from year-end 2025 and a 37.9% increase from the end of 2024. The increase is occurring against the backdrop of several customers ordering with shorter lead times. We have implemented just-in-time finished product delivery strategies with several large customers who have requested much shorter lead times. These programs allow customers to order in small quantities based on long-term binding forecasts which have produced the delivery time in many -- of many items from over 100 days to 20 days or less. I would further note that we are seeing signs of strength in our aerospace and defense customers given the current geopolitical climate. These factors contribute to the long -- to the strong positive trend in the backlog and has created an opportunity to expand our direct labor at several facilities to handle the increasing workload. Andy and I, along with the rest of the Nortech leadership team, I'm proud of the hard work and execution by our employees. I would also like to highlight an very important accomplishment in March. We entered into new agreements with Associated Bank for a $2.2 million term note and a $15 million asset-backed line of credit. We believe that this new asset-backed debt structure and banking arrangement is more flexible and more closely matches our business model. This new relationship will lower our borrowing costs and provides a 3-year arrangement to support our business growth. We continue to see strong quoting activity as many of our customers evaluating nearshore manufacturing strategies for both North America and Asia. We believe we are currently very well positioned with our North American footprint as our Monterrey, Maquiladora operations and Minnesota facilities work under the framework of the U.S.-Mexico-Canada agreement or USMCA for short. While the tariff environment remains uncertain, including tariffs with Mexico, it is important to note that Nortech is not the importer of record in the United States goods produced in Mexico as we operate under Maquiladora structure for our customers. This materially reduces our direct exposure to these tariffs. In situations where we incur tariffs on imported components, we are working with our customers to pass these costs through. More recently, we are closely monitoring the recent Supreme Court decision regarding the validity of IEEPA tariffs and the process for reimbursement of these tariffs. All in all, we are working hard and have all hands on deck to proactively monitoring the shifting landscape, trade policies and uncertainties in the current geopolitical environment. Next, I'll turn it over to Andy for a more in-depth look at our financial results. Andy?

Thank you, Jay. I'll provide a brief overview of Nortech's financial performance for the first quarter ended March 31, 2026. Additional details are available in our Form 8-K earnings release and our Form 10-Q filed yesterday with the Securities and Exchange Commission. As we've discussed previously, quarterly results can be influenced by the timing of customer shipments, production schedules and working capital movements. While those factors persist, our execution and longer-term strategy are gaining traction as we move through 2026, consistent with Jay's comments earlier in the call. Net sales for the first quarter of 2026 were $30.3 million, an increase of $3.4 million or 12.7% compared with $26.9 million in the first quarter of 2025. Growth was led by Aerospace and Defense, where sales increased 41.2% year-over-year, following customer approvals and production transfers from Blue Earth to Bemidji. Medical imaging sales increased 15%, driven by higher volumes from existing customers, while medical device sales increased 10.4% as production normalized following our 2025 facility optimization. Industrial sales were relatively flat year-over-year. Gross profit totaled $4.7 million compared with $3.1 million in the prior year period, and gross margin improved to 15.5% up 410 basis points compared with 11.4% last year. Margin improvement reflected higher plant utilization manufacturing efficiency gains from our restructuring actions completed in 2025 and operating leverage on higher sales volume. Total operating expenses of $4.7 million were relatively flat year-over-year. The prior year included $266,000 of restructuring charges. As a result, we reported operating income of $47,000 compared with an operating loss of $1.6 million in the prior year period, representing a $1.7 million year-over-year improvement. Net interest expense was $256,000 compared with $214,000 last year primarily driven by the write-off of $82,000 of unamortized debt issuance costs relating to the refinancing completed during the quarter. Reported a net loss of $34,000 or $0.01 per share compared with a net loss of $1.3 million or $0.48 per share in the first quarter of 2025. Cash used in operating activities was $1.6 million, an improvement compared with a usage of $2.9 million in the prior year period. At quarter end, cash and restricted cash totaled $2.2 million. Our revolving line of credit balance was $7.2 million and we had approximately $3.5 million of availability, borrowing capacity under our new associated bank facility. Adjusted EBITDA for the first quarter of 2026 was $350,000 compared with an adjusted EBITDA loss of $1 million in the first quarter of 2025, reflecting the positive results of our strategic plant level customer program shifts and related restructurings in late 2024 and early 2025. As Jay highlighted earlier, our increased backlog provides strong visibility into future revenue and supports a positive development for 2026, with improving margins and stronger operating profile, a more flexible capital structure, we believe Nortech is well positioned to continue building momentum throughout the year. With that, I will turn it back over to Jay for his closing remarks. Jay?

Thanks, Andy. Before we open the call to your questions, I want to highlight it once again, three related areas that together serve our customers and help advance Nortech's corporate stewardship, Nortech's engineering expertise, product innovation focus, and sustainability plans. As for engineering expertise, we have a dedicated engineering services team focused on optimizing manufacturability, serviceability, supply chain risk mitigation and cost efficiency for our customers. Our 3-tier cost structure across the U.S., Mexico and China allows us to quickly adopt our global engineering resources to fit our customers' changing needs. Our core goal of our long-term strategic plan focuses on unique innovation. Nortech's engineering capabilities and innovation skills advance our research and development activities to solve the most complex challenges our customers face with technologies that are ruggedized, lighter, faster, more sustainable and more affordable. Nortech's technology is engineered to provide connectivity solutions to address three areas of concern for our customers. First, there is a need for ruggedization. Nortech's fiber optic technology stands up in harsh environments, such as the types of conditions commonly found in aerospace and defense applications. This is an old fiber optic technology. Today's fiber optic technology is much more resilient. To ensure high performance in today's applications Nortech's engineering team has rigorously tested and demonstrated the fiber optic cable can withstand twisting, bending and torque while achieving exceptional data integrity and data transfer speeds under rugged conditions. Most of the cables we produce today are for aerospace and defense application. Cables are traditional. Cable is common in legacy defense systems, such as shipboard missile launchers for the Navy. In conversations with our aerospace and defense customers, we are increasingly -- we see increasing interest in more modern warfare components such as ruggedized fiber optics, MT38999 connectors, which would be applied in wearable technology and tethered drones among others. Second, our customers need a means to enable connected devices and sensors to collect PARS transmit and receive data to the cloud in order to apply the data effectively in decision-making. Nortech's Digital Diagnostics Xtreme and SkyIoT technology platforms integrate digital diagnostics with fiber optic cables to generate real-time cable and system performance data. These digital diagnostic systems advance our customers' ability to monitor their systems and devices and to evolve from preventative maintenance to predictive maintenance to minimize downtime and costs. Third, our customers require technology that is physically lighter, faster and more sustainable. As copper prices continue to increase, fiber optic cable presents a clear alternative that is much more cost effective and substantially cleaner to produce. Nortech is well positioned to capitalize on this increasing interest with our advanced fiber optic capabilities. Our technologies align perfectly with the industry's move in favor of more efficient and reliable fiber optic solutions to provide EMI immune high data speed transmission and power delivery, all in one hybrid cable. Nortech's power over fiber technology reduces overall cable weight while providing EMI immunity and shielding by transmitting power over optical fiber cable. Nortech eliminates the need for a separate local power source in the cables that are used in medical devices and imaging were electromagnetic interference or EMI, must be minimized. Additionally, in satellites, aircraft or military systems, fiber can deliver powered, isolated or shielded components where EMI is also concerned. More and more often today, that data is being evaluated and analyzed using human intelligence as well as combined artificial and human intelligence for improved performance and data management for our customers and for their customers. For Nortech, we see AI capabilities as a clear opportunity to streamline and improve our processes, make our employees more productive and serve our customers better. To put a finer point on it, we are making a point of allocating resources and dedicating time to continue to build the AI skills of our employees in all functions to make better products, of course, but also to make us all more productive. With our intellectual property and fiber optic and digital technologies, Nortech is well aligned with projected future demand for fiber products. When compared with traditional copper, fiber optics offer dramatic environmental benefits during both production and operations, including improved energy efficiency and less material usage while significantly decreasing the carbon footprint of the complex cables we manufacture. We're also taking a forward-looking stance on materials, shifting focus from copper to fiber to mitigate cost pressures and align with our long-term strategy to produce ruggedized, lighter, faster, more sustainable and more affordable technology. In closing, we are excited about technological developments across all of our markets and expect them to support our continued sales momentum in 2026 and beyond, aided by stabilization in supply chain and customer orders. As we wrap up our prepared remarks, let me summarize key takeaways from today's call. First, we are operationally and financially realizing positive results from our restructuring activities in 2024 and early 2025. Second, we remain optimistic about our positioning and nearshoring landscape. Third, we are seeing benefits of our strategy with an increase in backlog over the past several quarters. And finally, we are making investments in innovative and unique technologies, the skills of our people, including AI skills and the regulatory capabilities to leverage future growth. We will now open the call for your questions. Operator, please open the lines.

The floor is now open for questions. [Operator Instructions] We do not currently have any questions in the queue. [Operator Instructions] Thank you for joining our call today. You may disconnect your lines at this time, and have a good afternoon.