Nortech Systems Inc 2026 Q2 Earnings Call

Thank you, Jenny, and welcome everyone. Jay will begin today's call with a review of our operations, recent developments, and business outlook. I will then review Nortech's second quarter financial results before turning the call back to Jay for closing comments. After that, we will open up the line for questions. Before we continue, please note statements made during this call may be forward-looking statements 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 in this call. These risks, including those detailed in our most recent SEC filings, may be amended or supplemented.

The statements made during this conference 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 statements in our SEC filings. With that, I will turn it over to Jay for his opening comments.

Jay? Thank you, Andy, and good afternoon, everyone.

We appreciate you joining us. The second quarter reflected continued execution across the business, with net sales increasing 9.3% year-over-year to $33.5 million, gross margin improving to 17%, and operating income of $623,000. Our results benefited from higher revenue levels, improved manufacturing cost absorption from increased production activity, and continued progress following the restructuring initiatives in late 2024 and early 2025. These improvements were partially offset by higher incentive compensation expense in 2026. Backlog remains one of the clearest and best forward-looking indicators that our strategy is gaining traction. As of June 30, 2026, our 90-day shipment backlog was $33.4 million, up 6.3% from the beginning of the quarter and up 25.8% from June 30 of 2025.

Our total order backlog as of June 30, 2026, was $93.8 million, up 3.4% from the beginning of the quarter and up 19.8% compared with the same period last year. Year-over-year growth in total backlog was primarily driven by an increase in aerospace and defense and medical imaging orders. This progress reflects stronger customer engagement, successful program transfers, and the value of our manufacturing footprint across the U.S., Mexico, and China. We continue to see strong quoting activity as customers evaluate nearshore manufacturing strategies for North America and Asia. We believe our North American footprint positions us well with our Monterrey, Mexico, Maquiladora operations and Minnesota facilities operating within the framework of the US-Mexico-Canada Agreement. While the tariff environment remains somewhat uncertain, we are actively monitoring developments, and the picture is getting clearer.

We are pursuing reimbursement and recovery of previously paid IEEPA-related tariffs, and while we are confident we are making important progress, the timing and amount of any recoveries remain uncertain, and no amounts have been recognized as of June 30, 2026. We remain proactive in monitoring trade policy, geopolitical uncertainty, and supply chain risk. In June 2026, we strengthened our supply chain leadership with the addition of a new vice president of supply chain. This leadership addition comes at an important time as selected component constraints, longer lead times, allocation pressures, and price volatility continue to affect many OEMs and EMS providers. We are working closely with customers and suppliers to plan ahead, secure critical materials, and protect production continuity. Next, I'll turn it over to Andy for a more in-depth look at our financial results.

Andy? Thank you, Jay. I will provide a brief overview of Nortech's financial performance for the second quarter ended June 30, 2026.

Additional details are available in our Form 8-K earnings release and Form 10-Q filed with the Securities and Exchange Commission this afternoon. As we have 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 strategies are gaining traction as we move through 2026, consistent with Jay's comments earlier in the call. Net sales for the second quarter of 2026 were $33.5 million, an increase of $2.9 million or 9.3% compared with $30.7 million in the second quarter of 2025.

Growth was led by the medical device market, where sales increased 36% year-over-year, primarily due to higher customer demand from existing customers and continued ramp-up in new programs. Medical imaging sales increased 12.2%, driven by higher customer demand, supported in part by increased revenues from a stocking program with a key customer that provides product availability to enable shorter lead times. Industrial sales decreased 4.7%, reflecting customer inventory adjustments and temporary production disruptions associated with the transfer of manufacturing activities to Monterrey, Mexico, partially offset by growth in China. Aerospace and Defense sales decreased 12.8% in the quarter, primarily due to reduced demand from one customer who is reducing post-COVID inventory levels. However, year-to-date, Aerospace and Defense sales increased 8.7% compared with the prior year period, benefiting from higher production volumes associated with completed transfers to our Bemidji location.

Gross profit totaled $5.7 million, compared with $4.8 million in the prior year period, and gross margin improved to 17%, up 120 basis points compared with 15.8% last year. The improvement was primarily attributable to higher revenue levels and improved manufacturing cost absorption resulting from increased production activity, partially offset by unfavorable sales mix. Total operating expenses were $5.1 million in the second quarter of 2026, compared with $4.1 million in the prior year period. The increase in operating expenses was primarily attributable to higher incentive compensation accruals in 2026. For the three and six months ended June 30, 2026, incentive compensation expenses were $402,000 and $647,000 respectively, compared with a reversal of expense of $131,000 during the second quarter of 2025, resulting in no management incentive compensation recorded in the first half of 2025.

In summary, incentive compensation expense in the second quarter and year-to-date periods in 2026 were $533,000 and $647,000 higher than in the respective 2025 periods. As a result, we reported second quarter operating income of $623,000, compared with operating income of $742,000 in the prior year period. For the first six months of 2026, operating income was $670,000, compared with an operating loss of $871,000 in the same prior year period, reflecting higher gross profit associated with increased revenue and improved operating leverage, offset by higher management incentive compensation, together with the absence of a $266,000 restructuring charge recorded in the first quarter of 2025. Net interest expense was $197,000, compared with $257,000 last year during the quarter, driven by lower average borrowings and reduced interest costs following the transition to our new financing arrangements.

We reported second quarter net income of $316,000, or $0.11 per diluted share, compared with net income of $313,000 or $0.12 per diluted share in the second quarter of 2025. For the first six months of 2026, net income was $282,000 or $0.09 per share, compared with a net loss of $1 million or $0.36 per share in the same prior period. Cash used in operating activities was $2.4 million in the first six months of 2026, compared with $2.8 million in the prior year period. Cash used by accounts receivable and contract assets was $4.5 million, largely due to the timing of customer shipments and related cash collections, and an increase in our contract assets to support future customer shipments. Cash used by inventory was $3.5 million, reflecting purchases of materials needed to support the growing backlog.

These uses of cash were partially offset by $2.1 million of cash provided by changes in accounts payable, primarily related to the timing of cash payments. At quarter end, cash and restricted cash totaled $1.7 million. Under our Associated Bank facility, the revolving credit facility balance was $7.6 million, and we had $3.6 million of unused availability as of June 30, 2026. For the remainder of the year, with support of our recently hired vice president of supply chain, we are very focused on reducing investments in inventory and generating cash from reductions in working capital. While year-over-year revenue growth, improved gross margins, positive year-to-date operating income, and a more flexible capital structure, we believe that Nortech is well-positioned to continue building momentum throughout the year. With that, I will turn it back to Jay for his closing remarks.