Overview





We are a Maple Grove, Minnesota based leading provider of design and
manufacturing solutions for complex electromechanical systems, assemblies and
components. We primarily serve the medical device aerospace and defense, and
industrial markets. Our design services span concept development to commercial
design, and include software, electrical, mechanical, and biomedical
engineering. Our manufacturing and supply chain capabilities are vertically
integrated around electromedical systems, wire, cable and interconnect
assemblies, printed circuit board assemblies, as well as system-level assembly,
integration and final test. We maintain facilities in Bemidji, Blue Earth,
Mankato, Merrifield, and Milaca, Minnesota; Monterrey, Mexico; and Suzhou,
China. All of our facilities are certified to one or more of the ISO/AS
standards, including 9001, AS9100 and 13485, with most having additional
certifications based on the needs of the customers they serve.



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 current and potential impacts 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 42 employees, who were offered
positions at other Nortech facilities in Minnesota. We entered into an agreement
on February 23, 2021 with a third-party agent to sell our facility in
Merrifield, MN and some related assets. We expect the sale to close in the
second quarter of 2021 near the carrying value of the assets, however a sale
transaction and the expected sale value is not guaranteed. As of March 31, 2021,
this closure did qualify for held for sale accounting.



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Results of Operations


The following table presents statements of operations data as percentages of total net sales for the periods indicated:





                                        Three Months Ended
                                             March 31,
                                        2021           2020
Net Sales                                 100.0 %       100.0 %
Cost of Goods Sold                         92.9          89.0
Gross Profit                                7.1          11.0

Selling Expenses                            3.3           2.3
General and Administrative Expenses        12.7           7.3
Restructuring Charges                       1.0           0.0
(Loss) Income from Operations              (9.9 )         1.4

Interest Expense                           (0.3 )        (0.8 )

(Loss) Income Before Income Taxes (10.2 ) 0.6



Income Tax (Benefit) Expense               (3.2 )         0.1
Net (Loss) Income                          (7.0 )%        0.5 %




Net Sales



Net sales were $22.1 million in the first quarter of 2021, as compared to $27.4
million in the first quarter of the prior year, a decrease of $5.3 million or
19.6% that was driven primarily by the COVID-19 pandemic and the related supply
chain shortages. Net sales results were varied by markets, the medical market
decreased by $3.1 million or 20.2%. The industrial market sector decreased by
$1.1 million or 14.9% in the first quarter of 2021 as compared to the same
quarter of 2020. Net sales from the aerospace and defense markets decreased by
$1.1 million or 24.8% in the first quarter of 2021 as compared to the first
quarter of 2020.



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Net sales by our major industry markets for the three months ended March 31, 2021 and 2020 were as follows (in thousands):





                            Three months Ended March 31,
                           2021            2020          %
                            $               $         Change
Medical                     12,342         15,461       (20.2 )
Industrial                   6,218          7,309       (14.9 )
Aerospace and Defense        3,512          4,670       (24.8 )
Total Net Sales             22,072         27,440       (19.6 )





Net sales by timing of transfer of goods and services for the three ended March 31, 2021 is as follows (in thousands):





                                                              Three Months Ended March 31, 2021
                                       Product/ Service           Product
                                         Transferred           Transferred at          Noncash          Total Net Sales
                                          Over Time            Point in Time        Consideration          by Market
Medical                               $            8,959      $          2,893     $           490     $          12,342
Industrial                                         4,630                 1,336                 252                 6,218
Aerospace and Defense                              3,064                   262                 186                 3,512
Total net sales                       $           16,653      $          4,491     $           928     $          22,072





Net sales by timing of transfer of goods and services for the three ended March 31, 2020 is as follows (in thousands):





                                                             Three Months Ended March 31, 2020
                                      Product/ Service          Product
                                         Transferred         Transferred at          Noncash          Total Net Sales
                                          Over Time          Point in Time        Consideration          by Market
Medical                               $          13,703     $          1,061     $           697     $          15,461
Industrial                                        6,016                  970                 323                 7,309
Aerospace and Defense                             4,317                  134                 219                 4,670
Total net sales                       $          24,036     $          2,165     $         1,239     $          27,440




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Backlog



Our 90-day shipment backlog as of March 31, 2021 was $31.1 million, a 28.3%
increase from the beginning of the quarter and a 13.0% increase from March 31,
2020. Backlog for our medical customers has increased 27.4% from the beginning
of the quarter and 10.7% from the prior year. Our industrial customers' backlog
increased 61.6% from the beginning of the quarter and 59.4% from the prior year.
The aerospace and defense backlog decreased 7.6% from the beginning of the
quarter and 25.3% from the prior year. Our 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.



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



                              Shipment Backlog as of the Period Ended
                          March 31,         December 31,         March 31,
                            2021                2020               2020
Medical                 $      15,870       $      12,454       $    14,330
Industrial                     10,123               6,263             6,352
Aerospace and Defense           5,087               5,508             6,812
Total 90-Day Backlog    $      31,080       $      24,225       $    27,494




Our 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. Our total shipment backlog was $62.8 million and $53.0 million for
periods ended March 31, 2021 and March 31, 2020, respectively.



Gross Profit



Gross profit as a percent of net sales 7.1% and 11.0% for the three months ended
March 31, 2021 and 2020, respectively. The decline in gross profit as a percent
of sales was driven by lower sales on a fixed cost base in part due to the
impact of COVID-19.



Selling Expense


Selling expenses for the three months ended March 31, 2021 and 2020 was $0.7 million or 3.3% of sales and $0.6 million or 2.3% of sales, respectively.

General and Administrative Expense





General and administrative expenses for the three months ended March 31, 2021
and 2020, were $2.8 million or 12.7% of sales and $2.0 million or 7.3% of sales,
respectively. This increase is due primarily to higher bad debt expense of $0.4
million and increased training expenses of $0.2 million.



Restructuring Charges



Restructuring charges for the three months ended March 31, 2021 was $0.2 million
or 1.0% of sales. There were no restructuring charges for the three months ended
March 31, 2020. The restructuring charges are due to the closure of the
Merrifield facility.



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Income (Loss) before Income Taxes

First quarter 2021 loss from operations was $2.3 million compared to income of $0.2 million for the first quarter in 2020.





Income Taxes



On a quarterly basis, we estimate what our effective tax rate will be for the
full fiscal year and record a quarterly income tax provision based on the
anticipated rate. As the year progresses, we refine our estimate based on the
facts and circumstances, including discrete events, by each tax jurisdiction.
Our effective tax rate for the three months ended March 31, 2021 and 2020 was
31% and 18%, respectively.



Net Income (Loss)



Net loss for the three months ended March 31, 2021 was $1.6 million or $0.58 per
basic and diluted common share. Net income for the three months ended March 31,
2020 of $0.1 million or $0.05 per basic and diluted common share.



Liquidity and Capital Resources





Our 2020 and 2021 sales and shipment backlog were impacted by the ongoing
COVID-19 pandemic and the related supply chain shortages. Due to the inherent
uncertainty of this evolving situation, we are unable at this time to predict
the likely impact of the COVID-19 pandemic on our future operations which has
led to indicators of an inability to continue as a going concern. However, these
indicators have been mitigated by our focus on reducing costs, minimizing
capital expenditures, and managing working capital. In addition, we believe that
cash provided by operations, funds available under the credit agreement with
Bank of America, N.A. (BofA), funds received from our sales leaseback
transaction and cash on hand will be adequate to meet our liquidity needs,
including working capital, capital expenditures, and debt payment obligations.



Net cash used by operating activities for the three months ended March 31, 2021 was $0.9 million. The net loss in the three months ended March 31, 2021 negatively impacted operating cash flows.





We have a credit agreement with Bank of America (BofA) which was entered into on
June 15, 2017 and amended on December 29, 2017 and provides for a line of credit
arrangement of $16.0 million that expires on June 15, 2022. The credit
arrangement also has a $5.0 million real estate term note outstanding with a
maturity date of June 15, 2022.



Both the line of credit and real estate term notes are subject to fluctuations
in the LIBOR rates. The line of credit and real estate term notes with BofA
contain certain covenants which, among other things, require us to adhere to
regular reporting requirements, abide by annual shareholder dividend
limitations, maintain certain financial performance, and limit the amount of
annual capital expenditures. The availability under our line is subject to
borrowing base requirements, and advances are at the discretion of the lender.
The line of credit is secured by substantially all of our assets.



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, 2020 and each Fiscal Quarter end thereafter subject only during a
trigger period commencing when our availability under our line is less than
$2,000 until availability is above that amount for 30 days due to amendment to
our agreement dated in December of 2020. The Company met the covenants for the
period ended March 31, 2021.



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The availability under the line is subject to borrowing base requirements, and
advances are at the discretion of the lender. At March 31, 2021, we had
outstanding advances of $2.2 million and we had unused availability under our
line of credit of $7.6 million, supported by our borrowing base. We believe our
financing arrangements and cash flows to be provided by operations will be
sufficient to satisfy our future working capital needs.



On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A.
(the "Promissory Note"), which provides for an unsecured loan of $6.1 million
pursuant to the Paycheck Protection Program 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 Promissory Note has a term of 2 years
with a 1% per annum interest rate. Payments are deferred for 6 months from the
date of the Promissory Note and we can apply for forgiveness of the Promissory
Note after 60 days. Forgiveness of the Promissory Note will be determined in
accordance with the provisions of the Cares Act and applicable regulations. Any
principal and interest amounts outstanding after the determination of amounts
forgiven will be repaid on a monthly basis.



Off-Balance Sheet Arrangements

We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.

Critical Accounting Policies and Estimates





Our significant accounting policies and estimates are summarized in Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended December 31, 2020. Some of our
accounting policies require us to exercise significant judgment in selecting the
appropriate assumptions for calculating financial estimates. Such judgments are
subject to an inherent degree of uncertainty. These judgments are based on our
historical experience, known trends in our industry, terms of existing contracts
and other information from outside sources, as appropriate. Actual results could
differ from these estimates.



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Forward-Looking Statements


Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.

? Volatility in the marketplace which may affect market supply, demand of our


    products or currency exchange rates;


  ? Supply chain disruption and unreliability due to COVID-19;


  ? Lack of supply of sufficient human resources to produce our products;

? 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;


  ? Increases in certain raw material costs such as copper and oil;


  ? Commodity and energy cost instability;


  ? Risks related to FDA noncompliance;


  ? The loss of a major customer;

? General economic, financial and business conditions that could affect our

financial condition and results of operations;

? Increased or unanticipated costs related to compliance with securities and

environmental regulation;

? Disruption of global or local information management systems due to natural

disaster or cyber-security incident;

? Outbreaks of epidemic, pandemic, or contagious diseases, such as the recent

novel coronavirus that affect our operations, our customers' operations or our


    suppliers' operations.




The factors identified above are believed to be important factors (but not
necessarily all of the important factors) that could cause actual results to
differ materially from those expressed in any forward-looking statement made by
us. Discussion of these factors is also incorporated in Part I, Item 1A, "Risk
Factors," and should be considered an integral part of Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Unpredictable or unknown factors not discussed herein could also
have material adverse effects on forward-looking statements. All forward-looking
statements included in this Form 10-K are expressly qualified in their entirety
by the forgoing cautionary statements. We undertake no obligations to update
publicly any forward-looking statement (or its associated cautionary language)
whether as a result of new information or future events.



Please refer to forward-looking statements and risks as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.


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