Overview
We are aMaple 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 inBemidji ,Blue Earth ,Mankato ,Merrifield , andMilaca, Minnesota ;Monterrey, Mexico ; andSuzhou, 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 InMarch 2020 , theWorld 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 employeeswho 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 onAugust 7, 2020 , the closure of ourMerrifield, Minnesota , production facility, shifting wire and cable assembly, system-level assembly and printed circuit board (PCB) manufacturing toNortech's otherMinnesota locations. TheMerrifield production facility consolidation was completed in the first quarter of 2021 and impacted approximately 42 employees,who were offered positions at otherNortech facilities inMinnesota . We entered into an agreement onFebruary 23, 2021 with a third-party agent to sell our facility inMerrifield, 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 ofMarch 31, 2021 , this closure did qualify for held for sale accounting. 18 --------------------------------------------------------------------------------
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. 19
--------------------------------------------------------------------------------
Net sales by our major industry markets for the three months ended
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
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
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 20
--------------------------------------------------------------------------------
Backlog Our 90-day shipment backlog as ofMarch 31, 2021 was$31.1 million , a 28.3% increase from the beginning of the quarter and a 13.0% increase fromMarch 31, 2020 . Backlog for our medical customers has increased 27.4% from the beginning of the quarter and 10.7% from the prior year. Our industrial customers' backlog increased 61.6% from the beginning of the quarter and 59.4% from the prior year. The aerospace and defense backlog decreased 7.6% from the beginning of the quarter and 25.3% from the prior year. Our backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days. 90-day shipment backlog by our major industry markets are as follows (in thousands): Shipment Backlog as of the Period Ended March 31, December 31, March 31, 2021 2020 2020 Medical$ 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 endedMarch 31, 2021 andMarch 31, 2020 , respectively. Gross Profit Gross profit as a percent of net sales 7.1% and 11.0% for the three months endedMarch 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
General and Administrative Expense
General and administrative expenses for the three months endedMarch 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 endedMarch 31, 2021 was$0.2 million or 1.0% of sales. There were no restructuring charges for the three months endedMarch 31, 2020 . The restructuring charges are due to the closure of theMerrifield facility. 21
--------------------------------------------------------------------------------
Income (Loss) before Income Taxes
First quarter 2021 loss from operations was
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 endedMarch 31, 2021 and 2020 was 31% and 18%, respectively. Net Income (Loss) Net loss for the three months endedMarch 31, 2021 was$1.6 million or$0.58 per basic and diluted common share. Net income for the three months endedMarch 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 withBank 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
We have a credit agreement withBank of America (BofA ) which was entered into onJune 15, 2017 and amended onDecember 29, 2017 and provides for a line of credit arrangement of$16.0 million that expires onJune 15, 2022 . The credit arrangement also has a$5.0 million real estate term note outstanding with a maturity date ofJune 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 withBofA 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 endingDecember 31, 2020 and eachFiscal 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 endedMarch 31, 2021 . 22
-------------------------------------------------------------------------------- The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. AtMarch 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. OnApril 15, 2020 , we entered into a Promissory Note withBank 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 onApril 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 endedDecember 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. 23
--------------------------------------------------------------------------------
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
24
--------------------------------------------------------------------------------
© Edgar Online, source