Nortech Systems (NSYS) Q3 2026 Earnings Call Transcript

DATE

Nov. 12, 2026

CALL PARTICIPANTS

• President and Chief Executive Officer - Jay Miller
• Chief Financial Officer and Senior Vice President of Finance - Andrew LaFrence

TAKEAWAYS

• Net Sales -- $33.0 million, an 8.4% increase driven by growth in medical device, medical imaging, and aerospace and defense sectors.
• Gross Margin -- 17.8%, up 130 basis points from 16.5% due to higher production activity and improved manufacturing cost absorption.
• Operating Income -- $1.4 million, compared with $945,000 in the third quarter of 2025, reflecting higher revenue and improved operating leverage.
• Total Order Backlog -- $92.8 million, an increase of 20% year over year led by strength in the Aerospace and Defense and Industrial markets.
• Aerospace and Defense Backlog -- $42.8 million, representing a 43% increase compared with the prior year.
• Industrial Backlog -- $21.2 million, an increase of approximately 70% year over year.
• China Operations Sales -- $8.2 million, growing 56.5% year over year and accounting for approximately 25% of total company net sales.
• Net Income -- $637,000, or $0.21 per diluted share, a return to profitability from a net loss of $146,000 in the prior year period.
• Adjusted EBITDA -- $2.0 million, representing a 56% increase from $1.3 million in the third quarter of 2025.
• 90-Day Shipment Backlog -- $31.5 million, remaining stable compared with $31.3 million a year ago and $31.5 million at the end of the second quarter.
• Strategy Review Expenses -- $236,000, incurred for third-party consulting and legal costs associated with the company's evaluation of long-term value enhancement opportunities.
• Incentive Compensation Reversal -- $647,000, which reduced total operating expenses during the third quarter.
• Tariff Recoveries -- $404,000, consisting of $177,000 in refunds and $227,000 in recognized receivables following a February 2026 Supreme Court ruling.
• Net Interest Expense -- $223,000, down from $273,000 in the prior year due to lower average borrowings and new financing arrangements.
• Cash and Restricted Cash -- $4.1 million, including $1.7 million held in China and $280,000 in Mexico as of Sept. 30, 2026.
• Revolving Credit Facility -- $8 million balance, with approximately $3 million in unused borrowing availability under a facility maturing in March 2029.
• Net Cash Used in Operating Activities -- $275,000 for the first nine months, improving from a usage of $2.9 million in the same period last year.
• Nine-Month Net Sales -- $96.9 million, a 10.1% increase over the $88.1 million reported in the first nine months of 2025.

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RISKS

• Miller noted that growth was partially offset by a year-to-date decline in the industrial market, which was affected by customer inventory adjustments and temporary production disruptions during the transfer of manufacturing to Mexico.
• LaFrence stated that gross margin improvement was partially offset by "unfavorable customer and geographical sales mix," as well as higher costs related to a supplier quality issue.

SUMMARY

Nortech Systems Incorporated (NASDAQ:NSYS) reported a return to profitability for the third quarter, supported by growth in its total backlog and significant revenue expansion in its China operations. Management stated that performance was driven by demand in aerospace, defense, and medical markets, with net sales reaching $33.0 million. The company is currently executing a review of long-term strategy and focus on supply chain efficiencies while expanding its proprietary fiber optic technology portfolio.

• The company was granted two patents by the U.S. Patent and Trademark Office covering active optical cable capabilities for use in high-speed magnetic environments such as MRI systems.
• President and CEO Jay Miller stated, "Our China operations, where net sales grew more than 56% in the quarter, continue to demonstrate the value of our global footprint."
• Management reported that its new fiber optic designs allow for real-time cable health monitoring without introducing electrical noise to sensitive medical imaging equipment.
• The company is utilizing AI tools developed under its corporate policy to manage complex tariff accounting, which management claims has increased data accuracy and reduced processing time.
• Miller noted that fiber optics offer environmental benefits, including improved energy efficiency and lower carbon footprints compared to traditional copper cables.
• The company transitioned to a three-tier cost structure across the U.S., Mexico, and China to align engineering and production resources with customer needs.
• Management expects to resolve a specific supplier quality issue that impacted third quarter margins by the end of the fourth quarter.

INDUSTRY GLOSSARY

• IEEPA: International Emergency Economic Powers Act, which governs certain trade regulations and associated tariffs.
• EMI: Electromagnetic Interference, a disturbance that affects electrical circuits due to electromagnetic induction or radiation.
• Electromedical: Related to medical equipment that uses electricity for therapeutic or diagnostic purposes, such as imaging or monitoring devices.
• Active Optical Cable (AOC): A cabling technology that uses optical fiber and electronic transceivers to improve signal strength and transmission distance.
• Contract Assets: Unbilled revenue representing the company's right to payment for work completed but not yet invoiced to the customer.
• MRI: Magnetic Resonance Imaging, a medical imaging technique that uses strong magnetic fields and radio waves to generate images of the body.

Full Conference Call Transcript

Operator: Good afternoon, ladies and gentlemen, and welcome to the Nortech Systems Incorporated Third Quarter 2026 Earnings Conference Call. Joining me today are Jay Miller, President and Chief Executive Officer; and Andrew LaFrence, Chief Financial Officer and Senior Vice President of Finance. [Operator Instructions] At this time, I will turn the call over to Andrew LaFrence.

Andrew LaFrence: Thank you, Mike, and welcome, everyone. Jay will begin this presentation with a review of our operations, recent developments and business outlook. I will then review Nortech's third quarter 2026 financial results before turning the call back to Jay for closing comments. After that, we will open the line for 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 in this call.

These 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 statements in our SEC filings. And with that, I will turn it over to Jay for his opening comments. Jay?

Jay Miller: Thank you, Andy, and good afternoon, everyone. We appreciate you joining us. At the outset, I have to say that while we have some headwinds as all companies do, our tailwinds are much stronger, and we are on a roll. Nortech has the strongest global team it's ever had, dedicated, hard-working people in 3 countries who work as a global team and are committed to excellence. We have an amazing group of blue-chip market-leading innovative customers who see us as a strategic long-term partner.

We also have a great list of supplier partners who have supported us through thick and thin over the past 8 years as we have navigated through significant changes to position Nortech for strong and steady top line growth and faster bottom line growth in the coming months, quarters and years. Together with our customers and supplier partners, I'll repeat, we are on a roll. To that point, third quarter 2026 showed solid progress. Nortech delivered year-over-year revenue growth and improved profitability in the third quarter, supported by a strong and steadily growing backlog. Net sales increased 8.4% to $33 million.

Gross margin improved 130 basis points to 17.8% and operating income increased to $1.4 million from $945,000 a year earlier. We reported net income of $637,000 or $0.21 per diluted share compared with a net loss of $146,000 in the third quarter of 2025. For the first 9 months of 2026, net sales increased 10.1% to $96.9 million and operating income improved to $2.1 million from $74,000. Higher production activity and improved manufacturing cost absorption supported gross margin expansion, partially offset by unfavorable customer and geographic sales mix and higher costs related to a supplier quality issue that we expect to be resolved in the fourth quarter.

Given the great job our business development and customer management team is doing, our backlog continues to be a key strength for Nortech. It's the most important forward-looking indicator for the company. As of September 30, 2026, total order backlog was $92.8 million, up 20% or $15.5 million from $77.3 million a year ago and essentially stable compared with $93.8 million on June 30. Year-over-year backlog growth was led by Aerospace and Defense, where total backlog increased 43% to $42.8 million and Industrial, where total backlog increased approximately 70% to $21.2 million. Both these markets also grew backlog sequentially from June 30. As of September 30, 2026, our 90-day shipment backlog remained strong at $31.5 million.

As a reminder, our reported 90-day and total backlog included orders for which $17.2 million of revenue has already been recognized and is included in contract assets. Our global manufacturing footprint in the U.S., Mexico and China supports our ability to align engineering and production resources with customer requirements. Our operations in China were a key driver of growth this year. Third quarter net sales from our China operations increased $3 million or 56.5% to $8.2 million from $5.2 million in the third quarter of 2025 and represented approximately 25% of total net sales compared with approximately 17% a year ago.

For the first 9 months of 2026, China net sales increased $7.5 million or 53.5% to $21.5 million from $14 million, accounting for approximately 85% of our year-over-year revenue growth. Growth in China is also largely offset by year-to-date decline in our industrial market, which was affected by customer inventory adjustments and temporary production disruptions associated with the transfer of manufacturing activities to Monterrey, Mexico. This performance highlights the value of our global footprint and our ability to serve our global customers from the location that best meets their needs. The strength of our backlog, together with the growth we have delivered this year, gives us great confidence in the direction of the business.

As noted earlier, total backlog of $92.8 million is up 20% from a year ago. And through the first 9 months of 2026, net sales have grown 10.1% with gains in medical device, medical imaging and aerospace and defense, along with strong growth from our China operations. As disclosed in our Form 10-Q and this afternoon's press release, our Board of Directors and management team incurred expenses related to third-party consulting, legal and other incremental costs associated with the company's 2026 review of long-term strategy to evaluate opportunities to enhance shareholder value following realized improvements in the company's backlog, financial performance and bank financing. We do not intend to comment further on these review activities.

When I turn the call over to Andy, he will spend some time on our balance sheet. We are very focused on improving free cash flow, and we're thrilled with the progress that our new Senior Vice President of Global Operations and our new Vice President of Supply Chain are making to drive supply chain efficiencies across our global operations with an emphasis on disciplined purchasing and inventory management. These efforts take time and are an important part of managing the cash needs to support our growing business. Now I'll turn it over to Andy for a more in-depth look at our financial results. Andy?

Andrew LaFrence: Thank you, Jay. I will provide an overview of Nortech's financial performance for the third quarter and the 9 months ended September 30, 2026. Additional details are available in our Form 8-K earnings release and our Form 10-Q filed with the Securities and Exchange Commission earlier this morning. As we 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 long-term strategy are gaining traction as we move through 2026, consistent with Jay's comments earlier. As Jay reviewed earlier in our presentation, revenues are up in both the quarterly and year-to-date results, and I'll move directly to cost of sales.

For the third quarter, gross profit totaled $5.9 million compared with $5 million in the prior year period. Gross margin percentage improved to 17.8% from 16.5%, an increase of 130 basis points. Higher revenue levels and improved manufacturing cost absorption from increased production activity supported the improvement, partially offset by unfavorable customer and geographical sales mix and higher costs related to a previously discussed supplier quality issue that we expect to be resolved in the fourth quarter of 2026. For the first 9 months, gross profit was $16.3 million compared with $12.9 million last year, and gross margin improved 210 basis points to 16.8% from 14.7%. Turning to tariffs.

We have made progress on recovery of previously paid IEEPA tariffs following the Supreme Court's February 2026 ruling. During the first 9 months of 2026, we received $177,000 in tariff refunds. And at September 30, we recognized receivable of $227,000 for additional claims that we have submitted for which recovery was determined to be realizable. We accounted for these recoveries consistent with the original tariff costs, resulting in $153,000 reduction in cost of goods sold in the quarter and $127,000 reduction in inventory and recorded $119,000 customer liability and $8,000 of interest income.

We continue to pursue additional recoveries, including from vendors where we are not the importer of record, but their timing and the amount remain uncertain, and we have not recognized amounts that do not meet our recognition criteria. We are closely monitoring trade policy, including the Section 301 tariffs implemented in July 2026 on imports from certain countries at rates generally from 10% to 12.5%, and their potential effects on product costs, supply chains and sourcing strategies. Total operating expenses were $4.5 million in the third quarter compared with $4.1 million in the prior year period. For the quarter, selling expenses were $1.2 million, general and administrative expenses were $3 million and research and development expenses were $267,000.

For the 3 months ended 2026, we reversed $647,000 of incentive compensation expense for 2026. Selling expenses decreased as a percentage of net sales to 3.6% from 4.0%, reflecting $145,000 reduction in incentive compensation expense. The increase in general and administrative expenses was primarily attributable to costs associated with the company's 2026 review of long-term strategy to evaluate opportunities to enhance shareholder value following the realized improvements in the company's backlog, financial performance and bank financing, and those costs totaled $236,000 in the third quarter and $440,000 year-to-date as well as the costs for G&A expenses were impacted by higher incentive -- excuse me, equity compensation expense.

For the 9 months, total operating expenses were $14.2 million compared with $12.9 million last year. Third quarter operating income increased $469,000 or 49.6% to $1.4 million compared with $945,000 in the prior year period, and operating margin improved to 4.3% from 3.1%. For the first 9 months, operating income was $2.1 million compared with $74,000 last year. Year-to-date improvements reflected higher gross margin, improved operating leverage and absence of $266,000 of restructuring charges recorded in the first quarter of 2025. Net interest expense was $223,000 in the third quarter compared with $273,000 last year, reflecting lower average borrowings and reduced interest costs following the transition to our new financing arrangements.

For the first 9 months, net interest expense was $676,000 compared with $744,000 in the prior year period. Third quarter income tax was $554,000 compared with $818,000 last year. And for the first 9 months of the year, income tax expense was $489,000 compared with $479,000 in the prior year period. We reported third quarter net income of $637,000 or $0.21 per diluted share compared with a net loss of $146,000 or $0.05 per diluted share in the third quarter of '25. For the first 9 months of 2026, net income was $919,000 or $0.30 per diluted share compared with a net loss of $1.1 million or $0.41 per diluted share in the same prior year period.

Turning to the cash flow statement. Net cash used in operating expenses was $275,000 for the 9 months ended September 30, 2026, compared with a usage of $2.9 million in the same period last year. Accounts receivables and contract assets used a combined $5.7 million of cash and inventory used $4.6 million of cash, primarily reflecting purchase of materials needed to support our growing backlog and anticipated production requirements.

These were partially offset by a $3.9 million of cash provided by customer deposits, reflecting customers' payments to procure inventory to support future customer manufacturing builds and shipments and a $2.4 million change in cash provided by accounts payable, primarily related to an increase in inventory purchases noted above and the timing of supplier payments. Purchases of property and equipment were $424,000 during the first 9 months. At September 30, cash on hand was $3 million and restricted cash was $1.1 million. Cash included approximately $1.7 million of cash held in China and $280,000 held in Mexico.

Restricted cash primarily represent customer deposits and payments on accounts receivable that are subject to our financing arrangement and therefore, will be applied against our line of credit at the next business day. Under our associated bank facility, the revolving credit balance was $8 million and unused borrowing availability of approximately $3 million, subject to the borrowing base. The facility matures in March of 2029. In summary, year-over-year revenue growth and gross margin improvement supported higher operating income and a return to net income through the first 9 months of 2026.

As Jay noted, with a total backlog of $92.8 million, up 20% from a year ago, our priority is to convert that backlog into profitable shipments while strengthening our cash generation. With that, I will turn it back to Jay for his closing remarks. Jay?

Jay Miller: Thank you, Andy. Before we take your questions, I'd like to return to 3 areas that serve our customers and advance Nortech's corporate stewardship: engineering expertise, product innovation and sustainability. This quarter, all 3 came together in a milestone we announced on Tuesday. Let me start with engineering expertise. Our dedicated engineering team focuses 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 adapt our global engineering resources to our customers' changing needs. That same engineering depth is also producing protected intellectual property. On Tuesday, we announced that the U.S.

Patent and Trademark Office has granted Nortech 2 patents covering our active optical cable capabilities. These patents solve 2 fundamental engineering challenges for our customers. The first is bringing high-speed fiber optics into strong magnetic fields. Our patented connector is built so that every key component is nonmagnetic. That gives customers the speed, lightweight and EMI immunity of fiber in environments such as MRI systems, where components with magnetic parts ideally should not go. The second is monitoring cable health without adding noise to sensitive systems. Our patented design builds diagnostics directly into the cable to track conditions such as optical power, voltage and temperature in real time.

Because diagnostic electronics can introduce electrical noise, the design also allows the whole system to pause those diagnostics on command during noise-sensitive operations, such as an imaging scan. Our customers no longer have to choose between monitoring their cables and protecting signal quality. Innovation is a core value here at Nortech and remains an important element of our long-term strategy. Our engineering and R&D work is focused on helping customers solve complex connectivity challenges with technologies that are ruggedized, lighter, faster, more sustainable and more affordable. And because every application we deliver is custom engineered, protected IP like this strengthens our position in the high-reliability programs where our customers need us most.

These advantages are particularly valuable in medical devices, imaging systems, aerospace, defense, drone and satellite applications where reliability, weight reduction and EMI immunity are critical. As copper costs continue to rise and system architecture becomes more demanding, we believe Nortech is well positioned to support the next generation of connected technologies. More and more often today, important 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. Inside Nortech, we see AI as a clear opportunity to streamline our processes and serve customers better. And we are investing in building the AI skills of our employees across every function.

On sustainability, compared with traditional copper, fiber optics offer meaningful environmental benefits in both production and operation, including improved energy efficiency, less material use and a significantly lower carbon footprint for the complex cables we manufacture. Our shift in focus from copper to fiber also helps us mitigate cost pressures. With our growing portfolio of patented fiber optic and digital capabilities, Nortech is well positioned for protected future demand for fiber products. I'd be remiss if I didn't take this opportunity to point out that our finance team led by Andy, arm-in-arm with our marketing team, has created AI tools specifically to handle the extremely complex tariff accounting we face as a contract manufacturer.

In fact, we are now considered to be an expert in the eyes of both our customers and supply chain partners in this area. These AI tools were developed very carefully under the Nortech company AI policy and have proven to both create accurate data and save us a dramatic amount of time. This is just one example of how Nortech's innovative culture is paying off day in and day out. In closing, we are excited about technological developments across all of our markets and expect them to support our continued sales momentum into 2027 and beyond, aided by a stabilization in the supply chain and customer orders.

As we wrap up our prepared remarks, let me summarize 3 key takeaways. First, third quarter revenue growth with 130 basis points of gross margin expansion drove higher operating income and return to profitability. Second, our backlog remains strong. Total backlog of $92.8 million is up 20% year-over-year, led by Aerospace and Defense and Industrial. And our 90-day shipment backlog of $31.5 million is above prior year levels. Third, our engineering capabilities and manufacturing footprint across the U.S., Mexico and China support our ability to serve customers across the product life cycle. Our focus is on executing customer commitments, converting backlog into shipments and profitable growth and improving cash conversion to create long-term value for customers, employees and shareholders.

Now we'll open the call for your questions. Mike, go ahead and open the lines.

Operator: [Operator Instructions] We do not have currently any questions in the queue. So I would like to turn the floor back over to Jay for any final comments.

Jay Miller: Thank you, Mike, and thanks to everyone for joining us today. I want to repeat what I said at the outset. Nortech has the strongest global team it's ever had, dedicated, hard-working people in 3 countries who work as a team and are committed to excellence. We have an amazing group of blue-chip market-leading innovative customers who see us as a strategic long-term partner. We also have a great list of loyal supplier partners. Today, Nortech is positioned for strong and steady top line growth and faster bottom line growth in the coming years. Arm-in-arm with our customers and supplier partners, we are on a positive roll and the future looks very bright.

We appreciate your interest in Nortech and look forward to speaking with you when we report our fourth quarter and full year 2026 results. Again, thank you, and goodbye.

Operator: Thank you. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.

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