Nortech Systems Incorporated

Q4 2022 Earnings Conference Call


spk_0: greetings and welcome to nor tex fourth quarter twenty twenty two earnings call at this time all participants are analysts and only mode and a question and answer session will follow the formal presentation if anyone should require operator assistance during the conference please press he wrote on your telephone key part and i turned a conference over to your host mister chris jones
spk_1: please go ahead
spk_2: hi good morning and thanks operator and happy things at the yeah as a patrick they'd everybody i want to walk and everyone to our conference call today at your birthday will begin with a review of our industry are value proposition for customers and operational performance and then i'll review in our tex que for and for your financial results and then turn it back over to jail for his closing comments and i will open up the coffee or questions of before we continued our please note that statements made during this call in the queue and a session maybe forward looking regarding expected revenue earnings future plans opportunities and other company expectations isn't estimates plans another forward looking statements involve unknown unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied on this call it's risks including those that are detailed and are most recent form ten k may be amended or supplemented the statements made during this conference call are based on information known by nortek as of the day time of this call and we assume no obligation to update the information in today's call you can find your text complete safe harbor statements and are se si he filings and with that i'll turn it over to jay for his opening comments
spk_0: thank you chris and happy st patrick's day everyone from were excited to discuss or twenty twenty two results and will do so shortly and but today i want to take a little better time take a step back and answer a simple question what does your tax value proposition
spk_3: though what we do here at nortek as complex the answer this question is relatively simple way engineering manufacture complex low volume hi max electro mechanical systems assemblies and components for medical industrial and defense customers and we do so on a global basis with plants in minnesota monterrey mexico and pseudo china notably we do not compete in a high volume low mix space which is dominated by larger companies like benchmark and plexus admiral both companies in their own right this factories turn up thousands of identical products every day running multiple chefs in contrast of those huge firms nor tackle set up production lines that might run for a week or two or maybe a month we constantly take down lines and set up different lines it's a fundamentally different business and while we leverage some very sophisticated capital equipment and the production and testing we primarily rely on are experienced high skilled hands on workforce to produce these very complex technical solutions a two to five million dollar order a significant for us and while larger contract manufacturers more take that business it's perfect for nortek or largest customer accounts for roughly twenty five percent of our revenue but after that our next largest customers about seven percent we can effectively serve customers of any size that fit our global low volume hi mix mission critical business model while wall street analysts may group all large and small him as firms together we do thought things that those larger firms cannot do or will not do and candidly they do things we will not do occasionally customers learn this fundamental difference in business philosophy the hard way
spk_0: we're currently negotiating with a medical costs were that it first awarded their business to a large him as from
spk_3: it was a relatively small contract for the relatively large gms from and a castro was neglected consequently quality and communication both suffered that the complicated complex manufacturing process and supply chain was a poor fit for that large companies high volume low makes model frustrated that customer then poses manufacturing back and house but quickly recognizing the managing all the suppliers they've taken on the cash implications of managing a lot of new inventory and the complexity of their manufacturing process that customers not talking us in this situation fits nortek perfectly the simple sorry reflects what happened somewhat frequently
spk_0: the not tech team is very proud of what we do daily for our customers and we feel we do it very well it starts with taking great care of each other's your tech employs and taking great care of our families
spk_3: das a very important to us that we take very good good care of our supplier partners by communicating with them openly and honestly and paying them on time one hundred percent of the time it also means we strive to be good corporate citizens locally nationally and globally we know the we take great care of all these critical stakeholders employs our families customers supplier partners in our communities we will also take great care of our shareholders if there's a secret to are strong results and twenty twenty two is is it now to explain our financials and more deaths will turn it over to chris
spk_2: chris i thanks james i'll lab begin with that the top line and i into for twenty twenty two revenue totaled thirty five point six million dollars for this represents a six point four percent increase in revenue and thirty three and five million in the fourth quarter of twenty twenty one and it's up slightly from the prior to order increases year over year coming from both higher volume and previous pricing actually for the full year twenty twenty two revenue told them one hundred thirty four million dollars in nearly seventeen percent increase from revenue of one hundred and fifty million dollars in the full year of twenty twenty one nor tax revenue performance was driven by growth in net sales across all the markets that we serve the medical market was up by about thirteen million dollars or twenty percent compared to twenty twenty one but the majority the increase coming from medical component products and twenty twenty two revenue from the industrial market was up three million dollars or nine percent from the prior year and last are aerospace and defense markets were also up from prior levels by seventeen point five percent or three million dollars so as i mentioned earlier the overall year over year revenue improvement across all our markets was primarily due to a combination of higher production volume and pricing adjustments two for gross profit total five point one million dollars or fourteen point three percent compared to a gross profit of two point seven million dollars or eight percent from the prior quarter the fourth quarter margin was down on a sequential basis and we believe that over the long run we are in a more stable gross margin position for the four year twenty twenty two gross profit of twenty point five million dollars or fifteen point three percent gross margin was up from adjusted gross profit of eleven point two million dollars or nine point seven percent in the prior year notable and in twenty twenty one is that gap gross profit included the four point seven million dollar employee retention credit and so are adjusted gross profit excludes that nonrecurring item the eighty three percent year over year gross profit improvement and resulting five hundred and sixty basis point improvement in your be your gross margin relate primarily an uprising action stove or come inflationary cost pressures fourth quarter operating expenses totaled four point four million dollars which is a twenty three percent increase from the fourth quarter twenty twenty one operating expenses and three point six million dollars and it was flat on a sequential order basis the eight hundred thousand dollar increase in year we are operating expenses with driven primarily by at three hundred forty seven thousand dollar increase in selling expenses related to engineering and marketing to drive new business bookings for future quarters
spk_0: next the majority of the three hundred eighty two thousand increase in here reared dna costs was due to necessary investments in i t h r and analytical capabilities
spk_2: finally a one hundred seventy four thousand dollar increase in year be your research and development cost reflects continued investment in new technologies such as the active optical extreme cable platform for four year twenty twenty two income tax expanse was one point five million dollars compared and nine hundred thousand dollars and twenty twenty one effective tax rate and fiscal twenty twenty two was forty two percent up from twelve percent and twenty twenty one that's a a large change in in in tax rate in two thousand twenty two the tax rate was driven by evaluation allowance from the tax cuts and jobs act requirement to capitalize and amortize research an experimental expenditures and twenty twenty two and a twenty twenty one our tax rate was driven by the non taxable ppp loan forgiveness
spk_4: fourth quarter either da total one point two million dollars which is a significant increase over any but the last one hundred thousand dollars in the fourth quarter of twenty twenty one
spk_2: for the full year ebitda totaled five point eight million dollars which is a six million dollar improvement on an event the loss of two hundred thousand dollars and twenty twenty one both the fourth quarter and four year increases resulted primarily from previously discussed revenue and gross profit increases offset by and based investments and operating capabilities putting they of the balance sheet and cashflow statement first in two thousand and twenty two cast provided by operating activities was five point four million dollars compared to a cash used by operations a four point five million in twenty twenty one also notable and twenty twenty two operating cash flow included the first of to two point six million dollar payments from the i r s for the employee retention credit
spk_5: director still processing nortek second e r c application and we hope to receive that payment at any time
spk_2: but we have no this ability to when we risk mm we also have a one point two million dollar have differed so security tax payments that will offset the final two point six million dollar drc bannon or in the fourth quarter networking capital improved by about a million dollars as inventory levels of twenty two point four million declined slightly from the prior quarter throughout twenty twenty two we saw a gradual improvement in supplied seen bottlenecks and component lead times nortek supply chain team is working very closely with our customers answer players to ensure that the entire and and supply chain is optimized for on time delivery and working capital efficiency we ended twenty twenty deal with six point nine million dollars of borrowings on our sixteen million dollar line of credit with bank of america and we had unused borrowing availability of eight point four million dollars we believe that i
spk_3: i so this is christian owns a miller and that we apologize for the technical problem though i think the best place the to restart are prepared comments as with jay ah thanks chris of before we opened the call for questions i want to touch on not three topics are strategic planning process our investments in new technologies in our e teacher strategic planning of an ongoing process it nortek rather than just the once here exercise or management team and border always think they've had gone the next quarter reagan fiscal year
spk_2: for example our current your checks for cheap plan covers twenty twenty three to twenty twenty eight effectively six years ahead
spk_3: effective strategic planning for the future requires comprehensible by reliable information and this effort were aided by our enterprise right yeah er p system that connects our entire organization in enable us to quickly adjusted demand fluctuations in this past year and will do so in the future while providing other vital insight we implement in new york p a few years ago today is a vital tool for the whole leadership team as we run the business
spk_2: a strategic planning process also recognizes your text growth history of the company
spk_3: it's encouraging to look back for years the span of my tenure as president ceo the city where much help your business today we're much more financially stable including our balance sheet and cashflows our internal team is significantly stronger at headquarters here the twin cities and in all of our plants one minnesota and mexico and china we have better customer relations more true partnerships today our supplier partnerships of also improved dramatically and we're also better corporate citizens we take better care of each other's employees including our families need to the locations where we operate nortek is working to become a better community partner in a better place to work this helps us attract and retain employees and today are staffing levels are sufficient unstable the stand topic technologies that can help further distinguish us in the marketplace will continue leveraging our engineering expertise in and in new areas last year we announce to exciting developments watching are active optical extreme cable platform for machine vision and factory automation and receiving us pat patents the affair like shared a extreme i'm flexible printed circuit for high frequency take signals both our future it technologies with exciting potential they're also critical stepping stones even better innovations are will help our customers in many ways making their products more competitive higher performance lighter more cyber secure all while lowering overall costs these innovations will make our products and therefore a customer or sprites cleaner environmentally and more sustainable while we work to develop future technologies for our customers we also must help them prepare for other challenges in the horizon is include issues of sustainability within the context of s g environmental social and government's priorities yes she may not be in the front may not be front and center and everyone's radar now but it's only a matter time and nortek will be a pro active leader not a follower note this are aren't the efforts are intimately tied to our yes cheap priorities tied directly to creating shareholder value nor tax board and management team are also committed to helping our customers and suppliers achieve critically important the as is critically important yesterday goals we are an initial stages of this journey establishing baselines in developing plans a relatively soon we'll begin to publicly report and track your tax ongoing yes she performance and progress in key areas no business operates in a vacuum in this effort demonstrates another way north texas committed to our employees are families customers the player partners and shareholders along with the grail world around us
spk_0: what that will open things up the call up the questions alley please up in line and poll for questions thank you at this time we will be conducting a question and answer session and if you would like to ask a question please press star one on your telephone keypad confirmation told indicate your line is into question keep you may press start to if you would like to remove your question from the king and for participants using speaker equipment and may be necessary to pick up your handset before pressing the kids wow moments where we pull for questions
spk_6: thank you we have a question from poll luther who is it private investor please go ahead the morning folks and that ah yes congratulations first stop on a strong twenty twenty two in a gets with that and a look at the queue for high catch rate i'm curious what you anticipate ah the twenty twenty three
spk_2: tax rate to run at and also care what you think normalize gross margins might be under the new year yet he has lifted crap out i'll take both both of those are not on the tax rate and art normalized gross profit margin so under on the tax rate at i think that that nortek had a a unique occurrence and twenty twenty one the made are effective tax rate low because of them the ppp loan forgiveness and then and twenty twenty two got a disproportionately high effective tax rate he and that i think that was due to add implementation of i arrest rules are around our research and experimentation capitalization go on your in twenty twenty three we we neither neither one of those two are unusual occurrence as well as a curse so now i would expect in a normal statutory income tax rate through twenty twenty three and of course we're working closely with iraq were attacked advisers to our they are to do the work on on any kind of that cash tax credit opportunities especially around think like read research and development
spk_5: that's our twenty twenty three as certainly ongoing planning on on taxes on gross margin the are normalized that full year gross margin last year was about fifteen percent
spk_2: which is that obviously up significantly from us and twenty twenty one and i think as we look at the at a can of a stable gross margin pattern and twenty twenty two i would expect that to continue into twenty twenty three i think we have we have of a measure degree of headwinds on the margins die the and tail and from the on the martin site though i think that that that's something that obviously twenty twenty three we're going to continue to have to focus on and i think ultimately yeah yeah we think beyond twenty twenty three and or text job broader planning on on improving margin it's sir you know if adding more guy you to our customers it's sad doing more are higher level assemblies more complex products and i think if you her jays and prepared remarks about that ultimately the strategic direction of the company is taught higher margin that arjun margin products
spk_3: it can be methodical and i and i think it's can be stepwise quarter on quarter all this is jay are small thanks for your question would appreciate it and we do feel very good about the year the is chris noted the we all know what the headwinds are are out there and we are dealing with those and data and thing very close to our suppliers in our customers as we're working through these things these pendulums tend to go back and forth and are part of our job is to i work with our customers and and try to even those things out as best we can a long term over time clearly we expect to grow our top line up reasonably aggressively and gras profitability even faster
spk_2: over time we expect our gross profit nervous margins to continue to build vernacular give specific numbers and but we expect improvement in all those areas and again thanks thanks for the question
spk_6: at the thank you are christian jay and ten it the a pinch of color you know yet it went to the cabinet headwinds and kale and more important than the head when and i know there there's the labor canary pressure there's material
spk_3: pressures but that the driver or that competitive market conditions at the customer allow bowler the need to do i have be extra competitive the when new business or taken can put a little flavor on that langley yeah you know out i'd say one of the one of the significant headwinds is as the we were not as the global supply chain large the ease and and really if we look back twelve to eighteen months it it is quite a bit better now than it does than it was before as we've seen that is our customers are more comfortable with their inventory and in some cases they they have pushed or readers out because they're not concerned about the inventory because were performing better at which makes for an interesting dynamic in the market there's also concerns that courses as far as the fed is pre been pretty aggressive about take an interest rates up i'm about whether we going to really see up a hard landing or a softer i'm at as we see this by the way we we kind of anticipate that that that pendulum as it goes back and we've seen a business push out and we expected that will that will come back of course and we'll we'll get back to normal run rates and terms of of business i'm our customers from the most part of tend to be a little more hi independent if you will have of are a lot of the regular of market or economics fluctuations is it because they're and in the defense or because in their medical space so we're expecting that to normalize out a little bit here i'd this year i'm a
spk_6: and i look were all and to and and well we'll say we're planning for a harder landing ah and and hoping for a softer landing if you will at night not thank you and august one final question you know here with that
spk_2: two weeks before the and a q one
spk_7: do you guys
spk_3: if a little sense of how he wanted track and at your end and and you know maybe relative the queue for i've got one run rate margin and and a light i yeah oh yeah we we want
spk_6: comment specifically and que one at this point i've been partly because world where as he will write in the middle of it and and like most businesses the last month of each quarter is is pretty busy so we won't comment necessarily and q one i'm but we we do expect it does that we will have a solid year
spk_3: this year old wrong and and we really like our strategic plan going forward ah over the next six years
spk_0: that they can gentlemen
spk_8: thank you paul present
spk_3: thank you once again if there are any remaining questions or comments please press star one on your phone at this time okay
spk_2: there appear to be no further questions and queue at assigned to our hundred bucks management for any closing remarks the math with an alley thank you very much and and thanks everyone for joining us today are we look forward to talk to you i next in may our first quarter for a first or when he twenty three results ah thank you i'm happy st patrick's day i this is craft an hour have ago go to iraq are safe harbor statement again so as a reminder of as you stay with me during the found you in a session where forward looking regarding expected revenue learning future plans opportunities expectations he that it's plans and other forward looking statements involve unknown unknown risks and uncertainties that may cause the actual results the differ materially from those expressed or implied on this call
spk_0: he's risks including those are detailed in our most recent for ten k may be amended or supplemented statement made during a conference call a based on information known by nortek as of the date and time of this call and we assume no obligation to update the information today's call you can find your texts complete safe harbor statements in our as

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