Nortech Systems Incorporated

increase of 2.6%. As Jay noted, we experienced reduced net sales from our medical customers as they are aggressively reducing their inventory investments. We have also noted several medical product introductions being pushed out to later in 2024 or into 2025. We continue to see strong revenue growth in our aerospace and defense category, as well as moderate gains in our industrial customers. Further, as Jay noted in his remarks, we have realized a reduction in customer backlog in the second quarter of 2024 as customers have changed their purchasing patterns and are requesting shorter lead times with new orders. Second quarter of 2024 gross profit totaled 4.6 million or 13.6% of net sales compared with gross profit of 5.5 million or 15.6% of net sales in the same prior year quarter. For the first six months of 2024, we realized gross profit of $10.1 million or 14.8% of net sales as compared with $11 million or 15.7% of net sales in the first six months of 2023. Reduction in gross margin percentage in the 2024 periods is largely due to lower net sales and resulting reduced facility utilization and to a lesser extent, incremental training costs related to the movement of Blue Earth production to Bemidji by the end of 2024. Operating expenses for the second quarter and the first six months of 2024 are marginally lower than the prior year periods as a result of lower incentive compensation accruals and expense management with offsets increased payroll costs. Further, the 2024 periods reflect $91,000 of restriction costs related to retention bonuses and other costs associated with the upcoming Blue Earth closure. The closure of our Blue Earth facility in the second half of 2024 is on schedule and going well. We now estimate the Blue Earth closing will result in a restructuring cash charge of between $750,000 and $850,000 in 2024. We currently do not anticipate any significant non-cash impairment charges related to this closure. we expect to pay substantially all of the restructuring costs in 2024. As we previously disclosed, we expect to realize annual savings starting in 2025 of at least $1.6 million annually related to the optimization of our Minnesota facilities. Moving to the cash flow statement, for the first six months ended June 30th, 2024, net cash used in operating activities totaled $1.5 million is compared with cash provided of $281,000 in the same period in 2023. While the timing of customer and vendor payments impacting operating cash flow for the period, we have purposely increased inventory levels in anticipation of the Blue Earth facility transition to Bemidji. As noted in our press release distributed this morning, we use earnings before interest, tax, depreciation, and amortization, or EBITDA, as a key performance indicator to manage our business. In the press release, we have provided a reconciliation of our financial performance determined in accordance with U.S. generally accepted con principles and EBITDA. For the quarter ended June 30, 2024, as adjusted for restructuring charges, EBITDA was $919,000 as compared with $1.6 million for the same period in 2023. Year-to-date 2024 adjusted EBITDA is $2.6 million as compared with $3.2 million in the first six months of 2023. The decreased adjusted EBITDA is a result of lower net sales and related gross profit. Turning to the balance sheet, As of June 30, 2024, cash and cash equivalents totaled $1.5 million, down from $1.7 million as of December 31, 2023. The fluctuation in cash balances reflects timing of cash receipts, expenditures, and line of credit borrowings. We ended the second quarter of 2024 with $6.6 million of borrowing capacity under our line of credit. Accounts receivable as of June 30, 2024, were 17.6 million down from 19.3 million as of December 31st, 2023. This is in line with our strong fourth quarter sales and the expected timing of customer payments. Inventories were 22.8 million as of June 30th, 2024, as compared with 21.7 million as of December 31st, 2023. The increase in inventory reflects the buildup of inventory balances in anticipation of completing our movement of Blue Earth production to our Bemidji facility. Our contract asset, which represents revenue earned but not yet billed to customers, increased slightly to $15 million as of June 30, 2024, as compared with $14.5 million at the end of 2023. The increase reflects the timing of customer shipments. As we disclosed in our press release issued earlier today, we have presented non-cap results, including trailing 12-month financial data in EBITDA. For the trailing 12-month period ended June 30, 2024, net sales were $137.5 million, as compared with $148.8 million in the same 12-month period ended June 30, 2023. In addition, adjusted EBITDA for the 12-month period ended June 30, 2024 with $7.3 million as compared with $6.8 million for the 12-month period ended June 30, 2023. As we stated in May, our top priorities in 2024 remain unchanged. First, we are extremely focused on continuing to strengthen our balance sheet. Next, we will take further advantage of opportunities to align our operations and infrastructure with market demand. that we are seeing to deliver sustainable long-term EBITDA growth, as well as driving improvements in free cash flow. Coupled with discipline, lean operations, execution, expense management, and R&D innovation, we believe Nortec can deliver on our objectives. With that, I will turn it back to Jay for his closing comments. Jay?

Thanks, Andy. Before we open the call to your questions, I want to touch on three related areas that together serve our customers and help advance North Texas.

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