Nortech Systems Incorporated

milestone for Nortec and the direct reflection of our team's dedication to quality and operational excellence. Second, we have successfully completed our CMMC 2.0 certification to support our U.S. Department of Defense customers in advance of the newly effective government contracting cybersecurity requirements. Operationally, we are continuing to work to execute our strategy to partner closely with customers to drive shorter lead times, tailored on-time delivery strategies, high-quality standards, along with deeper customer partnerships that are fundamental to our long-term growth. We now have several customers with programs that result in shipments within days of order dates, resulting in world-class service and on-time delivery metrics. Further, our ability to manage build cycles for these programs create consistent manufacturing processes, which are also delivering leading quality metrics. Finally, I'd like to note that while our lead times have become shorter for many customers, we continue to see strength in our customer backlog. As we noted in our 10K filing this morning, our customer backlog was $77.3 million as of September 30th, 2025. Next, I'll turn it over to Andy for a more in-depth look at our financial results. Andy? Thank you, Jay.

In the next few minutes, I'll provide certain details of our financial performance in the third quarter of 2025. I would encourage you to review our Form 10, excuse me, Form 8K containing our press release and non-GAAP measures, as well as our quarterly report on Form 10Q filed earlier this morning with the U.S. Securities and Exchange Commission. As a continued theme, we have historically noted our individual quarterly performance can be affected by outside factors. These might include timing fluctuations, including seasonal fluctuations, customer shipments, and supply chain issues, any of which could materially impact a particular quarter, either positively or negatively. Consequently, we believe it's important to review our business on a 12-month basis rather than focusing on quarterly performance. This approach will help to normalize these potential anomalies and offer a better gauge of our strategy's long-term success. So today, while I focus most of my comments on our quarter results, I will spend some time reviewing trailing 12-month results for business. Net sales for the third quarter of 2025 totaled $3.5 million. This represents a 2.9% decrease from net sales of $31.4 million in the third quarter of 2024. Net sales in the third quarter of 2025 were negatively impacted by a $1.4 million decrease in aerospace and defense net sales as a result of increased production in the last half of 2024 in the anticipation of moving aerospace and defense manufacturing from our Blue Earth facility to our Bemidji facility, and to a lesser extent, the continued delay of certain defense customer product approvals. As Jay noted, we made significant headway with the transfer of customer programs in the first nine months of 2025, and this contributed to an 8.7% or $832,000 increase in medical imaging net sales in the current quarter, as compared with the same quarter in 2024. As Jay also noted, we have a strong customer backlog at the end of the third quarter, which arrived at $77.3 million. This is consistent with our customer backlog at June 30th of 2025. Third quarter of 2025 gross profit totaled $5 million or 16.5% of net sales compared with gross profit of $3.8 million or 12.2% of net sales in the same prior year quarter. The increase in gross profit as a percentage of net sales in the current year period was a result of increased facility utilization, increased manufacturing productivity, and a change in the reporting structure of our customer managers from operations to a sales function, which more than offset lower sales. Operating expenses excluding restructuring charges for the third quarter were down $46,000 as compared with the prior year period as a result of higher selling expenses from the alignment over customer-facing managers to a sales function. This increases more than offset by lower payroll costs due to lower headcount and expense management. We incurred $176,000 of restructuring costs in the prior year period. As we focus on earnings before interest tax depreciation and amortization or EBITDA as a key performance metric for management and our investors, we generally have not spent time discussing our income tax expense and our quarterly calls. Given the size of the income tax expense for the current quarter, we are providing some color. Income tax expense in the third quarter of 2025 was $818,000 as compared to $56,000 in the third quarter of 2024. As a result of our pre-tax income of $672,000 for the current quarter, that was more than offset with income tax expense resulting in a net loss of $146,000. In the third quarter of 2025, the One Big Beautiful Bill Act was signed by the President. This bill restored the company's ability to immediately deduct domestic research and development expenses. The company has prepared its tax revision for the three nine months ending September 30, 2025, assuming it will take advantage of this provision of the new tax bill. As a result, the company currently estimates it will incur a U.S. tax loss for the company in 2025, which will temporarily limit the ability of the company to deduct interest expense and would impact our ability to claim foreign tax deductions and credits under the GILTI provisions of the U.S. tax code. The impact to the GILTI calculation results in a permanent unfavorable impact to the overall tax rate for the quarter and year-to-date periods. The company plans to continue to review the impact of the new tax bill and the various elections, including the company's deduction of research and development expenses in the fourth quarter of 25 to optimize tax cash payments along with overall tax expense for 2025. Turning to the balance sheet as of September 30, 2025, cash flow of $1.3 million up from $916,000 as of December 31, 2024. The fluctuation in cash balances reflects the timing of cash receipts and expenditures, distributions of earnings from our Chinese operations, and credit line borrowings, which aggregated $12 million as of the end of the quarter. Accounts receivable as of September 30, 2025 were $18.8 million, up from $14.9 million as of December 31, 2024. And this increase was largely due to the timing of shipments. Inventories were $18.4 million as of September 30, 2025, as compared with $21.6 million as of the end of December 31, 2024, reflecting a planned decrease in our inventory balances during 2025. Our contract asset, which represents revenue earned but not yet billed to customers, increased to $15.3 million as of September 30, 2025, as compared with $13.8 million as of December 31, 2024. This increase reflects the timing of customer shipments and our focus on increased production to reduce raw material balances, optimize plant operations, and provide ready-to-ship inventory to certain customers to reduce lead times. Moving to the cash flow statement for the nine months ended September 30, 2025, net cash used in operating activities totaled $2.9 million as compared with $3 million used in the same period in 2024. The timing of revenue shipments as well as customer and vendor payments impacted operating cash flows for the periods. As noted above, we use EBITDAB as well as adjusted EBITDAB, which does not reflect restricting charges as key performance indicators to manage our business. While EBITDA and adjusted EBITDA are non-GAAP measures, we believe these provide meaningful information regarding our underlying core business financial performance. In the press release, we have provided a reconciliation of our financial performance determined in accordance with U.S. generally accepted and kind principles and EBITDA as well as adjusted EBITDA. For the quarter ended September 30, 2025, adjusted EBITDA was $1.3 million as compared with $143,000 in the same period in 2024. This significant improvement in adjusted EBITDA from the prior year quarter reflects the positive impacts of our restructuring activities as well as improved efficiencies and productivity in our manufacturing facilities as noted in Jay's prior comments. In our press release issued today, we presented non-GAAP results, including trailing 12-month financial data and EBITDA. For the 12-month period ended September 30, 2025, net sales were $116.7 million, as compared with $135.6 million for the 12-month period ended September 30, 2024. In addition, adjusted EBITDA for the 12-month period ended September 30th, 2025 was $0.7 million as compared with $5.9 million for the 12-month period ended September 30th, 2024. As we have noted over the past year, we have experienced revenue and resulting earning headwinds from the change in customer ordering patterns, the number of device customers post-COVID rebalancing of inventory levels, and delays in aerospace and defense for programs moved from Blue Earth to Bemidji. We firmly believe that we have overcome these headwinds, as demonstrated by our financial results over the past two quarters, and are very optimistic about the remainder of 2025 and 2026. Our top financial priorities remain unchanged. First, we are extremely focused on continuing to strengthen our balance sheet, including our plan to further reduce our inventory investments in 2025, as well as close a new asset-backed line of credit in early 2026. Next, we are focusing on driving efficiencies in our manufacturing processes, especially for those programs we have transferred over the past year to new facilities to deliver sustainable, long-term EBITDA growth, as well as driving improvements in free cash flow. We believe our performance over the past few quarters reflects the outcome of our hard work. With that, I'll turn it back over to Jay for his closing comments. Jay?

Thanks, Andy. Before we open the call up to your questions, I want to highlight, once again, three related areas that together serve our customers and help advance Nortec's corporate stewardship. Nortec's engineering expertise, product innovation focus, and sustainability plans. As for engineering expertise, we have a dedicated engineering services team focused on optimizing manufacturability, serviceability, supply chain risk mitigation, and cost efficiency for our customers. Our three-tier cost structure across the US, Mexico, and China allows us to quickly adopt our global engineering resources to fit our customers' changing needs. A core goal of our long-term strategic plan focuses on unique innovation This is somewhat unusual for most contract manufacturers. Nortec's engineering capabilities and innovation skills advance our research and development activities, especially in fiber optic technology, including power over fiber. By transmitting power over optical fiber cable, Nortec eliminates the need for a separate local power source on cables that are used in medical devices and imaging where electromagnetic interference, or EMI, must be minimized. Additionally, in satellites, aircraft, or military systems, fiber can deliver power to isolated or shielded components where EMI is also a concern. At the simplest level, the vast majority of Nortec's products provide complex custom digital connectivity solutions that transmit data and power in various applications. These components, in turn, enable connected devices and sensors to collect, parse, transmit, and receive data. More and more often today, that 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. For Nortec, we see AI capabilities as a clear opportunity to streamline and improve our processes, make our employees more productive, and serve our customers better. Our pivot to more fiber optic technology improves product performance for our customers by offering unparalleled speed and reliability. It also aligns with global sustainability goals we share with many of those customers. When compared with traditional copper, fiber optics offer dramatic environmental benefits both during production and operations, including improved energy efficiency and less material usage. while significantly decreasing the carbon footprint of the complex cables we manufacture. Nortec's aerospace and defense customers are exploring fiber optic technology due to these key advantages, reduced size, weight, and power requirements, immunity to electromagnetic interference, and greater ruggedization in harsh environments. Harsh environments, of course, are very common for aerospace and defense applications. Nortec has a proud history of serving these customers' unique needs, dating back roughly 30 years. It's the smallest of our four core markets by net sales, but is our fastest-growing segment, and it's very important for both diversification and future growth. Our contributions to our national defense are a source of great pride for the Nortec team. Every year, we make a point of recognizing Nortec's veterans and all the veterans in our families and communities as we did this past Tuesday on Veterans Day. Most of the cables we produce today for aerospace and defense applications are traditional cables common in legacy defense systems such as shipboard missile launchers for the Navy. In conversations with our aerospace and defense customers, we see increasing interest in more modern warfare components such as ruggedized fiber optics, MT38999 connectors, which would be applied in wearable technology and tethered drones, among other uses. Nortec is well-positioned to capitalize on this increasing interest with our advanced fiber optic capabilities. Our technologies align perfectly with the industry's move toward more efficient and reliable fiber optic solutions to provide AMI-immune high-speed data transmission and power delivery in all-in-one hybrid cable. By integrating digital diagnostics with fiber optic cables, we are able to generate real-time cable and system performance data These digital diagnostic cables advance our customers' ability to monitor their systems and devices to evolve from preventive maintenance to predictive maintenance to minimize downtime and costs. With our intellectual property in fiber optic and digital technologies, Nortec is well aligned with projected future demand for fiber products. We're also taking a forward-looking stance on materials, shifting focus from copper to fiber to mitigate cost pressures and align with our long-term strategy to produce lighter, faster, and more sustainable and more affordable technology. In closing, we are excited about technological developments across all of our markets and expect them to support our continued sales momentum in 2025 and beyond, aided by stabilization in the supply chain and customer orders. As we wrap up our prepared remarks, let me summarize three takeaways from today's call. First, we are operationally and financially realizing positive results from our restructuring activities in 2024 and early 2025. Second, we remain cautiously optimistic of our positioning in the near-shoring landscape. And finally, we are making investments in our regulatory capabilities to leverage future growth. We'll now open up the call for your questions. Paul, go ahead and open up the lines.

Thank you, at this time we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

And one moment please while we poll for questions. Once again, that's star one if there are any questions today. There were no questions from the lines, and I will now turn the call back to Jay Miller for closing remarks.

Thank you, Paul, and thanks to everyone for joining us today. We look forward to talking to you in March when we report our fourth quarter of 2025 results. Again, thank you and goodbye.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.