Nortech Systems Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 3 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to the Nortek Systems Second Quarter 2023 Earnings Conference Call. With me on the line today are Jay Miller, President and Chief Executive Officer and Alan Nordstrom, Acting Chief Financial Officer. All lines have been placed on a listen only mode and the call will be open for questions and comments following the management presentation. At this time, it is my pleasure to turn the call over to Alan Nordstrom.

Speaker 1

Thank you, Holly. I'd like to welcome everyone To today's conference call, Jay will begin this call with a review of our business, current trends and several strategic initiatives. Then I will review Nortek's Q2 2023 financial results before turning it back over to Jay for his closing comments. Then we'll open up the call for your questions. But before we continue, please note that statements made during this call and Q and A session may be forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 1

Forward looking statements include expected revenue, gross profit, gross margin, EBITDA, free cash flow, net income, financial performance, future plans, developing technologies, 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 on this call. These risks, including those that are detailed in our most recent Form 10 ks most recent Form 10 Q filed with the SEC may be amended or supplemented. These statements made during this conference Call are based upon information known by Nortek 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 Nortek's complete Safe Harbor statements in our SEC filings.

Speaker 1

With that, I'll turn it over to Jay for his opening comments.

Speaker 2

Thank you, Alan, and good afternoon, everyone. We appreciate you joining us. I know we have some employees listening in as well, and I'd like to start off my remarks by thanking all of our Global Nortek team members. I'm very proud to lead such a dedicated team here in Minnesota as well as in Mexico and China, Committed to serving our customers during difficult times like the global pandemic and subsequent supply chain disruptions. While both of these specific situations have improved significantly, we know that Nortek must always be prepared to face tomorrow's challenges.

Speaker 2

I have confidence in our team members' willingness and ability to consistently deliver outstanding performance that helps differentiate Nortek from our competition. Also on behalf of the entire Nortek team, I want to express appreciation for Nortek's many supplier partners who work closely with us As we serve our mission critical medical, industrial and defense customers, we truly could not do our jobs without these strong relationships with our supplier Right at the beginning, please note these key takeaways from this call. Our bookings remain very strong and our backlog is continuing to climb. Revenue continues to grow and our profitability has grown even faster. In fact, over the previous 10 quarters, last 12 month revenue has grown by over 40%.

Speaker 2

Meanwhile, our last 12 month gross profit adjusted for one time events has nearly tripled And our adjusted gross margin percentage has roughly doubled. Most importantly, our last 12 month adjusted EBITDA has By over $9,000,000 from a negative $2,300,000 to a positive $6,800,000 Humbly, we have to admit That's pretty amazing trend. Turning now more specifically to our 2nd quarter performance. We continue to achieve solid results In revenue, EBITDA, bookings and backlog, even over strong prior year comparisons. Bookings came in at the highest level in the past 4 quarters at $37,000,000 Our total backlog topped 100,000,000 which continues to surpass our expectations as the post pandemic and supply chain crisis market is stabilizing.

Speaker 2

With strong bookings, we are resetting our expectations back to steady backlog growth sooner than we had anticipated. This, of course, is great news. In recent quarters when supply chain challenges were more acute, certain customers ordered parts ahead, which meant that we shipped more in those quarters than we would have otherwise. Now those customers are working down their inventories, which means we shipped a little less in the Q2 generally than we would have otherwise. History indicates that these factors tend to balance out, and we are guardedly optimistic that the pendulum is starting to swing back.

Speaker 2

Looking ahead at the rest of 2023, our positive results at the halfway mark support the upbeat outlook Our large customers in particular are communicating. They are expecting a pretty solid year with an outlook I would characterize as cautiously optimistic. One major customer recently cited increasing global demand as the key driver of their revenue increase. Beyond 2023, there is still some shared uncertainty about next year, including wondering what a possible recession might look like and how long it could last. However, recent macroeconomic news is encouraging, such as sustained labor market strength and easing inflation.

Speaker 2

This news has influenced higher GDP predictions for the remainder of 2023 by some economists And the economy seems on track for relatively soft landing. In this dynamic global economy and industry, Nortek's relatively small size compared to much larger EMS firms can be an advantage. We are more nimble and better able to adjust more quickly to changing conditions and market forces. I'll conclude my opening comments with 2 examples of Nortek's agility and prudent approach. 1st, strategic innovation.

Speaker 2

To stay ahead of market trends and better serve our customers, we are carefully investing in new technologies that can differentiate Nortek and provide a competitive advantage. Two examples include the active optical extreme and Flexverity Extreme Platforms. To help foster innovation like this, Nortek established the Science and Technology Committee of our Board several years ago. The existence of this Board Committee makes Nortek somewhat unique. Indeed, just 56 Fortune 500 Companies have such committees according to a Wall Street Journal article in May of 2023.

Speaker 2

It was gratifying to be included in this article With Nortek recognized for our focus on innovation and its impact on winning new business. The article noted that Nortek stock price More than doubled in the past 3 years, far exceeding the 44% gain of the S and P 500. 2nd, Nortek is committed to being a better steward of our planet. As I mentioned on our last call, we are Proactively steering our focus on environmental, social and governance or ESG objectives. In our initial baselining steps, Our U.

Speaker 2

S. Plants are initiating measurements of Nortek's Scope 1 and Scope 2 emissions, which encompass both direct emissions and indirect emissions from energy repurchase. While focusing on our planet's long term future Through ESG efforts and long term and the long term value of Nortek, we simultaneously remain committed to optimizing quarterly financial returns for our shareholders. We firmly believe that these objectives can coexist and also mutually enhance each other. We also expect that aligning with ESG goals will become increasingly crucial for business in our chosen markets.

Speaker 2

Before I hand the call back off to Alan for our financial review, I should mention that our search for Nortek's next Chief Financial Officer is underway. We believe we are in a good position right now with our financial reporting structure and procedures in place. Alan is filling the Interim CFO role very capably and the finance and accounting team is operating at a very high level. We are taking the necessary time to make the right hire, realizing the next CFO will play a vital role in supporting our growth plans. Now for more in-depth financial discussion, I'll turn the call back over to Alan.

Speaker 1

Thank you, Jay, and thanks everyone for joining us today. In the next few minutes, I'll provide certain details of our financial performance in the 2023 Q2, but I would encourage you to review our latest Form 10 Q, which we filed earlier as it contains far more information about our business operations and financial performance Before I begin our financial review, I'd like to take a minute to again highlight the new chart we added to our press release last quarter and which we will include each quarter going forward. It provides 10 quarters of LTM or last 12 months Historical data for 4 key metrics: sales, gross profit dollars, gross margin percent and EBITDA. As we have pointed out in the past, we believe that our individual quarters can be affected by outside factors. These might include Timing fluctuations, customer shipments and supply chain issues.

Speaker 1

Any of these during a given reporting cycle could temporarily disrupt our momentum. Consequently, we believe it's more appropriate to review our business on a longer term 12 month basis rather than a strict calendar year. This approach will help normalize these potential anomalies and offer a better gauge of our company's long term success. So Switching to our Q2 financial performance, as Jay noted, we made progress in several key performance areas with quarterly revenue up nearly 8% from the prior year period. Again, we're particularly pleased by this revenue momentum as this quarter's year over year growth continues to come on a strong prior year comparable.

Speaker 1

We also saw sustained year over year backlog levels, increases in the year over year gross margin and solid levels of net income and EBITDA. Over the past several quarters, we have taken necessary steps to create a firm financial platform that can be flexible and respond quickly to changing Macroeconomic conditions. While we are constantly vigilant to the negative impacts of inflation, we are encouraged as our customers are reporting fewer supply chain disruptions And we are more optimistic given the continued sales momentum we saw in the 2nd quarter. Evidence of this renewed sense of Optimism can be found in our total backlog level last quarter and our new record level of bookings. Total backlog continues to exceed 100,000,000 Coupled with the strong bookings levels and our solid foundation, we are confident that we can maintain momentum into the second half of the year.

Speaker 1

Increased shipments during the quarter resulted in orders moving through the pipeline quicker and causing backlog levels to start reaching a steady state. In the near term, we expect backlog levels to remain relatively constant with future growth coming from accelerated contributions from both new and existing customers as well as technology innovations. In the balance of my comments, I'll review key areas which drove our Q2 financial performance. They include: 1st, a review of certain factors impacting our income statement 2nd, selected items which influence Nortek's cash flow statement And lastly, a brief review of the balance sheet. As usual, if you have specific questions about these items or any of our quarterly financial results, I'll be happy to address them during the Q and A portion of this afternoon's call.

Speaker 1

In Q2 2023, Near record revenue totaled $35,000,000 This represents a $7,700,000 increase from revenue of $32,500,000 in the Q2 of 2022 And it was up slightly from the prior quarter, which increases with increases coming from higher volume and previous pricing actions. Again, this performance was particularly noteworthy as it compares to a strong performance in the prior year period. In fact, we've been able to sustain revenue growth 2023 revenue performance was driven by growth in our medical as well as our aerospace and defense categories. In the Q2, the medical market was up $2,100,000 or 11.2% as compared to 2022, with the majority of the increase coming from medical component products. In the 2nd quarter, revenue from the aerospace and events market was up $829,000 or 18 percent from the prior year.

Speaker 1

Included in the financial performance for the current year, gross profit Total $5,500,000 or 15.6 percent compared to gross profit of $5,000,000 or 15.4 percent in the prior year quarter. 2nd quarter 2023 operating expenses totaled $4,400,000 a 10% increase from the Q2 of 2022 operating expenses of $4,000,000 and flat on a sequential basis. The $396,000 increase in year over year operating expense was driven primarily by a $437,000 increase in 2nd quarter general and administrative expenses from the prior year quarter. The majority of the increase in year over year G and A costs were due to higher professional fees and increased labor costs. Finally, We had a reduction of $34,000 year over year research and development costs.

Speaker 1

We believe that this level of investment was sufficient to support new technologies such as the AOX cable platform and the FlexBarade Extreme technology. As a result of our performance in the Q2 of 2023, Net income totaled $635,000 or $0.22 per diluted share in line with the prior quarter and Q2 of 2022. Through the first half of twenty twenty three, net income totaled $1,300,000 versus $857,000 in the prior year first half. Also, all employee retention credits or ERC have been received as of June 30, 2023 and our balance sheet and cash flow statements reflect that. Next, in the Q2 of 2023, net cash used by operating activities was 1,400,000 Receivables at June 30, 2023 were $17,400,000 up from receivables of $16,200,000 in the prior quarter and $16,000,000 at year end.

Speaker 1

This is in line with the seasonal pattern that we have seen evolve over the past couple of years. The first half of the year has been typically marked by higher receivable levels, While cash collections accelerated during the summer months and second half receivable levels declined. During the Q2, increased shipments As well as less pressure to respond to global supply chain shortages, capped inventory levels at $21,100,000 relatively flat We ended the Q2 of 2023 with a $5,300,000 of borrowing capacity on our $16,000,000 line of credit with Bank of America. This credit agreement is important in giving Nortek the flexibility to manage through the headwinds we have experienced in the last few years and the previously mentioned seasonal fluctuations we see in our receivable, receivable balances and collections. At June 30, 2023, cash and equivalents totaled $1,900,000 down from $2,500,000 at the ended the prior year.

Speaker 1

However, we believe that our existing financing arrangements, anticipated cash flows from operations and cash on hand We will be sufficient to satisfy our working capital needs in 2023 as well as any capital expenditures and debt repayments. We're confident that we have created a solid financial base to take this company into the future. On a final note, let me reiterate that our top financial priorities 2023 remain unchanged. First, we are extremely focused on continuing to strengthen our balance sheet and mitigate impacts we may see from changes in the economic environment or seasonality. Next, we will take further advantage of Our confidence in results from the growth momentum we saw in 2022 that has sustained thus far in 2023.

Speaker 1

Coupled with disciplined lean operation execution and R and D innovation, we believe Nortek can deliver on our objectives. With that, I'll turn it back over to Jay for his closing comments.

Speaker 2

Thanks, Alan. Early in this call, I mentioned our efforts around 2 key initiatives, Innovation and ESG. I'll conclude my remarks by citing these other initiatives, the Internet of Things or IoT and artificial intelligence or AI. We know there are opportunities for Nortek to leverage IoT and AI applications to enhance our services, Efficiency and Financial Scalability. While chatGBT is getting most of the media headlines, AI and machine learning and IoT have actually been around for a number of years, but the opportunities and awareness of IoT and AIs potentially are certainly ramping up.

Speaker 2

As with our ESG approach, we intend to lead and not just follow with IoT and AI. What could IoT and AI implementation look like in Nortek Systems? We're in the early stages, but here are some applications our team will be analyzing. For improved quality control, AI and IoT can be leveraged proactively in the detection of manufacturing issues to ensure better product performance and customer satisfaction. For enhanced engineering support, IoT and AI can streamline and design assistance we offer customers for their PCBAs and high level assemblies, followed by accelerating our production setup.

Speaker 2

And when future component charges happen, IoT and AI can help us more quickly identify and source substitute parts. By harnessing the potential of IoT and AI, Nortek can not only accelerate manufacturing processes and improve product quality, but also expand our services and reinforce Nortek's competitive advantages. Finally, before our Q and A session, the key takeaways I noted earlier bear repeating. Our bookings remain very strong And our backlog has continued to climb. Revenue continues to grow and our profitability has grown even faster.

Speaker 2

Over the previous 10 quarters, trailing 12 month revenue has grown by over 40%. Meanwhile, our last 12 month gross profit adjusted for one time events has nearly tripled and our adjusted Gross margin percentage has roughly doubled. Most importantly, our last 12 month adjusted EBITDA has improved by over $9,000,000 from a negative $2,300,000 to a positive $6,800,000 We're very proud of these numbers. That concludes our presentation. And now we'll open the call up for questions.

Speaker 2

Operator?

Operator

There are no questions in queue.

Speaker 2

Thank you, Holly, and thanks to everyone for joining us today. We look forward to talking to you next in November with our Q3 2023 results. Thank you and goodbye.

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Key Takeaways

  • Over the past 10 quarters, Nortek’s trailing 12-month revenue has grown by over 40%, adjusted gross profit has nearly tripled, and adjusted EBITDA has swung from a negative $2.3 million to a positive $6.8 million.
  • In Q2 2023, revenue rose nearly 8% year-over-year to $35 million, bookings reached $37 million—the highest in four quarters—and total backlog topped $100 million, signaling continued demand strength.
  • Growth was driven by medical components (up 11.2%) and aerospace & defense (up 18%), with supply‐chain pressures easing and customer inventories normalizing for steadier shipments ahead.
  • Nortek is investing in strategic innovation with the AOX cable and Flexverity Extreme platforms, and advancing its ESG agenda by measuring Scope 1 and Scope 2 emissions to enhance sustainability.
  • The balance sheet remains solid, with $5.3 million of borrowing capacity on its credit line, disciplined working capital management, and an ongoing search for a permanent CFO to support growth plans.
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Earnings Conference Call
Nortech Systems Q2 2023
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