Nortech Systems Q4 2024 Earnings Call Transcript

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March 31, 2025

There are 3 speakers on the call.

Operator

afternoon, ladies and gentlemen, and welcome to the Nortek Systems Incorporated Fourth Quarter twenty twenty four Earnings Conference Call. With me on the line today are Jay Miller, President and Chief Executive Officer and Andrew LaFrenz, Chief Financial Officer and Senior Vice President of Finance. 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 Andy LaFrentz.

Speaker 1

Thank you, John. I would also like to welcome everyone to today's conference call. Jay will begin the call with a review of our operations, recent developments and business outlook. Then I will review Nortek's fourth quarter twenty twenty four financial results before turning it back over to Jay for his closing comments. Then we will be open for your questions.

Speaker 1

Before we continue, please note that statements made during this call may be forward looking statements 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 on this call. These risks, including those that are detailed in our most recent SEC filings, may be amended or supplemented. The 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

And with that, I will turn it over to Jay for his opening comments. Jay?

Speaker 2

Thank you, Andy, and good afternoon, everyone. We're glad you could join us today. In our last earnings call, we noted customer order headwinds, which we expected to impact our near term orders and revenue. Our third and fourth quarter net sales were impacted by a continuing pattern of customers delaying product purchases, reducing their on hand inventories and charting order to fulfillment timelines. These impacts have been a theme at many contract manufacturers over the past couple of quarters.

Speaker 2

Additionally, fourth quarter results in our aerospace and defense market were negatively impacted by the closure of our Blue Earth facility and the transfer of our customer programs to Bemidji as we experienced unexpected delays in customer approvals. While we fully expect our aerospace and defense business to get back to normal in the second half of twenty twenty five, we do expect this headwind to continue to impact revenues to a decreasing level in the first quarter and the first half of twenty twenty five. Meanwhile, the imposition of tariffs may significantly impact contract manufacturers with facilities in China and Mexico, including Nortek. While the tariffs with Mexico are currently uncertain, it is important to note that Nortek is not the importer of record into The United States for goods produced in Mexico as we operate under a maquiladora structure for our customers. This reduces our direct exposure to these tariffs.

Speaker 2

However, this may cause our customers to evaluate their supply chain model. Throughout this period of uncertainty, we remain vigilant and hand to hand with our customers, we are closely monitoring any potential changes that could affect our operations and the operations of our customers. As for China, as we have mentioned on past calls, much of our production work there is built in country for country and near shoring approach to better serve customers in the global market with reduced shipping costs and time. Unfortunately, we had the foresight to start implementing this strategy faster than most of our competitors. As a result, our China tariff exposure is primarily related to parts imported from China rather than larger finished goods imported from China.

Speaker 2

As tariffs on Chinese imports may increase, we are closely monitoring these impacts on our business and adjusting customer pricing as well as our sourcing strategy as needed to mitigate any adverse effects. All in all, we are working hard and have all hands on deck to proactively monitor this shifting landscape, trade policies and uncertainties in the current geopolitical environment, which may significantly impact our global business operations. Regarding our cost structure, we also continue to be very diligent in managing operating costs with an eye on long term optimization of our facilities. In addition to the Blue Earth closure, we recently completed a 30% reduction in our Maple Grove lease space. Those facility optimization activities are behind us now and will result in at least $1,600,000 in annual savings in 2025 and beyond.

Speaker 2

We have also taken actions during the first quarter of twenty twenty five to further reduce our headcount based on our current operating metrics. The backdrop of the past nine months has provided us with opportunities to work closely with customers to provide solutions for the new normal supply chain near shoring. These very important strategic customer discussions revolve around shorter lead times and on time delivery strategies along with deeper customer partnerships, which are fundamental to our long term growth strategy. Over the past several years, we have taken a number of steps to invest in core infrastructure and world class leadership team to drive our long term growth strategy. We continued this leadership investment in 2024 as we completed fully staffing our industry specific business development team early in the year.

Speaker 2

This team is performing at a very high level and driving impressive business quotes and opportunities. Further, to align our organization with the expected accelerated new business growth, we recently completed the seamless realignment of our quoting process and our new product introduction engineering teams. This realignment will allow the company to serve our customers better by delivering high quality products and services on time with shorter lead times. This process is a natural evolution of our business and entails changes in organizational structure to enhance customer intimacy. A key takeaway from today's call and I want to make this very clear is that we are very bullish on the future of Nortek and continue to make investments to accelerate long term growth.

Speaker 2

While we clearly recognize that it was a difficult and disappointing quarter, we firmly believe that our decision to consolidate our North American footprint as well as moving customer programs to other manufacturing locations to better fit customers' needs will improve our long term EBITDA generation. These numerous strategic activities have been hard and have stretched our employees, but we all know that these changes are important and we're happy that the whole team came together and had the wherewithal to get them done expeditiously. I continue to be impressed by how our customers live out Nortek's values of teamwork, excellence, commitment, innovation and integrity every day. Once again, the whole Nortek team deserves our sincere appreciation. Our three tier global strategy of manufacturing in The U.

Speaker 2

S, Mexico and China gives Nortek's customers flexibility to improve their own competitiveness by moving quickly in response to new market global global market dynamics. We can move production among facilities based on factors like cost, intellectual property management and operating operational requirements, including ever improving on time delivery of high quality products with shorter lead times. Our customer and business development teams and engineers evaluate each customer's needs to determine the most suitable location, which may also change over the course of our product lifecycle. Next, I'll turn it over to Andy for a more in-depth look at our financial results. Andy?

Speaker 1

Thank you, Jay. In the next few minutes, I will provide certain details of our financial performance in the fourth quarter of twenty twenty four. I would encourage you to review our Form eight ks containing our press release and non GAAP measures as well as our report on Form 10 ks filed earlier this morning with the U. S. Securities and Exchange Commission.

Speaker 1

As a continued theme, we have historically noted that our individual quarterly performance can affect be affected by outside factors. These might include timing fluctuations, including seasonal fluctuations, customer shipments and supply chain issues. Any of these could materially impact a particular quarter either positively or negatively. Consequently, we believe it's important and appropriate to review our business on a twelve month basis rather than focusing on quarterly performance. This approach will help normalize these potential anomalies and offer a better gauge of our strategy's long term success.

Speaker 1

So today, while I'll focus most of my comments on our fourth quarter and year end 2024 results, I will provide some comparisons for the year ended 12/31/2024, compared with the year ended 12/31/2023. Net sales for the fourth quarter of twenty twenty four totaled $28,600,000 This represents a decrease of 20.6% from the net sales of $36,100,000 in the fourth quarter of twenty twenty three. For the year ended 12/31/2024, net sales were $128,100,000 as compared with $139,300,000 in the same prior year period, a decrease of 8%. During 2024, we realized headwinds with our industrial customers as a result of softness in this market, which is similar to results published by other contract manufacturers as well as the delayed product launches. In 2024, we have experienced revenue headwinds from our medical customers as they are aggressively reducing their inventory investments.

Speaker 1

We have also noted several medical product introductions being pushed out. As previously discussed, we experienced lower aerospace and net sales in the fourth quarter of twenty twenty four as we addressed unexpected requirements to transfer our Blue Earth production to our Bemidji location. Further, as Jay noted in his remarks, we have realized reduction in customer backlog in the fourth quarter of twenty twenty four as customers have changed their purchasing patterns and are requesting shorter lead times with new orders. Of course, with shorter lead times comes smaller backlogs. Fourth quarter of twenty twenty four gross profit totaled $2,800,000 or 9.9% of net sales compared with gross profit of $6,800,000 or 18.9% of net sales in the same prior year quarter.

Speaker 1

For the year ended 12/31/2024, we realized gross profit of $16,700,000 or 13.1 percent of net sales as compared with $23,100,000 or 16.6% of net sales in the year ended 12/31/2023. The reduction in gross margin percentages in the 2024 periods is largely due to lower net sales and resulting reduced facility utilization and to lesser extent incremental training and other transitional costs related to the movement of Blue Earth's production to Bemidji by the end of twenty twenty four. Operating expenses in the fourth quarter and the year ended 12/31/2024, are lower than the prior year periods as a result of lower incentive compensation accruals and expense management, which offsets increased payroll related costs. In 2024, we incurred $571,000 of restructuring costs related to the retention bonuses and other costs associated with the Blue Earth closure. We currently do not anticipate any significant non cash asset impairment charges related to this closure.

Speaker 1

We paid substantially all these restructuring costs in 2024. Moving to the cash flow statement for the year ended 12/31/2024, net cash used in operating activities totaled $2,300,000 as compared with cash provided by operating activities of $1,800,000 in the same period in 2023. While the timing of customer and vendor payments impact operating cash flows for the periods, we purposely increased inventory levels in anticipation of the Blue Earth facility transition to Bemidji. We plan to focus on reducing our investment in inventory during 2025 by several million dollars. As noted in our press release distributed this morning, we used earnings before interest, tax, depreciation and amortization or EBITDA as well as adjusted EBITDA, which does not reflect the restructuring charges we incurred through the fourth quarter related to our Blue Earth closure as key performance indicators to manage our business.

Speaker 1

While EBITDA and adjusted EBITDA are non GAAP measures, we believe that 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 kind principles and EBITDA as well as adjusted EBITDA. For the fourth quarter ended 12/31/2024, adjusted EBITDA was a negative 585,000 as compared with a positive $3,200,000 for the same period in 2023.

Speaker 1

Year end 2024 adjusted EBITDA is $2,100,000 as compared with $8,000,000 for the year ended 12/31/2023. The decrease in adjusted EBITDA is the result of lower net sales and related gross profit. Turning to the balance sheet, as of 12/31/2024, cash and cash equivalents totaled $916,000 down from $1,700,000 dollars as of 12/31/2023. The fluctuation in cash balances reflect the timing of cash receipts, expenditures and credit line borrowings. We ended the fourth quarter of twenty twenty four with $6,300,000 of borrowing capacity under our line of credit, which was amended in March of twenty twenty five to address the previously noted near term impacts of revenue headwinds.

Speaker 1

Accounts receivable as of 12/31/2024 were $14,900,000 down from $19,300,000 as of December of twenty twenty three. This is in line with our strong fourth quarter sales in 2023, the expected timing of customer payments and strong collection outcomes from our staff. Inventories were $21,600,000 as of 12/31/2024, as compared to $21,700,000 as of 12/31/2023. The slight decrease in inventories, which also impacted by the Blue Earth facility close, reflects the buildup of inventory balances in anticipation of completing that move. We are focusing on reducing our investment in inventory over the next several quarters as we mirror our purchasing activities to customer ordering patterns.

Speaker 1

Our contract asset, which represents revenue earned but not yet billed to customers, decreased slightly to $13,800,000 as of 12/31/2024, as compared with $14,500,000 at the end of 'twenty three. This decrease reflects the timing of customer shipments. In our press release issued early today, we have also presented non GAAP results including trailing twelve months financial data, EBITDA and adjusted EBITDA. For the year ended 12/31/2024, net sales were $128,100,000 as compared with $139,300,000 in year ended 12/31/2023. And adjusted EBITDA was $2,100,000 in 2024 as compared to $8,000,000 in December of twenty twenty three.

Speaker 1

Our top financial priorities for 2025 remain unchanged. First, we are extremely focused on continuing to strengthen our balance sheet. We made good progress in our receivable collections in 2024 and plan to reduce our inventory investments in 2025. Next, we will take further advantage of opportunities to align our operations and infrastructure with the market demand that we are seeing to deliver sustainable long term EBITDA growth as well as driving improvements in free cash flow. Coupled with disciplined lean operations, execution, expense management and R and D innovation, we believe Nortek can deliver on our objectives.

Speaker 1

With that, I will turn it back to Jay for his closing comments. Jay?

Speaker 2

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 Nortek's corporate stewardship, our engineering expertise, product innovation focus and sustainability plans. As for engineering expertise, we have a dedicated engineering services team that is focused on enhancing manufacturability, serviceability, supply chain risk mitigation and cost efficiency for our customers. Our three tier cost structure across The U. S, Mexico and China allows us to quickly adopt our global engineering resources to fit our customers' changing needs.

Speaker 2

A core goal of our long term strategic plan focuses on unique innovation. This is somewhat unusual for most contract manufacturers. Nortek's engineering capabilities and innovation skills further our research and development activities with advancements like the expanded Beam Extreme Fiber Optic Technology or EBX that we announced in January. EBX is designed for digital data transmission through the very complex custom cable systems we manufacture and offers improved speed, reliability and security when compared to traditional copper. We're also excited about our active optical extreme or AOX, a hybrid power plus data fiber optic technology that works in sophisticated magnetic environments, a testament to our team's dedication to innovation, hard work and excellence in the field of digital connectivity solutions.

Speaker 2

AOX represents a significant advancement in our product offerings and underscores our commitment to providing state of the art solutions that meet the evolving needs of our clients to deliver products that offer lighter weight, lower cost and ruggedized solutions sustainably. At the simplest level, the vast majority of Nortek's products provide complex custom digital connectivity solutions that transmit data and power in various applications. As you may know, the Internet of Things or IoT integrates a variety of electronic components such as microcontrollers, sensors, actuators and connectivity modules. These components in turn enable IoT connected devices to collect, parse, transmit and receive data. More and more today, that data is being evaluated and analyzed using human intelligence and combined artificial and human intelligence for improved performance and data management for our customers as well as for their customers.

Speaker 2

For Nortek, we see AI capabilities as a clear opportunity to streamline and improve our processes, make our employees more productive and serve our customers better. We'll hear more about you will hear more about our innovations and AI in future conference calls. More data needs better data pipelines and that's where Nortek comes in. Technology like our EBX smart cables helps collect and distribute this data faster, more cost effectively and more securely securely across these sophisticated networks. We see strong opportunities of growth here.

Speaker 2

Our pivot to more fiber optic technology improves product performance for our customers by offering unparalleled speed and reliability. It also aligns with sustainability goals, thus sustainability goals that we share with many of our customers. When compared with traditional copper, fiber optics offers significant environmental benefits during both production and operations, including improved energy efficiency and less material usage, while decreasing the carbon footprint of the complex cables that we manufacture. One might think that our customers no longer care about their carbon footprint. We're staying very close to our customers and we know they still do care for a range of important business reasons.

Speaker 2

We also know that our aerospace and defense customers are adopting 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 in aerospace and defense. Nortek has a proud history of serving these customers' unique needs dating back roughly thirty years. It's the smallest of our four core markets by net sales, but very important for our diversification and future growth. Our contributions to our national defense are also a source of great pride for Nortek's employees.

Speaker 2

The majority of our aerospace and defense cables are still with traditional type common and legacy defense systems, such as shipboard missile launchers for the Navy. But we are looking to the future with ruggedized fiber optics and evolving with our customers. 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 and supply chain and customer orders. Nortek is well positioned to capitalize on these trends with our fiber optic capabilities. Our EVX and AOX technologies align perfectly with the industry's move towards more efficient, reliable fiber optic solutions.

Speaker 2

EVX offers non physical contact connectors for applications in harsh environments, while AOX combines fiber optics with copper to provide EMI, immune high speed data transmission, low speed signals and power delivery 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 them evolve from preventive maintenance to predictive maintenance to minimize downtime and costs. Our commitment to innovation and sustainability positions us as a leader in the fiber optics industry ready to meet the growing demands for high speed, reliable and environmentally friendly connectivity solutions. We will now open up the call for your questions.

Speaker 2

John, please open the lines.

Operator

Certainly. At this time, we will be conducting a question and answer Okay. It appears we have no questions in queue. I'd like to turn the floor back to Jay Miller for any closing remarks.

Speaker 2

Thank you, John, and thanks to everyone for joining us today. We look forward to talking with you in May when we report our first quarter twenty twenty five results. Again, thank you and goodbye.

Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

Speaker 1

Thanks, John.

Operator

Thank you, gentlemen. Take care.

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Earnings Conference Call
Nortech Systems Q4 2024
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