What changed in NORTECH SYSTEMS INC's 10-K — 2022 vs 2023
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Paragraph-level year-over-year comparison of NORTECH SYSTEMS INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.
+176 added−132 removedSource: 10-K (2024-03-20) vs 10-K (2023-03-17)
Top changes in NORTECH SYSTEMS INC's 2023 10-K
176 paragraphs added · 132 removed · 102 edited across 7 sections
- Item 7. Management's Discussion & Analysis+68 / −59 · 38 edited
- Item 1A. Risk Factors+78 / −44 · 36 edited
- Item 1. Business+24 / −23 · 22 edited
- Item 5. Market for Registrant's Common Equity+3 / −3 · 3 edited
- Item 2. Properties+1 / −1 · 1 edited
Item 1. Business
Business — how the company describes what it does
22 edited+2 added−1 removed14 unchanged
Item 1. Business
Business — how the company describes what it does
22 edited+2 added−1 removed14 unchanged
2022 filing
2023 filing
Biggest changeAll of our facilities are certified to one or more of the industry standards, including International Standards Organization (“ISO”) 9001, ISO 13485, and Aerospace Systems (“AS”) 9100, with most having additional certifications based on the needs of the customers they serve.
Biggest changeMost of our net sales are derived from products built to the customer's unique design specifications. Our quality systems and processes are based on ISO standards with all facilities certified to at least one of the following: ISO 9001, ISO 13485 or AS9100. These certifications and registrations provide our customers assurance of our capabilities and proven processes.
We are committed to continuous improvement and have invested in training our people to identify and act on improvement opportunities. We maintain a diversified customer base and expand into other capabilities and services when there is a fit with our core competencies and strategic vision. Marketing We concentrate our marketing efforts in the Medical, Aerospace & Defense and Industrial markets.
We are committed to continuous improvement and have invested in training our people to identify and act on improvement opportunities. We maintain a diversified customer base and expand into other capabilities and services when there is a fit with our core competencies and strategic vision. Marketing We concentrate our marketing efforts in the Medical, Aerospace and Defense and Industrial markets.
Expenditures relating to compliance for operating facilities incurred in the past have not significantly affected our capital expenditures, earnings or competitive position. 7 Government Regulation As a medical device manufacturer, we have additional compliance requirements.
Expenditures relating to compliance for operating facilities incurred in the past have not significantly affected our capital expenditures, earnings or competitive position. Government Regulation As a medical device manufacturer, we have additional compliance requirements.
We see trends of the low volume, high mix customer demand going to a regional supply base. This is a good fit with our operations in US, Mexico and Asia. We continue to study and investigate other regions and global alternatives to meet our competitive challenges and customer requirements.
We see trends of the low volume, high mix customer demand going to a regional supply base. This is a good fit with our operations in US, Mexico and China. We continue to study and investigate other regions and global alternatives to meet our competitive challenges and customer requirements.
Our customers rely on our experience and capabilities in manufacturing and supply chain to manage and reduce cost over the life cycle of their products. This requires a strong relationship with our customers based on a trusting partnership as we perform as an extension of their operations.
Our customers rely on our experience and capabilities in manufacturing and supply chain to manage and reduce total overall cost over the life cycle of their products. This requires a strong relationship with our customers based on a trusting partnership as we perform as an extension of their operations.
Item 1. Business General Nortech Systems, Inc., (“the Company”, “we”, “our”) organized in December 1990, is a provider of design and manufacturing solutions for complex electromedical devices, electromechanical systems, assemblies and components headquartered in Maple Grove, Minnesota, a suburb of Minneapolis, Minnesota. We maintain facilities and operations in Minnesota in the United States; Monterrey, Mexico; and Suzhou, China.
Item 1. Business General Nortech Systems Incorporated, (“the Company”, “we”, “our”) organized in December 1990, is a provider of engineering design and manufacturing solutions for complex electromedical devices, electromechanical systems, assemblies and components headquartered in Maple Grove, Minnesota, a suburb of Minneapolis, Minnesota. We maintain facilities and operations in Minnesota in the United States; Monterrey, Mexico; and Suzhou, China.
We continue to pursue strategic opportunities that may include acquisitions, mergers, and/or joint ventures with complementary companies to expand our service offering, advance our competitive edge, grow our customer base and increase revenues. Our strategic objectives and our history have been based on both organic and acquired growth.
We continue to pursue strategic opportunities that may include acquisitions, mergers, and/or joint ventures with complementary companies to expand our service offering, advance our competitive edge, grow our customer base and increase net sales. Our strategic objectives and our history have been based on both organic and acquired growth.
Business Segment The Company operates in the Medical, Aerospace & Defense and Industrial markets with over 50% of its revenue coming from medical device and product manufacturing and related engineering services. All of our operations fall under the Contract Manufacturing segment within the Electronic Manufacturing Services (“EMS”) industry.
Business Segment The Company operates in the Medical, Aerospace and Defense and Industrial markets with over 50% of its net sales coming from medical device and product manufacturing and related engineering services. All of our operations fall under the Contract Manufacturing segment within the Electronic Manufacturing Services (“EMS”) industry.
These certifications and registrations provide our customers assurance of our capabilities and proven processes. We are committed to quality, cost effectiveness and responsiveness to customer requirements. To achieve these objectives we have invested in Restriction of Hazardous Substances (lead free) processing, equipment, plant capacity studies, people, enterprise resource planning systems, lean manufacturing and supply chain management techniques at our facilities.
We are committed to quality, cost effectiveness and responsiveness to customer requirements. To achieve these objectives, we have invested in Restriction of Hazardous Substances (lead free) processing, equipment, plant capacity studies, people, enterprise resource planning systems, lean manufacturing and supply chain management techniques at our facilities.
Patents and Licenses Our success depends on our technical expertise, trade secrets, supply chain and manufacturing skills. However, during the normal course of business we have obtained or developed proprietary product requiring licensing, patent, copyright or trademark protection.
Patents and Licenses Our success depends on our technical expertise, trade secrets, supply chain and manufacturing skills. During the normal course of business, we obtain or develop proprietary product requiring licensing, patent, copyright or trademark protection.
Research and Development We perform research and development for customers on an as requested, project and program basis for development of conceptual engineering and design activities as well as products moving into production. We spent approximately $1.5 million and $0.5 million on product research and development in years ended 2022 and 2021, respectively.
Research and Development We perform research and development for customers on an as requested, project and program basis for development of conceptual engineering and design activities as well as products moving into production. We spent approximately $1.2 million and $1.5 million on product research and development in the years ended December 31, 2023 and 2022, respectively.
In addition to industry standard certifications we actively manage quality metrics throughout product life-cycle at all levels of the organization to provide real-time, pro-active support to our customers and their projects. Process validation is performed through the strict phases of installation qualification, operation qualification and performance qualification.
Our Milaca operation is a U.S. Food and Drug Administration (“FDA”) registered facility. In addition to industry standard certifications, we actively manage quality metrics throughout product life-cycle at all levels of the organization to provide real-time, pro-active support to our customers and their projects. Process validation is performed through the strict phases of installation qualification, operation qualification and performance qualification.
We market our services through a mix of traditional marketing outreach, a specialized business development team and independent manufacturers' representatives. For more information on our marketing and service offerings see our web site at nortechsys.com.
We market our services through a mix of traditional marketing outreach, a specialized business development team and independent manufacturers' representatives. For more information on our marketing and service offerings see our web site at www.nortechsys.com. The information on our Company’s website is not part of this filing.
Export sales from our domestic operations represented 4.0% and 3.1% of net sales the years ended December 31, 2022 and 2021, respectively.
Export sales from our U.S. domestic operations represented 4.1% and 4.0% of net sales for the years ended December 31, 2023 and 2022, respectively.
We attempt to overcome these disruptions through advanced supply chain solutions we develop in partnership with our customers, a commitment to strong supplier partnerships and risk management tools. Major Customers Our largest customer accounted for approximately 26.9% of net sales in each of the years ended December 31, 2022 and 2021.
We attempt to overcome these disruptions through advanced supply chain solutions we develop in partnership with our customers, a commitment to strong supplier partnerships and risk management tools. 6 Major Customers Two customers, individually, accounted for at 25.7% and 10.3%, respectively, of net sales for the year ended December 31, 2023, and one customer accounted for 26.9% of net sales for the year ended December 31, 2022.
The information on our company’s website is not part of this filing. 6 Sources and Availability of Materials We currently purchase the majority of our electronic components globally and directly from electronic component manufacturers and large electronic distributors. In 2021 and into 2022, we, like many other companies in our industries, experienced significant supply chain and shipping disruptions.
Sources and Availability of Materials We currently purchase most of our electronic components globally and directly from electronic component manufacturers and large electronic distributors. In 2022 and into 2023, we, like many other companies in our industries, experienced significant supply chain and shipping disruptions.
Human Capital Resources We have 782 full-time and 50 part-time/temporary employees as of December 31, 2022. Manufacturing personnel, including direct, indirect support and sales functions, comprise 781 employees, while general administrative employees total 51. Foreign Operations and Export Sales from Our Domestic Operations We have leased manufacturing facilities in Monterrey, Mexico and Suzhou, China.
Manufacturing personnel, including direct, indirect support and sales functions, comprise 728 employees, while general administrative employees total 47. Foreign Operations and Export Sales from Our Domestic Operations We have leased manufacturing facilities in Monterrey, Mexico and Suzhou, China.
The diversity in the markets we serve is an advantage in dealing with the effects of fluctuations from the economy and competition. In the design phase, we provide technical support, subject matter expertise in design for manufacturing and testing capabilities that allow our customer programs to get to production faster while meeting both their quality and cost requirements.
In the design phase, we provide technical support, subject matter expertise in design for manufacturing and testing capabilities that allow our customer programs to get to production faster while meeting both their quality and cost requirements. Our breadth of manufacturing, technical expertise and experience make us attractive to our broad customer base.
We offer a full range of value-added engineering, technical and manufacturing services and support including project management, designing, testing, prototyping, manufacturing, supply chain management and post-market services. Our manufacturing and engineering services include complete medical devices, printed circuit board assemblies, wire and cable assemblies, and complex higher-level electromechanical assemblies.
We offer a full range of value-added engineering, technical and manufacturing services and support including project management, designing, testing, prototyping, manufacturing, supply chain management and post-market services.
Monterrey, Mexico has approximately $494,000 and $454,000 in long-term assets, and $2,469,000 and $2,800,000 of right of use assets at December 31, 2022 and 2021, respectively. Suzhou, China has approximately $805,000 and $715,000 in long-term assets, and $384,000 and $896,000 of right of use assets at December 31, 2022 and 2021, respectively.
Monterrey, Mexico has approximately $747,000 and $494,000 in long-term assets, and $2,123,000 and $2,469,000 of net operating lease assets as of December 31, 2023 and 2022, respectively. Suzhou, China has approximately $861,000 and $805,000 in long-term assets, and $278,000 and $384,000 of net operating lease assets as of December 31, 2023 and 2022, respectively.
Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections and product field monitoring by the FDA. To support the quality requirements of our Aerospace and Defense market customers, all our US locations are International Traffic in Arms Regulations (“ITAR”) compliant.
Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections and product field monitoring by the FDA.
The majority of our revenue is derived from products built to the customer's design specifications. Our breadth of manufacturing, technical expertise and experience make us attractive to our broad customer base. Our customers are original equipment manufacturers (“OEMs”) in the Medical, Aerospace and Defense and Industrial markets.
Our customers are original equipment manufacturers (“OEMs”) in the Medical, Aerospace and Defense and Industrial markets. The diversity in the markets we serve is an advantage to mitigate the effects of fluctuations from the economy and competition.
Removed
Our quality systems and processes are based on ISO standards with all facilities certified to ISO 9001 and/or AS9100 standards. We also have ISO 13485 certification which recognizes our quality management systems applicable to contract design, manufacture and repair of assemblies for the medical industry. Our Milaca operation is a U.S. Food and Drug Administration (“FDA”) registered facility.
Added
Our manufacturing and engineering services include complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, complex higher-level assemblies and other box builds for a wide range of industries.
Added
To support the quality requirements of our Aerospace and Defense market customers, all our US locations are International Traffic in Arms Regulations (“ITAR”) compliant. 7 Human Capital Resources We have 733 full-time and 42 part-time/temporary employees as of December 31, 2023, none which is covered by union agreements.
Item 1A. Risk Factors
Risk Factors — what could go wrong, per management
36 edited+42 added−8 removed49 unchanged
Item 1A. Risk Factors
Risk Factors — what could go wrong, per management
36 edited+42 added−8 removed49 unchanged
2022 filing
2023 filing
Biggest changeComplying with securities laws, tax laws, accounting policies and regulations, and subsequent changes, may be costly for us and adversely affect our financial statements.
Biggest changeFailure of the Company or any of its customers operating in these markets to effectively respond to changes to applicable laws and regulations or comply with existing and future laws and regulations may have a negative effect on the Company’s business, financial condition, results of operations and cash flows. 16 Complying with securities laws, tax laws, accounting policies and regulations, and subsequent changes, may be costly for us and adversely affect our financial statements.
If our internal controls and compliance program do not adequately prevent or deter our employees, agents, suppliers and other third parties with whom we do business from violating anti-corruption laws, we may incur defense costs, fines, penalties, reputational damage and business disruptions. 14 Non-compliance with environmental laws may result in restrictions and could adversely affect operations.
If our internal controls and compliance program do not adequately prevent or deter our employees, agents, suppliers and other third parties with whom we do business from violating anti-corruption laws, we may incur defense costs, fines, penalties, reputational damage and business disruptions. Non-compliance with environmental laws may result in restrictions and could adversely affect operations.
We also expect that our competitors will continue to improve the performance of their current products or services, to reduce their current products or service sales prices and improve services that maybe offered. Any of these could cause a decline in sales, loss of market share, or lower profit margin.
We also expect that our competitors will continue to improve the performance of their current products or services, to reduce their current products or service sales prices and improve services that maybe offered. Any of these could cause a decline in net sales, loss of market share, or lower profit margin.
Demand for our products and services depends upon worldwide economic conditions, including but not limited to overall economic growth rates, construction, consumer spending, financing availability, employment rates, interest rates, inflation, consumer confidence, defense spending levels, and the profits, capital spending, and liquidity of industrial companies. 13 An economic downturn or financial market turmoil may depress demand for our products and/or services in all major geographies and markets.
Demand for our products and services depends upon worldwide economic conditions, including but not limited to overall economic growth rates, construction, consumer spending, financing availability, employment rates, interest rates, inflation, consumer confidence, defense spending levels, and the profits, capital spending, and liquidity of industrial companies. 15 An economic downturn or financial market turmoil may depress demand for our products and/or services in all major geographies and markets.
We have made investments in research and development (“R&D) of new technologies that we believe will strengthen our relationships with customers if successful. To the extent that those investment efforts are unsuccessful, our competitive position may be harmed, and we may not realize a return on our investments.
We have made investments in research and development (“R&D”) of new technologies that we believe will strengthen our relationships with customers if successful. To the extent that those investment efforts are unsuccessful, our competitive position may be harmed, and we may not realize a return on our investments.
We compete against many companies that engineer and manufacture complex electromedical and electromechanical products medical, aerospace & defense products and industrial products. The larger global competitors have more resources and greater economies of scale and have more geographically diversified international operations.
We compete against many companies that engineer and manufacture complex electromedical and electromechanical products as well as medical, aerospace and defense, and industrial products. The larger global competitors have more resources and greater economies of scale and have more geographically diversified international operations.
As a result, our majority shareholder group will have the ability to elect all of the members of our Board of Directors and thereby control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, on our common stock, the incurrence or modification of debt by us, amendments to our amended and restated certificate of incorporation and amended and restated bylaws and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with your interests.
As a result, our majority shareholder group will have the ability to elect all of the members of our Board of Directors and thereby control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, on our common stock, the incurrence or modification of debt by us, amendments to our articles of incorporation, as amended and amended and restated bylaws and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with interests of other shareholders.
Any disruption of our operations, our suppliers or our customers would likely impact our sales and operating results.
Any disruption of our operations, our suppliers or our customers would likely impact our net sales and operating results.
We are focusing our R&D efforts across several key areas, including development of active optical cables and expanded beam connectors. 11 We do not expect all of our R&D investments to be successful.
We are focusing our R&D efforts across several key areas, including development of active optical cables and expanded beam connectors. 12 We do not expect all our R&D investments to be successful.
Our efforts to comply with evolving laws, regulations, accounting policies and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and management time and attention from revenue-generating activities to compliance activities and may have an adverse effect on our financial statements, including cash flows.
Our efforts to comply with evolving laws, regulations, accounting policies and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and management time and attention from net sales-generating activities to compliance activities and may have an adverse effect on our financial statements, including cash flows.
Our operations depend upon the continued contributions of our key management, marketing, technical, financial, accounting, product development engineers, sales people and operations personnel. We also believe that our continued success will depend upon our ability to attract, retain and develop highly skilled managerial and technical resources and direct labor resources within our highly competitive industries.
Our operations depend upon the continued contributions of our key management, marketing, technical, financial, accounting, product development engineers, salespeople and operations personnel. We also believe that our continued success will depend upon our ability to attract, retain and develop highly skilled managerial and technical resources and direct labor resources within our highly competitive industries.
Not being able to attract or retain these employees could have a material adverse effect on revenues and earnings. In addition, the cost of attracting and retaining direct and indirect labor may continue to increase, which will increase our operating costs and may reduce our profitability.
Not being able to attract or retain these employees could have a material adverse effect on net sales and earnings. In addition, the cost of attracting and retaining direct and indirect labor may continue to increase, which will increase our operating costs and may reduce our profitability.
Legal and Regulatory Risks We may not meet regulatory quality standards applicable to our manufacturing and quality processes which could have an adverse effect on our business.
We may not meet regulatory quality standards applicable to our manufacturing and quality processes which could have an adverse effect on our business .
Our engineering revenue depends on our ability to deliver quality value-added engineering services required by our customers. The markets for our engineering services are characterized by rapidly changing technology and evolving process development. The continued success of our business will depend upon our ability to hire and retain qualified engineering personnel and maintain and enhance our technological leadership.
Our engineering net sales depend on our ability to deliver quality value-added engineering services required by our customers. The markets for our engineering services are characterized by rapidly changing technology and evolving process development. The continued success of our business will depend upon our ability to hire and retain qualified engineering personnel and maintain and enhance our technological leadership.
Although we believe that we currently have the ability to provide the value-added engineering services that is required by our customers, there is no certainty that we will develop the capabilities required by our customers in the future. The emergence of new technology, industry standards or customer requirements may render the engineering services we currently provide obsolete or uncompetitive.
Although we believe that we currently can provide the value-added engineering services that is required by our customers, there is no certainty that we will develop the capabilities required by our customers in the future. The emergence of new technology, industry standards or customer requirements may render the engineering services we currently provide obsolete or uncompetitive.
The Company is majority owned by one group of shareholders, and those shareholders may be able to take actions that do not reflect the will or best interests of other shareholders. The Kunin family as a group owns a majority of our common stock.
The Company is majority owned by one group of shareholders, and those shareholders may be able to take actions that do not reflect the will or best interests of other shareholders. Curits Squire, Inc. and the Kunin family, collectively as a group, own a majority of our common stock.
New or changing laws, regulations, policy and standards relating to corporate governance and public disclosure, including SEC and Nasdaq regulations, domestic or international tax legislation and the implementation of significant changes in the United States Generally Accepted Accounting Principles (“GAAP”), present challenges due to complexities, assumptions and judgements required to implement.
New or changing laws, regulations, policy and standards relating to corporate governance and public disclosure, including SEC and Nasdaq regulations, domestic or international tax legislation and the implementation of significant changes in the GAAP, present challenges due to complexities, assumptions and judgements required to implement.
Our operations in those countries are subject to risks that could adversely impact our financial results, such as economic or political volatility, foreign legal and regulatory requirements, international trade factors (export controls, trade sanctions, duties, tariff barriers and other restrictions), protection of our and our customers’ intellectual property and proprietary technology in certain countries, potentially burdensome taxes, crime, employee turnover, staffing, managing personnel in diverse culture, labor instability, transportation delays, and foreign currency fluctuations. 10 Risks Related to our Assets We are dependent on our information technology systems for order, inventory and production management, financial reporting, communications and other functions.
Our operations in those countries are subject to risks that could adversely impact our financial results, such as economic or political volatility, foreign legal and regulatory requirements, international trade factors (export controls, trade sanctions, duties, tariff barriers and other restrictions), protection of our and our customers’ intellectual property and proprietary technology in certain countries, potentially burdensome taxes, crime, employee turnover, staffing, managing personnel in diverse culture, labor instability, transportation delays, and foreign currency fluctuations. 10 We face risks arising from the restructuring of our operations .
We purchase raw materials, commodities and components for use in our production process. Increased costs of these materials could have an adverse effect on our production costs if we are unable to pass along price increases or reduce the other cost of goods produced through cost improvement initiatives.
Increased costs of these materials could have an adverse effect on our production costs if we are unable to pass along price increases or reduce the other cost of goods produced through cost improvement initiatives. Fuel and energy cost increases could also adversely affect our freight and operating costs.
Risks Related to our Business A large percentage of our sales have been made to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect us. Our largest customer has accounts for 26.9% of net sales in each of the years ended December 31, 2022 and 2021.
Risks Related to our Business A large percentage of our net sales have been made to a small number of customers, and the loss of a major customer, if not replaced, would adversely affect us.
Such adverse effects could include one or more of the following: an increase in our provision for doubtful accounts, a charge for inventory write-offs, a reduction in revenue, and an increase in our working capital requirements due to higher inventory levels and increases in days our accounts receivables are outstanding.
Such adverse effects could include one or more of the following: an increase in expenses for doubtful accounts receivable and inventory write-offs, a reduction in net sales, and an increase in our working capital requirements due to higher inventory levels and in days our accounts receivables are outstanding. 13 Changes in foreign currency translation rates could adversely impact our net sales and earnings.
Changes in currency translation rates could adversely impact our revenue and earnings. Changes in exchange rates will impact our reported sales and earnings. A majority of our manufacturing and cost structure is based in the United States.
Changes in foreign currency exchange rates will impact our reported net sales and earnings. Substantially all our net sales are transacted in U. S. Dollars. A majority of our manufacturing and cost structure is based in the United States and transacted in U.S. Dollars.
We have taken steps to protect and create redundancies for the equipment that facilitates the use of our management information systems, but these steps may not be adequate to ensure that our operations are not disrupted by events within and outside of our control.
We have taken steps to protect and create redundancies for the equipment that facilitates the use of our management information systems, but these steps may not be adequate to ensure that our operations are not disrupted by events within and outside of our control. 11 Disruptions to our information systems, including security breaches, losses of data or outages, cyber attacks and other security issues, have and could in the future adversely affect our operations and/or financial results.
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future.
We do not expect to pay dividends for the foreseeable future, and we may never pay dividends; investors must rely on stock appreciation for any return on investment in our common stock. We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future.
Changes or restrictions on discharge limits; emissions levels; or material storage, handling, or disposal might require a high level of unplanned capital investment or relocation. It is possible that environmental compliance costs and penalties from new or existing regulations may harm our business, financial condition, and results of operations. Global climate change and related regulations could negatively affect the Company.
It is possible that environmental compliance costs and penalties from new or existing regulations may harm our business, financial condition, and results of operations. 17 Global climate change and related regulations could negatively affect the Company.
Fuel and energy cost increases could also adversely affect our freight and operating costs. Due to customer specifications and requirements, we are dependent on suppliers to provide critical electronic and other components and materials for our operations that could result in shortages of some of the components needed for production.
Due to customer specifications and requirements, we are dependent on suppliers to provide critical electronic and other components and materials for our operations that could result in shortages of some of the components needed for production. Component shortages may result in an inability to deliver products on time or at all, expedited freight, overtime premiums and increased component costs.
In addition, excess and obsolete inventory losses as a result of customer order changes, cancellations, product changes and contract termination could have an adverse effect on our operations.
We face, through the normal course of business, customer cancellations and rescheduled orders and are not always successful in recovering the costs of such cancellations or rescheduling. In addition, excess and obsolete inventory losses as a result of customer order changes, cancellations, product changes and contract termination could have an adverse effect on our operations.
To compete more successfully, we believe it is advantageous to maintain an effective R&D program to develop new products and manufacturing processes that will benefit our customers. Our R&D efforts are currently funded through investment of capital generated from operations, and we incurred R&D expenses of $1.5 million in 2022.
To compete more successfully, we believe it is advantageous to maintain an effective R&D program to develop new products and manufacturing processes that will benefit our customers.
Our credit agreement contains financial and operating covenants with which we must comply. As of December 31, 2022, we were in compliance with these covenants. However, our continued compliance with these covenants is dependent on our financial results, which are subject to fluctuation as described elsewhere in these risk factors.
Our compliance with these covenants is dependent on our financial results, which are subject to fluctuation as described elsewhere in these risk factors.
We estimate and reserve for any known or potential impact from these possibilities We depend heavily on our people and may from time to time have difficulty attracting and retaining skilled employees and the cost of labor may continue to increase.
We recognize reserves in accordance with United States Generally Accepted Accounting Principles (“GAAP”) for exposures related to the estimated impact from these possibilities. We depend heavily on our people and may from time to time have difficulty attracting and retaining skilled employees and the cost of labor may continue to increase.
The loss of a substantial portion of net sales to our largest customers could have a material adverse effect on us. 8 We are dependent on suppliers for components and raw materials and may experience shortages, extended lead times, cost premiums and shipment delays that would adversely affect our customers and us.
We are dependent on suppliers for components and raw materials and may experience shortages, extended lead times, cost premiums and shipment delays that would adversely affect our customers and us. We purchase raw materials, commodities and components for use in our production process.
In addition, decreased value of local currency may adversely affect demand for our products and may adversely affect the profitability of our products in U.S. dollars in foreign markets where payments are made in the local currency. 12 We do not expect to pay dividends for the foreseeable future, and we may never pay dividends; investors must rely on stock appreciation for any return on investment in our common stock.
The decreased value of local currency may adversely affect demand for our products and may adversely affect the profitability of our products in U.S. dollars in foreign markets where payments are made in the local currency.
To reduce the effects of supply chain disruption for our customers, we have increased inventory significantly, which has resulted in a reduction of cash available. If we are unable to sell such inventory or sell such inventory within a reasonable timeframe, it may adversely affect our operations and financial results.
In addition to the financial impact on operations from lost net sales and increased cost, there could potentially be harm to our customer relationships. To reduce the effects of supply chain disruption for our customers, we have increased inventory significantly, which has resulted in a reduction of cash available.
Any of these events could negatively impact our sales and have a material adverse effect on our business, financial condition, results of operations, or cash flows. We concluded no impairment of long-lived assets as of December 31, 2022 or 2021.
Any of these events could negatively impact our net sales and have a material adverse effect on our business, financial condition, results of operations, or cash flows. The economic conditions around the world could adversely affect demand for our products and services and the financial health of our customers.
Our customers cancel orders, change order quantity, timing and specifications that if not managed would have an adverse effect on inventory carrying costs. We face, through the normal course of business, customer cancellations and rescheduled orders and are not always successful in recovering the costs of such cancellations or rescheduling.
If we are unable to sell such inventory or sell such inventory within a reasonable timeframe, it may adversely affect our operations and financial results. 8 Our customers cancel orders, change order quantity, timing and specifications that if not managed would have an adverse effect on inventory carrying costs.
We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources. Market Risks Pandemics or disease outbreaks could adversely affect our operations, supply chains, financial condition and results of operations.
We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources. If we fail to maintain effective systems of internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results or prevent fraud.
Removed
Component shortages may result in an inability to deliver products on time or at all, expedited freight, overtime premiums and increased component costs. In addition to the financial impact on operations from lost revenue and increased cost, there could potentially be harm to our customer relationships.
Added
Two customers, individually, accounted for at 25.7% and 10.3%, respectively, of net sales for the year ended December 31, 2023, and one customer accounted for 26.9% of net sales for the year ended December 31, 2022. The loss of a substantial portion of net sales to our largest customers could have a material adverse effect on us.
Removed
If our information technology systems fail or experience major interruptions, or the information technology systems of third parties that we rely upon fail or experience major interruptions, due to cyber-attacks or other activities designed to disrupt global information systems, our business and our financial results could be adversely affected.
Added
In recent years, we have undertaken initiatives to restructure our business operations with the intention of improving utilization and realizing cost savings. These initiatives have included changing the number and location of our production facilities, largely to align our capacity and infrastructure with current and anticipated customer demand.
Removed
We rely on information technology systems to effectively manage our operational and financial functions and our day-to-day functions. We increasingly rely on information technology systems to process, transmit, and store electronic information. In addition, a significant portion of internal communications, as well as communication with customers and suppliers, depends on information technology.
Added
The process of restructuring entails, among other activities, moving production between facilities, transferring programs from higher cost geographies to lower cost geographies, closing facilities, reducing the level of staff, realigning our business processes and reorganizing our management.
Removed
We are exposed to the risk of cyber incidents in the normal course of business. Cyber incidents may be deliberate attacks for the theft of intellectual property, other sensitive information or cash or may be the result of unintentional events.
Added
Restructurings could adversely affect us, including a decrease in employee morale, delays encountered in finalizing the scope of, and implementing, the restructurings, failure to achieve targeted cost savings, and failure to meet operational targets and customer requirements due to the restructuring process.
Removed
Like most companies, our information technology systems may be vulnerable to interruption due to a variety of events beyond our control, including, but not limited to, terrorist attacks, telecommunications failures, computer viruses, hackers, foreign governments, and other security issues.
Added
These risks are further complicated by our extensive international operations, which subject us to different legal and regulatory requirements that govern the extent and speed of our ability to reduce our manufacturing capacity and workforce.
Removed
We have technology security initiatives and data recovery plans in place to mitigate our risk to these vulnerabilities, but these measures may not be adequate, or implemented properly, or executed timely to ensure that our operations are not disrupted. Potential consequences of a material cyber incident include damage to our reputation, litigation, and increased cyber security protection and remediation costs.
Added
We have and may be required to take additional charges in the future to align our operations and cost structures with global economic conditions, market demands, cost competitiveness, and our geographic footprint as it relates to our customers' production requirements or following divestitures. We may consolidate or divest certain manufacturing facilities or transfer certain of our operations to other geographies.
Removed
Such consequences could materially and adversely affect our results of operations. We have insurance coverage for cyber liability, but there can be no assurances that the amount of coverage will be adequate or that insurance proceeds will be available for a particular claim. We are investing in new technologies which are inherently risky .
Added
If we are required to take additional restructuring charges in the future, our operating results, financial condition, and cash flows could be adversely impacted. Risks Related to our Assets We are dependent on our information technology systems for order, inventory and production management, financial reporting, communications and other functions.
Removed
The economic conditions around the world could adversely affect demand for our products and services and the financial health of our customers.
Added
We rely on information systems, some of which are managed by third parties, to store, process and transmit confidential information, including financial reporting, inventory management, procurement, invoicing and electronic communications, belonging to our customers, our suppliers, our employees and/or us.
Added
We monitor and mitigate our exposure to cybersecurity issues and modify our systems when warranted and we have implemented certain business continuity items, including leveraging our multiple sites for redundancies, as well as backup and restore methods inclusive of off-site, secure hosted and cloud based third-party providers.
Added
Nevertheless, these systems are vulnerable to, and at times have suffered from, among other things, damage from power loss or natural disasters, computer system and network failures, loss of telecommunication services, physical and electronic loss of data, terrorist attacks, computer viruses, cyberattacks and security breaches, ranging from uncoordinated individual attempts to gain unauthorized access to our IT systems to sophisticated and targeted measures.
Added
These include data theft, malware, phishing, ransomware attacks, or other cybersecurity threats or incidents. The increased use of mobile technologies and the internet of things can heighten these and other operational risks.
Added
If we, or the third parties who own and operate certain of our information systems, are unable to prevent such breaches, losses of data and outages, our operations could be disrupted.
Added
Also, the time and funds spent on monitoring and mitigating our exposure and responding to breaches, including the training of employees, the purchase of protective technologies and the hiring of additional employees and consultants to assist in these efforts could adversely affect our financial results.
Added
The increasing sophistication of cyberattacks requires us to continually evaluate the threat landscape and new technologies and processes intended to detect and prevent these attacks. There can be no assurance that the security measures and systems configurations we choose to implement will be sufficient to protect the data we manage.
Added
Any theft or misuse of information resulting from a security breach could result in, among other things, loss of significant and/or sensitive information, litigation by affected parties, financial obligations resulting from such theft or misuse, higher insurance premiums, governmental investigations, negative reactions from current and potential future customers (including potential negative financial ramifications under certain customer contract provisions) and negative publicity and any of these could adversely affect our financial results.
Added
In addition, we must comply with increasingly complex regulations intended to protect business and personal data in the U.S. and globally. In many cases, these laws apply not only to third-party transactions, but also restrict transfers of personal information among the Company and its international subsidiaries.
Added
Several jurisdictions have passed laws in this area, and additional jurisdictions are considering imposing additional restrictions or have laws that are pending. These laws continue to develop and may be inconsistent from jurisdiction to jurisdiction.
Added
Complying with emerging and changing requirements causes the Company to incur substantial costs and has required and may in the future require the Company to change its business practices.
Added
Compliance with these regulations can be costly and any failure to comply could result in legal and reputational risks as well as penalties, fines and damages that could adversely affect our financial results. We are investing in new technologies which are inherently risky .
Added
Our R&D efforts are currently funded through investment of capital generated from operations, and we incurred R&D expenses of $1.2 million and $1.5 million in the years ended December 31, 2023 and 2022, respectively.
Added
Our credit agreement contains financial and operating covenants with which we must comply. As of December 31, 2023, we were in compliance with these covenants. Effective as of February 29, 2024, we entered into a new credit agreement with Bank of America. Our new current credit agreement contains financial and operating covenants with which we must comply.
Added
We have exposures to local currencies for certain net sales in China denominated in Chinese Yuan as well as certain costs incurred at our facilities in China and Mexican that are denominated in Chinese Yuan and the Mexican Peso, respectively.
Added
Effective internal control over financial reporting and disclosure controls and procedures are necessary for us to provide reliable financial reports and effectively prevent fraud and operate successfully as a public company.
Added
Any failure to develop or maintain effective internal control over financial reporting and disclosure controls and procedures could harm our reputation or operating results or cause us to fail to meet our reporting obligations.
Added
As we expand our business operations both within the United States and internationally, we will need to maintain effective internal controls over financial reporting and disclosure control and procedures. 14 Our services involve other inventory risk Our production services primarily provide that we purchase some, or all, of the required materials and components based on customer forecasts or orders.
Added
Although, in general, our contracts with our customers obligate our customers to ultimately purchase inventory ordered to support their forecasts or orders, we generally finance these purchases initially. In addition, suppliers may require us to purchase materials and components in minimum order quantities that may exceed customer requirements.
Added
A customer’s cancellation, delay or reduction of forecasts or orders can also result in excess inventory or additional expense to us. Engineering changes by a customer or a product’s end-of-life may result in obsolete materials or components.
Added
While we attempt to cancel, return or otherwise mitigate excess and obsolete inventory, as well as require customers to reimburse us for these items and/or price our services to address related risks, we may not actually be reimbursed timely or in full, be able to collect on these obligations or adequately reflect such risks in our pricing.
Added
In addition to increasing inventory in certain instances to support new program ramps, we may also increase inventory if we experience component shortages or longer lead-times for certain components in order to maintain a high level of customer service.
Added
In such situations, we may procure components earlier, which leads to an increase in inventory in the short term and may lead to increased excess or obsolete inventory in the future.
Added
Excess or obsolete inventory, the need to acquire increasing amounts of inventory due to shortages, customer demand or otherwise, or other failures to manage our working capital, could adversely affect our operating results, including our return on invested capital.
Added
In addition, we provide managed inventory programs for some of our customers under which we hold and manage finished goods or work-in-process inventories. These managed inventory programs may result in higher inventory levels, further reduce our inventory turns and increase our financial exposure with such customers.
Added
In addition, our inventory may be held at a customer’s facility or warehouse, or elsewhere in a location outside of our control, which may increase the risk of loss.
Added
Even though our customers generally have contractual obligations to purchase such inventories from us, we remain subject to customers’ credit risks as well as the risk of potential customer default and the need to enforce those obligations. Market Risks Pandemics or disease outbreaks could adversely affect our operations, supply chains, financial condition and results of operations.
Added
Legal and Regulatory Risks We are subject to extensive government regulations and industry standards and the terms of complex contracts; a failure to comply with current and future regulations and standards, or the terms of our contractual arrangements, could have an adverse effect on our business, customer relationships, reputation and profitability.
Added
We are subject to extensive government regulation and industry standards relating to the products we manufacture as well as how we conduct our business, including regulations and standards relating to labor and employment practices, workplace health and safety, the environment, sourcing and import/export practices, the market sectors we support, privacy and data protection, the regulations that apply to government contracts, and many other facets of our operations.
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Item 2. Properties
Properties — owned and leased real estate
1 edited+0 added−0 removed1 unchanged
Item 2. Properties
Properties — owned and leased real estate
1 edited+0 added−0 removed1 unchanged
2022 filing
2023 filing
Biggest changeThe following are our manufacturing facilities as of December 31, 2022: Manufacturing Space Office Space Total Location Own/Lease Lease End Date Square Feet Square Feet Square Feet Bemidji, MN Lease August 31, 2035 56,000 13,000 69,000 Blue Earth, MN Own 92,000 48,000 140,000 Milaca, MN Lease June 30, 2025 15,000 5,000 20,000 Mankato, MN Lease August 31, 2035 43,000 15,000 58,000 Monterrey, Mexico Lease January 24, 2029 76,000 1,000 77,000 Suzhou, China Lease February 28, 2024 27,000 3,000 30,000 Suzhou, China Lease December 31, 2023 15,000 - 15,000 Suzhou, China Lease October 17, 2023 15,000 - 15,000
Biggest changeThe following are our manufacturing facilities as of December 31, 2023: Manufacturing Space Office Space Total Location Own/Lease Lease End Date Square Feet Square Feet Square Feet Bemidji, MN Lease August 31, 2035 56,000 13,000 69,000 Blue Earth, MN Own 92,000 48,000 140,000 Milaca, MN Lease June 30, 2025 15,000 5,000 20,000 Mankato, MN Lease August 31, 2035 43,000 15,000 58,000 Monterrey, Mexico Lease January 24, 2029 76,000 1,000 77,000 Suzhou, China Lease February 28, 2024 27,000 3,000 30,000 Suzhou, China Lease January 14, 2024 (1) 15,000 - 15,000 Suzhou, China Lease October 17, 2026 15,000 - 15,000 (1) In January 2024, we extended the Suzhou lease which now expires on January 20, 2027. 19
Item 3. Legal Proceedings
Legal Proceedings — active lawsuits and investigations
1 edited+0 added−0 removed0 unchanged
Item 3. Legal Proceedings
Legal Proceedings — active lawsuits and investigations
1 edited+0 added−0 removed0 unchanged
2022 filing
2023 filing
Biggest changeItem 3. Legal Proceedings From time to time, we are involved in ordinary, routine or regulatory legal proceedings incidental to the business. When a loss is deemed probable and reasonably estimable an amount is recorded in our consolidated financial statements. Item 4. Mine Safety Disclosures Not applicable. 16 PART II
Biggest changeItem 3. Legal Proceedings From time to time, we are involved in ordinary, routine or regulatory legal proceedings incidental to the business. When a loss is deemed probable and reasonably estimable an amount is recorded in our consolidated financial statements. Item 4. Mine Safety Disclosures Not applicable. 20 PART II
Item 4. Mine Safety Disclosures
Mine Safety Disclosures — required of mining issuers
1 edited+0 added−0 removed0 unchanged
Item 4. Mine Safety Disclosures
Mine Safety Disclosures — required of mining issuers
1 edited+0 added−0 removed0 unchanged
2022 filing
2023 filing
Biggest changeItem 4. Mine Safety Disclosures 16 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17 Item 6. Selected Financial Data 17 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18-27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27 Item 8.
Biggest changeItem 4. Mine Safety Disclosures 20 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 21 Item 6. Selected Financial Data 21 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22-32 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 32 Item 8.
Item 5. Market for Registrant's Common Equity
Market for Common Equity — stock, dividends, buybacks
3 edited+0 added−0 removed1 unchanged
Item 5. Market for Registrant's Common Equity
Market for Common Equity — stock, dividends, buybacks
3 edited+0 added−0 removed1 unchanged
2022 filing
2023 filing
Biggest changeStock price comparisons (NASDAQ): During the Three Months Ended Low High March 31, 2022 $ 9.50 $ 12.38 June 30, 2022 $ 9.94 $ 14.37 September 30, 2022 $ 10.07 $ 19.56 December 31, 2022 $ 9.31 $ 16.01 March 31, 2021 $ 6.00 $ 9.00 June 30, 2021 $ 5.45 $ 10.67 September 30, 2021 $ 7.38 $ 14.20 December 31, 2021 $ 9.02 $ 12.59 Equity Compensation Plan Information Certain information with respect to our equity compensation plans are contained in Part III, Item 12 of this Annual Report on Form 10-K.
Biggest changeStock price comparisons (NASDAQ): During the Three Months Ended Low High March 31, 2023 $ 10.37 $ 16.52 June 30, 2023 $ 9.00 $ 11.26 September 30, 2023 $ 8.76 $ 10.89 December 31, 2023 $ 7.45 $ 10.27 March 31, 2022 $ 9.50 $ 12.38 June 30, 2022 $ 9.94 $ 20.37 September 30, 2022 $ 10.07 $ 19.56 December 31, 2022 $ 9.31 $ 16.01 Equity Compensation Plan Information Certain information with respect to our equity compensation plans are contained in Part III, Item 12 of this Annual Report on Form 10-K.
We intend to invest our profits into the growth of our operations and, therefore, do not plan to pay out dividends to shareholders in the foreseeable future. We did not declare or pay a cash dividend in 2022 or 2021.
We intend to invest our profits into the growth of our operations and, therefore, do not plan to pay out dividends to shareholders in the foreseeable future. We did not declare or pay a cash dividend in 2023 or 2022.
Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities As of March 6, 2023, there were 611 shareholders of record. Our stock is listed on the NASDAQ Capital Market under the symbol “NSYS”.
Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities As of March 12, 2024, there were 590 shareholders of record. Our stock is listed on the NASDAQ Capital Market under the symbol “NSYS”.
Item 7. Management's Discussion & Analysis
Management's Discussion & Analysis (MD&A) — revenue / margin commentary
38 edited+30 added−21 removed11 unchanged
Item 7. Management's Discussion & Analysis
Management's Discussion & Analysis (MD&A) — revenue / margin commentary
38 edited+30 added−21 removed11 unchanged
2022 filing
2023 filing
Biggest changeWe have also taken actions to scale the direct labor workforce and strengthen the supply chain for parts. 20 Net sales by our major EMS industry markets for the years ended December 31, 2022 and 2021 were as follows (in millions): % 2022 2021 Change Medical $ 75.9 $ 63.1 20.3 Aerospace and Defense 19.5 16.6 17.5 Industrial 38.7 35.5 9.0 Total Net Sales $ 134.1 $ 115.2 16.4 Net sales by timing of transfer of goods and services for years ended December 31, 2022 and 2021 are as follows (in millions): Year Ended December 31, 2022 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration Total Net Sales by Market Medical $ 51.5 $ 22.3 $ 2.1 $ 75.9 Aerospace and Defense 16.7 1.9 0.9 19.5 Industrial 28.7 8.5 1.5 38.7 Total net sales $ 96.9 $ 32.7 $ 4.5 $ 134.1 Year Ended December 31, 2021 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration Total Net Sales by Market Medical $ 47.3 $ 13.3 $ 2.5 $ 63.1 Aerospace and Defense 14.8 0.9 0.9 16.6 Industrial 27.2 6.9 1.4 35.5 Total net sales $ 89.3 $ 21.1 $ 4.8 $ 115.2 21 Backlog Our 90-day order backlog as of December 31, 2022 was $35.9 million as compared to $36.9 million at the end of 2021.Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days.
Biggest changeThe increase in net sales is due to continued strong demand across our medical, industrial and defense markets, and the impact of pricing actions taken in the second half of 2022 to address increased manufacturing costs. 23 Net sales by our major EMS industry markets for the years ended December 31, 2023 and 2022 were as follows (in millions): % 2023 2022 Change Medical $ 78.7 $ 75.9 3.7 Aerospace and Defense 20.5 19.5 5.1 Industrial 40.1 38.7 3.6 Total Net Sales $ 139.3 $ 134.1 3.9 Net sales by timing of transfer of goods and services are as follows (in millions): Year Ended December 31, 2023 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Medical $ 60.5 $ 15.8 $ 2.4 $ 78.7 Aerospace and Defense 18.3 1.8 0.4 20.5 Industrial 31.4 7.4 1.3 40.1 Total net sales $ 110.2 $ 25.0 $ 4.1 $ 139.3 Year Ended December 31, 2022 Product/ Service Transferred Over Time Product Transferred at Point in Time Noncash Consideration 1 Total Net Sales by Market Medical $ 51.5 $ 22.3 $ 2.1 $ 75.9 Aerospace and Defense 16.7 1.9 0.9 19.5 Industrial 28.7 8.5 1.5 38.7 Total Net Sales $ 96.9 $ 32.7 $ 4.5 $ 134.1 1 Noncash consideration represents material provided by the customer used in the build of the product. 24 Backlog Our 90-day order backlog as of December 31, 2023 was $35.1 million as compared with $35.9 million at the end of 2022.
Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, higher-level assemblies, and other box builds for a wide range of industries. We serve three major markets within the EMS industry: Aerospace and Defense, Medical, and the Industrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and gas.
Our products are complex electromedical and electromechanical products including medical devices, wire and cable assemblies, printed circuit board assemblies, complex higher-level assemblies and other box builds for a wide range of industries. We serve three major markets within the EMS industry: Medical, Aerospace and Defense, and the Industrial market which includes industrial capital equipment, transportation, vision, agriculture, oil and gas.
Discussion of these factors is also incorporated in Part I, Item 1A, “Risk Factors,” and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements.
Discussion of these factors is incorporated in Part I, Item 1A, “Risk Factors,” and should be considered an integral part of Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements.
Net cash used in financing activities in 2022 of $2.7 million consisted primarily of net payments on the line of credit of $2.1 million and capital lease payments of $0.6 million.
The cash used by financing activities in 2022 of $2.7 million consisted primarily of net payments on the line of credit of $2.1 million and capital lease payments of $0.6 million.
The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of our consolidated financial statements, the reported amounts of revenues and expenses during the reporting periods presented, as well as our disclosures of contingent assets and liabilities.
The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of our consolidated financial statements, the reported amounts of net sales and expenses during the reporting periods presented, as well as our disclosures of contingent assets and liabilities.
Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the Condensed Consolidated Statements of Operations and Comprehensive Income. Sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis.
Our net sales for services were less than 10% of our total sales for all periods presented, and accordingly, are included in net sales in the Condensed Consolidated Statements of Income and Comprehensive Income. Sales, value added, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from net sales) basis.
All revenue is recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our revenue being recognized over time including goods produced under contract manufacturing agreements and services revenue.
All net sales are recognized when the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service to our customer either when (or as) our customer obtains control of the product or service, with the majority of our net sales being recognized over time including goods produced under contract manufacturing agreements and services net sales.
We believe that the following discussion addresses our critical accounting policies and reflects those areas that require more significant judgments and use of estimates and assumptions in the preparation of our consolidated financial statements. 18 Revenue Recognition Our revenue is comprised of product, engineering services and repair services.
We believe that the following discussion addresses our critical accounting policies and reflects those areas that require more significant judgments and use of estimates and assumptions in the preparation of our consolidated financial statements. Revenue Recognition Our net sales are comprised of product, engineering services and repair services.
As of December 31, 2022, we have facilities in Minnesota: Bemidji, Blue Earth, Mankato, Milaca and Maple Grove. We also have facilities in Monterrey, Mexico and Suzhou, China. Our revenue is derived from complex designed products built to the customers’ specifications. The products we manufacture are engineered and designed products that require sophisticated manufacturing support.
As of December 31, 2023, we have facilities in Minnesota: Bemidji, Blue Earth, Mankato, Milaca and Maple Grove. We also have facilities in Monterrey, Mexico and Suzhou, China. Our net ‘sales are derived from complex designed products built to the customers’ specifications. The products we manufacture are engineered and designed products that require sophisticated manufacturing support.
Income from Operations Our income from operations for the 2022 fiscal year was $3.9 million, an increase of $1.6 million from the 2021 fiscal year income of $2.3 million. The increase in income from operations was driven by the increase in gross profit.
Income from Operations Our income from operations for 2023 was $6.0 million, an increase of $2.1 million from the income of $3.9 million in 2022. The increase in income from operations was driven by the increase in gross profit.
Liquidity and Capital Resources We believe that our existing financing arrangements, anticipated cash flows from operations, funds expected to be received for the ERC and cash on hand will be sufficient to satisfy our working capital needs, capital expenditures and debt repayments for the next twelve months. 24 Credit Facility We have a credit agreement with Bank of America which was entered into on June 15, 2017 and provides for a line of credit arrangement of $16 million that was to expire on June 15, 2022.
Liquidity and Capital Resources We believe that our existing financing arrangements, anticipated cash flows from operations, and cash on hand will be sufficient to satisfy our working capital needs, capital expenditures and debt repayments for the next twelve months. 27 Credit Facilities We had a $16 million asset backed line of credit agreement with Bank of America which, as amended, was to expire on June 15, 2026.
To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value.
To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value. As of December 31, 2023, the Company’s common stock was trading at a value less than the Company’s net equity value.
Our net income in 2021 was $7.2 million or $2.54 per diluted and $2.68 per basic common share.
Our net income in 2022 was $2.0 million or $0.70 per diluted and $0.75 per basic common share.
We may also make forward-looking statements in other reports filed with the SEC, in materials delivered to stockholders and in press releases. Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes.
Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes.
The statutory reconciliation for the years ended December 31, 2022 and 2021 is as follows (in thousands): 2022 2021 Statutory Rate $ 572 $ 1,606 State Income Tax 41 14 Effect of foreign operations 71 110 Withholding Tax 122 - Change in State Deferred Rate 29 (39 ) Valuation Allowance 587 472 PPP Loan Forgiveness - (1,276 ) US Permanent differences (28 ) 3 Federal Tax Credits (272 ) (37 ) Global Intangible Low-Taxed Income Effect 301 391 Return to provision - credits, perm diffs 9 (481 ) IRS Payable 17 121 Other 18 (25 ) $ 1,467 $ 859 Net Income Our net income in 2022 was $2.0 million or $0.70 per diluted common share and $0.75 per basic common share.
The statutory rate reconciliation for the years ended December 31, 2023 and 2022 is as follows, (in thousands): 2023 2022 Statutory Rate $ 1,148 $ 572 State Income Tax 79 41 Effect of Foreign Operations (124 ) (82 ) Research and Development (316 ) - Change in State Deferred Rate - 29 Valuation Allowance (2,563 ) 587 Maquiladora Tax 158 153 US Permanent Differences (44 ) (28 ) Federal Tax Credits - (272 ) Global Intangible Low-Taxed Income Effect 7 301 Return to Provision - Credits, Perm Diffs (189 ) 9 Withholding Tax 318 122 IRS Payable - 17 Other 118 18 $ (1,408 ) $ 1,467 Net Income Our net income in 2023 was $6.9 million or $2.38 per diluted common share and $2.53 per basic common share.
We have an evaluation process to assess the value of the inventory that is slow moving, excess or obsolete on a quarterly basis.
We seek to require our customers to prepay for end of life or certain inventory in excess of current customer order quantities. We have an evaluation process to assess the value of the inventory that is slow moving, excess or obsolete on a quarterly basis.
We had no amounts outstanding as of December 31, 2022 and 2021. 25 Cash flows for the years ended December 31, 2022 and 2021 are summarized as follows: (in thousands) 2022 2021 Cash flows provided by (used in): Operating activities $ 5,402 $ (4,540 ) Investing activities (2,426 ) (730 ) Financing activities (2,667 ) 3,931 Effect of exchange rate changes on cash (53 ) 0 Net change in cash $ 256 $ (1,339 ) Cash provided by operating activities for the year ended December 31, 2022 was $5.4 million compared to cash used in operations of $4.6 million for the year ended December 31, 2021.
The interest rate as of December 31, 2023 was approximately 4%. 28 Cash flows for the years ended December 31, 2023 and 2022 are summarized as follows: (in millions) 2023 2022 Cash Flows Provided By (Used In): Operating Activities $ 1.8 $ 5.4 Investing Activities (1.3 ) (2.4 ) Financing Activities (1.3 ) (2.7 ) Effect of Exchange Rate Changes on Cash 0.0 0.0 Net Change in Cash $ 0.8 $ 0.3 Cash provided by operating activities for the year ended December 31, 2023 was $1.8 million compared with cash provided by operations of $5.4 million for the year ended December 31, 2022.
Our accounting policies are described in “Note 1 – Summary of Significant Accounting Policies,” in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
If, for any reason, those estimates, and assumptions vary substantially it would also impact our financial results. 29 Our accounting policies are described in “Note 1 – Summary of Significant Accounting Policies,” in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
The line of credit with Bank of America contains certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.
There are no subjective acceleration clauses under the Revolver that would accelerate the maturity of our outstanding borrowings. The Revolver contains certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.
Our China operation has a financing agreement with China Construction Bank which provides for a line of credit arrangement of 10,000,000 Renminbi (RMB) (approximately 1.5 million USD) that will expire on August 18, 2023.
The Revolver is secured by substantially all the Company’s assets and expires on February 28, 2027. Our China operation has a financing agreement with China Construction Bank which provides for a line of credit arrangement of 10,000,000 Renminbi (RMB) (approximately 1.4 million USD) that expires on August 18, 2024.
We utilize a pipeline generated by our sales team and speak directly with all departments regarding estimates and assumptions. If, for any reason, those estimates, and assumptions vary substantially it would also impact our financial results.
We utilize a pipeline generated by our sales team and speak directly with all departments regarding estimates and assumptions.
On December 31, 2021, we renewed the credit agreement through June 15, 2026. Under the Bank of America credit agreement, the line of credit is subject to variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. Our line of credit bears interest at a weighted-average interest rate of 5.2% and 3.5% as of December 31, 2022 and 2021, respectively.
Under this credit agreement, line of credit borrowing availability was restricted by a defined asset borrowing base, and interest was based on variations in the Bloomberg Short-Term Bank Yield (BSBY) index rate. This line of credit weighted-average interest rate was 8.3% and 5.2% as of December 31, 2023 and 2022, respectively.
A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The majority of our contracts have a single performance obligation. Revenue is recorded net of returns, allowances and customer discounts.
A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. Most of our contracts have a single performance obligation and require that we provide services and products that are unique to each customer’s designed products and have no alternative usage.
The increase in selling expense is driven by an increase in sales engineering expenses to support the increased sales. General and Administrative General and administrative expenses were $11.4 million, or 8.5% of net sales, for the year ended December 31, 2022 and $10.0 million, or 8.7% of net sales, for the year ended 2021.
General and Administrative General and administrative expenses were $12.3 million, or 8.9% of net sales, for the year ended December 31, 2023 and $11.4 million, or 8.5% of net sales, for the year ended 2022.
The Company met the covenants for the period ended December 31, 2022. At December 31, 2022 and 2021, we had unused availability under our line of credit of $8.4 million and $3.5 million, respectively, supported by our borrowing base. The line is secured by substantially all of our assets.
We had borrowings on our line of credit of $5.8 million and $6.9 million as of December 31, 2023 and December 31, 2022, respectively. As of December 31, 2023 and 2022, we had unused availability under our line of credit of $9.4 million and $8.4 million, respectively, supported by our borrowing base.
The industrial market increased by $3.2 million or 9.0% in 2022 as compared to 2021. The medical market increased by $12.8 million or 20.3% with medical devices accounting for 6% of the increase and medical component products 94% of the increase.
The industrial market increased by $1.4 million or 3.6% in 2023 as compared with 2022. The medical market increased year-over-year by $2.8 million or 3.7% with medical devices accounting for the increase. Net sales from the aerospace and defense markets increased by $1.0 million or 5.1% in 2023 as compared with 2022.
Total order backlog by our major industry markets are as follows (in millions): Total Backlog as of the Year Ended December 31, % 2022 2021 Change Medical $ 57.1 $ 54.9 4.0 Aerospace and Defense 24.5 22.0 11.4 Industrial 22.5 18.1 24.3 Total Backlog $ 104.1 $ 95.0 9.6 The 90-day and total backlog at December 31, 2022 contain the contract asset value of $10.0 million which has been recognized as revenue.
Our 90-day backlog varies each reporting period end due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases. 90-day shipment backlog by our major industry markets are as follows (in millions): 90 Day Backlog as of December 31, % 2023 2022 Change Medical $ 18.1 $ 21.7 (16.6 ) Aerospace and Defense 8.4 5.1 64.7 Industrial 8.6 9.1 (5.5 ) Total Backlog $ 35.1 $ 35.9 (2.2 ) Total order backlog by our major industry markets are as follows (in millions): Total Backlog as of December 31, % 2023 2022 Change Medical $ 47.6 $ 57.1 (16.6 ) Aerospace and Defense 30.2 24.5 23.3 Industrial 13.9 22.5 (38.2 ) Total Backlog $ 91.7 $ 104.1 (11.9 ) The 90-day and total backlog as of December 31, 2023 contain the contract asset value of $14.5 million, which has been recognized as net sales.
We evaluate our inventory based on current usage and the latest forecasts of product demand and production requirements from our customers. 19 Operating Results The following table presents our statements of operations data as percentages of total net sales for the years indicated: 2022 2021 Net Sales 100.0 % 100.0 % Cost of Goods Sold 84.7 86.2 Gross Profit 15.3 13.8 Selling Expenses 2.8 2.0 General and Administrative Expenses 8.5 8.7 Restructuring Expenses 0.0 0.3 R&D Expenses 1.1 0.4 Loss on Abandonment of Intangible Asset 0.0 0.5 Gain on Sale of Property and Equipment 0.0 (0.1 ) Income from Operations 2.9 2.0 Interest Expense (0.3 ) (0.4 ) PPP Loan Forgiveness 0.0 5.4 Income Before Income Taxes 2.6 7.0 Income Tax Expense 1.1 0.8 Net Income 1.5 % 6.2 % Net Sales Our net sales in 2022 were $134.1 million, compared to $115.2 million in 2021, an increase of $18.9 million or 16.4% that was driven by increases in all of our markets.
Our industrial and defense markets are focused on improving our asset utilization and profitability while transforming to a value added, solution-sell business model that supports early engagement, design for manufacturability and rapid prototyping. 22 Operating Results The following table presents our statements of income data in dollars and as a percentage of total net sales for the years indicated (dollars in millions): 2023 2022 $ % $ % Net Sales 139.3 100.0 134.1 100.0 Cost of Goods Sold 116.2 83.4 113.6 84.7 Gross Profit 23.1 16.6 20.5 15.3 Selling Expenses 3.6 2.6 3.7 2.8 General and Administrative Expenses 12.3 8.9 11.4 8.5 Research and Development Expenses 1.2 0.9 1.5 1.1 Income from Operations 6.0 4.2 3.9 2.9 Interest Expense (0.5 ) (0.3 ) (0.4 ) (0.3 ) Income Before Income Taxes 5.5 3.9 3.5 2.6 Income Tax (Benefit) Expense (1.4 ) (1.0 ) 1.5 1.1 Net Income 6.9 4.9 2.0 1.5 Net Sales Our net sales in 2023 were $139.3 million, compared with $134.1 million in 2022, an increase of $5.2 million or 3.9%, that was driven by increases in all of our markets.
Research and Development Expense Research and development expenses were $1.5 million or 1.1% of sales for the year ended December 31, 2022 and $0.5 million or 0.4% of sales for the year ended 2021. We have several projects in process with estimated completion dates within the next two to five years.
Research and Development Expense Research and development expenses were $1.2 million or 0.9% of net sales for the year ended December 31, 2023 and $1.5 million or 1.1% of net sales for the year ended 2022.
Net cash used in investing activities was $2.4 million for the year ended December 31, 2022 and net cash used in investing activities was $0.7 million for the year ended December 31, 2021. Cash used in investing activities in 2022 relates primarily to the purchase of $2.4 million of property and equipment.
In 2022, the cash provided by operating activities was driven by results from operations. Net cash used in investing activities was $1.3 million for the year ended December 31, 2023 and net cash used in investing activities was $2.4 million for the year ended December 31, 2022.
The effective tax rate for fiscal 2022 and 2021 was 42% and 12%, respectively. Our 2022 tax rate was driven by the increase in the valuation allowance from the Tax Cuts and Jobs Act requirement to capitalize and amortize research and experimental expenditures in 2022. Our 2021 tax rate was driven by the nontaxable PPP loan forgiveness.
Our 2022 tax rate was driven by the increase in deferred tax assets and corresponding valuation allowance from research and development expenses which were no longer tax deductible pursuant to the Tax Cuts and Jobs Act which requires the Company to capitalize and amortize research and experimental expenditures for tax return purposes starting in 2022.
General and administrative expenses for the twelve months ended December 31, 2022 were up $1.4 million mainly due to higher professional fees and higher cost of labor; the twelve months ended December 31, 2021 includes a $0.4 million reduction in payroll and medical expenses related to the ERC.
General and administrative expenses for the year ended December 31, 2023 were up $0.9 million mainly due to higher wages of $0.7 due to merit increases and one-time higher professional fees related to a system implementation of $0.2 million.
The cash provided by financing activities in 2021 of $3.9 million consisted primarily of increased borrowing on the line of credit of $5.7 million offset by payments on long-term debt and capital leases of $1.7 million. 26 Forward-Looking Statements This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-Looking Statements This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in other reports filed with the SEC, in materials delivered to stockholders and in press releases.
Cash used in investing activities in 2021 relates primarily to the purchase of $1.3 million of property and equipment offset by the proceeds from the sale of $0.6 million of property and equipment related to the Merrifield plant closure.
Cash used in investing activities in both years primarily relates to the purchase of property and equipment. Net cash used in financing activities in 2023 of $1.3 million consisted primarily of net payments on the line of credit of $1.0 million and capital lease payments of $0.4 million, partially offset by cash receipts of $0.1 million from stock option exercises.
Gross Profit Our gross profit as a percentage of net sales was 15.3% and 13.8% for the years ended December 31, 2022 and 2021, respectively. The gross profit improvement relates primarily to price increases in response to material and labor cost inflation and higher production volume which increased plant utilization.
The gross profit improvement relates primarily to price increases in response to material and labor cost inflation. 25 Selling Selling expenses were marginally lower at $3.6 million, or 2.6% of net sales, for the year ended December 31, 2023 compared with $3.7 million, or 2.8% of net sales, for the year ended December 31, 2022.
Income from operations in the 2021 fiscal year was positively affected by the 2021 employee retention credits of $5.2 million. Interest Expense Interest expense for the year ended December 31, 2022 and December 31, 2021 was $0.4 million in each period.
Interest Expense Interest expense for the year ended December 31, 2023 and December 31, 2022 was $0.5 and $0.4 million, respectively. 26 Income Taxes We realized an income tax benefit of $1.4 million resulting in an effective tax rate of 26% for the year ended December 31, 2023.
Allowance for Doubtful Accounts When evaluating the adequacy of the allowance for doubtful accounts, we analyze accounts receivable, historical write-offs of bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms.
We estimate expected credit losses based on relevant information about past events, including historical write-offs of bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in customer payment terms that affect the collectability of the reported amount. When measuring expected credit losses, we pool assets with similar country risk and credit risk characteristics.
If the financial condition of our customers was to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for uncollectible accounts may be required. Inventory Reserves Inventory reserves are maintained for the estimated value of the inventory that may have a lower value than stated or quantities in excess of future production needs.
Write-offs are recognized as a deduction from the allowance for credit losses. 30 Inventory Reserves Inventory reserves are maintained for the estimated value of the inventory that may have a lower value than stated or quantities in excess of future production needs. Certain raw material inventories are purchased solely to meet a customer’s unique manufacturing requirements.
Removed
Our industrial and defense markets are focused on improving our asset utilization and profitability while transforming to a value added, solution-sell business model that supports early engagement, design for manufacturability and rapid prototyping.
Added
Our 90-day backlog consists of firm purchase orders we expect to ship in the next 90 days, with any remaining amounts to be transferred within 180 days. Our total order backlog as of December 31, 2023 was $91.7 million, a 11.9% decrease from $104.1 million as of December 31, 2022.
Removed
We maintain an allowance for doubtful accounts at an amount estimated to be sufficient to provide adequate protection against losses resulting from collecting less than full payment on outstanding accounts receivable. An amount of judgment is required when assessing the ability to realize accounts receivable, including assessing the probability of collection and the current credit-worthiness of each customer.
Added
Our total and 90-day order backlog by market has decreased when compared with the prior year. As the supply chain continues to normalize, customer order lead times are reducing and are starting to return to their pre-pandemic ordering practices.
Removed
Net sales from the aerospace and defense markets increased by $2.9 million or 17.5% in 2022 as compared to 2021. These increases were driven by increased demand as well as price increases to counteract higher material and labor cost.
Added
Gross Profit Our gross profit was $23.1 million and $20.5 million, and as a percentage of net sales 16.6% and 15.3%, for the years ended December 31, 2023 and 2022, respectively.
Removed
Our 90-day order backlog by market has remained relatively constant when compared to the prior year. 90-day backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases.
Added
This benefit was largely driven by the $2.6 million valuation allowance reversal as we concluded it was more likely than not that we will realize our net deferred tax assets. Income tax expense was $1.5 million for the year ended December 31, 2022 with an effective tax rate of 42%.
Removed
These variables cause inconsistencies in comparing the backlog from one period to the next. 90-day shipment backlog by our major industry markets are as follows (in millions): 90 Day Backlog as of the Year Ended December 31, % 2022 2021 Change Medical $ 21.7 $ 20.4 6.4 Aerospace and Defense 5.1 7.6 (32.9 ) Industrial 9.1 8.9 2.2 Total Backlog $ 35.9 $ 36.9 (2.7 ) Our total order backlog as of December 31, 2022 was $104.1 million, a 9.6% increase from $95.0 million at December 31, 2021.
Added
We were in compliance with all the financial covenants related to this agreement as of and for the year ended December 31, 2023. On February 29, 2024, we replaced our asset back line of credit agreement with $15 million Senior Secured Revolving Line of Credit with Bank of America (the “Revolver”).
Removed
Our total backlog remains strong as our biggest customers are placing orders into the future to secure supply of critical components, in particular for those with long lead times.
Added
The Revolver allows for borrowings at a defined base rate, or at the one, three or six month Secured Overnight Finance Rate, also known as “SOFR”, plus a defined margin. If we prepay SOFR borrowings before their contractual maturity, we have agreed to compensate the bank for lost margin, as defined in the Revolver agreement.
Removed
The prior year gross profit as a percentage of net sales benefited from the $4.7 million reduction in payroll and medical expenses related to the Employee Retention Credit (“ERC”). 22 Selling Selling expenses were $3.7 million, or 2.8% of net sales, for the year ended December 31, 2022 and $2.4 million, or 2.0% of net sales, for the year ended December 31, 2021.
Added
We are required to quarterly pay a 20-basis point fee on the unused portion of the Revolver. The Revolver requires us to maintain no more than 2.5 times leverage ratio and at least a 1.25 times minimum fixed charges coverage ratio, both of which are defined in the Revolver agreement.
Removed
Restructuring Charges There were no restructuring charges for the year ended December 31, 2022. Restructuring charges related to the closure of the Merrifield facility were $0.3 million or 0.3% of net sales for year ended December 31, 2021.
Added
No amounts were outstanding under this financing arrangement as of December 31, 2023 or 2022.
Removed
Loss on Abandonment of Intangible Asset There were no abandonment charges for the year ended December 31, 2022. Abandonment charges were approximately $0.6 million or 0.5% of net sales for the year ended December 31, 2021. The charges relate to the abandonment of the Devicix tradename.
Added
In 2023, the cash provided by operating activities was driven by $6.9 million in net income offset by a $2.2 million non-cash tax benefit from the reduction in our valuation allowance, and increased uses of working capital largely from accounts receivable and contract assets due to the increase in net sales and longer payment terms with several customers.
Removed
Paycheck Protection Program (PPP) Loan Forgiveness In the fourth quarter of 2021, we received forgiveness from the Small Business Association (SBA) for the $6.1 million Promissory Note under the PPP.
Added
As of December 31, 2023, the Company has recorded a contract asset of $14.5 million for unbilled customer net sales included in net sales. Net sales are recorded net of returns, allowances and customer discounts.
Removed
We recorded a PPP loan forgiveness gain of $6.2 million, including interest forgiven, which is included in other income (expense) on the consolidated statement of operations and other comprehensive income (loss) for the year ended December 31, 2021. 23 Income Taxes Income tax expense was $1.5 million and $0.9 million for the years ended December 31, 2022 and 2021, respectively.
Added
As such, the Company evaluated future undiscounted cash flows and determined that no long-lived asset impairment was required as of December 31, 2023.
Removed
We had borrowings on our line of credit of $6.9 million and $9.0 million outstanding as of December 31, 2022 and December 31, 2021, respectively. There are no subjective acceleration clauses under the credit agreement that would accelerate the maturity of our outstanding borrowings.
Added
Allowance for Credit Losses When we record customer receivables and contract assets arising from net sales transactions, we record an allowance for credit losses for the current expected credit losses (“CECL”) inherent in the asset over its expected life.
Removed
In addition, the credit agreement does not expire within one year, the Company is not in violation of the covenants and the Company expects Bank of America to be capable of honoring the financing arrangement.
Added
The allowance for credit losses is a valuation account deducted from the cost basis of the assets to present their net carrying value at the amount expected to be collected. Each period, the allowance for credit losses is adjusted through earnings to reflect expected credit losses over the remaining lives of the assets.
Removed
The Bank of America Credit Agreement provides for, among other things, a Fixed Charge Coverage Ratio of not less than 1.0 to 1.0, for the twelve months ending December 31, 2022 and each Fiscal Quarter end thereafter subject only during a trigger period commencing when our availability under our line is less than $2.0 million until availability is above that amount for 30 days.
Added
We adopted CECL as of January 1, 2023 with a $30 thousand adjustment to retained earnings. As of December 31, 2023, we held an allowance for credit losses of $0.4 million.
Removed
During 2022, we amended our credit agreement to include the Employee Retention Credit Receivable as security in our line of credit which improves our unused availability which expired on January 15, 2023.
Added
Changes in the relevant information may significantly affect the estimates of expected credit losses. Assets are written off when we determine them to be uncollectible.
Removed
On April 15, 2020, we entered into a Promissory Note with Bank of America, N.A., which provides for an unsecured loan of $6.1 million pursuant to the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act and applicable regulations (the “CARES Act”) of which funds were received on April 22, 2020.
Added
This process includes an evaluation of our inventory based on current usage and the latest forecasts of product demand and production requirements from our customers. On at least an annual basis we review the underlying inventory reserve assumptions based on recent trends. As of December 31, 2023, we had an inventory reserve of $1.2 million.
Removed
The loan was accounted for as debt until November 3, 2021 when the $6.1 million loan and $0.1 million accrued interest was fully forgiven by the SBA.
Added
Income Taxes Significant judgment is required in evaluating our tax positions and in determining income tax expense, deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. We evaluate the recoverability of deferred tax assets based on available evidence.
Removed
As a result, we recorded a PPP loan forgiveness gain of $6.2 which is included in other income (expense) on the consolidated statements of operations and other comprehensive income for the year ended December 31, 2021.
Added
This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between future projected operating performance and actual results.
Removed
In 2022, the cash provided by operating activities was driven by results from operations. In 2021, increases in working capital due to higher sales backlog as well as actions taken to address the global supply chain shortages drove the use of cash from operating activities, primarily increased inventories of $4.6 million.
Added
We establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not (defined as a likelihood of more than 50%) that all or a portion of the deferred tax assets will not be realized.
Removed
Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation: ♦ Volatility in the marketplace which may affect market supply, demand of our products or currency exchange rates; ♦ Increased competition from within the EMS industry or the decision of OEMs to cease or limit outsourcing; ♦ Changes in the reliability and efficiency of our operating facilities or those of third parties; ♦ Risks related to availability of labor; ♦ Increases in certain raw material costs such as copper and oil; ♦ Commodity and energy cost instability; ♦ Risks related to FDA noncompliance; ♦ The loss of a major customer; ♦ General economic, financial and business conditions that could affect our financial condition and results of operations; ♦ Increased or unanticipated costs related to compliance with securities and environmental regulation; ♦ Disruption of global or local information management systems due to natural disaster or cyber-security incident; ♦ Outbreaks of epidemic, pandemic, or contagious diseases, such as the recent novel coronavirus that affect our operations, our customers' operations or our suppliers' operations.
Added
In making this determination, we evaluate all positive and negative evidence as of the end of each reporting period. Future adjustments (either increases or decreases) to the deferred tax asset valuation allowance are determined based upon changes in the expected realization of the net deferred tax assets.
Removed
The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us.
Added
As of December 31, 2022, we had recorded a valuation allowance of $2.6 million that resulted from the establishment of a full valuation allowance against U.S. net deferred tax assets as of that date. In 2023, we recorded a $2.6 million tax benefit as we reversed our valuation allowance against our net U.S. deferred tax assets.
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