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Nortech Systems Incorporated, a leading provider of engineering and manufacturing solutions for complex electromedical and electromechanical products serving the medical, industrial and defense markets, reported 2022 fourth quarter and full year results for the period ended December 31, 2022.
2022 Fourth Quarter and Full Year Highlights:
- Fourth quarter 2022 revenue of $35.6 million, up 6.4% compared to the fourth quarter of 2021.
- Full year revenue of $134.1 million, up 16.5% from 2021.
- Fourth quarter gross margin of 14.3%, up 6.3 percentage points from gross margin of 8.0% in the fourth quarter of 2021.
- Full year earnings before interest, taxes, depreciation, and amortization (EBITDA) of $5.8 million, up from the ($0.2) million EBITDA loss in the prior year period.
- Quarter-end backlog of $104.0 million on December 31, 2022, up 9.6% compared to December 31, 2021.
Management Commentary
“Our double-digit revenue growth last year – culminating with both a record quarter and record year in revenue – is a credit to excellent collaboration among our dedicated employees, suppliers and customers,” stated Jay D. Miller, President & CEO of Nortech Systems. “Fourth quarter revenue growth is notable in light of the strong revenue level for the same period in 2021. I want to thank the entire Nortech team for their contributions to this achievement.”
“Throughout 2022, we saw a gradual improvement in supply chain bottlenecks and component lead times,” noted Mr. Miller. “These improvements enabled customers to slowly reduce their inventory levels. Our operations are designed to be responsive to fluctuating demand and economic forces, facilitated by our inventory management technology and experienced supply chain personnel.”
“For our key strategic customers, across medical, industrial and defense markets, Nortech’s team members build complex products and perform highly technical services, often on tight deadlines,” Miller commented, “Effectively executing this low-volume, high-mix model differentiates us while helping our customers achieve world-class quality, delivery and competitiveness.”
In the fourth quarter 2022, revenue totaled $35.6 million, a 6.4% increase from revenue in the fourth quarter of 2021. For the full year 2022, revenue totaled $134.1 million, a 16.5% increase from revenue in the prior year. In the fourth quarter of 2022, gross profit totaled $5.1 million, or 14.3%, compared to gross profit of $2.7 million, or 8.0%, in the fourth quarter of 2021. For the full year 2022, gross profit totaled $20.5 million, or 15.3%, compared to gross profit of $15.9 million, or 13.8%, in 2021. Full year 2021 gross profit included $4.7 million in CARES Act Employee Retention Credits (ERC). Net of the ERC, full year 2021 adjusted gross profit would have totaled $11.2 million or 9.7%. Gross profit improvement was primarily due to pricing increases implemented to overcome inflationary costs as well as higher plant volumes and improved operating efficiencies.
Fourth quarter 2022 operating expenses totaled $4.4 million, flat compared to the prior quarter and a 22.6% increase from fourth quarter 2021 operating expenses of $3.6 million. The increase in year-over-year operating expenses was primarily driven by two expense categories. Research and development costs increased $174,000 to support new technologies, such as the Active Optical Extreme (AOXTM) cable platform, improved digital data capabilities and sustainability programs. Also, a year-over-year increase of $347,000 in fourth quarter 2022 sales engineering expenses helped enable the increase in revenue. For the full year 2022, operating expenses totaled $16.6 million, up 22.1% from operating expenses of $13.6 million in 2021. In addition to R&D, sales engineering, and labor inflation, Nortech is investing in upgrading essential IT, HR, and analytical capabilities.
Full year 2022 income tax expense was $1.5 million compared to $0.9 million in 2021. 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 tax rate in 2021 was driven by the nontaxable PPP loan forgiveness.
Fourth quarter 2022 EBITDA totaled $1.2 million, a significant increase over an EBITDA loss of ($0.4) million in the fourth quarter of 2021. For the full year 2022, EBITDA totaled $5.8 million, a $6 million increase from an EBITDA loss of ($0.2) million in 2021. Both the fourth quarter and full-year increases resulted primarily from the previously discussed revenue and gross profit increases offset by investments in operating capabilities.
Business Outlook
“We are confident in progress Nortech has made as a team over the past four years,” stated Mr. Miller. “We have built a solid financial platform, and Nortech’s gross margin, cash flow, and balance sheet are all healthier. We have invested in our people and enhanced our inclusive culture. We are also carefully investing our engineering resources to develop and sell innovative proprietary products that can complement and enhance our customers’ offerings. Those foundational capability improvements give us confidence in Nortech’s future growth opportunities.”
