Paula M. Graff – Vice President & Chief Financial Officer Richard G. Wasielewski – President & Chief Executive Officer.

Greetings and welcome to the Nortech’s Third Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host, Paula Graff.

Thank you. Please go-ahead..

Thank you. Good morning and welcome to Nortech Systems third quarter fiscal 2014 conference call. I’m Paula Graff, Vice President and CFO; and with me is Rich Wasielewski, Nortech’s President and CEO. Following my introduction, Rich will offer comments on our third quarter results and developments in the market we serve.

Then we’ll open up the call for your questions. Before we begin, please be advised that statements made during this call may be forward-looking and are subject to risk factors and uncertainties. Please see the complete Safe Harbor statements in our press release and SEC filings.

Our 10-Q for the third quarter was released yesterday along with our press release. Now, I will turn the call over to Rich Wasielewski.

Rich?.

Thank you, Paula, and good morning everyone. Thanks for joining our call. Our third quarter results continued the positive momentum that’s been growing during the year. After the slow start in Q1 from the cold weather and the impact of the economy on our customers, we’ve seen continued improvement in our results in both Q2 and now here in Q3.

Our quarterly sales of $28 million rose 2% over prior year and 2% sequentially from the second quarter. But even a slight growth increase coupled with a good profitable mix is good news. Our total backlog levels are rising for the third straight quarter.

Total backlog 90-days increased 9% from the prior quarter and were up a 11% from the third quarter of 2013 and were up 30% from the start of the year. Looking at the major markets we serve, we are seeing strong top line gains out of our medical customers. Sales for the quarter increased 19% from the prior year to $10,800,000.

Nine months revenue was $30.8 million, up 24% from the prior year. During the recent third quarter, our medical backlog rose 17% sequentially and year-over-year our third quarter medical backlog increased an impressive 81%. The majority of the increases are coming from our medical systems, cables, assemblies.

They go on larger medical machines cables such as power cables, track cables and coil cables. But we are also seeing good activity in backlog and pipeline in our medical device customers. Increased focus on design engineering is leading the way.

As we mentioned in our second quarter call, we are working to engage our customers earlier in the new product development. During the past recession, many medical OEMs laid-off a larger number of their design and engineering staff. Now these firms are looking to us to offer more engineering support and expertise.

Recent success in the third quarter, we were awarded projects with medical devices from Georgia and Texas; one making Class 3 life critical surgical equipment. We are also increasing our focus on many of the Medtech companies found in our backyard here in Minnesota.

Twin Cities were ranked Number 2 nationally with the Medtech Innovation earlier this year and it’s growing. We attended the Minnesota MD&M show last week which provided a number of quality leads.

Our aerospace and defense business continues to lag behind prior year levels, down 22% in the quarter and 18% for the nine months, but there are signs that the worse may be behind us. Sequentially, defense sales for the third quarter were flat for the second quarter and backlog has increased sequentially the past two quarters.

Even these small improvements make a trend in the right direction. When following this market, we watched the Department of Defense and military dollars going to prime contractors. Over the last six months of 2014, the budget and funding has been cut drastically. Recent U.S. military policy has focused on notebooks on the ground.

So fewer soldiers are being deployed and there is less need for the related communication systems we provide. Looking ahead analyst leave defense spending levels will stay flat the next five years and it will be 2016 before we begin to start seeing opportunities of our new programs when the R&D programs currently underway.

We do expect our current customers and business to stay with us through the downturn. We are tied to many defense programs that need replacement and spare parts. Although profitable, these orders are generally low in dollars and quantity. Meanwhile, we are broadening our sales targets and adjusting accordingly.

We are following the military’s great emphasis on Unmanned Aerial Vehicles (UAVs), missile systems and guided munitions. We are looking at R&D stage companies developing tomorrow’s technologies and earlier engagement at the engineering level. Simulation and training is also potential opportunities.

We are expanding our focus on the aerospace business, including the high growth commercial aircraft sector. And lastly for defense, our vertical integrated operations and ruggedized molded custom cables are strictly being focus today on the defense customers.

We see opportunities within our industrial customers such as oil and gas, and they could provide increased leveraging for this cost structure. That leads me into our industrial margin, which is actually our largest by revenue and most diverse by customer. Industrial sales for the third quarter were $13.6 million basically flat from the prior year.

Sequentially, however, industrial sales have risen for two straight quarters and are up 5% in the second quarter of this year. Here is what we are seeing and hearing from our customer base.

From the semiconductor customers, we saw some weakness with the semiconductor capital equipment purchases although our order activity is picking up here in the fourth quarter. With our process measurement and control customers, we are seeing finishing the second half of the year very strong.

Our activity in this sector is also impacted by construction and oil and gas capital equipment purchases, all which are showing positive signs of traction. With our transportation customers dealing with trucking and locomotives, we are seeing increased activity in new product development especially for our wire and cable businesses.

On shoring opportunities, we are getting more requests from customers through onshore back from Asia to North America. To serve these customers, we are in the process of adding lower cost printed circuit boards, assemblies, capabilities in our Mexico facility.

We should be able to provide more detail and progress on this initiative during our next conference call. Moving on to other financial results in the quarter, gross profit increased to 12.6% of sales, which is 60 basis points over the prior quarter and 160 basis points over last year’s third quarter.

Mix from the sales to our medical customers, increased plant utilization and process improvements account for the gross margin gains. As a result of that gross margin improvement, our quarterly operating income increased 26%.

In addition to the growth in operating profit, our net income was aided by a low 10% effective tax rate in the quarter as we reported $0.12 per share compared with $0.08 the prior year. For the nine month period, sales were $81.6 million and that held steady with 2013. Operating income however rose 9% and net income is up 22%.

Looking at liquidity, our line of credit remains just under $8 million at $7.8 million outstanding and we have $4.3 million available that is supported by our borrowing base. For the nine months, we generated $1.4 million in operating cash flows, a positive turnaround from the $21,000 of cash used for the same period in 2013.

The third quarter saw a modest sequential improvement from the second quarter as the working capital was impacted by higher inventory levels than planned. This is due to increased backlog and production schedules. Finally, this morning, I’d like to briefly address the EMS industry overall and some of the economic trends that are going on.

The latest growth forecast from new venture research expects that North American EMS market to grow at 5.7% during 2014, down just 0.5% from last year. As for overall economic news, the Institute of Supply Management said Monday that the U.S.

manufacturing activities increased in October for the seventeenth consecutive month, which is over 80% of the industry showing growth. Last week, the Commerce Department reported third quarter GDP growth of 3.5% in the quarter and Wall Street have these results showing broad-based improvement in the U.S. economy.

Certainly, there are potential external threats to U.S. economic growth, the deflation in Europe and a slowdown in some emerging markets. The overall trends have been positive lately. In the past several years, we’ve seen the financial recession start and stop as far as growth goes.

This momentum and indicators feel and appears to be stronger due to the industrial trends getting traction, and our backlog and pipeline activities support these trends even with the variation by markets. That concludes the details. Now, I would like to open up for questions. Operator, please open the lines..

(Operator Instructions) And it seems that we have no questions at this time. I’d like to turn the floor back to management for any additional remarks..

Well, if there are no questions, we’ll conclude this call. Thank you for your interest in Nortech Systems and we look forward to updating you in the future. We’ll do our best to keep our momentum going. Have a great day. Thank you..