Paula Graff - Vice President and Chief Financial Officer Richard Wasielewski - President and Chief Executive Officer.

Analysts:.

Good day, ladies and gentlemen, and welcome to Nortech Systems' First Quarter 2017 Earnings Conference Call. All lines have been placed on a listen-only mode. And the floor will be open for your questions and comments, following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Paula Graff.

Ma'am the floor is yours..

Thank you. Good morning and welcome to Nortech Systems' first quarter 2017 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 some comments on our first quarter results and highlights from last week's Annual Shareholder Meeting, including Nortech's vision for the future. Later, in today's call we will respond to any questions.

About the shareholder meeting, I should briefly mention that all the proposals up for vote were passed by more than 90% majority, including the slate of eight directors. We recently filed an 8-K with the voting results, if you're interested in more detail.

Before we begin, please be advised that the 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 our SEC filings. Now, I will turn the call over to Rich Wasielewski.

Rich?.

Thank you, Paula, and good morning, everyone. Yesterday we reported net sales of $28.3 million for the first quarter ended March 31, against $28.9 million for the prior year period. This was in line with our expectations for the first quarter, given our lower backlog numbers when the quarter started.

At the end of 2016, we saw many of our large customers adjust their orders to lower demand levels to start the year. Fast-forwarding, during the first quarter our overall 90-day backlog of $23.5 million ended up 15% both sequentially and year over year.

To look at our three core markets more closely, our medical customer sales in the quarter rose 18% over the prior year to $13.9 million. Medical comprises 49% of our total revenue. Our 90-day medical backlog increased 34% over the prior year and 10% from the fourth quarter.

At the annual meeting last week, we highlighted 12 new medical device and engineering programs wins in 2016, 2 are new multinational accounts and 6 of the 12 programs should go into production over the next year. Our sales to defense and aerospace customers were $3.4 million in the first quarter, down 9% sequentially and off 12% year over year.

However, our 90-day backlog ended the first quarter, up 13% sequentially and we're seeing good progress on booking to start the year. The proposed budget increases for defense spending is 10% or $54 billion. Prospects for the budget passing are still unclear.

Whatever happens, there is certainly more optimism among the defense contractors than we've seen in a long time. We have several long-term programs underway that we expect will generate consistent quarterly revenue going forward.

Our growth will be dependent on the defense budget increases and our ability to expand our offering into the commercial aerospace market.

We are currently in the process of completing AS9100 certification in our Mankato, Minnesota facility, offering MIL-Spec PCBAs, which along with being aligned with our unique capabilities in molded wire and cable design for ruggedization MIL-Spec business should be a good additive for our offerings.

This strategy will position us for additional aerospace and defense opportunities, with both components and higher-level assemblies. Looking at the industrial customers, where most of our quarterly volatility and mixed results are being reported by customer and segments. Certainly, the economy impacts our industrial capital equipment customers.

The lackluster U.S. GDP growth of 0.7% Q1 plays a big part in our results. Our industrial sales were off 17% from the prior year, but up 20% sequentially from the fourth quarter.

Our 90-day industrial backlog at the end of the first quarter was 7.4%, up 23% sequentially and up 24% from the first quarter of 2016, showing a positive trend heading into the second quarter. Industrial sub-segments results saw sales for transportation and environmental control customers flat from prior year.

Our power generation customer's continues to be a bright spot with new global projects in the recent high-level assembly platform win. Process controls were up, new products and the new customer. The semiconductor equipment business saw improvements in the past two quarters.

Some positive trends for industrial customer base with that, hasn't seen this in a while. Moving on to profitability. Our quarterly gross margin was 10.9% of sales compared to 11.7% from the prior year.

Gross margin was impacted by lower plant utilization in January and February, closing costs for our Wisconsin facilities and costs associated with a large number of product transfers. Our SG&A spending was $3.3 million in the quarter, up slightly compared to $3.2 million in the prior year.

Selling expenses were lower due to timing of the expense, while the G&A were higher due to investments in information systems in our new China operation. Operating income was $120,000 for the first quarter, and this includes a $354,000 gain from the sale of our Wisconsin facility.

This gain helped to offset the lower gross margins and the higher G&A expenses. We reported a net loss of $15,000 or $0.01 per share, compared with net income of $63,000 or about $0.02 per share for the prior year. On our liquidity, we used operating cash in the quarter of $255,000 compared to cash generated of $1.3 million in Q1 of 2016.

The use of cash in the quarter was the result of poor working capital management mainly due to increased inventory levels. New product production-launch delays and safety stock for transfers were the main causes. Plans are in place to get this corrected.

We ended the quarter with $4.9 million available on our line of credit and this compares to $5.7 million from the end of the year and $5.4 million from the end of first quarter last year.

Before I open up for questions, I'd like to share some of what was presented last week at the Annual Meeting that outlines Nortech's 2020 vision and strategies for the future. The vision centers around three main focuses.

Number one, increasing shareholders' value through our globalization efforts, growing our medical markets and customers, transforming our industrial and defense model to a more value-added solution and early engagement process versus today's commodity price and transactional one, and by creating a culture that supports investments in IT and R&D.

Number two, helping our customers succeed, by finding solutions to their problems, by providing technical expertise and support, speed to market, cost competitiveness, and reach of global support.

And finally, number three, we are also committed to providing a quality place to work, which is particularly important in this tight global labor market through employee recognition, community involvement and developing our employees individually, professionally and technically, all in a high performance culture, with the full awareness that our products and service improve people's quality of life and support our troops in harm's way.

The Annual Meeting also highlighted our expanded globalization [ph] efforts. Strengthening Nortech's global footprint helps Nortech provide our multinational customers with in-region manufacturing support in Mexico and China.

We invited the General Managers of both our facilities in Mexico and China to be recognized and answer any questions about their organization, customers or their unique business environments. Looking ahead to 2020, we expect as much as 30% of our overall revenue to be coming out of Mexico and 10% from the China operation.

We also expect to take full advantage of the Asian electronic supply chain, to benefit all of our business and improve our cost competitiveness. We could foresee purchasing a minimum of 20% of material components from our Asia supply chain by 2020, a significant increase from the low-single-digits currently being purchased.

Our one Nortech path to growth and profitability depends on all our Nortech operations working together, to provide customers the best value when and wherever their product is manufactured. This will help us to add more value and further differentiate Nortech in the marketplace at solutions providers and strategic partners.

The vision and strategies are in place and the major investments have been made. It's our ability to execute on the initiatives that will determine our results.

In closing, on a look back to the quarter, it looks like our quarterly volatility in customer inventory adjustments occurred this year in the first quarter; wherein 2016 it was the second quarter. We had two poor shipping months in January and February that had major impact on our Q1 performance.

Looking forward to Q2, we are encouraged by our backlog growth and the momentum that it provides, particularly with industrial and medical customers. The majority of the product transfers and launch costs should be behind us by the end of the second quarter.

These positive developments along with continued focus on operational execution provide an optimistic outlook for 2017. And a little help from the economy would not hurt the cause. Now, we'll open up the call for any of your questions this morning. Operator, please open the lines..

Thank you. [Operator Instructions] And there appear to be no questions at this time..

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Well, if there are no further - if there are no questions, we'll conclude this call. Thank you for your interest in Nortech. And we look forward to updating you in the future. Have a great day. Thanks, Mike..

Thank you. This does conclude today's call. We thank you for your participation. You may disconnect at this time. And have a great day..