Paula Graff – Vice President and Chief Financial Officer Rich Wasielewski – President and Chief Executive Officer.

Sheldon Grodsky – Grodsky Associates.

Good day, ladies and gentlemen and welcome to the Nortech Systems’ Third Quarter 2017 Earnings Conference call. All lines have been placed on listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions] And 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 Third 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 third quarter results and developments in the markets we serve.

Then we will open up the call to 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 keep the complete safe harbor statements in our press release and 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 third quarter compared to $29.7 million for the prior year, down 5%. For the nine months, net sales were $87 million compared to $88 million for the same period in 2016.

Our 90-day backlog ended the quarter at $20.3 million, down 7.5% from the start of the quarter, mainly due to medical customers. Our medical sales were down 11% sequentially and 7% from prior year period, having the largest impact on our quarterly results.

We saw delays in medical device programs along with reduced demand for engineering project work and EMS production. Our 90-day medical backlog decreased 27% in the second quarter, several of our large medical OEMs had inventory buildups due to over-aggressive forecast.

We target both established large medical OEMs as well as early-stage startup companies. New med tech startups are facing fundamental changes from a lower venture capital activity, along with the industry being impacted by recent increases in FDA user fees, tougher regulations.

Some analysts site the medical device tax in the affordable healthcare factors hampering innovation and overall business growth. We expect it will take several quarters and into the first half of 2018 to work through this business cycle.

Nortech has seen strong growth in medical since 2008, at nearly a 12% compounded average growth rate and in 2017, for the nine months medical sales are up 8%. We are closely monitoring the situation and all of field intelligence indicates a short-term adjustment.

All major customers and programs are moving forward with Nortech, it’s timing, funding and end user demand factors at this point. Turning to the aerospace and defense. Our sales were $4 million in the quarter, up 4% sequentially and down 5% from the prior year.

Our 90-day backlog increased 6% since the beginning of the quarter and is up 27% from the prior year. The strong demand we’re experiencing is led by increased defense spending and it’s generating increased order sizes and longer-term contracts. Funding patents are more stable and global defense spending is expected to increase by 3.5%, annually.

It’s been painful waiting for this turnaround, but the trends are showing signs of recovery. We are investing beyond our legacy molded cable products, to now include more value-added services, integrated box build systems and more complex smart cable assembly.

An investment that should begin to pay dividends in the near future is our Mankato, Minnesota, AS9100 certification, transforming that facility into a mil spec PCBA operation. Finally, our industrial sales were down 3% sequentially, but experienced a 14% increase in backlog.

As we drove down into the industrial submarkets, there are more positive signs which are showing up in the backlog. Power generation continues to be a bright spot with strong regional and global demand.

Our sale to semiconductor customers posted a sizable increase in the third quarter and process control customers were strong in the quarter, our new customer products and new project businesses with growth rates outpacing most of its history.

Still there are several other industrial sectors where we’re seeing less positive results, our transportation was down and the environmental controllable construction equipment that we deal – customers we deal with were flat.

We’re seeing more projects and proposals for remotely operated construction equipment and higher level HLA’s, higher level assemblies, and we expect this shift to continue. As we said many times on these calls, our industrial customers are offered – are often follow the economic trends.

The first reading on the Q3 GDP was 3% growth, up from 2.5% expected and the Dow Jones industrial index rose nearly 5% during the third quarter. It’s good to see some positive economic momentum and the impact it’s having on our industrial and commercial customers. I’ll take a couple of minutes to comment on the EMS industry outlook.

The overall, EMS industry in the Americas grew – growth outlook has not changed since our last conference call in August. New venture research continues to estimate that the EMS industry in the Americas will decline 4% in 2017, with a projected growth of 5% in 2018.

The worldwide EMS industry is expected to rise at 5% this year and again, at the same 5% in 2018. Nortech is well positioned to take advantage of the global growth with our new operations up and running in Asia and the expansion that continues in Mexico.

Looking at financial results, our third quarter gross margin was 12.4% of sales, up 120 basis points from 11.2% in the second quarter. The nine months gross margin was 11.5% of sales compared to 11.7% last year. Selling expenses in the third quarter are basically on par with the prior year as a percentage in the same with the nine months.

Our 4% of sales were selling expenses low. We need to invest in this area to maintain good service and support the existing customers and grow the business. While we are in the process of realigning resources to address the current backlog decline.

One of the actions taken place is the redeployment of resources from customer and order management to revenue generating, adding additional in-house and independent field reps. G&A expenses have declined $386,000 for the third quarter versus the prior year. When comparing a nine months figure G&A expenses are roughly down $100,000.

With the overall revenue flat to slightly down here in 2017, we are watching our SG&A spending closely to match the demand. Operating income for the third quarter was $284,000, up from $190,000 from the third quarter last year. For the nine months, operating income was $500,000 compared to last years $301,000.

We reported third quarter net income of $43,000 or $0.02 per diluted common share, on par with the third quarter last year and our nine months year-to-date net income is $13,000 compared to a loss of $54,000 in 2016.

On the liquidity side, we used $678,000 of operating cash in the third quarter and for the nine months, we have generated $615,000 of operating cash.

The primary cause for the use of cash in the quarter was in working capital, we had an increase in accounts receivable of $1.2 million, that was offset slightly by lower inventories and higher AP and other accruals. Free cash flow for the last 12 months is a positive $1.4 million.

Total debt of $15.1 million at the end of the third quarter compares with $13.8 million to start the year. A capital lease of $1 million for the new SMT PCB line in Mankato, Minnesota, accounted for the majority of the increase. We ended the third quarter with a $4.5 million available on our line of credit.

In closing, when we talk about our strategies of diverse customer base, servicing three core markets with globalization, operations and supply chains, remaining a key strength for Nortech.

We’re investing in the lining infrastructure, operations and business development to achieve profitable growth and counting on our technical resources, technology and information systems to standardize our business processes across all facilities aimed at providing better customer services and cost improvements.

And to end, as I stated earlier, we expected the medical sector will continue to present challenges for the business over the next several quarters, as our customers work down inventories levels and adjust to the market trends.

We will make the appropriate – we will take the appropriate actions to reduce financial impacts by controlling and focusing on the activities we can control, primarily, cash management, which includes inventory levels, class and building a backlog from a qualified pipeline. Now, we’ll open up the call, if there is any questions this morning.

Operator, please open the line..

Thank you. Ladies and gentlemen, the floor is now open for question. [Operator Instructions] And our first question comes from Sheldon Grodsky from Grodsky Associates. Sir, please state your question..

Thank you. Good morning, everybody..

Good morning, Sheldon..

You put out a press release – let’s see what was the date on this – back in October..

October. I’m sorry..

The headline I see in my word is, Nortech System jumped on collaboration with Panasonic.

Okay? First, I’d like to know a, is it basically – with this collaboration, is this basically that you bought some equipment from them? This is an unusual way to phrase it? And b, do you know who moved the stock on that news?.

First of all, it was a purchase from Panasonic. It was a little more than just a purchase with them being a public company and us being a public company that came out with both legal folks talking about what they wanted to talk. Some of it was part of the communications.

The – it was just a purchase of equipment, but it is a longer-term commitment from Panasonic with this particular machine and what we’re doing with it. We’re making a full complete line with the quality inspections, with the inventory control and technology and sensors that we’ve not used before.

So we expect – it’s a relatively new technology for them and we’re one of the first ones that are starting to use it..

The second part of the question was, do you know who moved the stock on that news?.

We do – we are in contact with NASDAQ and you know that we’re under the 5% rule. So there was no major players in it, it looked a lot like this is happened several times in my time here, and it looks like day traders.

I think the market – my theory is the market’s pretty hot and some people have taken – some of the day traders have taken some gains and they look at our fundamentals and they feel that we’re well under market – well under book value from the market standpoint. And they took – I think that’s where they were at.

There was some – there were several articles written on Nortech for this same reason undervalued. So I think, that’s what happened, Sheldon. There were no major investments or positions taken. Otherwise, you would see that..

Thank you..

[Operator Instructions].

Operator, if there are no further questions, we’ll conclude this call. Thanks for joining us today and your interest in Nortech. And we look forward to speaking with you in the future. Have a great day..