Nortech Systems Incorporated (NSYS) Earnings

Management highlights

- Overall Financial & Operational Results • Q2 2026 net sales increased 9.3% year over year to $33.5 million, gross margin improved 120 basis points to 17%, and operating income reached $623,000. • Improvements stem from higher revenue, better manufacturing cost absorption from increased production, and benefits from 2024–2025 restructuring initiatives; gains were partially offset by higher 2026 incentive compensation expenses. • 90-day shipment backlog as of June 30, 2026 was $33.4 million, up 6.3% quarter-over-quarter and 25.8% year-over-year, indicating strong momentum for the company's strategy. • Year-to-date 2026 operating income was $670,000, compared to an $871,000 operating loss in the first half of 2025; net income was $282,000 (9 cents per diluted share) versus a net loss of $1 million (36 cents per diluted share) in the prior year period. - Manufacturing & Supply Chain • Nortech maintains a diversified manufacturing footprint across the U.S., Mexico, and China, which positions it well to capture nearshoring demand from customers targeting North American and Asian production locations. • A new Vice President of Supply Chain was hired in June 2026 to address ongoing industry headwinds including component constraints, extended lead times, allocation pressures, and price volatility. The company is working closely with customers and suppliers to secure critical materials and protect production continuity. • Management notes the company has ample excess capacity across all existing facilities, with room for multi-year growth without major additional capital expenditure or new facilities; capacity can be expanded by adding shifts as needed. - Strategic Focus & Innovation • Core long-term strategy centers on engineering expertise, product innovation, and sustainability to serve customers and drive growth. • Key innovation focus areas include: ruggedized fiber optic solutions for harsh aerospace/defense environments, digital diagnostics and IoT platforms that enable predictive maintenance, and power over fiber technology that reduces weight, eliminates local power needs, and provides EMI immunity for medical, aerospace, defense, and satellite applications. • The company is investing in building AI skills across all functions to streamline internal processes, improve employee productivity, and better serve customer data management needs. • The company's three-tier cost structure across its global footprint allows it to adapt to changing customer requirements quickly.

Guidance

Management did not provide formal revised full-year numerical guidance in this call. Key forward-looking outlooks include: • Management expects continued sales momentum in 2026 and beyond, supported by growing backlog, stabilizing supply chains, and increasing demand for the company's fiber optic and innovative connectivity products. • Management expects gross margin has room for further expansion as the company grows, driven by operating leverage from the existing fixed cost structure and opportunities to improve sales mix. • Management confirmed the company is well-positioned to continue building momentum through the remainder of 2026, with positive direction, strong commercial activity, and improving operating execution.

Segment performance

For the second quarter of 2026, total net sales were $33.5 million, a 9.3% year-over-year increase from $30.7 million in Q2 2025. Breakdown by market segment: 1) Medical device: Sales increased 36% year over year, driven by higher demand from existing customers and ramp-up of new programs. 2) Medical imaging: Sales increased 12.2% year over year, supported by a new stocking program with a key customer that enables shorter lead times. 3) Industrial: Sales decreased 4.7% year over year, due to customer inventory adjustments and temporary production disruptions from the manufacturing transfer to Monterey, Mexico; this decline was partially offset by sales growth in China. 4) Aerospace and defense: Sales decreased 12.8% year over year in Q2 2026, driven by inventory reduction efforts at one major customer. However, year-to-date aerospace and defense sales increased 8.7% year over year, supported by higher production volumes after completed program transfers to the Bemidji location.

Risks & headwinds

- Forward-looking statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from expectations, with additional risks detailed in the company's recent SEC filings. • The global tariff and trade policy environment remains uncertain, and while the company is pursuing reimbursement of previously paid IEPA-related tariffs, the timing and amount of any potential recoveries are still uncertain, and no recoveries have been recognized as of Q2 2026. • Ongoing geopolitical uncertainty and supply chain risks, including component constraints, extended lead times, allocation pressures, and price volatility continue to impact the company and broader industry. • Quarterly results can be volatile due to the timing of customer shipments, production schedules, and working capital movements. • The company's cash position remains moderate: total cash and restricted cash was $1.7 million as of quarter end, with $3.6 million in unused revolving credit availability, and the company is prioritizing working capital reduction and inventory optimization to generate operating cash flow for the remainder of the year.

Analyst Q&A

• Q: The analyst asks if most of the year-over-year operating expense growth in Q2 2026 was driven by one-off items. /

  A: Management confirms the majority of the OPEX increase came from two main items: higher incentive compensation accruals and increased stock-based compensation, which account for nearly all the year-over-year growth in operating expenses.

• Q: The analyst asks if Nortech sees opportunities in the growing data center build-out market, given its fiber optic and connectivity product capabilities. /

  A: Management notes the company is actively pursuing multiple opportunities in the data center space for custom, complex fiber optic connectivity solutions that fit the demanding requirements of the market. It confirms Nortech is well-positioned for this sector but has not yet closed significant business or gained substantial traction to date.

• Q: The analyst asks if management expects gross margin to expand further as the company grows. /

  A: Management confirms that year-to-date 2026 gross margin is already a company record, and that further expansion is expected. Unfavorable current sales mix has temporarily held back margins, and the company sees opportunities to improve mix and leverage the existing fixed cost structure to expand margins as growth continues.

• Q: The analyst asks for more detail on Nortech's go-to-market strategy for the data center opportunity, specifically whether it will pursue opportunities directly or via partnerships. /

  A: Management confirms the business development team is pursuing multiple avenues into the data center market, including both direct engagement with data center builders and partnership models, but declined to share additional specifics at this time.