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    NSYS
    Earnings call· Jun 2026(Q2 FY26)

    NORTECH SYSTEMS Q2 FY26 earnings call NSYS

    Aug 12, 2026 Source

    Executive summary

    Nortech Systems Q2 FY26 — Strong Backlog and Margin Expansion

    Nortech Systems delivered a solid second quarter, marked by robust sales growth and significant gross margin expansion, reflecting the benefits of prior restructuring efforts and increased production. The company's strong backlog, particularly in aerospace, defense, and medical imaging, provides a positive outlook, though increased operating expenses from incentive compensation and cash usage for working capital were noted. Management is focused on leveraging its global footprint and innovation in fiber optics and AI to drive future growth, while actively monitoring supply chain risks and trade policies.

    Highlights

    5

    • Net sales increased 9.3% year-over-year to $33.5 million.

    • Gross margin improved to 17%, up 120 basis points year-over-year.

    • Total order backlog grew 19.8% year-over-year to $93.8 million, driven by aerospace, defense, and medical imaging.

    • Medical device sales increased 36% year-over-year, and Medical Imaging sales increased 12.2%.

    • Operating income for the first six months of 2026 was $670,000, a significant improvement from a loss in the prior year period.

    Concerns

    4

    • Operating expenses increased to $5.1 million, primarily due to $533,000 higher incentive compensation compared to the prior year.

    • Aerospace and defense sales decreased 12.8% in the quarter due to reduced demand from one customer.

    • Cash used in operating activities was $2.4 million in the first six months of 2026, with $4.5 million used by accounts receivable and contract assets and $3.5 million by inventory.

    • Uncertainty remains regarding the timing and amount of EPA-related tariff recoveries, with no amounts recognized as of June 30, 2026.

    Segment performance

    4
    SegmentRevenueYoYQoQMargin
    Medical device
    Growth due to higher customer demand from existing customers and continued ramp-up in new programs.
    		—36%——
    Medical Imaging
    Driven by higher customer demand, partly by increased revenues from a stocking program with a key customer.
    		—12.2%——
    Industrial
    Reflecting customer inventory adjustments and temporary production disruptions associated with manufacturing transfer to Monterrey, Mexico, partially offset by growth in China.
    		—-4.7%——
    Aerospace and defense
    Primarily due to reduced demand from one customer reducing post-COVID inventory levels. Year-to-date sales increased 8.7% benefiting from higher production volumes associated with completed transfers to Bemidji.
    		—-12.8%——

    Operational metrics

    17
    Net sales growth
    9.3%YoY
    Q2 FY26

    Compared to Q2 FY25 net sales of $30.7 million, an increase of $2.9 million.

    Gross margin
    17%up 120 bps YoY
    Q2 FY26

    Compared to 15.8% in Q2 FY25. Attributable to higher revenue levels and improved manufacturing cost absorption, partially offset by unfavorable sales mix.

    Operating expenses
    $5.1Mvs $4.1M in Q2 FY25
    Q2 FY26

    Increase primarily due to higher incentive compensation accruals and increased stock-based compensation.

    Incentive compensation expense
    $402kvs reversal of $131k in Q2 FY25
    Q2 FY26

    Resulting in $533k higher expense in Q2 FY26 compared to Q2 FY25.

    Incentive compensation expense
    $647kvs no management incentive compensation recorded in H1 FY25
    YTD FY26

    Resulting in $647k higher expense in YTD FY26 compared to YTD FY25.

    Operating income
    $670kvs operating loss in YTD FY25
    YTD FY26

    Reflecting higher gross profit and improved operating leverage, offset by higher management incentive compensation and absence of restructuring charge.

    Restructuring charge
    $266k
    Q1 FY25

    Recorded in Q1 FY25, absent in YTD FY26.

    Net interest expense
    $197kvs $257k in Q2 FY25
    Q2 FY26

    Driven by lower average borrowings and reduced interest costs following new financing arrangements.

    Diluted EPS
    $0.11vs $0.12 in Q2 FY25
    Q2 FY26

    Based on net income of $316k in Q2 FY26 compared to $313k in Q2 FY25.

    Diluted EPS
    $0.09vs loss of $0.36 in YTD FY25
    YTD FY26

    Based on net income of $282k in YTD FY26 compared to net loss of $1M in YTD FY25.

    Cash used in operating activities
    $2.4Mvs $2.8M in YTD FY25
    YTD FY26

    Cash used in operating activities was $2.4 million in the first 6 months of 2026 compared with $2.8 million in the prior year period.

    Cash used by accounts receivable and contract assets
    $4.5M
    YTD FY26

    Largely due to the timing of customer shipments and related cash collections and an increase in contract assets to support future customer shipments.

    Cash used by inventory
    $3.5M
    YTD FY26

    Reflecting purchases of materials needed to support the growing backlog.

    Cash provided by accounts payable
    $2.1M
    YTD FY26

    Primarily related to the timing of cash payments.

    Cash and restricted cash balance
    $1.7M
    as of Jun 30, 2026

    Cash and restricted cash totaled $1.7 million at quarter end.

    Revolving credit facility balance
    $7.6M
    as of Jun 30, 2026

    Under the associated bank facility, the revolving credit facility balance was $7.6 million.

    Unused revolving credit facility availability
    $3.6M
    as of Jun 30, 2026

    The company had $3.6 million of unused availability as of June 30, 2026.

    Industry KPIs

    5
    MetricValueDetails
    Orders book to bill$93.8M (total order backlog)USD
    Order visibility backlog policyStrong backlog
    Supply demand imbalance lead timesSelected component constraints, longer lead times, allocation pressures, and price volatility
    Capacity expansion internal sourcingPlenty of capacity
    End market revenue mix organic growthMedical device: 36%; Medical Imaging: 12.2%; Industrial: -4.7%; Aerospace and defense: -12.8%%

    Orderbook & backlog

    2
    90-day shipment backlog$33.4MJune 30, 2026

    up 6.3% QoQ; up 25.8% YoY

    Total order backlog$93.8MJune 30, 2026

    up 3.4% QoQ; up 19.8% YoY

    Primarily driven by an increase in aerospace and defense and medical imaging orders.

    Risks & headwinds

    4
    Tariff uncertainty and recovery

    No amounts recognized as of June 30, 2026

    Mitigation: Actively monitoring developments, pursuing reimbursement and recovery of previously paid EPA-related tariffs.

    Selected component constraints, longer lead times, allocation pressures, and price volatility

    Affect many OEMs and EMS providers

    Mitigation: Strengthened supply chain leadership, working closely with customers and suppliers to plan ahead, secure critical materials, and protect production continuity.

    Customer inventory adjustments and temporary production disruptionsQ2 FY26

    Industrial sales decreased 4.7% in Q2 FY26

    Mitigation: Associated with the transfer of manufacturing activities to Monterrey, Mexico.

    Reduced demand from one customer in Aerospace and DefenseQ2 FY26

    Aerospace and defense sales decreased 12.8% in Q2 FY26

    Mitigation: Customer reducing post-COVID inventory levels.

    What to watch in Q3 FY26

    4

    Inventory investment reduction

    Remainder of the year (H2 FY26)
    CurrentCash used by inventory was $3.5M in YTD FY26.
    TargetReduction in investments in inventory and generation of cash from reductions in working capital.

    Why it matters

    This is a key focus area for management to improve cash flow and working capital efficiency.

    for the remainder of the year, with support of our recently hired Vice President of Supply Chain, we are very focused on reducing investments in the inventory and generate cash from reductions in working capital.

    Q&A highlights

    5

    Clarification on whether OpEx growth was primarily one-off.

    Management confirmed OpEx growth was mainly due to higher incentive compensation and increased stock-based compensation, not one-off items.

    “most of the OpEx growth for the quarter, it was really above and around incentive compensation. So there was 2 pieces there related to -- we had incentive compensation, and then we also had increased stock-based compensation -- so the combination of those 2 really drove the majority of the increase in terms of operating expenses during the quarter year-over-year.”

    asked by Serge Mascaro · answered by Jay Miller

    2 min read6 chapters

    Detailed Narrative

    01

    Operational Improvements and Restructuring Benefits

    The company is realizing operational and financial benefits from restructuring activities completed in late 2024 and early 2025, contributing to higher revenue levels, improved manufacturing cost absorption, and gross margin expansion. These improvements were partially offset by higher incentive compensation expenses in 2026.

    02

    Strategic Positioning and Nearshoring

    Nortech sees strong customer interest in its North American and Asian manufacturing footprint, particularly for nearshore strategies. Its Monterrey, Mexico, and Minnesota facilities operate within the U.S.-Mexico-Canada agreement framework, positioning the company well despite tariff uncertainties. The company is actively monitoring trade policy and geopolitical uncertainty🌐.

    03

    Engineering Expertise and Innovation

    Nortech emphasizes its dedicated engineering services team focused on optimizing manufacturability, serviceability, supply chain risk mitigation, and cost efficiency for customers. A core element of its long-term strategy is innovation, with R&D activities focused on solving complex connectivity challenges with ruggedized, lighter, faster, more sustainable, and more affordable technologies.

    04

    Key Technology Focus Areas

    The company is focusing on ruggedized solutions for harsh environments, particularly in aerospace and defense, utilizing fiber optic technologies. It is also developing digital Diagnostics Extreme and Sky IoT technology platforms for real-time cable and system performance data, and power over fiber technology to reduce cable weight and provide EMI immunity in critical applications like medical devices and aerospace.

    05

    AI Integration and Sustainability

    Nortech is allocating resources and dedicating time to build AI skills among its employees across all functions to streamline processes, improve productivity, and enhance customer service. The company also highlights the environmental benefits of fiber optics over traditional copper, including improved energy efficiency and less material usage, aligning with sustainability goals and mitigating rising copper costs.

    06

    Supply Chain Management

    Nortech strengthened its supply chain leadership with the addition of a new Vice President of Supply Chain in June 2026. This move is aimed at proactively managing selected component constraints, longer lead times, allocation pressures, and price volatility by working closely with customers and suppliers to secure critical materials and protect production continuity.

    AI-generated summary of the company’s earnings call. Not investment advice.