This article first appeared on GuruFocus .
Release Date: August 12, 2026
For the complete transcript of the earnings call, please refer to the full earnings call transcript .
Positive Points
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Nortech Systems Inc ( NASDAQ:NSYS ) reported a 9.3% year-over-year increase in net sales, reaching $33.5 million in Q2 2026.
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Gross margin improved to 17%, up 120 basis points from the prior year, driven by higher revenue and improved manufacturing cost absorption.
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Total order backlog grew 19.8% year-over-year to $93.8 million, with 90-day shipment backlog up 25.8%, indicating strong future demand.
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The company is well-positioned in the nearshoring landscape with its North American footprint, including operations in Mexico under the USMCA framework.
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Nortech Systems Inc ( NASDAQ:NSYS ) is investing in innovative technologies like Power over Fiber and ruggedized fiber optics, which are gaining traction in aerospace, defense, and medical markets.
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Year-to-date operating income turned positive at $670,000, compared to an operating loss of $871,000 in the same period last year.
Negative Points
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Aerospace and defense sales decreased 12.8% in the quarter due to one customer reducing post-COVID inventory levels.
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Industrial sales declined 4.7%, impacted by customer inventory adjustments and temporary production disruptions from the transfer of manufacturing to Monterey, Mexico.
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Operating expenses increased to $5.1 million from $4.1 million, primarily due to higher incentive compensation accruals in 2026.
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Cash used in operating activities was $2.4 million in the first half of 2026, with significant cash tied up in accounts receivable and inventory to support growing backlog.
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The tariff environment remains uncertain, and while the company is pursuing reimbursement for previously paid IEPA-related tariffs, no amounts have been recognized as of June 30, 2026.
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The company faces ongoing supply chain challenges, including component constraints, longer lead times, and price volatility, which could impact production continuity.
Q & A Highlights
Q: Can you provide some color on the level of capacity utilization at the company? A: Andy Laference, CFO and Senior Vice President of Finance, stated that while the company does not provide specific capacity utilization figures, Nortech has the ability to significantly expand production without incurring significant capital expenditures or needing additional facilities. With six plants across Minnesota, Monterey, Mexico, and Suzhou, China, the company has ample capacity to support growth for several years by adding shifts and utilizing existing space.
Q: Do you believe that the gross margin has level for expansion as the company grows? A: Andy Laference, CFO, confirmed that the gross margin for the first six months of 2026 was a record for the company. He noted that despite some unfavorable sales mix in the quarter, there are significant opportunities to expand margins further through increased leverage of the fixed cost structure as production volumes grow, both with existing and new customers.
Q: Are you seeing any opportunity related to the data center buildouts? A: Jay Miller, President and CEO, stated that Nortech is actively pursuing a number of opportunities in the data center space, particularly for custom complex cable capabilities and fiber optics in demanding environments. While the company has not yet closed a significant amount of business in this area, it is well-positioned and engaged in numerous conversations to gain traction.
Q: Can you explain the go-to-market strategy for data centers, whether you are looking for partners or going alone? A: Jay Miller, CEO, explained that the business development team is exploring multiple angles to enter the data center market, including direct engagement with data center builders and potential partnerships. He declined to provide further specifics but emphasized the team's effectiveness in winning new business.
Q: Was most of the OpEx growth during the quarter due to one-off items? A: Andy Laference, CFO, clarified that the majority of the operating expense increase was driven by higher incentive compensation accruals and increased stock-based compensation. These two factors combined accounted for the bulk of the year-over-year increase in operating expenses during the second quarter.
For the complete transcript of the earnings call, please refer to the full earnings call transcript .
