Nortech Systems (NASDAQ:NSYS) reported second-quarter 2026 revenue growth and improved gross margin, while higher incentive and stock-based compensation expenses weighed on operating income. Management said backlog growth, restructuring benefits and demand in medical-related markets supported results, while supply-chain constraints and trade-policy uncertainty remained areas of focus.
Net sales for the quarter ended June 30 rose 9.3% year over year to $33.5 million, from $30.7 million. Gross profit increased to $5.7 million from $4.8 million, and gross margin expanded 120 basis points to 17.0%.
Medical Markets Drive Revenue Growth
Chief Financial Officer and Senior Vice President of Finance Andrew LaFrence said growth was led by the Medical Device market, where sales increased 36% from a year earlier. The increase reflected higher demand from existing customers and continued ramp-ups of new programs.
Medical Imaging sales rose 12.2%, driven by higher customer demand and increased revenue from a stocking program with a key customer designed to provide product availability and shorter lead times.
Industrial sales declined 4.7%, which LaFrence attributed to customer inventory adjustments and temporary production disruptions tied to transfers of manufacturing activity to Monterrey, Mexico. Growth in China partly offset the decline.
Aerospace and Defense sales fell 12.8% during the quarter, primarily because one customer reduced post-COVID inventory levels. However, year-to-date Aerospace and Defense sales increased 8.7%, benefiting from higher production volumes after completed transfers to Nortech’s Bemidji location.
Profitability Improves Despite Higher Compensation Costs
The company reported operating income of $623,000 in the second quarter, compared with $742,000 in the prior-year quarter. Operating expenses increased to $5.1 million from $4.1 million, primarily due to higher incentive compensation accruals.
LaFrence said second-quarter incentive compensation expense was $402,000, compared with a $131,000 expense reversal in the 2025 quarter. He also said higher stock-based compensation contributed to the increase in operating expenses.
Net income was $316,000, or $0.11 per diluted share, compared with net income of $313,000, or $0.12 per diluted share, a year earlier. Net interest expense declined to $197,000 from $257,000, reflecting lower average borrowings and reduced interest costs under the company’s new financing arrangements.
For the first six months of 2026, Nortech recorded operating income of $670,000, versus an operating loss of $871,000 in the prior-year period. First-half net income totaled $282,000, or $0.09 per share, compared with a net loss of $1 million, or $0.36 per share, in the first half of 2025. LaFrence said the company’s gross margin for the first six months represented a company record.
Backlog Expands as Company Pursues Nearshoring Demand
Nortech ended the quarter with a 90-day shipment backlog of $33.4 million, up 6.3% from the start of the quarter and 25.8% from June 30, 2025. Total order backlog was $93.8 million, increasing 3.4% sequentially and 19.8% year over year.
Miller said annual backlog growth was primarily driven by Aerospace and Defense and Medical Imaging orders. He cited stronger customer engagement, successful program transfers and the company’s manufacturing footprint in the U.S., Mexico and China.
The company said it continues to see strong quoting activity as customers assess nearshore manufacturing strategies in North America and Asia. Miller said Nortech’s Monterrey, Mexico, operations and Minnesota facilities provide positioning within the U.S.-Mexico-Canada Agreement framework.
Management is also monitoring tariffs, geopolitical developments and supply-chain risks. Miller said Nortech is pursuing reimbursement and recovery of previously paid IEEPA-related tariffs, though the timing and amount of any recovery remain uncertain. No recoveries had been recognized as of June 30.
In June, Nortech hired a vice president of supply chain. The company said component constraints, longer lead times, allocation pressures and price volatility continue to affect original equipment manufacturers and electronics manufacturing services providers.
Working Capital Remains a Focus
Cash used in operating activities was $2.4 million in the first six months of 2026, compared with $2.8 million in the prior-year period. Cash use included $4.5 million tied to accounts receivable and contract assets, largely reflecting shipment and collection timing as well as increased contract assets supporting future customer shipments.
Inventory used $3.5 million of cash as Nortech purchased materials to support its growing backlog. Changes in accounts payable provided $2.1 million of cash, primarily related to payment timing.
At June 30, cash and restricted cash totaled $1.7 million. The balance under its Associated Bank revolving credit facility was $7.6 million, with $3.6 million of unused availability.
LaFrence said the company is focused on reducing inventory investment and generating cash through lower working capital during the remainder of 2026. He added that Nortech has capacity to grow across its facilities without significant additional capital expenditures or added facilities, and could increase capacity through additional shifts.
During the question-and-answer session, Miller said Nortech is pursuing opportunities related to data-center buildouts, particularly for custom complex cable and fiber-optic applications, but said the company has not yet gained substantial traction in that market. Management also said it sees opportunities for further gross-margin expansion through plant leverage and potential improvements in sales mix.
About Nortech Systems (NASDAQ:NSYS)
Nortech Systems, Inc is a specialized engineering and manufacturing company that designs, develops and produces custom gas distribution and control solutions. Its core offerings include cryogenic valves and regulators, gas distribution panels and manifolds, and precision instrumentation for monitoring and controlling the delivery of industrial, specialty and medical gases. The company leverages in-house engineering, machining and assembly capabilities to tailor products to the exact specifications of its customers.
In addition to its mechanical product lines, Nortech Systems provides electronic monitoring and control systems.
