Greetings, and welcome to Nortech's Fourth Quarter 2017 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Rich Wasielewski. Thank you, you may begin.

Well, thank you and good morning, and welcome everyone to Nortech Systems' year-end 2017 conference call. This is Rich Wasielewski, Nortech's President and CEO. And with me here today is our new Vice President and CFO, Connie Beck, along with Matt Mahmood, who joined us at the midpoint of the year as our Chief Operating Officer. Before we begin, I would like to recognize Paula Graff, our retiring CFO, who has been coordinating these calls for the past five years. Paula has been instrumental in our strategic initiatives of increasing our global footprint in Asia and Mexico, and growing our medical market and fostering the one Nortech culture. And in 2017, she led the transition to our new bank arrangements with Bank of America, and our new audit service, Baker Tilly. Both fit our international growth plans, including an improvement to processes and efficiencies. Thanks, Paula, for your service and contributions. We wish you the best of luck as you move on to your next chapter. We're going to change the format a little bit today with me providing the introduction and turning it over to Connie to go through the financial results. Then Matt will update us on his initiatives and the activities since joining Nortech. Then I'll close and open it up for questions. Just to introduce, Connie. Connie joined us in January, previously was Vice President of Finance and Controller for MOCON, where in addition to her public company reporting requirements she helped support strategic planning in international multi-site operations. Her financial experience and operation expertise makes Connie an excellent fit here, and it's already shown in a short time with us. I'd also like to reintroduce Matt Mahmood. Matt, joined Nortech as the COO last May, and oversees all global manufacturing operations including global sourcing, engineering, and business development activities. His passion and drive to make Nortech a metric-driven organization with leveraging technology has already been felt. A good example is the major inventory reduction here at the end of the year. Matt spent 13 years with Thermotech, Pioneer Plastics in various management roles, including their COO. Thermotech supplies global financial 100 [ph] companies with contract manufacturing, assembling, and logistics services. Matt will be up shortly to share his thoughts on his time with Nortech. I will turn the call over to Connie Beck. Connie?

Thank you, Rich, and good morning everyone. I'm excited to be here at Nortech. They told me there won't be a dull moment, and that has been proven true. It's a challenging environment with many moving parts, but that's why I came. I feel my experience serves me well in my new role. Before I continue, please note that statements made during this call and Q&A session may be forward-looking regarding expected revenue, earnings, future plans, opportunities, and other company expectations. These estimates, plans, and other forward-looking statements involve known and unknown risks and uncertainties that may cause the actual results to differ materially from those expressed or implied on this call. These risks include those that are detailed in our most recent annual report in Form 10-K and may be amended or supplemented. The statements made during this conference call are based upon information known to Nortech as of the date and time of this call. We assume no obligation to update the information in today's call. You can find Nortech's complete Safe Harbor statements in our SEC filings. This morning, I'll first touch on our 2017 full-year financial results, which were announced yesterday. 2017 net sales were $112.3 million, a decrease of 4% or $4.3 million compared to 2016. Sales for the year were impacted primarily by our largest OEM transportation customer and several medical device startup customers. It was a tale of two halves for our overall medical revenue as the first-half of 2017 was up 16% year-over-year, while the second-half of the year was down 22%. Our field and customer intelligence data indicate our larger OEM medical equipment customer was too optimistic on the forecast during the first-half of 2017, and they built up their inventory levels well over their actual demand. Our overall medical device…

Thanks Connie and Rich for your introductions. Rich asked me to comment on what have observed since joining Nortech as well as our plans for the business and operations in 2018. I'll start my observations on Nortech's capabilities, customers, and employees. First of all, our customers are far more advanced than I had originally understood. Nortech has built a suite of technology and capabilities that make us unique in the competitive landscape. This has happened through evolution and acquisition within the EMS space and more recently in the medical device and design service industry. I firmly believe we have more value and opportunity to market in our services and capabilities and technology than before. Secondly, our customers; our customers are loyal and are with high expectations and they trust us with our integrity and have given us the keys to long-term relationships. Out top 40 customers have been relatively stable and compromised 85% of our revenue. Nortech's breath of services appeal to a wide range of customers. We service large multinational fortune 100 customers who want an innovation and technology partner. Our midsized customers pick and choose the services they need on an à la carte basis while startups often rely on our full capabilities including design and engineering, manufacture and transfer and FDA certifications and so on. Across the board, every customer expects performance including on-time delivery and speed to market, quality products and services, order and porting [ph] responsiveness, productivity and economic competitiveness. Third, I have learnt Nortech employees are hardworking and committed to all our locations in North America and Asia. They are very aware of our product quality which is very critical. They understand that many of our products and services include health outcomes, help protect our military in harm's way and support the global economic…

Thanks Matt and Connie for your contributions thus far and into the future. They both bring energy and new perspectives to their business and the overall organization. Although we are disappointed in 2017 financial results as reported, we are encouraged about the way we attack the quarter revenue drop and positioned our overall business for success here in 2018. As Connie outlined, there was a snowball effect from the pacific non-cash adjustment and other items she mentioned which greatly impacted our profitability. Thanks to our early indicators and field intelligence that we saw it coming early enough in the fourth quarter to minimize the impact and focus on the things that were more in our control which is asset and cash management. Our ability to manage that cash and working capital allowed us to get our balance sheet in good order starting the new year. We reduced inventory by 2.5 million and accounts payable by 3.1 from the start of the fourth quarter. In addition, we had positive operating cash flow in the quarter and for the year, $800,000, a tough revenue quarter and a need to get our working capital in line. Major initiatives started in 2017 that will benefit us in 2018 and beyond as we mentioned, and Connie mentioned, our new credit facility with Bank of America provides increased flexibility and support for our global operations and allows us to consider specific strategic acquisitions. We are making major operational investments in automation, equipment and expanding our footprint in Mexico as mentioned by Matt. The Asia facility is fully operational, accretive from both profit and cash standpoint in just the second year. It also provides us with Asia sourcing opportunities and new markets for their middleclass that they are growing. Our backlog position ended the year strong for…

Yes, thank you. [Operator Instructions] Our first question is from Sheldon Grodsky with Grodsky Associates. Please proceed with your question.

Well, good morning lady and gentlemen.

Good morning, Sheldon.

Good morning.

It's been a long haul, we're in the, I guess, ninth year of an economic recovery and we're still really waiting for an earnings breakout from Nortech. And it always seems to be around the corner. What can we expect that will make a significant contribution for this year, getting us some black ink, and maybe one of these days getting us a decent return on investment?

Well, again, good morning, Sheldon, and thanks for your question. The initiatives that we put in place for 2017 are around the operations. Up to, as you did a fine job of pointing out, over the economic recovery, it became obvious after the recession that a commodity-based company, such as ours, an EMS company competing with the Asia and Mexico economies of scale. And price was not going to work for the Americas, total Americas. So the transformation of the company started probably in '11 and '12 to be the one Nortech. That's when we started taking the individual companies that we acquired over 20 years and started consolidating, and started to look at one Nortech view from a standardization to leverage every cost we can as we transform into this earlier engagement, engineering, and taking advantage of the technologies that we've enquired and our capabilities that were our expertise over that period of time. We have some locations that have expertise in the engineering technology electronics area, like in our defense business, we've been since '62, so -- what's that, 38-45 years. Our medical device folks have been around with technology from 1978. The cable and wire harness business has been around from the '70s as well, late-'70s early '80s. So there's a lot of pockets of gold that we have to go mine, but we have to put them together. So you are correct on -- I don't look it as an economic recovery, I look at us transforming it. The earnings, we're still not there from a market and business development. We're still looking more and more like a contract manufacturer. That we've tried to change, but it's very difficult because the competition doesn't stand still. And our strategic investments in the transformation, such as Asia, the…

One quick follow-up question, there was a lot of noise in the presidential campaign and subsequently about bringing manufacturing back to the U.S. and possibly putting taxes on imports of components and stuff like that. At this point, does it look like the policy decisions coming out of Washington are negative for the company, neutral, or positive?

I'm going to give you my thoughts. One of Matt's strengths is international. He's worked in that arena more, so he has some thoughts on that. And it really is just an opinion. But as far as from my view as far as the business goes, the Asia market, and what our strategy is for the Asia market from a Nortech standpoint is for country in country. So that's not going to make a big deal in the next year or two for us as far as anything that happens with the Asia or the China tariffs. The future though, one of the other reasons we went to Asia was for the sourcing, and we're keeping a close eye on it. So we haven't experienced major gains on the sourcing side. We have them identified and starting to take some action, but it takes a while to get through the validations with parts and stuff because of our EMS industry and the customer validations. So there's opportunities from the sourcing side, but as far as the immediate future, next year Asia is pretty is neutral. But, yes, in the long haul it could have some impact. I think we have read something here about the semiconductor tariffs and stuff that we are going put on it. And China is going to take some of that off to make it even more attractive for us to get some of those components. The other thing is Mexico and NAFTA. That one probably we are watching a little more closely. But the majority of our stuff today is again being imported back or exported back to the United States. It's U.S. customers that are there. As long as it's going into our customers' manufacturing and then ship back here, it's not going to have a big impact. Everybody is in the same game on the tariffs. So, we just need to stay aware of them and we are. And that's the company's standpoint. Matt, maybe you've got some thoughts.

Yes. Thank you, Sheldon for that good question. I have been working international markets for little under 20 years and I can tell you there is no reasoning why companies went abroad was primarily for the labor arbitrage having the low cost labor. But lately what we are seeing across the marketplace is low cost countries make to the local market initiatives as well as logistics and lead times are becoming larger factors. The tariffs in particular have not had an impact on our business. We are finding that our customers who are the primary OEMs are challenged by government and macroeconomic policy that drives their businesses. We are not seeing any changes in the trend lines. We actually see growth opportunities with those prospects and customers in the United States, Mexico, and China. The other part of it is when you talk about the cost of goods, as Richard earlier mentioned, commodity prices are becoming more parallel in global markets. The difference between 2010 versus 2018 is that we are finding that the prices of the same commodities across the globe are becoming more in par with each other. So, the only advantage you have in terms of global contract manufacturing is your labor arbitrage and your technology, which is where we are investing heavily. We are investing in automation to simplify our work process, streamlining our operations with more Kaizen activities and eliminating a lot of the redundancies that have taken away our cost. So, we are becoming more and more competitive in that landscape. But, I don't see the global policy and tariffs affecting our business at least for the near future more than that.

Thanks, Matt. The only concern we have for '18, we have budgeted and adjusted our cost structure to the current demand. You will see improvements in the first and second quarter to the Q4 profitability. And we expect the second half of the year start returning back to good profitability which we expected in 2017. So, thanks for that question, Sheldon. And we will move on to anybody else who has a question.

There are no questions at this time.

Okay.

Do you have closing remarks?

That is it. If there is more further questions, we will conclude the call. Thanks for joining us today and your interest in Nortech. And we look forward to updating you in the future. Have a great day everyone.