Nortech Systems Incorporated (NSYS) Q4 2017 Earnings Report, Transcript and Summary

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 revenue, of $16 million, was down $3.5 million for the year. Our top three medical device programs completed their engineering design project work and filled their inventory pipeline in 2016 accounting for the 63% growth in that year. During 2017, these customers experienced their first year of commercial sales of their devices, and their forecasts were too optimistic. In the fourth quarter, we reported net sales of $25.6 million compared to $29 million in the prior year. The shortfall in the quarter is isolated to three accounts, our largest medical OEM, a medical device, and our transportation customers. At the end of 2017, our 90-day backlog was $19.4 million, a decline of 5% year-over-year. However, our industrial and defense backlogs each grew over 35% year-over-year with those customers taking advantage of the improved economic conditions and increased DoD budgets. This was offset by a decline of 42% in the 90-day backlog for our medical market which is primarily related to our two largest medical customers. They built up large backlogs heading into 2017, and then 12 months later we saw a large drop-off as they adjusted orders to current business conditions and inventory levels. The expectations and current projections indicate a full recovery to normal levels starting in the third quarter. Our gross margin decreased 110 basis points to 10.8% in 2017. The volume, products, and service mix accounted for most of the change in the year and the quarter. Also, in the fourth quarter our plant supporting the medical customers was significantly underutilized. Our selling expense for the fiscal year was $4.7 million or 4.2% of sales, down $200,000 from last year. For the fourth quarter the selling expense was the same, at 4.2% of sales and down $140,000 compared to last year. G&A expense for 2017 was $8.1 million compared to $8.3 million in 2016, down $200,000. Fourth quarter 2017 G&A expense was $1.9 million compared to $2 million for the same period in 2016. Our 2017 results include several significant items. In the fourth quarter of 2017, we recognized a non-cash impairment of goodwill of $908,000. During the second quarter we had a $175,000 loss on extinguishment of debt in connection with a prepayment penalty when we moved our banking relationship to Bank of America. A gain on sale of property of $355,000 was recognized during the first quarter of 2017. Reflecting these items, our pretax loss for the fourth quarter and year ended 2017 was $1.9 million and $2.1 million respectively. Excluding the effects of those significant items, our pretax loss would have been roughly $1 million for the fourth quarter of 2017, and $1.3 million for the 2017 fiscal year. Despite our reported pretax loss we recognized tax expense of $516,000 in the fourth quarter and $375,000 for our fiscal year 2017. The recently enacted tax reforms in the United Stated resulted in additional tax expense of $280,000. And also has an indirect effect on our loss carry-back and deduction limitation capabilities. In addition, during the fourth quarter we placed a valuation allowance on our U.S-based deferred tax asset of $1 million. These discreet tax events were partially offset by tax benefits for operating losses and the effect of foreign operations. Net loss for the fourth quarter was $2.5 million or $0.90 per share, compared to net income of $98,000 or $0.04 per share in the year-ago period. Net loss for the year ended 2017 was $2.4 million or $0.89 per share, compared to net income of $44,000 or $0.02 per share for the 2016 fiscal year. Overall, our 2017 results include those specific items which I mentioned before that had a negative impact to our results of approximately $2 million. Moving on to the balance sheet, our liquidity comes from operating cash flow and our new credit facility of up to $21 million with Bank of America, with an additional $20 million accordion option feature. Bank of America is well qualified to serve our financial needs through their U.S. and international treasury services. The accordion option expands our credit facility, subject to covenants, and is in place to fund potential growth opportunities or expansion, new R&D, technology activities, and strategic acquisitions. Cash provided operations was $806,000 in 2017 compared to $3.5 million provided a year ago. The decrease is primarily due to our focus on decreasing accounts payables during 2017. Total debt of $16.3 million at the end of the year compares to $13.8 million to start the year. During 2017, we entered into a capital lease of $1.1 million for a new SMP PCBA line in Mankato, Minnesota and a $400,000 capital lease for our ERP software which accounts for the majority of the increase over the beginning of the year. We ended the year with $4.2 million available on our line of credit compared to $4.5 million at the end of the third quarter. In summary, the fiscal 2017 year was heavily impacted by the onetime non-cash and goodwill impairment and tax adjustments at year end. Our ability to react to early indicators and backlog tracking at the end of the third quarter allowed us to minimize the impacts on our profitability from the revenue drop in the fourth quarter by focusing on cost cutting and cost avoidance measures. And on the balance sheet, we significantly reduced our inventory level by $2.1 million to close the year and to get our accounts payable into an acceptable position giving us a much improved solid balance sheet heading into 2018. Now I'll turn the call over to Matt Mahmood, our COO.

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 value and scalpel equipment for energy and power generation. While our employees support our customers, Nortech is committed to providing our employees with quality workplace to work and develop life long careers. Those are my observations for the first nine months. I'll discuss my current activities. When I started, I was looking at a few things that I thought were core to the company's strength and growth. First was the alignment and standardization. Nortech was growing so fast, we had not properly aligned our business to adapt to the demand fluctuations from our customers. We were scaling our operations to better support growth and profitability. The alignment includes analyzing our capacity and global footprint. This is an ongoing activity. Capacity changes always take time implement and involve relocating production and customer validation. While we are starting to centralize our business operation has been focused on helping us design better processes to be more efficient and effective, to eliminate redundancies and overhead, standardization will enable us to maximize utilization and capture more economies of scale as we build a flexible operating environment with tighter controls around our customers' need. Joint strategies; we have been negotiating with customers with long term contracts and plans to develop joint strategies and resources to support their businesses. We have also been cooperating with our vendors and suppliers to develop a more streamline supply chain so that we can meet our customers' demand. On the front of sales and marketing, we have added resources in business development. Sales and marketing at our core locations are looking to target more opportunities both domestic and international. This includes penetrating new markets such as automotive, alternative energy, automation and robotics. We are investing in technical engineering and sourcing programs to develop a standard one stop shop solution, so customers can envision the sourcing that can be available anywhere in the world. We support our customers looking for concept to market and execution to scale scope of services. We are strong in these areas. And I believe that's going to be the foundation of our growth. For medical customers, we are looking at more strategic initiatives that add economies of scale including value driven services and sourcing within our global operations. In the coming years, we anticipate offering certified medical manufacturing facilities for any customer worldwide. Educational partnerships have been a cornerstone to Nortech's future and we believe that strongly. Nortech is building partnerships with leading technical eduction and academic institutions. We are driven to foster the development of new engineering services and solutions. We anticipate some of these institutional partners will be great sources for our future recruitment and talent development. Global activities; we are expanding our in-country marketing Mexico and China with new sales team and support marketing as well. As recently announced, we are relocating our Monterey operations to a newer larger facility by the end of this year. With additional space and improved workflow, we are hoping that we will have more capacity to deliver wider services to our customers. Our China operation has begun preparing a second floor for the building for future opportunities. We anticipate the completion of this expansion later this year. Our global reach is our biggest competitive advantage. We deliver highly engineered product and a cost effective value while mitigating our costumer's global supply risk and meeting tight delivery requirement. IP and engineering services; on the engineering and IP front, we have been investing over the past two to three years in developing proprietary technologies that support value-driven solutions for our EMS customers across the globe. These technologies can be game changing for customers helping elevate their competitive advantage. Simultaneously, we have been building on our strong engineering skills to enhance our current manufacturing processes. We anticipate continued innovation that are IP driven solutions for the next year or two designed to benefit our customers. Our engineering resources at Devicix with its medical focus continue to influence and how we can change and support our industrial aerospace customers. We can offer all our customers improved product design and quality. The interoperability across all of Nortech's facilities delivers a better value across all of Nortech's facilities delivers a better value for customers seeking a partner to solve complex design engineering and manufacturing challenges. In addition to our current capabilities and services as a contract manufacturer in the EMS space, we are investing in advanced robotics machine vision learning, biomechanics, and mechatronics to complement our high quality, high tolerance manufacturing complex assembly services. We are leveraging our known leadership position and expertise in electromechanical contract manufacturing into these newer technologies. We are developing a global capability to sever much broader mix of customers, medtech, aerospace, and industrial. This includes capital equipment to support capacity demand like new SMP technology that supports smaller components and assemblies. We are always looking for new technologies that can complement our current portfolio. Our largest technology upgrade is our new ERP system which is being rolled across all our global operations throughout this year. This final phase of realizing our one Nortech strategy helps us get real-time actionable data that will soon be available across the company for rapid decision making and analysis. This ERP system is an element -- a key element of the building of a metric driven organization that thrives on performance and goals. This will give both our leadership and workforce clear objectives and improve responsiveness in challenges. We are also evaluating shared information from our ERP system with our customers and suppliers. As a metric driven organization, the new ERP system will serve as a backbone to improved 360 degrees visibility across our entire organization. We will be able to track our plans against our measurable outcomes. We look forward to updating you on these activities on future calls. Now, I'll turn it back to Rich. Rich?

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 both defense and industrial, both up over 35%. Keeping SG&A in line with demand levels with targeted investments and business development and marketing for growth as well as bringing in talent and technical resources to support the business is very critical in 2017 and at the end of the year and going into 2018. Medical revenue backlog issues are tied to two major customers, both formerly committed to Nortech for the future. The issues in Q4 were timing-related. Our total medical revenue has grown 8% on a compounded annual growth rate basis since 2010 with the industry projected to grow roughly at the same rate in 2018 and into the future. I would like to address the major write off as Connie mentioned and it is centered around engineering and medical device service revenue, which dropped roughly 3.5 million in the year, splitting pretty much evenly between engineering services and production. First, some background, we had a 70% revenue increase in 2016 from the acquisition and from several pipeline sales both from engineering services and production, and finished a combined $19.5 million. But the expected plan to grow from 2017 was 10%. That turned out to be 18% below that level due the timing and marketing conditions. We still think the $16.5 million revenue for medical device, and engineering services would have served us well without the big spike of 70% in 2016. If it was a little more leveler, we could have done better at adjusting our cost structure. In addition, in the plan we expected to invest $1.5 million in SG&A to support that 2017 goal plan that didn't materialize. The number one reason on the revenue, too much effort on OEMs and not enough focus on the core startups in their funding pipeline our core businesses before the acquisitions. The second impact was on profitability from the volume loss and the SG&A $1.5 million infrastructure cost without the volume. Matt outlined the need of startups needing all our services, while the OEMs are more specific in what their requirements are. They need much more time to market; they need much more time to influence it in the selling effort. And the other effort that we need to continue to emphasize in front of them from a marketing standpoint is our innovation and technology platforms. And as I said, the selling cycle for the larger OEMs is a lot longer, and there's a lot more levels to it. We have to go up three levels before we in the quote, as opposed to talking a president or owner of the medical startups. The Board and management responses for this that are getting focused on is getting the cost and operations in line with the current backlog and our new pipeline expectations. The other items to take advantage of by the Board, we have a new board member -- not new board member, he's with us two years. His name is Bill Murray, who has an extensive industry and personal experience in medical devices from an engineering service and an FDA medical production standpoint from his days in Medtronics and medical innovation. He has been assigned to review and assess our marketing strategies for both medical devices and production, and tie his assessments into the current trends in the industry. He's been at it about 38 to 45 days of a 90-day assessment. And we will bring this assessment and his results, because of the significant issue, to note at the next meeting. I'm going to move over to a quick look at the favorable EMS industry outlook. Forecasting an overall 7% growth during 2017 for both the Americas and worldwide according to New Venture Research, they are also expecting similar worldwide growth in 2018, and 5% here in the Americas. Overall, this industry outlook and our corporate developments give us optimism for 2018. Matt did an excellent job outlining our key initiatives for this year, and our business fundamentals remain solid. Our goal is the same, to outperform the EMS industries in the markets we serve by profitable growth coupled with our global strategy that has continue progression of transforming Nortech from being a commodity-oriented supplier to an early-engagement-value solutions selling partner. Now, I'd like to open up the line for questions. Operator, if you'd please open the lines?

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 good news in Asia that in year two, they have generated about $500,000 of cash to come back, and the repatriation helps us out to bring that cash back here. Those are investments that we need to make, that's one. The Mexico facility, with the PCB business, that was another investment. Both of those two investments in the last two years are probably in the $2 million to $2.5 million. And more than half of that being expenses, as you have learning curves and stuff. Before that it was pretty much the transformation cost. So, we're positioned -- I know you're going to hear it; we're positioned well for 2018. We thought we were positioned well for 2017 especially with all the transformations that we're taking a hold with the defense and the industrials. If you look at those two markets, up 35% in orders from a year ago, and that's 35% good business, not 35% commodity-type business. We're trying to get up the food chain and have people pay for our values. The issue for 2017 is strictly related around being too energetic on the medical device. When we grew 70% from '15 to '16, and invested infrastructure that would do $20 million to $25 million in that medical device area, we took a hit when we only $16.5 million. $16.5 million is still a good number. If we were going from our $11 million in '15, to about $13 million in '16 instead of 19, and did $16 million this time and didn't get so rambunctious on the SG&A, which is a management issue. I'm not here making any excuses. It was a management decision. And with that number alone would've put us in a profitable operating situation, and a steady growth by our large OEM customer who was in -- that hit the fourth quarter in our plant utilization hard. If you would've asked me this in the first quarter, I think for second quarter I was bullish. We had a 30% increase in our largest OEM healthcare guy in the first quarter. And we had a 20% increase in the second quarter. In the third quarter is when we've seen him drop it to 12, because they weren't selling through and their inventory started piling up. And the fourth quarter was down 25%. So instead of it having about a $10 million quarter for that customer in the first quarter, we went down to about a $5.7 million hit. So it's related -- it's isolated and related to the medical device costs that we put in, and we got carried away with it. We've taken steps with the cost on the medical device that we see that's going to be in there in '18. We've adjusted our operations to meet -- to not expect those 20% and 30% increases from the large OEM in the first two quarters. The first two quarters are going to look a lot like Q4. I think we did like $25 million in the fourth quarter. The first and second quarter are going to look just like that until they work through their inventory issues, both in the medical device area and in the large OEM medical equipment area, but we are seeing signs. We are seeing signs. We still have an overall large -- we don't report it, but a large backlog. We're seeing signs that they're working through it, especially on the medical device side. The medical device customers that were down show a little bit sign of life here going into April and May, so that might be a little quicker. I know that's a longwinded answer to your question, but I needed to give you some background to understand that. We've taken the steps with the cost structure in the medical side to adjust more in line. Don't expect a lot of growth. Be really tied to our customers that need growth, so they're aware of it. We do that with any customer in the industrial or the defense, so they know exactly where we're at on capacity. But the other answer for medical device, which is the biggest question on the earnings side, is to get Bill Murray's assessment done. He's halfway through. We're already taking action. Again, I'll refer back to what Matt said, and I'd try to say again, is that our focus on OEMs that have a long selling cycle that need specific technology and innovation take longer, and that's where that cost in that business development efforts was. He's already got us centered in into our core and our roots. But we're better off selling in a quick window to a startup that needs all of our expertise, from concept and design through manufacturing so we can control the whole process. And that's been our bread and butter. The OEMs are seeing that benefit, that when they have projects that they want to spin-off they look to us for that full deal. We have two or three programs going right now. So we need to build on that. And once we get inside that OEM and those midsized companies they'll see our value more and more each time.

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.