10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to

NORTECH SYSTEMS INCORPORATED

Commission file number 0-13257

State of Incorporation: Minnesota

IRS Employer Identification No. 41-1681094

Executive Offices: 1120 Wayzata Blvd E., Suite 201, Wayzata, MN 55391

Telephone number: (952) 345-2244

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o	Accelerated Filer o
Non-accelerated Filer o	Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

Number of shares of $.01 par value common stock outstanding at July 31, 2012 - 2,742,992

(The remainder of this page was intentionally left blank.)

TABLE OF CONTENTS

			PAGE
PART I - FINANCIAL INFORMATION
Item 1	-	Financial Statements
		Consolidated Balance Sheets	3
		Consolidated Statements of Income	4-5
		Consolidated Statements of Cash Flows	6
		Condensed Notes to Consolidated Financial Statements	7-13
Item 2	-	Management’s Discussion and Analysis of Financial Condition And Results of Operations	13-18
Item 4	-	Controls and Procedures	18
PART II - OTHER INFORMATION
Item 1	-	Legal Proceedings	19
Item 6	-	Exhibits	19
INDEX TO EXHIBITS			19
SIGNATURES			20

2

PART 1

ITEM 1.  FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	JUNE 30		DECEMBER 31
	2012		2011
	(Unaudited)
ASSETS
Current Assets
Cash	$	—	$	—
Accounts Receivable, Less Allowance for Uncollectible Accounts	15,642,510		16,720,462
Inventories	18,893,504		19,029,593
Prepaid Expenses	718,829		572,140
Income Taxes Receivable	—		170,292
Deferred Income Taxes	978,000		805,000
Total Current Assets	36,232,843		37,297,487
Property and Equipment, Net	9,178,156		9,083,874
Finite Life Intangible Assets, Net of Accumulated Amortization	47,664		61,547
Other Assets	339,235		339,235
Total Assets	$	45,797,898	$	46,782,143

	JUNE 30			DECEMBER 31
	2012			2011
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Line of Credit	$	8,268,737		$	9,345,044
Current Maturities of Long-Term Debt	370,340			1,310,210
Accounts Payable	10,073,981			11,333,013
Accrued Payroll and Commissions	2,399,955			2,170,852
Other Accrued Liabilities	981,803			852,936
Income Taxes Payable	57,764			—
Total Current Liabilities	22,152,580			25,012,055
Long-Term Liabilities
Long-Term Debt, Net of Current Maturities	2,510,328			812,917
Deferred Income Taxes	249,000			271,000
Other Long-Term Liabilities	131,466			180,378
Total Long-Term Liabilities	2,890,794			1,264,295
Total Liabilities	25,043,374			26,276,350
Shareholders’ Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding	250,000			250,000
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,742,992 Shares Issued and Outstanding at both June 30, 2012 and December 31, 2011	27,430			27,430
Additional Paid-In Capital	15,725,392			15,725,392
Accumulated Other Comprehensive Loss	(62,936		)	(62,936		)
Retained Earnings	4,814,638			4,565,907
Total Shareholders’ Equity	20,754,524			20,505,793
Total Liabilities and Shareholders’ Equity	$	45,797,898		$	46,782,143

See Accompanying Condensed Notes to Consolidated Financial Statements

3

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	THREE MONTHS ENDED
	JUNE 30
	2012			2011
Net Sales	$	28,033,345		$	27,796,576
Cost of Goods Sold	24,941,591			24,561,236
Gross Profit	3,091,754			3,235,340
Operating Expenses:
Selling Expenses	1,152,808			871,409
General and Administrative Expenses	1,620,360			2,024,797
Total Operating Expenses	2,773,168			2,896,206
Income From Operations	318,586			339,134
Other Expense
Interest Expense	(100,303		)	(142,093		)
Miscellaneous Expense, net	(16,358		)	(26,947		)
Total Other Expense	(116,661		)	(169,040		)
Income Before Income Taxes	201,925			170,094
Income Tax Expense	76,000			24,000
Net Income	$	125,925		$	146,094
Earnings Per Common Share:
Basic and Diluted	$	0.05		$	0.05
Weighted Average Number of Common Shares Outstanding Used for Basic and Diluted Earnings Per Common Share	2,742,992			2,742,992

See Accompanying Condensed Notes to Consolidated Financial Statements

4

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	SIX MONTHS ENDED
	JUNE 30
	2012			2011
Net Sales	$	56,394,259		$	56,794,773
Cost of Goods Sold	50,294,270			50,363,268
Gross Profit	6,099,989			6,431,505
Operating Expenses:
Selling Expenses	2,240,624			1,800,793
General and Administrative Expenses	3,212,349			4,004,916
Total Operating Expenses	5,452,973			5,805,709
Income From Operations	647,016			625,796
Other Income (Expense)
Interest Expense	(237,063		)	(262,085		)
Bargain Purchase Gain	—			791,615
Miscellaneous Expense, net	(26,223		)	(46,044		)
Total Other Income (Expense)	(263,286		)	483,486
Income Before Income Taxes	383,730			1,109,282
Income Tax Expense	135,000			337,000
Net Income	$	248,730		$	772,282
Earnings Per Common Share:
Basic and Diluted	$	0.09		$	0.28
Weighted Average Number of Common Shares Outstanding Used for Basic and Diluted Earnings Per Common Share	2,742,992			2,742,992

See Accompanying Condensed Notes to Consolidated Financial Statements

5

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	SIX MONTHS ENDED
	JUNE 30
	2012			2011
Cash Flows From Operating Activities
Net Income	$	248,730		$	772,282
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
Depreciation	915,176			971,993
Amortization	13,883			70,302
Stock-Based Compensation	—			15,862
Interest on Swap Valuation	—			(18,140		)
Bargain Purchase Gain	—			(791,615		)
Deferred Income Taxes	(195,000		)	191,000
Loss on Disposal of Property and Equipment	(499		)	2,744
Changes in Current Operating Items, Net of Effects of Business Acquisitions
Accounts Receivable	1,077,952			(47,592		)
Inventories	136,089			(5,416,349		)
Prepaid Expenses and Other Assets	(146,689		)	(135,740		)
Income Taxes Receivable / Payable	228,056			133,940
Accounts Payable	(1,259,032		)	(991,849		)
Accrued Payroll and Commissions	229,103			798,052
Other Accrued Liabilities	81,338			(222,346		)
Net Cash Provided by (Used in) Operating Activities	1,329,107			(4,667,456		)
Cash Flows from Investing Activities:
Proceeds from Sale of Property and Equipment	36,856			1,400
Business Acquisitions	—			(1,042,389		)
Purchase of Property and Equipment	(1,047,253		)	(355,110		)
Net Cash Used in Investing Activities	(1,010,397		)	(1,396,099		)
Cash Flows from Financing Activities:
Net Borrowings (Repayments) on Line of Credit	(1,076,307		)	6,682,584
Proceeds from Long-Term Debt	1,085,970			1,380,904
Principal Payments on Long-Term Debt	(328,373		)	(813,184		)
Net Cash Provided by (Used in) Financing Activities	(318,710		)	7,250,304
Net Increase in Cash	—			1,186,749
Cash - Beginning	—			230,582
Cash - Ending	$	—		$	1,417,331
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	192,572		266,413
Cash Paid During the Period for Income Taxes	87,602			—
Supplemental Noncash Investing and Financing Activities Due to Seller for Business Acquisition	$	—		462,233

See Accompanying Condensed Notes to Consolidated Financial Statements

6

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading.  It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our latest shareholders’ annual report on Form 10-K.  The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  In preparing these consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality.  Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiary, Manufacturing Assembly Solutions of Monterrey, Inc.  All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

We recognize revenue upon shipment of manufactured products to customers, when title has passed, all contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. We also provide engineering services separate from the manufacture of a product. Revenue for engineering services is recognized upon completion of the engineering process, providing standalone fair value to our customers. Our engineering services are short-term in nature. In addition, we have another separate source of revenue that comes from short-term repair services, which are recognized upon completion of the repairs and shipment of product back to the customer. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

7

Stock Options

Following is the status of all stock options as of June 30, 2012, including changes during the six-month period then ended:

	Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding - January 1, 2012	623,600		$	7.33
Forfeited	(11,250	)	$	7.83
Cancelled	(319,600	)	$	7.43
Outstanding - June 30, 2012	292,750		$	7.19	2.97	$	—
Exercisable - June 30, 2012	292,750		$	7.19	2.97	$	—

There were no options exercised during the three and six months ended June 30, 2012 and 2011.

Total compensation expense related to stock options for the three months ended June 30, 2012 and 2011 was $0 and $7,930, respectively.  Total compensation expense related to stock options for the six months ended June 30, 2012 and 2011 was $0 and $15,862, respectively.  As of June 30, 2012, there was no unrecognized compensation expense as all options were fully vested.

In January 2012, the Board of Directors terminated the 2007 FOCUS Incentive plan and as a result all 319,600 outstanding stock options under this plan were cancelled.

Equity Appreciation Rights Plan

In November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the “2010 Plan”).  The total number of Equity Appreciation Right Units (Units) the Plan can issue shall not exceed an aggregate of 750,000 Units, of which 100,000 Units were granted during the year ended December 31, 2010 with a vesting date of December 31, 2012.  On March 7, 2012, we granted an additional 250,000 Units with vesting dates ranging from December 31, 2014 through December 31, 2016.

The 2010 Plan provides that Units granted shall fully vest three years from the grant date unless terminated earlier.  Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date.  Unit redemption payments under this plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date.

Total compensation expense related to these Units based on the estimated appreciation over their remaining terms was $11,195 and $5,931 for the three months ended June 30, 2012 and 2011,

8

respectively, and $14,005 and $32,472 for the six months ended June 30, 2012 and 2011, respectively.  At June 30, 2012 and December 31, 2011, approximately $76,000 and $62,000 have been accrued under this plan.  As of June 30, 2012, approximately $71,000 of this balance is included in Other Accrued Liabilities as it is an estimate of the amount to be paid within 12 months.  The remaining $5,000 balance at June 30, 2012 and all of the balance at December 31, 2011 are included in Other Long-Term Liabilities.

Earnings per Common Share

For the three and six months ended June 30, 2012 and 2011, the effect of all stock options is antidilutive.  Therefore, no outstanding options were included in the computation of per-share amounts.

Segment Reporting Information

All of our operations fall under the Contract Manufacturing segment within the Electronic Manufacturing Services industry.  We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements.  We share resources for sales, marketing, engineering, supply chain management, cash and risk management, banking, credit and collections, human resources, payroll, internal control, audit, taxes, SEC reporting and corporate accounting.  Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of replacement cost or net realizable value).  Costs include material, labor, and overhead required in the warehousing and production of our products.  Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.

Inventories are as follows:

	June 30			December 31
	2012			2011
Raw Materials	$	14,047,395		$	13,056,955
Work in Process	2,942,268			3,202,002
Finish Goods	3,260,052			3,880,764
Reserve	(1,356,211		)	(1,110,128		)
Total	$	18,893,504		$	19,029,593

Finite Life Intangible Assets

Finite life intangible assets at June 30, 2012 and December 31, 2011 are as follows:

9

	June 30, 2012
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	9	$	79,373	$	31,709	$	47,664
Customer Base	0	676,557		676,557		—
Totals		$	755,930	$	708,266	$	47,664

	December 31, 2011
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	10	$	79,373	$	29,106	$	50,267
Customer Base	1	676,557		665,277		11,280
Totals		$	755,930	$	694,383	$	61,547

Amortization expense for the three months ended June 30, 2012 and 2011 was $1,283 and $35,151, respectively.  Amortization expense for the six months ended June 30, 2012 and 2011 was $13,883 and $70,302, respectively.  Estimated future amortization expense related to these assets is as follows:

Remainder of 2012	$	3,000
2013	5,000
2014	5,000
2015	5,000
2016	5,000
Thereafter	25,000
Total	$	48,000

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable.  With regard to cash, we maintain our excess cash balances in checking accounts at one high-credit quality financial institution.  These accounts may at times exceed federally insured limits.  We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.

One customer accounted for 10% or more of our net sales for the three and six months ended June 30, 2012 and 2011:

10

	Three Months Ended				Six Months Ended
	June 30				June 30
	2012		2011		2012		2011
GE Medical Division	16	%	15	%	16	%	15	%
GE Transportation Division	10		9		7		7
Total GE Medical & Transportation Division	26	%	24	%	23	%	22	%

Accounts receivable from G.E.’s Medical and Transportation Divisions represented 20% and 17% of total accounts receivable at June 30, 2012 and December 31, 2011, respectively.

Export sales represented 6% of consolidated net sales for the three months ended June 30, 2012 and 2011.  Export sales represented 7% and 6% of net sales for the six months ended June 30, 2012 and 2011, respectively.

NOTE 3. FINANCING ARRANGEMENTS

On May 2, 2012 we entered into the fourth amendment to the third amended and restated credit agreement with Wells Fargo Bank (WFB).  The credit agreement with WFB provides for a line of credit arrangement of $13.5 million, which expires if not renewed, on May 31, 2015.  The credit arrangement also has a $1.8 million real estate term note with a maturity date of March 31, 2027 which replaces the $0.9 million real estate term note that was to expire on May 31, 2012, and a new term loan of up to $2.0 million for capital expenditures to be made prior to December 31, 2013 with a maturity date of May 31, 2015.

Both the line of credit and real estate term note are subject to variations in LIBOR rates.  The weighted-average interest rate on our line of credit was 3.7% and 3.8% for the three and six months ended June 30, 2012, respectively, while the weighted-average rate on our real estate term loan was 3.6% and 3.9% for the same periods.  The line of credit, real estate term note, and equipment term loans with WFB contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.  On June 30, 2012, we had outstanding advances of $8.3 million under the line of credit, with unused availability of $4.3 million supported by our borrowing base and we were in compliance with all covenants.

NOTE 4.  INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate.  As the year progresses, we refine our estimate based on the facts and circumstances by each tax jurisdiction.  Our effective tax rate for the three months ended June 30, 2012 was 38%, compared with 14% for the three months ended June 30, 2011, respectively.  The effective tax rate for the year ended December 31, 2012 is expected to be 37% compared to 32% for the year ended December 31, 2011.

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The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three and six months ended June 30, 2012 and 2011 are as follows:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2012			2011			2012			2011
Statutory federal tax provision	$	63,000		$	58,000		$	125,000		$	377,000
State income taxes	12,000			6,000			16,000			33,000
Income tax credits	(3,000		)	(16,000		)	(6,000		)	(32,000		)
Tax authority closing agreement	—			(96,000		)	—			(96,000		)
Change in uncertain tax positions	(2,000		)	90,000			8,000			90,000
Other	6,000			(18,000		)	(8,000		)	(35,000		)
Income tax expense	$	76,000		$	24,000		$	135,000		$	337,000

At June 30, 2012 we had $126,000 of net uncertain tax benefit positions recorded in other long-term liabilities that would reduce our effective income tax rate if recognized.  The $8,000 increase from December 31, 2011 was related to 2012 state research and experimentation credits.

NOTE 5. ACQUISITIONS

On January 1, 2011, we completed the purchase of certain assets and certain liabilities relating to Winland Electronics, Inc.’s EMS operations (Winland) located in Mankato, MN.  Winland is a designer and manufacturer of custom electronic control products and systems.  This purchase provided needed manufacturing capacity, particularly for supporting medical and industrial customers with printed circuit board assemblies and higher-level builds.  The acquisition was accounted for as a business combination and results of operations since the date of acquisition are included in the consolidated financial statements.

We paid $1,042,389 in cash at closing, $212,233 on July 1, 2011 and $250,000 on October 1, 2011.  As provided for in the purchase agreement, our July 1, 2011 required payment of $250,000 was reduced by $37,767 for acquired accounts receivable which were deemed uncollectible in the second quarter and assigned back to Winland.  As part of the acquisition we also agreed to purchase from Winland a minimum of $2,200,000 of inventories to be consumed over a period of 24 months.  We have exceeded this minimum requirement as of June 30, 2012.

The following table presents the allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values at the time of the acquisition:

12

Accounts receivable	$	1,914,723
Property, plant and equipment	2,451,000
Accounts payable assumed	(1,772,334		)
Lease payoff	(259,385		)
Net assets acquired	2,334,004
Purchase price	1,542,389
Bargain purchase gain	$	791,615

We recognized a $791,615 bargain purchase gain related to the excess fair value over the purchase price for the assets acquired in the first quarter of 2011.

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview:

We are a Wayzata, Minnesota based full-service Electronics Manufacturing Services (EMS) contract manufacturer of wire and cable assemblies, printed circuit board assemblies, higher-level assemblies and box builds for a wide range of industries.  We provide value added services and technical support including design, testing, prototyping and supply chain management to customers mainly in the Aerospace and Defense, Medical, and Industrial Equipment markets. We maintain manufacturing facilities in Baxter, Bemidji, Blue Earth, Mankato, Merrifield, and Milaca, Minnesota; Augusta, Wisconsin; and Monterrey, Mexico.

Summary of Results:

For the quarter ended June 30, 2012, we reported net sales of $28.0 million compared to $27.8 million reported in the same quarter of 2011, a slight 1% increase.  Our 90-day backlog at June 30, 2012 was $17.3 million.  Both our sales and backlog position are showing mixed results due to the sluggish economy and its impact on many of our customers.

Our gross profit percentage for the three and six months ended June 30, 2012 was 11.0% and 10.8%, respectively.  The gross profit percentage for the three and six months ended June 30, 2011 was 11.6% and 11.3%, respectively.  The decrease in gross profit percentage from 2011 was due to product and service mix and under utilized plant capacity.  Income from operations was approximately $319,000 and $647,000 for the three and six months ended June 30, 2012, respectively and $339,000 and $626,000 for the three and six months ended June 30, 2011, respectively.

Net income for the second quarter of 2012 was $125,925 or $0.05 per diluted common share, compared to net income of $146,094 or $0.05 per diluted common share for the same period in 2011.  Net income for the six months ended June 30, 2012 was $248,730 or $0.09 per diluted common share, while net income for the same period in 2011 totaled $772,282 or $0.28 per diluted common share, with the net after tax impact of the non-operating gain increasing net income by $0.5 million or $0.20 per diluted common share.

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Cash provided from operating activities was $1.3 million in the first six months of 2012.  Cash used in operating activities for the same period in 2011 was $4.7 million.  The cash used in 2011 was needed to fund the working capital needs of our Mankato acquisition.

(1.)Results of Operations:

The following table presents statements of income data as percentages of total net sales for the periods indicated:

	Three Months Ended				Six Months Ended
	June 30				June 30
	2012		2011		2012		2011
Net Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of Goods Sold	89.0		88.4		89.2		88.7
Gross Profit	11.0		11.6		10.8		11.3
Selling Expenses	4.1		3.1		4.0		3.2
General and Administrative Expenses	5.8		7.3		5.7		7.0
Income from Operations	1.1		1.2		1.1		1.1
Bargain Purchase Gain	0.0		0.0		0.0		1.4
Other Expenses, Net	(0.4	)	(0.6	)	(0.5	)	(0.5	)
Income Before Income Taxes	0.7		0.6		0.6		2.0
Income Tax Expense	0.3		0.1		0.2		0.6
Net Income	0.4	%	0.5	%	0.4	%	1.4	%

Net Sales:

We reported net sales of $28.0 million and $27.8 million for the three months ended June 30, 2012 and 2011, respectively.  Net sales for the six months ended June 30, 2012 and 2011 were $56.4 million and $56.8 million, respectively.

Net sales by industry markets for the three and six month periods ended June 30, 2012 and 2011 are as follows:

	Three Months Ended			Six Months Ended
	June 30			June 30
	2012	2011	%	2012	2011	%
(in thousands)	$	$	Change	$	$	Change
Aerospace and Defense	3,408	2,764	23	8,067	7,175	12
Medical	8,067	7,781	4	15,892	15,790	1
Industrial	16,558	17,251	-4	32,435	33,830	-4
Total Sales	28,033	27,796	1	56,394	56,795	-1

The Aerospace and Defense increase relates to delays in approving defense budgets and funding in 2011.  Medical sales are up slightly, while our Industrial customers continue to be impacted by the slow overall economy.

14

Backlog:

Our 90-day order backlog as of June 30, 2012 was approximately $17.3 million, compared to approximately $18.4 million at the beginning of the quarter and $22.8 million at June 30, 2011.  The biggest reduction in backlog relates to our Industrial customers and the sluggish economy.

Backlog by industry market is shown below.

	Backlog as of the Quarter Ended
	June 30		March 31		June 30
(in thousands)	2012		2012		2011
Aerospace and Defense	$	3,275	$	2,954	$	4,025
Medical	5,858		5,858		6,314
Industrial	8,161		9,632		12,445
Total Backlog	$	17,294	$	18,444	$	22,784

Gross Profit:

Gross profit as a percent of net sales for the three months ended June 30, 2012 and 2011 was 11.0% and 11.6% of net sales, respectively.  Gross profit percentage for the six months ended June 30, 2012 and 2011 was 10.8% and 11.3%, respectively.  Mix of product and services along with underutilized plant capacity accounts for the majority of the change in gross margin percentage.

Selling Expense:

Our selling expenses were $1.2 million or 4.1% of net sales and $0.9 million or 3.1% of net sales for the three months ended June 30, 2012 and 2011, respectively.  Selling expenses were $2.2 million or 4.0% of net sales and $1.8 million or 3.2% of net sales for the six months ended June 30, 2012 and 2011, respectively.  Our selling expense increase in 2012 comes from investing in more resources for our business development infrastructure and marketing initiatives.

General and Administrative Expense:

Our general and administrative expenses were $1.6 million or 5.8% of net sales and $2.0 million or 7.3% of net sales for the three months ended June 30, 2012 and 2011, respectively.  General and administrative expenses were $3.2 million or 5.7% of net sales and $4.0 million or 7.1% of net sales for the six months ended June 30, 2012 and 2011, respectively.  People related expenses for open positions and redeployment into manufacturing and sales functions account for the majority of the decrease in 2012.

15

Other Income (Expense):

Other expense was $0.1 million and $0.2 million for the three months ended June 30, 2012 and 2011, respectively.  Other expense was $0.3 million for the six months ended June 30, 2012 compared to other income of $0.5 million for the six months ended June 30, 2011.  Other income in the first six months of 2011 relates primarily to a bargain purchase gain of $0.8 million from the Mankato acquisition in the first quarter of 2011.

Income Taxes:

Our effective tax rate for the three and six months ended June 30, 2012 was 38% and 35%, respectively, compared with 14% and 30% for the three and six months ended June 30, 2011, respectively.  The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three and six months ended June 30, 2012 are as follows:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2012			2011			2012			2011
Statutory federal tax provision	$	63,000		$	58,000		$	125,000		$	377,000
State income taxes	12,000			6,000			16,000			33,000
Income tax credits	(3,000		)	(16,000		)	(6,000		)	(32,000		)
Tax authority closing agreement	—			(96,000		)	—			(96,000		)
Change in uncertain tax positions	(2,000		)	90,000			8,000			90,000
Other	6,000			(18,000		)	(8,000		)	(35,000		)
Income tax expense	$	76,000		$	24,000		$	135,000		$	337,000

Liquidity and Capital Resources:

We have satisfied our liquidity needs over the past several years with cash flows generated from operations and an operating line of credit through WFB.  We also have real estate and equipment term loans.  Both the line of credit and real estate term note are subject to fluctuations in the LIBOR rates.  The line of credit, real estate term note, and equipment loans with WFB contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.  The availability under our line is subject to borrowing base requirements, and advances are at the discretion of the lender.  The line of credit is secured by substantially all of our assets.

On June 30, 2012, we had outstanding advances of $8.3 million under the line of credit and unused availability of $4.3 million supported by our borrowing base.  We believe our financing arrangements (see Note 3) and cash flows provided by operations will be sufficient to satisfy our future working capital needs.  Our working capital was $14.0 million and $12.3 million as of June 30, 2012 and December 31, 2011.  The increase in working capital relates primarily to the reclassification of the real estate term note from current liabilities to long term liabilities as a result of our new financing arrangement and a reduction in advances outstanding under the line of credit.

16

Net cash provided by operating activities for the six months ended June 30, 2012 was $1.3 million.  Income and non-cash addbacks for depreciation and amortization accounted for the majority of the operating cash provided.  Net cash used in operating activities for the six months ended June 30, 2011 was $4.7 million.  The cash flow used in operations for the six months ended June 30, 2011 was primarily the result of working capital requirements needed to support the newly acquired Mankato operation, which included the purchase of approximately $4.2 million of inventory.

Net cash used in investing activities of $1.0 million for the six months ended June 30, 2012 is comprised primarily of property and equipment purchases to support the business.

Net cash used in financing activities for the six months ended June 30, 2012 was $0.3 million, mainly due to repayments on the line of credit of $1.1 million and payments on long-term debt of $0.3 million, offset by loan proceeds of $1.1 million.

Critical Accounting Policies and Estimates

Our significant accounting policies and estimates are summarized in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2011.  There have been no significant changes in these critical accounting policies since December 31, 2011.  Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates.  Such judgments are subject to an inherent degree of uncertainty.  These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate.  Actual results could differ from these estimates.

Forward-Looking Statements:

Those statements in the foregoing report that are not historical facts are forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such statements generally will be accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “possible,” “potential,” “predict,” “project,” or other similar words that convey the uncertainty of future events or outcomes.  Although we believe these forward-looking statements are reasonable, they are based upon a number of assumptions concerning future conditions, any or all of which may ultimately prove to be inaccurate.  Forward-looking statements involve a number of risks and uncertainties.  Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation:

·Volatility in the marketplace which may affect market supply and demand for our products;

·Increased competition;

·Changes in the reliability and efficiency of operating facilities or those of third parties;

·Risks related to availability of labor;

·Increase in certain raw material costs such as copper;

·Commodity and energy cost instability;

17

·General economic, financial and business conditions that could affect our financial condition and results of operations;

·Successful integration of recent acquisitions

The factors identified above are believed to be important factors (but not necessarily all of the important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by us.  Unpredictable or unknown factors not discussed herein could also have material adverse effects on forward-looking statements.  All forward-looking statements included in this Form 10-Q are expressly qualified in their entirety by the forgoing cautionary statements.  We undertake no obligations to update publicly any forward-looking statement (or its associated cautionary language) whether as a result of new information or future events.

Please refer to forward-looking statements and risks as previously disclosed in our report on Form 10-K for the fiscal year ended December 31, 2011.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Executive Vice President and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act).  Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the date of such evaluation in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting:

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

18

PART II

ITEM 1.  LEGAL PROCEEDINGS

We are subject to various legal proceedings and claims that arise in the ordinary course of business.

ITEM 6. EXHIBITS

Exhibits

31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.
32	Certification of the Chief Executive Officer and Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Financial statements from the quarterly report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL: (i) Condensed Balance Sheets, (ii) Condensed Statements of Operations, (iii) Condensed Statements of Cash Flows, and (iv) the Notes to Condensed Financial Statements.

19

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Nortech Systems Incorporated and Subsidiary

Date: August 10, 2012	by	/s/ Michael J. Degen
	Michael J. Degen
	President and Chief
	Executive Officer
Date: August 10, 2012	by	/s/ Richard G. Wasielewski
	Richard G. Wasielewski
	Chief Financial Officer

20

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934

I, Michael J. Degen, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Nortech Systems, Inc. and Subsidiary;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about

the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 10, 2012	By:	/s/ Michael J. Degen
	Michael J. Degen
	Chief Executive Officer
	Nortech Systems Incorporated

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934

I, Richard G. Wasielewski, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Nortech Systems, Inc. and Subsidiary;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in the report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 10, 2012	By:	/s/ Richard G. Wasielewski
	Richard G. Wasielewski
	Chief Financial Officer
	Nortech Systems Incorporated

EX-32

Exhibit 32

Written Statement of the President and Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Michael J. Degen, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2012 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	August 10, 2012
By:	/s/ Michael J. Degen
	Michael J. Degen
	Chief Executive Officer
	Nortech Systems Incorporated

Exhibit 32

Written Statement of the Executive Vice President and Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Richard G. Wasielewski, hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2012 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	August 10, 2012
By:	/s/ Richard G. Wasielewski
	Richard G. Wasielewski
	Chief Financial Officer
	Nortech Systems Incorporated

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INCOME TAXES

6 Months Ended

Jun. 30, 2012

INCOME TAXES

INCOME TAXES

NOTE 4.  INCOME TAXES

On a quarterly basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision based on the anticipated rate.  As the year progresses, we refine our estimate based on the facts and circumstances by each tax jurisdiction.  Our effective tax rate for the three months ended June 30, 2012 was 38%, compared with 14% for the three months ended June 30, 2011, respectively.  The effective tax rate for the year ended December 31, 2012 is expected to be 37% compared to 32% for the year ended December 31, 2011.

The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three and six months ended June 30, 2012 and 2011 are as follows:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2012			2011			2012			2011
Statutory federal tax provision	$	63,000		$	58,000		$	125,000		$	377,000
State income taxes	12,000			6,000			16,000			33,000
Income tax credits	(3,000		)	(16,000		)	(6,000		)	(32,000		)
Tax authority closing agreement	—			(96,000		)	—			(96,000		)
Change in uncertain tax positions	(2,000		)	90,000			8,000			90,000
Other	6,000			(18,000		)	(8,000		)	(35,000		)
Income tax expense	$	76,000		$	24,000		$	135,000		$	337,000

At June 30, 2012 we had $126,000 of net uncertain tax benefit positions recorded in other long-term liabilities that would reduce our effective income tax rate if recognized.  The $8,000 increase from December 31, 2011 was related to 2012 state research and experimentation credits.

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FINANCING ARRANGEMENTS

6 Months Ended

Jun. 30, 2012

FINANCING ARRANGEMENTS

FINANCING ARRANGEMENTS

NOTE 3. FINANCING ARRANGEMENTS

On May 2, 2012 we entered into the fourth amendment to the third amended and restated credit agreement with Wells Fargo Bank (WFB).  The credit agreement with WFB provides for a line of credit arrangement of $13.5 million, which expires if not renewed, on May 31, 2015.  The credit arrangement also has a $1.8 million real estate term note with a maturity date of March 31, 2027 which replaces the $0.9 million real estate term note that was to expire on May 31, 2012, and a new term loan of up to $2.0 million for capital expenditures to be made prior to December 31, 2013 with a maturity date of May 31, 2015.

Both the line of credit and real estate term note are subject to variations in LIBOR rates.  The weighted-average interest rate on our line of credit was 3.7% and 3.8% for the three and six months ended June 30, 2012, respectively, while the weighted-average rate on our real estate term loan was 3.6% and 3.9% for the same periods.  The line of credit, real estate term note, and equipment term loans with WFB contain certain covenants which, among other things, require us to adhere to regular reporting requirements, abide by annual shareholder dividend limitations, maintain certain financial performance, and limit the amount of annual capital expenditures.  On June 30, 2012, we had outstanding advances of $8.3 million under the line of credit, with unused availability of $4.3 million supported by our borrowing base and we were in compliance with all covenants.

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CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2012	Dec. 31, 2011
Current Assets
Cash	$ 0	$ 0
Accounts Receivable, Less Allowance for Uncollectible Accounts	15,642,510	16,720,462
Inventories	18,893,504	19,029,593
Prepaid Expenses	718,829	572,140
Income Taxes Receivable		170,292
Deferred Income Taxes	978,000	805,000
Total Current Assets	36,232,843	37,297,487
Property and Equipment, Net	9,178,156	9,083,874
Finite Life Intangible Assets, Net of Accumulated Amortization	47,664	61,547
Other Assets	339,235	339,235
Total Assets	45,797,898	46,782,143
Current Liabilities
Line of Credit	8,268,737	9,345,044
Current Maturities of Long-Term Debt	370,340	1,310,210
Accounts Payable	10,073,981	11,333,013
Accrued Payroll and Commissions	2,399,955	2,170,852
Other Accrued Liabilities	981,803	852,936
Income Taxes Payable	57,764
Total Current Liabilities	22,152,580	25,012,055
Long-Term Liabilities
Long-Term Debt, Net of Current Maturities	2,510,328	812,917
Deferred Income Taxes	249,000	271,000
Other Long-Term Liabilities	131,466	180,378
Total Long-Term Liabilities	2,890,794	1,264,295
Total Liabilities	25,043,374	26,276,350
Shareholders' Equity
Preferred Stock, $1 par value; 1,000,000 Shares Authorized: 250,000 Shares Issued and Outstanding	250,000	250,000
Common Stock - $0.01 par value; 9,000,000 Shares Authorized: 2,742,992 Shares Issued and Outstanding at both June 30, 2012 and December 31, 2011	27,430	27,430
Additional Paid-In Capital	15,725,392	15,725,392
Accumulated Other Comprehensive Loss	(62,936)	(62,936)
Retained Earnings	4,814,638	4,565,907
Total Shareholders' Equity	20,754,524	20,505,793
Total Liabilities and Shareholders' Equity	$ 45,797,898	$ 46,782,143

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading.  It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our latest shareholders’ annual report on Form 10-K.  The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  In preparing these consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality.  Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiary, Manufacturing Assembly Solutions of Monterrey, Inc.  All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

We recognize revenue upon shipment of manufactured products to customers, when title has passed, all contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. We also provide engineering services separate from the manufacture of a product. Revenue for engineering services is recognized upon completion of the engineering process, providing standalone fair value to our customers. Our engineering services are short-term in nature. In addition, we have another separate source of revenue that comes from short-term repair services, which are recognized upon completion of the repairs and shipment of product back to the customer. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

Stock Options

Following is the status of all stock options as of June 30, 2012, including changes during the six-month period then ended:

	Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding - January 1, 2012	623,600		$	7.33
Forfeited	(11,250	)	$	7.83
Cancelled	(319,600	)	$	7.43
Outstanding - June 30, 2012	292,750		$	7.19	2.97	$	—
Exercisable - June 30, 2012	292,750		$	7.19	2.97	$	—

There were no options exercised during the three and six months ended June 30, 2012 and 2011.

Total compensation expense related to stock options for the three months ended June 30, 2012 and 2011 was $0 and $7,930, respectively.  Total compensation expense related to stock options for the six months ended June 30, 2012 and 2011 was $0 and $15,862, respectively.  As of June 30, 2012, there was no unrecognized compensation expense as all options were fully vested.

In January 2012, the Board of Directors terminated the 2007 FOCUS Incentive plan and as a result all 319,600 outstanding stock options under this plan were cancelled.

Equity Appreciation Rights Plan

In November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the “2010 Plan”).  The total number of Equity Appreciation Right Units (Units) the Plan can issue shall not exceed an aggregate of 750,000 Units, of which 100,000 Units were granted during the year ended December 31, 2010 with a vesting date of December 31, 2012.  On March 7, 2012, we granted an additional 250,000 Units with vesting dates ranging from December 31, 2014 through December 31, 2016.

The 2010 Plan provides that Units granted shall fully vest three years from the grant date unless terminated earlier.  Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date.  Unit redemption payments under this plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date.

Total compensation expense related to these Units based on the estimated appreciation over their remaining terms was $11,195 and $5,931 for the three months ended June 30, 2012 and 2011, respectively, and $14,005 and $32,472 for the six months ended June 30, 2012 and 2011, respectively.  At June 30, 2012 and December 31, 2011, approximately $76,000 and $62,000 have been accrued under this plan.  As of June 30, 2012, approximately $71,000 of this balance is included in Other Accrued Liabilities as it is an estimate of the amount to be paid within 12 months.  The remaining $5,000 balance at June 30, 2012 and all of the balance at December 31, 2011 are included in Other Long-Term Liabilities.

Earnings per Common Share

For the three and six months ended June 30, 2012 and 2011, the effect of all stock options is antidilutive.  Therefore, no outstanding options were included in the computation of per-share amounts.

Segment Reporting Information

All of our operations fall under the Contract Manufacturing segment within the Electronic Manufacturing Services industry.  We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements.  We share resources for sales, marketing, engineering, supply chain management, cash and risk management, banking, credit and collections, human resources, payroll, internal control, audit, taxes, SEC reporting and corporate accounting.  Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of replacement cost or net realizable value).  Costs include material, labor, and overhead required in the warehousing and production of our products.  Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.

Inventories are as follows:

	June 30			December 31
	2012			2011
Raw Materials	$	14,047,395		$	13,056,955
Work in Process	2,942,268			3,202,002
Finish Goods	3,260,052			3,880,764
Reserve	(1,356,211		)	(1,110,128		)
Total	$	18,893,504		$	19,029,593

Finite Life Intangible Assets

Finite life intangible assets at June 30, 2012 and December 31, 2011 are as follows:

	June 30, 2012
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	9	$	79,373	$	31,709	$	47,664
Customer Base	0	676,557		676,557		—
Totals		$	755,930	$	708,266	$	47,664

	December 31, 2011
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	10	$	79,373	$	29,106	$	50,267
Customer Base	1	676,557		665,277		11,280
Totals		$	755,930	$	694,383	$	61,547

Amortization expense for the three months ended June 30, 2012 and 2011 was $1,283 and $35,151, respectively.  Amortization expense for the six months ended June 30, 2012 and 2011 was $13,883 and $70,302, respectively.  Estimated future amortization expense related to these assets is as follows:

Remainder of 2012	$	3,000
2013	5,000
2014	5,000
2015	5,000
2016	5,000
Thereafter	25,000
Total	$	48,000

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CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

6 Months Ended

Jun. 30, 2012

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

NOTE 2. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and accounts receivable.  With regard to cash, we maintain our excess cash balances in checking accounts at one high-credit quality financial institution.  These accounts may at times exceed federally insured limits.  We grant credit to customers in the normal course of business and do not require collateral on our accounts receivable.

One customer accounted for 10% or more of our net sales for the three and six months ended June 30, 2012 and 2011:

	Three Months Ended				Six Months Ended
	June 30				June 30
	2012		2011		2012		2011
GE Medical Division	16	%	15	%	16	%	15	%
GE Transportation Division	10		9		7		7
Total GE Medical & Transportation Division	26	%	24	%	23	%	22	%

Accounts receivable from G.E.’s Medical and Transportation Divisions represented 20% and 17% of total accounts receivable at June 30, 2012 and December 31, 2011, respectively.

Export sales represented 6% of consolidated net sales for the three months ended June 30, 2012 and 2011.  Export sales represented 7% and 6% of net sales for the six months ended June 30, 2012 and 2011, respectively.

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Jun. 30, 2012	Dec. 31, 2011
CONSOLIDATED BALANCE SHEETS
Preferred Stock, par value (in dollars per share)	$ 1	$ 1
Preferred Stock, Shares Authorized	1,000,000	1,000,000
Preferred Stock, Shares Issued	250,000	250,000
Preferred Stock, Shares Outstanding	250,000	250,000
Common Stock - par value (in dollars per share)	$ 0.01	$ 0.01
Common Stock - Shares Authorized	9,000,000	9,000,000
Common Stock - Shares Issued	2,742,992	2,742,992
Common Stock - Shares Outstanding	2,742,992	2,742,992

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2) (USD $)	3 Months Ended		6 Months Ended			6 Months Ended	12 Months Ended	6 Months Ended	12 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011	Jun. 30, 2012 Bond Issue Costs	Dec. 31, 2011 Bond Issue Costs	Jun. 30, 2012 Customer Base	Dec. 31, 2011 Customer Base
Finite Life Intangible Assets
Remaining Lives (in years)						9 years	10 years	0 years	1 year
Gross Carrying Amount	$ 755,930		$ 755,930		$ 755,930	$ 79,373	$ 79,373	$ 676,557	$ 676,557
Accumulated Amortization	708,266		708,266		694,383	31,709	29,106	676,557	665,277
Net Book Value	47,664		47,664		61,547	47,664	50,267		11,280
Amortization expense	1,283	35,151	13,883	70,302
Estimated future amortization expense related to assets
Remainder of 2012	3,000		3,000
2013	5,000		5,000
2014	5,000		5,000
2015	5,000		5,000
2016	5,000		5,000
Thereafter	25,000		25,000
Total	$ 48,000		$ 48,000

XML

Document and Entity Information	6 Months Ended
	Jun. 30, 2012	Jul. 31, 2012
Document and Entity Information
Entity Registrant Name	NORTECH SYSTEMS INC
Entity Central Index Key	0000722313
Document Type	10-Q
Document Period End Date	Jun. 30, 2012
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		2,742,992
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2

XML

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (Details)	6 Months Ended	3 Months Ended		6 Months Ended		3 Months Ended		6 Months Ended		3 Months Ended		6 Months Ended		3 Months Ended		6 Months Ended		3 Months Ended	12 Months Ended
	Jun. 30, 2012 entity	Jun. 30, 2012 Net sales Customer concentration risk customer	Jun. 30, 2011 Net sales Customer concentration risk customer	Jun. 30, 2012 Net sales Customer concentration risk customer	Jun. 30, 2011 Net sales Customer concentration risk customer	Jun. 30, 2012 Net sales Customer concentration risk GE Medical Division	Jun. 30, 2011 Net sales Customer concentration risk GE Medical Division	Jun. 30, 2012 Net sales Customer concentration risk GE Medical Division	Jun. 30, 2011 Net sales Customer concentration risk GE Medical Division	Jun. 30, 2012 Net sales Customer concentration risk GE Transportation Division	Jun. 30, 2011 Net sales Customer concentration risk GE Transportation Division	Jun. 30, 2012 Net sales Customer concentration risk GE Transportation Division	Jun. 30, 2011 Net sales Customer concentration risk GE Transportation Division	Jun. 30, 2012 Net sales Customer concentration risk Total GE Medical & Transportation Division	Jun. 30, 2011 Net sales Customer concentration risk Total GE Medical & Transportation Division	Jun. 30, 2012 Net sales Customer concentration risk Total GE Medical & Transportation Division	Jun. 30, 2011 Net sales Customer concentration risk Total GE Medical & Transportation Division	Jun. 30, 2012 Accounts receivable Customer concentration risk Total GE Medical & Transportation Division	Dec. 31, 2011 Accounts receivable Customer concentration risk Total GE Medical & Transportation Division
Concentration of credit risk and major customers
Excess cash balance, number of high credit quality financial institution	1
Number of significant customers		1	1	1	1
Threshold percentage		10.00%	10.00%	10.00%	10.00%
Percentage of concentration risk						16.00%	15.00%	16.00%	15.00%	10.00%	9.00%	7.00%	7.00%	26.00%	24.00%	23.00%	22.00%	20.00%	17.00%
Percentage of export sales to consolidated sales		6.00%	6.00%	7.00%	6.00%

XML

CONSOLIDATED STATEMENTS OF INCOME (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Net Sales	$ 28,033,345	$ 27,796,576	$ 56,394,259	$ 56,794,773
Cost of Goods Sold	24,941,591	24,561,236	50,294,270	50,363,268
Gross Profit	3,091,754	3,235,340	6,099,989	6,431,505
Operating Expenses:
Selling Expenses	1,152,808	871,409	2,240,624	1,800,793
General and Administrative Expenses	1,620,360	2,024,797	3,212,349	4,004,916
Total Operating Expenses	2,773,168	2,896,206	5,452,973	5,805,709
Income From Operations	318,586	339,134	647,016	625,796
Other Income (Expense)
Interest Expense	(100,303)	(142,093)	(237,063)	(262,085)
Bargain Purchase Gain				791,615
Miscellaneous Expense, net	(16,358)	(26,947)	(26,223)	(46,044)
Total Other Expense	(116,661)	(169,040)	(263,286)	483,486
Income Before Income Taxes	201,925	170,094	383,730	1,109,282
Income Tax Expense	76,000	24,000	135,000	337,000
Net Income	$ 125,925	$ 146,094	$ 248,730	$ 772,282
Earnings Per Common Share:
Basic and Diluted (in dollars per share)	$ 0.05	$ 0.05	$ 0.09	$ 0.28
Weighted Average Number of Common Shares Outstanding Used for Basic Earnings Per Common Share	2,742,992	2,742,992	2,742,992	2,742,992
Weighted Average Number of Common Shares Outstanding Used for Diluted Earnings Per Common Share (in shares)	2,742,992	2,742,992	2,742,992	2,742,992

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

6 Months Ended

Jun. 30, 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Schedule of status of all stock options

	Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding - January 1, 2012	623,600		$	7.33
Forfeited	(11,250	)	$	7.83
Cancelled	(319,600	)	$	7.43
Outstanding - June 30, 2012	292,750		$	7.19	2.97	$	—
Exercisable - June 30, 2012	292,750		$	7.19	2.97	$	—

Schedule of inventories

	June 30			December 31
	2012			2011
Raw Materials	$	14,047,395		$	13,056,955
Work in Process	2,942,268			3,202,002
Finish Goods	3,260,052			3,880,764
Reserve	(1,356,211		)	(1,110,128		)
Total	$	18,893,504		$	19,029,593

Schedule of finite life intangible assets

	June 30, 2012
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	9	$	79,373	$	31,709	$	47,664
Customer Base	0	676,557		676,557		—
Totals		$	755,930	$	708,266	$	47,664

	December 31, 2011
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	10	$	79,373	$	29,106	$	50,267
Customer Base	1	676,557		665,277		11,280
Totals		$	755,930	$	694,383	$	61,547

Schedule of estimated future amortization expense related to assets

Remainder of 2012	$	3,000
2013	5,000
2014	5,000
2015	5,000
2016	5,000
Thereafter	25,000
Total	$	48,000

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 30, 2012

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Basis of Presentation

The accompanying unaudited consolidated financial statements for the interim periods have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the financial information and footnotes required by GAAP for complete financial statements, although we believe the disclosures are adequate to make the information presented not misleading.  It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our latest shareholders’ annual report on Form 10-K.  The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other interim period.  In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  In preparing these consolidated financial statements, we have made our best estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality.  Changes in the estimates and assumptions used by us could have a significant impact on our financial results, since actual results could differ from those estimates.

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of Nortech Systems Incorporated and its wholly owned subsidiary, Manufacturing Assembly Solutions of Monterrey, Inc.  All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

Revenue Recognition

We recognize revenue upon shipment of manufactured products to customers, when title has passed, all contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured. We also provide engineering services separate from the manufacture of a product. Revenue for engineering services is recognized upon completion of the engineering process, providing standalone fair value to our customers. Our engineering services are short-term in nature. In addition, we have another separate source of revenue that comes from short-term repair services, which are recognized upon completion of the repairs and shipment of product back to the customer. Shipping and handling costs charged to our customers are included in net sales, while the corresponding shipping expenses are included in cost of goods sold.

Stock Options

Stock Options

Following is the status of all stock options as of June 30, 2012, including changes during the six-month period then ended:

	Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding - January 1, 2012	623,600		$	7.33
Forfeited	(11,250	)	$	7.83
Cancelled	(319,600	)	$	7.43
Outstanding - June 30, 2012	292,750		$	7.19	2.97	$	—
Exercisable - June 30, 2012	292,750		$	7.19	2.97	$	—

There were no options exercised during the three and six months ended June 30, 2012 and 2011.

Total compensation expense related to stock options for the three months ended June 30, 2012 and 2011 was $0 and $7,930, respectively.  Total compensation expense related to stock options for the six months ended June 30, 2012 and 2011 was $0 and $15,862, respectively.  As of June 30, 2012, there was no unrecognized compensation expense as all options were fully vested.

In January 2012, the Board of Directors terminated the 2007 FOCUS Incentive plan and as a result all 319,600 outstanding stock options under this plan were cancelled.

Equity Appreciation Rights Plan

Equity Appreciation Rights Plan

In November 2010, the Board of Directors approved the adoption of the Nortech Systems Incorporated Equity Appreciation Rights Plan (the “2010 Plan”).  The total number of Equity Appreciation Right Units (Units) the Plan can issue shall not exceed an aggregate of 750,000 Units, of which 100,000 Units were granted during the year ended December 31, 2010 with a vesting date of December 31, 2012.  On March 7, 2012, we granted an additional 250,000 Units with vesting dates ranging from December 31, 2014 through December 31, 2016.

The 2010 Plan provides that Units granted shall fully vest three years from the grant date unless terminated earlier.  Units give the holder a right to receive a cash payment equal to the appreciation in book value per share of common stock from the base date, as defined, to the redemption date.  Unit redemption payments under this plan shall be paid in cash within 90 days after we determine the book value of the Units as of the calendar year immediately preceding the redemption date.

Total compensation expense related to these Units based on the estimated appreciation over their remaining terms was $11,195 and $5,931 for the three months ended June 30, 2012 and 2011, respectively, and $14,005 and $32,472 for the six months ended June 30, 2012 and 2011, respectively.  At June 30, 2012 and December 31, 2011, approximately $76,000 and $62,000 have been accrued under this plan.  As of June 30, 2012, approximately $71,000 of this balance is included in Other Accrued Liabilities as it is an estimate of the amount to be paid within 12 months.  The remaining $5,000 balance at June 30, 2012 and all of the balance at December 31, 2011 are included in Other Long-Term Liabilities.

Earnings per Common Share

Earnings per Common Share

For the three and six months ended June 30, 2012 and 2011, the effect of all stock options is antidilutive.  Therefore, no outstanding options were included in the computation of per-share amounts.

Segment Reporting Information

Segment Reporting Information

All of our operations fall under the Contract Manufacturing segment within the Electronic Manufacturing Services industry.  We strategically direct production between our various manufacturing facilities based on a number of considerations to best meet our customers’ requirements.  We share resources for sales, marketing, engineering, supply chain management, cash and risk management, banking, credit and collections, human resources, payroll, internal control, audit, taxes, SEC reporting and corporate accounting.  Consolidated financial information is available that is evaluated regularly by the chief operating decision maker in assessing performance and allocating resources.

Inventories

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market (based on the lower of replacement cost or net realizable value).  Costs include material, labor, and overhead required in the warehousing and production of our products.  Inventory reserves are maintained for the estimated value of the inventories that may have a lower value than stated or quantities in excess of future production needs.

Inventories are as follows:

	June 30			December 31
	2012			2011
Raw Materials	$	14,047,395		$	13,056,955
Work in Process	2,942,268			3,202,002
Finish Goods	3,260,052			3,880,764
Reserve	(1,356,211		)	(1,110,128		)
Total	$	18,893,504		$	19,029,593

Finite Life Intangible Assets

Finite Life Intangible Assets

Finite life intangible assets at June 30, 2012 and December 31, 2011 are as follows:

	June 30, 2012
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	9	$	79,373	$	31,709	$	47,664
Customer Base	0	676,557		676,557		—
Totals		$	755,930	$	708,266	$	47,664

	December 31, 2011
	Remaining	Gross
	Lives	Carrying		Accumulated		Net Book
	(Years)	Amount		Amortization		Value
Bond Issue Costs	10	$	79,373	$	29,106	$	50,267
Customer Base	1	676,557		665,277		11,280
Totals		$	755,930	$	694,383	$	61,547

Amortization expense for the three months ended June 30, 2012 and 2011 was $1,283 and $35,151, respectively.  Amortization expense for the six months ended June 30, 2012 and 2011 was $13,883 and $70,302, respectively.  Estimated future amortization expense related to these assets is as follows:

Remainder of 2012	$	3,000
2013	5,000
2014	5,000
2015	5,000
2016	5,000
Thereafter	25,000
Total	$	48,000

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FINANCING ARRANGEMENTS (Details) (USD $)	6 Months Ended		3 Months Ended	6 Months Ended		3 Months Ended	6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011	Jun. 30, 2012 Line of credit	Jun. 30, 2012 Line of credit	May 02, 2012 Line of credit	Jun. 30, 2012 Real estate term loan	Jun. 30, 2012 Real estate term loan	Jun. 30, 2012 Real estate term note maturing on March 31, 2027	May 02, 2012 Real estate term note expiring on May 31, 2012	Jun. 30, 2012 Term loan Maximum
Financing arrangements
Variable rate basis	LIBOR			LIBOR			LIBOR
Maximum borrowing capacity					$ 13,500,000
Debt instrument, face amount								1,800,000	900,000	2,000,000
Weighted-average interest rate (as a percent)			3.70%	3.80%		3.60%	3.90%
Outstanding balance	8,268,737	9,345,044	8,300,000	8,300,000
Unused availability supported by entity's borrowing base			$ 4,300,000	$ 4,300,000

XML

ACQUISITIONS (Tables)

6 Months Ended

Jun. 30, 2012

ACQUISITIONS

Schedule of allocation of acquisition cost to assets acquired and liabilities assumed, based on their estimated fair values at time of acquisition

Accounts receivable	$	1,914,723
Property, plant and equipment	2,451,000
Accounts payable assumed	(1,772,334		)
Lease payoff	(259,385		)
Net assets acquired	2,334,004
Purchase price	1,542,389
Bargain purchase gain	$	791,615

XML

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS (Tables)

6 Months Ended

Jun. 30, 2012

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

Schedule of concentration of credit risk

	Three Months Ended				Six Months Ended
	June 30				June 30
	2012		2011		2012		2011
GE Medical Division	16	%	15	%	16	%	15	%
GE Transportation Division	10		9		7		7
Total GE Medical & Transportation Division	26	%	24	%	23	%	22	%

XML

INCOME TAXES (Tables)

6 Months Ended

Jun. 30, 2012

INCOME TAXES

Schedule of differences between federal income taxes computed at the federal statutory rate and reported income taxes

	Three Months Ended						Six Months Ended
	June 30						June 30
	2012			2011			2012			2011
Statutory federal tax provision	$	63,000		$	58,000		$	125,000		$	377,000
State income taxes	12,000			6,000			16,000			33,000
Income tax credits	(3,000		)	(16,000		)	(6,000		)	(32,000		)
Tax authority closing agreement	—			(96,000		)	—			(96,000		)
Change in uncertain tax positions	(2,000		)	90,000			8,000			90,000
Other	6,000			(18,000		)	(8,000		)	(35,000		)
Income tax expense	$	76,000		$	24,000		$	135,000		$	337,000

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $)	1 Months Ended	3 Months Ended		6 Months Ended		12 Months Ended
	Mar. 31, 2012	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2010	Dec. 31, 2011	Nov. 30, 2010
Inventories
Raw Materials		$ 14,047,395		$ 14,047,395			$ 13,056,955
Work in Process		2,942,268		2,942,268			3,202,002
Finish Goods		3,260,052		3,260,052			3,880,764
Reserve		(1,356,211)		(1,356,211)			(1,110,128)
Total		18,893,504		18,893,504			19,029,593
Stock Options
Shares
Outstanding at the beginning of the period (in shares)				623,600
Forfeited (in shares)				(11,250)
Cancelled (in shares)				(319,600)
Outstanding at the end of the period (in shares)		292,750		292,750
Exercisable at the end of the period (in shares)		292,750		292,750
Weighted-Average Exercise Price Per Share
Outstanding at the beginning of the period (in dollars per share)				$ 7.33
Forfeited (in dollars per share)				$ 7.83
Cancelled (in dollars per share)				$ 7.43
Outstanding at the end of the period (in dollars per share)		$ 7.19		$ 7.19
Exercisable at the end of the period (in dollars per share)		$ 7.19		$ 7.19
Weighted Average Remaining Contractual Term (in years)
Outstanding at the end of the period (in years)				2 years 11 months 19 days
Exercisable at the end of the period (in years)				2 years 11 months 19 days
Equity Appreciation Rights Plan
Total compensation expense		0	7,930	0	15,862
Equity Appreciation Rights Plan
Equity Appreciation Rights Plan
Total compensation expense		11,195	5,931	14,005	32,472
Accrued compensation		76,000		76,000			62,000
Accrued compensation included in other accrued liabilities		71,000		71,000
Accrued compensation included included in Other Long-Term Liabilities		$ 5,000		$ 5,000
Aggregate units that can be issued (in shares)								750,000
Shares issued	250,000					100,000
Vesting period from the grant date (in years)				3 years
Redemption cash payment period (in days)				90 days

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ACQUISITIONS (Details) (Winland Electronics, Inc.'s EMS operations (Winland), USD $)	1 Months Ended
	Jan. 31, 2011	Oct. 01, 2011	Jul. 01, 2011	Jan. 02, 2011
ACQUISITIONS
Cash paid for business acquisition		$ 250,000	$ 212,233	$ 1,042,389
Required payment for business acquisition			250,000
Uncollectible acquired accounts receivable by which required payment was reduced			37,767
Estimated fair values of assets acquired and liabilities assumed
Accounts receivable				1,914,723
Property, plant and equipment				2,451,000
Accounts payable assumed				(1,772,334)
Lease payoff				(259,385)
Net assets acquired				2,334,004
Purchase price				1,542,389
Bargain purchase gain	791,615
Inventories
ACQUISITIONS
Purchase commitment time period (in months)	24 months
Minimum | Inventories
ACQUISITIONS
Purchase commitment amount	$ 2,200,000

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash Flows From Operating Activities
Net Income	$ 248,730	$ 772,282
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
Depreciation	915,176	971,993
Amortization	13,883	70,302
Stock-Based Compensation		15,862
Interest on Swap Valuation		(18,140)
Bargain Purchase Gain		(791,615)
Deferred Income Taxes	(195,000)	191,000
Loss on Disposal of Property and Equipment	(499)	2,744
Changes in Current Operating Items, Net of Effects of Business Acquisitions
Accounts Receivable	1,077,952	(47,592)
Inventories	136,089	(5,416,349)
Prepaid Expenses and Other Assets	(146,689)	(135,740)
Income Taxes Receivable / Payable	228,056	133,940
Accounts Payable	(1,259,032)	(991,849)
Accrued Payroll and Commissions	229,103	798,052
Other Accrued Liabilities	81,338	(222,346)
Net Cash Provided by (Used in) Operating Activities	1,329,107	(4,667,456)
Cash Flows from Investing Activities:
Proceeds from Sale of Property and Equipment	36,856	1,400
Business Acquisitions		(1,042,389)
Purchase of Property and Equipment	(1,047,253)	(355,110)
Net Cash Used in Investing Activities	(1,010,397)	(1,396,099)
Cash Flows from Financing Activities:
Net Borrowings (Repayments) on Line of Credit	(1,076,307)	6,682,584
Proceeds from Long-Term Debt	1,085,970	1,380,904
Principal Payments on Long-Term Debt	(328,373)	(813,184)
Net Cash Provided by (Used in) Financing Activities	(318,710)	7,250,304
Net Increase in Cash	0	1,186,749
Cash - Beginning	0	230,582
Cash - Ending	0	1,417,331
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	192,572	266,413
Cash Paid During the Period for Income Taxes	87,602
Supplemental Noncash Investing and Financing Activities
Due to Seller for Business Acquisition		$ 462,233

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ACQUISITIONS

6 Months Ended

Jun. 30, 2012

ACQUISITIONS

ACQUISITIONS

NOTE 5. ACQUISITIONS

On January 1, 2011, we completed the purchase of certain assets and certain liabilities relating to Winland Electronics, Inc.’s EMS operations (Winland) located in Mankato, MN.  Winland is a designer and manufacturer of custom electronic control products and systems.  This purchase provided needed manufacturing capacity, particularly for supporting medical and industrial customers with printed circuit board assemblies and higher-level builds.  The acquisition was accounted for as a business combination and results of operations since the date of acquisition are included in the consolidated financial statements.

We paid $1,042,389 in cash at closing, $212,233 on July 1, 2011 and $250,000 on October 1, 2011.  As provided for in the purchase agreement, our July 1, 2011 required payment of $250,000 was reduced by $37,767 for acquired accounts receivable which were deemed uncollectible in the second quarter and assigned back to Winland.  As part of the acquisition we also agreed to purchase from Winland a minimum of $2,200,000 of inventories to be consumed over a period of 24 months.  We have exceeded this minimum requirement as of June 30, 2012.

The following table presents the allocation of the acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values at the time of the acquisition:

Accounts receivable	$	1,914,723
Property, plant and equipment	2,451,000
Accounts payable assumed	(1,772,334		)
Lease payoff	(259,385		)
Net assets acquired	2,334,004
Purchase price	1,542,389
Bargain purchase gain	$	791,615

We recognized a $791,615 bargain purchase gain related to the excess fair value over the purchase price for the assets acquired in the first quarter of 2011.

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INCOME TAXES (Details) (USD $)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2012	Dec. 31, 2011
INCOME TAXES
Effective income tax rate (as a percent)	38.00%	14.00%			37.00%	32.00%
Reconciliation of federal income taxes and reported income taxes
Statutory federal tax provision	$ 63,000	$ 58,000	$ 125,000	$ 377,000
State income taxes	12,000	6,000	16,000	33,000
Income tax credits	(3,000)	(16,000)	(6,000)	(32,000)
Tax authority closing agreement		(96,000)		(96,000)
Change in uncertain tax positions	(2,000)	90,000	8,000	90,000
Other	6,000	(18,000)	(8,000)	(35,000)
Income tax expense	76,000	24,000	135,000	337,000
Unrecognized tax benefits
Net uncertain tax benefit positions that would reduce effective income tax rate, if recognized	126,000		126,000
Increase in uncertain tax positions related to R&E credits			$ 8,000