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, 2013

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 August 1, 2013 - 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	7-12
	Item 2	-	Management’s Discussion and Analysis of Financial Condition And Results of Operations	12-17
	Item 4	-	Controls and Procedures	17
PART II - OTHER INFORMATION
	Item 1	-	Legal Proceedings	18
	Item 6	-	Exhibits	18
INDEX TO EXHIBITS				18
SIGNATURES				19

2

PART 1

ITEM 1.  FINANCIAL STATEMENTS

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	JUNE 30		DECEMBER 31
	2013		2012
	(Unaudited)
ASSETS
Current Assets
Accounts Receivable, Less Allowance for Uncollectible Accounts	$	15,475,312	$	13,607,933
Inventories	18,776,113		17,664,862
Prepaid Expenses	623,305		561,576
Income Taxes Receivable	90,530		—
Deferred Income Taxes	853,000		857,000
Total Current Assets	35,818,260		32,691,371
Property and Equipment, Net	11,239,888		11,566,315
Other Assets	125,064		257,213
Total Assets	$	47,183,212	$	44,514,899

	JUNE 30			DECEMBER 31
	2013			2012
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Line of Credit	$	8,674,662		$	7,923,487
Current Maturities of Long-Term Debt	563,805			453,105
Accounts Payable	8,473,518			9,051,978
Accrued Payroll and Commissions	2,832,689			1,965,657
Other Accrued Liabilities	669,194			676,336
Income Taxes Payable	—			60,878
Total Current Liabilities	21,213,868			20,131,441
Long-Term Liabilities
Long-Term Debt, Net of Current Maturities	4,060,646			2,865,899
Deferred Income Taxes	226,000			227,000
Other Long-Term Liabilities	213,658			155,328
Total Long-Term Liabilities	4,500,304			3,248,227
Total Liabilities	25,714,172			23,379,668
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	27,430			27,430
Additional Paid-In Capital	15,730,893			15,725,392
Accumulated Other Comprehensive Loss	(62,936		)	(62,936		)
Retained Earnings	5,523,653			5,195,345
Total Shareholders’ Equity	21,469,040			21,135,231
Total Liabilities and Shareholders’ Equity	$	47,183,212		$	44,514,899

See Accompanying Condensed Notes to Consolidated Financial Statements

3

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	THREE MONTHS ENDED
	JUNE 30
	2013			2012
Net Sales	$	28,450,699		$	28,033,345
Cost of Goods Sold	25,092,036			24,941,591
Gross Profit	3,358,663			3,091,754
Operating Expenses
Selling Expenses	1,193,031			1,152,808
General and Administrative Expenses	1,792,527			1,620,360
Total Operating Expenses	2,985,558			2,773,168
Income From Operations	373,105			318,586
Other Expense
Interest Expense	(104,968		)	(100,303		)
Miscellaneous Income (Expense), net	17,082			(16,358		)
Total Other Expense	(87,886		)	(116,661		)
Income Before Income Taxes	285,219			201,925
Income Tax Expense	98,000			76,000
Net Income	$	187,219		$	125,925
Earnings Per Common Share:
Basic and Diluted	$	0.07		$	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
	2013			2012
Net Sales	$	54,376,100		$	56,394,259
Cost of Goods Sold	47,780,012			50,294,270
Gross Profit	6,596,088			6,099,989
Operating Expenses:
Selling Expenses	2,389,771			2,240,624
General and Administrative Expenses	3,535,587			3,212,349
Impairment Charge	74,003			—
Total Operating Expenses	5,999,361			5,452,973
Income From Operations	596,727			647,016
Other Income (Expense)
Interest Expense	(198,493		)	(237,063		)
Miscellaneous Income (Expense), net	7,074			(26,223		)
Total Other Expense	(191,419		)	(263,286		)
Income Before Income Taxes	405,308			383,730
Income Tax Expense	77,000			135,000
Net Income	$	328,308		$	248,730
Earnings Per Common Share:
Basic and Diluted	$	0.12		$	0.09
Weighted Average Number of Common Shares Outstanding Used for Basic and Diluted Earnings Per Common Share	2,742,992			2,742,992

5

NORTECH SYSTEMS INCORPORATED AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	SIX MONTHS ENDED
	JUNE 30
	2013			2012
Cash Flows From Operating Activities
Net Income	$	328,308		$	248,730
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
Depreciation	1,009,775			915,176
Amortization	2,646			13,883
Compensation on Stock-Based Awards	5,501			—
Impairment on Assets Held for Sale	74,003			—
Deferred Taxes	3,000			(195,000		)
(Gain) Loss on Disposal of Property and Equipment	(107		)	(499		)
Changes in Current Operating Items
Accounts Receivable	(1,867,379		)	1,077,952
Inventories	(1,111,251		)	136,089
Prepaid Expenses	(61,729		)	(146,689		)
Income Taxes Receivable	(90,530		)	—
Income Taxes Payable	(60,878		)	228,056
Accounts Payable	(595,357		)	(1,259,032		)
Accrued Payroll and Commissions	867,032			229,103
Other Accrued Liabilities	49,629			81,338
Net Cash Provided by (Used in) Operating Activities	(1,447,337		)	1,329,107
Cash Flows from Investing Activities:
Proceeds from Sales of Assets	55,910			36,856
Purchases of Property and Equipment	(665,195		)	(1,047,253		)
Net Cash Used in Investing Activities	(609,285		)	(1,010,397		)
Cash Flows from Financing Activities:
Net Borrowings (Repayments) on Line of Credit	751,175			(1,076,307		)
Proceeds from Long-Term Debt	1,674,000			1,085,970
Principal Payments on Long-Term Debt	(368,553		)	(328,373		)
Net Cash Provided by (Used in) Financing Activities	2,056,622			(318,710		)
Net Increase in Cash	—			—
Cash - Beginning	—			—
Cash - Ending	$	—		$	—
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	$	178,103		192,572
Cash Paid During the Period for Income Taxes	187,300			87,602
Supplemental Noncash Investing and Financing Activities
Capital Expenditures in Accounts Payable	64,322			—

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, 2013, 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, 2013	288,750		$	7.19
Granted	29,000		$	3.20
Cancelled	(50,000	)	$	7.22
Outstanding - June 30, 2013	267,750		$	6.75	3.28	$	3,480
Exercisable - June 30, 2013	238,750		$	7.19	2.51	$	—

There were no options exercised during the three and six months ended June 30, 2013 and 2012.  There were no stock options granted during the three months ended June 30, 2013.  The weighted-average fair value of options granted during the six months ended June 30, 2013 was $1.65 per share.

Total compensation expense related to stock options for the three months ended June 30, 2013 and 2012 was $1,720 and $0, respectively. Total compensation expense related to stock options for the six months ended June 30, 2013 and 2012 was $5,501 and $0, respectively. As of June 30, 2013, there was approximately $42,000 of unrecognized compensation related to unvested option awards that we expect to recognize over a weighted-average period of 2.62 years.

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. The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement 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 value as of the redemption date.

During the year ended December 31, 2010, 100,000 Units were issued with a vesting date of December 31, 2012.  On March 7, 2012, the Company granted an additional 250,000 Units with vesting dates ranging from December 31, 2014 through December 31, 2016. On February 13, 2013, the Company granted an additional 350,000 Units with vesting dates ranging from December 31, 2015 through December 31, 2019.

Total compensation expense related to these Units based on the estimated appreciation over their remaining terms was $22,838 and $11,195 for the three months ended June 30, 2013 and 2012,

8

respectively and $36,830 and $14,005 for the six months ended June 30, 2013 and 2012, respectively.

As of June 30, 2013 and December 31, 2012, approximately $52,000 and $101,000 have been accrued under this plan, respectively.  As of December 31, 2012, approximately $86,000 of this balance was included in Other Accrued Liabilities and the remaining $15,000 balance was included in Other Long-term Liabilities.  A payment of $86,817 was made during the first quarter of 2013 related to these Units.  As of June 30, 2013, the balance is included in Other Long-term Liabilities.

Earnings per Common Share

For the three and six months ended June 30, 2013 and 2012, 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, information services, human resources, payroll, and all corporate accounting functions.  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
	2013			2012
Raw Materials	$	13,582,936		$	13,325,525
Work in Process	3,713,847			2,704,653
Finished Goods	2,893,897			3,108,839
Reserve	(1,414,567		)	(1,474,155		)
Total	$	18,776,113		$	17,664,862

9

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.  Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets.  To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value.  Assets held for sale are reported at the lower of the carrying amount or fair value less costs to dispose.  We recorded an impairment charge for the three and six months ended June 30, 2013 of $0 and $74,000, respectively, which related to an asset held for sale which was ultimately sold in the second quarter of 2013.  The impairment charge was included in general and administrative expenses in the statements of income. There were no impairment charges for the three and six months of ended June 30, 2012.

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 two high-credit quality financial institutions.  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.

Our largest customer has two divisions which accounted for 10% or more of our net sales for the three and six months ended June 30, 2013 and 2012.  The first division accounted for 19% of net sales for the three and six months ended June 30, 2013 and 16% of net sales for the three and six months ended June 30, 2012.  The second division accounted for 4% of net sales for the three and six months ended June 30, 2013 and 10% and 7% for the three and six months ended June 30, 2012, respectively.  Together the divisions accounted for 23% of net sales for the three and six months ended June 30, 2013 and 26% and 23% for the three and six months ended June 30, 2013 and 2012, respectively.

Combined accounts receivable from both divisions represented 18% and 15% of total accounts receivable at June 30, 2013 and December 31, 2012, respectively.

Export sales represented 12% of net sales for the three and six months ended June 30, 2013.  Export sales represented 6% and 7% of net sales for the three and six months ended June 30, 2012, respectively.  The increase in export sales relates to increased sales volume to existing customers.

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

10

of credit arrangement of $13.5 million, which expires if not renewed, on May 31, 2015.  The credit arrangement also provides a $1.8 million real estate term note with a maturity date of March 31, 2027 which replaced 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 December 31, 2017.  At June 30, 2013, we’ve used $0.9 million of the $2.0 million capital term loan.

On December 31, 2012, in connection with our purchase of the Mankato building, we again amended our credit agreement with WFB to include an additional $1.7 million real estate term note that expires if not renewed on May 31, 2015.  The purchase of the building was funded through our line of credit which was paid down when the new real estate term note was funded on January 9, 2013.

Under the agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate.  Our line of credit bears interest at three-month LIBOR + 2.75% (approximately 3.00% at June 30, 2013) while our real estate term notes bear interest at three-month LIBOR + 3.25% (approximately 3.5% at June 30, 2013).  The weighted-average interest rate on our line of credit was 3.3% and 3.2% for the three and six months ended June 30, 2013, respectively, while the weighted-average rate on our real estate term loan was 3.7% and 3.5% for the same periods. We had borrowings on our line of credit of $8,674,662 and $7,923,487 outstanding as of June 30, 2013 and December 31, 2012, respectively.

The credit agreement contains 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 the line is subject to borrowing base requirements, and advances are at the discretion of the lender.  At June 30, 2013, we have net unused availability under our line of credit of approximately $3.9 million.  The line is secured by substantially all of our assets.

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, 2013 was 34%, compared with 38% for the three months ended June 30, 2012, respectively. The effective tax rate for the year ended December 31, 2013 is expected to be 27% compared to 32% for the year ended December 31, 2012.  The decreases are principally due to the federal government retroactively reinstating the research and development credit for the 2012 tax year and extending it to 2013.

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, 2013 and 2012 are as follows:

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	Three Months Ended						Six Months Ended
	June 30						June 30
	2013			2012			2013			2012
Statutory federal tax provision	$	97,000		$	63,000		$	140,000		$	125,000
State income taxes	13,000			12,000			23,000			16,000
Income tax credits	(17,000		)	(3,000		)	(103,000		)	(6,000		)
Change in uncertain tax positions	8,000			(2,000		)	22,000			8,000
Other	(3,000		)	6,000			(5,000		)	(8,000		)
Income tax expense	$	98,000		$	76,000		$	77,000		$	135,000

At June 30, 2013, we had $161,500 of net uncertain tax benefit positions recorded in other long-term liabilities that would reduce our effective income tax rate if recognized.  The $21,500 increase from December 31, 2012 primarily relates to 2012 and 2013 state research and experimentation credits.

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, 2013, we reported net sales of $28.5 million compared to $28.0 million reported in the same quarter of 2012, a 1% increase year over year and a 10% increase sequentially from the first quarter of 2013.

Our gross profit percentage for the three and six months ended June 30, 2013 was 11.8% and 12.1%, respectively. The gross profit percentage for the three and six months ended June 30, 2012 was 11.0% and 10.8%, respectively. The improvement in gross margin is the result of favorable product mix and an increased investment in automation along with our continued lean initiatives.

Income from operations was approximately $373,000 and $597,000 for the three and six months ended June 30, 2013, respectively and $319,000 and $647,000 for the three and six months ended June 30, 2012, respectively.

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Net income for the second quarter of 2013 was $187,219 or $0.07 per diluted common share, compared to net income of $125,925 or $0.05 per diluted common share for the same period in 2012. Net income for the six months ended June 30, 2013 was $328,308 or $0.12 per diluted common share, while net income for the same period in 2012 totaled $248,730 or $0.09 per diluted common share.

Cash used in operating activities in the first six months of 2013 was $1.4 million while cash provided by operating activities was $1.3 million in the first six months of 2012.  The difference in cash used in the first six months of 2013 compared to the first six months of 2012 is mainly due to a buildup of inventory to support future production schedules and timing differences on collections of our accounts receivable.

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
	2013		2012		2013		2012
Net Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of Goods Sold	88.2		89.0		87.9		89.2
Gross Profit	11.8		11.0		12.1		10.8
Selling Expenses	4.2		4.1		4.4		4.0
General and Administrative Expenses	6.3		5.8		6.6		5.7
Income from Operations	1.3		1.1		1.1		1.1
Other Expenses, Net	(0.3	)	(0.4	)	(0.4	)	(0.5	)
Income Before Income Taxes	1.0		0.7		0.7		0.6
Income Tax Expense	0.3		0.3		0.1		0.2
Net Income	0.7	%	0.4	%	0.6	%	0.4	%

Net Sales:

We reported net sales of $28.5 million and $28.0 for the three months ended June 30, 2013 and 2012, respectively. Our Aerospace and Defense customers drove the increase as we launched a number of new programs and assemblies.  Net sales for the six months ended June 30, 2013 and 2012 were $54.4 million and $56.4 million, respectively. The majority of the decrease in sales year to date is related to our Industrial customers who continue to be impacted by the slow economy.

Net sales by industry markets for the three and six month periods ended June 30, 2013 and 2012 are as follows:

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	Three Months Ended				Six Months Ended
	June 30				June 30
	2013	2012	%		2013	2012	%
(in thousands)	$	$	Change		$	$	Change
Aerospace and Defense	5,036	3,408	48		9,701	8,067	20
Medical	8,100	8,067	0		15,877	15,892	0
Industrial	15,315	16,558	(8	)	28,798	32,435	(11	)
Total Sales	28,451	28,033	1		54,376	56,394	(4	)

Backlog:

Our 90-day order backlog as of June 30, 2013 was approximately $19.3 million, compared to approximately $20.3 million at the beginning of the quarter and $17.3 million at June 30, 2012.  Our backlog consists of firm purchase orders and we expect a major portion of the current 90 day backlog to be realized as revenue during the following quarter.  Orders for Medical and Defense customers remain strong heading into the 3rd quarter while our Industrial orders remain soft.

Backlog by industry market is shown below:

	Backlog as of the Quarter Ended
	June 30		March 31		June 30
(in thousands)	2013		2013		2012
Aerospace and Defense	$	5,117	$	5,496	$	3,275
Medical	7,366		7,621		5,858
Industrial	6,768		7,230		8,161
Total Backlog	$	19,251	$	20,347	$	17,294

Our 90 day backlog varies due to order size, manufacturing delays, contract terms and conditions and timing from customer delivery schedules and releases. These variables cause inconsistencies in comparing the backlog from one period to the next.

Gross Profit:

Gross profit as a percent of net sales for the three months ended June 30, 2013 and 2012 was 11.8% and 11.0% of net sales, respectively. Gross profit percentage for the six months ended June 30, 2013 and 2012 was 12.1% and 10.8%, respectively. Our gross margin improvement is due to a favorable product mix, increased automation and manufacturing cost reduction lean workouts.

Selling Expense:

Our selling expenses were $1.2 million or 4.2% of net sales and $1.2 million or 4.1% of net sales for the three months ended June 30, 2013 and 2012, respectively. Selling expenses were $2.4 million or 4.4% of net sales and $2.2 million or 4.0% of net sales for the six months ended June 

14

30, 2013 and 2012, respectively.  We continue to invest in business development infrastructure and marketing initiatives in an effort to stimulate sales.

General and Administrative Expense:

Our general and administrative expenses were $1.8 million or 6.3% of net sales and $1.6 million or 5.8% of net sales for the three months ended June 30, 2013 and 2012, respectively. General and administrative expenses were $3.5 million or 6.6% of net sales and $3.2 million or 5.7% of net sales for the six months ended June 30, 2013 and 2012, respectively. The increase in general and administrative expenses is due to people and incentive expenses.

Income Taxes:

Our effective tax rate for the three and six months ended June 30, 2013 was 34% and 19%, respectively, compared with 38% and 35%, respectively for the three and six months ended June 30, 2012, respectively.  The decreases are principally due to the federal government retroactively reinstating the research and development credit in the 1st quarter of 2013 for the 2012 tax year and extending it to 2013.  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, 2013 and 2012 are as follows:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2013			2012			2013			2012
Statutory federal tax provision	$	97,000		$	63,000		$	140,000		$	125,000
State income taxes	13,000			12,000			23,000			16,000
Income tax credits	(17,000		)	(3,000		)	(103,000		)	(6,000		)
Change in uncertain tax positions	8,000			(2,000		)	22,000			8,000
Other	(3,000		)	6,000			(5,000		)	(8,000		)
Income tax expense	$	98,000		$	76,000		$	77,000		$	135,000

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 notes are subject to fluctuations in the LIBOR rates.  The line of credit, real estate term notes, 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, 2013, we had outstanding advances of $8.7 million under the line of credit and unused availability of $3.9 million supported by our borrowing base.  We believe our financing

15

arrangements and cash flows to be provided by operations will be sufficient to satisfy our future working capital needs.  Our working capital was $14.6 million and $12.6 million as of June 30, 2013 and December 31, 2012, respectively.  The increase in working capital relates primarily to increased accounts receivable and inventory levels related to the revenue and planned production increases.

Net cash used in operating activities for the six months ended June 30, 2013 was $1.4 million.  Increased inventories, accounts receivable and decreases in accounts payable were partially offset by an increase in accrued payroll and commissions and noncash depreciation expense.

Net cash used in investing activities of $0.6 million for the six months ended June 30, 2013 is comprised primarily of property and equipment purchases to support the business.

Net cash provided by financing activities for the six months ended June 30, 2013 was $2.1 million, mainly due to loan proceeds of $1.7 million related to the purchase of the Mankato facility and increased borrowings on the line of credit of $0.8 million to fund operations, offset by payments on long-term debt of $0.4 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, 2012.  There have been no significant changes in these critical accounting policies since December 31, 2012.  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;

16

·Increase in certain raw material costs such as copper;

·Commodity and energy cost instability;

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

·Availability of raw material components.

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, 2012.

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 President, Chief Operating and 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 the President, Chief Operating and 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 President, Chief Operating and 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.

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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

31.1Certification 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.

31.2Certification of the President, Chief Operating and Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended.

32Certification of the Chief Executive Officer and President, Chief Operating and Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101Financial statements from the quarterly report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, and (iv) the Condensed Notes to Consolidated Financial Statements.

18

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 9, 2013	by	/s/ Michael J. Degen
	Michael J. Degen
	Chief Executive Officer
Date:  August 9, 2013	by	/s/ Richard G. Wasielewski
	Richard G. Wasielewski
	President, Chief Operating and Financial Officer

19

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 9, 2013	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 9, 2013	By:	/s/ Richard G. Wasielewski
	Richard G. Wasielewski
	President, Chief Operating and Financial Officer
	Nortech Systems Incorporated

EX-32

Exhibit 32

Written Statement of the 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, 2013 (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 9, 2013

By:	/s/ Michael J. Degen
	Michael J. Degen
	Chief Executive Officer
	Nortech Systems Incorporated

Exhibit 32

Written Statement of the 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, 2013 (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 9, 2013

By:	/s/ Richard G. Wasielewski
	Richard G. Wasielewski
	President, Chief Operating and Financial Officer
	Nortech Systems Incorporated

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INCOME TAXES (Details) (USD $)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2013	Dec. 31, 2012
INCOME TAXES
Effective income tax rate (as a percent)	34.00%	38.00%			27.00%	32.00%
Reconciliation of federal income taxes and reported income taxes
Statutory federal tax provision	$ 97,000	$ 63,000	$ 140,000	$ 125,000
State income taxes	13,000	12,000	23,000	16,000
Income tax credits	(17,000)	(3,000)	(103,000)	(6,000)
Change in uncertain tax positions	8,000	(2,000)	22,000	8,000
Other	(3,000)	6,000	(5,000)	(8,000)
Income tax expense	98,000	76,000	77,000	135,000
Unrecognized tax benefits
Net uncertain tax benefit positions that would reduce effective income tax rate, if recognized	161,500		161,500
Increase in uncertain tax positions related to R&E credits			$ 21,500

XML

CONSOLIDATED STATEMENTS OF INCOME (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
CONSOLIDATED STATEMENTS OF INCOME
Net Sales	$ 28,450,699	$ 28,033,345	$ 54,376,100	$ 56,394,259
Cost of Goods Sold	25,092,036	24,941,591	47,780,012	50,294,270
Gross Profit	3,358,663	3,091,754	6,596,088	6,099,989
Operating Expenses:
Selling Expenses	1,193,031	1,152,808	2,389,771	2,240,624
General and Administrative Expenses	1,792,527	1,620,360	3,535,587	3,212,349
Impairment Charge			74,003
Total Operating Expenses	2,985,558	2,773,168	5,999,361	5,452,973
Income From Operations	373,105	318,586	596,727	647,016
Other Income (Expense)
Interest Expense	(104,968)	(100,303)	(198,493)	(237,063)
Miscellaneous Income (Expense), net	17,082	(16,358)	7,074	(26,223)
Total Other Expense	(87,886)	(116,661)	(191,419)	(263,286)
Income Before Income Taxes	285,219	201,925	405,308	383,730
Income Tax Expense	98,000	76,000	77,000	135,000
Net Income	$ 187,219	$ 125,925	$ 328,308	$ 248,730
Earnings Per Common Share:
Basic and Diluted (in dollars per share)	$ 0.07	$ 0.05	$ 0.12	$ 0.09
Weighted Average Number of Common Shares Outstanding Used for Basic and 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 (Policies)

6 Months Ended

Jun. 30, 2013

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, 2013, 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, 2013	288,750		$	7.19
Granted	29,000		$	3.20
Cancelled	(50,000	)	$	7.22
Outstanding - June 30, 2013	267,750		$	6.75	3.28	$	3,480
Exercisable - June 30, 2013	238,750		$	7.19	2.51	$	—

There were no options exercised during the three and six months ended June 30, 2013 and 2012.  There were no stock options granted during the three months ended June 30, 2013.  The weighted-average fair value of options granted during the six months ended June 30, 2013 was $1.65 per share.

Total compensation expense related to stock options for the three months ended June 30, 2013 and 2012 was $1,720 and $0, respectively. Total compensation expense related to stock options for the six months ended June 30, 2013 and 2012 was $5,501 and $0, respectively. As of June 30, 2013, there was approximately $42,000 of unrecognized compensation related to unvested option awards that we expect to recognize over a weighted-average period of 2.62 years.

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. The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement 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 value as of the redemption date.

During the year ended December 31, 2010, 100,000 Units were issued with a vesting date of December 31, 2012.  On March 7, 2012, the Company granted an additional 250,000 Units with vesting dates ranging from December 31, 2014 through December 31, 2016. On February 13, 2013, the Company granted an additional 350,000 Units with vesting dates ranging from December 31, 2015 through December 31, 2019.

Total compensation expense related to these Units based on the estimated appreciation over their remaining terms was $22,838 and $11,195 for the three months ended June 30, 2013 and 2012, respectively and $36,830 and $14,005 for the six months ended June 30, 2013 and 2012, respectively.

As of June 30, 2013 and December 31, 2012, approximately $52,000 and $101,000 have been accrued under this plan, respectively.  As of December 31, 2012, approximately $86,000 of this balance was included in Other Accrued Liabilities and the remaining $15,000 balance was included in Other Long-term Liabilities.  A payment of $86,817 was made during the first quarter of 2013 related to these Units.  As of June 30, 2013, the balance is included in Other Long-term Liabilities.

Earnings per Common Share

Earnings per Common Share

For the three and six months ended June 30, 2013 and 2012, 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, information services, human resources, payroll, and all corporate accounting functions.  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
	2013			2012
Raw Materials	$	13,582,936		$	13,325,525
Work in Process	3,713,847			2,704,653
Finished Goods	2,893,897			3,108,839
Reserve	(1,414,567		)	(1,474,155		)
Total	$	18,776,113		$	17,664,862

Impairment Analysis

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.  Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets.  To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value.  Assets held for sale are reported at the lower of the carrying amount or fair value less costs to dispose.  We recorded an impairment charge for the three and six months ended June 30, 2013 of $0 and $74,000, respectively, which related to an asset held for sale which was ultimately sold in the second quarter of 2013.  The impairment charge was included in general and administrative expenses in the statements of income. There were no impairment charges for the three and six months of ended June 30, 2012.

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2013

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, 2013, 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, 2013	288,750		$	7.19
Granted	29,000		$	3.20
Cancelled	(50,000	)	$	7.22
Outstanding - June 30, 2013	267,750		$	6.75	3.28	$	3,480
Exercisable - June 30, 2013	238,750		$	7.19	2.51	$	—

There were no options exercised during the three and six months ended June 30, 2013 and 2012.  There were no stock options granted during the three months ended June 30, 2013.  The weighted-average fair value of options granted during the six months ended June 30, 2013 was $1.65 per share.

Total compensation expense related to stock options for the three months ended June 30, 2013 and 2012 was $1,720 and $0, respectively. Total compensation expense related to stock options for the six months ended June 30, 2013 and 2012 was $5,501 and $0, respectively. As of June 30, 2013, there was approximately $42,000 of unrecognized compensation related to unvested option awards that we expect to recognize over a weighted-average period of 2.62 years.

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. The 2010 Plan provides that Units issued shall fully vest three years from the base date as defined in the agreement 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 value as of the redemption date.

During the year ended December 31, 2010, 100,000 Units were issued with a vesting date of December 31, 2012.  On March 7, 2012, the Company granted an additional 250,000 Units with vesting dates ranging from December 31, 2014 through December 31, 2016. On February 13, 2013, the Company granted an additional 350,000 Units with vesting dates ranging from December 31, 2015 through December 31, 2019.

Total compensation expense related to these Units based on the estimated appreciation over their remaining terms was $22,838 and $11,195 for the three months ended June 30, 2013 and 2012, respectively and $36,830 and $14,005 for the six months ended June 30, 2013 and 2012, respectively.

As of June 30, 2013 and December 31, 2012, approximately $52,000 and $101,000 have been accrued under this plan, respectively.  As of December 31, 2012, approximately $86,000 of this balance was included in Other Accrued Liabilities and the remaining $15,000 balance was included in Other Long-term Liabilities.  A payment of $86,817 was made during the first quarter of 2013 related to these Units.  As of June 30, 2013, the balance is included in Other Long-term Liabilities.

Earnings per Common Share

For the three and six months ended June 30, 2013 and 2012, 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, information services, human resources, payroll, and all corporate accounting functions.  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
	2013			2012
Raw Materials	$	13,582,936		$	13,325,525
Work in Process	3,713,847			2,704,653
Finished Goods	2,893,897			3,108,839
Reserve	(1,414,567		)	(1,474,155		)
Total	$	18,776,113		$	17,664,862

Impairment Analysis

We evaluate long-lived assets, primarily property and equipment, as well as the related depreciation periods, whenever current events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.  Recoverability for assets to be held and used is based on our projection of the undiscounted future operating cash flows of the underlying assets.  To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of related assets, a charge might be required to reduce the carrying amount to equal estimated fair value.  Assets held for sale are reported at the lower of the carrying amount or fair value less costs to dispose.  We recorded an impairment charge for the three and six months ended June 30, 2013 of $0 and $74,000, respectively, which related to an asset held for sale which was ultimately sold in the second quarter of 2013.  The impairment charge was included in general and administrative expenses in the statements of income. There were no impairment charges for the three and six months of ended June 30, 2012.

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FINANCING ARRANGEMENTS

6 Months Ended

Jun. 30, 2013

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 provides a $1.8 million real estate term note with a maturity date of March 31, 2027 which replaced 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 December 31, 2017.  At June 30, 2013, we’ve used $0.9 million of the $2.0 million capital term loan.

On December 31, 2012, in connection with our purchase of the Mankato building, we again amended our credit agreement with WFB to include an additional $1.7 million real estate term note that expires if not renewed on May 31, 2015.  The purchase of the building was funded through our line of credit which was paid down when the new real estate term note was funded on January 9, 2013.

Under the agreement, both the line of credit and real estate term notes are subject to variations in the LIBOR rate.  Our line of credit bears interest at three-month LIBOR + 2.75% (approximately 3.00% at June 30, 2013) while our real estate term notes bear interest at three-month LIBOR + 3.25% (approximately 3.5% at June 30, 2013).  The weighted-average interest rate on our line of credit was 3.3% and 3.2% for the three and six months ended June 30, 2013, respectively, while the weighted-average rate on our real estate term loan was 3.7% and 3.5% for the same periods. We had borrowings on our line of credit of $8,674,662 and $7,923,487 outstanding as of June 30, 2013 and December 31, 2012, respectively.

The credit agreement contains 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 the line is subject to borrowing base requirements, and advances are at the discretion of the lender.  At June 30, 2013, we have net unused availability under our line of credit of approximately $3.9 million.  The line is secured by substantially all of our assets.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

6 Months Ended

Jun. 30, 2013

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, 2013	288,750		$	7.19
Granted	29,000		$	3.20
Cancelled	(50,000	)	$	7.22
Outstanding - June 30, 2013	267,750		$	6.75	3.28	$	3,480
Exercisable - June 30, 2013	238,750		$	7.19	2.51	$	—

Schedule of inventories

	June 30			December 31
	2013			2012
Raw Materials	$	13,582,936		$	13,325,525
Work in Process	3,713,847			2,704,653
Finished Goods	2,893,897			3,108,839
Reserve	(1,414,567		)	(1,474,155		)
Total	$	18,776,113		$	17,664,862

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INCOME TAXES

6 Months Ended

Jun. 30, 2013

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, 2013 was 34%, compared with 38% for the three months ended June 30, 2012, respectively. The effective tax rate for the year ended December 31, 2013 is expected to be 27% compared to 32% for the year ended December 31, 2012.  The decreases are principally due to the federal government retroactively reinstating the research and development credit for the 2012 tax year and extending it to 2013.

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, 2013 and 2012 are as follows:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2013			2012			2013			2012
Statutory federal tax provision	$	97,000		$	63,000		$	140,000		$	125,000
State income taxes	13,000			12,000			23,000			16,000
Income tax credits	(17,000		)	(3,000		)	(103,000		)	(6,000		)
Change in uncertain tax positions	8,000			(2,000		)	22,000			8,000
Other	(3,000		)	6,000			(5,000		)	(8,000		)
Income tax expense	$	98,000		$	76,000		$	77,000		$	135,000

At June 30, 2013, we had $161,500 of net uncertain tax benefit positions recorded in other long-term liabilities that would reduce our effective income tax rate if recognized.  The $21,500 increase from December 31, 2012 primarily relates to 2012 and 2013 state research and experimentation credits.

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Jun. 30, 2013	Dec. 31, 2012
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

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Impairment Analysis
Impairment charges recognized	$ 0	$ 0	$ 74,000	$ 0

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Cash Flows From Operating Activities
Net Income	$ 328,308	$ 248,730
Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities:
Depreciation	1,009,775	915,176
Amortization	2,646	13,883
Compensation on Stock-Based Awards	5,501
Impairment on Assets Held for Sale	74,003
Deferred Taxes	3,000	(195,000)
(Gain) Loss on Disposal of Property and Equipment	(107)	(499)
Changes in Current Operating Items
Accounts Receivable	(1,867,379)	1,077,952
Inventories	(1,111,251)	136,089
Prepaid Expenses	(61,729)	(146,689)
Income Taxes Receivable	(90,530)
Income Taxes Payable	(60,878)	228,056
Accounts Payable	(595,357)	(1,259,032)
Accrued Payroll and Commissions	867,032	229,103
Other Accrued Liabilities	49,629	81,338
Net Cash Provided by (Used in) Operating Activities	(1,447,337)	1,329,107
Cash Flows from Investing Activities:
Proceeds from Sales of Assets	55,910	36,856
Purchases of Property and Equipment	(665,195)	(1,047,253)
Net Cash Used in Investing Activities	(609,285)	(1,010,397)
Cash Flows from Financing Activities:
Net Borrowings (Repayments) on Line of Credit	751,175	(1,076,307)
Proceeds from Long-Term Debt	1,674,000	1,085,970
Principal Payments on Long-Term Debt	(368,553)	(328,373)
Net Cash Provided by (Used in) Financing Activities	2,056,622	(318,710)
Net Increase in Cash	0	0
Cash - Beginning	0	0
Cash - Ending	0	0
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest	178,103	192,572
Cash Paid During the Period for Income Taxes	187,300	87,602
Supplemental Noncash Investing and Financing Activities
Capital Expenditures in Accounts Payable	$ 64,322

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CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2013	Dec. 31, 2012
Current Assets
Accounts Receivable, Less Allowance for Uncollectible Accounts	$ 15,475,312	$ 13,607,933
Inventories	18,776,113	17,664,862
Prepaid Expenses	623,305	561,576
Income Taxes Receivable	90,530
Deferred Income Taxes	853,000	857,000
Total Current Assets	35,818,260	32,691,371
Property and Equipment, Net	11,239,888	11,566,315
Other Assets	125,064	257,213
Total Assets	47,183,212	44,514,899
Current Liabilities
Line of Credit	8,674,662	7,923,487
Current Maturities of Long-Term Debt	563,805	453,105
Accounts Payable	8,473,518	9,051,978
Accrued Payroll and Commissions	2,832,689	1,965,657
Other Accrued Liabilities	669,194	676,336
Income Taxes Payable		60,878
Total Current Liabilities	21,213,868	20,131,441
Long-Term Liabilities
Long-Term Debt, Net of Current Maturities	4,060,646	2,865,899
Deferred Income Taxes	226,000	227,000
Other Long-Term Liabilities	213,658	155,328
Total Long-Term Liabilities	4,500,304	3,248,227
Total Liabilities	25,714,172	23,379,668
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	27,430	27,430
Additional Paid-In Capital	15,730,893	15,725,392
Accumulated Other Comprehensive Loss	(62,936)	(62,936)
Retained Earnings	5,523,653	5,195,345
Total Shareholders' Equity	21,469,040	21,135,231
Total Liabilities and Shareholders' Equity	$ 47,183,212	$ 44,514,899

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (USD $)	3 Months Ended		6 Months Ended			3 Months Ended		6 Months Ended		0 Months Ended		3 Months Ended			6 Months Ended		12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012	Jun. 30, 2013 Stock Options	Jun. 30, 2012 Stock Options	Jun. 30, 2013 Stock Options	Jun. 30, 2012 Stock Options	Feb. 13, 2013 2010 Plan Equity Appreciation Rights Plan	Mar. 07, 2012 2010 Plan Equity Appreciation Rights Plan	Jun. 30, 2013 2010 Plan Equity Appreciation Rights Plan	Mar. 31, 2013 2010 Plan Equity Appreciation Rights Plan	Jun. 30, 2012 2010 Plan Equity Appreciation Rights Plan	Jun. 30, 2013 2010 Plan Equity Appreciation Rights Plan	Jun. 30, 2012 2010 Plan Equity Appreciation Rights Plan	Dec. 31, 2010 2010 Plan Equity Appreciation Rights Plan	Dec. 31, 2012 2010 Plan Equity Appreciation Rights Plan	Nov. 30, 2010 2010 Plan Equity Appreciation Rights Plan Maximum
Inventories
Raw materials	$ 13,582,936		$ 13,582,936		$ 13,325,525
Work in process	3,713,847		3,713,847		2,704,653
Finished goods	2,893,897		2,893,897		3,108,839
Reserve	(1,414,567)		(1,414,567)		(1,474,155)
Total	18,776,113		18,776,113		17,664,862
Shares
Balance at the beginning of the period(in shares)								288,750
Granted (in shares)						0		29,000
Cancelled (in shares)								(50,000)
Balance at the end of the period (in shares)						267,750		267,750
Exercisable at the end of the period (in shares)						238,750		238,750
Weighted-Average Exercise Price Per Share
Outstanding at the beginning of the period (in dollars per share)								$ 7.19
Granted (in dollars per share)								$ 3.20
Cancelled (in dollars per share)								$ 7.22
Outstanding at the end of the period (in dollars per share)						$ 6.75		$ 6.75
Exercisable at the end of the period (in dollars per share)						$ 7.19		$ 7.19
Weighted-Average Remaining Contractual Term
Outstanding at the end of the period								3 years 3 months 11 days
Exercisable at the end of the period								2 years 6 months 4 days
Aggregate Intrinsic Value
Outstanding at the end of the period						3,480		3,480
Additional disclosures
Weighted-average fair value of options granted (in dollars per share)								$ 1.65
Compensation expense						1,720	0	5,501	0			22,838		11,195	36,830	14,005
Unrecognized compensation related to unvested awards						42,000		42,000
Weighted-average period over which unrecognized compensation costs expected to be recognized								2 years 7 months 13 days
Equity Appreciation Rights Plan
Number of common shares authorized																			750,000
Vesting period from the base date															3 years
Redemption cash payment period															90 days
Shares issued (in units)																	100,000
Shares granted (in units)										350,000	250,000
Accrued compensation												52,000			52,000			101,000
Accrued compensation included in other accrued liabilities																		86,000
Accrued compensation included in Other Long-Term Liabilities																		15,000
Payment made related to units													$ 86,817
Awards exercised (in shares)						0	0	0	0
Granted (in shares)						0		29,000
Earnings Per Common Share:
Options outstanding included in computation of per-share amounts (in shares)	0	0	0	0

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FINANCING ARRANGEMENTS (Details) (USD $)	3 Months Ended	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2013	Dec. 31, 2012	May 02, 2012
Financing arrangements
Outstanding balance	$ 8,674,662	$ 8,674,662	$ 7,923,487
Long-term debt - net of current maturities	4,060,646	4,060,646	2,865,899
Line of credit
Financing arrangements
Maximum borrowing capacity				13,500,000
Variable rate basis		three-month LIBOR
Interest rate margin on variable rate basis (as a percent)	2.75%	2.75%
Interest rate (as a percent)	3.00%	3.00%
Weighted-average interest rate (as a percent)	3.30%	3.20%
Outstanding balance	8,674,662	8,674,662	7,923,487
Unused availability supported by entity's borrowing base	3,900,000	3,900,000
Real estate term note
Financing arrangements
Variable rate basis		three-month LIBOR
Interest rate margin on variable rate basis (as a percent)	3.25%	3.25%
Interest rate (as a percent)	3.50%	3.50%
Weighted-average interest rate (as a percent)	3.70%	3.50%
Real estate term note maturing on March 31, 2027
Financing arrangements
Debt instrument, face amount				1,800,000
Real estate term note expiring on May 31, 2012
Financing arrangements
Debt instrument, face amount				900,000
Term loan
Financing arrangements
Long-term debt - net of current maturities	900,000	900,000
Term loan | Maximum
Financing arrangements
Debt instrument, face amount				2,000,000
Equipment term loan tied to equipment purchased in Mankato acquisition
Financing arrangements
Debt instrument, additional borrowing amount			$ 1,700,000

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INCOME TAXES (Tables)

6 Months Ended

Jun. 30, 2013

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
	2013			2012			2013			2012
Statutory federal tax provision	$	97,000		$	63,000		$	140,000		$	125,000
State income taxes	13,000			12,000			23,000			16,000
Income tax credits	(17,000		)	(3,000		)	(103,000		)	(6,000		)
Change in uncertain tax positions	8,000			(2,000		)	22,000			8,000
Other	(3,000		)	6,000			(5,000		)	(8,000		)
Income tax expense	$	98,000		$	76,000		$	77,000		$	135,000

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CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

6 Months Ended

Jun. 30, 2013

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 two high-credit quality financial institutions.  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.

Our largest customer has two divisions which accounted for 10% or more of our net sales for the three and six months ended June 30, 2013 and 2012.  The first division accounted for 19% of net sales for the three and six months ended June 30, 2013 and 16% of net sales for the three and six months ended June 30, 2012.  The second division accounted for 4% of net sales for the three and six months ended June 30, 2013 and 10% and 7% for the three and six months ended June 30, 2012, respectively.  Together the divisions accounted for 23% of net sales for the three and six months ended June 30, 2013 and 26% and 23% for the three and six months ended June 30, 2013 and 2012, respectively.

Combined accounts receivable from both divisions represented 18% and 15% of total accounts receivable at June 30, 2013 and December 31, 2012, respectively.

Export sales represented 12% of net sales for the three and six months ended June 30, 2013.  Export sales represented 6% and 7% of net sales for the three and six months ended June 30, 2012, respectively.  The increase in export sales relates to increased sales volume to existing customers.

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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			12 Months Ended
	Jun. 30, 2013 Largest customer item	Jun. 30, 2013 Credit concentration risk item	Jun. 30, 2013 Net sales Customer concentration risk	Jun. 30, 2012 Net sales Customer concentration risk	Jun. 30, 2013 Net sales Customer concentration risk	Jun. 30, 2012 Net sales Customer concentration risk	Jun. 30, 2013 Net sales Customer concentration risk Division one of largest customer	Jun. 30, 2012 Net sales Customer concentration risk Division one of largest customer	Jun. 30, 2013 Net sales Customer concentration risk Division one of largest customer	Jun. 30, 2012 Net sales Customer concentration risk Division one of largest customer	Jun. 30, 2013 Net sales Customer concentration risk Division two of largest customer	Jun. 30, 2012 Net sales Customer concentration risk Division two of largest customer	Jun. 30, 2013 Net sales Customer concentration risk Division two of largest customer	Jun. 30, 2012 Net sales Customer concentration risk Division two of largest customer	Jun. 30, 2013 Net sales Customer concentration risk Divisions one & two	Jun. 30, 2012 Net sales Customer concentration risk Divisions one & two	Jun. 30, 2013 Net sales Customer concentration risk Divisions one & two	Jun. 30, 2012 Net sales Customer concentration risk Divisions one & two	Jun. 30, 2013 Accounts receivable Customer concentration risk Divisions one & two	Dec. 31, 2012 Accounts receivable Customer concentration risk Divisions one & two
Concentration of credit risk and major customers
Excess cash balance, number of high credit quality financial institution		2
Number of divisions	2
Percentage of concentration risk							19.00%	16.00%	19.00%	16.00%	4.00%	10.00%	4.00%	7.00%	23.00%	26.00%	23.00%	23.00%	18.00%	15.00%
Percentage of export sales to consolidated sales			12.00%	6.00%	12.00%	7.00%

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Document and Entity Information	6 Months Ended
	Jun. 30, 2013	Aug. 01, 2013
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, 2013
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	2013
Document Fiscal Period Focus	Q2