Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Executives

Leonard Anthony - Chairman & Principal Executive Officer

Rich Fitzgerald - Chief Financial Officer

Bob Francis - President & General Manager of TechPrecision, Ranor Division

Jeff Stanlis - Hayden, Investor Relations

Analysts

Walter Schenker - MAZ Partners

Ross Taylor - Somerset Capital

Tony Pollock - Aegis Capital

Michael Potter - Monarch Capital Group

Alan Reacher - Private Investor

Peter Trapp - Bifrost Fund

TechPrecision Corporation (OTCQB:TPCS) F2Q2014 Earnings Conference Call November 14, 2013 4:30 PM ET

Operator

Good day ladies and gentlemen. Welcome to the TechPrecision Corporation, second quarter fiscal 2014 earnings call. During today’s presentation all parties will be in listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, November 14, 2013.

I would like to turn the conference over to, Jeff Stanlis with Hayden IR. Please go ahead sir.

Jeff Stanlis

Thank you. On the call with us today are Leonard Anthony, Chairman of the Board of Directors and Principal Executive Officer; Rich Fitzgerald, Chief Financial Officer and Bob Francis, President and General Manager of TechPrecision, Ranor Division. I would like to mention this call is being simulcast on the website at www.TechPrecision.com.

Before we begin I would like to remind our listeners that management's remarks may contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions.

Therefore, the company claims the protection of the safe harbor for forward-looking statements as contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of risk and uncertainties in the company's financial filings with the SEC.

In addition, projections as to the company's future performance represents management's estimates as of today, November 14, 2013. TechPrecision assumes no obligation to revise or update these forward-looking statements.

With that out of the way, I would like to turn the call over Leonard Anthony, Chairman of the Board of Directors and Principal Executive Officer, to provide opening remarks. Mr. Anthony, go ahead.

Leonard Anthony

Thanks Jeff and good afternoon to everyone and thank you for joining us today. TechPrecision continues to work its way through a very challenging transaction period that has been lingering for several quarters due to certain legacy issues. These issues began when Ranor’s largest customer migrated its solar production from domestic sources to Asia.

As a reminder, this customer represented more than 60% of Ranor’s historical revenue and while we expect that some revenue streams from the China operations offset portions at loss, changes in our customers business occurred and these purchase orders did not materialize.

We work diligently to secure new revenue and replace this loss to the transition period. Unfortunately this required considerable first order production and prototype work, which generated a significant increase in cost, but did not result in a corresponding increase from revenue during the past two years.

The company anticipated that in several of the opportunities that it was pursuing, it would have transitioned to full volume production by now, but clearly this was not the case. However I am pleased to report that just prior to issuing our financial results today, we announced an $8.1 million purchase order for the same alternative energy customer.

The PO is for Sapphire Furnaces. It’s scheduled to deliver by the end of May 2014, just a little over six months from now. This is our first significant order from this customer in some time. Because we have had prior experience building these furnaces, we believe the execution risk to this order is relatively low and we expect to be able to product and shift the order for a very quick turnaround, of course maintaining a reputation for very high quality.

What we currently don’t know if there is potential for additional orders and we certainly aren’t planning for any more. We remain hopeful that this adoption of Sapphire for small electron devices begins to accelerate. For now this order will be a very helpful bridge to move from today to the accelerated order activity from key customers that we continue to expect to begin in fiscal year 2015.

In terms of one of the key opportunities with Navion, our optimism and frankly our uncertainty on timing continues. I want to reiterate that the timing of this ramp is something over which we have no control.

Major milestone is the turnover of their first system to The Siteman Cancer Center in Missouri. That will be followed by treatment of the first patient and we currently expect this to occur within several months of turnover event.

Successful patient treatment is a critical milestone to continuing the production ramp and potential acceleration of this strategic project.

Presently Navion has a 11 systems currently under developed with customers in the U.S. Bob Francis will spend a bit more time discussing Navion in a few minutes. Meanwhile we have a large and growing backlog of business in defense, but has not expected to materially continue to revenues for at least two more quarters.

We have developed and built Tier 1and Tier 2 relationships with the customers and we continue to seek opportunities in this sector. In addition over the past year we have increased our business development efforts with large prime defense contact. We believe that there are additional opportunities to secure increased outsourcings business with existing and new defense contractors who are actively looking to increase outsourced content on certain expanding defense programs over the next several years.

Backlog as of September 30, was $17.5 million compared to $16.5 million as of March 31 and $26.1 million as of September 30. The Sapphire order we announced today provides meaningful growth to our backlog.

We do remain confident and the majority of our opportunities in our pipeline will ultimately translate into orders, and as we work to redirect the company strategically, we’ve made numerous changes to control expenses, free up resources and increase our manufacturing efficiency.

We are continuing to asset, reduce and eliminate all amount of essential costs and our cost reduction initiatives are already producing results. Sequentially SG&A expenses deceased 16%.

Our year term plan is to stabilize your business by focusing on generating cash and then returning to profitability. While this may be slower than we all would like, we think we are continuing to make good progress.

Our most significant near term challenge is getting the company refinanced in a way that fits its potential and cash flow profile. As you know, this item is still open and we are pursuing alternative sources of financing. We believe now that our growing high quality backlog will be very helpful to our discussion with new potential sources of capital.

Now I would like to turn the call over to Bob Francis for an update on our operations at our Ranor division. Bob.

Bob Francis

Thank you Len. During the Q1 earnings call we discussed the contract loss of approximately $700,000, early through a customers turbine based program. At that time I said we were going to review our performance on these basis in order to get them to profitability.

During the past month we have fully reviewed the entire manufacturing process to determine what we believe we will achieve on the remaining basis. Unfortunately we do not believe we will make the budget or breakeven numbers for these bases, although we have and we’ll continue to try to do so, and unfortunately this year there were approximately $800,000 of additional loss. We have currently delivered three bases in Q2 and have 16 more to deliver under this long-term agreement.

Last week I met with senior management for our customer and presented the case for a price increase. Our customer too has lost money on these basis and is unable at this point to get any price concession from its customer. Although we have the LPA though 2019, we gave our customer notice in writing November 8 that we will not take any more orders beyond the 16 we have committed to.

We continue to discuss a variety of alternatives with this customer to resolve these ongoing issues, including ongoing conversations between our customer and their customer regarding a price increase. Our customer will present our finding as future evidence and a need for adjustment, particularly when you consider that we are the second base tender of theirs to encounter these issues.

We also discussed the possible use of the previous vendors experts in conversations with our customer sister company, which bid against us for this project and may have some insight on ways to reduce the cost. Needless to say, this project is our highest current focus, as we look for a reasonable resolution. In the interim as I mentioned we have provided notice that we will not take on additional (inaudible) basis until a resolution is filed.

Now let me discuss progress in some of our other verticals. Navion is still expecting their first patient treatment by the end of the year. A unit has been installed and is in the clinical commissioning phase of the SC cooling center for Proton Therapy at the Siteman Cancer Center at Barnes-Jewish Hospital in Washington University School in St. Louis Missouri.

When this center treats the first patient we expect Navion will begin to ramp up to full production expectations under the long-term supply agreement we entered into, with them early this year. Once that happens, we expect to see real progress on future orders. As Len just mentioned, Navion currently has working systems in active deployment with customers and more systems in their backlog.

We are doing a significant amount of quoting and see substantial opportunities across several defense contractors and many of these opportunities are in fiscal year 2015 and beyond. One of our defense customers have begun talking about releasing orders that may still happen during our fiscal year 14 Q4, but we can’t guarantee this. We also expect that they are still on a schedule to release larger missile programs during our fiscal year ‘15.

The programs that provide some of the best future opportunities are at the top of the navy’s funding priority list and should continue to gain funding in the future. We have another defense contractor who we expect will continue to be a steady customer during the next couple of years, but their growth potential will be limited by their own throughput capacities.

Based on this reality we continue to right size our workforce during the month of October, in line with our forecast. In total we reduced 18 people during the month, ranging from direct personnel all the way through management.

Now we’ll turn the call over to Rich Fitzgerald for a more in-depth discussion of the financials. Rich.

Rich Fitzgerald

Thank you, Bob. First I’ll cover operating results for Q2 of fiscal 2014 and then I’ll cover the six-month, year-to-date result. For the three months period ended September 30, 2013 revenue was $5.2 million, compares with $8.1 million in the same fiscal quarter one year ago. Revenues decreased in the precession industrial market due to lower shipment of Sapphire production chambers and medical complements. These decreases were partially offset by increased net sales to or navy/maritime and energy customers.

For the three months ended September 30, 2013 revenues originating at our WCMC division in China were $0.2 million compared to $1.1 million in the three months ended September 30, 2012. This was a result of weak demand for Sapphire production chambers from our primary customer in China.

Gross profit for the quarter ended September 30, 2013 was approximately $0.7 million or 14% of sales, compared to gross profit of $1.9 million or 24% of sales in the fiscal second quarter of last year.

Gross margin in any reporting period is impacted by the mix of services we provide on projects completed within that period. Accordingly, there can be variability due to the project mix when comparing period over period or year-over-year margin results.

Certain low margin projects and contract losses reduced margins during the second quarter. We recorded $0.8 million of additional contract losses during the second quarter of fiscal 2014 compared with $0.1 million recorded in the same quarter one year ago.

The majority of these contract losses are from first units of turban base components being manufactured at our Ranor division that Bob spoke of earlier. The primary order generating contract losses that we’ve taken on is somewhat a consequence of delayed production volume we have from Navion. As this order was originally sourced due to large production capacity, idled by delayed orders fro Navion. This order has proven as Bob explained to be more challenging that originally predicted.

Turning to expenses; selling, general and administrative expenses for the second quarter were $1.5 million, which compares with $1.9 million of SG&A incurred in the second quarter of the prior year. SG&A cost for the quarter were $0.4 million lower due to reduced spending of approximately $0.1 million, each for compensation and benefits outside services, travel and business expenses and other general administrative expenses.

Net loss for the quarter ended September 30, 2013 was $0.8 million or $0.04 a share basic and fully diluted. This is based upon roughly 20 million shares basic and fully diluted outstanding for the second quarter and compared to the net loss of $45,000 or $0.00 per share basic and fully diluted in the prior year. Last year’s per share metrics were based on $18.7 million basic and fully diluted shares outstanding.

Moving on to year-to-date financial results. For the six months ended September 30, 2013 consolidated revenue decreased 19% to $12.3 million from the prior years reported revenues of $15.2 million.

The decrease is due to $2.8 million of lower sales volume in Sapphire Chambers and medical device components within our precision industrial segment, as well as $0.2 million in lower sales volume with our naval/maritime customers when compared to the same six-month period last year. These declines in sales volume were partially offset by $0.1 million in increased sales to customers within our energy segment.

Turning to gross margin, for the six months ended September 30, 2013 gross margins was 9% or $1.1 million in gross profit, compared with gross profit margin of 20% or $3 million gross profit in the same period in fiscal 2013. Gross profit included additional contract losses of approximately $1.5 million for the six months ended September 30 this year, the majority of which were incurred on the turbine based components we discussed earlier on the call.

Turing to SG&A for the six months period, that decreased to $3.2 million for a reduction of 26.5, and represents 26.5 of the revenue base and its decline from $3.9 million or 25.8% of revenues last year for the same six months period. This reflects a decrease of approximately $670,000 or 17% reduction over last year’s SG&A level.

The decrease in SG&A expenses were primarily due to reduced spending of $0.3 million for compensation and benefits, $0.2 million for outside services and $0.2 million of reductions in travel and business related expenses.

Net loss for the six months ended September 30, 2013 was $2.2 million or $0.04 a share basic and fully diluted. This is based again on 20 million shares on a basis and fully diluted outstanding basis and it compares with a net loss of $751,000 or $0.04 a share basic and fully diluted on a 18.6 million basis and fully diluted weighted average shares outstanding for the same six months period last year.

Now for a cash flow recap, TechPrecision reported negative operating cash flows from operations of $616,000 for the period ended September 30, 2013 compared with positive operating cash flow of $78,000 for the same period end of September 30, 2012.

During the six months ended September 30, 2013 purchases of property, plant and equipment were $54,000 compared to $75,000 capital equipment spending in the prior year. During the first six months of fiscal 2014 the company paid down approximately $0.9 million of debt, including the payoff of $500,000 on the expired revolving credit facility that’s paid down in July.

As of September 30, 2013 cash and cash equivalents were $1.5 million compared with a cash and cash equivalent balance of $3.1 million as of March 31, 2013. TechPrecision had positive working capital of $1.6 million as of September 30 after reclassifying all of the company’s $5.4 million in debt obligations of the current liability. This compares with working capital of $3.1 million at March 31, 2013. You will find additional details in our filings submitted to the SEC earlier today.

With that brief financial recap, I’d now like to turn the call back over to Len for some additional comments. Len.

Leonard Anthony

Yes, thanks Rich. As I expressed in our press release comments, we are diligently working to resolve the lingering issues that we face and eliminate the drag in our results. Our quotation activity is an all time high. We are seeking both long-term project with more predictable cost structures and continue to target profitability by the end of the fiscal year, positioning us for a significantly improved fiscal 2015.

We are going to continue to be focused on building our backlog with production orders from our key customers and we are now starting to see signs of some progress. We believe that the quality certifications we maintain and our ability to do turnkey fabrication, machining and manufacturing services at a single facility positions us well with our Tier 1 and Tier 2 customers and as an attractive outsourcing partner for prime contractors looking to increase outsourced production.

Because of our manufacturing capabilities, our certification from the ASME and our historic relationships with suppliers in the nuclear power industry, we believe that we are also well positioned to benefit from any increased activities in that sector. And we expect that sales volume to Navion will increase as Navion further expands the market launch of its innovative proton therapy device.

We thank our long-term shareholder for your patience as we work through our issues. I’d now like to open the call up for Q&A. So Calvin, could you take care of that.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And our first question comes from the line of Walter Schenker with MAZ Partners. Please go ahead.

Walter Schenker - MAZ Partners

Hi Bob. I’m just trying to understand on the turbine basis, if you’ve lost $1.5 million between these two quarters, does that actually mean you missed by more than $1.5 million just hopefully at least some profit is originally built into your quote.

So maybe you’re off by $2 million or so. I’m not sure which is currently low on the margin business. I have been to the facility a bunch of times. I don’t know fully (inaudible) understand how you can be off by that large an amount given what you do.

Leonard Anthony

Well, I’ll start to answer that for you Walter. The GAAP reporting requirements are such that we book the full loss as we estimated today on the entire contract and as Bob covered in his comments, we’ve been monitoring this and working our way through the efficiency curve, to try and determine when we would get to breakeven point of these. And that the mark has been achieved and we’ve been obligated based on that analysis, the book the full expected loss of anything we have in backlog on these contracts, so…

And we are at this point very confident that we are not leading anything at risk to conclude and further to that Bob covered in this remarks that we are going to be working very diligently and our working very diligently with this customer to make sure that we don’t actually incur the full breadth of the what we’ve accrued. That said, we are obligated to accrue the full breadth of it and then who are mitigated, which is what we are doing.

Walter Schenker - MAZ Partners

I’ve got a few other questions now to get a hold of. (a) Could you give your thoughts on the Chinese operations and secondly, in some of our prior discussions you indicated your goal was to bring the cost structure in line with the certain revenue level. Cleary if we annualize the current quarter, that is below the revenue level, because you might be able to stabilize that. So does that mean that we are still sort of on the treadmill on cutting costs or should we look toward a higher revenue level in which you are trying to adjust costs. Thank you

Rich Fitzgerald

Got it. Well, you should look for both, higher revenues and low continued reduction of cost. Because the cost reduction program and plans we put in place, that made a lot of progress, but they are not over, so I anticipate that there will continue to be cost reduction and more alignment. But clearly revenues in the quarter were significantly lower than one we expect on a run rate basis and if we presume we’ll see some recovery in the next quarter.

Walter Schenker - MAZ Partners

Okay. So we are just still looking for a run rate that’s below some – with some hope they are meaningfully higher than if I can chance the course.

Rich Fitzgerald

Right, yes that’s kind of an unsustainable number frankly. And then to address your China point, given the fact that we now received this interesting order from GT, and our plan is to produce the majority, if not all of those units at Ranor. The decision we are talking with China is to kind of mothball it, not shut it down, that completely, but take it done to no operations essentially and just kind of a call it a bus (ph) only entity for some period of time.

Because given how the GT situation is evolving, we want to preserve the option that should we need additional capacity that we could once again ramp up for certain quarters if appropriate. So again, this is the bulk of the cost. You know 99.9% of costs are coming out and China won’t continue to exist, but it will remain there as a somewhat mothballed entity.

Walter Schenker - MAZ Partners

Okay, thank you.

Leonard Anthony

You’re welcome.

Operator

(Operator Instructions). And our next question comes from the line of Ross Taylor with Somerset Capital. Please go ahead.

Ross Taylor - Somerset Capital

Okay as first Walter covered some of the questions I had, because I was trying to get a better understanding of your through process on how – while you’re still constant you get to breakeven by year end, you made that comment last quarter and obviously this quarter has proven to be pretty disappointing on the revenue line, and if you can give a little bit more color also on the specifies of why the revenue line was so far short of what I think many people had been expecting.

Leonard Anthony

Yes, well I’ll let Rich touch on the kind of revenue line, because clearly we expected a number of more consistent with what we might see as a run rate that would get us to a $30 million or approximate $30 million run rate. But the bottom line was certain things that were expected to ship at the end of the month didn’t ship and flipped into the next quarter, but Rich would you like to add any color to that.

Rich Fitzgerald

Yes, I think one of the dynamics we have in the lower revenue number metric you see here is again, we are not – we have very little revenue from GTAT in this quarter, its not above $200,000. So that is a significant customer for us and has been. It has not been very significant for the last three quarters, although the purchase order we announced today brings it back into the mix and it’s a routine production unit that we’ve made before and it has predictable outcomes for us.

Navion, which has been a nice production item that we’ve been for many, many years and it’s a very good customer relationship. Its $2.3 million less revenue year-to-date this year than it was last year for the waiting game that’s taking place, while they wait to go into clinical mode and treatment out in Missouri. So a number of the key customers have been in a more dormant state than we would like to see them, but we look to see both of those customers improve as we move forward and the backlog would suggest that’s going to happen.

Ross Taylor - Somerset Capital

Have you seen shipments so far in this quarter? I mean this comment that was just made about the idea that there were some things that didn’t happen. It makes me feel as though there were things on the dock that were ready ship and just didn’t ship. Is that the situation where things just didn’t move out or are we now still kind of waiting for additional orders between here and the end of the year to get shipped out.

Leonard Anthony

Well, you need to be careful in the quarter, because we work with very large customers and many of them have significant holiday shutdowns in November and December. So while we got this slippage and we think it leads to a stronger October, we’ve got to make sure that we manage those customer outages and still achieve our deliveries over the balance of the quarter so.

Ross Taylor - Somerset Capital

Okay.

Leonard Anthony

We get mindful of when we are in the sort of November, December quarter.

Ross Taylor - Somerset Capital

The cash drop, fairly substantial. Obviously if appears about $900,000 of that went to payoff the short-term debt. When do we see this getting back to where we are staring to build the cash?

Leonard Anthony

Well, as I explained Ross, our objectives and our current thinking is that we’ll see cash start to build through this next quarter and that should continue through the fourth quarter.

The one, and that’s where we were pre GTAT. As we look at GTAT our expectation is based on our terms and conditions that that would be neutral to cash positive throughout its like, but we have frankly a bit more modeling to do on that and given the high volumes, there could be some periods of potentially negative cash and we are just taking a look at that now.

But overall on the base business deal that we are trying to compare to pre GTAT, clearly we had a view that we are going to building cash in 3Q and 4Q. Well and in some, I wouldn’t call it significant, I wouldn’t call it like doubling the cash balance, but headed in the right direction, which has been the plan all along.

Ross Taylor - Somerset Capital

Okay and with the GTAT and you have this $8 million contact, you said you were a little over $8 million you expect to be shipped between here and what you said May I believe.

Leonard Anthony

That’s correct

Ross Taylor - Somerset Capital

And obviously that’s something that just came in at this point in time. Is this tied into any of the talk we’ve heard about Sapphire glass is the consumer electronic space.

Leonard Anthony

Yes, it is exactly. I don’t know if you saw the announcement that GT made about a new facility in Arizona that they are operating, plan to operator for Apple, these units are going there.

Ross Taylor - Somerset Capital

Okay, and how are these units used in the production of Sapphire Glass? Are they consumables or are they something that there’s a razor blade aspect to it or is it once they put this new facility in, you will have sold what you are going to sell them.

Leonard Anthony

I think its – at this point it’s the final version there Ross and that is once we sell them they go in and maybe need some repair and maintenance, but its not material.

Ross Taylor - Somerset Capital

Okay and with this $8.1 million, do you have any idea how much Sapphire Glass, that would allow them produce in the Arizona facility.

Leonard Anthony

I have no idea what their plans are.

Ross Taylor - Somerset Capital

Okay, is there a coloration between how much produce and how many furnaces they need.

Leonard Anthony

No.

Ross Taylor - Somerset Capital

No, okay.

Leonard Anthony

Given the end user here, who is very, very tight knit about what their plans are for the obvious reasons. I think it would be a significant challenge for us even to attempt gain such information, even though we have been in direct contact with the ultimate user.

Ross Taylor - Somerset Capital

Okay, and the waiting gain, we are still waiting for the go with regard to Navion, does that ever actually happen? They raised cash, but we’ve kind of been sitting her for what several months, expecting your shipment any day now or treatment any day now.

Leonard Anthony

It is shipped to Navion.

Ross Taylor - Somerset Capital

Yes, I know, but I mean you were expecting a treatment I think was two quarters ago and the thought was there would be someone treated within weeks and six months later we are looking at and no ones been treated yet.

Leonard Anthony

Yes Ross, as we sit her today, there are patients, cancer patients all over the country being turned away, because there is not enough Proton Beam capacity for them. There will be absolutely no trouble for a center with the sort of reputation that Siteman has, doing patient recruitment.

In fact there is nothing more permanent or dangerous than shooting a human being with radiation. I can assure you that radiating oncologist who are going to hit that button are going to be absolutely certain that they know what’s going to happen and they can control the machine. So they are in clinical commissioning, as they call it and they are fully comfortable that they can put a patient through the machine and be absolutely certain of the outcome and their operating or us, that’s when it will happen.

Ross Taylor - Somerset Capital

Okay, you didn’t make any comment on the bank debt situation. Obviously we are still waiting for refi. I’m one of those people who believed that I think the lack of the refi holding down the share price, because there are still people out there who seem to believe that this company and this quarter it probably won’t help matters any in this way and its kind of hanging on the edge of the abyss. So can you talk to us about what’s it going to take to kind of get to where we put a new longer term debt structure in place.

Leonard Anthony

Let me answer that partially by kind of going back to the GTAT things. Despite the fact we just got the order, we’ve been in discussions on that for some time. And part of our thinking in terms of refi activity was that being in a position of having some significant backlog that we are going to generate a net bottom line, based on our experience in producing these things, with a stronger hand your going to kind of go out with to talk about an appropriate refi.

So while we, maybe your perspective, you are interested in the short term, in the stock. I’m kind of looking at what’s the right thing to do to minimize the cash outlook. Because we clearly could pay banks a fee right, we could have, to do some refinancing that wasn’t necessarily appropriate or fits the current situations.

We are trying to think about managing the whole process and what we are looking at is to the extent we can be successful in building profitable backlog, with cash flow profile and we continue to get cost out there and was a lot stronger in finding the right kind of financing versus super high cost financing that might dilute you guys.

Ross Taylor - Somerset Capital

Well, I’m a little confused, because when I look at your balance sheet, it looks to me like you have the fact where the MDSA, which I believe is kind of the equivalent of revenue bond or an industrial bond out of Massachusetts. That accounts for roughly $4.9 million of your just under $5.5 million in debt. So I’m looking at your debt obligations. I’m seeing you are having roughly little over $500,000 in debt out to Sovereign and also I’m wondering why in this case we don’t come up with an alternative.

I know that there are a fair number of, I think you probably could solicit your shareholders and come up with $500,000, $600,000 to get the banks out totally and to get away from being in the situation where you are not in compliance in that fashion.

Leonard Anthony

Rob, just to be clear, Sovereign holds the NDFA bonds still. So all of our debt, that entire balance you are referring was Sovereign. That said, the $840,000 we’ve had on deposit with them for almost 18 months now can be used to pay of the Sovereign specific debt and if they were a willing buyer, the bonds could trader freely, that’s one way to achieve a refi.

So the $5 million and change, you got $840,000 sitting with Sovereign that can built a direct pay down in any refi we achieve. So again, we can delever and use the cash that we’ve got sitting on the shelf with them and from a collateral perspective, with the right backlog and the right forward view, we should be able to refinance the bond and probably pay off the CapEx that you were referencing, which is a higher rate.

Clearly our rates will go up because of the financial results and the history we have behind this, but there is certainly sufficient capital and the quality of our backlog is pretty good.

Ross Taylor - Somerset Capital

Okay, I’ll leave you with the thought that, yes, I think your shareholders are showing tremendous patients, but I don’t, it think it’s a mistake to assume that their patient isn’t nearing the end on this. I know that there is – this is a very valuable collection of assets and if you are not able to operate it, I think we for one would suggest that the company exports strategic alternatives. I think it would be relatively easy to sell this business for a substantial premium, because the problems here don’t seem to be insurmountable or they seem to be more kind of execution timing and quite honestly lack of critical mass and size.

Leonard Anthony

Yes, I would say that as we work our way though the next steps here, considering a variety of alternatives that might position the better of the company, better strategically are going to be on the table, because I agree with you. I mean at this size, to be a public company, to bare the cost associated with that, significant impact. And again, I think what I’m trying to say is I completely agree with you Ross. We need to get this company refinanced in the right way and that may provide better valuation for everybody.

Ross Taylor - Somerset Capital

Yes, that would be good. If it turns out as it does, then I think that then its importantly – I mean what are your public company costs, probably north of $1 million being public.

Leonard Anthony

Well, north of a $1 million. Even with the significant reduction we realized by changing external audit firms, and again with a kind of big reduction not yet realized on its way, but yes, significant cost and frankly more than its the dollars, a company of this size don’t have the infrastructure to really deal with the issue.

We are sitting here today instead of talking to customers, talking to you guys, no offence to you. It took a lot of time and it takes effort and sort of even to be as prepared as we are, which maybe limited in your view, but its one of those things that you end up spending a lot of time not focused on business to the extent that there’s small private competitors, who everyday are focused on generating, cash generating profit as supposed to dealing with other issues. I think that gives them a meaningful competitive advantage.

Ross Taylor - Somerset Capital

And I would agree with you. I actually as I said, I think that when you look at the business, the problems here are not insurmountable and I think in fact many ways the fact that your public actually probably hurts you, because people look at your stock price and they assume it reflects on the viability of the business as opposed to a collection of other factors.

Leonard Anthony

Okay I can’t disagree with you. It’s a painful process, but we need to – my thinking all along Ross would be, to learn about it is that we needed to get this better position and given the potential revenue that could be generated out of the assets.

Costs were way out of line and needed to get pulled back into some reasonable sort of as low as possible when you think about that sort of revenue that Ranor might be able to generate, and so we’ve been on that mission, because I think that has and will result in a lot of value creation and doing that plus working with some key customers that we continue to talk about, it should have a positive impact and the question of strategic alternative is one that every public company always has to consider.

Ross Taylor - Somerset Capital

Okay, and then lastly then you mentioned the navy business and that second half probably six months or more out. Can you give us a little bit more color on that and what’s holding that up at this point?

Leonard Anthony

Yes, I’ll turn that one over to Bob Francis, because he is very close.

Bob Francis

That’s really just near the carrying cycle right now. As I mentioned there is a block four orders that we do expect will be released probably during our Q4, probably not in time for us to actually have any deliveries in Q4 of fiscal year ’14 and then on top of that the larger programs I know are in a significant team review cycle right now with our customers and that review cycle actually will take the better part of several months to complete and we expect that sometime during the mid next calendar year is when they would actually let these orders out for the larger programs. So we stay in very close contact with them and we really haven’t wavered too much on our timing over the past three or four months.

Ross Taylor - Somerset Capital

If you’re running this business at a $30 million plus rate, what kind of EBITDA margin should you be generating?

Leonard Anthony

With the right mix Ross?

Ross Taylor - Somerset Capital

With a realistic mix.

Leonard Anthony

We should be at a high 20’s gross margin. I think when we were in our Halcyon (ph) days with GTAT on the solar, we are clocked at 31% gross margin in the aggregate and then on a net basis we should be after tax 8% to 10%, 12% margin.

Ross Taylor - Somerset Capital

So if you’re generating, if your able to do $30 million plus in revenues its not unrealistic to assume you could be doing something in the neighborhood of $7 million in EBITDA out of that.

Leonard Anthony

I’m thinking that the highest EBITDA I have and on a historic basis was March 2009, that fiscal year when the solar product was in its highest level, the $10.1 million EBITDA here.

Ross Taylor - Somerset Capital

Okay, so the $7 million number is not unrealistic or a reach.

Leonard Anthony

Actually I would call it and this is all speculative now, we’re aligned. I would say that’s probably the high end of the realistic range, because if you think about the customers we’re now pursuing, the Navy, the events contractor, it’s a repeat business, its not as high margin. But I think at the end of the day exhibited to this whole process is Ranor needs volume. Volume helps a lot of things. So I think at the end of the day it may turn out to be a somewhat lower margin business than Rich described in the kind of best of days, but one that’s way more predictable.

Ross Taylor - Somerset Capital

Right and if you look at it now in that fashion, if you can generate $6 million, $7 million in EBITDA, probably its safe to assume the underlying the asset value of the company should be $40 million plus on a strategic basis.

Leonard Anthony

Well, we can all move numbers around, so.

Rich Fitzgerald

On the loan growth, you could certainly see that.

Ross Taylor - Somerset Capital

Okay, thank you all very much.

Leonard Anthony

Thank you.

Operator

(Operator Instructions). And our next question comes from the line of Tony Pollock with Aegis Capital. Please go ahead.

Tony Pollock - Aegis Capital

Good afternoon. Could you give us a little background on what’s happening in Nuclear since nothing’s been mentioned on that and that is a prime, potential avenue?

Leonard Anthony

Yes, I got Bob. Maybe I’ll turn that one over to Bob Francis. Bob, maybe you can just talk about the current nuclear business, where we have and where we may see opportunities.

Bob Francis

We continue to work with some of our existing nuclear customers and it’s been steady, but fairly low volume business with those customers. We did just this past week attend POWER-GEN down in Florida and the nuclear section of that was actually much smaller than the previous year’s show. I would mention the kind of attraction where we’re hoping to continue to get into other customers within the nuclear sector, but as I said starting out, our current nuclear customers that have been with us for years now have been very steady although low volume.

Tony Pollock - Aegis Capital

Is there a reason that it’s at low volume?

Leonard Anthony

I would just say the sector itself is in that condition right now. There is a potential opportunity with one of our customers that we have bid on, that’s relatively large and so they’ve actually won from their parent group and we are working that, but its probably going to be several months before we see anything like that. Beyond that nuclear has just been relatively small over the past as the market base is just relatively small.

Tony Pollock - Aegis Capital

And how large a contract could that be?

Leonard Anthony

What was that?

Tony Pollock - Aegis Capital

How large a contract could that be?

Leonard Anthony

It kind of depends upon their internal capacities, but when we originally did it against them to their parent, it could have ranged between $2 million to $8 million.

Tony Pollock - Aegis Capital

Okay, thank you.

Operator

And our next question comes from the line of Michael Potter with Monarch Capital. Please go ahead.

Michael Potter - Monarch Capital Group

Hi guys.

Leonard Anthony

Hi.

Michael Potter - Monarch Capital Group

Much better – even if the results aren’t there yet, much better tone of the call than the prior one and obviously things are beginning to show that we’re moving in the right direction. A couple of quick question, on the GT order than we have, should we assume that we should achieve gross margins back to our historical margins on the TFS chambers, because that type of volume, these are repetitive and we should be able to churn them out once we get up and running.

Leonard Anthony

Well, again the way we bid it and of course its competitive, I’d say that the bid margins that we went in with were slightly under where we were before, because again you can tell. I knew getting this volume and getting agreement to do it at Ranor versus China is a very important thing for the company. So it may have been a little bit of a trade there, but not all that much, so margins are slightly under.

But again as Bob will tell you, I’m strongly encouraging the team, putting together an implementation plan that drives down costs through the repetitive nature of this thing, so that the margins expand into where we like to see them, but that’s kind of a long answer to a short question.

Michael Potter - Monarch Capital Group

No, that’s okay, but we’re also carrying much fewer employees now than we were at that time as well I believe.

Leonard Anthony

Yes, but the overall cost was operating in SNG or materially lower, although its again as I’ve said that’s all not going to be reflected into fiscal 2015 and the thing that we’re going to be blessed if we have the GT order is what additional resources that we need and how do we recast our operations to limit the number of resources we need to execute the order to develop a major impact on the margins.

See what to do Michael, but they said to everybody earlier that this is something that has been in discussion for some time and had its ups and downs. We weren’t really sure where it was going to end up and we weren’t really sure that GT was going to agree that producing in the U.S., at Ranor was a sensible strategy, because they do have a focus on using capacity as of China. The reason we ended up here in the first place.

So I guess what I’m saying, I think we made a kind of progress with that customer in terms of getting a sizable order and getting an agreement to produce it out of Ranor, where we have much more control and from my perspective, much more capability to build the quality product quickly and as we told you, there is a relatively short time frame here during which we got to get these out.

So again, I’m encouraging Bob and the team to really get an operating plan together quickly that allows us to exceed customer expectations on quality and delivery and get these units flowing out. We’ve got all set up for positive cash flow effects.

Michael Potter - Monarch Capital Group

When do we start generating revenue off this contract? Yesterday I’m hoping.

Rich Fitzgerald

Wish it were that quickly Michael. We do have a smaller [seed work] (ph) that was given to us while this was germinating and being negotiated. That’s going to conclude in this quarter out of China and then the bulk of what we announced today, the $8.1 million, the new order, that will progress out of Ranor with first delivery in January is the plan.

Michael Potter - Monarch Capital Group

Okay. So the initial production is going to come out of China for fiscal Q3 and then our production starts at Ranor in Q4?

Rich Fitzgerald

Yes, very limited number out in Q3 and the bulk of this $8.1 million order is January through May delivery.

Michael Potter - Monarch Capital Group

Okay, so Q4 and beginning of Q1.

Rich Fitzgerald

Right.

Michael Potter - Monarch Capital Group

Okay. And we’re still sitting with restricted cash at Sovereign. It was at $600,000 to $900,000 is that correct?

Rich Fitzgerald

Yes, its $840,000.

Michael Potter - Monarch Capital Group

And where is that reflected on our balance sheet?

Rich Fitzgerald

That’s in other current assets.

Michael Potter - Monarch Capital Group

In other current assets, okay. And then Rich, can you break down the adjusted EBITDA for us as well for the quarter.

Rich Fitzgerald

You can’t get to an EBITDA because of the loss provisions Michaels and if you go to the cash flow you can certainly take the non-cash items traditionally and add them back to the reported loss from operations.

Michael Potter - Monarch Capital Group

Okay, it’s possible. I mean you know its either myself or somebody else is always asking this question on the call. Perhaps you could break this out for us on the future calls and the future releases.

Leonard Anthony

We commit to do that.

Michael Potter - Monarch Capital Group

Okay. Alright guys, I’ll get back in queue. Thanks.

Leonard Anthony

Thank you.

Operator

And our next question comes from the line of Alan Reacher. Please go ahead.

Alan Reacher – Private Investor

Hi there. I’m an individual investor. One question quickly on the Sapphire equipment order, do you have any irons in the fire with other than GTAT.

Leonard Anthony

Relative to Sapphire, the answer is no.

Alan Reacher – Private Investor

Thank you.

Operator

(Operator Instructions). And I’m showing no additional questions at this time. I’d like to turn the call back over to Management. Pardon me, one person has just queued up.

The next question comes from the line of Peter Trapp with Bifrost Fund. Please go ahead.

Leonard Anthony

Hello Peter.

Peter Trapp - Bifrost Fund

Yes, hi Rich. Now I’ve got a couple of observations, because I did quite a bit of check and I’m sure your aware that this Apple order, Apple their commitment to try to do more business or manufacture more in the United States and they are going to provide financing to GT for the product that they are going to be building and I’m wondering if there is no chance, at least as your short of cash or you’d like to get your hands on some cash, there wouldn’t be a trickle down effect that if Apple is going to fund GT, why shouldn’t GT take some of that money and help fund you on this order or pre fund it?

Leonard Anthony

Yes, no I would say that we have good terms and conditions on this order relative to cash.

Peter Trapp - Bifrost Fund

Okay, and then I think a question was asked about production, Sapphire production by furnace and whether more Sapphire met more furnaces and my understanding is that yes, more Sapphire is more furnaces and this is just the beginning of what Apple and GT are going to be doing. So I mean I’m not trying to put the cart before the horse, but it would seem to me that this is the beginning of potentially a series of orders, so can you comment on that?

Leonard Anthony

We have no visibility into what the future may hold, but I firmly believe, they said earlier that to the extent that the adoption of Sapphire accelerates that it could have an important benefit to us and therefore my strategy with the management team is to ensure that the commitments we’ve made to GT relative to these orders, in terms of the quality and the timing of delivery absolutely must be met or exceeded. Because at the end of the day they have a very demanding customer who is a customer that we all would love to be doing business with other than for their exceptional ability to negotiate price.

Peter Trapp - Bifrost Fund

Yes. Now I remember, back in the battle days a conversation that had to do with Ranor and the fact that the sales cycle and the sales effort was not particularly robust and therefore Ranor was kind of waiting for the phone to ring in order for business to come in the door. And with the change in the management and I know that you’ve cut back stocks quite significantly, how does that impact on the sales and the sales initiatives and the ability to build up some more orders, so that you can use more capacity at Ranor. I mean just thinking through the logic here.

Leonard Anthony

No, no, it’s an excellent question and one observation is with the GT order we’re going to be using a lot of our capacity at Ranor during that time period. We also have very good sales men up at Ranor, located up there now who is doing a good job in terms of and frankly, as soon as I can get myself out of the cost reduction and kind of the order management boat here, I will be starting to talk to more customers on a more strategic basis, because at the end of the day, this is a long sales cycle. I’m surprised at other observations I might make, but selling for this company may not have always been in terms of building strong relationships.

So I think we need to do two things; a bottoms up more aggressive day to day selling to fill in the backlog once GT fade off, assuming that there isn’t another GT order right behind it and then we got to do some more top down relationship building, so that the position that we want to be in relative to being called a premier outsource for certain companies is one that can be executed on. So the main thing is bottom line, we need to do more in that area.

Peter Trapp - Bifrost Fund

Yes. While I think its sad to say that as there’s been more and more pressure on the administration and on Corporate America to provide jobs here in the United States and obviously in the center of the country, that’s a huge initiative. We are seeing more and more companies now committing to bring production back on shore, whether it’s from China or from Mexico or Central America or whatever. So I’m thinking that the cycle is probably coming your way in that sense, wouldn’t you think?

Leonard Anthony

Yes, I think a lot of people are learning that at the end of the day those other offshore locations didn’t turn out to be as good as they thought they would be for a whole variety of reasons, including the cost of doing business there.

Peter Trapp - Bifrost Fund

For you its also a security issue, because I mean if you have patents or if you have unique products or what companies have that are passing it onto you for manufacturing. I mean that’s a big security issue. I mean we’ve been around through loops on that one.

Leonard Anthony

Yes, the kind of questions I always had about why the company might have started the China operation when we’re pursuing major defense contractors and needless to say, they would be a bit panicked about someone in China getting into our systems or and maybe having access.

So I agree with all your points and look, my view is that our principal assets are at Ranor. They weren’t in China and we need to find a way to make Ranor successful and that’s what we’re working hard at doing.

Peter Trapp - Bifrost Fund

I mean if the cultures change and that your actually making sales calls, that certainly is a help. I’ll just make one last comment or question and that has to do with the solar. I mean its no secret, but solar has been on a tear this year and historically you’ve had good solar business and it seems as though your initiatives or your orders in the solar side have lagged behind the success of solar here in the United States in 2013. Could you comment on that please?

Leonard Anthony

Yes, I’ll try to calibrate to that Peter. If you look at where we participate in the solar supply chain, we provide sort of upstream, mid stream production equipment. It resides upstream with the panel manufacturers and if you look at what’s going on, the panel prices have come down. That’s good for people who want to farms and installations. It’s good for people who are brokering the panels.

But we have not seen and if you look at GTAT’s most recent numbers, they don’t have a great deal of backlog for upstream solar equipment and no one is putting a whole lot of extra capacity online. I think we’re at 35 gigawatts of solar panel production annually, yes 35 gigawatts and there is talk that we’re suppose to be going to 55 gigawatts, but we haven’t the big install for people to put that next slug of capacity on line.

Now if I look at long term GT’s business and they just reported their quarter, the majority of their sales was their poly-silicon reactors, which is the ultimate piece of the upstream equation. So people have been installing those poly-silicon reactors while they haven’t been doing the mid stream equipment that we participate in.

Eventually the mid stream will catch up with the up stream install and we’ll see some orders or at least GT will, but its nowhere near the kind of volumes we saw when the world was going from eight gigawatts up to 25 gigawatts and we were all riding that rapid expansion. Is that helpful?

Peter Trapp - Bifrost Fund

Okay, one last thing. The breakeven sales to EBITDA of $30 million, at the current expense levels, is it still your attention to try to reduce costs or you think that you’ve rung out everything you can and its kind of time to kind of increase it a little bit as the orders are coming in, especially on the sales side.

Rich Fitzgerald

Yes, well there’s always costs that can be reduced and as part of our new culture we’re going to be focused on doing that, as well as adding costs where and when appropriate.

So for example in terms of the GT thing there maybe some need to add some costs to execute those orders. There maybe an interest and desire to help products stand the sales and marketing organization that I just finished shrinking a bit, but maybe another person at Ranor with good contacts in the verticals that we’re trying to supply could happen. But I think its been more important for us given the precarious situation the company was in, to try to get stabilized with what we had and build from there and that’s what we’ve been doing.

So yes going forward, certainly you can’t cut your cost as a strategy for success, so I understand that and we’re going to have to start to kind of do more in terms of customer development, etcetera. But at the end of the day cost as I said before and many times, we’re way out of line for a company this size and had to be ringed in and we haven’t seen the full effect of all the actions that have been taken and will be taken, none of which should impact the business going forward.

Peter Trapp - Bifrost Fund

Okay, thank you very much Rich.

Leonard Anthony

Thank you Peter. Any other questions?

Operator

There are no more questions at this time.

Leonard Anthony

Okay, thank you very much for your time and attention and your investment in TechPrecision and the continued opportunity to work for you. We’ll keep you posted as we progress with the redirection of TechPrecision on our next call. Thank you very much.

Operator

Thank you ladies and gentlemen for attending today’s conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: TechPrecision's CEO Discusses F2Q2014 Results - Earnings Call Transcript
This Transcript
All Transcripts