TechPrecision's (TPCS) Q1 2015 Results - Earnings Call Transcript

Aug.18.14 | About: Techprecision Corp. (TPCS)

TechPrecision Corp (OTCQB:TPCS) Q1 2015 Earnings Conference Call August 18, 2014 8:00 AM ET

Executives

Brett Maas - IR

Leonard Anthony – Principal Executive

Rich Fitzgerald - CFO

Alex Shen - President of Ranor Division

Analysts

Ross Taylor - Somerset Capital

Operator

Good day and welcome to the TechPrecision Corporation First Quarter 2015 Financial Results Conference Call. Please note, today’s conference is being recorded. At this time I would like to turn the call over to Brett Maas of Hayden IR. Please go ahead, sir.

Brett Maas

Thank you. Welcome to everyone joining us today. 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 Alex Shen, President of TechPrecision’s Ranor Division. I’d like to mention this call is being simulcast on the web at www.techprecision.com.

Before we begin, I’d 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 question. Therefore, the company claims the protection of the Safe Harbor 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 risks and uncertainties in the company's financial filings with the SEC.

In addition, projections as to the company's future performance represent management's estimates as of today, July 18, 2014. TechPrecision assumes no obligation to revise or update these forward-looking statements.

I’d now like to turn the call over to Leonard Anthony, Chairman of the Board of Directors, Principal Executive Officer to provide opening remarks. Mr. Anthony?

Leonard Anthony

Great. Thanks, Brett, and good day to everyone and thank you for joining us. Although the recent challenges that our business has faced are not really behind us, I am encouraged by the positive sequential improvement from the fiscal fourth quarter 2014. We grew our revenues and narrowed our losses on a sequential basis.

On year-on-year basis, we reduced our selling, general, and administrative expenses positioning us for better days as we regrow our topline and put Ranor back on a solid footing. Alex Shen, who joined the company as President of the Ranor division in late June has visited our key customers in naval/maritime, precision industrial, and nuclear sectors, the three areas which comprise the majority of Ranor’s business, and he was able to confirm that our customer base remains very committed to sourcing Ranor’s expertise.

Alex and his team are aggressively pursuing further improvement in productivity, building backlog, transforming the culture, and developing a long-term strategy to improve the level of stability and profitability of Ranor. I will ask him to speak about his early efforts in just a few minutes. Our fiscal Q1 2015 sales to customers in the naval/maritime sector increased on higher shipments of components to our largest customer.

We continued to pursue additional outsourcing opportunities in this sector, and we will maintain Ranor’s unique position within the nuclear sector. Net sales in our energy group decreased as did sales in our precision industrial group due to lower sales volume of polysilicon reactor components which was partially offset by higher sales of production furnaces and medical components. Sales of production furnaces increased significantly as Ranor made shipments from the U.S. and from our WCMC subsidiary in China as required under a certain customer purchase agreement.

As noted in our last conference call and Form 10-K, we disclosed that we have initiated a legal proceeding with a customer regarding modifications to a purchase order. At this time, we have no additional information on this action and we’re limiting our remarks and disclosures solely to what has been disclosed within 10-K and the subsequent 10-Q that will be filed today; and we refer you to those documents for any questions you may have. As we stated previously, the legal proceeding is intended to recover some of the contract loss provision that company recorded in fiscal Q4 of 2014.

In late May, we completed a $4.1 million refinancing of the production equipment at Ranor, and we have continued to progress refinancing efforts relative to Ranor’s real estate assets in order to enable Ranor to payoff equipment and real estate debt with our legacy bank. This process has taken longer than we originally envisioned due to measures necessary in allocating collateral among the various creditors versus a single creditor for all classes of collateral. In addition, the legal proceeding I just mentioned now to an extent is impacting timing of the closing of the financing package. When we conclude our process, Ranor will be financed by an asset base group of creditors with more flexibility to exclude the types of financial covenants that have proven to be problematic during Ranor’s transition.

On August 12, 2014, we completed a fourth forbearance agreement with our legacy bank, extending the forbearance period through September 30, 2014 as the third forbearance agreement expired on July 31. This event and the related agreement are disclosed within our June 30, 2014 Form 10-Q. With that, I will now turn the call over to Rich for a recap of the financial results.

Rich Fitzgerald

Thank you, Len. I will cover operating results for the fiscal first quarter of 2015; the three-month period ended June 30, 2014. Revenue was $6.2 million compared with $7.1 million in the same fiscal quarter one a year ago, and up from $3.6 million in the fiscal fourth quarter of fiscal 2014, the March 31, 2014 fiscal year end. The $0.9 million or 12% revenue reduction was distributed amongst our three sector as follows; sales in naval and maritime group increased by $0.6 million on increased shipments of components to our largest customer, net sales to the energy group decreased $1.2 million primarily due to the fact that the current year Q1 sales did not include any shipments of isotope transport casks while the prior year Q1 included revenues related to transport casks.

Net sales for our precision indusial group decreased by $0.3 million on lower sales for polysilicon reactor components, which were partially offset by higher sales volume of production furnaces and medical components. Our production furnace customer has indicated us a desire to reduce the number of units ordered under the contract, and as Len stated earlier, we have commenced an arbitration process to recover costs associated with the reduced order volume.

Gross margin for the quarter ended June 30, 2014, was $0.2 million or 3.5% of sales compared to a gross profit of $0.4 million or 5.9% of sales in the fiscal first quarter of last year.

Contract losses of $0.4 million recorded within the first quarter of fiscal 2015 on US production as well as underutilized overhead on the lower sales volume negatively impacted Q1 fiscal 2015 results, and contributed to the loss within the period. We believe a portion of the Q1 contract loss may be recoverable through insurance and are working with the impacted customer to develop and submit an insurance claim.

Turning to expenses; selling, general and administrative expenses for the first quarter were $1.3 million, which compares with $1.8 million of general administrative costs in the first quarter of last year. SG&A compensation related expenses were $0.3 million lower due to reduced headcounts at our holding company and China operation as well as $0.1 million lower spending on travel and other business related expenses when compared to the prior year. SG&A at our Ranor subsidiary was relatively unchanged year-over-year.

Net loss for the quarter ended June 30, 2014, was $1.3 million or $0.05 a share basic and fully diluted. This is based on 24 million shares basic and fully diluted outstanding through the first quarter ended June 30, 2014, and compares with a net loss of 1.4 million or $0.07 a share basic and fully diluted last year on 20.0 million basic and fully diluted weighted average shares outstanding.

TechPrecision reported negative operating cash flows of $1.6 million for the quarter ended June 30, 2014, compared to negative $0.4 million of operating cash flows for the period ended June 30, 2013. During the quarter ended June, purchase of property, plant, and equipment was $54,000 and is comparable to the $56,000 spend in the prior year’s first quarter for property, plant, and equipment additions.

During the quarter ended June 30, 2014, the company borrowed $4.1 million under a new equipment loan facility. Approximately $2.7 million of the proceeds from this financing where utilized to pay off series A and series B bonds with our legacy bank. At June 30, 2014, we had $1.5 million outstanding with our legacy bank in the form of series A bond.

We remain focused on completing a real estate financing facility to fully pay off the remaining debt obligations with our legacy bank. At June 30, 2014, TechPrecision had negative working capital of $3.4 million as compared with negative working capital of $2.0 million at March 31, 2014.

As of June 30, 2014, the Company had $0.9 million in cash and cash equivalents compared with $1.1 million as of March 31, 2014. The working capital metrics include the impact of classifying all debt as a current liability at both June 31, 2014 and at our fiscal year end March 31, 2014. You may find additional details in our filings submitted to the SEC.

With that brief financial recap, I would like to turn the call back over to Len for some additional remarks. Len?

Len Anthony

Thanks Rich. On our last call Alexander Shen resumed the role of Ranor’s President in late June just more briefly about his thoughts about improving the organization, modifying the business strategy and strengthening the execution while it’s only been a couple of weeks since he provided you that initial overview I thought it would be useful again today to have Alex shared his additional perspective these gains over the last month.

With that, I would like to turn the call over Alex.

Alex Shen

Thank you, Len and good afternoon to everyone. Alex Shen here it’s been a month since our last call, so now with eight weeks in the position I have some more thoughts and actions to share. My personal contact with clients continues on a daily basis. Under my watch, Ranor is aggressively pursuing new opportunities as well as declining opportunities that are not a good fit for Ranor. New opportunities and more customer diversification are key pieces in the strategy that we are developing and in the tactics that are needed for Ranor’s recovery. In the past eight weeks, we have continued to take steps to right size our business and reduce costs without negative impacts to either delivery or quality, operational affectivity and operational visibility that improving with a tighter focus on each job. The relevant block timing associated with that job and the impacts of each of the changes associated also with each job.

With this improved visibility external and internal communications have continued to improve rapidly. I continue to reconfirm that our customers remain very interested in sourcing Ranor. We will continue to aggressively pursue orders. Back to you Len.

Leonard Anthony

Thanks Alex. Our initiatives early to remain three quarters of fiscal 2015 we’ll remain unchanged as we do our best to stabilize the company and regain a consistent revenue stream, higher gross margins, positive cash flow and return to profitability. We are going to focus on achieving rapid improvement in productivity and later in the fiscal year we expect to see the results of Alex’s turnaround plan at Ranor.

Additionally, we’ll continue to seek appropriate long-term financing facilities that will allow us greater production and manufacturing flexibility to pursue additional business opportunities and as always we remain committed to the best interest of our customers, employees, lenders and investors. That concludes our prepared remarks today and accordingly I’d like to open up the call for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Stuart Goldberg (Ph), private investor.

Unidentified Analyst

Good afternoon gentlemen. Three questions, looks like backlog is down $8.2 million, revenues of $6 million, so can you walk us through the inputs and the outputs aside from the revenue bookings to the backlog, and then I’ll ask the other two questions after –as we go through them?

Leonard Anthony

Rich could you handle the backlog?

Rich Fitzgerald

Yes, sure. So, the backlog is down because we’ve got bookings, we’ve also had some projects that got differed, so they are no longer in backlog and that’s [totaled] (ph) $6 million in revenue and then a project removed from backlog for differed order.

Unidentified Analyst

Okay, so you really didn’t have any projects coming into backlog for the quarter?

Leonard Anthony

We did not have significant bookings net of those other impacts.

Unidentified Analyst

Okay.

Leonard Anthony

But again the order flow like other metrics in our business can be quite lumpy.

Unidentified Analyst

When we look at note Note 5 in the Q on costs incurred on uncompleted contracts, I can see what you’ve -- obviously what your revenues and what you booked for revenues and what you booked for cost of goods sold, what I would like to know is based on the balances left in there, what is -- I mean it looks like a very thin margin has been booked the last couple of orders in last year or this quarter in last year, what is the anticipated margin that’s left in that balance?

Rich Fitzgerald

Again, what comprises our backlog for the most part has our targeted margins. The impact we’re seeing in the margin here where it’s coming through is a single digit for gross margin, it’s really a function of the provision, both contract loss provision that was established as of March 31, a good piece of the revenue, almost 30%, it’s running against those loss provisions as the contracts will allow to completion. So that’s really the impact, what’s in backlog for the most part are products we’ve made before albeit at a lower volume right now, but products that generally -- a targeted margin on them subject to the throughput of Ranor being at its targeted capacity. So, the margins are impacted by unfavorable overhead absorptions and then both the booking of loss contracts and the run-off of revenue against those contract loss provisions. So…

Unidentified Analyst

So the $2.4 million that you talked about in Note 8 under accrued expenses, is that running through the costs incurred on uncompleted contracts?

Rich Fitzgerald

Correct. So you are basically coming through it, if you properly accrued for your loss on the contract and you’ve got a good estimate, you’re coming through a zero margin as the contract runs out to completion.

Unidentified Analyst

When will the contract that specifically relates to the $2.4 million run out?

Rich Fitzgerald

There is also some of the contract losses relative to excess material on adjusted [quarter] quantities, so that will resolve when we receive some type of settlement on the contract to the legal process.

Unidentified Analyst

Okay and then regarding that, you have a quote in here, future manufacturing activities and shipments under this contract are at risk. That implies some kind of hope or a potential expectation that this contract may actually have a future life to it or is that just legally sort of saying this contract is over?

Rich Fitzgerald

No, that’s correct.

Leonard Anthony

There is still maybe opportunity going forward.

Unidentified Analyst

Because this potential client is also seeing a huge uptick in solar at this point in time hypothetically speaking client, I think, it is clients seeing a huge uptick in solar furnaces which is relatively new to the most recent quarter and the end of the year. And you had previously built furnaces for their solar business, is there a potential you are resolving this situation in an amicable way that would get you back on board?

Leonard Anthony

We are not able to reply to that specifically at this time.

Operator

(Operator Instructions). We will take our next question from Ross Taylor with Somerset Capital.

Ross Taylor - Somerset Capital

A number of my questions were just asked, but away from this I would like to get to the idea. Have you or do you feel that the current cost structure of the company is right sized for what we should expect revenue base to be over the next 12 months so that we can operate at breakeven or better or an earnings basis?

Alex Shen

So, as far as are we at the right size now, we are on the way to being the right size. However, since I am aggressively booking as well, it’s highly dependent on what I can book in the short-term and the mid-term, not just the long-term. So, I don’t know is probably the most correct answer operationally, but we are at a better right size now than when I started eight weeks ago, meaning I am cost reduced further than when I started on June 23. I am not answering your question with a yes or a no or very much clarity at all, but we are in a much better place today.

Ross Taylor - Somerset Capital

Have you, since the end of the quarter been able to put any new contracts and revenue contracts in place?

Alex Shen

I have.

Ross Taylor - Somerset Capital

Also looking at or listening to the comments you made, there is reference to a loss from the contract in an insurance, filing an insurance claim?

Alex Shen

Yes, Ross that happens to be on the defense related contract, so there is not a lot of granularity.

Leonard Anthony

That’s a reference that we are making but that’s as I far as I am prepared to go today.

Ross Taylor - Somerset Capital

Okay, it seems a little oblique.

Leonard Anthony

It is. It’s meant to disclose to all of us but there are different ways to make sure that we are covered with our losses including an insurance claim that will become a little more apparent in the future.

Ross Taylor - Somerset Capital

We understand what actually happened.

Leonard Anthony

That’s correct.

Ross Taylor - Somerset Capital

Away from that looking as they have been in place for right weeks, could you talk about the state of Ranor, how you find it at this point in time? What needs to be done? Is this just literally a revenue problem? Is this the problem where we need to get a better culture of creating contracts with either better customers meaning those who actually intend to pay us for what we do for them or kind of where do we stand as investors at this point in time looking at Ranor going forward?

Alex Shen

Certainly, we need to have clients that need to pay us because if you have a large client that doesn’t pay us it turns into something quite undesirable. Now having said that, we take that off the table, and of course, your new President is going to be securing contracts from clients that will pay us. The other piece is, are we chasing the correct clients and are we declining on jobs that do not fit within our real house, that’s another piece that I am working on consistently, daily. So, there are customers that have been no quoted, I just no quoted another customer this morning as a matter of fact and they came back and re-requested us to take another look. So the customers are very, very interested in sourcing us even if we do no quote they come back and ask us what can you quote it, can you do it for a higher price? Well, that’s not the problem sir because it doesn’t fit within our real house, so we do not do those.

So, two things, one finding customers that will pay us; two, finding the right customers to decline business for and to secure the right business from the same customers, sometimes it’s one and the same and the page for this morning was one and the same. We are a current supplier for them, they would like to expand our repertoire with them which is not in our wheelhouse. So we gracefully decline and it was taken well. I think with those two pieces as well as an operational pieces doing the more traditional focus on on-time delivery, planning ahead and really executing well it’s all about the execution of the details, so probably in those three areas that’s where the recovery is going to happen.

Ross Taylor - Somerset Capital

Len, can you talk about, it really seems to be going on at this point in time obviously we’ve had some significant top line issues, but the reason why the stock is trading where it is going I think it is the liquidity crisis the company facing. Can you talk about where we are with regard to finding a viable long-term solution to that liquidity crisis?

Leonard Anthony

Well, in my comments I talked about what I consider to be a short-term step improving the liquidity situation and its somewhat based on just a few things that Ranor getting resolved and maybe a little bit of progress on the contract that we’ve got some question about and if we can get ourselves to that point we’d be close to another financing which we’d add to liquidity but I view that frankly Ross as a short term solution because as I look at the company kind of going forward and thinking about what reasonable targeted revenue run rate might be in the near term Alex has new reduced cost structure might look like et cetera. I feel like the financing we’re going to put in place as you know is going to be relatively high cost that’s going place an additional burden on Ranor not that we wouldn’t be kind of enter into it I think we can generate the cash to pay it instead of significant piece of cash would be allocated to ongoing interest payment, debt maturities and the like, so where we are is I want Alex to continue to make good progress as he has so that we can demonstrate to investors that we’ve reached some point of stability we have a solid cost structure and we’ve got a building backlog with presumably customers and products where we can execute and make a reasonable margin. Reasonable margin is 25% gross margin or something like that.

So we get ourselves to that point then I think we have to look at the capital structure again and determine what is the right cap structure for the company and from my perspective frankly Ross I think the company cannot perform the way it needs to perform if it’s heavily burden debt and we’d therefore start to look for other avenues be it strategic investors or other investors who might be interested in equity like investment in the company. But I think we have a little more work to do before we can get to that point.

Ross Taylor - Somerset Capital

You commented, have you seen any, it sounds like what you’re you haven’t seen any diminishing of interest from your customers so that at this point in time this situation is not damaging the viability of the business.

Rich Fitzgerald

I don’t think it’s damaging the current viability of the business I think it would be helpful if we got a stronger capital structure because they it would just give us little bit more capability when you’re dealing with the types of clients we are attempting to pursue additional business with them.

So I would say fairly based on our direct communication with customers as Alex points out many of the big name customers we do have are interested in trying to move more business to us which is a great thing. They certainly ask questions about our financial viability and we do our best to answer them appropriately and fairly about where we are and how we see resolving this situation and clearly to the extent that they have such a strong interest in us one of the way if they can insists this Alex remind them all I’m sure some near term orders for maybe some things that do fit in our wheel, it would be quite helpful.

And so I think that’s a way to make progress. From my perspective and Alex you can speak to this as well the customers really would like to see us be successful and are trying to find ways to help us to do so but there is question of financial viability does hangout there and it’s one we have to address and it’s one frankly I’d like to get off the table but I think we have to earn our way out if we can’t ask for too much help at this point.

Ross Taylor - Somerset Capital

And what level of revenues do you feel you need to have to be able to become a free cash flow generator?

Rich Fitzgerald

I think its north of -- or so between 25 and 30.

Leonard Anthony

I agree with that.

Ross Taylor - Somerset Capital

Okay. So it’s basically a number that if you can slightly update the current run rate over the next 12 months we should expect the company to be able to actually generate some quick [indiscernible]. Again Rich didn’t say that as a part of his answer. But I think if there is way to strip out the big contracts the significant losses associated with those large contracts and look underneath and see what’s going on in the rest of the business you’d see some pretty decent margins and if you have more of that kind of thing and we kind of resist the temptation to take on huge contracts with huge risks and just kind of focused on growing the core kind of business that we know we can do it doesn’t take a whole lot risk.

Leonard Anthony

Volume and mix get the kind of results we’re all expecting here. And now having the contracts that due to these sizeable losses and cannibalize the other quality contracts we have on the books and in the backlog.

Ross Taylor - Somerset Capital

So simply put, obviously the two quarters you are referencing are about $4.6 million or so. So they had not gone that way, you could make a stronger even that debt rather than being an encumbrance now would be a relatively insignificant issue without those two contracts?

Leonard Anthony

That’s right.

Operator

And we will take our next question from [indiscernible] Investment Consulting.

Unidentified Analyst

Yes, the size of the company sales force, how big is it?

Len Anthony

Alex, for you.

Alex Shen

The size of the company sales force, I obviously am taking charge of sales myself and I have five guys on it.

Unidentified Analyst

It’s been a long-term investor in the company and it’s starting to see some very sizeable losses that clearly has been discussed before that the balance sheet has deteriorated significantly. Without improvement, how much longer can this company last before you can’t refinance debt anymore before things are called in. Are we talking months or is it years or where do we stand there?

Len Anthony

Well from my perspective it’s a moving target, how long can you continue to lose a lot of money, I think that question from my perspective is being diminished with Alex as the leader and the things he is doing at Ranor. I wouldn’t want to predict how long a company could last or what its cash out date is. Clearly you look at the balance sheet and you can see we’re in a currently fairly risky situation but the fact is we’ve got significant amount of fixed asset and working capital collateral that is available to be pledged which would allow us to build liquidity and to assist Alex in his efforts to return Ranor to profitability. So from our perspective, while the current situation is certainly call it tenuous from a balance sheet perspective. At a liquidity perspective, it’s being managed daily and we believe we’ve got the tools and the techniques to continue to manage that for the foreseeable future until such time as we see the backlog build and that be converted into free cash flow and presumably profit at some point in hopefully not too distant future.

Operator

And that will conclude today’s question-and-answer session. At this time, I would like to turn the conference back over to our management team for any additional or closing remarks.

Len Anthony

No additional remarks, just appreciate everybody’s interest in the company, continued interest and participation on the call today and we look forward to talking to you all again soon. Thank you.

Operator

And this concludes today’s conference. We thank you for your participation.

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