TechPrecision's (TPCS) CEO Alex Shen on Q3 2016 Results - Earnings Call Transcript

| About: Techprecision Corp. (TPCS)

TechPrecision Corp. (OTCQB:TPCS) Q3 2016 Earnings Conference Call February 16, 2016 4:30 PM ET

Executives

Brett Maas - Investor Relations

Alex Shen - Chief Executive Officer

Tom Sammons - Chief Financial Officer

Analysts

Walter Schenker - MAZ Partners

Richard Greulich - REG Capital Advisors

Ross Taylor - Somerset Capital

Steve Mistine - Private Investor

Mike Schellinger - MicroCapClub

Operator

Greetings and welcome to the TechPrecision Third Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brett Maas. Thank you. Mr. Maas, you may begin.

Brett Maas

Thank you. On the call today is Alex Shen, Chief Executive Officer and Tom Sammons, Chief Financial Officer. The call is also being simulcast on the company’s website 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 risks and uncertainties in the company’s financial filings and the SEC. In addition, projections as to the company’s future performance represent management’s estimates as of today, February 16, 2016. 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 to Alex Shen, Chief Executive Officer, to provide opening remarks. Alex?

Alex Shen

Thank you, Brett. Good day to everyone and thank you for joining us. The third quarter of fiscal year 2016 was another quarter of operational and financial progress as we delivered our third consecutive quarter of net profit and increased our sales order backlog by approximately $6 million in the last 9 months to $20.5 million at December 31, 2015. This is the third profitable quarter the company has reported since June 30, 2011 and the third profitable quarter since I joined the company back in late June 2014.

We achieved this result with our consistent, sharp focus on productivity initiatives, resource realignment and top line growth with key customers. Our continued efforts with our core customers enabled us to expand our backlog at December 31, 2015 to approximately $20.5 million compared to $14.3 million at March 31, 2015. We improved profitability in the third quarter of fiscal 2016 on a sales volume that was essentially the same as the year ago quarter, with net profit of $12,000 compared to a net loss of $946,000 for the third quarter of fiscal 2015. On January 22, 2016, we amended a term loan and security agreement, with one of our lenders and extended the maturity date to January 22, 2018.

Now, I would like to welcome Tom Sammons in to tell us more about our third quarter financial results.

Tom Sammons

Thank you, Alex. Today, I will recap the three months results for the quarter ended December 31, 2015. Net sales were relatively unchanged at $3.5 million when compared with the same fiscal quarter one year ago. Net sales increases are components to our defense group almost entirely offset decreased sales on lower volume in the company’s energy and precision industrial groups. Gross margins increased for the third quarter of fiscal 2016 to $1.1 million compared with $300,000 for the third quarter of fiscal 2015. The improvement can be attributed to lower labor and overhead cost as well as the absence of contract losses.

Total SG&A for the fiscal third quarter of 2016 was $28 million or 9% higher when compared with the third quarter cost of $0.7 million in the prior year. However, the third quarter of fiscal 2015 was positively impacted by a $300,000 non-recurring adjustment to compensation, which made the comparison unfavorable.

Our net income for the quarter was approximately $12,000 or $0 per share basic and fully diluted for the three months ended December 31, 2015 as compared to a net loss of $946,000 or $0.04 per share basic and fully diluted for the three months ended December 31, 2014. This is based on a share count of approximately 27.4 million both basic and fully diluted shares in fiscal 2016 – fiscal 2015 third quarter per share amounts are based on 24.7 million basic and fully diluted shares outstanding.

Turning to the balance sheet, on January 22, 2016, we extended our term loan maturity date with one of our lenders. As such, we are able to reclassify this debt to long-term from short-term on the December 31, 2015 balance sheet. As a result, our working capital swung to a positive $400,000 at December 31, 2015 from a negative $2.1 million at the fiscal 2015 year end.

Now for cash flow recap, we finished the quarter with $816,000 in cash and cash equivalents at December 31, 2015 as we used cash in operating activities during the third fiscal quarter of 2016. Our cash balance has since increased to approximately $1.3 million at the end of January 31, 2016 as we generated additional cash from our December shipments and January dense payments. As Alex alluded to earlier, our sales order backlog at December 31, 2015 was approximately $20.5 million compared with the backlog of $14.3 million at March 31, 2015. This backlog excludes orders canceled by a customer that filed for bankruptcy subsequent to March 31, 2015.

With that, I will now turn the call back over to Alex. Alex?

Alex Shen

Tom, thank you. Moving forward, we intend to maintain the sharp focus that got us to this point of our recovery. We plan to replenish our backlog and continue to focus on new business contracts with our core customers, which utilize our core competencies and customs, large scale, high precision, fabrication and machining and leverage our established expertise, our established certifications and our established qualifications in the defense, nuclear and precision industrial sectors. We must continue to execute and maintain operational run-rate improvements to improve our gross margins and increase the amount of cash generated from operations.

I would now like to open up the call for questions and answers.

Question-and-Answer Session

Operator

Thank you, gentlemen. [Operator Instructions] And our first question comes from the line of Walter Schenker from MAZ Partners. Please proceed with your question.

Walter Schenker

Hi, Alex. Actually I guess three questions. The first is the three profitable quarters make a trend and therefore are you more comfortable that we might get to you to do more in the way of Investor Relations?

Alex Shen

Well, two points make a line Walter, three points make a trend. Yes.

Walter Schenker

Okay. Secondly, Mevion was nice enough to send out pictures today of the cyclotron being delivered at Georgetown Hospital for their proton beam installation, before you arrived at TechPrecision, Mevion was a very large customer and signed a contract, which obviously isn’t happening, but had the possibility of being a much larger customer since they are acquiring a cyclotron or they also acquiring basis to put the cyclotron on, they talk about other installations, i.e. could you give us any more color on the business relationship between Mevion and TechPrecision?

Alex Shen

Can I give you more color on the business relationship between Mevion and TechPrecision?

Walter Schenker

Yes.

Alex Shen

I don’t have any color to add.

Walter Schenker

Okay. If they are buying cyclotron, so they are buying basis?

Alex Shen

I don’t know.

Walter Schenker

Okay. And therefore, you are not currently shipping products to them?

Alex Shen

Am I currently shipping products to them, I ship them as I get orders from them.

Walter Schenker

Okay. So you have shipped products to them during your time running the company?

Alex Shen

Yes.

Walter Schenker

Okay. And the test equipment to test those bases still sits in Ranor?

Alex Shen

The equipment that related here, I have taken no equipment out since I came.

Walter Schenker

Okay. Thank you.

Alex Shen

You are welcome.

Walter Schenker

Last question?

Alex Shen

That’s more than three questions, Walt.

Walter Schenker

Well, they were parts of two – they were all parts of the same question. And I doubt if many other people are on the call anyway. The third question is how do we proceed or with having an annual meeting and an election of Directors, now that we are in a trend of profitability, have a $20 million backlog and have stabilized the balance sheet?

Alex Shen

How do we proceed towards an annual meeting?

Walter Schenker

Yes…

Alex Shen

I would like to know…

Walter Schenker

An item, which is under consideration?

Alex Shen

It could be. I will let everyone know.

Walter Schenker

Okay. And therefore, not a question, a statement, as you let everyone know I would expect that it will include the ability because there normally is an advanced notice for major investors to submit either items to be considered at the annual meeting or Directors to be considered at the annual meeting, that was a statement not a question. Hopefully it will.

Alex Shen

Understood your statement.

Walter Schenker

Thank you.

Alex Shen

Absolutely. Thank you very much for your support, Walt.

Operator

Thank you. Our next question comes from the line of Richard Greulich from REG Capital Advisors. Please proceed with your question.

Richard Greulich

Good evening. I had a couple of kind of housekeeping questions, why was the depreciation and amortization expense so low in the quarter?

Alex Shen

As compared to?

Richard Greulich

Well, it was $36,000 from what I could see in the quarter versus about $230,000 in the prior two quarters each?

Alex Shen

No, amortization and depreciation was greater than that.

Richard Greulich

Because I mean, obviously I derived that from the – if I did it correctly or maybe not, from the cash flow statement. You show it for the nine months, depreciation of $582,000 and in the prior two quarters it was $546,000?

Alex Shen

I don’t know that we can answer your question and do math at the same time.

Richard Greulich

Okay. Just a big drop that’s why I was kind of curious as to whether there was some offset against to sale of assets or something like that. The second question is, am I reading it correctly – again, on the statement of cash flow that there was $219,000 amortization of debt issue costs in the quarter itself?

Alex Shen

I don’t know that we can correctly answer the question without delving into it in and double checking what we have.

Richard Greulich

Okay. Because it just shows...

Alex Shen

Your questions are very specific and we would like to go back and make sure before we give you an answer.

Richard Greulich

Okay. Just you did state in the cash flow statement of $219,000, I didn’t see that before in the prior quarters. The third question I had was again in the cash flow statement, it shows provision for contract loses of $111,000 and that’s about $121,000, if I am reading that correctly that facility that would be a contract loss that is a cash outflow?

Alex Shen

It’s more of a – yes, it’s more of a cash. I think it’s more of a reversal of a positive. I just want to get to the real quick to depreciation and amortization, they were combined in Q2, not combined in Q3.

Richard Greulich

Okay, that makes sense. Got it. Okay. And the increase in backlog from Q2 to Q3, which of your business areas accounted for most of that?

Alex Shen

So our focus is on defense, nuclear and precision industry, with our largest focus on defense, our second largest on nuclear and the rest of it in the precision industry.

Richard Greulich

So is it fair to conclude that defense was the factor – the largest factor resulting in the increased backlog?

Alex Shen

I am not trying to be cagy, but I would rather – because of our key customers and our concentration on our key customers, I think you can infer that because our actions reflect our focus, our major focus is first in priority on defense, second nuclear, third precision industry.

Richard Greulich

Okay. In – Walter’s first question, actually had two parts to it, the first part was do three quarters make a trend and then the second part does then that mean with that trend that you will be engaging in increased Investor Relations activities and so my question is you said, yes, but what part of that question did you say yes to?

Alex Shen

I said that two points make a line and three points make a trend and carefully did not answer the second part of Walter’s question.

Richard Greulich

Okay, thank you. Thank you very much.

Alex Shen

You are welcome. Thank you.

Operator

Our next question comes from the line of Ross Taylor from Somerset Capital. Please proceed with your question.

Ross Taylor

Okay. Couple of questions or a number of questions since we are being precise today. The run-rate on the backlog you are up to having effectively about 18 months worth of backlog, how long do you think that will take to run through the top line?

Alex Shen

To run through all of it, Ross, well, our run-rate has been holding at something under 20, so it’s probably logical to think that this is going to take more than a year. We haven’t been able to get there. And it said that it’s to our best benefit to get as much of it out as possible. It will depend, I don’t know a good way to answer your question, but I think it’s probably logical to think that it takes more than a year to get through it.

Ross Taylor

Well, the other question is does that – do you expect to actually increase your sales run-rate over the next 12 months?

Alex Shen

Do I expect? Well, that would cause me to forecast. I would like to.

Ross Taylor

Will you be disappointed if you do not increase?

Alex Shen

Well, I would be disappointed. Since I have proven that I can make money at our current run-rate, I would not be disappointed.

Ross Taylor

Okay. Shareholders might like to see the top line growth, will shareholders be disappointed?

Alex Shen

Well, since we have reached this point of recovery with the sharp focus that got us here, I think shareholders will be very happy that we keep the sharp focus despite any encouragement to shake the sharp focus by trying to read something that maybe detrimental even though it may look wonderful. It depends, but it depends on the content and depends on the situation. Of course, if we can get there with no shakiness, more is better.

Ross Taylor

Well, it’s really more a question of are you – is your focus, which is obviously generating fundamental improvements in the business, is that focus also generating increased confidence in demand from your key customers and resulting in them bringing you more business because they are more confident in your ability to execute it?

Alex Shen

Well, I think it’s fair to say that since I came on board in the first 30 days, 30, 60, 90, my focus was to make sure that I reached out to each of the core customers and retained all of them and have them continue to be interested in sourcing our business. We have continued our success in that. So, they have not left us. So, I think your question really is – are they interested in giving us more?

Ross Taylor

Yes, yes.

Alex Shen

I don’t know. They haven’t been interested in leaving us yet. They have been interested in staying with us.

Ross Taylor

What do you think you need to do to get them to be interested in giving you more?

Alex Shen

What do I think? Well, I think right now the ability to do more without detrimental impact is very important to hold the line. And trying to do more and getting shaky, that will be problematic. We are not recovered yet.

Ross Taylor

Okay. How long do you think the road to recovery is going to prove to be?

Alex Shen

I don’t know.

Ross Taylor

Okay. And lastly, since you said you basically danced around not answering Walter’s second question, does that mean you are going to be doing increased efforts of Investor Relations, let’s ask it directly are you going to be doing increased Investor Relations efforts?

Alex Shen

I don’t know about increase, but I think many of the shareholders that have reached out have been able to talk to me and I don’t think I am going to shy away from any of it.

Ross Taylor

Okay. And then rolling forward, you have been able to generate over the last year or so a fairly substantial level of free cash flow and use that to pay down debt and been able to successfully roll the debt out beyond just 12 months horizon. What should this business as it’s currently structured be able to generate in the way of free cash flow in order to pay down debt going forward?

Alex Shen

In order to pay down debt going forward, I think we are generating enough free cash flow to pay down what debt we need to pay going forward. I think we want to generate more than that.

Ross Taylor

Right.

Alex Shen

Right.

Ross Taylor

The market is pricing the stock as though it’s not really a going concern at this point, but you have accomplished a tremendous amount both operationally and on the balance sheet that should remove or would appear to have removed that concern, yet the market still has it. So, what I am getting at is obviously, there is some point at which you are going to be able to cross it and the market is going to recognize that your efforts have taken route and TechPrecision is no longer something that’s hanging on the prefaces, but rather has moved firmly inland and is going to be growing or moving forward generating free cash flow and rewarding its shareholders for its successes?

Alex Shen

Well, I guess in my own confident approach, I have already moved here from the very beginning, so I was never in doubt of my own string of successes unbroken in my career. But the rest of it just needs to follow. I need to continue to deliver. And as you indicated at the beginning of your questions, when can we expect more is probably a good way to paraphrase. I would like to be able to answer that better.

Ross Taylor

Meaning you need more time to answer it?

Alex Shen

Yes, because we are not – we are at a point of recovery where we have now pegged three positive quarters all in a row, but there is only three positive quarters. Before that, there were 15 negative ones all in a row. So, 15 to 3, okay, hopefully it won’t take 15 for me to come back with some type of an idea to you.

Ross Taylor

Yes. Let’s hope it’s not 15, let’s hope that it’s actually a much smaller number than 15 and that we can achieve it in the next few quarters, so where you get to obviously being comfortable enough to let us know that you are comfortable.

Alex Shen

Yes, sir.

Ross Taylor

Okay, thank you very much.

Alex Shen

Thank you, Ross, for your support. Appreciate it.

Ross Taylor

You’re welcome. Thank you.

Operator

Our next question comes from the line of Steve Mistine [ph], Private Investor. Please proceed with your question.

Steve Mistine

Hey, just a quick question. Maybe on the – from the joint venture in China, if sales start to occur overseas, do you expect Mevion to continue to use you to produce the parts that you do or do they have other manufacturers that they may use more locally, for example?

Alex Shen

More locally, more locally in China, I do not know the answer to the question.

Steve Mistine

Yes. Alright, that was it. Thanks, guys.

Operator

Our next question comes from the line of Mike Schellinger from MicroCapClub. Please proceed with your question.

Mike Schellinger

Yes. Regarding the refinance, were there one-time costs this quarter relating to extending the duration of that debt?

Tom Sammons

Could you repeat the question, please?

Mike Schellinger

Sure. Regarding the refinance or the debt that you extended recently, were there one-time costs associated with that extension that were accrued in this quarter?

Tom Sammons

Any such costs are identified in the 10-K that we put out – 8-K, sorry, filed on January 22.

Mike Schellinger

Okay, alright. Thank you very much.

Alex Shen

Thank you.

Operator

Our next question is a follow-up from Walter Schenker of MAZ Partners. Please proceed with your question.

Walter Schenker

You come around to backlog one more time, the backlog at the end of the prior quarter was $17.5 million, the backlog is now $20.5 million, which means that you shipped $3.5 million, so therefore your incoming order rate was $6.5 million, in round numbers that’s accurate. In the backlog for something to go into backlog, I expect there is some sort of shipment or expected shipment date is that not correct or targeted shipment date?

Alex Shen

Sure.

Walter Schenker

And therefore, with the $20 million plus backlog and $6.5 million of orders in the last quarter going into backlog it would – how far out can an order extend and still be included in backlog, some accounting…?

Tom Sammons

I don’t know how far out if it’s how many days out, it needs to be included. I don’t know what the exclusion line is Walt.

Walter Schenker

Well, you people said it, it varies by business and varies by the contract and the quality of the contract, etcetera, so normally the company who is the reporting company who comes up with the backlog number sets what goes into backlog, because it’s firm enough to be in backlog and what does not go into backlog, so – since we are parsing words, I would think that…

Tom Sammons

Anything that’s firm, that’s a believable PO is in the backlog. Otherwise, the PO is not accepted and won’t go into backlog.

Walter Schenker

And a PO would have an expected shipment date, correct?

Alex Shen

The PO, it should in order for it to be accepted by Ranor, yes.

Walter Schenker

Okay. So therefore, the $20.5 million, I am not going to get an answer but we will keep playing the game, the $20.5 million of backlog if one were to do a spreadsheet would show so much of it going out, each quarter going out some period of time beyond the year. March quarter, June quarter, September quarter, December quarter nothing is guaranteed, that’s when it goes out, but as you look at your business and you accept orders, someone is keeping track of the flow because you are running the plant and saying how much is supposed to go out close each month and each quarter from that backlog, correct?

Alex Shen

We have someone that’s keeping track of it, yes. That someone is me.

Walter Schenker

Okay. And therefore, you have at least based on what is in the backlog an expectation as to – from that backlog not including any additional orders you may get during the course of the year, what level of revenues might occur on a quarterly basis?

Alex Shen

Just for revenue recognition, yes.

Walter Schenker

Okay. I would therefore like to request and ask in the future conference calls if you could better identify that backlog at least as to the current fiscal or calendar year and what is beyond the current fiscal or calendar year?

Alex Shen

I understand you are requesting a forecast, which I have steadfastly avoided.

Walter Schenker

I don’t believe it’s a forecast. Hopefully you will do better than what’s in backlog because you get additional revenue during the course of the year from other orders that come in during the course of the year, but it’s fairly common for companies in discussing their backlog to explain, to break it into 12 month, 24 month, 36 month pieces so that people have a better understanding how relevant it is to the current periods.

Alex Shen

Understood.

Walter Schenker

Thank you.

Alex Shen

Thank you.

Operator

Okay. There are no further questions at this time. I would now like to turn the conference back over to management for any closing remarks.

Brett Maas

Thank you, everyone for your participation.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your time and participation. Again, you may disconnect your lines at this time. Have a wonderful rest of your day.

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