TechPrecision's (TPCS) CEO Alex Shen on Q4 2016 Results - Earnings Call Transcript

| About: Techprecision Corp. (TPCS)

TechPrecision Corporation (OTCQB:TPCS) Q4 2016 Earnings Conference Call June 28, 2016 4:30 PM ET

Executives

Brett Maas - IR

Alex Shen - CEO

Tom Sammons - CFO

Analysts

Howard Brous - Wunderlich Securities

Ross Taylor - Somerset Capital

Walter Schenker - MAZ Partners

Richard Greulich - REG Capital Advisors

Mike Schellinger - MicroCapClub

Operator

Good day, everyone and welcome to today’s TechPrecision Full Year and Fourth Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during a Q&A session. [Operator Instructions] Please note today’s call may be recorded and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Brett Maas. Please go ahead sir.

Brett Maas

Begin 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 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 with the SEC. In addition, projections as to the Company’s future performance represent management’s estimates as of today, June 28, 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 fourth quarter of fiscal year 2016 was another quarter of operational and financial progress as we delivered our fourth consecutive quarter of net income. In addition, we increased our working capital by approximately $2.6 million and paid down principal on our long-term debt by approximately $1 million since March 31, 2015. Prior to my watch, we had 12 consecutive quarters of net losses. This is the fourth profitable quarter the company has reported since June 30, 2011 and the fourth profitable quarter since I joined the Company back in late June 2014.

For the full fiscal 2016 year, we reported net income of $1.4 million compared to a fiscal 2015 net loss of $3.6 million. This is the first fiscal year of positive net income since fiscal 2011. We achieved this result with our consistent, sharp, focus on productivity initiatives, resourced realignment and top-line growth with key customers. Our continued efforts with our core customers enabled us to replenish our backlog to approximately $19.8 million at March 31, 2016 compared to $14.3 million at March 31, 2015. We have not altered our focus, we target defense as our primary focus with a secondary focus on nuclear and other high precision industrials.

We improved profitability in the fourth quarter of fiscal 2016. On a sales volume that increased by $947,000 when compared to the year ago quarter, with net profit of $885,000 compared to a net loss of $718,000 for the fourth quarter of fiscal 2015. On April 26, 2016 we refinanced our loan and security agreement or LSA with a new lender and extended the maturity date of April 26, 2021 under the terms of the new LSA, we will decrease our principal and interest payments over the next three fiscal years by approximately $1 million.

Now, I’d like to turn the call over to Tom Sammons to tell us more about our fourth quarter and the full year financial results. Tom?

Tom Sammons

Thank you, Alex. First I will cover the operating results for the fourth quarter of fiscal 2016 and then I will cover the full year results.

Net sales were 4.9 million or $947,000 higher when compared to the same fiscal quarter one year ago. Net sales increases of components to our customers in defense and energy groups were partially offset by decreased sales on lower demand in the Company’s precision industrial groups. Gross profit increased for the fourth quarter of fiscal 2016 to 1.7 million compared to 880,000 for the fourth quarter of fiscal 2015. The improvement can be attributed to lower labor and factory overhead costs. Total SG&A for the fiscal fourth quarter of 2016 was $903,000 or 30% lower when compared to the fourth quarter cost of 1.3 million in fiscal 2015 on decreased spending primarily for advisory fees, outside services and office cost. Our net income for the quarter was approximately $885,000 or $0.03 per share basic and fully diluted for the three months ended March 31, 2016, as compared to a net loss of $715,000 or $0.03 per share basic and fully diluted for the three months ended March 31, 2015.

Moving onto the full year financial results for the 12 months ended March 31, 2016. Net sales declined by 1.4 million to 16.9 million. Net sales to our customers in the defense and energy groups increased by 2.1 million and 1.3 million respectively, primarily due to a focused effort directed at our core customers. These increases were more than offset by a decrease in the net sales of 4.8 million and our precision industrial group primarily on lower volume for medical components, production furnaces and certain prototypes.

Gross margins for fiscal 2016 were 32.6% significantly higher when compared with a 12.7% gross margin for fiscal 2015. Our cost of sales for fiscal 2016 decreased by 4.6 million or 29% when compared to fiscal 2015 because of improved throughput and lower factory overhead costs the improved margins reflect our commitment to process rigor and control from quotation to delivery. Selling, general and administrative expenses for fiscal 2016 were 3.4 million, compared with 4.5 million for fiscal 2015, representing a decrease of $1.1 million or 25%.

Selling, general and administrative expenses for compensation, advisory services and office expenses were lower by $0.1 million, $0.7 million and $0.3 million respectively in fiscal 2016 as compared to fiscal 2015. Cash paid for interest expense was 684,000 in fiscal 2016, which is lower than the amount of cash paid for interest expense in 2015 due to lower average sell levels and interest rates in connection with our debt refinancing transactions. We recorded a tax benefit of 768,000 in fiscal 2016 this benefit reflects a reversal of $9,800 in connection with an expiry of an uncertain tax provision taken by the Company for state excise taxes partially offset by a call for alternative minimum tax of $9,032 due on taxable income in excess of operating losses.

As a result of the forgoing, for fiscal 2016 our net income was 1.4 million or $0.05 per share basic and fully diluted compared with a net loss of 3.6 million or $0.15 per share basic and fully diluted for fiscal 2015. Fiscal 2016, EPS is based on an average weighted share count of approximately 26.4 million and 26.6 million per basic and fully diluted shares respectively.

Turning to the balance sheet, our working capital increased year-over-year by 2.6 million to a positive 510,000 at March 31, 2016 from a negative 2.1 million at the fiscal 2015 year-end. We finished the year with 1.3 million in cash and cash equivalents at March 31, 2016 representing a decrease of $4,000 from March 31, 2015 year-end balance. Cash flow provided by operations was approximately 1 million in fiscal 2016, primarily due to improved financial performance. We used $934,000 of cash to pay down principal on our long-term debt in fiscal 2016. As Alex alluded to earlier, our sales order backlog at March 31, 2016 was approximately 19.8 million compared with a backlog of 14.3 million at March 31, 2015.

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

Alex Shen

Thank you, Tom. Moving forward, we will continue our focus on winning new contracts with our established customers in the defense, nuclear and precision industrial sectors, utilizing our core competencies and knowhow in custom large scale, high precision fabrication and high precision machining to be a valued high-quality supplier. In particular, we see meaningful opportunities in the defense sector, our primary business sector focus. Opportunistically, we will pursue contracts in the aerospace, nuclear and healthcare sectors, while continuing to execute on operational run rate improvements to increase our gross margins and cash flows. We will further strengthen our balance sheet by taking advantage of refinancing opportunities and paying down debt. We must continue to execute and maintain our operational run rate improvements to maintain our gross margins and increase the amount of cash generated from operations.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Howard Brous\ with Wunderlich Securities. Please go ahead.

Howard Brous

Thank you. I want to congratulate you on the business performance. I have some questions about it, but I have a problem with your releasing your numbers at 4:36 in the afternoon and I have always been in this business for 48-49 years I have never seen that happen. Can you try to do a little bit better next time?

Alex Shen

Definitely.

Howard Brous

Is there a reason that happened this time?

Alex Shen

Definitely Howard that was not our intent and we will work harder to make sure it gets out there before the earning call.

Howard Brous

All right, so my questions revolve around accounts receivable which was up $1.2 million and cost incurred on uncompleted contracts. When can we see those converted to revenue, this year or this fiscal year in both instances?

Alex Shen

The WIP for the costs incurred will for the most part become revenue by the end of the year and the ARs accounts receivable has been already invoiced so that's already revenue recognized.

Howard Brous

So, revenue recognized in the Q4 or is that revenue to be recognized in Q1?

Alex Shen

Q4.

Howard Brous

I am sorry. You've got $2 million worth of accounts receivable as of March 31st?

Alex Shen

Yes, and the $2 million has been invoiced prior to March 31st and the revenue recognized.

Howard Brous

Okay. I just wanted to confirm that. Okay. Those are my questions. Thank you.

Alex Shen

No problem.

Operator

Thank you. We'll take our next question from Ross Taylor with Somerset Capital. Please go ahead.

Ross Taylor

Okay. Could you comment on backlog and what level of backlog you expect to be executed within the next 12 months?

Alex Shen

About 70% to 80% of that backlog should be executed within the next 12 months for us this is Alex.

Ross Taylor

Okay. And also Alex on the last call you made the comment that you haven't failed at anything you've done, and operationally and financially you've turned this company around. But from an investor’s standpoint this stock is -- continues to trade as though it's going broke? Will you comment, what's it going to take, what are you going to do to get investor enthusiasm back? I mean this is the company you earned $0.05 and you're trading at $0.22 you've taken your balance sheet to where you were quite honestly hanging on the edge of bankruptcy for a couple of quarters to where you now have long-term debt you've taken the business to where you are making money operation. I mean you've done all those things, but the one thing that hasn't happened is when you came on board the stock was $0.60 and today it's $0.22. What are we going to see done to get people back excited about being owners of TechPrecision?

Alex Shen

Are you asking me?

Ross Taylor

Yes, you're the CEO.

Alex Shen

I am. So, I need to continue to maintain our gains first of all. And I am pretty excited for the first time I am pretty excited on this call to report our four quarters in a row in the same fiscal year of positive income, net income, it's great I think it’s good team work. We all helped together, our supply chain helped and our customers really stepped up and gave us a chance to prove ourselves, so [Multiple Speakers].

Ross Taylor

And do you think that this year is the year that you should be able to do better than next year?

Alex Shen

Better than last year. Well, it's pretty difficult to get it to perform like this to begin with. Any gains that we get are going to be incremental not really quantum leap of any sort. The quantum leaps tend to probably be more on the lumpy side of things, but real quantum leaps are pretty detrimental, they're -- we might get indigestion from quantum leaps to be pretty honest, slow but steady, we climb back into the black and now we're in the black. I made comments before to all of us about things like two points make a line and three points make a trend, now we've got four points I think we've started a new trend over our whole entire year in the black that's a new point and I am looking forward to really making that under the trend of used in the role of the black that would be good.

Ross Taylor

Okay. Also GTAT do you know what the status of that claim is in bankruptcy?

Alex Shen

Let me turn that over to Tom so he can answer that.

Tom Sammons

Yes Ross, we're always in contact with Citi, it is our understanding that the claim will most likely be addressed by the end of the year. But that being said it just keeps being pushed out every time I call them, so but we are in a long line of creditors, we're towards the end of the line not the very last I was told, but they'll address administrative claims first and then they'll get to the unsecured claims later.

Ross Taylor

Okay.

Tom Sammons

And that regards to Citi.

Ross Taylor

Okay and then I'd like to put out a suggestion. When you have a stock that's trading at basically what penny candy costs, some insider buying would I think send a message that the Company proceeds itself and its insiders proceed themselves as being part of a buyable enterprise. And I think that would help go a long way, I mean people obviously at this stage and you saw it today the stock traded fairly aggressively someone would sell in pretty hard on it. Selling at four times earnings with the balance sheet fixed and honestly Alex you and your team in place executing operationally as well as you are seems to me to be kind of crazy from a valuation standpoint.

Alex Shen

Understood, understood.

Ross Taylor

Okay, thank you.

Operator

Thank you. We'll go next to Walter Schenker with MAZ Partners. Please go ahead.

Walter Schenker

Thank you first, I assume as you know Alex the other people are my friends so I sort of was listening to Howard and Ross and sort of instead of us carrying you out on our shoulders because you really have turned it around, we'll have things to get which are appropriate, but I think the overriding issue at this point is, you really have done a good job turning it around and as you know I tend to be critical, the prior two guys that I think the overwhelming message ought to be congratulations on getting this company to a level which a; hopefully is sustainable because if it is has been mentioned the stock is God awful cheap, and so I just want to make, we all like to sit and complain and I think we've discussed to move it forward. I think in the past we've discussed and you've always said that my number one job is to run the business well and make money, but we also discussed getting you out to meet with people to at least give some exposure to you and what you've done and hopefully as we go forward in the current year, you'll be amenable to doing that now that we're past the three points and the four points you actually can talk about a fiscal year with four quarters profitability, a rising backlog and you know and I think it would be helpful if you would agree sometime over the next six months to meet with investors, number one.

Number two I would also like to see you and we've discussed this when I told you I was going to bring it up on the call. I would like to see and if [Leon] is on the call I'm directing this to [Leon] and any other the directors on the call now that the company is doing what it’s doing I think it's appropriate to have an annual meeting and a shareholder vote, I know in the past you've indicated Alex you'd be supportive of that well now seems to be a good time to move forward in that direction. Point number two and point number three and then I'll shut up, I mean in regard to the year and the fourth quarter there was nothing extraordinary except for the history being so different from what you achieved so that when you look at this year and earning a nickel it was done by old fashioned hard work there's no accounting or anything funny in these numbers, this is what you actually did. You're up.

Alex Shen

Okay thank you very much Walt, really appreciate the comments both on the call as well as throughout the year and your support. Meeting the investors and the shareholders meeting we will actively move forward on this, we are already actively moving forward on our planning for a shareholders' meeting. There is a number of things we need to go through and get a check list made so we can button up things up and we've started that process and we're going to have a shareholders' meeting, that's what we intend to do.

Walter Schenker

Good.

Alex Shen

Yes, absolutely.

Walter Schenker

And again just a third voluntary was a statement more than a question but as you look at the business if you can grow it on a revenue basis from where you were there's no reason why the profitability should fall backward.

Alex Shen

I don't see a reason why it would fall backward we just need to maintain our focus so we can maintain our gains. A loss of focus and a loss of rigor in our process Tom mentioned the rigor in our process from the quotation to the delivery, the bookends. We need to maintain that process rigor so we don't lose any of the gains as we continue to grow the business. Yes, and there are no strange things in here that led us to the four consecutive quarters of in the black. It's old fashioned hard work, do what's required and keep it in control.

Walter Schenker

Good. Well, again, congratulations. It’s, at least in my universe, it’s a pleasant change what we had lived with recently, has somebody really surprised me on the upside, so, good for you, and for us.

Alex Shen

Thank you very much.

Operator

[Operator Instructions] We will go next to Richard Greulich with REG Capital Advisors. Please go ahead.

Richard Greulich

Good afternoon. A couple of things, I’m just trying to understand the business a little better. When you make nuclear casks, is that primarily for the medical industry, like putting Gamma isotopes back and forth to different medical centers?

Alex Shen

That is one of the applications.

Richard Greulich

And what would be the others be?

Alex Shen

I need to look back in the history books for the others. We don’t do much of the others.

Richard Greulich

And is that a business that you could grow in, going forward?

Alex Shen

To be very open and honest, no, that is not a focus point.

Richard Greulich

Can you comment on any, over the next 12 to 18 months, future business regarding Mevion Systems?

Alex Shen

With specific customers, they value our commitment to confidentiality. So I am not going to comment directly on Mevion. I hope you understand.

Richard Greulich

I do. So let me ask in another way. If we follow in the press different installation openings, or discussions that they bring forward about new centers that are being developed, should we expect to still be getting business from them?

Alex Shen

Nothing has changed, as far as our business dealings with Mevion as far as the expectations of what we can deliver and our expectations as a supplier for them as a customer.

Richard Greulich

Okay. Is there any market seasonality that has existed in your fiscal fourth quarter?

Alex Shen

Market seasonality, no.

Richard Greulich

Okay, and what do you expect your interest expense will be for the full fiscal 2017 year?

Alex Shen

Let me turn that question to Tom.

Tom Sammons

Yes, I can get that for you in a second. Yes I believe we have -- let me just look for that, if you like you can ask the next question.

Richard Greulich

Yes so SG&A on a quarter-to-quarter sequential basis went up from 768,000 to, what was it 902. What was the reason for that?

Tom Sammons

The increase in SG&A?

Richard Greulich

Yes from quarter-to-quarter.

Alex Shen

While Tom is looking, why don’t I take the next question?

Richard Greulich

Okay.

Alex Shen

We do have the answers, but it’s not off the tip of our tongue.

Richard Greulich

The gross margin was fairly strong in the fourth quarter, I guess about 35.5%. Is that indicative of what would a reasonable expectation might be for the full fiscal 2017 year?

Alex Shen

It could be and it could not be. It depends on case-by-case. Gross margin varies with each piece that we make. And we make each piece one-by-one, one at a time.

Richard Greulich

Are there certain industries that you are serving that allow you to have better gross margins. And if so, would those be reflected in higher or lesser wage in the fiscal 2017 year?

Alex Shen

There are certain industries that definitely would not offer us the gross margins we intend to maintain. Those industries are not in our focus. We are focusing on industries that will allow us to use our own process rigor, as well as have some amount of gross margin that allows us to have net income.

Richard Greulich

So then I am concluding from what you said that in your fiscal 2017 year, the revenues that you expect from the backlog in any new orders would be likely not coming from those industries that would helming up lower gross margins available?

Alex Shen

That would be correct. I do not concentrate and focus on lower gross margin customers.

Richard Greulich

Is there a gross margin that if you look out two to three years that you would like to be able to achieve?

Alex Shen

The gross margin, maintaining the current gross margin, would be good. It’s been a daily struggle to make sure we don’t lose an inch in our recovery.

Richard Greulich

Okay. So just going back to the interest expense for 2017 and the reason for the SG&A increase quarter-to-quarter?

Alex Shen

Interest expense for 2017 should be around $700,000.

Richard Greulich

In total for the full year?

Alex Shen

Yes. And you’re looking at Q3 versus Q4?

Richard Greulich

Yes.

Alex Shen

Yes. So, we had some, our benefit costs in Q3 was -- we had some credits in Q3 that hit the benefits costs so that was a big driver that reduced other costs are fairly comparable but that was primarily the main driver.

Richard Greulich

So is it -- then that would indicate that your full year 2017 something on the order of like $3.6 million or so million dollars of SG&A might be a reasonable expectation?

Alex Shen

You’re asking us to forecast, right?

Richard Greulich

No, I’m just saying, I’m just looking. So in other words, like multiplying 768,000 times for from the fourth quarter would not be a reasonable expectation, because you had the benefits you talked about.

Alex Shen

That’s correct.

Richard Greulich

I’m assuming that the fourth quarter, there were no major benefits or non-benefits. And so I’m just saying, times for that come to around like 9.6 or 3.6, or something like that.

Alex Shen

That would be the math.

Richard Greulich

Yes. Okay, just wondering, I wasn’t using a calculator, so I just want to confirm that. Okay, thank you very much.

Operator

Thank you. We’ll go next to [Steve Mistine] a Private Investor. Please go ahead.

Unidentified Analyst

First of all, I just want to say congratulations. I’ve been a shareholder for quite a while. It’s a great turnaround and congratulations to Alex and the management team.

Alex Shen

Thank you.

Unidentified Analyst

Yes. Well, you guys deserve it. And just a quick question on the income statements, this quarter it shows that interest expense, that has a gain of 55,000, more normally there was an expense, a negative item there. Why is that positive instead of a loss or an expense?

Alex Shen

Well, we had deferred interest with the Utica Loan, and through the amortization process almost all of that was accrued already. And so when we refinanced and paid down the Utica Loan, there was about a little over $240,000 that was reversed through.

Unidentified Analyst

Okay.

Alex Shen

So only that we didn’t end up having to pay.

Unidentified Analyst

All right, so is that sort of a one-time event?

Alex Shen

Yes, one-time related to the refinancing.

Unidentified Analyst

It takes out of the way the net incomes of about $200,000 to $300,000 less than what is shown?

Alex Shen

Correct.

Unidentified Analyst

Okay, all right. Again congratulations and thank you very much.

Alex Shen

Thank you very much. I appreciate the support.

Operator

Thank you. We’ll go next to Mike Schellinger with MicroCapClub. Please go ahead.

Mike Schellinger

Great quarter guys, regarding your sales cycle, actually maybe more production cycle, I’m wondering. When you get orders, how long does it -- because you’re going to have a lot of your revenue was basically backlog you already have. And I’m wondering how -- as you get more orders in the year, how possible is it to have a lot of those hits in the next fiscal year? Or how much of your revenue or your orders that you receive in the coming years, mainly probably going to be a lot for the following year?

Alex Shen

So basically you’re asking this backlog $19.8 million. How much of it is going to be executed as revenue and recognized as revenue in the next 12 months?

Mike Schellinger

No, no. You already actually answered that one. I was trying to get a handle on the other part. So obviously you’ll be getting new orders in the year. And I’m trying to understand what the production cycle or how long new orders take. Are they typically is like as a average, like say 12 months from the time you get an order till the time you’re able to recognize the revenue on that? Or what is the range, maybe?

Alex Shen

Those are a little bit difficult questions, because these aren’t like -- they could be very short versus pretty long, depending on if it’s a long developmental program that’s been funded, or if it's pretty simple job that just we can get it out even in the same month.

Mike Schellinger

Okay.

Alex Shen

It really depend case-by-case, I am not trying to be cagy here, just being.

Mike Schellinger

Right, right, okay. Well, fair enough. That was my question.

Operator

Thank you. It appears we have no additional questions at this time. Mr. Sammons, Mr. Shen, Mr. Maas, do you have any additional or closing remarks?

Alex Shen

Not at this time.

Operator

Thank you very much, gentlemen. This does conclude today’s conference. We appreciate your participation. You may disconnect at any time, and have a great day.

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