TechPrecision Corporation (OTCQB:TPCS) Q2 2017 Earnings Conference Call November 10, 2016 4:30 PM ET
Jeff Stanlis - Hayden IR
Alex Shen - CEO
Tom Sammons - CFO
Howard Brous - Wunderlich Securities
Ross Taylor - Somerset Capital
Al Shams - American Capital Partners
Good day, everyone and welcome to today’s TechPrecision’s Second Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session [Operator Instructions]. Please note, this call maybe recorded.
It is now my pleasure to turn today’s program over to Mr. Jeff Stanlis, with Hayden IR. Please go ahead, sir.
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 Web site 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 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 we 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, November 14, 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?
Thank you, Jeff. Good day to everyone, and thank you for joining us. The second quarter of fiscal year 2017 was another quarter of operational and financial progress, and we delivered a profit for our sixth consecutive quarter. Prior to my watch, we had 12 consecutive quarters of net losses. This quarter is the sixth profitable quarter the Company has reported since June 30, 2011, and the sixth profitable quarter since I joined the Company back in late June 2014.
Net income in the second quarter of fiscal 2017 was more than double that of the second quarter of fiscal year 2016 on net sales of $3.7 million. We achieved this result with our consistent sharp focus on productivity initiatives and top-line growth with key customers. We generated $1.4 million of cash from operations for the first six months of fiscal 2017, and increased our cash position to $2.8 million at September 30, 2016.
We target defense, nuclear and precision industrial as our primary markets. We continue to replenish our backlog, focusing on new business contracts with our core customers. Our backlog at October 31, 2016 was $18.1 million compared to $17.9 million at September 30, 2016, and $19.8 million at March 31, 2016.
I do have something to add in regards to subsequent events. With respect to the current quarter, the resolution of an outstanding customer claim will result in a again being recognized in our fiscal third quarter ending December 31, 2016 of approximately $1.1 million.
Now, I’d like to turn the call over to Tom Sammons to tell us more about our second quarter financial results. Tom?
Thank you, Alex. Net sales were $3.7 million or $448,000 lower when compared to the same fiscal quarter one year ago, the results of uneven timing of shipments. Net sales in our defense markets increased by $0.5 million on higher shipments of components to our largest customer; and net sales in our precession industrial markets increased by $0.2 million, primarily on higher shipments of components from medical systems. However, net sales in our energy markets decreased by $1.1 million, more than offsetting the above increases.
Gross profit increased for the second quarter of fiscal 2017 to $1.5 million compared to $1.4 million for the second quarter of fiscal 2016. The improvement is attributed to a higher margin product mix and lower factory overhead costs. The improved margins reflect our commitment to process rigor and control from quotation to delivery. Our net income for the quarter was approximately $546,000 or $0.02 per basic and fully diluted share for the three months ended September 30, 2016 compared to $255,000 or $0.01 per basic and fully diluted share for the three months ended September 30, 2015.
Our recent debt refinancing activities have lowered our interest rates. As a result, cash paid for our interest expense was $114,000 in the second quarter of fiscal 2017 compared to a $152,000 in the second quarter of fiscal 2016. Second quarter fiscal 2017 earnings per share is based on average weighted share count of approximately $27.3 million and $28 million basic and fully diluted shares respectively.
Turning to the balance sheet, our working capital increased by $1.9 million to $2.4 million at September 30, 2016 compared to $0.5 million at March 31, 2016. As Alex mentioned earlier, we finished the quarter with $2.8 million in cash at September 30, 2016, representing an increase of $1.5 million from March 31, 2016 fiscal year-end balance. Cash flow provided by operations was approximately $1.4 million in the first six months of fiscal 2017 as a result of our improved operational performance. We borrowed an additional $3 million from our new MLSA and used $2.7 million cash to pay-off our remaining principal and interest on the Utica equipment loan.
As Alex alluded to earlier, on November 07, 2016, GTAT’s legal counsel notified Citigroup that Ranor’s unsecured claim of GTAT’s bankruptcy was fully allowed without objection. In accordance with the terms of the assigned agreement, Citigroup paid Ranor an additional $614,000 on November 08, 2016. The resolution of this claim under the assigned agreement will be recognized as a gain in our fiscal third quarter ended December 31, 2016 of approximately $1.1 million.
With that, I will now turn the call back over to Alex. Alex?
Thank you, Tom. Moving forward, we will continue our focus on winning new contracts with our established customers in the defense, energy and precision industrial markets, utilizing our core competency, and knowhow in custom large scale high precision fabrication and high precision machine to be a valued, high quality supplier.
In particular, we see meaningful opportunities in the defense market. And 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.
I would now like to open-up the call for questions and answers.
[Operator Instructions] We’ll go first to Howard Brous with Wunderlich. Your line is open.
Just thinking of GTAT, is this a potential client that you would pursue again?
I would pursue all clients as long as they can pay their bills and be less of a risk or threat to us.
Would you consider them less of a risk inflict you today?
They would depend on what I can negotiate. I mean to protect the Company and the shareholders first.
[Operator Instructions] We’ll go next to Ross Taylor from Somerset Capital. Your line is open.
Coming in something, things have changed a lot since you arrived. Looking at the Company and with regard to the $614,000 that was paid-in, what does the balance sheet at this point look like?
I’m going to turn that question over to Tom.
In what respect...
I’m just trying to get at because -- it looks like at the end of the quarter, we know you have what $2.1 million or so in cash and -- or $2.8 million in cash and this obviously takes you up to $3.4 million, curious on the net debt level at this point in time?
Debt level hasn’t really changed besides of making payments on that. Yes, our cash is increased. So we have not used that cash for anything it sits for.
So, obviously, the balance sheet which has been seriously questionable, when Alex you and your team arrived has made a miraculous improvement. Also you have a backlog of about $18 million. How much do you expect of that to be realized over the next 12 months?
It’s about the same about 75% or so give or take. It's close to the 80-20 rule just under 80 I would say.
And how close, I mean two things, obviously, at this point in time, you’re operating -- you’ve been able to turn over the Company around, so you’re generating both operating and real income. How close are you, do you feel to maximum efficiency? Is there more room -- can you sort of 100 or 200 basis points or more available in operating margins that can be picked up in here? Or at this point in time, is the real driver for growth going to be growing the top-line?
I think we just need to be careful in answering the questions. Well, there is not a lot of different types of business and many different products. So if one doesn’t go quite right, there can be losses I don’t operate loosely, I am very tight, and prevent loss. But I think to try to predict improvements in basis points that’s probably more top-line driven. And assuming that we can keep our gains and have operational discipline and business discipline when we add more to the backlog and can execute on those then we had to gain more. I’m hoping to have answered your question with side of top-line growth.
And as far as top-line growth goes, what do -- do you see the ability to meaningfully drive that or do you feel that we’re in a situation where we’re looking at incremental gains or more of a steady state situation?
Somewhere between steady state and incremental gains, we have continued to gain as far as increasing the backlog and the backlog now extends out further.
And would you expect, given that defense is a major area focus for you, would you expect that the changes in the election outcome and other factors are going to drive greater backlog in that specific niche of your business?
I don’t know how the election outcome would drive, I don’t know.
So one of the thoughts is I have directly is that the navy is under submarine right now, and that force has indicated that they are -- they need additional boats because of the fact that the navy is taking some submarines, some attack submarines out of service as they’re focusing building capability or budget rather not building the budget on nuclear boats boomers. And so would you benefit if under a new administration they were to go back and actually give the navy the attack submarines that they have requested or wanted to have in essence shrinking the submarines fleet over the next few years actually they hold at steady state or to grow it?
We would benefit, yes. I would say opportunistically there we think there’re chances.
[Operator Instructions] We’ll go next to Al Shams with American Capital Partners. Your line is open.
Yes, gentlemen. Good afternoon. No question, just a comment. And the comment, so thank you, Alex, and your team for all that you’ve done for the benefit of individual shareholders, like my-self. So again, thanks.
You’re very welcome, sir.
Thank you. And I’m showing we have no further questions at this time. I’d like to turn the call back to management for any closing remarks today.
No, we’re good. Thank you.
This does conclude today’s conference. Thank you for your participation. You may disconnect at any time.
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