TechPrecision Corporation (TPCS) Q2 2013 Earnings Report, Transcript and Summary

Good day ladies, and gentlemen. Thank you for standing by. Welcome to the TechPrecision Corporation Second Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded today November 14, 2012. I would now like to turn the conference over to Jeff Stanlis with Hayden IR. Please go ahead, sir.

Thank you, welcome to everyone joining us today. On the call with us are Jim Molinaro, TechPrecision’s Chief Executive Officer; and Rich Fitzgerald, Chief Financial Officer. I’d like to mention this call is being simulcast on the website at www.techprecision.com along with a slide presentation. If you have not already done so, now would be a good time for you to go to the website and download the slide presentation. In addition, the presentation should be available on today’s webcast. If you do not have a copy of the presentation, please e-mail me at jeff@haydenir.com and I will be glad to send you a copy. If you will now turn to Slide 2, before we begin, may I 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 for forward-looking statement 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, November 14, 2012. TechPrecision assumes no obligation to revise or update these forward-looking statements. With that out of the way, I'd like to turn the call over to Mr. Jim Molinaro, TechPrecision's CEO, to provide opening remarks. Jim?

Thanks, Jeff. Good day everyone, and thank you for joining us. Please turn to Slide 3 of the presentation. On the call today, we will follow an agenda that will include a brief overview of our second quarter. Rich Fitzgerald, will then detail our fiscal, our Q2 fiscal ’13 financial results. I will follow up with operational and business updates at our Ranor and CMC divisions, and close with updates to our expected fiscal 2013 pipeline and outlook for the remainder of 2013 through 2016. Please turn to Slide 4, the expectations we set for the second fiscal quarter was for sequential improvements both top and bottom line and targeting return to profitability on an operating level. We have achieved both those goals. We delivered improved operational metrics showing a clear trend that is significantly more positive compared to prior several quarters. We indicated that the second quarter would likely represent the turning point in the Ranor transition with the returning to profitability for second half of this year and we’ve began that transition. As previously mentioned, our Ranor division experienced heavy volumes of complicated first article prototype projects throughout fiscal 2012 and we finished out several of those projects during the early part of fiscal 2013. This shift in project mix, resulted as we moved to offset Ranor’s largest customer migrating solar production from domestic sources toward WCMC division in China. This significant operational and financial issues we encountered with Ranor’s transition over the last year are behind us and we now price prototype and first article flows with more risk premium and upfront cost. Additionally, we are actively enhancing our operational systems at Ranor to better manage a new more diversified mix of product lines and optimized work flow and production forecasting. While we still have work to do, these initiatives are clearly on the right path. Bob Francis, Ranor’s division President and his new senior management team continue to build out the operational processes enabling KPI’s to develop a world class operation, specifically one that delights our customers. This progress is reflected in the improved second quarter gross margins compared to the first quarter gross margin performance. Although second fiscal quarter 2013 gross margins is down 3% from the year-ago period, we’re demonstrating movement towards our targeted gross margin levels, with the gross margin improvement over our first quarter results. We continue to grow our diverse and global customer base and achieve stable backlog and bookings over the last 6 quarters. As of October 31, the backlog has reached $26.6 million. Only $1 million of this backlog comes from our largest historical customer, demonstrating our ability to diversify the customer base beyond alternative energy and specifically beyond our historic heavy reliance on the solar market to include more business from the medical, nuclear and defense sectors. Our backlog across multiple sectors will allow us to return this company to profitability and growth. During the fiscal second quarter of 2013, our CMC division in Wuxi China began initial production numbers and product line. Please turn to Slide 5. Historically; revenue fluctuations have been a major part of our business there has been too much concentrated dependence on those 1 or 2 major customers and products. When viewing this product mix by market segment slide you can see a significant portion of our business historically was generated by a small number of major customers the largest being our solar customer. The balance of our business consisted of 3 projects for a numerous -- from numerous customers. Our largest customers since fiscal 2008, is a leader in the solar energy space, enabling high quality multi-crystalline solar wafer production with the production innovation. This customer accounted for 34% of our net sales in fiscal 2012, and compared to 54% of our net sales in fiscal 2011. Fiscal year 2011 sales to this customer exclusively through the Ranor division while in fiscal 2012 we generated over $4 million in sales from our WCMC division in China. It’s important to note that this customer now represents just $1 million of our $26.6 million backlog. This compares to the historical backlog levels from GT in the range of $10 million to $16 million. Also evident on this chart is the increased contribution from nuclear and medical customers to our current revenue mix. We continue to focus on strategic products and expect to grow in the medical, nuclear, defense, polysilicon, NSAP biosectors over the balance of fiscal ’13 and beyond positioning us for greater revenue diversity as we move forward in particular we expect the medical sector revenue to become a much larger contributor to our total revenue mix over the next few years. Our revenue was no longer evaluated to the Alternative energy sector. That sector is relatively small portion of our more diversified revenue base today and going forward. Now, I'll turn the call over to Rich for more in-depth review of our financials.

Thank you, Jim. Please if you would turn to page 6. I’m sorry Slide 6, for this 3 months ended September 30, 2012, revenue was $8.1 million, compared to $7.1 million in the same fiscal quarter one year ago. The primary reason for the $931,000 or 13% year-over-year increase in revenue resulted from a comparable sales volume from our Ranor subsidiary, plus $1.6 million of increased revenues from our WCMC subsidiary in China when compared with the second quarter last year. On a sector level, sales to Alternative energy customers and medical device customers increased $2.7 million and $1.3 million respectively when compared to the same quarter one year ago. However, these sales gains were partially offset by revenue decreases from customers in the commercial industrial sector of $2.8 billion and defense and aerospace customer declined by $0.2 million, and our nuclear sales declined by roughly $16,000 year-over-year. On a perspective of sales mix within the second quarter of fiscal 2013, reported revenue from alternative energy customers was $2.9 million, or 37% of the total Q2, 2013 revenue. This compares with $0.23 million, or 3% of total revenue reported during a comparable second quarter of last year. Q2 fiscal 2013 sales to customers in the commercial industrial sector amounted to $0.2 million, or 2.5% of consolidated Q2 2013 sales. While revenues to customers in the defense and aerospace sector during the quarter totaled $2.2 million or 27% of the quarterly revenue. During the quarter ended September 30, 2012 sales of the nuclear power sector were $0.7 million or 8% of sales. While sales in the medical device sector were approximately $2.1 million, or 25% of the total quarterly revenue figure. Gross profit for the quarter ended September 30, 2012 was approximately $1.9 million, or 24% of sale, compared to gross profit of $1.9 million, or 26.8% of sales in the second fiscal quarter of last year. Ranor shipped the remaining prototype and first article project that were in a contract loss position as of March 31, 2012 during the quarter ended September 30, 2012. Lower margins on first article and prototype project dampened margins during the second quarter of this year, as well as in the prior year. We expect Ranor’s mix of business to ship forward featuring a greater percentage of repeat production orders as we migrate through the balance of fiscal 2013. The quarter ended September 30, 2011 included higher margin repeat production items for 5 customers aggregating appropriately $1.8 million in revenue, which supported the higher gross margin in the prior year when compared to the current quarters gross margin as of September 30, 2012. Gross margin in any reporting period is impacted by the mixed services we provide on projects completed within that period. So, there is variability period over period and year-to-year. Turning to expenses, selling, general and administrative expenses for the second quarter were $1.1 million, $1.92 million, which compares to the $1.95 million of SG&A expense in the year-ago second quarter. This reflects a nominal decrease of $29,000 or 1.5% when compared to the prior year. Comparing SG&A cost for the quarter ended June 30, 2012 to this quarter, SG&A costs had decreased $76,000 or 3.8% during the second quarter. Net loss for the quarter ended September 30, 2012 was $45,000 or $0.00 per share basic and fully diluted. This is based on $18.7 million shares, basic and fully diluted outstanding, for the second quarter. This compares with a net loss of $88,000 or $0.01 per share basic and fully diluted share on a $16.5 million share, basic and fully diluted, weighted average share outstanding in the prior second quarter one year-ago. Moving on to year-to-date financials, please turn to Slide 7 for the 6 months ended September 30,2012 revenue decreased 6.7% or $1.1 million to $15.2 million from $16.3 million in the same period one year-ago. At the sector level decreases in revenue from the alternative energy sector and commercial industrial sector of $1.6 million and $2.9 million respectively were partially offset by increased sales to the defense and aerospace sector of $1.1 million; increased sales for the medical sector by $2.1 million and increase nuclear sector sales by $5.3 million when compared to the same 6 months period one year-ago Turning to gross margin, for the quarter ended September 30, 2012 gross margin was 19.6% or $3 million in gross profit compared to gross margin of $26.6 or $4.3 million gross profit for the year-ago period. Gross profit during the fiscal first half of 2013 was lower due to a blend of the 15.5% gross margin reported during the first quarter ended June 30,2012 and the 24% gross margin reported for our second quarter ended September 30, 2012. Gross margins in both the first and second quarters of this year were impacted by the run of projects completed during those first half of 2013 that were in a contract loss position at March 31,2012. Selling, General and Administrative expenses for the 6 months ended September 30, 2012, increased to $3.9 million from $3.7 million in the same period one year-ago reflecting an increase of $238,000 or 6.4%. Non-recurring cost associated with severance and executive search related recruiting fees accounted for $218,000 of this increase. Net loss for the 6 months ended September 30, 2012 was $0.75 million or $0.04 a share basic and fully diluted share on a weighted average share count of $18.6 million basic and fully diluted shares. As of November 10, the Company’s backlog was $26.6 million and was $26.1 million at September 30, 2012 as referenced by Jim earlier in this call. This is down from the $29.9 million in the quarter ended September 30, 2011 we reported one year ago. It is important to note that last year’s backlog included $3.4 million of solar orders for which a customer delayed delivery into the third quarter of last fiscal year. As of September 30, 2012 our backlog included $1.47 million of open purchase orders issued under the $9.5 million purchase agreement executed back in February of 2012. We expect to receive additional purchase orders under the $9.5 million purchase agreement in January 2013, and to date we have received orders aggregating $2.4 million under this purchase agreement. Please turn to Slide 8, turning to our balance sheet at September 30, 2012, we had $2.1 million in cash and cash equivalent and net working capital of $9.4 million as compared to net working capital of $10.2 million, as of March 31, 2012. This represents a decrease of $0.8 million, or 8% during the first half of 2013. Cash provided by operations during the 6 months ended September 30, 2012 was $78,000, as compared to cash used by operations during the first half of the prior fiscal year of $0.96 million. Turning to long-term debt, total debt outstanding increased by $0.64 million during the first half of fiscal of 2013, to a $6.5 million total debt outstanding as of September 30, 2012. With that brief financial recap, I'd now like to turn the call back over to Jim for some additional remark. Jim?

Thanks, Rich. If everyone would please turn to Slides 8 and 9. I will be referencing back and forth to the slides on the next few statements. In covering some of our main product lines in diversified product lines we are starting with Medical. As we mentioned on our last call, Mevion System received FDA 510-K clearance or S250 proton therapy system in June of this year for the Mevion s250. To date, we have shipped 5 S250 units to the medical sector. As of September 30, our backlog for the medical sector stood at $5.4 million. This is a significant increase compared to the $1.1 million we shipped in for this sector during the entire fiscal 2012. Last week, we announced we had received an additional $2.3 million in poly silicon orders for our Ranor and WCMC divisions to produce Poly silicon chambers, for an existing Tier 1 customer. This product supports an advanced emerging Poly silicon technology for the semiconductor and solar markets. These orders demonstrate results of our customers relationships business development and ground work. The driving market force for these units is to reduce the cost of polysilicon by producing larger volumes in the single batch. In addition the semiconductor industry is starting the early implementation of converting from 300 millimeter diameter silicon wafers to 450 millimeter diameter silicon wafers increasing the surface area of the wafer by 225% and thus the demand for polysilicon On the nuclear front, our strategy is to continue to expand the Isotope Transport Casks and the production remains on track with the 6 units currently in backlog. Two key initiatives to accelerate the growth of these products will be for our customer to receive approval from the NRC to transport fusion with these casks and/or our team to partner with the second strategic to produce a much larger Transport Cask for the transport of spent fuel from exhausting nuclear reactors. We expect both events to happen in fiscal 2014. On the defense and aerospace sectors, they also continue to grow and as of September 30, 2012 our backlog in these sectors was approximately $9.7 million. During fiscal 2013 our strategic customer will submit final proposals for the U.S government for the Blockmore [indiscernible] purchase of the next set of Virginia Class nuclear submarines. Regarding the alternative energy sector, as of September 30.2012, our Sapphire products accounted for over $1.47 million of the current backlog. Our WCMC division began production volume shipments of the Sapphire chambers and due to fiscal 2013, and we are optimistic about the growth in this market, as initial units were used to support the LED market requirements, however, accelerating growth for the Sapphire furnaces or result from mobile phone manufacturers moving to utilize Sapphire for the covers and touchscreens. One of the mobile phone manufacturers has already adopted Sapphire to the cover the camera on their smartphones. Our strategic Sapphire customers publically stated that a single digit market adoption of Sapphire by a mobile phone manufacturer for front screens would require an estimated 3,000 Sapphire growth process [ph]. You would please turn to Slide 10, our current strong backlog for strategic products in the medical, nuclear, defense, polysilicon and Sapphire sectors validates our strategy to expand our business into areas that have shown increasing demand in which we believe it can generate higher margins. Our diversified revenue base in backlog improving gross margins of stabilizing SG&A, provide us with continued confidence for fiscal 2013 and beyond. And with that I will turn the call over to the operator for question-and-answer session.

[Operator Instructions] And we have no questions at this time. Actually we do have a question, it is from Michael Potter with Monarch Capital Group.

Couple of quick questions, what was the cash from operations for the quarter, and also the adjusted EBITDA for the quarter?

Yes, adjusted EBITDA for the quarter was just the 3 months ended was about $220,000. And then cash provided by the -- by the operations-- we had cash consumed during the quarter versus the cash provided by operations at the first quarter Michael. Much of that is the rundown of deferred revenue on our polysilicon project.

Okay again, what’s the number?

It’s negative $1.8 million for the quarter and we’re $78,000 positive for the 6 months ended.

Okay. WCMC, can you give -- what was the revenue for WCMC for Q2?

Q2 revenue was roughly about $1 million

Okay. And what kind of visibility do we have for the current quarter and when you anticipate that I guess WCMC will be, I guess, a least back at a breakeven level if not positive?

Well, it’s positive now, we’ve scaled [indiscernible]

Okay. So at the $1 million mark it is breakeven to positive.

$1 million to $1.5 million it’s got a nominal contribution to us. We’d certainly like to see that higher and we are adding customers to WCMC beyond just the GT product lines that we initiated WCMC for.

But very much, it’s got a low fixed cost and as we can scale it up, it certainly got some nice contribution of top line growth there.

Okay. And how many customers are currently in production with regards to WCMC?

Right now, 3.

Okay. And all of them are production rates.

All those are -- yes, and 2 of the 3 are moving to the higher production rates and third one is about to start.

[Operator Instructions] Our next question is from the line of Greg Garner with Singular Research.

I fell off the line, so I want to apologize if am asking the question that were just asked. On the gross margin, any sense for what it was if you were to take out the prototype issue from Ranor?

Again, we generally target to be up in 28%, 30% gross margin range, Greg. And obviously if you do the math, but the balance of the revenue mix is obviously up there.

Okay. Are any of those prototypes are they in a position to move into production or is that more of a longer-term event.

One is a prototype of a longer-term event, the other prototype was for the NSA and that was one-off for the NSA and I hope as a country we don’t need more than one of those. So that’s not going to be a line production. The other one is in the field going through testing and qualification to determine what it’s performance is. And they would meet the scale that is designed for what we call commercial viabilities. I think it would be sometime before we see any contribution from those products. The main products we’re going to see a continued growth and that’s what’s shown on Slide 10, because we already have a pretty good handle as our customer in medical their requirements from the next 3 years, so you see that’s a pretty good growth. Nuclear is continued to grow primarily in the transport cask. Defense, if you look in Slide 10, in defense it shows that light because none of the block 4 and block 5 approvals have happened yet. And when that happens I would expect those brownish, orange or mustard colored things to be much bigger. So this is assuming our current defense backlog without incremental approvals from the Navy. And the same with polysilicon, it’s more -- we see more of the semiconductor giants, the Samsungs and the Intels converting over to 450, we’ll just see a nice steady state poly. So those are the primary growth areas and none of those original prototypes have any impact for that.

In 2012 prototypes, all right, it’s 2012 prototypes, yes.

That helps and covered couple of items I was thinking about. But the Sapphire orders that you’re mentioning here, that also potentially for the smartphones or tablets, also would these be done in Ranor or in China?

No, they all are going to be done in China. Right now China is producing -- now it’s at a rate of 10 per month and I know it’s expected to hold those levels until one of the smartphone guys commits to the front screen, the touch screen and then that goes up pretty considerable. There’s a huge demand just -- they were already quoted just -- a single digit increase is about 3000 furnaces.

And when you say 10 a month, you’re talking 10 furnaces a month, right?

Yes, 10 furnaces per month, yes.

In 3000 furnaces, I mean you wouldn’t get all of that but…

No, but we would be able to -- we get more than 10 a month. We will react to customers that we can model between 30 and 40 a month.

If you had 30 or 40 of those a month, what kind of revenue is that for the quarter, first half or…?

If I have 30 per month, so I’m going to do to get the calculator, if I had 30 per month.

So I guess it would be 90 to 120 a quarter?

Yes. It’s going to be about $4.5 million to $5.5 million a month -- a quarter for the Sapphire Chambers.

Okay. So that’s the potential magnitude of that is what you’re saying?

Yes. That would be really, really nice, but we…

Yes. I mean what’s the likelihood of it really ramping up that to that level?

We know 4 mobile phone companies in China right now going through testing right now with Sapphire. Hopefully one of them will jump on it.

What that allows you to do, but certainly it's not going to make [indiscernible] people happy, but what that’s going to allow you to do as you can significantly change the structure of the phone, you can make it a lot thinner. Whereas right now the phone structure is also helping to protect both Gorilla glass and if you’re able to switch over to Sapphire which is stronger, you'll be able to make a thinner phone. And there is a number of applications so it allows the phone producers to get pretty radical in their designs and where they move forward.

Okay. Is it a similar price point for them?

It’s a little bit more money for that, but by making the phone thinner, you’ll be taking costs of other areas.

The other guys don’t like are the screen protector guys, because if you have -- if one of the smartphones, I'm not going to endorse any of them one, but if one of those smartphones came with Sapphire, you wouldn’t put screen protector on it.

Okay, yes, it makes sense. And in the nuclear product, you’ve mentioned that there was 2 events, I’m just want to be clear, could you go through that again, just sort of unclear on that, but NRC approval and also it seems like there was approval for a larger cask size. Am I right?

Yes, there is, so let’s start with the existing cask which is for isotopes and we’re building 6 of these now, isotopes a nice business, we expect seeing incremental or it was coming in on the isotopes. But the heavy volume for this size cask will be to allow it to transport fissle material, fuel and that will create the demand so, all the applications on paper work and all the forms are going to the NRC before Christmas. So that they have a chance to review it and bless it. We don’t have the change of the design or how we built it for fissle materials literally, review it and all the paper work and approval that'll let us do it, and that will opens the floodgates to groups like the DOE. So that’s on the smaller cask, and the larger cask we're being asked by a certain country to produce extremely large cask and these are somewhere in the neighborhood of around 95 feet long and 160 tons to transport to that spec fuel. And that the specifications are being finalized so that we can turn over the final designs in paperwork to the NRC for these casks as well. But these are enormous in size.

And then the normal isotope cask that’s for my understanding is medical research kind of…?

Sure, well, any hospital university and anybody with a cancer treatment equipment like a [indiscernible] you need the isotopes for that and the fuel needs to be changed and that’s what it's being used for.

Even the S250 will need changes.

Okay. So that seems to be a larger market, at least larger units I suppose and the other market, there is not as many power, nuclear-power facilities and how much of those spent fuels are being transport around, like I said I don’t really know?

Unfortunately you’re not going to like the answer, but unfortunately on the U.S. highways is quite a bit, there is more fissle transports right now than there are isotope transports, and all being done in very old transport casks that will approve something like 25 years, 30 years ago. So do you remember in the United States we have 104 reactors and China is building 96, and there are some awful lot of fuel to be moved around.

Okay. So that it sounds like it's much more significant market than I had thought.

Absolutely.

If that's the case it doesn't seem like you have much real growth after 2013 in your forecast for nuclear, so is that safe to assume you are not really incorporating that into your charts?

Yes, that the yellow bar is little bigger in '14, little bigger in '15 and '16 and that one and the Defense bar will be altered when you get fissle approval. That bar gets changed quite a bit. That's the yellow bar. And the same thing for the defense. If block 4 gets approved, which I suspected it needs too, that mustard color will be greatly enhanced as well. This is our current visibility from we have right now from those strategics. And this is without significant events it's a pretty nice growth for us for the next 3 years.

Visibility certainly is a good factor too there. One question I will get back in the queue, just go into the medical. That's really ramping up well and was there $.5.5 million I believe in the backlog. A question--weren't they at a limit of only being able to take like 12 or 15 a year, I’m wondering and so with, I wondering-- in the backlog how many unit is that, that $5.5 million on the backlog?

We really don’t want to go with into the ASP on that because our customer doesn’t want us to go into an ASP on that and there will be more announcements forthcoming with that medical customer to give you an idea on that green bar and how it plans out and it'll be soon.

Their backlog is north of 20, and I think what you’re referring to Greg is we’ve been asked to model various volumes of units for them across fiscal year and a ramp and we question but this is theirs to answer, if they can go much above 10 or 12 units a year because they are pretty complex machines and it takes a while to commission them. But that said we’ve been asked to model more of that what is in the backlog today that’s for sure. I think the rate limiting step, how many of those they can commission in any given year to the market. We’ll get a sense for that pretty soon.

Our next question is from the line of Robert Bruce with Wunderlich Securities.

Currently at Ranor, what is your current ship rate? What you’re shipping out of Ranor today.

Ranor right now its ship rates is targeted north of $3 million a month right now.

Okay and tool hours, as you’re using that previously.

And our tool hours is the drive utilization of the tools and utilization means it’s actually cutting apart, not being set up is the drive tool hours north of $400 per month.

That is running right now.

I would say about half the tools are achieving that KPI right now. You’re speaking of one the new KPIs that we implemented, we are looking at the utilization of each and every tool each and every week because with the current demand of getting those in order to achieve what is on the bar chart we’ve got to be north of $400 on every machine.

In the fleet?

In the fleet, yes.

Right, so you are running around 350, 375 still or.

Somewhere in that neighborhood, yes.

Okay. And [indiscernible] left for of the Westinghouse. When do you expect those to ship out?

One is finished and I expect it to ship out the current quarter. And then the other one is targeted to ship in our Q4.

And you have any thoughts with the administration and [indiscernible]do you have any thoughts here?

Well I think, the phrase I believe our military will use something more than horses and bayonets, right. But in particular, our programs are pretty much centered around the submarine programs. And that is not something that we believe our customers believe or the navy believes will be impacted. We have plenty of surface ships. But we have problems with our submarines running out of fuel, some of the older ones like Ohio class and we, as a country I felt very confident that block 4 and block 5 will be approved shortly.

And we will not be impacted by the pricing cuts, by the administration change.

[Operator Instructions] And our next question is from the line of Walter Schenker with MAZ partners.

The question is if you are currently operating your ship rate's about $3 million from Ranor and given the--just the physical ramp from Mevion possibly. That would seem that we will reach a point at $3 million, I really suspect that if that’s limit, but we are going to reach a point in Mevion. We are almost through the capacity at Ranor, almost all goes to Mevion. So the question is what does it take, or what is the capacity that you can actually ramp Ranor to given the current physical size that you have there without adding a building or doing anything significant, that’s the first part of the question.

Okay. Let me answer the first part. So I believe we will have to add another building just for fabrication. So not a huge capital expense like we did with East Bay. We’ve added East Bay, definitely we have to build the building and the cranes but we had to put in the pit to accommodate the large Gantry mill and that was an expensive building. The building-- what we’re needing more of what will be more assembly and test based. So I believe and at the shareholder meeting, I’ll actually start talking about some of those future plans and requirements, but they’re not heavy on the capital side to get a fab building. This is why we have implemented several new KPIs, but more importantly it’s driven using finally using the ERP system at Ranor to actually schedule down to each and every man hour and machine hour utilization, because we believe that if we crank the machines to the level we want, we believe Ranor is capable of getting between 50 million to 60 million in output. And that extra fab building helps us get towards the 60 number without going crazy on the capital side. So it’s a matter of taking the tools, scheduling properly through the ERP system, which I am happy to announce we’re actually doing and it’s a wonderful thing. And so that we’re tracking every hour on every tool in our fleet on every week and now it's being utilized, you can get a lot out of Ranor. So the answer to your capacity is between 50 million and 60 million and yes we’ll need a fabrication building to assemble more floor space.

And the second question is, if you look through your products that you now have and your customers that you now have, clearly 28% to 30% gross margin is an average, the sum of a lot of parts. How much of what product, if efficiently produced is above 30% . You’re not going to identify which ones, but if you really are running fairly efficiently, this gross margin, how much of that product line theoretically could be doing better than that?

I’m hopeful especially with our current price and costing structures and now we’re monitoring it that all medical products, all nuclear products and all defense products are north of 30%, that’s up.

Yes, which would then cause the total, because that’s a big part of the total, to move up from 28% to 30% in the range of 30% to 30% something, 30% to 34%, 32%, 35%, We can hope or expect the possibility of the gross margin 2, 3, 4 percentage points higher than it currently is.

And that would be a good expectation, a very good expectation, absolutely.

And given capacity, my last part of the same related question, you talked at times about getting additional customers, medical or possibly in other areas, that would clearly require a major new manufacturing facility as opposed to fabrication room?

Yes. So at that point, with contracts and agreements in hand, long-term contracts and agreements in hand with deposit that will constitute another operation. What Bob and the rest of team were doing now is making sure this Ranor operation with all CRP Systems with all KPI is running at world class levels, because the minute we say, we need this other operation we are setting it up, we’re going to make sure we can transfer all of these operational excellences over right away and now have to ever go through what Ranor went through 9months ago.

Our next question is from the line of Michael Wise [ph] with Joslin Capital.

Can you comment on the last slide where you gave the future 2013 through 2016, are those specific numbers or that just, is that a percentage increase each year or how should we look at that?

With a scale ruler you can figure that on the number basis, order of magnitude on a dollar basis. And it based upon our current discussions, backlog and forecast with these 5 of the strategic without the significant events that was discussed earlier about what [indiscernible] brought up about the fissle approval, we’re really pretty comfortable of this growth trajectory for this company.

What are you hearing on Sapphire? I keep hearing, great future, great future, but nobody has exactly signed up. Is everybody just waiting and doesn’t want to be the first?

Well, one of the phone company joined us and now their latest phone all the camera lens covers are Sapphire. They have started and you are right, the 10 chambers a month we’ve reduced is really mostly supporting the LED market and it has really supporting Asia. There is really no domestic demand for it other than there is some DOD work and in the United States, but it’s all being driven around LED at the current point. The day one of this smartphone or 2 announces they are making the move to Sapphire then that’s going to be a great day for Sapphire. But right now it’s an LED market, our China division produces 10 a month and we make money out of it and the division is profitable. So I call that steady state mode, so a little red Sapphire, or little blue Sapphire lens on the bottoms of the chart assumes steady state there is no significant event of the 3,000 processes we have talked about earlier, it’s not assumed on here.

Okay. And how is the LED working?

How is the LED working? The LED market is extremely strong right now as continue and the issue was overnight, the LED market moved from the United States, moved to China, LED moved to China faster than Solar ever did and that’s where the customers are and that’s where the LED business is and any LED products you buy are coming from over there.

[Operator Instructions] Our next question is from the line of Richard Molinsky with Max Communications.

Looking at the slide deck it looks like going forward, it should be an exciting time for the company. I’m trying to get a handle on to last slide, to me it’s looking at the revenues going forward from 2013, 2014 on. What kind of revenues are we looking at there? I don't see a number on it and what kind of profitability do you think is possible going forward over the next couple of years now?

Well Richard, we can’t give the dollar--but the chart, the chart is accurate in scale. And so like I said we have the scale ruler and you look back the historicals and you can figure it out. If you get a handle on it I think Walter asked a valid question which is can you handle it and --without something new and really there will only be 2 events in handling it, and Ranor, that division’s, got to get up to $60 million. And what we do believe we can but we'll need some more assembly floor space, for that which is good. Beyond that, we need a new place, we need another facility. But we will have to do that, I will have that as a long-term agreement contracts in hand not a spot order and that will give us the confidence to move forward and our shareholders confidence that we are moving forward.

Again, how would you do that?

I’m sorry, go ahead.

To raise the money for that, would you be looking again in the bond offering versus an equity deal?

We’ve already talked to the states and significantly narrowed our bandwidth of where we would go, including even in Massachusetts, By the way the extra building we can give a name for it, it's Ranor 3. The states are working with us to have the IRB financing for any of the expansions and any of the capital purchases, so it’s the low interest IRB like we used to buy the [indiscernible] operation a year and half ago, so we’re not looking to raise capital.

All right.

So that will be financed with pretty good cash and the IRBs that Jim referenced. And the other point is, Rich, we are in the final 2 quarters away from fully amortizing the $4 million debt that was taken out about 7 years back in 2006. So at the year end March, we will gain a lot of debt service as we pay down that one big chunk of debt and all that's left are the bonds and CapEx financing. So I think strategic cash--our normal financing capacity as we would gain the cash flow at Ranor that historically have generated, gets us what we need with the IRBs that expecting the expansion that might come forth across this time horizon.

Our next question is a follow-up from Michael Potter with Monarch Capital Group.

On the nuclear side, with regards to alpha, omega, we still are getting I guess large contracts or volume contracts, the orders are coming in: 1,2,3,4 at a time. Is that still the case?

Yes, that’s still the case.

Okay. Do you see any change in that going forward?

Yes, when they get fissle approval, I do see significant change in that and we’ve already given quantity proposals in north of 10 units for that already, which just means on that. For the ASPs of this cash, it’s the healthy number when you get 1 or 2 every other month of these things. The issue that’s gating the isotope people all is up until this casks were approved as the only approved cask and you want to buy a cask, you paid $75,000 for them and now when you call up and say we want an approved cask, the NRC says yes use this one and it's $1 million. So it’s a little sticker shock for the isotope guys and they are literally going out to raise the money to go buy these things. And cash is required when you place these orders, so that’s part of it, but fissle changes that completely because the people that would buy for it for fissle material, cash is not a bigger concern.

Okay. Just I want to clear on the prototyping having again some negative effects to our gross margins in Q2, that has fully run off now? We won't see any of the suspect in Q3 going forward?

Correct, Michael. You have been running those projects after their completion against the reserves established at March. And that they’ve shipped, we will only have the business we've been writing what where the better quoting and more discipline around the risk at any projects comes to us and also there is the shifting Ranor back into more of a production modality than the heavy prototyping first article that it was forced into 10-12 months ago.

What was the negative effect on the quarter, Rich?

It’s got an effect, but it’s a dampening of fact that is comparable in the prior year and this year, because we have lost contracts running out last year in the second quarter. You could think I mean, we get the differential just being up in the high 20s and where we are, right.

Okay. But can you give us a number specific to I guess or the loss specific to the prototyping work

No, can't quantify it for you, Michael.

We can’t quantify it, okay. Okay. With regards to electric boat, Jim, the navy is currently producing what or looking for production of one Virginia Class Submarine per year?

Yes, and that’s current.

That’s current, and going forward they are looking to double that, is that correct?

That is correct. We are looking to make no less than 2 Virginia Class or there will be a iteration of Virginia Class a year at a minimum if we literally, as a country we only produce one year we are literally just one having in the, any of the sub fleet more coming out we can put in the water. So we must be at 2.

We must be at 2. So our work with regard to electric boats should double.

Should.

At minimum, I am assuming we don’t, and hopefully we will pick up some more componentry, right. Going forward assuming block 4 is approved?

There is always more, those are business development side working with the strategic clients and there is many more than just electric boat, but not working more with the strategic clients on other products assemblies that we can do and as we have earned our stripes on some of the current assemblies, it has opened the door for more assemblies, so our business dev group is working hard order with multiple clients to expand that order.

Our next question is a follow up from Greg Garner with Singular Research.

And looking at the Sapphire 4 for smartphones and tablets, I want to make sure I have this right there, you mentioned that there is one phone company that signed up, one camera company, but you haven’t had any orders yet. You just seen that they have identified that’s what they want to do and they’re getting that from the Sapphire companies, but you haven’t seen direct Sapphire furnace orders for that yet, is that right?

Let me clarify it. Smartphone has a camera built into it, I mean when you flip the phone over there's a camera. That camera lens now is Sapphire, so it's a nice half inch by half inch pieces Sapphire, that is coming from furnaces that what we supply to our end customer. Like I said, that half inch for half inch, what we are talking about is the 6 inch by 4 inch front screen that has not being adopted yet by any other big 4 and we’re looking forward to that happening. Our customer was quoted as saying, if any one of those guys do it and just impacts it on a single percentage digit it’s a 3,000 furnace demand that's not in those charts. But right now at least one guy has taken the step to protect the camera in their phone with Sapphire. Here I think it’s actually was a strategic test to see that they could be produced, could be assembled in China and shipped before they commit the whole product line. This particular phone company has traditionally made very smart decisions.

Okay. And the increase in the commercial and the out years after 13, does that have to do with the air product?

No, it doesn’t. It has to go with some other commercial products we produce mostly around the Carbon Black as more and more autos get put on the road, especially in China, the demand for Carbon Black is continuing to grow and it’s a really nice product for us. We have a little visual on Slide 8 of Carbon Black as our customer doesn’t want to show you the end product for proprietary reasons, but that is a significant driver in commercial. Beautiful product -- it’s a beautiful product that we make, it’s a repeat product and it’s a good thing.

Okay. Only that for now and did I hear correctly that the issues with the prototype of these, all those have runoff there is no more in Ranor.

All those are runoff. The prototypes at a loss are runoff. That's not to say we won’t have prototyping in the future and we’ve had prototyping and that’s not had a loss, and it is our commitment to stay in that later category, not on the loss category we ran into on the transition.

Thank you, and we have no further questions at this time I’ll turn it back to management for any closing remarks.

Okay, ladies and gentlemen, thank you for participating. Thank you for your really good questions and I’ve shared some of those stated this is an exciting time. Yes, I’m happy to be through the woods. I’m happy to the new management team at Ranor and happy with the new processes and I’m happy to show the quarter turning in Q2 and now looking for more exciting times in Q3 and Q4 beyond. Well, thank you for your support and have a good night.

Ladies and gentlemen, this concludes the TechPrecision Corporation second quarter fiscal 2013 earnings conference call. Thank you for your participation. You may now disconnect.