TechPrecision Corporation (TPCS) Q3 2013 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to the TechPrecision Corporation's third quarter fiscal 2013 earnings conference call. [Operator Instructions] I will now turn the conference over to our host, Mr. Jeff Stanlis with Hayden IR. Please go ahead, air.

Thank you. Welcome to everyone joining us today. On the call with us today are Jim Molinaro, TechPrecision's Chief Executive Officer and Rich Fitzgerald, Chief Financial Officer. I would like to mention this call is being simulcast on the website at www.techprecision.com along with the slide presentation. If you've 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 email me at Jeff@haydenir.com and I will gladly send you a copy. If you'll now turn to Slide 2 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 and 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 represents management's estimate as of today, February 19, 2013. 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 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'll follow an agenda that will include a brief overview of our third quarter. Rich Fitzgerald will then detail our Q3 fiscal '13 financial results. I'll follow up with updates to our business outlook and strategic product updates. Please turn to Slide 4. Through 9 months, fiscal 2013 has been a year of transition in terms of the complete elimination of the solar market and significant operational improvements at our Ranor division. We have transitioned from a single subsidiary to 2 operating business units. We have transitioned from high reliance on a single industry and frankly, a single customer to a highly diversified platform for growth. And we have transitioned to a more professional proven management team at our domestic subsidiary. I'm incredibly proud of the progress we have made. However, I fully recognize that this transition has been challenging and the fruits of our labor have not yet shown up in our financial statements for a variety of reasons, both expected and not. As disclosed in our press release, on January 7th, if not for our customer requesting a change in the scope of work regarding the large scale PolySilicon chambers at our Ranor division, we would have been reporting and expected continued sequential improvements at both the top and bottom lines. This change resulted in over $2 million of production activity and revenue shifting from the third quarter into our fourth fiscal quarter, the period ending March 31st. In addition, we have invoiced this customer for approximately $480,000 in change orders and related incremental revenue, which will be recognized as the units are completed and shipped. If you account for these changes, you can begin to see the positive momentum we are building. If you consider the 5 year $115 million agreement we just signed to exclusively produce complete product assemblies for proton beam cancer treatment equipment in the U.S. and Asia, that progress becomes more evident. I'll discuss this agreement and in particular how we'll ramp later in the call. However, this is a milestone agreement for us. To understand how important it is, you have to also realize that the solar industry and the single solar customer, which has sustained our business for the past 6years largely disappeared over the last year. Anyone who follows the leaders in this space is well aware of the challenges in the solar industry in terms of the inventory levels, pricing, and demand. For us to have maintained our revenue base and added as many new customers in the other industries to set the table for sustainable profitable growth, in the face of this follow-up in the solar industry, it's a considerable achievement. And already even before this 5 year $115 million medical agreement kicks in, our largest customer is the medical device customer. And based on our existing pipeline of business and late stage conversations with customers, I believe there is a chance a year from now defense related work, not medical and certainly not solar may be our largest vertical. As I mentioned, approximately $2 million of the Ranor deliverables in the third quarter shifted to the fourth quarter completion due to scope of work changes on the PolySilicon order. The positive news is that our manufacturing capability is nimble enough to accommodate these customer changes. This factor coupled with $3.4 million of solar product that shipped in third quarter of fiscal 2012 rather than the second quarter makes comparables challenging year-over-year. If we normalize these scheduling changes adding back the $2 million that did complete production in Q3, fiscal '13 results and excluding the $3.4 million from a year ago, revenues would have been approximately $9.3 million for the past quarter versus $7.5 million for the quarter a year ago. It is also important to note that we have a comparison issue albeit a positive one next quarter when that $2 million is recognized incrementally boosting our overall revenue. As of July 31st, our backlog has reached $21.8 million. None of this backlog comes from our largest historical customer, which has historically represented $10 to $16 million of our backlog. This demonstrates our ability to grow and diversify our global customer base and achieve backlog in bookings beyond the alternative energy market and specifically beyond our historical heavy reliance on the solar sector. This backlog now includes more business from the medical, nuclear, and defense sectors. I'll cover the business outlook and strategic product updates in a few minutes. And for now, I'll turn the call over to Rich for a more in-depth review of our financials. Rich.

Thank you, Jim. If you would, turn to Slide 5, I'll cover the operating results for Q3. For the 3 month period ended December 31, 2012, revenue was $7.3 million compared with $10.9 million in the same fiscal quarter one year ago. The primary reason for the $3.6 million or 33% year-over-year decrease in revenue as Jim mentioned earlier resulted from a customer initiated scope of work change at our Ranor division, which shifted approximately $2 million of PolySilicon production into the fourth quarter. Additionally, last year's Q3 revenue included $3.4 million of solar production completed during Q2, but that was not shipped and delivered to the customer until Q3 due to a customer delay. Year-to-date, fiscal 2013 consolidated revenue includes $2.9 million of revenue from our WCMC subsidiary in China compared with $3.2 million in revenue contribution for the comparable 9 month period last year. On a sector level, sales to alternative energy customer and commercial and industrial customers decreased by $3.9 million and $1.8 million respectively when compared to the same quarter 1 year ago. These sales declines were partially offset by revenue increases from customers in the medical and nuclear sectors of $1.8 million and $245,000 respectively. Sales to defense and aerospace customers were comparable to the prior year at $1.6 million within the quarter. From the perspective of sales mix within the third quarter, fiscal 2013, we reported revenue from alternative energy customers of $2.6 million or 35% of the total Q3, 2013 revenue. This compares with $6.4 million or 59% of total revenue reported during the comparable third quarter last year. Q3, fiscal 2013 sales to customers in the [indiscernible] were 8% of consolidated Q3, 2013 sales. While revenues to customers in the defense and aerospace sectors during the quarter totaled $1.6 million or 23% of the quarterly revenue. During the quarter ended December 31, 2012, sales to nuclear power sector customers were $442,000 or 6% of sales. While sales in the medical device sector were approximately $2 million or 28% of the total quarterly revenue figure. Gross profit for the quarter ended December 31, 2012, was approximately $1.9 million or 26% of sales compared to gross profit of $740,000 and 7% of sales in the third fiscal quarter of last year. Consolidated gross margin was 26%, up significantly from the 7% gross margin the year ago period. That was substantially impacted by a heavy mix of prototyping and first article production volume at our Ranor subsidiary. Sequentially, gross margins were up 2,500 basis points from $23.3 million in the second quarter of fiscal 2013. Gross margin in any reporting period is impacted by the mix of services we provide on projects completed within that period. Accordingly, there can be variability due to the project mix when comparing period-over-period or year-over-year margin results. Turning to expenses, selling general and administrative expenses for the third quarter were $2.3 million, which compares with $1.9 million of SG&A incurred in the year ago third quarter. G&A costs for the quarter were higher due to $145,000 of non-recurring executive search fees, plus $50,000 of severance related costs, and also stock based compensation expense was $42,000 higher versus the prior year third quarter. Additionally, professional fees increased by $162,000 over the prior year. But were offset by lower business travel costs of $53,000. These items collectively drove a $370,000 overall increase in Q3 G&A. The search fees and severance are non-occurring in nature. And in the case of stock compensations, it's a non-cash charge. Net loss for the quarter ended December 31, 2012, was $545,000 or $0.03 of share basic and fully diluted. This is based on 19.1 million of shares basic and fully diluted outstanding through the third quarter. This compares to a net loss of $1.1 million or $0.07 per share basic and fully diluted on 17.1 million basic and fully diluted weighted average shares outstanding for the prior year third quarter. Moving to the year-to-date financials, please turn to Slide 7. For the nine months ended December 31, 2012, revenues decreased 17.2% or $4.7 million to $22.5 million from $27.2 million in the same period one year ago. At the sector level, decreases in revenue from the alternative energy sector and commercial industrial sector were $5.4 million and $4.9 million respectively. These declines in revenue were partially offset by increased sales to the defense and aerospace sectors of $1.1 million and increased sales in the medical sector of $3.9 million and nuclear sector sale increases of $600,000 when compared to the same nine-month period 1 year ago. Turning to gross margin, for the quarter ended December 31, 2012, gross margin was 22% or $4.9 million in gross profit compared to a gross profit margin of 19% or $5.1 million gross profit for the year ago nine-month period. Gross profit year-to-date in fiscal 2013 was lower due to a blend of 15.5% gross margin reported for the quarter ended June 30th, 2012, 24% gross margin reported for our second quarter ended September 30, 2012, and the 25% gross margin reported in the third quarter. Gross margins year-to-date were impacted by the runoff of projects during the first 9 months of 2013 that were in a contract loss position or low margin first article and prototyping at March 31, 2012. Selling general and administrative expenses for the nine months ended December 31, 2012, increased to $6.2 million from $5.6 million for the same nine-month period 1 year ago reflecting an increase of $608,000 or 11%. Non-recurring costs associated with executive search related fees and $115,000 of severance costs accounted for $315,000 of this increase respectively. Additionally, non-cash stock based compensation was $76,000 higher for the first 9 months of fiscal 2013 when compared to the same period in fiscal 2012. Additionally, increased professional fees of $283,000 were offset by reduced travel related costs of $171,000 when compared to the prior year. Please turn to Slide 7. Turning to our balance sheet, as of December 31, 2012, we had $2 million in cash and cash equivalents. And net working capital was $9.1 million. That's compared to net working capital of $10.2 million as of March 31, 2012. Turning to long-term debt, total debt outstanding decreased by $1.1 million during the first 9 months of fiscal 2013. And we concluded the third quarter with $6.1 million in debt outstanding. It's important to note that our debt service will be roughly $600,000 lower after we close the fourth quarter here. So we are de-levering the company as we move through the last 9 months and in the trailing 18 months. With that brief financial recap, I'd like to turn the call back over to Jim for some additional remarks. Jim.

Thanks, Rich. If everyone would please turn to Slide 8, our business outlook has been updated to reflect the recent developments and projected growth for strategic products associated with the medical, defense, and nuclear markets. Fiscal '13 is a year of transition away from the solar market and single customer dependence for the last 6 years. Fiscal 2014 is the year of growth for the products in the medical, defense, and nuclear sectors. And will be the primary drivers for the growth. In the next 2 slides, we'll provide updates to some of the strategic products associated with those markets. Please turn to Slide 9. As I mentioned earlier, in January, we announced a long-term agreement valued at $115 million over the next 5 years with our strategic medical equipment partner. This is the result of a long and successful collaboration to develop a new system to treat cancer with revolutionary proton beam radiotherapy that was recently cleared by the Food and Drug administration in June of 2012. We will be the exclusive provider of the complete product assemblies for this partner with both Ranor and WCMC participating to meet demand globally. We expect to begin shipping initial assemblies under this LTA during Q1, fiscal 2014 and continuing through Q4, fiscal 2018. The company has already successfully shipped assemblies to 5 different hospital locations prior to this agreement. Mevion Medical Systems received FDA 510 clearance for its S250 proton beam radiotherapy system in June, 2012, with expected complete first patient treatments for the end of May, 2013. Successful patient treatment is a critical milestone to continue the production ramp and potential acceleration of the strategic product. I think it's important to note that this agreement is a foundation for growth. And this agreement is designed to ramp over time. The agreement represents a 40% to 50% compound annual growth rate for TechPrecision in the medical sector and will serve as a foundation for our growth. For the nuclear sector as publicly announced, Ranor shipped the first complete AOS100 nuclear isotope transport cast and cage on February 15th. We are excited with this important milestone for Ranor. And look forward to shipping the next 5 transport casts in Q4, fiscal 2013 and Q1, fiscal 2014. We anticipate with the successful shipments of the next 5 units, incremental orders for this product will be received in Q1, fiscal 2014. For our sapphire products, WCMC has successfully shipped over 50 units to our customer. Our main concern with this product and customer is their dependence on the China market. It is our belief that the sapphire market is already saturated causing a significant erosion in sapphire prices. The same saturation in pricing events happened in the solar market. While our customer maintains a large backload for this product, it is our belief that many of their China customers will push out deliveries and therefore a quick result in the slowdown in the sapphire chamber shipments from our WCMC division. We are awaiting any news regarding the adoption of the sapphire material for the Smartphone phase, which could help recover and accelerate this market and product. But until such time, we remain conservative with this product and its' outlook. Please turn to Page 10. On the defense and aerospace sectors, they continue to grow. And we estimate the year-on-year growth rate from fiscal 2012 to fiscal 2013 will be approximately 20%. The business development team and I are spending significant resources with most of the Navy's prime contractors and NAVSEA to expand our strategic product offering to support the Virginia class and Ohio replacement submarine programs. In December, 2012, Congress approved the first 2 submarines for the new Block 4 program, with the remaining submarines anticipating approval by June, 2013. In January, Ranor received purchase orders for assemblies to support the first submarine of Block 4. We believe the operational improvements and results at Ranor have demonstrated our ability to support additional product assemblies, some of which may require the expansion of our Ranor3 project here in Westminster. I predict that the defense market could outpace the growth of the medical market sector. For the PolySilicon product, the entire new management team at Ranor have been working very closely with our customer to launch one of the largest PolySilicon chambers in the international market. The advantage of this large unit will be to provide the lowest cost of ownership for the industry. We expect to ship the initial unit by end of Q4, fiscal '13 with additional support equipment to ship from WCMC and Ranor divisions in Q1, fiscal 2014. We look forward to much success for this product as the initial market interest has been very strong for repeat orders. The last market or product I want to talk about is the entry into the new industrial oil sector. Recently, our business development activities have given our WCMC division an opportunity to supply test units to one of the largest oil well production companies. WCMC has shipped the initial units to the customer in Q3, fiscal 2014. As a reminder, it can take sometimes as many as months to years for a product offering to launch into production. However, this is an exciting new market for TechPrecision and WCMC. And we look forward to expanding our offering in the sector. This concludes the business outlook and strategic product updates. And I would like to turn the call over to any questions. Operator if you would, open it up for question and answer please.

Thank you Sir. We will now begin the question-and-answer session. [Operator instructions]. Our first question comes from the line of Greg Garner with Singular Research. Please go ahead.

Hi. Nice progression of revenues except for that delay of that PolySi order. If that were not delayed, any sense for what gross margin would have been in the quarter?

No, we really don’t have that Greg.

Okay. In the medical order, the backorder of the $115 million, is that - any sense for the timeframe as that executed. Is that going to be - you know, I would suspect fiscal year ’14 would be somewhat of a ramp up, and then might it get to a steady state? Is that how you see it, or do you have a sense for how the order flow might occur there?

Yes. We have things worked out with that customer with monthly bookings and monthly shipments that has planned out for quite some time. What I stated publicly a few minutes ago, is that - to give you a rough estimate, the way the agreement is written, it represents between a 40% and 50% compound annual growth-rate for the next 5 years. And, so we gave initial forecast that our medical business in fiscal 2013 was going to approach a pipeline somewhere north of $8 million. That’s up from $1 million in fiscal 2012, a little bit year-on-year change. So, based upon that, you’re looking at a 40 to 50% compound growth rate, again for the next 5 years.

So, you’re taking that from the base number of $8 million, or the base number $1 million.

Yes.

Oh, okay.

Excuse me, base of 8.

That’s good.

So, it’s a very, very - it’s a nice predictable, manageable growth for the company for both Ranor and WCMC.

Do you have any sense for how many number of systems or installation this would be from Mevion? Either on aggregate basis over a period of time, or anything, you know, per year.

Yes we do. You know, we’ve been asked to keep that confidential. If you do go to the Mevion website, what we said is we have shipped assemblies to 5hospitals, and that’s not completed units. We’ve actually shipped completed units to 3 hospitals. And you know, we start off sending the initial assemblies for the next 2, makes it 5. If you go to the Mevion website, they will show you currently the number of units they have under contract in the United States, and recently in Japan. So, [indiscernible] 3, 6, 8, 10, 11. So basically if you go to the website, they’re publically showing 11 units right now. And that’s all we can tell you. But obviously the agreement is written for more than that.

And so that’s the normal how this product is going to be shipped. Essentially where it sounds like 2 increments? An initial shipment and a second one, which …

Yes. We actually have - we actually ship hardware that gets built into the physical building or the vault. So, the hardware needs to be actually installed in the walls of the building while you’re building it. Then when the concrete hardens and the walls are up and there’s a roof, then we can ship the remaining parts.

Okay, so that sort of helps support the continual flow of product too?

Absolutely, yes.

Okay, interesting. In the nuclear, in the transport cask, is there any - so the first shipment occurred - I guess I’m not remembering that properly. Is the first shipment going to occur in the current quarter, the fourth quarter, is that right?

No, we publically announced the first shipment was last Friday.

Okay.

The cask and the cage, there’s 2 parts of the cask, and then there’s a transport cage, that protects you so you don’t get burnt if you touched it. And that shipped last Friday, and now we have the next 5 to build and ship.

And would the potential market here of what was it 500 or 1,000 I don’t recall exactly what it was, I thought was in that range. Would there - doesn’t it seem to be a low demand number of only 5, if this is really something that needs [indiscernible] up there?

I want you to be right. There are 2 factors on that; first we have to demonstrate with the next 5 being shipped, that we have a dependable, predictable on-time shipment for his product. It’s a critical product to ship on-time, because the end customers, you know, for example GE, they’re depending on those casks to be there to transport an isotope to a hospital to treat cancer patients. So the NRC wants to see that we are rock solid with on-time deliveries, so that we can give rock solid to the day shipments of these casks. As everybody gets more comfortable with our ability to ship on-time, to ship predictably, then this will continue. So, in the two-- that is, look, as we ship the next 5, and everybody starts to breathe that this product is ready to go, we should start seeing more incremental orders in our Q1 fiscal ’14. The reality is there’s a pent-up demand for this product. But it’s so critical because people’s lives are dependent on it being there on-time.

And how long does it take you to produce one from order?

We - it takes roughly 3 months for us to get the nuclear grade materials that we co-certify. And then it takes 3 months to finish it. So, it’s a total cycle time of 6 months.

So, - and when are you going to be court approved with your, you know, product manufacturing cycle time to have an order flow equipped?

When they see these next 5 ship on-time. So, that’s what we have to do now.

Okay, and the time-frame for the next 5 shipments is?

Are Q4 and Q1.

Oh, for just the next, okay. So the first half of calendar 2013 here?

Yes, first half of calendar 2013 they all go, yes.

Okay, so then - so would you reasonably expect - assuming that you do well there, that some orders will start coming through then in first fiscal quarter of 2014?

Yes, very much so.

Okay. And this oil market,that’s new. Can you give us a sense for, you know, what’s the typical size of an order might be? Or what are we talking about, drilling component parts or…

We’re talking about several different components and assemblies used from everywhere from the pumps to the rigs themselves. It’s a - it’s a huge market, it’s a huge customer. If you take pretty much every one of our customers and add them up together, they don’t equal the revenue of this one customer. So, we’re excited to crack it, we’re excited to ship it. And by the way, there was a typo in my scrip I was reading. We shipped the first articles that are being evaluated this quarter. This Q4 fiscal ’13 we’ve shipped [indiscernible] we didn’t ship Q3, we shipped Q4. So, huge opportunity, huge market, customer is getting comfortable with us, we’re getting comfortable with them. The big deal is, can we handle the ramp, can we handle the quality and demonstrate it repeatedly. But it’s a huge, huge, huge market, and it’s a nice market to crack. They seem to be making a lot of money on the oil /gas side of things, especially I went to the pump it was like $4.20 a gallon. So, nice to get some of that money back.

Yes. Can you tell us what the product is, what it does?

The product is used on the rig with the pumping itself. And it will be made in our CMC division, and it will be distributed with rigs and opportunities throughout the world.

So, this is sort of like the core metal component for the pump itself?

Yes.

Okay. And how fast - I mean, what’s the turnaround time from an order of that to production/delivery?

We think - we’re meeting now to go over final specification production unit ramps. What we can handle, what we can forge, what we can machine, our cycle time is under 3 months for a unit.

Okay. And could that at all improve, or you think that’s pretty much where…

It’s not so much the cycle time, as how many can you do at the same time, right?

I see, okay.

It’s a volume factor. So, we are sharing with the customer how many units per month we can ramp to, and grow carefully. I want to - this is a huge customer, this is a huge opportunity, it’s a huge market. I want to walk into it very well. I’d love to promise them a thousand a month, but I would just screw it up. So I want to do it in stages, make sure they’re happy, make sure we can deliver. As we gain more and more of their trust, we can gain more and more of their outsourcing.

Okay, great. Yes, it does sound like a huge opportunity here. Those pumps do get replaced on …

Frequently.

Okay.

Greg, I like consumables, so they’re a good thing.

[Operator Instruction] Our next question comes from the line of Walter Schenker with MAZ Partners.

Hi. A couple of questions largely relating to Page 8, which is: Revenue outlook market growth. I congratulate you. This is somewhat tongue-and-cheek in enhancing the slope over the years as the base gets somewhat lower for the initial year. But how do you get fiscal year ’13 ahead of fiscal year ’12, given that through 9 months you’re $4.5 million behind going into that year?

We better have one heck of a Q4.

Okay. Because if one - again, I’m not trying to give you too hard a time, just a mild one mind you. But, if one goes back to December presentation, fiscal year ’13 was going to be somewhat better than it’s going to turn out to be, and given that we are in the middle of February of fiscal year ’13, one would hope that we got a chance of getting some pretty big quarters here - quarter here. To get to that number, because it would be nice to actually make a number.

Yes, it would be. We have the backlogs, we have the orders, we have the work in process. We have to get a lot of shipments. We have to have a good Q4 with those shipments. I’m not waiting for orders. You know, we can pick up some nice change orders. We have to get these things out. So, yes the way you catch-up is to have a really, really, really good Q4.

And just 2 quick accounting type questions. $300,000 year-to-date and about half of that in the current quarter for executive search, seems like a lot of money to me. This is being spent in this country, overseas, or…

It was all for this country. It was the executive search to replace the division president at Ranor, that conducted a board search. So those were some of those fees.

Okay. And just as again one of my comments, and I look forward to seeing you next week. But, it is nice to see another area of growth in the oil service business. This can and is all being done out of China, correct?

Correct.

So this does not affect any capacity limitations which may exist domestically as some of these programs ramp up?

Correct.

Our next question comes from the line of Robert Brous with Wunderlich Securities. Please go ahead, sir.

Hi, Jim. Could you give me a breakdown of the $21.9 million backlog, what does that look like?

Well, Rich, you want to take that?

Yeah, I’ve got that here. Thanks, Robert. If you look at it, you know, we’ve got no more than - the highest component we have in there right now is just shy of 20% at $4.3 million, it’s the Defense program we’re on. We’ve got another Defense program for $3.1 million the backlog, another one for about $440,000. The medical backlog at the end of December is about $3.9 million and that’s before the - before we receive any orders under the LTA, another $500,000 from another Defense customer and then, you know, we’ve got our PolySi order in there that continues into the fourth quarter in the sort of 2-plus range. Nuclear is about $600 million and then we’ve got about $670 million over in China coming through in Q4.

So more than half of it is Defense, Robert.

And then what can I look for going forward, a rate that you’d be happy with, the run rate on SG&A?

Lower than this quarter. Rich, you want to give them that?

Yeah, we should get, you know, we’d like to get it back down into the 1.9 range and a lot of the, you know, the one-time or the non-recurring items would allow us to back it down to that and certainly we’d like to go lower than 1.9 if we can but that’s - 2.3 is higher than we would like but we’ve got a lot of episodic costs that took place with the transition here.

And using your word, episodic, are we past the episodic costs at this point?

Yes.

For those types of costs, severance and search, yes.

Okay. And then if you could - Jim, with regards to kind of this one-time first article prototypes, and you talk about in the press release the transitioning, isn’t that - I thought that transition was behind us or if the transition you’re seeing, does all that have a three-handle on the gross margin or are we still seeing some low margin stuff and when is that going to be behind us?

There were a couple smaller defense assemblies, you know, in - we’ll call it around the $140,000, $150,000 range which go back 2-plus years of history that will pop out, but they’re not as significant as the $3 million defense project at a loss. So there’s those in there that creep in. I think the important one is when you look at the PolySi chamber, it’s a prototype and what we’ve said is, prototypes do not have to be done at a loss and I’m going to put a new team at Ranor that will be able to build prototypes and show a profit; albeit, it might not be a three-handle, but it won’t be a negative handle. And I’m looking forward to that shipping because I believe as we’re tracking now, this prototype product by Ranor and its new team will be at a profit, which is, I think, a monumental event because Ranor has not demonstrated that historically. So you know, we won’t have a three-handle on it, but we won’t be in the red on it either and going forward it’s a very nice product.

So the PolySi will not have a three-handle on it?

Not for the first 2 that we’re building now.

And the Oil Field Services stuff you shipped in the quarter, what kind of margin did that have?

Nope, those have three handles on it.

Our next question comes from the line of Michael Potter with Monarch Capital Group. Please go ahead, sir.

I just wanted to get some clarity on a few things. Jim, I think you mentioned briefly that GT is no longer part of the backlog, or it’s nothing of any substance?

I’m sorry, you - I think you guys were both talking. What was it?

I’m sorry, there’s only about 6 figures with GT, which is a big change as Jim highlighted earlier, it’s usually a significant 7 figure or even 8 figure piece of the backlog.

So it’s somewhere between 100,000 and 999,000?

Yeah.

Okay. Well, one could be a non-significant number, an insignificant number, and one could be still significant to the backlog. Jim, you mentioned in the script, I guess we had a release. Did we get the release with regards to the Virginia Class Summary under Block 4?

Yes, the first few subs have been released. The monies have come through, or part of the monies have come through the first sub and Ranor received orders for part of the first sub under Block 4. So it’s starting to come through. Congress officially, on December 28th, said they blessed the first 2 of the subs for Block 4, although it doesn’t come through cash that way. What they bless and what they fund are 2 different things. The funding comes. So we started seeing pieces now, you know, the critical assembly pieces for the first submarine of Block 4. What I said in the script is there will probably be a sequester event which means Block 4 will be 9 submarines instead of 10 submarines, but that’s still really good for us and should be fine. The anticipation or the speculation is that all submarines are funded by June 2013.

Okay, so we received parts for - for I guess the first submarine. We didn’t get the, I guess, all the parts that we fabricated…

On the first submarine - on the first submarine we probably received about $1 million worth so far. I’m guessing between - yeah, it’s a little more than $1 million on the first one so far.

Okay. And what does each submarine represent to Ranor?

When the submarine is complete with all the assemblies, we should be seeing anywhere - and we’re working - most of my time, Michael is with these primes on the submarines because we want to increase it significantly, but right now it’s roughly about $7 million a submarine.

$7 million per submarine now, and that number has increased, you know, over the past couple of years, correct?

Yes, it used to be like $200,000.

Wow.

Three years ago it was $200,000 a submarine. So it’s gone up quite a bit, but the reason I’m spending my time on it and we’ve got our 2 biz guys going after it and meeting with the various primes is a very simple expectation. I have a very simple expectation. It’s these submarines are costing $2 billion apiece, much of it is outsourced, so I would like a bigger piece than $7 million, right, and it’s obtainable. The exciting part is the new management team at Ranor is demonstrating the ability to ship these very important, very complex proprietary assemblies on time to our customers, including the Navy, and that’s making our lives much easier to say thank you sir, maybe I have another. So that’s the mode we’re in right now, so I’m pleased Ranor is making our biz development life with Navy projects much better.

Okay, all right. So that’s good news that that I guess long hand[ph] is slowly beginning to be released?

Yeah, it will be exciting by March 1st for sure, right. No partisan issues whatsoever. We do need a Navy and we do need our submarines that are running out of fuel do need a replacement. And the other thing that was announced on December 28th is they did release the design monies for the OR program. For those not familiar with that, that’s the Ohio Class Replacement Program. Most of the Ohio is our biggest deterrent, our biggest defense and those subs are running out of fuel by 2020 and need to replace. So that’s what we’ll call our next-generation. So design monies have come through, which is promising.

Okay. But if we just go back to Block 4 and the 10 submarines within Block 4, maybe it gets cut down to 9, maybe it gets cut down to 8. If it’s 7 submarines, going 2 submarines a year, it’s a $14 million opportunity as it stands right now?

With our current content, yes.

With your current content, right.

Which I’m not happy with, so - and we’re spending a lot of time there.

Okay. One other question, with WCMC, it that continuing to show a revenue ramp from Q2 to Q3?

It’s holding - in Q2/Q3 I think it went up from like 1.1 or 1.2 to 1.4, so it’s a slight ramp. My assignment for WCMC has been, of course, breaking into the oil products and my caution has been in the Sapphire because what others announce as the big backlog when it’s all Chinese customers, they’re notorious for saying, yeah, we’re not canceling our order but we’re pushing it out 3 years and we don’t call that backlog but others are. So that’s my caution that Sapphire seems saturated and I’m hearing discussions of - that these customers want, you know, more subsidies from the Chinese government and they’re already $2 billion in debt per customer, per company. That must be nice, but I’m - I’m being cautious on Sapphire for all reasons. It’s very dependent on only one country.

And how many customers are we producing content for at WCMC?

Four - we’re currently producing for 4 customers. I don’t call the oil customer yet a customer until I see a production order.

Four customer, and that’s including our medical customer as well?

Yes.

And we have a follow-up question from the line of Robert Brous with Wunderlich Securities.

Hi, just a few follow-up questions. On the PolySilicon chambers, when you ship what is going to be the kind of the turnaround that they’re going to take to test this, try out this new chamber - this enormous chamber and come around to you inputting this kind of in the larger production?

The estimate would be about 6 to 8 months. It’s pretty quick. If you’re familiar with the chem-gas generation system we did for that one customer, you know, it’s years to get it qualified. This is much faster, it’s about 6 to 8 months. This, once it’s hooked up and all the gases are rigged up, this will - can yield product pretty quick.

And do you have a thought in what kind of market size this is or is it too soon to go there?

You know, getting a couple of these assemblies, so you know, each unit with its support equipment is roughly $4 million to $5 million a unit and it’s reasonable to assume that we would see at least 2 a year. It’s a nice business.

Okay, and on the Block 4, what’s the content? Is that just personnel hatches and supply hatches or it’s larger than that?

It’s larger and we really can’t get into the specifics of those. From an ITAR perspective, these are product assemblies and we keep them as quiet as possible.

[Operator Instructions]. Mr. Molinaro, there appears to be no questions.

Okay. Well, thank you. Let me get my wrap-up page. So anyway, I want to thank you for your time today and for your continued support of the company. I stated before, fiscal ’13 was a transition year, or is the transition year away from the solar market and one main customer for the last 6 years to a much-improved operational team at Ranor with many new and exciting products and markets for us to grow in fiscal 2014 and beyond. So thank you very much, everyone. Have a good evening and we’ll talk to you soon.

Ladies and gentlemen, this concludes our conference for today. If you’d like to listen to a replay, please dial 1-877-870-5176 or 858-384-5517 and use the access code of 4600306. Thanks for your participation, you may now disconnect.