TechPrecision Corporation (TPCS) Q3 2014 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Welcome to the TechPrecision Corporation Third Quarter Fiscal 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Brett Maas. Please, go ahead, sir.

Thank you. On the call with us today are Len Anthony, Chairman of the Board of Directors and Principal Executive Officer; Rich Fitzgerald, Chief Financial Officer; and Bob Francis, President and General Manager of TechPrecision's Ranor Division. I would like to mention that this call is being simulcast on the website at www.techprecision.com. Before I begin, I would like to remind our listeners that management's remarks may contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor in 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 12, 2014. 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 over to Leonard Anthony, Chairman of the Board and Principal Executive Officer, to provide opening remarks. Mr. Anthony?

Great. Thanks, Brett, and good day to everyone, and thanks for joining us. Pleased to report that we continue to make good progress in our efforts to complete a very challenging transition and turnaround at TechPrecision. While the progress is not yet evident in the financial results we're reporting today, the financial results are in line with what we expected for the quarter, and our operating performance on certain large orders and processes has been outstanding. Our backlog is strengthening, and we're seeing positive indicators that the market and customers that we have been pursuing for the past couple of years will finally mature into additional business. According to my confidence, the fiscal '15 and '16 will be much better years for TechPrecision and has been increasing over the past few months. I'll provide a bit more color and update on that progress in a minute. Rich will speak to the financial results and Bob Francis will provide an update on some near-term market opportunity. In terms of the company's progress, the $8.1 million purchase order that we announced just prior to our last earnings call where an important customer of precision industrial segment, is on plan to achieve the quality, the cost and the deliveries, which will be complete by the end of May 2014. The ramp-up in production level required for this order was significant, a significant challenge for the team at Ranor, and they've done a great job executing so far. We are hopeful that our high-quality and timely delivers on this order put us in a position for additional opportunity with this customer as the market for their products continues to grow. Another important customer, Mevion Medical Systems, recently achieved a critical milestone at the end of calendar 2013. This also increases our optimism with them. In mid December 2013, Mevion's customer in St. Louis announced it was treating the first patient with MEVION S250 Proton Therapy System. This was a critical next step, the rollout of the innovative cost effective and precise device, which promises to greatly improve the treatment of specific types of cancers. The MEVION S250 is a unique proton therapy device designed to deliver precise doses of radiation, eliminating unnecessary radiation to healthy tissue. Previously, proton therapy adoption was limited by the high cost of a larger conventional system, but the MEVION S250 system offers significantly lower capital and operating costs, enabling a wider range of facilities to offer proton therapy. TechPrecision has partnered with Mevion Systems since 2006, and in January 2013, we announced a 5-year agreement with them to exclusively produce the components for the S250 system. Currently, there are 11 systems under active development in the U.S. alone. We expect our sales to Mevion will begin to increase as the MEVION S250 device begins to demonstrate the expectation outcomes with a lower cost profile than traditional proton beam systems. As I've mentioned on prior calls, we have a growing pipeline of business in our Defense segment, but it is not expected to materially contribute to revenues for at least a few more quarters. We have developed and built Tier 1 and Tier 2 relationships with our customers and continue to seek opportunities in this sector. In addition, over the past year, we've increased our business development efforts with large prime defense contractors. We believe there are additional opportunities to secure increased outsourcing business as defense contractors are actively looking to increase outsourced content for certain expanding defense programs. Taken in the aggregate, potential future business from Mevion as well as other customers within our Precision Industrial segment and our Defense customers provides us with significant optimism for fiscal '15, '16 and beyond. We remain focused on our near-term challenges, which is essentially is to continue to find ways to bridge the gap from today to the expected great future. In that regard, we are continuing to assess, reduce and eliminate all nonessential costs. We've made numerous changes, controlled expenses, free up resources and increased our manufacturing efficiency. Our cost reduction initiatives continue to produce results. Sequentially, SG&A expenses remained relatively unchanged but decreased by almost 37% from the same period last year. Over the past 3 quarters, we believe we have scaled consolidated SG&A to a rational baseline. Our most significant near-term challenge is getting the company refinanced in a way that fits its potential and cash flow profile. Subsequent to the calendar year end, we had announced a Forbearance Agreement, effective through March 31, 2014, with our current bank. We're in discussion with several financing sources and anticipate having at least a portion of a new financing arrangement in place before the expiration of the forbearance period. The Forbearance Agreement covers the period of the bank's forbearance from April 1, 2013, through March 31, 2014, and details of that agreement are included in the 8-K we filed with the SEC regarding that matter. We appreciate our bank's patience and continuing support during our [indiscernible] difficult transition period. Now I would like to turn the call over to Rich Fitzgerald to discuss our financial results for the third quarter. Rich?

Thank you, Len. First, I'll cover operating results for Q3 of fiscal 2014, and then I'll cover the 9-month year-to-date results. For the 3-month period ended December 31, 2013, revenue was $5.2 million compared with $7.3 million in the same fiscal quarter one year ago. Net sales decreased in the precision industrial markets on lower shipments of medical components, production furnaces and pressure vessels, partially offset by increased sales to naval/maritime, and energy-related customers. Net sales at our WCMC division in China decreased by $1.3 million, primarily due to weaker demand for production furnaces in China. The decreases in net sales were flat in a regular order flow from customers as they gauge market demand for new and existing products. Gross profit for the quarter ended December 31, 2013, was approximately $0.8 million, or 15% of sales, compared to a gross profit of $1.9 million, or 26% of sales, in the fiscal third quarter of last year. 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. Certain low-margin projects and contract losses reduced margins within the quarter. The majority of these contract losses are the -- are from the first units of turbine-based components being manufactured for customers at our Ranor subsidiary. The contract-loss situation is somewhat a consequence of order delays from our Mevion customer and other projects which were expected to be at higher volumes than they have been the last 3 quarters. In response to a deferral of Mevion order volume in fiscal 2014, we backfilled with a defense contract that has proven more challenging than originally estimated. Turning to operating expenses. Selling, general and administrative expenses for the third quarter were $1.4 million, which compares with $2.3 million of SG&A incurred in the third quarter the prior year. The overall $0.9 million reduction in SG&A-related spending represents a 37% reduction compared to the comparable spending in Q3 of last year. Reduced SG&A headcounts resulted in lower spending for compensation and benefits, travel and outside advisory as well as travel and outside advisory services in Q3 of the current fiscal year. Net loss for the quarter ended December 31, 2013, was $0.8 million, or $0.0004 (sic) [$0.04] per share, basic and fully diluted. This is based upon 20.3 million shares basic and fully diluted outstanding for the third quarter of this year and compares with a net loss of $0.5 million or $0.03 per share, basic and fully diluted, in the prior year. Last year's per-share metrics are based upon 19.1 million basic and fully diluted weighted average shares outstanding. The net loss for the period -- for the quarter ended December 31, 2013, included noncash expenses of approximately $0.3 million. Moving onto year-to-date results. For the 9 months ended December 31, 2013, consolidated sales decreased 22.5% to $17.5 million from the prior year's reported sales of $22.5 million. Turning to gross margin. For the 9 months ended December 31, 2013, gross margin was 11%, or $1.9 million in gross profit, compared with gross profit margin of 22%, or $4.9 million gross profit, in the same period of fiscal 2013. Gross profit included the impact of contract losses aggregating $2 million, on a majority -- a majority of which were incurred on the initial units turbine-based components, we mentioned earlier, at our Ranor facility. These components were initiated during the first quarter of fiscal 2014 and are expected to be completed and shipped before the end of the first quarter of fiscal 2015. Selling, general and administrative expenses for the 9 months ended December 31, 2013, decreased to $4.7 million, or 27% of revenue, from a level of $6.2 million, or 28% of revenues, for the same 9-month period the prior year. This reflects a decrease of approximately $1.5 million, or 25%, over last year's SG&A levels for the 9-month period. The decrease in SG&A expenses was primarily due to reduced spending of $0.7 million for compensation and the benefits, $0.4 million for outside services, and $0.4 million for travel and business-related expenses in fiscal 2014. Net loss for the 9 months ended December 31, 2013, was $3.0 million or $0.15 a share basic and fully diluted. This was based upon $20.1 million shares basic and fully diluted outstanding, and it compares to a net loss of $1.3 million, or $0.07 per share, basic and fully diluted, on 18.1 million basic and fully diluted weighted average shares outstanding the same 9-month period last year. Net loss for the 9 months period included noncash expenses of approximately $1 million. Now for a cash flow recap, TechPrecision reported positive operating cash flow of $1.8 million for the period ended December 31, 2013, compared to a positive operating cash flow of $651,000 for the same period ended December 31, 2012. During the 9 months ended December 31, 2013, purchase of property, plant and equipment were $54,000 as compared to cash used in investing activities the prior year for property, plant and equipment of $395,000. During the 9 months ended 12/31/2013, the company paid down a net $1.1 million in long-term debt. The company's revolving credit facility was also paid in full on July 31, 2012. As previously disclosed, when the revolving credit facility expired on July 31, it was not renewed. As of December -- turning to cash and balance sheet metrics. As of December 31, 2013, cash and cash equivalents were $3.7 million compared to $3.1 million as of March 31, 2013. TechPrecision had positive working capital of $1.1 million after reclassifying all the company's $5.2 million in debt obligation as current liabilities. This compares with working capital of $3.1 million at March 31, 2013. You will find additional details in our filings submitted to the SEC. Turning a little bit to the -- to debt situation, which we are all tracking. As governed by the Forbearance Agreement, we entered with our primary lender on January 16, 2014. We utilized $840,000 of collateral enhancement we had on deposit with our lender to retire certain debt facilities, aggregating $840,000. With this offset now executed, we expect to conclude the March 31, 2014, quarter with a total debt outstanding of approximately $4.3 million compared to $5.2 million of the total debt we're reporting at the end of Q3. We also are in ongoing dialogue with a number of parties regarding the refinancing of our remaining debt facilities as called for under the Forbearance Agreement, and we anticipate achieving progress on the refinancing effort during the fourth quarter. From a backlog perspective, our sales order backlog at December 31, 2013, was approximately $22.1 million compared with a backlog of $16.4 million reported at March 31, 2013. This is a positive trend in bookings, and we look to build forward on it as we move forward. With that brief financial recap, I would now like to turn the call over to Bob Francis for an update on our operations at our Ranor division. Bob?

Thanks, Rich. First, let me discuss progress in some of our key verticals. As Len mentioned, Mevion commissioned, the world's first MEVION S250 Proton Therapy System at The S. Lee Kling Proton Therapy Center at Barnes-Jewish Hospital in St. Louis. In December, the first patient was treated, and they are continuing to treat over [ph] 2 more patients since December. The first patient has a rare type of cancer and was the first person in the world to receive proton therapy using the system. With this milestone complete, we expect Mevion will begin to ramp in full production expectations during the next 12 to 18 months. We are doing a significant amount of floating and see substantial opportunities across several defense contractors with many of these opportunities beginning in fiscal year '15 and continuing into future fiscal years. We're expecting that we will see release of orders before the end of Q4 fiscal year '14, but we can't guarantee this. We also expect they are still on a schedule to release larger missile programs during our fiscal year '15. The programs that provide us with the best future opportunities are at the top of the Navy's funding priority list as we continue to gain funding in the future. As Len stated, the aggregate opportunity from Mevion and defense-related customers is significant. But the timing for volume production remains several quarters out, and specific timing is challenging to predict. In the near term, we are focused upon executing on the one large and short-term contract we received in November 2013. This contract calls for all deliveries to be complete by May 2014. Due to this, we've actually ramped up the 50 temporary employees and will expect significant deliveries during Q4 fiscal year '14 and Q1 fiscal year '15. Now I will turn the call back over to Len for some additional remarks. Len?

Yes, thanks, Bob. Our fourth quarter 2014 should be materially better than the past several quarters due in large part to the large- and short-term project that we have discussed today and we discussed in our last call. And based on our current backlog plus identified opportunities and cost reduction efforts, we're confident that fiscal year '15, which begins April 1, should show significant improvements versus fiscal 2014. Our focus for the next quarter is to execute the significant orders in process, complete the refinancing and book some additional 2015 orders. We do remain confident the majority of the opportunities in our pipeline ultimately will translate into orders as we work to redirect the company strategically. We again thank our long-term shareholders for their patience as we work through these issues. And now I'd like to open the call up for questions.

[Operator Instructions] And the have a question from the line of Walter Schenker with MAZ partners.

I apologize if there's background noise as I'm in the car. Basically, 2 questions, one on Mevion and one on the Sapphire chambers. On Mevion, you indicated they had 11 units. I forgot the exact nomenclature. You have produced components for how many of those to this point? And do you have any sense as to what their larger backlog is? That's one question. And secondly, can you give us any thought about what $8 million of Sapphire chambers produce in usable volume? I realize it depends on what it turn it into, and how you dice it and cut it and everything else. But I think there has been a fair amount of questions as to -- if that might be sufficient equipment to fill [ph] very large plants going part [ph] might be required to be -- produce sapphire in a very large plant?

Sure. We'll start with Rich answering the Mevion question, specifically.

Yes. I'll try to give you color on Mevion, and I'll invite Bob to fill in since he's in regular contact with the Mevion team. Yes, the Mevion backlog right now is about $1.8 million. Would like to see that be much larger. Walter, can you repeat the question?

Out of the 11 units?

The 11, yes, if you look at their website, and this is featured on the Mevion website, they list 11 centers under active development. It's our belief that we have supplied components for a good number of 3 or 4 of those units. They are the most advanced. The rest of those units under development tend to be in some form of zoning early construction, and there's still an opportunity for us to get orders on those. Their backlog as they've communicated includes more than just the 11 units under development, and those units are roughly 22 units we understand to be their backlog. From a standpoint of the units that are most advanced in their development, obviously, the Siteman Cancer Center, which began treatment in December is the most advanced. Right behind that is Robert Wood Johnson, the Orlando facility and the Oklahoma facility that have received most if not all of the components for the system. Currently, the Siteman Center is the only one in clinical operation actively treating patients. And, I think, Bob illuminated the number of patients that have been treated.

Hey, Walter, can you mute your line as we respond because your background noise is really loud.

Done.

Just confirming what you said, Rich. We've delivered units through 4, through the fourth system for Mevion. We're currently manufacturing for the fifth and sixth systems and have delivered some parts for the fifth system. As -- And as far as the treatment goes, they have treated the 3 patients that are actually in the fourth and possibly the fifth. We haven't gotten confirmation of the fifth patient yet. As far as the chambers, I don't know if you want me to answer some of that...

That's right. I'll take that, Bob. But just one more thing on Mevion, I think it would be helpful for all investors and that is in terms of each one of these units, what is the size of the order that we would see in dollars for each unit? Do you have any sense, I mean could you give us a range of what that is?

For us, we are talking between $2 million and $2.5 million per system that we deliver to them.

Okay. Good. Then in terms of the Sapphire, Walter's question was with respect to what the $8.1 million worth of stuff that we're making might produce in terms of Sapphire? And, frankly, we don't know what that would be, and we can't tell you. We think we are only a small portion of the total facility that's being constructed.

[Operator Instructions] And we have another question from Tony Polak with Aegis.

Could you give us a little feel on nuclear, whether there's any business coming up on that?

Yes, Bob, maybe you can talk about that one.

I'm sorry. What was the question? On what?

Nuclear?

Nuclear, we are -- we continue to see some strong orders from Westinghouse, and we've been doing well with that customer, and we are -- they appear to be getting into a little more of an outsourcing situation because of their load, and they also are quoting more overseas that might lend to us being able to enjoy some other business there. We've also been pursuing several other customers in that arena. We have been dealing with AOS for the past couple years, and we're just in the process of completing delivery on the third and fourth AOS-100 casks, which are used for transportation of nuclear materials -- radioactive materials, and we are in the process of between now and the end of the fourth quarter also competing the first 2 AOS-50 casks. And we're hopeful -- we don't have a good backlog yet for next year in that, but we are hopeful that those will get into service and the NRC will see fit to, I'll say, demand or exact that these caskets used for all of that transport in the future.

Another way to answer that, Tony, is roughly about 10% of our backlog is nuclear-related, the backlog we reported at the end of December.

Right. Could you give us an idea of what the breakdown of the backlog is in the rest of it?

Yes, the predominant -- it's roughly about 28% to 30% defense and then the remainder precision industrial.

Could you give us a little more clarity on the preferred stock. It's going down. Is that because you're paying that off? Or because it's convertible into common, and it had been selling?

Yes. There is no coupon on the preferred. It is convertible into common, but it's only convertible into common to a level where the holder -- once the holder achieves 4.9% of the common stock outstanding, they are locked out from any further convergence. So there is somewhat of a meter on the pace at which they can convert. All right. And we and they obviously monitor that at each conversion. You can see that during the third quarter there was a number of conversions executed by that holder. And then you can also see in the subsequent event footnote that there is a number of conversions that were orchestrated in January and February subsequent to the close of the third quarter. And we've reported that volume. So at the end -- as we sit here on this call today, there's roughly $2.9 million of the preferred outstanding, and that converts into common at a rate of 1.307189. So that's what remains out there, but there has been a sizable amount of conversions for the last 2, 3 months.

So it's about 3.8 million left on that shares possible?

If you apply the conversion factor, yes.

. Our next question is from Ross Taylor with Somerset Capital.

Gentlemen, can you give us more background on the Navy contract, where we stand? You said, it's a portion of your backlog, but basically how many subs in the line [ph] are accounted for in your backlog, if any at this point?

We're currently executing on what's called Block-3 [ph] for the kind of event that we have from our customers, and that will continue. The Block-3 [ph] deliveries will continue through fiscal year '15. And what I spoke of earlier is Block-4 [ph], and Block-4 [ph] funding, we understand our -- the primes have received it, and they have told us that they are willing to be going out for best and final offers between now and the end of March and actually placing the orders and [indiscernible] by the end of March, and that remains to be seen that they will do that. But that Block-4 [ph] is for 8 to 9 subs worth of material, and we certainly would expect that we would be able to enjoy the same parts that we have on Block-3 [ph] on Block-4 [ph], and that would be work that would continue -- through 2000 -- calendar year 2018, 2019, in that ballpark.

And on a per sub basis, what kind of value are you carrying per sub program [ph]? If you carry this contract through?

The price tag for the Virginia-class sub is north of $2 billion. So we're a small piece of the total cost of that sub.

How small? I'm trying to figure out dollar-wise.

I would tell you that currently we're carrying 25% to 28% of our backlog is maritime-related, including the subs.

And how many subs are in that backlog right now?

The way the orders come to us, you can't necessarily discern that. We're making the components, and the primes are putting them into the ultimate deliverable to the government.

I mean, I'm just trying to get an idea of -- do you sell $1 million per sub, $500,000 per sub, $3 million per sub? And then also, looking forward, do you see the ability to significantly increase that and to what kind of magnitude?

I would say per sub, we're in the $500,000 to $1 million. I think that's a good very range across all the parts we produce for them. We do have competition for each of the parts that we have, and we've done fairly well with our customers on that. And I would expect that we'd be at least that level in Block-4 [ph] and possibly inching up a little bit more beyond that.

And, well, I have also, can you talk about basically looking forward the next 6 months or so, free cash generation. You actually have a fair amount of cash on the balance sheet at this point in time without a refi. You're not working with a working capital line, so it looks like you are carrying probably a little bit more cash that you might otherwise need to carry in the future. But with the one particular contract coming up, I would suspect that you should be able to generate a fair amount of free cash flow out of that.

Yes, the way it's going to work, Ross, is initially, the cash is going to get worked down pretty quick because that's a very significant contract. All that's happening very rapidly. It's going to be out and complete by the end of May. So there's going to be a period here where we kind of burn up the cash, and then we generate the free cash flow over the kind of, call it, first and second quarters of the next fiscal year. And we expect it to be fairly material in terms of its cash generation ability.

And what's the holdup on the refi?

Well, I don't -- wouldn't necessarily describe where we are as a holdup. I think -- as we've talked before, what we have been kind of work our way through is first get ourselves in a better position from a backlog perspective and an outlook perspective, so that as we talked to these professional sources of capital, we weren't talking about outrageous costs of financing or significant dilution for [ph] existing holders. So we've made that progress, I think, and we are in the process of examining several term sheets, several alternative proposals, and again, as we indicated [ph], we would expect to do something relatively soon. And we had a desire to do it sooner rather than later as we proceed through this significant order because, as I said, we will be burning up liquidity, and we will want to be in a stronger position going forward, both for that order and for the rest of the business that we hope to book. And beyond that, Ross, as you know, it has seen, last year, we entered -- reported in the 10-K that we have material weakness in internal controller of financial reporting. We're working to remediate that. We're trying to put in place a new financing that also can give us an opportunity to eliminate the growing concern opinion that we have in the past. So first, we are trying to pull all the pieces together in a logical way so that we not only get liquidity and financing we need, but it helps us build a better company and want the customers to feel much more comfortable when they make that.

And as a substantial holder, we would agree, but we also think that getting it done, getting rid of that growing concern, overhang is an important step to moving the stock forward and getting value recognition by the markets.

Yes. Well, we completely agree with you. And just to be clear, simply getting a financing in place does not necessarily overcome the growing concern issue. It's going to be somewhat based on our ability to achieve recent forecasts, and then, I think, examination of our outlook and kind of the risk associated with that. So there's more work to do than just the financing.

But we understand, but obviously, the financing is -- once that is done, and done at a reasonable level, I think, quite honestly, from the market perspective, it takes away that risk.

We're right there with you, and Rich understands that as soon as we finish this call, the priority is to get the refinancing done.

Well, Len promises to take [ph] me to the train so I could get right on it.

Our next question is from Allan Ratchet [ph], private investor.

I want to thank you for doing a good job of shrinking expenses last quarter, but seems to me, it's a top line issue more than anything else after the short-term refinancing thing's out of the way. Could you provide a little color on what if anything you expect with regard to follow-up from the $8 million Sapphire chamber order that's in progress right now? There's been speculation that that's just a small fraction of what the ultimate requirements would be for this end customer.

Yes. That's -- well, we have no knowledge of that, and clearly, the end user is not about to say what their plan is. They're pretty secretive about those sorts of things, so we don't know. But we read the articles, and we acknowledge that the product -- the Sapphire products, which if you've had an iPhone and drop it and see kind of see what happens, you understand the potential value here. So we think that there's significant upside opportunity. And in my earlier comments, what I suggested was that our focus is on trying to be the very best supplier of the products that we can supply into this project because we think that will be the key in satisfying the ultimate customer and putting us in a favorable position as they begin to use this product in more devices, not only phones but maybe some other things as they move forward. So we believe that this is a contestable [ph] order for us to pursue, for us to bring it as opposed to making it in China, bring it to the U.S., where we can make it at the absolute highest quality, that we have the best production control so that we have timely shipments to them. And therefore, we're working really hard, bottom line, to position ourselves as best possible because we believe without any specific knowledge that there's a huge upside opportunity. But we can't measure it. We don't know where it is. And we don't know whether -- what else might come out of it, to be fair. We think we're doing what we can do to be best positioned to capitalize on it. We read the articles just like you do, and it gives us great, great encouragement.

But no preliminary discussions with GT with respect to follow-ons?

No. And there won't -- just to be clear, again, you've read the article about who the ultimate customers. There's not a lot of communication and there won't be from any of those folks about what their plans are or their kind of next step. But it will happen when it happens. And the way you'll see it in our business, is you'll see it in our backlogs if we get more opportunities.

There are no questions at this time. Please, continue with any closing statements.

Well, first of all, thanks for the questions we did get. Thank you, all, very much for your time and attention and your investment at TechPrecision, and the continued opportunity to work for you. We'll keep you updated as we make progress with redirection of the company, and stay tuned for announcements on refinancing and other matters as we complete them. Thank you very much.

Ladies and gentlemen, that does conclude the TechPrecision Corporation third quarter fiscal 2014 earnings conference call. Thank you for your participation, and you may now disconnect.