TechPrecision Corporation (TPCS) Q4 2015 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to the TechPrecision Corporation Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Brett Maas of Hayden IR. Thank you, sir. Please go ahead.

Thank you. On the call today is Alex Shen, Chief Executive Officer, and Rich Fitzgerald, Chief Financial Officer. The call is also being simulcast on the Company's Web-site at www.techprecision.com. Before we begin, I'd like to remind our listeners that management's remarks may contain forward-looking statements which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor 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 represent management's estimates as of today, June 29, 2015. 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 Alex Shen, Chief Executive Officer, to provide opening remarks. Mr. Shen?

Thank you, Brett. Good afternoon to everyone and thank you for joining us. Fiscal year 2015 was the beginning of our turnaround under my watch as I started on June 23, 2014. The successful turnaround is about focus, good focus and good success. During the first 30 days of my tenure, I focused to rebuilt relationships, relationships with our key customers and relationships with our supply-chain partners. In the second quarter of fiscal year 2015, I finished meeting and speaking in person to each customer and each supply-chain partner with no exceptions. I have realigned our customer focus, primarily targeting defense and aerospace clients who continue to value our expertise. My secondary focus is on nuclear industry clients, with a third area of focus on other industrial clients that benefit from our core competencies. This focus continues to enable us to better communicate our value proposition and to win with clients that know us and value our services. By the third quarter of fiscal '15, quoting activity was back on solid footing. As we rebuilt our relationships, we sharply focused and took decisive actions on productivity initiatives, realignment of resources and top line growth with key customers. As a result, we have improved profitability on a sales volume that was 13% lower than the previous fiscal year. We ended fiscal year 2015 with a 26% year-over-year decrease in selling, general and administrative expense and a positive gross margin of 13% compared to a negative 3.5% for the previous fiscal year. Also, we achieved a key milestone in successfully refinancing our legacy bank debt through two separate financing events with asset-based lenders, enabling us to eliminate certain liquidity risks associated with the legacy bank covenant defaults giving us the time and flexibility to rebuild our business, more optimal [indiscernible] customers and customer orders. Now I'd like to turn the call over to Rich Fitzgerald to discuss our fourth quarter and full year financial results. Rich?

Thank you, Alex. First I'll cover operating results for the fourth quarter of fiscal 2015 and then I'll cover full year results. For the three-month period ended March 31, 2015, net sales were $3.9 million compared with $3.6 million in the same fiscal quarter one year ago. This increase was primarily driven by higher sales volumes with defense sector customers that were partially offset by lower sales volume customers within both the nuclear and precision industrial sectors. Gross margin for the quarter ended March 31, 2015 was 22% of net sales or gross profit of approximately $0.9 million, compared to a negative gross margin of 74% of net sales or a loss of approximately $2.7 million in the fourth quarter of last year. The year-over-year improvement was the result of a $3.1 million contract loss reserve recorded in Q4 of last year relating primarily to a partially canceled order and dispute with a customer. There were no similar contract losses in Q4 of fiscal 2015. Turning to expenses, selling, general and administrative expenses for the fourth quarter were $1.2 million, which compares with $1.4 million of SG&A incurred in the fourth quarter of fiscal 2014. The overall $0.2 million reduction in SG&A related to spending represented 15% reduction compared to Q4 of last year. We continue to pursue a process to recover at least a portion of the contract losses we recorded last year on an order partially canceled by a customer. However, our efforts are now governed by that customer's Chapter 11 bankruptcy proceeding, which adds additional uncertainty to both the timing and the amount that may ultimately be recovered. Net loss for the quarter ended March 31, 2015 was $0.7 million or $0.03 per share both basic and fully diluted. This is based upon a share count of 24.7 million shares both basic and fully diluted and compares to a net loss of $4.1 million or $0.19 per share basic and diluted share for the year ago quarter. Fiscal 2014's per share amounts are based on 21.2 million basic and fully diluted shares outstanding. Moving on to the full-year financial results, for the 12 months ended March 31, 2015, net sales decreased 13% or $2.8 million to $18.2 million from the prior year's net sales of $21.1 million. This decline was primarily driven by declines in sales volumes of $1.9 million with energy segment customers and $1.1 million to precision industrial customers. These volume declines were partially offset by increased sales to defense and aerospace sector customers. Turning to gross profit, for the 12 months ended March 31, 2015, gross margin was 12.7% or a gross profit of $2.3 million compared to a negative gross margin of 3.5% or a loss of approximately $702,000 in the same period a year ago. The year-over-year margin improvement was driven by the absence of contract losses during fiscal 2015 while two customer orders generated contract losses in fiscal 2014 that negatively impacted last year's results. As I mentioned earlier, we are continuing our efforts to recover a portion of those prior year contract losses, specifically as it relates to one contract on a customer's partial order cancellation. Selling, general and administrative expenses for the 12 months ended March 31, 2015 decreased to $4.5 million or 25% of net sales, from $6.1 million or 29% of net sales from the prior year. This reflects a decrease of approximately $1.6 million or 26% over last year's SG&A spending. The decrease in SG&A expenses was primarily driven by reduced headcount and compensation related expenses of $1.3 million. Additionally, reduced Board of Director fees and travel related expenses were lower by $0.3 million. Net loss for the 12 months ended March 31, 2015 was $3.6 million or $0.15 per share basic and diluted share. This is based upon 24.1 million shares basic and fully diluted outstanding, and compares to a net loss of $7.1 million or $0.34 basic and diluted share on [indiscernible] approximately 776,000 for the fiscal year ended March 31, 2015 compared to positive operating cash flow of approximately $203,000 for the same period ended March 31, 2014. During the 12 months ended March 31, 2015, net purchase of property, plant and equipment were approximately $42,000 compared to net purchases of approximately $65,000 in property, plant and equipment in the prior year. During the 12 months, the Company had net borrowings of approximately $1.5 million compared to debt repayment of approximately $2.1 million in the prior fiscal year. As of March 31, 2015, cash and cash equivalents were $1.3 million compared to $1.1 million as of March 31, 2014. We concluded the March 31, 2015 quarter with total debt outstanding of approximately $5.7 million compared to approximately $4.2 million of total debt in the same period a year ago. From a backlog perspective, our sales order backlog at March 31, 2015 was $14.3 million compared to an adjusted backlog of $17.4 million at March 31, 2014 which excludes orders canceled by a customer that filed for bankruptcy subsequent to March 31, 2014. Now I'd like to turn the call back over to Alex. Alex?

Thank you, Rich. As we ended fiscal year 2015, we have been capturing near-term and long-term opportunities that fit our manufacturing model. We are continuing to land new orders, continuing to execute on our manufacturing agreements and continuing to maintain a reasonable cost structure. Moving forward, the key is to maintain our sharp focus that got us to this point of our recovery. I plan to increase our backlog and focus on new business contracts which utilize our core competencies in custom large-scale high-precision fabrication and high-precision machining with our core customers which leverage our established expertise, our established certification and our established qualification in the defense, nuclear, energy and precision industrial sectors. We have a compelling opportunity in front of us. We must continue our initiatives that we have in place to do it right the first time, to maintain our reductions in unplanned overtime and to execute and maintain operational run rate improvements to improve gross margins and increase the amount of cash generated from operations. I would now like to open up the call for questions and answers.

[Operator Instructions] Our first question comes from the line of Ross Taylor with Somerset Capital. Please proceed with your question.

Alex, first thank you for having a conference call, it's good to have the chance to both hear your story and how you see things changing and going and also to have the chance to ask questions. Off the start, you're talking about the initiative of growing sales and growing backlog. Where do you see that coming from and what kind of level of backlog growth should we expect to see over the coming six months or so?

Where it's coming from? It should come from our primary and our secondary focus sectors which is going to be in our defense and aerospace primarily, and secondarily from nuclear. At what level? I find that a little bit hard to predict at what level but I think it's a good idea to increase it a little bit more because we're just running pretty close. Having said that, the types of contracts that we are now securing are a very good fit for us because what I'm trying to do is secure contracts that utilize both our plants, our high precision fabrication as well as our high precision machining, so we can utilize both plants with the same product traveling through both plants. That's a much better utilization of our resources because we can plan much better in succession to each other. I'm not answering your second question.

No, you're not. Because what I'm trying to get at, do you foresee the ability in this fiscal year to get the Company to where it presents a profit on a GAAP basis?

That's what I'm going to be trying for. I'm going to try very hard to avoid announcing a foreseeing.

Okay. Additionally, in the past we've talked about the idea of the working capital issue and the potential to transfer some of the working capital burden, historically a lot of the cost of the Company are tied up in [metal] [ph] I think that nature which you would buy and work on for your customers, has there been any movement in the ability to have customers actually cover some or all of the price of the materials that are coming in?

There has, and as is public knowledge, many of the defense contracts that are out there authorize funding for materials and that is passed down to the subcontractors like Ranor. So we take advantage of that and we take advantage of milestone invoicing arrangements so that when we do secure the materials then we get paid along the way. So the rule of subcontracting is to always get paid along the way. I have to pay the guys and I have to pay for materials to my supply-chain partners. So milestone billings help that extensively and significantly and we have had success with that due to our focus on contracts that will provide that. But your question is, yes.

Yes, and so that's a change from where you had been – the Company had been in the past?

That is a change, yes.

Okay. Last and I'll let some others ask questions. When you came onboard, you had in the past you've worked with effectively a team, for want of a better phrase. Have you felt that the situation is safe enough that at this point you've brought some of your team into work with you here at Ranor and TechPrecision?

I have hired one of my previous team members and I find that most of the Ranor team in particular is – they are a bunch of craftsman that really know and are confident in producing high precision product for our customers and it's been a delight to work with the existing Ranor management team. I've done some reallocation and done some headcount reduction and taken some people off, but by and large it's a very good team that's in place and I'm very confident in their abilities to continue to work with me. I've only brought one person in from my previous teams.

Okay, so you have brought someone in, which is interesting in and of itself. And lastly, obviously you're looking at – you've done some refinancing and the like, and I know it's very hard to talk about the potential of the Chapter 11 situation but obviously that's [ought to] [ph] drive one of the – the value you'll receive out of one of the financings. Is there any thought on time horizon for the milestones you need to achieve to get that payment or to free that payment up?

I'm more in a wait and see mode at this moment. I don't have a great idea of when that timing may happen. Having said that, I don't count on that to happen and the idea is to survive without. Rich, would you like to add any more color?

Thanks, Alex. Ross, what we're following in that bankruptcy is, there was originally a due date of June 4 this year for them to provide their initial Chapter 11 case to the court. That has been deferred until September and I'm not sure they've taken a specific date in September yet but they've got the rest of the summer continue working on their initial Chapter 11 plan, so we won't see much coming out of that bankruptcy proceeding. That said, if we look at Citigroup, who we partnered with on the sale of our claim, they've amassed a pretty healthy position in that bankruptcy and are one of the larger creditors and fairly active within the bankruptcy proceeding. So I think that may allow us to see an earlier point in the queue or resolution queue than we might see on our own, but again as Alex said, with that initial Chapter 11 plan not due till the end of – till sometime in September, it's really hard to handicap when we might see a resolution or a ruling on where that will sit.

Okay, so you don't foresee the need to have that to get – TechPrecision is viable without that resolution at this point in time?

We do not foresee a need.

Okay, cool. I'll let some others – the market doesn't believe you but it seems like you've done – you and your team are doing a great job getting this thing turned around. Thank you.

[Operator Instructions] Our next question comes from the line of Walter Schenker with MAZ Partners. Please proceed with your question.

Just picking on that and I'll move forward, in your 8K which discussed your partnership on trying to recover that receivable, that money you received in advance on that is not included in the balance sheet obviously that you showed as of the end of March?

That's correct, Walter, it was a late April transaction when we consummated that arrangement.

And if one looks at the 8K, not a loaded question [indiscernible] answer, the total amount that they are involved with, is the total claim or are you going to claim outside of that?

It's the total claim, so the $3.7 million claim and we received about $0.5 million advance on the sale of that claim to Citigroup.

Okay. And the $1.1 million is just another number within it?

[We then take a number] [ph] like $1.1 million and there was a holdback of 55%.

Exactly, and we received in advance net of the holdback.

Okay. So in theory, we don't know – your claim is really much larger claim than the $0.5 million that you've received?

Correct.

Okay. Alex, you've now been [indiscernible]. As you look at the business given the reestablishment of relationships, what are you trying to put in as a gross margin in your new contracts as you're doing it now today as a more stable Company?

That would be telling, wouldn't it?

It's more than 13% of that.

That's probably a very good idea that you have there, Walt.

Okay. And on the cost structure, if we look at the March quarter, you've accomplished most of what you want on the cost structure?

I have.

So the key issue going forward is revenues and improved gross margins, not costs?

Yes. The key really is to maintain our focus and driving the gains that we initially secured with higher efficiency, better utilization and what I was talking to Ross earlier about getting contracts that can both utilize our machining plant as well as our fabrication plant securing a contract and a product that will remain with us and travel through both plants and effectively utilizes both facilities.

Okay. And those facilities are in two different buildings or two different operations at Ranor?

Actually there's three buildings but the two main ones are one for high precision fabrication and the other one for high precision machining.

Okay. And looking at the types of contracts you're getting, these were at some point the multiyear contracts or I mean what kind of backlog, it's typically a six month backlog, a one-year backlog, 10-year backlog, what type of stuff goes into that duration type into that backlog?

They are multi-year contracts. That is correct now.

Okay. And just the last question, and maybe it's for Rich, when you did your asset-based lending and put it in place, they lent you X dollars against those assets as collateral. Have you and they negotiated on it? Can you give us some sense because they obviously didn't lend 100 cents on the dollar, sort of how they look at how much they are willing to lend against those assets?

Yes, Walter, they tended to be in the sort of 60% to 70% loan-to-value.

Okay. So if they were to lend you $5 million, that would probably mean they thought that those assets are worth $7.5 million [indiscernible] round numbers, [indiscernible] two-thirds of – they lent you roughly two-thirds? If I lend you $5 million, I thought the assets probably were $7.5 million.

And it's a rough order. I mean the two ABLs use different metrics, they are different types of funds and different types of players, but rough order on a blended basis that's kind of the loan to value metric you're seeing on the [flagship] [ph] facilities with these types of lenders.

I was just trying to get a sense of how someone independent might look at the assets in the business to put some value, conservative value on them. Thank you.

Thank you. Ladies and gentlemen, at this time I would like to turn the floor back to management for any closing comments.

Thank you all for your time today. We do look forward to updating you on our progress during our next call. Thank you very much.