TechPrecision Corporation (TPCS) Q3 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the TechPrecision Third Quarter 2017 Earnings Call. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host Brett Maas, with Hayden IR. Sir the floor is yours.

Thank you. On the call today is Alex Shen, Chief Executive Officer; and Tom Sammons, Chief Financial Officer. The call is also being simulcast on the company’s web site at www.techprecision.com. Before I begin, I like to remind our listeners that management’s remarks may contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements as contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and 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, February 14, 2017. TechPrecision assumes no obligation to revise or update these forward-looking statements. With that out of the way, I like to turn the call over to Alex Shen, Chief Executive Officer, to provide opening remarks. Alex?

Thank you, Brett. Good day to everyone, and thank you for joining us. This was another quarter of operational and financial progress, as we delivered consistent and increasing profitability along with a significant increase in revenue. Our third quarter net income of $1 million doubled our year-to-date income for fiscal year 2017. We continue to benefit from our consistent sharp focus on productivity initiatives and topline growth with key customers. We have significantly improved our balance sheet, compared to March 31, 2016 levels. We reported $3.8 million in cash and $5 million in working capital at December 31, 2016. In addition, we refinanced a portion of our long-term debt in December, reducing the annual interest rate from 10% to 5.21%. We have clearly demonstrated improving trends and profitability, working capital, and cash. We expect to increase productivity and maintain profitability levels on an annual basis. Now, I’d like to turn the call over to Tom Sammons to tell us more about our third quarter financial results. Tom.

Thank you, Alex. Net sales were $5.3 million or $1.8 million higher when compared to the same fiscal quarter one year ago. Net sales in our defense markets increased by $1.9 million, on higher shipments of components to our largest customer, and net sales in our precision industrial markets increased by $0.2 million, primarily on higher shipments of components for medical systems. Net sales in our energy markets decreased by $0.3 million as the company worked to replenish the backlog. Our energy market backlog has increased by 2.3 million since March 31, 2016. Gross profit increased for the third quarter of fiscal 2017 to $2.1 million, compared to $1.1 million for the third quarter of fiscal 2016. Total selling, general, and administrative expenses or SG&A increased by $1.2 million for the third quarter of fiscal 2017. Non-cash share-based compensation totaled $1.1 million for the third quarter ended December 31, 2016, as the company remunerated its Board members and Chief Executive Officer for past service. Share-based compensation totaled $9,873 for the third quarter ended December 31, 2015. Professional fees increased by $134,952, primarily for outside advisory services rendered in connection with the company’s annual meeting in December 2016 and the expansion of the size of our Board of Directors. Salaries and related expenses decreased by $8,981 in the third quarter ended December 31, 2016. The company recognized a gain of $1.1 million in our fiscal third quarter ended December 31, 2016 related to the settlement of a claims assignment. Our net income for the third quarter December 31, 2016 was approximately $1 million or $0.03 per basic and fully diluted share compared to $12,003 or zero per basic and fully diluted share for the quarter ended December 31, 2015. Third quarter fiscal 2017 EPS is based on average weighted share count of approximately $28.2 million and $28.9 million basic and fully diluted shares, respectively. The net impact to our third quarter net income was a gain on the settlement of a claims assignment and the non-cash share-based compensation expense was a gain $51,512. Our recent debt refinancing activities have lowered our interest rates. As a result interest expense for the quarter ended December 31, 2016 was $207,521 or 29% lower than interest expense reported in the quarter ended December 31, 2015. Turning to the balance sheet, our working capital increased by $4.5 million to $5 million at December 31, 2016, compared to $0.5 million at March 31, 2016. As Alex mentioned earlier, we finished the quarter with $3.8 million in cash at December 31, 2016, representing an increase of $2.5 million from March 31, 2016 fiscal year end balance. Cash flow provided by operations was approximately $1.9 million in the first nine months of fiscal 2017 as a result of our improved operational performance. We borrowed an additional $6.2 million under new debt agreements and used approximately $5 million of cash to pay-off the old long term debt. We invested $452,820 in fixed property, planned equipment during first nine months of fiscal 2017. We received $614,452 in our fiscal third quarter ended December 31, 2016 related to the claims assignment. Our sales order backlog at December 31, 2016 was approximately $15.6 million, compared with a backlog of $19.8 million at March 31, 2016. We are working diligently with our customers to replenish our backlog. With that, I will now turn the call back over to Alex. Alex?

Thank you, Tom. Our fiscal 2017 third quarter illustrates that our witness is subject to uneven or lumpy revenue, as well as lumpy customer order stream. Through our efforts with one specific client, we achieved a 52% increase in net sales for the quarter, compared to the same quarter one year ago. Overall, we have achieved a 14% increase in net sales for the first nine months of fiscal year 2017, compared to the same nine-month period one year ago. These lumpy revenue and lumpy customer order streams in our business are not likely to change in the future. Shipment timing changes also can easily affect the performance of one or two quarters. In my opinion, the best way is to look at our business results over a 12-month period. Moving forward, we will continue our focus on winning new contracts with our established customers in the defense, energy, and precision industrial markets utilizing our core competencies and knowhow in custom, large scale, high precision fabrication, and high precision machining to maintain our position as a valued high quality supplier. In particular, we see meaningful opportunities in the defense market. Additionally, we will continue to pursue contracts in the aerospace, nuclear, and precision industrial sectors, while continuing to execute on operational run rate improvements to increase our gross margins and cash flow. I would like to open-up the call now for questions and answers.

Thank you. [Operator Instructions] Okay. And the first question comes from Ross Taylor [ph]. Please state your question.

Thank you. Excellent quarter, Alex. I like to first, since you haven't released the queue yet, can you give us what the debt structure looks like right now?

I would like to turn this over to Tom, Ross. Thank you very much.

The Q has - it should have been released a few minutes ago, but…

Perhaps it is, but it is not up on the [indiscernible].

Yes. Well currently we have the two financings, one from People's Capital and one from Commerce Bank, and People's Capital is about 3.4 million and Commerce is 2.85 million.

Okay and the rate on the People's Loan in the rate on the Commerce Loan?

People's is 7.9, Commerce is 5.21.

Okay. Is there is a thought with 3.8 million in cash and what are you looking at using that cash for at this point in time Alex?

Right now I don't think we have too much room to use too much of it. We’re really needing to - because of the lumpiness of the business, I think it’s good to have a little bit of a reserve.

That's true although when you really kind of look at it, you realize that you have taken the company from 5 million, 6 million in debt where to - down to a net debt level of what about 2.54 million, so, and I expect - you expect to be generating free cash flow as you roll forward through the next few quarters?

That's our aim, absolutely.

Yes. And the increase with the difference contract was that specifically related to projects that are ongoing particularly and I know you can't necessarily comment on whether it was submarine related, but I would assume that it was likely out of that side?

Yes.

And so should we expect to see going forward, particularly given the Navy is looking at increasing production rate of submarines, that business actually not just stabilizing at a higher rate, but actually possibly growing from this rate?

We would like to see the growth. We are seeing a lot of opportunity in front of us from the Navy and from the defense sector overall.

Overall?

Yes.

I mean this actually, this is a breakthrough quarter in many ways because you for the first time, you kind of broke out of that, first time in long time you broke out of that 3 million, 3.5 million annual run rate, so I want to congratulate you on that, I think it’s an important step.

Thank you. I think, I tried to temper that with, even though there was quarter-over-quarter 52% increase it is 14% over the nine months and because of the lumpiness and how it all coalesced together in the same quarter, we had a quite a large jump all happen all at the same time. Perfect storming to our advantage.

But you would expect that you should be able to continue to grow the top line as we work forward?

That’s what we want to do, absolutely.

Okay. And I am going to through in one comment. I did not provide [ph] you getting stock options nor your operating team, but have as a large shareholder, I have real trouble with most of the carryover members of the board getting granted substantial stock options, when I feel that they were largely responsible for the situation the company found itself in. And the fact that they rewarded themselves something, strikes me as somewhat undemocratic. And - or more than somewhat undemocratic, so I wanted to voice that and say that, when the stock was trading at $0.09, $0.10, and $015 the lack of insider buying was noticeable and I think it was unconscionable and I would have preferred to have seen them actually put some of their own money, not just sit around the boardroom and after the - you’ve turned this company around and really got this thing going, award themselves substantial shares for a job that they think was well done, but I think most shareholders would argue with sub optimally done.

Understood. I am writing your comments down carefully. I may not give you a counterpoint. So, you know I took the company over at a very low point and the point that I would like to make sure everybody understands is, paid them nothing in the whole time this carry over board was there. So, gave them absolutely nothing and still held them in place.

Well I think as a large holder Alex, I know a lot of us would have liked to have seen them replaced and would have been willing to replace them with ourselves at no compensation, other than the fact of doing the job right. So, I do appreciate your comments, I understand that you work for these people, but as a large shareholder I just wanted to - known that we were not happy with the way the whole thing was handled. We were not happy with the lack of action by the board even in the open market where, as I said, where literally you could buy thousand shares for the prize of a latte was kind of crazy to not see [indiscernible].

Understood.

Okay, thank you sir.

Thank you.

And there appeared to be no further questions at this time.

Thank you all. We’ll now close the conference.