TechPrecision Corporation (TPCS) Q3 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the TechPrecision Corporation Third Quarter 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brett Maas, Hayden IR. Thank you. Mr. Maas, you may begin.

Thank you. On the call today is Alex Shen, Chief Executive Officer; Tom Sammons, Chief Financial Officer. The call is also being simulcast on the company's website, 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 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 represents management's estimates as of today, February 13, 2018. TechPrecision assumes no obligation to revise or update these forward-looking statements. With that out of the way, let's 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. Net sales for the third quarter of fiscal 2018 were $3.6 million, a 32% decrease when compared to the same quarter 1 year ago. We suffered a loss from operations of approximately $174,000 in this quarter, our first such quarterly loss since the quarter that ended March 31, 2015. As I have stated before on a previous earnings call, our business is subject to uneven or lumpy revenue, lumpy customer order streams and a lumpy mix of lower and higher margins. This lumpiness in our business is not likely to change in the future. This lumpiness can easily affect the performance of 1 or 2 quarters. Clearly, our third quarter loss from operations was impacted by lumpiness. Today, I want to share with you 2 specifics of lumpiness that Ranor experienced this quarter: first, defense customer appropriations and funding delays resulting in lower order volume; and second, a higher mix of lower-margin shipments. Looking ahead, we expect a strong pipeline of business once the defense customers' appropriations and funding delays are resolved. As of today, we have in place certain agreements which release funding for materials acquisition in advance of new orders to build components for a number of our key customers. These specific new orders are valued at multiple-7 figures once full funding is released. Now I'd like to turn the call over to Tom Sammons to tell us more about our third quarter and 9 months year-to-date financial results. Tom?

Thank you, Alex. As Alex noted, net sales for the third quarter of fiscal 2018 were $3.6 million or $1.7 million lower when compared to the same quarter a year ago. Net sales in our defense market increased by $1.6 million -- I'm sorry, decreased by $1.6 million when compared to the same quarter a year ago primarily due to lower shipment volume and a slowdown of project activity caused by customer funding delays. Net sales in our precision industrial market increased by $0.3 million, while net sales in our nuclear market increased by $0.2 million when compared to the same quarter a year ago. Gross profit was $0.4 million, a decrease of $1.6 million when compared to the same quarter of fiscal 2017. The decrease can be attributed to lower sales volume, higher shipments of low-margin products and unabsorbed overhead costs in connection with the slowdown in project activity. Our net loss for the quarter was approximately $691,000 or $0.02 per share basic and fully diluted for the quarter ended December 31, 2017, as compared to a net income of $992,000 or $0.03 per share basic and fully diluted for the quarter ended December 31, 2016. The third quarter of fiscal 2018 includes a $485,000 noncash discrete tax expense, a result of a revaluation of the company's estimated net deferred tax assets to reflect the new 21% U.S. federal statutory tax rate as provided under the Tax Cuts and Jobs Act, recently enacted on December 22, 2017. For the 9 months ended December 31, 2017, our net sales increased by 3% to $14.1 million. Gross profit was $3.6 million or a 29% decrease from the same period a year ago. Our gross profit and margin suffered due to the third quarter slowdown and higher shipments of low-margin products mentioned earlier. Income from operations was $1.4 million, a 48% decrease when compared to the same period a year ago. For the 9 months ended December 31, 2017, we recorded tax expense of $946,000. This tax expense includes the $485,000 noncash discrete tax expense that was booked in the third quarter. Our tax expense is primarily a noncash expense, as we continue to utilize our deferred tax assets to offset any tax liability. Cash paid for income taxes was $30,000 for the 9 months ended December 31, 2017. The company does not expect to make any other significant tax payments for the remainder of the fiscal year. Our net income for the 9 months ended December 31, 2017, was approximately $101,000 or $0.00 per share basic and fully diluted, for the quarter (sic) [ 9 months ] ended December 31, 2017, as compared to a net income of $2 million or $0.07 per share basic and fully diluted for the quarter (sic) [ 9 months ] ended December 31, 2016. Year-to-date fiscal 2018 earnings per share is based on an average weighted share count of approximately 28.8 million and 29.6 million for basic and fully diluted shares, respectively. Turning to the balance sheet. We finished the quarter with $3 million in cash at December 31, 2017. Our working capital increased by $393,000 to $5.4 million at December 31, 2017, compared to $5 million at March 31, 2017. Cash flow provided by operations was approximately $1.3 million in the first 9 months of fiscal 2018. In addition, we used approximately $900,000 of cash to purchase new machinery and equipment that was placed in service during the first 9 months of fiscal 2018. With that, I will now turn the call back over to Alex. Alex?

Tom, thank you. Primarily, TechPrecision serves the defense industry and more specifically naval submarine manufacturing. We continue to see meaningful opportunities in this sector. Let me share 3 pieces of information to illustrate the meaningful opportunities. First, for the 15-year period 2017 through 2031, the submarine shipbuilding outlook includes 28 Virginia class fast-attack submarines, plus 12 Virginia payload modules and 2 Columbia class submarines. The Department of Defense base budget is reported to be $523.9 billion, with the Columbia class submarine program being the #1 priority for the U.S. Navy. That's the first point. Second, the U.S. Navy has awarded a $5.1 billion cost-plus fixed-fee contract for the integrated product and process development design completion for the lead Columbia class ballistic missile submarine. This contract also includes component and technology development, missile tube module and reactor compartment bulkhead prototyping and manufacturing efforts; and United Kingdom strategic weapon support system kit manufacturing for the Columbia class ballistic missile submarines. That's the second point. Third, a $432 million contract modification has been awarded by the U.S. Navy, with a potential value of $900 million through November 2018, to provide research and development and lead yard services for Virginia class nuclear-powered fast-attack submarines. As I mentioned earlier, we have in place certain agreements which release funding for material acquisition in advance of new orders to build the components for a number of our key customers. These specific new orders are valued at multiple-7 figures once full funding is released. Our backlog at December 31, 2017, was $11.2 million compared to $15.8 million at March 31, 2017. These specific new orders valued at multiple-7 figures will be additive to our backlog. 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 of ARS Investment Partners.

First, I'd like to commend you on the job you've done since you've come over to the company. This quarter was a little bit disappointing on a number of levels, but it seems to me to be a transitional quarter for the company between what had been and what should be, had been a more difficult path and should be an exceptionally promising one. You mentioned both Virginia class and Columbia class boats. Are -- on those boats, which of those hull frames is more available to TechPrecision?

That's a good question. I think it remains to be seen because Columbia class is not completely -- designed fully yet, so therefore it follows that it's not completely sourced. So the people that will be doing the outside manufacturing other than the shipyards are not completely decided at the moment. So the advanced funding has come through a bit, so the advanced cycle of material acquisition has started. Overall, the size is like 3 to 1. There are 16 Columbia class submarines scheduled for the United States. There are more scheduled. There are several more scheduled for the U.K., not as many as the U.S. The Virginia class has probably more, a number of fast-attack submarines. There are 2 different classes of submarines. I think it's hard to quantify the answer to your question because that really remains to be seen. The better cadence of manufacturing is obviously in the Virginia class attack submarines. The block 4, which is winding down -- as far as the material procurement and outside-manufacturing pieces like we do, is winding down. The procurement activity for block 5 is starting up, and we're at that gap time now. The cadence for block 4, which is 10 submarines, was cadenced to be approximately 2 a year. The U.S. Navy's plan of record is wanting to do the same for block 5, so as far as cadence wise on the shipbuilding side, the shipyards, it's a smoother build, but that doesn't mean they're going to buy that way either. So we have opportunities in both. There are very large opportunities.

And I would think that, as we look forward -- Columbia class, you talk about 16 boats. There's also talk about the navy feeling that they want to build. When that program is done, they want to build Columbia class boats as cruise missile carriers or volley ships. And that would extend -- it's probably -- it seems to me what you're looking at is a situation where internally we -- you've been investing a great deal of money -- or relatively a great deal of money in CapEx. You obviously see substantial upside opportunities in markets that you can appeal to. I would assume that CapEx is not just replacing or updating in-house capacity already existing but adding capacity to do new things and more things for the navy.

Not just for the Navy but in general. The -- even if we replace one machine that exists and scrap out that machine with a new machine, the -- it still results in additional capacity and capability usually. It's not a 1 for 1. We would probably replace a machine but end up with more efficient machining; or just a updated, modernized, more super-duper machine. It's not really a 1 for 1. It's probably a 1.2-for-1 trade. The age of our machines is quite old. Some of them, I think, are much older than me.

Which makes them almost as old as I am, Alex.

[ I guess so ].

So but looking -- so looking at this, as you're seeing this, you're talking about potential to meaningfully build your backlog. It's not only meaningfully build your backlog, but once you're designed into a vessel that's being built by Electric Boat, you basically -- it's almost like being a subcontractor to Boeing. You're there for an extended period of time, but it's not -- they do not routinely change subcontractors. Is that correct?

It's risky to change, but it's up to us as the subcontractors to minimize our risk to the shipyards and to the sailors that these ships protect. So if -- yes. It -- I need to do a good job so that I can retain the business which I had basically last year. These bids, we're still competing. We need to re-earn the business every time and it's no small matter, but you're right. Once you're in, you become a little bit harder to dislodge. The other factors that we need to consider is how many are building these parts. Maybe there's 2 suppliers that have been selected to build these 10 parts, so each guy gets a portion. It's their risk mitigation policies and practices that we need to be aware of and to re-earn the business every time, but the advantage goes to whomever is building now.

Right. And it would -- what I'm kind of getting out of is -- I'm trying to -- you -- internally, you guys see the opportunity in front of you as being an extremely lucrative one running for multiple years and that the problem we've been having is that it's more Washington politics have kept that -- the pot of gold that you guys -- that you and your board see from being realized as quickly as you would have liked because there have been -- we've been working on continuing resolutions and budgets have fallen. But yet right now we're in a situation where effectively the Navy is going to get more than what they originally had expected to get out of this new budget. So I'm struggling to see -- I understand you're a naturally reticent human being. You don't like to pump your stock, but I'm looking at what I see going on in the submarine program as being a huge multiyear meaning potentially a 10-, 12-year trail of revenue stream that should be meaningful. Am I wrong?

You are not wrong. The other piece that I was alluding to earlier was the gap between the block 4 and the block 5 Virginia class. So the -- and between the wind-down and the ramp-up, there's probably a whole host of administrative activities that these same people that are trying to ramp up the procurement for block 5 are also doing for the wind-down. They can't all of a sudden double their staff to wind down one and ramp up the other and then fire half of them again. So there's the natural problem of finishing one off, completing it and ramping up the other one, when obviously you can't complete the procurement activity because it just completed the procurement activity for only me. Naturally, as your CEO of TechPrecision, I am inclined to only care about TechPrecision's share of business. I -- and I do everything I can to get these orders so that they can be less lumpy and more steady. I do look at the horizon of potential orders and the horizon of commercial versus nuclear versus really defense. And the stability of the program and the program of record that the U.S. Navy has filed is unmatched in the commercial world. The number of submarines are at an all-time low...

Yes, yes. And the navy has made it very clear they need more submarines. They need meaningfully more submarines. And submarines are wearing out rapidly.

So the demand is not going to get trumped by some new iPhone XYZ. There is no such submarine XYZ that trumps this submarine. So I think, the stability and the look ahead, we're not going to be disappointed, but I -- and my -- as a naturally withdrawn human being, I hesitate to forecast ever.

I've known you long enough, Alex, to know that you don't like to forecast. I would -- I'm going to step off the call for a moment, let others come in, but I would like to -- I have other questions I'd like to ask, but rather turn this in -- than turn this into a monologue, I'll let some others ask questions first. But [indiscernible].

Thank you, Ross.

[Operator Instructions] Our next question comes from the line of [ Samir Gulati ] of [ Gulati Consulting ].

We're your largest holders, of 7-figure position. And I just wanted to congratulate you once again. I haven't been in contact but really appreciate your efforts and the operational turnaround of the company. And are excited about this naval opportunity. And I think all of us are scratching our head over the last year with this valuation gap between the opportunity that the company has and where the stock price trades. And I don't really -- maybe I'll end this with a question, but my comment is we -- you and the board spent time coming up with a strategy to communicate what you communicated to -- on this call to us, to investors. As a public company CEO, twofold. Operationally, you're a master, what you've done with this company and turned it around. I mean this thing was done, and you were brought in way too late. And so what you've done from an operational standpoint, you're the right guy to lead this company into the higher market cap and to squeeze this gap and to get the valuation get where it needs to be. But you have to go talk to investors. You've got to sell the stock. You've got to sell the company. Like Ross just said, it's obvious you don't like to forecast. We know that. I was joking, I was telling one of my colleagues that your job is not to put the disclosures, so many disclosures in some sense -- the teleprompter prior to the call, lays all the SEC disclosures out. The financials has all these disclosures that -- for any company, if they read the 10-Ks and the 10-Qs, these disclosures scare people. But we don't need to attach a negative tone to anything that we say. If you just state the facts of what you've done and what the company's numbers are and what this Navy opportunity is, people will buy, but they won't do that if Ross is telling them to do it. They won't do it if board members are telling them to do it or communicating this opportunity to them. The CEO has to get out there and tell people 28 submarines, 2 class -- 2 Columbia class submarines, 15-year period, $523 billion market. You guys are a big player. You guys have been doing this for a long time you've been working with your companies. You're also a relationship master. I mean, to maintain all these relationships from taking over from the CEO prior to you, all you have to do is go out there and say what the facts are. And people are going to like this company because the opportunity is huge. We're very happy where you've positioned us. I'm very happy with your comments on the call today. You typically have a lot more disclosures and kind of pullbacks on anything positive. Typically it's followed by a negative because I think you're kind of scared sometimes to not -- to underperform or not meet expectations. But in closure: Please get out there. Talk to people. This is a great opportunity. And your comments on the call today are appreciated.

Our next question is a follow-up question from the line of Ross Taylor of ARS Investment Partners.

We can save money in the future by only having the three of us on the call.

Yes...

Two things. First, I -- actually I think the previous caller made some very interesting points. And I would like to reiterate what I believe he was saying, which is you've done an excellent job as an operator and we're now moving to the next stage. To me, quite honestly, it's almost a joke the stock trades at less than it did when you came onboard because, when you came onboard, this was a company that was effectively about to [ test crush step ]. And the fact now is it's an operating business. I'd also like to extend to you publicly something I did before, is we would love to entertain you here in New York City to meet with investors and potential investors. The story is here. It's very exciting. It seemed to me that the comments you -- I had to miss the beginning of this call, so I don't know if you led it off with the same type of comment you led off the prior call, but it seemed that from the prior call's initial statement you made is your board understands how meaningfully undervalued this company is. And it is looking to take the steps to close that valuation gap for shareholders and that part of that is this effort that you are building this business. And I will agree. I actually think that you're shockingly upbeat and ebullient, for you. I think this is not the -- this is really -- yes. I mean, for someone who -- having known you for a number of years, this is actually "Alex being peeled off the ceiling" type of conversation. And so I think that I wish that more investors would have a chance to get to know you and appreciate how really excited you are and therefore obviously also how excited your insiders, your board is over where this company is going and where it can go. So away from that, I'd just like to say we spend a lot of time talking about the submarines. Will you talk briefly about the other opportunities you're looking at here beyond just Columbia and Virginia class subs either in defense or commercial?

Absolutely. So the -- obviously the submarines far overshadow any other opportunities just simply because the opportunity is so large. That does not preclude us from doing more similar work. That is specification-driven work. That's high-tolerance, highly critical work. So that falls into different defense work. There are certain other pieces of defense work that we also have done in the past that we are looking forward to continue doing much more lumpier than the submarines are. The other arena is in the nuclear sector, where most of the nuclear work is now not done in the United States, other than shutting down and closing down nuclear reactors in the United States which also involves us making parts to assist in that. The specific opportunity is in replacement parts as well as new parts overseas. And we are very engaged in pursuing that on an annual basis. And that does provide a secondary focus for us; as well as others that really require critical, complex component fabrication and machining capabilities.

When you look at your markets, what kind of revenues -- I'm not going to ask you to specifically forecast, but it would seem to me that everything I hear you talking about would say that we -- as I said before, this is really a -- you see this period right in here as being a transitional period; and that going forward we should be able to see meaningful upside ramp in revenues, which should drive improved profitability and improved free cash flow generation and the like.

By and large, yes, absolutely. It will still remain lumpy because these appropriations and releases of funding are still gapped by certain things that happen that I can't control very well. The -- this gap between block 4 and block 5 Virginia class will not be around later on. This is -- I really don't know how long this is going to be, so I didn't set a time line and talk about a time line on when we would see these orders that I'm waiting for actually get funded. But I did [ want to share with you ] -- that the funding for advanced material acquisition is in place.

Right. And it takes years to build a -- my -- one of the problems that -- and I appreciate you being much more educational on this call about the submarine business because I think a lot of your shareholders probably do not understand the nuances of the business and the fact that it takes years to build a submarine. It takes -- and quite honestly, the Navy -- unlike most warships, you don't sail a submarine much past its useful life, that when -- there gets to be a point when the Navy ends up -- submarines get broken apart and basically taken apart when they reach the end of their useful lives. They don't get sold to Argentina or Chile or the People's Republic of Iran. They end up going to the breaker yard. And the Navy is fast approaching the point where they don't have enough boats to do the job they need to do. And so that's to me what makes this a very exciting story. And I think that it's good to get more of that out there and get people understanding. This new budget changes that calculus because they're -- it's a 2-year agreement, not just a 1 year of live-by, hand-to-mouth agreement. But it would seem to me -- and I know you're not going to forecast it, but it would seem to me that, if we came back in 3 to 4 years, we should expect sales to be a multiple of what they currently are if you guys are executing. Which probably is important because, a company of your size, it's hard to -- if you can't -- you kind of need to either push the top line meaningfully, generate the free cash flow and the like to stay public. Or quite honestly, we should talk about going private. And as one of your largest holders, we'd be open to that conversation too.

, Yes.

Yes. So one thing is thank you for the job, what you've done. I think this is you're at this stage where I think there are some really exciting things that should start to happen. We look forward to seeing those. And as I said, I extend the offer. I'd love to see you in New York. And I'd love to get a chance that we could meet new investors as well as meet many of your core holders. Because I have to be honest: I'm constantly shocked when I see someone aggressively selling the stock. I just think they're selling because they simply don't understand where this thing is going in a year or 2 years.

I'd be very excited to get out there.

Our next question comes from the line of Richard Greulich of REG Capital Advisors.

I wanted to follow on to Ross's ending comments because I think in the last call or two, Alex, I think you mentioned that the board was cognizant of the fact that, as a small company, you suffer. The earnings per share suffer from the fact that you have a certain level of fixed costs associated with being a public company, and for the size you are right now, that's a fairly large amount. What progress or what actions or what conclusions or -- have been taken to mitigate that?

To mitigate which?

The impact on the earnings. In other words, like possible actions could be selling out to another company so you wouldn't have to have the public company expenses.

Well, I wouldn't be able to comment on selling the company. I can comment on other mitigations that we have done, as far as squashing down aggressively the actual costs of being a public company, which I would say that Tom Sammons has done a masterful job of squeezing down every cost possible with a lot of aggressive support and push from our board members as well as me and himself. So I think that mitigation on -- minimizing the dollar amount we spend is in place and continues to be in place. And we are going to make sure that, that continues in the future.

At this time, we have no further questions over the audio portion of the conference. I would now like to turn the conference back over to management for concluding remarks.

Thank you, everyone, for attending. We appreciate your support. Thank you.