TechPrecision Corporation (TPCS) Q4 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the TechPrecision Fourth Quarter and Year-End 2018 Earnings 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. I would now like to turn the conference over to your host, Brett Maas of Hayden IR.

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 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, June 28, 2018. 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, Chief Executive Officer, to provide opening remarks. Alex, the floor is yours.

Brett, thank you. Good day to everyone, and thank you for joining us. For fiscal year 2018, we are happy to report the highest annual revenue in four years and our third consecutive year of pretax profit. Net sales were $18.7 million for fiscal year 2018. Pretax income was $559,000 compared to $2.2 million in fiscal 2017. Our results were impacted by lower gross margins for fiscal 2018, which were primarily the result of higher amounts of unabsorbed overhead related to extended lumpiness in sourcing and funding from our customers, in turn driving a slowdown in the number of projects in production. Additionally, we experienced a higher volume of low margin components shipped during the period. We expect to return to levels of project activity that are more consistent with our prior year. Net sales were just under $19 million for both fiscal 2018 and fiscal 2017. The opportunities we are actively pursuing for the next 24 months are basically four to five times that, somewhere between $75 million to $100 million. I offer my sincere thanks to our Board and our Shareholders for your continued patience and your continued support as we experience delays in our journey of growth. We positively embrace the growth opportunities and in tandem, we will aggressively engage and collaborate with our customers to capture more short-term opportunities to offset the delays. As I stated before on a previous earnings call, we expect a strong pipeline of business from our defense customers. This does not change. On our last call, we discussed certain agreements which released funding for materials acquisition in advance of new orders to build components for a number of our key customers. These specific new orders are beginning to be fulfilled as we added 7.5 million in new orders in the fourth quarter of fiscal 2018. This enabled us to grow our backlog from $11.2 million at December 31, 2017 to $14 million at March 31, 2018. I'd like to now turn the call over to Tom Sammons to tell us more about our fourth quarter and our 12-month year-to-date financial results. Tom?

Thank you, Alex. Net sales for the fourth quarter of fiscal 2018 were $4.7 million or approximately $263,000 lower when compared to the same quarter a year ago. Net sales in our defense market increased by $0.4 million when compared to the same quarter a year-ago, primarily on higher shipments of new product components to one of our largest defense customers in support of the U.S. Navy’s submarine programs. Net sales in our precision industrial market increased by $0.5 million, net sales in our nuclear market decreased by $1.2 million, when compared to the same quarter a year-ago. Gross profit was $0.4 million in the fourth quarter, a decrease of approximately $655,000 when compared to the same quarter of fiscal 2017. The decrease can be attributed primarily to unabsorbed overhead costs in connection with the slowdown in project activity as our customers evaluate their own project workflow, also to the lower sales volume and to higher shipments of low margin products. Our net loss was approximately $367,000 or $0.01 per share basic and fully diluted for the fourth quarter of fiscal 2018, as compared to a net income of $3.1 million or $0.11 per share basic and fully diluted for the fourth quarter of fiscal 2017. The fourth quarter of fiscal 2017 includes a tax benefit of $2.9 million, net of the release of a valuation allowance of $3.6 million. The release of the valuation allowance was based on the weight of positive evidence at the balance sheet date, primarily the result of improving business performance, financial trends and achieving sustained profitability in certain tax jurisdictions. For fiscal year 2018, our net sales increased by 1% to $18.7 million. Our sales in our defense market increased by $1.3 million, net sales in our energy market increased by $0.4 million in fiscal 2018 when compared fiscal 2017, while net sales in our precision industrial market decreased by $1.5 million when compared to fiscal 2017. Gross profit was $4 million or 35% decrease when compared to fiscal 2017. Our gross profit and margin suffered primarily due to the slowdown in projects and due to the higher shipments of lower margin products as mentioned earlier. Income from operations is $1 million, a $1.9 million or 66% decrease when compared to the same period year-ago. Fiscal 2017 income from operations included a one-time gain from a customer claims assignment settlement of $1.1 million. For the fiscal year 2018, we recorded tax expense of $824,000. This tax expense includes $700,000 of non-cash tax expense, the result of remeasured net deferred tax assets to reflect the new 21% U.S. federal statutory tax rate as provided in under the Tax Cuts and Jobs Act recently enacted on December 22, 2017. Our tax expense is primarily a non-cash expense, as we continue to utilize our deferred tax assets to offset any tax liability. Cash paid for income taxes was $32,000 for the fiscal year 2018. The Company does not expect to make any significant tax payments for the remainder of 2018 calendar year. Our net loss for the fiscal year 2018 was approximately $266,000 or $0.01 per share basic and fully diluted, as compared to a net income of $5.1 million or $0.18 per share basic and fully diluted for the fiscal year 2017. Fiscal year 2018 earnings per share is based on an average weighted share count of approximately $28.8 million for basic and fully diluted shares respectively. Turning to the balance sheet, we finished the quarter with $2.7 million in cash at March 31, 2018. Our working capital was $4.9 million and $5 million at March 31, 2018 and 2017 respectively. Cash flow provided by operations was approximately $1.3 million in fiscal year 2018, we used approximately $994,000 of cash to purchase new machinery and equipment that was placed in service during fiscal 2018 and used 717,000 of cash to repay principal under our long-term debt agreements. With that, I will now turn the call back over to Alex. Alex?

Thank you, Tom. TechPrecision is proud and honored to serve the United States defense industry, specifically naval submarine manufacturing through its Ranor subsidiary. We continue to see meaningful opportunities in this sector. To illustrate, there are two significant demand drivers that will double existing overall nuclear submarine business workload at the shipyards, starting in 2019. I’ve gleaned this from all publicly available information and wanted to make sure that we reviewed it once again. Number one is the Virginia Payload Module, an 85-foot hull section with four centerline large diameter payload tubes that is expected to be added to all future Virginia-class submarines starting with the second Virginia-class submarine in Block 5. Number two, the Columbia program will build 12 new SSBNs. These are ballistic missile nuclear submarines over a period of 20 years to replace the 14 Ohio-class SSBNs currently in service. At 560-feet and 20,800 tons displacement, the Columbia-class is slightly larger than the Ohio-class it is replacing and represents a doubling of overall demand compared to the Virginia-class construction program. I would now like to open up the call for questions and answers.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ross Taylor from ARS Investment Partners. Please proceed with your question.

Alex, could you give us more color on your comment about the $75 million to $100 million in project business that you are currently pursuing for near-term opportunity?

I can, in a limited fashion as usual. So the amounts are clear. These are facts. I am actively pursuing them with quotes or attempting to get quotes. I have engaged with the customers on each one of these and ascertained the fact that there is an actual need on these. The focus is pretty basic. Our focus is primarily number one on defense and number two on nuclear, with third precision industrial where it fits our niche and where it fits the customer requirements. So I think the distribution over those three sectors is nothing unexpected there within what we are aiming for.

Okay. So looking at this over that $75 million to $100 million, what kind of time horizon if you're successful in getting that business? And I would assume that given the fact that the Navy is itching to start and in fact has been talking about building an extra Virginia-class Block 5 boat in each of the first two years of its program before the Columbia-class has come on. You've probably had pretty extensive conversations, what kind of time horizon are we looking at for that dollar amount?

So I think you asked multiple questions. Let me carve them up and answer each one. I want to make sure that Block 5 is understood properly. So Block 5 has originally had nine boats with the 10th that needed to get approved that has since gotten approved. So it is a 10-boat block. The first boat does not have the Virginia Payload Modules, but the subsequent nine do, which is that 8-foot hull section that's being added to add four more payload tubes. So that comes to Block 5 10-boat cadence. And the cadence is intended to be two a year just like the cadence for Block 4 has been.

Yes, I understand. The Navy has actually expressed the desire to speed up to use the extra shipyard space to build extra boats faster, so they can get two new – two additional Virginia boats in the water before they start the Columbia-class to accelerate that. So that's also publicly available information. But I want to kind of get out, so looking at it, in the past it looks like you did $6 million to $8 million a hull, on a submarine – on a Virginia type submarine. With this extra payload module, would it be safe to assume that you guys should more than double that revenue run rate on a hull basis?

On a hull basis, I very much do not make it public how much I have on a hull.

I would say as not insignificant shareholder, it would make it a lot easier for us. We don't – you talked in the past about the lumpiness of the order book. I understand the book is lumpy, but quite honestly this is really a story about this Virginia-class and the Columbia-class boat, it's not really – I mean if those things work bluntly, we're in a situation where we're looking at a decade of backlog and I can't think of a Company I know if that I could predict a decade out on what their revenue run rate would be on a low side as a minimum. And yet as this thing moves forward, we'll be able to do that with regard to TechPrecision. So I am trying to get an idea of what we're looking at – so other – I have a pretty good idea from publicly available information, but I don't think your shareholders at large have made as much an effort. So it might be helpful, if you help these guys out who might not have figured out what the opportunity here is. I don't want to know specific programs or parts of the hull, but on a run rate basis, I think it would be helpful for us to know.

I understand. I have to protect us from others that are not so benign.

As I said I think that – and looking at it, at this stage to me what's very interesting in here is you guys are sitting in a situation where my guess is you have a pretty good idea of exactly what you've actually won that the Navy isn't this close to starting these programs with the fiscal year that starts in October without having given you a good idea as to what you're going to be building, am I correct in that assumption?

We have a very good idea of exactly which parts we're chasing, yes.

Yes. Okay. Sometimes, trying to get information out of you is like trying to – work with a hostile witness.

So I'm not attempting to be hostile. On this one, specifically I have been cautioned directly to not give up competition and edge against us because we might lose.

Okay. Let's try this a different way. BAE has gotten an order for launch tubes in the Virginia-class boat. Electric Boat recently released a rather sizable order to oversee the rather sizable order and released orders for component parts of which $45 million or $50 million was basically metal to an operation in the Midwest to produce the metals and alloys and the like needed for certain components. How does that work with that if that – if they have not released a contract, but they've built metal? Is that metal sit in your factories? Is that metal sit at the forge or at the foundry? Does that metal sit at Electric Boat, where is that metal right now?

Well, by the time it makes it over to me is when I have an actual contract to build and we would probably be out of our lumpiness in the sourcing and funding from our customers.

Right.

So we can surmise that it’s not here.

Okay. So it's somewhere else down the line. Okay, I will step out. I’ll probably come back. I’ll let someone else have a shot at you.

Thank you very much.

Take care.

Yes, sir.

[Operator Instructions] Our next question comes from Private Investor, [John Hardison] [ph]. Please proceed with your question.

Hey, Alex and Tom. Congratulations on another year of profitability. And I also wanted to thank you for holding the very positive investor meeting in New York on May 8. That was very helpful. And from the meeting, from your slide show and going through past 10-Ks, 10-Qs, it sure looks to me like in the past, Ranor has done what Ross said about $6 million to $7 million per old Virginia-class sub and I think the new 28 Virginia-class subs, the Virginia payload modules and the 12 Columbia-class subs adds a tremendous amount of new work. And when I work the math out, I can see just from the submarine program over the next 20 years, a $500 million plus backlog to Ranor for the submarine work and I'm not looking for a forecast or you don't even have to comment on it, but I just wanted to say congratulations guys because I think we have a fantastic annuity here going forward? Thank you.

Thank you.

Thank you.

[Operator Instructions] Our next question comes from Private Investor, [indiscernible]. Please proceed with your question.

Yes. In the November call, you opened it with statement from the Chairman, who said the Board is very aware of the significant drag on earnings caused by the cost of being public. We have been and continue to actually investigate and pursue all ways to improve this. It’s now been seven months since that statement and so for at least a minimum of seven months, you’ve been actively investigating, pursuing it could be eight, nine, 10 months. It seems now it's an appropriate time to give us an update on that. Could you please do so?

I think first of all we're not prepared to give you an update in detail on that. We continue to strive to pay less on services and strive to get best value for our shareholders.

That's a different issue, paying less for services and getting better value than what you said in that statement, two different issues.

I understand that.

Well, so you didn’t answer the question at all, right?

Like I said, I was answering your question, first, as we're not very well prepared to answering your question. But we are prepared to tell you that we have been diligently concentrating on cost reduction. I know that that doesn't answer the question. I was just adding to the answer.

I think as Ross said, you’re adding to the non-answer.

Well, I told you I wasn't prepared to answer.

Well, seven months ago, you said the…

So I was being very direct and honest.

Right, seven months ago, you were a very small Company. So in terms of pursuing what you talked about, seven months seemed like a sufficient time to give an update, not for a conclusion, but an update.

We'll take that under advisement and come back to you.

Thanks.

Our next question comes from the line of Private Investor, [Jim Koenig]. Please proceed with your question.

Hi, guys. A couple things, a website looks very good. We're happy that you guys have updated the website. Then Alex one question, are you guys getting any work currently on the Columbia, on the prototype or is that down the road?

I'm sure I'm not ready to answer you specifically on prototype or tactical or some kind of category of Columbia. But Columbia work is part of our work, yes.

Okay, so that is part of the $75 million to $100 million that you guys are shooting for?

Yes, absolutely.

That's all I got. Thanks, Alex.

Yes, sir. Thank you.

[Operator Instructions] Our next question comes from the line of Ross Taylor from ARS Investment Partners.

Okay. First, with regard to the question about strategic alternatives, look at it this way. You're in a situation where you have the potential for a decade long annuity. I assume it doesn't make any sense for you to come to any strategic decision and tell you're actually putting those orders in the backlog because that is effectively what would be the lever on which the value – company will be valued. Am I correct in making that assumption?

Ross, can you please repeat that question one more time?

I assume that as it was noted back in November that you read a statement from the Chairman of the Board about the idea of effectively maximizing and optimizing shareholder value to paraphrase it. Any of us who have been in the business long enough know that’s quite language – code language for saying that you're looking at the sale of the Company. It doesn't to me as a substantial holder make any sense that this Company be sold until such a time or any decision be made about what your strategic direction is or alternatives are until you actually have the order book or an idea of what you're going to get on approval basis. Now my assumption is you know that. My assumption is you probably put together a book that might have been seen by other potential investors and that they have an idea of what you're bidding on. The people who don't know are those of us on the call who are shareholders, but I'm just asking therefore to the assumption that until such a time that you have these hard orders it's unlikely that we would see any kind of endgame or announcement as to what the strategic alternative strategy is going to result and whether it's a share buyback or decision to for example take free cash flow on an annual basis going forward and retire stock in sizable portions through a Dutch auction, which would be another way to drive the value higher. I mean it looks like we're on the front-end of a decade long cash flow stream that's going to be pretty significant on a per share basis. It's just not the answer for why nothing has happened yet?

I think I have to take the safe way out here and say no comment at this time.

Okay. I'll take in a no comment. No comment usually means, yes. So away from that looking at other options, are you doing work or are you bidding for work with regard to UK boats where they're making use of weapons systems and subcomponents from the United States?

Well the real answer is, I don't know yet.

So you're bidding for it. Okay. We can actually have a conversation, Alex?

Yes, we can.

I just have to speak, Alex. So looking at this you've been – when you were in New York, you were exceptionally upbeat about the Company about the opportunities and things of that nature. Is there anything that has gone on in recent weeks that has made you less enthusiastic or is what's been developing over the last – since you were in New York made you more enthusiastic about the opportunity?

Well, I don't release number that all ever. So I think the fact that we're talking about actively pursuing for the next 24 months, a number that’s between $75 million to $100 million is a sure sign of more enthusiasm and not less. I don't know that means that there is more opportunity or not. I just want to somehow convey in my stilted style that it's really there. Really, really there.

Okay. And how long is the lead that Electric Boat that you need from Electric Boat to produce products? Or from Newport News, how long do they – before they need something, do they need to let you know?

The true answer is that depends. Seriously, it depends on what it is. And then on how empty or busy I am with certain work center. It really depends on a number of operational and executable items.

Okay. So you've added in the last year close to $1 million worth of component or of equipment and the like on the plants works for that nature CapEx. I assume that that was not added as a spec. I assume that was added because – and I assume you’ve had the Navy in and Electric Boat in to look at your capacity and things of that nature. So what we're really stuck here is a situation where you can see over the transom and you know what's coming and because of a variety of reasons you cannot yet tell us how good that is. Correct?

So I go back to what I carefully crafted. This extended lumpiness in the sourcing and funding from our customers is causing a bad quarter. Okay, so I'm now not really wanting to throw the customers under the business, it's the company that I'm running not very correctly for that quarter. Yes, I think.

Alex, I think those of us who know the Company honestly, are indifferent to the quarter. The story is not about the quarter, the story is about the next 10 years, really bluntly. And I think that to me, the way I think you need to tell the story is that way. The quarter is what it was, but the quarter has nothing to do with the opportunity that’s sitting in front of you. As was mentioned earlier, you can look at $0.5 billion of revenues coming from this build program and things of that nature. Obviously, General Dynamics Electric Boat thought you were an incredibly important supplier because I've been in the defense industry and you don't rescue small companies going out of business unless that small company does something no one else can do. Honestly, you just are indifferent to it. If they go out of business someone else buys the assets and you work with them. The fact that Electric Boat has bent over backwards to help keep you guys going, tells me that you're an incredibly important subcomponent suppliers of these guys, and therefore, this is why I think you're so enthusiastic. I know you can't tell us all this yet, but within a few quarters or whatever it's honestly going to become pretty obvious because you don't have any place to hide it. It's going to start popping through. So I would tell, I think the story would be something to focus on in that direction, and don't be apologetic for what the quarter was. No one who knows the story cares about it. Anyone who sells a stock because the quarter was soft basically doesn't understand the story.

Yes, sir. Thank you very much.

Great. Take care.

Our next question comes from the line of Sameer Gulati from Gulati Consulting. Please proceed with your question.

Hi, gentleman. I'm [piggybacking] a little bit off Ross here on what he was saying and I'm coming off the cuff not really with much of any questions, but kind of – the story of – I want to give some appreciation to Alex, because I remember this Company got caught up with GTAT. There was really bad practices within the Company and there were some big hopes at that time, and a lot of investors are still here and a lot of money had been lost. And Alex came aboard and Alex – you and Ross go back and forth a lot and your communication, some people in for a CFO of public company may expect something a little different or may want to a little more information, want the number of as me – myself being up to a 6% holder in the company. We want to know your spreadsheets. Am I still on the line?

You are.

You are.

Okay, good. Good, we want to know your spreadsheets. But if – this is a big part of our life and some – your progress and what you've done and when you first came aboard this company – you really over exceeded, how quickly you were able to repair these relation jumped off Ross with GE. You are really an honorable trustworthy smart operator. And you TechPrecision is coming out because of you with really high quality products, but with service. This is the only way this company has turned around the way it has and then the position it is today. And I guess when I’m saying of shareholder, yes there is some frustration with not having numbers. But hearing you on every call and every word you say, you even use the word many times laser focused. As a large shareholder, I've trust that you have this laser focus and you have been executing this laser focus and we are there now. When you talk about just this confidence you have and knowing how you communicate things. We are in the spot, you were thinking about when you started and it's been a long ride, and we still have a lot of uncertainty. But the payout is large and the way you operate and communicate is working. It's working for this Company. The size of the Company and the valuation will follow and just appreciate – I appreciate your communication and I appreciate kind of you're laser focus. That’s it. Thank you.

Thank you very much.

Our next question comes from the line of John Hardison, Private Investor. Please proceed with your question.

Hey, Alex. Just a few minutes ago, I saw a press release that said, the Australian Navy gave a $26 billion award to BAE Systems for antisubmarine frigates and that in the same article, they discussed that over the next 10 years, there's going to be 500 submarines built around the world. Now I know you guys are bidding on the Columbias and the Virginia-class, and that adds up to about 40 submarines. Are you guys bidding on international sub-work as well?

We are not. We are focused on the United States of America. Bear in mind, the U.S. and the UK have agreements that allow many things to be shared. So I suppose that the UK could be in the mix as I didn't answer Ross earlier. But I seriously don't know which parts are going to or not going to be in the mix with the UK, but I would say other than the UK, we are not in pursuit internationally.

Okay. And then next question, has there been any discussions regarding up-listing to the NASDAQ? I mean you're going to have this I think huge backlog of work and you're going to start generating a lot of cash flow and I think it would be very helpful to up list and get off of the OTC bulletin board, so that other people could become shareholders.

John, thank you for the question, I'm not prepared to give an answer at this time. So I need to respond back with a no comment at this time.

Okay.

I understand that an update is – I am understanding that you want an update, so we'll work on that.

Okay.

And you’re going to have – Tom Sammons is going to have to take this one, but we'll take that one. I just cannot comment at this time.

Okay. And then I have a question for Tom. With the existing debt covenant, can you guys buy back shares or pay down debt really?

Well, you're asking, can we?

Yes.

Yes, are we able to? We can pay down debt early if we want, but there is a penalty with people’s with the one debt.

And are you allowed to buyback shares with the existing debt covenants?

Yes. My initial reaction would be no, but without further going back through the loan debt agreements, but my recollection is that we cannot.

Okay. Tom, that’s all I have right now. I’ll let somebody else get into the queue. Thanks.

Thank you. End of Q&A

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

Thank you, everyone for joining us on this call. Have a great day.

Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.