TechPrecision Corporation (OTC:TPCS) Q2 2023 Earnings Call Transcript

TechPrecision Corporation (OTC:TPCS) Q2 2023 Earnings Call Transcript November 17, 2022

Operator: Good afternoon, ladies and gentlemen, and welcome to the TechPrecision Corporation Fiscal 2023 Second Quarter Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Brett Maas. Sir, the floor is yours.

Brett Maas: Thank you. On the call today is Alex Shen, Chief Executive Officer; and Tom Sammons, Chief Financial Officer. 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 to you a more detailed discussion of the risks and uncertainties in the Company’s financial filings with SEC. In addition, projections as to the Company’s future performance represents management’s estimates as of today, November 17, 2022.

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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. Alex?

Alexander Shen: Thank you, Brett. Good afternoon to everyone. Thank you for joining us. The second quarter of fiscal year 2023 was another strong quarter for our Ranor subsidiary. Ranor operating results improved across the board when compared to the second quarter of fiscal year 2022 with higher revenue and improved gross margins. Ranor’s gross profit was $2.0 million compared to $733,000 year-over-year. The Stadco subsidiary is a turnaround. With the addition of Stadco, we recognized additional revenue, but also absorbed additional costs. These additional costs dampened our gross margins and added to our selling, general and administrative expense and interest expense. We remain highly focused on cash management through control of expenses, control of capital expenditures, customer advances, progress billings and final invoicing at shipment.

Business prospects remain strong. Our backlog was $49.4 million at September 30, 2022, an increase of $23 million since September 30, 2021, the first quarter that included Stadco backlog. I would like to now turn the call over to our CFO, Tom Sammons, to continue with the review of our fiscal year 2023 second quarter and six-month results. Tom?

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Thomas Sammons: Thank you, Alex. Net sales for the second quarter of fiscal year 2023 were $8.5 million or 78% higher when compared to the same quarter a year-ago as we added a full quarter of Stadco revenue and realized increased revenue of Ranor. We recorded an increase in revenue in our defense markets, which more than offset a decrease in precision industrial revenue. Our defense backlog remains very strong as new orders captured within the quarter and after the quarter are primarily from our defense customers. Cost of sales were $6.8 million or $2.9 million higher than the prior year period, due primarily to the addition of a full quarter of Stadco cost of sales. Gross profit was $1.7 million or $809,000 higher when compared to the same quarter year-ago.

Gross profit was higher because of higher revenue and stronger operational throughput at Ranor and improved factory overhead absorption. SG&A expense increased by $653,000 primarily due to the addition of Stadco SG&A and increased spending for outside advisory services related to the Stadco acquisition. We recorded an operating loss of $87,000 compared to an operating loss of $243,000 in the same prior year period. Interest expense increased to $84,000 from $57,000 in the same prior year quarter as we added new debt to the balance sheet on August , 2021 as part of the acquisition of Stadco and increased our borrowings under our revolver loan. We recorded a net income of $391,000 in fiscal 2023 second quarter compared to a net loss of $220,000 in the same period a year-ago.

Fiscal 2023 second quarter included an accrual of $624,000 for refundable employee retention tax credits under the CARES Act. Net sales for the six months ended September 30, 2022 was $15.6 million compared to $8.2 million in the same period a year-ago, an increase of $7.4 million due to an additional $4.7 million of revenue from our Stadco segment, coupled with a Ranor sales increase of $2.7 million. Our cost of sales for the six months ended September 30, 2022 were $6.6 million higher due primarily to the inclusion of Stadco business for the full six months compared to approximately one-month in the same period a year-ago. Gross profit increased by $794,000 or 45% higher on a strong operating period of Ranor. Weak operating results of Stadco due to certain unprofitable projects and low production levels dampen consolidated gross margin.

SG&A expense for the six months ended September 30, 2022, increased by $1.3 million primarily on the inclusion of the Stadco for the full reporting period and increased spending on outside advisory services due primarily to the acquisition. As a result of the foregoing, including the integration and reduced profitability at Stadco, we recorded an operating loss of $640,000 compared to an operating loss of $143,000 for the prior year. Interest expense was $167,000 for the six months ended September 30, 2022 compared to $87,000 during the same prior year period due to the borrowings under the Stadco term loan and the higher usage of the revolver. We recorded a net loss of $110,000 for the six months ended September 30, 2022, compared to net income of $1.2 million for the same period a year-ago.

The prior year period included a one-time gain of $1.3 million from loan forgiveness under the Paycheck Protection Program. Moving on to the cash flows and balance sheet. We realized a cash inflow from operating activities of $1.6 million and used $1.1 million for capital expenditures. Our total debt was $6 million at September 30, 2022 compared to $7.4 million at the end of March 31, 2022 as period ending borrowings under our revolver loan were lower by $1 million. Cash balance at September 30, 2022 was $235,000 compared to $1.1 million at March 31, 2022. Working capital was $3.3 million at September 30, 2022 compared to $2.8 million at March 31, 2022. With that, I will now turn the call back over to Alex. Alex?

Alexander Shen: Tom, thank you. TechPrecision is proud and honored to serve the United States defense industry, specifically naval submarine manufacturing through its Ranor subsidiary and military aircraft manufacturing through its Stadco subsidiary. We aim to secure and maintain an enduring long-term partnership with our customers. Overall, in both the Ranor and the Stadco subsidiaries, we continue to see meaningful opportunities in our defense sector as evidenced by the strength of our backlog. We are encouraged by the prospects. Today, I would like to share some information on the defense industry sector that we serve, specifically naval submarine manufacturing of the Columbia Class submarine. I am quoting from publicly available information.

The District of Columbia is the name of the first ship in the new class of ballistic missile submarines being built for the U.S. Navy by Electric Boat. The Columbia class will replace the 14 Ohio class submarines due to begin to retire from service in 2027. Each class is named for the first ship in the series. Design of the District of Columbia began in 2007, when the Navy approached Electric Boat to assist in the conceptual design of a replacement for the aging Ohio class. This aging Ohio class entered service in the early 1980s. The Columbia class of 12 ships will carry 16 missiles each, which in total will represent approximately 70% of the country’s nuclear arsenal. Submarines are the stealthiest and most survivable of the nation’s nuclear triad of land, air, and sea-based nuclear weapons at a length of 560-feet and displacing 20,810 tons.

The District of Columbia will be the largest submarine ever built by the United States of America. Its reactor will not require refueling during the lifetime of planned service, making the ship more cost effective to operate and maximizing its time on deployment. In addition to its compliment of missiles, the submarine will be armed with Mark 48 torpedoes and will feature superior acoustic performance and state-of-the-art sensors to make it the most capable and quiet submarine ever built. The District of Columbia is designed for modular construction. Construction is underway with the support of more than 3,000 suppliers from around the country. Outfitted hull modules will be barged to the Electric Boat shipyard in Groton, Connecticut, where they will be assembled into a complete hull, fully equipped and tested prior to delivery to the Navy.

Electric Boat is constructing a 200,000 square foot assembly building for the project, which will be operational in time for the first module’s arrival in 2023. The building is part of a $1.8 billion investment General Dynamics is making to grow its submarine design and manufacturing infrastructure. Construction of the lead ship is presently more than 20% complete. The District of Columbia is the latest and a continuing relationship between Electric Boat and the country’s ballistic missile fleet, the first ballistic missile submarine, USS George Washington was designed and built by Electric Boat and delivered in 1959. This was followed by the design and construction of the lead ships in the Ethan Allen and the Lafayette and the Benjamin Franklin classes.

All 18 boats of the Ohio class were designed by Electric Boat and built at its facilities in Quonset Point and Groton. The District of Columbia is scheduled for delivery in 2027 and expected to begin its first deployment in 2030. The Columbia class of submarines is expected to have a service life into the 2080s€. Finally, a reminder again that we do most of our work in industries that are highly sensitive to confidentiality, which preclude us from speaking publicly about many things that a company not operating in these fields might discuss. As such, there are real limits as to what I can discuss and sometimes those limits change. Please understand that my saying, I am not allowed to discuss that is based on customer requirements and the environment in which we conduct business.

Additionally, before we open up for questions, the Board has asked me to read the following. The company is working on an application to have its common stock listed on the NASDAQ stock market. As the stock exchange processes our application, the Board will determine whether we need to utilize the authority granted to us by the stockholders to effect a reverse split of our stock and the timing thereof. Thank you for your continued support from the Board. Operator, we’re ready for Q&A. Please open the line.

Q&A Session

Operator: Absolutely. Thank you. Ladies and gentlemen, the floor is now open for questions. And the first question is coming from Ross Taylor with ARS Investment Partners. Please proceed.

Ross Taylor: Thank you. First, congratulations, Alex, and the whole team on being named BAE Systems 2022 VPM supplier of the year for a company your size. That’s quite an accomplishment, and I think it should be recognized. Second, away from that, you mentioned the idea that you added California, you have some unprofitable projects. Could you talk about the magnitude of those? And are these unprofitable projects that are basically early in life, and therefore, we would expect to see them gain profitability? Or are they isolated projects from the major programs that you’re working on there.

Alexander Shen: Let me take a stab at this, and then I’ll ask Tom to take a stab at answering that question to me, it’s a mix.

Thomas Sammons: That’s exactly what I was going to say. You have a combination of a variety of factors with the jobs.

Ross Taylor: Okay. Good. So therefore, part of the process is you guys working things up and kind of putting the TechPrecision Ranor stamp on Stadco, we should expect to see the margins in that business move higher as you guys get kind of more of your efforts and your expertise worked into what they’re already doing, which is €“ has been pretty good historically?

Alexander Shen: I agree. We will be concentrating on that. But also I would remind all of us that our number one, number two, number three priority is on shepherding cash.

Ross Taylor: Yes, you’ve made that clear. Looking at as we see things here, what kind of revenue breakdown did we see between Stadco and Ranor last quarter?

Thomas Sammons: Last quarter?

Ross Taylor: The quarter you just reported, yes. There’s no €“ it’s a non-timely queue, I think this information was available last time by the time we had the call, but it’s not available currently.

Thomas Sammons: It’s in the press release, the Ranor revenue for the quarter was $4.9 million, Stadco was $3.6 million.

Ross Taylor: Okay. And we’re coming up here fairly quickly. The Navy Marines have talked about needing to decide when they’re going to go effectively full production rate on the CH-53K. In the past, the company or people with Stadco have commented on what that is on a revenue per airframe basis, and it’s pretty significant relative to what you’re currently operating as a run rate. The Stadco backlog is also pretty significant compared to what you’re running on a quarterly run rate. So looking at this, the question would be, if the decides to go to 20 to 24 airplanes per year, roughly two a month for the CH-53K would that impose any difficulties in you guys meeting that demand? And secondarily, would that increased run rate, which would probably generate on a monthly basis, revenues close to what you’re generating on a quarterly basis in that business go a long way to helping alleviate the unused overhead or allocating the overhead over a broader basis?

Alexander Shen: So that was, again, a world-famous Ross Taylor combination question that we need to cut up in the pieces and answer carefully, correct?

Ross Taylor: Yes. Yes. It’s the way my mind worked, Alex, I’m sorry.

Alexander Shen: That’s okay. That’s all. So I think the €“ in general, to answer your question properly, it’s a really question of timing. And this timing involves a number of different things, which really breaks down the what-if into several what-ifs that are all related to timing. So what if the 20 to 24 number comes true, it’s a question of timing when it’s going to come true and how it’s going to come true. Yes.

Ross Taylor: If we €“ if I suppose that we’re going to be at 20 to 24 airframes a year run rate by federal fiscal year 2024, currently, we’re in fiscal 2023 for the Feds, would that pose any difficulty in you meeting that? And would that be a significantly positive economic event for the company?