TechPrecision Corp (TPCS) 2009 Q4 法說會逐字稿

Good day and welcome to the TechPrecision quarterly update conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Crocker Coulson. Please go ahead, sir.

Thank you, operator. Good morning and welcome, everyone, to TechPrecision's fourth quarter of fiscal year 2009 earnings conference call. With us today are TechPrecision Corporation's interim CEO, Mr. Louis Winoski and the Chief Financial Officer of TechPrecision, Mr. Richard Fitzgerald.

Before I turn the call over to Mr. Winoski, I would like to remind our listeners, in this call, management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties. And management may make some additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and therefore, we'd like to refer you to a more detailed discussion of the risks, uncertainties in the Company's filings with the SEC.

In addition, any projections as to the Company's future performance represent management's estimates as of today, June 25, 2009, and TechPrecision assumes no obligation to update these projections in the future as market conditions change. With those formalities out of the way, it's now my pleasure to turn this call over to TechPrecision Corporation's CEO, Mr. Louis Winoski. Lou?

Thank you, Crocker. Welcome, everyone and thank you for joining us today for TechPrecision's fourth quarter of our fiscal year 2009 earnings call. In our fourth fiscal quarter, TechPrecision experienced dramatic change. First, the ongoing weak global economic conditions continued to impact our business as our end customers retrenched and credit markets remained tight. However, we were able to move quickly to resize our business to maintain our positive cash flow.

Second, I was appointed interim CEO following the resignation of James Reindl and Rich Fitzgerald accepted the position as Chief Financial Officer of TechPrecision Corporation. Rich will later discuss our financial results in more detail, but let me give you a brief summary now.

Revenues in the fourth quarter decreased 53.9% to $4.3 million compared to our same quarter last year. Gross profit declined 57.3% to $1.1 million, representing a gross margin of 25.8% compared to 27.8% last year. Our EBITDA was $500,000, which compared to $2.2 million last year, but due to a tax credit, our net income was flat at $900,000. Net income per common share was $0.06 and $0.04 basic and diluted versus$0.07 and $0.03 for the fourth quarter of the previous year.

Our fourth-quarter results largely reflected the reason downturn in demand for our alternative energy products and services. We believe the slowdown is temporary, but expect these conditions to persist for some time. These results demonstrate the importance of having a diversified customer base. As a result, our new management team is working very proactively to win long-term production programs to return TechPrecision on a growth path.

Our overall fiscal year 2009 results paint a much better picture. Revenues increased 19.8% to $38.1 million. Gross profits rose 45.4% to $12.1 million, representing a gross margin of 31.8%, up from 26.2% in the prior year. Our EBITDA was $10.2 million compared to $6.9 million last year. Net income increased 68.6% to $5.9 million. Net income per common share was $0.43 and $0.23 basic and diluted versus $0.32 and $0.12 for the previous year.

Now let me talk about our new leadership team. Most of my experience has been in the aerospace industry, having 21 years across a broad range of management positions, including President, CEO, Managing Director, Chairman of the Board of a variety of manufacturing and design firms in the United States, Canada and Europe. My experience spans vision and strategy development, fundraising, mergers and acquisitions, integration of diverse entities, supply chain organization and operational excellence.

Rich Fitzgerald has a wealth of experience having served as Vice President and CFO of Nucleonics, a private venture capital-backed biotechnology company. Before Nucleonics, Rich served as Director, Corporate Development at Exelon Corporation at PECO Energy Company. We expect to leverage his extensive knowledge of the nuclear energy industry and his demonstrated track record of identifying, financing and executing growth strategies to help take TechPrecision to the next level.

Both Rich and I, along with the rest of the operational team, have been busy developing a vision and strategic roadmap what we want to accomplish at TechPrecision for the next two years, now with goals, objectives and a fully executable strategy.

First, we've aligned Ranor's vision with TechPrecision's. We plan to extract greater value from Ranor's capabilities and by this time next year, plan to have four significant productlines in production and restore its workforce to full capacity.

Similarly, we look for TechPrecision to add three new scale opportunities, capabilities, through acquisition, joint venture or partnership that augment our value stream. As you can see, and hopefully will see, we are excited as we work diligently to complete our new roadmap despite weak macroeconomic conditions that persist.

With that brief introduction, I'd like to now provide you with an update on our progress in our key alternative energy, medical and nuclear businesses.

During our fourth quarter, our solar business declined as our solar customer had significantly reduced its monthly delivery requirements. Based on our research, it appears that end customers in the solar industry continue to invest in facilities expansion, so a ramp-up in capital equipment spending could occur in calendar year 2010 assuming capital markets become more fluid. We believe we will remain a key supplier to our important customer since we have been able to consistently deliver to very demanding specifications on critical components while enabling them to maintain a highly variable production cost model.

As we mentioned in the last call, within alternative energy, we are exploring potential new production programs for wind turbine and geothermal industries based on requests for quotations we received. In wind, we are working with two customers who develop cost-effective designs for two new types of wind turbine generators.

Our nuclear business represented about 5.3% of revenues in our fourth fiscal quarter. Our work in this area requires long leadtimes. However, given the background of this management team, having been involved in consolidation of the US nuclear fleet, we intend to take a much more engaged and proactive stance toward developing new business in this area. While we still believe the major ramp-up in new plant construction is a year or two out, the nuclear renaissance is happening now in terms of refurbishment and rebuilding the supply chain of key components. There are 104 operating nuclear power plants in the United States and most are filing for license renewal to extend their operating life another 20 years.

For example, Oyster Creek, a nuclear plant in New Jersey, just received approval for a license renewal extending its operational life by 20 more years. All existing plants require replacement parts and operators will now have up to 20 additional years to recover any investment in replacement equipment with budgets in the hundreds of millions of dollars for each plant that is refurbished.

TechPrecision is positioned to provide some of the replacement parts a currently operating plant may require. We've assembled a group of key industry consultants who will be scheduling visits with the major fleet operators and suppliers in the coming months to map out the greatest opportunities to support their needs.

Additionally, there are 20 to 30 new nuclear plant requests in the US. One of our customers, Westinghouse, is involved in building these next-generation nuclear plants. We believe they have a backlog of approximately 15 orders related to the AP1000 reactor design. Some of these plants will be the first to deploy newbuilds in China. Westinghouse has already outsourced some internal reactor components to Ranor and we believe we will be able to earn additional similar work in the future.

Just last week, on June 17, the Wall Street Journal reported that the Energy Department awarded $18.5 billion to federal financing to four power companies to build the next-generation nuclear power plants, which was the most significant development in 30 years to revive the US nuclear power industry. This would enable the companies to start building these new nuclear power plants as early as 2011.

In addition, 17 companies have applied for $122 billion of federal loan guarantees for 21 proposed reactors. The new power plants will require thousands of specialized parts and skilled a skilled labor pool to make them.

Our medical business continued to ramp up in the fourth quarter, accounting for approximately 14.1% of our sales. Currently, our backlog with our medical customer stands at more than $1.9 million. As you know, we are building, assembling and testing essentially all major structural mechanical components for the next-generation proton beam therapy machine for our customer.

After working with our customer for several years now, we are finalizing an exclusive manufacturing agreement to build these components for the first 14 systems. We expect their first new system to be in its final testing phases by this fall. Successful testing and FDA approval must precede continued production, which on the initial 14 units would result in roughly $35 million in sales to TechPrecision.

Presently, there are only five treatment centers using proton beam therapy in existence throughout the United States. We believe there could be a strong demand following the successful testing of the initial system, which could result in orders for a significant number of units beyond the 14 units already in our customers' backlog.

This quarter, we took a step back, but we have worked quickly and diligently to reposition TechPrecision for the long term. We are nearly complete with the development and deployment of a new strategic roadmap ahead. We believe we have the products and team in place and maintain a solid financial position to not only ride out the storm, but to thrive in the eventual upturn. On that note, I would like to introduce our CFO, Rich Fitzgerald, you will go over, in greater detail, our financial results for the quarter.

Thank you, Lou. I'm pleased to provide further details on the fourth quarter of fiscal year 2009. For the three months ended March 31, 2009, sales decreased to $4.3 million or 53.9% from $3.9 million in the fourth quarter of fiscal 2008.

Since our products are manufactured pursuant to contracts, which are based on capital budgets of our customers and potential customers, the decrease in sales reflects the result of the downturn in the general economy and specifically the alternative energy industry and the related lack of credit availability for our customers.

Starting in December 2008, our largest customer significantly reduced its monthly delivery requirements, which carried into the fourth quarter of 2009. Cost of sales for the quarter ended March 31, 2090 decreased by $3.5 million to $3.2 million, a decrease of 52.6%, with $6.7 million for quarter ended -- from a base of $6.7 million for the quarter ended March 31, 2008. Gross margin was 25.8% of net sales for the fourth fiscal quarter of 2009 as compared to a gross margin of 27.8% in the fourth fiscal quarter of 2008. The gross margin decline was largely attributable to decreased revenue from our solar customer and the accompanying decline in capacity utilization within our facilities.

Selling and administrative and other expenses for the quarter ended March 31, 2009 were $755,000 as compared to $456,000 for the quarter ended March 31, 2008, reflecting increased professional fees and marketing costs related to our Company.

TechPrecision had an income tax credit of $600,000 for the three months ended March 31, 2009 as compared to income tax expense of $1.1 million for the three quarters ended March 31, 2008 -- for the three months ended March 31, 2008. The tax credit in the March 2009 quarter was due to provisions of the American Recovery and Reinvestment Act relating to bonus depreciation on assets placed in service during the fourth quarter. Tax refunds and revisions in estimates have affected tax rates on an annualized basis that were captured and reflected in the fourth quarter.

As a result of the factors described above, TechPrecision's net income was $900,000 or $0.06 per share of basic $0.04 per share diluted for the quarter ended March 31, 2009 as compared to a similar number of $900,000 or $0.07 per share basic and $0.03 per share diluted for the same quarter ended March 31, 2008.

As far as our backlog is concerned, as of March 31, 2009, we had a backlog of orders totaling approximately $38.6 million, of which $28.5 million represented orders from our largest customer. This compared to $40 million of backlog at the end of our third fiscal quarter on December 31, 2008 and $33.4 million of backlog reported for the year ended March 31, 2008.

Subsequent to March 31, 2009, our largest customer canceled a portion of their orders, reducing the total backlog by approximately $16.8 million to a net figure of $21.8 million, of which approximately $11.7 million represents orders retained by our most significant customer. The backlog of this $11.7 million retained by our most significant customer also includes orders from other customers, of which five totaled more than $1 million each for a total of $8.3 million. We expect to deliver the backlog during the years ended March 31, 2010 and March 31, 2011.

We ended the quarter in a strong financial condition. At March 31, 2009, TechPrecision had working capital of $11.2 million as compared with working capital of $6.4 million as of March 31, 2008, an increase of $4.8 million reflecting our increased level of business achieved during fiscal year 2009.

The cash flow from operations was $9.3 million for the year ended March 31, 2009 as compared with $2.5 million for the year ended March 31, 2008. The increase in operating cash flow was due to the net effect of an increase in net profits, collections of outstanding account receivables and a decrease in costs incurred on uncompleted contracts year versus year. As of March 31, 2009, the Company had $10.5 million in cash and cash equivalents. Stockholders' equity increased during the period to $10.1 million, which is up from $4.2 million as of March 31, 2008. With that review, I would like to turn this call back over to Lou for some final concluding remarks.

Thank you, Rich. In conclusion, while we were very disappointed with our results this quarter, we have reasons to be optimistic. We were able to move quickly to resize our business to maintain a positive cash flow. We have laid out a new roadmap we think will allow TechPrecision and Ranor to capitalize on our unique capabilities to increase shareholder wealth over time. We thank you for your support. We look forward to speaking with you again in the future. With that, let's open the floor to questions. Operator?

(Operator Instructions). [Tony Pollack], Maxim Group.

Good morning. Just wanted a little more clarification on the medical sales. If I was right, you said something about 14 units in backlog. What is that right? And two, how can that be if there hasn't been FDA approval yet?

Yes, it's important to note when we were speaking of the 14 units, we are in the final stages of negotiating a contract with that customer where we will supply the first 14 US-based units, at least the critical components that we manufacture. We were referencing there as to what is in backlog today was in fact their backlog. They have not refundable deposits for 14 units from various hospitals and proposed treatment centers around the country. That is ahead of the FDA approval, which is still pending. At the moment, we are developing the prototype for them, so when we reference $1.9 million as our current backlog, that is the orders in our Company for the prototype components that will be used to gain FDA approval. So the backlog we were referring to there of 14 is actually their backlog, not ours.

But the $1.9 million, is that in relation to the 14 units or is that in relation to a lot less units?

That is the first two units that are really the prototypes under construction, one of which will be used to validate the equipment for FDA purposes.

So am I right in saying that you could be producing approximately a little less than $1 million per unit of product for this equipment?

No. Some of the revenue, when we report that $1.9 million, it is net of revenue we've already recognized, Tony. So what we anticipate on a per copy basis of the 14 that we are finalizing the contract for their entire US backlog right now, it will be about $2.3 million to $2.5 million of revenue for us per unit they deploy. Does that help?

And where does the FDA process stand or is there a timetable when they hope to get approval?

I think the way we understand it to play out is that, in the early fall of this year, they anticipate generating a bream from the equipment that they are assembling, the first unit. So that proton beam will ideally be generated, it will be characterized as equivalent to the proton beams that are in the clinic today. They will be able to demonstrate they have the ability to manipulate that proton beam and direct it to a tumor bed as is currently the case with the five units that are up and running. And I think that is largely an engineering test.

What will follow from there -- that is part of the approval process. I think what will follow from there is they will deploy a fully integrated unit, their entire design with all the componentry integrated. And that will be clinically validated by their first customer.

Once that customer gathers all of the data and the entire system is validated and characterized, at that point in time, we believe that that would be when they would apply to the FDA for the 510(b) approval. But again, it's important to remember that, in the case of a medical device, you merely need to demonstrate equivalency. Whereas in certain diagnostics and therapeutics, you have to demonstrate some superiority over existing technology to gain approval.

So we think if they can generate the beam, it is reasonably -- that is the real art in their technology. I think if they are able to do that, integrating that beam generating capability with their unique technology into an integrated clinical setting is probably -- it's just brute force and logistics.

Right. Is there any of the $100 million equipment on order right now and who produces that?

Of the type that are installed today, the large [protomic] accelerator --?

Yes, as we understand it, Tony, right now, I know, because I happen to live in Philadelphia, there is one being built down by the University of Penn and Children's Hospital of Philadelphia. It is largely backed by the Roberts family of Comcast fame. And that apparently has a price tag of some $140 million to $160 million and a big piece of the cost is the manner in which the proton beam is generated. It's on a football-sized field accelerating track. Our customer's technology has been able to shrink that footprint in a manner that you don't need as much square feet and as much capital cost to deliver a clinical proton bean therapy unit.

Who produces that?

There are actually several players who produce it. I am not entirely sure who is building the one in Philadelphia.

Okay, thank you very much.

Anthony Marchese, Monarch Capital.

-- questions for you. Could you talk about cash flow in the fourth quarter? I know you mentioned it for the year, but do you have a number for the fourth quarter?

Yes, Tony, cash flow in the fourth quarter -- obviously it tailed down with the earnings in the fourth quarter. I would have to -- I'll have to come back to on that. I really haven't tracked the cash flow statement in that manner, just the earnings release.

Okay. And have you disclosed CapEx anticipation for the following year yet?

We have not. We don't have any specific capital budget at the moment. We are tracking one of our machines that would either need to be replaced or overhauled such that we can maintain the capability that that machine provides for us. But that -- right now, we don't have a formal CapEx budget for the year.

What we have identified is what key pieces of equipment are going to require upgrading or refurbishment. But as part of the overall strategic planning, we are holding off on additional capital planning, for lack of a better word, until we understand what opportunities are in front of us. So that will become more detailed here in the coming months.

Another important consideration for that is we have equipment debt capacity and we intend to tap into that. During the last six to nine months, we've deployed an overhead crane in our East Bay facility and we have also purchased a fairly sophisticated milling machine. And that together we are probably going to finance in the July timeframe that will basically put debt that amortizes on that and we will access about $900,000 in debt proceeds for that. We still on top -- even after accessing that, we would have debt capacity to finance any meaningful CapEx that sits before us. Is that helpful?

Yes, thank you. First quarter, I know it's almost over, you have a week to go. Can you share with us -- how would you characterize it? Continuation of the fourth quarter? Just something to help us with what this quarter may look like.

I think if we were to contrast -- the fourth quarter of 2009, we had total revenue of about $4.2 million, $4.3 million. My expectation is we are probably more in the $3 million to $3.1 million, $3.2 million range for the quarter ended June 30, 2009. So there has been a continued slowdown and what we have seen there is a real pullback, as noted in the cancellation from our solar customer, in that piece of our business.

What I would comment on is, at one point, we had an opportunity -- we had two defense opportunities that were a little bit more than $2 million in revenue that we would have recognized some in Q1, some in Q2 of this year that those government programs, those defense programs were canceled and the work was withdrawn from our floor.

So right now, we are running right at about a breakeven to nominal flat run rate. We expect that will persist a little while longer, but we are seeing customers -- they are not canceling orders, they are deferring them later into the year in light of the economy and financing requirement.

Okay, so you would look at that level of sales as somewhat cash flow breakeven then I think is what you said?

Yes, $900,000 a month to $1.1 million, $1.2 million is sort of our breakeven the way we are configured right now.

Right, okay.

And that is largely where we have been, April, May and for the bulk of June as we sit here today.

Right. Just as a comment, it would be helpful to have more communication with the public in between earnings releases. As I look back on my Bloomberg, I see basically the only time you guys put out a press release is when you have an extraordinary corporate event like you had with your Chairman or earnings. But in between there is nothing. I just think it might be helpful to, if possible, try to update shareholders a little more regularly other than once every 90 days. I don't know if that is possible, but certainly as a suggestion. I know you have a new management team in there and I do appreciate the comment on the quarter. But I just think it would be helpful for the investment community to have more communication.

Tony, that is a very good input and Rich and I take that constructively. We have been getting our feet underneath us for the last 2.5 months and frankly there hasn't been a whole lot to talk about as we have been diving into the Company and giving it strategic direction and organizing to address some fundamental weaknesses in the Company.

Now, that said, you can expect, in the coming quarters, Rich and I are going to be much more active. We will be in New York next week for a couple of days meeting with the investment community. We expect to be making some announcements because, despite the difficulty we've had over the course of the last couple of quarters, we do have good reason to be optimistic. So we will have some good news out there as well. We expect to update the investment community on the progress we are making in our strategic initiatives. We feel we are pretty well-placed now to begin to turn our focus a little bit less inward and a little bit more outward.

Okay. And my final comment, then I will cede the floor and I appreciate the time that you have given me in asking these questions. One of the things that we have never seen out of the company is insider buying. I mean I know you guys probably are not in the stock-buying mode from a company standpoint, but if in fact, at these levels, you guys think that this is the trough in earnings and sales, it would be nice from the investment community to see some of the officers and directors buy some stock in the open market with the stock at these levels, which, again, if you have any success it seems to me in any of your programs, the stock should be a screaming buy at these levels. Again, that is just my commentary.

Yes, and I will comment on that just a little bit. Certainly one of the issues we suffer from our shareholder base and the way the holdings are is they are highly concentrated and we don't have a lot of daily float. That is something I would like to see change going forward here and certainly as we execute on this strategy and the story, we would hope to drive more buyer interest.

With regards to insider buying, I hear that refrain quite frequently across the shareholder base. But the issue becomes, if we are trying to drive trading, any sort of aggregation of shares amongst the management team or the directors only serves to concentrate illiquid pools of shares. I've got a goal that I want to increase the float, increase the number of shareholders and certainly insider buying is not something that serves that goal. But I understand why you folks look for those signals in the market.

Just as a commentary, and I specialize or my firm specializes in microcap stocks, I think the illiquidity at these levels is just, in my opinion, an inefficiency in valuation of the stock. If the stock were $1.50, you would be trading 20 times more volume than you do at $.50. We are in the only business where the lower something goes, the less people want it.

Yes, how about that.

Yes, but my point to you is, and I've seen this happen in numerous microcap stocks, the higher these stocks go on value, the more people want to buy them. So I wouldn't be concerned frankly about the fact there isn't much volume at these levels. If you perform, the stock will -- as it goes higher on very little volume, you will get more people trading the stock. So again, from my personal vantage point, I wouldn't be concerned about that. If insiders want to buy the stock, buy the stock. As you perform, the stock will go higher and those concentrated positions, in my opinion, will come down and it will get distribution. So I think performance comes first. As the stock goes higher, I think you will get the distribution you are looking for.

Tony, this is Lou. We believe that the stock is highly undervalued. What Rich and I have been doing as we've compared to the various other indices and to competitors in the space, we realized that one of the things that has been missing is a story around TechPrecision. And we have worked hard over the last couple of months to put that story together. I think you will see some more enthusiasm within the insiders, if you will. As we're executing and deploying on this strategy, it will be reflected in stock transactions.

Right. I appreciate that, thank you.

You're welcome.

(Operator Instructions). It appears that we have no further questions at this time.

Okay, well, we want to thank everyone for their interest in joining TechPrecision this quarter to discuss the Company's results. And as we mentioned, management will be in New York early next week and if you have a desire to meet with them, please feel free to reach out to us and we will be happy to accommodate those requests. This now concludes TechPrecision's fourth-quarter fiscal 2009 conference call. Thank you, everyone.

Thank you.

Thank you.

That concludes today's conference. Thank you for your participation.