TechPrecision Corp (TPCS) 2016 Q1 法說會逐字稿

Greetings and welcome to the TechPrecision Corporation first-quarter 2016 earnings call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Brett Maas, Managing Partner of Hayden IR. Thank you, sir. You may begin.

Thank you. On the call today is Alex Shen, Chief Executive Officer, and Rich Fitzgerald, 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 in 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 a more detailed discussion of the 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, August 17, 2015. TechPrecision assumes no obligation to revise or update these forward-looking statements.

With that out of the way, I'd like to turn to call over to Alex Shen, Chief Executive Officer, to provide opening remarks. Alex?

Thank you, Brett. Good day to everyone. Thank you for joining us. Opening the first quarter of fiscal year 2016 with net profit is certainly a significant achievement for all of us. This is the first profitable quarter the Company has reported since June 30, 2011 and the first profitable quarter since I joined the Company back in late June of 2014. Prior to my watch, we had 12 consecutive quarters of net losses. Prior to first quarter fiscal year 2016, we had 15 consecutive quarters of net loss. We now have one quarter of net profit.

We achieved this result with our consistent sharp focus on productivity initiatives resource realignment and topline growth with key customers. We improved profitability on a sales volume that was 30% lower than the same period last fiscal year. We ended the first quarter of fiscal year 2016 with a 39% decrease in selling, general and administrative expense and a positive gross margin of 29% compared to 3.5% for the first quarter of fiscal year 2015.

Moving forward, we intend to maintain the sharp focus that got us to this point of our recovery. We plan to increase our backlog and focus on new business contracts which utilize our core competencies in custom, large-scale, high-precision fabrication and machining with our core customers, which leverage our established expertise, our certification, and our qualifications in the defense, nuclear, and precision industrial sectors. We must continue to execute and maintain operational run rate improvements to improve our gross margins and increase the amount of cash generated from operations.

I'd like to now turn the call over to Rich Fitzgerald. Rich?

Thank you, Alex. I'll recap the three-month results for the quarter ended June 30, 2015. Net sales were $4.4 million compared with $6.2 million in the same fiscal quarter one year ago. The decrease was due to lower sales in the Company's precision industrial group and defense group, partially offset by increased sales in the customer's energy group.

Gross margins for the first quarter of fiscal 2016 were 29.3% compared with 3.5% for the first quarter of fiscal 2015. The increase was due to decreased costs from materials and decreased labor costs, as well as the absence of contract losses which are recognized on certain lost contracts during Q1 of the prior year.

As Alex alluded to earlier, total SG&A from fiscal first quarter of 2016 was $0.8 million or 39% lower when compared to the first quarter costs in the prior year. SG&A compensation expenses were lower due to reduced headcount in the United States and lower outside advisory service costs.

We continue to pursue a process to recover at least a portion of the contract losses we recorded last year. However, our efforts are now governed by the customer's Chapter 11 bankruptcy proceeding, which adds additional uncertainty to both the timing and the amount that we may ultimately recover.

On April 17, 2015, the Company, through Ranor, entered into an assignment of claim agreement with Citigroup Financial Products Inc. in which Ranor agreed to sell, transfer, convey and assign to Citigroup all of Ranor's right, title, and interest in Ranor's $3.7 million unsecured claim against GTAT -- GT Advanced Technologies, rather.

Citigroup paid to Ranor an additional amount equal to approximately $508,000. The assignment agreement provides for Citigroup to pay to Ranor up to an additional $614,000 if we and Citigroup are successful in transitioning Ranor's proof of claim within the bankruptcy proceeding to a formal allowed status within our customer's bankruptcy case. At this time, we have no further update on the bankruptcy proceedings or the status of this claim.

Turning to net income, our net income for the quarter was approximately $206,000 or $0.01 per share basic and fully diluted for the three months ended June 30, 2015, as compared to a net loss of $1.3 million or $0.05 per share basic and fully diluted for the three months ended June 30, 2014. This is based on a share count of 24.9 million, both basic and fully diluted shares, and fiscal 2015's first-quarter share amounts are based on 24 million basic and fully diluted shares outstanding.

Now for cash flow recap, we generated approximately $379,000 in positive operating cash flow during the first fiscal quarter of 2016. We finished the quarter with $1.5 million in cash and cash equivalents.

From a backlog perspective, our sales order backlog at June 30, 2015 was approximately $13.9 million compared with a backlog of $14.3 million at March 31, 2015. This backlog excludes orders canceled by our customer that filed for bankruptcy subsequent to March 31, 2014.

With that, I'd now like to turn the call back over to Alex. Alex?

Thank you, Rich. Our focus for the coming quarters is to increase our backlog and grow our pipeline of new business opportunities to leverage our core competencies and our expertise in our industry. At the same time, our manufacturing operations will continue their standards of high-quality production to fulfill orders we have in process. Essentially the diligence and execution that propelled us to this point of our recovery will continue as we aim to improve our gross margins and increase our cash generation.

I would now like to open up the call for questions and answers.

(Operator Instructions) Walter Schenker, MAZ Partners.

Hi, Alex. I guess congratulations again. It's nice to make money, and most shareholders don't remember when the Company made money.

The first question -- and I'll limit myself to just a couple of questions -- can you address your view of what the implications might be of one of your major customers -- historically Mevion -- putting its financial house in better order by getting a $200 million financing and how that might affect demand for you, especially if they grow the business in China?

Well, as far as applications go, that would require me to make some very forward-looking statements with my crystal ball, which I don't do very well. But having that investment from Mevion certainly bolsters their position, and with them increasing their volume possibly in China as they stated publicly, as they grow, I think we will grow. But it really remains to be seen what's going to happen next. I'm just very happy and ecstatic that a major customer of ours has bolstered their standing.

Okay. I'll ask one more question, and then I'll get back into the queue. In listening to your presentation, you indicated a goal -- so it's not a forward-looking forecast -- of growing revenues, growing backlog and improving margins. Realizing very little goes in a straight line, but having said that, you would, therefore, expect/hope Hope to remain profitable going forward on a quarterly basis?

Not so sure about expect, but this is the reason why I talk about 15 consecutive quarters of loss followed by one quarter of positive profit. So I have 1 data point; 2 points will make in line; 3 points will make a trend. I think we're all rooting for Ranor and TechPrecision to get another point so that we can have 2 data points to make a line.

I haven't really answered your question, though.

I know. I didn't really expect you to, but you are optimistic that as you look at your customer base your goals should be achievable based on the relationships you now have in place?

Well, we got here through our customer base and through the customers that have stuck with us and helped us as we were going through our recovery. My first three quarters of loss and the customers have stuck by us, so has our supply chain. So here we are. I would expect that we continue our consistent efforts with our current supply chain that have stuck with us and our current customers that have stuck with us.

I can't squeeze a really positive line out of you, can I, Alex?

I am not going to get positive or negative. Here are the facts. We are going to consistently approach the facts and deliver and execute according to the facts.

Okay. Thank you.

(Operator Instructions). Ross Taylor, Somerset Capital.

Thank you. Good quarter, Alex. Real quick -- on the Mevion, the relationship with Mevion, does it continue in the same fashion should the JV be successful? I.e., are you going to supply the same components for systems sold into China that you are supplying in the US?

That's a good question. I can't confirm that, but we have a very good relationship with Mevion. They have a very good relationship with us, so as we move forward, I'll have to report out what I find out.

Okay.

I can't really answer that without more facts.

Right. And they haven't sold anything yet at this point. But to your knowledge, is there anyone in China who can produce some of the parts and pieces that you think that you produced to the same tolerances that you produced?

Well, let's look at the facts. It's taken several years for Ranor to achieve this expertise in Westminster, Massachusetts. It's also taken Mevion several years to achieve their expertise, and between the both of us, we've taken all these years to grow it to this level of high precision and high level of execution with the ability to launch actual treatment centers in the field by Mevion.

So the China JV is not there yet. They are talking about that right now.

Okay. Looking at the current quarter and going forward, what sort of revenue run rate do you need to remain profitable?

The revenue run rate that I'm at right now is profitable according to my data from first quarter of 2016.

And so we do expect that you should be able to retain that revenue run rate this current quarter?

Well, that would cause me to project a forward-looking statement and focus.

But the stock is writing at $0.13. Come on, give us something.

Well, I think I am giving you something with the fact that it's one positive quarter after 15 negative ones.

Yes -- and two becomes a line.

I'm not trying to be shy. I'm just trying to (inaudible).

I never thought of you shy, so that's why I'm trying to get you to be bold.

Looking at the end of the year approaching, obviously there's the refi situation. You've been able to turn a profit at this point in time. Are you currently in or have you begun discussions about rolling the debt at this point?

Well, that is certainly something that I'm looking at.

Other than telling me the sky is blue, can I get anything out of you today?

Well, you know, when I went over and personally sealed that deal, I knew what kind of deal it was. It was a shorter-term deal for 12 months. So I didn't get here because I have bad planning. I got here because I know that it's for 12 months. So probably you would be correct in thinking that I've been dealing with it this whole time. I just I'm not ready to talk about it quite yet as far as where I'm going with what is on the refi.

Okay. Well, keep up the good work. Obviously you and the team have made a tremendous amount of progress in what seems like a long time, but is actually probably a very short period of time. So keep that up and I'll let Walter come back and ask additional questions.

Thank you for your support, Ross.

Robert Strauss, Private Investor.

Hi, Alex. How are you?

Hi, Rob.

Congratulations on the progress. I know you've gone through a lot of hard work -- you and your team -- and I look forward to the next 12 to 24 months as well.

A couple of my questions were asked, but I have just a couple more. We'll see if you answer any of them.

First, you've clearly turned around the gross profit margin level. At the current rate, do you expect that to continue, or if I were to look out over the next 12 to 24 months, do you expect with the right mix of business that that can go higher?

Boy, you three guys must be on the same page trying to ask me the different questions that will cause me to have forward-looking statements and forecasts. It would be foolish of me not to aim for that, right? It would also be equally foolish of me to try to forecast and pin myself down.

I guess then another way of asking, how do you expect your mix of business to change if at all?

I think our focus is very clear, and we're going to consistently execute our focus. So we don't expect changing our customers. We're going to stick with the customers that have stuck with us. If there are more customers, all customers are welcome.

Looking at the customer concentration in your 10-Q, there were some customers who clearly came in and had business with us, the quarter you just reported versus the same period a year ago. Were all of those customers existing customers, or were any of them new customers?

We have no new customers.

Okay. Thank you very much. Keep up with the great work, and good luck in the current quarter.

Thank you.

[Jim Koenig], [Taseka Capital Partners].

Alex, just two quick ones. In the quarter just reported, was Mevion in there at all as a customer?

Yes.

So you are still selling some small stuff to Mevion?

Correct.

And they are an existing customer?

Correct. I don't know that I would say anything was small or big. They are a current customer. They continue to be a customer.

So you're still supplying -- because I follow Mevion and I follow all the stuff. They have five units under construction, so you are supplying -- since you guys are -- they say you are the exclusive on some of their arms and all that, you are still supplying some of their product?

Well, if you follow Mevion, then you are free to look at their website and follow them as well.

I do. I do. So I'm just curious whether you've shipped everything before the current quarter or not. That's all.

That would be telling, wouldn't it?

Yes. Okay. The other question I got and maybe Richard can answer it, how is the claim -- or the money that you guys got from Citibank recorded? Is GTAT written off entirely, then you get $500,000 on the claim, or how does that get recorded?

Do you want me to take that, Alex?

Sure, Rich. Please do. Thank you.

Great. So if you look at the way that the claim sale was recorded -- again, that was mid-April when we transacted with Citigroup, so we received roughly $508,000. Because that is contingent -- it's basically an advance on the claim rights they purchased, and our claim -- what was a disputed claim with GT. If you remember we were in arbitration with them last summer leading up to their bankruptcy filing, so the term of the bankruptcy court is allowed. We would like to have our claim allowed. When that happens, we're eligible to get further cash payment from Citigroup, and once that claim is allowed at a level, we will settle up with Citigroup.

That said, if our claim was not allowed at all, we would have to make a refund back to Citigroup. Now obviously they don't believe that that's going to happen and nor do we, but again in a bankruptcy case, it's hard to predict. For that uncertainty -- debit cash or credit liability is the way it's recorded in the 10-Q and also the financials you see in the press release.

So the total receivable is gone. You wrote the total receivable off?

Right. That was all last year. In March 31, 2014, we had zero balance sheet exposure to what would happen with GT, and that's really how the accounting rules require us to behave on that kind of uncertainty.

Okay. So right now you've got cash, $500,000, and then I see your advanced claim payment has a liability.

That sits there until it's resolved. Exactly -- until the recourse that Citigroup has is resolved and the way that recourse would be resolved is our claim would the somewhat adjudicated within the bankruptcy proceedings, and some portion or all of it would be allowed, which means it's fully recognized along with all the other unsecured claims, and disputed piece of it or any dispute type would be resolved between us and GT.

And if you get this $507,000, it goes in the income -- into other income?

At that time, whenever the uncertainty would be resolved, yes.

Okay. All right. Thanks, guys.

Walter Schenker, MAZ Partners.

I'll keep trying a little bit more and then let you go. First -- and I don't know the answer at all -- are there opportunities and are you pursuing recovery on any of the other business that was done historically where there was substantial cost overruns?

I'm not sure I understand the question, Walter. Are you asking me --

GTAT wasn't the only person TechPrecision managed to lose a lot of money manufacturing for over the last couple of years. I was just wondering if there are any other of those loss programs you did in the past where there is an opportunity to come back to try and recover something, or basically this is the only one which is GTAT and the rest are just history?

The rest are basically historical leftovers, so we finished those contracts. I'm not so sure it's the best idea known to Alex Shen to go back after a customer when we concluded the contract and ask them for more money.

Okay. It depends on whether or not you believe the customer treated you appropriately. I realize the Company has something to do with it. But the answer is, that will not probably take place.

Well, I wasn't there so it's difficult for me to pursue. I just deal with those facts. If I was there and I was able to witness that myself and present the facts as I saw them, then I would have some grounds for conversation with the client.

Walter, that all comes from change orders. We're much more active with our customers on change orders when the scope of a product changes than before Alex and the new regime was in place. And with the case of GT, that was pretty much a bright line contractual issue. We basically are holding them both in the arbitration and in our bankruptcy claim. We are holding them to the letter of their terms and conditions and their purchase order, which we believe they breached. So that was a little bit more of a bright line issue. The other issues you referenced are probably water well over the dam in that you've got to be very proactive to assert change orders in these types of contracts, and we are doing that now, whereas former leadership we didn't always get those right up front the way you need to do it.

Okay. Last tried to get Alex to make a forecast, you would expect, as you now look at the business, that the operating business should not require -- should be cash flow positive with the exception of the ups and downs of receivables versus payables. The business should not burn cash except for working capital?

Well, the business is inherently lumpy. I think that's what you are speaking of, so yes. Are we going to burn capital ever again, or are we going to stay positive? I don't know yet.

Okay. I give up. Thanks, Alex.

Absolutely, Walter.

Mike Schellinger, MicroCapClub.

Regarding gross margin in the current quarter, were there any unusual items that would lead to the numbers you got, like cost basis on materials being unusually low or some kind of unusual product that was much higher margin?

Rich, correct me if I'm wrong, but if anything unusual is detected, we are obligated to report such unusualness, yes?

Exactly. We try to compare the quarters back and forth.

So since there was no unusualness reported, we are a compliant company -- compliant to SEC regulations.

Okay. Thank you. So then regarding your current backlog of business, is it fair to assume that the margin on that would be relatively similar to what you had this quarter?

That would be another stab at asking me to forecast the margin; correct?

Well, I guess maybe if you consider it that then, yes, okay, but you probably know what's in your book already. But if you don't want to talk about that, that's fine.

Thank you.

I don't have any further questions at the moment.

Thank you. Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back over to management for closing remarks.

Thank you all for your time today. We do look forward to updating you on our progress during our next call. Thanks, everyone.