TechPrecision Corp (TPCS) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TechPrecision Fourth Quarter 2017 Earnings Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host, Brett Maas, of Hayden IR. Sir, the floor is yours.

Thank you. On the call today is Alex Shen, Chief Executive Officer; Tom Sammons, Chief Financial Officer. The call is also being simulcast on the company's website, www.techprecision.com.

Before we begin, I'd like to remind our listeners that management's remarks may contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the safe harbor for forward-looking statements, as contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore, we refer you to a more detailed discussion of risks and uncertainties in the company's financial filings with the SEC. In addition, projections as to the company's future performance represents management's estimates as of today, June 28, 2017. 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?

Thank you, Brett. Good day to everyone. Thank you for joining us. The fourth quarter of fiscal year 2017 was another quarter of operational and financial progress.

For the fiscal 2017 full year, we reported net income of $5.1 million compared to a fiscal 2016 net income of $1.4 million. Fiscal 2017 net income includes a $3.9 million partial reversal of our tax valuation allowance. This is the second consecutive fiscal year of positive net income since fiscal 2015. We achieved this result with our consistent sharp focus on productivity initiatives, resource realignment and top line growth with key customers. We have not altered our focus. We target defense as our primary focus with a secondary focus on nuclear and other high-precision industrials. Our business is subject to uneven or lumpy revenue, lumpy customer order streams and a lumpy mix of lower and higher-margin contracts. This lumpiness in our business is not likely to change in the future. This lumpiness can easily affect the performance of 1 or 2 quarters. In my opinion, the best way to look at our business results is over a 12-month period.

Fourth quarter profitability of fiscal 2017 was impacted by the lumpy mix of lower and higher-margin contracts. Pretax income was approximately $220,000 compared to $885,000 in the year-ago quarter of fiscal 2016. Our sales order backlog at March 31, 2017, was approximately $15.8 million compared with a backlog of $19.8 million at March 31, 2016. We continue and are working diligently with our customers to replenish our backlog.

In fiscal 2017, we refinanced all of our long-term debt and as a result, will decrease our principal and interest payments over the next fiscal years by approximately $1 million. Cash provided by operating and financing activities totaled $2.5 million, and our working capital was $5 million.

Now I'd like to turn the call over to Tom Sammons to tell us more about our fourth quarter and our full year financial results. Tom?

Thank you, Alex. First, I'll cover the operating results for fourth quarter of fiscal 2017, and then I will cover the full year results.

Net sales were at $4.9 million for the fourth quarter of fiscal 2017, 1% higher when compared to the same fiscal quarter 1 year ago. Net sales increased -- increases of components shipped to our customers in the defense and energy groups more than offset decreased sales to lower -- on lower shipments in the country's precision -- company's precision industrial groups.

Gross profit decreased for the fourth quarter of fiscal 2017 to $1 million compared to $1.7 million for the fourth quarter of fiscal 2016 due to a higher mix of low-margin contracts. Total SG&A for the fiscal fourth quarter of 2017 was $745,000 or 16% lower when compared to the fourth quarter cost of $903,000 in fiscal 2016, as lower compensation was partially offset by increased spending for advisory fees and outside services.

Our net income for the quarter was approximately $3.1 million or $0.11 per share basic and 11% fully diluted for the 3 months ended March 31, 2017, as compared to a net income of $885,000 or $0.03 per basic share and fully diluted for the 3 months ended March 31, 2016.

Moving on to the full year financial results. For the 12 months ended March 31, 2017, net sales increased by $1.7 million to $18.6 million. Net sales to our customers in the defense group, precision industrial groups increased by $2.2 million and $1.2 million, respectively, primarily due to sustained demand from our core customers. These increases more than offset a decrease in net sales of $1.7 million to our energy group as the company worked to replenish backlog and start up new projects.

Selling, general and administrative expenses for fiscal 2017 were $4.3 million compared to $3.4 million in fiscal 2016, representing an increase of approximately $1 million or 28%. This increase is primarily driven by a $1.1 million increase in noncash stock-based compensation and a $0.4 million increase in advisory services offset by a $0.5 million decrease in employee-related cost in fiscal '17 as compared to fiscal '16. The company also recognized a gain of $1.1 million in our fiscal third quarter ended December 31, 2016, related to the settlement of a claims assignment, which was offset by the increase on the stock-based compensation.

Interest expense was $644,000 in fiscal 2017, down from $752,000 of interest expense in fiscal 2016, due primarily to lower amortization of debt issuance cost and lower interest rates. Based on current borrowings, we expect interest expense of $420,000 in fiscal 2018 and $355,000 for fiscal year 2019.

We recorded a tax benefit of $2.8 million in fiscal 2017. This benefit includes the release of a tax valuation allowance in certain tax jurisdictions. The company reached this conclusion as a result of the company's return to profitability and the weight of other positive evidence under the accounting guidelines set forth in ASC 740 Income Taxes. As a result of the foregoing for fiscal 2017, our net income was $5.1 million or $0.18 per share basic and $0.18 per share fully diluted compared with net income of $1.4 million or $0.05 per share basic and fully diluted for fiscal year 2016.

Fiscal 2017 EPS was based on an average weighted share count of approximately 27.9 million and 28.6 million for basic and fully diluted shares, respectively.

Turning to the balance sheet. Our working capital increased year-over-year by $4.5 million to $5 million at March 31, 2017, from $0.5 million at March 31, 2016. We finished the year with $3.1 million in cash at March 31, 2017, representing an increase of $1.7 million from the March 31, 2016, year-end balance.

Cash flows provided by operation was approximately $1.7 million in fiscal 2017, due primarily to our improved operating performance and the settlement of the claims assignment with a final payment received of $614,000. The company expended $788,000 on new equipment. Net cash provided by financing activities was $792,000 as we completed a refinancing of all our long-term debt during fiscal 2017.

With that, I will now turn the call back over to Alex. Alex?

Tom, thank you. Moving forward, we will continue our focus on winning new contracts with our established customers in the defense, nuclear and precision industrial sectors, utilizing our core competencies and know-how in custom, large-scale, high-precision fabrication and high-precision machining to be a valued high-quality supplier. We see meaningful growth in the defense sector. Additionally, we will opportunistically pursue contracts in the nuclear and precision industrial sectors. We will continue to execute and maintain operational run rate improvements to improve our gross margins and increase the amount of cash generated from operations.

I'll take a few minutes now for a quick recap of our progress since June of 2014 when I joined Ranor and also provide some color of where we are. The company was in trouble then, and now is not. TechPrecision and Ranor have now demonstrated that it can maintain consistent profitability and maintain the steady improvements in our operating results.

Three significant changes I'd like to point out: one, customer trust; two, employee trust in the leadership; three, a focused backlog. With 1 and 2, with customer trust and employee trust, we were able to steadfastly grow our way out of trouble. Developing a highly focused backlog focused on harnessing the strength of the company matched with customers who place great value on the ability to deliver complex, critical, high-precision, high-quality work.

Next, a picture of the growth opportunities ahead of TechPrecision and Ranor. Primarily, we serve the defense industry and more specifically, naval submarine manufacturing. According to publicly available information, over the next 2 decades, there will be a significant increase in demand on the nuclear shipbuilding industrial base. Over the last 15 years, delivery requirements for Virginia Class fast attack submarines equaled 14 submarines, while there were no delivery requirements for Columbia Class intercontinental ballistic missile submarines. The outlook for the next 15 years, 2017 through 2031, is for 28 Virginia Class submarines plus 12 Virginia payload modules. Payload modules are payload modifications to Virginia Class submarines. Plus, 2 Columbia Class submarines. This is over the next 15 years.

I attended a submarine builder supply chain conference, where the Department of Defense base budget was reported to be $523.9 billion, with the Columbia Class submarine program being the #1 priority for the Navy. TechPrecision Ranor has been successfully manufacturing components for these programs and continues to receive customer purchase orders for submarine components.

At the end of fiscal 2017, 81% of our backlog consisted of submarine-related orders. The increasing submarine build rate provides the company with solid revenue and solid revenue growth opportunities for the next 15 years. Also, as mentioned previously, we will continue to opportunistically pursue contracts beyond the defense industry in the nuclear and precision industrial sectors.

The company has grown our way out of trouble to reach stability. And for fiscal year 2018, the board, the management team and all of Ranor are aiming for another year of growth.

I would also point out that each of the directors on the board of directors and top management, Tom Sammons and myself, are significant shareholders, option holders, committed to enhancing shareholder value over a reasonable time frame.

Now I'd like to open up the call for questions and answers.

(Operator Instructions) Okay, we have a question that came in from Al Shams.

A couple questions. Number one, how much business do you think we derive from each submarine that's built? Secondly, what kind of business could we expect maybe or hope to get outside of naval vessels in the nuclear area? And then thirdly, do you have any kind of plans to tell this good story to others who might have an interest, small cap money manager, et cetera? So I'll wait your response.

So I'm not really exactly sure what -- how to answer the first question on what percentage business per submarine. It's quite small.

But -- no, I was thinking in terms of gross. I mean, is it $600,000 per sub or $2 million per sub or $8 million per sub? Is there any kind of quantifying number like that?

I don't have that number right now. We -- probably, that number would change as we go forward and grow more and secure more contracts on what we're bidding now.

Okay, okay. What other type of nuclear business might we -- are we bidding on outside of naval vessels?

So the naval vessels are not part of our nuclear sector. The nuclear sector consists of customers such as -- that would build a nuclear plant. Energy. Nuclear energy sector, right.

Okay, okay. I mean, here in Georgia, we have a huge problem with Westinghouse. Toshiba built a nuclear power plant. I mean, is there -- can we expect other nuclear plants to be built or retrofitted over the next 5 years? And you would have (inaudible) .

So we don't provide only for end users in the U.S. The growth was not -- the growth would not be in the U.S. since the nuclear energy generation base in the U.S. is not taking off.

Okay, okay. And then lastly, how are we thinking in terms of trying to tell this story to other potential investors?

I'll have to think about that. I don't have a good answer for you, Al.

Our next question comes from Steve (inaudible).

What percentage of the most recent fiscal year revenues were tied to the naval submarine industry?

Excuse me? Can you repeat that question?

Yes. What percent of the most recent fiscal year revenues were tied to the naval submarine industry?

Most recent as in this past 2017 or 2016? I'm sorry, you're crackling quite a bit.

Yes, 2017.

One moment. Let me come back to you on that.

Okay. A few years ago, there was a lot of enthusiasm, optimism for -- with the Mevion relationship. And it seems like they -- I think they've got 7 machines out there, but they really haven't sold additional machines beyond that. What do you see coming out of this relationship? Is it dead? Or is it still viable or...

I'm not at liberty to comment on specific customers.

Okay, all right. And then under the -- with the new administration, there's been talk about bringing manufacturing jobs back to the United States and improving manufacturing here. Has that led to increased business or -- with the company?

I don't see where -- there's any effect with whomever is in the administration. That is my personal opinion, and I don't see that affecting Ranor. I do have an answer for you as far as percentage. It's under 80%, the answer to your first question, what percent of business was submarine-related in 2017.

Okay, it looks like he dropped off.

Our next question comes from [John Hardison].

A couple questions. First one, why are you not on the board of directors?

I don't know the answer to that question.

I guess as a shareholder and somebody that's been invested in, in public companies, it would seem that you should be on the board of directors since you are hands-on running this company. So I guess my recommendation would be, one, that you go on the board of directors. And then I guess a follow-up to that is you -- I don't know if you, but we have changed the board of directors of your company. I guess the question to you is, what value do these new guys add since they are not running the company?

So the value that the board adds is not in running the company. Because if they are running the company, you probably should fire the CEO and CFO, in my opinion, because these guys probably aren't doing the job if the board has to do their job. They do add value.

I guess I -- my question is more to strategy and increasing shareholder value. The board -- my experience is the board takes recommendations from the CEO, CFO, and they approve budget, strategy, capital and whether it's a return of dividends, whatever. So the board approves the strategy, and I'm trying to -- I'm struggling with -- is the strategy to grow TechPrecision? I think I heard you rightly that you want to grow it. Or is the board going to say, okay, let's take the cash, return it to shareholders?

I don't know that I can answer the take the cash, return it to shareholders. I can tell you that we are on a growth path, and we have a trend of growth. We actually have 8 quarters in a row of profitability, which is pretty good.

Oh, I -- Alex, I congratulate you. I am happy you are sitting where you're sitting. My only challenge to what happened in the last 6 months. I'm not -- I wasn't happy with paying the prior board all the money and shares because I think you basically got us to where we are today. My only question is, we brought in new board members who we are going to compensate, and I would like them to add value to what you're doing, and that gets into understanding strategy, understanding how to improve shareholder value. And I think I'm just talking, but that's what I would like to happen as a long-term shareholder. I'm not criticizing you at all. I would recommend you for the board because I think for them to make a decision in strategy and governance, they should be sitting with the CEO.

Well, the strategy would probably come from the CEO, not from the board itself because the strategy is closely tied to the match between the strengths and weaknesses of Ranor versus what the customer base wants to get from Ranor. The value that the...

(inaudible)

Go ahead.

I agree with you there. I agree with you 100%. I think the CEO is the key person in a company like yours. That's why you sitting on the board, explaining your strategy, explaining what you and Tom do, I think, is critical because I have a hard time -- again, I have done this before. I've been on boards. And if the CEO isn't there, then you have a country club of directors that does -- don't add a lot of value besides oversight, which I can -- I'm not sure how much that adds. But anyway, we need oversight. Anyway, my recommendation is you go on the board. My view is that the strategy, I'd like to hear -- I like what you're saying. I believe in a growth strategy. I would like the board to be on -- support that and help you get there.

I would say that both boards have supported quite well as far as supporting the strategy and helping us dig out of the hole and grow out of the hole. We've enjoyed the -- working with the previous board as well as the current board. I am not just pandering here, I'm telling you a fact.

No, no. And, Alex, don't get me wrong. I'm not trying to say anybody wasn't doing it. All I'm saying is, as an outside shareholder who's been around a while, I'm very pleased with what you've done. I support everything you've done. I wasn't real happy with the prior board, but that's water under the bridge. I would just like, if we're going to have new directors and pay these directors, that they add value to your business, to what you're trying to do. And it just seems like Alex should be on the board because you add more value than anybody else. And there are certain things that -- as a shareholder, I'd like to see you guys get listed on the NASDAQ. I'd like to see a strategy that uses cash to grow it. What you just described, I think, is great, the submarine business and what you're doing. So anyway, I don't think I need to say any more. You heard me. I appreciate what you've done, I'm thankful.

Thank you, sir.

And there are no further questions.

Thank you, everyone.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.