TechPrecision Corp (TPCS) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TechPrecision First Quarter 2018 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; and Tom Sammons, Chief Financial Officer. The call is also being simulcast in 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, August 14, 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?

Brett, thank you. Good day to everyone. Thank you for joining us. The first quarter of fiscal year 2018 was yet another profitable quarter of operational and financial progress, continuing our trends, and bolstering our confidence that we are on the right path. Our improved quality and consistent on-time delivery is resonating with key customers. Net sales were $5.8 million, an increase of $1.2 million or 26% when compared to the same quarter a year ago. Income before income taxes were $712,000 or 57% higher than the same quarter a year ago.

Tax expense was $287,000 in the first quarter of fiscal year 2018 compared to tax expense of $10,000 in the same quarter a year ago. Net income in the first quarter of fiscal 2018 was $425,000 compared to $445,000 in the same quarter a year ago. We expect to maintain profitable levels on an annual basis. In addition, we generated $574,000 of cash from operations, and increased our cash position to $3.3 million at June 30, 2017. This was the largest quarterly revenue achieved in the last 12 quarters. We are moving forward to replenish backlog by maintaining our focus, targeting defense, nuclear, and precision industrial markets.

Now I'd like to turn the call over to Tom Sammons. He'll tell us more about our first quarter financial results. Tom?

Thank you, Alex. As Alex noted, net sales for the first quarter of fiscal 2018 were $5.8 million or 26% higher when compared to the same quarter a year ago. Net sales in our defense market increased by $2 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. Net sales in our energy market increased by $0.7 million when compared to the same quarter last year, primarily on higher shipment volume of nuclear plant components. Net sales in our precision industrial market decreased by $1.5 million on lower shipments of large scale medical device components.

Gross profit increased for the first quarter of fiscal 2018 to $1.7 million compared to $1.5 million for the first quarter of fiscal 2017. The improvement can be attributed to the higher revenue volume, offset in part by an increase in an unabsorbed overhead cost. Income before income taxes was $712,000, a 57% increase over the same quarter a year ago. Income tax expense was $287,000 for the first quarter of fiscal 2018, as estimated tax expenses provided against interim results based on our annual effective tax rate. Income tax expense was lower for the quarter ended June 30, 2016, due to the utilization of net operating losses and the associated reduction in the valuation allowance that had been provided for this deferred tax asset.

Our net income for the quarter was approximately $425,000 or $0.01 per share basic and fully diluted, for the quarter ended June 30, 2017, as compared to a net income of $445,000, or $0.02 per share, basic and fully diluted, for the quarter ended June 30, 2016. Fiscal quarter -- first quarter fiscal 2018 EPS is based on an average weighted share count of approximately 28.8 million, and 29.8 million for basic and fully diluted shares, respectively. Our backlog at July 31, 2017, was $13 million compared to $15.8 million at March 31, 2017, however, up from $11.6 million at June 30, 2017.

Turning to the balance sheet. Our working capital increased by $664,000 to $5.6 million at June 30, 2017, compared to $5 million at March 31, 2017. As Alex mentioned earlier, we finished the quarter with $3.3 million in cash at June 30, 2017, representing an increase of $266,000 from March 31, 2017 year end balance.

Cash flow provided by operations was approximately $574,000 in the first quarter fiscal 2018. We utilized about $213,000 for the purchase of new equipment and approximately $175,000 to pay down debt.

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

Thank you, Tom. Moving forward, we will continue our focus on winning new contracts with our established customers in the defense, energy and precision industrial markets, 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 opportunities in the defense sector, and we'll pursue contracts in the aerospace, nuclear and health-care sectors. We will continue to execute on operational run rate improvements to increase our gross margins and cash flows.

Further expanding on what Tom talked about, utilizing about $213,000 for the purchase of new equipment, we have judiciously made CapEx investments to increase our capability, as well as capacity to prepare ourselves for new business that we look forward to securing as we move ahead to continue our focus on the markets that we have done well with in the defense, energy and precision industrial markets.

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

(Operator Instructions) Our first question comes from -- (Operator Instructions) Okay. Our first question comes from Ross Taylor.

Alex, what I'd love to get a better understanding of is how you see the stronger revenues you're beginning to produce here turning into meaningfully higher earnings per share?

Okay. I think as we -- so I think as we progress into stronger revenues, this is quarterly, the best quarter by far for the last 12. So the -- with the lumpiness of the business, we'd like to look at it on an annual basis. Having said that, how do we use our stronger revenues to make stronger earnings per share? So it would probably depend quite a lot on the mix. There's going to be a balance between higher profit margins and lower profit margins, as that lumpiness gets mixed into the mix. I don't know that I'm answering the question quite well, though.

No, what I'm trying to get at is, I mean, you've basically been producing $0.01 or $0.02 a share in earnings per share per quarter in here. And as a public company, you -- to me, as a -- we're substantial shareholders, we believe that you need to be able to kind of push these numbers meaningfully higher, meaning, push the earnings numbers on an annual basis from the $0.05, $0.06, $0.07 a share range to something in the neighborhood of $0.15 or $0.20 a share, or bluntly, it doesn't make a great deal of sense to be public. My assumption is your public company costs are probably between $1 million and $1.5 million a year, and with your share count, that's a fairly substantial drag on the earnings performance of the company.

I can't disagree with anything that you've said so far. Absolutely. The -- so the income, the net income, as we have stronger revenues, depending on the mix, I would expect it to go up, not down. So it should contribute. I'm just trying to be careful because of the mix and because of the lumpiness. That's -- that was all I was trying to do. When we achieve higher revenues, I don't expect to sacrifice profits in the name of just having a higher revenue number. I'd be doing all that extra work for -- I could do less work, and still have the same amount of gain, stay in the same amount of [gain] above this. It wouldn't make too much sense. So I personally drive myself to keep a consistent percentage in mind as we increase our revenues, have stronger revenues, therefore, the absolute dollar numbers for net income would go up. And I just absolutely cannot argue with how much the public cost is -- nobody could argue with that logic, I don't think.

Okay. Because as we look at, it's an inefficient structure. You've obviously done an excellent job building cash. You've done a good job turning this company around. But in reality, for a variety of reasons, the stock has not responded, and some of that, I mean, in this quarter you look at it, you're now back to being a taxpayer, but which will act as a bit of a drag, but the simple fact is this company seems to be significantly undervalued in the public market versus what it should be worth, given the kind of numbers you're not only are capable of producing, but are beginning to produce.

Yes.

Okay. Also, one of the -- what kind of lead do you have on your defense and your major business? I mean, looking at your backlog, you obviously had a very strong quarter in 2 or good 3 areas. The third area, obviously, the medical related was weak. But what type of insight do you have to that backlog from the defense space?

I can give you publicly available information quite readily. So what we are bidding on and beginning to secure contracts on is, for example, by the largest piece, is Virginia Class, Block 5. Block 5 consists of 10 boats, and so we have vision into that. Block 4 sourcing is not completely done yet. That's also for 10 boats. It's almost done. There is also Block 6 and Block 7 for 5 boats each. That's the vision that I have, and that expands into for the next -- over 2 decades.

Yes, and there's been some talk that the Navy wants to increase production of these boats because they see themselves falling below their desired level of the fleet operating boats.

Of growing coverage for world peace, yes.

Yes. And so, obviously, that is not in these numbers yet. When you look at that, these are obviously long-term contracts. What do you -- what's the competitive environment you're facing? And if you see if the Navy adds another 0.5 boat to 1 boat a year, what does that mean for you?

Well, if the Navy adds another 1.5 boats a year or so, so the application of CapEx, at this point, in time maybe looked at upon as premature, but we think of it as building ahead, because we are seeing the uptick and the need to provide increased capability and capacity in some key areas of both fabrication and machining. We're doing that in preparation. I hope that answers the question.

Right. And so some of this CapEx you did this quarter, actually, is anticipatory to additional and increased production years ahead?

Right. So just because we spend the money doesn't mean that the machine's actually tuned in and active yet. So as we go through and we tune it up, and we try to get orders to let the customers that come visit are highly energized to try out these new things that we have, these new gizmos that we have. So they're active in wanting to give us something to try out to make sure that it works, and we encourage that behavior because we didn't -- we don't want to buy things and have them not used. So that's good. And then that will also pave the way to future sourcing, because we have demonstrated that we're willing to spend money ahead to have the ready to be used capability and capacity.

And so this new capacity, these new machines like actually add additional capability, so it's not just to do what you've been doing better, but it actually allows you to do new things for these customers?

It gives us more redundancy, to be more blunt. So therefore, the higher redundancy we have, the better the defense market reacts to sourcing. So we have more -- if this is not available, then you have that one now, right, kind of thing, yes. And instead of 2, you have 3 choices. So instead of, for example, to be more specific, we can put these angles on pieces of sheet metal either in the fabrication shop by cutting them or we can machine them into place. Now if you could do it in both places, that would be great.

And this kind of stuff give you that capability?

Absolutely, yes.

(Operator Instructions) Our next question comes from Wilson Schenker (sic) [Walter Schenker].

I like Wilson Schenker because maybe I'm not supposed to ask a question. Could you please clarify the statement by the last person about TechPrecision now being a taxpaying company, and whether or not the company is actually paying cash taxes?

This is Tom. The -- we are not paying tax. We're recognizing tax expense, but we'll not pay taxes until we utilize our net operating losses and deferred tax assets.

Until we finish.

Until we finish utilizing them, yes.

So just to answer the question very clearly, we are not paying cash taxes. We are a taxpaying company now. We're making money and paying taxes, but not in cash.

Not in cash. We're not paying tax. We're recognizing the tax expense, but it's being offset by the deferred tax assets.

Our next question comes from Ross Taylor.

Following up on Mr. whatever his name was, what is the current level of deferred tax assets?

$3.1 million.

$3.1 million, okay. And what kind of run rate do you expect? How long do you think those last?

Ross, that would be dangerously close to forecasting.

No, no, no, not at all because I have to ask you -- I'd have to do this (inaudible).

I would expect that we're going to extinguish that inside of 2 years.

Okay. Now if you're able to extinguish $3-plus million of tax credits and the like, tax loss carryforwards in a couple of years, you're going to generate a lot of free cash flow. Currently you have about, what, $3.3 million in cash on the balance sheet. You have what -- I missed the debt level, but it's 5 and change?

Correct.

5.5.

5.5

5.5. So basically, I mean, you have about $2.2 million in net debt, which is a pretty amazing recovery from where this company was a few years ago. You're generating free cash flow. You just put $300 million in free cash flow in the quarter. That gives you kind of a run rate if you can keep things here, north of $1 million. That means that within a couple of years, you literally have no net debt, which is a sub-optimal capital structure. What do you do -- given the nature of this business, what do you do with that cash? Do you -- does your board -- I mean, looking at your board, it would strike me, as I would expect to see some form of return of capital to shareholders if you end up in a situation where you're going to be approaching net debt free for this company?

That certainly would be one of the choices. Absolutely. Another piece that we need to look at is more CapEx spending since many of our pieces of equipment are in north of 2.5 decades old, and the time that -- I've only been here for 3-plus years, and we're starting to do some CapEx. There's some overhauls that are long overdue as well. So I think judicious capital of -- judicious application of this cash is necessary, and both between CapEx and what you mentioned, absolutely. Those two are good choices.

Okay, because it really looks like you are on the cusp of being able to break this company out in a meaningful way operationally and financially, fiscally. That's not a forecast. It's a question.

Well, it's certainly what you have hired me to do. So we are running at the damn thing, Ross. I think our trends are showing that. I think I'll be fairly clam-like and still not forecast too much, but it's getting -- it's looking better, isn't it?

Well, yes, and it's looking quite honestly where if it wasn't on, I think, the execution, operational execution has got to be strong consistently, and the issue really here going forward is -- and is converting more of the operation, growing the top line, converting cash, and quite honestly, working our way through the sellers who might or might not be people who I'm glad are no longer associated with the company.

Yes. And not to belabor a point, which is largely ignored when companies are recovered, but simply maintaining the gain is also very important and takes a -- it's difficult. It's easily taken for granted by all that are here, as well as outside of Ranor.

Yes, but that's -- I have confidence in your ability to execute operationally, which means a lot. It's difficult. It's something I would suspect that you'll be able to accomplish handily.

I would expect that of myself as well.

(Operator Instructions) Okay, and it doesn't look like we have any incoming questions. So I'll turn it back over to management.

Thank you. Thank you, everybody, for participating. Thank you for listening. Have a good day.

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.