TechPrecision Corp (TPCS) 2018 Q4 法說會逐字稿

Greetings, and welcome to the TechPrecision Fourth Quarter and Year-end 2018 Earnings Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Brett Maas of Hayden IR.

Thank you. On the call today is Alex Shen, Chief Executive Officer; and Tom Sammons, Chief Financial Officer. The call is also being simulcast on the company's webcast, 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, 2018. 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, Chief Executive Officer, to provide opening remarks. Alex, the floor is yours.

Brett, thank you. Good day to everyone, and thank you for joining us.

For fiscal year 2018, we're happy to report the highest annual revenue in 4 years and our third consecutive year of pretax profit. Net sales were $18.7 million for fiscal year 2018. Pretax income was $559,000 compared to $2.2 million in fiscal 2017. Our results were impacted by lower gross margins for fiscal 2018, which were primarily the result of higher amounts of unabsorbed overhead related to extended lumpiness in sourcing and funding from our customers, in turn, driving a slowdown in the number of projects in production.

Additionally, we experienced a higher volume of low-margin components shipped during the period. We expect to return to levels of project activity that are more consistent with our prior year.

Net sales were just under $19 million for both fiscal 2018 and fiscal 2017. The opportunities we are actively pursuing for the next 24 months are basically 4 to 5x that, somewhere between $75 million to $100 million.

I offer my sincere thanks to our board and our shareholders for your continued patience and your continued support as we experience delays in our journey of growth. We positively embrace the growth opportunities and in tandem, we'll aggressively engage and collaborate with our customers to capture more short-term opportunities to offset the delays.

As I stated before on a previous earnings call, we expect a strong pipeline of business from our defense customers. This does not change. On our last call, we discussed certain agreements, which released funding for materials acquisition in advance of new orders to build components for a number of our key customers. These specific new orders are beginning to be fulfilled as we added $7.5 million in new orders in the fourth quarter of fiscal 2018. This enabled us to grow our backlog from $11.2 million at December 31, 2017, to $14 million at March 31, 2018.

I'd like to now turn the call over to Tom Sammons to tell us more about our fourth quarter and our 12-month year-to-date financial results. Tom?

Thank you, Alex.

Net sales for the fourth quarter of fiscal 2018 were $4.7 million or approximately $263,000 lower when compared to the same quarter a year ago. Net sales in our defense market increased by $0.4 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 in support of the U.S. Navy's submarine programs.

Net sales in our precision industrial market increased by $0.5 million. Net sales in our nuclear market decreased by $1.2 million when compared to the same quarter a year ago. Gross profit was $0.4 million in the fourth quarter, a decrease of approximately $655,000 when compared to the same quarter of fiscal 2017. The decrease can be attributed primarily to unabsorbed overhead costs in connection with the slowdown in project activity as our customers evaluate their own project workflow, also to the lower sales volume and to higher shipments of low-margin products.

Our net loss was approximately $367,000 or $0.01 per share basic and fully diluted for the fourth quarter of fiscal 2018 as compared to a net income of $3.1 million or $0.11 per share basic and fully diluted for the fourth quarter of fiscal 2017. The fourth quarter of fiscal 2017 includes a tax benefit of $2.9 million net of the release of the valuation allowance of $3.6 million. The release of the valuation allowance was based on the weighted positive evidence at the balance sheet date, primarily the result of improving business performance, financial trends and achieving sustained profitability in certain tax jurisdictions.

For fiscal year 2018, our net sales increased by 1% to $18.7 million. Our sales in our defense market increased by $1.3 million. Net sales in our energy market increased by $0.4 million in fiscal 2018 when compared to fiscal 2017, while net sales in our precision industrial market decreased by $1.5 million when compared to fiscal 2017.

Gross profit was $4 million or a 35% decrease when compared to fiscal 2017. Our gross profit and margin suffered primarily due to the slowdown in projects and due to higher shipments of lower-margin products, as mentioned earlier.

Income from operations is $1 million, a $1.9 million or 66% decrease when compared to the same period a year ago. Fiscal 2017 income from operations included a onetime gain from a customer claims assignment settlement of $1.1 million.

For the fiscal year 2018, we recorded tax expense of $824,000. This tax expense includes $700,000 of noncash tax expense, the result of remeasured net deferred tax assets to reflect the new 21% U.S. federal statutory tax rate as provided under the Tax Cuts and Jobs Act recently enacted on December 22, 2017. Our tax expense is primarily noncash expense as we continue to utilize our deferred tax assets to offset any tax liability. Cash paid for income taxes was $32,000 for the fiscal year 2018. The company does not expect to make any significant tax payments for the remainder of 2018 calendar year.

Our net loss for the fiscal year 2018 was approximately $266,000 or $0.01 per share basic and fully diluted as compared to a net income of $5.1 million or $0.18 per share basic and fully diluted for the fiscal year 2017. Fiscal year 2018 earnings per share is based on an average weighted share count of approximately 28.8 million for basic and fully diluted shares, respectively.

Turning to the balance sheet. We finished the quarter with $2.7 million in cash at March 31, 2018. Our working capital was $4.9 million and $5 million at March 31, 2018, and 2017, respectively. Cash flow provided by operations was approximately $1.3 million in fiscal year 2018. We used approximately $994,000 of cash to purchase new machinery and equipment that was placed in service during fiscal 2018 and used $717,000 of cash to repay principal under our long-term debt agreements.

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

Thank you, Tom.

TechPrecision is proud and honored to serve the United States' defense industry, specifically, naval submarine manufacturing, through its Ranor subsidiary. We continue to see meaningful opportunities in this sector.

To illustrate, there are 2 significant demand drivers that will double existing overall nuclear submarine business workload at the shipyards starting in 2019. I've gleaned this from all publicly available information and wanted to make sure that we reviewed it once again.

Number one is the Virginia Payload Module, an 85-foot hull section with 4 centerline large-diameter payload tubes, that is expected to be added to all future Virginia class submarines, starting with the second Virginia class submarine in Block 5.

Number two, the Columbia program will build 12 new SSBNs. These are ballistic missile nuclear submarines, over a period of 20 years to replace the 14 Ohio class SSBNs currently in service. At 560 feet and 20,800 tons displacement, the Columbia class is slightly larger than the Ohio class it is replacing and represents a doubling of overall demand compared to the Virginia class construction program.

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

(Operator Instructions) Our first question comes from the line of Ross Taylor from ARS Investment Partners.

Alex, could you give us more color on your comment about the $75 million to $100 million in project business that you are currently pursuing for near-term opportunity?

I can, in a limited fashion, as usual. So the amounts are clear. These are facts. I am actively pursuing them with quotes or attempting to get quotes. I have engaged with the customers on each one of these and ascertained the fact that there is an actual need on these. The focus is pretty basic. Our focus is primarily, number one, on defense; and number two, on nuclear; with the third, precision industrial, where it fits our niche and where it fits the customer requirements. So I think the distribution over those 3 sectors is nothing unexpected. They're within what we are aiming for.

Okay. So looking at this over -- at $75 million to $100 million, what kind of time horizon, if you're successful in getting that business? And I would assume that given the fact that the Navy is itching to start and, in fact, has been talking about building an extra Virginia class Block 5 boat in each of the first 2 years of its program before the Columbia class has come on, you've probably had some pretty extensive conversations. What kind of time horizon are we looking at for that dollar amount?

So the -- I think you asked multiple questions. Let me carve them up and answer each one. I want to make sure that Block 5 is understood properly. So Block 5 has originally had 9 boats, with a 10th that needed to get approved. That has since gotten approved. So it is a 10-boat block. The first boat does not have the Virginia Payload Modules, but the subsequent 9 do, which is that 8-foot hull section that's being added to add 4 more payload tubes. So that comes to a Block 5 10-boat cadence, and the cadence is intended to be, to a year, just like the cadence for Block 4 has been.

Yes, I understand. The Navy has actually expressed the desire to speed up to use the extra shipyard space to build extra boats faster so they can get 2 new -- 2 additional Virginia boats in the water before they start the Columbia class to accelerate that. So that's also publicly available information. But I want to kind of get at -- so looking at it, in the past, it looks like you did $6 million to $8 million a hull on a submarine -- on a Virginia-type submarine. With this extra payload module, would it be safe to assume that you guys should more than double that revenue run rate on a hull basis?

On a hull basis, I very much do not make it public how much I have on a hull.

I would say as a -- not an insignificant shareholder, it would make it a lot easier for us if we -- we don't -- you talked in the past about the lumpiness of the order book. I understand that book is lumpy. But quite honestly, this is really a story about the -- this Virginia class and the Columbia class boats. It's not really -- I mean, if those things worked bluntly, we're in a situation where we're looking at a decade of backlog. And I can't think of a company I know of that I could predict a decade out on what their revenue run rate would be on the low side as a minimum. And yet, as this thing moves forward, we'll be able to do that with regard to TechPrecision. So I'm trying to get an idea of what we're looking at -- so other -- I have a pretty good idea from publicly available information. But I don't think your shareholders at large have made as much an effort. So it might be helpful if you help these guys out, who might not have figured out what the opportunity here is. I'm not -- I don't want to know specific programs or parts of the hull, but on a run-rate basis, I think it would be helpful for us to know.

I understand. I have to protect us from others that are not so benign.

Well, so they said, I think that in looking at it kind of at this stage, to me, what's very interesting in here is you guys are sitting here in a situation where my guess is you have a pretty good idea of exactly what you've actually won, that the Navy isn't this close to starting these programs this fiscal year that starts in October without having given you a good idea as to what you're going to be building. Am I correct in that assumption?

We have a very good idea of exactly which parts we're chasing, yes.

Yes. Okay. Sometimes, if working -- trying to get information out of you is like trying to test -- to work with a hostile witness.

At least I'm not attempting to be hostile on this one specifically. I have been cautioned directly to not give up competition and edge against us because we might lose.

Okay. Let's try this a different way. BAE has gotten an order for launch tubes in the Virginia class boat. Electric Boat recently released a rather sizable order to oversee the rather sizable order and released orders for component parts, of which $45 million or $50 million was basically metal to an operation in the Midwest to produce the metals and alloys and the like needed for certain components. How does it work with that? If that -- if they have not released a contract but they've built metal, does that metal sit in your factories? Does that metal sit at the forge? At the foundry? Does that metal sit at Electric Boat? Where is that metal right now?

Well, by the time it makes it over to me is when I have an actual contract to build. And we would probably be out of our lumpiness in the sourcing and funding from our customers. So we can surmise that it's not here.

Okay. So it's somewhere else down the line. Okay, I will step out. I'll probably come back. I'll let someone else have a shot at you.

(Operator Instructions) Our next question comes from a private investor,[John Hardison].

Hey, Alex and Tom, congratulations on another year of profitability. I also wanted to thank you for holding the very positive investor meeting in New York on May 8. That was very helpful. And from the meeting, from your slide show and going through past 10-Ks, 10-Qs, it sure looks to me like in the past, Ranor has done what was at about $6 million to $7 million per old Virginia class sub. And I think the new 28 Virginia class subs, the Virginia Payload Modules and the 12 Columbia class subs adds a tremendous amount of new work. And when I work the math out, I can see just from the submarine program over the next 20 years, a $500 million-plus backlog to Ranor for the submarine work. And I'm not looking for a forecast or you don't even have to comment on it, but I just wanted to say congratulations, guys, because I think we have a fantastic annuity here going forward. Thank you.

Thank you.

Thank you.

(Operator Instructions) Our next question comes from private investor, Jerry [Wanotis].

In the November call, you opened it with a statement from the Chairman, who said the board is very aware of the significant drag on earnings caused by the cost of being public. You have been and continue to actively investigate, pursue all ways to improve this. It's now been 7 months since that statement. And so for at least a minimum of 7 months, you've been actively investigating, pursuing it, could be 8, 9, 10 months. It seems now is an appropriate time to give us an update on that. Could you please do so?

I think, first of all, we're not prepared to give you an update in detail on that. We continue to strive to pay less on services and strive to get best value for our shareholders.

That's a different issue, paying less for services and getting better value than what you said in that statement. 2 different issues.

I understand that.

So you didn't answer the question at all.

Like I said, I was answering your question, first, is we're not very well prepared to answer your question. But we are prepared to tell you that we have been diligently concentrating on cost reduction. I know that, that doesn't answer the question. I was just adding to the answer.

I think, as Ross said, you were adding to the non-answer.

Well, I told you I wasn't prepared to answer.

Well, 7 months ago, you said at the time...

I was being very direct and honest.

Right. 7 months ago, you -- we're a very small company. So in terms of pursuing what you talked about, 7 months seemed like a sufficient time to give an update, not for a conclusion but an update.

We'll take that under advisement and come back to you.

Our next question comes from the line of private investor, [Jim Koenig].

A couple of things. The website looks very good. We're happy that you guys have updated the website. And then, Alex, one question. Are you guys getting any work currently on the Columbia on the prototype? Or is that down the road?

I'm sure I'm not ready to answer you specifically on prototype or tactical or some kind of category of Columbia, but Columbia work is part of our work, yes.

Okay. So that is part of the $75 million to $100 million that you guys are shooting for?

Yes. Absolutely.

(Operator Instructions) Our next question comes from the line of Ross Taylor from ARS Investment Partners.

First, with regard to the question about strategic alternatives, you may look at it this way. You're in a situation where you have potential for a decade-long annuity. I assume it doesn't make any sense for you to come to any strategic decision until you're actually putting those orders in the backlog because that is effectively what would be the lever on which the value of the company will be valued. Am I correct in making that assumption?

Ross, can you please repeat that question one more time?

I assume that, as was noted back in November, that you read a statement from the Chairman of the Board about the idea of effectively maximizing, optimizing shareholder value, to paraphrase it. Any of us who've been in the business long enough know that's quite language -- code language for saying that you're looking at the sale of the company. It doesn't, to me as a substantial holder, make any sense that this company be sold until such a time or any decision be made about what your strategic direction is or alternatives are until you actually have the order book or an idea what you can get on a per-hull basis. Now my assumption is you know that. My assumption is you've probably put together a book that might have been seen by other potential investors and that they have an idea what you're bidding on. The people who don't know are those of us on the call who are shareholders. But I'm just asking, therefore, to the assumption that until such a time that you have these hard orders, it's unlikely that we would see any kind of endgame or announcement as to what the strategic alternative strategy is going to result and whether it's a share buyback or a decision to, for example, take free cash flow on an annual basis going forward and retire stock in sizable portions through a Dutch auction, which would be another way to drive the value higher. I mean, it looks like we're on the front end of a decade-long cash flow stream that's going to be pretty significant on a per-share basis. Is this not the answer for why nothing has happened yet?

I think I have to take the safe way out here and say no comment at this time.

Okay. I'll take a no comment, because no comment usually means yes. So away from that, looking at other options, are you doing work or are you bidding for work with regard to U.K. boats where they're making use of weapon systems and subcomponents from the United States?

Well, the real answer is I don't know yet.

So you're bidding for it? Okay. We can actually have a conversation, Alex.

Yes, we can.

I just have to speak out. So looking at this, you've been -- when you were in New York, you were exceptionally upbeat about the company, about the opportunities and things of that nature. Is there anything that has gone on in recent weeks that has made you less enthusiastic? Or what's been developing over -- since you were in New York made you more enthusiastic about the opportunity?

Well, you know I don't release numbers, at all, ever. So I think the fact that we're talking about actively pursuing for the next 24 months a number that's between $75 million to $100 million is a sure sign of more enthusiasm and not less. I don't know if that means that there's more opportunity or not, I just want to somehow convey in my stilted style that it's really there. Really, really there.

Okay. And how long is the lead that Electric Boat -- that you need from Electric Boat to produce products? Or from Newport News, how long do they -- before they need something, do they need to let you know?

The true answer is, that depends. Seriously, that depends on what it is and then on how empty or busy I am with certain work center. It really depends on a number of operational and executable items.

Okay. So you've added, in the last year, close to $1 million worth of component or of equipment and the likes on the plant floors to that nature [of CapEx].

CapEx. Correct.

I assume that, that was not added as a spec. I assume that, that was added because -- and I assume you've had the Navy in and Electric Boat in to look at your capacity and things of that nature. So what we're really stuck here in is a situation where you can see over the transom and you know what's coming. And because of a variety of reasons, you cannot yet tell us how good that is. Correct?

The -- so I go back to what I carefully crafted. This extended lumpiness in the sourcing and funding from our customers is causing a bad quarter, okay. So I'm not really wanting to throw the customers under the bus. It's the company that I'm running not very correctly for that quarter, yes.

Alex, I think those of us who know the company, honestly, are indifferent to the quarter. The story is not about the quarter. The story is about the next 10 years, really bluntly. And I think that, to me, the way I think you need to tell the story is that way. The quarter is what it was, but the quarter has nothing to do with the opportunity that's sitting in front of you. As was mentioned earlier, you can look at $0.5 billion of revenues coming from this build program and things of that nature. Obviously, General Dynamics Electric Boat thought you were an incredibly important supplier because I've been in the defense industry and you don't rescue small companies going out of business unless that small company does something no one else can do. Honestly, you just are indifferent to it. If they go out of business, someone else buys the assets and you work with them. The fact that Electric Boat has bent over backwards to help keep you guys going tells me that you're an incredibly important subcomponent supplier to these guys. And therefore, this is why I think you're so enthusiastic. I know you can't tell us all this yet, but within a few quarters, whatever -- it's honestly going to become pretty obvious because you don't have any place to hide it. It's going to start popping through. So I would tell -- I think the story would be something to focus on in that direction, and don't be apologetic for what the quarter was. No one who knows the story cares about it. Anyone who sells a stock because the quarter was soft basically doesn't understand the story.

Yes, sir. Thank you very much.

Our next question comes from the line of [Samir Gulati] from [Gulati Consulting].

I'm pigging back (sic) [piggybacking] a little bit off Ross here on what he was saying. And I'm coming off the cuff not really with much of any questions but kind of -- you know the story of -- I want to give some appreciation to Alex because I remember this company got caught up with GTAT. There was really bad practices within the company and there were some big hopes at that time, and a lot of investors are still here and a lot of money had been lost. And Alex came aboard, and Alex -- you and Ross go back and forth a lot. And your communication -- some people -- and for a CFO of a public company, may expect something a little different or may want a little more information, want the numbers. As me, myself being up to a 6% holder in the company, we want to know your spreadsheets. Am I still on the line?

You are.

You are.

Okay, good. Good. We want to know your spreadsheets. But if -- because this is a big part of our life in some (inaudible), your progress and what you've done. And when you first came aboard, this company, you really overexceeded (inaudible) you were able to repair these relations (inaudible) jumped off Ross with [GD]. You are a really an honorable, trustworthy, smart operator. And you -- TechPrecision is coming out because of you, with really high-quality products but with service. This is the only way this company has turned around the way it has and into the position it is today. And I guess, what I'm saying as a shareholder, yes, there is some frustration with not having numbers, but hearing you on every call and every word you say, you would even use the word many times, laser focus. As a large shareholder, I trust that you have this laser focus and you have been executing this laser focus. And we are there now. When you talk about just the confidence you have and knowing how you communicate things, we are in the spot you were thinking about when you started. And it's been a long ride, and we still have a lot of uncertainty, but the payout is large. And the way you operate and communicate is working. It's working for this company. The size of the company and the valuation will follow and just appreciate -- I appreciate your communication, and I appreciate kind of your laser focus. That's it. Thank you.

Thank you very much.

Our next question comes from the line of [John Hardison], private investor.

Hey, Alex, just a few minutes ago, I saw a press release that said the Australian Navy gave a $26 billion award to BAE Systems for antisubmarine frigates. And that in the same article, they discussed that over the next 10 years, there's going to be 500 submarines built around the world. Now I know you guys are bidding on the Columbias and the Virginia class, and that adds up to about 40 submarines, are you guys bidding on international sub work as well?

We are not. We are focused on the United States of America. Bear in mind, the U.S. and the U.K. have agreements that allow many things to be shared. So I suppose that the U.K. could be in the mix, as I didn't answer Ross earlier. But I seriously don't know which parts are going to or not going to be in the mix with the U.K. But I would say, other than the U.K., we are not in pursuit internationally.

Okay. And then next question, has there been any discussions regarding uplisting to the NASDAQ? I mean, you're going to have this, I think, huge backlog of work and you're going to start generating a lot of cash flow. And I think it would be very helpful to uplist and get off of the OTC Bulletin Board so that other people could become shareholders.

John, thank you for the question. I'm not prepared to give an answer at this time, so I need to respond back with a no comment at this time. I understand that an update is -- I'm understanding that you want to update, so we'll work on that. Tom, you're going have -- Tom Sammons is going to have to take this one, but we'll take that one. I just cannot comment at this time.

Okay. And then I have a question for Tom. With the existing debt covenants, can you guys buy back shares or pay down debt early?

Well, you're asking can we?

Yes.

Yes, are we able to? We can pay down debt early if we want, but there is a penalty with People's with the one debt.

And are you allowed to buy back shares with the existing debt covenant?

Yes, my initial reaction would be no, but without further going back through the loan agreement. But my recollection is that we cannot.

Okay. That's all I had right now. I'll let somebody else get into the queue.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

Thank you, everyone, for joining us on this call. Have a great day.

Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.