TechPrecision Corp (TPCS) 2022 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the TechPrecision Corporation Fiscal 2022 Second Quarter Financial Results. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Brett Maas with Hayden IR. Brett, the floor is yours.

Thank you. On the call today is Alex Shen, Chief Executive Officer; and Tom Sammons, Chief Financial Officer.

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, December 7, 2021. TechPrecision assumes no obligation to revise or update these forward-looking statements.

Furthermore, the results presented during this conference call and in our press release issued today are preliminary and subject to revision until the company files its quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2021.

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, and thank you for joining us. Our preliminary financial results for the second quarter of fiscal 2022 include 36 days of activity from our newly acquired subsidiary, STADCO. As we began to integrate the STADCO operations, we recognized additional revenue and cost of goods sold and added to our selling, general and administrative and interest expense.

Our sales order backlog totals $26.4 million at September 30, 2021, which includes STADCO backlog. Since the end of the second quarter, we have booked over $13 million in new orders. We continue to see strong opportunities for both Ranor and STADCO. We have started the post-acquisition turnaround of STADCO. Key personnel and assets remain in place. We believe business prospects are good, and we expect to see continued revenue growth our STADCO focus is on the future.

And now I'd like to turn the call over to our CFO, Tom Sammons, to continue with the review of our preliminary fiscal 2022 second quarter results. Tom?

Thank you, Alex. Our preliminary net sales for the second quarter of fiscal year 2022 were $4.8 million, which included STADCO revenue for the period post acquisition compared to $4.7 million in the same quarter a year ago. Cost of sales were $3.9 million or 8% higher when compared to the same quarter a year ago, resulting in a gross profit of 19.4% in the second quarter of fiscal 2022 compared to a gross profit of 23.9% in the same quarter a year ago, primarily due to higher rates of unabsorbed labor and overhead costs and lower margins on certain projects.

SG&A expense increased by approximately $478,000, primarily due to the addition of STADCO SG&A expense plus approximately $234,000 of additional costs incurred in connection with the STADCO acquisition.

Interest expense increased by about $5,000 compared to the second quarter a year ago. We expect higher interest costs as we move forward with higher debt levels in fiscal 2022. As a result of the above, we recorded a net loss of $220,000 in the fiscal 2022 second quarter compared with net income of $271,000 in the same quarter a year ago.

Net sales for the 6 months ended September 30, 2021, which included STADCO revenue for the post-acquisition period were $8.2 million or about 3% higher than the same period last year. Gross profit for the 6 months ended September 30, 2021 was down slightly to 21.5% from 22.8% in the same period a year ago. As was the case with our second quarter, SG&A expense increased by $417,000 as we incurred costs in connection with the STADCO acquisition plus the additional STADCO SG&A expense. Interest expense was lower year-over-year, but we expect to see an increase in interest expense as we move forward due to higher average debt levels in fiscal 2022.

For the 6 months ended, we recorded net income of $1.2 million as we realized a onetime nontaxable gain from the forgiveness of our $1.3 million PPP loan in May of 2021. We used $1.1 million of cash in operating activities through September 30, 2021 compared to an operating cash outflow of $740,000 during the same period a year ago. Our total debt was $7.2 million at September 30, 2021 or $3.4 million higher than reported on March 31, 2021. We also added $6 million in new assets and liabilities in connection with the amended lease for the STADCO's building and property.

Cash balance at September 30, 2021 was $281,000 compared to $2.1 million at March 31, 2021. Working capital decreased by $1.2 million since March 31, 2021 from $5.2 million to $4.0 million as an increase in current liabilities more than offset our increase in current assets.

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

Thank you, Tom. A few more words about our STADCO acquisition before we take questions. STADCO sells to a blue-chip customer base that includes some of the largest OEMs and prime contractors in the defense and aerospace industries. STADCO is a key supplier of large flight critical components on several high-profile commercial and military aircraft programs. STADCO also provides tooling, customized molds, fixtures, jigs and dyes used in the production of aircraft components. I'd like to rehighlight some flight capable high-profile programs with Sikorsky.

STADCO has a long history of making critical high-precision parts for the defense and civil aviation industry, national labs, various weapons programs and space flight. It continues to do so. It has been a prime supplier of parts for the Sikorsky CH-53 helicopter for over 45 years and continues to be a supplier of critical parts for the current CH-53E model and the new CH-53K king stallion heavy-lift helicopter.

Sikorsky, on October 2020, announced that it will build 6 additional production CH-53K king stallion helicopters under a new contract for the U.S. Navy. The aircraft will further support the U.S. Marine Corps and its mission to conduct expeditionary heavy lift assault transport of armored vehicles, equipment and personnel to support distributed operations deep inland from a sea-based center of operations. These 6 helicopters are part of a 200-unit aircraft program of record for the U.S. Marine Corps. Their addition makes a total of 24 CH-53K production aircraft now under contract -- under the terms of this most recent contract known as low-rate initial production Lot 4. Sikorsky will begin delivery of the 6 aircraft in January 2024.

This 200 aircraft program of record does not include an expected order from Israel, does not include a possible order from Germany or any other export orders. Production at Sikorsky is expected to increase to as many as 24 CH-53K helicopters per year over the next several years.

I'll talk a little bit more about Sikorsky. On June 25, 2021, the U.S. Navy awarded Sikorsky a contract to build 9 more CH-53K king stallion helicopters. The Lot 5 contract includes 9 helicopters for a value of about $878 million and an option for a Lot 6 contract worth about $852 million for 9 more helicopters. The Lot 5 low-rate initial production contract increases the number of CH-53Ks on contract to 33. The Lot 5 aircraft are to be delivered in 2024.

Finally, a reminder again that we do most of our work in industries that are highly sensitive to confidentiality, which preclude us from speaking publicly about many things that a company not operating in these fields might discuss. As such, there are real limits as to what I can discuss and sometimes those limits change. Please understand that by saying that I am not allowed to discuss that is based on customer requirements and the environment in which we conduct business.

As a final note, the results presented during today's conference call and in our press release issued today are preliminary and subject to revision until the company files its quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2021.

Operator, we can start the Q&A.

(Operator Instructions) The first question is coming from Aaron Warwick from Breakout Investors.

I was hoping that you could give some clarity about the backlog, the $26.4 million, I think it was -- how much of that is Ranor, and how much of that is from STADCO?

We're not breaking that down at this point. We're going to stick with reporting at a consolidated level for both companies.

Okay. And is that true then also for the orders that you mentioned $13 million, are you able to break that out at all?

Yes, yes.

The next question is coming from Robert Balopole from Balopole Investments.

Congratulations on the $13 million of new orders. A couple of questions about some financial statement items. You've got the current portion of long-term debt, almost $3.8 million. Has any of that been refinanced since September 30?

No. We have -- our mortgage is due in December. So that's been a 5-year loan, and that is why the long-term debt is -- I mean, the short-term debt is higher.

And what's the plan for that? Is it going to be refinanced? Are you going to draw some more debt to pay that off? Or how it...

Looking to refinance.

Okay. Good. And just one other question. The prior period information presented like the prior year income statement balance sheet. That hasn't been revised to include STADCO, has it?

No. No, that's TechPrecision.

And the next question is coming from Ross Taylor from ARS Investment Partners.

First, congratulations on closing the deal. Also, congratulations on the significant backlog you guys have built up both through the quarter and since the quarter. At this point in time, I saw that the Israeli government committee approved the purchase of up to 15 of the CH-53Ks and that's working through its budget. If you were to get those, do you have any -- when those come through, rather, do you have any idea on kind of timing and where they fit into the production line?

I don't have access to that information right now.

Okay. Second, I saw that Sikorsky has removed the production of the UH-60 Black Hawk models from its Connecticut plant and is devoting that plant entirely to the CH-53K. So obviously, they're expecting a significant ramp in production out of there. Have you, at this point, seen anything from them as they talked to you at all about the need to be able to ramp up production to the targeted 24 a year?

Well, that's what I alluded to when I sort of repeated myself a little bit, but the production at Sikorsky is expected to increase to as many as 24 CH-53K helicopters per year.

The way your stock trade...

So you're right in line with what you're saying.

Yes. I think sometimes the way your stock trades being slightly misdirected is a little hard on people. It seems they clearly need to be told things directly. So looking at that piece of information, obviously, we're going to build out. It looks like they put 9 into the budget this year, but I understand that likely before the end of the calendar year, they will have decided on when they'll move to full run rate production from what I've been reading and what I've been told. If they move to full run rate production, which is 24 a year, 2 a month, do you need to do anything additional? Do you need to add any capital expenditures to meet with that need?

Well, if it gets there and we -- I don't have the visibility exactly. Will we need more equipment? Will we need more people? Yes. So that's the direct answer to your question.

Okay. Great. And you did -- I'm sure you saw that they actually did conduct a week or 2 ago, heavy lift hauling off of a helicopter landing ship carrying light-armored vehicles, 12-ton armored vehicles, over 220 nautical miles into, say, marine operations, demonstrating the capabilities of the CH-53, which was interesting because that's -- I understand. I think it's 4x the lift capacity of the CH-53E. So it's significant improvement at this point in time. Looking at the budget, it looks like right now that we're seeing in the F-15EX, they're looking for, I believe, 12 this year. Are any of those aircraft-s in your backlog at this point in time?

I'm not going to be able to comment on that one.

Okay. Have you heard any talk about the fact that the Canadians were looking for a fighter, and they narrowed it down to the F-35 and the Gripen. From what I'm told that neither is really a satisfactory answer for them, and there's some thought that they might be looking to bring the F-15EX into the hunt for that. Have you heard any talk about that?

I have the same access that you do to public information.

Okay. Okay. So looking at this setup, obviously, where you're really -- you've transformed the company with this move. And I congratulate you for that. I think it's really -- I mean we're at the cusp of something really exciting. It looks like the backlog, it's nice to see a real meaningful number in that backlog for the first time in some time. Also with regard to the submarine side, have you seen any of the Navy is looking at reducing meaningfully its number of -- it's going to drop in, I think, late '20s...

Ross, can you get closer to the mic. It's dropping a little bit.

Certainly. The Navy is looking at needing to -- is going to drop the 4 Ohio class valley boats that they have that, I think, are 156 launch tubes in aggregate. Do you believe -- when this happens, do you think that -- I mean, we've seen this is going to put more pressure on them to at least keep if not up the build rate on the (inaudible) class boats. So have you heard talk about the idea of them rolling in the late '20s into 3 boats a year from the current 2 projections.

I hear a lot of things, but I'm not going to be able to comment on this one.

Okay. Cool.

And I'm sorry, I just restricted on this.

It's all right. Sometimes saying nothing says a lot. And lastly, with the fact that it's been talked about a lot of the equipment that's used out in California, it's similar or the same as the equipment that's used in Massachusetts. Would it be possible with Sikorsky being located so close to your Massachusetts' facility? Down the road somewhere, would it be possible for you to fill orders for that -- for the Sikorsky business out of the Massachusetts facility or Ranor facility?

Would it be possible? Well, I wouldn't rule out the possibility.

Okay. Okay. Well, as I said, I think...

I think, right now the key here is STADCO is a turnaround. So our focus is to get the ship righted not so much try to see if Sikorsky wants to shift production out of California into Ranor. I don't think we want to promote those ideas at this point.

Okay. So pretend I did say that. And lastly, you say it's to get their ship right. Do you have any concerns about them as an operating business or was the issue there largely financial enough?

Do I have any -- you're dropping again, Ross? Did you say do I have any concerns?

Yes, operating concerns about them.

Well, I think we made the acquisition with our eyes wide open. It is a turnaround. It takes heavy lifting. We're doing the heavy lifting. We've started that. Key assets are in place, key personnel are in place. We're going to move forward carefully and manage every detail carefully.

Okay. Well, as I said, I think this acquisition is really transformational. I don't think the equity market quite understands how transformational it is. In fact, I don't -- I wouldn't say I don't think they understand. I think it's clear they don't understand how transformational it is. But congratulations on getting it across the goal line, and congratulations on the way it's set up to play out for you.

(Operator Instructions) And the next question is coming from Andrew Shapiro from Lawndale Capital Management.

Can you hear me okay?

Yes. We can.

Okay. This is a human resources question. As a federal contractor and all, there's been a pretty laser being focused by the administration and elsewhere, at least until perhaps legal injunctions have come out about mandating 100% vax rate and all that, which as you need to hire people and also maintain your staffing to achieve your production, turnover and everything else is not a good thing. Do you have a handle on what percent of your staff that needs to be vaxxed, is already vaxxed? And how much more you guys have to go, and when you acquired STADCO if that posed any additional issues?

Well, all we can say right now is that we encourage our employees to get vaccinated. We try to support them in that effort. And we are watching the regulations and any kind of pass downs that we get from customers. We're watching them closely. And just trying to keep an eye on it and make sure that we don't disrupt our production. I can tell you that Tom and I are fully vaccinated.

Well, you're not on the production line. I know you're pretty essential employees, but we want to be able to produce and book our revenue with that backlog.

I think all of us are essential.

Yes. That's what I'm saying. But the point I want to get at is if the mandates are upheld and if there is a mandate, do you guys have a hurdle to overcome here in terms of either hiring new -- a bunch of new staff, are you going to be faced with some turnover or are your workforce is fairly amenable to satisfying any mandate.

Well, as Tom said, the mandates keep changing, and the landscape keeps changing, and we're keeping a very, very close track on the changes. These slowdowns from our different customers are different as well, and we're keeping very close tabs on those as well.

Okay. That might have been [answered] to the comments I might have.

I think we have a handle on it. But I don't think we're going to be able to answer your question as to tell you what percent are vaccinated. Those are dipping into areas where we're not going to be able to answer those private questions. But the mandates what we think we've been able to work.

Yes. But the mandates are not clear right now. So it's a very different -- it's a question that causes speculation. Do we think we have a handle on it? Well, we've had a handle on it so far through all of COVID. And not only are we surviving, we're thriving. So...

Right. But if there is a...

(inaudible) that we have handle on.

Okay. Well, I just would hate to get a quarterly report saying, well, we didn't achieve what we wanted to achieve because we had a substantial turnover because of mandates. And that is a risk from an investment point of view. I just want to have a handle on and not an unpleasant surprise.

Sure. We don't love to have no unpleasant surprise, and that's what we're working to. We're all in new territory here with this COVID thing, not one business is unaffected. But I think we can tell you with clear conscious, we believe we have a handle on it. We keep very close track on all the details as they transform. Sometimes, they transform several times a day. We're right in the thick of it. We're not just reading about it.

And the next question is coming from Kris Tuttle from SoundView.

I think I understand your plans and the turnaround and the opportunity from these existing programs to drive the business. My question is how do you think about -- or how should investors be thinking about additional programs outside of the ones that you and STADCO are already involved in, in terms of driving future growth, is that not on the table right now, something we should be looking for a year from now? Sort of how does that fit into the company's current strategy and our expectations?

So the current set of customers have an enormous -- overwhelmingly enormous number of opportunities for too little companies that are both small businesses, even if you combine them, there's still a small business. So trying to diversify when the opportunities are huge with current customers, not so sure about that. But of course, opportunistically, we would not be saying no to any new customers that would be foolish. We will keep our eyes open. If it's a true opportunity, we'll pursue.

Can you give me a feel for how you think about the word enormous because it means different things to different people?

Like 1,000 -- orders of magnitude that cannot be overcome by. We're tiny, and our customers are giant It is huge.

I mean, is that $10 million, $100 million, $500 million, $1 billion, like what...

Yes. It depends. But those numbers are very big.

Okay. All right. I got a turnaround absolutely. No additional segments required for you guys to fully -- for your plans to bear fruit. That's helpful for me.

And we had another question come in from Aaron Warwick from Breakout Investors.

I wanted to go back to the $13 million in orders. Would it be fair to characterize that a material amount of that was related to submarine work?

I think you're trying to have us break it out but ask the question in a different way. So...

I'm just asking it in a way that maybe you could answer. That's all. I'm not -- obviously, not trying to trick you. How can slip anything past by you. I know that. In terms of the of those orders, the $13 million, what -- over what time line are you expecting to recognize revenue from that?

Over what time line? I think it's safe to say it's over 2 years.

And we had a follow-up coming from Ross Taylor from ARS Investment.

A couple of quick questions. Are you doing work in any way with someone Raytheon or others in hypersonic missiles?

Ross, you're always trying to pinpoint me on things that you probably know that I can't really comment on.

Well, you can only not comment on them if you're doing something. So therefore...

You're correct.

You're correct. Okay. Second, similar with Lockheed. Lockheed is supposedly working on, perhaps has developed a new advanced fighter aircraft. Some people believe they actually have something in limited production. What kind of work are you doing with Lockheed? Are you doing work with Lockheed at this point in time?

Are we dealing with Lockheed at this point in time? Yes. We're doing work with Lockheed at this point in time.

Are you doing work with what's known as Skunk Works operation?

I didn't hear you. Sorry. Can you repeat that, please?

Are you doing -- the work you're doing with Lockheed being done with what's known as their Skunk Works?

Well, probably since it's Skunk Works, I shouldn't comment. If it is (inaudible), we are to Skunk Works come with, come on, Ross.

Okay. Okay. No, I'm just trying to make...

Like always Skunk Works, I couldn't comment. If I wasn't, I probably shouldn't comment either.

Part of the game. As I said, unfortunately, I think there are a lot of people who actually don't do a lot of work on your company. And therefore, in our business, my business, a lot of people rely on other people telling them what they're supposed to think.

Lastly, with regard to space, are you doing work right now with anyone on the idea of reusable space capsules. And there's a thought that there is an effort to build a system that can basically go into lower orbit and fly from London to Sydney or other places in a few hours. Is anyone you're working with, any of your customers looking at that type of project, that type of work?

I think we're certainly open to those types of customers. I can tell you that.

Okay. Well, as I said, I think there's really a lot of really exciting things. And as I said, this acquisition and this deal to me, it's game changing, and I'm excited for you guys to get your teeth into it and to get your operational hands on their business and to push forward? Because it looks like money is starting to free up. Has the -- last question is, have you been able to get an idea on order of magnitude? How much drag has been induced by the lack of a defense budget?

How do I answer this? I don't think I know how to answer this.

Big in their breadbox?

Well, I also think that our ability to secure new orders probably says we're doing well regardless of the perceived drag budgeting concerns can cause.

Yes. I actually have to say I'm very impressed given the fact that we've been operating under a continuing resolution and the like that you've been able to develop the business the way you have. Okay. I think it's all -- as I said, I think it's great. Congratulations.

Ross, thank you very much for bringing that point out. I think that's a very salient point. [Lots of] drag and the performance in spite of perceived drag. Thank you very much.

And there were no other questions in queue at this time.

Thank you, everyone. Have a great day.

Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect at this time, and have a wonderful day. Thank you for your participation.