TechPrecision Corp (OTCQB:TPCS) Q3 2023 Earnings Conference Call February 14, 2023 4:30 PM ET
Company Participants
Brett Maas – Hayden IR
Alexander Shen – CEO, President & Director
Thomas Sammons – CFO
Conference Call Participants
Ross Taylor – ARS Investment
Operator
Good day, everyone, and welcome to the TechPrecision Corporation Third Quarter Fiscal 2023 Financial Results. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Brett Maas. Sir, the floor is yours.
Brett Maas
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, February 14, 2023. 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, the floor is yours.
Alexander Shen
Thank you, Brett. Good afternoon to everyone, and thank you for joining us. The third quarter of fiscal year 2023 was another strong quarter for our Ranor subsidiary. Ranor operating results improved across the board when compared to the third quarter of fiscal year 2022 with higher revenue and improved gross margins. Ranor’s gross profit was $1.7 million in the third quarter of fiscal year 2023 compared to $0.2 million in the same period a year ago.
The STADCO subsidiary has a turnaround. Revenue was down 3% from the third quarter of fiscal year 2022. We noted improving throughput and improving gross margins over the first 9 months of fiscal year 2023. TechPrecision remains highly focused on cash management through control of expenses and capital expenditures, customer advances, progress billings and final invoicing at shipment. Business prospects remain strong. Our backlog was $43.9 million at December 31, 2022, an increase of $17.5 million since September 30, 2021, the first quarter that included STADCO backlog.
Now I would like to turn the call over to our CFO, Tom Sammons, to continue with the review of our fiscal year 2023 third quarter and 9-month results. Tom?
Thomas Sammons
Thank you, Alex. Net sales for the third quarter of fiscal year 2023 were $8.3 million or 28% higher when compared to the same quarter a year ago as we realized a $1.9 million increase in revenue at Ranor. All of the increase in revenue came in the defense markets, offsetting a small decrease in the precision industrial markets. Our defense backlog remains very strong.
Cost of sales were $6.8 million or 13% higher than the prior year period due primarily to increased net sales of Ranor and higher unabsorbed overhead of STADCO. Gross profit was $1.5 million or $1 million higher when compared to the same quarter a year ago. Gross profit was higher due primarily to higher revenue and better project mix and strong throughput at Ranor. SG&A expense decreased by $399,000, primarily due to lower spending for outside advisory services. Same quarter a year ago included a onetime cost in connection with the STADCO acquisition.
As a result of the above, we recorded operating income of $274,000 compared to operating loss of $1.1 million in the same prior year period. Interest expense for the current quarter and prior year quarter were $94,000. We recorded net income of $134,000 in fiscal 2023 third quarter compared to a net loss of $905,000 in the same period a year ago. Net sales for the 9 months ended December 31, 2022, were $23.9 million compared to $14.7 million in the same period a year ago, an increase of $9.2 million.
The sum of additional revenue from our STADCO and Ranor segment were $4.5 million and $4.7 million, respectively. Prior year 9-month period included only about 4 months of STADCO revenue. Our cost of sales for the 9 months ended December 31, 2022, were $7.4 million higher due primarily to the inclusion of the STADCO business for the full 9 months compared to only 4 months of the same period a year ago and a significant increase in net sales of Ranor.
Gross profit increased by $1.8 million or 81% higher on a strong operating period at Ranor. Weaker operating results of STADCO from certain unprofitable projects and our production levels dampened consolidated gross margin. SG&A expenses for the 9 months ended December 31, 2022, increased by $897,000, primarily due to the inclusion of STADCO for the full reporting period.
As a result of the foregoing, we recorded an operating loss of $371,000 compared to an operating loss of $1.3 million for the prior year. Interest expense was $261,000 for the 9 months ended December 31, 2022, or $79,000 higher than the same prior year period due primarily to a full 9 months of interest expense recorded for the STADCO term loan and higher usage under the revolver loan. We recorded net income of $24,000 for the 9 months ended December 31, 2022, compared to net income of $246,000 for the same period a year ago.
The prior year period included a onetime gain of $1.3 million from the loan forgiveness under the Paycheck Protection Program. The current 9-month period included an accrual for $624,000 in the second quarter for refundable employee retention tax credits under the CARES Act. Moving to the cash flows and balance sheet. We realized a cash inflow from operating activities of $871,000 and used $1.3 million for capital expenditures. The total debt was $7.1 million at December 31, 2022, compared to $7.4 million at the end of March 31, 2022, as principal paid on our term loans more than offset additional borrowings under the revolver.
Cash balance at December 31, 2022, was $316,000 compared to $1.1 million at March 31, 2022. Working capital was $7.2 million at December 31, 2022, compared to $2.8 million at March 31, 2022, as we extended the Ranor term loan for an additional 5 years in December 2022, and we’re able to convert a significant current liability to long term.
With that, I will now turn the call back over to Alex.
Alexander Shen
Thank you, Tom. TechPrecision is proud and honored to serve the United States defense industry, specifically naval submarine manufacturing through its Ranor subsidiary and military aircraft manufacturing through its STADCO subsidiary. We aim to secure and maintain an enduring partnership with our customers. Overall, in both the Ranor and the STADCO subsidiaries, we continue to see meaningful opportunities in our defense sector, as evidenced by the strength of our backlog.
We are encouraged by the prospects for growing our revenue and increasing profitability in future quarters. Finally, a reminder 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 my saying I’m not allowed to discuss that is based on customer requirements and the environment in which we conduct business. Additionally, I would like to inform you that our applications to uplist to NASDAQ and for the reverse split have both been filed and are pending with the appropriate entities. Although there can be no assurance that our listing application with NASDAQ and/or our authorization to effect the reverse stock split will be approved by the appropriate entities in a timely manner or at all.
With that said, there’s nothing further that we can discuss regarding the applications or processes. Operator, we can start the Q&A. Please proceed.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question is coming from Ross Taylor from ARS Investment.
Ross Taylor
Alex, we appear to be stuck in a bit of a holding pattern with regard to both the top line, the bottom line and backlog. And we’re watching others in the subspace show meaningful increases in these areas. Can you explain to us why or where it is that we sit in this process and why we’re not seeing an improved backlog and why we’re not seeing an improved top line?
Alexander Shen
Well, I think the top line, if you separate it between Ranor and STADCO, you’re seeing an improvement pretty big on one side, right?
Ross Taylor
You define big differently than I do.
Alexander Shen
Sure.
Ross Taylor
I think kind of — we are seeing some growth, but I’m just curious, where do we sit? Obviously, when you work in these programs, the components you supply fall somewhere into the build cycle. Are you an early-stage build cycle? Are you a mid- or a late-stage build cycle?
And so if we’re looking at these programs starting to ramp would we be expecting to see you — are you putting something — in essence, if you supply the keel of the boat, you’re early stage; if you supply something that the flagstaff, you’re probably late stage. So kind of where do you sit inside that cycle?
Alexander Shen
Well, I think one of the items that we need to also consider is how our project mix affects everything all the time using the lumpy word. The lumpiness of our top line, when we’re comparing quarter-to-quarter or even over a year, it really is subject to project mix and how due dates can expand and contract. It’s part of the mix.
As far as — and I’m also trying to answer the question on where in the build cycle we land. Some of this is stuff that I really shouldn’t be discussing, whether we’re in the early cycle or mid-cycle or late cycle. I don’t think there’s any calls for concern that our backlog is not continuing to expand quarter over quarter over quarter. The business is there. We are in very good shape.
Ross Taylor
In the past, you kind of indicated that you were looking at $80 million to $100 million biannual revenue run rate possibilities out of the Virginia and Columbia class boats. Would you say that’s still a reasonable expectation?
Alexander Shen
In the past, I had stated that there’s $100 million worth of opportunity, and I can not classify it as far as how many years it was for.
Ross Taylor
Yes. Okay. Is that still a legitimate $80 million to $100 million number a reasonable target for the opportunity you have?
Alexander Shen
The answer to the question is yes.
Ross Taylor
Okay. While we’re looking at submarines, there’s talk that the Australians appear to be looking for a unique design, not the British design. I think that’s the Adventure class and not the Virginia class, largely because the Australians have crew issues. Their boats have, I think, 68-man crews, the British boats have some 90-man crew. One thing they did…
Alexander Shen
I’m in that place where I cannot speak at all on that. At all, I’m sorry.
Ross Taylor
Okay. I was just going to ask you if you had the capacity to produce if VE Aerospace were to include a Virginia launch module inside, would you have the floor capacity to produce without CapEx.
Alexander Shen
I’m at the point where I cannot speak any more on that. I’m sorry. Can we change the subject, please?
Ross Taylor
I understand. With STADCO, you mentioned you have programs that you’re losing money on. Are those programs specific programs that will end? Are those early-stage build cycle programs where you’re having to learn how to do it? Are those programs where it was — were they bid poorly? And are they going to be with us? Or are these things that you expect that — you’ve shown some — it looks like you showed some pretty meaningful improvement in profitability, although, I mean, shall we say, reducing the losses in STADCO.
Is that something that — how is that going to play out with regard to getting to profitability there? Is it going to be something that you grow into, learned your way into? Or is it something that you’re just going to get rid of bad business and replace it with good business?
Alexander Shen
Let me redefine or rename what you — the words that you used. So instead of programs, let’s focus on talking about contract and POs and PO line items. So there’s not so much programs that are losing money, but there’s certain line items in a PO that are moving. Some of it is highly affected because there’s a lot of unabsorbed overhead. So that’s a pretty direct contributor, wouldn’t you think, Tom?
Thomas Sammons
Yes, but I think you have all 3 items. You have some things where we’re starting some projects new. You have others that probably should not…
Alexander Shen
Legacy deal line items that were suffering from legacy pricing.
Thomas Sammons
And we have to work through that and get the pricing changed. And we have had some price changes on some products.
Alexander Shen
Yes.
Ross Taylor
Okay. Is the unprofitability the result of component costs going up? Or is it the inefficiency of your ability to build them in that facility?
Alexander Shen
I would say it’s neither because Tom’s explanation was spot on. Some of it is legacy pricing that we haven’t been able to move up. So we need to build out those and get those shipped out. That’s one.
Ross Taylor
Okay. Now looking at…
Alexander Shen
Sorry, Ross. And then the other one is when our absorption improves with better throughput and higher throughput, that will also ease some of the pain. So I think the concentrating on those 2 pieces is essential in answering your question.
Ross Taylor
You’ve put a lot of money into CapEx in STADCO since you’ve acquired it. You are looking now at a significant ramp in business coming up. We have 2 recognized programs we know they’re involved with, the F-15EX and the CH-53K. Both of those programs are seeing a significant ramp up in production run rates. So one would assume that the components, and we’ll be seeing that this year and next year, next fiscal year, so that would be the year — fiscal year ending September 30 of this year and September 30 of next year. Have you — do you have the capacity to produce the projected run rate for both of those programs at STADCO’s facility at this point in time after the CapEx you put into it since you’ve acquired it?
Alexander Shen
I think as usual, I’m going to need to answer your question by rephrasing the question and answering what I can answer.
Ross Taylor
Okay.
Alexander Shen
So the — without delving into areas where I can’t talk about it, I can tell you that the requirements from the customer, the external customers at STADCO are being satisfied with what equipment we have in place now. And the CapEx is helping.
I really can’t talk too much about the actual ramp-up numbers. What I can tell you without a doubt that our current CapEx is definitely helping and that we are able to currently meet the requirements of the external customers, 2 of which are named by you just now, F-15 and CH-53K.
Ross Taylor
And since it’s pretty clear what the ramp is going to be, I assume that you are comfortable with your ability to continue to satisfy your customer as the publicly stated ramp run rates occur.
Alexander Shen
I’m trying carefully not to talk about the publicly stated ramp rates as — what’s out there versus…
Ross Taylor
They are out today.
Alexander Shen
I understand.
Ross Taylor
Yes. I’m a little confused why you can’t talk to something that the Pentagon has said it’s going to happen and where you’re…
Alexander Shen
I’m not denying what the public information is, Ross.
Ross Taylor
Okay. I was just asking if you’re comfortable that you can continue to satisfy your customer, say, over the next 1.5 years, 2 years.
Alexander Shen
So far, I’ve been personally also speaking with them, and they continue to be satisfied.
Ross Taylor
Okay, cool. and they’re not worried at this point in time. They’re not pounding on you to do something different?
Alexander Shen
I think the pounding is mutual.
Ross Taylor
Okay. So — and looking at this also at this stage, you’re kind of running — you’re looking at — what kind of CapEx do you see putting into STADCO over the balance of this calendar year?
Alexander Shen
I don’t know yet.
Ross Taylor
Is it significant? Do you see it being at the same rate it’s been at since you guys have taken it over?
Alexander Shen
I will say that our concentration and our #1, #2 and #3 focus is on cash. So…
Ross Taylor
Go ahead.
Alexander Shen
So I think as far as what my prediction for CapEx is, that might be my #4 item. I don’t know yet.
Ross Taylor
Okay. Okay. And so at this point in time, also it seems that you’ve put into the NASDAQ. I know you can’t comment on anything, but have they given you an idea of how long it would take for them to review your request?
Alexander Shen
Ross, there’s nothing further that I can discuss on that.
Ross Taylor
Okay. I’ll pass it on. Let someone else — I’ll reserve the right to come back, recall the witness.
Operator
[Operator Instructions]. That concludes our Q&A session. I will now hand the conference back to our host for closing remarks. Please go ahead.
Alexander Shen
Thank you, everyone. Have a great day.
Operator
Thank you, everyone. This concludes today’s event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
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