TechPrecision Corporation (OTCQB:TPCS) Q1 2023 Earnings Conference Call August 22, 2022 4:30 PM ET
Company Participants
Brett Maas – Hayden Investor Relations
Alex Shen – President & Chief Executive Officer
Tom Sammons – Chief Financial Officer
Conference Call Participants
Ross Taylor – ARS Investment Partners
Operator
Good day, ladies and gentlemen, and welcome to the TechPrecision Corporation Fiscal 2023 First Quarter Financial Results Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host, Brett Maas, Investor Relations for TechPrecision. 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 to you a more detailed discussion of the risks and uncertainties in the company’s financial filings with SEC. In addition, projections as to the company’s future performance represents management’s estimates as of today, August 22, 2022. TechPrecision assumes no obligation to revise or update these forward-looking statements.
Before I turn the call over to Alex, I’ve been asked to read the following by Rich McGowan, the Chair of the Board for TechPrecision as follows. For the last 4.5 years Alex Shen is set next me at every Board meeting [indiscernible] taking part in all aspects of the meeting with the exception of voting. Several months back, the Board decided to remedy this. I’m pleased to announce that after the upcoming annual meeting we will be adding Alex as the fifth Board Member. Congratulations, Alex.
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?
Alex Shen
Thank you, Brett. Good afternoon to everyone, and thank you for joining us. The first quarter of fiscal 2022 was a significantly strong quarter for our Ranor segment. Ranor operating results improved across the board when compared to the first quarter of fiscal 2022 with higher revenue and improved gross margins. Ranor’s operating income was $1.4 million compared to $427,000 year-over-year. The Stadco segment is a turnaround. With the addition of Stadco we recognized additional revenue, but also absorbed additional costs. These additional costs dampened our margins and added to our selling, general and administrative expense and interest expense.
Selling, general and administrative expense included onetime costs related to the acquisition that we expect will decrease materially in future quarters. We remain highly focused on cash management and shepherding of cash through control of expenses, control of capital expenditures, customer advances, progress billings to our customers and final invoicing at shipment. Business prospects remain strong, very strong. Our backlog was $45.9 million at June 30, 2022.
And now I would like to turn the call over to our Chief Financial Officer, Tom Sammons to continue with the review of our fiscal 2023 first quarter results. Tom?
Tom Sammons
Thank you, Alex. Net sales for the first quarter of fiscal year 2023 were $7.1 million or 107% higher when compared to the same quarter a year ago as we added a four full quarter of Stadco revenue and realized increased revenue of Ranor. We recorded an increase in revenue in our defense markets, which more than offset small decrease in precision industrial revenue. Our defense backlog remains very strong as new orders captured within the quarter and after the quarter are primarily from our defense customers.
Cost of sales were $6.3 million or $3.7 million higher, due primarily to the additional cost of sales from our Stadco subsidiary. Gross profit was $817,000, slightly lower when compared to the same quarter a year ago. Gross profit was lower because of operational problems and low production levels at Stadco leading to higher unabsorbed factory overhead. SG&A expense increased by 643,000 due to the addition of Stadco and increased spending for outside advisory services and travel related to the Stadco acquisition, including approximately $109,000 of one-time expense, primarily related to the Stadco acquisition.
Our operating loss was $558,000 compared to an operating income of $100,000 in the same prior year period. Interest expense increased to $84,000 from $30,000 in the same prior year quarter as we added new debt to the balance sheet on August 25, 2021 to acquire Stadco and increased our borrowings under our revolver loan. As a result of the above, we recorded a net loss of $501,000 in fiscal 2023 first quarter compared to net income of $1.4 million in the same period a year ago, the quarter which included the forgiveness of our PPP loan in the amount of $1.3 million.
Moving on to cash flows and balance sheet. We realize a cash inflow from operating activities of $1.4 million and used $763,000 for capital expenditures and fixed asset deposits. Our total debt was $6.2 million at June 30, 2022 compared to $7.4 million at the end of March, 31, 2022 as we paid down about $1 million on a revolver during the quarter. Cash balance at June 30, 2022 was $574,000 compared to $1.1 million at March, 31, 2021 — 2022. Sorry. Working capital was $2.6 million at June 30, 2022 compared to $2.8 million at March 31, 2022.
With that I will now turn the call back over to Alex. Alex?
Alex Shen
Tom, thank you. 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 very significant increase in our sales orders and backlog. We are encouraged by the prospects for growing our revenue and increasing profitability in future quarters.
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 my saying, I am not allowed to discuss that is based on customer requirements and the environment in which we conduct business.
Additionally, before we open up for questions, the Board has asked me to read you the following message from the Board. As you know, at the upcoming Annual Stockholder Meeting we are requesting authority to do a reverse split of the stock, which overall has been met with a positive response. We want to make it crystal clear that if approval is given at the meeting the only reason we would proceed with the reverse stock split would be to qualify for an uplifting to a NASDAQ or similar exchange. We believe listing on such an exchange would strengthen the stock by allowing the stock to be bought by funds and institutions proscribed from investing in OTC stocks, such as ours and increase the attraction of the stock because of the possibility of investors being able to margin our stock. While a few investors have raised the specter of companies in dire financial straits, who have used reverse splits and desperate failed attempts to try to save themselves from being delisted, becoming a penny stock and ultimately completely failing. Obviously, that is not our situation and we believe any comparisons to these thinking ships is not valid we ask that you vote in favor of the proposal and that you do so expeditiously. Thank you for your continued support, the Board.
Operator, we can start the Q&A.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] We did have a couple of questions come in. The first question is coming from [Rob Stress] (ph) Rob, is a private investor. Rob, you may go ahead.
Unidentified Participant
Hey, Alex and Tom. Can you hear me?
Alex Shen
Yes, we can.
Unidentified Participant
Okay, great. So, Alex, first of all, congratulations for being added to the Board. I consider that long overdue as it’s very traditional for a CEO to be on the Board. So that’s giving you that full privileges, it’s completely appropriate from my perspective. A few questions that I’m going to bounce between both you Alex and Tom. First of all, Tom, when I look at the Ranor gross profit margins, they are quite high for the quarter. Can you comment whether or not there is any one-time items in there that elevated that gross profit margin or any commentary — other commentary, because that probably is at a level that maybe is not sustainable, or at least elevated from normal levels that we would expect?
Tom Sammons
Well, I think in previous — in previous filings, I mean we often talk about the mix of the jobs that we have and the lumpiness of the business. And right now we are sitting on some pretty good projects. Some of the projects that have hurt us in the past are no longer here and that contributes to a good performance.
Unidentified Participant
I think — look, I think you’re very sensitive to what you can say on a go-forward basis, and I don’t want to Alex to have to repeat that kind of similar narrative, which I understand. Flatly, were there any one-time items in there besides product mix or customer mix that would have elevated that gross profit margin.
Tom Sammons
No.
Unidentified Participant
Okay. Great. Then I think a question moving to Alex would be, when we look at the Stadco performance understanding that it takes time to ramp, integrate, as well as turnaround frankly and you have a significant turnaround that I think investors understand well. My question is this, when you consider that operation and the pace of that turnaround, simply, is it meeting your expectations? Are you ahead or behind? Any kind of color from that perspective.
Alex Shen
No, I don’t have any other color from that perspective. I think it’s pretty premature to give my audience, my shareholders, including myself any kind of forecasting or idea that it’s doing anything other than it is a turnaround. We are taking the correct measures to make sure we’re shepherding cash and not solely focusing on that, but highly focused on making sure we have cash.
Unidentified Participant
Okay. And one question, Alex, that you might not be able to answer as a follow-up to that Stadco point. We know that previously that company did not operate effectively to create shareholder value. I think part of that is probably the way that they operated, part of that could have been the contracts that they wrote with their customers. Are you able to comment at all about prior contracts written that you are still working through not specifically, but whether or not those types of contracts are still waiting down our performance of that business today?
Alex Shen
You’re delving into a question that dives into the area where I’m not going to be able to comment.
Unidentified Participant
Okay. So moving on, in past calls you have discussed quarter-to-date backlog. I have not heard that as of yet today. Is that a change of policy or would you like to have the opportunity to tell us whether or not the $45.9 million is higher or lower on a quarter-to-date basis.
Alex Shen
If I had something to tell you I would have already. I don’t have anything significant to tell you right now.
Unidentified Participant
Yeah, okay. And I think we recognize that backlog is –
Alex Shen
That has been — my norm is, I always tell you guys quarter-to-date, if there is something significant to report at that time.
Unidentified Participant
Okay, perfect. Just two quick ones. When I consider the press release, I look at its presentation and its presentation has changed somewhat over, I would say, the last couple of quarters. The essence of my question is effectively, Tom, is this press release that we’re seeing is the planned press release structure going forward or is that indicative of the fact that you had to play some catch-up here with the 10-K and we understand the difficulty of financially integrating Stadco so on and so forth. And what I am effectively asking you is that, we went back a couple of quarters ago and we looked at a typical quarterly press release. We did in fact have a full balance sheet there, we had an income statement down to the net loss line with some supplemental information and we also had a full cash flow statement. So just let investors know whether or not that presentation of the press release has changed going forward, or if that’s just a momentary step because of what you were dealing with regarding the Stadco integration.
Tom Sammons
Yes. It’s more the latter in that — in the sense of it was a little bit abbreviated from a financial perspective — financial statement perspective given the timing of getting things filed right now, but the anticipation is that, we get back to what we’ve always done.
Unidentified Participant
Great. And I would be highly supportive of that. I think the information that you used to provide is quite good. So I appreciate that response. Last question, and I’m not sure who should answer this, but as a long-term investor here I paid attention to the messaging of the company, as well as the investor Relations strategy. I think in many ways you as a management team have done an excellent job in what you’ve been able to deliver. The backlog has dramatically increased and the company by and large should be positioned quite well for creating shareholder value in the coming quarters and years. With that said, knowing public companies fairly well, the investor relations strategy is lacking in many ways. How do you think about your Investor Relations strategy and where you are? And anything that you’d like to share regarding that.
Alex Shen
I’ll take that one under advisement. I’m not trying to avoid the question. I think it’s premature to and probably dumb of me to try to answer it right off the bat. It’s definitely something we think about and how to maybe make some improvements in what we over offering. But –
Unidentified Participant
So that’s a understandable response, but I think that it has to be dealt into much deeper for a company that has performed beyond just headline talk and what I’m referring to specifically is the great strides that you have made as it relates to the backlog, particularly this company is today in a much better position and I think that data point along with others would allow you to message this company in a way where the shares would no longer be at $1.50 a share. It is wasted operating performance that these shares are still $1.50 and I think it is very important that the investor relation strategy get on track, because I think if it was the shares for all shareholders would be much, much higher. Thank you for your time and taking all my questions. And good luck on your future quarters.
Operator
Thank you. [Operator Instructions] The next question is coming from Ross Taylor from ARS Investment Partners. Ross, your line is live.
Ross Taylor
Thank you. First — again, congratulations. Alex, I know you [indiscernible] your head and staying on the board. Can you talk a little bit more of couple of things. You mentioned one onetime costs, can you mention any other one-time costs that were there just in aggregate, how many — what we’re looking at beyond the $160,000, $180,000 you mentioned.
Tom Sammons
I mentioned, there was $109,000 in the quarter.
Ross Taylor
$109,000. Yeah. Was that the total one-time costs in the quarter?
Tom Sammons
Yes.
Ross Taylor
Okay, cool. Can you talk generally, Alex, about the run rate. It seems that the problem at Stadco right now is run rate on the revenue side. We don’t know, we don’t have enough familiarity yet with their programs, we know the CH-53K, we know the F-15EX, we have ideas of some of the other programs that they’re working on. It seems that this quarter’s run rate was a little lower than I would have expected. But then again, to use — I won’t use the L word, but the L word might have —
Alex Shen
We’re going to end up using the L word.
Ross Taylor
No, no, we’re not, we’re going to find another word other than that one.
Alex Shen
Okay.
Ross Taylor
Yeah, I have an answer to a guy who was acquitted for [indiscernible] merger, just so you understand and that will drive me up and crazy. So getting into that, the idea of that business, we are not familiar enough as shareholders yet with the tempo of their business. Is the tempo of their business when we’re looking at things like the CH-53K, the F-15EX, I think we’re looking at some point in the next fiscal year decision by the Navy/Marines on the uptake on the run rate for the CH-53K. I think the last budget I saw had 24 F-15EXDs projected at least from one side. I think the Senate side of the budget. It would seem that you’d be doing more run rate business there. Is it just because of the L word?
Alex Shen
Well, before we get to the L word I think we really need to focus on the fact that this is a turnaround. So it’s highly focused, first, before we even get into run rates of specific programs. We need to shepherd the cash. We need to concentrate on shepherding cash, managing cash effectively and efficiently and pulling all the different levers. The backlog itself is strong, very strong in both subsidiaries. So we need to get past the turnaround problems.
Ross Taylor
Right. So you —
Alex Shen
Once we get past — hold on Ross, just one second please. Sorry. So once we get past the stabilizing the cash situation and maintaining that stability. We can look at pulling the different execution levers. Because we do have a strong backlog, we have the orders. So I think it’s just needs to be taken in order of sequence. And the performance of the previous turnaround called Ranor has been good and we have been able to not only maintain our gains, but growth. So I think the past history of the management before you speaks for itself. I’m not trying to pat myself on the back or Tom. I never complement Tom much anyway. I think we just need to be carefully stepping through solving the problems one by one. And really I say one by one, but all of them need to be simultaneously juggled. But we can have a chance to look at things like, okay, which program that I can’t talk about specifically has run rate implication or not.
Ross Taylor
Okay. So, in looking at Stadco is the management capability what you had been looking for? Are you happy with the people you have running that business?
Alex Shen
Well in general, yes.
Ross Taylor
Okay. And then looking at the ability to execute on the contract, are you happy with the people on the factory, floors ability, do they have the skill set needed to produce the product in a quality fashion and the lot?
Alex Shen
Well, I think part of the turnaround is to really flesh all these items out, just like at Ranor. There have been some changes and most of them has not been with the management.
Ross Taylor
So when looking at this overall — when you look at Stadco at this point, is there anything about the business that has surprised you in a negative fashion or a positive fashion.
Alex Shen
I don’t think there is any surprises here.
Ross Taylor
Okay. And so when you look at –
Alex Shen
I do I do mean to answer your question a little bit more before you go on further. So when you’re talking about the satisfaction with the people in general, I’m satisfied. And in general, we need to bring on some more talent, which we are doing so as part of our turnaround.
Ross Taylor
And as we execute that talent, you would think that as the business builds you are comfortable that it can achieve what you were targeting it to achieve when you acquired it or better?
Alex Shen
Well, I target things and usually we’re going to get us there.
Ross Taylor
Yes, that is true. So –
Alex Shen
But we just got to get that first point one, two, three, I got to get the one.
Ross Taylor
Right. And so at this point in time where we really are seeing is, it’s really as you’re coming into a business and you are — you have the team, you’re comfortable with the resources, you’re comfortable with the people, you’re really in the process of kind of just pushing this forward to the next step and you don’t see anything about it. When one looks at the quarter and sees $2.5 million in revenue, this isn’t something that you guys saw and were surprised by, it’s something that is inside the expectations and the plan that you have?
Alex Shen
Well, between Tom and me, he has been axe murdering me for not hitting numbers as soon as I can. But that’s private. We would like to have better numbers. Yes. Absolutely. The disappointment is absolutely there, we’re not happy.
Ross Taylor
When you look at the opportunities between Stadco and Ranor, which of the two do you think has the broader opportunities in front of itself, not the programs that you’re already in and of one, but programs that you’re looking for down the road.
Alex Shen
Yes.
Ross Taylor
So I take that to be both. You are really excited about both of them.
Alex Shen
I’m very excited by both.
Ross Taylor
Okay. And looking at this overall situation, so what we have do — I know you won’t give us forecasts, but should we look at a quarter like this in Stadco and consider that going forward we should start to see some level of improvement or do you want to [indiscernible] several quarters of maneuver. How do you on the Board kind of think that you probably can be more both?
Alex Shen
Ross, you’re asking me these questions that you know I’m going to do everything to dodge, right? [Multiple Speakers] I will not be giving you a forecast or anybody else. So I’m going to [Multiple Speakers] a little bit.
Tom Sammons
I’ll just say obviously we expect better.
Ross Taylor
You expect better. That’s what — Thank you. And you go back to axe murdering them. I’ll let someone else have it.
Alex Shen
Thank you, sir.
Ross Taylor
Thank you gentlemen and congratulations, Alex.
Alex Shen
Thank you.
Operator
Thank you. There were no other questions in the queue at this time. I would now like to hand the call back to the management team for closing remarks.
Alex Shen
Thank you. Everyone have a great day.
Operator
Thank you. Ladies and gentlemen, this does conclude today’s conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.
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