Techprecision Corp Q2 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to the TechPrecision Corporation Fiscal twenty twenty two Second Quarter Financial Results. At this time, all participants have been placed on listen-only mode, and the floor will be open for questions and comments after the presentation. 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 forward-looking statements as contained in the Private Securities Litigation Reform Act of nineteen ninety-five. 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 represent management's estimates as of today, December seven, twenty twenty-one. 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 thirty, twenty twenty-one. 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, everyone, and thank you for joining us. Our preliminary financial results for the second quarter of fiscal twenty twenty-two include thirty-six 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 twenty-six point four million dollars at September thirty, twenty twenty-one, which includes STADCO backlog. Since the end of the second quarter, we have booked over thirteen million dollars 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 remained 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 twenty twenty-two second quarter results. Tom?

Thank you, Alex. Our preliminary net sales for the second quarter of fiscal year twenty twenty-two were four point eight million dollars, which included STADCO revenue for the period post-acquisition, compared to four point seven million dollars in the same quarter a year ago. Cost of sales were three point nine million dollars, or eight percent higher when compared to the same quarter a year ago, resulting in a gross profit of nineteen point four percent in the second quarter of fiscal twenty twenty-two, compared to a gross profit of twenty-three point nine percent in the same quarter a year ago, primarily due to higher rate and absorbed labor and overhead costs and lower margins on certain projects. SG&A expense decreased by approximately four hundred and seventy-eight thousand dollars primarily due to the addition of STADCO SG&A expense plus approximately two hundred and thirty-four thousand dollars of additional cost incurred in connection with the STADCO acquisition. Interest expense increased by about five thousand dollars compared to the second quarter a year ago, we expect higher interest costs as we move forward with higher debt levels in fiscal twenty twenty-two. As a result of the above, we recorded a net loss of two hundred and twenty thousand dollars in the fiscal twenty twenty-two second quarter compared with net income of two hundred and seventy-one thousand in the same quarter a year ago. Net sales for the six months ended September thirty, twenty twenty-one, which included STADCO revenue for the post-acquisition period were eight point two million dollars or about three percent higher than the same period last year. Gross profit for the six months ended September thirty, twenty twenty-one was down slightly to twenty-one point five percent from twenty-two point eight percent in the same period a year ago. As was the case for the second quarter, SG&A expense increased by four hundred and seventeen thousand dollars, 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 twenty twenty-two. For the six months ended, we recorded net income of one point two million as we realized a one-time non-taxable gain from the forgiveness of our one point three million dollar PPP loan in May of twenty twenty-one. We used one point one million dollars of cash in operating activities through September thirty, twenty twenty-one compared to an operating cash outflow of seven hundred and forty thousand dollars during the same period a year ago. Our total debt was seven point two million dollars at September thirty, twenty twenty-one which was three point four million dollars higher than reported on March thirty-one, twenty twenty-one. We also added six million in new assets and liabilities in connection with the amended lease for the STADCO building and property. Cash balance at September thirty, twenty twenty-one was two hundred and eighty-one thousand dollars compared to two point one million dollars at March thirty-one, twenty twenty-one. Working capital decreased by one point two million dollars since March thirty-one, twenty twenty-one and five point two million dollars to four point zero million dollars 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 dies used in the production of aircraft components. I'd like to re-highlight 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 forty-five 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 twenty twenty, announced that it will build six 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 in 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 six helicopters are part of a two hundred unit aircraft program of record for the U.S. Marine Corps. Their addition makes a total of twenty-four 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 six aircraft in January twenty twenty-four. This two hundred 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 twenty-four CH-53K helicopters per year over the next several years. I'll talk a little bit more about Sikorsky. On June twenty-five, twenty twenty-one, the U.S. Navy awarded Sikorsky a contract to build nine more CH-53K King Stallion helicopters. The Lot 5 contract includes nine helicopters for a value of eight hundred and seventy-eight million dollars, and an option for a Lot 6 contract worth eight hundred and fifty-two million dollars for nine more helicopters. The Lot 5 low-rate initial production contract increases the number of CH-53Ks on contract to thirty-three. The Lot 5 aircraft are to be delivered in twenty twenty-four. 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 so sometimes those limits change. Please understand that my 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 thirty, twenty twenty-one. Operator, we can start the Q&A.

Certainly, ladies and gentlemen, the floor is now open for questions. We did have a few questions come in. The first question is coming from Aaron Warwick from Breakout Investors. Aaron, your line is live.

Good afternoon, gentlemen. Thank you for the update. Was hoping that you could give some clarity about the backlog, the twenty-six point four million dollars 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 thirteen million dollars are you able to break that out at all?

Yes.

Okay. I have no further questions.

Okay.

Thank you. The next question is coming from Robert Investments. Robert, your line is live.

Okay. Hello guys and congratulations on the thirteen million dollars in new orders. Couple of questions about some financial statement items. You've got the current portion of long-term debt almost three point eight million dollars has any of that been refinanced since September thirty?

No. We have our mortgages due in December. So that's been a five-year loan and that is why the long-term debt is higher.

And what's the plan for that? Is it going to be refinanced or you are going to draw some more debt to pay that off or?

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, that's that precision.

Yes. Okay. Very good. Okay. Well, that is all my questions. Thank you.

Thank you.

Thank you. The next question is coming from Ross Taylor from ARS Partners - Investment Partners. Ross, your line is live.

Thank you. First, congratulations on closing the deal. Also, congratulations on the significant backlog you have built up both during the quarter and since then. I noticed that the Israeli government committee approved the purchase of fifteen of the CH-53K, which is now progressing through its budget. Do you have any idea about the timing of when those will come through and how they will 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 Blackhawk 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 or they talk to all about the need to be able to ramp up production to the targeted twenty-four 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 twenty-four CH-53K helicopters per year.

The way you're stock…

To be right in line with what you're saying?

Yes. I do think sometimes the way the stock trades being slightly misdirected it's a little hard on people things like they clearly need to be building things directly. So, looking at that that piece of information, obviously, we're going to build out looks like they put nine 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 called, if they move to full run rate production, which is twenty-four a year to a month. Do you need to do anything additional? Do you need to add any capital expenditures to meet with that need?

If we reach that point, I can't say for sure what the exact requirements will be. We will need more equipment and more personnel. That's the straightforward answer to your question.

Okay. Great. As you may have seen, they recently conducted a heavy lift operation using a helicopter landing ship to transport light armored vehicles over two hundred and twenty miles, demonstrating the capabilities of the CH-53. This helicopter has significantly improved capacity compared to its predecessor. Regarding the budget, it appears that for the F-15E, they are anticipating twelve units this year. Are any of those aircraft currently in your backlog?

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 Griffin and what I'm told that not there was 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.

Looking at this setup, you've truly transformed the company with this move, and I want to congratulate you for that. We are on the brink of something really exciting, and it’s encouraging to see a significant number in the backlog for the first time in a while. Regarding the submarine aspect, have you observed any indications from the Navy about a substantial reduction in their numbers that may happen in late twenty?

Can you get closer to the mic? It's dropping a little bit.

Certainly, the Navy is looking at needing to drop the four Ohio-class submarines that they have that I think are one hundred and fifty-six launch 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 as they keep up the build rate on the class boats? So, have you heard talk about the idea that them rolling in the late twenty’s into three boats a year from current two projections?

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

Okay. Cool.

I'm sorry. I'm not restricted on this.

It's all right. Sometimes saying nothing conveys a lot. Additionally, since there's been considerable discussion about the equipment used in California, it is quite similar to that used in Massachusetts. Considering Sikorsky's proximity to your Massachusetts facility, might it be possible for you to fulfill orders for Sikorsky business from there or the Ranor facility in the future?

Would it be possible? Well, I want to rule out the possibility.

Okay. As I think…

Right now, I think the key here is STADCO is a turnaround. So, our focus is to get the ship righted. And 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 the issues there largely enhancement?

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 started that. Key assets are in place. Key personnel are in place. We're going to move forward carefully and manage every detail carefully.

Thank you. As I mentioned, I believe this acquisition is truly transformational. I don't think the equity market fully grasps its significance. It seems clear they do not understand how transformative it really is. Congratulations on completing the deal and on how it is set up to benefit you.

Thank you very much.

Thank you. The next question is coming from Andrew Shapiro from Lawndale Capital Management. Andrew, your line is live.

Hi. Thank you. Can you hear me, okay?

Yes, we can.

Okay. Regarding the human resources question, as a federal contractor, there has been significant focus from the administration on ensuring a one hundred percent vaccination rate amid potential legal injunctions. This is concerning because hiring and maintaining staff is essential for meeting production demands. Do you know what percentage of your staff that needs to be vaccinated is already vaccinated and how much more is needed? Additionally, when you acquired STADCO, did that create any further challenges?

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 past down 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 important employees, but we want to ensure that we can produce to achieve our revenue targets. The point I want to make is, if the mandates are upheld and if there is a mandate, do you have challenges to address regarding hiring new staff, potential turnover, or is your workforce generally open to meeting 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 paths on those as well.

Okay. That might have been three comments I might have.

I think we have a handle on it.

Okay.

Look 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 mandate, we think we've been able to work.

But the mandates are not clear right now. So, 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, but thriving?

Right. But if there is…

That we can handle it.

Okay. Well, I just would hate to get a quarterly report saying well, we didn't achieve, but 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 wanted to handle on and not be unpleasant surprise.

Sure. We don't look to have no unpleasant surprises, and that's what we're working to.

Great.

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 confidence, we believe we have a handle on it.

Great. Thank you.

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.

Thank you.

Thank you. And the next question is coming from Kris Tuttle from SoundView. Kris, your line is live.

Great. Thanks for taking my question. 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 one 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 two little companies that are both small businesses. Even if you combine them, there's still a small business. Trying to diversify when the opportunities are huge with current customers. Not so sure about them. But of course, opportunistically we would not be saying no to any new customers that would be foolish and 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? It means different things to different people.

Thousands of orders of magnitude that cannot be overcome by, we're tiny and our customers are giant.

I mean, is that huge just ten million dollars, one hundred million dollars, five hundred billion dollars, a billion like what's…

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

Okay. I completely agree. No extra segments are needed for you all to successfully implement your plans. That's helpful for me. Thank you.

Great. Thank you.

Thank you. And we had another question come in from Aaron Warwick from Breakout Investors. Aaron, your line is live.

Hey. Thanks again guys. I wanted to go back to the thirteen million dollars in orders. Would it be fair to characterize that a material amount of that was related to submarine work?

I think you're asking us to approach it differently.

No. I'm just asking 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 on that? In terms of those orders, the thirteen million dollars over what timeline are you expecting to recognize revenue from that?

Over one time. I think it's safe to say it's over two years yes.

Okay. Thank you, guys. Appreciate it.

Thank you.

Thank you. And we have a follow-up coming from Ross Taylor from ARS Investments. Ross, your line is live.

Thank you. A couple of quick questions. Are you doing work in any way with someone rate 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.

You can only not comment on them if you're doing something therefore.

You are correct.

Okay. Thank you very much. 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 working with their operations?

Well, probably since it's unclear, I shouldn't comment on it.

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

I couldn't comment, if I wasn't I probably shouldn't comment either.

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 and what was supposed to think. Lastly, with regard to space, are you doing work right now with anyone on the IDM reusable space capsules and there's a thought that there's is an effort to build a system that can basically go into lower, but and fly from London to Sydney or other places in a few hours? Does 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.

I believe there are many exciting opportunities ahead. This acquisition and deal are truly transformative, and I'm eager for everyone to engage with it and operationally integrate their business to drive progress, as it seems that revenue is beginning to increase. My final question is whether you have been able to estimate the extent of the impact caused by the absence of a defense budget.

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

Big in their bed box.

I believe our ability to secure new orders indicates that we are performing well despite any budgeting concerns that may create a perceived drag.

Yeah. I actually have to say, I'm very impressed given the fact that we've been operating under a continuing resolution and like that you've been able to develop the business the way you have.

Ross, thank you very much for bringing that point out. I think that's a very fair endpoint.

Thank you.

Thank you. 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.