Earnings Call Transcript
Techprecision Corp (TPCS)
Earnings Call Transcript - TPCS Q3 2022
Operator, Operator
Good afternoon, ladies and gentlemen, and welcome to TechPrecision Corporation Fiscal 2022 Third Quarter Financial Results. At this time, all participants have been placed on a listen-only mode. It is now my pleasure to turn the floor over to your host, Brett Maas with Hayden IR. Sir, the floor is yours.
Brett Maas, Host
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 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 regarding the company's future performance represent management's estimates as of today, February 17th, 2022. 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.
Alex Shen, CEO
Thank you. Good afternoon to everyone. Thank you for joining us. The third quarter of fiscal year 2022 was a strong quarter for capturing new sales orders. We increased our backlog to $35.2 million at December 31, 2021. This is up significantly from $26.4 million at September 30, 2021. Furthermore, we have secured additional sales orders of over $11 million after the December quarter-end. Our financial results for the third quarter of fiscal 2022 include one entire quarter of manufacturing activity from our newly acquired STADCO subsidiary for the very first time. With the addition of STADCO, we recognized additional revenue. We also absorbed additional costs that dampened our margins and added to our selling, general, administrative, and interest expense. Fiscal year 2022 third quarter financial performance was significantly impacted by an unfavorable project mix which contributed to both lower revenue and lower margins. And by higher unabsorbed labor and overhead. In general, our third quarter is always challenging given the reduced production hours due to the Thanksgiving and Christmas holidays. Concluding my opening statements, we believe business prospects are strong. These strong business prospects are evidenced by the significant increase in new sales orders. We expect to see revenue growth and improved profitability in future quarters. I'd like to turn the call over to our CFO, Tom Sammons, to continue with the review of our fiscal 2022 third quarter results. Tom.
Tom Sammons, CFO
Thank you, Alex. Net sales for the third quarter of fiscal year 2022 were $6.5 million, or 82% higher compared to the same quarter a year ago, as we added a full quarter of STADCO revenue. We recorded an increase in revenue in our defense markets, which more than offset a decrease in precision industrial revenue. Our defense backlog remains strong as new orders captured in the quarter and after are largely from our prime defense contractors. Costs of sales were $6 million, resulting in a gross profit of 7.3% in the third quarter of fiscal year 2022, compared to a gross profit of 19.8% in the same quarter a year ago. Gross profit was $478,000, a decrease of $227,000 compared to the same quarter last year. As Alex noted above, the decline in gross profit was primarily due to an unfavorable mix of projects and higher unabsorbed labor and overhead costs. SG&A expense increased by $908,000 due to the addition of STADCO, an increase in outside advisory expenses, and travel-related to the STADCO acquisition. We incurred additional one-time costs in the quarter of approximately $329,000. Our operating loss is $1.2 million compared to an operating loss of $11,000 in the same prior year period. Interest expense increased to $95,000 from $50,000 in the same prior year quarter, as we added new debt to the balance sheet to acquire STADCO and to fund the first full quarter of operations. As a result of the above, we recorded a net loss of $905,000 in the fiscal 2022 third quarter. Net sales for the nine months ended December 31, 2021, which included approximately four months of STADCO, were $14.7 million or 27% higher than the same period last year. Gross profit was $2.2 million or 15.2% compared to $2.5 million or 21.9% in the same nine-month period a year ago. SG&A expense increased by $1.3 million with the addition of STADCO and related acquisition expenses. These one-time expenses for the nine-month period were approximately $563,000. Operating loss was $1.3 million compared to operating income of $326,000 a year ago. Interest expense increased by 14% year-over-year as we incurred higher interest costs associated with higher average debt levels in fiscal 2022. We also realized a one-time non-taxable gain of $1.3 million from the forgiveness of our Paycheck Protection Program loan in May 2021. As a result, we posted net income of $246,000 for the nine months ended December 31, 2021, compared to a net income of $106,000 in the prior-year period. Moving onto the cash flows and balance sheet, we used $1.6 million of cash in operating activities compared to an operating cash outflow of $340,000 during the same period a year ago. Investing activities included a $7.9 million payment for our new business acquisition. We sourced most of that amount from the sale of common stock and new debt. Our total debt was $8.2 million at December 31, 2021, which is $4.4 million higher than reported on March 31, 2021. Cash balance at December 31, 2021, was $562,000 compared to $2.1 million at March 31, 2021. Working capital decreased from $5.2 million at March 31, 2021, to $3.1 million at December 31, 2021, as the increase in current liabilities more than offset the increase in current assets. With that, I will now turn the call back over to Alex.
Alex Shen, CEO
Tom, thank you. TechPrecision is proud and honored to serve the United States Defense Industry, specifically in Naval submarine industry manufacturing through its Ranor subsidiary and military aircraft manufacturing through its STADCO subsidiary. Overall, in both the Ranor and the STADCO subsidiaries, we continue to see meaningful opportunities in our defense sector, as evidenced by the significant increase in our new sales orders and in our backlog. I'm very encouraged, we're all very encouraged by the prospects for growing our revenue and increasing profitability in future quarters. A few words about the STADCO subsidiary before we take questions. STADCO is a key supplier of large flight-critical components on several high-profile commercial and military aircraft programs and has been a prime supplier of parts for the Sikorsky CH-53 helicopter for over 45 years. It continues to be a supplier of critical parts for the current CH-53E model and the new CH-53K King Stallion heavy-lift helicopter. Let me quote some publicly available facts about the CH-53 Sikorsky helicopter. The CH-53K is the only sea-based long-range heavy lift helicopter in production and will immediately provide three times the lift capability of its predecessor. The CH-53K will further support the U.S. Marine Corps 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, critical in the Indo-Pacific region. The new CH-53K has heavy lift capabilities that exceed all other DOD rotary wing platforms. It is the only heavy lifter that will remain in production through 2032 and beyond. In September 2021, Sikorsky, a Lockheed Martin company, celebrated the first Connecticut-built CH-53K heavy-lift helicopter that will be delivered to the U.S. Marine Corps. This is the first CH-53K helicopter to roll off the Stratford, Connecticut production line. This heavy-lift helicopter is part of a 200-unit aircraft program of record for the U.S. Marine Corps. In addition, the Israeli Ministry of Defense confirmed on December 31, 2021, a deal to buy 12 King Stallions with an option to acquire six more as part of a $3.1 billion foreign military sales package. Sikorsky has obtained a $372 million foreign military sales contract modification from U.S. Naval Air Systems Command to manufacture and deliver four LRIP Lot 6 CH-53K King Stallion heavy-lift helicopters for Israel. After 50 years of supporting the CH-53E, Sikorsky has a deep understanding of the heavy lift mission. And during our partnership with the U.S. Marine Corps. Similarly, TechPrecision aims to do the same through our subsidiaries Ranor and STADCO. The same meaning, one, achieve a deep understanding of the mission, and two, secure and enduring partnerships with our customers. Finally, a reminder again that we do most of our work in industries that are highly sensitive to confidentiality, which precludes 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 my saying that I am not allowed to discuss that is based on customer requirements and the environment in which we conduct business. Operator, we can open the line for questions, please.
Operator, Operator
Certainly. Ladies and gentlemen, the floor is now open for questions. Your first question is coming from Ross Taylor from ARS Investment Partners. Your line is live.
Ross Taylor, Analyst
Thank you very much. Well, first, Alex and the team, congratulations on the really great backlog growth and the beginning of the integration of STADCO. I think that both of those steps are huge home runs and really transformational in the business. I'm not sure if the market and most of your investors quite understand, I think, how transformational it is. But in spite of the stock action, I think it really is a huge home run. So what I wanted to start off with here first is you talked about new release and mentioned the unfavorable business mix that impacted operating margins in the quarter. Can you give us an understanding of whether that was early run projects, whether it was specific projects that just carried lower margins? What was it about those projects that caused them to return lower than average or a lower than normal operating margin?
Alex Shen, CEO
I think both of us would like to answer that question together. It was on specific part numbers, and it was mostly part numbers that were the first units of builds.
Ross Taylor, Analyst
Okay. Which is what I thought it was probably the case.
Alex Shen, CEO
I think that answers the first question. Tom, did you want to add anything else?
Tom Sammons, CFO
No, that's all that I can say that most of these projects were items that we had not built ever before. So they were new products to us, and we're still working on one final part from that project that had been last said.
Alex Shen, CEO
That one specific one, yes.
Ross Taylor, Analyst
And that's a comment.
Alex Shen, CEO
Several factors affected us, and while it's difficult to quantify their impact, we had a particularly tough quarter in November and December due to the Thanksgiving and Christmas holidays. There was an increase in human interaction during this period, which can be attributed to COVID fatigue. Although I prefer not to blame everything on COVID, we cannot overlook its influence globally. We acknowledge this and will move forward.
Ross Taylor, Analyst
Regarding the first, since these are new products and the part numbers have just been created, it's reasonable to expect a learning curve, and future manufacturing should yield better returns.
Alex Shen, CEO
Our expectation is that our experience has been by and large mostly like that. The humans do make non-conforming products and stumble once in a while, but it gets better when we make them over and over again. Tom?
Tom Sammons, CFO
Yeah. Most of them are short run, so someone would just disappear anyway.
Alex Shen, CEO
Right.
Ross Taylor, Analyst
Yeah. Regarding your programs, I see you as having four key federal initiatives: Columbia, Virginia at 15, and CH-53. Do you think the federal government still operating under a continuing resolution is currently impacting your situation in some way?
Alex Shen, CEO
To be honest, I don't see the correlation coming all the way down to the subcontracting vendor base such as Ranor and STADCO. Having said that, it's not no connection. It's just the timing is not exactly immediate and it's not in sync.
Ross Taylor, Analyst
The Navy has been focusing more on the Columbia program rather than Virginia when it comes to allocating their resources, particularly personnel. In an earlier conference call this year, they mentioned that the new hires would primarily be assigned to Virginia to help them catch up. Have you noticed any effects from this, or is the new business related to the Virginia Class progressing at the expected rate?
Alex Shen, CEO
I think overall, when we look at the past two years, there has been a slowdown bottleneck interruptions on the Virginia Class build that has been made public. I think the COVID impact really impacted the shipyards, and that has flowed down throughout the supply chain.
Ross Taylor, Analyst
It would seem to me that I noticed and it's actually interesting, I noticed that early in the Crimea situation the U.S. sent one of its Ohio-class, what I call volley boats, cruise missile carriers into Malta on the surface. Basically, I think to demonstrate to the Russians that it was in the neighborhood. Those boats basically have a very limited life at this point in time and if they go, the U.S. will lose a substantial portion of its strategic non-nuclear deterrent system. I know that the Navy has not yet gotten to where they are building three Virginia boats a year, but do you believe that we will see that build a three-year push forward in an effort to make up for the fact that we're going to lose four Virginia or for Ohio-class volley boats?
Alex Shen, CEO
I think my honest opinion is that I will believe it when I see it.
Ross Taylor, Analyst
Okay. Would it be a problem if they did that operationally for you?
Alex Shen, CEO
I would love to have that problem.
Ross Taylor, Analyst
Okay.
Alex Shen, CEO
I would absolutely love to have that problem. Our build sequence though is not completely in total sync with the two boats per year, our builds leaking once might build more.
Ross Taylor, Analyst
Right.
Alex Shen, CEO
We're focused on both STADCO and Ranor, not just on the timing of our revenue and managing the report, but on maximizing our revenue and profitability.
Ross Taylor, Analyst
Okay. Are you seeing new business flow, backlog flow from the Columbia Class in a meaningful way at this point yet?
Alex Shen, CEO
I want to carefully answer this question, so I don't get the buttonhold by you on the next question. However, I have no degradation of business flow on Columbia Class for sure.
Ross Taylor, Analyst
None for sure and one would think, do you have the same kind of relationship or non-linear relationship to build as you do in Virginia?
Alex Shen, CEO
The Columbia class consists of 12 submarines, and its build cycle is significantly longer and different compared to the Virginia Class. The Virginia Class tends to produce about 10 submarines every five years, progressing through various blocks from 1 to 4, and we are currently transitioning from block 4 to block 5, with block 6 on the horizon. The production of Virginia class submarines is more consistent and continuous. In contrast, the Columbia class is a single, large submarine, and we are engaged in more than one project for this program, focusing on various components rather than just number 1.
Ross Taylor, Analyst
Okay. Is Virginia better business for you than Ohio?
Alex Shen, CEO
Better? I think it depends.
Ross Taylor, Analyst
I'm thinking of it from an investor standpoint, dollars of sales and operating margins.
Alex Shen, CEO
I think from a strategic and a tactical deployment of assets, we need the mix of both in order to be a strategic supplier to the two shipyards, we need to be able to do both so that we can have an enduring relationship with both shipyards. So I would say that they are equal.
Ross Taylor, Analyst
Okay. On the STADCO side, do you know that Sikorsky is up to run rate? I think they're looking at doing 18 to 20 frames a year. Do you know if they're up to run rate yet on that program?
Alex Shen, CEO
I can share that the low-rate initial production is still ongoing.
Ross Taylor, Analyst
We're currently at a low rate. It's interesting to consider the raid on the ISIS leader; they left behind a helicopter that may have been left there if they had the CH-53K available, which was a costly loss. It appears that what we're looking at is essentially a run rate that suggests it will take about 11 or 12 years to meet U.S. needs upon arrival, with potential foreign sales contributing an additional five years. So, are we essentially looking at a 15 to 17-year program as it develops?
Alex Shen, CEO
Well, I think Tom did some analysis and it's in double digits for sure.
Ross Taylor, Analyst
And I've seen various numbers attached to value per airframe of $1 million to $1.5 million for you guys per airframe. When I build a model, is the low end of that number a realistic number to use?
Alex Shen, CEO
I don't think we ever tell you things like that, right Ross? We leave it up to you.
Ross Taylor, Analyst
I'm allowed to ask.
Tom Sammons, CFO
Absolutely.
Ross Taylor, Analyst
Okay, let me know if I'm completely off base. I found it interesting regarding the CH-53, and then we'll move on. The Israeli order is in place, but they won't receive their first aircraft until 2025. This suggests that there’s likely a strong business pipeline for you over the next four to five years. You can expect a significant ramp-up since I assume we'd be supplying something to Israel given our relationship and their extensive use of CH-53s. Are you satisfied with your operating margins in that sector? What would be the necessary run rate or level for you to feel that you're at a sustainable and reasonable operating margin for the CH-53?
Alex Shen, CEO
Am I comfortable? Not yet.
Ross Taylor, Analyst
Okay.
Alex Shen, CEO
Look, turn around. We will be pretty forward with when we think we're out of the woods a little bit. We will keep everybody informed. We are right in the middle of the turnaround.
Ross Taylor, Analyst
That would be great. And with regard to the F-15EX, some of the same questions. It appears that they're looking at building about 19 airframes annually, which gives it about a 10 or 11 year life for the U.S. I also noticed that your stock went down on the day this was announced, but it strikes me as part of the dislocation between your investors' understanding of your business potential and the realities of it. The U.S. approved the sale of 36 F-15 EXs to Indonesia, which would add two additional years to the production run, but it seems even more meaningful that Indonesia's not been a first-tier U.S. defense supplier, so if we're willing to sell them the EX, it would seem that there's going to be a much bigger overseas market for the EX. Have you had any conversations about whether that run rate would increase, and if it did, could you supply those aircraft or whether the program is expected to have a substantial foreign sales potential?
Alex Shen, CEO
So the first question, have we had conversations? I think that, you know me, we attempt to have these conversations. I have to do my job. I think some of it gets redirected right back at me saying we can't tell you stuff like that. I then tend to ask for okay, well, how about some orders then? Well, that would be a way of telling.
Ross Taylor, Analyst
Yes. Honestly, it seems that the program you're working on really depends on your efforts for it to materialize. If they want to boost the run rate or extend the program, they will need to discuss your capacity to meet that demand. I believe this is a crucial requirement for that airframe. While we wait for more information, could you share your thoughts on other areas? What opportunities do you see in space for your team?
Alex Shen, CEO
I'm not sure there has to be some opportunity.
Ross Taylor, Analyst
You've worked in the past with STADCO, you've worked in the past with some of the players in the space. Are you working with any of them at this point in time?
Alex Shen, CEO
Yes. I believe Tom said that to you.
Ross Taylor, Analyst
Thank you. I'll take one last question. Lockheed has created a flying model, possibly more than one, related to the next-generation fighter aircraft. Is STADCO involved in that?
Alex Shen, CEO
I need to shut this line of questioning down, sorry.
Ross Taylor, Analyst
Thank you, you've answered the question. Okay, then I'll leave it because you won't answer my next question either. I'll let someone else come in and have a better shot at getting questions answered. I was going to ask the B-21.
Alex Shen, CEO
Thank you, Ross.
Operator, Operator
Your next question is coming from Aaron Warwick from Breakout Investors. Your line is live.
Aaron Warwick, Analyst
Hey everyone, thank you for joining the call. I want to begin by discussing the backlog, which is truly impressive, and I want to congratulate you on that. I understand you’ve been waiting for this, and some of us are naturally a bit more eager, but congratulations nonetheless. I just want to confirm my understanding. It seems that the backlog has increased by $20 million from September 30th to now; is that correct, with $9 million from the quarter and another $11 million added after the quarter?
Alex Shen, CEO
The backlog increased by $20 million between September 30th and now, with $9 million from the quarter and over $11 million from subsequent orders. We are gradually recognizing revenue and shipping additional items as we receive these orders.
Aaron Warwick, Analyst
I see what you're saying.
Alex Shen, CEO
We know around our backlog that ends on this quarter. I don't know where I'm at this point.
Aaron Warwick, Analyst
Sure.
Alex Shen, CEO
We started with the backlog.
Aaron Warwick, Analyst
Nonetheless, it's impressive and then plus you've got the $6 million that you work, some of that could've been worked through backlog as well. So whatever it is, impressive number. Congratulations on that. One thing that we haven't really heard much about recently is anything you do on the medical side. What's the status of that? Are you still involved in some of the medical stuff?
Alex Shen, CEO
So I think we try to avoid talking about single customers only, and we've carefully avoided, to try to talk about things that way. I can tell you we are Defense-centric.
Aaron Warwick, Analyst
Okay. Looking out into the future. How many you've, you've told us that you've got to work through some of these unfavorable contracts and so forth with STADCO. And just in general, Q3 is a difficult quarter for you. But looking at it, say 2023, 2024 and beyond, when things are really getting up and rolling, what are you expecting for margins? Are you still having that expectation around 25-30% that you've talked about before?
Alex Shen, CEO
I don't think we ever tell you our expectations with definite numbers what we expect. Tom have we done that?
Tom Sammons, CFO
We talked about what we've done historically, and obviously we would like to. This quarter was obviously not in the range that we want.
Alex Shen, CEO
Absolutely not.
Aaron Warwick, Analyst
Sure. And what's the target though that maybe you have in mind just in general?
Alex Shen, CEO
In general, I don't have a specific target. Depends on the business and the volume.
Aaron Warwick, Analyst
Okay. Could you provide the percentage breakdown of the backlog between STADCO and Ranor?
Alex Shen, CEO
We've not disclosed the backlog by company. I will just tell you that the new orders are coming in for both entities.
Tom Sammons, CFO
Thank you, Aaron.
Brett Maas, Host
Thank you, everyone. Have a great day.
Tom Sammons, CFO
Thank you.
Operator, Operator
Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.