TechPrecision Corporation (TPCS) Earnings Call Transcript

Ladies and gentlemen, hello, and welcome. Thank you for joining us for today's TechPrecision Fourth Quarter 2020 Earnings Call and Webcast. [Operator Instructions]. This session is being recorded. And now for opening remarks and introductions, we will go live to managing partner at Hayden IR, Mr. Brett Maas. Welcome, Brett.

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 by -- management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the safe harbor and 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, June 11, 2020. 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 the opening remarks. Alex?

Brett, thank you. Good day to everyone, and thank you for joining us. Net sales improved in the fourth quarter to $4.9 million compared to $4.7 million in the same quarter a year ago, resulting in total net sales in fiscal year 2020 of $16 million, down from $16.7 million in fiscal year 2019. Gross margins also improved in the fourth quarter to 26.4%, higher than gross margins realized in the prior 3 quarters of fiscal 2020. However, our fourth quarter results were negatively impacted by a $495,000 settlement, related to a civil action brought by former employees for past wages claimed under a paid time off program. We agreed to settle the claims to avoid the expense and uncertainty of future litigation. The company will be released from all claims raised in this litigation once the court approves the settlement. As a result, our fourth quarter net income was $48,000 or less than $0.01 per share. Our full year fiscal 2020 results were negatively impacted by a learning curve-related cost overruns on a limited number of new projects, which added $1 million to our loss provision. These new projects are an opportunity to demonstrate technical excellence and custom know-how of complex fabrication and custom know-how of complex machining. Furthermore, these specific projects represent an entry point into new business prospects as the highly complex nature of these projects and extended time period of performance, spanning multiple fiscal years, provide a showcase opportunity on Ranor's production flow. A number of these units have now been completed. We expect improved margins going forward as the remaining of these projects approach completion and their cost stabilize and other new projects come online during fiscal year 2021. We reported a net loss of $342,000 for the full fiscal year 2020, compared to net income of $1.1 million in the prior year. The company's sales order backlog was $16.8 million on March 31, 2020, compared to $12.6 million in the prior year. As approximately $20.1 million as additional orders were booked over the full year in fiscal 2020. We continue to replenish backlog. We believe this will provide for a steady revenue and profitable margins in fiscal 2021. Overall, fiscal year 2020 was a great year of positioning the company for future growth, securing new orders, characterized by part numbers that are new to the company, clearly demonstrating customer confidence and our ability to execute on our core business, which is complex fabrication and complex machining. I will address the impact of COVID-19 on our business and customers, following a brief review of our fiscal 2020 financial results with Tom Sammons, our CFO. Tom?

Thank you, Alex. As Alex mentioned, net sales for the fourth quarter of fiscal 2020 were $4.9 million, 5% higher when compared to the same period a year ago, primarily on increased shipments in the industrial sector. Cost of sales were 12% higher than the prior year, due in part to $178,000 charge in our fourth quarter for loss contracts. Gross profit was $1.3 million or 11% lower than the same period a year ago. Our fourth quarter operating income, which included a $495,000 provision for the legal settlement, was $166,000, down from $832,000 in the same period a year ago. Net sales for fiscal year 2020 were $16 million or 4% lower than fiscal year 2019. Net sales in the defense and energy markets decreased by $1.7 million and $0.7 million, respectively, when compared to fiscal 2019, while sales to industrial markets increased by $1.7 million. Cost of sales for fiscal 2020 was $750,000 higher, primarily due to the increase in provision of $1 million for contract losses. As a result, gross profit was $3.1 million or $1.4 million lower than the prior year. Gross margin was 19.6% in fiscal 2020, compared to a gross margin of 27.5% in fiscal 2019. Selling, general and administrative expense, excluding the $495,000 provision for the legal settlement, was up $39,000 or 1% over fiscal year 2019. Interest expense was $296,000 or 17% lower than the same period a year ago. In January 2020, we paid off in full our capital equipment loan that carried a 7.9% interest rate. As a result of the above, we recorded a net loss in fiscal 2020 and of $342,000 or negative $0.01 per share basic and fully diluted compared to a net income in fiscal 2019 of $1.1 million or $0.04 per share basic and fully diluted. Moving to the balance sheet. Our working capital was $5.6 million at March 31, 2020, a decrease of $656,000 when compared to working capital at March 31, 2019. Our total debt at March 31, 2020, was $2.6 million compared to a total debt of $4.3 million at March 31, 2019, as we paid off our equipment loan in full in January 2020. Our net debt at the end of fiscal 2020 was approximately $1.7 million. Cash provided by operating activities was $677,000 for fiscal 2020 compared with $531,000 in fiscal 2019. In December 2019, we signed an agreement to increase the amount available under our revolver loan to $3 million from $1 million and decreased our interest rate on the revolver by 50 basis points. In April 2020, we drew down $1 million under the revolver for working capital purposes. In May 2020, the company issued a promissory note and received $1.3 million in proceeds under the Paycheck Protection Program established under the Coronavirus Act, Relief and Economic Security Act and administered by the Small Business Administration. The loan was made through Berkshire Bank. With that, I will now turn the call back over to Alex to tell us more about the impact COVID-19 has had on our business. Alex?

Thank you, Tom. At the end of March of 2020, the outbreak of coronavirus, COVID-19, had spread worldwide as a pandemic. The full extent of the outbreak-related business and travel restrictions and changes to social behavior intended to reduce its spread. These all -- the full extent remains uncertain as the health crisis continues to evolve in the U.S. and abroad. The directives imposed by federal, state and local governments did not impair our ability to maintain operations during the fourth quarter of fiscal 2020 as the company was designated an essential service. However, the pandemic has negatively affected our customers, our suppliers and labor force. And with the changing conditions as a result of the COVID-19 outbreak, the impact on our operations and fiscal year 2021 financial results remains uncertain. The change in focus of the company on growing its defense business, which started 6 years ago by the current executive team. This sharp focus put us on a successful trajectory to transform ourselves into a predominantly defense-centric entity. We became a full-fledged member of the defense industrial base and secured the designation of an essential service during this COVID-19 crisis. The 2 shipyards that we serve directly. Our other key defense customers as well as the U.S. Navy itself, issued formal communications requesting and directing our Ranor subsidiary to remain open and productive during this time of crisis. As a result, we were able to successfully continue to execute contracts and very importantly, retain our highly skilled custom workforce and provide full wages and benefits. We must remain vigilant and take the necessary actions to protect our workforce. And by extension, our families, so that we can continue executing our mission. TechPrecision is proud and honored to serve the United States defense industry, specifically naval submarine manufacturing and carrier manufacturing through its Ranor subsidiary. I would now like to open up the call for Q&A.

[Operator Instructions] Our first question today comes from Ross Taylor with ARS.

First, congratulations to you and your team. I think you guys continue, Alex, to do a great job. It looks to me from the backlog numbers that we are turning the revenue corner. We're starting to see the benefits of work and the efforts you guys have put into building this business? Is that -- do you think that would be a correct assumption? Obviously, with the caveat of COVID-19 impacting the flow of business from your primes?

Well, I think your characterization of turning the revenue corner. I don't know if it is or not, but certainly, the numbers are better.

Is there any reason we should expect them not to continue to get better?

I don't see a reason for that.

Okay. Great. And you had about -- you had, what, $1 million in cost overrun losses on new part numbers that you were picking up. What was the revenue base that was around those part -- that loss, that $1 million loss?

I'm thinking, hold on.

I can hear.

Yes. It's clunky, as usual.

Yes, we dance again, Alex.

Well, we dance again maybe, but let's see. And Tom, help me out here. I know it's over $1 million.

Yes. And it is over $1 million. It's probably about -- give me one second. I'll come up. The only caveat I would say is that the loss that we booked is scheduled or expected to be the total loss. I mean that's what we're estimating. So even though we haven't recognized all the revenue to date, the loss, so it's really the question is, how much of that loss versus the contract amounts.

Yes, that's what I'm looking for.

Let me come back to you. [indiscernible]

Okay. And then -- yes. Right. And so while we're waiting to come back to that, also going forward, you've indicated that these are -- this is business that you are both continuing to work on and expect to see continued look on going forward. So I was going to try to get to an idea of the magnitude of the opportunity that these -- this particular or these particular projects offer us?

I think I want to make sure that I expound on my characterization of this opportunity. So this opportunity is not just an opportunity to resecure the same part numbers again. This opportunity was an entry point into potentially securing other new part number opportunities, hopefully, similar in nature to the complex, highly complex and critical nature of these projects, similar projects. And so I tried to add more color into it and tell us about the extended time period of performance, spanning multiple fiscal years, which actually leave these parts on the Ranor's production floor to be showcased since seeing is believing. That kind of -- because it's been such a long period of time, it far will outstrip this limited people contact time into the time where there's more customers that come back and visit us once again. This extended time period of performance will be then as well. Am I -- that was coming off pretty clunky, I guess.

No. But most of what you're looking at is a multiyear opportunity here and it's...

[indiscernible] opportunity, and it's a multi-part number, new part number opportunity, not just these part numbers that we have the learning curve cost overruns of.

Right. And it's of such a quality or precision or the work is so sophisticated that you actually consider this work to be my words an advertisement for the capabilities of Ranor.

I would completely agree with you.

Okay. Now with these parts, were they on vessels that spend most of their time at sea, above or below the water?

I won't be able to answer that question. I'm sorry.

Okay. Now you are seeing revenues. I would assume at this point at the last quarter, and does the backlog include revenues from all 3 of the vessel types in which I -- which you're working, Columbia, Virginia and carriers.

Does the backlog include all three classes? Yes. Backlog does include all 3 classes.

Okay. And so basically, at this point, what we're seeing is we're starting to see all of these areas ramp and you're seeing -- you've successfully demonstrated the capabilities of the company. And so you said, when you're getting new part numbers, are those part numbers being -- those contracts being given to you by the primes or by subcontractors for the primes?

Primes, you mean the 2 shipyards?

Yes. Are they seeing you guys as a way to outsource business that's complicated and difficult to basically, say, allows them to focus their resources on higher other areas where they feel they can be more effective? Or is what this is, is that you're finding, you're picking up business from people who stand between you and the final assembler?

We're picking up new part numbers from the whole -- from all of them as a whole, not just from the shipyards and not just from the guys that are the Tier 1 to the shipyards from both sides of [indiscernible]. Yes.

Okay. And then going forward, you obviously, this year has...

I have a quick answer. I think I'll check in with Tom to make sure. I think the contract value is north of $3 million. I think it's safe to say, Tom?

Yes.

Okay. Okay. And Alex, what made these components so difficult? Well, someone else -- was this something that someone else was doing and wasn't doing effectively? Was this something that is new that was brought to you? I mean obviously, they were quite complicated because your engineering and capabilities are quite good. So I'm curious on what about them in some ways, made them so complicated?

There's about 30 pages of write-up on this that's been ongoing so far. I'm not completely -- I'm a little bit at a loss to -- the devil's in the details, Ross, on -- especially on this one. Very much in the details, highly complex nature. I can tell you, for sure, these part numbers were new to our Ranor subsidiary.

Okay. Is there any recovery possibility?

The other side of it would be that they're not new to the world.

Okay. Is there any recovery possibility? Meaning that the source of some of the problems was it -- did you inherit it?

Did we inherit problems?

The issue, yes.

Let me characterize this. Did we inherit problems? Yes. Did we create our own new problems? Yes. Did the customer create new problems? Yes. The supply chain that reports into us create new problems? Yes. The number of factors on such a highly complex project was -- there's multiple factors that contributed. Absolutely.

Okay. And is there any ability, do you think, to recover any of the cost overruns by the writedowns? I'll take a no comment as yes.

I think you know me by now. If there's a way that I can operate properly and get the adjustments, I will be doing so. I will not leave any rock unturned.

Certainly. And I will leave step back out, but I want to say, I think that this is really the backlog building and the things you're talking about, to me, make this a really exciting quarter. Congratulations once again to you and your team for the progress and success you guys have had in navigating a pretty difficult environment.

Ross, thank you again for your continued patience and very strong support.

Next, we'll hear from Aaron Warwick at [ ES Capital ]. [Operator Instructions]

I wanted to ask you, you've been commenting at least now for, I don't know, probably 12 to 18 months, or I should say that starting 12 to 18 months ago, you mentioned an opportunity that you had for $80 million to $100 million over 2 years. And eventually, then you started referring to it as a $100 million opportunity. And on these calls, you've continued to say that, that was still in play. And I'm just wondering, apart from these new part numbers that you've been discussing, is that opportunity, that $100 million opportunity still in play?

Tom, I'm going to take this one, and you pitch in where you see fit. So let me be really clear. I don't think the $100 million over 2 years is something that I have said. Period. Then the next part is the $100 million opportunities in front of us, not separate from the new part numbers, including everything. It exists. I will definitely make sure that we all know when it stops existing.

When you speak of that opportunity, then over what time frame are you speaking?

Over many time frames because the world keeps changing. The impact of COVID itself sometimes changes. It's very dynamic. It's a snapshot in time. I check on it every day.

You guys had in the press release, the backlog as of March 31. I'm wondering if you could tell us what the current backlog is.

I don't have that with me right now.

[Operator Instructions] We'll hear next from Pipeline and Mr. Mark Gomes.

Great quarter, guys. Your introductory comments were unabashedly bullish, if not deadpan if I might add. In the past, you've commented on your overall excitement around the business and what you see. Is it safe to say based on your introductory comments that your level of excitement about your business is as high, if not better than what it has been in past calls?

If I didn't know any better, I thought Ross was asking the question.

I've learned from the best.

Yes. My excitement has not diminished whatsoever.

Great. And with regard to the $100 million opportunity, you say that it is an ever shifting opportunity. And obviously, you've been receiving orders incoming, which would shrink the opportunity. And then it would have to be then replenished with other opportunities to remain at that $100 million level, is that an accurate assessment?

Absolutely. Otherwise, I would be lying to you, right?

Fantastic. Just making sure you're not lying to me. Final question.

Do you think I would?

That's not for me to prejudge.

Judge [indiscernible] every day and so does the United States government, right? So we serve with integrity, right? So we can't.

And I've been judging you for over 5 years, and I've been never higher in my judgment of you. So with that, my final question is, is there any additional commentary you could provide us with to help us understand. We see revenues, we see backlog, but we do not see wins that are not in backlog, nor do we see projects with which you have confidence that you will win and not have in backlog. So there's maybe 4 categories of things, and we only get to see 2. Can you qualify -- not quantify but qualify, to what extent do those -- are there wins that are not in backlog? Are there projects that you have confidence that you will win? I don't need to know how great those are, I just want to have an understanding of how much is -- what's behind the veil without knowing how much is behind the veil?

I'm going to rely on my consistent remarks of not responding properly to that question with an answer that satisfies the question. I won't be able to forecast what happens.