TechPrecision Corporation

Good day, ladies and gentlemen, and welcome to the Tech Precision First Quarter 2020 Earnings Call. All lines have been placed on a listen-only mode. If you require assistance throughout the conference, please press star zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Jeff Standless, with Hayden IR. The floor is yours.

Thank you. On the call today is Alex Shen, Chief Executive Officer, and Tom Sammons, Chief Financial Officer. The call is also being simulcast on the company's website at www.techprecision.com. Before we begin, I'd like to remind our listeners that management's remarks may contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the safe harbor for forward-looking statements as contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore, we refer you to a more detailed discussion of risks and uncertainties in the company's financial filings with the SEC. In addition, projections as to the company's future performance represents management's estimates as of today, August 13, 2019. Tech Precision 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, go ahead.

Thank you, Jeff. Good day to everyone, and thank you for joining us. Our results for the first quarter of fiscal year 2020 were highlighted by net sales of $4.3 million, and net income of $221,000. Net income was 34% higher for the first quarter of fiscal year 2020 when compared to net income for the first quarter of fiscal year 2019. We improved liquidity by adding $1.5 million to our available cash balance in the first quarter of this fiscal year. At June 30, 2019, we had a backlog of orders totaling approximately $14 million compared to approximately $12.6 million at March 31, 2019. Now, I'd like to turn the call over to Tom Sammons, to tell us more about our first quarter financial results.

Tom? Thank you, Alex. Net sales were $4.3 million for the first quarter of fiscal 2020 compared to $4.1 million in the first quarter of fiscal 2019. Our backlog remains strong as new orders for components continue to flow down from our prime defense contractors. Cost of sales for the quarter ended June 30th 2019 was $3.2 million compared to $3 million for the same quarterly period a year ago, resulting in a gross margin of 25.6% for the current quarter. Our margin was negatively impacted by higher unabsorbed factory overhead and increased costs on certain new projects. Selling general and administrative increased by $11,000, primarily due to an increase in professional fees. Interest expense and debt cost amortization was lower for the quarter end of June 30, 2020, and will continue to decrease as we amortize debt principal to maturity. Income tax expense continues to be a non-cash item as we are able to utilize our federal net operating loss carry forward to offset taxable income. The company does not expect to make any significant tax payments for the remainder of fiscal 2020. Net income for the quarter ended June 30, 2019 was $221,000 compared to $164,000 in the same quarter a year ago, an increase of 34%. Earnings were one cent per share, basic fully diluted for both quarterly periods. Moving to the balance sheet, at June 30, 2019, we had $3.5 million in cash and working capital of $6.6 million. Cash provided by operating activities was $1.7 million for the three months ended June 30, 2019, due to favorable timing of shipments and collections during the quarter. Net debt at the end of the first quarter of fiscal 2020 was $567,000. With that, I will now turn the call back over to Alex. Alex?

Tom, thank you. Tech Precision. remains proud and honored to serve the United States defense industry, specifically naval submarine manufacturing through its Raynor subsidiary. We continue to see meaningful opportunities in our defense sector, primarily in the nuclear submarine business for the next 12 months and beyond. I would now like to open up the call for Q&A.

Thank you. The floor is now open for questions. If you do have a question, please press star 1 on your telephone keypad at this time. If at any time your question has been answered, you can remove yourself from the queue by pressing 1. Again, ladies and gentlemen, that's star 1. Please hold while we poll for questions. And our first question comes from Ross Taylor with ARS Investment. Go ahead, Ross.

Okay. Thank you, Alex. It appears we're a little stuck in a waiting for Godot situation here in that the Navy clearly has a need and a massively growing need for submarines, but they are not really pushing through for a variety of reasons. The build of those boats. So can you tell us has anything changed from your outlook last quarter? So I see that the question is, has anything changed? for my outlook since last quarter. Last quarter, yeah. You were very bullish on the last call about the prospects the company had looking out over the next two years. Has anything about that changed? I don't see how our position has changed since last quarter as far as what I see as meaningful opportunities in the defense sector. Okay, and then... Can you comment on what level of – I don't know how exactly you would put it, but effectively I assume that you are – you have a workforce and a faculty capability that is sized more for what you expect to be coming than what is currently there. Is that correct? I'm taking my time answering the question, Ross, because – There's a portion of competitive nature that causes me to be careful in answering. I hope you forgive me. No, I will. And perhaps you can simply say, would I be wrong if I assumed the basic premise of my question that you're carrying? I think the basic question is, do we have more capacity to than the business that we're flowing through now. Yes. If I can rephrase the question in that way, Raynor and Tech Precision has more capacity than the business flowing through now. Okay. And then will you comment on how you see the competitive environment? It appears that some players that might have been competitors of yours in a variety of areas have run into difficulties providing the proper equipment and the like or providing things with the right standards or in a timeless fashion. In fact, some of that might be why the Navy is behind on its build of boats. I can tell you that what you commented on just now is something that I'm not going to be able to say a thing on. I can comment on information that's of a more public nature that says the two shipyards, Electric Boat and Huntington Ingalls Newport News, are busy expanding the landscape of competitors. They need more, and they need more capacity. And that is public information. More capacity would mean more competitors. And some of that is because they are looking, are they not looking to outsource business that they used to do in-house on contracts? In essence, boiling down their emphasis and focus to a smaller universe of component structures and things of that nature, and therefore actually opening up opportunities for you to, provide products that in the past might have been provided by the prime? Ross, I'm going to parse your combination questions carefully and answer each one. Thank you. I think it's relevant and I'd like to do that so that I'm clear. So number one, the two shipyards, the main shipyards that are building the submarines are definitely outsourcing more than they have before, more than ever. That is true, and that is public information that's available to all of us. The other thing that we can talk about is what does that mean as far as needing more vendor capability and capacity, and that's the part I was alluding to. The two shipyards are very interested in developing more vendor capability because they're outsourcing. So that means that there's more competitors simply because there's more capacity that's needed. Right. Because of that, it's not that you're facing more direct competitors in your spaces, but there's more opportunities moving for you and others, therefore creating a greater number of aggregate competitors. I think I'm learning to speak, Alex. I think we're both – very well versed in dancing with each other. But also, I think we're very clear in trying to make sure that the opportunity is very clear. Yes. And there was a Seeking Alpha piece written about you, and there were two risks laid, and I thought I'd like to address from a perspective. One of the risks was whether the company, Tech Precision, would perform, execute on its contracts and I would say from my perspective, I know you can't say this. You've said it's job one is to execute effectively for your prime customer. And I would say that, you know, I can't imagine a scenario in which you would not. It doesn't strike me as anywhere in your personality or the nature of how you run that firm. And the second is the submarines. And it appears the U.S. is falling, as I said, further behind in that area. there's probably a greater risk of the Navy needing more boats as opposed to needing less boats when you start to see everything that's going on in the world and the moves Russia's been making and things of that nature, and China as well. So I'd like to say, you know, we're still waiting for Godot, but someone just reminded me Godot does show up in this movie or this play, unlike the ones in the book. So thank you very much and continued good luck. Thank you, Ross, as always, for your continued support.

Our next question comes from Aaron Warwick with ES Capital. Go ahead, Aaron.

Hey, guys. Thanks for taking my call. I always enjoy hearing you and Ross dance. I've got a couple of questions for you that are unrelated to each. I'll ask the first one here is about the backlog. And my understanding from reading the 10Qs and the 10Ks is that backlog consists of funded projects that you believe you can complete within a two-year fiscal period, which seems pretty straightforward. But I'm wondering when you consider something like the U.S. Navy submarine programs to be funded and therefore included in backlog, is that only after the passing and signing of the National Defense Authorization Act, or is there some other event before that that would trigger that?

that work to be considered part of the funded backlog? Excuse me, that was a pretty long question.

Yeah, so do you consider for submarine work, like on the Virginia class or the Columbia class, for that to be part of your backlog, does the National Defense Authorization Act have to be passed and signed by the President, or is there some other event or advanced authorization that would trigger that to be considered part of your backlog?

My backlog consists of orders that I get.

Okay. Thank you. My second question, you had mentioned with Ross about public information. There was actually an article in Bloomberg today. It comes out of the VWX Technologies call last week, a conference call. where they had mentioned that they have not received any updated orders from Electric Boat and that they're considering withdrawing from producing those tubes altogether. So that would appear to leave one of your partners or customers as the sole supplier of those tubes in the future. And based on that, I would think the opportunity for you, although already large, has gotten even bigger since that development. Am I understanding that correctly?

I am completely unable to answer that question for a number of reasons. The primary reason is that Every single one of my customers, without exception, has put a lip lock on me on that subject.

Okay, that's fair. Thank you for your time. I appreciate it, guys. Keep up the good work.

Aaron, thank you very much.

Our next question comes from Mark Gomez with Pipeline Data. Go ahead, Mark.

Good afternoon, gentlemen. You know, just to rephrase the last question in complete general terms and nothing to do with the specificity of that question. on contracts such as this misstep in such a way to create a setback in production. Is it fair to say that it's generally a negative sign for the vendor's future as a supplier and therefore positive for its competitors? Again, nothing to do with the last question that was asked.

Understood, Mark. So you understand I'm also a very careful and conservative person and I do know that customers listen and replay this as well. to see if I'm compliant to their instruction. So I will be... And I respect that. I will not be answering that question. Excuse me.

Okay, fair enough. And, you know, boiling the ocean down, you know, you did mention your level of excitement and, you know, how you feel about the opportunities ahead of you on the last call. are you generally as excited about your future as you were on our last call?

My excitement level remains the same. I'm very excited. Thank you. Thank you for your support.

Our next question comes from Howard Bruce with Wellington Shields.

Go ahead, Howard.

Alex, congratulations on the significant increase in balance sheet. It looks significantly better than it did several years ago, so congratulations. In following up a question about purchase orders, if there's a purchase order that extends beyond two years, and this is a generic question, having nothing to do with a particular order, what part is in backlog or is all of it in backlog?

Every purchase order is in backlog.

Okay. So even if it extends beyond two years?

There is no time limit. Every purchase order is in backlog.

Okay. Let me ask a hypothetical question. If I go back three years ago in terms of gross margins, those gross margins approached 35%, if I remember correctly. Is that a correct comment?

I don't remember back then. I'd have to do some research and answer you exactly.

I appreciate it. That's all I have. Thank you and congratulations and good luck on the future purchase orders.

Thank you, Howard. I appreciate your support.

Our next question comes from Richard Grulich with REG Capital Advisors. Go ahead, Richard.

Thank you. Alex, the increase in sales to the industrial market you noted in the 10Q it was due to completed projects of large medical device components. Is that indicative of any ongoing business that you might be getting over the next, you know, four to six quarters?

I'm sorry, can you rephrase that question?

Yeah, the fact that you had an increase in medical device component sales, does that portend Any future sales from that area as well?

I do not know.

Okay. And was that involved with Mevion?

I will not be commenting on individual customers at this time.

Okay. In the 10Q, when you noted that defense market revenues was lower partly due to timing, and related project closing and startup activities. Could you shed any light on what you mean by that?

Sure. That's a more probably wordy way to say that we have a lumpy business. That's as much light as I can shed on it. It's lumpy, so certain characteristics go up, certain ones go down. Timing is definitely one of them. We try to mention more than simply just saying it's lumpy and, you know, try to tell you guys a little bit more about, you know, there's timing, there's these things, there's other things. But those are all contributors to the business being lumpy.

In the past, let's say over the last five or six years, when a prime contractor received a contract to supply certain products parts of the submarine, is there any general timeframe in which that would flow down to subcontractors?

I'm not aware of any such timing.

Okay. Thank you. Thank you. And our next question comes from Ross Taylor, ARS Investment.

Go ahead, Ross.

Thank you. Alex, given that you sit on the cusp of a substantial uptake in what should be top line, middle line, bottom line, free cash flow generation and the like, has the board begun to have discussions on how it plans on returning capital and the like and how it plans on investing what should be a substantial growth in the balance sheet market? It's already been mentioned how much it's improved, but the simple fact is going forward as this business really starts to ramp, as you've talked about in the prior call and the opportunities in front of you, one would expect that you're going to end up generating a lot of cash that doesn't need to go to pay down debt, and the question is how you guys plan on using it. Have you thought about instituting a dividend, a share buyback? What are you going to be doing with that capital? So I think the question is what are we going to be doing with the capital is the question. I don't know that we can answer the question right now. We are considering different things, yes. But I think that's more of a company and board conversation probably. I'm going to ask Tom to also pitch in. I think we're having a discussion here, not so much a Q&A, but we can tell you what we can tell you.

Yeah, I mean our cash goes up and down, so it's under a scenario where we have large growth, we should be generating cash. And then we will be, but there's no decision yet as what do we do with that cash.

Okay. I would only suggest that as you move into that state that the plans and return of capital approach you guys choose to take, because I would assume that whatever you do will involve not inconsequential return of capital likely. that it be communicated to investors because I think it becomes a big part of the investment story going forward. I think, you know, this is one there. We're kind of, as I said, we're stuck in this holding pattern at this point beyond your control, but it's very clear that the need hasn't gone down, the opportunity hasn't gone down. In fact, I'd probably argue, you might even argue that you're more excited this quarter than you were three months ago. Although I know you want to be calm. Yes, I want to be calm. But you're more excited, aren't you? Boy, he asks such leading questions, doesn't he? That was not a question, right, Ross? Yeah, it was. I have the same excitement level, Ross. Okay. I think you're more excited. I can tell that in your voice. Thank you very much. Thank you.

And there appears to be no further questions in the queue.

Thank you everyone for your attendance. Have a good day.