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spk02: Good afternoon, ladies and gentlemen, and welcome to Tech Precision 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 Moss, with Hayden IR. Sir, the floor is yours.
spk01: 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 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 It represents management's estimates as of today, February 17, 2022. 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?
spk08: 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 holidays and the 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?
spk03: Thank you, Alex. Net sales for the third quarter of fiscal year 2022 were $6.5 million, or 82% higher when compared to the same quarter a year ago as we added a full quarter of STATCO 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. Cost 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 percent in the same quarter a year ago. Gross profit was $478,000, a decrease of $227,000 when compared to the same quarter last year. As Alex noted above previously, 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 STATCO and increased outside advisory expenses and travel related to the STATCO acquisition. We incurred additional one-time cost 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 period, 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 StatCo 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 StatCo for $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 STATCO and related acquisition expenses. These one-time expenses over 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 of 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 on to 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. Invested in activities included $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, or $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. Tom, thank you.
spk08: Tech Precision is proud and honored to serve the United States defense industry specifically. Specifically, naval submarine industry manufacturing through its Raynor subsidiary and military aircraft manufacturing through its STATCO subsidiary. Overall, in both the Raynor and the STATCO 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 STATCO subsidiary before we take questions. STATCO is a key supplier of large, flight-critical components on several high-profile commercial, and military aircraft programs. It 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, the Lockheed Martin Company, celebrated the first Connecticut-built CH-53K heavy lift helicopter that will be delivered to the US 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 US 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 an enduring partnership with the U.S. Marine Corps. Similarly, TechPrecision aims to do the same through our subsidiaries, Raynor and STADCO. The same meaning, one, achieve a deep understanding of the mission, and two, secure an enduring partnership with our customers. 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 my saying that I am not allowed to discuss that is based on customer requirements. and the environment in which we conduct business.
spk02: Operator, we can open the line for questions, please. Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing a question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while we poll for questions. Your first question is coming from Ross Taylor from ARS Investment Partners. Your line is live.
spk04: 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 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 talk about in your 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 carry lower margins? What was it about those projects that caused them to, you know, return lower than average or lower than normal operating margin?
spk08: I think both of us would like to answer that question together. It was on specific part numbers, and it was on mostly part numbers that were the first units of builds.
spk04: Okay, which is what I thought was probably the case.
spk08: I think that answers the first question. Tom, did you want to add anything else?
spk03: No, that's what I was going to say, that most of those projects were items that we had not built ever before. So they were kind of new products to us, and we're still working on one final from that project that had been lasting for a couple years. That one specific one?
spk08: Yes. Yes.
spk04: And that's a common practice.
spk08: There's a couple other things that also specifically impact us. but it's hard to put together the impact level. This all crashed into, this is going to sound like some kind of an excuse, but the challenging, very challenging quarter includes November and December, which are Thanksgiving and Christmas holidays. The COVID impact itself cannot be denied that there was more human-to-human contact And with people getting fatigued from not contacting, I think there was more contact during this time. And the COVID contact certainly increased. So some kind of impact was there as well, which even though we don't talk about COVID, I don't like to blame COVID for everything. There certainly is an impact. It's worldwide. So we just want to... state that and move on.
spk04: And then with regard to the first, since these are first-run products, first time you've made the part numbers, one would expect that you have a learning curve and that the future manufacturing should generate higher returns.
spk08: 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.
spk03: Yeah, most of them are short run, so some of them will just disappear anyway.
spk04: Right. Yeah. Yeah. With regard to you, I kind of look at you guys as having four major federal programs, Columbia, Virginia, F-15, and CH-53. Do you believe the government's still operating, the federal government's still operating under a continuing resolution? Is that continuing to act as a drag at this point, do you think, in some fashion?
spk08: To be honest, I don't see the correlation coming all the way down to the subcontracting vendor base, such as Raynor and Stadco. Having said that, it's not no connection. It's just that timing is not exactly, it's not immediate and it's not in sync.
spk04: Gotcha. The Navy, I've been reading, has been asking its primes to focus on Columbia over Virginia in here as far as allocating their build resources, particularly people. And on one of the prime conference calls earlier this year, they indicated that they were looking Basically, the new people they were hiring were going to be going to Virginia because they needed to catch up on Virginia. Have you seen any impact, or is Virginia running at the pace, new business related to the Virginia class, running at the pace you would expect it to run at?
spk08: I think overall, when we look at the past two years, there has been a slowdown, bottleneck, interruptions on a Virginia-class build that has been made public. I think the COVID impact really impacted the shipyards, and that has slowed down throughout the supply chain.
spk04: It would seem to me that I noticed, and it was actually interesting, I noticed that early in the Crimea situation, the U.S. sent one of its Ohio-class, what I call volleyboats, 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. Do you believe, I know the Navy has not yet gone to where they're building three Virginia boats a year, but do you believe that we will see that build of three a year pushed forward in an effort to make up for the fact that we're going to lose four Virginia or four Ohio class volley boats?
spk08: Do I believe? I don't know what, I think my honest opinion is I'll believe it when I see it.
spk04: Okay. Would it be a problem if they did that operationally for you?
spk08: I would love to have that problem. 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 build sequence might build more. Right. We're interested in, well, we're talking about Raynor specific, but both STATCO and Raynor, we're interested in not so much timing out our revenue and managing the report, but We're interested in making everything we can and getting as much revenue and as much profitability as we can. Okay.
spk04: Are you seeing new business flow, backlog flow from the Columbia class in a meaningful way at this point yet?
spk08: I want to carefully answer this question so I don't get buttonholed by you on the next question. However, however, I have no degradation of business flow on Columbia class for sure.
spk04: 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?
spk08: So the Columbia class, it's a known fact that there are 12 vaults. And that's it. The build cycle is much longer and very different from Virginia class. The Virginia class seems to build 10 boats every five years, and the blocks keep going. From block one, two, three, four, we're currently on finishing off four and into five. So six is next. There's a lot more Virginia class boats, and it's a lot more... continuous production type of behavior the Columbia class is one big giant submarine and they do buy more than one for one submarine on on some of our items we're not on number one we're on on different ones okay okay so it's Virginia better business for you than Ohio
spk05: I think it depends.
spk04: I'm thinking of it from an investor standpoint. Dollars of sales and operating margins.
spk08: 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're equal.
spk04: Okay. On the StatCo side, do you know is Sikorsky up to run rate? I think they're looking at doing 18 to 20 airframes a year. Do you know if they're up to run rate yet on that program?
spk08: I can tell you through public knowledge information that the low rate initial production is still going, so a low rate.
spk04: We're at low rate at this stage. I actually think it's interesting that the raid on the ISIS leader, they abandoned the helicopter, which actually might have been liftable if they'd had the CH-53K in the theater at that time, which was a fairly expensive thing to end up having to leave behind. It looks to me like what we're looking at is you are basically at one rate. You're talking about about 11 or 12 years for the satisfy U.S. needs. when they get there and then you have foreign sales that could add another five years to it. So are we looking at, do you think this is effectively a 15, 17-year program for you guys as it gets going?
spk08: Well, I think Tom did some analysis, and it's in double digits for sure. Yes.
spk04: And I've seen various numbers attached to value per airframe of a million to a million and a half dollars for you guys per airframe. When I build a model, it's the low end of that number of realistic number to use.
spk07: I don't think we ever tell you things like that, right?
spk08: Ross, we leave it up to you.
spk04: I'm allowed to ask. Absolutely. Okay. You'll tell me if I'm really off and totally wrong, though. Okay. I also noticed it was interesting to me on the CH-53, and then we'll move on to something else. The Israeli order was in place, as you said. They're not getting their first aircraft until 2025, which tells me that there's probably a pretty healthy book of business there for you guys in the next four or five years. So you're going to see that ramp pretty meaningfully, because I would assume that we'd be getting something to Israel given that. the nature of the relationship between us and them and the aggressive use they make of their ch 53 is the ease at this point. Are you comfortable where you stand on operating margins in that business? Or how long what kind of run rate level whatever does it take for you to get on the ch 53 to where you think you're at kind of a sustainable, reasonable operating margin?
spk08: Am I comfortable? Not yet.
spk04: Okay.
spk08: Is that still a turnaround? We will be pretty forward with when we think we're out of the woods a little bit. We'll keep everybody informed. We're right in the middle of the turnaround.
spk04: 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 this scene. I thought it was interesting. Your stock went down on the day this was announced, but 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 has not been a first-tier U.S. defense supplier, so who's 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? whether the program is expected to have a substantial foreign sales potential?
spk08: So the first question, have we had conversation? 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. So I then tend to ask for, okay, well, how about some orders then? Well, you know, that would be a way of telling.
spk04: Yes, yes. And honestly, from what I think you're doing for that program, it's a little hard for that thing to get to be built without what you're doing. And so if they want to increase run rate, it would seem that, you know, or extend the program, they're going to need to talk to you about your ability to fulfill that need at you know since it's pretty much i think a central need for the airframe so away from that can you give a quick comment and thoughts of other other areas what do you see in space you know what's the opportunity for you guys i'm not sure there has to be some opportunity you know
spk05: You've worked in the past or STATCO has worked in the past with some of the players in space. Are you working with any of them at this point in time? Yes. I can't believe Tom said that to you.
spk04: Thank you. And then I'll pass after just one last question with it. Lockheed has built a flying model, perhaps more than one of, actually, I got two questions, of the next-gen fighter aircraft. Are you, is STATCO involved in that project?
spk08: I need to shut this line of questioning down. Sorry.
spk04: Thank you. You answered the question. Okay. Then I'll leave it because you won't answer my next question either, so I'll let someone else come in and have a better shot at getting questions answered. I was going to ask about the B-21.
spk08: Thank you, Ross.
spk02: Ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone at this time. Your next question is coming from Aaron Warwick from Breakout Investors. Your line is live.
spk09: Hey, guys. Thanks for taking the call. I want to start with the backlog, which is really just outstanding, and congratulations on that. I know you've been patiently waiting for this, some of us not so patient. Congratulations on that. And I just want to make sure I'm understanding correctly. I mean, it sounds to me like backlog is up 20 million between September 30th and now. Is that what I'm, nine from the quarter and another 11 million after the quarter?
spk03: Definitely the nine to the quarter. The 11 million, over 11 million are orders. As we get them, we chip away at that by recognizing revenue and shipping some other items. I see what you're saying. Yeah.
spk08: We can't, I don't know where I'm our backlog that ends on this quarter.
spk03: I don't know where I'm at at this point. Sure. Sure.
spk09: We started with nonetheless, nonetheless impressive. And then plus you've got the 6 million that you work, you know, some of that could have been worked through a backlog as well. So whatever it is, impressive number. Congratulations on that. Um, one thing that we haven't really heard much about recently is anything you do on the medical side. Um, what's the status of that? Are you still involved in some of the medical stuff?
spk08: So I think, you know, 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.
spk09: Okay. Looking out into the future, I mean, you've You know, 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, you know, looking at, say, 2023, 2024 and beyond, when things are really get up and rolling, what are you expecting for the margins? Do you still have that expectation around 25%, 30% that you've kind of talked about before?
spk08: I don't think we ever tell you our expectations with definite numbers what we expect. Tom, have we done that?
spk03: We talk about what we've done historically, and obviously we would like to. This quarter was obviously not in the range that we want. Absolutely not. We need to get back to ranges that were similar to the prior year.
spk09: Sure. And what's the target, though, that maybe you have in mind just in general?
spk06: In general, I don't have a specific target. It depends on the business and the volume.
spk09: Okay. And then back to the backlog, you know, like what percentage-wise, what part of that is Raynor and what part of it is STATCO?
spk06: We've not disclosed the backlog by company.
spk03: I would just tell you that the new orders are coming in for both entities.
spk09: Excellent, excellent. Hey, thank you, guys. Appreciate it. I appreciate all the color you gave with Ross as well. Thank you.
spk02: Thank you. Thank you. That concludes our Q&A session. I will now hand the conference back to our host for closing remarks. Please go ahead.
spk08: Thank you, everyone. Have a great day. Thank you.
spk02: 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.
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