Brett Maas - Hayden Investor Relations Alexander Shen - Chief Executive Officer Thomas Sammons - Chief Financial Officer

Ross Taylor - Somerset Capital Advisers LLC

Good day, ladies and gentlemen and welcome to the TechPrecision First Quarter 2018 Earnings Call. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host Brett Maas of Hayden IR. Sir, 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, 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 represent management’s estimates as of today, August 14, 2017. 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?

Brett, thank you. Good day to everyone. Thank you for joining us. The first quarter of fiscal year 2018 was yet another profitable quarter of operational and financial progress, continuing our trends and bolstering our confidence that we are on the right path. Our improved quality and consistent on-time delivery is resonating with key customers. Net sales were $5.8 million, an increase of $1.2 million or 26% when compared to the same quarter or year-ago. Income before income taxes were $712,000, or 57% higher than the same quarter a year-ago. Tax expense was $287,000 in the first quarter of fiscal year 2018, compared to tax expense of $10,000 in the same quarter a year-ago. Net income in the first quarter of fiscal 2018 was $425,000, compared to $445,000 in the same quarter a year-ago. We expect to maintain profitable levels on an annual basis. In addition, we generated $574,000 of cash from operations and increased our cash position to $3.3 million at June 30, 2017. This was the largest quarterly revenue achieved in the last 12 quarters. We are moving forward to replenish backlog by maintaining our focus: targeting defense, nuclear and precision industrial markets. Now I would like to turn the call over to Tom Sammons, he'll tell us more about our first quarter financial results. Tom?

Thank you, Alex. As Alex noted, net sales for the first quarter of fiscal 2018 were $5.8 million or 26% higher when compared to the same quarter a year-ago. Net sales in our defense market increased by $2 million when compared to the same quarter a year-ago, primarily on higher shipments of new product components to one of our largest defense customers. Net sales in our energy market increased by $0.7 million when compared to the same quarter last year, primarily on higher shipment volume of nuclear plant components. Net sales in our precision industrial market decreased by $1.5 million on lower shipments of large scale medical device components. Gross profit increased for the first quarter of fiscal 2018 to $1.7 million compared to $1.5 million for the first quarter of fiscal 2017. The improvement can be attributed to the higher revenue volume offset in part by an increase in an unabsorbed overhead costs. Income before income taxes was $712,000 or 57% increase over the same quarter a year-ago. Income tax expense was $287,000 for the first quarter of fiscal 2018 as estimated tax expense was provided against interim results based on our annual effective tax rate. Income tax expense was lower for the quarter ended June 30, 2016 due to the utilization of net operating losses and the associated reduction in the valuation allowance that had been provided for this deferred tax asset. Our net income for the quarter was approximately $425,000 or $0.01 per share basic and fully diluted for the quarter ended June 30, 2017 as compared to a net income of $445,000 or $0.02 per share basic and fully diluted for the quarter ended June 30, 2016. First quarter of fiscal 2018 EPS is based on an average weighted share count of approximately $28.8 million and $29.8 million for basic and fully diluted shares respectively. Our backlog at July 31, 2017 was $13 million compared to $15.8 million at March 31, 2017, however, up from $11.6 million at June 30, 2017. Turning to the balance sheet, our working capital increased by $664,000 to $5.6 million at June 30, 2017 compared to $5 million at March 31, 2017. As Alex mentioned earlier, we finished the quarter with $3.3 million in cash at June 30, 2017 representing an increase of $266,000 from March 31, 2017 year-end balance. Cash flows provided by operation was approximately $574,000 in the first quarter of fiscal 2018. We utilized about $213,000 for the purchase of new equipment and approximately $175,000 to pay down debt. With that, I will now turn the call back over to Alex. Alex?

Thank you, Tom. Moving forward, we will continue our focus on winning new contracts with our established customers in the defense, energy and precision industrial markets, utilizing our core competencies and know-how in custom large scale high precision fabrication and high precision machining to be a valued high quality supplier. We see meaningful opportunities in the defense sector and will pursue contracts in the aerospace, nuclear, and healthcare sectors. We will continue to execute on operational run rate improvements to increase our gross margins and cash flows. Further expanding on what Tom talked about utilizing about $213,000 for the purchase of new equipment, we have judiciously made CapEx investments to increase our capability as well as capacity to prepare ourselves for a new business that we look forward to securing as we move ahead to continue our focus on the markets that we have done well in the defense, energy and precision industrial markets. I would now like to open up the call for questions and answers. Operator?

[Operator Instructions] Our first question comes from Ross Taylor. Please state your question.

Alex, congratulations on the strong revenue quarter. What I'd love to get a better understanding of is how you see the stronger revenues you're beginning to produce here turning into meaningfully higher earnings per share?

Okay. So I think as we progress into stronger revenues, this is quarterly – the best quarter by far for the last 12, so with the lumpiness of the business, we'd like to look at it on an annual basis. Having said that, how do we use our stronger revenues to make stronger earnings per share? So it would probably depend quite a lot on the mix. There is going to be a balance between higher profit margins and lower profit margins as that lumpiness gets mixed in through the mix, I don’t know that I am answering the question quite well though.

What I’m trying to get out is, I mean you basically been producing $0.01 or $0.02 a share in earnings per share, per quarter inhere and as a public company, to me we’re substantial shareholders. We believe that you either need to be able to kind of push these numbers meaningfully higher, meaning push the earnings numbers on an annual basis from the $0.05, $0.06, $0.07 a share range to something in the neighborhood of $0.15 or $0.20 a share or bluntly it doesn't make a great deal of sense to be public. My assumption is your public company costs are probably between $1 million and $1.5 million a year and with your share count that's a fairly substantial drag on the earnings performance of the Company.

I can't disagree with anything that you said so far, absolutely. So the income, the net income as we have stronger revenues depending on the mix, I would expect it to go up, not down. So it should contribute. I'm just trying to be careful because of the mix and because of the lumpiness. That’s was all I was trying to do. When we achieve higher revenues, I don't expect to sacrifice profits in the name of just having a higher revenue number. I'd be doing all that extra work for – I could do less work and still have the same amount of gain, staying the same in that public. It wouldn't make too much sense. So I personally drive myself to keep a consistent percentage in mind as we increase our stronger revenues therefore the absolute dollar numbers for net income would go up. And I just absolutely cannot argue with how much the public cost is – nobody could argue with that logic, I don't think.

Okay. As we look at it's an inefficient structure, you've obviously done an excellent job building cash, you've done a good job turning this company around, but in reality for a variety of reasons, the stock has not responded and some of that I mean in this quarter you look at it, you now back to being a taxpayer. But which will act as a bit of a drag, but the simple fact is this company seems to be significantly undervalued in the public market versus what it should be worth given the kind of numbers here, but not only are capable of producing, but are beginning to produce.

Yes.

Okay. Also one other what kind of lead do you have on your defense and your major business? When you're looking at your backlog, you obviously had a very strong quarter in two of your three areas. The third area obviously the medical related was weak, but what type of insight do you have to that backlog from the Fed space?

I can give you publicly available information quite readily. So what we are bidding on and beginning to secure contracts on is for example buy the largest pieces Virginia Class, Block 5, Block 5 consists of 10 boats and so we have vision into that. Block 4 sourcing is not completely done yet. That's also for 10 boats, that’s almost done. There is also Block 6 and Block 7 for five boats each. That's the vision that I have and that expands into for the next – over two decades.

Yes. There has been some talk that the Navy wants to increase production of these boats because they see themselves falling below their desired level of fleet operating boats, they basically…

Coverage for royalties, yes.

Yes, and so obviously that is not in these numbers yet. When you look at that these are obviously long-term contracts. What’s the competitive environment you are facing and if you see – if the Navy adds another half a boat to a boat a year? What does that mean for you?

Well, if the Navy adds another boat half a year or so. So the application of CapEx at this point in time maybe looked at upon as premature, but we think of it as building ahead because we are seeing the uptick and the need to provide increased capability and capacity in some key areas of both fabrication and machining. We're doing that in preparation. I hope that answers the question.

Right and so some of the CapEx you did this quarter actually is anticipatory to additional and increase production years ahead?

Right, so just because we spend the money doesn't mean that the machines actually tuned in and active yet. So as we go through and we tuned it up and we try to get orders to let the customers that come visit our highly energized to try out these new things that we have, these new gizmos that we have. So they're active and wanting to give us something they try out to make sure that it works and we encourage that behavior because we didn't – we don't want to buy things and have them not used. So that's good and then that will also pave the way to future sourcing because we have demonstrated that we're willing to spend money ahead to have the ready to be used capability and capacity.

And so this new capacity is new machines and like actually add additional capability, so it's not just to do what you've been doing better, but it actually allows you to do new things for these customers.

It gives us more redundancy to be more blunt, so therefore, the higher redundancy we have, the better the defense market reacts to sourcing. So we have more – if this is not available then you have that one now that kind of thing? And instead of two you have three choices. So instead of – for example to be more specific, we can put these angles on pieces of sheet metal either in the fabrication shop by cutting them or we can machine them in the place, now if you could do in both places that would be great.

And this kind of stuff will give you that capability.

Yes absolutely, yes.

Okay, cool. I’ll let someone else ask questions. Thank you, sir.

Thank you very much Ross.

[Operator Instructions] Our next question comes from [Wilson Schenker]. Please state your question. Wilson, are you there? You may be muted.

I like Wilson Schenker because maybe I’m not supposed to ask a question. Could you please clarify the statement by the last person about TechPrecision now being a tax paying Company, whether or not the Company is actually paying cash taxes? Thank you.

Yes, this is Tom. We are not paying tax or recognizing tax expense. We will not pay taxes until we utilize out net operating losses and deferred tax assets.

Until we finish.

Until we finished utilizing them, yes.

Thank you.

Just answer the question very clearly; we are not paying cash taxes. We are a tax paying Company now. We are making money and paying taxes, but not in cash.

Not in cash. We're not paying tax. We’re recognizing the tax expense, but it’s been offset by the deferred tax assets.

Thank you.

Okay. Our next question comes from Ross Taylor. Please state your question.

Okay, keep following up on Mr. whatever his name was. What is the current level of deferred tax assets?

$3.1 million.

$3.1 million. Okay, and what kind of run rate do you expect? How long do you think those last?

Ross that would be dangerously close to forecasting.

No not at all, because I have to ask you - I’ve to do this…

I would expect that we’re going to extinguish that inside of two years.

Okay. Now if you were able to extinguish $3 million plus of tax credits and the alike – tax loss carryforwards in a couple of years, you're going to generate a lot of free cash flow. Currently you have about $3.3 million in cash on the balance sheet, you have missed the debt level, but it’s $5 million in change?

Correct.

$5.5 million.

$5.5 million.

$5.5 million. So basically – I mean do you have about $2.2 million in net debt, which is a pretty amazing recovery from where this Company was a few years ago. You're generating free cash flow. You just put $300 million in free cash flow in the quarter that gives you kind of the run rate if you can keep things here north of $1 million. That means within a couple of years, you literally have no net debt, which is a suboptimal capital structure. What do you – given the nature of this business, what do you do with that cash? I mean looking at your Board would strike me as I would expect to see some form of return of capital to shareholders if you end up in a situation where you're going to be approaching net debt free for this Company?

That certainly would be one of the choices, absolutely. Another piece that we need to look at is more CapEx spending, since many of our pieces of equipment are in north of 2.5 decades old. And the time that – I've only been here for three plus years and we’re starting to do some CapEx, there's some overhaul that are long overdue as well. So I think judicious capital of – judicious application of this cash is necessary and both between CapEx and what you mentioned absolutely those two are good choices.

Okay, it really looks like you are on the cusp of being able to break this Company out in a meaningful way operationally and financially fiscally. Now it's not a forecast, it's a question.

Well, it certainly what you’ve hired me to do.

Yes, sir.

We are running at the damn thing Ross. I think our trends are showing that. I think I’ll be fairly clam like and still not forecast too much, but it's getting – it’s looking better, isn’t it?

–:

Yes, and not to be labor appoint, which is largely ignored when companies are recovered, but simply maintaining the gain is also very important and picks – it’s difficult. It's easily taken for granted by all that are here as well as outside of Ranor.

Yes, but that’s – I have confidence in your ability to execute operationally, which means well it's difficult that's something I would suspect that you'll be able to accomplish handling.

I would expect that of myself as well.

Good. Thank you, sir.

Yes, sir. End of Q&A

[Operator Instructions] Okay and it doesn't look like we have any incoming questions, so I’ll turn it back over to management.

Thank you. Thank you very everybody for participating. Thank you for listening. Have a good day.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time and have a great day.