Techprecision Corp: Form 10-Q for the period ended Jun 30, 2017

Statement Regarding Forward Looking Disclosure

The following discussion of the results of our operations and financial condition should be read in conjunction with our condensed consolidated financial statements and the related notes, which appear elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q, including this section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may contain predictive or “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of current or historical fact contained in this annual report, including statements that express our intentions, plans, objectives, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “should,” “would” and similar expressions, as they relate to us, are intended to identify forward-looking statements.

These statements are based on current expectations, estimates and projections made by management about our business, our industry and other conditions affecting our financial condition, results of operations or business prospects. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements due to numerous risks and uncertainties. Factors that could cause such outcomes and results to differ include, but are not limited to:

• our ability to change the composition of our revenues and effectively reduce operating expenses;
• the availability of appropriate financing facilities impacting our operations, financial condition and/or liquidity;
• our ability to receive contract awards through competitive bidding processes;
• our ability to maintain standards to enable us to manufacture products to exacting specifications;
• our ability to enter new markets for our services;
• our reliance on a small number of customers for a significant percentage of our business;
• competitive pressures in the markets we serve;
• changes in the availability or cost of raw materials and energy for our production facilities;
• restrictions in our ability to our operate our business due to our outstanding indebtedness;
• government regulations and requirements;
• pricing and business development difficulties;
• our ability to make acquisitions and successfully integrate those acquisitions with our business;
• general industry and market conditions and growth rates;
• general economic conditions; and
• the risks discussed in “Item 1A. Risk Factors” and elsewhere in our 2017 Annual Report on Form 10-K, as well as those described in any other filings which we make with the SEC.

Any forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this Quarterly Report on Form 10-Q, except as required by applicable law. Investors should evaluate any statements made by us in light of these important factors.

Overview

We offer a full range of services required to transform raw materials into precision finished products. Our manufacturing capabilities include: fabrication operations (cutting, press and roll forming, assembly, welding, heat treating, blasting and painting) and machining operations including CNC (computer numerical controlled) horizontal and vertical milling centers. We also provide support services to our manufacturing capabilities: manufacturing engineering (planning, fixture and tooling development, manufacturing), quality control (inspection and testing), materials procurement, production control (scheduling, project management and expediting) and final assembly.

All U.S. manufacturing is done in accordance with our written quality assurance program, which meets specific national and international codes, standards and specifications. Ranor holds several certificates of authorization issued by the American Society of Mechanical Engineers and the National Board of Boiler and Pressure Vessel Inspectors. The standards used are specific to the customers’ needs, and our manufacturing operations are conducted in accordance with these standards.

Because our revenues are derived from the sale of goods manufactured pursuant to a contract, and we do not sell from inventory, it is necessary for us to constantly seek new contracts. There may be a time lag between our completion of one contract and commencement of work on another contract. During such periods, we may continue to incur overhead expense but with lower revenue resulting in lower operating margins. Furthermore, changes in either the scope of an existing contract or related delivery schedules may impact the revenue we receive under the contract and the allocation of manpower. Although we provide manufacturing services for large governmental programs, we usually do not work directly for the government or its agencies. Rather, we perform our services for large governmental contractors. Our business is dependent in part on the continuation of governmental programs which require our services and products.

Our contracts are generated both through negotiation with the customer and from bids made pursuant to a request for proposal. Our ability to receive contract awards is dependent upon the contracting party’s perception of such factors as our ability to perform on time, our history of performance, including quality, our financial condition and our ability to price our services competitively. Although some of our contracts contemplate the manufacture of one or a limited number of units, we are seeking more long-term projects with predictable cost structures.

We historically have experienced, and continue to experience, customer concentration. For the three months ended June 30, 2017 and June 30, 2016, our largest customer accounted for approximately 50% and 32% of reported net sales, respectively. Our sales order backlog at June 30, 2017 was approximately $11.6 million compared with a backlog of $15.8 million at March 31, 2017.

For the three months ended June 30, 2017, our net sales and net income were $5.8 million and $0.4 million, respectively, compared with net sales of $4.6 million and net income of $0.4 million, for the three months ended June 30, 2016. Our gross margins for the three months ended June 30, 2017 were 30% compared with gross margins of 33% in the three months ended June 30, 2016. We generated $0.6 million of cash from operating activities for the three months ended June 30, 2017 and had a cash balance of $3.3 million at June 30, 2017.

Critical Accounting Policies

The preparation of the unaudited condensed consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We continually evaluate our estimates, including those related to contract accounting, inventories, recovery of long-lived assets, income taxes and the valuation of equity transactions. These estimates and assumptions require management's most difficult, subjective or complex judgments. Actual results may differ under different assumptions or conditions.

Our significant accounting policies are set forth in detail in Note 2 to the consolidated financial statements included in the 2017 Form 10-K. There were no significant changes in the critical accounting policies during the three months ended June 30, 2017, nor did we make any changes to our accounting policies that would have changed these critical accounting policies.

New Accounting Pronouncements

See Note 3 – New Accounting Standards to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently adopted accounting guidance and other new accounting guidance.

Results of Operations

Our results of operations are affected by a number of external factors including the availability of raw materials, commodity prices (particularly steel), macroeconomic factors, including the availability of capital that may be needed by our customers, and political, regulatory and legal conditions in the United States and in foreign markets. Generally, our product mix is made up of short-term contracts with a production timeline of less than twelve months. Units manufactured under the majority of our customer contracts are delivered on time and with a positive gross margin. Our results of operations are also affected by our success in booking new contracts, the timing of revenue recognition, delays in customer acceptances of our products, delays in deliveries of ordered products and our rate of progress fulfilling obligations under our contracts. A delay in deliveries or cancellations of orders could have an unfavorable impact on liquidity, cause us to have inventories in excess of our short-term needs, and delay our ability to recognize, or prevent us from recognizing, revenue on contracts in our order backlog.

Key Performance Indicators

While we prepare our financial statements in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, we also utilize and present certain financial measures that are not based on or included in U.S. GAAP. We refer to these as Non-GAAP financial measures. Please see the section “EBITDA Non-GAAP financial measures” below for further discussion of these financial measures, including the reasons why we use such financial measures and reconciliations of such financial measures to the nearest U.S. GAAP financial measures.

Three Months Ended June 30, 2017 and 2016

The following table sets forth information from our Condensed Consolidated Statements of Operations and Comprehensive Income, in dollars and as a percentage of revenue:

(dollars in thousands)

nm - not meaningful

Net Sales

Our shipments in the three months ended June 30, 2017 included orders for new and repeat business from existing key customers. Generally, increases and decreases in net sales reflect changes in product mix as our customers gauge their demand for new components. Customer acceptance and the timing of delivery dates play a significant role as to when we can recognize revenue in any given period. For the three months ended June 30, 2017, net sales increased by $1.2 million, or 26%, to $5.8 million when compared to $4.6 million for the three months ended June 30, 2017. Net sales in our defense market, increased by $2.0 million in the three months ended June 30, 2017 when compared to the three months ended June 30, 2016, 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 three months ended June 30, 2016, primarily on a higher shipment volume of nuclear plant components. Net sales in our precision industrial market decreased by $1.5 million when compared to the three months ended June 30, 2016 on lower shipments of large scale medical device components.

Cost of Sales and Gross Margin

Cost of sales consists primarily of raw materials, parts, labor, overhead and subcontracting costs. Our cost of sales for fiscal 2018 increased by $1.0 million compared to fiscal 2017 primarily on higher sales volume, higher estimates for contract losses and higher amounts of unabsorbed overhead. Contract losses increased by $0.1 million for the three months ended June 30, 2017, and are included in cost of sales. Gross profit increased by $0.2 million for the three months ended June 30, 2017 when compared to the three months ended June 30, 2016. Gross margin in any reporting period is impacted by the mix of products and services we provide on projects completed within that period. Gross margins were 30% and 33% for the three months ended June 30, 2017 and 2016, respectively. Lower gross margin for the three months ended June 30, 2017 was caused by an increase in loss reserves and higher rework activity on certain contracts.

Selling, General and Administrative Expenses

Total SG&A expenses increased by $31,582 for the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily the result of remuneration for the board of directors and share-based compensation, offset in part by lower outside advisory services and other office expenses.

Other Income (Expense)

The following table reflects other income, interest expense and amortization of debt issue costs for the three months ended June 30:

Interest expense and amortization of debt issue costs for the three months ended June 30, 2017 were lower when compared to the three months ended June 30, 2016. The decrease in interest expense is primarily due to lower interest rates in connection with our debt refinancing transactions completed in fiscal 2017. Debt issue costs amortization for the three months ended June 30, 2017 decreased when compared to the three months ended June 30, 2016 because of lower debt issue costs in connection with our new debt.

Income Taxes

For the three months ended June 30, 2017 we recorded tax expense of $287,635, compared to tax expense of $9,453 for the three months ended June 30, 2016. The effective tax rate was 40.4% and 2.1%, for the three months ended June 30, 2017 and 2016, respectively. For the three months ended June 30, 2016 the effective tax rate of 2.1% was a result of the utilization of net operating losses and the associated reduction in the valuation allowance which had been provided for this deferred tax asset. The 2016 tax provision was an accrual for the alternative minimum tax.

The valuation allowance on deferred tax assets at June 30, 2017 and March 31, 2017 was approximately $1.5 million. We believe that it is more likely than not that the benefit from certain state and foreign NOL carryforwards and other deferred tax assets will not be realized. In recognition of this risk, we continue to provide a valuation allowance on these items. In the event future taxable income is below management’s estimates or is generated in tax jurisdictions different than projected, the Company could be required to increase the valuation allowance for deferred tax assets. This would result in an increase in the Company’s effective tax rate.

Our future effective tax rate may be affected if earnings are lower than anticipated in tax jurisdictions with lower statutory rates and higher than anticipated in tax jurisdictions with higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof.

Net Income

As a result of the foregoing, for the three months ended June 30, 2017, our net income was $424,502, or $0.01 per share basic and fully diluted, compared with net income of $445,303, or $0.02 per share basic and fully diluted, for the three months ended June 30, 2016.

Liquidity and Capital Resources

At June 30, 2017, we had cash and cash equivalents of $3.3 million. Net cash provided by operating activities was $0.6 million for the three months ended June 30, 2017. Net cash provided by operating activities for the three months ended June 30, 2016 was $1.4 million. At June 30, 2017, we had working capital of $5.6 million as compared with working capital of $5.0 million at March 31, 2017. The table below presents selected liquidity and capital measures as of:

(dollars in thousands)

The following table summarizes our primary cash flows for the periods presented:

(dollars in thousands)

17

At June 30, 2017 the Company was in compliance with all financial covenants contained in all of its debt agreements. We believe our available cash will be sufficient to fund our operations, capital expenditures and principal and interest payments under our debt obligations through the 12 months from the issuance date of our financial statements.

Operating activities

Our primary sources of cash are from accounts receivable collections, customer advance payments, and project progress payments. Our customers make advance payments and progress payments under the terms of each manufacturing contract. Our cash flows can fluctuate significantly from period to period as the composition of our receivables collections mix changes between advance payments and customer payments made after shipment of finished goods. Cash provided by operations for the three months ended June 30, 2017 was $0.6 million compared with cash provided by operations of $1.4 million for the three months ended June 30, 2016. The three month period ended June 30, 2016 was marked by higher collections of cash from customer advances and progress payments.

Investing activities

For the three months ended June 30, 2017, net cash used in investing activities totaled $132,946, primarily made up of a $212,946 deposit for new factory machinery and equipment, offset in part by $80,000 in proceeds from the sale of certain machinery and equipment.

Financing activities

For the three months ended June 30, 2017, net cash used in financing activities was $174,591 consisting of monthly principal payments in connection with our debt obligations. For the three months ended June 30, 2016, cash provided by financing activities was $139,862. For the three months ended June 30, 2016 we received proceeds of $2.8 million from our MLSA with People's and used $2.5 million of the proceeds from the People's Loan as payment in full for the principal obligations under the Utica LSA. We also paid $144,338 in loan closing costs.

All of the above activity resulted in a net increase in cash of $0.3 million for the three months ended June 30, 2017 compared with an increase in cash of $1.5 million for the three months ended June 30, 2016.

Off-Balance Sheet Arrangements

We do not currently have, and have not had during the three months ended June 31, 2017, any off-balance sheet assets, liabilities or arrangements.

EBITDA Non-GAAP Financial Measure

To complement our condensed consolidated statements of operations and comprehensive income and condensed consolidated statements of cash flows, we use EBITDA, a non-GAAP financial measure. Net income is the financial measure calculated and presented in accordance with U.S. GAAP that is most directly comparable to EBITDA. We believe EBITDA provides our board of directors, management and investors with a helpful measure for comparing our operating performance with the performance of other companies that have different financing and capital structures or tax rates. We also believe that EBITDA is a measure frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, and is a measure contained in our debt covenants. However, while we consider EBITDA to be an important measure of operating performance, EBITDA and other non-GAAP financial measures have limitations, and investors should not consider them in isolation or as a substitute for analysis of our results as reported under U.S. GAAP.

We define EBITDA as net income plus interest, income taxes, depreciation and amortization. Net income was $424,502 for the three months ended June 30, 2017, as compared to $445,303 for the three months ended June 30, 2016. EBITDA, a non-GAAP financial measure, was $1.0 million for the three months ended June 30, 2017, as compared to $0.8 million for the three months ended June 30, 2016, an increase of $0.2 million over the prior period.

The following table provides a reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure reported in our condensed consolidated financial statements:

(dollars in thousands)

(1) Includes amortization of debt issue costs.

Evaluation of Disclosure Controls and Procedures.

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are controls and procedures that are designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and includes controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, an evaluation was carried out, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2017, our disclosure controls and procedures were effective at a reasonable assurance level.

Inherent Limitations Over Internal Controls

The Company’s internal control over financial reporting is designed under the supervision of our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, or GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods is subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

For the quarter ended June 30, 2017, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.