TechPrecision Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2011 (fiscal 2012); filed November 14, 2011. TechPrecision manufactures large-scale fabricated and precision-machined components for energy, medical, defense, industrial, and aerospace markets, through Ranor and its China subsidiary, WCMC.
Financial results
| Metric | Three months ended September 30, 2011 | Six months ended September 30, 2011 |
|---|---|---|
| Net sales | $7.15 million, down 15% year over year | $16.32 million, up 12% |
| Gross profit and margin | $1.92 million; 27% (31% prior year) | $4.34 million; 27% (34% prior year) |
| Operating income (loss) | $(39,000) | $656,000 |
| Net income (loss) | $(88,000); $(0.01) per basic and diluted share | $293,000; $0.02 basic and $0.01 diluted per share |
| Operating cash flow | Not separately presented for the quarter | $(964,000), versus $1.06 million provided in prior year |
Quarterly sales were affected by $3.4 million of completed, customer-accepted production not delivered until October; management said it would be recognized in the following quarter. Lower quarterly gross margin reflected approximately $0.3 million of contract losses on prototyping and first-article work. For the six months, higher material costs and a shift in project mix also reduced margin. SG&A rose 74% for the quarter and 72% for the six months, principally due to staffing and business-development costs for the China expansion.
Liquidity, debt, and capital
- Cash was $5.21 million at September 30, down $2.33 million from March 31. Working capital was $12.5 million, down from $13.6 million.
- Cash used in operations was $964,000; investing used $2.34 million, primarily for equipment and the facility expansion. Financing provided $966,000, including additional bond borrowings.
- Total debt and capital lease obligations were $7.52 million, including $1.37 million current and $6.15 million long-term. The $2 million revolving credit facility was unused.
- Contract costs in excess of progress billings rose to $8.14 million from $2.52 million at March 31; deferred revenue increased to $1.69 million from $382,000.
- Property, plant and equipment increased to $5.13 million net. The 19,500-square-foot facility expansion entered service in September; the gantry mill was still being tested and configured.
Changes, outlook, and risks
- Six-month revenue increased, but net income fell 83% year over year as cost of sales and SG&A grew faster than sales. The second quarter shifted to a net loss from prior-year profit.
- Backlog was $29.9 million at September 30, compared with $32.5 million at March 31. Management said the accepted $3.4 million of finished products would be recognized in the third quarter. WCMC began initial production and received initial orders from new customers.
- The company missed its 120% fixed-charge coverage covenant, reporting 76%; the bank waived the quarter’s breach only. Management expected compliance at the December 31, 2011 test. Interest coverage was 10:1 and leverage was 1:1, within stated limits.
- A property appraisal also exposed an approximately $490,000 collateral shortfall under the Series A bond loan-to-value requirement. On October 28, the company and bank agreed to address it with restricted cash pledged as collateral. The account is not available for general use.
- Management believed cash, the unused revolver, and access to equipment-specific financing would cover foreseeable cash needs, but noted possible additional financing needs for expansion. Risks include customer concentration, project timing and acceptance, contract awards, materials costs, China execution, and potential covenant breaches or accelerated debt.
- Four customers each represented at least 10% of six-month sales; the largest represented 29%. Together, the four accounted for 67% of revenue. The filing also describes a related-party China supplier relationship and a preferred shareholder’s right of first refusal on certain future equity financings.
Important facts for investors to verify
- Whether the $3.4 million delayed shipment was recognized as revenue in the following quarter and whether delivery timing remains a recurring risk.
- Compliance with the fixed-charge coverage covenant at the December 31 test and maintenance of the restricted-cash collateral arrangement.
- Cash conversion and working-capital trends, particularly the sharp increase in costs on uncompleted contracts and the six-month operating cash outflow.
- Whether margins recover as prototype work transitions to repeat production, and whether China expansion costs produce sustained revenue.
- Exposure to major customers, related-party sourcing, and potential dilution from convertible preferred stock and outstanding options.