TECHPRECISION CORPORATION Statement Regarding Forward Looking Disclosure
The following discussion of our financial condition and results of operations 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 titled "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 quarterly 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 forward-looking 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, or implied by, 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, risks and uncertainties arising from:
? our reliance on individual purchase orders, rather than long-term contracts, to
generate revenue;
? our ability to balance the composition of our revenues and effectively control
operating expenses;
external factors that may be outside our control: including the
?
inefficiencies;
? the impacts of the COVID-19 pandemic and government-imposed lockdowns in
response thereto;
? 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 operate our business due to our outstanding
indebtedness;
? government regulations and requirements;
? pricing and business development difficulties;
? changes in government spending on national defense;
? our ability to make acquisitions and successfully integrate those acquisitions
with our business;
? our failure to maintain effective internal controls over financial reporting;
? general industry and market conditions and growth rates;
? unexpected costs, charges or expenses resulting from the recently completed
acquisition of
those risks discussed in "Item 1A. Risk Factors" and elsewhere in our Annual
? Report on Form 10-K, as well as those described in any other filings which we
make with the
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.
21
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Overview
Contract Manufacturing
Through our two wholly-owned subsidiaries, Ranor and Stadco (acquired on August
25, 2021 ), each of which is a reportable segment, 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 manufacturing is done in accordance with our written quality assurance
program, which meets specific national and international codes, standards, and
specifications. 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
contracts, 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 that 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 continue to seek more long-term projects with
predictable cost structures.
All the Company's operations, assets, and customers are located in the U.S. Impact of COVID-19 Pandemic
At the beginning of calendar year 2020, the novel strain of coronavirus known as COVID-19 spread worldwide, including toU.S jurisdictions where the Company does business, and became a global pandemic. The United States Government declared a national emergency and various state governments imposed "lockdown" and "shelter-in-place" orders intended to reduce the spread of COVID-19 that have severely restricted business, social activities and travel during the periods in which they were imposed. The Governors of theCommonwealth of Massachusetts andState of California , in which jurisdictions the Company's manufacturing and executive offices are located, issued similar emergency orders inMarch 2020 . Although the emergency order forMassachusetts has expired, the national emergency declaration was renewed onJuly 15, 2022 and theCalifornia emergency order remains in effect throughFebruary 2023 . As a designated "COVID-19 Essential Service" we continued our operations throughout the pendency of the orders.
Our production facilities continue to operate as they had prior to the outbreak of the COVID-19 pandemic, other than the implementation of enhanced safety measures intended to prevent the spread of the virus. The remote working arrangements and travel restrictions imposed by applicable governmental authorities during 2020 and 2021 did not impair our ability to maintain operations.
Our results of operations and cash flows during the nine months endedDecember 31, 2022 , and 2021 were not materially affected by the COVID-19 pandemic.However, given the speed and frequency of continuously evolving developments with respect to this pandemic, the extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects, we cannot reasonably estimate the magnitude of future impact on our financial condition and results of operations. 22
Table of Contents
Critical Accounting Policies and Estimates
The preparation of the 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 revenue recognition and income taxes. These estimates and assumptions require management's most difficult, subjective or complex judgments. Actual results may vary under different assumptions or conditions. We consider the principles and estimates applied for revenue recognition to be one of the most critical accounting estimates that we make. Our revenue can fluctuate from quarter-to-quarter as we measure revenue recognition over the duration of a project, or at the end of the project. The Company records most of its revenue over time as it completes performance obligations or at a point-in-time, for example, at the delivery date, when control of the promised goods are transferred to the customer. Project volume for revenue recognized at a point-in-time is generally smaller, can fluctuate from period to period, and is difficult to forecast. We measure progress for performance obligations satisfied over time using input methods, for example, labor hours expended and time elapsed. As a result, assuming a steady flow of project volume and labor hours, we have the ability to deliver a fair and accurate flow of revenue over time. When project volume is higher or lower, we may report higher or lower amounts of revenue for those given quarterly periods. Our significant accounting policies are set forth in detail in Note 2 to the consolidated financial statements included in the 2022 Annual Report on Form 10-K. There were no significant changes to our critical accounting policies during the nine months endedDecember 31, 2022 .
New Accounting Standards
See Note 17, Accounting Standards Update, in the Notes to the Unaudited Condensed Consolidated Financial Statements under "Item 1. Financial Statements", for a discussion of recently adopted new accounting guidance and new accounting guidance not yet adopted.
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 inthe United States and in foreign markets. It generally takes approximately twelve months or less to complete our manufacturing projects. However, contracts for larger complex components can take up to thirty-six months to complete. Units manufactured under the majority of our customer contracts have historically been delivered on time and with a positive gross margin, with some exceptions. 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. We evaluate the performance of our segments based upon, among other things, segment net sales and operating profit. Segment operating profit excludes general corporate costs, which include executive and director compensation, stock-based compensation, certain pension and other retirement benefit costs, and other corporate facilities and administrative expenses not allocated to the segments. Also excluded are items that we consider not representative of ongoing operations, such as the unallocated PPP loan forgiveness and refundable employee retention tax credits. 23 Table of Contents Key Performance Indicators
While we prepare our financial statements in accordance withU.S. generally accepted accounting principles, or "U.S. GAAP", we also utilize and present certain financial measures that are not based on or included inU.S. GAAP. We refer to these as non-GAAP financial measures. Please see the section titled "EBITDA Non-GAAP financial measure" 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 most directly comparableU.S. GAAP financial measures.
Percentages in the following tables and throughout this "Results of Operations" section may reflect rounding adjustments.
Three Months Ended
The following table presents net sales, cost of sales and gross profit, consolidated and by reportable segment:
December 31, 2022 December 31, 2021 Changes
Percent of Percent of
(dollars in thousands) Amount net sales Amount net sales Amount Percent
Ranor $ 4,735 57 % $ 2,790 43 % $ 1,945 70 %
Stadco 3,592 43 % 3,721 57 % (129) (3) %
Net sales $ 8,327 100 % $ 6,511 100 % $ 1,816 28 %
Ranor $ 3,056 37 % $ 2,538 39 % $ 518 20 %
Stadco 3,773 45 % 3,495 54 % 278 8 %
Cost of sales $ 6,828 82 % $ 6,033 93 % $ 795 13 %
Ranor $ 1,680 20 % $ 199 3 % $ 1,481 744 %
Stadco (181) (2) % 279 4 % (460) (165) %
Gross profit $ 1,499 18 % $ 478 7 % $ 1,021 214 %
Net Sales
Consolidated - Net sales for the three months endedDecember 31, 2022 were$8.3 million , or 28% million higher when compared to the same period a year ago. A favorable project mix atRanor provided the boost for the increase in third quarter revenue.Ranor - Net sales were$4.7 million for the three months endedDecember 31, 2022 , or 70% higher when compared to the same prior year period. Net sales to defense customers increased by$2.1 million . Net sales increased primarily on profitable orders for repeat defense industry business which contributed to a favorable project mix in the period. The defense backlog forRanor remains strong as new orders for components related to a variety of programs, includingU.S. Navy submarine programs, continue to flow down from our existing customer base of prime defense contractors. Net sales to precision industrial markets decreased by$0.2 million due to lower project activity. Order flow in this sector can be uneven and difficult to forecast.Stadco - Net sales were$3.6 million for the three months endedDecember 31, 2022 , compared to net sales of$3.7 million for the same quarter a year ago. We have a strong defense backlog atStadco for new orders related to a variety of programs, including components for heavy lift helicopters.
Cost of Sales, Gross Profit and Gross Margin
Consolidated - Cost of sales consists primarily of raw materials, parts, labor, overhead and subcontracting costs. Our cost of sales for the three months endedDecember 31, 2022 , was 13% higher when compared to the three months endedDecember 31, 2021 , the result of increased direct labor hours charged to jobs atRanor because of the increased level of job activity, and under-absorbed factory overhead atStadco . Gross profit was$1.0 million higher when compared to the three months endedDecember 31, 2021 . Gross margin was 18% for the three months endedDecember 31, 2022 , compared to 7.3% for the three months endedDecember 31, 2021 . 24 Table of Contents
Ranor - Gross profit and gross margin increased year over year on improved throughput, profitable repeat business, and a favorable project mix. This set of production conditions resulted in better overhead absorption rates which began to take hold in the fourth quarter of fiscal 2022.Stadco - The gross margin turned negative at the end of fiscal year 2022 and continued through the third quarter of fiscal 2023. Certain unprofitable projects and new project startups slowed production activities and resulted in unfavorable throughput and under-absorbed overhead. These conditions have resulted in unfavorable factory overhead absorption rates since the acquisition date inAugust 2021 .
Selling, General and Administrative (SG&A) Expenses
December 31, 2022 December 31, 2021 Changes
Percent of Percent of
(dollars in thousands) Amount Net Sales Amount Net Sales Amount Percent
Ranor $ 345 4 % $ 443 7 % $ (98) (22) %
Stadco 381 5 % 471 7 % (90) (19) %Corporate and unallocated 499 6 % 710
11 % (211) (30) %
Consolidated SG&A $ 1,225 15 % $ 1,624 25 % $ (400) (25) %
Consolidated - Total SG&A is composed of compensation, outside advisory and other office costs. Total SG&A for the three months endedDecember 31, 2022 , decreased by$0.4 million , or 25% compared to the prior-year period. Outside advisory service fees in the prior year period included one-time costs for legal, accounting, and other outside advisory services.Ranor - Lower headcount and reduced business travel led to lower spending for compensation and other office costs of approximately$40,000 and$60,000 , respectively. Reduction in travel ($25,000 ) and lower insurance costs ($25,000 ) were the primary drivers of the office costs decrease.
Corporate and unallocated - Legal, accounting fees, travel expenses and other office costs decreased by approximately$0.2 million . The same period a year ago included certain one-time integration costs in connection with theStadco acquisition. Operating income (loss) December 31, 2022 December 31, 2021 Changes Percent of Percent of (dollars in thousands) Amount net sales Amount net sales Amount Percent Ranor$ 1,334 16 %$ (244) (4) %$ 1,578 647 % Stadco (561) (7) % (191) (3) % (370) nm %
Corporate and unallocated (499) (6) % (711)
(11) % 212 30 %
Operating income (loss) $ 274 3 % $ (1,146) (18) % $ 1,420 124 %
nm - not meaningful
Consolidated - As a result of the foregoing, notwithstanding the reduced
profitability at Stadco , we reported operating income of $0.3 million compared
with an operating loss of $1.1 million for the three months ended December 31,
2021 .
Ranor - Operating income was $1.6 million higher compared to same period prior
year, due primarily to profitable repeat business and a favorable project mix
and continued improved operating throughput which resulted in better factory
overhead absorption.
Corporate and unallocated - Losses narrowed due to a decrease in legal and
accounting fees, travel expenses and other office costs because of the absence
of integration costs in connection with the
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Other Income (Expense)
The following table presents other income (expense) for the three months ended
December 31 :
2022 2021 $ Change % Change
Other income, net $ 254 $ 1,999 $ (1,745) (87) %
Interest expense $ (80,389) $ (78,230) $ (2,159) (3) %Amortization of debt issue costs$ (13,214) $ (16,491) $ 3,277
20 %
Interest expense was higher for the three months endedDecember 31, 2022 . The increase in interest expense was due primarily to new borrowings under the Revolver Loan (each as defined below). We expect to see higher interest expense in future periods due to higher interest rates on the extended Ranor Term Loan and renewed Revolver Loan. Amortization of debt issue costs were lower when compared to the three months endedDecember 31, 2021 . However, new amortization periods commenced inDecember 2022 for costs incurred to extend the Ranor Term Loan and renew the Revolver Loan renewal. As a result, we expect to see higher amortization expense in future periods.
Other income, net, in the table above, reflects lower interest income earned for
the three months ended
Income Taxes
For the three months endedDecember 31, 2022 , the Company recorded tax expense of$46,991 . The Company recorded a tax benefit of$333,867 in the three months endedDecember 31, 2021 . Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The valuation allowance on deferred tax assets atDecember 31, 2022 andMarch 31, 2022 was approximately$2.0 million . We believe that it is more likely than not that the benefit from certain state 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. Net Income (Loss)
As a result of the foregoing, for the three months endedDecember 31, 2022 , we recorded net income of$0.1 million , compared with net loss of$0.9 million for the three months endedDecember 31, 2021 .
Nine Months Ended
The following table presents net sales, cost of sales and gross profit, consolidated and by reportable segment:
December 31, 2022 December 31, 2021 Changes
Percent of Percent of
(dollars in thousands) Amount net sales Amount net sales Amount Percent
Ranor $ 14,395 60 % $ 9,741 66 % $ 4,654 48 %
Stadco 9,531 40 % 4,980 34 % 4,551 91 %
Net sales $ 23,926 100 % $ 14,721 100 % $ 9,205 63 %
Ranor $ 8,849 37 % $ 7,924 54 % $ 925 12 %
Stadco 11,022 46 % 4,556 31 % 6,466 142 %
Cost of sales $ 19,871 83 % $ 12,480 85 % $ 7,391 59 %
Ranor $ 5,546 23 % $ 1,764 12 % $ 3,782 214 %
Stadco (1,491) (6) % 477 3 % (1,968) nm %
Gross profit $ 4,055 17 % $ 2,241 15 % $ 1,814 81 %
nm- mot meaningful
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Net Sales
Consolidated - Net sales were$23.9 million or 63% higher when compared to consolidated net sales for the nine months endedDecember 31, 2021 . Net sales increased due to$4.5 million of new revenue from ourStadco segment and$4.7 revenue increase at ourRanor segment. The prior year results only included eighteen weeks of business activity atStadco .Ranor - Net sales were$14.4 million for the nine months endedDecember 31, 2022 , or 48% higher when compared to the same prior year period. Net sales increased primarily on profitable orders of repeat business which contributed to a favorable project mix for the year-to-date period. Net sales to defense customers increased by$5.4 million . The defense backlog forRanor remains strong as new orders for components related to a variety of programs, including theU.S. Navy submarine programs, continue to flow down from our existing customer base of prime defense contractors. Net sales to precision industrial markets decreased by$0.7 million due to lower project activity. We have repeat business in this sector, but the order flow can be uneven and difficult to forecast.Stadco - Net sales were$9.5 million for the nine months endedDecember 31, 2022 . Net sales for the nine months endedDecember 31, 2021 were$5.0 million but only included eighteen weeks of business activity following theAugust 25, 2021 acquisition date. Our defense backlog forStadco remains strong with new orders for components related to a variety of programs, including components for heavy lift helicopters.
Cost of Sales, Gross Profit and Gross Margin
Consolidated - Cost of sales consists primarily of raw materials, parts, labor, overhead and subcontracting costs. Our cost of sales for the nine months endedDecember 31, 2022 , was$7.4 million higher when compared to the nine months endedDecember 31, 2021 . The increase in cost of sales was primarily the result of a full thirty-nine weeks of business activity at ourStadco segment when compared to only eighteen weeks in the same period a year ago. Gross profit increased by$1.8 million , or 81% when compared to the nine months endedDecember 31, 2021 , following a strong operating performance atRanor , which more than offset weak operating results atStadco . Gross margin was 17.0% versus 15.2% year-over-year.Ranor - The gross profit and gross margin significantly increased year over year with improved throughput on new orders of profitable repeat business. This set of favorable conditions began to take hold in the fourth quarter of fiscal 2022 and accelerated project progress with better overhead absorption rates. We expect this trend to continue in future periods.Stadco - The gross profit and gross margin turned negative at the end of fiscal year 2022 and continued through the third quarter of fiscal 2023. New projects with associated startup activities and certain unprofitable projects resulted in unfavorable throughput and under-absorbed overhead. We expect a gradual improvement in gross margin as the new projects progress with better throughput in future periods.
Selling, General and Administrative (SG&A) Expenses
December 31, 2022 December 31, 2021 Changes
Percent of Percent of
(dollars in thousands) Amount Net Sales Amount Net Sales Amount Percent
Ranor $ 1,468 6 % $ 1,177 8 % $ 291 25 %
Stadco 1,285 5 % 628 4 % 657 105 %
Corporate and unallocated 1,674 7 % 1,725 12 % (51) (3) %
Consolidated SG&A $ 4,427 18 % $ 3,530 24 % $ 897 25 %
Consolidated - Total selling, general and administrative expenses for the nine
months ended December 31, 2022 , increased by $0.9 million , or 25%. Spending on
outside advisory services and business travel returned to pre-pandemic levels at
Ranor . Stadco SG&A for the full nine months was higher as the comparable prior
year period only included eighteen weeks of business activity for the segment.
27
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Corporate and unallocated - SG&A decreased by approximately$0.1 million , due primarily to the absence of acquisition and integration costs in connection with theStadco acquisition in the third quarter of fiscal 2023. Operating loss December 31, 2022 December 31, 2021 Changes Percent of Percent of (dollars in thousands) Amount net sales Amount net sales Amount Percent Ranor$ 4,078 17 %$ 586 4 %$ 3,492 596 % Stadco (2,775) (12) % (150) (1) % (2,625) nm % Corporate and unallocated (1,674) (7) % (1,725) (12) % 51 3 % Operating loss$ (371) (2) %$ (1,289) (9) %$ 918 71 % nm - not meaningful
Consolidated - As a result of the foregoing, including the integration and reduced profitability atStadco , we reported an operating loss of$0.4 million compared to operating loss of$1.3 million for the nine months endedDecember 31, 2021 . Our operating losses have narrowed recently, due to favorable operating results atRanor , and incremental operating improvement atStadco .
Corporate and unallocated - Corporate expenses were lower for the nine months endedDecember 31, 2022 , as the savings from the absence of integration and acquisition costs in connection with theStadco acquisition in fiscal 2022 more than offset an increase in share-based compensation and office costs.
Other Income (Expense)
The following table presents information for the nine months endedDecember 31 : 2022 2021 $ Change % Change Other income, net$ 40,590 $ 13,390 $ 27,200 203 % Interest expense$ (221,017) $ (146,906) $
(74,111) (50) %
Amortization of debt issue costs
Other income, net, in the table above, includes the change in fair value for contingent consideration of$63,436 and the fair value of the stock issued for$56,310 in connection with theStadco acquisition, and other tax rebates for$33,223 . Other income for the nine months endedDecember 31, 2021 , includes a return of$10,000 for a retainer fee previously paid for outside advisory fees in connection with a class action settlement inMarch 2021 . Interest expense was higher for the nine months endedDecember 31, 2022 . The increase in interest expense was due primarily to borrowings under theStadco Term Loan (as defined below) and higher amounts borrowed under the Revolver Loan. We also expect to see higher interest expense in comparable future periods due to higher interest rates on the extended Ranor Term Loan and renewed Revolver Loan. 28 Table of Contents Amortization of debt issue costs were higher when compared to the nine months endedDecember 31, 2021 . New amortization periods commenced inDecember 2022 for costs incurred to extend the Ranor Term Loan and renew the Revolver Loan. As a result, we expect to see higher amortization expense in future periods.
Employee Retention Tax Credit (ERTC)
Other income for the nine months endedDecember 31, 2022 , includes an accrual of$624,045 for a refundable Employee Retention Tax Credit authorized under the Coronavirus Aid Relief and Economic Security ("CARES") Act for eligible employers with qualified wages.
Paycheck Protection Program (PPP) Loan Forgiveness
Included in the results for the nine-months endedDecember 31, 2021 , is$1.3 million for forgiveness of the Company's PPP loan. As authorized by Section 1106 of the CARES Act, theSmall Business Administration remitted toBerkshire Bank , the lender of record, a payment of principal for$1.3 million . The funds credited to the PPP loan paid this loan off in full.
Income Taxes
For the nine months endedDecember 31, 2022 , the Company recorded a tax expense of$8,786 , and for the nine months endedDecember 31, 2021 , the Company recorded a tax benefit of$385,749 . Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The valuation allowance on deferred tax assets atDecember 31, 2022 andMarch 31, 2022 was approximately$2.0 million . We believe that it is more likely than not that the benefit from certain state 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. Net Income
As a result of the foregoing, for the nine months endedDecember 31, 2022 , we recorded net income of$23,754 , compared with net income of$0.2 million for the nine months endedDecember 31, 2021 .
Liquidity and Capital Resources
Our liquidity is highly dependent on the availability of financing facilities and our ability to maintain gross profit and operating income.
As ofDecember 31, 2022 , we had$3.8 million in total available liquidity, consisting of$0.3 million in cash and cash equivalents, and$3.5 million in undrawn capacity under our Revolver Loan. As ofMarch 31, 2022 , we had$3.9 million in total available liquidity, consisting of$1.1 million in cash and cash equivalents, and$2.8 million in undrawn capacity under our Revolver Loan. OnDecember 23, 2022 ,Ranor and certain affiliates of the Company entered into a Fifth Amendment to Amended and Restated Loan Agreement, Fifth Amendment to Promissory Note and First Amendment to Second Amended and Restated Promissory Note, or the "Amendment". Effective as ofDecember 20, 2022 , the Amendment, among other things (i) extends the maturity date of the loan originally made toRanor byBerkshire Bank in 2016, or the "Ranor Term Loan" toDecember 15, 2027 , (ii) extends the maturity date of the Revolver Loan fromDecember 20, 2022 toDecember 20, 2023 , (iii) increases the interest rate on the Ranor Term Loan from 5.21% to 6.05% per annum, (iv) decreases the monthly payment on the Ranor Term Loan from$19,260 to$16,601 , (v) replaces LIBOR as an option for the benchmark interest rate for the Revolver Loan with SOFR, (vi) replaces LIBOR-based interest pricing conventions with SOFR-based pricing conventions, including benchmark replacement provisions, and (vii) solely with respect to the fiscal quarter endingDecember 31, 2022 , lowers the debt service coverage ratio from at least 1.2 to 1.0 to 1.1 to 1.0. Our capital expenditures are limited to$1.5 million annually and contain loan-to-value, and balance sheet leverage covenants. There was approximately$1.5 million outstanding under the Revolver Loan atDecember 31, 2022 . Interest payments made under the Revolver Loan were$20,769 for the nine months endedDecember 31, 2022 . The weighted average interest
rate atDecember 31, 2022 29 Table of Contents andMarch 31, 2022 was 4.41% and 2.67%, respectively. Unused borrowing capacity atDecember 31, 2022 andMarch 31, 2022 was approximately$3.5 million and$2.8 million , respectively.
At
The Company was in compliance with all of the financial and related covenants on
We believe our available cash, plus cash expected to be provided by operations, refundable Employee Retention Tax Credits, and borrowing capacity available under the Revolver Loan, will be sufficient to fund our operations, expected capital expenditures, and principal and interest payments under our lease and debt obligations through the next 12 months from the issuance date of our financial statements. We intend to refinance that Revolver Loan withBerkshire Bank at the next expiration date. The table below presents selected liquidity and capital measures at the period ended: December 31, March 31, Change (dollars in thousands) 2022 2022 Amount Cash and cash equivalents $ 316$ 1,052 $ (736) Working capital$ 7,242 $ 2,753 $ 4,489 Total debt$ 7,085 $ 7,356 $ (271) Total stockholders' equity$ 15,595 $ 15,264 $ 331
The next table summarizes changes in cash by primary component in the cash flows statements for the nine months ended:
December 31, December 31, Change
(dollars in thousands) 2022 2021 Amount
Operating activities $ 871 $ (1,649) $ 2,520
Investing activities (1,261) (8,232) 6,964
Financing activities (346) 8,313 (8,659)
Net decrease in cash $ (736) $ (1,568) $ 825
Operating activities
Apart from our loan facilities, our primary sources of cash are from accounts
receivable collections. 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 we mark progress with customer
projects and the composition of our accounts receivable collections mix changes
between advance and progress payments, and customer payments made after shipment
of finished goods.
The nine month period ended December 31, 2022 , was generally marked by favorable
project performance progress and delivery schedules that led to timely customer
payments. Cash provided by operating activities for the nine months ended
December 31, 2022 was $0.9 million , as customer cash advances and collections
exceeded cash outflows on both short and long duration projects in-progress.
Cash used in operations for the nine months ended December 31, 2021 was $1.6
million .
Investing activities
In fiscal 2023, we invested approximately $1.3 million in new factory machinery
and equipment through the nine months ended December 31, 2022 . We are limited by
our financial debt covenants and may not spend more than $1.5 million for new
machinery and equipment in the fiscal year. In fiscal 2022, we paid $7.8 million
to acquire the Stadco business in August 2021 and purchased $0.4 million of new
equipment for the nine months ended December 31, 2021 .
Financing activities
During the nine months endedDecember 31, 2022 , we drew down$6.7 million of proceeds under the Revolver Loan and repaid$6.5 million during the same period. We also used$0.5 million of cash to pay down debt principal and make periodic lease payments and pay off certain lease obligations. 30
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For the nine months endedDecember 31, 2021 , we raised approximately$7.2 million from the sale of stock and new debt borrowings to finance theStadco acquisition and related closing costs. In addition, we drew down$2.5 million under the Revolver Loan used to fund the acquisition ofStadco and various operating activities sinceAugust 25, 2021 , and repaid$0.6 million in the third quarter of fiscal 2022. We also paid down principal of$0.7 million on our term debt and finance lease obligations and paid out$0.1 million in debt issue costs. All of the above activity resulted in a net decrease in cash of$0.7 million for the nine months endedDecember 31, 2022 , compared with a net decrease in cash of$1.6 million for the nine months endedDecember 31, 2021 .
Berkshire Bank Loans
OnAugust 25, 2021 , the Company entered into an amended and restated loan agreement withBerkshire Bank , or the "Loan Agreement". Under the Loan Agreement,Berkshire Bank continues as lender of the Ranor Term Loan and the revolving line of credit, or the "Revolver Loan". In addition,Berkshire Bank provided toStadco a term loan in the original amount of$4.0 million , or the "Stadco Term Loan". The proceeds of the original Ranor Term Loan of$2.85 million were previously used to refinance existing mortgage debt ofRanor . The proceeds of the Revolver Loan are used for working capital and general corporate purposes of the Company. The proceeds of the Stadco Term Loan were to be used to support the acquisition ofStadco and refinance existing indebtedness ofStadco . Payments for the original Ranor Term Loan began onJanuary 20, 2017 and until the facility was amended inDecember 2022 , the Company paid monthly installments of$19,260 each, inclusive of interest at a fixed rate of 5.21% per annum. Since the effectiveness of the Amendment, the Company now makes monthly installment payments of$16,601 each, inclusive of interest at a fixed rate of 6.05% per annum. All outstanding principal and accrued interest due and payable on the maturity date. Under the Loan Agreement,Berkshire Bank also makes available toRanor a revolving line of credit with, following certain modifications, a maximum principal amount available of$5.0 million . The Company drew down$6.7 million under the Revolver Loan and repaid$6.5 million of principal during the nine months endedDecember 31, 2022 . There was$1.5 million outstanding under the Revolver Loan atDecember 31, 2022 . Interest-only payments on advances made under the Revolver Loan during the nine months endedDecember 31, 2022 totaled$20,769 at a weighted average interest rate of 4.41%. Unused borrowing capacity onDecember 31, 2022 was approximately$3.5 million . OnAugust 25, 2021 ,Stadco borrowed$4,000,000 fromBerkshire Bank under the Stadco Term Loan. Interest on the Stadco Term Loan is due on unpaid balances beginning onAugust 25, 2021 , at a fixed rate per annum equal to the 7 yearFederal Home Loan Bank of Boston Classic Advance Rate plus 2.25%. SinceSeptember 25, 2021 , and on the 25th day of each month thereafter,Stadco has made and will continue to make monthly payments of principal and interest in the amount of$54,390 each, with all outstanding principal and accrued interest due and payable onAugust 25, 2028 .
Commitments and Contractual Obligations
The following contractual obligations associated with our normal business
activities are expected to result in cash payments in future periods, and
include the following material items at
Our long-term debt obligations, including fixed and variable-rate debt, totaled
?
approximately
We enter into various commitments with suppliers for the purchase of raw
materials and work supplies. Our outstanding unconditional contractual
? commitments, including for the purchase of raw materials and supplies goods,
totaled
These purchase commitments are in the normal course of business.
Our lease obligations, including imputed interest, totaled
? buildings and equipment through 2030, with approximately
annually for each of the next eight years.
We believe our available cash, plus cash expected to be provided by operations,
refundable Employee Retention Tax Credits, and borrowing capacity available
under the Revolver Loan, will be sufficient to fund our operations, expected
capital expenditures, and
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principal and interest payments under our lease and debt obligations through the
next 12 months from the issuance date of our financial statements. There are no
off-balance sheet arrangements as of December 31, 2022 .
EBITDA Non-GAAP Financial Measure
To complement our condensed consolidated statements of operations and comprehensive income (loss) and condensed consolidated statements of cash flows, we use EBITDA, a non-GAAP financial measure. Net (loss) income is the financial measure calculated and presented in accordance withU.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 underU.S. GAAP. We define EBITDA as net income plus interest, income taxes, depreciation, and amortization. The following table provides a reconciliation of EBITDA to net income, the most directly comparableU.S. GAAP measure reported in our condensed consolidated financial statements for periods ended: Three Months ended December 31, Nine Months ended December 31, (dollars in thousands) 2022 2021 Change 2022 2021 Change Net income (loss)$ 134 $ (905) $ 1,039 $ 24 $ 246 $ (222) Income tax expense (benefit) 47 (334) 381 9 (386) 395 Interest expense (1) 94 95 (1) 261 181 80 Depreciation and amortization 550 463
87 1,667 979 688
EBITDA $ 825 $ (681) $ 1,506 $ 1,961 $ 1,020 $ 941 (1) Includes amortization of debt issue costs.
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