Techprecision Corp (TPCS) Q4 2023 Earnings Call Transcript

Greetings. Welcome to the TechPrecision Corporation Fourth Quarter Fiscal 2023 Financial Results Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Brett Maas, Managing Partner of Hayden IR. You may begin.

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 protection of the safe harbor and 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, June 15, 2023. 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, the floor is yours.

Brett, thank you. Good afternoon to everyone, and thank you for joining us. The fourth quarter of fiscal 2023 was another strong quarter for our Ranor subsidiary. For fiscal year 2023, Ranor operating results improved across the board when compared to fiscal year 2022 with higher revenue and improved gross margins. Ranor's revenue for fiscal year 2023 was $19.2 million, up from $14.6 million in fiscal year 2022. This is a 32% improvement year-over-year. Ranor's gross profit doubled in fiscal year 2023 to $7.0 million from $3.5 million in fiscal year 2022. The Stadco subsidiary is undergoing a turnaround. Revenue was 58% higher year-over-year, primarily due to having a full year of Stadco financial results. Production at Stadco, however, was hampered by machine downtime, specifically in the fourth quarter. This negatively impacted revenue generation and resulted in increased unabsorbed overhead. These equipment problems experienced during the fourth quarter are now resolved. Since the acquisition of the Stadco subsidiary, there has been significant work on repair and rebuild of Stadco's equipment. We will continue to enhance Stadco's manufacturing capabilities and capacity. We continue our sharp focus on tactical execution and risk mitigation, driving both subsidiaries to fully comprehend, successfully manage, and meet customer expectations, enabling the continuous recapture and continuous retention of customer confidence. We remain highly focused on cash management, a critical piece of risk mitigation and continue to manage and control expenses, capital expenditures, customer advances, progress billings, and final invoicing at shipment. As we successfully retain customer confidence, business prospects remain strong. Our backlog was $44 million at March 31, 2023, $17.7 million at Ranor and $26.3 million at Stadco. Since March, Ranor has secured an additional $6 million in new orders. Now I'd like to turn the call over to our CFO, Tom Sammons, to continue our review of our fourth quarter and fiscal year 2023 results. To you, Tom.

Thank you, Alex. Net sales for the fourth quarter of fiscal year 2023 were $7.5 million or 1% lower when compared to the same quarter a year ago. Cost of sales were $6.7 million or 4% higher than the prior year period, due primarily to lower margin project mix at Ranor and increased unabsorbed overhead at Stadco. Gross profit was $848,000 or 25% lower compared to the same quarter a year ago primarily due to Stadco's production issues during the quarter and the resulting increase in unabsorbed overhead. SG&A expense increased by $174,000 primarily due to a severance accrual and one-time miscellaneous charges such as recruitment fees and accounts receivables reserve. Operating loss was $734,000 compared to an operating loss of $273,000 in the same quarter a year ago. Interest expense for the fourth quarter increased by $7,000 due to increased borrowings under our revolver loan. We ended the quarter with $650,000 outstanding on the revolver. For the 12 months ended March 31, 2023, net sales were $31.4 million compared to $22.3 million in the same period a year ago, an increase of $9.1 million as a result of strong growth at Ranor and reporting a full 12 months of business activity at Stadco. Our cost of sales in fiscal 2023 were $7.6 million higher due primarily to the inclusion of the Stadco business for the full year compared to only 31 weeks in the same period a year ago. Gross profit increased by $1.5 million or 45% higher on a strong operating period of Ranor. A weak operating period of Stadco dampened consolidated gross margins year-over-year as some production issues led to slower throughput. While Ranor's gross margin percentage increased from 24% to 36% in fiscal '23, Stadco's performance resulted in only a slight increase in the consolidated gross margin percentage from 15.2% to 15.6%. SG&A expenses in fiscal 2023 increased by $1.1 million due primarily to the inclusion of Stadco for the full fiscal reporting period. As a result of the foregoing, we recorded an operating loss of $1.1 million compared to an operating loss of $1.6 million in the prior year. Interest expense was $356,000 for fiscal 2023 or $86,000 higher than fiscal 2022. The increase was due primarily to a full year of interest expense recorded on the Stadco term loan and increased borrowings under the revolver loan. Fiscal 2023 includes a one-time $637,000 employee retention tax credit refund. Fiscal 2022 included a gain of $1.3 million for loan forgiveness under the Paycheck Protection Program. Our pre-tax loss was $783,000 for fiscal 2023 compared with a pre-tax loss of $542,000 in fiscal 2022. We recorded a tax provision of $196,000 and reported a net loss of $1 million for fiscal 2023. EBITDA for fiscal 2023 was $1.8 million compared to $1.2 million in the prior fiscal year. Moving on to our financial position. Cash inflow from operating activities totaled $3.1 million, and we used $2.3 million of cash for capital expenditures. Our total debt was $6.1 million at March 31, 2023 compared to $7.4 million at the end of March 31, 2022, as we paid down principal on our term loans and revolver loan. Cash balance at March 31, 2023, was $531,000 compared to $1.1 million at March 2022. Working capital was $5.6 million at March 31, 2023 compared to $2.8 million at March 31, 2022.

Thank you, Tom. For those on the call today who may not be very familiar with our company, I'd like to do a quick review. TechPrecision is a custom manufacturer of precision large-scale fabricated components and precision large-scale machined metal structural components. These components that we manufacture are custom designed. We sell to customers in two main industry sectors: the defense sector and precision industrial, predominantly in the defense sector. TechPrecision is proud and honored to serve the United States defense industry, specifically naval submarine manufacturing through our Ranor subsidiary and military aircraft manufacturing through our Stadco subsidiary. We aim to secure and maintain enduring partnerships with our customers. Overall, in both the Ranor and the Stadco subsidiaries, we continue to see meaningful opportunities in our defense sector as evidenced by the strength of our backlog. We are encouraged by the prospects for growing our revenue and for increasing profitability in future quarters. Finally, a reminder. We do most of our work in industries that are highly sensitive to confidentiality, which precludes 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. Operator, you can open the line for Q&A.

The first question is from Kris Tuttle with Blue Caterpillar.

I have a few questions. I want to start with the Stadco situation. It seems like the downtime was unexpected. I'm interested in learning more about the nature of the failure and your thoughts on whether you could have been notified earlier. Additionally, what type of equipment are we discussing? Did the repairs take longer due to unavailability of parts or labor? I'm trying to gain a better understanding of the situation in relation to the business.

I'm going to be limited in my responses. The significant downtime was certainly unexpected. Could we have prevented it? Probably not. More than one machine was down; several were experiencing issues simultaneously. That's how I would describe the situation.

I mean, we always have equipment going down from time to time. That's just the nature of the business.

The equipment going down is the nature of the business.

It's when multiple ones go down at the same time that you're not used to.

Yes. I think we all understand that. I was just curious, was it a part issue, a training issue? It's odd, right, to have those multiple pieces of equipment go down at the same time.

It is a turnaround. It's not so hard for a turnaround. It's more about if you have a smoothly running company that you can now predict more.

So it was maybe deferred maintenance that maybe wasn't kept up on these machines or...?

Definitely, deferred maintenance would be one of the key factors that contributed.

Okay. And then moving on to some of your recent achievements related to shareholders with the reverse split and the successful uplisting. These are significant achievements. I'm interested in understanding how these developments impact your strategy with the investment community and Investor Relations, as well as any changes in activity you may have noticed. I'm trying to grasp what your next steps will be now that you've laid some of the groundwork to become more investor-ready.

I'm going to pass this one off to Tom Sammons. I don't know that we've seen any real shift from our perspective, but I think we need to reassess or just take a look at how we've been interacting with the shareholders and maybe make some changes there as we go forward.

Have you created a budget for doing more outreach, such as attending additional conferences?

I think that's what we have to look at now that we're kind of past getting the reverse split through and up onto the NASDAQ, yes.

Okay. And my last question, just for clarification, is so the STADCO outages that you guys experienced, those are in the past, and you guys are operating those machines smoothly at this point?

Let me just be really clear. So the equipment problems that I experienced in my Stadco subsidiary during the fourth quarter, those specific ones are now resolved. Does it mean that I've resolved them forever on those specific machines and nothing will ever go wrong? Like Tom alluded to, we always are repairing and maintaining our equipment. Can this happen again? Maybe.

And how much time or money do you think you guys need to get the Stadco plant just using the term loosely like up to your level of satisfaction of being current on maintenance? Anything can go down, I get that. But like if you buy a used car, you're like, no one has done any work on this in the last few years, I need to take it in and really get it taken care of. What's the analysis?

Right. That's just one used car, right? It's many.

Right. Right.

Right. So you have a fleet of all used cars and what's going to go down next, not really sure.

Okay.

With my track record, I think we haven't met before, right, Kris?

Yes, we are.

Okay. So I think my track record has been an unbroken series of wins on turnarounds. I'm not planning on having my turnaround of Stadco fail and be my first loss in my spanning several decades career of being a troubleshooter. So I'm not trying to convince you that I'm such a great operator, but I do operate well. And we have recaptured and retained key customer confidence, which results in more orders and increases in our backlog. So I think the proof is really checking to see the other metrics, not just we have downtime, and we have a blip, a negative blip in our performance, reduced revenue because of reduced throughput. However, the customers, they are on our side. I think that's a good way to characterize it and give good color and background.

I appreciate that, Alex. And my questions were in no way driven by any doubt about you and the team's operating capability. They were just motivated by my desire to get a really good understanding of the business, that's all.

The next question is from Mark Gomes with Pipeline.

Alex, you mentioned capacity when discussing Stadco's issues, specifically regarding overcoming those challenges to boost productivity. Is that correct? If so, could you elaborate on what that entails? Does it mean plans to increase capital expenditures, hire more staff, or enhance the overall output at Stadco beyond the current turnaround?

Well, first, beyond the turnaround, it's not beyond the turnaround. It's part of the turnaround. So I would characterize it that way. And then the specifics that I was talking about, I was talking about there has been and will continue to be significant work on repair and also significant work on rebuilding Stadco's equipment. Those are two different things with that significant work focused on enhancing our capabilities of the machines as well as enhancing capacity and throughput. I hope that's more clear.

It is. Do you anticipate that unanticipated CapEx spending, significant CapEx spending would be required to accomplish that goal over and above what you might have expected a few months ago?

Well, certainly, this fourth quarter blip with multiple downtimes on multiple machines was not anticipated. Will I run into it again? Maybe. Am I doing the right things to anticipate and see what I can avoid? Yes.

I guess my question really was, was this a setback in terms of your expectations of CapEx requirements going forward?

I'm not sure I understand.

Well, you have plans for maybe adding equipment. Obviously, there's always CapEx spending. And I'm just curious if your anticipated CapEx spending forecast change significantly as a result of what happened at Stadco over the last few months.

No.

Okay. And then final question, we're two weeks before the end of this current quarter. You're exuding, I think, a good amount of confidence on this call. Would the operations that have occurred for this point in the quarter contributed to the confidence you're exuding on this call?

Apparently, you and Ross are in cahoots to try to get me to forecast.

Well, it's not a forecast if 2.5 months have already occurred, but your point is taken. But the question stands.

The question does stand. It shall all be revealed in time.

The next question is from Ross Taylor with ARS Investment Partners.

Alex, a couple of things. Now that you wanted to address. A number of calls ago, you indicated you felt that Stadco could achieve margins in line with those that you're seeing at Ranor. Now you've executed really well at Ranor. And in fact, if this company was only Ranor right now, it would probably be worth a lot more than it is at Stadco, although I do think Stadco adds tremendous value to the business. How long is it going to take you to get these margins at Stadco up towards the neighborhood of Ranor? You're currently less than half.

That's a question I find difficult to answer because I'm not certain how long it will take.

Do you still believe that it's achievable in, let's say, a standard investment horizon, which is 12 to 24 months?

Since this involves a couple of unique subsidiaries, I would say this is an atypical view of two unconventional companies. However, considering customer confidence at its current level, we need to execute strategically. We should maintain our focus and tackle challenges gradually. I might be stretching it a bit in my response, but previously, I mentioned my belief that Stadco can achieve margins similar to Ranor.

Ranor-like margins.

I'm just paraphrasing, but that belief is there.

I would like to know if that belief is achievable internally. One frustration for investors, and there are several present, is that we seem to be accepting poor Investor Relations in exchange for promised excellent operating performance. The execution at Ranor supports some level of confidence, but what is happening at Stadco does not. While I see Stadco as a value-added acquisition, I currently believe it is not delivering value for investors. To enhance its value, we need to improve margins significantly and do so quickly. Do your internal models project that Stadco can achieve margins similar to those of Ranor within the next two years?

Are we forecasting, Tom, that in the next two years...

It's not a forecast. Honestly, I'm questioning the accuracy of a previous statement you made. I wasn't the one who said you could get them to Stadco. You did. So I'm asking now. That was months ago, quarters ago. I'm asking now, can you get them there in 24 months?

Right. I don't know.

I think it's essential to get operations up and running. We need to ensure that we derive value from the acquisition and avoid failure. It's been observed that there hasn't been much change since becoming a NASDAQ stock, which frustrates many investors. It's crucial to adopt a more professional approach to investor relations by either bringing in external coverage for the stock or finding better ways to communicate publicly. All the information shared in the past was publicly available. While I understand the sensitivity regarding certain customers, now that the company consists of two businesses, it's vital to discuss the overall company instead of focusing narrowly on specific programs or customers. This approach is important to engage potential investors and make it easy for them to understand and learn about TechPrecision.

I believe that you're talking about the Navy's delay.

The Navy stated that the GAO indicated the Navy is operating and the submarine build program, particularly in Virginia, is significantly behind schedule due to issues with the prime contractors.

I understand your point, Ross, and I want to emphasize that due to the delays, there is increased pressure on our vendors to put in more hours. So, potentially the opposite could be true since there is a genuine need for acceleration and consequently, more work is required.

Are you saying that you are finding the primes that you deal with, coming interested in pushing work on to Ranor?

I think you further define my comment, but I'm just saying that where there's a...

How I define your comments, Alex?

The key issue is the availability of production hours. If the requirement is 100 hours and one party can only provide half of that, then another party needs to step in to fulfill the remaining hours. This creates opportunities for custom shops like ours.

So...

And I think it's evidenced also by the number of POs and the dollar amount of the POs and the strong backlog. It's not dropping.

And recognize, we do not know how many POs you get or do. That's information that's not disclosed to us. So it would be impossible for us to know that you're getting more POs. But what I'm hearing you say is that you are finding opportunities with primes to pick up business that they either they cannot execute or their suppliers cannot execute at this time. Is that correct?

There's opportunity.

Are you seizing those opportunities and converting them into revenue?

I think the backlog shows that.

Ranor demonstrates strong performance. I believe Ranor illustrates that you're operating effectively and showcases the potential of what can be achieved moving forward. At this point, it's crucial for you, as a NASDAQ-listed company, to enhance your visibility and improve relationships. You need to communicate your identity and objectives clearly to others. Additionally, regarding your business, what level of capacity do you think Ranor is currently operating at? Have you added another shift to increase capacity? Would that be economically viable, and is there an opportunity to pursue that?

I'm in that zone of I'm not allowed to discuss that right now.

Okay. Well, I hope you're telling me that you're in discussions with people about increasing capacity so that you can take on business that others cannot fulfill. Aside from the production and machine issues at Stadco, is part of the challenges you're facing related to being in the early stages of several programs? Should we expect your margins to improve naturally as you progress through these? It's widely recognized in the defense industry that initial builds are often the most challenging and have the lowest margins. Is that contributing to the situation at Stadco, or are the issues solely internal?

Is it part of it? Sometimes it's involved in our initial article costs, yes. Is it significant? Not really. The major issue in the fourth quarter was that the equipment downtime was severe due to multiple factors coming together, resulting in a perfect storm, unfortunately.

Do you have a thought on how much revenue you lost in Stadco and idea of if you had not had those unexpected downtimes, would you have been able to see significant improvements, say, 400, 500 basis point operating margin improvement over what you generated?

I think it's probably a good gauge, Tom, to say that we wouldn't have lost money that quarter overall, probably.

The question of revenue, I mean, I'd say...

The revenue was not the main issue. It was significantly reduced, and the unabsorbed portion became a major factor. What we really need to do is reach a critical mass, which we fell below for that quarter.

Yes, I mean, you have a combination of these two things where Q2, Q3, the revenue was up around 3.7. You get to Q4, it dropped to about 2.7.

$1 million off.

And you're not getting absorption.

Several years ago, a Stadco executive mentioned that Stadco generated $101.5 million in revenue per CH-53K. I came across this information, but I won’t ask for your thoughts on it. However, with the program starting to ramp up, Sikorsky expects to sell around 200 units to the Marines, over 25 to the Israelis, and at least 75 to foreign governments. Shouldn't we now begin to see a significant increase in that number due to the program? Shouldn’t revenues at Stadco start to show progress reflecting the advancements Sikorsky is experiencing with the CH-53K?

I wish it would. Should it? Well, I think there's a lot of factors that aren't in my control at Stadco. Well, that are customer-related. So I can't really comment on that.

The demand is there.

Obviously, the demand is there. The PO quantities are obviously there. The funding for the POs to Stadco is all there. That's why the backlog is firm. These are firm orders. And that is a question of timing. So I just don't know how to answer it all, and I hesitate to talk about what Sikorsky is doing.

I mean, Sikorsky tells us what they're doing and maybe tells us what they have a build rate program on. So these aren't great mysteries. This is publicly available information. I understand that you have some trouble at times talking about it, but this is part of what I think we need to address and more effective shareholder relations effort is the ability to get people and point people to the publicly available information so they can make educated, informed decisions on what's happening inside this company.

The next question is from Richard Greulich with REG Capital Advisors.

First of all, Tom, thank you for the efforts you've put forward over the last several years and in dealing with, and good luck in the future.

Thank you, Richard. Appreciate that.

I have several questions. I always enjoy listening to Ross because he brings up interesting points, which gives me time to think of even more questions. So, Ranor, the gross margin was 30%. Do you see any potential for improving that margin from here?

You're talking about the quarterly gross margin?

Yes.

Yes. We see improvement. We have done better than that in prior quarters. It will go up and down depending upon the mix of the product we have, is one of the major factors. The business is lumpy.

Understood. But as your business grows over the next few years, I guess my question is, can it get up to 35% on an annualized 12-month basis, do you think? That all the question.

Given the variability of the business and the inconsistent interactions with our customers, it may be challenging to predict that. It is possible at times, but it really depends, and that's the most accurate response. Do we strive for that? Absolutely.

Well, Ranor was 36% on average for this fiscal year for 2023.

Right.

So it's definitely doable.

Sure.

So if there's increased interest perhaps on either the primes part of segmenting business from them or perhaps signing business to you from other subs...

You're going in that zone where I told Ross that I'm in that zone where I can't talk about it. I'm sorry.

Okay. That's okay. But I guess the thrust of my question, that's not evident in the backlog numbers at the end of the quarter. In other words, like the backlog was basically flat quarter-to-quarter. And so...

I understand that. What I was trying to say to Ross is that I believe Ross mentioned that publicly available information suggests the Navy is behind. However, our backlog is not decreasing; it remains steady and is even improving in some areas. That's the point I wanted to emphasize, highlighting that there are opportunities here.

Yes. But the backlog does go up and down.

It does go up and down but not significantly down to the point where it matches up to the publicly available information that the Navy is years behind.

But you mentioned that we brought in $6 million of POs so far in this quarter.

Correct.

Which would exceed our revenue, which tends to put us back up a little bit.

That's right.

It is not fluid. It is not smooth.

It's not a one-to-one relationship with the delays on the Navy side versus a lack of capture of new POs and new opportunities on TechPrecision's side. We…

Are you seeing more opportunities for business to capture now compared to 12 months ago because of that? It's a qualitative comment.

Holistically, I'm certainly not seeing less opportunity.

Okay.

Yes, that's why I was trying to characterize to Ross' earlier question also. There's no diminishing opportunity.

Yes. So let me turn to then Stadco. So you said the Stadco problems that occurred in the quarter, those have been solved. And of course, it could be others. But in solving them during the quarter, will there still be in the current quarter some impact from the problems impacting it?

Those problems that occurred last quarter are now resolved.

Will there be any lingering impact from those issues in the current quarter or were they resolved during the last quarter?

I deliberately avoided discussing that because we're still working on it. I try not to make predictions or set expectations, as that’s not my approach. I focus on identifying and solving problems one at a time, and I have successfully resolved those issues.

Okay. So let's look at SG&A expenses. Prior to the Stadco acquisition, they were running around, I think, $600,000, $700,000 a quarter. Now they're $1 million higher. So is that $1 million SG&A increase at Stadco itself?

Well, when we said they're $1 million over, I mean, we had, what, six, seven months of Stadco last year. So part of the increase is the increased number of months with Stadco.

Full year.

Full year. And then also, we had a lot of one-time expense, especially earlier in the year with the acquisition. We're going through the audit last year, we're going through everything else that we had gone through. There were certain one-time expenses that we had kind of talked about before that impacted this.

But I'm looking at...

One second, Rich. So Tom, I think what we're talking about here is that the SG&A expenses in fiscal '23 increased by $1.1 million compared to prior year.

Yes.

And this is due primarily because we included Stadco for the full 12 months.

Right. And we’ve had…

That's the primary driver.

But I'm looking at on a quarterly basis. On a quarterly basis, before the acquisition of Stadco, SG&A, I think, was running at like $600,000, $700,000 a year. And now like, this last quarter, it's running at $1.6 million.

Yes. We were about, I think, prior to the acquisition, about $750,000. So we were $2.8 million to $3 million a year.

$3 million a year.

Yes. I think we had times where we were a little bit below that.

I guess I'm surprised that Stadco's SG&A is probably more than Ranor's is.

Well, there were one-time expenses.

But even right now, is what I'm saying.

No, our quarter this year was challenging. We've incurred a lot of additional expenses over the last two years, particularly related to legal and accounting costs, as well as expenses associated with listing on NASDAQ and executing a reverse split. This increased activity has resulted in higher costs, particularly for our outside contractors and service providers. However, we expect these costs to begin decreasing soon.

I think we need to answer the intent of Rich's question is STADCO SG&A costing us more than expected versus Ranor. And your answer is not really. We had all these different expenses that added up. So mixed, it looked like that, but a lot of it was not related to Stadco.

It's not Stadco's SG&A.

Yes, that was really...

Just trying to apologize.

Okay. The prior question regarding precision industrial, are there opportunities there? Are you seeking them? Are you utilizing them?

We're certainly open to opportunities. We're not saying no to them.

Yes. Are there some that loom for you to go after at this point?

Well, certainly. That's what I mean. I'm not saying no to them. I'm open to those opportunities. If I'm open to them, that means I'm actively pursuing, yes. That's what open means.

We have no further questions. We have reached the end of the question-and-answer session. This concludes today's conference, and you may disconnect your lines at this time. Thank you.

Thank you, everyone. Have a great day.

Thank you.