Earnings Call Transcript - TPCS Q2 2025

Operator, Operator

Welcome to the TechPrecision Corporation Fiscal Year 2025 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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.

Brett Maas, Managing Partner of Hayden IR

Thank you. On the call today is Alex Shen, Chief Executive Officer and Richard Roomberg, 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 the protection of the Safe Harbor from 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 of the company's future performance represent management's estimates as of today, January 21, 2025. The acquisition 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.

Alex Shen, CEO

Thank you, Brett. Good afternoon to everyone, and thank you for joining us. As previously disclosed, the company held its Annual Meeting of Stockholders on December 19, 2024. And as a result, six directors were elected: Andy Levy, John Moore, Walter Schenker, Alex Shen, General Gene Renaud, and Rob Straus. On December 23, 2024, the Board appointed by unanimous vote General Gene Renaud to serve as Chair of the Board and Rob Straus to serve as Vice Chair of the Board. Effective January 13, 2025, John Moore resigned as a member of the Board of Directors to focus on his other responsibilities. The Board has decided not to fill the vacancy created by Mr. Moore's resignation at this time. The composition of committees of the Board is as follows: The audit committee members are Andy Levy, General Gene Renaud, and Walter Schenker. Walter Schenker is the Chair. The compensation committee members are Andy Levy and Rob Strauss. Andy Levy is the Compensation Committee Chair. The Nominating and Governance Committee members are General Gene Renaud, Walter Schenker, and Rob Straus. Rob Straus is the Chair of the Nominating and Governance Committee. I would like to share some remarks from our Board Chair, General Gene Renaud, and our Board Vice Chair, Rob Straus. The Board of Directors is committed to improving transparency for its stockholders, including the return to timely SEC filings. Enhanced accountability policies should drive better financial performance. A renewed focus on existing operations is an immediate priority, especially at Stadco, but also at Ranor. All directors are working constructively together to maximize stockholder value. As for myself as the CEO and the Board Director, I'm looking forward to forging ahead, constructively and with alignment. As a matter of fact, General Gene Renaud and Rob Strauss will both be on-site at Stadco on February 10 for an in-person review of the operations to help establish a firm understanding and enable a fact-based operational focus. One item additionally, on January 15, 2025, Richard Roomberg, Chief Financial Officer of the company, notified the company that he will resign from all roles with the company and its subsidiaries effective as of February 14, 2025. Mr. Roomberg's resignation is not due to any disagreement with the company on any matter related to the company's operations, policies, or practices. Mr. Roomberg's replacement will be announced in due course. Okay, next we return to our earnings call format. Starting off with the second quarter at Stadco, revenue was $4.2 million, a 17% increase compared to the same period a year ago. Second quarter Ranor revenue was $4.8 million compared to $4.5 million a year ago. The second quarter consolidated revenue was $8.9 million, 12% higher when compared to revenue of $8 million for the same period one year ago. Consolidated gross profit was 2% lower when compared to the same period a year ago. The second Stadco operating loss of $0.8 million resulted from unexpected higher manufacturing costs on one-off projects, legacy pricing problems on core business, machine breakdowns in the quarter that disrupted expected throughput, and under-absorbed overhead costs. Ranor had an operating profit of $1 million in the second quarter, primarily due to a favorable project mix. Customer confidence remains high as our consolidated backlog was $48.6 million at September 30, 2024. We expect to deliver our strong backlog over the course of the next one to three fiscal years with gross margin expansion. 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. And now I would like to turn the call over to our CFO, Richard Roomberg to continue with the review of our Q2 results.

Richard Roomberg, CFO

Thank you, Alex. As Alex stated, consolidated revenue for the second quarter of fiscal year 2025 was $8.9 million, 12% higher when compared to $8 million in the same quarter a year ago. Consolidated cost of revenue was $7.9 million, 14% higher than the prior year period, due primarily to higher production costs and under-absorbed overhead at Stadco. Consolidated gross profit was $1 million or 2% lower compared to the same quarter a year ago. SG&A expense decreased by $0.1 million primarily due to the decrease in spending for outside advisory services. Operating loss was $0.5 million for the second quarter of fiscal 2025, an improvement when compared to the same period a year ago as Ranor turned in a strong performance in Q2. Interest expense decreased by approximately $38,000 due to lower borrowing levels under our revolving loan. Net loss for the quarter was $0.6 million compared to $0.5 million in the same period a year ago. Revenue was $16.9 million for the six months ended, a 10% increase over the same period a year ago as revenue increased $1.3 million or 19% at Stadco. Cost of revenue increased by $2.1 million as a result of higher production costs at Stadco. Gross profit and gross margin both decreased due to those higher production costs. SG&A increased by 6% primarily due to a change in fair value for the Votaw breakup fee. Operating loss expanded as a result of the breakup fee and Stadco’s higher production costs. Interest expense increased slightly by 1% as overall interest costs were virtually equal to the same period a year ago. Net loss was $2.1 million due to recurring losses at Stadco. Moving on to our financial position, proceeds from a private placement in July provided $1.8 million. Our total debt was $7.1 million on September 30, 2024, as compared to $7.6 million on March 31, 2024. Cash balance as of September 30, 2024 was $132,000 and availability under the revolver was $1.1 million. Working capital was negative $1.5 million at September 30, 2024 as our bank debt is classified as current due to debt covenant violations. With that, I will now turn the call back over to Alex.

Alex Shen, CEO

Thank you, Richard. For those on the call who may not be very familiar with our company, TechPrecision, our two subsidiaries, Ranor and Stadco, are custom manufacturers of precision large-scale fabricated metal components and precision large-scale machined metal components. The components that we manufacture are customer designed. We sell to customers in two main industry sectors, defense and precision industrial markets, predominantly defense. 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 TechPrecision’s specific environment might discuss. Please understand there are real limits as to what I can discuss, and sometimes those limits do change. 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 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.

Operator, Operator

Please open the line for Q&A.

Ross Taylor, Analyst

Thank you. And first, it's nice to actually have a reemergence of our calls. It's been a long time out. I'm not sure I even recognized your voice when you came on here. I would like to say that I'm really excited about the opportunity that currently exists to rebuild the bridge to the company's shareholders and the future investors. It sounds like it's going to be something that's an important step and it's been long overdue. So I think that's, as I said, really exciting and should help us greatly going forward. Second, I wanted to say I thought the message sent by shareholders was exceptionally clear. Only two candidates got over 40% of the vote. And that, to me, sent a very clear mandate. It said shareholders want change. They want things done to help improve the relationship we have with you, the leadership team. And I'm looking forward to seeing the fruits of that. And that means I hope that all directors can work to support and further the initiative that the new leadership team wants to put in place. The company has dug a pretty deep hole for its shareholders over the last 12 months to 15 months, and I think it's time we start doing something proactively to get out of it. Operating questions I wanted to ask you: how long and where do you think it's going to take what's going to take to get Stadco to a level where it can produce a sustained level of profitability?

Alex Shen, CEO

Well, we're not at profitability yet. So I think the first few steps are really needing to, first of all, let's concentrate on basics and what's in front of me and I'll try to step through the steps. The first thing on cash management, we are succeeding in cash management and that part of it is going well. We need to continue to be focused on more profit for Stadco. So as I alluded to in my remarks, the lack of profits are coming from four sectors that I have made comments on today. The first one talks about pricing unexpected costs on one-off projects. So we need to do either a better job on organizing ourselves to predict better. And also, we need to perhaps not do those, and that needs a good hard look to make sure. And we'll be engaging more thoroughly from the front end to make sure we get those. But that is a problem that we've identified to ourselves that we want to be very transparent and identify to our shareholders on the call today as well. So that's one. On legacy pricing problems on the…

Ross Taylor, Analyst

sort of one-off projects we're talking about. I mean, investors have tended to focus on instead those two major programs.

Alex Shen, CEO

I'm sorry Ross, you're coming in a little muffled.

Ross Taylor, Analyst

Okay. Can you explain, talk a little more about the one-offs, what are they? Because investors tend to see Stadco as really a play on the F-15EX and the CH-53K. And those are big projects that appear to be moving rapidly towards run rate ramps where each would be producing over 20 a year. And so I'm curious, though. I have not heard a great deal of talk in the past about one-offs. So I'm curious. What type of business are these in nature? How big are they? And was this just a case where you bid badly on them, or were they more complicated? What was it that caused the losses there?

Alex Shen, CEO

Let me break down your questions into manageable parts. You're correct regarding the F-15EX and CH-53K Sikorsky Marine helicopters; we consider these core, recurring business rather than one-off projects. One-off projects, like those associated with Stadco, involve parts that are used in flight and the tools required to create those parts. For instance, tools are considered one-off projects due to their sporadic demand, appearing only occasionally and not being repeated often. There are only a limited number of tools needed for the production of multiple parts, making them a prime example of a one-off. Another example would be the additional work required to fill in gaps caused by inconsistent material availability between different builds of helicopter main gearbox parts. These are likely two clear instances of one-off projects.

Ross Taylor, Analyst

Where the problems…

Alex Shen, CEO

The issues you're inquiring about may relate to pricing. When we don't engage in one-off projects and lack historical data, we do our best to analyze the information provided by our customers and base our quotes on the most reliable data available. Are pricing issues present? Occasionally, yes. Is there insufficient or constantly changing information from the customer? Sometimes that happens too. Each case is unique. Since these are one-off situations, they don't easily reveal patterns that might repeat, making each one distinct and necessitating evaluation based on its specific circumstances. Some situations may also evolve over time. About our ability to address detected problems, whether we can possibly return the solution to the customer, it varies with the situation. The response isn't a straightforward yes or no. It requires more steps on both the initial and intermediary fronts to pinpoint these issues and involve the customer in resolving them before it's too late. We need to exercise more diligence throughout the process. As Stadco moves forward with its turnaround, we are gradually restoring capabilities lost over a decade of decline and bringing back skilled personnel recognized for their expertise. Progress is being made, but we need to accelerate our efforts. Personally, I feel a strong urge to improve; I want the turnaround at Stadco to progress more rapidly and consistently, allowing us to reach a point of breakeven and begin to show positive results in the near future. I apologize for the lengthy response.

Ross Taylor, Analyst

I will tell you I already see a change in how you're approaching these calls, and I want to say thank you because I think this is a change and it's important. So I appreciate the thoughtfulness you're giving to your answers.

Alex Shen, CEO

Thank you. I'd like to elaborate on the points I made earlier. During my opening remarks, I discussed four points, and the third point addressed machine breakdowns this quarter that affected our expected throughput. These breakdowns have contributed to under-absorbed overhead costs, which may continue based on fluctuations in the business and varying product mixes. It's important for us to minimize these costs as much as possible, although completely eliminating them is quite challenging. This doesn’t stop us from striving to reduce them. We're focused on identifying actions to address machines that have issues. Each quarter, we diligently work to resolve the problems that arise. We're seeing improvements as we intensify our efforts to identify, fix, categorize, and prioritize these issues. Additionally, we sometimes replace machines if necessary, but we must be prudent with our resources and prioritize addressing the most impactful problems rather than simply reacting to the most vocal ones. We will keep this focus and continue to provide updates on our progress. I wanted to clarify this point.

Ross Taylor, Analyst

Right. And you had machine downtime, and this is the September-ending quarter you're talking about. So therefore, I would assume that you were able to fix that in the following quarter and that we're now at a state where the manufacturing plant is operating as you would hope it to be operating?

Alex Shen, CEO

I think this is taking longer because the things that we fix generally are staying fairly fixed. But after about 14 years of decline and delayed maintenance through all that, more than a decade, almost 1.5 decades, certain other things go wrong. So you make a machine robust on the left side, and something goes wrong on the right side. I'm oversimplifying, of course. But to have it all balance out and be better is taking some time. We are doing our best. We'll continue to report on that and make things more clear.

Ross Taylor, Analyst

Are you at a place operationally where you can meet the demands of the Marine Corps, the Navy/Marine Corps, and the Air Force to produce the components they need you to produce to get F-15EX and CH-53Ks up to the projected run rate?

Alex Shen, CEO

Can we achieve the projected run rates? The straightforward answer is yes. How are we accomplishing this? We are proceeding with great caution, as we need to consider performance over time rather than focusing on isolated periods where results may not look favorable. Over a 12 to 24-month timeframe, can we meet the demand? Absolutely. While a poor quarter may indicate we didn't meet demand during that time, it's important to note that a single underperformance in a month or week doesn't define our overall capabilities across a 12 to 24-month period. I hope this explanation is clear.

Ross Taylor, Analyst

No, it does. There's clearly a variation. However, if I drive up the Merrit Parkway to the Sikorsky plant where they are producing the CH-53K, the components will not be a limiting factor in their ability to produce at the rate necessary over the next few years, which is what I understand you to be saying.

Alex Shen, CEO

As usual, you hear very well.

Ross Taylor, Analyst

My wife doesn't think so, but okay. Away from that, when you talk about those programs, I would assume that at run rate, they would change the concern about unabsorbed overhead because they would generate enough revenue to absorb that. Is that correct?

Alex Shen, CEO

It will help with the unabsorbed overhead, yes. However, there are fluctuations within these core projects themselves. As I mentioned earlier, completely eliminating it is probably less realistic; the focus should be on minimizing it as much as possible.

Ross Taylor, Analyst

And also, I hear you saying we should probably look at the company more on an annual year run rate as opposed to a quarterly run rate basis because you kind of think, if they're producing 24 CH-53K, that's 2 a month. And in reality, it's not always going to be that precise. Some months, it might be 1. Some months, it might be 3 or 4 or something of that nature. And that's something that I hear you're saying is going to impact quarter-to-quarter. But over a 12-month period, that should even out.

Alex Shen, CEO

Right. You're not going to find this in the papers as the guy that stopped production. That has not happened.

Ross Taylor, Analyst

Good. I want to quickly shift over to Ranor. Huntington Ingalls mentioned consolidating its suppliers. Are you finding opportunities in this area? Additionally, are your customers, including those at Stadco and Ranor, asking you to take on more project responsibility to address the production bottlenecks affecting the submarine program?

Alex Shen, CEO

Let me answer that with a different answer. And I think you'll be able to glean what I'm able to say with what I'm able to say. So we have secured three tranches of supplier development funding. And the third tranche is on the way to being fully funded. And this is a very important initiative that has a lot of eyeballs on it from both major shipyards, Newport News Shipbuilding as well as Electric Boat. The whole notion is to not add new capability as much as adding capacity to Ranor and adding a backup capability to Ranor with multiple options, in case there's a bottleneck at Ranor, to relieve that bottleneck by funding equipment grants to Ranor to put in redundant second, even third, machines for more capacity. So those efforts have been underway for a number of years at Ranor and are bearing fruit now. I hope that answers your question.

Ross Taylor, Analyst

Yes. And do they compensate you for that? You're not required to manage significant unabsorbed overhead to avoid any issues?

Alex Shen, CEO

So the unabsorbed overhead are all labor hours related and not idle CapEx investment related. So if we parse that out to the CapEx, those are CapEx grants that come from the U.S. government, through the Navy, and through organizations that fund us. That's it.

Ross Taylor, Analyst

Great. I will let others ask questions. I do want to mention that I notice a different tone from you. I feel that you're more responsive and I'm having to spar less with you, Alex. Hopefully, this next year will help fix a lot of the damage from the last year. Thank you.

Alex Shen, CEO

Thank you.

Operator, Operator

Thank you. That concludes our Q&A session. I will now hand the conference back to management for closing remarks. Please go ahead.

Alex Shen, CEO

Thank you, everyone. Have a great day.

Operator, Operator

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.