TechPrecision Corporation (TPCS) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the TechPrecision discussion of the acquisition of Stadco conference call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Brett Maas of Hayden IR. Sir, the floor is yours.

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 the protection of the Safe Harbor for forward-looking statements as combined -- I'm sorry, 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, September 29, 2021. 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 marks. Alex?

Thank you, Brett. So I think we'd like to start off with the presentation right away. Today's call is about the Stadco acquisition. And we have some key focal points here. Number one, Stadco is a prime turnaround acquisition. Point two, estimated average revenue over last 2 fiscal years is approximately $15.5 million. Point three, there have been significant losses over the last few years. Point four, Stadco key personnel and key assets remain in place. Point five, Stadco business prospects are good. So it brings us to point 6. Really, the whole point is our focus is on the future, okay? So with that, I'd like to start going here. Next page is talking about Stadco a little bit. Established in 1941, it's been in the North Los Angeles area since its inception. The company has expanded several times over its history, currently with 200,000 square foot of temperature-controlled operations. Stadco, the name Stadco was derived from Standard Tool & Die Company, founded in 1941 by Nat Handel. Mr. Handel expanded the business over the next few decades, ultimately selling to the Nazarian family in 1981. The Nazarians sold Stadco to a private equity firm in 2010 for $27 million. Doug Paletz, who had spent 8 years with Stadco, and Bob Parsi, who had spent 12 years with Stadco, left within 2 years of this sale. Stadco's financial condition and results of operations deteriorated under new ownership over the next several years. In November 2014, an investment group led by Doug Paletz and Bob Parsi, acquired Stadco. Upon taking possession, the new management team soon realized that the company was not in as good of a condition as expected and was facing significant liabilities. Stadco was not only financially strapped but locked into production contracts that resulted in significant losses over the next several years as well as financially responsible for damages for a previously defaulted contract. The remaining loss-leading pieces due under the various contracts are ending soon either this year or the beginning of calendar year 2022, is the expectation. From the closing of its acquisition by the recent sellers, Stadco was in serious need of cash, resulting in several financially necessary but punitive transactions. Because of this, Stadco's management had been continually distracted from its core purpose in order to constantly find funds to make payroll and keep suppliers at bay. The Stadco business -- Stadco is a key supplier of large flight-critical components on several high-profile commercial and military aircraft programs, including military helicopters. Stadco has been a critical supplier to a blue-chip customer base that includes some of the largest OEMs and prime contractors in the defense and aerospace industries. Stadco also provides tooling, customized molds fixtures, jigs and dies used in the production of aircraft components. Some of Stadco's largest orders run on multiyear based cycles. Stadco is presently finalizing the latest in a string of recurring long-term production contracts that will last through several years and provide a sound economic base upon which we believe we can grow the company. For some of these contracts, Stadco is the most significant supplier, if not the actual or virtual sole supplier. Going to some high-profile programs here in the military sector, Lockheed Sikorsky CH-53K helicopter. Another one is the Boeing F-15EX, going on to Raytheon Hypersonic Missiles and Lockheed Advanced Aircraft. On the commercial side, we have Boeing Space Launcher system, Lockheed Orion, Blue Origin New Shepard and New Glenn, Sierra Space Dream Chaser. Let's talk a little bit more about flight-capable high-profile programs with Sikorsky. So Stadco has a long history of making critical high-precision parts for the defense and civil aviation industry, national labs as well as various weapons programs and space flight. It's continuing to do so. We expect it's going to continue to do so in the near and mid-future, and has been a prime supplier of parts for the Sikorsky CH-53 helicopter for over 45 years, and continues to be a supplier of critical parts for the current CH-53E, as in Echo model, and the new CH-53K King Stallion heavy-lift helicopter. Sikorsky, on October 20, 2020, announced that it will build 6 additional production CH-53K King Stallion helicopters under a new contract for the U.S. Navy. The aircraft will further support the U.S. Marine Corps and its mission to conduct expeditionary heavy-lift assault transport of armored vehicles, equipment and personnel to support distributed operations deep inland from a sea-based center of operations. The 6 helicopters are part of a 200-aircraft program of record for the U.S. Marine Corps. Their addition makes a total of 24 CH-53K production aircraft now under contract. Under the terms of this most recent contract, known as LRIP, low-rate initial production Lot 4, Sikorsky will begin delivery of the 6 aircraft in January 2024. This 200 aircraft order does not include an expected order from Israel to replace 20 to 25 of its aging helicopters with the CH-53K, as well as a possible order from Germany for up to 70, that's 7-0, of the CH-53K helicopters. Production at Sikorsky is expected to increase to as many as 24 CH-53K helicopters per year over the next several years. On January 25, 2021, the U.S. Navy awarded Sikorsky a contract to build 9 more CH-53K King Stallion helicopters. According to a Naval Air Systems Command statement, the Lot 5 contract includes 9 helicopters for a value of approximately $879 million and an option for a Lot 6 contract worth about $853 million for 9 more helicopters. The Lot 5 low-rate initial production contract increases the number of CH-53Ks on contract to 33. The Lot 5 aircraft are to be delivered in 2024. Moving on to tooling capabilities. We're talking about large-scale, high-precision complex geometry tools, Invar steel and aluminum tools that successfully support composite part manufacturers. I'm going to give you a brief list of tools and molds and jigs. There's layup molds, there's bond ijgs, there's trim tools, drop hammer as well as forming dies, drill jigs, hot form dies, resin transfer molds, fiber placement mandrels, assembly fixtures, master gauges, monolithic graphite molds. These all have been done historically very successfully by Stadco, and we expect to do more in the future. Stadco's decades-long history and success in the design and manufacturing of invar tooling, a versatile, low CTE durable material, which is durable, meaning typically the life of program, provides customers with a reliable and experienced partner in Stadco. Comprehensive fab facilities at Stadco are closely tied into design and engineering, providing maximum flexibility and responsiveness to customers' design iterations. Let's talk a little bit about core capabilities. They include coordination of initial design concepts from the customer with the customer, leading to custom solutions, concurrent engineering as well as materials and process research, NC programming fabrication and machining, quality assurance planning and inspection, coordination of outside contracted processing as well as final assembly on site. Continuing with more core capabilities, we have crane capacity in excess of 50 tons, CNC machining up to 65 feet, large diameter turning capability up to 25 feet in diameter and one of the largest electron beam weld chambers in North America. Stadco have experts in specialized tooling and machine design of medium to large tools. Stadco maintains all the critical tool fab processes in-house, which include detailed material processing, bump forming of face sheets, welding, laser checking, machining for roughing and final machining as well as leak checking. Very extensive equipment list includes six 5-axis milling gantries, 10 horizontal boring mills, two 5-axis vertical contouring mills, 2 horizontal floor mills, 1 vertical floor mill, 4 vertical turret lathes, CNC rotary tables and 25 overhead cranes. The last item I'd like to talk about as far as equipment is going to be a little bit on the electron beam welding as well as inspection. So Stadco has one of the largest electron beam welding machines set up in the United States. This allows Stadco to seamlessly well very thick pieces of titanium and other metals. Using this capability, it has produced the largest structural part for the F-22 fighter plane as well as space shuttle and launch vehicle components for NASA. The electron beam welding machine envelope is 320 by 84 by 78. Again, it's one of the largest in the United States, and is accompanied by a shielded X-ray room, so we can do the X-ray on-site for x-ray inspection. So in summary, Stadco is a prime turnaround acquisition. And our focus is on the future. TechPrecision is proud and honored to serve the United States defense industry, and we are confident that the acquisition of Stadco will enhance our offering to the defense industry and expand our opportunities, both in defense and commercial. We're ready for Q&A. Operator?

[Operator Instructions] We'll take our first question from Robert Balopole with Balopole Investment.

Can you hear me?

We can. We missed your last name.

Balopole. Robert Balopole.

Thank you.

First, I just want to say I'm very grateful for the ongoing turnaround the 2 of you have been engineering. And I'm very impressed with this Stadco deal, how persistent you were, and it looks like it was a very complex transaction, pulling together all these creditors and lenders. And so my hats off to both of you. I do have a question. On one of your press releases, it said on April 3, 2021, an independent machinery and equipment appraisal report estimated that the orderly liquidation value of Stadco was approximately $8,638,300. That figure, is that just the liquidation value of the equipment? Or is that the figure net of Stadco's liabilities?

Now that's just the orderly liquidation value of Stadco's equipment.

Okay. Great. And now it looks like you settled most of Stadco's debts when you acquired them, but did you also assume any material debts?

We put in place a new term loan with Berkshire for $4 million. All other debt was cleared. All other bank debt or any kind of credit facilities like that.

Okay. Great. How many employees are you picking up with Stadco?

Under 100.

Okay. And now you said the average revenue for the past 2 years was about $15.5 million. What kind of utilization rate does that represent?

That's a good question. We ask these questions of ourselves at our Ranor subsidiary. The utilization is quite lumpy. So it's not like a production facility that makes the same thing over and over again, and we make 10,000 of them. We don't even make 100 of each part number. So that's probably a difficult question to answer ever. I'm just being very honest.

Well, let me phrase it -- Let me try to...

Go ahead.

Let me try to phrase it a different way. What kind of revenue are you hoping to achieve from Stadco, going forward? Or what kind of revenue do you think you could generate with the employees and equipment you have on hand now?

Well, let me give you an answer that is a little bit different. So in order to generate more revenue, it probably is going to take more employees, not less employees. We don't plan to keep it static, we plan to grow. As far as forecasting, I haven't been doing much forecasting of the future as what we're trying to target or what we can possibly achieve. That's just not what we do. If we try to, we'd be wrong all the time. Tom, do you have anything to add on forecasting?

We've not provided forecast numbers in the past, no.

Okay.

Okay. I just have one last question. 60 Minutes on Sunday had a big segment on the Chinook helicopter being used to fight forest fires in the Western U.S. And I assume the actual model they were talking about was the Boeing CH-47. And I'm just wondering if Stadco has any kind of history or connections to Boeing's helicopters?

Are you talking about the Chinook?

Yes.

So for the Chinook, I can tell you that it's not part of the high-profile program.

We'll take our next question from Kris Tuttle with IPO Candy.

Yes, I just had 2 questions right now, which is how do you think the business -- the Stadco business looks relative to your existing business in terms of gross margin? Do you think long term, it's above, below or right at the same gross margin level after you've had a chance to work through it?

I'll let Tom handle this one. Are you asking for a forecast?

Yes, it sounds a little bit more like the forecast. We are in very similar types of business with similar customers and although we don't compete. So we -- I would say that we're looking at something like Ranor.

Okay. Yes, again, I'm not asking you to forecast, it's just like for companies in this -- the Stadco line of business is a -- I think your gross margin was around 22-ish percent. Is that reasonable or unreasonable in terms of the longer-term future? That's what I was really trying to get at.

Well, I'd like to see our margins doing a little bit better. So we're always shooting for a higher margin.

Maybe I shouldn't have Tom answering these questions. This is going to be a lot of pressure on me.

Yes. But then, again, they are very similar businesses, very similar processes, very similar customers. So that's -- one thing we liked about the business was that we're not reaching out into something completely different.

And also, I would like to add to that and emphasize, once again that we are not the competitors against each other. So we're not acquiring a competitor. We didn't acquire a competitor. We had acquired a business that's adjacent and complementary and very similar.

Got it. My second question was just we've heard from so many companies lately about challenges in getting materials, parts for their -- to maintain their equipment, of which you have quite a bit. What are your feelings about how affected you may be operating in an environment where you may be constrained? Do you feel like you might be constrained in terms of raw materials, shipping, delivery or parts to complete sort of your plan for the next couple of quarters?

So that's a two-pronged question. One is on materials that go into the product and the other one is the parts for repairing or overhaul of equipment. Am I categorizing the 2-part question correctly? Okay. So the -- for material acquisition, sure, we're at the mercy of whatever is happening in the materials world. Is it significant? I wouldn't say it's significant. I would say also that a large component of it is coming from customers, customer-furnished materials, very similar to Ranor. So usually, when our customers are doing the buying, they have, I don't know, 1,000, 1 million times more -- significantly more buying power than these small businesses that we have 2 of now. So you would think that they have direct contact with the steel mills, with the source...

They will get priority.

And they would get a much higher priority than a small business trying to do the material acquisition itself. So that alone probably mitigates the risk quite significantly. I'm glad you brought that point up. It's -- that was a key tactical piece of why the acquisition is -- really has legs because of customer-furnished material by customers that have a lot higher priority and buying power. The second part of the question talks about parts for equipment. Parts for equipment, overall, we haven't really seen a problem.

[Operator Instructions] We'll take our next question from Mark Gomes with Pipeline.

Gentlemen, congratulations on getting the deal done. Is it safe to say that size of Stadco is similar and its capability similar as Ranor? Employees, machinery base, things like that. Same ballpark?

Yes.

Okay. Great. And what would you characterize as the sort of efficiencies that -- and maybe synergies that you can bring to bear? Of course, Alex, you brought TPCS back from the abyss. And this seems like a company that was heading towards the abyss in a while. Are there things there that you see is -- that your unique skill set are going to be bringing to bear? And if so, what kind of efficiencies and synergies do we have there?

I'm going to defer to Tom again.

Well, we'll look for those opportunities, but we also have a very good management team there that we have a lot of confidence in. We're working more and more with them, and we will look for those type of opportunities to save, to cross-pollinate, to try to help both businesses grow. And both business to introduce opportunities to both companies.

I think this might be an opportunity for me to just reiterate that one of the key focal points was for us, why is Stadco a prime turnaround acquisition was that the Stadco key personnel remain in place. And that's what Tom was alluding to.

And you believe that by shoring up their viability, they can now shift their focus from just keeping their heads above the water to strategic growth initiatives? Is that the read through to that?

Yes.

Okay. Just for my purposes and everyone else on the call that might not know, how important is vendor viability? The fact now that Stadco is under a more viable company's umbrella and you raised a little bit of money so your balance sheet looks nice, it doesn't look like anybody is going out of business. How important is that for your customers and potential customers?

So let's say that -- let's just pick Sikorsky helicopter, the CH-53K, and compare it to the Virginia-Class nuclear attack submarine. On both of these, if a critical component is missing because a vendor is not viable any longer, we wouldn't have a submarine, we wouldn't have a helicopter. And that would really impair the tactical ability to execute missions by the U.S. Navy and the U.S. Marines. So vendor viability is absolutely critical.

Last question. If you look at Stadco from either a maximum revenue potential or current equipment in place perspective, depending on how you want to look at it. I'm not looking for a specific answer, but is it kind of -- would you say that it's a more substantial infrastructure, the bones of this company more or less substantial than it was the last time that it was sold?

I don't see that. How about you, Tom?

I think it's pretty similar. They might have picked up 1 or 2 pieces but it's fairly similar.

But the infrastructure itself, there's not really a lot of difference. At one point in time, they sold it for, what, $27 million?

Yes.

That infrastructure really there has...

Still there.

There isn't much of a difference. It's still there.

Okay. And so it's still there and they still -- they might have added a couple more pieces and now you can take all that and try to do with it what the previous buyers and -- were probably hoping to do. Is that the game plan?

I don't know what the previous buyers were hoping to do because it doesn't look like that went too well.

I would suspect they were hoping to grow, that's what I was getting at.

Okay. Okay. Yes, we plan to do a much better job. I'm not trying to step on them or anything. It's -- we're looking forward to this.

No, they were they and you are you. Thank God for that.

For our next question, we'll return to Robert Balopole with Balopole Investment.

I just had 1 more question about all the stock that was issued, and if there's a lockup period and if so, what that period is. It says 1.5 million shares to Stadco shareholders and debt holders. There was stock issued to 5 crowns and there were stock issued in this pipe. So I'm just wondering what the lockup period is, if any.

Those are highlighted, I believe, in the agreements. But they're not registered shares yet, so I believe there's a time limit on those right now, approximately 6 months.

Okay. So that's the answer, they could be sold after 6 months from the time they're registered?

Well, they're not registered yet. So they can -- I believe they can be -- it's in the agreements of those terms, so I don't want to misspeak here.

I was looking for that agreement on the SEC website, and I didn't find it. Is that something that's been...

Yes, on the 8-K that was filed on August 30. It's at the bottom of the 8-K, it shows all the various agreements.

Very good.

[indiscernible] agreements with the stocks.

Okay. I'll take a look there.

We'll take our next question from Ross Taylor with ARS Investment Partners.

Yes, first, I'm not sure that this is actually Alex Shen on the call, so I think I might need proof of life, but...

I'll have to defer the answer to Tom Sammons, sir.

He'll go back to those normal self in a minute.

Yes, I'm here now. You guys laid out a lot of projects that Stadco is involved with that are either early stage, basically decade-plus long projects, or early-stage companies in the space area. How excited are you at the ability to meaningfully improve the last 2 years average run rate out of that business? I would think from the way the programs you're talking about, that there should be a rather steep natural growth to the revenue curve given the things that you guys are working on and who you're working for.

Absolutely. Really looking forward to it. I mean, these are real programs. And these are obviously blue-chip companies. Our focus is on the future. We're very excited.

And when you look at Stadco, they've been losing money, but they've also been struggling through a lot of issues. How much low-hanging fruit is there that you see that you believe you can grab hold of in here to kind of quickly start to put your stamp on this business as a financial entity? You obviously believe strongly in their ability to produce products. So the problem isn't the product they produce, it's all the other stuff that's gone around it, so how low hanging is that fruit?

Well, like low-hanging fruit also, we would probably equate that to the daily blocking and tackling and tactical execution. So I think now that Stadco's key management doesn't need to -- I think one of the earlier callers was talking about treading water or getting their head -- keeping their heads above water. We've been able to I think, free current management up from that. So we're looking forward to good things.

Okay. And so in looking at this -- one of the things you did, Alex, when you came into TechPrecision, you did engineer that move where you got the suppliers -- like your customers to effectively absorb the cost of the materials, which greatly reduced the drag on working capital at TechPrecision. Is that type of situation currently in place at Stadco? Or would you anticipate putting it in place at Stadco?

Yes. So that's a good catch. I was alluding to the similarities between the 2 companies when an earlier question was posed, talking about the impact of materials as well as parts for equipment. So the impact for materials, both companies -- both subsidiaries, Ranor as well as Stadco, we have customer-furnished material now.

Okay. Cool. That's great because it obviously reduces the working capital drag meaningfully. Australia just jumped the French and went with the U.S., basically U.S. nuclear submarine program, that -- to my efforts, it doesn't appear that Australia has the capability to build or necessarily even finish meaningfully these boats in Australia. Do you see this as an extension in years or an extension in run rate for your submarine class, the Virginia-Class program?

I can honestly tell you I have no idea. I don't have information enough to even tell you that I can't comment.

I mean it would appear that it's either going to increase the life of the program by 50% or increase the annual run rate of the program by 50% or some combination thereof.

I really don't know. I don't have enough information to tell you that I can't comment, right?

It is early days, yes. You look at these companies, you look at historic numbers, it's kind of running at a $33 million combined rate, maybe a little bit more. With the ramp up you guys are -- should be seeing in programs at both sides? I know you won't make projections, but would I be out of line to think that you should be able to do close to $40 million in revenues next year?

Well, that sounds like a projection to me.

No, it just sounds like -- you can just agree with me or you can say no comment, and that's kind of like agreeing with me.

I'll do the no comment without agreeing with you, how's that?

Sounds -- so you think you can do higher. Okay. And lastly, historically, Ranor ran -- when it was running the kind of last time you did -- had a lot of submarine work, your operating margins really were pushing into that 30%, 30-plus percent range. It would seem that -- I would assume, Alex, that you're a better operator than the people who preceded you. So I know you don't want to be stressed and put it back in the corner, but am I -- is it safe to assume that you think you're a better operator than those guys?

Tom accused me of breaking both arms patting myself on the back earlier. So I'll defer to Tom. What do you think, Tom?

Well, I think you bring a certain skill set. And it's not whether one is better than the other, but I hope we can help them improve their margins and the business. And perhaps they can provide us some insight and some help too.

And at the same time, it would seem that you guys should be starting with -- you're seeing money start to flow in this program. It's -- the Virginia program is years behind schedule. And obviously, the U.S. is not finding itself in an easier position tactically and strategically in the Pacific with regard to the need for nuclear subs. So it strikes me as fundamentally, you should be looking at a fairly attractive -- we probably should have crossed the Rubicon, if not, we might be midstream here from an operational standpoint, do you think?

I'm not sure. What's the question exactly?

Basically, revenues. Do you think that the Navy is finally going to kind of start to actually fund and build out the Virginia-Class boats and the Columbia boats now with probably 2, 3 years behind schedule? And the boats in the fleet have a limited life, obviously.

It depends on the release of the actual funding from the government to the prime. So it's hard for us to say.

It does appear that it's speeding up, which is why I asked if you -- if the thought was, you've actually kind of gotten to crossing that line because it does appear that the money is starting to flow much more readily than it has been. Okay. I will pass to some others. I think this is a home run acquisition. And I think that it's really exciting what you guys can do here and what you should be able to do here, operationally, financially. And like I think is -- it looks like we have probably finally turned a corner. And perhaps as Jimmy Carter said, our long national nightmare is over.

[Operator Instructions] We'll take our next question from Richard Greulich with REG Capital Advisors.

Alex, you mentioned that the -- some of the losses contracts are winding down. When you report your quarterly earnings, will you be able to sort of detail the impact of those losses that then will wind down?

Again, I'll defer to Tom.

Yes, we don't generally get into that detail on specific projects. And you'll have -- go ahead.

Would you be able to say now what you think the loss impact will be, for example, over the next quarter or 2?

I cannot say. No, I don't want to forecast that.

Okay. How comfortable are you that you have your hands around sort of what the extent of those loss contracts will be? I mean, whether you say it or not and probably just whether in your own consultations inside, do you feel -- how comfortable are you that you have a pretty good handle that they're not going to be more than what you think they're going to be?

The losses on those contracts?

Yes.

Given that we're at the tail end of those, you usually know where you're at by then. It's when you're entering a new one that's causing you problems, that's when it's hard to judge, but...

Okay. The Stadco management team, to what extent will they have an ownership of TechPrecision shares?

That's spelled out in our -- in the 8-K. There's some debt conversion agreements with the team and then also the shares given to the Stadco purchase.

Does Stadco have net operating loss carryforwards? And to what extent will TechPrecision be able to utilize them?

That's not full year analyzed yet until -- I don't have -- we will present their audited statements over the next couple of years, then we will know for sure what their carryforwards are. And then there's an analysis going forward based on the acquisition of how much we can utilize it as well.

Yes, Alex, in the past, you've indicated the size of the business that Ranor or TechPrecision is pursuing over the next couple of years. How would you characterize the business opportunity size that Stadco is going to be chasing over the next couple of years?

And so just to be sure we're talking about the same thing, I talk about the opportunity size versus the size of the business, per se?

Correct.

So the opportunity size, we're still trying to size that. It's still very early days. We haven't even finished our first audited statements and such on the financial side. And we haven't finished all the customer visits on the customer side. So I think I need to defer that.

For our next question, we'll return to Ross Taylor with ARS Investment Partners.

Just a quick question on recent backlog trends and wins either in -- actually for both Ranor, TechPrecision, and also Stadco. What -- have you seen in the last -- since the end of the last quarter, do you believe that [indiscernible] both is growing? Staying the same?

I don't have those numbers in front of me. We will present the backlog at the end of the quarter.

You have no feel of how it played out during the quarter?

Yes, I don't have those in front of me now.

And there appear to be no further questions at this time.

Thank you, everyone, for your time. Have a good afternoon.

Ladies and gentlemen, this does conclude today's teleconference, and we thank you again for your participation. You may disconnect your lines at this time, and have a great day.