TechPrecision Corporation (OTC: TPCS) is a manufacturer of precision, large-scale fabricated and machined metal components and systems. The company operates through a wholly-owned subsidiary, Ranor, Inc. The stock is $0.47 today.

Results have been in freefall the last three years. Revenue reached $33 million in 2013 and is $17 million today, while the market cap has declined from $26 million as recently as March 2014 to $12 million today.[1]

So what happened?

In FY2014, net sales declined by 35%. TPCS has a concentrated customer base, and one of its largest customers, Mevion Systems, a start-up medical device company and key customer, accounted for $5.6 million (or ~50%) of the sales decline in 2014. During 2013, Ranor landed an $8.1 million contract with GT Advanced Technologies (GTAT). Within a year, GTAT had filed for bankruptcy, leading to a further loss in revenue. During FY2014, operations at TPCS’s China subsidiary effectively ceased as its largest customer transferred production back to the US, costing TPCS $3 million in revenue.

So what has changed?

In June 2014 (that would be FY2015), Alex Shen was appointed CEO. Previously, Mr. Shen was CEO of Ryerson Mexico, with additional experience at Sumitomo Electric Group and Alcoa’s automotive division. Since taking over as CEO, Mr. Shen has done an incredible turnaround job. In June, TPCS reported its first full profitable year in 5 years. So the key question: is this that change sustainable? I believe so.

Margin expansion: Gross margins have jumped from 12.7% in FY2015 to 32.6% in 2016.

Product Mix: The product mix has changed between FY2012 to FY2016, moving from higher volumes of prototype and long-term construction-type contracts (which resulted in certain contract losses) to repeat business with a shorter production timeline. Peak sales in FY2013 reached $33 million, however, gross margins that year were 20% (vs. 32.6% currently). The decline in sales to Mevion appears to be an example of this strategy: Mevion, a start-up provider of cancer treatment therapy, represented $7.7 million of sales in FY2013, and today represents <$1.7 million. On the other hand, BAE Systems, one of the world’s largest defense companies, represented $4.8 million in sales in 2013, and $3.0 million in 2016, potentially indicative of a higher margin on that contract. One new unknown defense customer now represents $3.5 million in sales (21%), whereas last year, the customer represented less than 10% of sales.

Operating efficiencies: Company explains the margin improvement is due to improved throughput (i.e. operating efficiency) and shipment of higher margin products.

SG&A: FY2016 SG&A expenses were 25% lower YoY due to lower spend on advisory fees, outside services and office costs, all items that are discretionary.

Debt Refinancing: In April, TPCS refinanced its loan and extended its maturity profile to April 2021, while reducing its principal and interest payments for the next three years by ~$1mm. On the Q4 2016 earnings transcript, management guided to ~$700K interest expense this year, which is actually in line with FY2016, but with an improved maturity profile there may be an ability to refinance the facilities at lower rates in the future. Any improvement in debt service would be accretive to EPS.

Additionally, during FY2016, the entire amount of the company’s preferred stock was converted into equity. The impact was around 9% of shares, but it did simplify the capital structure

New Management: Since joining TPCS in June of 2015, Mr. Shen has has turned around operations. CFO Tom Sammons joined in March 2015 and was promoted to CFO in October 2015. Following 15 quarters of losses, TPCS has now put together 3 straight quarters of positive EPS.

Backlog growth

Backlog serves as a proxy for future sales. Backlog has started to improve after falling over the last two years. Company expects it’ll take two years to convert the backlog to sales, with 70 – 80% over next twelve months.

While the company does not provide guidance, I look at the growing backlog as support of the revenue momentum.

Other “Ups”

GTAT Claim: GTAT is a technology company that briefly became newsworthy when it filed for bankruptcy in 2014. It was a supplier of screens for Apple iPhones. GTAT received a $1B contract from Apple, and then TechPrecision received an $8.1 million contract from GTAT to produce components for the GTAT plant. GTAT no longer appears to be a customer of TPCS. Ranor believes it has a $3.7 million unsecured claim against GTAT. It sold its claim for $508K to Citigroup. Should this claim be allowed in full, TPCS will receive an additional $614K, and if the allowed claim is less than $1,692,782, Ranor will need to repay a portion of the $508K received.[2]

GTAT is a technology company that briefly became newsworthy when it filed for bankruptcy in 2014. It was a supplier of screens for Apple iPhones. GTAT received a $1B contract from Apple, and then TechPrecision received an $8.1 million contract from GTAT to produce components for the GTAT plant. GTAT no longer appears to be a customer of TPCS. Ranor believes it has a $3.7 million unsecured claim against GTAT. It sold its claim for $508K to Citigroup. Should this claim be allowed in full, TPCS will receive an additional $614K, and if the allowed claim is less than $1,692,782, Ranor will need to repay a portion of the $508K received.[2] Real Estate: TPCS owns 145,000 square feet of office and manufacturing space in Westminster, MA (~50 outside of Boston). I struggled to come up with a valuation here, but the 10-K has the Land + Buildings and Improvements listed at ~$3.4 million gross. This may provide some floor for the investment

TPCS owns 145,000 square feet of office and manufacturing space in Westminster, MA (~50 outside of Boston). I struggled to come up with a valuation here, but the 10-K has the Land + Buildings and Improvements listed at ~$3.4 million gross. This may provide some floor for the investment NOL: TPCS has $9.3 million in Federal NOLs and $27.2 million state NOLs.[3]

Forecast

I put some basic projections together. The key assumption is I believe the margin expansion we saw this past year is sustainable, and if it is, stock appears pretty well undervalued:[4]

Risks:

2015 was a “blip” and results return to 2011 – 2014 type earnings;

Customer Concentration Risk: Ten largest customers are 96% of revenue, with 3 customers accounting for 50% of sales;

Commodity prices: TPCS is purchasing steel in order to fabricate for customers, any increases or volatility in price may have a material impact;

Energy prices: production facilities are energy-intensive and increased energy prices would have an adverse effect on operations;

This is a microcap penny stock, so may be highly volatile and often illiquid.

[1] TechPrecision has March 31 fiscal year end.

[2] The claims reconciliation process is a long and laborious process. The GTAT bankruptcy court docket is public and you can see some details on the disputed claim. In short, it appears GTAT believes it owes Ranor a trade payable of $894K and undetermined amount related to the contract. Presumably, a settlement between Ranor and GTAT will be reached at some point. Given the incentive the keep the claim above $1.7 million, I’d guess they settle for some amount between $1.7 and $3.7 million. However, timing is unknown and any one time cash event is several months away at the earliest.

[3] $0.8 million of the Federal NOLs were incurred prior to 2006 ownership change, and may be limited. $8.5 million of the NOLs have been incurred post-2006 and have no limitations.

[4] Key assumptions: Low case assumes modest 5% quarterly order growth and 20% revenue conversion of backlog, 33% gross margins and SG&A of $3.6mm. Mid case based on 2018 forecast under same assumptions and 1% incremental SG&A cost for inflation. High case assumes earnings re-rate to come in line with comps (identified as Global Brass & Copper, Insteel Industries, NN Inc., RBC Bearings, Ryerson Holdings).