Techprecision, Corp (TPCS) reported fiscal fourth quarter and full year results last week – the stock has been hammered in the week since.  Yearly results still reflect the order cancellation from the Company’s largest customer, GT Solar, in April 2009.

Although orders have picked up again from GT Solar, this event threw off the Company’s numbers for the entire year.

Financial Results

Sales decreased 25.7% for the fiscal year, with EPS dropping from $.23/share to $.15/share, primarily driven by lower sales and margins.

As part of the order cancellation in April 09, TPCS sold off a large chunk of raw material at much lower margins than usual. I’m anticipating gross margins should return to near 2008/2009 levels, with the Company reported 4th quarter margins of 40.3%.

Total debt to equity has dropped slightly from .7 to .63. The Company also reduced diluted shares outstanding by almost 5m:

On August 14, 2009, the Company entered into a warrant exchange agreement pursuant to which the Company agreed to issue 3,595,472 shares of Series A Convertible Preferred Stock to certain investors in exchange for warrants to purchase 9,320,000 shares of common stock. The warrants carried exercise prices ranging from $0.44 to $0.65 per share.

Owner earnings came in at 1.5m for the fiscal year.

Key Metrics

Revenue Composition

Defense and Nuclear were both up a decent amount in 2010 on a percentage basis. Nuclear was one of the exciting growth prospects I identified in my original writeup of TPCS, so it’s encouraging to see an increase there.

Despite the Company’s efforts to broaden their sales composition, Alternative Energy still makes up 52% of total sales.

Backlog

Order backlog stood at $21.5m on March 31, 2010, an increase of $5.8m from the previous quarter.

Although the raw numbers are down, non-GT Solar backlog has increased significantly, both in dollars and percentage of total backlog. This is a very good sign as the Company tries to mitigate the risk of being dependent on such a large customer.

Conclusion

The market has not treated TPCS kindly this year, as it is very easy to focus on the sharp decrease in sales and income.

Could an order cancellation happen again? It’s possible, but, I think it was largely a one-time event that unfortunately affected the Company for the entire year.  In any case, TPCS’s future outlook is better positioned to handle such an event.

On the positive side, quarterly results show signs of stabilization, with increasing demand from not only GT Solar, but also the other business segments.

According to TPCS’s CEO,

“We have seen three consecutive quarters of steady improvements throughout the industries we serve and increased activity including requests for proposals and expanded sales activity.”

Based on 2010 numbers, I will probably lower my intrinsic value target, but I still think TPCS offers at least 50% upside at its current price. After TPCS reports Q1 numbers, I think the stock will get a boost, as the results will show a much cleaner picture of how the business is executing its strategy.

Disclosure

Long TPCS.

RINO International is a fast growing environmental protection and remediation company. Unlike some of my other investments in low P/B and out-of-favor stocks, RINO has been growing like crazy over the past several years.

I can’t say for certain whether this torrid growth will continue, but sometimes a typical ‘growth’ company can be selling at a cheap price, even if the growth is largely ignored.

Technology Overview

RINO has been around since 2007 and has three primary product lines:

Lamella Inclined Tube Settler Waste Water Treatment System – An advanced waste water treatment system for the iron and steel industry.

Rapid growth and government spending on infrastructure has placed a huge demand on raw materials from these mills – as they ramp up production, this waste water is a byproduct and must be dealt with in some fashion, driving demand for RINO’s products.

Circulating, Fluidized Bed, Flue Gas Desulphurization System – Removes sulphur from flute gas emissions by the sintering process in the production of iron and steel.

Just like the waste water, the iron and steel industry generate a toxic gas that must be handled properly. In 2009, the China’s Ministry of the Interior implemented a formal process for requiring sintering desulpurization equipment.

According to RINO’s CEO,

“We believe that the addressable market for sinter FGD systems specific to RINO is over 200, which includes sinters at least 90m2 in size, and creates a billion dollar plus opportunity for our Company.”

High Temperature Anti-Oxidation System for Hot Rolled Steel – 90% of China’s steel production uses this particular method. Oxidized steel results in lost production output, wasted water & energy, and generates pollution. RINO’s system reduces this loss by over 60%.

Other Products:

Sludge Treatment System –

“We estimate that there is a market of approximately $28.8 billion for the treatment of sludge generated by various municipal wastewater and industrial processing systems in the PRC market”

DXT System –

“Our new DXT operating system utilizes coking waste ammonia in the flue gas to effectively remove the sulphur dioxide from the sinter flue gas and produces ammonia sulfate as a by-product, which can be used as fertilizer.”

Growth Potential

There is no doubt that the Company owns some very exciting technology, with huge ramifications and an extremely large potential market. According to RINO’s press release,

“Pollution problems in China are estimated to cost the country more than $200B annually. The China State Environmental Protection Agency (SEPA) states that over $190B will be spent by industrial companies for cleanup”

As the country grows, especially from an industrial standpoint, RINO benefits from the cleanup required. The Company’s SEC filings put it best:

“Our business is driven more by policy, environmental regulations which are mandating steel manufacturers to install these systems – THEY DON’T HAVE A CHOICE AND THE FINES FOR NOT COMPLYING ARE INCREASING.”

Financial Highlights

RINO has grown extremely rapidly over the past 3 years, and benefits from outstanding margin numbers with median gross, operating, & net margins of 43.6%, 24.8%, and 16% respectively. Topline growth in 2009 was 38%, following a crazy 119% growth rate in 2008.

The Company has a total debt to equity ratio of .07, and a quick and current ratio of 4 and 7.1 respectively. P/E is only 5.83.

Risks

CFO Turnover: The Company hired a new CFO in July 2009 who resigned promptly on May 3, 2010, a potential warning sign. Using the Beneish M Score Formula to test for earnings manipulation, RINO scores -2.48 on the 5 variable test (anything less than -2.2 might signal earnings manipulation).

However, turnover among the executive ranks, especially at the CFO level, is always a cause for concern.

Q1 Earnings: Although the Company reported a nice QoQ EPS growth rate for the latest quarter, there were definite warning signs. The EPS increase was largely driven by a change in the valuation of stock warrants, a variable number that is not tied directly to business operations.

Gross margins declined from 45.5% to 35.3%, as RINO was forced to rely on outsourcing for a good portion of their contracts.

“ Initially, we had to try to fully utilize our own manpower on the contracted projects. However, when we reached our maximum production capacity, we have to outsource some of our products to outside constructors.”

Many companies do not effectively take advantage of such hyper-growth periods, and RINO is no exception. If the outsourcing trend continues, the financial situation will look much different in 2010.

New Sales Model: RINO has been experimenting with a new sales model (maybe pushed by the government?) that opens them up to greater financial risk.

Rather than accepting payment from the iron/steel companies for each project, under the new “Build-Operate-Transfer” or BOT plan, RINO will construct – and pay for – the entire project and then transfer the finished project in the final state.

Read more about in this SeekingAlpha article “Rino International Morphing into a Financier.”

Valuation

Conclusion

RINO has a very attractive product line that is addressing huge potential markets in China. Long-term, China’s infrastructure needs will continue to grow rapidly and RINO is positioned to capitalize on the environmental cleanup that must go along with this growth.

At its current price, I don’t think the Company offers enough margin of safety but I’ll be watching closely, especially if it drops back below $10.

What sort of value would you place on RINO?

Disclosure

No position in RINO at the time of this writing.

American Homepatient, Inc. (AHOM), announced on April 28th that it will be bought out and taken private by its largest shareholder, Highland Capital Management.  This is another example of a special situations investment (see my writeups on the CHDN/UBET merger and VR tender offer as well)

History

The Company has been in financial straits since August 2009, when it effectively breached the covenants for repaying its senior debt.  Since that time, the Company has been acting under short-term forbearance agreements with its lenders.

If the going private transaction is approved, the lenders have agreed to a substantial restructuring of the existing debt, allowing the Company to avoid bankruptcy.

According to this article, Highland Capital offered to buy the company in 2006 for $3.40 per share but was unsuccessful. Now, with the Company’s continued struggles, it doesn’t look like shareholders have much choice but to approve the offer.

Why the Attractive Spread?

Even though this looks like the only option if shareholders want to avoid being wiped out in bankruptcy, the merger still offers attractive an arbitrage opportunity. Why?

The transaction seems more complicated on the surface than a typical going private transaction. I’ve broken down the steps below:

Steps for Merger Completion

1. “This repurchase would not be possible if the Company remained incorporated in Delaware. A Delaware corporation is prohibited from repurchasing its own shares if after giving effect to such purchase its net assets would be less than its capital. Nevada law differs and would permit such a repurchase. Reincorporation in Nevada is, therefore, a necessary step in carrying out the repurchase as contemplated by the Restructuring Support Agreement.”

Under the terms of the merger agreement and restructuring, AHOM cannot legally repurchase its shares as a Delaware corporation. The vote on reincorporation will occur at the company’s annual meeting of shareholders on June 30, 2010.

2. “Conditioned upon approval of the reincorporation by our stockholders, we agreed to carry out the reincorporation.”

Highland owns 48% of outstanding shares and has voted to approve the transaction. With this in mind, the reincorporation is almost guaranteed.

3. “If the reincorporation is approved and carried out as described above, we agreed that AHP Nevada will then commence a self-tender offer to you at $0.67 per share.”

The tender offer will expire after 20 business days.

4. “In the event the self-tender offer is accepted by a number of our stockholders other than Highland and its affiliates holding shares that together with the shares owned by Highland and its affiliates represent at least 90% of the number of its outstanding shares, and subject to other customary closing conditions, AHP Nevada agreed that it would repurchase all of the tendered shares.”

The voting numbers from the shareholder meeting should be watched closely, but I’m assuming this will pass as well.

5. “If the self-tender offer is completed, Highland has agreed to initiate a follow-on merger at the conclusion of the self-tender offer pursuant to which shares of common stock in AHP Nevada not tendered and not held by Highland and its affiliates would be cancelled in exchange for $0.67 per share.”

Any additional shares not tendered will be cashed out at $0.67 per share.

Timeline

The annual meeting of shareholders will occur on June 30, 2010. If shareholders vote to approve the reincorporation, the tender offer will be initiated within 5 business days, and remain open for 20 business days.

Assuming the votes are approved, I’m estimating the transaction should close the second week of August – consistent with the terms of the merger agreement: “if the Merger Closing shall not have occurred on or before August 10, 2010 (the “ Merger Deadline)”

Return

The stock has been trading under $0.60 over the past month, and as low as $0.56.

Final Thoughts

If the transaction is not completed, substantial risk remains, as the stock was trading under $0.20 before the merger announcement.

Although I’m sure some of AHOM’s long-time shareholders are disappointed by this result (especially when compared to the offer from 4 years ago), I think it is the only option for the Company. Several executives have been exercising stock options in the past month, a sign they expect the transaction to go through.

Update – 7-07-10

AHOM announced the launch of the tender offer today.  The transaction seems to be on schedule, with the expiration of the tender offer on August 4.

The main condition that still needs to be satisfied is that >90% of outstanding shares actually tender their shares.  Since 96% of shares voted to approve the merger, I think it’s likely that a similar number will tender their shares during the offer period.

AHOM SEC Filing

Documents

*Update – 8/05/10

Step 4 of the going private transaction – the self tender offer – was supposed to wrap up yesterday.  Greater than 90% of shares needed to be tendered in order to complete the transaction.

Yesterday, AHOM announced an initial count, with 6,848,732 or 87% of shares validly tendered.  Therefore, the company is extending the offer until August 25.

Although it is disappointing that the transaction won’t wrap up this week (from a time value of money standpoint), it seems pretty likely that the company will get the last 3% it needs.

Disclosure

Long AHOM