Taylor Devices, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended November 30, 2019. Comparisons are with the corresponding 2018 periods unless stated otherwise. The company reports products sold to industrial, construction, and aerospace/defense customers.
Financial performance
| Metric | Three months ended Nov. 30, 2019 | Six months ended Nov. 30, 2019 |
|---|---|---|
| Sales | $7.70 million, down 19% | $13.41 million, down 20% |
| Gross profit | $2.64 million, up 23%; gross margin 34% vs. 23% | $4.32 million, down 3%; gross margin 32% vs. 27% |
| Operating income | $1.12 million vs. $0.43 million | $1.51 million, up 11% |
| Net income | $0.92 million vs. $0.38 million; diluted EPS $0.26 vs. $0.11 | $1.27 million, up 14%; diluted EPS $0.37 vs. $0.32 |
| Cash from operations | Not presented quarterly | $7.37 million vs. $2.43 million |
Six-month SG&A declined 9% to $2.82 million, mainly because outside commissions fell 38%; other SG&A increased 4%. Six-month income before taxes was $1.57 million, compared with $1.38 million.
Financial position and liquidity
- At November 30, cash and cash equivalents were $12.12 million, compared with $5.07 million at May 31; short-term investments were $1.06 million. Operating cash flow, including a substantial reduction in costs and estimated earnings in excess of billings, drove the increase.
- Total assets were $43.91 million and stockholders’ equity was $37.65 million. Current assets were $33.70 million and current liabilities $6.25 million.
- The balance sheet presents no debt. Management says operations and borrowing capacity under a bank line of credit should fund operations and capital improvements for the next 12 months; the filing text does not provide a clear line-of-credit amount or availability.
- Six-month capital expenditures were $0.32 million; commitments for the next 12 months totaled $0.60 million, primarily for manufacturing equipment.
- Accounts receivable rose 20% from May to $6.35 million, and days sales outstanding increased from 53 to 74. Management attributes the receivable increase primarily to higher November project billings and expects collection within 12 months.
Material changes and operating trends
- Despite lower sales, margins and earnings improved, particularly in the second quarter. Management attributes higher gross margins primarily to improved margins on domestic construction projects.
- For the first six months, project revenue fell 10% and non-project revenue fell 32%. Sales declined 20% in the U.S. and 39% in Asia. Construction sales declined 20% and aerospace/defense sales 25%, while industrial sales increased 12%.
- Management says the aerospace/defense year-to-date decline reflected timing gaps in mature product deliveries and earlier customer deliveries in the prior period; scheduled shipments resumed in the second quarter. Construction weakness reflected project start delays, Asian tariffs and local competition, and lower-initial-cost competing technologies in U.S. construction.
- Backlog was $17.1 million across 132 open orders at November 30, versus $18.0 million and 130 orders a year earlier. It was 29% above the $13.3 million reported at May 31; $8.0 million was for projects already in progress.
- Revenue recognized over time was 60% of six-month revenue, versus 53% a year earlier. Project revenue depends on estimates of costs to complete; expected contract losses are charged when identified.
Outlook, risks, and other disclosures
- The company provided no specific revenue or earnings guidance. It cautions that interim results and period-to-period changes are not necessarily indicative of full-year or future results.
- Management identifies risks including customer capital-budget reductions, changing demand and industry capacity, competition and pricing pressure, technology changes, and natural disasters. It also notes that competing construction technologies and delayed project starts may weigh on demand; performance-based building-code changes could support demand but are not assured.
- Inventory was $10.80 million, down 4% from May; work in process represented about 82%. The company recorded $90,000 of potential inventory-obsolescence provision during the six-month period and notes exposure to technological obsolescence.
- The company stated that no profit sharing, dividends, or other benefits would be provided during the fiscal year. It reported no material control changes, effective disclosure controls, and no legal proceedings other than routine litigation. The interim financial statements were reviewed by the independent accountant, not audited.
Important facts for investors to verify
- Whether project margins and estimates of remaining contract costs remain consistent as projects progress.
- Collection of the higher receivables balance, the 74-day DSO, and billing and collection of contract assets.
- Backlog conversion, project delays, and the extent to which Asian tariffs and construction competition continue to affect sales.
- Availability and terms of the bank line of credit, which are not quantified in the filing, and funding of the $0.60 million capital-expenditure commitments.
- Inventory recoverability and the adequacy of the obsolescence allowance given the company’s stated technology and product-life-cycle risks.