Taylor Devices, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended August 31, 2018. Taylor Devices sells to industrial, construction, and aerospace/defense customers. Financial statements are unaudited interim statements; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $7.314 million | $6.568 million | +11% |
| Gross profit | $2.306 million | $1.618 million | +43% |
| Gross margin | 31.5% | 24.6% | +6.9 percentage points |
| Operating income | $932,000 | $410,000 | +127% |
| Net income | $741,000 | $302,000 | +145% |
| Diluted EPS | $0.21 | $0.09 | — |
| Operating cash flow | $4.357 million | $(983,000) | Improved |
| Capital expenditures | $100,000 | $621,000 | Lower |
SG&A rose 14% to $1.375 million, including higher commissions, marketing, and freight costs. The company attributed improved gross margin mainly to sales mix: domestic and aerospace/defense sales generally carry higher margins than export and construction sales.
Liquidity and balance sheet
- Cash and cash equivalents were $7.121 million at August 31, up from $2.858 million at May 31, 2018. Operating cash flow benefited notably from lower receivables and contract assets.
- Current assets were $30.320 million and current liabilities $6.975 million. The company reported no long-term debt and no balance drawn on its unsecured $10 million demand line of credit. The facility is subject to annual renewal and the bank is not expressly required to lend.
- Inventory increased 13% from fiscal year-end to $12.760 million, primarily work in process. Management said much of the increase reflected adoption of the new revenue standard and expected the effect to reverse as affected products ship.
- Receivables were $4.829 million, down 23% from year-end; days sales outstanding fell from 88 to 59. Contract assets (costs and estimated earnings in excess of billings) were $4.262 million, and contract liabilities (billings in excess of costs and estimated earnings) were $1.846 million. Management expected collection or billing of these balances within 12 months.
- Management believed operating cash flow and available borrowing capacity would fund operations and capital improvements for the next 12 months. Capital expenditure commitments were $120,000 over the next 12 months.
Period comparison and business developments
- Long-term project revenue fell 17% year over year, with 27 projects in process during the quarter versus 34 a year earlier. Non-project revenue rose 62%.
- U.S. sales increased 37%; sales to Asia decreased 54%. Aerospace/defense sales increased 43%, while sales to building/bridge construction customers fell 3% and industrial sales fell 19%. Sales mix shifted to aerospace/defense (44% of sales versus 34%) and away from construction (50% versus 57%) and industrial (6% versus 9%).
- Backlog was $22.6 million at August 31, compared with $21.6 million a year earlier and $23.1 million at May 31, 2018. Open orders declined 16% year over year to 118. The filing says $11.9 million of backlog related to projects already in progress.
Accounting, outlook, and risks
- The company adopted ASC 606 revenue recognition on June 1, 2018 using the modified retrospective method. The transition increased opening retained earnings by $4,999. For the quarter, adoption increased reported sales by $73,443 and net income by $29,801 versus results without adoption; prior-year figures were not restated.
- The filing provides no specific earnings or sales guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results and that backlog, revenue, commissions, margins, and earnings fluctuate.
- Forward-looking risks identified include reduced customer capital budgets, changing demand and industry capacity, competition and pricing pressure, technology advances that reduce product demand, and natural disasters affecting demand. The filing reports routine litigation incidental to the business and no other legal proceedings.
- Management identified potential technological obsolescence in maintenance and other inventory; it maintains an obsolescence allowance and reworks slow-moving inventory where applicable. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the shift toward domestic and aerospace/defense sales—and the resulting margin improvement—continues.
- Whether backlog converts to shipments and cash on schedule, particularly given fewer open orders and the substantial work-in-process balance.
- Whether the expected reversal of ASC 606-related inventory and customer-advance effects occurs as products ship.
- Whether receivables, retainage, contract assets, and inventory are collected, billed, or converted as management expects.
- The availability and renewal terms of the demand credit line, which has no outstanding balance but does not obligate the bank to lend.