Taylor Devices, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended November 30, 2018; fiscal year ends May 31. The filing covers Taylor Devices and its subsidiary. Interim statements are unaudited and were reviewed by the independent accountant, who expressed no audit opinion.
Financial performance
| Metric | Three months ended Nov. 30, 2018 | Three months ended Nov. 30, 2017 | Six months ended Nov. 30, 2018 | Six months ended Nov. 30, 2017 |
|---|---|---|---|---|
| Net sales | $9.48 million | $4.81 million | $16.79 million | $11.38 million |
| Gross profit | $2.15 million | $1.26 million | $4.46 million | $2.88 million |
| Gross margin | 22.7% | 26.2% | 26.5% | 25.3% |
| Operating income | $430,000 | $35,000 | $1.36 million | $445,000 |
| Net income | $376,000 | $52,000 | $1.12 million | $354,000 |
| Diluted EPS | $0.11 | $0.02 | $0.32 | $0.10 |
- Six-month operating cash flow was $2.43 million, versus cash used of $988,000 in the prior-year period. Capital expenditures were $326,000, down from $737,000. Cash increased to $4.96 million from $2.86 million at May 31, 2018.
- At November 30, total assets were $40.51 million, current assets $29.52 million, current liabilities $5.70 million, and stockholders’ equity $34.81 million. No line-of-credit borrowings were outstanding. The company had a $10 million unsecured demand line, subject to annual renewal and with no express bank obligation to lend.
Changes and operating drivers
- Six-month sales rose 48% and net income rose 215% year over year; second-quarter sales rose 97% and net income rose 620%. Management attributed growth mainly to construction-related demand, including domestic seismic-protection infrastructure and building retrofits. Six-month construction sales increased 76%; aerospace/defense sales increased 23%.
- Six-month sales were 84% U.S., 11% Asia, and 5% other, compared with 73%, 23%, and 4%, respectively, a year earlier. Sales to Asia decreased 29% for the six-month period.
- Six-month gross margin improved to 27% from 25%, but second-quarter gross margin declined to 23% from 26%. Management said the quarterly decline primarily reflected the new revenue standard’s effect on affected revenue, which generated a slight gross loss.
- SG&A rose 27% for six months and 40% for the quarter, driven by higher commissions on increased sales, freight expense, and accrued incentive compensation. SG&A as a share of sales declined for the six-month period to 18% from 21%.
- Backlog was $18.0 million at November 30, including $9.1 million on projects in progress. It was 22% below the $23.1 million at May 31; the filing also reports $20.4 million at November 30, 2017. Inventory increased 7% from May 31 to $12.08 million, with approximately 89% in work-in-process.
Accounting, liquidity, outlook, and risks
- The company adopted ASC 606 on June 1, 2018 using the modified retrospective method, applying it to open contracts. The opening retained-earnings adjustment was $4,999. The filing says adoption increased six-month reported revenue by $1.096 million and does not expect a material effect on fiscal 2019 net earnings. Revenue is recognized either when control transfers or over time for qualifying contracts using costs incurred relative to estimated total costs.
- Management stated that operating cash flows and available borrowing capacity should fund operations and capital improvements for the next 12 months. Planned capital expenditure commitments for that period were $15,000. No formal earnings or revenue guidance was provided; management cautioned that interim results may not indicate full-year results.
- Risks cited include customer capital-budget reductions, shifts in demand and industry capacity, competition and pricing pressure, technology changes that could reduce product demand, and natural disasters affecting demand. Long-term project estimates and inventory obsolescence are also relevant: management recorded an $85,000 obsolescence provision for the six-month period.
- The filing reports no material control changes and says disclosure controls were effective. There were no non-routine legal proceedings disclosed; routine litigation is incidental to the business. The company reported no dividends or profit-sharing benefits for the fiscal year.
Important facts for investors to verify
- Reconcile the second-quarter ASC 606 revenue impact: MD&A cites $850,000, while the note’s income-statement comparison reports $1,022,674. The note also shows a $34,800 reduction in quarterly net income from adoption.
- Track project backlog conversion, work-in-process levels, and the timing of customer billings and collections. At November 30, costs and estimated earnings in excess of billings were $5.95 million; accounts receivable were $4.99 million.
- Assess whether the substantial sales growth and improved six-month profitability persist, given the lower quarterly gross margin, changing geographic/customer mix, and management’s warning about period-to-period volatility.
- Confirm continued access to the demand credit line, which is renewable annually and is not a committed lending obligation.