Taylor Devices, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended August 31, 2015, the first quarter of the company’s fiscal year. Taylor Devices manufactures products serving construction, aerospace/defense, and industrial customers. The interim financial statements are unaudited; the independent accountants performed a review, not an audit.
Financial results
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $9.473 million | $6.551 million | +45% |
| Gross profit | $3.375 million | $1.685 million | +100% |
| Operating income | $1.548 million | $598,428 | +159% |
| Income before taxes | $1.552 million | $602,306 | +$949,000 |
| Net income | $1.010 million | $392,306 | +157% |
| Basic and diluted EPS | $0.30 | $0.12 | +$0.18 |
Gross margin was approximately 35.6%, versus 25.7%; operating margin was approximately 16.3%, versus 9.1%; and net margin was approximately 10.7%, versus 6.0%. SG&A rose 68% to $1.827 million, including an 89% increase in outside commissions and a 60% increase in other SG&A.
Operating cash flow was negative $165,798, compared with positive $815,682 a year earlier. Capital expenditures were $298,664, versus $110,388. Cash decreased by $396,639 during the quarter to $4.499 million.
At August 31, 2015, current assets were $25.520 million and current liabilities were $7.280 million, for working capital of approximately $18.240 million. The company reported $628,785 in long-term liabilities. No balance was outstanding on its $6 million demand line of credit; the full unused amount was available under debt covenants. Stockholders’ equity was $26.590 million.
Material changes and operating drivers
- Management attributed higher revenue to a 62% increase in revenue from long-term construction projects, with 45 projects in process during the quarter versus 32 a year earlier. Non-project revenue rose 8%.
- Management said higher gross margin reflected better pricing on certain larger construction projects, higher-margin aerospace/defense projects, and increased volume that absorbed fixed manufacturing costs.
- U.S. sales increased 84% year over year; sales to Asia increased 9%. Construction represented 63% of sales, aerospace/defense 31%, and industrial 6%.
- Backlog was reported at $26.4 million and 150 open orders at August 31, versus $24.1 million and 95 orders a year earlier. A separate comparison in the filing reports $25.2 million at May 31, 2015, making August backlog 5% higher than fiscal year-end; $15.1 million was on projects already in progress.
- Receivables increased to $5.590 million, and days sales outstanding rose from 40 days at May 31 to 53 days at August 31. Inventory rose 6% from fiscal year-end to $9.199 million, principally work in process.
Outlook, risks, and other items
Management said operating cash flows and borrowing capacity were sufficient to fund operations, capital improvements, and potential share repurchases for the next 12 months. The company had $1.5 million of capital expenditure commitments for the next 12 months, primarily for a building expansion to assemble and test larger seismic-protection units. The filing provides no specific revenue or earnings guidance and cautions that quarterly results are not necessarily indicative of full-year results.
Risks identified include reduced customer capital budgets, changing demand and industry capacity, competition and pricing pressure, technological changes that could reduce product demand, and natural disasters affecting demand. Management also noted maintenance inventory exposure to technological obsolescence; the obsolescence provision was $45,000 in each comparable quarter. The company had no provision for profit sharing, dividends, or other benefits for the fiscal year. Routine litigation was the only legal proceeding reported. No material changes in internal control were reported, and disclosure controls were deemed effective.
Important facts for investors to verify
- Whether the sharp quarterly revenue and margin gains, particularly on construction projects, are sustainable; management says results and margins can fluctuate.
- Conversion of backlog and unbilled contract assets into customer billings and cash, given higher receivables, 53-day DSO, and negative operating cash flow.
- Execution, timing, and funding of the planned $1.5 million building expansion and the company’s ability to maintain adequate working capital.
- Availability and renewal of the $6 million demand line: it is subject to annual renewal and the bank has no express obligation to lend.
- The filing reports different backlog comparisons depending on the reference date: $26.4 million versus $24.1 million a year earlier, and $26.4 million versus $25.2 million at May 31, 2015.