Taylor Devices, Inc. — Form 10-Q Summary
Business context and period: This filing covers the fiscal third quarter and first nine months ended February 28, 2015, compared with the corresponding 2014 periods. Taylor Devices reports sales to industrial, construction, and aerospace/defense customers, including long-term construction projects.
Financial performance
| Metric | Three months ended Feb. 28, 2015 | Three months ended Feb. 28, 2014 | Nine months ended Feb. 28, 2015 | Nine months ended Feb. 28, 2014 |
|---|---|---|---|---|
| Net sales | $6.57 million | $4.81 million | $19.82 million | $14.71 million |
| Gross profit | $1.73 million | $1.32 million | $5.41 million | $3.90 million |
| Gross margin | 26% | 27% | 27% | 27% |
| Operating income | $463,381 | $341,654 | $1.83 million | $1.02 million |
| Net income | $391,754 | $222,236 | $1.29 million | $729,922 |
| Diluted EPS | $0.12 | $0.07 | $0.39 | $0.22 |
For the nine-month period, sales rose 35%, gross profit 39%, operating income 80%, and net income 77%. In the quarter, sales rose 37% and net income 76%. SG&A increased 24% for nine months and 30% for the quarter; outside commissions were the main driver, increasing 97% and 133%, respectively. SG&A was 18% of nine-month sales versus 20% a year earlier.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was a use of $3,996, compared with $182,842 provided in the prior-year period. Working-capital changes included increases in receivables and unbilled contract costs.
- Investing cash outflow was $458,070, including $453,945 of capital expenditures, versus $1.30 million of investing outflow and $1.30 million of capital expenditures in the prior-year period.
- Cash declined from $2.79 million at May 31, 2014 to $2.37 million at February 28, 2015. Total assets were $29.77 million; stockholders’ equity was $24.45 million.
- Current assets were $21.19 million and current liabilities $4.74 million; reported working capital was $16.449 million. Accounts receivable was $3.89 million, inventory $9.27 million, and costs and estimated earnings in excess of billings $4.10 million.
- No balance was outstanding on the $6 million bank demand line of credit. The filing reports $579,685 of long-term liabilities; it does not clarify their composition. The company was in compliance with its credit covenants, and the full unused line was available without violating them.
- Management expects $230,000 of capital expenditures over the next 12 months and believes operating cash flows and borrowing capacity will fund operations, capital improvements, and any share repurchases over that period.
Business trends, outlook, and risks
- Long-term project revenue increased 94% for nine months, with 53 projects in process during the period versus 36 a year earlier. Non-project revenue declined 19%. For the quarter, project revenue rose 148%, while non-project revenue fell 35%.
- Backlog at February 28 was $30.3 million across 150 open orders, up 64% in value and 36% in order count from a year earlier. The filing also reports backlog up 23% from May 31, 2014; $15.3 million was associated with projects already in progress.
- Nine-month sales rose 41% in the U.S. and 21% in Asia. Construction/building and bridge customers and aerospace/defense customers increased, while industrial sales declined. Results and backlog fluctuate and are not necessarily indicative of future performance; the company provided no specific earnings or revenue forecast.
- Contract revenue and estimated profits on certain long-term projects depend on percentage-of-completion cost estimates. Management adjusts estimates periodically and records expected contract losses when identified. CIEB increased 73% from fiscal year-end, and the company expected to bill the balance within 12 months.
- Maintenance and other inventory is exposed to technological obsolescence. The company recorded a $135,000 obsolescence provision in each nine-month comparison period and said it reworks slow-moving inventory where applicable.
- Forward-looking statement risks include customer capital-budget reductions, demand and capacity changes, competition and pricing pressure, technology advances, and natural disasters. The company had no material change in internal controls and reported only routine litigation incidental to its business.
- The company had not determined the effect of adopting the new revenue-recognition standard, expected to apply to its fiscal 2018 reporting year. The filing says no profit-sharing, dividends, or other benefits would be provided for the fiscal year.
Important facts for investors to verify
- Whether project execution, billing milestones, and collections convert the larger backlog and contract assets into cash as expected.
- Whether the negative nine-month operating cash flow and increases in receivables and CIEB reverse in subsequent periods; DSO rose to 53 days from 49 at May 31, 2014.
- Whether project mix, commission costs, and the quarter’s lower gross margin affect future profitability.
- The composition and terms of reported long-term liabilities, which the filing text does not clearly identify.
- Potential effects of the new revenue-recognition standard and inventory obsolescence exposure.