Taylor Devices, Inc. — Form 10-Q Summary
Business context and period: The filing covers the fiscal first quarter ended August 31, 2013, with comparisons to the three months ended August 31, 2012. Taylor Devices manufactures products sold to industrial, construction, and aerospace/defense customers. Interim financial statements are unaudited and were reviewed by the independent accounting firm.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $5.30 million | $7.32 million | Down 28% |
| Gross profit | $1.28 million | $2.62 million | Down 51% |
| Gross margin | 24% | 36% | Down 12 percentage points |
| Operating income | $254,000 | $896,000 | Down 72% |
| Net income | $201,263 | $607,817 | Down 67% |
| Diluted earnings per share | $0.06 | $0.18 | Down $0.12 |
| Cash from operations | $(1.42) million | $(2.75) million | Outflow narrowed |
| Capital expenditures | $667,000 | $528,000 | Increased |
Balance sheet and liquidity: At August 31, 2013, cash was $74,387, compared with $2.00 million at May 31, 2013. Current assets were $16.22 million and current liabilities were $2.51 million; management reported working capital of $13.71 million, above the $3 million covenant minimum. Total assets were $24.98 million and stockholders’ equity was $22.07 million. No balance was outstanding on the $6 million demand line of credit; the full amount was reported available under the debt covenants. Long-term liabilities were $398,185. The filing does not provide a separate total-debt figure.
Material changes and operating trends
- Long-term project revenue fell 44% year over year; non-project revenue increased 7%. The company had 24 projects in process versus 33 a year earlier.
- Sales declined in the U.S. by 14% and in Asia by 46%. By customer sector, sales decreased 9% in aerospace/defense, 15% in industrial, and 37% in building and bridge construction.
- Construction represented 57% of sales, aerospace/defense 33%, and industrial 10%. Geographic mix was 62% U.S., 29% Asia, and 9% other.
- SG&A fell 41% to $1.03 million, primarily because of lower air-freight costs than in the prior-year quarter. SG&A was 19% of sales versus 24%.
- Cash fell mainly amid operating cash outflows and $667,000 in property and equipment purchases. Operating cash flow included a $971,000 reduction in other current liabilities and increased contract costs and estimated earnings in excess of billings.
- Backlog was $15.4 million at quarter-end, 12% above the prior-year $13.8 million level and 18% above May 31, 2013. The current backlog comprised 98 orders, 34% fewer than a year earlier; $3.8 million was for projects already in progress.
Outlook, risks, and other notable items
- Management said operating cash flows and borrowing capacity should be sufficient for operations, capital improvements, and any share repurchases over the next 12 months. Results for the quarter are not necessarily indicative of full-year results; the filing gives no earnings or revenue guidance.
- The company expects to complete a production-machinery move to renovated buildings in autumn 2013. The renovation’s total construction cost was $2.9 million, with $240,000 of capital expenditure commitments over the next 12 months. Management expects cash and the credit line to fund the work.
- Accounts receivable rose 17% from fiscal year-end to $2.64 million; days sales outstanding increased from 39 to 45. Costs and estimated earnings in excess of billings rose 27% to $3.12 million. Management expected receivables, including retainage, to be collected and the contract asset to be billed within 12 months.
- Risks cited include continued or worsening economic weakness, customer capital-budget reductions, changing demand and industry capacity, competition and pricing pressure, and technological advances that may reduce demand. The company cautioned that project mix, backlog, revenues, margins, and earnings fluctuate.
- Maintenance and other inventory is exposed to technological obsolescence; management records an obsolescence allowance and continues reworking slow-moving inventory. No material legal proceedings beyond routine litigation were reported.
- No dividends or profit-sharing benefits were planned for the fiscal year. There were no share repurchases during the quarter; $419,815 remained designated for possible open-market repurchases.
- Disclosure controls were judged effective, and no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Whether the lower project revenue and 24-project activity level are temporary, and how backlog converts to recognized revenue and cash.
- Cash needs and collection timing, especially given quarter-end cash of $74,387, negative operating cash flow, higher receivables and contract assets, and capital spending commitments.
- Execution, cost, and timing of the production relocation and the remaining renovation expenditures.
- Availability and renewal terms of the demand credit line, which has no express bank lending commitment despite the reported unused capacity.
- Project cost estimates underlying percentage-of-completion accounting and potential inventory obsolescence, both of which could affect reported results.