Taylor Devices, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended August 31, 2012; comparisons are with the three months ended August 31, 2011 unless noted. The interim financial statements are unaudited and were reviewed by the independent registered public accounting firm, which reported no material modifications were needed.
Business context and results
The company sells to industrial, construction, and aerospace/defense customers. Management cited stronger demand for products protecting buildings and bridges from wind and seismic events. Construction represented 65% of quarterly sales, aerospace/defense 26%, and industrial 9%.
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $7.317 million | $4.573 million | +60% |
| Gross profit | $2.619 million | $1.838 million | +42% |
| Gross margin | 36% | 40% | Down 4 percentage points |
| Operating income | $896,000 | $552,000 | +62% |
| Net income | $608,000 | $408,000 | +49% |
| Basic and diluted EPS | $0.18 | $0.13 | Up $0.05 |
Cost of goods sold rose 72%, faster than sales. SG&A increased 34% to $1.723 million, including a 115% increase in outside commissions and higher air-freight and estimated incentive compensation costs. SG&A declined to 24% of sales from 28%.
Cash flow, balance sheet, and liquidity
- Operating cash flow was negative $2.748 million, versus positive $1.139 million a year earlier. The principal reported working-capital uses included a $2.747 million increase in accounts receivable and a $677,000 increase in inventory; cash flow also benefited from a $1.629 million reduction in costs and estimated earnings in excess of billings.
- Capital expenditures were $528,000, compared with $411,000. Cash at quarter-end was $278,000, up from $74,000 at May 31, 2012, but below $2.872 million at August 31, 2011. Net short-term borrowings supplied $3.478 million during the quarter.
- At August 31, current assets were $22.738 million and current liabilities $8.804 million; reported working capital was $13.934 million. Accounts receivable was $8.357 million, inventory $8.938 million, and costs and estimated earnings in excess of billings $3.863 million.
- The $6.0 million demand line of credit had $3.740 million outstanding at quarter-end, versus $262,000 at May 31, leaving $2.260 million available. The stated interest rate was 3%. The company reported compliance with covenants, including a $3.0 million minimum working-capital requirement.
- Receivables included approximately $3.385 million of customer retainage. Days sales outstanding increased to 103 from 52 at May 31; management attributed the increase in part to higher project retainage and expected collection of net receivables, including retainage, within twelve months.
Material changes and outlook
- Long-term project revenue increased 63% year over year and non-project revenue increased 54%. There were 24 projects in process during the quarter, compared with 38 in the year-earlier quarter.
- Backlog was $13.8 million across 148 open orders at August 31, 2012, 37% below the $21.9 million reported at August 31, 2011 despite 12% more orders. Separately, the filing says backlog fell from $17.5 million at May 31, 2012; $4.5 million of current backlog was on projects already in progress.
- The company is renovating three industrial buildings purchased in North Tonawanda to expand manufacturing capacity. The total project cost, including the purchase price, is $2.5 million; one building was in service, with the other two expected by December 2013. Capital-expenditure commitments for the next twelve months were $1.425 million.
- Management said current cash and bank-line resources should be sufficient for the renovations and that operating cash flows and borrowing capacity should fund operations, capital improvements, and share repurchases for the next twelve months. No specific earnings or revenue guidance was provided. Management cautioned that quarterly results may not indicate full-year results.
Risks, contingencies, and other items
Management identified risks including the duration or deepening of the worldwide recession, customer capital-budget reductions, changing demand and industry capacity, competition and pricing pressure, and technology changes that could reduce demand. Results, backlog, margins, commissions, and earnings may fluctuate. Maintenance inventory is exposed to technological obsolescence; the company recorded a $45,000 obsolescence provision in each comparative quarter. Legal proceedings were limited to routine litigation incidental to the business. The company reported no material changes to internal control over financial reporting and no material weakness in disclosure controls.
The company reported no provision for profit sharing, dividends, or other benefits for the fiscal year. No shares were repurchased during the quarter; $419,815 was designated as available for open-market repurchases.
Important facts for investors to verify
- Whether the elevated receivables, 103-day DSO, and project retainage convert to cash on the expected schedule.
- Whether gross margin can recover from 40% to 36% as sales and project mix change, and whether the higher freight and incentive costs persist.
- How the lower backlog compares with project delivery schedules, cancellations, and subsequent order intake.
- Whether the facility renovations remain within the stated $2.5 million total cost and December 2013 completion target, and whether the demand credit line remains available on renewal.
- How inventory levels, turnover, and obsolescence exposure develop as work in process and maintenance inventory grow.