Taylor Devices, Inc. — Form 10-Q Summary
Reporting period: Second fiscal quarter and six months ended November 30, 2016. The filing reports unaudited consolidated results; the independent accountant conducted a review, not an audit.
Financial performance
| Metric | Three months ended Nov. 30, 2016 | Year-over-year change | Six months ended Nov. 30, 2016 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $7.81 million | Down 11% | $13.56 million | Down 26% |
| Gross profit / margin | $2.75 million / 35% | Down 8% / up about 1 percentage point | $4.19 million / 31% | Down 34% / down about 4 percentage points |
| Operating income | $1.37 million | Down 3% | $1.64 million | Down 45% |
| Net income | $938,280 | Up 1%; EPS $0.27, unchanged | $1.15 million | Down 41%; EPS $0.34 versus $0.57 |
For the six-month period, selling, general and administrative expense fell 25% to $2.56 million, mainly reflecting lower commissions, freight and estimated incentive compensation. The tax provision was $526,000, compared with $1.04 million a year earlier.
Cash flow, liquidity and balance sheet
- Operating cash flow was negative $967,000 for the six months, versus positive $194,000 in the comparable period. Capital expenditures were $1.24 million, up from $855,000. Cash declined by $2.07 million to $4.02 million.
- At November 30, cash and cash equivalents were $4.02 million, short-term investments $1.01 million, and current assets $27.09 million versus current liabilities of $5.44 million. Working capital was $21.65 million.
- No balance was drawn on the $6 million demand line of credit. The company reported compliance with its covenants and said the full unused facility was available. Long-term liabilities were $683,000; the filing does not identify this amount as borrowings.
- Inventory rose 10% from May 31 to $10.58 million, primarily due to advanced production on customer and pending orders. Inventory turnover was 1.7, compared with 2.3 at fiscal year-end.
- Costs and estimated earnings in excess of billings rose 17% to $6.42 million; the company expected to bill the balance within 12 months. Accounts receivable days outstanding increased from 40 to 44.
Material changes and operating trends
- Six-month revenue from long-term projects was down 32% year over year, with 42 projects in process versus 49. Non-project revenue declined 11%. The quarter’s project revenue was down 1%, while non-project revenue fell 31%.
- For the six months, U.S. sales declined 20% and Asia sales declined 50%. Construction, aerospace/defense, and industrial customer sales fell 25%, 27%, and 32%, respectively. Construction accounted for 61% of six-month revenue; aerospace/defense 34% and industrial 5%.
- Management attributed the six-month gross-margin decline to unusually favorable pricing and higher-margin projects in the prior-year period, competitive bids on some current export projects amid unfavorable foreign-exchange rates, and lower production volume spreading fixed manufacturing costs over fewer sales. In the second quarter, gross margin improved to 35% from 34%.
- Backlog at November 30, 2016 was $20.6 million across 97 open orders, down 13% in value and 26% in order count from November 30, 2015. Of current backlog, $12.9 million related to projects already in progress.
Outlook, risks and other items
- No specific revenue or earnings guidance was provided. Management said operating cash flows and borrowing capacity were sufficient for operations and capital improvements over the next 12 months. It had $300,000 of capital expenditure commitments for that period, primarily for a building expansion to assemble and test larger seismic-protection units.
- Risks cited include reduced customer capital budgets, changing demand and industry capacity, competition and pricing pressure, technology changes that could reduce demand, and natural disasters affecting demand. Management cautioned that results fluctuate and interim results are not necessarily indicative of full-year performance.
- Revenue on certain long-term fixed-price contracts is recognized using percentage of completion and cost estimates; changes in estimates can affect reported results. The company had not yet determined the effects of adopting the new customer-contract revenue standard, expected to apply in fiscal 2019.
- Routine litigation was the only legal proceeding reported. Disclosure controls were assessed as effective, with no material internal-control changes reported. No dividends or profit-sharing benefits were planned for the fiscal year.
Important facts for investors to verify
- Whether backlog converts to billings, revenue and cash on schedule, particularly the $6.42 million of costs and earnings recognized ahead of billings.
- Whether inventory growth, lower turnover and negative operating cash flow persist or reverse as projects progress and customer payments are collected.
- Whether sales levels and gross margins recover, given the six-month declines and the company’s explanations for prior-period margin differences.
- The terms, renewal and availability of the demand line of credit, which is uncommitted by the bank and secured by specified assets.
- The eventual financial-statement effects of adopting the new revenue-recognition standard.