Taylor Devices, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended February 28, 2018, compared with the corresponding 2017 periods. The filing date is April 12, 2018. Although the request metadata labels this “2017 Q3,” the filing covers fiscal 2018’s third quarter.
Financial performance
| Metric | Three months ended Feb. 28, 2018 | Three months ended Feb. 28, 2017 | Nine months ended Feb. 28, 2018 | Nine months ended Feb. 28, 2017 |
|---|---|---|---|---|
| Net sales | $6.57 million | $5.67 million | $17.95 million | $19.24 million |
| Gross profit | $1.46 million | $1.64 million | $4.33 million | $5.84 million |
| Gross margin | 22% | 29% | 24% | 30% |
| Operating income | $137,000 | $466,000 | $582,000 | $2.10 million |
| Net income (loss) | $(23,000) | $338,000 | $330,000 | $1.49 million |
| EPS, basic and diluted | $(0.01) | $0.10 | $0.09 | $0.43 |
- Quarterly sales increased 16%, but gross profit fell 11%; cost of goods sold rose 27%, outpacing revenue growth. Net income declined by $362,000 year over year.
- Nine-month sales declined 7%, gross profit fell 26%, and net income fell 78%. SG&A was nearly flat year over year for the nine-month period, but rose 12% in the quarter.
- Nine-month operating cash flow was negative $1.39 million, versus negative $3.83 million a year earlier. Investing cash flow was negative $765,000, including $750,000 of capital expenditures; financing provided $130,000.
- Cash and cash equivalents were $1.30 million at February 28, 2018, down from $3.32 million at May 31, 2017. Short-term investments were $1.03 million. Current assets were $27.53 million and current liabilities $5.41 million.
- No borrowings were outstanding under the $10 million unsecured demand credit line. The facility is renewable annually and the bank has no express obligation to lend. The filing reports no other debt balance.
- Working capital pressures included accounts receivable of $5.34 million, up 110% from year-end; contract costs and estimated earnings in excess of billings of $8.05 million, up 17%; and billings in excess of costs and estimated earnings of $2.00 million, up 54%. Receivable days outstanding increased to 73 from 36 at May 31, 2017.
Material changes and management commentary
- For the first nine months, long-term project revenue was down 16%, while non-project revenue rose 12%. Construction-related sales fell 19%; industrial sales increased 31% and aerospace/defense sales increased 8%. U.S. sales declined 13%, while sales to Asia increased 40%.
- Management attributed weaker construction sales to customer-site scheduling delays, late custom components, a subcontractor quality issue, and testing bottlenecks while a new test machine was brought into operation. Management said these issues were resolved and expressed optimism that sales volume would continue to improve.
- Nine-month gross margin fell to 24% from 30%, primarily because lower sales volume provided less coverage of fixed manufacturing costs and some projects were competitively bid. Quarterly margin was 22%, versus 29%.
- Backlog was $18.8 million at February 28, 2018, compared with $20.6 million at the prior fiscal year-end and $19.5 million a year earlier. Open order count was 163, up 37% from a year earlier; $9.2 million of current backlog related to projects already in progress.
- The Tax Cuts and Jobs Act’s reduction in the federal corporate tax rate led to a $164,000 non-cash write-down of deferred tax assets in the quarter. This increased tax expense; the nine-month effective tax rate was 45% and the quarterly rate was 116%. Management expected to benefit from the lower tax rate thereafter.
- The company had $95,000 of capital-expenditure commitments for the next 12 months, primarily for testing equipment. Management believed operating cash flow and borrowing capacity would be adequate to fund operations and capital improvements over that period.
Outlook, risks, and other items
- The company did not provide quantified earnings or revenue guidance. It cautioned that interim results and fluctuations in backlog, revenue, commissions, margins, and earnings may not indicate full-year results.
- Management identified risks including reductions in customer capital budgets, demand and capacity changes, competition and pricing pressure, technology advances that could reduce product demand, and natural-disaster effects on demand.
- The company had not completed its assessment of the new revenue-recognition standard, expected to apply in fiscal 2019. It said adoption would likely slow revenue recognition for some contracts currently using percentage-of-completion accounting.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. The interim financial statements were reviewed by the independent accountant, not audited. The company reported no material litigation beyond routine proceedings.
Important facts for investors to verify
- Whether resolved production and testing bottlenecks translate into improved project revenue, margins, and backlog conversion.
- Collection timing for the sharply higher receivables and contract assets, including $824,000 of customer retainage; management expected collection of receivables and billing of contract assets within 12 months.
- Whether the $18.8 million backlog converts to sales on schedule and at profitable margins, given competitive bidding and project timing variability.
- The financial-statement effects of adopting the revenue-recognition standard, particularly on percentage-of-completion contracts.
- Availability of the demand credit line if needed, given its annual renewal and the bank’s lack of an express lending commitment.