Taylor Devices, Inc. — Form 10-Q Summary
Business context and period. The filing reports results for the fiscal third quarter and nine months ended February 28, 2017, compared with the periods ended February 29, 2016. Taylor Devices manufactures products sold to industrial, construction, and aerospace/defense customers. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and position
| Metric | Three months ended Feb. 28, 2017 | Nine months ended Feb. 28, 2017 |
|---|---|---|
| Net sales | $5.67 million (down 32%) | $19.24 million (down 28%) |
| Gross profit / margin | $1.64 million / 29% (prior-year margin 40%) | $5.84 million / 30% (prior-year margin 36%) |
| Operating income | $466,000 (down 72%) | $2.10 million (down 55%) |
| Net income | $338,000 (down 71%); EPS $0.10 | $1.49 million (down 52%); EPS $0.43 |
- Cash flow: Nine-month operating cash flow was negative $3.83 million, versus positive $2.70 million in the prior-year period. Investing cash outflow was $1.64 million, primarily reflecting $1.62 million of capital expenditures. Cash and equivalents fell by $5.31 million to $775,000; short-term investments were $1.02 million.
- Balance sheet and liquidity: Total assets were $37.30 million and stockholders’ equity $31.88 million at February 28, 2017. Current liabilities were $4.74 million. The company had no borrowings on its $6.0 million demand line of credit and reported covenant compliance; working capital under the covenant definition was $21.78 million. Management said cash flows and available borrowing capacity should fund operations and capital improvements for the next 12 months.
- Working capital pressures: Inventory increased 19% from May 31, 2016 to $11.46 million, mostly work in process. Costs and estimated earnings in excess of billings rose 40% to $7.71 million. Receivable days outstanding increased to 66 from 40, partly because a $1.1 million invoice was not paid until March 2017.
- Debt and commitments: No line-of-credit balance was outstanding. Capital-expenditure commitments were $700,000 over the next 12 months. Capital expenditures during the nine months were higher than the prior year’s $1.07 million, at $1.62 million.
Material changes and management commentary
- Management attributed weaker results to lower project and non-project sales, lower U.S. and Asian sales, and reduced sales across customer sectors. Sales to Asia fell 58% for the nine-month period; U.S. sales fell 20%.
- Gross margin declined as prior-year projects included unusually high-priced construction work and higher-margin aerospace/defense work. Current-period export projects were competitively bid amid unfavorable foreign-exchange rates, and lower sales volume reduced coverage of fixed manufacturing costs.
- Backlog was $19.5 million at February 28, 2017, compared with $21.5 million at the prior fiscal year-end. Open sales orders numbered 119, versus 129 in the prior-year comparable period; reported order value was $19.5 million in both periods.
- The company expects to bill the full $7.71 million of costs and estimated earnings in excess of billings within 12 months and expects to collect net receivables, including retainage, within 12 months. Timing depends on project progress, contract terms, and customer payment.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance was provided. Management cautioned that period-to-period fluctuations are not necessarily indicative of future results.
- Identified risks include customer capital-budget reductions, changes in demand and industry capacity, competition and pricing pressure, technology changes that reduce product demand, and natural disasters affecting demand. The filing also notes foreign-exchange pressure on export-project pricing.
- The company had not completed its assessment of the new revenue-recognition standard, but expected adoption could slow recognition of revenue for contracts then accounted for using percentage-of-completion accounting.
- There was no provision for profit sharing, dividends, or other benefits for the fiscal year. The filing reports no material legal proceedings beyond routine litigation, no defaults, and no material changes to internal controls.
Important facts for investors to verify
- Whether sales, margins, and project backlog recover, and whether the current backlog converts to revenue on schedule.
- Collection of the delayed $1.1 million invoice and the timing of receivables, retainage, and project billings.
- Inventory growth, turnover decline to 1.6 from 2.3, and potential obsolescence or rework needs.
- Cash use, planned capital spending, and continued availability and renewal of the demand line, which is not an unconditional lending commitment.
- The eventual impact and timing of adopting the new revenue-recognition standard.