Taylor Devices, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended August 31, 2016; comparative period is the three months ended August 31, 2015. Taylor Devices manufactures products serving industrial, construction, and aerospace/defense customers. Financial statements are unaudited interim statements; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $5.756 million | $9.473 million | Down 39% |
| Gross profit / margin | $1.448 million / 25% | $3.375 million / 36% | Profit down 57%; margin down 11 percentage points |
| Operating income / margin | $266,150 / 4.6% | $1.548 million / 16.3% | Operating income down 83% |
| Net income | $209,834 | $1.010 million | Down 79% |
| Diluted earnings per share | $0.06 | $0.30 | Down $0.24 |
| Cash from operations | $(585,650) | $(165,798) | Outflow increased |
| Capital expenditures | $673,313 | $298,664 | More than doubled |
At August 31, 2016, cash and equivalents were $4.970 million, with $1.0 million of short-term investments. Current assets were $26.083 million and current liabilities were $5.131 million, for working capital of approximately $20.952 million. The company reported no balance drawn on its $6.0 million demand line of credit. Long-term liabilities were $682,985; the filing does not clearly identify this balance as debt.
Material changes and operating factors
- Lower long-term project revenue was the principal sales headwind: project revenue fell 56%, while non-project revenue rose 15%. There were 33 projects in process compared with 45 a year earlier.
- Gross margin declined amid prior-year higher-priced construction work and higher-margin aerospace/defense projects, competitive pricing on current-period export projects affected by unfavorable foreign exchange rates, and lower production volume over fixed manufacturing costs.
- Sales declined across customer sectors: construction/buildings and bridges 49%, aerospace/defense 24%, and industrial 21%. U.S. sales fell 36% and Asia sales fell 54% year over year.
- SG&A decreased 35%, including lower outside commissions and freight and incentive-compensation expenses, but SG&A rose to 21% of revenue from 19%.
- Year-over-year backlog at August 31 fell 19% to $21.3 million, with 103 open orders versus 150 a year earlier. Compared with May 31, backlog was slightly lower ($21.3 million versus $21.5 million); $10.9 million was on projects already in progress.
Liquidity, outlook, and risks
Cash declined by $1.116 million during the quarter, reflecting operating and investing cash outflows partly offset by $144,634 of net proceeds from common-stock issuance. Inventory increased 6% from May 31 to $10.204 million, mostly work in process; annualized inventory turnover was 1.6 versus 2.3 at May 31. Days sales outstanding rose from 40 to 56 days. Management expects to collect net receivables, including retainage, and bill the costs-and-estimated-earnings balance within 12 months.
Management believes operating cash flows and borrowing capacity are sufficient to fund operations and capital improvements over the next 12 months. The company had $520,000 in capital expenditure commitments for the following 12 months, primarily for a building expansion to assemble and test larger seismic-protection units. No numerical revenue or earnings guidance was provided. The filing cautions that quarterly results are not necessarily indicative of full-year results.
Identified risks include customer reductions in capital budgets, changing demand and industry capacity, competition and pricing pressure, technology advances that could reduce product demand, and natural disasters affecting demand. The line of credit is subject to annual renewal and the bank is not expressly required to lend. The company reported compliance with its restrictive covenants and $6.0 million available under the line without covenant violation. No material legal proceedings beyond routine business litigation were reported.
The company had not determined the effect of adopting the new revenue-recognition standard (ASU 2014-09), scheduled to apply for its fiscal year 2019. Adoption of the deferred-tax classification standard (ASU 2015-17) would change balance-sheet classifications; the filing quantified the proposed effects.
Important facts for investors to verify
- Whether the reduced project order count and 19% year-over-year backlog decline translate into continued lower revenue or improve as orders progress.
- Whether margins recover as production volume, project mix, and pricing change, particularly for export work exposed to foreign-exchange conditions.
- Whether cash conversion improves given negative operating cash flow, rising inventory, and DSO of 56 days; also monitor collection and billing of contract balances.
- Progress, cost, and expected returns on the building expansion and the $520,000 capital commitment.
- Renewal and availability terms of the demand line of credit, and the nature and repayment terms of the $682,985 in long-term liabilities.