Business Context and Reporting Period
Company: Taylor Devices, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 28, 2011 (Third Quarter of Fiscal Year 2011)
Business Overview: The Company manufactures and sells products to industrial, construction, and aerospace/defense markets. It utilizes the percentage-of-completion method for long-term construction projects.
Key Financial Metrics
| Metric | 9 Months Ended Feb 28, 2011 | 9 Months Ended Feb 28, 2010 | 3 Months Ended Feb 28, 2011 |
|---|---|---|---|
| Net Revenue | $13,781,168 | $13,285,823 | $4,979,343 |
| Gross Profit | $3,521,483 | $4,646,491 | $1,342,919 |
| Gross Margin % | 26% | 35% | 27% |
| Operating Income | $818,507 | $1,377,979 | $396,751 |
| Net Income | $693,713 | $1,147,461 | $386,100 |
| Diluted EPS | $0.21 | $0.36 | $0.12 |
| Cash and Equivalents (Ending) | $1,498,578 (as of Feb 28, 2011) | ||
| Net Cash from Operations (9mo) | $1,598,174 | ||
| Long-Term Debt | $254,513 (Current portion: $5,485) |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 4% for the nine-month period and 4% for the quarter compared to the prior year. This was driven by an 8% increase in long-term construction project revenues, offset by a 2% decline in non-project revenues.
- Profitability Decline: Net income decreased 40% for the nine-month period ($693k vs $1.15M) despite revenue growth. Gross margin contracted from 35% to 26% due to a shift in customer mix (lower aerospace/defense sales) and lower-margin export projects in Asia.
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased 17% year-over-year for the nine-month period, primarily due to lower outside commissions and reduced incentive compensation.
- Working Capital: Accounts receivable decreased significantly by 60% ($5.0M to $2.0M), reducing Days Sales Outstanding (DSO) from 99 days to 36 days. Conversely, "Costs and estimated earnings in excess of billings" increased 194% to $3.1M, reflecting revenue recognized on projects not yet billed.
- Backlog: Total sales backlog increased 5% to $13.6 million, though the number of open orders decreased by 11%.
Outlook, Risks, and Management Commentary
- Tax Provision: The provision for income taxes was significantly lower (84% reduction) in the current quarter due to the completion of a research and development tax credit study.
- Liquidity: The Company maintains a $6.0 million line of credit with no outstanding balance as of February 28, 2011. Net working capital of $11.5 million exceeds the $3.0 million covenant minimum.
- Share Repurchases: The Board authorized a $500,000 share repurchase program in November 2010. During the quarter, 4,700 shares were repurchased at an average price of $4.72.
- Risks: Management cites risks including the duration of the worldwide economic recession, reductions in customer capital budgets, changing product demand, and technological obsolescence affecting maintenance inventory.
- Legal Proceedings: A lawsuit regarding the Manufacturing Self-Insurance Trust was settled in May 2010, and all cross-claims were dismissed in October 2010 with no appeals pending.
Investor Verification Checklist
- Margin Sustainability: Verify if the 26% gross margin is sustainable given the shift away from high-margin aerospace/defense customers toward lower-margin construction and export markets.
- Billings Timing: Confirm the timeline for billing the $3.1M in "Costs and estimated earnings in excess of billings" to ensure cash conversion aligns with revenue recognition.
- Inventory Obsolescence: Review the adequacy of the allowance for inventory obsolescence, particularly for maintenance inventory which increased 14% and is sensitive to technological changes.
- Backlog Quality: Assess the profitability and cancellation risk of the $13.6M backlog, noting that 58% of the prior quarter's unbilled costs were billed in the current quarter.