Business Context and Reporting Period
Company: TAYLOR DEVICES, INC.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended November 30, 2010
Business Overview: The Company manufactures and sells products to industrial, construction, and aerospace/defense customers. Revenues are recognized using the percentage-of-completion method for long-term construction projects.
Key Financial Metrics
| Metric | Six Months Ended Nov 30, 2010 | Six Months Ended Nov 30, 2009 | Three Months Ended Nov 30, 2010 | Three Months Ended Nov 30, 2009 |
|---|---|---|---|---|
| Net Revenue | $8,801,825 | $8,502,470 | $4,525,002 | $3,488,797 |
| Gross Profit | $2,178,564 | $3,146,714 | $1,037,827 | $1,414,868 |
| Gross Margin % | 25% | 37% | 23% | 41% |
| Operating Income | $421,756 | $834,292 | $159,955 | $282,784 |
| Net Income | $307,613 | $822,688 | $122,975 | $501,891 |
| Earnings Per Share (Basic/Diluted) | $0.10 | $0.26 | $0.04 | $0.16 |
| Cash and Equivalents (Nov 30, 2010) | $2,172,593 | |||
| Net Cash from Operating Activities (6mo) | $2,113,664 | |||
| Backlog Value (Nov 30, 2010) | $13,000,000 |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 4% for the six-month period and 30% for the quarter compared to the prior year. This was driven by a 17% increase in non-project sales and a 39% increase in long-term construction project revenues for the quarter.
- Profitability Decline: Despite revenue growth, Net Income decreased 63% for the six-month period and 75% for the quarter. Gross margins contracted significantly (from 37% to 25% over six months) due to the absence of high-margin aerospace/defense projects and export projects seen in the prior year, as well as increased sales to Asian representatives net of commissions.
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased 24% for the six-month period, primarily due to a 40% drop in outside commissions and lower incentive compensation.
- Liquidity Improvement: Cash and cash equivalents surged from $197,587 to $2,172,593. Accounts receivable dropped 69% to $1.54 million, reducing Days Sales Outstanding (DSO) from 99 days to 31 days.
Guidance, Outlook, and Risks
- Outlook: Management states that results for the six-month period are not necessarily indicative of full-year results. The Company expects to collect net accounts receivable and bill the "costs and estimated earnings in excess of billings" balance ($2.3 million) within the next twelve months.
- Capital Resources: The Company maintains a $6,000,000 bank line of credit with no outstanding balance as of November 30, 2010. It is in compliance with all covenants, including a minimum working capital requirement of $3,000,000 (actual: $11.2 million).
- Share Repurchases: On November 5, 2010, the Board authorized a $500,000 share repurchase program. As of the filing date, 1,700 shares were purchased at an average price of $4.73.
- Legal Proceedings: A lawsuit regarding the Manufacturing Self-Insurance Trust was settled in May 2010. In October 2010, the New York Supreme Court dismissed cross-claims against settling members, though the decision is subject to appeal.
- Risks: Forward-looking statements are subject to risks including the duration of the economic recession, customer capital budget reductions, and technological obsolescence of maintenance inventory.
Investor Verification Checklist
- Margin Sustainability: Verify if the shift in customer mix (lower aerospace/defense, higher construction/Asian reps) is a permanent structural change affecting future gross margins.
- Backlog Conversion: Confirm the timeline for converting the $13 million backlog into recognized revenue, noting that 13% fewer orders exist despite higher total value.
- Inventory Obsolescence: Review the adequacy of the $90,000 provision for inventory obsolescence, particularly for maintenance inventory which increased 16% and is sensitive to technological changes.
- Accounts Receivable Quality: Validate the collection of the $145,000 in retainage and the $42,000 allowance for doubtful accounts included in the current receivable balance.
- Legal Finality: Monitor the status of the appeal regarding the Manufacturing Self-Insurance Trust settlement to ensure no further liability exposure.