TAYD

Business Context and Reporting Period

Taylor Devices, Inc. (a smaller reporting company) filed its Form 10-Q for the quarterly period ended February 28, 2009. The company manufactures seismic and other industrial equipment, with a significant portion of revenue derived from long-term construction projects accounted for under the percentage-of-completion method. As of April 1, 2009, there were 3,222,095 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenue decreased 10% for the nine-month period and 25% for the quarter. Long-term construction project revenues dropped 34% (nine months) and 22% (quarter) due to the global economic recession causing projects to be placed "on-hold" or cancelled. Conversely, non-project revenues increased 15% for the nine-month period.
• Margin Compression: Gross margin fell from 35% to 25% (nine months) and 36% to 24% (quarter). Management attributes this to two large domestic projects with very low margins and lower margins on specific non-project shipments.
• Profitability: Net income decreased 72% for the nine-month period and 91% for the quarter. Operating income followed a similar trend, dropping 72% and 91% respectively.
• Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased 17% (nine months) and 27% (quarter). Outside commissions dropped significantly (42% and 48%) due to lower sales volume and the absence of high-commission export orders seen in the prior year.
• Liquidity and Debt: The company significantly reduced its debt load. Short-term borrowings and the current portion of long-term debt fell from $1,016,621 to $111,151. Cash flow from operations improved substantially to $1.6 million, driven by a $860,000 reduction in accounts receivable.

Outlook, Risks, and Contingencies

• Economic Outlook: Management attributes revenue declines to the worldwide economic recession, specifically citing reduced capital budgets and financing difficulties in the construction sector. Several projects in the U.S. and Asia remain on hold.
• Backlog: Despite having 14% fewer open sales orders (104 vs. 121), the total backlog value increased 7% to $12.4 million. Approximately $2.0 million of this backlog is on long-term construction projects already in progress.
• Liquidity: The company maintains a $5,000,000 line of credit with only $34,000 outstanding. Management believes cash flows and borrowing capacity are sufficient to fund operations for the next twelve months. The company is in compliance with all debt covenants (minimum working capital of $2M and tangible net worth of $6M).
• Legal Proceedings: The New York Workers' Compensation Board sued the company and 264 other entities regarding a deficit in the Manufacturing Self-Insurance Trust. The Board alleges the company's share of the deficit exceeds $79,555, though joint and several liability could be substantially higher. The company denies the claims and is vigorously defending the lawsuit.
• Inventory: Inventory levels increased slightly (2%) to $6.79 million, primarily due to longer lead times for foreign-sourced components and strategic stocking of seismic components. Inventory turnover slowed to 1.6 from 1.9.

Investor Verification Checklist

• Verify the status of the "on-hold" construction projects and the likelihood of their resumption given the economic climate.
• Monitor the outcome of the New York Workers' Compensation Board litigation regarding the Manufacturing Self-Insurance Trust deficit.
• Assess the sustainability of the reduced SG&A expenses, particularly outside commissions, if sales volume does not recover.
• Review the composition of the $12.4 million backlog to determine the mix of low-margin projects versus higher-margin non-project sales.
• Confirm the collectibility of the $137,000 in retainage held by customers on long-term projects.