Taylor Devices, Inc. — Form 10-Q Summary
Reporting period: Three months ended August 31, 2017 (fiscal first quarter). Comparisons are with the three months ended August 31, 2016; balance sheet comparisons are with May 31, 2017. The unaudited interim statements received an independent accountant’s review, not an audit.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $6.568 million | $5.756 million | +14% |
| Gross profit | $1.618 million | $1.448 million | +12% |
| Gross margin | 24.6% (reported as 25%) | 25.2% (reported as 25%) | Slightly lower |
| Operating income | $410,084 | $266,150 | +54% |
| Net income | $301,747 | $209,834 | +44% |
| Basic and diluted EPS | $0.09 | $0.06 | Up $0.03 |
| Net cash used in operations | $983,069 | $585,650 | Higher use of cash |
| Capital expenditures | $620,789 | $673,313 | Lower by about 8% |
Sales rose while cost of goods sold increased 15%, slightly faster than sales; gross profit increased, but gross margin was approximately flat year over year. SG&A rose 2% to $1.208 million and declined to about 18% of sales from about 21%. Operating income benefited from sales growth and lower SG&A as a proportion of sales.
Liquidity, balance sheet and cash flow
- At August 31, cash and cash equivalents were $1.837 million, down from $3.325 million at May 31. Short-term investments were $1.024 million. Cash fell by $1.488 million during the quarter.
- Current assets were $26.109 million and current liabilities were $4.557 million, leaving working capital of approximately $21.552 million. The current ratio was approximately 5.7.
- The company reported no outstanding borrowings. On August 30, it replaced its prior facility with a $10 million unsecured demand line bearing interest at the selected 30-, 60- or 90-day LIBOR rate plus 2.25%. It is subject to annual renewal, and the bank is not expressly obligated to lend. The facility includes a negative pledge on real property.
- Operating cash use reflected, among other items, a $1.518 million increase in costs and estimated earnings in excess of billings and a $746,000 increase in accounts receivable. Investing cash use was $624,110; financing provided $119,075 from common stock issuance.
- Accounts receivable was $3.292 million, with 45 days’ sales outstanding versus 36 days at May 31. Costs and estimated earnings in excess of billings (CIEB) rose 22% to $8.386 million. Management expected to collect receivables, including retainage, and bill the CIEB balance within the next 12 months.
- Inventory was $11.252 million, down 2% from May 31; approximately 87% was work in process. Management noted that maintenance and other inventory is exposed to technological obsolescence and reported a $100,000 obsolescence allowance.
- Capital expenditure commitments totaled $250,000 for the following 12 months, primarily for product-testing equipment. Management stated that operating cash flows and borrowing capacity were sufficient for operations and capital improvements over that period.
Material changes and operating context
- Revenue from long-term construction projects increased 35%; revenue from non-project sales declined 11%. The company had 34 projects in process during the quarter versus 33 a year earlier.
- U.S. sales rose 11% and Asia sales rose 30%. Sales to building and bridge construction customers increased 22%, and industrial customer sales increased 35%; aerospace/defense sales declined less than 1%.
- Sales mix shifted to construction at 57% of sales from 53%; aerospace/defense represented 34% versus 39%, and industrial represented 9% versus 8%.
- Backlog was $21.6 million at August 31, approximately unchanged from May 31 and up from $21.3 million a year earlier. Open orders increased 37% year over year to 141. The filing states that $8.7 million of backlog was on projects already in progress.
- Long-term contract revenue is recognized using the percentage-of-completion method and cost estimates. At quarter-end, 31 projects were in progress, with aggregate completion of 73%; estimates and timing of billings can affect reported revenue and cash conversion.
Outlook, risks and other disclosures
- The company provided no specific earnings or revenue guidance. It cautioned that quarterly results are not necessarily indicative of full-year results and that backlog, revenue, commissions, margins, gross profit and net income fluctuate.
- Management said adoption of ASU 2014-09, effective for the company in fiscal 2019, had not been fully assessed and would likely slow revenue recognition for some contracts currently accounted for under percentage of completion.
- Risks cited include customer capital-budget reductions, demand and industry-capacity changes, competition and pricing pressure, technology that may reduce product demand, and natural disasters affecting demand. Forward-looking statements are not guarantees, and the company disclaimed an obligation to update them.
- There were no dividends or profit-sharing benefits provided for the fiscal year. The company reported no material changes in internal controls, no defaults upon senior securities, and no legal proceedings other than routine litigation incidental to the business.
Important facts for investors to verify
- Whether the increase in CIEB and receivables converts to billings and collections as management expects, especially given higher days sales outstanding and negative operating cash flow.
- Project cost estimates, completion progress and margins, including any changes that could affect percentage-of-completion revenue or require recognition of contract losses.
- The terms, availability and renewal of the demand line, given the bank’s lack of an express lending obligation.
- The effect and timing of the new revenue-recognition standard on contract revenue and reported results.
- Whether backlog and the increased number of open orders translate into future deliveries, revenue and cash generation; the filing warns that quarterly results may not predict full-year performance.