Taylor Devices, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter, three months ended August 31, 2014. The unaudited consolidated interim financial statements were reviewed by the independent accountant, not audited. The company is a smaller reporting company.
Business context and results
The filing reports sales across industrial, construction, and aerospace/defense customers. Revenue from long-term construction projects is recognized using percentage-of-completion estimates; results may fluctuate as projects progress.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $6.55 million | $5.30 million | +24% |
| Gross profit | $1.69 million | $1.28 million | +32% |
| Gross margin | 25.7% | 24.1% | +1.6 percentage points |
| Operating income | $598,428 | $253,915 | +136% |
| Net income | $392,306 | $201,263 | +95% |
| Basic and diluted EPS | $0.12 | $0.06 | +$0.06 |
| Operating cash flow | $815,682 | $(1,415,306) | Improved |
Gross margin was approximately 25.7%, operating margin 9.1%, and net margin 6.0%, compared with approximately 24.1%, 4.8%, and 3.8%, respectively, in the prior-year quarter. SG&A rose 6% to $1.09 million; outside commissions increased 31%, primarily reflecting higher commissionable sales, while other SG&A declined slightly.
Financial position and liquidity
- Cash and cash equivalents were $3.50 million at August 31, up from $2.79 million at May 31. Quarterly cash increased $708,180. Operating cash flow was positive, while investing cash use was $111,723, including $110,388 of capital expenditures.
- Current assets were $20.57 million and current liabilities $5.18 million; working capital was approximately $15.39 million. Total assets were $29.26 million.
- The company reported $558,485 of long-term liabilities; the filing text does not clearly identify their nature. No balance was outstanding on its $6 million bank demand line of credit. The line is subject to annual renewal and the bank is not expressly obligated to lend.
- The company said the full $6 million line was available without breaching covenants and reported compliance with its covenants, including a $3 million minimum working-capital requirement. Management believes operating cash flows and borrowing capacity can fund operations, capital improvements, and potential share repurchases for the next 12 months.
- Inventory was $8.75 million, down 3% from May 31. Receivables were $3.26 million, and costs and estimated earnings in excess of billings were $3.52 million, up 48% from May 31; billings in excess of costs and estimated earnings were $1.39 million, up 63%. Management expects to collect receivables and bill the CIEB balance within 12 months.
Material changes and operating commentary
- Long-term project revenue increased 58% year over year, with 32 projects in process during the quarter versus 24 a year earlier. Non-project revenue declined 15%.
- Sales to Asia increased 80% from the prior-year quarter; U.S. sales increased 5%. Construction and aerospace/defense sales rose 17% and 46%, respectively, while industrial sales declined 10%. Customer mix shifted to 54% construction, 39% aerospace/defense, and 7% industrial.
- Backlog was $24.1 million at August 31, 2014, 56% above the $15.4 million a year earlier, with 95 open orders versus 98. The filing also states backlog was slightly below $24.6 million at May 31, 2014; $13.7 million of August backlog related to projects already in progress.
- The effective tax rate rose to 35% from 23%, because federal R&D tax-credit legislation had expired. The company recorded $45,000 in potential inventory-obsolescence provision in each comparative quarter.
- No capital-expenditure commitments were reported for the next 12 months. There were no share repurchases during the quarter; $419,815 was designated as available for open-market repurchases.
Outlook, risks, and unusual items
No specific full-year revenue or earnings guidance was provided. The company cautioned that quarterly results are not necessarily indicative of full-year results and that backlog, revenue, commissions, margins, and earnings fluctuate. Cited risks include reduced customer capital budgets, changing demand and industry capacity, competition and pricing pressure, technological advances that may reduce product demand, and natural disasters affecting demand.
The company had not determined the effect of the new revenue-recognition standard, ASU 2014-09, which it expected to adopt in fiscal 2018; early adoption was not permitted. Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no material legal proceedings beyond routine litigation incidental to the business, and no dividends or profit-sharing benefits for the fiscal year.
Important facts for investors to verify
- Whether the elevated backlog converts to shipments, billings, and cash on schedule, particularly given the increase in unbilled project revenue.
- Project cost estimates and completion assumptions underlying percentage-of-completion revenue, including whether any contract losses emerge.
- Cash conversion and collection of receivables, retainage, and CIEB balances; the filing notes that these balances fluctuate with project timing.
- The nature of the $558,485 in long-term liabilities, and renewal and availability terms for the demand line of credit.
- The sustainability of margin and earnings improvement, the effect of expired R&D credits, and the eventual impact of ASU 2014-09.