Taylor Devices, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended November 30, 2012 (fiscal 2013). Comparisons are with the corresponding 2011 periods unless otherwise noted. The company manufactures products for industrial, construction, and aerospace/defense customers.
Financial performance
| Metric | Three months ended Nov. 30, 2012 | Six months ended Nov. 30, 2012 |
|---|---|---|
| Net sales | $6.51 million, down 4% | $13.82 million, up 22% |
| Gross profit / margin | $2.48 million / 38% (prior: 24%) | $5.10 million / 37% (prior: 31%) |
| Operating income | $1.17 million, up 91% | $2.07 million, up 77% |
| Net income | $769,361, up 86%; EPS $0.23 | $1.38 million, up 68%; EPS $0.42 |
For the six-month period, SG&A rose 31% to $3.03 million, including higher air-freight and estimated incentive-compensation costs. The effective income-tax provision was $682,000 for the half year.
Cash flow and balance sheet: Six-month operating cash flow was $394,000, versus $109,000 in the prior-year period. Capital expenditures were $1.63 million (prior: $461,000); investing cash outflow was $1.63 million. Financing provided $1.20 million, primarily from increased short-term borrowings. Cash declined by $41,144 to $32,808. At November 30, current assets were $19.35 million and current liabilities $5.62 million; equity was $20.42 million.
Short-term borrowings were $1.452 million, up from $262,000 at May 31, 2012. The company had a $6 million demand line of credit, with $4.548 million unused; the outstanding balance carried a 3% rate. The facility is renewable annually and the bank has no express obligation to lend. The company reported compliance with its covenants, including working capital of $13.733 million against a $3 million minimum.
Material changes and business developments
- Half-year sales increased, while second-quarter sales decreased. Six-month revenue from non-project sales rose 44% and project revenue rose 13%; in the quarter, non-project revenue rose 36% while project revenue fell 18%.
- Management attributed stronger gross margins in part to a higher share of North American sales, where it said market conditions and competition were more favorable. U.S. sales were 57% of half-year revenue, versus 41%; Asia was 38%, versus 50%.
- Backlog at November 30 was $13.0 million, down 49% from $25.5 million a year earlier and 26% from $17.5 million at May 31. The prior-year comparison included several high-value orders for one Asian customer. Open orders increased 31% year over year to 142.
- Accounts receivable increased 19% from May to $6.67 million, including approximately $2.40 million of project retainage. Days sales outstanding rose to 92 from 52. Management expects collection of net receivables, including retainage, within 12 months. Costs and estimated earnings over billings declined to $2.28 million from $5.49 million; management expects the balance to be billed within 12 months.
- Inventory rose 8% from May to $9.03 million, principally due to work in process. Annualized inventory turnover fell to 1.8 from 2.7. The filing notes maintenance inventory may be exposed to technological obsolescence and reports a $90,000 obsolescence provision for the half year.
Outlook, risks, and other matters
The company is renovating recently acquired manufacturing buildings to expand machining, assembly, and testing capacity. Total renovation cost is estimated at $2.7 million; $1.63 million of capital expenditures had been incurred during the half year, with another $690,000 committed over the next 12 months. Management expects cash and line-of-credit resources to fund the work and says liquidity is adequate for operations and planned capital improvements over the next 12 months. No specific earnings or revenue guidance was provided. Management cautioned that period-to-period results fluctuate and are not necessarily indicative of full-year results.
Forward-looking risks identified include prolonged or worsening economic weakness, customer capital-budget reductions, changing demand and industry capacity, competition and pricing pressure, and technology changes that could reduce demand. The filing reports routine litigation only, no defaults, and effective disclosure controls; no material change in internal controls was reported. The interim statements were reviewed by the independent accountant, not audited.
The board continued the share-repurchase arrangement; no shares were repurchased during the quarter. The company had designated $419,815 for open-market purchases, and 15,600 shares had previously been repurchased under the arrangement at an average $5.14 per share.
Important facts for investors to verify
- Whether the $13 million backlog converts to revenue on schedule, given its substantial decline from the prior-year comparison and the company’s project-based sales fluctuations.
- Collection timing for project retainage and other receivables, and whether the elevated 92-day DSO reverses as management expects.
- Cash needs and borrowing availability as renovation spending continues, including the demand nature and annual renewal of the credit line.
- Whether work-in-process inventory and slower turnover lead to delivery delays, additional costs, or obsolescence charges.
- Whether improved gross margins persist given changing geographic and product mix and the company’s exposure to customer capital spending and competition.