Taylor Devices, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 28, 2013; comparisons are with the periods ended February 29, 2012. The interim financial statements are unaudited and were reviewed by the independent accountant.
Business context and results
Taylor Devices manufactures products for industrial, construction, and aerospace/defense customers. For the nine months, sales mix was 62% construction, 29% aerospace/defense, and 9% industrial. Revenue mix by geography was 53% U.S., 43% Asia, and 4% other.
| Metric | Three months ended Feb. 28, 2013 | Year-over-year | Nine months ended Feb. 28, 2013 | Year-over-year |
|---|---|---|---|---|
| Net sales | $5.753 million | Down 28% | $19.578 million | Up 1% |
| Gross profit / margin | $2.063 million / 36% | Down 11% / up from 29% | $7.164 million / 37% | Up 24% / up from 30% |
| Operating income | $933,000 | Up 24% | $3.000 million | Up 56% |
| Net income | $623,000 | Up 21% | $2.000 million | Up 50% |
| Basic and diluted EPS | $0.19 | Compared with $0.16 | $0.60 | Compared with $0.41 |
Quarterly sales fell as long-term project revenue declined 50% and projects in process decreased to 27 from 44. Non-project revenue rose 61%. For the nine months, project revenue was down 15%, while non-project revenue rose 50%. Management attributed stronger gross margins in both comparisons partly to a greater share of aerospace/defense sales, where competition is more favorable.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $2.702 million, versus cash used of $784,000 a year earlier. Investing used $2.168 million, including $2.164 million of property and equipment purchases; financing used $253,000. Cash increased $281,000 to $355,000.
- At February 28, cash was $355,000, accounts receivable $4.606 million, inventory $9.007 million, and costs and estimated earnings in excess of billings $1.879 million. Current assets were $17.141 million and current liabilities $3.285 million.
- Short-term borrowings were zero, compared with $262,000 at May 31, 2012. The company had a $6 million bank demand line, secured by specified assets, with no outstanding balance. It is renewed annually and the bank has no express obligation to lend. The company reported compliance with covenants and working capital of $13.857 million against a $3 million minimum.
- Backlog was $11.7 million at quarter-end, 49% below the $23 million a year earlier and 33% below the $17.5 million at the prior fiscal year-end. The prior-year comparison included several high-value orders for one Asian customer.
Material changes, outlook, and risks
- Quarterly revenue weakness reflected fewer and lower-value projects and lower construction-related sales; aerospace/defense and industrial sales increased. Nine-month U.S. sales rose 40%, while Asia sales fell 18% from the prior-year record level.
- SG&A increased 7% for the nine months, primarily due to higher air-freight charges, but fell 27% in the quarter as commissions and air-freight costs declined.
- The company is renovating three acquired buildings to expand manufacturing space. Two were occupied; completion of the third was expected in summer 2013, with machining operations planned to move in autumn 2013. Total renovation costs were estimated at $2.9 million, with $1.225 million of capital expenditure commitments over the next 12 months. Management expected cash and the credit line to fund the work.
- Management said operating cash flow and borrowing capacity should be sufficient for operations, capital improvements, and potential share repurchases over the next 12 months. No specific earnings or revenue guidance was provided; management cautioned that interim results may not indicate full-year performance.
- Key disclosed risks include economic conditions and customer capital-budget reductions, changing demand, competition and pricing pressure, and technology advances that could reduce product demand. Maintenance inventory is exposed to technological obsolescence; inventory turnover declined to 1.7 from 2.7. Receivables days outstanding increased to 72 from 52, and the company expected to collect receivables and bill contract assets within 12 months.
- The filing reported no material legal proceedings beyond routine litigation, no defaults, and no share repurchases during the quarter. The company stated there would be no profit sharing, dividends, or other such benefits during the fiscal year.
Important facts for investors to verify
- Whether the $11.7 million backlog converts to revenue on schedule, given its decline and the lower number of projects.
- Progress, remaining cost, and funding of the facility renovation and planned relocation of machining operations.
- Collection timing for receivables and contract assets, including the effect of the 72-day DSO and customer retainage.
- Inventory quality and potential obsolescence, especially maintenance inventory and work in process.
- Availability and renewal terms of the demand line of credit, notwithstanding management’s liquidity assessment.