Taylor Devices, Inc. — Form 10-Q Summary
Business context and reporting period: The filing covers the quarter and six months ended November 30, 2017, the second quarter of the company’s fiscal year. Sales include long-term construction projects accounted for using the percentage-of-completion method, as well as other orders. Customers are grouped as construction, aerospace/defense, and industrial. Interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance
| Metric | Three months ended Nov. 30, 2017 | Six months ended Nov. 30, 2017 |
|---|---|---|
| Sales | $4.812 million, down 38% | $11.379 million, down 16% |
| Gross profit / margin | $1.262 million / 26% (35% prior year) | $2.879 million / 25% (31% prior year) |
| Operating income | $35,084, versus $1.372 million | $445,168, down 73% |
| Net income | $52,147, versus $938,280 | $353,894, down 69% |
| EPS, basic and diluted | $0.02, versus $0.27 | $0.10, versus $0.34 |
| Operating cash flow | $(988,449) for six months, versus $(967,098) |
At November 30, cash and cash equivalents were $1.713 million and short-term investments were $1.031 million. Current assets were $25.871 million and current liabilities $4.159 million. The company had no borrowings outstanding. Stockholders’ equity was $33.391 million. Capital expenditures were $737,000 for the six months.
Material changes and management commentary
- Lower construction-project revenue drove much of the decline: project revenue fell 22% for the six-month period and 53% in the quarter. The company had 34 projects in process during the six months, versus 42 a year earlier.
- Management attributed delays and reduced construction sales to customer-site scheduling, late custom components, subcontractor quality issues, and bottlenecks while bringing a new test machine into operation. It said most issues were resolved and expressed optimism that sales volume would improve in subsequent quarters.
- Lower production volume reduced absorption of fixed manufacturing costs, while several projects were competitively bid, contributing to lower gross margins. SG&A fell 5% year over year for six months, mainly from lower commissions, but remained higher as a share of revenue.
- Backlog was $20.4 million at November 30, compared with $20.6 million a year earlier; open orders increased 43% to 139. Of current backlog, $7.2 million related to projects already in progress.
- Six-month sales mix shifted: construction was 50% of sales versus 61% prior year; aerospace/defense was 41% versus 34%; industrial was 9% versus 5%. U.S. sales fell 19%, while Asia sales increased 11%.
Liquidity, risks, and outlook
- Operating cash flow was negative, with cash declining $1.612 million during the six months. Accounts receivable rose 38% from fiscal year-end to $3.509 million, and days sales outstanding increased from 36 to 66. Receivables and contract assets net of contract liabilities totaled $10.235 million, up 26% from May 31.
- Inventory was $11.790 million, up 3% from fiscal year-end, and approximately 91% was work in process. Management said it expected to collect net receivables and bill the full $7.519 million contract asset balance within twelve months.
- Effective August 30, the company replaced its credit facility with a $10 million unsecured demand line priced at LIBOR plus 2.25%. It had no balance outstanding, but the facility is renewed annually and the bank is not expressly obligated to lend. Management believes operating cash flow and borrowing capacity are sufficient for operations and capital improvements over the next twelve months. Planned capital commitments were $150,000.
- The company had not fully determined the effect of adopting the new revenue recognition standard, expected in fiscal 2019; it anticipated that adoption would likely slow revenue recognition for some percentage-of-completion contracts.
- Tax legislation enacted December 22, 2017 reduced the federal corporate tax rate from 34% to 21%. The company expected incremental deferred tax expense in the quarter ending February 28, 2018; the filing does not provide a clear amount.
- Disclosed risks include customer capital-budget reductions, changing demand and industry capacity, competition and pricing pressure, technology changes, and natural disasters. The filing reports no material legal proceedings beyond routine litigation. The auditor performed an interim review, not an audit, and reported no material modifications known to be required.
Important facts for investors to verify
- Whether management’s expectation of improved sales materializes, and how backlog converts into revenue and cash.
- Collection timing for the increased receivables and contract assets, including the $818,000 of customer retainage.
- Whether work-in-process inventory and competitively bid projects support margins without additional delays or cost overruns.
- The eventual revenue-recognition impact of the new standard and the deferred tax expense from tax reform.
- Availability and renewal terms of the demand credit line, given the negative operating cash flow and the bank’s lack of an express lending obligation.