Taylor Devices, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 30, 2013. The company manufactures products for industrial, construction, and aerospace/defense customers. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and position
| Metric | Three months ended Nov. 30, 2013 | Six months ended Nov. 30, 2013 |
|---|---|---|
| Net sales | $4.60 million; down 29% year over year | $9.90 million; down 28% |
| Gross profit / margin | $1.31 million / 28%, versus $2.48 million / 38% | $2.59 million / 26%, versus $5.10 million / 37% |
| Operating income | $424,367; down 64% | $678,282; down 67% |
| Net income / diluted EPS | $306,423 / $0.09, versus $769,361 / $0.23 | $507,686 / $0.15, versus $1.38 million / $0.42 |
| Operating cash flow | Not reported quarterly | $241,784, versus $393,666 |
| Capital expenditures | Not reported quarterly | $1.07 million, versus $1.63 million |
Cash and equivalents were $1.33 million at November 30, down from $2.00 million at May 31. Six-month cash decreased $671,309, ending at $1.33 million. Current assets were $17.11 million and current liabilities $3.46 million. Stockholders’ equity was $22.38 million. The company had no balance on its $6 million bank line of credit; long-term liabilities were $398,185.
Material changes and management commentary
- Management attributed lower sales and production disruption to relocating all production equipment to the Buffalo Bolt Way campus during October and November, including installation and setup downtime. Renovations and the machinery move were completed in autumn 2013; total renovation costs were approximately $3 million.
- Six-month revenue from long-term construction projects fell 43%; 34 projects were in process, compared with 42 a year earlier. Non-project revenue increased 1%. U.S. sales declined 25% and Asia sales 33%; sales to construction customers fell 42%, industrial customers 15%, and aerospace/defense customers 1%.
- Six-month customer mix was 53% construction, 36% aerospace/defense, and 11% industrial, versus 64%, 26%, and 10%, respectively, in the prior year.
- Backlog value rose 27% to $16.5 million, although open orders declined 27% to 103 from 142. $6.7 million of backlog related to projects already in progress. Management cautioned that backlog, revenue, margins, and earnings fluctuate and current changes may not indicate future results.
- SG&A fell 37% for the six-month period, mainly due to lower commissions, lower air-freight costs than the prior year, and reduced estimated incentive compensation.
Liquidity, outlook, and risks
- Management said operating cash flows and borrowing capacity should be sufficient for operations, capital improvements, and any share repurchases over the next 12 months. The $6 million demand line is annually renewable, secured by specified assets, and the bank is not expressly obligated to lend. The company reported compliance with its covenants and $13.647 million of working capital against a $3 million minimum.
- Capital expenditure commitments for the next 12 months were $20,000. Management expected to collect accounts receivable, including retainage, and bill the full $2.978 million of costs and estimated earnings in excess of billings within 12 months.
- No specific revenue or earnings guidance was provided. The filing says interim results are not necessarily indicative of full-year results.
- Risks cited include reduced customer capital budgets, changing demand and industry capacity, competition and pricing pressure, technology reducing product demand, and natural disasters. Contract revenue depends on percentage-of-completion estimates; estimated contract losses are charged when identified. Maintenance and other inventory is exposed to technological obsolescence; an obsolescence allowance was recorded.
- Accounts receivable days outstanding increased to 46 from 39 at May 31. Costs and estimated earnings in excess of billings increased 21% to $2.978 million; billings in excess of costs and estimated earnings increased to $655,000 from $172,000.
- The board continued its share-repurchase authorization; $419,815 was designated for open-market purchases, with no repurchases during the quarter. The company stated that no dividends or profit-sharing benefits were planned for the fiscal year.
- Routine litigation was the only legal proceeding reported. Management assessed disclosure controls as effective and reported no material changes to internal controls during the quarter.
Important facts for investors to verify
- Whether production at the new campus normalized after the relocation and whether revenue and gross margins recovered.
- Conversion, timing, and collectability of the $16.5 million backlog and contract-related receivables and unbilled balances.
- Cash generation and working-capital needs, including the effect of elevated work in process and receivables days outstanding.
- Availability and renewal terms of the demand credit line, which has no express bank lending obligation.
- Potential inventory obsolescence and the accuracy of percentage-of-completion cost and earnings estimates.