TAYLOR DEVICES, INC. Cautionary Statement
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Information in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this 10-Q and its Exhibits that does not consist of historical facts, are "forward-looking statements." Statements accompanied or qualified by, or containing, words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements and, as such, are not a guarantee of future performance. The statements involve factors, risks and uncertainties, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements. Risks and uncertainties can include, among others, reductions in capital budgets by our customers and potential customers; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products; the kind, frequency and intensity of natural disasters that affect demand for the Company's products; the occurrence or recurrence of pandemics such as COVID-19; and other factors, many or all of which are beyond the Company's control. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results. The Company disclaims any obligation to release publicly any updates or revisions to the forward-looking statements herein to reflect any change in the Company's expectations with regard thereto, or any changes in events, conditions or circumstances on which any such statement is based. Results of Operations
A summary of the period to period changes in the principal items included in the condensed consolidated statements of income is shown below:
Summary comparison of the three months ended
Increase /
(Decrease)
Sales, net $ 1,783,000
Cost of goods sold $ 270,000
Research and development costs $ 93,000
Selling, general and administrative expenses $ 359,000
Income before provision for income taxes $ 1,036,000
Provision for income taxes $ 216,000
Net income $ 820,000
Sales under certain fixed-price contracts, in which the product has no
alternative use to the Company and the Company has enforceable rights to payment
for progress completed to date, inclusive of profit, are accounted for under the
percentage-of-completion method of accounting whereby revenues are recognized
based on estimates of completion prepared on a ratio of cost to total estimated
cost basis. Costs include all material and direct and indirect charges related
to specific contracts.
Adjustments to cost estimates are made periodically and any losses expected to
be incurred on contracts in progress are charged to operations in the period
such losses are determined. However, any profits expected on contracts in
progress are recognized over the life of the contract.
For financial statement presentation purposes, the Company nets progress
billings against the total costs incurred on uncompleted contracts. The asset,
"costs and estimated earnings in excess of billings," represents revenues
recognized in excess of amounts billed. The liability, "billings in excess of
costs and estimated earnings," represents billings in excess of revenues
recognized.
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For the three months ended August 31, 2022 (All figures discussed are for the
three months ended August 31, 2022 as compared to the three months ended August
31, 2021 ).
Three months ended August 31 Change
2022 2021 Amount Percent
Net Revenue $ 9,091,000 $ 7,308,000 $ 1,783,000 24 %
Cost of sales 5,706,000 5,436,000 270,000 5 %
Gross profit $ 3,385,000 $ 1,872,000 $ 1,513,000 81 %
… as a percentage of net revenues 37 % 26 %
The Company's consolidated results of operations showed a 24% increase in net
revenues and an increase in net income of 451%. Revenues recorded in the current
period for long-term construction projects ("Project(s)") were 14% more than the
level recorded in the prior year. The Company had 33 Projects in process during
the current period as compared to 26 during the same period last year. Revenues
recorded in the current period for other-than long-term construction projects
(non-projects) were 45% more than the level recorded in the prior year. Total
sales within the U.S. increased 45% from the same period last year. Total sales
to Asia decreased 40% from the same period of the prior year. The strong U.S.
dollar is making our products less competitive in already competitive Asian
markets. Sales increases were recorded over the same period last year to
customers involved in construction of buildings and bridges (17%) as well as to
customers in aerospace / defense (37%) and to industrial customers (25%). Sales
are now at or surpassing pre-pandemic levels. The negative effects of the
pandemic now appear to be behind us.
In prior periods, the Company reported research and development costs as part of
cost of sales and therefore included in the gross profit. Management intends to
continue to make significant investments in research and development in order to
promote profitable growth of the Company. In order to more clearly distinguish
these investments from the profitability of a period's sales, effective with the
current quarter, the Company is disclosing research and development costs
separately on the Condensed Consolidated Statements of Income below the gross
profit line. Prior period statements of income as well as disclosures in this
document have been reclassified to conform with the presentation adopted for the
current period.
The gross profit as a percentage of net revenue of 37% in the current period is
eleven percentage points greater than the same period of the prior year (26%).
The Company has been able to increase sales prices to recover more of the
increased costs for materials and labor that were incurred over the past year.
Management continues to work with suppliers to obtain more visibility of
conditions affecting their respective markets. These actions have helped to
improve the gross margin as a percentage of revenue over the prior year.
Sales of the Company's products are made to three general groups of customers: industrial, structural and aerospace / defense. A breakdown of sales to the three general groups of customers is as follows:
Three months ended August 31
2022 2021
Industrial 8 % 7 %
Structural 56 % 60 %
Aerospace / Defense 36 % 33 %
At August 31, 2021 , the Company had 165 open sales orders in its backlog with a
total sales value of $19.4 million . At August 31, 2022 , the Company has 12%
fewer open sales orders in its backlog (146 orders), and the total sales value
is $23.0 million (19% increase).
The Company's backlog, revenues, commission expense, gross profits, and net income fluctuate from period to period. The changes in the current period, compared to the prior period, are not necessarily representative of future results.
Net revenue by geographic region, as a percentage of total net revenue for the three-month periods endedAugust 31, 2022 andAugust 31, 2021 , is as follows: Three months ended August 31 2022 2021 USA 82 % 70 % Asia 10 % 20 % Other 8 % 10 % -11- Table of Contents
Research and Development Costs
Three months ended August 31 Change
2022 2021 Amount Percent
R & D $ 375,000 $ 282,000 $ 93,000 33 %… as a percentage of net revenues 4 %
4 %
Research and development costs stayed consistent at four percent of net revenues while increasing by 33% over the prior year.
Selling, General and Administrative Expenses
Three months ended August 31 Change
2022 2021 Amount Percent
S G & A $ 1,831,000 $ 1,472,000 $ 359,000 24 %
… as a percentage of net revenues 20 % 20 %
Selling, general and administrative expenses increased 24% from the prior year. This increase is primarily due to increased employee compensation costs including incentive compensation.
The above factors resulted in operating income of
Stock Options The Company has a stock option plan which provides for the granting of nonqualified or incentive stock options to officers, key employees and non-employee directors. Options granted under the plan are exercisable over a ten-year term. Options not exercised at the end of the term expire. No stock options were granted in the period.
A summary of changes in the stock options outstanding during the three-month
period ended
Weighted-
Number of Average
Options Exercise Price
Options outstanding and exercisable
at May 31, 2022: 283,000 $ 11.43
Less: Options
exercised: 4,000 8.06
Less:
Options expired: 3,000 -
Options outstanding and exercisable atAugust 31, 2022: 276,000 $
11.49
Closing value per share on NASDAQ at
August 31, 2022: $ 10.19 Capital Resources and Long-Term Debt
The Company's primary liquidity is dependent upon the working capital needs. These are mainly inventory, accounts receivable, costs and estimated earnings in excess of billings, accounts payable, other accrued liabilities, and billings in excess of costs and estimated earnings. The Company's primary source of liquidity has been operations. Capital expenditures for the three months endedAugust 31, 2022 were$833,000 compared to$462,000 in the same period of the prior year. As ofAugust 31, 2022 , the Company has commitments for capital expenditures totaling$1,700,000 during the next twelve months.
The Company believes it is carrying adequate insurance coverage on its facilities and their contents.
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Inventory and Maintenance Inventory
August 31, 2022 May 31, 2022 Increase /(Decrease)
Raw materials $ 601,000 $ 489,000 $ 112,000 23 %
Work-in-process 5,137,000 5,166,000 (29,000 ) -1 %
Finished goods 165,000 200,000 (35,000 ) -18 %
Inventory 5,903,000 86 % 5,855,000 84 % 48,000 1 %Maintenance and other inventory 1,001,000 14 % 1,107,000
16 % (106,000 ) -10 %
Total $ 6,904,000 100 % $ 6,962,000 100 % $ (58,000 ) -1 %
Inventory turnover 3.3 3.1
NOTE: Inventory turnover is annualized for the three-month period ended
Inventory, at$5,903,000 as ofAugust 31, 2022 , is$48,000 more than the prior year-end level of$5,855,000 . Approximately 87% of the current inventory is work in process, 3% is finished goods, and 10% is raw materials. Maintenance and other inventory represent stock that is estimated to have a product life cycle in excess of twelve months. This stock represents certain items the Company is required to maintain for service of products sold and items that are generally subject to spontaneous ordering. This inventory is particularly sensitive to technological obsolescence in the near term due to its use in industries characterized by the continuous introduction of new product lines, rapid technological advances and product obsolescence. Management of the Company has recorded an allowance for potential inventory obsolescence. The provision for potential inventory obsolescence was zero and$45,000 for the three-month periods endedAugust 31, 2022 and 2021. The Company continues to rework slow-moving inventory, where applicable, to convert it to product to be used on customer orders. During fiscal 2021, the Company began a thorough review of the inventory to identify and dispose of items that had not been used for several years and were unlikely to be used in the foreseeable future.
Accounts Receivable, Costs and Estimated Earnings in Excess of Billings ("CIEB"), and Billings in Excess of Costs and Estimated Earnings ("BIEC")
August 31, 2022 May 31, 2022 Increase /(Decrease)
Accounts receivable $ 5,832,000 $ 4,467,000 $ 1,365,000 31 %
CIEB 2,833,000 3,336,000 (503,000 ) -15 %
Less: BIEC 1,614,000 1,123,000 491,000 44 %
Net $ 7,051,000 $ 6,680,000 $ 371,000 6 %
Number of an average day's sales
outstanding in accounts
receivable (DSO) 58 42
The Company combines the totals of accounts receivable, the current asset, CIEB, and the current liability, BIEC, to determine how much cash the Company will eventually realize from revenue recorded to date. As the accounts receivable figure rises in relation to the other two figures, the Company can anticipate increased cash receipts within the ensuing 30-60 days. Accounts receivable of$5,832,000 as ofAugust 31, 2022 includes$6,000 of an allowance for doubtful accounts ("Allowance"). The accounts receivable balance as ofMay 31, 2022 of$4,467,000 included an allowance of$16,000 . The DSO increased from 42 days atMay 31, 2022 to 58 atAugust 31, 2022 . The DSO is a function of 1.) the level of sales for an average day (for example, total sales for the past three months divided by 90 days) and 2.) the level of accounts receivable at the balance sheet date. The level of sales for an average day in the first quarter of the current fiscal year is almost equal to the level in the fourth quarter of the prior year. The level of accounts receivable at the end of the current fiscal quarter is 31% more than the level at the end of the prior year. The increase in the level of accounts receivable caused the DSO to increase from last year end to this quarter-end. The level of accounts receivable is greater than at the end of the prior year primarily because more than half of the current quarter's revenue was recorded in the final month of the quarter compared with less than a third of the comparative quarter being recorded in the month of May. The Company expects to collect the net accounts receivable balance during the next twelve months. -13- Table of Contents As noted above, CIEB represents revenues recognized in excess of amounts billed. Whenever possible, the Company negotiates a provision in sales contracts to allow the Company to bill, and collect from the customer, payments in advance of shipments. Unfortunately, such provisions are often not possible. The$2,833,000 balance in this account atAugust 31, 2022 is 15% less than the prior year-end balance. This decrease is the result of normal flow of the Projects through production with billings to the customers as permitted in the related contracts. The Company expects to bill the entire amount during the next twelve months. As the Company bills the customers on these Projects, the accounts receivable balance will increase. 60% of the CIEB balance as of the end of the last fiscal quarter,May 31, 2022 , was billed to those customers in the current fiscal quarter endedAugust 31, 2022 . The remainder will be billed as the Projects progress, in accordance with the terms specified in the various contracts.
The balances in this account are comprised of the following components:
August 31, 2022 May 31, 2022
Costs $ 3,464,000 $ 3,250,000
Estimated Earnings 2,421,000 2,642,000
Less: Billings to customers 3,052,000 2,556,000
CIEB $ 2,833,000 $ 3,336,000
Number of Projects in progress 14 11
As noted above, BIEC represents billings to customers in excess of revenues
recognized. The
The balance in this account fluctuates in the same manner and for the same reasons as the account "costs and estimated earnings in excess of billings," discussed above. Final delivery of product under these contracts is expected to occur during the next twelve months.
The balances in this account are comprised of the following components:
August 31, 2022 May 31, 2022
Billings to customers $ 5,037,000 $ 2,711,000
Less: Costs 2,486,000 1,019,000
Less: Estimated Earnings 937,000 569,000
BIEC $ 1,614,000 $ 1,123,000
Number of Projects in progress 13 8
Summary of factors affecting the balances in CIEB and BIEC:
August 31, 2022 May 31, 2022
Number of Projects in progress 27 19
Aggregate percent complete 45 % 47 %Average total sales value of Projects in progress$ 721,000 $
795,000 Percentage of total value invoiced to customer 42 % 35 %
The Company's backlog of sales orders atAugust 31, 2022 is$23.0 million , down slightly from the$23.7 million at the end of the prior year.$10.2 million of the current backlog is on Projects already in progress. Other Balance Sheet Items
Accounts payable, at$1,449,000 as ofAugust 31, 2022 , is 2% more than the prior year-end. Other current liabilities decreased 39% from the prior year-end, to$2,068,000 . This decrease is primarily due to a decrease in customer advance payments as payments were applied to customer invoices issued during the period. The Company expects the current accrued amounts to be paid or applied during the next twelve months.
Management believes the Company's cash flows from operations are sufficient to fund ongoing operations and capital improvements for the next twelve months.
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