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; 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 nine months ended
Increase /
(Decrease)
Sales, net $ 8,270,000
Cost of goods sold $ 2,608,000
Research and development costs $ 197,000
Selling, general and administrative expenses $ 1,432,000
Income before provision for income taxes $ 4,389,000
Provision for income taxes $ 893,000
Net income $ 3,496,000 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 and estimated earnings recognized 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 nine months endedFebruary 28, 2023 (All figures discussed are for the nine months endedFebruary 28, 2023 as compared to the nine months endedFebruary 28, 2022 ). Nine months ended February 28 Change 2023 2022 Amount Percent Net Revenue$ 29,479,000 $ 21,209,000 $ 8,270,000 39% Cost of sales 17,980,000 15,372,000 2,608,000 17% Gross profit$ 11,499,000 $ 5,837,000 $ 5,662,000 97% … as a percentage of net 39% 28% revenues
The Company's consolidated results of operations showed a 39% increase in net
revenues and an increase in net income of 483%. Revenues recorded in the
current period for long-term construction projects ("Project(s)") were 36% more
than the level recorded in the prior year. The Company had 45 Projects in
process during the current period as compared to 34 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
In prior years, 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 first quarter of fiscal 2023, 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 39% in the current period is eleven percentage points greater than the same period of the prior year (28%). 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 combined with benefits from the Company's continuous improvement initiatives and increased volume 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:
Nine months ended February 28
2023 2022
Industrial 10% 8%
Structural 54% 58%
Aerospace / Defense 36% 34%
At
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.
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Net revenue by geographic region, as a percentage of total net revenue for the
nine-month periods ended
Nine months ended February 28
2023 2022
USA 81% 72%
Asia 12% 18%
Other 7% 10%
Research and Development Costs
Nine months ended February 28 Change
2023 2022 Amount Percent
R & D $ 881,000 $ 684,000 $ 197,000 29%
… as a percentage of net 3.0% 3.2%
revenues
Research and development costs stayed consistent as a percent of net revenues while increasing by 29% over the prior year.
Selling, General and Administrative Expenses
Nine months ended February 28 Change
2023 2022 Amount Percent
S G & A $ 5,878,000 $ 4,446,000 $1,432,000 32%
… as a percentage of net 20% 21%
revenues
Selling, general and administrative expenses increased by 32% from the prior year. This increase is primarily due to increased employee compensation costs including incentive compensation.
The above factors resulted in an operating income of
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 $ 3,748,000
Cost of goods sold $ 1,102,000
Research and development costs $ (10,000 )
Selling, general and administrative expenses $ 660,000
Income before provision for income taxes $ 2,231,000
Provision for income taxes $ 455,000
Net income $ 1,776,000 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.
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For financial statement presentation purposes, the Company nets progress billings against the total costs incurred and estimated earnings recognized 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.
For the three months endedFebruary 28, 2023 (All figures discussed are for the three months endedFebruary 28, 2023 as compared to the three months endedFebruary 28, 2022 ). Three months ended February 28 Change 2023 2022 Amount Percent Net Revenue$9,891,000 $6,143,000 $3,748,000 61% Cost of sales 5,871,000 4,769,000 1,102,000 23% Gross profit$4,020,000 $1,374,000 $2,646,000 192% … as a percentage of net 41% 22% revenues
The Company's consolidated results of operations showed a 61% increase in net
revenues and
The gross profit as a percentage of net revenue of 41% in the current period is nineteen percentage points higher than the same period of the prior year (22%).
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 combined with benefits from the Company's continuous improvement initiatives and increased volume 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 February 28
2023 2022
Industrial 8% 8%
Structural 54% 49%
Aerospace / Defense 38% 43%
Net revenue by geographic region, as a percentage of total net revenue for the
three-month periods ended
Three months ended
2023 2022
USA 85% 69%
Asia 9% 19%
Other 6% 12%
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Research and Development Costs
Three months ended February 28 Change
2023 2022 Amount Percent
R & D $ 191,000 $ 201,000 $ (10,000) -5%
… as a percentage of net 1.9% 3.3%
revenues
Selling, General and Administrative Expenses
Three months ended February 28 Change
2023 2022 Amount Percent
S G & A $ 2,025,000 $ 1,365,000 $ 660,000 48%
… as a percentage of net 20% 22%
revenues
Selling, general and administrative expenses increased 48% from the prior year.
This increase is primarily due to increased employee compensation costs including incentive compensation.
The above factors resulted in an 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.
The Company expenses stock options using the fair value recognition provisions
of the FASB ASC. The Company recognized
The fair value of each stock option grant has been determined using the
Black-Scholes model. The model considers assumptions related to exercise price,
expected volatility, risk-free interest rate, and the weighted average expected
term of the stock option grants. Expected volatility assumptions used in the
model were based on volatility of the Company's stock price for the thirty-month
period ending on the date of grant. The risk-free interest rate is derived from
the
The following assumptions were used in the Black-Scholes model to estimate the fair market value of the Company's stock option grants:
February February
2023 2022
Risk-free interest rate: 1.625% 2.875%
Expected life of the options: 4.1 years 4 years
Expected share price volatility: 30% 32%
Expected dividends: zero zero
These assumptions resulted in estimated fair-market value per
stock option: $3.06 $3.42 The ultimate value of the options will depend on the future price of the Company's common stock, which cannot be forecast with reasonable accuracy.
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A summary of changes in the stock options outstanding during the nine-month
period ended
Weighted-
Number of Average
Options Exercise Price
Options outstanding and exercisable at May 31, 2022: 283,000 $ 11.43
Options granted: 42,000 $ 11.45
Less: Options exercised: 13,750 $ 10.04
Less: Options expired: 3,750 -
Options outstanding and exercisable at February 28,
2023: 307,500 $ 11.51
Closing value per share on NASDAQ at February 28, 2023: $ 16.80 Capital Resources and Long-Term Debt
The Company's primary liquidity is dependent upon the working capital needs. These are mainly short-term investments, inventory, accounts receivable, costs and estimated earnings in excess of billings, accounts payable, other current liabilities, and billings in excess of costs and estimated earnings. The Company's primary source of liquidity has been operations.
Capital expenditures for the nine months ended
The Company believes it is carrying adequate insurance coverage on its facilities and their contents.
Inventory and Maintenance Inventory
February 28, 2023 May 31, 2022 Increase /(Decrease)
Raw materials $ 684,000 $ 489,000 $ 195,000 40%
Work-in-process 4,808,000 5,166,000 (358,000 ) - 7%
Finished goods 188,000 200,000 (12,000 ) - 6%
Inventory 5,680,000 87% 5,855,000 84% (175,000 ) - 3%
Maintenance and other inventory 868,000 13% 1,107,000 16% (239,000 ) - 22%
Total $ 6,548,000 100% $ 6,962,000 100% $ (414,000 ) - 6%
Inventory turnover 3.5 3.1
NOTE: Inventory turnover is annualized for the nine-month period ended
Inventory, at
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
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Accounts Receivable, Costs and Estimated Earnings in Excess of Billings ("CIEB"), and Billings in Excess of Costs and Estimated Earnings ("BIEC")
February 28, 2023 May 31, 2022 Increase /(Decrease)
Accounts receivable $ 8,563,000 $ 4,467,000 $ 4,096,000 92%
CIEB 3,774,000 3,336,000 438,000 13%
Less: BIEC 1,438,000 1,123,000 315,000 28%
Net $ 10,899,000 $ 6,680,000 $ 4,219,000 63%
Number of an average day's
sales outstanding in accounts
receivable 78 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
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
The balances in this account are comprised of the following components:
February 28, 2023 May 31, 2022
Costs $ 3,430,000 $ 3,250,000
Estimated Earnings 4,045,000 2,642,000
Less: Billings to customers 3,701,000 2,556,000
CIEB $ 3,774,000 $ 3,336,000
Number of Projects in progress 15 11
As noted above, BIEC represents billings to customers in excess of revenues
recognized. The
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The balances in this account are comprised of the following components:
February 28, 2023 May 31, 2022
Billings to customers $ 3,772,000 $ 2,711,000
Less: Costs 1,349,000 1,019,000
Less: Estimated Earnings 985,000 569,000
BIEC $ 1,438,000 $ 1,123,000
Number of Projects in progress 7 8
Summary of factors affecting the balances in CIEB and BIEC:
February 28, 2023 May 31, 2022
Number of Projects in progress 22 19
Aggregate percent complete 49% 47%
Average total sales value of Projects in progress
Percentage of total value invoiced to customer 41% 35%
The Company's backlog of sales orders at
Other Balance Sheet Items
Accounts payable, at
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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