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| TAYD > SEC Filings for TAYD > Form 10-Q on 14-Jan-2013 | All Recent SEC Filings |
14-Jan-2013
Quarterly Report
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 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, uncertainty regarding how long the worldwide economic recession will continue and whether the recession will deepen; 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; 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 six months ended November 30, 2012 and 2011
Increase /
(Decrease)
Sales, net $ 2,470,000
Cost of goods sold $ 859,000
Selling, general and administrative expenses $ 710,000
Income before provision for income taxes $ 853,000
Provision for income taxes $ 298,000
Net income $ 555,000
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Sales under certain fixed-price contracts, requiring substantial performance over several periods prior to commencement of deliveries, 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.
For the six months ended November 30, 2012(All figures discussed are for the six months ended November 30, 2012 as compared to the six months ended November 30, 2011.)
Six months ended November 30 Change
2012 2011 Amount Percent
Net Revenue $ 13,825,000 $ 11,355,000 $ 2,470,000 22%
Cost of sales 8,723,000 7,864,000 859,000 11%
Gross profit $ 5,102,000 $ 3,491,000 $ 1,611,000 46%
… as a percentage of net revenues 37% 31%
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The Company's consolidated results of operations showed a 22% increase in net revenues and an increase in net income of 68%. Revenues recorded in the current period for long-term construction projects ("Project(s)") were 13% higher than the level recorded in the prior year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 44% higher than the level recorded in the prior year. The gross profit as a percentage of net revenues for the current and prior year periods was 37% and 31%. We had 42 Projects in process during the current period compared with 52 during the same period last year.
Sales of the Company's products are made to three general groups of customers:
industrial, construction and aerospace / defense. A breakdown of sales to the
three general groups of customers is as follows:
Six months ended November 30
2012 2011
Industrial 10% 8%
Construction 64% 64%
Aerospace / Defense 26% 28%
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At November 30, 2011, the Company had 108 open sales orders in our backlog with a total sales value of $25.5 million. At November 30, 2012, the Company has 31% more open sales orders in our backlog (142 orders) and the total sales value is $13.0 million or 49% less than the prior year value. Last year's backlog included a small number of orders, with high sales values, for a single customer to provide seismic protection to buildings in Asia.
The Company's backlog, revenues, commission expense, gross margins, 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 three month periods ended November 30, 2012 and November 30, 2011 is as follows:
Six months ended November 30
2012 2011
USA 57% 41%
Asia 38% 50%
Other 5% 9%
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Selling, General and Administrative Expenses
Six months ended November 30 Change
2012 2011 Amount Percent
Outside Commissions $ 562,000 $ 456,000 $ 106,000 23%
Other SG&A 2,472,000 1,868,000 604,000 32%
Total SG&A $ 3,034,000 $ 2,324,000 $ 710,000 31%
… as a percentage of net revenues 22% 20%
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Selling, general and administrative expenses increased by 31% from the prior year. Outside commission expense increased by 23% from last year's level. This fluctuation was primarily due to: 1.) the significant increase in commissionable sales in the current year, and, 2.) in the current year there is a lower percentage of Project sales sold through our Asian Representatives net of commissions. Other selling, general and administrative expenses increased 32% from last year to this. This increase is primarily due to an increase in air-freight charges incurred in order to meet contractual obligations to deliver products on schedule along with an increase in estimated incentive compensation expense in the current period related to the higher level of sales and operating results.
The above factors resulted in operating income of $2,068,000 for the six months ended November 30, 2012, up 77% from the $1,167,000 in the same period of the prior year.
Summary comparison of the three months ended November 30, 2012 and 2011
Increase /
(Decrease)
Sales, net $ (274,000 )
Cost of goods sold $ (1,105,000 )
Selling, general and administrative expenses $ 273,000
Income before provision for income taxes $ 539,000
Provision for income taxes $ 183,000
Net income $ 356,000
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For the threemonths ended November 30, 2012 (All figures discussed are for the three months ended November 30, 2012 as compared to the three months ended November 30, 2011.)
Three months ended November 30 Change
2012 2011 Amount Percent
Net Revenue $ 6,508,000 $ 6,782,000 $ (274,000 ) -4%
Cost of sales 4,025,000 5,130,000 (1,105,000 ) -22%
Gross profit $ 2,483,000 $ 1,652,000 $ 831 ,000 50%
… as a percentage of net revenues 38% 24%
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The Company's consolidated results of operations showed a 4% decrease in net revenues and an increase in net income of 86%. Revenues recorded in the current period for long-term construction projects ("Project(s)") were 18% lower than the level recorded in the prior year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 36% higher than the level recorded in the prior year. The gross profit as a percentage of net revenues for the current and prior year periods was 38% and 24%. We had 31 Projects in process during the current period compared with 44 during the same period last year. The gross profit in the current year was positively affected by the increase in the percentage of sales to customers in North America where the market conditions and the level of competition are more favorable to the Company than in sections of Asia. Please refer to the chart, below, which shows the breakdown of sales by geographic region.
Sales of the Company's products are made to three general groups of customers:
industrial, construction and aerospace / defense. A breakdown of sales to the
three general groups of customers is as follows:
Three months ended November 30
2012 2011
Industrial 10% 6%
Construction 64% 71%
Aerospace / Defense 26% 23%
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Net revenue by geographic region, as a percentage of total net revenue for three month periods ended November 30, 2012 and November 30, 2011 is as follows:
Three months ended November 30
2012 2011
USA 62% 36%
Asia 36% 57%
Other 2% 7%
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Selling, General and Administrative Expenses
Three months ended November 30 Change
2012 2011 Amount Percent
Outside Commissions $ 283,000 $ 326,000 $ (43,000 ) - 13%
Other SG&A 1,028,000 712,000 316,000 44%
Total SG&A $ 1,311,000 $ 1,038,000 $ 273,000 26%
… as a percentage of net revenues 20% 15%
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Selling, general and administrative expenses increased by 26% from the prior year. Outside commission expense decreased by 13% from last year's level. This fluctuation was primarily due to the decrease in commissionable sales in the current year. Other selling, general and administrative expenses increased 44% from last year to this. This increase is primarily due to an increase in air-freight charges incurred in order to meet contractual obligations to deliver products on schedule.
The above factors resulted in operating income of $1,172,000 for the three months ended November 30, 2012, up 91% from the $615,000 in the same period of the prior year.
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 Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). The Company recognized $36,000 and $27,000 of compensation cost for the six month periods ended November 30, 2012 and November 30, 2011.
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 U.S. treasury yield. The Company used a weighted average expected term. The following assumptions were used in the Black-Scholes model in estimating the fair market value of the Company's stock option grants:
November 2012 November 2011
Risk-free interest rate: 1.875% 1.875%
Expected life of the options: 2.9 years 2.7 years
Expected share price volatility: 43% 49%
Expected dividends: zero zero
These assumptions resulted in estimated fair-market value per stock option: $2.46 $1.74
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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.
A summary of changes in the stock options outstanding during the six month period ended November 30, 2012 is presented below:
Weighted-
Number of Average
Options Exercise Price
Options outstanding and exercisable at May 31, 2012: 163,750 $6.300
Options granted: 14,500 $8.055
Options expired: 1,500 $6.170
Options outstanding and exercisable at November 30, 2012: 176,750 $6.440
Closing value per share on NASDAQ at November 30, 2012: $8.150
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Capital Resources, Line of Credit 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, accrued commissions, and billings in excess of costs and estimated earnings. The Company's primary source of liquidity has been operations and bank financing.
Capital expenditures for the six months ended November 30, 2012 were $1,628,000 compared to $461,000 in the same period of the prior year. As of November 30, 2012, the Company has commitments for capital expenditures of $690,000 during the next twelve months. These expenditures are construction costs contracted to renovate a recently acquired building which will house the Company's machining operations, as discussed below.
In December 2011, the Company closed on its purchase of three industrial buildings in the City of North Tonawanda, NY. The location of the site is 1.4 miles from the Company's existing facilities on Tonawanda Island. In February 2012, the Company closed on its purchase of vacant lots adjacent to the new facilities. The combined real estate of the new parcel totals 9+ acres.
The additional manufacturing space is needed to address overcrowding of the Company's large parts machining and assembly areas due to increased sales of large seismic protection products. Total area of the three buildings is 46,000 square feet, which more than doubles the Company's current manufacturing space.
Two of the three buildings are now occupied and the Company's painting operations have been relocated to the facility. When the remaining building is fully renovated, the Company's production machinery will be relocated from the Company's Tonawanda Island site, and large overhead cranes will be installed to move large parts from machine to machine. The Company plans to move all machining and metalworking operations to the new site. This will allow the former machining areas at the existing Tonawanda Island site to house greatly expanded assembly and product testing areas. All corporate and engineering offices will be unaffected by the change and will remain on Tonawanda Island.
The renovations and modifications to the buildings are extensive, with a total construction cost of $2.7 million. The Company anticipates that its current cash and bank line of credit resources will be sufficient for that purpose.
The Company believes it is carrying adequate insurance coverage on its facilities and their contents.
The Company has available a $6,000,000 bank demand line of credit, with interest payable at the Company's option of 30, 60, 90 or 180 day LIBOR rate plus 2.5%, or the bank's prime rate less .25%. There is a $1,452,000 principal balance outstanding as of November 30, 2012. There was a $258,000 principal balance outstanding at May 31, 2012. The increase in the outstanding balance of the debt is primarily due to the increases in retained amounts for construction Projects included in accounts receivable, as discussed below, and the recent expenditures towards the renovation of the new buildings, as discussed above. The interest rate on the outstanding balance at November 30, 2012 is 3%. The line is secured by accounts receivable, equipment, inventory, and general intangibles, and a negative pledge of the Company's real property. This line of credit is subject to the usual terms and conditions applied by the bank, is subject to renewal annually, and is not subject to an express requirement on the bank's part to lend. The outstanding balance on the line of credit fluctuates as the Company's various long-term projects progress.
The Company is in compliance with restrictive covenants under the line of credit. In these covenants, the Company agrees to maintain the following minimum levels of the stated item:
Covenant Minimum per Covenant Current Actual When Measured
Minimum level of working capital $3,000,000 $13,733,000 Quarterly
Minimum debt service coverage ratio 1.5:1 n/a Fiscal Year-end
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All of the $4,548,000 unused portion of our line of credit is available without violating any of our debt covenants.
Inventory and Maintenance Inventory
November 30, 2012 May 31, 2012 Increase /(Decrease)
Raw materials $ 626,000 $ 622,000 $ 4,000 1%
Work in process 7,893,000 7,112,000 781,000 11%
Finished goods 514,000 638,000 (124,000 ) -19%
Inventory 9,033,000 90% 8,372,000 91% 661,000 8%
Maintenance and other inventory 971,000 10% 845,000 9% 126,000 15%
Total $10,004,000 100% $ 9,217,000 100% $ 787,000 9%
Inventory turnover 1.8 2.7
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NOTE: Inventory turnover is annualized for the six month period ended November 30, 2012
Inventory, at $9,033,000 as of November 30, 2012, is $661,000 or 8% higher than the prior year-end level of $8,372,000. Approximately 87% of the current inventory is work in process, 6% is finished goods, and 7% 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. The maintenance inventory increased 15% since May 31, 2012. Management of the Company has recorded an allowance for potential inventory obsolescence. The provision for potential inventory obsolescence was $90,000 for each of the six month periods ended November 30, 2012 and November 30, 2011. The Company continues to rework slow-moving inventory, where applicable, to convert it to product to be used on customer orders.
Accounts Receivable, Costs and Estimated Earnings in Excess of Billings (CIEB"), and Billings in Excess of Costs and Estimated Earnings ("BIEC")
November 30, 2012 May 31, 2012 Increase /(Decrease)
Accounts receivable $ 6,667,000 $ 5,610,000 $ 1,057,000 19%
CIEB 2,279,000 5,492,000 (3,213,000 ) -59%
Less: BIEC 132,000 669,000 (537,000 ) -80%
Net $ 8,814,000 $10,433,000 $(1,619,000 ) -16%
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Number of an average day's sales
outstanding in accounts
receivable 92 52
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 $6,667,000 as of November 30, 2012 includes approximately $2,402,000 of amounts retained by customers on Projects. It also includes $42,000 of an allowance for doubtful accounts ("Allowance"). The accounts receivable balance as of May 31, 2012 of $5,610,000 included an Allowance of $42,000. The number of an average day's sales outstanding in accounts receivable ("DSO") increased from 52 days at May 31, 2012 to 92 at November 30, 2012. 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 second quarter of the current fiscal year is approximately 33% less than in the fourth quarter of the prior year when the Company recorded record high level of sales. The level of accounts receivable at the end of the current fiscal quarter is 19% more than at the end of the prior year. The combination of these two factors caused the DSO to increase from last year end to this quarter-end. The $1,057,000 increase in accounts receivable is primarily due to a 68% increase in the retained amounts by customers on construction Projects. The retained amounts are high at this time due to the recent completion or near completion of several Projects. It is expected that the retained amounts will be released in the normal course of the business in accordance with the related contracts. The Company expects to collect the net accounts receivable balance, including the retainage, during the next twelve months.
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, provisions such as this are often not possible. The $2,279,000 balance in this account at November 30, 2012 is 59% less than the prior year-end. The Company expects to bill the entire amount during the next twelve months. 68% of the CIEB balance as of the end of the last fiscal quarter, August 31, 2012, was billed to those customers in the current fiscal quarter ended November 30, 2012. 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:
November 30, 2012 May 31, 2012
Costs $ 3,485,000 $ 9,342,000
Estimated Earnings 941,000 2,251,000
Less: Billings to customers 2,147,000 6,101,000
CIEB $ 2,279,000 $ 5,492,000
Number of Projects in progress 13 20
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As noted above, BIEC represents billings to customers in excess of revenues recognized. The $132,000 balance in this account at November 30, 2012 is down from the $669,000 balance at the end of the prior year. 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 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:
November 30, 2012 May 31, 2012
Billings to customers $ 220,000 $ 1,107,000
Less: Costs 71,000 328,000
Less: Estimated Earnings 17,000 110,000
BIEC $ 132,000 $ 669,000
Number of Projects in progress 4 8
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Summary of factors affecting the balances in CIEB and BIEC:
November 30, 2012 May 31, 2012
Number of Projects in progress 17 28
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