Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
TAYD > SEC Filings for TAYD > Form 10-Q on 10-Oct-2013All Recent SEC Filings

Show all filings for TAYLOR DEVICES INC

Form 10-Q for TAYLOR DEVICES INC


10-Oct-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 three months ended August 31, 2013 and 2012
                                                            Increase /
                                                            (Decrease)
                                        Sales, net       $  (2,020,000 )
                                Cost of goods sold       $    (680,000 )
      Selling, general and administrative expenses        $   (697,000 )
          Income before provision for income taxes        $   (641,000 )
                        Provision for income taxes       $    (234,000 )
                                        Net income        $   (407,000 )

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 three months ended August 31, 2013 (All figures discussed are for the three months ended August 31, 2013 as compared to the three months ended August 31, 2012.)

                                  Three months ended August 31          Change
                                       2013           2012         Amount      Percent
                      Net Revenue  $  5,297,000   $   7,317,000 $ (2,020,000 )  -28%
                    Cost of sales     4,018,000      4,698,000      (680,000 )  -14%
                     Gross profit  $  1,279,000   $   2,619,000 $ (1,340,000 )  -51%
 as a percentage of net revenues      24%            36%

The Company's consolidated results of operations showed a 28% decrease in net revenues and a decrease in net income of 67%. Revenues recorded in the current period for long-term construction projects ("Project(s)") were 44% lower than the level recorded in the prior year. We had 24 Projects in process during the current period compared with 33 during the same period last year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 7% higher than the level recorded in the prior year. Total sales within the U.S. decreased 14% from the same period last year. Total sales to Asia are down 46% from the same period of the prior year. Sales decreases were recorded over the same period last year to customers in aerospace / defense (9%), industrial (15%) as well as customers involved in construction of buildings and bridges (37%). Please refer to the charts, below, which show the breakdown of sales.

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 August 31

                           2013           2012
         Industrial       10%               9%
       Construction       57%              65%
Aerospace / Defense       33%              26%

At August 31, 2012, the Company had 148 open sales orders in our backlog with a total sales value of $13.8 million. At August 31, 2013, the Company has 34% fewer open sales orders in our backlog (98 orders) and the total sales value is $15.4 million or 12% more than the prior year value. Last year's backlog included a small number of orders for a single customer with a high aggregate sales value, 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 the three month periods ended August 31, 2013 and August 31, 2012 is as follows:

Three months ended August 31

           2013           2012
  USA      62%            52%
 Asia      29%            40%
Other       9%             8%

Selling, General and Administrative Expenses

                                    Three months ended August 31          Change
                                          2013          2012          Amount      Percent
                Outside Commissions  $    246,000    $   279,000   $    (33,000 )  - 12%
                         Other SG&A       779,000      1,444,000       (665,000 )  - 46%
                         Total SG&A  $   1,025,000   $  1,723,000  $   (698,000 )  - 41%
   as a percentage of net revenues       19%            24%

Selling, general and administrative expenses decreased by 41% from the prior year. Outside commission expense decreased by 12% from last year's level. Other selling, general and administrative expenses decreased 46% from last year to this. This decrease is primarily due to a decrease in air-freight charges incurred last year in order to meet contractual obligations to deliver products on schedule.

The above factors resulted in operating income of $254,000 for the three months ended August 31, 2013, down 72% from the $896,000 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 $43,000 and $36,000 of compensation cost for the three month periods ended August 31, 2013 and August 31, 2012.

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 to estimate the fair market value of the Company's stock option grants:

                                                                            August 2013   August 2012
                                                   Risk-free interest rate:    3.25%        1.875%
                                              Expected life of the options:  3.0 years     2.9 years
                                           Expected share price volatility:     36%           43%
                                                        Expected dividends:    Zero          Zero

These assumptions resulted in estimated fair-market value per stock option:    $2.41         $2.46

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 three month period ended August 31, 2013 is presented below:

                                                                            Weighted-
                                                            Number of        Average
                                                             Options      Exercise Price
   Options outstanding and exercisable at May 31, 2013:         206,750       $6.63
                                       Options granted:          18,000       $8.48
                                     Options exercised:          30,000       $5.26
Options outstanding and exercisable at August 31, 2013:         194,750       $7.01
  Closing value per share on NASDAQ at August 31, 2013:                       $8.76

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 three months ended August 31, 2013 were $667,000 compared to $528,000 in the same period of the prior year. As of August 31, 2013, the Company has commitments for capital expenditures of $240,000 during the next twelve months. These expenditures are construction costs contracted to renovate buildings which will house the Company's machining operations, as discussed below.

The substantial renovation of the buildings acquired in 2011 has been completed and relocation is underway for the production machinery from the Company's Tonawanda Island site. The move will be completed in the autumn of 2013. 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 $2.9 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 no balance outstanding as of August 31, 2013 or as of May 31, 2013. 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         $13,705,000        Quarterly
Minimum debt service coverage ratio          1.5:1                n/a         Fiscal Year-end

All of the $6,000,000 unused portion of our line of credit is available without violating any of our debt covenants.

Inventory and Maintenance Inventory





                                 August 31, 2013     May 31, 2013     Increase /(Decrease)
                  Raw materials   $  580,000       $   583,000           $   (3,000 )   -1%
                Work in process    7,645,000         7,876,000             (231,000 )   -3%
                 Finished goods      561,000           665,000             (104,000 )  -16%
                      Inventory    8,786,000  91%    9,124,000   91%       (338,000 )   -4%
Maintenance and other inventory      903,000   9%      904,000    9%         (1,000 )   -
                          Total   $9,689,000 100%  $10,028,000 100%      $ (339,000 )   -3%

             Inventory turnover     1.6               1.7

NOTE: Inventory turnover is annualized for the three month period ended August 31, 2013.

Inventory, at $8,786,000 as of August 31, 2013, is $338,000 or 4% lower than the prior year-end level of $9,124,000. 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. Management of the Company has recorded an allowance for potential inventory obsolescence. The provision for potential inventory obsolescence was $45,000 for each of the three month periods ended August 31, 2013 and August 31, 2012. 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")

                                   August 31, 2013   May 31, 2013     Increase /(Decrease)
              Accounts receivable     $ 2,637,000    $ 2,245,000         $  392,000    17%
                             CIEB       3,122,000      2,458,000            664,000    27%
                       Less: BIEC         168,000        172,000             (4,000 )  -2%
                              Net     $ 5,591,000    $ 4,531,000         $1,060,000    23%

 Number of an average day's sales
          outstanding in accounts
                       receivable       45               39

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 $2,637,000 as of August 31, 2013 includes approximately $246,000 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, 2013 of $2,245,000 included an Allowance of $42,000. The number of an average day's sales outstanding in accounts receivable ("DSO") increased from 39 days at May 31, 2013 to 45 at August 31, 2013. 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 only slightly more than in the fourth quarter of the prior year. The level of accounts receivable at the end of the current fiscal quarter is 17% more than at the end of the prior year. The net effect of these two factors caused the DSO to increase from last year end to this quarter-end. 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 $3,122,000 balance in this account at August 31, 2013 is 27% more than the prior year-end. The Company expects to bill the entire amount during the next twelve months. 38% of the CIEB balance as of the end of the last fiscal quarter, May 31, 2013, was billed to those customers in the current fiscal quarter ended August 31, 2013. 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, 2013    May 31, 2013
                         Costs  $     3,544,000    $     2,752,000
            Estimated Earnings         779,000            640,000
   Less: Billings to customers       1,201,000            934,000
                          CIEB  $     3,122,000    $     2,458,000
Number of Projects in progress        14                 13

As noted above, BIEC represents billings to customers in excess of revenues recognized. The $168,000 balance in this account at August 31, 2013 is down slightly from the $172,000 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:

                                August 31, 2013    May 31, 2013
         Billings to customers  $      409,000    $      256,000
                   Less: Costs         185,000            71,000
      Less: Estimated Earnings          56,000            13,000
                          BIEC  $      168,000    $      172,000
Number of Projects in progress        4                 3

Summary of factors affecting the balances in CIEB and BIEC:

                                                   August 31, 2013   May 31, 2013
                   Number of Projects in progress       18               16
                       Aggregate percent complete       58%              52%
Average total sales value of Projects in progress    $445,000         $415,000
   Percentage of total value invoiced to customer       20%              18%

The Company's backlog of sales orders at August 31, 2013 is $15.4 million, up 18% from $13.1 million at the end of the prior year. $3.8 million of the current backlog is on Projects already in progress.

Other Balance Sheet Items

Accounts payable, at $1,065,000 as of August 31, 2013, is 12% less than the prior year-end. Commission expense on applicable sales orders is recognized at the time revenue is recognized. The commission is paid following receipt of payment from the customers. Accrued commissions as of August 31, 2013 are $516,000, up 18% from the $437,000 accrued at the prior year-end. The Company expects the current accrued amount to be paid during the next twelve months. Other current liabilities decreased 56% from the prior year-end, to $766,000. This is primarily due to a lower level of customer advance payments and a lower level of accrued incentive compensation expense. Payments on these liabilities will take place as scheduled within the next twelve months.

Management believes the Company's cash flows from operations and borrowing capacity under the bank line of credit is sufficient to fund ongoing operations, capital improvements and share repurchases (if any) for the next twelve months.

  Add TAYD to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for TAYD - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.