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 three months ended
Increase /
(Decrease)
Sales, net $ 51,000
Cost of goods sold $ 179,000
Selling, general and administrative expenses $ 73,000
Income before provision for income taxes $ (229,000 )
Provision for income taxes $ (50,000 )
Net income $ (179,000 )
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, 2020 (All figures discussed are for the
three months ended August 31, 2020 as compared to the three months ended August
31, 2019 ).
Three months ended August 31 Change
2020 2019 Amount Percent
Net Revenue $ 5,760,000 $ 5,709,000 $ 51,000 1 %
Cost of sales 4,205,000 4,026,000 179,000 4 %
Gross profit $ 1,555,000 $ 1,683,000 $ (128,000 ) -8 %
… as a percentage of net revenues 27 % 29 %
The Company's consolidated results of operations showed a 1% increase in net
revenues and a decrease in net income of 50%. Revenues recorded in the current
period for long-term construction projects ("Project(s)") were 36% less than the
level recorded in the prior year. The Company had 19 Projects in process during
the current period as compared to 27 during the same period last year. Revenues
recorded in the current period for other-than long-term construction projects
(non-projects) were 52% more than the level recorded in the prior year. Total
sales within the U.S. decreased 13% from the same period last year. Total sales
to Asia increased 86% from the same period of the prior year. Sales decreases
were recorded over the same period last year to customers involved in
construction of buildings and bridges (13%), as well as to industrial customers
(17%). There was an increase in sales to customers in aerospace / defense (36%).
Sales to customers in aerospace / defense in the same period last year were
lower than any quarter since the second quarter of 2014 for the Company.
The gross profit as a percentage of net revenue of 27% in the current period is slightly less than the same period of the prior year (29%).
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
2020 2019
Industrial 8 % 10 %
Construction 52 % 60 %
Aerospace / Defense 40 % 30 %
At August 31, 2019 , the Company had 124 open sales orders in its backlog with a
total sales value of $18.3 million . At August 31, 2020 , the Company has slightly
less open sales orders in its backlog (110 orders), and the total sales value is
$10.3 million .
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 endedAugust 31, 2020 andAugust 31, 2019 , is as follows: Three months ended August 31 2020 2019 USA 67 % 78 % Asia 27 % 15 % Other 6 % 7 % -11- Table of Contents
Selling, General and Administrative Expenses
Three months ended August 31 Change
2020 2019 Amount Percent
Outside Commissions $ 243,000 $ 252,000 $ (9,000 ) -4 %
Other SG&A 1,120,000 1,038,000 82,000 8 %
Total SG&A $ 1,363,000 $ 1,290,000 $ 73,000 6 %
… as a percentage of net revenues 24 % 23 %
Selling, general and administrative expenses increased by 6% from the prior year. Outside commission expense decreased by 4% from last year's level. Other selling, general and administrative expenses increased 8% from last year to this.
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.
The Company expenses stock options using the fair value recognition provisions of the FASB ASC. The Company recognized$50,000 and$55,000 of compensation cost for the three month periods endedAugust 31, 2020 and 2019. 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 theU.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 August
2020 2019
Risk-free interest rate: 1.750 % 1.750 %
Expected life of the options: 3.9 years 3.8 years
Expected share price volatility: 34 % 30 %
Expected dividends: zero zero
These assumptions resulted in estimated
fair-market value per stock option: $ 2.88 $ 2.84 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 three month
period ended
Weighted-
Number of Average
Options Exercise PriceOptions outstanding and exercisable at May
31, 2020: 252,250 $ 11.52
Options granted: 17,250 $ 10.05
Less: Options exercised: 3,000 $ 8.52
Options outstanding and exercisable at
August 31, 2020: 266,500 $ 11.46 Closing value per share on NASDAQ at August
31, 2020: $ 9.35
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, accrued commissions, 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, 2020 were$244,000 compared to$73,000 in the same period of the prior year. As ofAugust 31, 2020 , the Company has commitments for capital expenditures totaling$300,000 during the next twelve months.
During 2020, the Company received a loan totaling$1,462,000 from theSmall Business Administration (SBA) under the Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security (CARES) Act, in response to the Coronavirus pandemic described below. Some or all of the loan may be forgiven if certain criteria are met. Otherwise, the loan is unsecured, has a deferment on payments for 6 months after a decision on forgiveness has been made, then is payable over a negotiable period of time, and bears interest at 1%.
The Company believes it is carrying adequate insurance coverage on its facilities and their contents.
Inventory and Maintenance Inventory
August 31, 2020 May 31, 2020 Increase /(Decrease)
Raw materials $ 637,000 $ 658,000 $ (21,000 ) -3 %
Work-in-process 8,472,000 8,586,000 (114,000 ) -1 %
Finished goods 441,000 863,000 (422,000 ) -49 %
Inventory 9,550,000 90 % 10,107,000 92 % (557,000 ) -6 %Maintenance and other inventory 1,091,000 10 % 879,000
8 % 212,000 24 %
Total $ 10,641,000 100 % $ 10,986,000 100 % $ (345,000 ) -3 %
Inventory turnover 1.6 1.7
NOTE: Inventory turnover is annualized for the three month period ended
Inventory, at$9,550,000 as ofAugust 31, 2020 , is$557,000 less than the prior year-end level of$10,107,000 . Approximately 89% of the current inventory is work in process, 4% 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 zero and$45,000 for the three month periods endedAugust 31, 2020 and 2019. The Company continues to rework slow-moving inventory, where applicable, to convert it to product to
be
used on customer orders.
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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")
August 31, 2020 May 31, 2020 Increase /(Decrease)
Accounts receivable $ 4,709,000 $ 5,819,000 $ (1,110,000 ) -19 %
CIEB 1,677,000 1,755,000 (78,000 ) -4 %
Less: BIEC 110,000 737,000 (627,000 ) -85 %
Net $ 6,276,000 $ 6,837,000 $ (561,000 ) -8 %
Number of an average day's sales
outstanding in accounts
receivable 74 68
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$4,709,000 as ofAugust 31, 2020 includes$211,000 of an allowance for doubtful accounts ("Allowance"). The accounts receivable balance as ofMay 31, 2020 of$5,819,000 included an Allowance of$211,000 . The number of an average day's sales outstanding in accounts receivable ("DSO") increased slightly from 68 days atMay 31, 2020 to 74 atAugust 31, 2020 . 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 26% less than in the fourth quarter of the prior year. The level of accounts receivable at the end of the current fiscal quarter is 19% less than the level at the end of the prior year. The decrease in the level of an average day's sales off-set by the decrease in the level of accounts receivable caused the DSO to increase from last year end to this quarter-end. The Company expects to collect the net accounts receivable balance 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, such provisions are often not possible. The$1,677,000 balance in this account atAugust 31, 2020 is 4% 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. 23% of the CIEB balance as of the end of the last fiscal quarter,May 31, 2020 , was billed to those customers in the current fiscal quarter endedAugust 31, 2020 . 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, 2020 May 31, 2020
Costs $ 2,472,000 $ 2,615,000
Estimated Earnings 440,000 540,000
Less: Billings to customers 1,235,000 1,400,000
CIEB $ 1,677,000 $ 1,755,000
Number of Projects in progress 8 10
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.
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The balances in this account are comprised of the following components:
August 31, 2020 May 31, 2020
Billings to customers $ 3,766,000 $ 7,794,000
Less: Costs 2,211,000 3,781,000
Less: Estimated Earnings 1,445,000 3,276,000
BIEC $ 110,000 $ 737,000
Number of Projects in progress 3 5
Summary of factors affecting the balances in CIEB and BIEC:
August 31, 2020 May 31, 2020
Number of Projects in progress 11 15
Aggregate percent complete 79 % 80 %Average total sales value of Projects in progress$ 732,000 $
830,000 Percentage of total value invoiced to customer 62 % 74 %
The Company's backlog of sales orders atAugust 31, 2020 is$10.3 million , up slightly from the$9.8 million at the end of the prior year.$1.5 million of the current backlog is on Projects already in progress. Other Balance Sheet Items
Accounts payable, at$1,127,000 as ofAugust 31, 2020 , is 18% 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 ofAugust 31, 2020 are$446,000 , up 46% from the$306,000 accrued at the prior year-end. Other current liabilities decreased 49% from the prior year-end, to$856,000 . This decrease is primarily due to a decrease in accrued incentive compensation and customer advance payments. 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.
Coronavirus Pandemic Company management currently does not have reason to believe that the COVID-19 pandemic will adversely affect our ability to meet our obligations to our customers. Our top priorities continue to be the health and safety of our employees and their families along with supporting our customers. Thanks to the careful adherence to our COVID-19 safety measures by our workforce as well as our customers and suppliers, we remain in a strong position with respect to being able to process existing orders and we are quite prepared to process new orders as they are secured. Our high-spirited, healthy workforce continues to adjust their work schedules as the needs arise. While the majority of our customers remain open to continue to receive shipments from us and issue new purchase orders to us, many of our construction customers continue to delay ordering materials while they attempt to determine the extent and impact of the pandemic on their projects. This continues to keep our backlog of sales orders at a lower level. The liquidity of the Company remains strong at this time. Management, however, is concerned about the uncertainty of the length of time during which the virus will continue to spread throughout the world before effective vaccines have been developed, distributed and administered, as well as the level of impact it will have on the various economies of the world. A prolonged economic downturn would have a negative impact on our operations and our liquidity. For this reason, we have applied for and have received assistance from the federal government under provisions of the CARES Act, as discussed above. OurSupply Chain Management team is in communication with our partners around the globe so that we can be updated on any delays that may occur. To date, there have been no significant delays in receiving our raw materials, purchased components or outside services that affect our final product. -15-
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