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 $ 5,960,000
Cost of goods sold $ 3,341,000
Selling, general and administrative expenses $ 613,000
Income before provision for income taxes $ (41,000 )
Provision for income taxes (benefit) $ 238,000
Net income $ (279,000 )
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 ended February 28, 2022 (All figures discussed are for the
nine months ended February 28, 2022 as compared to the nine months ended
February 28, 2021 ).
Nine months ended February 28 Change
2022 2021 Amount Percent
Net Revenue $ 21,209,000 $ 15,249,000 $ 5,960,000 39 %
Cost of sales 16,056,000 12,715,000 3,341,000 26 %
Gross profit $ 5,153,000 $ 2,534,000 $ 2,619,000 103 %
… as a percentage of net revenues 24 % 17 %
The Company's consolidated results of operations showed a 39% increase in net
revenues and a decrease in net income of 28%. Revenues recorded in the current
period for long-term construction projects ("Project(s)") were 103% more than
the level recorded in the prior year. We had 34 Projects in process during the
current period compared with 38 during the same period last year. Revenues
recorded in the current period for other-than long-term construction projects
(non-projects) were 17% less than the level recorded in the prior year. Total
sales within the U.S. increased 55% from the same period last year. Total sales
to Asia increased 7% from the same period of the prior year. Sales increases
were recorded over the same period last year to customers involved in
construction of buildings and bridges (85%) as well as in sales to customers in
aerospace / defense (4%) and industrial customers (1%). The significant increase
in domestic sales is primarily from the increase in sales to structural
customers. Many customers in the construction field delayed orders in the prior
period as they considered the potential effects of the COVID pandemic on the
economy.
The gross profit as a percentage of net revenue of 24% in the current period is
higher than the 17% recorded in the same period of the prior year. The increase
in gross profit as a percentage of revenue is primarily due to the significant
increase in domestic sales to structural customers following the COVID related
delay discussed above.
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
2022 2021
Industrial 8 % 10 %
Structural 58 % 44 %
Aerospace / Defense 34 % 46 %
AtFebruary 28, 2021 , the Company had 146 open sales orders in its backlog with a total sales value of$18.8 million . AtFebruary 28, 2022 , the Company has 140 open sales orders in its backlog, and the total sales value is$17.4 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 nine-month periods endedFebruary 28, 2022 andFebruary 28, 2021 is as follows: Nine months ended February 28 2022 2021 USA 72 % 64 % Asia 18 % 24 % Other 10 % 12 % -11- Table of Contents
Selling, General, and Administrative Expenses
Nine months ended February 28 Change
2022 2021 Amount Percent
Outside Commissions $ 465,000 $ 504,000 $ (39,000 ) -8 %
Other SG&A 3,981,000 3,329,000 652,000 20 %
Total SG&A $ 4,446,000 $ 3,833,000 $ 613,000 16 %… as a percentage of net revenues 21 % 25
% Selling, general, and administrative expenses increased by 16% from the prior year. Outside commission expense decreased by 8% from last year's level due to lower levels of commissionable sales. Other selling, general, and administrative expenses increased 20% from last year to this year primarily due to increases in personnel costs. The above factors resulted in operating income of$707,000 for the nine months endedFebruary 28, 2022 , as compared to an operating loss of$1,298,000 in the same period of the prior year. Other income during the prior period includes$2,096,000 of financial assistance provided by theU.S. federal government as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act and the Consolidated Appropriations Act of 2021 (CAA): a.)$1,462,000 of income due to the forgiveness of the loan by theSmall Business Administration (SBA) under the Paycheck Protection Program, and b.)$634,000 of Employee Retention Credit income.
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 $ 1,371,000
Cost of goods sold $ 601,000
Selling, general and administrative expenses $ 141,000
Loss before provision for income taxes $ (10,000 )
Provision for income taxes (benefit) $ 290,000
Net income (loss) $ (300,000 )
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 three months ended February 28, 2022 (All figures discussed are for the
three months ended February 28, 2022 as compared to the three months ended
February 28, 2021 ).
Three months ended February 28 Change
2022 2021 Amount Percent
Net Revenue $ 6,143,000 $ 4,772,000 $ 1,371,000 29 %
Cost of sales 4,970,000 4,369,000 601,000 14 %
Gross profit $ 1,173,000 $ 403,000 $ 770,000 191 %
… as a percentage of net revenues 19 % 8 %
The Company's consolidated results of operations showed a 29% increase in net
revenues and a decrease in net income of 164%. Revenues recorded in the current
period for long-term construction projects ("Project(s)") were 40% more than the
level recorded in the prior year. The Company had 27 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 18% more than the level recorded in the prior year. Total
sales within the U.S. increased 59% from the same period last year. Total sales
to Asia decreased 8% from the same period of the prior year. Sales increases
were recorded over the same period last year to customers involved in
construction of buildings and bridges (37%), as well as to customers in
aerospace / defense (30%). There was a decrease in sales to industrial customers
(10%). The significant increase in domestic sales is primarily from the increase
in sales to structural customers. Many customers in the construction field
delayed orders in the prior period as they considered the potential effects of
the COVID pandemic on the economy.
The gross profit as a percentage of net revenue of 19% in the current period is
significantly higher than the same period of the prior year (8%). The increase
in gross profit as a percentage of revenue is primarily due to the significant
increase in domestic sales to construction customers following the COVID related
delay discussed above.
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
2022 2021
Industrial 8 % 12 %
Structural 49 % 46 %
Aerospace / Defense 43 % 42 %
Net revenue by geographic region, as a percentage of total net revenue for the
three-month periods ended February 28, 2022 and February 28, 2021 , is as
follows:
Three months ended February 28
2022 2021
USA 69 % 56 %
Asia 19 % 26 %
Other 12 % 18 %
Selling, General, and Administrative Expenses
Three months ended February 28 Change
2022 2021 Amount Percent
Outside Commissions $ 39,000 $ 131,000 $ (92,000 ) -70 %
Other SG&A 1,325,000 1,092,000 233,000 21 %
Total SG&A $ 1,364,000 $ 1,223,000 $ 141,000 12 %
… as a percentage of net revenues 22 % 26 %
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Selling, general, and administrative expenses increased by 12% from the prior
year. Outside commission expense decreased by 70% from last year's level due to
lower levels of commissionable sales. Commissionable sales are lower, despite
total sales being 29% higher than last year's level, as the Company has added
staff to its business development and sales team thereby reducing reliance on
independent, commissioned manufacturers' representatives to help obtain sales
contracts with customers. Other selling, general, and administrative expenses
increased 21% from last year to this primarily due to increases in personnel
costs.
The above factors resulted in an operating loss of $191,000 for the three months
ended February 28, 2022 , as compared to an operating loss of $820,000 in the
same period of the prior year.
Other income during the prior period includes
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$126,000 and$50,000 of compensation cost for the nine-month periods endedFebruary 28, 2022 and 2021. This increase in recognized costs for this incentive resulted from an increase in the number of options granted in order to attract and retain talented, key employees of the Company. 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:
February February
2022 2021
Risk-free interest rate: 2.875 % 1.750 %
Expected life of the options: 4 years 3.9 years
Expected share price volatility: 32 % 34 %
Expected dividends: zero zero
These assumptions resulted in estimated
fair-market value per stock option: $ 3.42 $ 2.88 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 nine-month
period ended
Weighted-
Number of Average
Options Exercise Price
Options outstanding and exercisable at May
31, 2021: 267,750 $ 11.60
Options granted: 36,750 $ 11.64
Less: Options expired: 1,500 -
Options outstanding and exercisable at
February 28, 2022: 303,000 $ 11.61
Closing value per share on NASDAQ at
February 28, 2022: $ 10.00
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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 nine months endedFebruary 28, 2022 were$722,000 compared to$1,089,000 in the same period of the prior year. As ofFebruary 28, 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.
Inventory and Maintenance Inventory
February 28, 2022 May 31, 2021 Increase /(Decrease)
Raw materials $ 497,000 $ 503,000 $ (6,000 ) -1 %
Work-in-process 5,201,000 5,076,000 125,000 2 %
Finished goods 234,000 256,000 (22,000 ) -9 %
Inventory 5,932,000 80 % 5,835,000 78 % 97,000 2 %Maintenance and other inventory 1,478,000 20 % 1,613,000
22 % (135,000 ) -8 %
Total $ 7,410,000 100 % $ 7,448,000 100 % $ (38,000 ) -1 %
Inventory turnover 2.9 2.1
NOTE: Inventory turnover is annualized for the nine-month period ended
Inventory, at$5,932,000 as ofFebruary 28, 2022 , is$97,000 more than the prior year-end level of$5,835,000 . Approximately 88% of the current inventory is work in process, 4% is finished goods, and 8% 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. There was no provision for potential inventory obsolescence for the nine-month periods endedFebruary 28, 2022 and 2021. 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")
February 28, 2022 May 31, 2021
Increase /(Decrease)
Accounts and other receivables
$ 1,147,000 28 % Less: Other receivable - 741,000 (741,000 ) -100 % Accounts receivable 5,268,000 3,380,000 1,888,000 56 % CIEB 1,321,000 1,500,000 (179,000 ) -12 % Less: BIEC 708,000 1,362,000 (654,000 ) -48 % Net$ 5,881,000 $ 3,518,000 $ 2,363,000 67 %
Number of an average day's sales
outstanding in accounts
receivable 77 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.
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Accounts receivable of $5,268,000 as of February 28, 2022 includes $7,000 of an
allowance for doubtful accounts ("Allowance"). The accounts receivable balance
as of May 31, 2021 of $3,380,000 included an Allowance of $7,000 . The number of
an average day's sales outstanding in accounts receivable ("DSO") increased from
42 days at May 31, 2021 to 77 at February 28, 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 third quarter
of the current fiscal year is 15% less than in the fourth quarter of the prior
year. The level of accounts receivable at the end of the current fiscal quarter
is 56% more than the level at the end of the prior year. The increase in the
level of accounts receivable combined with the decrease in the level of an
average day's sales 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.
Other receivable is an amount of Employee Retention Credit claimed by the Company for the second calendar quarter of 2021 and was received in the third calendar quarter of 2021.
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$1,321,000 balance in this account atFebruary 28, 2022 is 12% 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. 89% of the CIEB balance as of the end of the last fiscal quarter,August 31, 2022 , was billed to those customers in the current fiscal quarter endedFebruary 28, 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:
February 28, 2022 May 31, 2021
Costs $ 2,865,000 $ 2,362,000
Estimated Earnings 134,000 410,000
Less: Billings to customers 1,678,000 1,272,000
CIEB $ 1,321,000 $ 1,500,000
Number of Projects in progress 10 9
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:
February 28, 2022 May 31, 2021
Billings to customers $ 2,246,000 $ 2,741,000
Less: Costs 762,000 1,011,000
Less: Estimated Earnings 776,000 368,000
BIEC $ 708,000 $ 1,362,000
Number of Projects in progress 5 5
Summary of factors affecting the balances in CIEB and BIEC:
February 28, 2022 May 31, 2021
Number of Projects in progress 15 14
Aggregate percent complete 56 % 32 %Average total sales value of Projects in progress $ 578,000
Percentage of total value invoiced to customer 45 % 30 %
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The Company's backlog of sales orders at February 28, 2022 is $17.4 million ,
down from the $22.0 million at the end of the prior year. $4.1 million of the
current backlog is on Projects already in progress.
Other Balance Sheet Items
Accounts payable, at $1,170,000 as of February 28, 2022 , is 35% 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 February 28, 2022 are
$353,000 , 31% more than the $269,000 accrued at the prior year-end. Other
current liabilities increased 33% from the prior year-end, to $2,281,000 . 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. The liquidity of the Company remains strong at this time. Management, however, remains concerned that the pandemic may have a significant impact on the various economies of the world. A prolonged economic downturn would have a negative impact on our operations and our liquidity. 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. The Company has taken proactive measures when necessary to mitigate the risk associated with longer lead times on certain raw materials.
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