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 six months ended
Increase /
(Decrease)
Sales, net $ 4,522,000
Cost of goods sold $ 1,506,000
Research and development costs $ 207,000
Selling, general and administrative expenses $ 772,000
Income before provision for income taxes $ 2,158,000
Provision for income taxes $ 438,000
Net income $ 1,720,000
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 six months ended November 30, 2022 (All figures discussed are for the
six months ended November 30, 2022 as compared to the six months ended November
30, 2021 ).
Six months ended November 30 Change
2022 2021 Amount Percent
Net Revenue $ 19,588,000 $ 15,066,000 $ 4,522,000 30 %
Cost of sales 12,109,000 10,603,000 1,506,000 14 %
Gross profit $ 7,479,000 $ 4,463,000 $ 3,016,000 68 %
… as a percentage of net revenues 38 % 30 %
The Company's consolidated results of operations showed a 30% increase in net
revenues and an increase in net income of 204%. Revenue for the first half of
fiscal 2023 is higher than any half fiscal year period in the history of the
Company. Revenues recorded in the current period for long-term construction
projects ("Project(s)") were 18% more than the level recorded in the prior year.
The Company had 35 Projects in process during the current period as compared to
28 during the same period last year. Revenues recorded in the current period for
other-than long-term construction projects (non-projects) were 55% more than the
level recorded in the prior year. Total sales within the U.S. increased 43% from
the same period last year. Total sales to Asia decreased 4% 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 (13%) as well as
to customers in aerospace / defense (47%) and to industrial customers (93%). The
increase in aerospace /defense sales is due, in part, to a healthy combination
of providing production hardware on several legacy programs and new development
programs, along with receiving substantial contracts for the refurbishment of
hardware on existing naval platforms. The 108% increase in sales to industrial
customers is primarily due to some new domestic manufacturing facilities
beginning operations which utilized the Company's products.
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 38% in the current period is
eight percentage points greater than the same period of the prior year (30%).
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 the
increase in volume have helped to improve the gross margin as a percentageof 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:
Six months ended November 30
2022 2021
Industrial 11 % 8 %
Structural 54 % 62 %
Aerospace / Defense 35 % 30 %
AtNovember 30, 2021 , the Company had 139 open sales orders in our backlog with a total sales value of$17.0 million . AtNovember 30, 2022 , the Company has 139 open sales orders in our backlog, and the total sales value is$18.1 million .
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
six-month periods ended November 30, 2022 and November 30, 2021 is as follows:
Six months ended November 30
2022 2021
USA 80 % 73 %
Asia 13 % 18 %
Other 7 % 9 %
Research and Development Costs
Six months ended November 30 Change
2022 2021 Amount Percent
R & D $ 690,000 $ 483,000 $ 207,000 43 %
… as a percentage of net revenues 3.5 % 3.2 %
Research and development costs stayed consistent as a percent of net revenues while increasing by 43% over the prior year.
Selling, General and Administrative Expenses
Six months ended November 30 Change
2022 2021 Amount Percent
SG&A $ 3,853,000 $ 3,081,000 $ 772,000 25 %
… as a percentage of net revenues 20 % 20 %
Selling, general and administrative expenses increased by 25% 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 $ 2,739,000
Cost of goods sold $ 1,236,000
Research and development costs $ 114,000
Selling, general and administrative expenses $ 413,000
Income before provision for income taxes $ 1,122,000
Provision for income taxes $ 222,000
Net income $ 900,000
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 ended November 30, 2022 (All figures discussed are for the
three months ended November 30, 2022 as compared to the three months ended
November 30, 2021 ).
Three months ended November 30 Change
2022 2021 Amount Percent
Net Revenue $ 10,497,000 $ 7,758,000 $ 2,739,000 35 %
Cost of sales 6,403,000 5,167,000 1,236,000 24 %
Gross profit $ 4,094,000 $ 2,591,000 $ 1,503,000 58 %… as a percentage of net revenues 39 % 33 % The Company's consolidated results of operations showed a 35% increase in net revenues and an increase in net income of 136%. Revenues recorded in the current period for Projects were 22% more than the level recorded in the prior year. The Company had 28 Projects in process during the current period as compared to 26 during the same period last year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 64% more than the level recorded in the prior year. Total sales within theU.S. increased 41% from the same period last year. Total sales toAsia increased 36% 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 (10%) as well as to customers in aerospace / defense (59%) and to industrial customers (152%). The increase in aerospace /defense sales is due, in part, to a healthy combination of providing production hardware on several legacy programs and new development programs, along with receiving substantial contracts for the refurbishment of hardware on existing naval platforms. The increase in sales to industrial customers is primarily due to some new domestic manufacturing facilities beginning operations which utilized the Company's products. The gross profit as a percentage of net revenue of 39% in the current period is six percentage points higher than the same period of the prior year (33%). 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 the increase in 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 November 30
2022 2021
Industrial 15 % 8 %
Structural 52 % 64 %
Aerospace / Defense 33 % 28 %
Net revenue by geographic region, as a percentage of total net revenue for the
three-month periods ended November 30, 2022 and November 30, 2021 , is as
follows:
Three months ended November 30
2022 2021
USA 77 % 75 %
Asia 17 % 16 %
Other 6 % 9 %
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Research and Development Costs
Three months ended November 30 Change
2022 2021 Amount Percent
R & D $ 315,000 $ 201,000 $ 114,000 57 %
… as a percentage of net revenues 3.0 % 2.6 %
Research and development costs stayed consistent as a percentage of net revenues while increasing by 57% over the prior year.
Selling, General and Administrative Expenses
Three months ended November 30 Change
2022 2021 Amount Percent
S G & A $ 2,022,000 $ 1,609,000 $ 413,000 26 %
… as a percentage of net revenues 19 % 21 %
Selling, general and administrative expenses increased 26% 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$1,756,000 for the three months endedNovember 30, 2022 , 125% more than the$780,000 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 FASB ASC. The Company recognized$128,000 and$126,000 of compensation cost for the six-month periods endedNovember 30, 2022 and 2021. 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:
November November
2022 2021
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 six-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: 4,000 $ 8.06
Less: Options expired: 3,750 -
Options outstanding and exercisable at
November 30, 2022: 317,250 $ 11.49
Closing value per share on NASDAQ at
November 30, 2022: $ 13.40 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, 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 six months endedNovember 30, 2022 were$1,391,000 compared to$560,000 in the same period of the prior year. As ofNovember 30, 2022 , the Company has commitments for capital expenditures totaling$1,800,000 during the next twelve months.
The Company believes it is carrying adequate insurance coverage on its facilities and their contents.
Inventory and Maintenance Inventory
November 30, 2022 May 31, 2022 Increase /(Decrease)
Raw materials $ 575,000 $ 489,000 $ 86,000 18 %
Work-in-process 4,901,000 5,166,000 (265,000 ) -5 %
Finished goods 120,000 200,000 (80,000 ) -40 %
Inventory 5,596,000 85 % 5,855,000 84 % (259,000 ) -4 %Maintenance and other inventory 972,000 15 % 1,107,000
16 % (135,000 ) -12 %
Total $ 6,568,000 100 % $ 6,962,000 100 % $ (394,000 ) -6 %
Inventory turnover 3.6 3.1
NOTE: Inventory turnover is annualized for the six-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 zero and$90,000 for the six-month periods endedNovember 30, 2022 and 2021. 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")
November 30, 2022 May 31, 2022 Increase /(Decrease)
Accounts receivable $ 5,941,000 $ 4,467,000 $ 1,474,000 33 %
CIEB 5,295,000 3,336,000 1,959,000 59 %
Less: BIEC 1,090,000 1,123,000 (33,000 ) -3 %
Net $ 10,146,000 $ 6,680,000 $ 3,466,000 52 %
Number of an average day's sales
outstanding in accounts
receivable 51 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$5,941,000 as ofNovember 30, 2022 includes$6,000 of an allowance for doubtful accounts ("Allowance"). The accounts receivable balance as ofMay 31, 2022 of$4,467,000 included an Allowance of$16,000 . The number of an average day's sales outstanding in accounts receivable ("DSO") increased from 42 days atMay 31, 2022 to 51 atNovember 30, 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 second quarter of the current fiscal year is 9% more than in the fourth quarter of the prior year. The level of accounts receivable at the end of the current fiscal quarter is 33% more than the level at the end of the prior year. The increase in the level of accounts receivable off-set by the increase 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. The level of accounts receivable is greater than at the end of the prior year primarily because of the$1.2 million increase in the level of sales for the month ofNovember 2022 over the month ofMay 2022 . 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$5,295,000 balance in this account atNovember 30, 2022 is 59% more than the prior year-end balance. This increase 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. 17% 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 endedNovember 30, 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:
November 30, 2022 May 31, 2022
Costs $ 3,380,000 $ 3,250,000
Estimated Earnings 3,221,000 2,642,000
Less: Billings to customers 1,306,000 2,556,000
CIEB $ 5,295,000 $ 3,336,000
Number of Projects in progress 16 11
As noted above, BIEC represents billings to customers in excess of revenues
recognized. The $1,090,000 balance in this account at November 30, 2022 is down
3% from the $1,123,000 balance at the end of the prior year. The balance in this
account fluctuates in the same manner and for the same reasons as the CIEB,
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:
November 30, 2022 May 31, 2022
Billings to customers $ 2,037,000 $ 2,711,000
Less: Costs 676,000 1,019,000
Less: Estimated Earnings 271,000 569,000
BIEC $ 1,090,000 $ 1,123,000
Number of Projects in progress 4 8
Summary of factors affecting the balances in CIEB and BIEC:
November 30, 2022 May 31, 2022
Number of Projects in progress 20 19
Aggregate percent complete 54 % 47 %Average total sales value of Projects in progress $ 657,000
$ 795,000 Percentage of total value invoiced to customer 25 % 35 % The Company's backlog of sales orders atNovember 30, 2022 is$18.1 million , down from the$23.7 million at the end of the prior year.$5.6 million of the current backlog is on Projects already in progress. While too late to be included in the backlog as ofNovember 30, 2022 , the Company recorded an additional$8.2 million of sales order bookings in the first half of December. Other Balance Sheet Items Accounts payable, at$1,537,000 as ofNovember 30, 2022 , is 8% more than the prior year-end. Other current liabilities decreased 10% from the prior year-end, to$3,088,000 . 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.
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