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 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; the
occurrence or recurrence of pandemics such as COVID-19; 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, 2022 and 2021 |
| | |
Increase / |
| | |
(Decrease) |
| Sales, net | |
$ | 1,783,000 | |
| Cost of goods sold | |
$ | 270,000 | |
| Research and development costs | |
$ | 93,000 | |
| Selling, general and administrative expenses | |
$ | 359,000 | |
| Income before provision for income taxes | |
$ | 1,036,000 | |
| Provision for income taxes | |
$ | 216,000 | |
| Net income | |
$ | 820,000 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
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.
For
the three months ended August 31, 2022 (All figures discussed are for the three months ended August 31, 2022 as compared to
the three months ended August 31, 2021).
| | |
Three months ended August 31 | |
Change |
| | |
2022 | |
2021 | |
Amount | |
Percent |
| Net Revenue | |
$ | 9,091,000 | | |
$ | 7,308,000 | | |
$ | 1,783,000 | | |
| 24 | % |
| Cost of sales | |
| 5,706,000 | | |
| 5,436,000 | | |
| 270,000 | | |
| 5 | % |
| Gross profit | |
$ | 3,385,000 | | |
$ | 1,872,000 | | |
$ | 1,513,000 | | |
| 81 | % |
| … as a percentage of net revenues | |
| 37 | % | |
| 26 | % | |
| | | |
| | |
The
Company's consolidated results of operations showed a 24% increase in net revenues and an increase in net income of 451%. Revenues recorded
in the current period for long-term construction projects (“Project(s)”) were 14% more than the level recorded in the
prior year. The Company had 33 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 45% more than the level recorded in
the prior year. Total sales within the U.S. increased 45% from the same period last year. Total sales to Asia decreased 40% from the same
period of the prior year. The strong U.S. dollar is making our products less competitive in already competitive Asian markets. Sales increases
were recorded over the same period last year to customers involved in construction of buildings and bridges (17%) as well as to customers
in aerospace / defense (37%) and to industrial customers (25%). Sales are now at or surpassing pre-pandemic levels. The negative effects
of the pandemic now appear to be behind us.
In
prior periods, 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 current
quarter, 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
37% in the current period is eleven percentage points greater than the same period of the prior year (26%). 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 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 August 31 |
| | |
2022 | |
2021 |
| Industrial | |
| 8 | % | |
| 7 | % |
| Structural | |
| 56 | % | |
| 60 | % |
| Aerospace / Defense | |
| 36 | % | |
| 33 | % |
| | |
| | | |
| | |
At
August 31, 2021, the Company had 165 open sales orders in its backlog with a total sales value of $19.4 million. At August 31,
2022, the Company has 12% fewer open sales orders in its backlog (146 orders), and the total sales value is $23.0 million (19% increase).
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.
Net
revenue by geographic region, as a percentage of total net revenue for the three-month periods ended August 31, 2022 and August
31, 2021, is as follows:
| | |
Three months ended August 31 |
| | |
2022 | |
2021 |
| | USA | | |
| 82 | % | |
| 70 | % |
| | Asia | | |
| 10 | % | |
| 20 | % |
| | Other | | |
| 8 | % | |
| 10 | % |
Research and Development Costs
| | |
Three months ended August 31 | |
Change |
| | |
2022 | |
2021 | |
Amount | |
Percent |
| R & D | |
$ | 375,000 | | |
$ | 282,000 | | |
$ | 93,000 | | |
| 33 | % |
| … as a percentage of net revenues | |
| 4 | % | |
| 4 | % | |
| | | |
| | |
Research and development costs stayed consistent at four percent of net
revenues while increasing by 33% over the prior year.
Selling, General and Administrative Expenses
| | |
Three months ended August 31 | |
Change |
| | |
2022 | |
2021 | |
Amount | |
Percent |
| S G & A | |
$ | 1,831,000 | | |
$ | 1,472,000 | | |
$ | 359,000 | | |
| 24 | % |
| … as a percentage of net revenues | |
| 20 | % | |
| 20 | % | |
| | | |
| | |
Selling, general and administrative expenses increased
24% from the prior year. This increase is primarily due to increased employee compensation costs including incentive compensation.
The
above factors resulted in operating income of $1,178,000 for the three months ended August 31, 2022, almost ten times the $118,000
in the same period of the prior year. Other income during the prior period includes $54,000 of financial assistance provided by the U.S.
federal government as part of the Employee Retention Credit program of the Consolidated Appropriations Act of 2022.
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. No stock options were granted in the
period.
A summary of changes in the stock options outstanding
during the three-month period ended August 31, 2022 is presented below:
| | |
| |
Weighted- |
| | |
Number of | |
Average |
| | |
Options | |
Exercise Price |
| Options outstanding and exercisable at May 31, 2022: | |
| 283,000 | | |
$ | 11.43 | |
| Less: Options exercised: | |
| 4,000 | | |
| 8.06 | |
| Less: Options expired: | |
| 3,000 | | |
| — | |
| Options outstanding and exercisable at August 31, 2022: | |
| 276,000 | | |
$ | 11.49 | |
| Closing value per share on NASDAQ at August 31, 2022: | |
| | | |
$ | 10.19 | |
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 accrued liabilities, 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 ended August
31, 2022 were $833,000 compared to $462,000 in the same period of the prior year. As of August 31, 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
|
| | |
August 31, 2022 | |
May 31, 2022 | |
Increase /(Decrease) |
| Raw materials | |
$ | 601,000 | | |
| | | |
$ | 489,000 | | |
| | | |
$ | 112,000 | | |
| 23 | % |
| Work-in-process | |
| 5,137,000 | | |
| | | |
| 5,166,000 | | |
| | | |
| (29,000 | ) | |
| -1 | % |
| Finished goods | |
| 165,000 | | |
| | | |
| 200,000 | | |
| | | |
| (35,000 | ) | |
| -18 | % |
| Inventory | |
| 5,903,000 | | |
| 86 | % | |
| 5,855,000 | | |
| 84 | % | |
| 48,000 | | |
| 1 | % |
| Maintenance and other inventory | |
| 1,001,000 | | |
| 14 | % | |
| 1,107,000 | | |
| 16 | % | |
| (106,000 | ) | |
| -10 | % |
| Total | |
$ | 6,904,000 | | |
| 100 | % | |
$ | 6,962,000 | | |
| 100 | % | |
$ | (58,000 | ) | |
| -1 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Inventory turnover | |
| 3.3 | | |
| | | |
| 3.1 | | |
| | | |
| | | |
| | |
NOTE: Inventory turnover is annualized for the three-month
period ended August 31, 2022.
Inventory, at $5,903,000 as of August 31, 2022, is
$48,000 more than the prior year-end level of $5,855,000. Approximately 87% of the current inventory is work in process, 3% is finished
goods, and 10% 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
ended August 31, 2022 and 2021. The Company continues to rework slow-moving inventory, where applicable, to convert it to product to be
used on customer orders. During fiscal 2021, the Company began a thorough review of the inventory to identify and dispose of items
that had not been used for several years and were unlikely to be used in the foreseeable future.
Accounts Receivable, Costs and Estimated Earnings
in Excess of Billings (“CIEB"), and Billings in Excess of Costs and Estimated Earnings ("BIEC")
| | |
August 31, 2022 | |
May 31, 2022 | |
Increase /(Decrease) |
| Accounts receivable | |
$ | 5,832,000 | | |
$ | 4,467,000 | | |
$ | 1,365,000 | | |
| 31 | % |
| CIEB | |
| 2,833,000 | | |
| 3,336,000 | | |
| (503,000 | ) | |
| -15 | % |
| Less: BIEC | |
| 1,614,000 | | |
| 1,123,000 | | |
| 491,000 | | |
| 44 | % |
| Net | |
$ | 7,051,000 | | |
$ | 6,680,000 | | |
$ | 371,000 | | |
| 6 | % |
| | |
| | | |
| | | |
| | | |
| | |
| Number of an average day’s sales outstanding in accounts receivable (DSO) | |
| 58 | | |
| 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 $5,832,000 as of August 31, 2022 includes $6,000 of an allowance for doubtful accounts (“Allowance”). The accounts
receivable balance as of May 31, 2022 of $4,467,000 included an allowance of $16,000. The DSO increased from 42 days at May 31, 2022 to
58 at August 31, 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 first quarter of the current fiscal year is almost equal to the level in the fourth quarter of the prior year. The level of
accounts receivable at the end of the current fiscal quarter is 31% more than the level at the end of the prior year. The increase in
the level of accounts receivable caused the DSO to increase from last year end to this quarter-end. The level of accounts receivable is
greater than at the end of the prior year primarily because more than half of the current quarter’s revenue was recorded in the
final month of the quarter compared with less than a third of the comparative quarter being recorded in the month of May. 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 $2,833,000 balance
in this account at August 31, 2022 is 15% 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. As the Company bills the customers on these Projects, the accounts receivable balance will increase. 60%
of the CIEB balance as of the end of the last fiscal quarter, May 31, 2022, was billed to those customers in the current fiscal quarter
ended August 31, 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:
| | |
August 31, 2022 | |
May 31, 2022 |
| Costs | |
$ | 3,464,000 | | |
$ | 3,250,000 | |
| Estimated Earnings | |
| 2,421,000 | | |
| 2,642,000 | |
| Less: Billings to customers | |
| 3,052,000 | | |
| 2,556,000 | |
| CIEB | |
$ | 2,833,000 | | |
$ | 3,336,000 | |
| Number of Projects in progress | |
| 14 | | |
| 11 | |
As noted above, BIEC represents billings to customers
in excess of revenues recognized. The $1,614,000 balance in this account at August 31, 2022 is up 44% 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 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, 2022 | |
May 31, 2022 |
| Billings to customers | |
$ | 5,037,000 | | |
$ | 2,711,000 | |
| Less: Costs | |
| 2,486,000 | | |
| 1,019,000 | |
| Less: Estimated Earnings | |
| 937,000 | | |
| 569,000 | |
| BIEC | |
$ | 1,614,000 | | |
$ | 1,123,000 | |
| Number of Projects in progress | |
| 13 | | |
| 8 | |
Summary of factors affecting the balances in CIEB and BIEC:
| | |
August 31, 2022 | |
May 31, 2022 |
| Number of Projects in progress | |
| 27 | | |
| 19 | |
| Aggregate percent complete | |
| 45 | % | |
| 47 | % |
| Average total sales value of Projects in progress | |
$ | 721,000 | | |
$ | 795,000 | |
| Percentage of total value invoiced to customer | |
| 42 | % | |
| 35 | % |
The Company's backlog of sales orders at August 31,
2022 is $23.0 million, down slightly from the $23.7 million at the end of the prior year. $10.2 million of the current backlog is on Projects
already in progress.
Other Balance Sheet Items
Accounts
payable, at $1,449,000 as of August 31, 2022, is 2% more than the prior year-end. Other current liabilities decreased 39% from the prior
year-end, to $2,068,000. This decrease is primarily due to a decrease in customer advance payments as payments were applied to customer
invoices issued during the period. 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.
