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; 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 February 28, 2022 and 2021 |
| | |
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.
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 | % |
| | |
| | | |
| | |
At
February 28, 2021, the Company had 146 open sales orders in its backlog with a total sales value of $18.8 million. At February
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 ended February 28, 2022 and February
28, 2021 is as follows:
| | |
Nine months ended February 28 |
| | |
2022 | |
2021 |
| | USA | | |
| 72 | % | |
| 64 | % |
| | Asia | | |
| 18 | % | |
| 24 | % |
| | Other | | |
| 10 | % | |
| 12 | % |
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 ended February 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 the U.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 the Small 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 February 28, 2022 and 2021 |
| | |
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.
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 | % | |
| | | |
| | |
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 $634,000 for funds received from the U.S. federal government as financial assistance under
provisions of the Employee Retention Credit program included in the CAA.
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 ended February 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 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:
| | |
February
2022 | |
February
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 February 28, 2022 is presented below:
| | |
| |
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 | |
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 ended February
28, 2022 were $722,000 compared to $1,089,000 in the same period of the prior year. As of February 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 February 28, 2022.
Inventory, at $5,932,000 as of February 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 ended February 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 | |
$ | 5,268,000 | | |
$ | 4,121,000 | | |
$ | 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.
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 at February 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 ended February 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 $708,000 balance in this account at February 28, 2022 is down 48% from the $1,362,000 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:
| | |
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 | | |
$ | 963,000 | |
| Percentage of total value invoiced to customer | |
| 45 | % | |
| 30 | % |
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.
Our Supply 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.