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GLGI - Some observations about GM:

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ZachBuffett   Monday, 10/16/17 12:40:12 PM
Re: SSKILLZ1 post# 39814
Post # of 78953 
GLGI - Some observations about GM:

I looked back at GM for the past few years:




They have had lumpy margins in the past, and when it is dipping their explanation seems to be ramp-up costs- specifically direct labor and production. Here from Q2 2015:
Quote:
The increase in the ratio of cost of sales to sales from fiscal year 2015 over fiscal year 2014 is primarily due to Greystone’s inflexible pallet production costs. Greystone’s direct labor and production overhead costs for pallet production increased approximately 6% from fiscal year 2014 to fiscal year 2015 while pallet production decreased approximately 18%.



You can see that Q1 and Q2 in 2017 had the lowest positive GM, and that is directly preceeding the huge increase in both the top and bottom line. From Q1 when GLGI was sitting in the low .20s:
Quote:
Cost of sales in fiscal year 2017 was $6,876,443, or 88% of sales, compared to $4,629,316, or 83% of sales, in fiscal year 2016. The increase in cost of sales as a percentage of sales in fiscal year 2017 compared to 2016 is principally due to setup costs to fulfill the product requirements of the pallet leasing company.



So a decrease in margins could very well be a good thing even now in the last few quarters. We do know that that production is still ramping even now. From the recent 8k:
Quote:
Another new machine was recently delivered with an additional machine on order. These machines are projected to be in production in September 2017 and January 2018. We anticipate steady growth in top line sales during fiscal year 2018.



While these machines were not in production for Q1 '18, I would bet there are costs associated to this further ramp-up rolled into COGS. We do know that they hired 14 people this quarter:
Quote:
As of May 31, 2017, Greystone had 162 full-time employees and used a temporary personnel service to provide additional production personnel as needed.


Quote:

Greystone had approximately 176 and 160 full-time employees as of August 31, 2017 and 2016, respectively.



In light of this, I don't see the QoQ GM decrease as necessarily a negative development.



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