Taylor Devices, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended May 31, 2016, compared with fiscal 2015. This is an annual report, not a standalone 2015 fourth-quarter filing. Taylor Devices designs and manufactures shock absorption, rate control, and energy storage products, including seismic dampers and aerospace, defense, and industrial products.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $35.68 million | $30.59 million | +17% |
| Gross profit | $12.44 million | $8.74 million | +42% |
| Gross margin | 35% | 29% | +6 percentage points |
| Operating income | $5.75 million | $3.06 million | +88% |
| Net income | $4.21 million | $2.17 million | +93% |
| Diluted earnings per share | $1.21 | $0.64 | — |
| Net cash from operating activities | $3.79 million | $2.78 million | — |
| Capital expenditures | $1.94 million | $0.75 million | — |
At May 31, 2016, cash and cash equivalents were $6.09 million, with an additional $1.00 million in short-term investments. Working capital was $20.97 million. The company had no outstanding balance on its $6.0 million demand credit line; the bank is not committed to lend, and the facility is renewable annually. Total assets were $37.49 million and stockholders’ equity was $30.16 million. No cash or stock dividends were declared in the last two fiscal years.
Material changes and operating trends
- Revenue growth was driven primarily by stronger U.S. construction activity for new and retrofitted buildings and bridges requiring seismic protection. Construction sales rose 26% and represented 59% of revenue; aerospace and defense represented 35%, and industrial 6%.
- Management attributed the higher gross margin to better pricing on certain larger construction projects, above-average margins on several aerospace and defense projects, and higher volume absorbing fixed manufacturing costs. SG&A rose 18%, mainly from commissions and higher incentive compensation.
- Sales order backlog fell to $21.5 million across 115 open orders at year-end, from $25.2 million across 139 orders a year earlier. $11.7 million of the current backlog related to projects already in progress. Management cautioned that backlog and results fluctuate and are not necessarily indicative of future performance.
- Cash from operations increased to $3.79 million. Cash and cash equivalents rose by $1.19 million during the year after investing outflows of $2.94 million, including $1.94 million of capital spending and a $1.00 million short-term investment purchase.
- Inventory increased 8% to $10.30 million, including $9.60 million of current inventory, largely work in process. Accounts receivable declined 16% to $3.99 million, while costs and estimated earnings in excess of billings, net of billings in excess, increased 11% to $8.03 million.
Outlook, risks, and unusual items
- Management said cash on hand, operating cash flows, and borrowing capacity should be sufficient for operations, capital improvements, and any share repurchases over the next 12 months. No specific revenue or earnings guidance was provided.
- The company was constructing a 10,000-square-foot facility addition and a long-bed damper test machine to increase seismic-damper capacity, including support for dampers up to 45 feet long. Capital expenditure commitments were approximately $550,000 at year-end.
- Customer concentration remains relevant: seven customers accounted for approximately 55% of FY2016 sales. Loss of one or more could adversely affect results if the business is not replaced.
- Federal government contracts may be terminated at the government’s election; management warned that reductions in defense spending could materially affect the company. Other cited risks include order timing and amount, economic and industry cycles, competition, pricing pressure, and technology changes.
- Revenue recognition depends in part on estimates for long-term fixed-price contracts. Percentage-of-completion accounting applied to 66% of FY2016 revenue, versus 70% in FY2015; changes in estimated contract costs can affect reported revenue and profit.
- The company recorded a $180,000 inventory-obsolescence provision in each year. Its $965,000 deferred tax asset depends on generating future taxable income; management estimated approximately $2.8 million of future taxable income is needed for realization. State investment tax credit carryforwards were approximately $262,000, expiring through May 2022.
- The filing reports no current legal proceedings in Item 3, while the financial-statement note refers to routine litigation incidental to the business. Management reported effective disclosure controls and internal control over financial reporting; the auditor expressed an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether the lower year-end backlog converts to revenue, and the timing and margins of projects in progress.
- Whether the construction-led sales growth and FY2016 gross-margin improvement are sustainable across changing project mix and volume.
- Cash conversion and working-capital demands, especially inventory levels and unbilled contract assets.
- Progress, total cost, and expected returns from the facility addition and testing-machine investment.
- Customer concentration, government-contract exposure, and the recoverability of deferred tax assets.
- The filing’s geographic disclosures differ in terminology: MD&A gives North America as 73% of revenue in FY2016 and 66% in FY2015, while the notes report U.S. sales of 73% and 65%, respectively. Confirm the intended comparison before relying on the regional trend.