Taylor Devices, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended May 31, 2014, compared with fiscal 2013. This is an annual report, not a quarterly filing. Taylor Devices designs and manufactures shock absorption, rate control, and energy storage products for construction, industrial, aerospace, and defense applications.
Financial performance and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $20.01 million | $24.73 million | Down 19% |
| Gross profit / gross margin | $5.47 million / 27% | $8.76 million / 35% | Gross profit down 38% |
| Operating income | $1.55 million | $3.47 million | Down 55% |
| Income before taxes | $1.57 million | $3.46 million | Down $1.89 million |
| Net income | $1.13 million | $2.55 million | Down 56% |
| Basic / diluted EPS | $0.34 / $0.34 | $0.77 / $0.76 | Lower year over year |
| Operating cash flow | $1.98 million | $5.47 million | Down $3.49 million |
| Capital expenditures | $1.36 million | $3.29 million | Down $1.94 million |
Cash and cash equivalents were $2.79 million at year-end, up from $2.00 million. The company had no outstanding balance on its $6.0 million demand line of credit at either year-end; the bank is not committed to lend, and the facility is subject to annual renewal. Working capital was $14.8 million, against a $3.0 million covenant minimum. Management said available cash, operating cash flow, and borrowing capacity should fund operations, capital improvements, and any share repurchases for the next 12 months.
Total assets were $27.43 million and stockholders’ equity was $23.08 million. Receivables were $2.89 million, and inventory was $9.82 million, including maintenance inventory. Receivable days outstanding increased from 39 to 49. No dividends were declared in either year; the company said it expects to retain cash for working capital.
Material changes and management commentary
- Management attributed the sales and profit decline in part to fewer construction projects and an interruption in production during the October–November 2013 relocation of production equipment to a new North Tonawanda campus. Construction sales fell 35%, industrial sales fell 19%, and aerospace/defense sales rose 9%.
- Construction accounted for 46% of FY2014 sales versus 57% in FY2013; aerospace/defense accounted for 44% versus 33%, and industrial for 10% in both years.
- Year-end order backlog rose to $24.6 million from $13.1 million, with 107 open orders versus 108. $12.4 million of current backlog related to projects already in progress. Backlog is not a guarantee of future revenue.
- Revenue recognized under percentage-of-completion accounting fell 35%; it represented 47% of FY2014 revenue versus 58% in FY2013. Project cost and completion estimates affect reported revenue and profit.
- SG&A fell 26%, primarily because of lower air-freight charges and estimated incentive compensation. The effective tax rate increased to 27.9% from 26.4%.
Outlook, risks, and notable items
- The filing provides no specific revenue or earnings guidance. Management cautions that orders, backlog, margins, commissions, and profits fluctuate and that current changes may not indicate future results.
- One customer, Sinodynamics Enterprise Co., Ltd., represented approximately 20% of FY2014 net sales. Management warns that losing this customer without replacement could adversely affect results.
- Federal government contracts may be terminated at the government’s election; management says reduced defense spending could materially harm the company. The business also faces competition, changing demand, pricing pressure, and technological obsolescence.
- Inventory is subject to obsolescence; the annual provision was $180,000 in both years. Management’s recoverability of $1.10 million in deferred tax assets depends on generating approximately $3.2 million in future taxable income.
- Capital spending and production relocation affected operations; capital expenditures were $1.36 million, and the company reported no commitments for additional capital expenditures at year-end.
- The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting. Item 3 reports no current legal proceedings; the financial-statement note refers to routine litigation incidental to the business.
Investor facts to verify
- Whether the $24.6 million backlog converts to revenue on schedule and at expected margins, particularly the $12.4 million already in process.
- Whether production recovered after the equipment move and whether construction demand and customer mix stabilize.
- Receivable collection, including retained construction-project balances, given the increase in DSO to 49 days.
- Customer concentration, project cost estimates, and inventory obsolescence exposure.
- Availability and renewal terms of the uncommitted $6.0 million demand credit line, and taxable-income assumptions supporting deferred tax assets.