Taylor Devices, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended May 31, 2012, compared with fiscal 2011. The filing is an annual report, notwithstanding the request metadata’s “2011 Q4” label.
Business context
Taylor Devices designs and manufactures shock absorption, rate-control and energy-storage products, including seismic dampers, for industrial, construction and aerospace/defense uses. Seismic protection products drove much of the year’s growth, particularly sales to Asia. The company reports one product group and does not break out sales by individual product category.
Financial performance and liquidity
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Net sales | $29.01 million | $20.91 million | +39% |
| Gross profit | $8.06 million | $5.56 million | +45% |
| Gross margin | 27.8% | 26.6% | +1.2 percentage points |
| Operating income | $2.89 million | $1.48 million | +95% |
| Net income | $2.20 million | $1.42 million | +55% |
| Basic and diluted EPS | $0.67 | $0.44 | +$0.23 |
| Cash from operations | $(1.11) million | $2.40 million | Declined |
- Net income benefited from higher sales and operating leverage. Selling, general and administrative expense rose 27% to $5.18 million; outside commissions rose 61% as sales increased. The effective tax rate increased to 25.4% from 17.1%.
- Cash and equivalents fell to $74,000 from $2.19 million. Working-capital demands included accounts receivable of $5.61 million, up 163%; inventory of $8.37 million, up 56%; and costs and estimated earnings in excess of billings of $5.49 million, up 31%. Receivables days outstanding rose to 52 from 27.
- Capital expenditures were $1.55 million. The company reported $1.9 million of additional capital-expenditure commitments at year-end.
- Year-end borrowings included $258,000 under a $6 million demand line of credit and $3,657 of current long-term debt; there was no long-term debt balance. The line is secured by assets and subject to annual renewal. Working capital was $13.8 million, versus a $3 million minimum covenant.
- Backlog increased 17% to $17.5 million, from $15.0 million. About $8 million was for projects already in progress.
Material changes, outlook and risks
- Construction customers represented 71% of sales, up from 57%; aerospace/defense sales fell to 23% from 35%. Asia accounted for 54% of revenue, up from 35%.
- One customer, Sinodynamics Enterprise Co., Ltd., represented approximately 41% of sales. Three customers together accounted for 49%. Management warns that losing the largest customer without replacement could adversely affect results.
- Management attributed record seismic-damper shipments largely to Asian demand following major earthquakes, but said it was too early to know how long demand would remain at that level. The filing provides no formal earnings or revenue guidance.
- Management expected inventory to decline 10%–20% over the next 12 months and expected current cash and the bank line to fund operations and expansion. The credit line is a demand facility and the bank is not committed to lend.
- The company acquired three industrial buildings and adjacent land to expand manufacturing capacity. The renovation project, including purchase price, is estimated at $2.5 million; one building was in service, with the other two expected by December 2013. Management cited overcrowding amid increased seismic-product sales.
- Fixed-price contracts and percentage-of-completion accounting are significant: 77% of FY2012 revenue was recognized using that method, versus 61% in FY2011. Cost-estimate changes can affect reported revenue and profit. Federal contracts may be terminated at the government’s election, and reduced defense spending could materially harm the company.
- Other stated risks include demand and economic-cycle volatility, competition, technology changes, and potential inventory obsolescence. Routine litigation was reported; no material legal proceeding was identified. Management stated that disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether the largest customer’s orders and the strong Asia-driven seismic demand are recurring, and how concentrated current backlog remains.
- Collection and billing progress for the sharp increases in receivables and unbilled contract assets; confirm subsequent cash receipts and customer retention collections.
- Cash-flow conversion and working-capital needs as the company executes its backlog and completes the manufacturing expansion.
- Availability and renewal terms of the uncommitted demand credit line, and actual spending against the $1.9 million capital-expenditure commitments.
- Contract cost estimates, inventory recoverability and realization of the $950,000 deferred tax asset, which management said requires approximately $2.8 million of future taxable income.