Taylor Devices, Inc. — FY2019 Form 10-K
Period clarification: The filing is an annual report for the fiscal year ended May 31, 2019, with comparison to fiscal 2018. It is not a report for calendar 2018 Q4.
Business context
Taylor Devices designs and manufactures shock-absorption, rate-control and energy-storage products, including seismic dampers and aerospace, defense and industrial devices. It reports one broadly similar product group and does not break out sales by product category. Construction represented 60% of FY2019 revenue, aerospace/defense 34%, and industrial 6%.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $33.62 million | $24.36 million | +38% |
| Gross profit | $9.05 million | $5.92 million | +53% |
| Gross margin | 26.9% | 24.3% | +2.6 percentage points |
| Operating income | $3.00 million | $0.65 million | +364% |
| Net income | $2.54 million | $0.44 million | +474% |
| Diluted earnings per share | $0.73 | $0.13 | +$0.60 |
| Cash from operations | $2.66 million | $0.30 million | +$2.35 million |
| Capital expenditures | $0.47 million | $0.94 million | Down $0.46 million |
Cash and cash equivalents were $5.07 million at year-end, and short-term investments were $1.06 million. Current assets were $30.77 million versus current liabilities of $4.88 million. The company had no balance outstanding on its $10 million demand credit line; the lender is not committed to advance funds and the facility is subject to annual renewal. Total stockholders’ equity was $36.32 million. No dividends were declared in either year.
Operating cash flow improved substantially, alongside higher earnings and lower receivables. Accounts receivable fell 16% to $5.28 million and reported days sales outstanding fell to 53 from 88. Inventory was $11.24 million, down 1%; work-in-process made up approximately 88% of inventory. Capital spending commitments at year-end were approximately $50,000.
Material changes and accounting comparability
- Growth was led by construction customers: construction sales rose 65%, compared with 12% growth in aerospace/defense and 5% in industrial. Management attributed construction growth to domestic infrastructure spending and seismic retrofits.
- North American sales increased 46%; Asia sales increased 12%. North America rose to 79% of revenue from 74%, while Asia declined to 17% from 21%.
- SG&A increased 15% to $6.05 million, including a 45% increase in outside commissions, but fell to 18% of sales from 22%.
- Backlog fell to $13.3 million at May 31, 2019 from $23.1 million a year earlier, although open sales orders increased to 153 from 121. The filing says $6.7 million of current backlog related to projects already in progress.
- The company adopted revenue standard ASU 2014-09 using the modified retrospective method. It increased FY2019 reported sales by $1.10 million and cost of goods sold by $1.10 million; the disclosed net-income effect was a $4,999 decrease. FY2018 comparatives were not restated, so reported year-over-year revenue comparisons are not fully on the same accounting basis.
- The FY2019 effective tax rate was 16.8%, versus 34.4% in FY2018. The prior year included $164,000 of non-cash deferred-tax expense from the federal corporate tax-rate change; FY2019 also benefited from research tax credits.
Outlook, risks and unusual items
Management gave no specific revenue or earnings guidance. It stated that cash, operating cash flow and borrowing capacity were expected to fund operations and capital improvements for the next 12 months. The company expected to recognize the remaining revenue on open projects during fiscal 2020, while cautioning that sales, backlog, margins and earnings fluctuate and current-period results may not predict future performance.
- Customer demand and project timing can vary; backlog declined materially year over year. Revenue on long-term projects depends on cost and completion estimates, and project work creates significant unbilled contract assets: costs and estimated earnings in excess of billings were $7.57 million at year-end.
- Four customers represented approximately 36% of FY2019 sales, with the largest at 17%. Management warned that loss of these customers without replacement business could adversely affect results.
- Federal government contracts may be terminated at the government’s election, and reduced defense spending could materially affect the company.
- Inventory is exposed to technical obsolescence. The FY2019 provision for potential inventory obsolescence was $175,000, versus $60,000 in FY2018; management also reported disposing of approximately $111,000 of obsolete inventory.
- The company reported $761,000 of deferred tax assets and said approximately $3.6 million of future taxable income would be needed to realize them. Management considered realization more likely than not, but lower future income estimates could reduce the amount considered realizable.
- The company adopted a shareholder rights plan in 2018, with specified ownership and offer thresholds and an expiration date of October 5, 2028.
The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of May 31, 2019; the auditor did not provide an opinion on internal control effectiveness.
Important facts for investors to verify
- Confirm the reporting period: this summary covers FY2019, not 2018 Q4.
- Assess the backlog decline, its composition and the timing of converting project backlog and unbilled contract assets into billings and cash.
- Review how much of the reported sales growth and period-to-period comparison reflects underlying demand versus adoption of the new revenue standard.
- Monitor customer concentration, construction-market exposure and the potential impact of changes in government and defense spending.
- Evaluate inventory obsolescence reserves and the assumptions supporting realization of deferred tax assets.
- Confirm availability and renewal terms of the demand credit line; it is not a committed borrowing facility.