Taylor Devices, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended May 31, 2023, compared with fiscal 2022. Although the request metadata refers to 2022 Q4, this filing is an annual report for FY2023, not a quarterly report.
Business context
Taylor Devices designs and manufactures shock absorption, rate-control and energy-storage products, including seismic dampers, industrial buffers and aerospace and defense components. Sales rose across its industrial, structural and aerospace/defense customer groups. Structural products were 51% of revenue; aerospace/defense 39%; and industrial 10%.
Financial performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net sales | $40.20 million | $30.87 million | +30% |
| Gross profit / margin | $16.07 million / 40% | $9.63 million / 31% | Margin +9 percentage points |
| Operating income | $6.81 million | $2.47 million | +175% |
| Net income | $6.29 million | $2.24 million | +181% |
| Basic / diluted EPS | $1.79 / $1.77 | $0.64 / $0.64 | Increased |
| Cash from operations | $7.71 million | $3.31 million | +$4.40 million |
| Capital expenditures | $3.36 million | $1.39 million | +$1.97 million |
- Gross margin improved as price increases recovered more material and labor costs; management also cited higher volume and continuous-improvement initiatives.
- SG&A rose 33% to $8.16 million, primarily due to higher personnel costs. R&D increased 10% to $1.10 million.
- Net interest income was $699,000, compared with $5,000 in FY2022. The effective tax rate increased to 16.2% from 12.4%.
- Cash and cash equivalents were $3.58 million at year-end, while short-term investments were $24.51 million, for combined cash and investments of about $28.09 million. Cash declined from $22.52 million as the company placed $23.42 million into short-term investments; operating cash flow was positive.
- Current assets were $44.38 million and current liabilities $7.79 million. The company had no balance outstanding on its $10 million bank line of credit. The facility is a demand line, not a committed lending facility, and is subject to annual renewal.
- Total stockholders’ equity was $50.09 million. No dividends were declared in either year; management expects to retain cash for working capital.
Changes, outlook and risks
- Sales increased 27% in structural, 25% in aerospace/defense and 85% in industrial applications. U.S. sales increased 39%; Asia sales increased 2%.
- Year-end backlog was $32.5 million across 134 open orders, versus $23.7 million across 135 orders a year earlier. Aerospace/defense represented 81% of backlog, up from 41%; structural orders fell to 15% from 50%. Management expects to recognize most backlog revenue in FY2024 and the balance in FY2025.
- Management cautions that backlog, project timing, sales, margins and earnings fluctuate, and current results may not predict future results. Order levels and customer demand, competition and pricing, economic conditions, technology changes, and government defense spending are cited risks.
- Revenue from long-term contracts is recognized over time using costs incurred relative to estimated total costs. Estimates of costs to complete can affect reported revenue and margins; the auditor identified this accounting as a critical audit matter. The filing reports 61% of FY2023 revenue recognized over time.
- Inventory obsolescence remains a judgment-sensitive area. The company recorded a $295,000 obsolescence provision and disposed of $322,000 of inventory in FY2023. Maintenance and other inventory of $2.24 million was reported net of a $1.23 million allowance.
- The company is a third-party defendant in litigation related to the 432 Park Avenue condominium. The underlying owner’s complaint demands $125 million plus punitive damages, but that is not a quantified claim against Taylor Devices. The company disputes the allegations and says its supplied damping devices met contractual and technical requirements; management states its potential liability cannot be reasonably quantified given limited discovery.
- Deferred tax assets were $1.58 million; management says approximately $7.5 million of future taxable income is needed to realize them and has recorded no valuation allowance. Realization depends on future taxable income.
- Management concluded disclosure controls and internal control over financial reporting were effective. The independent auditor issued an unqualified opinion on the financial statements and did not audit internal-control effectiveness.
Investor verification priorities
- Review the $32.5 million backlog’s timing, cancellation or execution risks, and its increased aerospace/defense concentration.
- Monitor long-term contract cost estimates, project progress and conversion of recognized revenue and contract assets into billings and cash; days sales outstanding rose to 47 from 42.
- Assess the status and potential exposure of the 432 Park litigation; the filing does not quantify Taylor Devices’ likely damages.
- Check the composition, maturities and liquidity of the $24.51 million in short-term investments and the renewal terms of the noncommitted credit line.
- Evaluate inventory reserve assumptions and whether forecast taxable income supports realization of deferred tax assets.