Taylor Devices, Inc. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2018, compared with fiscal 2017. The filing describes annual results, not a standalone fourth quarter. Taylor Devices designs and manufactures shock absorption, rate-control and energy-storage products, including seismic dampers, buffers and aerospace/defense components.
Financial results and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $24.364 million | $25.537 million | Down 5% |
| Gross profit / margin | $5.924 million / 24% | $7.986 million / 31% | Profit down 26%; margin down 7 percentage points |
| Operating income | $648,000 | $2.921 million | Down 78% |
| Net income | $443,000 | $2.331 million | Down 81% |
| Basic / diluted EPS | $0.13 / $0.13 | $0.68 / $0.66 | Lower year over year |
| Cash from operating activities | $304,000 | $(1.056) million | Improved, but modest relative to earnings and working-capital needs |
| Capital expenditures | $937,000 | $1.869 million | Down |
Cash and cash equivalents were $2.858 million at year-end, down from $3.325 million; short-term investments were $1.039 million. Current assets were $28.285 million and current liabilities $5.899 million, implying working capital of about $22.386 million and a current ratio of approximately 4.8. The company reported no line-of-credit borrowings at either year-end. Its $10 million demand facility is secured by a negative pledge, renewable annually, and the bank is not committed to lend under it.
There were no reported long-term borrowings. Inventory was $12.204 million including maintenance inventory; approximately 88% of current inventory was work in process. Net accounts receivable rose 146% to $6.266 million, and DSO increased to 88 days from 36. Management attributed the increase chiefly to $2.6 million of project billings in May 2018 versus $0.5 million in May 2017, and expected collection within 12 months.
Material changes and operating drivers
- Construction sales fell 12% to $12.193 million, while industrial sales rose 27% to $1.965 million and aerospace/defense sales rose 1% to $10.206 million. Construction represented 50% of sales; aerospace/defense 42% and industrial 8%.
- Long-term project revenue was 13% lower, while non-project revenue was 13% higher. Management cited construction-site scheduling delays, late custom components, subcontractor quality issues and testing bottlenecks, including delays in bringing a new test machine online. It said these issues were resolved and expressed optimism that sales volume would improve.
- Gross margin declined mainly because lower sales volume provided less coverage of fixed manufacturing costs and several projects were competitively bid. SG&A increased 4% to $5.277 million.
- Year-end backlog increased to $23.1 million across 121 open orders from $21.6 million across 116 orders. Construction was 65% of backlog versus 42% a year earlier; aerospace/defense was 33% versus 56%. Backlog and project timing fluctuate and are not necessarily indicative of future results.
- North American sales declined 13%; sales to Asia increased 57%. Asia represented 21% of revenue, compared with 13% in FY2017.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said cash, operating cash flows and borrowing capacity should be sufficient for operations and planned capital improvements over the next 12 months.
- The company recorded $164,000 of incremental, non-cash deferred tax expense from the U.S. corporate tax-rate reduction. The effective tax rate was 34.4%, versus 22.0% in FY2017. Deferred tax assets were $663,000, and management said about $3.2 million of future taxable income would be needed to realize them.
- FY2018 manufacturing research expense was $263,000, down from $903,000, largely because FY2017 included research for new seismic-contract specifications. Defense-sponsored R&D was $22,000 versus $87,000.
- Adoption of the new revenue-recognition standard was expected in FY2019. The company had not completed its assessment but said adoption would likely slow revenue recognition on contracts then accounted for using percentage of completion.
- Risks include lumpy customer orders and project schedules, competition and pricing pressure, limits on manufacturing capacity and financing, customer concentration (five customers generated 49% of FY2018 sales), and potential reductions or termination of federal-government contracts. The federal government may terminate contracts at its election.
- The company reported no legal proceedings in the business section; the financial-statement note refers to routine litigation incidental to the business. Management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether the sharp margin and profit declines reverse as the delayed construction projects ship, and whether the $23.1 million backlog converts to revenue on schedule and at acceptable margins.
- Collection of the higher receivables and contract balances, including $860,000 of customer retainage, and whether DSO returns toward prior levels.
- The company’s ability to fund operations and approximately $530,000 of committed capital expenditures without relying on an uncommitted demand credit line.
- The effect of adopting the new revenue standard on timing of revenue and earnings for percentage-of-completion contracts.
- Whether projected taxable income supports realization of deferred tax assets, and the implications of the $369,000 of state investment tax-credit carryforwards expiring through May 2024.