Taylor Devices, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 31, 2017, compared with fiscal 2016. Although the request metadata says “2016 Q4,” this filing reports fiscal 2017 results for the full year.
Business context
Taylor Devices designs and manufactures shock-absorption, rate-control and energy-storage products, including seismic dampers, industrial buffers and aerospace/defense vibration dampers. Construction represented 54% of fiscal 2017 sales, aerospace/defense 39%, and industrial 7%. The company does not report sales by product category.
Financial performance and position
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $25.54 million | $35.68 million | Down 28% |
| Gross profit / margin | $7.99 million / 31% | $12.44 million / 35% | Profit down 36% |
| Operating income | $2.92 million | $5.75 million | Down 49% |
| Net income | $2.33 million | $4.21 million | Down 45% |
| Basic / diluted EPS | $0.68 / $0.66 | $1.24 / $1.21 | Lower year over year |
| Cash flow from operations | $(1.06) million | $3.79 million | Changed to cash outflow |
| Capital expenditures | $1.87 million | $1.94 million | Approximately $650,000 further commitments |
Gross margin fell as prior-year projects included unusually high-margin construction and aerospace/defense work, while some current export work was competitively bid amid unfavorable foreign exchange rates. Lower sales volume also left fixed manufacturing costs spread over fewer products. SG&A declined 24%, but rose as a share of sales to 20% from 19%.
At May 31, 2017, cash and cash equivalents were $3.32 million, short-term investments $1.02 million, current assets $25.68 million and current liabilities $4.30 million. Working capital was $21.37 million. Total stockholders’ equity was $32.86 million. No line-of-credit balance was outstanding at year-end; the filing describes a demand credit facility but gives conflicting facility amounts (see investor checks below).
Cash declined by $2.76 million during the year, to $3.32 million. Operating cash use reflected, among other items, a $2.25 million increase in inventory, a $1.37 million increase in costs and estimated earnings in excess of billings, and a $1.90 million reduction in other accrued expenses. Inventory rose 20% to $12.37 million including maintenance inventory; turnover fell to 1.5 from 2.3.
Changes, outlook and risks
- Sales decreased in all three customer groups: construction down 34%, aerospace/defense down 18%, and industrial down 34%. Asia sales fell 59%; North American sales fell 20%.
- Year-end backlog was nearly unchanged at $21.6 million versus $21.5 million, across 116 open orders versus 115 a year earlier. Aerospace/defense rose to 56% of backlog from 38%, while construction fell to 42% from 61%. Management cautions that backlog and period-to-period results fluctuate and do not necessarily indicate future performance.
- Manufacturing research spending increased to $903,000 from $428,000, primarily for new specifications on domestic seismic-protection contracts. Defense-sponsored research spending was $87,000 versus $56,000.
- The company completed a 10,000-square-foot facility addition intended to expand seismic-damper capacity, including production of dampers up to 45 feet long. Management expects cash, operating cash flows and borrowing capacity to fund operations and planned investment for the next 12 months.
- No specific earnings or revenue guidance is provided. The company plans to retain cash for working-capital needs and has not declared dividends in the past two fiscal years.
- Key risks include variable customer order timing and project mix, competition and pricing pressure, foreign-exchange effects on export bids, customer concentration (five customers contributed 44% of sales), and potential reductions or termination of federal contracts. Fixed-price contracts and percentage-of-completion revenue depend on cost estimates; 66% of FY2017 revenue was recognized using that method.
- Adoption of the new revenue-recognition standard was expected in fiscal 2019; management had not completed its impact assessment and said it would likely slow revenue recognition for some percentage-of-completion contracts. Deferred tax assets were $1.23 million and depend on generating approximately $3.6 million of future taxable income for realization.
Important facts for investors to verify
- Credit facility size: MD&A states a $10 million line, while the financial-statement note states $6 million. Both report no year-end borrowing; confirm the operative facility amount, renewal terms and availability, noting the bank is not committed to lend.
- Cash conversion and project billing: Investigate the negative operating cash flow, higher inventory and unbilled contract balances, and timing of expected customer billings and collections.
- Backlog quality: Assess conversion timing, margins and customer concentration, particularly the shift toward aerospace/defense orders and away from construction.
- Revenue estimates and tax assets: Monitor project cost estimates under percentage-of-completion accounting and whether future taxable income supports realization of deferred tax assets.
- Legal disclosure: The business section says there are no current legal proceedings, while a financial-statement note refers to routine litigation incidental to the business; clarify the scope and status.