Taylor Devices, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended May 31, 2015, compared with fiscal 2014. Although the request metadata says “2014 Q4,” this filing reports annual results, not a standalone quarterly period. The company designs and manufactures shock absorption, rate control and energy storage products, including seismic dampers, for construction, aerospace/defense and industrial customers.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $30.59 million | $20.01 million |
| Gross profit / gross margin | $8.74 million / 28.6% | $5.47 million / 27.3% |
| Operating income | $3.06 million | $1.55 million |
| Net income | $2.17 million | $1.13 million |
| Basic / diluted EPS | $0.65 / $0.64 | $0.34 / $0.34 |
| Net cash from operations | $2.78 million | $1.98 million |
| Capital expenditures | $0.75 million | $1.36 million |
| Cash and cash equivalents at year-end | $4.90 million | $2.79 million |
Sales rose 53%, gross profit 60%, operating income 98% and net income 92%. Gross margin improved to about 28.6% from 27.3%; operating margin was about 10.0% and net margin about 7.1% in FY2015. Cash increased by $2.10 million. Working capital was $17.15 million; current assets were $24.73 million and current liabilities $7.59 million.
There was no line-of-credit balance at either year-end. The company had a $6 million demand credit line, but the bank was not committed to lend; the facility is secured by receivables, equipment, inventory and intangibles, with a negative pledge on real estate. The company reported no long-term debt. Management said cash, operating cash flow and potential borrowing capacity should fund operations, capital improvements and any repurchases for the next 12 months.
Material changes and operating developments
- Growth was primarily attributed to U.S. and Asian construction activity on new and retrofit buildings and bridges requiring seismic protection, plus increased defense demand for naval and aerospace isolation systems.
- Construction sales increased 83% and represented 54% of sales, versus 46% in FY2014. Aerospace/defense sales increased 35% but declined to 39% of sales from 44%; industrial sales fell 5% and represented 7%.
- Percentage-of-completion revenue increased 126%; it accounted for 70% of FY2015 revenue versus 47% a year earlier. The company worked on 63 projects during the year, versus 51. Year-end backlog rose to $25.2 million from $24.6 million, across 139 open orders versus 107.
- SG&A increased 45% to $5.68 million, mainly due to a 120% increase in outside commissions and higher air-freight and incentive-compensation costs. SG&A declined slightly as a proportion of sales, to 19% from 20%.
- Inventory declined 3% to $9.55 million, while receivables rose 64% to $4.75 million and costs and estimated earnings in excess of billings increased to $5.17 million from $2.37 million. Days sales outstanding improved to 40 from 49. Accounts payable increased 132% to $2.70 million.
Outlook, risks and other notable items
- The filing provides no quantified revenue or earnings guidance. Management cautioned that backlog, revenue, margins and profits fluctuate and that current-period changes may not predict future results.
- Key risks include order timing and business-cycle variability, competition and pricing pressure, changing demand and technology, and limited financing and manufacturing capacity relative to larger aerospace competitors. Federal contracts may be terminated at the government’s election; reduced defense spending could materially harm results.
- Customer concentration is material. The business section says five customers represented approximately 52% of FY2015 sales, while the financial-statement note says seven customers represented approximately 62%. The filing also notes that losing major customers could adversely affect results.
- Long-term contract revenue depends on percentage-of-completion estimates of costs and earnings. At year-end, $5.17 million of recognized revenue exceeded billings; management expected to bill that balance and complete deliveries on relevant contracts within 12 months. Cost-estimate changes could affect recognized revenue and profit.
- Deferred tax assets were $858,900, down 22% year over year. Management considered them realizable but said approximately $2.5 million of future taxable income would be needed; a reduction in expected taxable income could require an allowance.
- Inventory obsolescence remains a consideration: the company recorded a $180,000 annual provision and disposed of approximately $260,000 of obsolete inventory in FY2015. No material legal proceedings were reported in the business discussion; the notes mention routine litigation incidental to business.
- No dividends were declared in the last two fiscal years, and the company said it intended to retain cash for working capital. No shares were repurchased during FY2015. Capital expenditure commitments at year-end were approximately $75,000.
Investor verification priorities
- Reconcile the customer-concentration disclosures: five customers at 52% in the business section versus seven at 62% in the financial-statement note.
- Assess backlog quality, project timing and conversion to billings and cash, particularly the elevated unbilled contract asset and increased percentage-of-completion revenue.
- Review the $6 million demand facility’s renewal and availability, given that the bank is not committed to lend, and monitor liquidity as receivables and contract balances grow.
- Evaluate customer and end-market concentration, especially construction’s increased share of revenue, and sensitivity to construction cycles and government defense spending.
- Confirm the assumptions supporting contract cost estimates, inventory reserves and realization of deferred tax assets.
The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting.