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TAYLOR DEVICES INC - Quarter Report: 2022 November (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

   
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE    ACT OF 1934

For the quarterly period ended November 30, 2022

OR

   
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE      ACT OF 1934

For the transition period from                      to                     

Commission File Number 0-3498

TAYLOR DEVICES INC

 

(Exact name of registrant as specified in its charter)

     
New York   16-0797789
 
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
90 Taylor Drive, North Tonawanda, New York   14120
 
(Address of principal executive offices)   (Zip Code)

716-694-0800

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

None None None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated Filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

  


  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No

 

As of December 29, 2022, there were outstanding 3,502,546 shares of the registrant’s common stock, par value $.025 per share.

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TAYLOR DEVICES, INC.

 

Index to Form 10-Q

 

 

 

PART I FINANCIAL INFORMATION PAGE NO.
       
  Item 1. Financial Statements  
       
    Condensed Consolidated Balance Sheets as of November 30, 2022 and May 31, 2022 4
       
    Condensed Consolidated Statements of Income for the three and six months ended November 30, 2022 and 2021 5
       
    Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended November 30, 2022 and 2021 6
       
    Condensed Consolidated Statements of Cash Flows for the six months ended November 30, 2022 and 2021 7
       
    Notes to Condensed Consolidated Financial Statements 8
       
  Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

10
  Item 3. Quantitative and Qualitative Disclosures About Market Risk  

17

 

  Item 4. Controls and Procedures   17
       
PART II

OTHER INFORMATION

 

 

 

 

Item 1. Legal Proceedings 18

 

 

Item 1A. Risk Factors 18

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18

 

 

Item 3. Defaults Upon Senior Securities 18

 

 

Item 4. Mine Safety Disclosures 18

 

 

Item 5. Other Information 18
  Item 6. Exhibits 19

 

 

     

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

20

SIGNATURES

 

  21

 

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TAYLOR DEVICES, INC. AND SUBSIDIARY      
       
Condensed Consolidated Balance Sheets  (Unaudited)   
   November 30,  May 31,
   2022  2022
       
Assets          
Current assets:          
Cash and cash equivalents  $21,013,144   $22,517,038 
Short-term investments   1,097,450    1,097,450 
Accounts and other receivables, net   5,940,731    4,466,686 
Inventory   5,596,046    5,854,935 
Costs and estimated earnings in excess of billings   5,295,376    3,336,474 
Other current assets   890,506    704,436 
Total current assets   39,833,253    37,977,019 
           
Maintenance and other inventory, net   972,282    1,107,309 
Property and equipment, net   10,610,010    9,854,759 
Other assets   207,879    205,359 
Deferred income taxes   74,615    74,615 
Total assets  $51,698,039   $49,219,061 
Liabilities and Stockholders' Equity          
Current liabilities:          
Accounts payable  $1,537,181   $1,426,830 
Billings in excess of costs and estimated earnings   1,089,884    1,122,763 
Other current liabilities   3,087,615    3,414,314 
Total current liabilities   5,714,680    5,963,907 
           
Stockholders' Equity:          
Common stock and additional paid-in capital   10,495,584    10,329,258 
Retained earnings   38,402,777    35,840,898 
Stockholders’ equity before treasury stock   48,898,361    46,170,156 
Treasury stock - at cost   (2,915,002)   (2,915,002)
Total stockholders’ equity   45,983,359    43,255,154 
Total liabilities and stockholders’ equity  $51,698,039   $49,219,061 
           
           
See notes to condensed consolidated financial statements.          

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TAYLOR DEVICES, INC. AND SUBSIDIARY
            
             
Condensed Consolidated Statements of Income  (Unaudited)  (Unaudited)
   For the three months ended November 30,  For the six months ended November 30,
   2022  2021  2022  2021
             
             
Sales, net  $10,497,366   $7,757,986   $19,588,065   $15,065,723 
                     
Cost of goods sold   6,403,541    5,167,463    12,109,483    10,603,021 
                     
     Gross profit   4,093,825    2,590,523    7,478,582    4,462,702 
                     
Research and development costs   315,301    201,277    690,647    483,217 
Selling, general and administrative expenses   2,022,061    1,608,860    3,853,099    3,080,959 
                     
     Operating income   1,756,463    780,386    2,934,836    898,526 
                     
Other income, net   153,045    7,418    193,043    71,155 
                     
     Income before provision for income taxes   1,909,508    787,804    3,127,879    969,681 
                     
Provision for income taxes   350,000    128,000    566,000    128,000 
                     
     Net income  $1,559,508   $659,804   $2,561,879   $841,681 
                     
Basic and diluted earnings per common share  $0.45   $0.19   $0.73   $0.24 
                     

 

See notes to condensed consolidated financial statements.

 

                    
                     

 

 

 

 

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TAYLOR DEVICES, INC. AND SUBSIDIARY            
             
Condensed Consolidated Statements of Stockholders’ Equity         
   (Unaudited)  (Unaudited)
   For the three months ended November 30,  For the six months ended November 30,
   2022  2021  2022  2021
             
Common Stock                    
  Beginning of period  $101,451   $101,313   $101,342   $101,305 
  Issuance of shares for employee stock purchase plan   6    10    15    18 
  Issuance of shares for employee stock option plan   —      —      100    —   
  End of period   101,457    101,323    101,457    101,323 
Paid-in Capital                    
  Beginning of period   10,263,098    10,014,255    10,227,916    10,010,430 
  Issuance of shares for employee stock purchase plan   2,592    4,256    5,654    8,081 
  Issuance of shares for employee stock option plan   —      —      32,120    —   
  Stock options issued for services   128,437    125,764    128,437    125,764 
  End of period   10,394,127    10,144,275    10,394,127    10,144,275 
Retained Earnings                    
  Beginning of period   36,843,269    33,783,352    35,840,898    33,601,475 
  Net income   1,559,508    659,804    2,561,879    841,681 
  End of period   38,402,777    34,443,156    38,402,777    34,443,156 
Treasury Stock                    
  Beginning and end of period   (2,915,002)   (2,915,002)   (2,915,002)   (2,915,002)
Total stockholders' equity  $45,983,359   $41,773,752   $45,983,359   $41,773,752 
                     
                     

See notes to condensed consolidated financial statements.

 

                    
                     

 

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TAYLOR DEVICES, INC. AND SUBSIDIARY      
       
Condensed Consolidated Statements of Cash Flows      
   (Unaudited)
   November 30,
For the six months ended  2022  2021
       
Operating activities:          
Net income  $2,561,879   $841,681 
Adjustments to reconcile net income to net cash flows from operating activities:          
   Depreciation   635,580    637,363 
   Stock options issued for services   128,437    125,764 
   Changes in other assets and liabilities:          
      Accounts and other receivables, net   (1,474,045)   (189,316)
      Inventory   393,916    88,563 
      Costs and estimated earnings in excess of billings   (1,958,902)   (2,385,172)
      Other current assets   (186,070)   354,898 
      Accounts payable   110,351    (284,608)
      Billings in excess of costs and estimated earnings   (32,879)   (645,498)
      Other current liabilities   (326,699)   82,114 
          Net operating activities   (148,432)   (1,374,211)
           
Investing activities:          
   Acquisition of property and equipment   (1,390,831)   (560,159)
   Other investing activities   (2,520)   (7,249)
          Net investing activities   (1,393,351)   (567,408)
           
Financing activities:          
   Proceeds from issuance of common stock, net   37,889    8,099 
           
          Net change in cash and cash equivalents   (1,503,894)   (1,933,520)
           
Cash and cash equivalents - beginning   22,517,038    20,581,604 
           
          Cash and cash equivalents - ending  $21,013,144   $18,648,084 
           
See notes to condensed consolidated financial statements.          

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TAYLOR DEVICES, INC.

 

Notes to Condensed Consolidated Financial Statements

 

1.The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of November 30, 2022 and May 31, 2022, the results of operations for the three and six months ended November 30, 2022 and 2021, and cash flows for the six months ended November 30, 2022 and 2021. These financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company's Annual Report to Shareholders for the year ended May 31, 2022.

 

2.The Company has evaluated events and transactions for potential recognition or disclosure in the financial statements through the date the financial statements were issued.

 

3.There is no provision nor shall there be any provisions for profit sharing, dividends, or any other benefits of any nature at any time for this fiscal year.

 

4.For the six-month periods ended November 30, 2022 and 2021, the net income was divided by 3,500,172 and 3,496,697 respectively, which is net of the Treasury shares, to calculate the net income per share. For the three-month periods ended November 30, 2022 and 2021, the net income was divided by 3,499,598 and 3,496,610 respectively, which is net of the Treasury shares, to calculate the net income per share.

 

5.The results of operations for the three and six-month periods ended November 30, 2022 are not necessarily indicative of the results to be expected for the full year.

 

6.Recently issued Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) guidance has either been implemented or is not significant to the Company.

 

7.Inventory:
       
   November 30, 2022  May 31, 2022
Raw materials  $575,415   $488,393 
Work-in-process   4,900,432    5,166,271 
Finished goods   220,199    300,271 
Gross inventory   5,696,046    5,954,935 
Less allowance for obsolescence   100,000    100,000 
Net inventory  $5,596,046   $5,854,935 

 

8.Revenue Recognition:

 

Revenue is recognized (generally at fixed prices) when, or as, the Company transfers control of promised products or services to a customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts which are, therefore, not distinct. Promised goods or services that are immaterial in the context of the contract are not separately assessed as performance obligations.

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For contracts with customers in which the Company satisfies a promise to the customer to provide a product that has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date inclusive of profit, the Company satisfies the performance obligation and recognizes revenue over time (generally less than one year) using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material and overhead. Adjustments to cost estimates are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. Other sales to customers are recognized upon shipment to the customer based on contract prices and terms. In the six months ended November 30, 2022, 61% of revenue was recorded for contracts in which revenue was recognized over time while 39% was recognized at a point in time. In the six months ended November 30, 2021, 67% of revenue was recorded for contracts in which revenue was recognized over time while 33% was recognized at a point in time.

Progress payments are typically negotiated for longer term projects. Payments are otherwise due once performance obligations are complete (generally at shipment and transfer of title). For financial statement presentation purposes, the Company nets progress billings against the total costs incurred and estimated earnings recognized on uncompleted contracts. The asset, “costs and estimated earnings in excess of billings,” represents revenues recognized in excess of amounts billed. The liability, “billings in excess of costs and estimated earnings,” represents billings in excess of revenues recognized.

If applicable, the Company recognizes an asset for the incremental, material costs of obtaining a contract with a customer if the Company expects the benefit of those costs to be longer than one year and the costs are expected to be recovered. As of November 30, 2022 and May 31, 2022, the Company does not have material incremental costs on any open contracts with an original expected duration of greater than one year, and therefore such costs are expensed as incurred. These incremental costs include, but are not limited to, sales commissions incurred to obtain a contract with a customer.

9.The November 30, 2021 statement of income has been reclassified to conform with the presentation adopted for November 30, 2022.

 

10.Other current liabilities:
       
   November 30, 2022  May 31, 2022
Customer deposits  $954,262   $1,347,709 
Personnel costs   1,579,679    1,587,271 
Other   553,674    479,334 
Other current liabilities  $3,087,615   $3,414,314 

 

 

 

 

 

 

 

 

 

 

 

 

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statement

 

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Information in this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this 10-Q and its Exhibits that does not consist of historical facts, are "forward-looking statements." Statements accompanied or qualified by, or containing, words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements and, as such, are not a guarantee of future performance. The statements involve factors, risks and uncertainties, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements. Risks and uncertainties can include, among others, reductions in capital budgets by our customers and potential customers; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products; the kind, frequency and intensity of natural disasters that affect demand for the Company’s products; and other factors, many or all of which are beyond the Company's control. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results. The Company disclaims any obligation to release publicly any updates or revisions to the forward-looking statements herein to reflect any change in the Company's expectations with regard thereto, or any changes in events, conditions or circumstances on which any such statement is based.

 

Results of Operations

 

A summary of the period-to-period changes in the principal items included in the condensed consolidated statements of income is shown below:

 

Summary comparison of the six months ended November 30, 2022 and 2021
   Increase /
   (Decrease)
Sales, net  $4,522,000 
Cost of goods sold  $1,506,000 
Research and development costs  $207,000 
Selling, general and administrative expenses  $772,000 
Income before provision for income taxes  $2,158,000 
Provision for income taxes  $438,000 
Net income  $1,720,000 

 

 

Sales under certain fixed-price contracts, in which the product has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date, inclusive of profit, are accounted for under the percentage-of-completion method of accounting whereby revenues are recognized based on estimates of completion prepared on a ratio of cost to total estimated cost basis. Costs include all material and direct and indirect charges related to specific contracts.

 

Adjustments to cost estimates are made periodically and any losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. However, any profits expected on contracts in progress are recognized over the life of the contract.

 

For financial statement presentation purposes, the Company nets progress billings against the total costs incurred and estimated earnings recognized on uncompleted contracts. The asset, "costs and estimated earnings in excess of billings," represents revenues recognized in excess of amounts billed. The liability, "billings in excess of costs and estimated earnings," represents billings in excess of revenues recognized.

 

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For the six months ended November 30, 2022 (All figures discussed are for the six months ended November 30, 2022 as compared to the six months ended November 30, 2021).

 

   Six months ended November 30  Change
   2022  2021  Amount  Percent
Net Revenue  $19,588,000   $15,066,000   $4,522,000    30%
Cost of sales   12,109,000    10,603,000    1,506,000    14%
Gross profit  $7,479,000   $4,463,000   $3,016,000    68%
… as a percentage of net revenues   38%   30%          

 

The Company's consolidated results of operations showed a 30% increase in net revenues and an increase in net income of 204%. Revenue for the first half of fiscal 2023 is higher than any half fiscal year period in the history of the Company. Revenues recorded in the current period for long-term construction projects (“Project(s)”) were 18% more than the level recorded in the prior year. The Company had 35 Projects in process during the current period as compared to 28 during the same period last year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 55% more than the level recorded in the prior year. Total sales within the U.S. increased 43% from the same period last year. Total sales to Asia decreased 4% from the same period of the prior year. Sales increases were recorded over the same period last year to customers involved in construction of buildings and bridges (13%) as well as to customers in aerospace / defense (47%) and to industrial customers (93%). The increase in aerospace /defense sales is due, in part, to a healthy combination of providing production hardware on several legacy programs and new development programs, along with receiving substantial contracts for the refurbishment of hardware on existing naval platforms. The 108% increase in sales to industrial customers is primarily due to some new domestic manufacturing facilities beginning operations which utilized the Company’s products.

 

In prior years, the Company reported research and development costs as part of cost of sales and therefore included in the gross profit. Management intends to continue to make significant investments in research and development in order to promote profitable growth of the Company. In order to more clearly distinguish these investments from the profitability of a period’s sales, effective with the first quarter of fiscal 2023, the Company is disclosing research and development costs separately on the Condensed Consolidated Statements of Income below the gross profit line. Prior period statements of income as well as disclosures in this document have been reclassified to conform with the presentation adopted for the current period.

 

The gross profit as a percentage of net revenue of 38% in the current period is eight percentage points greater than the same period of the prior year (30%). The Company has been able to increase sales prices to recover more of the increased costs for materials and labor that were incurred over the past year. Management continues to work with suppliers to obtain more visibility of conditions affecting their respective markets. These actions combined with the increase in volume have helped to improve the gross margin as a percentage of revenue over the prior year.

 

Sales of the Company’s products are made to three general groups of customers: industrial, structural and aerospace / defense. A breakdown of sales to the three general groups of customers is as follows:

 

   Six months ended November 30
   2022  2021
Industrial   11%   8%
Structural   54%   62%
Aerospace / Defense   35%   30%
           

 

 

At November 30, 2021, the Company had 139 open sales orders in our backlog with a total sales value of $17.0 million. At November 30, 2022, the Company has 139 open sales orders in our backlog, and the total sales value is $18.1 million.

 

The Company's backlog, revenues, commission expense, gross profits, and net income fluctuate from period to period. The changes in the current period, compared to the prior period, are not necessarily representative of future results.

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Net revenue by geographic region, as a percentage of total net revenue for the six-month periods ended November 30, 2022 and November 30, 2021 is as follows:

 

   Six months ended November 30
   2022  2021
 USA    80%   73%
 Asia    13%   18%
 Other    7%   9%

 

 

Research and Development Costs

 

   Six months ended November 30  Change
   2022  2021  Amount  Percent
R & D  $690,000   $483,000   $207,000    43%
   … as a percentage of net revenues   3.5%   3.2%          

Research and development costs stayed consistent as a percent of net revenues while increasing by 43% over the prior year.

 

Selling, General and Administrative Expenses

 

   Six months ended November 30  Change
   2022  2021  Amount  Percent
SG&A  $3,853,000   $3,081,000   $772,000    25%
   … as a percentage of net revenues   20%   20%          

 

Selling, general and administrative expenses increased by 25% from the prior year. This increase is primarily due to increased employee compensation costs including incentive compensation.

 

The above factors resulted in an operating income of $2,935,000 for the six months ended November 30, 2022, 227% more than the $899,000 in the same period of the prior year.

 

A summary of the period-to-period changes in the principal items included in the condensed consolidated statements of income is shown below:

 

Summary comparison of the three months ended November 30, 2022 and 2021
   Increase /
   (Decrease)
Sales, net  $2,739,000 
Cost of goods sold  $1,236,000 
Research and development costs  $114,000 
Selling, general and administrative expenses  $413,000 
Income before provision for income taxes  $1,122,000 
Provision for income taxes  $222,000 
Net income  $900,000 

 

 

Sales under certain fixed-price contracts, in which the product has no alternative use to the Company and the Company has enforceable rights to payment for progress completed to date, inclusive of profit, are accounted for under the percentage-of-completion method of accounting whereby revenues are recognized based on estimates of completion prepared on a ratio of cost to total estimated cost basis. Costs include all material and direct and indirect charges related to specific contracts.

 

Adjustments to cost estimates are made periodically and any losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. However, any profits expected on contracts in progress are recognized over the life of the contract.

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For financial statement presentation purposes, the Company nets progress billings against the total costs incurred and estimated earnings recognized on uncompleted contracts. The asset, "costs and estimated earnings in excess of billings," represents revenues recognized in excess of amounts billed. The liability, "billings in excess of costs and estimated earnings," represents billings in excess of revenues recognized.

 

For the three months ended November 30, 2022 (All figures discussed are for the three months ended November 30, 2022 as compared to the three months ended November 30, 2021).

 

   Three months ended November 30  Change
   2022  2021  Amount  Percent
Net Revenue  $10,497,000   $7,758,000   $2,739,000    35%
Cost of sales   6,403,000    5,167,000    1,236,000    24%
Gross profit  $4,094,000   $2,591,000   $1,503,000    58%
… as a percentage of net revenues   39%   33%          

 

The Company's consolidated results of operations showed a 35% increase in net revenues and an increase in net income of 136%. Revenues recorded in the current period for Projects were 22% more than the level recorded in the prior year. The Company had 28 Projects in process during the current period as compared to 26 during the same period last year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 64% more than the level recorded in the prior year. Total sales within the U.S. increased 41% from the same period last year. Total sales to Asia increased 36% from the same period of the prior year. Sales increases were recorded over the same period last year to customers involved in construction of buildings and bridges (10%) as well as to customers in aerospace / defense (59%) and to industrial customers (152%). The increase in aerospace /defense sales is due, in part, to a healthy combination of providing production hardware on several legacy programs and new development programs, along with receiving substantial contracts for the refurbishment of hardware on existing naval platforms. The increase in sales to industrial customers is primarily due to some new domestic manufacturing facilities beginning operations which utilized the Company’s products.

 

The gross profit as a percentage of net revenue of 39% in the current period is six percentage points higher than the same period of the prior year (33%). The Company has been able to increase sales prices to recover more of the increased costs for materials and labor that were incurred over the past year. Management continues to work with suppliers to obtain more visibility of conditions affecting their respective markets. These actions combined with the increase in volume have helped to improve the gross margin as a percentage of revenue over the prior year.

 

Sales of the Company’s products are made to three general groups of customers: industrial, structural and aerospace / defense. A breakdown of sales to the three general groups of customers is as follows:

 

   Three months ended November 30
   2022  2021
Industrial   15%   8%
Structural   52%   64%
Aerospace / Defense   33%   28%
           

 

 

Net revenue by geographic region, as a percentage of total net revenue for the three-month periods ended November 30, 2022 and November 30, 2021, is as follows:

 

   Three months ended November 30
   2022  2021
 USA    77%   75%
 Asia    17%   16%
 Other    6%   9%

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Research and Development Costs

 

   Three months ended November 30  Change
   2022  2021  Amount  Percent
R & D  $315,000   $201,000   $114,000    57%
   … as a percentage of net revenues   3.0%   2.6%          

Research and development costs stayed consistent as a percentage of net revenues while increasing by 57% over the prior year.

 

Selling, General and Administrative Expenses

 

   Three months ended November 30  Change
   2022  2021  Amount  Percent
S G & A  $2,022,000   $1,609,000   $413,000    26%
   … as a percentage of net revenues   19%   21%          

Selling, general and administrative expenses increased 26% from the prior year. This increase is primarily due to increased employee compensation costs including incentive compensation.

 

The above factors resulted in an operating income of $1,756,000 for the three months ended November 30, 2022, 125% more than the $780,000 in the same period of the prior year.

 

 

Stock Options

 

The Company has a stock option plan which provides for the granting of nonqualified or incentive stock options to officers, key employees and non-employee directors. Options granted under the plan are exercisable over a ten-year term. Options not exercised at the end of the term expire.

 

The Company expenses stock options using the fair value recognition provisions of the FASB ASC. The Company recognized $128,000 and $126,000 of compensation cost for the six-month periods ended November 30, 2022 and 2021.

 

The fair value of each stock option grant has been determined using the Black-Scholes model. The model considers assumptions related to exercise price, expected volatility, risk-free interest rate, and the weighted average expected term of the stock option grants. Expected volatility assumptions used in the model were based on volatility of the Company's stock price for the thirty-month period ending on the date of grant. The risk-free interest rate is derived from the U.S. treasury yield. The Company used a weighted average expected term.

 

The following assumptions were used in the Black-Scholes model to estimate the fair market value of the Company's stock option grants:

 

   November
2022
  November
2021
Risk-free interest rate:   1.625%   2.875%
Expected life of the options:   4.1 years    4 years 
Expected share price volatility:   30%   32%
Expected dividends:   zero    zero 
           
These assumptions resulted in estimated fair-market value per stock option:  $3.06   $3.42 

 

The ultimate value of the options will depend on the future price of the Company's common stock, which cannot be forecast with reasonable accuracy.

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A summary of changes in the stock options outstanding during the six-month period ended November 30, 2022 is presented below:

      Weighted-
   Number of  Average
   Options  Exercise Price
Options outstanding and exercisable at May 31, 2022:   283,000   $11.43 
Options granted:   42,000   $11.45 
Less: Options exercised:   4,000   $8.06 
Less: Options expired:   3,750    —   
Options outstanding and exercisable at November 30, 2022:   317,250   $11.49 
Closing value per share on NASDAQ at November 30, 2022:       $13.40 

 

 

Capital Resources and Long-Term Debt

 

The Company's primary liquidity is dependent upon the working capital needs. These are mainly inventory, accounts receivable, costs and estimated earnings in excess of billings, accounts payable, other current liabilities, and billings in excess of costs and estimated earnings. The Company's primary source of liquidity has been operations.

 

Capital expenditures for the six months ended November 30, 2022 were $1,391,000 compared to $560,000 in the same period of the prior year. As of November 30, 2022, the Company has commitments for capital expenditures totaling $1,800,000 during the next twelve months.

 

The Company believes it is carrying adequate insurance coverage on its facilities and their contents.

 

 

Inventory and Maintenance Inventory

 

 

   November 30, 2022  May 31, 2022  Increase /(Decrease)
Raw materials  $575,000        $489,000        $86,000    18%
Work-in-process   4,901,000         5,166,000         (265,000)   -5%
Finished goods   120,000         200,000         (80,000)   -40%
Inventory   5,596,000    85%   5,855,000    84%   (259,000)   -4%
Maintenance and other inventory   972,000    15%   1,107,000    16%   (135,000)   -12%
Total  $6,568,000    100%  $6,962,000    100%  $(394,000)   -6%
                               
Inventory turnover   3.6         3.1                

 

NOTE: Inventory turnover is annualized for the six-month period ended November 30, 2022.

 

Inventory, at $5,596,000 as of November 30, 2022, is $259,000 less than the prior year-end level of $5,855,000. Approximately 88% of the current inventory is work in process, 2% is finished goods, and 10% is raw materials.

 

Maintenance and other inventory represent stock that is estimated to have a product life cycle in excess of twelve months. This stock represents certain items the Company is required to maintain for service of products sold and items that are generally subject to spontaneous ordering. This inventory is particularly sensitive to technological obsolescence in the near term due to its use in industries characterized by the continuous introduction of new product lines, rapid technological advances and product obsolescence. Management of the Company has recorded an allowance for potential inventory obsolescence. The provision for potential inventory obsolescence was zero and $90,000 for the six-month periods ended November 30, 2022 and 2021. The Company continues to rework slow-moving inventory, where applicable, to convert it to product to be used on customer orders.

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Accounts Receivable, Costs and Estimated Earnings in Excess of Billings (“CIEB"), and Billings in Excess of Costs and Estimated Earnings ("BIEC")

 

   November 30, 2022  May 31, 2022  Increase /(Decrease)
Accounts receivable  $5,941,000   $4,467,000   $1,474,000    33%
CIEB   5,295,000    3,336,000    1,959,000    59%
Less: BIEC   1,090,000    1,123,000    (33,000)   -3%
Net  $10,146,000   $6,680,000   $3,466,000    52%
                     
Number of an average day’s sales outstanding in accounts receivable   51    42           
                     

 

The Company combines the totals of accounts receivable, the current asset, CIEB, and the current liability, BIEC, to determine how much cash the Company will eventually realize from revenue recorded to date. As the accounts receivable figure rises in relation to the other two figures, the Company can anticipate increased cash receipts within the ensuing 30-60 days.

 

Accounts receivable of $5,941,000 as of November 30, 2022 includes $6,000 of an allowance for doubtful accounts (“Allowance”). The accounts receivable balance as of May 31, 2022 of $4,467,000 included an Allowance of $16,000. The number of an average day's sales outstanding in accounts receivable (“DSO”) increased from 42 days at May 31, 2022 to 51 at November 30, 2022. The DSO is a function of 1.) the level of sales for an average day (for example, total sales for the past three months divided by 90 days) and 2.) the level of accounts receivable at the balance sheet date. The level of sales for an average day in the second quarter of the current fiscal year is 9% more than in the fourth quarter of the prior year. The level of accounts receivable at the end of the current fiscal quarter is 33% more than the level at the end of the prior year. The increase in the level of accounts receivable off-set by the increase in the level of an average day’s sales caused the DSO to increase from last year end to this quarter-end. The Company expects to collect the net accounts receivable balance during the next twelve months. The level of accounts receivable is greater than at the end of the prior year primarily because of the $1.2 million increase in the level of sales for the month of November 2022 over the month of May 2022.

 

As noted above, CIEB represents revenues recognized in excess of amounts billed. Whenever possible, the Company negotiates a provision in sales contracts to allow the Company to bill, and collect from the customer, payments in advance of shipments. Unfortunately, such provisions are often not possible. The $5,295,000 balance in this account at November 30, 2022 is 59% more than the prior year-end balance. This increase is the result of normal flow of the Projects through production with billings to the customers as permitted in the related contracts. The Company expects to bill the entire amount during the next twelve months. 17% of the CIEB balance as of the end of the last fiscal quarter, August 31, 2022, was billed to those customers in the current fiscal quarter ended November 30, 2022. The remainder will be billed as the Projects progress, in accordance with the terms specified in the various contracts.

 

The balances in this account are comprised of the following components:

 

   November 30, 2022  May 31, 2022
Costs  $3,380,000   $3,250,000 
Estimated Earnings   3,221,000    2,642,000 
Less: Billings to customers   1,306,000    2,556,000 
CIEB  $5,295,000   $3,336,000 
Number of Projects in progress   16    11 

 

As noted above, BIEC represents billings to customers in excess of revenues recognized. The $1,090,000 balance in this account at November 30, 2022 is down 3% from the $1,123,000 balance at the end of the prior year. The balance in this account fluctuates in the same manner and for the same reasons as the CIEB, discussed above. Final delivery of product under these contracts is expected to occur during the next twelve months.

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The balances in this account are comprised of the following components:

 

   November 30, 2022  May 31, 2022
Billings to customers  $2,037,000   $2,711,000 
Less: Costs   676,000    1,019,000 
Less: Estimated Earnings   271,000    569,000 
BIEC  $1,090,000   $1,123,000 
Number of Projects in progress   4    8 

 

Summary of factors affecting the balances in CIEB and BIEC:

 

   November 30, 2022  May 31, 2022
Number of Projects in progress   20    19 
Aggregate percent complete   54%   47%
Average total sales value of Projects in progress  $657,000   $795,000 
Percentage of total value invoiced to customer   25%   35%

 

 

The Company's backlog of sales orders at November 30, 2022 is $18.1 million, down from the $23.7 million at the end of the prior year. $5.6 million of the current backlog is on Projects already in progress. While too late to be included in the backlog as of November 30, 2022, the Company recorded an additional $8.2 million of sales order bookings in the first half of December.

 

Other Balance Sheet Items

 

Accounts payable, at $1,537,000 as of November 30, 2022, is 8% more than the prior year-end. Other current liabilities decreased 10% from the prior year-end, to $3,088,000. The Company expects the current accrued amounts to be paid or applied during the next twelve months.

 

Management believes the Company's cash flows from operations are sufficient to fund ongoing operations and capital improvements for the next twelve months.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Smaller reporting companies are not required to provide the information called for by this item.

 

Item 4. Controls and Procedures

 

(a)        Evaluation of disclosure controls and procedures.

 

The Company's principal executive officer and principal financial officer have evaluated the Company's disclosure controls and procedures as of November 30, 2022 and have concluded that as of the evaluation date, the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer to allow timely decisions regarding required disclosure.

 

(b)        Changes in internal control over financial reporting.

 

There have been no changes in the Company's internal controls over financial reporting that occurred during the fiscal quarter ended November 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company's control over financial reporting.

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Part II - Other Information

 

ITEM 1 Legal Proceedings        
               
    There are no other legal proceedings except for routine litigation incidental to the business.
               
ITEM 1A Risk Factors        
     
    Smaller reporting companies are not required to provide the information called for by this item.
               
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds
               
    (a) The Company sold no equity securities during the fiscal quarter ended November 30, 2022 that were not registered under the Securities Act.
    (b) Use of proceeds following effectiveness of initial registration statement:
      Not Applicable
    (c) Repurchases of Equity Securities – Quarter Ended November 30, 2022
               
      Period (a) Total Number of Shares Purchased (b) Average Price Paid Per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
               
      September 1, 2022 -        
      September 30, 2022 - - -  -
               
      October 1, 2022 -        
      October 31, 2022 - - -
               
      November 1, 2022 -        
      November 30, 2022 - - -
               
       Total - - - -
       
               
   
ITEM 3 Defaults Upon Senior Securities
               
    None          
               
ITEM 4 Mine Safety Disclosures        
             
    Not applicable        
               
ITEM 5 Other Information        
               
    (a) Information required to be disclosed in a Report on Form 8-K, but not reported
               
      None        
               
    (b) Material changes to the procedures by which Security Holders may recommend nominees to the Registrant's Board of Directors
               
      None        
                     

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ITEM 6 Exhibits          
    3(v) By-laws
    31(i) Rule 13a-14(a) Certification of Chief Executive Officer.
    31(ii) Rule 13a-14(a) Certification of Chief Financial Officer.
    32(i) Section 1350 Certification of Chief Executive Officer.
    32(ii) Section 1350 Certification of Chief Financial Officer.
    101.SCH XBRL Taxonomy Extension Schema Document
    101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
    101.LAB XBRL Taxonomy Extension Label Linkbase Document
    101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
    104 Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document and are contained within Exhibit 101

 

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Report of Independent Registered Public Accounting Firm

 

 

The Board of Directors and Stockholders

Taylor Devices, Inc.

 

 

Results of Review of Interim Financial Information

 

We have reviewed the accompanying condensed consolidated balance sheet of Taylor Devices, Inc. and Subsidiary (the Company) as of November 30, 2022, and the related condensed consolidated statements of income and stockholders’ equity for the three and six months ended November 30, 2022 and 2021, and cash flows for the six months ended November 30, 2022 and 2021, and the related notes (collectively referred to as the interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of May 31, 2022, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated August 19, 2022, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2022, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

Basis for Review Results

 

These financial statements are the responsibility of the Company's management. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

 

Lumsden & McCormick, LLP

Buffalo, New York

December 29, 2022

 

 

 

 

 

 

 

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TAYLOR DEVICES, INC.

 

Signatures

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

  TAYLOR DEVICES, INC.
  (Registrant)

 

 

 

 

Date: December 29, 2022     /s/Timothy J. Sopko
 

 

 

 

 

 

   

Timothy J. Sopko

Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date: December 29, 2022     /s/Mark V. McDonough
 

 

 

 

   

Mark V. McDonough

Chief Financial Officer