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EX-20 - TAYLOR DEVICES INCshareholderletter.htm
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EX-31 - TAYLOR DEVICES INCceo302certification.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

For the quarterly period ended February 29, 2012

OR

     
o   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   14120-0748
 
(Address of principal executive offices)   (Zip Code)

716-694-0800

(Registrant’s telephone number, including area code)

 

 

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

 

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 þ      No o

 

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ     No o

 

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

             
Large accelerated filer o       Accelerated filer o
             
Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company þ

    

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

Yes o       No þ

 

As of April 12, 2012, there were outstanding 3,286,294 shares of the registrant’s common stock, par value $.025 per share.

 

 

TAYLOR DEVICES, INC.

 

Index to Form 10-Q

 

 

 

PART I FINANCIAL INFORMATION                                                                                                                    PAGE NO.
       
  Item 1. Financial Statements  
       
    Condensed Consolidated Balance Sheets as of February 29, 2012 and May 31, 2011 3
       
    Condensed Consolidated Statements of Income for the three and nine months ended February 29, 2012 and February 28, 2011 4
       
    Condensed Consolidated Statements of Cash Flows for the nine months ended February 29, 2012 and February 28, 2011 5
       
    Notes to Condensed Consolidated Financial Statements 6
       
  Item 2.

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

 

7
  Item 3. Quantitative and Qualitative Disclosures About Market Risk  

14

 

         
  Item 4. Controls and Procedures   14
       
PART II

OTHER INFORMATION

 

 

 

 

Item 1. Legal Proceedings 15

 

 

Item 1A. Risk Factors 15

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15

 

 

Item 3. Defaults Upon Senior Securities 16

 

 

Item 4. Mine Safety Disclosures 16

 

 

Item 5. Other Information 16
  Item 6. Exhibits 16

 

 

     

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

17

SIGNATURES

 

  18

 

 

 

 

 

TAYLOR DEVICES, INC. AND SUBSIDIARY      
       
Condensed Consolidated Balance Sheets (Unaudited)  
  February 29, 2012 May 31,
  2011
     
Assets    
Current assets:    
Cash and cash equivalents  $        641,429  $       2,193,534
Accounts receivable, net         3,447,810           2,136,848
Inventory         8,029,278           5,352,424
Costs and estimated earnings in excess of billings         5,490,490           4,189,799
Other current assets         1,438,236           1,597,830
Total current assets       19,047,243         15,470,435
     
Maintenance and other inventory, net            808,668             846,177
Property and equipment, net         3,970,160           3,413,446
Other assets            152,201             147,970
   $   23,978,272  $     19,878,028
Liabilities and Stockholders' Equity    
Current liabilities:    
Current portion of long-term debt  $            5,028  $             5,485
Accounts payable         2,570,960           1,292,095
Accrued commissions            691,892             433,355
Billings in excess of costs and estimated earnings         788,905             152,505
Other current liabilities         1,716,425           1,329,341
Total current liabilities         5,773,210           3,212,781
     
Long-term liabilities            278,485             282,142
     
Stockholders' Equity:    
Common stock and additional paid-in capital         7,079,741           6,720,784
Retained earnings       13,260,094         11,924,023
        20,339,835         18,644,807
Treasury stock - at cost       (2,413,258)         (2,261,702)
Total stockholders' equity       17,926,577         16,383,105
     
   $   23,978,272  $     19,878,028
     
     
See notes to condensed consolidated financial statements.      
       

 

 

3


 

 

TAYLOR DEVICES, INC. AND SUBSIDIARY        
         
Condensed Consolidated Statements of Income (Unaudited) (Unaudited)
  For the three months ended For the nine months ended
  February 29, 2012 February 28, 2011 February 29, 2012 February 28, 2011
         
Sales, net  $ 8,008,836  $ 4,979,343  $ 19,363,292 $ 13,781,168
         
Cost of goods sold     5,887,732     3,636,424     13,861,085    10,259,685
         
Gross profit     2,121,104     1,342,919       5,502,207      3,521,483
         
Selling, general and administrative expenses     1,366,731        946,168       3,581,053      2,702,976
         
Operating income        754,373        396,751       1,921,154         818,507
         
Other income, net          14,840          25,349            53,917           86,206
         
Income before provision for income taxes        769,213        422,100       1,975,071         904,713
         
Provision for income taxes        255,000          36,000          639,000         211,000
         
Net income  $    514,213  $    386,100  $   1,336,071  $     693,713
         
Basic and diluted earnings per common share  $       0.16  $     0.12  $       0.41  $         0.21
             

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

4


 

 

TAYLOR DEVICES, INC. AND SUBSIDIARY    
     
Condensed Consolidated Statements of Cash Flows    
  (Unaudited)
  February 29, February 28,
For the nine months ended 2012 2011
     
Operating activities:    
Net income  $  1,336,071  $    693,713
Adjustments to reconcile net income to net cash flows from operating activities:    
Depreciation and amortization         383,677         351,205
Stock options issued for services           26,502            30,463
Deferred income taxes  -             (8,000)
Changes in other assets and liabilities:    
Accounts receivable    (1,310,962)       3,040,534
Inventory    (2,639,345)        (346,493)
Costs and estimated earnings in excess of billings    (1,300,691)    (2,044,058)
Other current assets         159,594             73,883
Accounts payable      1,278,865           373,795
Accrued commissions         258,537       (9,271)
Billings in excess of costs and estimated earnings         636,400        (167,298)
Other current liabilities         387,084       (390,299)
Net operating activities       (784,268)        1,598,174
     
Investing activities:    
Acquisition of property and equipment       (940,391)       (268,034)
Other investing activities           (4,231)          (4,268)
Net investing activities       (944,622)       (272,302)
     
Financing activities:    
Principal repayments on long-term debt           (4,114)          (4,113)
Proceeds from issuance of common stock, net         230,666               9,650
Acquisition of treasury stock         (49,767)          (30,418)
Net financing activities           176,785          (24,881)
     
Net change in cash and cash equivalents       (1,552,105)        1,300,991
     
Cash and cash equivalents - beginning      2,193,534           197,587
     
Cash and cash equivalents - ending  $  641,429    $  1,498,578

 

 

 

See notes to condensed consolidated financial statements.

 

 

 

5


 

TAYLOR DEVICES, INC.

 

Notes to Condensed Consolidated Financial Statements

 

1.

 

 

 

 

 

 

 

 

 

 

 

 

2.

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 February 29, 2012 and May 31, 2011, the results of operations for the three and nine months ended February 29, 2012 and February 28, 2011, and cash flows for the nine months ended February 29, 2012 and February 28, 2011. 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, 2011. There have been no updates or changes to our audited financial statements for the year ended May 31, 2011.

 

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 nine month periods ended February 29, 2012 and February 28, 2011, the net income was divided by 3,249,471 and 3,228,120, respectively, which is net of the Treasury shares, to calculate the net income per share.  For the three month periods ended February 29, 2012 and February 28, 2011, the net income was divided by 3,243,282 and 3,228,120, respectively, which is net of the Treasury shares, to calculate the net income per share. 
   
5. The results of operations for the three and nine month periods ended February 29, 2012 are not necessarily indicative of the results to be expected for the full year.
   

6.

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

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 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, uncertainty regarding how long the worldwide economic recession will continue and whether the recession will deepen; 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; 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 nine months ended February 29, 2012 and February 28, 2011
      Increase /  
      (Decrease)  
  Sales, net    $       5,582,000  
  Cost of goods sold    $       3,601,000  
  Selling, general and administrative expenses    $          878,000  
  Income before provision for income taxes    $       1,070,000  
  Provision for income taxes    $          428,000  
  Net income    $          642,000  
         
           

 

Sales under certain fixed-price contracts, requiring substantial performance over several periods prior to commencement of deliveries, 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 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.

 

 

7

 

 

For the nine months ended February 29, 2012 (All figures discussed are for the nine months ended February 29, 2012 as compared to the nine months ended February 28, 2011.)

 

 

   Nine months ended    Change 
   February 29, 2012   February 28, 2011   Increase / (Decrease)   Percent Change 
Net Revenue  $        19,363,000  $      13,781,000  $      5,582,000 41%
Cost of sales            13,861,000          10,260,000          3,601,000 35%
Gross profit  $          5,502,000  $        3,521,000  $      1,981,000 56%
... as a percentage of net revenues 28% 26%    

 

               

 

The Company's consolidated results of operations showed a 41% increase in net revenues and an increase in net income of 93%. Revenues recorded in the current period for long-term construction projects (“Project(s)”) were 77% higher than the level recorded in the prior year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were lower by 13% from the level recorded in the prior year. The gross profit as a percentage of net revenues for the current and prior year periods was 28% and 26%. We had 66 Projects in process during the current period compared with 34 during the same period last year.

 

Sales of the Company’s products are made to three general groups of customers: industrial, construction and aerospace / defense. As the construction market improves around the world, we are experiencing a greater increase in demand from our customers for products to provide protection to buildings and bridges from wind and seismic events. A breakdown of sales to the three general groups of customers is as follows:

 

    Nine months ended 
    Feb. 29, 2012 Feb. 28, 2011
  Industrial 7% 8%
  Construction 69% 60%
  Aerospace / Defense 24% 32%

 

 

At February 28, 2011, the Company had 110 open sales orders in our backlog with a total sales value of $13.6 million. At February 29, 2012, the Company have 27% more open sales orders in our backlog (140 orders) and the total sales value is $23.0 million or 69% more than the prior year value.

.

The Company's backlog, revenues, commission expense, gross margins, 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.

 

Net revenue by geographic region, as a percentage of total net revenue for nine month periods ended February 29, 2012 and February 28, 2011 is as follows:

 

 

    Nine months ended 
    Feb. 29, 2012 Feb. 28, 2011
  USA 38% 39%
  Asia 53% 35%
  Other 9% 26%

 

8

 

 

Selling, General and Administrative Expenses      
   Nine months ended    Change 
   February 29, 2012   February 28, 2011   Increase / (Decrease)   Percent Change 
Outside Commissions   $             811,000  $           466,000  $         345,000 74%
Other SG&A              2,770,000            2,237,000             533,000 24%
Total SG&A  $          3,581,000  $        2,703,000  $         878,000 32%
... as a percentage of net revenues 18% 20%    

 

 

Selling, general and administrative expenses increased by 32% from the prior year. Outside commission expense increased by 74% from last year's level. This fluctuation was primarily due to the significant increase in the level of sales from last year to this. Other selling, general and administrative expenses increased 24% from last year to this. This increase is primarily due to an increase in estimated incentive compensation expense in the current period related to the higher level of sales and operating results.

 

The above factors resulted in operating income of $1,921,000 for the nine months ended February 29, 2012, up 135% from the $819,000 in the same period of the prior year.

 

Summary comparison of the three months ended February 29, 2012 and February 28, 2011  
      Increase /  
      (Decrease)  
  Sales, net    $       3,029,000
  Cost of goods sold    $       2,251,000
  Selling, general and administrative expenses    $          421,000
  Income before provision for income taxes    $          347,000
  Provision  for income taxes    $          219,000
  Net income    $          128,000
           

 

 

For the three months ended February 29, 2012 (All figures discussed are for the three months ended February 29, 2012 as compared to the three months ended February 28, 2011.)

 

 

   Three months ended   Change 
   February 29, 2012   February 28, 2011   Increase / (Decrease)   Percent Change 
Net Revenue  $          8,008,000  $        4,979,000  $      3,029,000 61%
Cost of sales              5,887,000            3,636,000          2,251,000 62%
Gross profit  $          2,121,000  $        1,343,000  $         778,000 58%
... as a percentage of net revenues 26% 27%    

 

 

 

The Company's consolidated results of operations showed a 61% increase in net revenues and an increase in net income of 33%. Revenues recorded in the current period for long-term construction projects (“Project(s)”) were 95% higher than the level recorded in the prior year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 6% less than the level recorded in the prior year. The gross profit as a percentage of net revenues for the current and prior year periods was 26% and 27%. We had 44 Projects in process during the current period compared with 26 during the same period last year.

 

Sales of the Company’s products are made to three general groups of customers: industrial, construction and aerospace / defense. As the construction market improves around the world, we are experiencing a greater increase

9

 

in demand from our customers for products to provide protection to buildings and bridges from wind and seismic events. A breakdown of sales to the three general groups of customers is as follows:

 

 
  Three months ended 
  Feb. 29, 2012 Feb. 28, 2011
Industrial 5% 9%
Construction 77% 62%
Aerospace / Defense 18% 29%
           

 

Net revenue by geographic region, as a percentage of total net revenue for three month periods ended February 29, 2012 and February 28, 2011 is as follows:

 

  Three months ended 
  Feb. 29, 2012 Feb. 28, 2011
USA 34% 35%
Asia 57% 35%
Other 9% 30%

 

 

 

Selling, General and Administrative Expenses      
   Three months ended   Change 
   February 29, 2012   February 28, 2011   Increase / (Decrease)   Percent Change 
Outside Commissions   $             355,000  $           182,000  $         173,000 95%
Other SG&A              1,012,000               764,000             248,000 32%
Total SG&A  $          1,367,000  $           946,000  $         421,000 45%
... as a percentage of net revenues 17% 19%    

 

 

 

Selling, general and administrative expenses increased by 45% from the prior year. Outside commission expense increased by 95% from last year's level. This fluctuation was primarily due to the significant increase in commissionable sales. Other selling, general and administrative expenses increased 32% from last year to this. This increase is primarily due to an increase in estimated incentive compensation expense in the current period related to the higher level of sales and operating results.

 

The above factors resulted in operating income of $754,000 for the three months ended February 29, 2012, up 90% from the $397,000 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 Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). The Company recognized $27,000 and $30,000 of compensation cost for the nine month periods ended February 29, 2012 and February 28, 2011.

 

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

10

 

from the U.S. treasury yield. The Company used a weighted average expected term. The following assumptions were used in the Black-Scholes model in estimating the fair market value of the Company's stock option grants:

 

        2012   2011
    Risk-free interest rate:   1.875%   2.75
    Expected life of the options:   2.7 years   2.5 years
    Expected share price volatility:   49.42%   60.27
    Expected dividends:   zero   zero
             
These assumptions resulted in:        
    Estimated fair-market value per stock option:   $1.74   $2.00

 

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.

A summary of changes in the stock options outstanding during the nine month period ended February 29, 2012 is presented below:

        Weighted-
    Number of   Average
    Options   Exercise Price
Options outstanding and exercisable at May 31, 2011:              229,000   $  5.21
Options granted:                15,250   $  5.23
Options exercised:                69,750   $  4.65
Options outstanding and exercisable at February 29, 2012:              174,500   $  5.44
Closing value per share on NASDAQ at February 29, 2012:       $10.66

 

 

Capital Resources, Line of Credit 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, accrued commissions, and billings in excess of costs and estimated earnings. The Company's primary source of liquidity has been operations.

 

Capital expenditures for the nine months ended February 29, 2012 were $940,000 compared to $268,000 in the same period of the prior year. As of February 29, 2012, the Company has commitments for capital expenditures of $100,000 during the next twelve months.

 

In December 2011, the Company closed on its purchase of three industrial buildings in the City of North Tonawanda, NY. The location of the site is 1.4 miles from the Company’s existing facilities on Tonawanda Island. In February 2012, the Company closed on its purchase of vacant lots adjacent to the new facilities. The combined real estate of the new parcel totals 9+ acres.

 

The additional manufacturing space is needed to address overcrowding of the Company’s large parts machining and assembly areas due to increased sales of large seismic protection products. Total area of the three newly purchased buildings is 46,000 square feet, which more than doubles the Company’s current manufacturing space.

 

The three buildings require renovation and modification to house the production machinery that will be relocated from the Company’s Tonawanda Island site, along with the addition of large overhead cranes to move large parts from machine to machine. It is the Company’s intent to move all machining and metalworking operations to the new site. This will allow the former machining areas at the existing Tonawanda Island site to house greatly expanded assembly and product testing areas. All corporate and engineering offices will be unaffected by the change and will remain on Tonawanda Island.

 

Although the aggregate purchase price was approximately $323,000, the renovations to the buildings are extensive, with a total project budget (including the initial purchase cost) of $2.5 million. The Company intends to have the first of the three buildings in service by summer 2012, with the remaining two buildings completed and in service by

11

 

December 2013. The Company anticipates that its current cash and bank line of credit resources will be sufficient for that purpose.

 

The Company has a $6,000,000 bank demand line of credit, with interest payable at the Company's option of 30, 60, 90 or 180 day LIBOR rate plus 2.5%, or the bank's prime rate less .25%. The line is secured by accounts receivable, equipment, inventory, and general intangibles, and a negative pledge of the Company’s real property. This line of credit is subject to the usual terms and conditions applied by the bank, is subject to renewal annually, and is not subject to an express requirement on the bank’s part to lend. There was no balance outstanding as of February 29, 2012 or as of May 31, 2011. The outstanding balance on the line of credit fluctuates as the Company's various long-term projects progress. The Company is in compliance with restrictive covenants under the line of credit. In these covenants, the Company agrees to maintain the following minimum levels of the stated item:

 

 

  Covenant   Minimum per Covenant   Current Actual   When Measured
  Minimum level of working capital   $3,000,000   $13,569,000   Quarterly
  Minimum debt service coverage ratio   1.5:1   n/a   Fiscal Year-end

 

 

 

All of the $6,000,000 unused portion of our line of credit is available without violating any of our debt covenants.

Principal maturities of long-term debt for the remainder of the current fiscal year and the subsequent years are as follows: 2012 - $1,028; 2013 - $4,000.

 

Inventory and Maintenance Inventory

   February 29, 2012  May 31, 2011 Increase /(Decrease)  
Raw materials  $     582,000    $      666,000    $        (84,000) -13%
Work in process      6,740,000         4,083,000          2,657,000 65%
Finished goods         707,000            603,000             104,000 17%
Inventory      8,029,000 91%       5,352,000 86%        2,677,000 50%
Maintenance and other inventory         809,000  9%          846,000 14%            (37,000) -4%
Total  $  8,838,000 100%  $   6,198,000 100%  $    2,640,000 43%
               
Inventory turnover 2.5   2.3        

NOTE: Inventory turnover is annualized for the nine month period ended February 29, 2012.

 

Inventory, at $8,029,000 as of February 29, 2012, is $2,677,000 or 50% higher than the prior year-end level of $5,352,000. Approximately 84% of the current inventory is work in process, 9% is finished goods, and 7% 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. The maintenance inventory decreased 4% since May 31, 2011. Management of the Company has recorded an allowance for potential inventory obsolescence. The provision for potential inventory obsolescence was $135,000 for each of the nine month periods ended February 29, 2012 and February 28, 2011. The Company continues to rework slow-moving inventory, where applicable, to convert it to product to be used on customer orders.

 

 

 

12

 

  Accounts Receivable, Costs and Estimated Earnings in Excess of Billings (CIEB"),      
       and Billings in Excess of Costs and Estimated Earnings ("BIEC")          
               
     February 29, 2012   May 31, 2011  Increase /(Decrease)
  Accounts receivable  $          3,448,000    $        2,137,000    $    1,311,000 61%
CIEB              5,490,000              4,190,000          1,300,000 31%
Less: BIEC                 789,000                 153,000             636,000 416%
  Net  $          8,149,000    $        6,174,000    $    1,975,000 32%
               
  Number of an average day’s sales outstanding in accounts receivable 39   27      

 

 

 

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 $3,448,000 as of February 29, 2012 includes approximately $1,104,000 of amounts retained by customers on Projects. It also includes $42,000 of an allowance for doubtful accounts (“Allowance”). The accounts receivable balance as of May 31, 2011 of $2,137,000 included an Allowance of $42,000. The number of an average day's sales outstanding in accounts receivable (“DSO”) increased from 27 days at May 31, 2011 to 39 at February 29, 2012. 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 third quarter of the current year is approximately 12% more than in the fourth quarter of the prior year. The level of accounts receivable at the end of the current fiscal quarter is 61% more than at the end of the prior year. The combination of these two factors caused the DSO to increase from last year end to this. The Company expects to collect the net accounts receivable balance, including the retainage, during the next twelve months.

 

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, provisions such as this are often not possible. The $5,490,000 balance in this account at February 29, 2012 is 31% more than the prior year-end. The Company expects to bill the entire amount during the next twelve months. 46% of the CIEB balance as of the end of the last fiscal quarter, November 30, 2011, was billed to those customers in the current fiscal quarter ended February 29, 2012. 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:

 

   February 29, 2012  May 31, 2011
Costs  $              8,673,000    $          5,818,000
Estimated Earnings                  1,743,000                1,388,000
Less: Billings to customers                  4,926,000                3,016,000
CIEB  $              5,490,000    $          4,190,000
Number of Projects in progress 28   25

 

As noted above, BIEC represents billings to customers in excess of revenues recognized. The $789,000 balance in this account at February 29, 2012 is up from the $153,000 balance at the end of the prior year. This significant increase is the result of a single sales order in which the Company received 67% of the order value upon receipt of the order. The balance in this account fluctuates in the same manner and for the same reasons as the account “costs and estimated earnings in excess of billings”, discussed above. Final delivery of product under these contracts is expected to occur during the next twelve months.

13

 

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

 

   February 29, 2012  May 31, 2011
Billings to customers  $              1,833,000    $          2,592,000
Less: Costs                     745,000                1,645,000
Less: Estimated Earnings                     299,000                   794,000
BIEC  $                 789,000    $             153,000
Number of Projects in progress 6   3

 

Summary of factors affecting the balances in CIEB and BIEC:

 

   February 29, 2012  May 31, 2011
Number of Projects in progress 34   28
Aggregate percent complete 51%   67%
Average total sales value of Projects in progress $668,000   $510,000
Percentage of total value invoiced to customer 30%   39%

 

The Company's backlog of sales orders at February 29, 2012 is $23 million, up from $15 million at the end of the prior year. $11.3 million of the current backlog is on Projects already in progress.

 

Other Balance Sheet Items

 

Accounts payable, at $2,571,000 as of February 29, 2012, is almost double the prior year-end. The volume of purchases is higher to support the increase in sales volume. Commission expense on applicable sales orders is recognized at the time revenue is recognized. The commission is paid following receipt of payment from the customers. Accrued commissions as of February 29, 2012 are $692,000, up 60% from the $433,000 accrued at the prior year-end. The Company expects the current accrued amount to be paid during the next twelve months. Other current liabilities increased 29% from the prior year-end, to $1,716,000 primarily due to taxes and incentive compensation accrued in the current period. Payments on these liabilities will take place as scheduled within the next twelve months.

 

Management believes the Company's cash flows from operations and borrowing capacity under the bank line of credit is sufficient to fund ongoing operations, capital improvements and share repurchases 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 February 29, 2012 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.

 

 

14

 

(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 February 29, 2012 that have materially affected, or are reasonably likely to materially affect, the Company's control over financial reporting.

 

 

 

 

 

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, 2011 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, 2011
               
      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
               
       December 1, 2011 -        
       December 31, 2011 - - -  
               
       January 1, 2012 -        
       January 31, 2012 - - -  
               
       February 1, 2012 -        
       February 29, 2012 -   -  
              (1)
       Total - - - $419,815.00
      (1) The Company has designated $419,815 of cash on hand as available for open-market purchases of its outstanding common stock
               
    (d) Under the terms of the Company's credit arrangements with its primary lender, the Company is required to maintain net working capital of at least $3,000,000, as such term is defined in the credit documents.  On February 29, 2012, under such definition the Company's net working capital was significantly in excess of such limit.  Additional information regarding the Company’s line of credit and restrictive covenants appears under the caption “Capital Resources, Lines of Credit and Long-Term Debt” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations
               
  ITEM 3 Defaults Upon Senior Securities
               
    None          
               
  ITEM 4 Mine Safety Disclosure        
    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        
               
  ITEM 6 Exhibits           
    20 News from Taylor Devices, Inc. Shareholder Letter, Spring 2012  
    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.INS* XBRL Instance Document 
    101.SCH* XBRL Taxonomy Extension Schema Document
    101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
    101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
    101.LAB* XBRL Taxonomy Extension Label Linkbase Document
    101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
               
  *Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections

 

 

 

 

 

16

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

The Board of Directors and Stockholders

Taylor Devices, Inc.

 

 

 

We have reviewed the accompanying condensed consolidated balance sheet of Taylor Devices, Inc. and Subsidiary as of February 29, 2012, the related condensed consolidated statements of income for the three and nine months ended February 29, 2012 and February 28, 2011 and cash flows for the nine months ended February 29, 2012 and February 28, 2011. These interim financial statements are the responsibility of the Company's management.

 

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 standards of the Public Company Accounting Oversight Board, 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.

 

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim 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 standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of May 31, 2011, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated August 5, 2011, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2011 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

 

Lumsden & McCormick, LLP

Buffalo, New York

April 12, 2012

 

 

 

 

 

 

 

 

17

 

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: April 12, 2012     /s/Douglas P. Taylor          
 

 

 

 

 

 

   

Douglas P. Taylor

President

Chairman of the Board of Directors

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date: April 12, 2012     /s/Mark V. McDonough
 

 

 

 

   

Mark V. McDonough

Chief Financial Officer

 

18