EDGAR 10-K Filing

Company CIK: 96536
Filing Year: 2022
Filename: 96536_10-K_2022_0000096536-22-000019.json

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ITEM 1. BUSINESS
Item 1. Business.
The Company was incorporated in the State of New York on July 22, 1955 and is engaged in the design, development, manufacture and marketing of shock absorption, rate control, and energy storage devices for use in various types of machinery, equipment and structures. In addition to manufacturing and selling existing product lines, the Company continues to develop new and advanced technology products.
Principal Products
The Company manufactures and sells a group of very similar products that have many different applications for customers. These similar products are included in one of eight categories; namely, Seismic Dampers, Fluidicshoks®, Crane and Industrial Buffers, Self-Adjusting Shock Absorbers, Liquid Die Springs, Vibration Dampers, Machined Springs and Custom Actuators. Custom derivations of all of these products are designed and manufactured for many aerospace and defense applications. The following is a summary of the capabilities and applications for these products.
Seismic Dampers are designed to mitigate the effects of earthquakes on structures and represent a substantial part of the business of the Company. Fluidicshoks® are small, extremely compact shock absorbers with up to 19,200 inch-pound capacities, produced in 12 standard sizes for primary use in the defense, aerospace and commercial industry. Crane and industrial buffers are larger versions of the Fluidicshoks® with up to 10,890,000 inch-pound capacities, produced in more than 60 standard sizes for industrial applications on cranes and crane trolleys, truck docks, ladle and ingot cars, ore trolleys and train car stops. Self-adjusting shock absorbers, which include versions of Fluidicshoks® and crane and industrial buffers, automatically adjust to different impact conditions, and are designed for high cycle application primarily in heavy industry. Liquid die springs are used as component parts of machinery and equipment used in the manufacture of tools and dies. Vibration dampers are used primarily by the aerospace and defense industries to control the response of electronics and optical systems subjected to air, ship, or spacecraft vibration. Machined springs are precisely controlled mechanical springs manufactured from a variety of materials. These are used primarily for aerospace applications that require custom features that are not possible with conventional wound coil springs. Custom actuators are typically of the gas-charged type, using high pressure, that have custom features not available from other suppliers. These actuators are used for special aerospace and defense applications.
Distribution
The Company does not rely on sales representatives in the United States but uses the services of several representatives throughout the rest of the world. Specialized technical sales in custom marketing activities outside the U.S.A. are serviced by these sales representatives, under the direction and with the assistance of the Company's President and in-house technical sales staff. Sales representatives typically have non-exclusive agreements with the Company, which, in most instances, provide for payment of commissions on sales at 5% to 10% of the product's net aggregate selling price. A limited number of distributors also have non-exclusive agreements with the Company to purchase the Company's products for resale purposes.
Competition
The Company faces competition on mature aerospace and defense programs which may use more conventional products manufactured under less stringent government specifications. Two foreign companies and two U.S. companies are the Company's main competitors in the production of crane buffers.
The Company competes directly against two other firms supplying structural damping devices for use in the United States. For structural applications outside of the USA, the Company competes directly with several other firms particularly in Japan, China and Taiwan. The Company competes with numerous other firms that supply alternative seismic protection technologies.
Raw Materials and Supplies
The principal raw materials and supplies used by the Company in the manufacture of its products are provided by numerous U.S. and foreign suppliers. The loss of any one of these would not materially affect the Company's operations.
Dependence Upon Major Customers
The Company is not dependent on any one or a few major customers. Sales to four customers approximated 37% (15%, 8%, 8%, and 5%, respectively) of net sales for 2022. The loss of any or all of these customers, unless the business is replaced by the Company, could result in an adverse effect on the results for the Company.
Patents, Trademarks and Licenses
The Company holds 6 patents expiring at different times until the year 2035.
Terms of Sale
The Company does not carry significant inventory for rapid delivery to customers, and goods are not normally sold with return rights such as are available for consignment sales. The Company had no inventory out on consignment and no consignment sales for the years ended May 31, 2022 and 2021. No extended payment terms are offered. During the year ended May 31, 2022, delivery time after receipt of orders averaged 8 to 10 weeks for the Company's standard products. Due to the volatility of structural and aerospace/defense programs, progress payments are usually required for larger projects using custom designed components of the Company.
Need for Government Approval of Principal Products or Services
Contracts between the Company and the federal government or its independent contractors are subject to termination at the election of the federal government. Contracts are generally entered into on a fixed price basis. If the federal government should limit defense spending, these contracts could be reduced or terminated, which management believes would have a materially adverse effect on the Company.
Research and Development
To accommodate growth and to maintain its presence in current markets, the Company engages in product research and development activities in connection with the design of its products. Occasionally, research and development for products in the aerospace and defense sectors is funded by customers or the federal government. The Company also engages in research testing of its products. For the fiscal years ended May 31, 2022 and 2021, the Company expended $1,213,000 and $924,000, respectively, on product research. This increase is primarily due to research and development that will aid in accommodating planned growth in multiple sectors. For the years ended May 31, 2022 and 2021, defense sponsored research and development totaled $334,000 and $243,000, respectively.
Government Regulation
Compliance with federal, state, and local laws and regulations which have been enacted or adopted regulating the discharge of materials into the environment has had no material effect on the Company, and the Company believes that it is in substantial compliance with such provisions.
The Company is subject to the Occupational Safety and Health Act ("OSHA") and the rules and regulations promulgated thereunder, which establish strict standards for the protection of employees, and impose fines for violations of such standards. The Company believes that it is in substantial compliance with OSHA provisions and does not anticipate any material corrective expenditures in the near future. The Company currently incurs only moderate costs with respect to disposal of hazardous waste and compliance with OSHA regulations.
The Company is also subject to regulations relating to production of products for the federal government. These regulations allow for frequent governmental audits of the Company's operations and fairly extensive testing of Company products. The Company believes that it is in substantial compliance with these regulations and does not anticipate corrective expenditures in the future.
Employees
Exclusive of Company sales representatives and distributors, as of May 31, 2022, the Company had 123 employees, including five executive officers. The Company has good relations with its employees.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
Smaller reporting companies are not required to provide the information required by this item.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
Not applicable.

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ITEM 2. PROPERTIES
Item 2. Properties.
The Company's production facilities occupy approximately six acres on Tonawanda Island in North Tonawanda, New York and are comprised of four interconnected buildings and two adjacent buildings. The production facilities consist of a small parts plant (approximately 4,400 square feet), a large parts plant (approximately 13,500 square feet), and include a facility of approximately 7,000 square feet comprised of a test facility, storage area, pump area and the Company's general offices. One adjacent building is a 27,000 square foot seismic assembly and test facility. This building contains overhead traveling cranes to allow dampers to be built up to 45 ft. in length. It is also the site of two long bed damper test machines where seismic dampers Taylor Devices manufactures will be tested at maximum force to satisfy customer specifications. Another adjacent building (approximately 2,000 square feet) is used as a training facility. These facilities total more than 54,000 square feet. Adjacent to these facilities, the Company has a remote test facility used for shock testing. This state-of-the-art test facility is 1,200 square feet. The Company owns two additional industrial buildings on nine acres of land in the City of North Tonawanda located 1.4 miles from the Company’s headquarters on Tonawanda Island. Total area of the two buildings is 46,000 square feet. One building includes a machine shop containing custom-built machinery for boring, deep-hole drilling and turning of parts. Another is used for painting and packaging parts and completed units.
The Company's real properties are subject to a negative pledge agreement with its lender, M&T Bank. The Company has agreed with the lender that, for so long as the credit facilities with the lender are outstanding, the Company will not sell, lease or mortgage any of its real properties. Additional information regarding the Company's agreement with M&T Bank is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, at "Capital Resources, Line of Credit and Long-Term Debt."
The Company believes it carries adequate insurance coverage on its facilities and their contents.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
There are no legal proceedings at present.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
The Company's Common Stock trades on the NASDAQ Capital Market of the National Association of Securities Dealers Automated Quotation ("NASDAQ") stock market under the symbol TAYD. The high and low sales information noted below for the quarters of fiscal year 2022 and fiscal year 2021 were obtained from NASDAQ.
Fiscal 2022 Fiscal 2021
High Low High Low
First Quarter $ 12.25 $ 11.21 $ 11.46 $ 8.68
Second Quarter $ 12.00 $ 10.93 $ 10.54 $ 8.58
Third Quarter $ 11.00 $ 9.88 $ 11.93 $ 9.76
Fourth Quarter $ 10.24 $ 8.75 $ 12.43 $ 10.58
Holders
As of May 31, 2022, the number of issued and outstanding shares of Common Stock was 3,497,937 and the number of record holders of the Company's Common Stock was 461. A substantial number of shares of the Company's Common Stock are held in street name. The Company believes that the total number of beneficial owners of its Common Stock is less than 1,300.
Dividends
No cash or stock dividends have been declared during the last two fiscal years. The Company plans to retain cash in the foreseeable future to fund working capital needs.
Rights Plan
As of September 25, 2018, the Company's Board of Directors adopted a shareholder rights plan designed to deter coercive or unfair takeover tactics and prevent an acquirer from gaining control of the Company without offering a fair price to shareholders. Under the plan, certain rights ("Rights") were distributed as a dividend on each share of Common Stock (one Right for each share of Common Stock) held as of the close of business on October 2, 2018. Each whole Right entitles the holder, under certain defined conditions, to buy one two-thousandths (1/2000) of a newly issued share of the Company's Series A Junior Participating Preferred Stock ("Series A Preferred Stock") at a purchase price of $5.00 per unit of one two-thousandths of a share. Rights attach to and trade with the shares of Common Stock, without being evidenced by a separate certificate. No separate Rights certificates will be issued unless and until the Rights detach from Common Stock and become exercisable for shares of the Series A Preferred Stock.
The Rights become exercisable to purchase shares of Preferred Stock (or, in certain circumstances, Common Stock) only if (i) a person acquired 15% or more of the Company's Common Stock, or (ii) a person commenced a tender or exchange offer for 10% or more of the Company's Common Stock, or (iii) the Board of Directors determined that the beneficial owner of at least 10% of the Company's Common Stock intended to cause the Company to take certain actions adverse to it and its shareholders or that such ownership would have a material adverse effect on the Company. The Rights Plan will expire on October 5, 2028.
Issuer Purchases of Equity Securities
A share repurchase agreement with a major broker-dealer, under which the Company repurchased shares of its common stock on the open market, has been terminated by the Company. No shares have been purchased since August 2011.
Equity Compensation Plan Information
The following table sets forth information regarding equity compensation plans of the Company as of May 31, 2022.
Equity Compensation Plan Information
Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants, and rights
(a)
Weighted-average exercise price of outstanding options, warrants and rights
(b)
Number of securities remaining available
for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
Equity compensation plans approved by security holders:
2008 Stock Option Plan
2012 Stock Option Plan
2015 Stock Option Plan
2018 Stock Option Plan
4,750
52,000
90,000
136,250
$ 8.06
$11.30
$12.72
$10.75
-
-
-
23,750
Equity compensation plans not approved by security holders:
2004 Employee Stock Purchase Plan (1)
-
-
217,287
Total
283,000
241,037
(1) The Company's 2004 Employee Stock Purchase Plan (the "Employee Plan") permits eligible employees to purchase shares of the Company's common stock at fair market value through payroll deductions and without brokers' fees. Such purchases are without any contribution on the part of the Company. As of May 31, 2022, 217,287 shares were available for issuance.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data.
The Company qualifies as a smaller reporting company, as defined by 17 CFR §229.10(f)(1) and is not required to provide the information required by this Item.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. 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 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this 10-K 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," "assume" and "optimistic" 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, fluctuations in general business cycles and changing economic conditions; variations in timing and amount of customer orders; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products, as well as other factors, many or all of which may be 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.
Application of Critical Accounting Policies and Estimates
The Company's consolidated financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. The preparation of the Company's financial statements requires management to make estimates, assumptions and judgments that affect the amounts reported. These estimates, assumptions and judgments are affected by management's application of accounting policies, which are discussed in Note 1, "Summary of Significant Accounting Policies", and elsewhere in the accompanying consolidated financial statements. As discussed below, our financial position or results of operations may be materially affected when reported under different conditions or when using different assumptions in the application of such policies. In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information. Management believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company's financial statements.
Accounts Receivable
Our ability to collect outstanding receivables from our customers is critical to our operating performance and cash flows. Accounts receivable are stated at an amount management expects to collect from outstanding balances. Management provides for probable uncollectible accounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts after considering the age of each receivable and communications with the customers involved. Balances that are collected, for which a credit to a valuation allowance had previously been recorded, result in a current-period reversal of the earlier transaction charging earnings and crediting a valuation allowance. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable in the current period. The actual amount of accounts written off over the five year period ended May 31, 2022 equaled less than 0.3% of sales for that period. The balance of the valuation allowance has increased to $16,000 at May 31, 2022 from $7,000 at May 31, 2021. Management does not expect the valuation allowance to materially change in the next twelve months for the current accounts receivable balance.
Inventory
Inventory is stated at the lower of average cost or net realizable value. Average cost approximates first-in, first-out cost.
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 technical 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. Therefore, management of the Company has recorded an allowance for potential inventory obsolescence. Based on certain assumptions and judgments made from the information available at that time, we determine the amount in the inventory allowance. If these estimates and related assumptions or the market changes, we may be required to record additional reserves. Historically, actual results have not varied materially from the Company's estimates.
During fiscal 2021, the Company began a thorough review of the facilities including the flow of inventory through the factory and warehouse areas to determine the most efficient utilization of available space. This review continued through fiscal 2022. Inventory purchasing practices and stocking levels were also evaluated and it was determined that a significant portion of the older items would be disposed of while the allowance for potential inventory obsolescence would be increased as more items are identified for disposal. There was $772,000 and $1,101,000 of inventory disposed of during the years ended May 31, 2022 and 2021. The provision for potential inventory obsolescence was zero and $1,500,000 for the years ended May 31, 2022 and 2021.
Revenue Recognition
Revenue is recognized 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.
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 cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material and overhead. Total estimated costs for each of the contracts are estimated based on a combination of historical costs of manufacturing similar products and estimates or quotes from vendors for supplying parts or services towards the completion of the manufacturing process. Adjustments to cost and profit estimates are made periodically due to changes in job performance, job conditions and estimated profitability, including those arising from final contract settlements. These changes may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Any losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. If total costs calculated upon completion of the manufacturing process in the current period for a contract are more than the estimated total costs at completion used to calculate revenue in a prior period, then the profits in the current period will be lower than if the estimated costs used in the prior period calculation were equal to the actual total costs upon completion. Historically, actual results have not varied materially from the Company's estimates. Other sales to customers are recognized upon shipment to the customer based on contract prices and terms. In the year ended May 31, 2022, 60% of revenue was recorded for contracts in which revenue was recognized over time while 40% was recognized at a point in time. In the year ended May 31, 2021, 43% of revenue was recorded for contracts in which revenue was recognized over time while 57% was recognized at a point in time.
For financial statement presentation purposes, the Company nets progress billings against the total costs incurred and estimated earnings 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.
Income Taxes
The provision for income taxes provides for the tax effects of transactions reported in the financial statements regardless of when such taxes are payable. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the tax and financial statement basis of assets and liabilities. The deferred tax assets relate principally to asset valuation allowances such as inventory obsolescence reserves and bad debt reserves and also to liabilities including warranty reserves, accrued vacation, accrued commissions and others. The deferred tax liabilities relate primarily to differences between financial statement and tax depreciation. Deferred taxes are based on tax laws currently enacted with tax rates expected to be in effect when the taxes are actually paid or recovered.
Realization of the deferred tax assets is dependent on generating sufficient taxable income at the time temporary differences become deductible. The Company provides a valuation allowance to the extent that deferred tax assets may not be realized. A valuation allowance has not been recorded against the deferred tax assets since management believes it is more likely than not that the deferred tax assets are recoverable. The Company considers future taxable income and potential tax planning strategies in assessing the need for a potential valuation allowance. In future years the Company will need to generate approximately $4.2 million of taxable income in order to realize our deferred tax assets recorded as of May 31, 2022 of $876,000. This deferred tax asset balance is 7% ($61,000) more than at the end of the prior year. The amount of the deferred tax assets considered realizable however, could be reduced in the near term if estimates of future taxable income are reduced. If actual results differ from estimated results or if the Company adjusts these assumptions, the Company may need to adjust its deferred tax assets or liabilities, which could impact its effective tax rate.
The Company's practice is to recognize interest related to income tax matters in interest income / expense and to recognize penalties in selling, general and administrative expenses.
The Company and its subsidiary file consolidated Federal and State income tax returns. As of May 31, 2022, the Company had State investment tax credit carryforwards of approximately $389,000 expiring through May 2027.
Results of Operations
A summary of the period-to-period changes in the principal items included in the consolidated statements of income is shown below:
Summary comparison of the years ended May 31, 2022 and 2021
Increase /
(Decrease)
Sales, net $ 8,357,000
Cost of goods sold $ 2,904,000
Selling, general and administrative expenses $ 628,000
Income before provision for income taxes $ 1,875,000
Provision for income taxes $ 698,000
Net income $ 1,177,000
For the year ended May 31, 2022 (All figures being discussed are for the year ended May 31, 2022 as compared to the year ended May 31, 2021.)
Year ended May 31 Change
Amount Percent
Net Revenue $ 30,867,000 $ 22,510,000 $ 8,357,000 37 %
Cost of sales 22,239,000 19,335,000 2,904,000 15 %
Gross profit $ 8,628,000 $ 3,175,000 $ 5,453,000 172 %
… as a percentage of net revenues 28 % 14 %
The Company's consolidated results of operations showed a 37% increase in net revenues and an increase in net income of 110%. Revenues recorded in the current period for long-term construction projects (“Project(s)”) were 92% more than the level recorded in the prior year. We had 45 Projects in process during the current period compared with 41 during the same period last year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 4% less than the level recorded in the prior year. The number of Projects in-process fluctuates from period to period. The changes from the prior period to the current period are not necessarily representative of future results.
Sales of the Company's products are made to three general groups of customers: industrial, structural and aerospace / defense. The Company saw a 60% increase from last year’s level in sales to structural customers who were seeking seismic / wind protection for either construction of new buildings and bridges or retrofitting existing buildings and bridges along with a 22% increase in sales to customers in aerospace / defense and a 1% decrease in sales to customers using our products in industrial applications. The significant increase in sales to structural customers is primarily from domestic customers.
A breakdown of sales to these three general groups of customers, as a percentage of total net revenue for fiscal years ended May 31, 2022 and 2021 is as follows:
Year ended May 31
Industrial 7 % 10 %
Structural 53 % 45 %
Aerospace / Defense 40 % 45 %
Total sales within North America increased 52% from last year. Total sales to Asia decreased 5% from the prior year. Net revenue by geographic region, as a percentage of total net revenue for fiscal years ended May 31, 2022 and 2021 is as follows:
Year ended May 31
North America 78 % 70 %
Asia 14 % 20 %
Other 8 % 10 %
The gross profit as a percentage of net revenue of 28% in the current period is double the 14% recorded in the same period of the prior year. The significant increase in gross profit as a percentage of revenue is primarily due to the increase in domestic sales to structural customers. The prior year results were adversely affected by the pandemic.
At May 31, 2021, we had 132 open sales orders in our backlog with a total sales value of $22.0 million. At May 31, 2022, we had 135 open sales orders in our backlog with a total sales value of $23.7 million. $7.6 million of the current backlog is on Projects already in progress. $9.3 million of the $22.0 million sales order backlog at May 31, 2021 was in progress at that date. 41% of the sales value in the backlog is for aerospace / defense customers compared to 43% at the end of fiscal 2021. As a percentage of the total sales order backlog, orders from structural customers accounted for 50% at May 31, 2022 and 55% at May 31, 2021.
The Company's backlog, revenues, commission expense, gross margins, gross profits, and net income fluctuate from period to period. Total sales in the current period and the changes in the current period compared to the prior period, are not necessarily representative of future results.
Selling, General and Administrative Expenses
Year ended May 31 Change
Amount Percent
Outside Commissions $ 495,000 $ 719,000 $ (224,000 ) -31 %
Other SG&A 5,660,000 4,808,000 852,000 18 %
Total SG&A $ 6,155,000 $ 5,527,000 $ 628,000 11 %
… as a percentage of net revenues 20 % 25 %
Selling, general and administrative expenses increased 11% from the prior year. Outside commission expense decreased 31% from last year's level due to the significant decrease in the level of commissionable sales recorded in the current period as compared to the prior period. Other selling, general and administrative expenses increased 18% from last year. The Company reduced its reliance on outside manufacturers’ representatives in FY22 and increased its internal sales force in an effort to increase profitable sales. This is the primary reason that the level of commissionable sales has decreased while the other SG&A expenses have increased.
The above factors resulted in operating income of $2,473,000 for the year ended May 31, 2022, showing significant improvement from the $2,352,000 operating loss in the prior year.
Other income during the prior period includes $2,972,000 of financial assistance provided by the U.S. federal government as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act and the Consolidated Appropriations Act of 2021 (CAA): a.) $1,462,000 of income due to the forgiveness of the loan by the Small Business Administration (SBA) under the Paycheck Protection Program (PPP), and b.) $1,510,000 of Employee Retention Credit (ERC) income. Other income during the current period includes ERC income of $54,000.
The Company's effective tax rate (ETR) is calculated based upon current assumptions relating to the year's operating results and various tax related items. The ETR for the fiscal year ended May 31, 2022 is 12%, compared to the ETR for the prior year of -56%.
A reconciliation of provision for income taxes at the statutory rate to income tax provision at the Company's effective rate is as follows:
Computed tax provision at the expected statutory rate $ 538,000 $ 143,000
Tax effect of permanent differences:
Research tax credits (275,000 ) (218,000 )
Foreign-derived intangible income deduction (12,000 ) -
U.S. Government PPP loan forgiven - (307,000 )
Other permanent differences 3,000 42,000
Other 63,000 (41,000 )
$ 317,000 $ (381,000 )
The foreign-derived intangible income deduction is a tax deduction provided to corporations that sell goods or services to foreign customers. It became available through Public Law 115-97, known as the Tax Cuts and Jobs Act. The legislation that created the PPP and permitted the SBA to forgive loans made through the PPP also directed that the forgiven loan would not be taxable income to the recipient.
Stock Options
The Company has stock option plans which provide for the granting of nonqualified or incentive stock options to officers, key employees and non-employee directors. Options granted under the plans are exercisable over a ten-year term. Options not exercised by the end of the term expire.
The Company measures compensation cost arising from the grant of share-based payments to employees at fair value and recognizes such cost in income over the period during which the employee is required to provide service in exchange for the award. The Company recognized $201,000 and $154,000 of compensation cost for the years ended May 31, 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. The Company used a weighted average expected term. Expected volatility assumptions used in the model were based on volatility of the Company's stock price for the thirty-month period immediately preceding the granting of the options. The Company issued stock options in August 2021 and April 2022. The risk-free interest rate is derived from the U.S. treasury yield.
The following assumptions were used in the Black-Scholes model in estimating the fair market value of the Company's stock option grants:
August 2021 April 2022
Risk-free interest rate: 2.875 % 2.25 %
Expected life of the options: 4 years 4 years
Expected share price volatility: 32 % 29 %
Expected dividends: zero zero
These assumptions resulted in estimated fair-market value per stock option: $ 3.42 $ 2.52
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 year ended May 31, 2022 is presented below.
Weighted-
Number of Average
Options Exercise Price
Options outstanding and exercisable at May 31, 2021: 267,750 $ 11.60
Options granted: 66,750 $ 10.69
Less: Options expired: 51,500 -
Options outstanding and exercisable at May 31, 2022: 283,000 $ 11.43
Closing value per share on NASDAQ at May 31, 2022:
$ 9.30
Capital Resources, Line of Credit and Long-Term Debt
The Company's primary liquidity is dependent upon its working capital needs. These are primarily inventory, accounts receivable, costs and estimated earnings in excess of billings, accounts payable, accrued commissions, billings in excess of costs and estimated earnings, and debt service. The Company's primary sources of liquidity have been operations and bank financing.
Capital expenditures for the year ended May 31, 2022 were $1,392,000 compared to $1,622,000 in the prior year. Current year capital expenditures included new manufacturing machinery, testing equipment, paint booths system, upgrades to technology equipment and assembly / test facility improvements. The Company has commitments to make capital expenditures of approximately $1,600,000 as of May 31, 2022. These capital expenditures will be primarily for new manufacturing and testing equipment.
The Company has a $10,000,000 demand line of credit from a bank, with interest payable at the Company's option of 30, 60 or 90 day LIBOR rate plus 2.25%. There is no outstanding balance at May 31, 2022 or May 31, 2021. The outstanding balance on the line of credit fluctuates as the Company's various long-term projects progress. The line is secured by a negative pledge of the Company's real and personal property. This line of credit is subject to the usual terms and conditions applied by the bank and is subject to renewal annually.
The bank is not committed to make loans under this line of credit and no commitment fee is charged.
Inventory and Maintenance Inventory
May 31, 2022 May 31, 2021 Increase /(Decrease)
Raw materials $ 488,000
$ 503,000
$ (15,000 ) -3 %
Work-in-process 5,166,000
5,076,000
90,000 2 %
Finished goods 200,000
256,000
(56,000 ) -22 %
Inventory 5,854,000 84 % 5,835,000 78 % 19,000 0 %
Maintenance and other inventory 1,107,000 16 % 1,613,000 22 % (506,000 ) -31 %
Total $ 6,961,000 100 % $ 7,448,000 100 % $ (487,000 ) -7 %
Inventory turnover 3.1
2.1
Inventory, at $5,854,000 as of May 31, 2022, is only slightly higher than at the prior year-end. Of this, approximately 88% is work in process, 4% is finished goods, and 8% is raw materials. All of the current inventory is expected to be consumed or sold within twelve months. The level of inventory will fluctuate from time to time due to the stage of completion of the non-project sales orders in progress at the time.
The Company continues to rework slow-moving inventory, where applicable, to convert it to product to be used on customer orders. During fiscal 2021, the Company began a thorough review of the inventory to identify and dispose of items that had not been used for several years and were unlikely to be used in the foreseeable future. The Company disposed of approximately $772,000 and $1,101,000 of obsolete inventory during the years ended May 31, 2022 and 2021, respectively.
Accounts Receivable, Costs and Estimated Earnings in Excess of Billings (“CIEB”) and Billings in Excess of Costs and Estimated Earnings (“BIEC”)
May 31, 2022 May 31, 2021 Increase /(Decrease)
Accounts and other receivables $ 4,467,000 $ 4,121,000 $ 346,000 8 %
Less: Other receivable - 741,000 (741,000 ) -100 %
Accounts receivable 4,467,000 3,380,000 1,087,000 32 %
CIEB 3,336,000 1,500,000 1,836,000 122 %
Less: BIEC 1,123,000 1,362,000 (239,000 ) -18 %
Net $ 6,680,000 $ 3,518,000 $ 3,162,000 90 %
Number of an average day’s sales outstanding in accounts receivable (DSO)
The Company combines the totals of accounts receivable, the asset CIEB, and the 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 $4,467,000 as of May 31, 2022 includes approximately $190,000 of amounts retained by customers on long-term construction projects. The Company expects to collect all of these amounts, including the retained amounts, during the next twelve months. The number of an average day's sales outstanding in accounts receivable (DSO) was 42 days at May 31, 2022 and May 31, 2021. The Company expects to collect the net accounts receivable balance, including the retainage, during the next twelve months.
Other receivable is an amount of ERC claimed by the Company for the second calendar quarter of 2021 and was received in the third calendar quarter of 2021.
The status of the projects in-progress at the end of the current and prior fiscal years have changed in the factors affecting the year-end balances in the asset CIEB, and the liability BIEC:
Number of projects in progress at year-end
Aggregate percent complete at year-end 47 % 32 %
Average total value of projects in progress at year-end $ 795,000 $ 963,000
Percentage of total value invoiced to customer 35 % 30 %
There are 5 more projects in-process at the end of the current fiscal year as compared with the prior year end and the average value of those projects has decreased by 17% between those two dates.
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 $3,336,000 balance in this account at May 31, 2022 is a 122% increase from the prior year-end. This increase reflects the higher aggregate level of the percentage of completion of these Projects as of the current year end as compared with the Projects in process at the prior year end. Generally, if progress billings are permitted under the terms of a project sales agreement, then the more complete the project is, the more progress billings will be permitted. The Company expects to bill the entire amount during the next twelve months. 58% of the CIEB balance as of the end of the last fiscal quarter, February 28, 2022, was billed to those customers in the current fiscal quarter ended May 31, 2022. The remainder will be billed as the projects progress, in accordance with the terms specified in the various contracts.
The year-end balances in the CIEB account are comprised of the following components:
May 31, 2022 May 31, 2021
Costs $ 3,250,000 $ 2,362,000
Estimated earnings 2,642,000 410,000
Less: Billings to customers 2,556,000 1,272,000
CIEB $ 3,336,000 $ 1,500,000
Number of projects in progress
As noted above, BIEC represents billings to customers in excess of revenues recognized. The $1,123,000 balance in this account at May 31, 2022 is in comparison to a $1,362,000 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 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.
The year-end balances in this account are comprised of the following components:
May 31, 2022 May 31, 2021
Billings to customers $ 2,711,000 $ 2,741,000
Less: Costs 1,019,000 1,011,000
Less: Estimated earnings 569,000 368,000
BIEC $ 1,123,000 $ 1,362,000
Number of projects in progress
Accounts payable, at $1,427,000 as of May 31, 2022, is 20% less than the prior year-end. This decrease is normal fluctuation of this account and is not considered to be unusual. The Company expects the current accounts payable amount to be paid during the next twelve months.
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 May 31, 2022 are $85,000. This is 68% less than the $269,000 accrued at the prior year-end. This decrease is generally due to the decrease in the level of commissionable sales, discussed above. The Company expects the current accrued amount to be paid during the next twelve months.
Other accrued expenses of $3,329,000 increased 94% from the prior year level of $1,715,000. This increase is due to increases in customer prepayments on projects not yet started along with an increase in accrued incentive compensation resulting from increased earnings and sales order bookings.
Management believes that the Company's cash on hand, cash flows from operations, and borrowing capacity under the bank line of credit will be sufficient to fund ongoing operations and capital improvements for the next twelve months.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Smaller reporting companies are not required to provide the information required by this item.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data required pursuant to this Item 8 are included in this Form 10-K as a separate section commencing on page 25 and are incorporated herein by reference.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
There have been no disagreements between the Company and its accountants as to matters which require disclosure.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. 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 May 31, 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 the Company files or submits 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 the Company files or submits 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) Management's report on internal control over financial reporting.
The Company's management, with the participation of the Company's principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's management has assessed the effectiveness of the Company's internal control over financial reporting as of May 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -- Integrated Framework, updated in 2013. Based on this assessment management has concluded that, as of May 31, 2022, the Company's internal control over financial reporting is effective based on those criteria.
(c)	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 year ended May 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company's control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None.
PART III
The information required by Items 10, 11, 12, 13 and 14 of this part will be presented in the Company's Proxy Statement to be issued in connection with the Annual Meeting of Shareholders to be held on October 21, 2022, which information is hereby incorporated by reference into this Annual Report. The proxy materials, including the Proxy Statement and form of proxy, will be filed within 120 days after the Company's fiscal year end.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
DOCUMENTS FILED AS PART OF THIS REPORT:
Index to Financial Statements:
(i)
Report of Independent Registered Public Accounting Firm (PCAOB ID: 130)
(ii)
Consolidated Balance Sheets as of May 31, 2022 and 2021
(iii) Consolidated Statements of Income for the years ended May 31, 2022 and 2021
(iv)
Consolidated Statements of Stockholders' Equity for the years ended May 31, 2022 and 2021
(v)
Consolidated Statements of Cash Flows for the years ended May 31, 2022 and 2021
(vi) Notes to Consolidated Financial Statements - May 31, 2022 and 2021
EXHIBITS:
Articles of incorporation and by-laws
(i)
Restated Certificate of Incorporation incorporated by reference to Exhibit (3)(i) of Annual Report on Form 10-K, dated August 24, 1983.
(ii)
Amendment to Certificate of Incorporation incorporated by reference to Exhibit (3)(iv) to Form 8 [Amendment to Application or Report], dated September 24, 1993.
(iii)
Amendment to Certificate of Incorporation eliminating and re-designating the Series A Junior Preferred Stock and creating 5,000 Series 2008 Junior Participating Preferred Stock, at $.05 par value, as filed by the Secretary of State of the State of New York on September 16, 2008, and incorporated by reference to Exhibit (3)(i) of Form 8-K, dated as of September 15, 2008 and filed September 18, 2008.
(iv)
Certificate of Change incorporated by reference to Exhibit (3)(i) to Quarterly Report on Form 10-QSB for the period ending November 30, 2002.
(v)
By-laws and Proxy Review Guidelines incorporated by reference to Exhibit (3) to Quarterly Report on Form 10-Q for the period ending February 28, 2015, filed April 14, 2015.
Instruments defining rights of security holders, including indentures
(i)
Rights Agreement by and between registrant and Computershare Trust Company, N.A., dated as of September 25, 2018 and letter to shareholders (including Summary of Rights), dated October 5, 2018, attached as Exhibits 4 and 20, respectively, to Registration Statement on Form 8-A 12G, filed with the Securities and Exchange Commission on October 5, 2018.
(ii) Description of registrant’s securities incorporated by reference to Exhibit 4(vi) to Annual Report on Form 10-K for the fiscal year ended May 31, 2019, filed August 2, 2019.
Material Contracts
(i)
2005 Taylor Devices, Inc. Stock Option Plan attached as Appendix B to Definitive Proxy Statement, filed with the Securities and Exchange Commission on September 27, 2005.
(ii)
2008 Taylor Devices, Inc. Stock Option Plan attached as Appendix C to Definitive Proxy Statement, filed with the Securities and Exchange Commission on September 26, 2008.
(iii)
2012 Taylor Devices, Inc. Stock Option Plan attached as Appendix C to Definitive Proxy Statement, filed with the Securities and Exchange Commission on September 21, 2012.
(iv)
2015 Taylor Devices, Inc. Stock Option Plan attached as Appendix B to Definitive Proxy Statement, filed with the Securities and Exchange Commission on April 8, 2016.
(v)
2018 Taylor Devices, Inc. Stock Option Plan attached as Appendix B to Definitive Proxy Statement, filed with the Securities and Exchange Commission on September 27, 2018.
(vi)
The 2004 Taylor Devices, Inc. Employee Stock Purchase Plan, incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8, File No. 333-114085, filed with the Securities and Exchange Commission on March 31, 2004.
(vii)
Post-Effective Amendment No. 1 to Registration Statement on Form S-8, File No. 333-114085, for the 2004 Taylor Devices, Inc. Employee Stock Purchase Plan, filed with the Securities and Exchange Commission on August 24, 2006.
(viii)
Form of Indemnification Agreement between registrant and directors and executive officers, attached as Appendix A to Definitive Proxy Statement, filed with the Securities and Exchange Commission on September 27, 2007.
(ix)
Management Bonus Policy dated as of March 4, 2011 between the Registrant and executive officers, incorporated by reference to Exhibit 10(i) to Quarterly Report on Form 10-Q for the period ending February 28, 2011.
(x)
Negative Pledge Agreement dated August 30, 2017 by the Registrant in favor of M&T Bank, incorporated by reference to Exhibit 10(xiv) to Quarterly Report on Form 10-Q for the period ending August 31, 2017..
(xi)
Employment Agreement dated as of June 14, 2018 between the Registrant and Alan R. Klembczyk, incorporated by reference to Exhibit 10(i) to Current Report on Form 8-K filed June 19, 2018.
(xii)
Employment Agreement dated as of June 14, 2018 between the Registrant and Mark V. McDonough, incorporated by reference to Exhibit 10(ii) to Current Report on Form 8-K filed June 19, 2018.
(xiii)
Employment Agreement dated as of August 9, 2021 between the Registrant and Timothy J. Sopko, incorporated by reference to Exhibit 10 to Current Report on Form 8-K filed August 13, 2021.
Statement regarding computation of per share earnings
REG. 228.601(A)(11) Statement regarding computation of per share earnings
Weighted average of common stock/equivalents outstanding - fiscal year ended May 31, 2022
Weighted average common stock outstanding 3,497,345
Common shares issuable under stock option plans using treasury stock method 2,208
Weighted average common stock outstanding assuming dilution 3,499,553
Net income fiscal year ended May 31, 2022 (1) $ 2,239,423
Weighted average common stock (2) 3,497,345
Basic income per common share (1) divided by (2) $ 0.64
Net income fiscal year ended May 31, 2022 (3) $ 2,239,423
Weighted average common stock outstanding assuming dilution (4) 3,499,553
Diluted income per common share (3) divided by (4) $ 0.64
Weighted average of common stock/equivalents outstanding - fiscal year ended May 31, 2021
Weighted average common stock outstanding 3,490,213
Common shares issuable under stock option plans using treasury stock method 1,674
Weighted average common stock outstanding assuming dilution 3,491,887
Net income fiscal year ended May 31, 2021 (1) $ 1,062,895
Weighted average common stock (2) 3,490,213
Basic income per common share (1) divided by (2) $ 0.30
Net income fiscal year ended May 31, 2021 (3) $ 1,062,895
Weighted average common stock outstanding assuming dilution (4) 3,491,887
Diluted income per common share (3) divided by (4) $ 0.30
The Annual Report to Security Holders for the fiscal year ended May 31, 2022, attached to this Annual Report on Form 10-K.
Subsidiaries of the registrant
Tayco Realty Corporation is a New York corporation organized on September 8, 1977, owned by the Company.
The Consent of Independent Registered Public Accounting Firm precedes the Consolidated Financial Statements.
Officer Certifications
(i) Rule 13a-14(a) Certification of Chief Executive Officer.
(ii) Rule 13a-14(a) Certification of Chief Financial Officer.
Officer Certifications
(i) Section 1350 Certification of Chief Executive Officer.
(ii) Section 1350 Certification of Chief Financial Officer.
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.
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
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/Timothy J. Sopko Date: August 19, 2022
Timothy J. Sopko
Chief Executive Officer
(Principal Executive Officer)
and
By: /s/Mark V. McDonough Date: August 19, 2022
Mark V. McDonough
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/John Burgess By: /s/Robert M. Carey
John Burgess, Director
Robert M. Carey, Director
August 19, 2022
August 19, 2022
By: /s/F. Eric Armenat By: /s/Alan R. Klembczyk
F. Eric Armenat, Director
Alan R. Klembczyk, President and Director
August 19, 2022
August 19, 2022
[Lumsden & McCormick, LLP Letterhead]
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors of
Taylor Devices, Inc.
Gentlemen:
We hereby consent to the incorporation by reference in this Annual Report on Form 10-K (Commission File Number 0-3498) of Taylor Devices, Inc. of our report dated August 19, 2022 and any reference thereto in the Annual Report to Shareholders for the fiscal year ended May 31, 2022.
We also consent to such incorporation by reference in Registration Statement Nos. 333-114085, 333-133340, 333-155284, 333-184809, 333-210660, and 333-232121 of Taylor Devices, Inc. on Form S-8 of our report dated August 19, 2022.
/s/Lumsden & McCormick, LLP
Lumsden & McCormick, LLP
Buffalo, New York
August 19, 2022
TAYLOR DEVICES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2022
[Lumsden & McCormick, LLP Letterhead]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Taylor Devices, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Taylor Devices, Inc. and Subsidiary (the Company) as of May 31, 2022 and 2021, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial condition of the Company as of May 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Cost Estimates for Long-Term Contracts and Related Revenue Recognition
Description of the Matter
As more fully described in Note 1 to the consolidated financial statements, the Company recognizes revenue over time for long-term contracts as goods are produced. The Company uses costs incurred as the method to determine progress, and revenue is recognized based on costs incurred to date plus an estimate of margin at completion. The process of estimating margin at completion involves estimating the costs to complete production of goods and comparing those costs to the estimated final revenue amount. Long-term contracts are inherently uncertain in that revenue is fixed while the estimates of costs required to complete these contracts are subject to significant variability. Due to the technical performance requirements in many of these contracts, changes to cost estimates could occur, resulting in higher or lower margins when the contracts are completed.
Given the inherent uncertainty and significant judgments necessary to estimate future costs at completion, auditing these estimates involved a focused audit effort and a high degree of auditor judgment.
How We Addressed the Matter in Our Audit
Our auditing procedures related to the cost estimates for long-term contracts and related revenue recognition included the following, among others:
We evaluated the appropriateness and consistency of management’s methods used to develop its estimates.
We evaluated the reasonableness of judgments made and significant assumptions used by management relating to key estimates.
We selected a sample of executed contracts to understand the contract, perform an independent assessment of the appropriate timing of revenue recognition, and test the mathematical accuracy of revenue recognized based on costs incurred to date relative to total estimated costs at completion.
We performed inquiries of the Company’s project managers and others directly involved with the contracts to evaluate project status and project challenges which may affect total estimated costs to complete. We also observed the project work site when key estimates related to tangible or physical progress of the project.
We tested the accuracy and completeness of the data used to develop key estimates, including material, labor, overhead, and sub-contractor costs.
We performed retrospective reviews of prior year long-term contracts, comparing actual performance to estimated performance and the related financial statement impact, when evaluating the thoroughness and precision of management’s estimation process in previous years.
Valuation of Inventory
Description of the Matter
As of May 31, 2022, the Company’s inventory balance was approximately $5.9 million, net of a $100,000 allowance for obsolescence, its maintenance and other inventory balance was approximately $1.1 million, net of an approximate $1.2 million allowance for obsolescence. As discussed in Note 5, maintenance and other inventory represents certain items that are estimated to have a product life-cycle in excess of twelve months the Company is required to maintain for service of products sold and items that are generally subject to spontaneous ordering. The Company evaluates its inventory for obsolescence on an ongoing basis by considering historical usage as well as requirements for future orders.
Given the inherent uncertainty and significant judgments necessary to estimate potential inventory obsolescence, auditing management’s estimates involved a high degree of auditor judgment.
How We Addressed the Matter in Our Audit
Our auditing procedures related to valuation of inventory included the following, among others:
We evaluated the appropriateness and consistency of management’s methods used to develop its estimates.
We evaluated the reasonableness of judgments made and significant assumptions used by management relating to key estimates.
We inquired of management relative to write-offs of inventory during the year.
We tested the completeness and accuracy of management’s schedule of inventory.
We developed an independent expectation of the obsolescence reserve based on our knowledge of the Company’s inventory, including analysis of slow-moving items and historical usage and compared it to actual.
We examined management’s lower of cost or net realizable value analysis and performed procedures to test its completeness and accuracy.
We selected a sample of material purchases made during the year to ensure they were included in inventory at the proper value.
During our physical inventory observation, we toured the Company’s warehouses and examined inventory on hand for any indications of obsolescence.
/s/Lumsden & McCormick, LLP
Lumsden & McCormick, LLP
We have served as the Company’s auditor since 1998.
Buffalo, New York
August 19, 2022
TAYLOR DEVICES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
May 31,
Assets
Current assets:
Cash and cash equivalents $ 22,517,038 $ 20,581,604
Short-term investments 1,097,450 1,097,012
Accounts and other receivables, net 4,466,686 4,120,564
Inventory 5,854,935 5,835,596
Prepaid expenses 468,489 522,747
Prepaid income taxes 235,947 454,778
Costs and estimated earnings in excess of billings 3,336,474 1,499,604
Total current assets 37,977,019 34,111,905
Maintenance and other inventory, net 1,107,309 1,612,839
Property and equipment, net 9,854,759 9,816,594
Cash value of life insurance, net 205,359 200,538
Deferred income taxes 74,615 190,115
Total assets $ 49,219,061 $ 45,931,991
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 1,426,830 1,787,325
Accrued commissions 84,907 269,064
Other accrued expenses 3,329,407 1,715,409
Billings in excess of costs and estimated earnings 1,122,763 1,361,985
Total current liabilities 5,963,907 5,133,783
Stockholders' Equity:
Common stock, $.025 par value, authorized 8,000,000 shares, issued 4,056,771 and 4,055,275 shares 101,342 101,305
Paid-in capital 10,227,916 10,010,430
Retained earnings 35,840,898 33,601,475
Stockholders’ equity before treasury stock 46,170,156 43,713,210
Treasury stock - 558,834 shares at cost (2,915,002 ) (2,915,002 )
Total stockholders' equity 43,255,154 40,798,208
Total liabilities and stockholders’ equity $ 49,219,061 $ 45,931,991
See notes to consolidated financial statements.
TAYLOR DEVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
For the years ended May 31,
Sales, net $ 30,866,582 $ 22,509,641
Cost of goods sold 22,239,070 19,334,950
Gross profit 8,627,512 3,174,691
Selling, general and administrative expenses 6,154,735 5,526,774
Operating income (loss) 2,472,777 (2,352,083 )
Other income
Interest, net 4,543 53,654
Paycheck Protection Program loan forgiveness - 1,461,500
Employee Retention Credit 53,508 1,510,131
Miscellaneous 25,595 8,693
Total other income 83,646 3,033,978
Income before provision for income taxes 2,556,423 681,895
Provision for income taxes (benefit) 317,000 (381,000 )
Net income $ 2,239,423 $ 1,062,895
Basic and diluted earnings per common share $ 0.64 $ 0.30
See notes to consolidated financial statements.
TAYLOR DEVICES, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders’ Equity
For the years ended May 31,
Common Stock
Beginning of period $ 101,305 $ 100,943
Issuance of shares for employee stock purchase plan
Issuance of shares for employee stock option plan -
End of period 101,342 101,305
Paid-in Capital
Beginning of period 10,010,430 9,759,063
Issuance of shares for employee stock purchase plan 16,208 14,954
Issuance of shares for employee stock option plan - 82,070
Stock options issued for services 201,278 154,343
End of period 10,227,916 10,010,430
Retained Earnings
Beginning of period 33,601,475 32,538,580
Net income 2,239,423 1,062,895
End of period 35,840,898 33,601,475
Treasury Stock
Beginning of period (2,915,002 ) (2,861,032 )
Issuance of shares for employee stock option plan - (53,970 )
End of period (2,915,002 ) (2,915,002 )
Total stockholders' equity $ 43,255,154 $ 40,798,208
See notes to consolidated financial statements.
TAYLOR DEVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended May 31,
Operating activities:
Net income $ 2,239,423 $ 1,062,895
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation 1,347,442 1,212,713
Stock options issued for services 201,278 154,343
Bad debt expense - 134,000
Gain on disposal of property and equipment (1,530 ) -
Provision for inventory obsolescence - 1,500,000
Deferred income taxes 115,500 (20,000 )
Paycheck Protection Program loan forgiveness - (1,461,500 )
Changes in other current assets and liabilities:
Accounts and other receivables (346,122 ) 1,564,907
Inventory 486,191 2,038,052
Prepaid expenses 54,258 (62,535 )
Prepaid income taxes 218,831 (404,630 )
Costs and estimated earnings in excess of billings (1,836,870 ) 254,969
Accounts payable (360,495 ) 417,150
Accrued commissions (184,157 ) (36,821 )
Other accrued expenses 1,613,998 51,495
Billings in excess of costs and estimated earnings (239,222 ) 625,119
Net operating activities 3,308,525 7,030,157
Investing activities:
Acquisition of property and equipment (1,391,577 ) (1,621,817 )
Proceeds from disposal of property and equipment 7,500 -
Increase in short-term investments (438 ) (25,062 )
Increase in cash value of life insurance (4,821 ) (4,917 )
Net investing activities (1,389,336 ) (1,651,796 )
Financing activities:
Proceeds from issuance of common stock 16,245 43,416
Net change in cash and cash equivalents 1,935,434 5,421,777
Cash and cash equivalents - beginning 20,581,604 15,159,827
Cash and cash equivalents - ending $ 22,517,038 $ 20,581,604
See notes to consolidated financial statements.
TAYLOR DEVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Nature of Operations:
Taylor Devices, Inc. (the Company) manufactures and sells a single group of very similar products that have many different applications for customers. These similar products are included in one of eight categories; namely, Seismic Dampers, Fluidicshoks®, Crane and Industrial Buffers, Self-Adjusting Shock Absorbers, Liquid Die Springs, Vibration Dampers, Machined Springs and Custom Actuators for use in various types of machinery, equipment and structures, primarily to customers which are located throughout the United States and several foreign countries. The products are manufactured at the Company's sole operating facility in the United States where all of the Company's long-lived assets reside. Management does not track or otherwise account for sales broken down by these categories.
76% of the Company's 2022 revenue was generated from sales to customers in the United States and 14% was from sales to customers in Asia. Remaining sales were to customers in other countries in North America, Europe, Australia, and South America.
68% of the Company's 2021 revenue was generated from sales to customers in the United States and 20% was from sales to customers in Asia. Remaining sales were to customers in other countries in North America, Europe and South America.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Tayco Realty Corporation (Realty). All inter-company transactions and balances have been eliminated in consolidation.
Subsequent Events:
The Company has evaluated events and transactions for potential recognition or disclosure in the financial statements through the date the financial statements were issued.
Use of Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents:
The Company includes all highly liquid investments in money market funds in cash and cash equivalents on the accompanying balance sheets.
Cash and cash equivalents in financial institutions may exceed insured limits at various times during the year and subject the Company to concentrations of credit risk.
Short-term Investments:
At times, the Company invests excess funds in liquid interest earning instruments. Short-term investments at May 31, 2022 and May 31, 2021 include “available for sale” corporate bonds stated at fair value, which approximates cost. The bonds (16) mature on various dates during the period December 2022 to November 2026. Unrealized holding gains and losses would be presented as a separate component of accumulated other comprehensive income, net of deferred income taxes. Realized gains and losses on the sale of investments are determined using the specific identification method.
The bonds are valued using pricing models maximizing the use of observable inputs for similar securities. This includes basing value on yields currently available on comparable securities of issuers with similar credit ratings.
Accounts and Other Receivables:
Accounts and other receivables are stated at an amount management expects to collect from outstanding balances. Management provides for probable uncollectible accounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to the receivable.
Inventory:
Inventory is stated at the lower of average cost or net realizable value. Average cost approximates first-in, first-out cost.
Property and Equipment:
Property and equipment is stated at cost net of accumulated depreciation. Depreciation is provided primarily using the straight-line method for financial reporting purposes and accelerated methods for income tax reporting purposes. Maintenance and repairs are charged to operations as incurred; significant improvements are capitalized.
Cash Value of Life Insurance:
Cash value of life insurance is stated at the surrender value of the contracts.
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.
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 cost represents 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 year ended May 31, 2022, 60% of revenue was recorded for contracts in which revenue was recognized over time while 40% was recognized at a point in time. In the year ended May 31, 2021, 43% of revenue was recorded for contracts in which revenue was recognized over time while 57% 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 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 May 31, 2022 and 2021, 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.
Shipping and Handling Costs:
Shipping and handling costs on incoming inventory items are classified as a component of cost of goods sold, while shipping and handling costs on outgoing shipments to customers are classified as a component of selling, general and administrative expenses. The amounts of these costs classified as a component of selling, general and administrative expenses were $238,536 and $146,878 for the years ended May 31, 2022 and 2021. Shipping and handling activities that occur after the customer has obtained control of the product are considered fulfillment activities, not performance obligations.
Research and Development Costs:
Research and development costs are classified as a component of cost of sales. The amounts of these costs were $1,213,000 and $924,000 for the years ended May 31, 2022 and 2021.
Income Taxes:
The provision for income taxes provides for the tax effects of transactions reported in the financial statements regardless of when such taxes are payable. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the tax and financial statement basis of assets and liabilities. Deferred taxes are based on tax laws currently enacted with tax rates expected to be in effect when the taxes are actually paid or recovered.
The Company's practice is to recognize interest related to income tax matters in interest income / expense and to recognize penalties in selling, general and administrative expenses. The Company did not have any accrued interest or penalties included in its consolidated balance sheets at May 31, 2022 and 2021. The Company recorded no interest expense or penalties in its consolidated statements of income during the years ended May 31, 2022 and 2021.
The Company believes it is no longer subject to examination by federal and state taxing authorities for years prior to May 31, 2019.
Sales Taxes:
Certain jurisdictions impose a sales tax on Company sales to nonexempt customers. The Company collects these taxes from customers and remits the entire amount as required by the applicable law. The Company excludes from revenues and expenses the tax collected and remitted.
Stock-Based Compensation:
The Company measures compensation cost arising from the grant of share-based payments to employees at fair value and recognizes such cost in income over the period during which the employee is required to provide service in exchange for the award. The stock-based compensation expense for the years ended May 31, 2022 and 2021 was $201,278 and $154,343.
New Accounting Standards:
Any recently issued Accounting Standards Codification (ASC) guidance has either been implemented or are not significant to the Company.
2. Accounts and Other Receivables:
Customers $ 4,292,300 $ 3,184,970
Customers - retention 190,492 200,956
Gross accounts receivable 4,482,792 3,385,926
Less allowance for doubtful accounts 16,106 6,781
Add other receivables - 741,419
Net accounts receivable $ 4,466,686 $ 4,120,564
Retention receivable from customers represents amounts invoiced to customers where payments have been partially withheld pending completion of the project. All amounts are expected to be collected within the next fiscal year.
Other receivable was an amount of Employee Retention Credit claimed by the Company for the second calendar quarter of 2021 and received in the third calendar quarter of 2021.
3. Inventory:
Raw materials $ 488,393 $ 503,344
Work-in-process 5,166,271 5,076,377
Finished goods 300,271 355,875
Gross inventory 5,954,935 5,935,596
Less allowance for obsolescence 100,000 100,000
Net inventory $ 5,854,935 $ 5,835,596
4. Costs and Estimated Earnings on Uncompleted Contracts:
Costs incurred on uncompleted contracts $ 4,268,608 $ 3,372,276
Estimated earnings 3,211,392 778,011
Total costs and estimated earnings 7,480,000 4,150,287
Less billings to date 5,266,289 4,012,668
Costs and estimated earnings not billed $ 2,213,711 $ 137,619
Amounts are included in the accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of billings $ 3,336,474 $ 1,499,604
Billings in excess of costs and estimated earnings 1,122,763 1,361,985
Costs and estimated earnings not billed $ 2,213,711 $ 137,619
The following summarizes the status of Projects in progress as of May 31, 2022 and 2021:
Number of Projects in progress
Aggregate percent complete 47 % 32 %
Aggregate amount remaining $ 7,627,234 $ 9,333,701
Percentage of total value invoiced to customer 35 % 30 %
The Company expects to recognize the entire remaining revenue on all open projects during the May 31, 2023 fiscal year.
Revenue recognized during the years ended May 31, 2022 and 2021 for amounts included in billings in excess of costs and estimated earnings as of the beginning of the year amounted to $1,420,000, and $736,866.
5. Maintenance and Other Inventory:
Maintenance and other inventory $ 2,334,889 $ 3,612,000
Less allowance for obsolescence 1,227,580 1,999,161
Maintenance and other inventory, net $ 1,107,309 $ 1,612,839
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 technical 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. Therefore, management of the Company has recorded an allowance for potential inventory obsolescence.
During fiscal 2021, the Company began a thorough review of the facilities including the flow of inventory through the factory and warehouse areas to determine the most efficient utilization of available space. This review continued through fiscal 2022. Inventory purchasing practices and stocking levels were also evaluated and it was determined that a significant portion of the older items would be disposed of while the allowance for potential inventory obsolescence would be increased as more items are identified for disposal. $772,000 and $1,101,000 of inventory was disposed of during the years ended May 31, 2022 and 2021. The provision for potential inventory obsolescence was zero and $1,500,000 for the years ended May 31, 2022 and 2021.
6. Property and Equipment:
Land $ 195,220 $ 195,220
Buildings and improvements 9,821,812 9,584,087
Machinery and equipment 12,824,696 12,366,569
Office furniture and equipment 2,744,400 2,536,688
Autos and trucks 24,818 24,818
Land improvements 483,929 476,429
Gross property and equipment 26,094,875 25,183,811
Less accumulated depreciation 16,240,116 15,367,217
Property and equipment, net $ 9,854,759 $ 9,816,594
Depreciation expense was $1,347,442 and $1,212,713 for the years ended May 31, 2022 and 2021.
The Company has commitments to make capital expenditures of approximately $1,600,000 as of May 31, 2022.
7. Short-Term Borrowings:
The Company has available a $10,000,000 demand line of credit from a bank, with interest payable at the Company's option of 30, 60 or 90 day LIBOR rate plus 2.25%. The line is secured by a negative pledge of the Company's real and personal property. This line of credit is subject to the usual terms and conditions applied by the bank and subject to renewal annually.
There is no amount outstanding under the line of credit at May 31, 2022 or May 31, 2021.
The Company uses a cash management facility under which the bank draws against the available line of credit to cover checks presented for payment on a daily basis. Outstanding checks under this arrangement totaled $193,478 and $366,209 as of May 31, 2022 and 2021. These amounts are included in accounts payable.
8. Other Accrued Expenses:
Customer deposits $ 1,347,709 $ 867,652
Personnel costs 1,587,271 659,623
Other 394,427 188,134
Total other accrued expenses $ 3,329,407 $ 1,715,409
9. Sales:
The Company manufactures and sells a single group of very similar products that have many different applications for customers. These similar products are included in one of eight categories; namely, Seismic Dampers, Fluidicshoks®, Crane and Industrial Buffers, Self-Adjusting Shock Absorbers, Liquid Die Springs, Vibration Dampers, Machined Springs and Custom Actuators. Management does not track or otherwise account for sales broken down by these categories. Sales of the Company's products are made to three general groups of customers: industrial, structural and aerospace / defense. A breakdown of sales to these three general groups of customers is as follows:
Structural $ 16,267,162 $ 10,137,468
Aerospace / Defense 12,440,687 10,183,399
Industrial 2,158,733 2,188,774
Sales, net $ 30,866,582 $ 22,509,641
Sales to a single customer approximated 15% of net sales for 2022. Sales two customers approximated 21% (11% and 10%, respectively) of net sales for 2021.
10. Income Taxes:
Current tax provision (benefit):
Federal $ 200,100 $ (361,000 )
State 1,400 -
Total current tax provision 201,500 (361,000 )
Deferred tax provision (benefit):
Federal 115,500 (20,000 )
State - -
Total deferred tax provision 115,500 (20,000 )
Total tax provision $ 317,000 $ (381,000 )
A reconciliation of provision for income taxes at the statutory rate to income tax provision at the Company's effective rate is as follows:
Computed tax provision at the expected statutory rate $ 536,800 $ 143,200
State income tax - net of Federal tax benefit 1,100 -
Tax effect of permanent differences:
Research tax credits (275,400 ) (218,000 )
Foreign-derived intangible income deduction (12,200 ) -
PPP loan forgiveness - (306,900 )
Other permanent differences 3,100 41,500
Other 63,600 (40,800 )
Total tax provision $ 317,000 $ (381,000 )
Effective income tax rate 12.4 % (55.9 %)
Significant components of the Company's deferred tax assets and liabilities consist of the following:
Deferred tax assets:
Allowance for doubtful receivables $ 3,400 $ 1,400
Tax inventory adjustment 92,200 22,900
Allowance for obsolete inventory 278,800 440,800
Accrued vacation 84,300 81,400
Accrued commissions 7,000 5,900
Warranty reserve 48,800 23,900
R&D tax credit 84,000 -
Stock options issued for services 277,600 238,500
Total deferred tax assets 876,100 814,800
Deferred tax liabilities:
Excess tax depreciation (801,485 ) (624,685 )
Net deferred tax assets $ 74,615 $ 190,115
Realization of the deferred tax assets is dependent on generating sufficient taxable income at the time temporary differences become deductible. The Company provides a valuation allowance to the extent that deferred tax assets may not be realized. A valuation allowance has not been recorded against the deferred tax assets since management believes it is more likely than not that the deferred tax assets are recoverable. The Company considers future taxable income and potential tax planning strategies in assessing the need for a potential valuation allowance. The amount of the deferred tax assets considered realizable however, could be reduced in the near term if estimates of future taxable income are reduced. The Company will need to generate approximately $4.2 million in taxable income in future years in order to realize the deferred tax assets recorded as of May 31, 2022 of $876,100.
The Company and its subsidiary file consolidated Federal and State income tax returns. As of May 31, 2022, the Company had State investment tax credit carryforwards of approximately $389,000 expiring through May 31, 2027.
11. Earnings Per Common Share:
Basic earnings per common share is computed by dividing income available to common stockholders by the weighted-average common shares outstanding for the period. Diluted earnings per common share reflects the weighted-average common shares outstanding and dilutive potential common shares, such as stock options.
A reconciliation of weighted-average common shares outstanding to weighted-average common shares outstanding assuming dilution is as follows:
Average common shares outstanding 3,497,345 3,490,213
Common shares issuable under stock option plans 2,208 1,674
Average common shares outstanding assuming dilution 3,499,553 3,491,887
12. Related Party Transactions:
The Company had no related party transactions for the years ended May 31, 2022 and 2021.
13. Employee Stock Purchase Plan:
In March 2004, the Company reserved 295,000 shares of common stock for issuance pursuant to a non-qualified employee stock purchase plan. Participation in the employee stock purchase plan is voluntary for all eligible employees of the Company. Purchase of common shares can be made by employee contributions through payroll deductions. At the end of each calendar quarter, the employee contributions will be applied to the purchase of common shares using a share value equal to the mean between the closing bid and ask prices of the stock on that date. These shares are distributed to the employees at the end of each calendar quarter or upon withdrawal from the plan. During the years ended May 31, 2022 and 2021, 1,496 ($9.90 to $11.83 price per share) and 1,470 ($9.20 to $11.40 price per share) common shares, respectively, were issued to employees. As of May 31, 2022, 217,287 shares were reserved for further issue.
14. Stock Option Plans:
In 2018, the Company adopted a stock option plan which permits the Company to grant both incentive stock options and non-qualified stock options. The incentive stock options qualify for preferential treatment under the Internal Revenue Code. Under this plan, 160,000 shares of common stock have been reserved for grant to key employees and directors of the Company and 136,250 shares have been granted as of May 31, 2022. Under the plan, the option price may not be less than the fair market value of the stock at the time the options are granted. Options vest immediately and expire ten years from the date of grant.
Using the Black-Scholes option pricing model, the weighted average estimated fair value of each option granted under the plan was $3.02 during 2022 and $3.27 during 2021. The pricing model uses the assumptions noted in the following table. Expected volatility is based on the historical volatility of the Company's stock. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life of options granted is derived from previous history of stock exercises from the grant date and represents the period of time that options granted are expected to be outstanding. The Company uses historical data to estimate option exercise and employee termination assumptions under the valuation model. The Company has never paid dividends on its common stock and does not anticipate doing so in the foreseeable future.
Risk-free interest rate 2.59 % 2.31 %
Expected life in years 4.0 years 4.0 years
Expected volatility 31 % 33 %
Expected dividend yield 0 % 0 %
The following is a summary of stock option activity:
Shares Weighted Average Exercise Price Intrinsic Value
Outstanding - May 31, 2020 252,250 $ 11.52 $ 209,835
Options granted 47,250 $ 11.26
Less: options exercised 13,000 $ 6.34
Less: options expired 18,750 $ 13.31
Outstanding - May 31, 2021 267,750 $ 11.60 $ 271,426
Options granted 66,750 $ 10.69
Less: options expired 51,500 -
Outstanding - May 31, 2022 283,000 $ 11.43 $ 28,248
We calculated intrinsic value for those options that had an exercise price lower than the market price of our common shares as of the balance sheet dates. The aggregate intrinsic value of outstanding options as of the end of each fiscal year is calculated as the difference between the exercise price of the underlying options and the market price of our common shares for the options that were in-the-money at that date (29,250 at May 31, 2022 and 137,750 at May 31, 2021.) The Company's closing stock price was $9.30 and $11.85 as of May 31, 2022 and 2021. As of May 31, 2022, there are 23,750 options available for future grants under the 2018 stock option plan. No options were exercised in the fiscal year ended May 31, 2022. $28,425 was received from the exercise of share options during the fiscal year ended May 31, 2021.
The following table summarizes information about stock options outstanding at May 31, 2022:
Outstanding and Exercisable
Range of Exercise Prices Number of Options Weighted Average Remaining Years of Contractual Life Weighted Average Exercise Price
$ 7.01-$ 8.00 10,000 0.9 $ 7.74
$ 8.01-$ 9.00 19,250 1.5 $ 8.64
$ 9.01-$10.00 55,000 9.0 $ 9.67
$10.01-$11.00 26,500 7.3 $ 10.14
$11.01-$12.00 112,250 7.8 $ 11.72
$12.01-$13.00 28,750 3.9 $ 12.39
$13.01-$14.00 10,000 4.9 $ 13.80
$16.01-$17.00 10,000 3.9 $ 16.40
$19.01-$20.00 11,250 4.2 $ 19.26
$ 7.01-$20.00 283,000 6.5 $ 11.43
The following table summarizes information about stock options outstanding at May 31, 2021:
Outstanding and Exercisable
Range of Exercise Prices Number of Options Weighted Average Remaining Years of Contractual Life Weighted Average Exercise Price
$ 7.01-$ 8.00 15,000 1.6 $ 7.74
$ 8.01-$ 9.00 24,250 2.1 $ 8.71
$ 9.01-$10.00 30,000 7.6 $ 9.85
$10.01-$11.00 32,250 7.2 $ 10.17
$11.01-$12.00 91,250 7.4 $ 11.71
$12.01-$13.00 33,750 4.3 $ 12.36
$13.01-$14.00 15,000 4.2 $ 13.80
$16.01-$17.00 15,000 3.6 $ 16.40
$19.01-$20.00 11,250 5.2 $ 19.26
$ 7.01-$20.00 267,750 5.7 $ 11.60
15. Preferred Stock:
The Company has 2,000,000 authorized but unissued shares of preferred stock which may be issued in series. The shares of each series shall have such rights, preferences, and limitations as shall be fixed by the Board of Directors.
16. Treasury Stock:
Treasury shares are 558,834 at both May 31, 2022 and 2021.
17. Retirement Plan:
The Company maintains a retirement plan for essentially all employees pursuant to Section 401(k) of the Internal Revenue Code. The Company matches a percentage of employee voluntary salary deferrals subject to limitations. The Company may also make discretionary contributions as determined annually by the Company's Board of Directors. The amount expensed under the plan was $313,269 and $288,470 for the years ended May 31, 2022 and 2021.
18. Fair Value of Financial Instruments:
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value because of the short maturity of these instruments.
The fair values of short-term investments were determined as described in Note 1.
19. Cash Flows Information:
Interest paid none none
Income taxes paid none $ 43,630
20. Risks and Uncertainties:
On January 31, 2020, the United States Secretary of Health and Human Services (HHS) declared a public health emergency related to the global spread of coronavirus COVID-19, and a pandemic was declared by the World Health Organization in February 2020. Efforts to fight the widespread disease included limiting or closing many businesses and resulted in a severe disruption of operations for many organizations. Financial markets also fluctuated significantly during this time. The extent of the impact of COVID-19 on the Company’s operational and financial performance was significant in fiscal 2021. The use of vaccinations world-wide have apparently slowed spread of the disease, the extent of the impact of COVID-19 on the Company’s operational and financial performance in fiscal 2022 was minimal. The effect on the Company’s operational and financial performance in fiscal 2023 is not expected to be significant however it will depend on further developments, including the duration and spread of the outbreak, impact on customers, employees, and vendors, all of which cannot be predicted.
As a result of the pandemic described above, the Company applied for, and received, financial assistance from the U.S. federal government as part of the CARES Act and the Consolidated Appropriations Act of 2021 (CAA) including: a.) $1,461,500 of income due to the forgiveness of the PPP loan by the SBA (all in fiscal 2021), and b.) $1,563,639 of Employee Retention Credit income ($53,508 in fiscal 2022 and $1,510,131 in fiscal 2021). These amounts are included in Other income on the Consolidated Statements of Income.
21. Legal Proceedings:
There are no legal proceedings except for routine litigation incidental to the business.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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ITEM 11. EXECUTIVE COMPENSATION

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules.
DOCUMENTS FILED AS PART OF THIS REPORT:
Index to Financial Statements:
(i)
Report of Independent Registered Public Accounting Firm (PCAOB ID: 130)
(ii)
Consolidated Balance Sheets as of May 31, 2022 and 2021
(iii) Consolidated Statements of Income for the years ended May 31, 2022 and 2021
(iv)
Consolidated Statements of Stockholders' Equity for the years ended May 31, 2022 and 2021
(v)
Consolidated Statements of Cash Flows for the years ended May 31, 2022 and 2021
(vi) Notes to Consolidated Financial Statements - May 31, 2022 and 2021
EXHIBITS:
Articles of incorporation and by-laws
(i)
Restated Certificate of Incorporation incorporated by reference to Exhibit (3)(i) of Annual Report on Form 10-K, dated August 24, 1983.
(ii)
Amendment to Certificate of Incorporation incorporated by reference to Exhibit (3)(iv) to Form 8 [Amendment to Application or Report], dated September 24, 1993.
(iii)
Amendment to Certificate of Incorporation eliminating and re-designating the Series A Junior Preferred Stock and creating 5,000 Series 2008 Junior Participating Preferred Stock, at $.05 par value, as filed by the Secretary of State of the State of New York on September 16, 2008, and incorporated by reference to Exhibit (3)(i) of Form 8-K, dated as of September 15, 2008 and filed September 18, 2008.
(iv)
Certificate of Change incorporated by reference to Exhibit (3)(i) to Quarterly Report on Form 10-QSB for the period ending November 30, 2002.
(v)
By-laws and Proxy Review Guidelines incorporated by reference to Exhibit (3) to Quarterly Report on Form 10-Q for the period ending February 28, 2015, filed April 14, 2015.
Instruments defining rights of security holders, including indentures
(i)
Rights Agreement by and between registrant and Computershare Trust Company, N.A., dated as of September 25, 2018 and letter to shareholders (including Summary of Rights), dated October 5, 2018, attached as Exhibits 4 and 20, respectively, to Registration Statement on Form 8-A 12G, filed with the Securities and Exchange Commission on October 5, 2018.
(ii) Description of registrant’s securities incorporated by reference to Exhibit 4(vi) to Annual Report on Form 10-K for the fiscal year ended May 31, 2019, filed August 2, 2019.
Material Contracts
(i)
2005 Taylor Devices, Inc. Stock Option Plan attached as Appendix B to Definitive Proxy Statement, filed with the Securities and Exchange Commission on September 27, 2005.
(ii)
2008 Taylor Devices, Inc. Stock Option Plan attached as Appendix C to Definitive Proxy Statement, filed with the Securities and Exchange Commission on September 26, 2008.
(iii)
2012 Taylor Devices, Inc. Stock Option Plan attached as Appendix C to Definitive Proxy Statement, filed with the Securities and Exchange Commission on September 21, 2012.
(iv)
2015 Taylor Devices, Inc. Stock Option Plan attached as Appendix B to Definitive Proxy Statement, filed with the Securities and Exchange Commission on April 8, 2016.
(v)
2018 Taylor Devices, Inc. Stock Option Plan attached as Appendix B to Definitive Proxy Statement, filed with the Securities and Exchange Commission on September 27, 2018.
(vi)
The 2004 Taylor Devices, Inc. Employee Stock Purchase Plan, incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8, File No. 333-114085, filed with the Securities and Exchange Commission on March 31, 2004.
(vii)
Post-Effective Amendment No. 1 to Registration Statement on Form S-8, File No. 333-114085, for the 2004 Taylor Devices, Inc. Employee Stock Purchase Plan, filed with the Securities and Exchange Commission on August 24, 2006.
(viii)
Form of Indemnification Agreement between registrant and directors and executive officers, attached as Appendix A to Definitive Proxy Statement, filed with the Securities and Exchange Commission on September 27, 2007.
(ix)
Management Bonus Policy dated as of March 4, 2011 between the Registrant and executive officers, incorporated by reference to Exhibit 10(i) to Quarterly Report on Form 10-Q for the period ending February 28, 2011.
(x)
Negative Pledge Agreement dated August 30, 2017 by the Registrant in favor of M&T Bank, incorporated by reference to Exhibit 10(xiv) to Quarterly Report on Form 10-Q for the period ending August 31, 2017..
(xi)
Employment Agreement dated as of June 14, 2018 between the Registrant and Alan R. Klembczyk, incorporated by reference to Exhibit 10(i) to Current Report on Form 8-K filed June 19, 2018.
(xii)
Employment Agreement dated as of June 14, 2018 between the Registrant and Mark V. McDonough, incorporated by reference to Exhibit 10(ii) to Current Report on Form 8-K filed June 19, 2018.
(xiii)
Employment Agreement dated as of August 9, 2021 between the Registrant and Timothy J. Sopko, incorporated by reference to Exhibit 10 to Current Report on Form 8-K filed August 13, 2021.
Statement regarding computation of per share earnings
REG. 228.601(A)(11) Statement regarding computation of per share earnings
Weighted average of common stock/equivalents outstanding - fiscal year ended May 31, 2022
Weighted average common stock outstanding 3,497,345
Common shares issuable under stock option plans using treasury stock method 2,208
Weighted average common stock outstanding assuming dilution 3,499,553
Net income fiscal year ended May 31, 2022 (1) $ 2,239,423
Weighted average common stock (2) 3,497,345
Basic income per common share (1) divided by (2) $ 0.64
Net income fiscal year ended May 31, 2022 (3) $ 2,239,423
Weighted average common stock outstanding assuming dilution (4) 3,499,553
Diluted income per common share (3) divided by (4) $ 0.64
Weighted average of common stock/equivalents outstanding - fiscal year ended May 31, 2021
Weighted average common stock outstanding 3,490,213
Common shares issuable under stock option plans using treasury stock method 1,674
Weighted average common stock outstanding assuming dilution 3,491,887
Net income fiscal year ended May 31, 2021 (1) $ 1,062,895
Weighted average common stock (2) 3,490,213
Basic income per common share (1) divided by (2) $ 0.30
Net income fiscal year ended May 31, 2021 (3) $ 1,062,895
Weighted average common stock outstanding assuming dilution (4) 3,491,887
Diluted income per common share (3) divided by (4) $ 0.30
The Annual Report to Security Holders for the fiscal year ended May 31, 2022, attached to this Annual Report on Form 10-K.
Subsidiaries of the registrant
Tayco Realty Corporation is a New York corporation organized on September 8, 1977, owned by the Company.
The Consent of Independent Registered Public Accounting Firm precedes the Consolidated Financial Statements.
Officer Certifications
(i) Rule 13a-14(a) Certification of Chief Executive Officer.
(ii) Rule 13a-14(a) Certification of Chief Financial Officer.
Officer Certifications
(i) Section 1350 Certification of Chief Executive Officer.
(ii) Section 1350 Certification of Chief Financial Officer.
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.
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