TAYLOR DEVICES, INC. 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.
-8-
Table of Contents
Application of Critical Accounting Policies and Estimates
The Company's consolidated financial statements and accompanying notes are prepared in accordance withU.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 endedMay 31, 2022 equaled less than 0.3% of sales for that period. The balance of the valuation allowance has increased to$16,000 atMay 31, 2022 from$7,000 atMay 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 endedMay 31, 2022 and 2021. The provision for potential inventory obsolescence was zero and$1,500,000 for the years endedMay 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. -9- Table of Contents
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 endedMay 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 endedMay 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 ofMay 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
-10-
Table of Contents
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
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
Year ended May 31 Change
2022 2021 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
2022 2021
Industrial 7 % 10 %
Structural 53 % 45 %
Aerospace / Defense 40 % 45 %
-11-
Table of Contents
Total sales withinNorth America increased 52% from last year. Total sales toAsia decreased 5% from the prior year. Net revenue by geographic region, as a percentage of total net revenue for fiscal years endedMay 31, 2022 and 2021 is as follows: Year ended May 31 2022 2021 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. AtMay 31, 2021 , we had 132 open sales orders in our backlog with a total sales value of$22.0 million . AtMay 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 atMay 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% atMay 31, 2022 and 55%
atMay 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
2022 2021 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 operatingloss in the prior year. Other income during the prior period includes$2,972,000 of financial assistance provided by theU.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 theSmall 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$54,000 . The Company's effective tax rate (ETR) is calculated based upon current assumptions relating to the year's operating results and various tax related items. The ETR for the fiscal year endedMay 31, 2022 is 12%, compared to the ETR for the prior year of -56%. -12- Table of Contents
A reconciliation of provision for income taxes at the statutory rate to income tax provision at the Company's effective rate is as follows:
2022 2021
Computed tax provision at the expected statutory rate$ 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 endedMay 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 inAugust 2021 andApril 2022 . The risk-free interest rate is derived from theU.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 PriceOptions 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
11.43
Closing value per share on NASDAQ at May 31, 2022: $ 9.30
-13-
Table of Contents
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 endedMay 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 ofMay 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 atMay 31, 2022 orMay 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 endedMay 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
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) 42 42
-14-
Table of Contents
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 ofMay 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 atMay 31, 2022 andMay 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:
2022 2021
Number of projects in progress at year-end 19 14
Aggregate percent complete at year-end 47 %
32 %
Average total value of projects in progress at year-end
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$3,336,000 balance in this account atMay 31, 2022 is a 122% increase from the prior year-end. This increase reflects the higher aggregate level of the percentage of completion of these Projects as of the current year end as compared with the Projects in process at the prior year end. Generally, if progress billings are permitted under the terms of a project sales agreement, then the more complete the project is, the more progress billings will be permitted. The Company expects to bill the entire amount during the next twelve months. 58% of the CIEB balance as of the end of the last fiscal quarter,February 28, 2022 , was billed to those customers in the current fiscal quarter endedMay 31, 2022 . The remainder will be billed as the projects progress, in accordance with the terms specified in the various contracts. The year-end balances in the CIEB account are comprised of the following components: May 31, 2022 May 31, 2021 Costs$ 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 11 9 As noted above, BIEC represents billings to customers in excess of revenues recognized. The$1,123,000 balance in this account atMay 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.
-15-
Table of Contents
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 8 5
Accounts payable, at
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 ofMay 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
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.
-16-
Table of Contents© Edgar Online, source
