SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10‑QSB

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

For quarter ended February 28, 2006

Commission File Number 0‑3498

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the last 12 months and (2) has been subject to the filing requirements for the past 90 days.

Yes

X

No

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

Yes

No

X

State the number of shares outstanding of each of the Issuer's classes of common equity, as of the latest practicable date:

 

 

TAYLOR DEVICES, INC.

---

Index to Form 10-QSB
 

 

TAYLOR DEVICES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets		(Unaudited)
		February 28,       2006	May 31, 2005
Assets
Current assets:
	Cash and cash equivalents	$         82,545	$         63,397
	Accounts receivable, net	1,120,320	2,718,902
	Inventory	4,442,952	4,771,086
	Costs and estimated earnings in excess of billings	4,372,314	1,657,170
	Other current assets	1,023,469	920,638
	Total current assets	11,041,600	10,131,193
Maintenance and other inventory, net		588,489	661,500
Property and equipment, net		3,360,215	3,477,672
Investment in affiliate, at equity		444,088	451,877
Intangible and other assets		166,314	168,376
		$  15,600,706	$  14,890,618
Liabilities and Stockholders' Equity
Current liabilities:
	Short-term borrowings and current portion of long-term debt	$    1,986,527	$   1,621,119
	Payables - trade	1,116,919	770,330
	Accrued commissions	881,407	576,550
	Billings in excess of costs and estimated earnings	54,000	288,003
	Other current liabilities	455,377	386,586
	Total current liabilities	4,494,230	3,642,588
Long-term liabilities		810,239	998,719
Payables - affiliate		298,551	589,976
Minority stockholder's interest		474,567	450,991
Stockholders' Equity:
	Common stock and additional paid-in capital	4,397,167	4,391,001
	Retained earnings	6,018,921	5,710,312
		10,416,088	10,101,313
	Treasury stock - at cost	(892,969)	(892,969)
	Total stockholders' equity	9,523,119	9,208,344
		$  15,600,706	$  14,890,618

See notes to condensed consolidated financial statements.

 

 

TAYLOR DEVICES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income		(Unaudited)		(Unaudited)
		For the three months ended February 28,		For the nine months ended February 28,
		2006	2005	2006	2005
Sales, net		$ 4,114,446	$ 2,619,488	$ 10,594,573	$ 7,720,634
Cost of goods sold		2,997,885	1,937,083	7,425,852	5,387,173
	Gross profit	1,116,561	682,405	3,168,721	2,333,461
Selling, general and administrative expenses		950,870	701,495	2,547,335	2,149,215
	Operating income (loss)	165,691	(19,090)	621,386	184,246
Other expense, net		(26,837)	(35,719)	(77,413)	(104,781)
	Income (loss)  before provision for income taxes, equity in net
	income of affiliate and minority stockholder's interest	138,854	(54,809)	543,973	79,465
Provision for income taxes (benefit)		50,000	(16,700)	204,000	21,300
	Income (loss) before equity in net income of affiliate
	and minority stockholder's interest	88,854	(38,109)	339,973	58,165
Equity in net income (loss) of affiliate		(1,337)	1,804	(7,789)	9,622
	Income (loss) before minority stockholder's interest	87,517	(36,305)	332,184	67,787
Minority stockholder's interest		(8,974)	(6,240)	(23,576)	(23,245)
	Net income (loss)	$     78,543	$     (42,545)	$    308,608	$      44,542
	Basic and diluted earnings (loss) per common share	$      0.03	$      (0.01)	$      0.10	$       0.01

See notes to condensed consolidated financial statements.

 

 

TAYLOR DEVICES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
					(Unaudited) February 28,
For the nine months ended					2006	2005
Cash flows from operating activities:
	Net income				$     308,608	$     44,542
	Adjustments to reconcile net income to net cash flows from
	operating activities:
		Depreciation and amortization			242,603	266,292
		Gain on sale of equipment
		Bad debts expense			9,157	16,000
		Equity in net income (loss) of affiliate			7,789	(9,622)
		Deferred income taxes
		Minority stockholder's interest			23,576	23,245
		Changes in other assets and liabilities:
			Accounts receivable		1,589,425	(146,684)
			Inventory		401,145	(718,627)
			Costs and estimated earnings in excess of billings		(2,715,144)	(792,504)
			Other current assets		(110,163)	(112,406)
			Payables - trade		346,589	(175,111)
			Accrued commissions		304,857	(14,561)
			Billings in excess of costs and estimated earnings		(234,003)	319,666
			Other current liabilities		68,791	(168,026)
				Net cash flows from (for) operating activities	243,230	(1,467,796)
Cash flows from investing activities:
	Acquisition of property and equipment				(118,845)	(130,198)
	Other investing activities				3,094	(16,585)
				Net cash flows for investing activities	(115,751)	(146,783)
Cash flows from financing activities:
	Net short-term borrowings and repayments on long-term debt				176,928	1,433,710
	Payables - affiliate				(291,425)	(175,764)
	Proceeds from long-term debt
	Proceeds from issuance of common stock				6,166	300,526
				Net cash flows from (for) financing activities	(108,331)	1,558,472
				Net increase (decrease) in cash and cash equivalents	19,148	(56,107)
Cash and cash equivalents - beginning					63,397	88,390
				Cash and cash equivalents - ending	$       82,545	$    32,283

See notes to condensed consolidated financial statements.

 

 

 

 

TAYLOR DEVICES, INC.

---

Notes to Condensed Consolidated Financial Statements

 

 

 

TAYLOR DEVICES, INC.

---

Item 2.  Management's Discussion and Analysis or Plan of Operation

Cautionary Statement

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements.  Information in this Item 2, "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this 10-QSB that does not consist of historical facts, are "forward-looking statements."  Statements accompanied or qualified by, or containing, words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements and, as such, are not a guarantee of future performance.  The statements involve factors, risks and uncertainties, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements.  Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; 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.

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:

Sales under certain fixed-price contracts, requiring substantial performance over several periods prior to commencement of deliveries, are accounted for under the percentage-of-completion method of accounting whereby revenues are recognized based on estimates of completion prepared on a ratio of cost to total estimated cost basis.  Costs include all material and direct and indirect charges related to specific contracts.

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

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

For the nine months ended February 28, 2006  (All figures being discussed are for the nine months ended February 28, 2006 as compared to the nine months ended February 28, 2005.)

	Nine months ended		Change
	February 28, 2006	February 28, 2005	Increase / (Decrease)	Percent Change
Net Revenue	$10,595,000	$7,721,000	$ 2,874,000	37%
Cost of sales	7,426,000	5,387,000	2,039,000	38%
Gross profit	$  3,169,000	$2,334,000	$    835,000	36%
¼as a percentage of net revenues	30%	30%

The Company's consolidated results of operations showed a 37% increase in net revenues and an increase in net income of 593%. Gross profit increased by 36%.  Revenues recorded in the current period for long-term construction projects increased by 84% over the unusually low level recorded in the prior year.  The increase in revenue in the current year is attributable to 1.) a 52% increase in the quantity of long-term construction projects this year compared to last year, and 2.) a 42% increase in the average total sales value of long-term construction projects this year compared to last year.  Management has noticed an increase in the global level of construction activity of structures requiring seismic protection.  This has resulted in an increased number of inquiries and quotes for our products.  Many of our bids to supply our products for these projects have been successful this year.  These current year's projects contributed a gross profit margin of 33% as compared to 30% in the prior year's period.  The overall gross profit as a percentage of net revenues for the current and prior year periods was 30%.   Management is optimistic that the level of construction activity of structures requiring seismic protection will remain strong through the fiscal year.  Based on this and our current sales order backlog of $13.2 million, management expects that the results achieved year-to-date will continue through the end of the current fiscal year.

The Company's revenues and net income fluctuate from period to period.  The increases in the current period, compared to the prior period, are not necessarily representative of future results.

Selling, General and Administrative Expenses

Nine months ended

Change

	February 28, 2006	February 28, 2005	Increase / (Decrease)	Percent Change
Outside Commissions	$   706,000	$   305,000	$  401,000	131%
Royalties	80,000	122,000	(42,000)	-34%
Other SG&A	1,761,000	1,722,000	39,000	2%
Total SG&A	$2,547,000	$2,149,000	$  398,000	19%
¼as a percentage of net revenues	24%	28%

Selling, general and administrative expenses increased by 19% from the prior year.  Commission expense increased by 131% over last year's level.  Commission expense was higher in this period due to higher commission rates on a few large, long-term construction projects in production, in addition to a higher volume of sales subject to commission.  Royalty expense is 34% less than the amount recorded in the prior year period.  There were fewer shipments that were subject to royalty during the current year.  Other selling, general and administrative expenses increased by only 2% from last year to this.

The above factors resulted in operating income of $621,000 for the nine months ended February 28, 2006, up 237% from the $184,000 in the same period of the prior year.

Other expense, net, of $77,000 is primarily interest expense and is 26% less than in the prior year.  Interest expense decreased by $31,000 from the prior year.  The average level of use of the Company's operating line of credit decreased significantly as compared to last year.  The line of credit is used primarily to fund the production of larger projects that do not allow for advance payments or progress payments.

For the three months ended February 28, 2006  (All figures being discussed are for the three months ended February 28, 2006 as compared to the three months ended February 28, 2005.)

 

	Three months ended		Change
	February 28, 2006	February 28, 2005	Increase / (Decrease)	Percent Change
Net Revenue	$4,114,000	$2,619,000	$  1,495,000	57%
Cost of sales	2,998,000	1,937,000	1,061,000	55%
Gross profit	$1,116,000	$   682,000	$     434,000	64%
¼as a percentage of net revenues	27%	26%

The Company's consolidated results of operations showed a 57% increase in net revenues with an increase in net income from a loss of $43,000 to income of $78,000. Gross profit increased by 64%.  Revenues recorded in the current period for long-term construction projects increased by 106% over the level recorded in the prior year.  The reasons for the increase are the same as stated above for the nine-month period.  These current year's projects contributed a gross profit margin of 31% as compared to an unusually low 24% in the prior year's period.  The overall gross profit as a percentage of net revenues for the quarter was 27% as compared to 26% for the same period in the prior year. 

The Company's revenues and net income fluctuate from period to period.  The increases in the current period, compared to the prior period, are not necessarily representative of future results.

Selling, General and Administrative Expenses

	Three months ended		Change
	February 28, 2006	February 28, 2005	Increase / (Decrease)	Percent Change
Outside Commissions	$   341,000	$   124,000	$  217,000	175%
Royalties	22,000	30,000	(8,000)	-27%
Other SG&A	588,000	547,000	41,000	7%
Total SG&A	$   951,000	$   701,000	$  250,000	36%
¼as a percentage of net revenues	23%	27%

Selling, general and administrative expenses increased by 36% from the prior year.  Commission expense increased by $217,000 over last year's level.  Commission expense was higher in this period due to higher commission rates on a few large, long-term construction projects in production, in addition to a higher volume of sales subject to commission.  Royalty expense is 27% less than the amount recorded in the prior year period.  There were fewer shipments that were subject to royalty during the current year.  Other selling, general and administrative expenses increased by only 7% from last year to this.

The above factors resulted in an operating income of $166,000 for the three months ended February 28, 2006 as compared to an operating loss of $19,000 in the same period of the prior year.

Other expense, net, of $26,000 is primarily interest expense and is 25% less than in the prior year.  Interest expense decreased by $14,000 from the prior year for the same reasons noted above for the nine month period.

Capital Resources, Line of Credit and Long-Term Debt

The Company's primary liquidity is dependent upon the 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 nine months ended February 28, 2006 were $119,000 compared to $130,000 in the same period of the prior year.  The Company has commitments to pay $154,000 for production machinery in the quarter ending May 31, 2006.

The Company has a $5,000,000 line of credit with a bank.  There is a $1,739,000 principal balance outstanding as of February 28, 2006, which is up from the $1,390,000 balance outstanding as of May 31, 2005.  The outstanding balance on the line of credit will fluctuate as the Company's various long-term projects progress.  The Company is in compliance with restrictive covenants under the line of credit.  Additional information regarding the covenants appears in Part II, item 2(d) of this Report.

Principal maturities of long-term debt for the remainder of the current fiscal year and the subsequent five years are as follows: 2006 - $52,000; 2007 - $241,000; 2008 - $232,000; 2009 - $138,000; 2010 - $72,000; and 2011 - $27,000.

Inventory and Maintenance Inventory

February 28, 2006

May 31, 2005

Increase

NOTE: Inventory turnover is annualized for the nine-month period ending February 28, 2006.

Inventory, at $4,443,000 as of February 28, 2006, is 7% lower than the prior year-end.  Of this, approximately 83% is work in process, 8% is finished goods, and 9% is raw materials.

Maintenance and other inventory represent stock that is estimated to have a product life cycle in excess of twelve months. This stock represents certain items that 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.  Management of the Company has recorded an allowance for potential inventory obsolescence. The provision for potential inventory obsolescence was $95,000 for the nine-month period ended February 28, 2006 and $42,000 for the same period last year.  The Company continues to rework slow-moving inventory, where applicable, to convert it to product to be used on customer orders.

Accounts Receivable, Costs and Estimated Earnings in Excess of Billings,

and Billings in Excess of Costs and Estimated Earnings

February 28, 2006

May 31, 2005

Increase /(Decrease)

Accounts receivable

$1,120,000

$2,719,000

$ (1,599,000)

-59%

Costs and estimated earnings in excess of billings

4,372,000

1,657,000

2,715,000

164%

Less: Billings in excess of costs and estimated earnings

54,000

288,000

(234,000)

-81%

Net

$5,438,000

$4,088,000

$    1,350,000

33%

The Company combines the totals of accounts receivable, the asset "costs and estimated earnings in excess of billings", and the liability, "billings in excess of costs and estimated earnings", 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 $1,120,000 as of February 28, 2006 includes approximately $405,000 of amounts retained by customers on long-term construction projects.  Management expects this balance to increase significantly during the next three months as progress billings on certain long-term construction projects increase as the projects move closer to completion.  The Company expects to collect all of these amounts, including the retainage, during the next twelve months.

As noted above, the current asset, "costs and estimated earnings in excess of billings," 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 $4,372,000 balance in this account at February 28, 2006 is a 164% increase from the prior year-end.  This significant increase from last year-end is a reflection of 1.) the increase in the number of projects in progress at the two balance sheet dates (24 at February 28, 2006  compared to 16 at May 31, 2005) and 2.) the amount of progress billings permitted per the terms of the various sales agreements for the projects ( 14% of the aggregate order value of the projects in progress at February 28, 2006  has been invoiced to the customers compared to 37% at May 31, 2005.)  In the aggregate, the projects in progress at February 28, 2006 are 44% complete at that date while the projects in progress at May 31, 2005 were 54% complete at that date.  Generally, if progress billings are permitted under the terms of a project sales agreement, 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.

As noted above, the current liability, "billings in excess of costs and estimated earnings", represents billings to customers in excess of revenues recognized.  The $54,000 balance in this account at February 28, 2006 is a $234,000 decrease from the 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 Company's backlog of sales orders at February 28, 2006 is $13.2 million, up from the backlog at the end of the prior year of $7.3 million.  $8.1 million of the current backlog is on projects already in progress. 

Accounts payable, at $1,117,000 as of February 28, 2006, is approximately $347,000 more than the prior year-end.  This significant increase is attributable due to the increase in production activity to manufacture the products for which the Company has sales orders.

Commission expense on applicable sales orders is recognized at the time revenue is recognized.  The commission is paid following receipt of payment from the customers.  Accrued commissions as of February 28, 2006 are $881,000.  This is 53% higher than the $577,000 accrued at the prior year-end.  This significant increase was expected and is reasonable due to the increase in the current asset, "costs and estimated earnings in excess of billings".  Commission expense related to the long-term construction projects is recorded at the same time as revenue on the projects is recorded. This liability will not decrease until progress billings on the projects have been issued by the Company and are paid by our customers.  The Company expects the current accrued amount to be paid during the next twelve months.  Other current liabilities increased by only $69,000 from the prior year-end, to $455,000.

The Company paid $285,000 to Developments during the nine months ended February 28, 2006, reducing the principal balance on the note payable to $299,000.

Management believes that the Company's cash flows from operations and borrowing capacity under the bank line of credit will be sufficient to fund ongoing operations, capital improvements and share repurchases for the next twelve months. 

TAYLOR DEVICES, INC.

---

Item 3.  Controls and Procedures

(a)           Evaluation of disclosure controls and procedures. 

The Company's principal executive officer and principal financial officer have evaluated the Company's disclosure controls and procedures as of February 28, 2006 and have concluded that as of the evaluation date, the disclosure controls and procedures were effective to ensure that material information relating to the Company was made known to the officers by others within the Company. 

(b)           Changes in internal controls.          

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

 

TAYLOR DEVICES, INC.

---

Part II - Other Information

 

 

 

 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Taylor Devices, Inc.

We have reviewed the accompanying condensed consolidated balance sheet of Taylor Devices, Inc. and Subsidiary as of February 28, 2006, the related condensed consolidated statements of income for the three and nine months ended February 28, 2006 and February 28, 2005 and cash flows for the nine months ended February 28, 2006 and February 28, 2005.  These interim financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of May 31, 2005, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated July 22, 2005, we expressed an unqualified opinion on those financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, 2005 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

Lumsden & McCormick, LLP
Buffalo, New York
March 29, 2006

 

 

 

 

 

TAYLOR DEVICES, INC.

---

Signatures

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

TAYLOR DEVICES, INC.

(Registrant)