TAYLOR DEVICES, INC. — Interim / Quarterly Report 2011

Jan 14, 2011

10-Q 1 taylor10qnov2010n.htm HTML PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN" saved from url=(0060)file://H:\TAYLOR\FILINGS\2011\2nd Q\Taylor 10q Nov 2010.html SECURITIES AND EXCHANGE COMMISSION

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended November 30, 2010

OR

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

For the transition period from to

Commission File Number 0-3498

| TAYLOR DEVICES,
INC. |
| --- |
| (Exact name of
registrant as specified in its charter) |

| NEW
YORK | |
| --- | --- |
| (State or other
jurisdiction of incorporation or organization) | (I.R.S.
Employer Identification No.) |
| 90
Taylor Drive, North Tonawanda, New York | 14120-0748 |
| (Address of principal
executive offices) | (Zip
Code) |

716-694-0800
(Registrant's
telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]

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

Large accelerated filer [ ]	Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a
smaller reporting company)	Smaller reporting company [ X ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

As of January 14, 2011, there were outstanding 3,229,159 shares of the registrant's common stock, par value $.025 per share.

1

TAYLOR DEVICES, INC.

Index to Form 10-Q

| PART I | FINANCIAL
INFORMATION
PAGE NO. — Item 1. | Financial
Statements | |
| --- | --- | --- | --- |
| | | Condensed Consolidated
Balance Sheets as of November 30, 2010 and May 31,
2010 | 3 |
| | | Condensed Consolidated
Statements of Income for the three and six months ended November 30, 2010
and November 30, 2009 | 4 |
| | | Condensed Consolidated
Statements of Cash Flows for the six months ended November 30, 2010 and
November 30, 2009 | 5 |
| | | Notes to Condensed
Consolidated Financial Statements | 6 |
| | Item 2. | Management's Discussion
and Analysis of Financial Condition and Results of
Operations | 7 |
| | Item 3. | Quantitative and
Qualitative Disclosures About Market Risk | 14 |
| | Item 4. | Controls and
Procedures | 14 |
| PART II | OTHER
INFORMATION | | |
| | Item 1. | Legal
Proceedings | 15 |
| | Item 1A. | Risk
Factors | 15 |
| | Item 2. | Unregistered Sales of
Equity Securities and Use of Proceeds | 15 |
| | Item 3. | Defaults Upon Senior
Securities | 16 |
| | Item 4. | (Removed and
Reserved) | 16 |
| | Item 5. | Other
Information | 16 |
| | Item 6. | Exhibits | 16 |
| REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM | | | 17 |
| SIGNATURES | | | 18 |

2

| TAYLOR DEVICES, INC. AND
SUBSIDIARY — Condensed
Consolidated Balance Sheets | (Unaudited) | |
| --- | --- | --- |
| | November
30, 2010 | May
31, 2010 |
| Assets | | |
| Current
assets: | | |
| Cash and cash
equivalents | $
2,172,593 | $ 197,587 |
| Accounts receivable,
net | 1,535,212 | 5,033,395 |
| Inventory | 6,169,118 | 6,474,148 |
| Costs and estimated earnings in
excess of billings | 2,307,695 | 1,051,354 |
| Other current assets | 1,490,708 | 1,485,015 |
| Total current assets | 13,675,326 | 14,241,499 |
| Maintenance and other inventory,
net | 835,437 | 718,749 |
| Property and equipment,
net | 3,396,042 | 3,497,800 |
| Other assets | 145,320 | 142,355 |
| | $
18,052,125 | $ 18,600,403 |
| Liabilities and
Stockholders' Equity | | |
| Current
liabilities: | | |
| Short-term borrowings and current
portion of long-term debt | $
5,485 | $
5,485 |
| Accounts payable | 964,661 | 1,096,289 |
| Accrued commissions | 254,047 | 380,448 |
| Billings in excess of costs and
estimated earnings | 340,238 | 367,764 |
| Other current
liabilities | 951,453 | 1,548,655 |
| Total current liabilities | 2,515,884 | 3,398,641 |
| Long-term liabilities | 310,884 | 313,626 |
| Stockholders'
Equity: | | |
| Common stock and additional paid-in
capital | 6,649,554 | 6,611,906 |
| Retained earnings | 10,815,127 | 10,507,514 |
| | 17,464,681 | 17,119,420 |
| Treasury stock - at
cost | (2,239,324) | (2,231,284) |
| Total stockholders' equity | 15,225,357 | 14,888,136 |
| | $
18,052,125 | $ 18,600,403 |

See notes to condensed consolidated financial statements.

3

| TAYLOR DEVICES, INC. AND
SUBSIDIARY — Condensed
Consolidated Statements of Income | (Unaudited) | | (Unaudited) | |
| --- | --- | --- | --- | --- |
| | For the three months
ended November 30, | | For the six months
ended November 30, | |
| | 2010 | 2009 | 2010 | 2009 |
| Sales, net | $
4,525,002 | $ 3,488,797 | $
8,801,825 | $ 8,502,470 |
| Cost of goods sold | 3,487,175 | 2,073,929 | 6,623,261 | 5,355,756 |
| Gross
profit | 1,037,827 | 1,414,868 | 2,178,564 | 3,146,714 |
| Selling, general and administrative
expenses | 877,872 | 1,132,084 | 1,756,808 | 2,312,422 |
| Operating
income | 159,955 | 282,784 | 421,756 | 834,292 |
| Other income, net | 32,520 | 7,107 | 60,857 | 2,396 |
| Income before provision for income
taxes | 192,475 | 289,891 | 482,613 | 836,688 |
| Provision for income taxes
(benefit) | 69,500 | (212,000) | 175,000 | 14,000 |
| Net
income | $ 122,975 | $
501,891 | $
307,613 | $
822,688 |
| Basic and diluted earnings per
common share | $ 0.04 | $ 0.16 | $ 0.10 | $ 0.26 |

See notes to condensed consolidated financial statements.

4

| TAYLOR DEVICES, INC. AND
SUBSIDIARY | | |
| --- | --- | --- |
| Condensed
Consolidated Statements of Cash Flows | | |
| | (Unaudited) | |
| | November
30, | November
30, |
| For the six months
ended | 2010 | 2009 |
| Operating
activities: | | |
| Net income | $
307,613 | $
822,688 |
| Adjustments to reconcile net income
to net cash flows from | | |
| operating
activities: | | |
| Depreciation and
amortization | 233,854 | 225,363 |
| Stock options issued for
services | 30,463 | 19,851 |
| Changes in other assets and
liabilities: | | |
| Accounts receivable | 3,498,183 | 1,450,197 |
| Inventory | 188,342 | (359,899) |
| Costs and estimated earnings in
excess of billings | (1,256,341) | (1,828,764) |
| Other current assets | (5,693) | (2,663) |
| Accounts payable | (131,628) | (141,119) |
| Accrued commissions | (126,401) | 64,523 |
| Billings in excess of costs and
estimated earnings | (27,526) | 92,801 |
| Other current
liabilities | (597,202) | 483,971 |
| Net operating
activities | 2,113,664 | 826,949 |
| Investing
activities: | | |
| Acquisition of property and
equipment | (132,096) | (129,059) |
| Other investing
activities | (2,965) | 34,971 |
| Net investing
activities | (135,061) | (94,088) |
| Financing
activities: | | |
| Net short-term borrowings and
repayments on long-term debt | (2,742) | (725,742) |
| Proceeds from issuance of common
stock, net | 7,185 | 7,050 |
| Acquisition of treasury
stock | (8,040) | (62) |
| Net financing
activities | (3,597) | (718,754) |
| Net change in cash and cash
equivalents | 1,975,006 | 14,107 |
| Cash and cash equivalents -
beginning | 197,587 | 45,297 |
| Cash and cash equivalents
- ending | $
2,172,593 | $
59,404 |

See notes to condensed consolidated financial statements.

5

TAYLOR DEVICES, INC.

Notes to Condensed Consolidated Financial Statements

| 1. | The accompanying
unaudited condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements. In the opinion of the Company, the accompanying unaudited
condensed consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly
the financial position as of November 30, 2010 and May 31, 2010, the
results of operations for the three and six months ended November 30, 2010
and November 30, 2009, and cash flows for the six months ended November
30, 2010 and November 30, 2009. These financial statements should be read
in conjunction with the audited financial statements and notes thereto
contained in the Company's Annual Report to Shareholders for the year
ended May 31, 2010. There have been no updates or changes to our
audited financial statements for the year ended May 31,
2010. |
| --- | --- |
| 2. | The Company has evaluated events and transactions for
potential recognition or disclosure in the financial statements through
January 14, 2011 (the date the financial statements were
issued). |
| 3. | There is no provision
nor shall there be any provisions for profit sharing, dividends, or any
other benefits of any nature at any time for this fiscal
year. |
| 4. | For the three and six
month periods ended November 30, 2010 and November 30, 2009, the net
income was divided by 3,230,221 and 3,222,943, respectively, which is net
of the Treasury shares, to calculate the net income per
share. |
| 5. | The results of
operations for the six month period ended November 30, 2010 are not
necessarily indicative of the results to be expected for the full
year. |
| 6. | Recently issued
Financial Accounting Standards Board Accounting Standards Codification
guidance has either been implemented or is not significant to the
Company. |

6

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

Cautionary Statement

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

Results of Operations

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

| Summary comparison of the six
months ended November 30, 2010 and November 30, 2009 | |
| --- | --- |
| | Increase
/ |
| | (Decrease) |
| Sales,
net | $
299,000 |
| Cost of goods
sold | $
1,267,000 |
| Selling, general and
administrative expenses | $
(556,000) |
| Income before provision
for income taxes | $
(354,000) |
| Provision for income
taxes | $
161,000 |
| Net
income | $
(515,000) |

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

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

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

7

For the six months ended November 30, 2010 (All figures discussed are for the six months ended November 30, 2010 as compared to the six months ended November 30, 2009.)

	Six months ended — November 30, 2010	November 30, 2009	Change — Increase / (Decrease)	Percent Change
Net
Revenue	$ 8,802,000	$ 8,503,000	$ 299,000	4%
Cost of
sales	6,623,000	5,356,000	1,267,000	24%
Gross
profit	$ 2,179,000	$ 3,147,000	$ (968,000)	-31%
... as a percentage of net revenues	25%	37%

The Company's consolidated results of operations showed a 4% increase in net revenues and a decrease in net income of 63%. Revenues recorded in the current period for long-term construction projects ("Project(s)") were 5% lower than the level recorded in the prior year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were higher by 17% from the level recorded in the prior year. The gross profit as a percentage of net revenues for the current and prior year periods was 25% and 37%. This fluctuation is attributable primarily to a.) three large export Projects in the prior year period had higher than average margins, b.) three large Projects in the prior year with aerospace / defense customers that had higher margins than average Projects for construction customers, and c.) in the current period, there were more Projects sold directly to representatives in two different Asian countries, net of their normal commission. This resulted in lower sales, gross margins and commission expense.

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

| | First Half Fiscal 2011 | First Half Fiscal
2010 |
| --- | --- | --- |
| Industrial | 9% | 8% |
| Construction | 58% | 41% |
| Aerospace / Defense | 33% | 51% |

At November 30, 2009, we had 115 open sales orders in our backlog with a total sales value of $11.4 million. At November 30, 2010, we have 13% fewer open sales orders in our backlog (100 orders) but the total sales value is $13 million or approximately 14% higher than the prior year.

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

8

Selling, General and Administrative Expenses

Six months ended Change

	November 30, 2010	November 30, 2009	Increase / (Decrease)	Percent Change
Outside
Commissions	$ 284,000	$ 475,000	$ (191,000)	-40%
Other
SG&A	1,473,000	1,837,000	(364,000)	-20%
Total
SG&A	$1,757,000	$2,312,000	$ (555,000)	-24%
... as a percentage of net revenues	20%
27%

Selling, general and administrative expenses decreased by 24% from the prior year. Outside commission expense decreased by 40% from last year's level. This fluctuation was primarily due to a single, high value, non-project, commissionable sales order recorded in the prior year period, as well as three Projects in an Asian country that included higher than average commissions in the prior year period. Additionally, of the 23 Projects in process during the six months ended November 30, 2010, only seven had related outside commissions recorded. This compares with 11 of 22 Projects having related outside commissions recorded in the prior year period. The primary reason for this is, in the current period, there were more Projects sold to representatives in two different Asian countries net of their normal commission. Other selling, general and administrative expenses decreased 20% from last year to this. This decrease is primarily due to a.) a decrease in estimated incentive compensation expense in the current period related to the lower level of operating results and lower level of aerospace sales, and b.) a decrease in professional fees in the current period related to the research tax credit study completed last year and the workers' compensation suit discussed, below, in Part II, Item 1.

The above factors resulted in operating income of $422,000 for the six months ended November 30, 2010, down 49% from the $834,000 in the same period of the prior year.

For the three months ended November 30, 2010 (All figures discussed are for the three months ended November 30, 2010 as compared to the three months ended November 30, 2009.)

| Summary comparison of the three
months ended November 30, 2010 and November 30, 2009 | |
| --- | --- |
| | Increase
/ |
| | (Decrease) |
| Sales,
net | $
1,036,000 |
| Cost of goods
sold | $
1,413,000 |
| Selling, general and
administrative expenses | $
(254,000) |
| Income before provision
for income taxes | $ (97,000) |
| Provision for income
taxes | $ 282,000 |
| Net
income | $
(379,000) |

| | Three months ended — November 30, 2010 | November 30, 2009 | Change — Increase / (Decrease) | Percent
Change |
| --- | --- | --- | --- | --- |
| Net
Revenue | $ 4,525,000 | $
3,489,000 | $
1,036,000 | 30% |
| Cost of
sales | 3,487,000 | 2,074,000 | 1,413,000 | 68% |
| Gross
profit | $ 1,038,000 | $
1,415,000 | $ (377,000) | -27% |
| ... as a percentage of net revenues | 23% | 41% | | |

The Company's consolidated results of operations showed a 30% increase in net revenues and a decrease in net income of 75%. Revenues recorded in the current period for long-term construction projects were 39% higher than

9

the level recorded in the prior year. Revenues recorded in the current period for other-than long-term construction projects (non-projects) were up 18% from the level recorded in the prior year. The gross profit as a percentage of net revenues for the current and prior year periods was 23% and 41%. This fluctuation is attributable primarily to a.) two large export Projects in the prior year period had higher than average margins, b.) three large Projects in the prior year with aerospace / defense customers that had higher margins than average Projects for construction customers, and c.) in the current period, there were more Projects sold directly to representatives in two different Asian countries, net of their normal commission. This resulted in lower sales, gross margins and commission expense.

A breakdown of sales to the three general groups of customers is as follows:

	Second Quarter Fiscal 2011	Second Quarter Fiscal 2010
Industrial	11%	12%
Construction	66%	42%
Aerospace / Defense	23%	46%

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

Selling, General and Administrative Expenses

Three months ended Change

	November 30, 2010	November 30, 2009	Increase / (Decrease)	Percent Change
Outside
Commissions	$ 179,000	$ 198,000	$ (19,000)	- 10%
Other
SG&A	699,000	934,000	(235,000)	-25%
Total
SG&A	$ 878,000	$1,132,000	$ (254,000)	-22%
...as a percentage of net
revenues	19%
32%

Selling, general and administrative expenses decreased by 22% from the prior year. Outside commission expense decreased by 10% from last year's level despite the 30% increase in Net Revenue. This fluctuation was primarily due to a.) two Projects in an Asian country last year that included commissions significantly higher than average, and b.) seven Projects in two other Asian countries, in the current year, that had no outside commissions. Other selling, general and administrative expenses decreased from last year to this for the same reasons as noted above for the six month period.

The above factors resulted in operating income of $160,000 for the three months ended November 30, 2010, down 43% from the $283,000 in the same period of the prior year.

10

Stock Options

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

The Company expenses stock options using the fair value recognition provisions of the ASC. The Company recognized $30,000 and $20,000 of compensation cost for the six month periods ended November 30, 2010 and November 30, 2009.

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

2010 2009 Risk-free interest rate: 2.75% 4.875% Expected life of the options: 2.5 years 2.5 years Expected share price volatility: 60.27% 57.57% Expected dividends: zero zero

These assumptions resulted in: Estimated fair-market value per stock option: $2.00 $1.37

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 six month period ended November 30, 2010 is presented below:

Weighted- Number of Average Options Exercise Price Options outstanding and exercisable at May 31, 2010: 193,750 $ 5.11 Options granted: 15,250 $ 5.15 Options outstanding and exercisable at November 30, 2010: 209,000 $ 5.11

Closing value per share on NASDAQ at November 30, 2010: $ 4.60

Capital Resources, Line of Credit and Long-Term Debt

The Company's primary liquidity is dependent upon the working capital needs. These are mainly inventory, accounts receivable, costs and estimated earnings in excess of billings, accounts payable, accrued commissions, 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 six months ended November 30, 2010 were $132,000 compared to $129,000 in the same period of the prior year. As of November 30, 2010, the Company has no commitments for capital expenditures during the next twelve months.

Effective August 7, 2009, the Company replaced its bank credit facility with a $6,000,000 bank demand line of credit, with interest payable at the Company's option of 30, 60, 90 or 180 day LIBOR rate plus 2.5%, or the bank's prime rate less .25%. There is an interest rate floor of 3.5%. The line is secured by accounts receivable, equipment, inventory, and general intangibles, and a negative pledge of the Company's real property. This line of credit is subject to the usual terms and conditions applied by the bank, is subject to renewal annually, and is not subject to an

11

express requirement on the bank's part to lend. There is no balance outstanding as of November 30, 2010 or as of May 31, 2010. The outstanding balance on the line of credit fluctuates as the Company's various long-term projects progress. The Company is in compliance with restrictive covenants under the line of credit. In these covenants, the Company agrees to maintain the following minimum levels of the stated item:

Covenant Minimum per Covenant Current Actual When Measured Minimum level working capital $3,000,000 $11,159,000 Quarterly Minimum debt service coverage ratio 1.5:1 n/a Fiscal Year-end

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

Principal maturities of long-term debt for the remainder of the current fiscal year and the subsequent years are as follows: 2011 - $3,000; 2012 - $5,000; and 2013 - $4,000.

Inventory and Maintenance Inventory

November 30, 2010 May 31, 2010 Increase / (Decrease)

| Work in
process | $
590,000 — 4,842,000 | | $ 569,000 — 5,247,000 | | $ 21,000 — (405,000) | 4% — -8% |
| --- | --- | --- | --- | --- | --- | --- |
| Finished
goods | 737,000 | | 658,000 | | 79,000 | 12% |
| Inventory | 6,169,000 | 88% | 6,474,000 | 90% | (305,000) | -5% |
| Maintenance
and other inventory | 835,000 | 12% | 719,000 | 10% | 116,000 | 16% |
| Total | $7,004,000 | 100% | $7,193,000 | 100% | $ (189,000) | -3% |
| Inventory turnover | 1.9 | | 1.6 | | | |

NOTE: Inventory turnover is annualized for the six month period ended November 30, 2010.

Inventory, at $6,169,000 as of November 30, 2010, is $305,000 or five percent lower than the prior year-end level of $6,474,000. Of this, approximately 79% is work in process, 12% 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 the Company is required to maintain for service of products sold and items that are generally subject to spontaneous ordering. This inventory is particularly sensitive to technological obsolescence in the near term due to its use in industries characterized by the continuous introduction of new product lines, rapid technological advances and product obsolescence. The maintenance inventory increased 16% since May 31, 2010. Management of the Company has recorded an allowance for potential inventory obsolescence. The provision for potential inventory obsolescence was $90,000 for each of the six month periods ended November 30, 2010 and November 30, 2009. 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
("CIEB"), |
| --- |
| and Billings in
Excess of Costs and Estimated Earnings ("BIEC") |

| Accounts
receivable | November 30, 2010 — $
1,535,000 | May
31, 2010 — $
5,033,000 | Increase /(Decrease) — $
(3,498,000 | ) | -
69% |
| --- | --- | --- | --- | --- | --- |
| CIEB | 2,307,000 | 1,051,000 | 1,256,000 | | 120% |
| Less:
BIEC | 340,000 | 368,000 | (28,000 | ) | -8% |
| Net | $
3,502,000 | $
5,716,000 | $
(2,214,000 | ) | -39% |

Number of an average day's sales outstanding in accounts receivable 31 99

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

12

Accounts receivable of $1,535,000 as of November 30, 2010 includes approximately $145,000 of amounts retained by customers on Projects. It also includes $42,000 of an allowance for doubtful accounts ("Allowance"). The accounts receivable balance as of May 31, 2010 of $5,033,000 included an Allowance of $42,000. The number of an average day's sales outstanding in accounts receivable ("DSO") decreased from 99 days at May 31, 2010 to 31 at November 30, 2010. The DSO is a function of 1.) the level of sales for an average day (for example, total sales for the past three months divided by 90 days) and 2.) the level of accounts receivable at the balance sheet date. The level of sales for an average day in the second quarter of the current year is only slightly lower than in the fourth quarter of the prior year. The level of accounts receivable at the end of the current fiscal quarter is 69% lower than at the end of the prior year. The combination of these two factors caused the DSO to decrease from last year end to this. 78% of the high level of accounts receivable at the end of last year was due from five customers and was collected subsequent to year-end. The Company expects to collect the net accounts receivable balance, including the retainage, during the next twelve months.

As noted above, CIEB represents revenues recognized in excess of amounts billed. Whenever possible, the Company negotiates a provision in sales contracts to allow the Company to bill, and collect from the customer, payments in advance of shipments. Unfortunately, provisions such as this are often not possible. The $2,307,000 balance in this account at November 30, 2010 is 120% more than the prior year-end. The Company expects to bill the entire amount during the next twelve months. 20% of the CIEB balance as of the end of the last fiscal quarter, August 31, 2010, was billed to those customers in the current fiscal quarter ended November 30, 2010. The remainder will be billed as the Projects progress, in accordance with the terms specified in the various contracts.

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

| | November 30, 2010 | May
31, 2010 |
| --- | --- | --- |
| Costs | $
2,894,000 | $ 984,000 |
| Estimated
earnings | 395,000 | 223,000 |
| Less:
Billings to customers | 982,000 | 156,000 |
| CIEB | $
2,307,000 | $
1,051,000 |
| Number of
Projects in progress | 13 | 7 |

As noted above, BIEC represents billings to customers in excess of revenues recognized. The $340,000 balance in this account at November 30, 2010 is down slightly from the $368,000 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:

| | November 30, 2010 | May
31, 2010 |
| --- | --- | --- |
| Billings to
customers | $
1,815,000 | $
1,085,000 |
| Less:
Costs | 1,026,000 | 673,000 |
| Less:
Estimated earnings | 449,000 | 44,000 |
| BIEC | $ 340,000 | $ 368,000 |
| Number of
Projects in progress | 2 | 3 |

Summary of factors affecting the balances in CIEB and BIEC:

| | November 30, 2010 | May
31, 2010 |
| --- | --- | --- |
| Number of
Projects in progress | 15 | 10 |
| Aggregate
percent complete | 50% | 37% |
| Average
total sales value of Projects in progress | $649,000 | $507,000 |
| Percentage
of total value invoiced to customer | 29% | 24% |

13

The Company's backlog of sales orders at November 30, 2010 is $13 million, as it was at the end of the prior year. $5 million of the current backlog is on Projects already in progress.

Other Balance Sheet Items

Accounts payable, at $965,000 as of November 30, 2010, is 12% less than the prior year-end. There is no specific reason for this fluctuation other than the normal payment cycle of vendor invoices. 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 November 30, 2010 are $254,000, down 33% from the $380,000 accrued at the prior year-end. This decrease is primarily due to the collection of accounts receivables (see 69% decrease in accounts receivable balance discussed above) and subsequent payment of the related commissions. The Company expects the current accrued amount to be paid during the next twelve months. Other current liabilities decreased 39% from the prior year-end, to $951,000 primarily due to accrued employee compensation at the prior year-end that was paid in the current period. Payments on these liabilities will take place as scheduled within the next twelve months.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures .

The Company's principal executive officer and principal financial officer have evaluated the Company's disclosure controls and procedures as of November 30, 2010 and have concluded that as of the evaluation date, the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms and that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting.

There have been no changes in the Company's internal controls over financial reporting that occurred during the fiscal quarter ended November 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company's control over financial reporting.

14

Part II - Other Information

| ITEM 1 | Legal
Proceedings As previously
disclosed, in May 2010 the Company settled the lawsuit brought by the
State of New York Workers' Compensation Board. The lawsuit claimed
that the Company and 264 other entities, which had participated in the
Manufacturing Self-Insurance Trust (the "Trust"), were jointly and
severally liable for an alleged deficit in the Trust's assets of
approximately $29,000,000. While many of the Trust members settled,
others have not. This resulted in the settling members being exposed
to cross-claims by the non- settling members. By Decision and Order
filed October 1, 2010, the New York Supreme Court in Albany County granted
the motions of various parties and dismissed all cross-claims asserted
against the settling members, including cross-claims asserted by the
non-settling members. That Decision and Order is subject to
appeal. There are no other legal
proceedings except for routine litigation incidental to the
business. | |
| --- | --- | --- |
| ITEM 1A | Risk
Factors | |
| | Smaller reporting
companies are not required to provide the information called for by this
item. | |
| ITEM 2 | Unregistered Sales of
Equity Securities and Use of Proceeds | |
| | (a) | The Company sold no
equity securities during the fiscal quarter ended November 30, 2010 that
were not registered under the Securities Act. |
| | (b) | Use of proceeds
following effectiveness of initial registration
statement: |
| | | Not
Applicable |
| | (c) | Repurchases of Equity
Securities |

| Period | (a) Total Number
of Shares Purchased | (b) Average Price Paid Per
Share | (c)
Total Number of Shares Purchased as Part
of Publicly Announced Plans or Programs | (d)
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans
or Programs |
| --- | --- | --- | --- | --- |
| September 1, 2010
- September 30, 2010 | - | - | - | . |
| October 1, 2010
- October 31, 2010 | - | - | - | . |
| November 1, 2010 - November 30, 2010 | 1,700 | $4.73 | 1,700 | . |
| Total | 1,700 | $4.73 | 1,700 | $492,000 (1) |
| (1) On November 5,
2010, the Board of Directors voted unanimously to enter into a share
repurchase agreement through open market purchases. The initial amount
allocable to the program is $500,000. To date, a total of 1,700
shares have been purchased at an average price per share of
$4.73. | | | | |

15

| ITEM
3 | Defaults Upon Senior
Securities | Under the terms of the
Company's credit arrangements with its primary lender, the Company is
required to maintain net working capital of at least $3,000,000, as such
term is defined in the credit documents. On November 30, 2010, under
such definition the Company's net working capital was significantly in
excess of such limit. Additional information regarding the Company's
line of credit and restrictive covenants appears under the caption
"Capital Resources, Lines of Credit and Long-Term Debt" in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations. |
| --- | --- | --- |
| | None | |
| ITEM
4 | (Removed and
Reserved) | |
| ITEM
5 | Other
Information | |
| | (a) | Information required to
be disclosed in a Report on Form 8-K, but not reported None |
| | (b) | Material changes to the
procedures by which Security Holders may recommend nominees to the
Registrant's Board of Directors None |
| ITEM 6 | Exhibits | |
| 20 | | News from Taylor
Devices, Inc. Shareholder Letter, Winter
2010-2011. |
| 31(i) | | Rule 13a-14(a)
Certification of Chief Executive Officer. |
| 31(ii) | | Rule 13a-14(a)
Certification of Chief Financial Officer. |
| 32(i) | | Section 1350
Certification of Chief Executive Officer. |
| 32(ii) | | Section 1350
Certification of Chief Financial
Officer. |

16

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders Taylor Devices, Inc.

We have reviewed the accompanying condensed consolidated balance sheet of Taylor Devices, Inc. and Subsidiary as of November 30, 2010, the related condensed consolidated statements of income for the three and six months ended November 30, 2010 and November 30, 2009 and cash flows for the six months ended November 30, 2010 and November 30, 2009. These interim financial statements are the responsibility of the Company's management.

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

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

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of May 31, 2010, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated August 7, 2010, 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, 2010 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 January 14, 2011

17

TAYLOR DEVICES, INC.

Signatures

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

| TAYLOR
DEVICES, INC. |
| --- |
| (Registrant) |

| Date: |
| --- |
| Douglas P.
Taylor President Chairman of the Board of Directors (Principal
Executive Officer) |

Date:
Mark V.
McDonough Chief Financial Officer

18