Table of Contents

PART I

Item 1.  Business.

The Company was incorporated in the State of New York on July 22, 1955 and is engaged in the design, development, manufacture and marketing of shock absorption, rate control, and energy storage devices for use in various types of machinery, equipment and structures.  In addition to manufacturing and selling existing product lines, the Company continues to develop new and advanced technology products.

Principal Products

The Company manufactures and sells a single group of very similar products that have many different applications for customers.  These similar products are included in one of sixeight categories; namely, Seismic Dampers, Fluidicshoks®, Crane and Industrial Buffers, Self-Adjusting Shock Absorbers, Liquid Die Springs, Vibration Dampers, Machined Springs and Vibration Dampers. Management does not track or otherwise accountCustom Actuators.  Custom derivations of all of these products are designed and manufactured for sales broken down by these categories.many aerospace and defense applications.  The following is a summary of the capabilities and applications for these products.

Seismic Dampers are designed to amelioratemitigate the effects of earthquake tremorsearthquakes on structures and represent a substantial part of the business of the Company.  Fluidicshoks® are small, extremely compact shock absorbers with up to 19,200 inch-pound capacities, produced in 1512 standard sizes for primary use in the defense, aerospace and commercial industry.  Crane and industrial buffers are larger versions of the Fluidicshoks® with up to 60,000,00010,890,000 inch-pound capacities, produced in more than 6050 standard sizes for industrial applicationapplications on cranes ships, container ships, railroad cars,and crane trolleys, truck docks, ladle and ingot cars, ore trolleys and train car stops.  Self-adjusting shock absorbers, which include versions of Fluidicshoks® and crane and industrial buffers, automatically adjust to different impact conditions, and are designed for high cycle application primarily in heavy industry.  Liquid die springs are used as component parts of machinery and equipment used in the manufacture of tools and dies.  Vibration dampers are used primarily by the aerospace and defense industries to control the response of electronics and optical systems subjected to air, ship, or spacecraft vibration.  Machined springs are precisely controlled mechanical springs manufactured from a variety of materials.  These are used primarily for aerospace applications that require custom features that are not possible with conventional wound coil springs.  Custom actuators are typically of the gas-charged type, using high pressure, that have custom features not available from other suppliers.  These actuators are used for special aerospace and defense applications.

Distribution

The Company does not rely on sales representatives in the United States but uses the services of more than 50 salesseveral representatives and distributors in the United States and Canada along with more than 20 representatives and distributors throughout the rest of the world. Specialized technical sales in aerospace and custom marketing activities outside the U.S.A. are serviced by threethese sales agents,representatives, under the direction and with the assistance of Douglas P. Taylor, the Company's President.President and in-house technical sales staff.  Sales representatives typically have non-exclusive yearly agreements with the Company, which, in most instances, provide for payment of commissions on sales at 5% to 10% of the product's net aggregate selling price.  DistributorsA limited number of distributors also have non-exclusive yearly agreements with the Company to purchase the Company's products for resale purposes.

Competition

The Company faces competition on mature aerospace and defense programs which may use more conventional products manufactured under less stringent government specifications. Two foreign companies and two U.S. companies are the Company's main competitors in the production of crane buffers.

The Company's principal competitor for the manufacture of products in the aerospace and commercial aerospace industries field is UTC Aerospace Systems Division of United Technologies in Ft. Worth, Texas. While the Company is competitive with this company in the areas of pricing, warranty and product performance, due to limited financing and manufacturing facilities, the Company cannot compete in the area of volume production.

The Company competes directly against two other firms supplying seismicstructural damping devices as well asfor use in the United States. For structural applications outside of the USA, the Company competes directly with several other firms particularly in Japan and Taiwan.  The Company competes with numerous other firms whichthat supply alternative seismic protection technologies.

Raw Materials and Supplies

The principal raw materials and supplies used by the Company in the manufacture of its products are provided by numerous U.S. and foreign suppliers.  The loss of any one of these would not materially affect the Company's operations.

Dependence Upon Major Customers

The Company is not dependent on any one or a few major customers.  Sales to five customers approximated 44% (14%30% (7%, 9%6%, 8%6%, 7%6% and 6%5%, respectively) of net sales for 2017.2023.  The loss of any or all of these customers, unless the business is replaced by the Company, could result in an adverse effect on the results for the Company.

Patents, Trademarks and Licenses

The Company holds 116 patents expiring at different times until the year 2034.2035.

Terms of Sale

The Company does not carry significant inventory for rapid delivery to customers, and goods are not normally sold with return rights such as are available for consignment sales.  The Company had no inventory out on consignment and there were no consignment sales for the years ended May 31, 20172023 and 2016.2022.  No extended payment terms are offered.  During the year ended May 31, 2017,2023, delivery time after receipt of orders averaged 8 to 10 weeks for the Company's standard products.  Due to the volatility of constructionstructural and aerospace/defense programs, progress payments are usually required for larger projects using custom designed components of the Company.

Need for Government Approval of Principal Products or Services

Contracts between the Company and the federal government or its independent contractors are subject to termination at the election of the federal government.  Contracts are generally entered into on a fixed price basis.  If the federal government should limit defense spending, these contracts could be reduced or terminated, which management believes would have a materially adverse effect on the Company.

Research and Development

TheTo accommodate growth and to maintain its presence in current markets, the Company does not generally engageengages in major product research and development activities in connection with the design of its products.  Occasionally, research and development for products except whenin the aerospace and defense sectors is funded by aerospace customers or the federal government.  The Company however,also engages in research testing of its products.  For the fiscal years ended May 31, 20172023 and 2016,2022, the Company expended $903,000$1,097,000 and $428,000,$999,000, respectively, on manufacturingproduct research. This significant increase is primarily due to research and development required to meet new types of specifications on certain domestic seismic protection contracts.  For the years ended May 31, 20172023 and 2016,2022, defense sponsored research and development totaled $87,000$581,000 and $56,000,$334,000, respectively.

Government Regulation

Compliance with federal, state, and local laws and regulations which have been enacted or adopted regulating the discharge of materials into the environment has had no material effect on the Company, and the Company believes that it is in substantial compliance with such provisions.

The Company is subject to the Occupational Safety and Health Act ("OSHA") and the rules and regulations promulgated thereunder, which establish strict standards for the protection of employees, and impose fines for violations of such standards.  The Company believes that it is in substantial compliance with OSHA provisions and does not anticipate any material corrective expenditures in the near future.  The Company currently incurs only moderate costs with respect to disposal of hazardous waste and compliance with OSHA regulations.

The Company is also subject to regulations relating to production of products for the federal government.  These regulations allow for frequent governmental audits of the Company's operations and fairly extensive testing of Company products.  The Company believes that it is in substantial compliance with these regulations and does not anticipate corrective expenditures in the future.

Employees

Exclusive of Company sales representatives and distributors, as of May 31, 2017,2023, the Company had 110125 employees, including three executive officers, and four part time employees.officers.  The Company has good relations with its employees.

Item 1A.  Risk Factors.

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

Item 1B.  Unresolved Staff Comments.

Not applicable.

Item 2.  Properties.

The Company's production facilities occupy approximately six acres on Tonawanda Island in North Tonawanda, New York and are comprised of four interconnected buildings and two adjacent buildings.  The production facilities consist of a small parts plant (approximately 4,400 square feet), a large parts plant (approximately 13,500 square feet), and include a facility of approximately 7,000 square feet comprised of a test facility, storage area, pump area and the Company's general offices.  One adjacent building is a 17,00027,000 square foot seismic assembly and test facility. This building contains overhead traveling cranes to allow dampers to be built up to 45 ft. in length. It is also the site of three long bed damper test machines where seismic dampers Taylor Devices manufactures will be tested at maximum force to satisfy customer specifications.  Another adjacent building (approximately 2,000 square feet) is used as a training facility.  These facilities total more than 45,00054,000 square feet.  Adjacent to these facilities, the Company has a remote test facility used for shock testing.  This state-of-the-art test facility is 1,200 square feet.  The small parts plant consists of a complete small machine shop and tool room that produces all of the Company's product items which are less than two inches in diameter. The large parts plant consists of a complete large machine shop and tool room. Both plants contain custom-built machinery for boring, deep-hole drilling and turning of parts.

The Company owns threetwo additional industrial buildings on nine acres of land in the City of North Tonawanda located 1.4 miles from the Company’s headquarters on Tonawanda Island.  Total area of the threetwo buildings is 46,000 square feet.  The Company’s productionOne building includes a machine shop containing custom-built machinery was relocated from the Company’s Tonawanda Island site in the autumnfor boring, deep-hole drilling and turning of 2013parts.  Another is used for painting and overhead cranes have been installed to move largepackaging parts from machine to machine. This allowed the former machining areas at the Tonawanda Island site to house greatly expanded assembly and product testing areas. All corporate and engineering offices were unaffected by the change and remain on Tonawanda Island.completed units.

The Company's real properties are subject to a negative pledge agreement with its lender, KeyM&T Bank.  The Company has agreed with the lender that, for so long as the credit facilities with the lender are outstanding, the Company will not sell, lease or mortgage any of its real properties.  Additional information regarding the Company's agreement with KeyM&T Bank is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, at "Capital Resources, Line of Credit and Long-Term Debt."

The Company leases a separate warehouse for storage from an unrelated third party, consisting of approximately 3,600 square feet at $975 per month. The warehouse is located approximately one-quarter mile from the above-referenced production facilities and office space. The total rental expense incurred by the Company for this facility in fiscal 2017 was $11,700.

The Company has constructed a 10,000 square foot addition at the present Tonawanda Island site. This greatly increased the product size capability and productivity for our seismic damper product lines. The new addition with its overhead traveling cranes allows dampers to be built up to 45 ft. in length. This supports customer orders now in process, and anticipates what the Company believes will be a new trend in very large damper sizes for major building and bridge projects. The new addition is also the site of a new long bed damper test machine where seismic dampers Taylor Devices manufactures will be tested at maximum force to satisfy customer specifications.

The Company believes it carries adequate insurance coverage on its facilities and their contents.

Item 3. Legal Proceedings.

ThereTaylor Devices Inc. (the “Company”) has been named as a Third-Party Defendant in an action captioned Board of Managers of the 432 Park Condominium, et al. v. 56th and Park (NY) Owner LLC, et al.  Index No. 655617/2021 (S.Ct. N.Y. Co.) (the “Action”).

The Action was filed on or about September 23, 2021.  In an amended Complaint dated April 29, 2022, the Board of Managers of 432 Park Condominium (the “Owner”), a condominium association for a high-rise condominium building (the “Building”) located at 432 Park Avenue in New York, N.Y., has asserted a claim against the condominium sponsor, 56th and Park (NY) Owner LLC (the “Sponsor”).  The Owner alleges “over 1500 identified construction and design defects to the common elements of” residential and commercial units at the Building, based upon a report generated by a consultant (SBI Consultants Inc.) retained by the Owner.  The alleged defects include, but are no legal proceedings at present.not limited to, allegedly-excessive noise and vibration, water leaks and elevator failures. The SBI report allegedly identified defects in the Building’s: (a) structural/envelope system; (b) mechanical/electrical & plumbing systems; (c) architectural/interiors; and (d) elevators/vertical systems.

On March 14, 2022, the Sponsor filed a Third-Party Complaint against LendLease Construction (US) LMB (“LendLease”), as well as the architects of record on the project (SLCE Architects), the lead structural engineer (Cantor ESA) and the head mechanical engineer (Flack + Kurtz) involved in the Building’s design. As to LendLease, the Third-Party Complaint alleges breach of a Construction Management Contract between LendLease and Sponsor and negligence arising from purported failure to perform under the contract.

On March 22, 2023, LendLease initiated a Third-Party action against various entities with whom LendLease had contracted for the supply of materials and services in connection with construction of the Building.  The Third-Party defendants include the suppliers of products and services relating to the automatic sprinkler system, structural steel, mechanical systems, electrical systems, sheet metal, component assembly, roofing, the building exterior, plumbing, concrete, curtain walls, custom machine work and elevators.  The Third-Party Complaint also names the Company as a Third-Party Defendant, based upon a contract between the Company and LendLease to supply 16 Viscous Damping Devices (“VDDs”) that were incorporated into a Tuned Mass Damper (“TMD”) system designed by another company to limit accelerations of the Building during wind events.  On July 5, 2023, the Company timely filed and served an Answer to LendLease’s Third-Party Complaint.

Additional third-party actions have been filed by parties named as defendants in the Third-Party Complaint.  Presently, seven third-party actions are pending.

The Progress of the Matter to Date.  The matter, and all of the related third-party actions, are pending in the Commercial Division of the Supreme Court, New York County before Justice Melissa A. Crane.  Justice Crane has appointed Hon. Andrew J. Peck, a retired justice of the Supreme Court, as Special Master to hear and determine disputes regarding all or any part of any discovery issue.  

On June 13, 2023, Special Master Peck issued an Amended Final Scheduling Order.  Among the directives in the Amended Final Scheduling Order is a requirement that:  (a) recently-added third-party defendants (including the Company) respond to discovery demands by August 30, 2023 and complete document productions by October 11, 2023; (b) all parties complete fact depositions and fact discovery by March 15, 2024; and (c) all parties complete expert discovery by August 28, 2024.

Management Response. Management of the Company vigorously disputes the allegations in the Third-Party Complaint.

Based upon the information currently available, there is a credible argument that: (a) the Company met the contractual requirements of the 2013 Purchase Order for Viscous Damping Devices (VDDs) that were incorporated into the Tuned Mass Damper (TMD) system; and (b) the VDDs that were delivered were successfully tested to the applicable specification and met the technical requirements of that specification.

The Owner has not itemized the damages it seeks to recover from Sponsor, but the Amended Complaint contains an ad damnum clause demanding $125 million plus punitive damages.  Sponsor has not itemized the damages it seeks to recover from LendLease or the other third-party defendants, but the claim for relief in the Third-Party Complaint includes a demand for full indemnification of any amounts the Sponsor is required to pay plaintiff.  In turn, LendLease does not itemize the damages it seeks to recover from the several Third-Party defendants (including the Company), but its demand for relief in the Third-Party Complaint includes a demand for full indemnification of any amounts LendLease is required to pay to Sponsor.  The Company anticipates that the pending actions would provide opportunities for Sponsor, LendLease and the Company to allocate some or all of any liability to one or more co-defendants or third parties.  In view of the limited discovery to date, it is not practical to quantify likely damages to the Company in the event of an unfavorable outcome on liability.

Item 4.Mine Safety Disclosures.

Not applicable.

PART II

Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases Ofof Equity Securities.

Market Information

The Company's Common Stock trades on the NASDAQ Capital Market of the National Association of Securities Dealers Automated Quotation ("NASDAQ") stock market under the symbol TAYD.  The high and low sales information noted below for the quarters of fiscal year 20172023 and fiscal year 20162022 were obtained from NASDAQ.

Holders

As of August 4, 2017,May 31, 2023, the number of issued and outstanding shares of Common Stock was 3,454,8943,520,442 and the approximate number of record holders of the Company's Common Stock was 645. Due to a406.  A substantial number of shares of the Company's Common Stock are held in street name, thename.  The Company believes that the total number of beneficial owners of its Common Stock exceeds 2,000.is less than 2,100.

Dividends

No cash or stock dividends have been declared during the last two fiscal years.  The Company plans to retain cash in the foreseeable future to fund working capital needs.

Rights Plan

As of September 15, 2008,25, 2018, the Company's Board of Directors adopted a shareholder rights plan designed to deter coercive or unfair takeover tactics and prevent an acquirer from gaining control of the Company without offering a fair price to shareholders.  Under the plan, certain rights ("Rights") were distributed as a dividend on each share of Common Stock (one Right for each share of Common Stock) held as of the close of business on October 3, 2008.2, 2018.  Each whole Right entitles the holder, under certain defined conditions, to buy one two-thousandths (1/2000) of a newly issued share of the Company's Series 2008A Junior Participating Preferred Stock ("Series 2008A Preferred Stock") at a purchase price of $5.00 per unit of one two-thousandths of a share.  Rights attach to and trade with the shares of Common Stock, without being evidenced by a separate certificate.  No separate Rights certificates will be issued unless and until the Rights detach from Common Stock and become exercisable for shares of the Series 2008A Preferred Stock.

The Rights become exercisable to purchase shares of Preferred Stock (or, in certain circumstances, Common Stock) only if (i) a person acquired 15% or more of the Company's Common Stock, or (ii) a person commenced a tender or exchange offer for 10% or more of the Company's Common Stock, or (iii) the Board of Directors determined that the beneficial owner of at least 10% of the Company's Common Stock intended to cause the Company to take certain actions adverse to it and its shareholders or that such ownership would have a material adverse effect on the Company.  The Rights Plan will expire on October 5, 2018.2028.  

Issuer Purchases of Equity Securities

TheA share repurchase agreement with a major broker-dealer, under which the Company repurchased shares of its common stock on the open market, has been terminated by the Company.  No shares have been purchased since August 2011.

Equity Compensation Plan Information

The following table sets forth information regarding equity compensation plans of the Company as of May 31, 2017.2023.

Item 6.  Selected Financial DataData.

The Company qualifies as a smaller reporting company, as defined by 17 CFR §229.10(f)(1), and is not required to provide the information required by this Item.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements.  Information in this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this 10-K that does not consist of historical facts are "forward-looking statements."  Statements accompanied or qualified by, or containing, words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," "assume" and "optimistic" constitute forward-looking statements and, as such, are not a guarantee of future performance.  The statements involve factors, risks and uncertainties, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements.  Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; variations in timing and amount of customer orders; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products, as well as other factors, many or all of which may be beyond the Company's control.  Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results.  The Company disclaims any obligation to release publicly any updates or revisions to the forward-looking statements herein to reflect any change in the Company's expectations with regard thereto, or any changes in events, conditions or circumstances on which any such statement is based.

Application of Critical Accounting Policies and Estimates

The Company's consolidated financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles.  The preparation of the Company's financial statements requires management to make estimates, assumptions and judgments that affect the amounts reported.  These estimates, assumptions and judgments are affected by management's application of accounting policies, which are discussed in Note 1, "Summary of Significant Accounting Policies", and elsewhere in the accompanying consolidated financial statements. As discussed below, our financial position or results of operations may be materially affected when reported under different conditions or when using different assumptions in the application of such policies.  In the event estimates or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.  Management believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company's financial statements.

Accounts Receivable

Our ability to collect outstanding receivables from our customers is critical to our operating performance and cash flows.  Accounts receivable are stated at an amount management expects to collect from outstanding balances.  Management provides for probable uncollectible accounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts after considering the age of each receivable and communications with the customers involved.  Balances that are collected, for which a credit to a valuation allowance had previously been recorded, result in a current-period reversal of the earlier transaction charging earnings and crediting a valuation allowance.   Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable in the current period.  The actual amount of accounts written off over the five year period ended May 31, 20172023 equaled less than 0.1%0.3% of sales for that period.  The balance of the valuation allowance has increased sinceto $29,000 at May 31, 2016 to the current level of slightly less than $110,000.2023 from $16,000 at May 31, 2022.  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.

 There was $322,000 and $772,000 of inventory disposed of during the years ended May 31, 2023 and 2022.  The provision for potential inventory obsolescence was $180,000$295,000 and zero for each of the years ended May 31, 20172023 and 2016.2022.  

Revenue Recognition

Sales areRevenue is recognized when, units are deliveredor as, the Company transfers control of promised products or services to a customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts which are, performed. Sales under fixed-price contractstherefore, not distinct. Promised goods or services that are recorded as deliveries are made atimmaterial in the context of the contract sales priceare 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 units delivered. Sales under certain fixed-price contracts requiring substantialCompany satisfies the performance obligation and recognizes revenue over several periods priortime (generally less than one year), using costs incurred 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 costdate relative to total estimated costs at completion to measure progress toward satisfying our performance obligations.  Incurred cost basis. Costsrepresents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer.  Contract costs include alllabor, material and direct and indirect charges related to specific contracts. Other expenses are charged to operations as incurred.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 revenue and 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 fiscal year ended May 31, 2017, 66% of total revenue recognized was accounted for using the percentage-of-completion method of accounting while the remaining 34%2023, 61% of revenue was recorded as deliveries were made to our customers.for contracts in which revenue was recognized over time while 39% was recognized at a point in time.  In the fiscal year ended May 31, 2016, 66% of total revenue recognized was accounted for using the percentage-of-completion method of accounting while the remaining 34%2022, 60% of revenue was recorded as deliveries were made to our customers.

for contracts in which revenue was recognized over time while 40% 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 $3.6$7.5 million of taxable income in order to realize our deferred tax assets recorded as of May 31, 20172023 of $1,227,000.$1,583,000.  This deferred tax asset balance is 27%81% ($262,000)707,000) more than at the end of the prior year.  The amount of the deferred tax assets considered realizable however, could be reduced in the near term if estimates of future taxable income are reduced.  If actual results differ from estimated results or if the Company adjusts these assumptions, the Company may need to adjust its deferred tax assets or liabilities, which could impact its effective tax rate.

The Company's practice is to recognize interest related to income tax matters in interest income / expense and to recognize penalties in selling, general and administrative expenses.

The Company and its subsidiary file consolidated Federal and State income tax returns.  As of May 31, 2017,2023, the Company had State investment tax credit carryforwards of approximately $275,000$424,000 expiring through May 2023.2028.

Results of Operations

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

For the year ended May 31, 20172023 (All figures being discussed are for the year ended May 31, 20172023 as compared to the year ended May 31, 2016.2022.)

The Company's consolidated results of operations showed a 28% decrease30% increase in net revenues and a decreasean increase in net income of 45%181%. Revenues recorded in the current period for long-term construction projects (“Project(s)”) were 28% less33% more than the level recorded in the prior year.  We had 5552 Projects in process during the current period compared with 6145 during the same period last year.  Revenues recorded in the current period for other-than long-term construction projects (non-projects) were 29% less26% more than the level recorded in the prior year.  The number of projectsProjects in-process fluctuates from period to period.  The changes from the prior period to the current period are not necessarily representative of future results.

The mix of customers buying our products changed slightly from last year. Sales of the Company's products are made to three general groups of customers: industrial, constructionstructural and aerospace / defense.  The Company saw a 34% decrease27% increase from last year’s level in sales to constructionstructural customers who were seeking seismic / wind protection for either construction of new buildings and bridges or retrofitting existing buildings and bridges as well as an 18% decreasealong with a 25% increase in sales to customers in aerospace / defense and a 34% decreasean 85% increase in sales to customers using our products in industrial applications.  The 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, 20172023 and 20162022 is as follows:

Total sales within North America decreased 20%the USA increased 39% from last year.  Total sales to Asia decreased 59%increased 2% from the prior year.  Net revenue by geographic region, as a percentage of total net revenue for fiscal years ended May 31, 20172023 and 20162022 is as follows:

The gross profit as a percentage of net revenue of 31%40% in the current period is fournine percentage points lessgreater than the prior year. This difference is primarily due to a combinationsame period of a.) certain larger construction Projects in the prior year for which the(31%). The Company washas been able to negotiate higher than typical selling prices; b.) several smaller, aerospace / defense Projects inincrease sales prices to recover more of the increased costs for materials and labor that were incurred over the past year. Management continues to work with suppliers to obtain more visibility of conditions affecting their respective markets. These actions combined with benefits from the Company’s continuous improvement initiatives and increased volume have helped to improve the gross margin as a percentage of revenue over the prior year that have margins higher than the Company’s average; c.) several export projects in the current period that were very competitively bid due to the unfavorable foreign exchange rates; and d.) lower total volume of product sales in the current period to cover non-variable manufacturing costs.year.

At May 31, 2016,2022, we had 115135 open sales orders in our backlog with a total sales value of $21.5$23.7 million.  At May 31, 2017,2023, we had 116134 open sales orders in our backlog and thewith a total sales value is $21.6of $32.5 million.  $10.7$18.1 million of the current backlog is on projectsProjects already in progress.  $11.7$7.6 million of the $21.5$23.7 million sales order backlog at May 31, 20162022 was in progress at that date.  56%81% of the sales value in the backlog is for aerospace / defense customers compared to 38%41% at the end of fiscal 2016.2022.  As a percentage of the total sales order backlog, orders from structural customers in construction accounted for 42%15% at May 31, 20172023 and 61%50% at May 31, 2016.2022.  The Company expects to recognize revenue for the majority of the backlog during the fiscal year ending May 31, 2024, with the remainder during fiscal year ending May 31, 2025.

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

Research and Development Costs

Research and development costs increased 10% from the prior year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased by 24%increased 33% from the prior year. Outside commission expense decreased 35%year, primarily from last year's level. This fluctuation was primarily due to the decrease in the level of sales from last year to this. Other selling, general and administrative expenses decreased by 19% from last year. This decrease is primarily due to a decrease in incentive compensation expense from the prior period related to the lower level of sales and operating results.increased personnel costs.

The above factors resulted in operatingOperating income of $2,921,000$6,809,000 for the year ended May 31, 2017, down 49%2023, showed significant improvement from the $5,748,000$2,473,000 operating income in the prior year.

The Company's effective tax rate (ETR) is calculated based upon current assumptions relating to the year's operating results and various tax related items.  The ETR for the fiscal year ended May 31, 20172023 is 22%16%, five percentage points less thancompared to the ETR for the prior year of 27%12%.  

A reconciliation of provision for income taxes at the statutory rate to income tax provision at the Company's effective rate is as follows:

Theforeign-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.

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 yearten-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 $178,000$417,000 and $151,000$201,000 of compensation cost for the years ended May 31, 20172023 and 2016.2022.    

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 monththirty-month period immediately preceding the granting of the options.  The Company issued stock options in August 2016October 2022 and April 2017.2023.  The risk-free interest rate is derived from the U.S. treasury yield.

The following assumptions were used in the Black-Scholes model in estimating the fair market value of the Company's stock option grants:

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, 20172023 is presented below.

Capital Resources, Line of Credit and Long-Term Debt

The Company's primary liquidity is dependent upon its working capital needs.  These are primarily short-term investments, inventory, accounts receivable, costs and estimated earnings in excess of billings, accounts payable, accrued commissions,expenses and billings in excess of costs and estimated earnings, and debt service.earnings.  The Company's primary sourcessource of liquidity havehas been operations and bank financing.operations.  

Capital expenditures for the year ended May 31, 20172023 were $1,869,000$3,359,000 compared to $1,939,000$1,392,000 in the prior year.  Current year capital expenditures included new manufacturing machinery, testing equipment, upgrades to technology equipment and assembly / test facility improvements.  The Company has commitments to make capital expenditures of approximately $650,000$107,000 as of May 31, 2017.2023.  These capital expenditures will be primarily for new manufacturing and testing equipment.

The Company has a $10,000,000 bank demand line of credit, from a bank, with interest payable at the Company's option of 30, 60 90 or 18090 day LIBOR rate plus 2.5% or the bank's prime2.25%. Interest payable will change from LIBOR rate less .25%.plus 2.25% to SOFR rate plus 2.365% effective July 1, 2023. There is no outstanding balance at May 31, 2017. There was no outstanding balance as of2023 or May 31, 2016. The outstanding balance on the line of credit fluctuates as the Company's various long-term projects progress.2022.  The line is secured by accounts receivable, equipment, inventory, and general intangibles, and 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.  In conjunction with this line of credit, the Company agreed to the following covenants:

The bank is not committed to make loans under this line of credit and no commitment fee is charged.

Inventory and Maintenance Inventory

Inventory, at $11,489,000$5,941,000 as of May 31, 2017,2023, is 20% moreone percent higher than at the prior year-end.  Of this, approximately 88%84% is work in process, 6%4% is finished goods, and 6%12% 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. There was approximately $126,000 of slow-moving inventory used during the year ended May 31, 2017. The Company disposed of approximately $56,000$322,000 and $133,000$772,000 of obsolete inventory during the years ended May 31, 20172023 and 2016,2022, respectively.

Accounts Receivable, Costs and Estimated Earnings in Excess of Billings (“CIEB”) and Billings in Excess of Costs and Estimated Earnings (“BIEC”)

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 $2,546,000$5,554,000 as of May 31, 20172023 includes approximately $677,000$24,000 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) decreased slightly to 36was 47 days at May 31, 2017 from 402023 and 42 days as ofat May 31, 2016.2022.  The level ofCompany expects to collect the net accounts receivable atbalance, including the end ofretainage, during the current year is 36% less than at the end of the prior year. The decrease in the level of accounts receivable was primarily due to a significant decrease in the level of sales from 2016 to 2017.next twelve months.

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:

There is 1 fewer projectare 3 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 increased by 21%62% 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 $6,868,000$4,124,000 balance in this account at May 31, 20172023 is a 25%24% 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.  33%46% of the CIEB balance as of the end of the last fiscal quarter, February 28, 2017,2023, was billed to those customers in the current fiscal quarter ended May 31, 2017.2023.  The remainder will be billed as the projects progress, in accordance with the terms specified in the various contracts.

As of May 31, 2017, there are sales orders for four projects that are not yet in progress. These projects average $259,000 each in value upon completion. This compares to five such projects as of the prior year end with an average value of $431,000.

The year-end balances in the CIEB account are comprised of the following components:

As noted above, BIEC represents billings to customers in excess of revenues recognized.  The $1,296,000$1,992,000 balance in this account at May 31, 20172023 is in comparison to a $1,464,000$1,123,000 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",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:

Accounts payable, at $1,329,000$1,718,000 as of May 31, 2017,2023, is significantly (25%) less20% more than the prior year-end.  This decreaseincrease is duenormal fluctuation of this account and is not considered to a lower level of purchased materials required to fill existing customer sales orders at the end of the current year that are not already in inventory, compared to the end of last year.be unusual.  The Company expects the current accounts payable amount to be paid during the next twelve months.

Commission expense on applicable sales orders is recognized at the time revenue is recognized. The commission is paid following receipt of payment from the customers. Accrued commissions as of May 31, 2017 are $847,000. This is 24% more than the $684,000 accrued at the prior year-end. This increase is primarily due to a few larger projects which, by the terms of the respective contracts, do not permit significant payments through the current levels of completion. The Company expects the current accrued amount to be paid during the next twelve months.

Other accrued expenses of $832,000 decreased by 70%$4,078,000 increased 19% from the prior year level of $2,734,000.$3,414,000.  This decreaseincrease is primarily due to decreasesincreases in a.) accrued tax obligations, b.) accrued incentive compensation resulting from increased earnings and c.)sales order bookings, offset by a reduction in customer prepayments. The decreases in accrued taxes and compensation are both related to a decrease in revenue and earnings of the Company.

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 and share repurchases (if any) for the next twelve months.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk.

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

Item 8. Financial Statements and Supplementary Data.

The financial statements and supplementary data required pursuant to this Item 8 are included in this Form 10-K as a separate section commencing on page 2326 and are incorporated herein by reference.

Item 9.Changes in and Disagreements With Accountants on Accounting andFinancial Disclosure.

There have been no disagreements between the Company and its accountants as to matters which require disclosure.

Item 9A. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

The Company's principal executive officer and principal financial officer have evaluated the Company's disclosure controls and procedures as of May 31, 20172023 and have concluded that, as of the evaluation date, the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms and that information required to be disclosed in the reports the Company files or submits under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

(b)Management's report on internal control over financial reporting.

The Company's management, with the participation of the Company's principal executive officer and principal financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting.  The Company's management has assessed the effectiveness of the Company's internal control over financial reporting as of May 31, 2017.2023.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -- Integrated Framework, updated in 2013.  Based on this assessment management has concluded that, as of May 31, 2017,2023, the Company's internal control over financial reporting is effective based on those criteria.

(c)Changes in internal control over financial reporting.

There have been no changes in the Company's internal controls over financial reporting that occurred during the fiscal year ended May 31, 20172023 that have materially affected, or are reasonably likely to materially affect, the Company's control over financial reporting.

Item 9B. Other Information.

None.

PART III

The information required by Items 10, 11, 12, 13 and 14 of this part will be presented in the Company's Proxy Statement to be issued in connection with the Annual Meeting of Shareholders to be held on November 3, 2017,October 20, 2023, which information is hereby incorporated by reference into this Annual Report.  The proxy materials, including the Proxy Statement and form of proxy, will be filed within 120 days after the Company's fiscal year end.

PART IV

Item 15.Exhibits and Financial Statement Schedules.