Gencor Industries, Inc. — Fiscal 2019 Third Quarter Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2019; filed August 2, 2019. Gencor manufactures asphalt plants, combustion systems and fluid heat-transfer systems for highway construction and related markets. Results are seasonal, and the filing notes that the prior two fiscal years had unusually strong backlog.
Financial performance
| Metric | Quarter ended June 30, 2019 | Quarter ended June 30, 2018 | Nine months ended June 30, 2019 | Nine months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $18.848 million | $24.118 million | $66.845 million | $78.069 million |
| Gross margin | 25.2% | 26.6% | 29.3% | 26.0% |
| Operating income | $1.398 million | $3.456 million | $10.016 million | $10.238 million |
| Operating margin | 7.4% | 14.3% | 15.0% | 13.1% |
| Net income | $2.444 million | $2.682 million | $10.217 million | $8.791 million |
| Diluted earnings per share | $0.17 | $0.18 | $0.69 | $0.60 |
- Quarterly change: Revenue fell 21.9% year over year, while operating income declined 59.5% and net income fell 8.9%. Investment gains helped offset weaker operating performance.
- Nine-month change: Revenue declined 14.4%, but net income rose 16.2%. Gross and operating margins improved despite lower sales.
- Cash flow: Operating cash flow was $23,000 for the nine months, versus $4.914 million in the prior-year period. Capital expenditures were $1.600 million, compared with $3.317 million. Cash declined to $6.435 million from $8.012 million at September 30, 2018.
- Liquidity and debt: Marketable securities totaled $104.767 million; working capital was $146.4 million. The company reported no short- or long-term debt. Current liabilities were $7.718 million.
- Other key balances: Contract assets—costs and estimated earnings in excess of billings—rose to $20.522 million from $11.900 million. Inventories were $19.995 million, up from $18.214 million.
Material changes and management commentary
- Management attributed lower quarterly revenue to a decline in orders versus the prior-year quarter. Lower production levels reduced quarterly gross margin and operating leverage.
- For the nine-month period, gross margin improved through cost management and operational improvements, partly offset by lower production volumes. SG&A fell year over year, while product engineering and development expense increased.
- Interest and dividend income, plus net realized and unrealized gains on marketable securities, supported year-to-date earnings. Securities gains were $1.147 million for the nine months, compared with losses of $1.061 million in the prior-year period.
- Backlog was $11.9 million at June 30, 2019, down from $29.3 million a year earlier.
- Management said final payments on a couple of plants remained open because customers faced permitting delays. It anticipated payment and shipment in the fourth quarter of fiscal 2019. The company also expected the $20.522 million of contract assets outstanding at quarter-end to be billed and collected within one year.
Outlook, risks and other items
- The filing provides no formal revenue or earnings guidance. Management described the expected collection and shipment of the delayed plants but cautioned that results are subject to uncertainty.
- Key stated business risks include customer financial condition, economic and competitive conditions, demand for products, government highway funding, steel and other material costs, oil and freight costs, and the company’s ability to pass cost increases on to customers.
- Customer concentration is notable: one customer accounted for 20.3% of quarterly revenue. For the nine months, one customer represented 8.6%, and two others represented 10.5% and 10.1%, respectively.
- Investment securities are marked to market through earnings, making reported income sensitive to market fluctuations. The effective tax rate was 20.0% for both the quarter and nine-month 2019 period; the prior-year nine-month rate of 14.3% was affected by a tax-reform-related deferred-tax adjustment.
- The company reported no material change in risk factors, no material legal proceedings, and no material changes in internal control over financial reporting. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the anticipated fourth-quarter shipment and collection of the delayed plants occurred, and whether contract assets converted to billings and cash as expected.
- Whether backlog stabilized or recovered after falling to $11.9 million, and how orders developed after quarter-end.
- Whether low operating cash flow reflects timing of contract activity or a more persistent working-capital pattern.
- The composition, liquidity and valuation sensitivity of the $104.767 million securities portfolio, and the effect of market gains or losses on future earnings.
- Whether customer concentration, permitting delays, and materials or freight cost pressures affected subsequent operating results.