Gencor Industries, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. The filing is an annual report, not a standalone fourth-quarter filing. Gencor manufactures asphalt plants, combustion systems, and fluid heat-transfer equipment, primarily for highway construction. Its business is seasonal and exposed to construction spending and government infrastructure funding.
Financial performance and condition
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $59.7 million | $55.6 million |
| Gross profit / margin | $9.4 million / 15.8% | $9.2 million / 16.5% |
| Operating income (loss) | $(1.7) million | $(3.0) million |
| Net income | $0.2 million | $3.0 million |
| Diluted EPS | $0.02 | $0.31 |
| Cash provided by (used in) operations | $0.2 million | $(0.3) million |
- Revenue rose 7.4%. Management attributed the year’s shipment pattern to a late start in orders: shipments were weaker in the first half and improved in the third and fourth quarters.
- Gross margin percentage declined, reflecting higher steel costs and a $344,000 increase in LIFO reserves; FY2010 benefited from a $641,000 LIFO reserve reduction. Lower engineering and development and selling, general and administrative expenses helped narrow the operating loss.
- Net income fell despite the improved operating result. FY2011 included $3.1 million of realized and unrealized investment losses, versus $1.4 million of gains in FY2010, and lower interest and dividend income. A $2.8 million income-tax benefit—primarily reflecting the reversal of $1.7 million in unrecognized tax benefits after a state tax examination—supported FY2011 net income.
- Cash and cash equivalents were $1.7 million and marketable securities were $72.5 million at year-end, for combined cash and investments of $74.2 million, versus $76.3 million a year earlier. The investment portfolio is exposed to market, interest-rate, and credit risks.
- Working capital was $89.8 million, down from $92.9 million. Current assets were $95.4 million and current liabilities $5.6 million. There was no long-term debt and no credit facility in place. Operating lease commitments totaled $97,000.
- Operating cash flow was $177,000; capital expenditures were $1.466 million, resulting in a $1.289 million net decrease in cash. The cash-flow statement includes purchases and proceeds from marketable securities within operating cash flows.
Changes, outlook, and risks
- Year-end backlog was $6.5 million, down from $7.8 million at September 30, 2010. Separately, backlog at December 1, 2011 was $18.6 million, compared with $11.4 million at December 1, 2010; management cautions that short production lead times make backlog an unreliable predictor of annual revenue.
- Management reported no formal earnings or revenue guidance. It said a multiyear federal highway bill would provide greater stability for customers; federal surface-transportation funding had been extended through March 31, 2012 pending longer-term authorization.
- Management said it was conserving cash and right-sizing costs through staffing adjustments, lower raw-material purchases, reduced administrative costs, and continued process and supplier reviews. It planned to continue investing in product engineering and development.
- Key risks include economic and construction-market weakness, uncertain government infrastructure spending and customer credit availability, seasonality, competitive pricing, steel and freight cost increases, and volatility in the securities portfolio. The company may be unable to pass all cost increases to customers.
- Ordinary-course litigation and claims were pending; management said estimated provisions were not material and did not expect the matters to materially affect financial position, results, or cash flows. No material environmental compliance impact was expected under then-current regulations.
- Management assessed internal control over financial reporting as effective at September 30, 2011. The independent auditor issued an unqualified opinion on the financial statements; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether the December 2011 backlog translated into orders, shipments, and revenue, given the seasonal cycle and short order-to-shipment period.
- Whether gross margins recover as steel and freight costs change, and whether pricing can offset cost increases.
- The composition, valuation, and subsequent performance of the $72.5 million marketable-securities portfolio, including the effect of further market losses on earnings and equity.
- The sustainability of operating cash generation and liquidity, particularly with no credit facility and continued capital spending.
- The assumptions behind percentage-of-completion contract estimates and the substantial increase in costs and estimated earnings in excess of billings, to $4.45 million from $0.58 million.
- The nature and outcome of tax positions and any litigation or other contingencies; also note related-party lease payments to Marcar Leasing of $179,000 in FY2011.