Gencor Industries, Inc. — Fiscal 2020 First Quarter
Reporting period: Quarter ended December 31, 2019; comparison is with the quarter ended December 31, 2018. Gencor manufactures asphalt plants, combustion systems, and fluid heat-transfer systems. Its business is seasonal, with orders typically concentrated from October through February.
Financial performance and liquidity
- Revenue: $18.03 million, down 15.5% from $21.33 million. Equipment sales recognized over time fell to $12.09 million from $16.35 million; parts and component sales rose 3.1% to $3.15 million.
- Gross profit and margins: Gross profit was approximately $4.32 million, with gross margin of 24.0%, up from 23.1%. Management attributed the margin improvement to a higher share of parts and component sales.
- Operating results: Operating income declined to $1.17 million from $2.00 million; operating margin was approximately 6.5%, versus 9.4%. Engineering and development expense was $766,000; SG&A was $2.38 million, up $192,000.
- Net income: $2.49 million, or $0.17 per basic and diluted share, versus $313,000, or $0.02 per share. The increase was driven by a $1.32 million net gain on marketable securities, compared with a $2.15 million net loss a year earlier, despite lower operating income. Interest and dividend income was $632,000. The effective tax rate was 20.0%.
- Cash flow: Operating cash flow was $4.05 million, compared with cash use of $3.08 million in the prior-year quarter. Cash and cash equivalents increased $4.04 million to $14.34 million. Capital expenditures were $6,000.
- Balance sheet and liquidity: At December 31, cash and cash equivalents were $14.34 million and marketable securities were $107.23 million, for combined cash and securities of approximately $121.58 million. Working capital was $151.7 million. Total liabilities were $13.77 million; the company reported no long-term debt and no current need for a credit facility.
- Orders and balance-sheet items: Backlog was $30.9 million, down from $34.8 million a year earlier. Customer deposits rose to $4.92 million from $1.92 million at September 30, 2019, reflecting equipment-booking down payments. Contract assets were $13.38 million, which the company expected to bill and collect within one year.
Material changes and management commentary
- Management said lower revenue reflected a slowdown in equipment orders following significant business growth in recent years. Parts and component sales provided some support to gross margin.
- SG&A increased due to higher travel expenses and professional fees; engineering expense increased with headcount.
- The backlog declined year over year. Demand is influenced by economic conditions, government highway funding, infrastructure spending, oil and asphalt prices, and demand for larger, more efficient plants.
- The company changed inventory costing from LIFO to FIFO in fiscal 2019 and applied the change retrospectively. It reported a cumulative $2.708 million increase in retained earnings for periods before those presented; fiscal 2018 comparative amounts were adjusted.
- The company adopted lease accounting guidance in the first quarter of fiscal 2020; management said adoption did not have a significant financial statement impact. It also filed Form 3115 to change its tax revenue-recognition method, resulting in a reclassification of taxes payable from long-term to current liabilities.
Outlook, risks, and contingencies
- The filing provides no specific financial guidance or quantified outlook. Management cautioned that quarterly results are not necessarily indicative of full-year results and that the business is seasonal.
- Key disclosed risks include customer financial condition, economic and competitive conditions, demand for products, changes in highway funding, steel and other raw-material costs, and oil-related effects on asphalt demand and freight costs. The company may not be able to pass through all cost increases.
- Two customers each represented 13.4% and 13.2% of quarterly revenue; each had represented less than 1% in the prior-year comparable period. This concentration is notable against the prior-year quarter, when four customers represented 13.7%–24.7% each.
- Marketable securities are trading investments marked to fair value, so investment gains and losses can materially affect reported earnings. The quarter’s securities gain was attributed by management to a strong domestic stock market.
- The company reported no material changes to its previously disclosed risk factors, no material current legal proceedings, and no off-balance-sheet arrangements. Disclosure controls were deemed effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether equipment orders and backlog stabilize or continue to weaken, and how seasonality affects subsequent quarters.
- Whether revenue and operating income recover; separate operating performance from volatile investment gains and losses when assessing earnings.
- The composition, liquidity, valuation exposure, and performance of the $107.23 million securities portfolio, including the $42.47 million in corporate bonds.
- Whether customer concentration persists and whether the large increase in customer deposits converts into shipments and recognized revenue.
- Whether steel, freight, and other input-cost movements affect margins, and whether contract estimates, contract assets, and inventory reserves remain appropriate.