Gencor Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2015; fiscal year ends September 30. The filing is unaudited. Gencor manufactures heavy machinery, including asphalt plants, combustion systems and fluid heat transfer systems, primarily serving highway construction markets.
Financial results and condition
| Metric | Quarter ended March 31, 2015 | Six months ended March 31, 2015 |
|---|---|---|
| Revenue | $13.754 million, down 5.4% year over year | $20.041 million, down 18.4% |
| Gross margin | 26.4%, versus 25.4% | 19.8%, versus 21.3% |
| Operating income (loss) | $1.500 million, versus $1.820 million | $(134,000), versus $1.238 million income |
| Net income | $1.184 million, versus $1.901 million; diluted EPS $0.12 versus $0.20 | $89,000, versus $2.347 million; diluted EPS $0.01 versus $0.25 |
Quarterly gross margin improved with production efficiencies, while six-month margin declined as revenue fell. Lower sales, higher selling, general and administrative expenses, and reduced investment returns contributed to weaker earnings. Prior-year SG&A benefited from a $393,000 recovery of a previously reserved receivable.
For the six months, cash provided by operating activities was $3.078 million, compared with $3.308 million used in the prior-year period. Capital expenditures were $261,000, and cash increased by $2.817 million to $10.010 million. Customer deposits rose $4.335 million and costs and estimated earnings in excess of billings increased $2.000 million, reflecting more open jobs.
At March 31, cash and cash equivalents were $10.010 million and marketable securities were $87.400 million. Working capital was $108.0 million. Total liabilities were $8.442 million; the company reported no short- or long-term debt and said it did not currently require a credit facility. Marketable securities are trading investments subject to market, interest-rate and credit risks.
Changes, outlook and risks
- Six-month revenue and operating results deteriorated substantially year over year; quarterly revenue and net income also declined, despite a higher quarterly gross margin.
- Management cited cautious domestic highway-equipment spending amid a Highway Trust Fund funding shortfall. MAP-21 funding was due to expire May 31, 2015. The filing gives no specific earnings or revenue guidance.
- Management said it was conserving cash and adjusting workforce, raw-material purchases and operating costs, while continuing to pursue efficiencies and invest in product engineering and development.
- Demand is seasonal, with orders typically concentrated between October and February and shipments largely before June. Demand is exposed to economic conditions, government infrastructure funding, oil and steel prices, freight costs, and customer finances.
- Management warned that higher oil, freight or steel costs may not be fully passed on to customers. It expects contract costs and estimated earnings recognized ahead of billings at March 31 to be billed and collected within one year.
- Investment income and marketable-security gains were lower than in the prior-year period. For the six months, securities produced a net realized and unrealized loss of $232,000, versus a $1.223 million gain in 2014.
- Disclosure controls were assessed as effective; the filing reported no material changes to internal control over financial reporting during the period.
Key facts for investors to verify
- Whether federal highway funding was extended or otherwise resolved after the stated May 31, 2015 MAP-21 expiration, and how that affected orders and demand.
- Subsequent revenue, margins and cash generation, particularly following the six-month operating loss and sharp year-over-year earnings decline.
- The composition, valuation and performance of the $87.4 million investment portfolio and its exposure to market and credit risks.
- Progress in converting contract work in progress and customer deposits into billed revenue and collected cash, including the assumptions used in percentage-of-completion estimates.
- Effects of seasonality and changes in oil, steel and freight costs on customer demand, pricing and margins.