Gencor Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2011; comparisons are to the corresponding 2010 periods. Gencor manufactures heavy equipment primarily for highway construction, including asphalt plants, combustion systems, and fluid heat-transfer systems.
Financial performance
| Metric | Quarter ended June 30, 2011 | Quarter ended June 30, 2010 | Nine months ended June 30, 2011 | Nine months ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $23.015 million | $12.684 million | $47.527 million | $47.796 million |
| Gross margin | 18.5% | 11.9% | 16.6% | 19.5% |
| Operating income (loss) | $1.447 million | $(1.518) million | $(362,000) | $(135,000) |
| Net income (loss) | $1.090 million | $(1.576) million | $4.646 million | $896,000 |
| Diluted earnings (loss) per share | $0.11 | $(0.16) | $0.49 | $0.09 |
- Quarterly revenue increased about 81% as delayed customer orders and production shifted into the third quarter. Nine-month revenue was nearly flat, down about 1%.
- Quarterly gross margin and operating results improved with higher production and manufacturing efficiencies, partly offset by steel-cost increases. For the nine-month period, gross margin declined and operating loss widened, mainly due to steel, fuel, freight, and other commodity costs that Gencor said it could not fully pass on amid strong competition.
- Nine-month net income included $2.838 million of net realized and unrealized investment gains. The income tax benefit was $659,000; it primarily reflected a roughly $1.7 million reduction in unrecognized tax benefits after a state tax examination concluded. Thus, reported net income exceeded operating performance.
- Nine-month operating cash flow was $388,000, versus cash used of $1.211 million in 2010. Capital expenditures were $969,000; there were no financing cash flows.
Balance sheet and liquidity
- At June 30, 2011, cash and cash equivalents were $2.423 million and marketable securities were $80.648 million. Management reported working capital of $95.8 million, compared with $92.9 million at September 30, 2010.
- Total assets were $113.837 million; total liabilities were $10.662 million. The company had no short- or long-term debt at June 30, 2011 or September 30, 2010. Management said it did not currently require a credit facility but continued to evaluate its options.
- Marketable securities included equity, mutual fund, corporate bond, municipal bond, and cash/money-fund holdings. The filing warns that these investments are exposed to market, interest-rate, and credit risks.
- Contract costs and estimated earnings in excess of billings increased to $4.222 million from $580,000 at fiscal year-end as the company began work on plant orders for later delivery. Customer deposits also increased, to $2.755 million from $1.478 million.
Outlook, risks, and other notable items
- Management expected fourth-quarter fiscal 2011 revenue to be below the unusually strong third quarter but improved versus fourth-quarter 2010. This expectation followed a late start to fiscal-year orders and stronger shipments in the third quarter; results remain subject to seasonal patterns.
- Management said a new multiyear federal highway program would best support customers’ long-term planning. At the filing date, federal surface-transportation funding had been extended through September 30, 2011; uncertainty over longer-term funding and weak economic conditions could constrain demand.
- Key operating risks include customer financing availability, competitive pricing, increases in steel, oil, fuel, and freight costs, and the company’s ability to pass those costs through. The filing also notes international-market, foreign-currency, and securities-investment risks.
- Gencor reported actions to conserve cash and reduce costs, including workforce adjustments, lower raw-material purchases, and reduced selling, general, and administrative expenses. It continued to invest in engineering and development, though spending on certain projects declined.
- The filing notes prior-period presentation reclassifications with no impact on previously reported net income. It also reassessed bond fair-value classifications from Level 1 to Level 2. Management reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether new orders and shipments sustain the third-quarter recovery, and how fourth-quarter results compare with management’s outlook.
- How much of nine-month net income came from investment gains and the tax benefit rather than operating results.
- Whether steel, fuel, freight, and other input costs can be passed through without further margin pressure.
- The composition, liquidity, and valuation sensitivity of the $80.648 million marketable-securities portfolio.
- The status of federal highway funding after September 30, 2011 and its implications for customer demand.