Business context and reporting period
Gencor Industries, Inc. manufactures asphalt plants, combustion systems, fluid heat-transfer systems, and related equipment for highway construction and environmental control. This unaudited Form 10-Q covers the quarter and nine months ended June 30, 2018, the company’s fiscal third quarter. Operations are seasonal, with most orders received October through February.
Financial and operating performance
- Quarter: Revenue was $24.1 million, up 1.6% year over year. Operating income was $3.5 million versus $3.8 million; net income was $2.7 million versus $2.6 million. Diluted EPS was $0.18, unchanged.
- Nine months: Revenue was $78.1 million, up 25.8%. Operating income rose to $10.2 million from $9.4 million; net income increased to $8.8 million from $7.4 million. Diluted EPS was $0.60 versus $0.50.
- Margins: Gross margin declined to 26.6% from 28.2% for the quarter and to 26.0% from 28.2% for the nine-month period. Operating margin was 14.3% versus 16.0% for the quarter and 13.1% versus 15.1% year to date.
- Cash flow: Nine-month operating cash flow was $4.9 million, compared with $7.7 million a year earlier. Capital expenditures were $3.3 million versus $0.9 million. Cash increased $2.0 million to $24.9 million.
- Liquidity and debt: Marketable securities totaled $87.9 million; working capital was $130.6 million. The company reported no short- or long-term interest-bearing debt.
- Other metrics: Backlog was $29.3 million at June 30, 2018, compared with $37.9 million a year earlier. Total assets were $148.0 million and shareholders’ equity was $138.1 million.
Changes versus prior comparable periods
Year-to-date revenue growth reflected strong domestic demand associated with the FAST Act and infrastructure spending. Higher steel and other material costs and increased manufacturing overhead reduced gross margins; higher engineering, sales-force, commission, and trade-show costs also weighed on expenses. Quarterly operating income declined despite slightly higher sales. Investment interest and dividend income increased, while securities produced a year-to-date net loss versus a gain in the prior-year period.
Outlook, commentary, risks, and unusual items
- Management cited continued strong domestic demand but provided no quantified revenue or earnings guidance. The company expects its fiscal 2018 effective tax rate to be lower than fiscal 2017, primarily due to the Tax Cuts and Jobs Act.
- The company recorded a $0.7 million tax benefit in the December 2017 quarter from remeasuring deferred taxes under the Act; the year-to-date tax rate also reflects this adjustment.
- Steel tariffs and related supply-chain effects had raised material costs in the first half of calendar 2018; additional tariffs could increase costs. The company may not be able to pass through all increases. Oil-price changes may affect customer demand and freight costs.
- Other risks include seasonal demand, customer financial condition, highway funding and economic conditions, and market, interest-rate, and credit risks in the investment portfolio. One customer group represented 27.3% of quarterly revenue, and two other customers represented 16.3% and 12.6%, respectively.
- Management said current legal proceedings were not believed material; no off-balance-sheet arrangements were reported. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether backlog converts to revenue, given its decline from $37.9 million to $29.3 million year over year.
- Whether steel and other input-cost inflation continues to pressure gross margins and whether cost increases can be passed to customers.
- Customer concentration and the effect of seasonality on orders, shipments, and cash generation.
- Investment portfolio valuation and exposure to market, interest-rate, and credit risks, including the year-to-date securities losses.
- Tax-rate assumptions and the final effects of implementing the Tax Cuts and Jobs Act.