Gencor Industries, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. Gencor manufactures asphalt plants and related highway-construction machinery, combustion systems, and fluid heat-transfer equipment. Results are seasonal and depend on infrastructure spending, customer capital investment, and order timing.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $98.6 million | $80.6 million | +22.3% |
| Gross profit | $26.6 million | $21.2 million | Gross margin 27.0%, up from 26.2% |
| Operating income | $13.7 million | $10.2 million | +34.0% |
| Net income | $12.6 million | $8.4 million | +49.2% |
| Diluted EPS | $0.85 | $0.57 | +$0.28 |
| Operating cash flow | $(12.0) million | $6.1 million | Turned negative |
Fourth-quarter revenue increased 10.7%, or $2.0 million, year over year. Higher sales and improved gross margin drove operating income growth; higher product engineering and development and selling, general and administrative expenses partly offset the gains. Steel and purchased-part inflation pressured costs, but management cited revenue growth, cost management, and operational improvements as supporting margins.
Financial position and liquidity
- At September 30, 2018, cash and cash equivalents were $8.0 million and marketable securities were $104.1 million, totaling approximately $112.1 million.
- Working capital was $136.6 million, versus $124.7 million a year earlier. Total assets were $153.0 million; shareholders’ equity was $142.2 million.
- No short- or long-term debt was outstanding; the company reported no credit facility or material long-term contractual obligations.
- Cash used in operations was primarily attributed to increased investment in marketable securities and working-capital movements. Costs and estimated earnings in excess of billings increased $5.1 million, while customer deposits declined $4.1 million.
- Capital expenditures were $3.6 million. The company did not pay dividends and said it did not expect to do so in the foreseeable future.
Material changes, outlook, and risks
- Management attributed strong FY2018 demand to the FAST Act and increased domestic infrastructure spending. It provided no specific numerical revenue or earnings guidance.
- Year-end backlog was $43.8 million, down from $61.3 million at September 30, 2017. Backlog at December 1, 2018 was $28.0 million, compared with $46.0 million at December 1, 2017; the company cautions that backlog is not a reliable indicator of quarterly or annual revenue because of fulfillment timing.
- The Tax Cuts and Jobs Act lowered the company’s effective tax rate to 15.6% from 30.9%. The company recorded $0.8 million in related tax benefits from deferred-tax remeasurement.
- Investment income rose to $1.5 million from $0.7 million, but net realized and unrealized investment results shifted to a $0.4 million loss from a $1.3 million gain. The securities portfolio is exposed to market, interest-rate, and credit risks.
- Key risks include cyclical highway-construction demand and government funding, steel and labor cost or availability, oil-price effects on asphalt demand, competition, seasonal and quarterly volatility, and estimates on percentage-of-completion contracts. No customer represented 10% or more of FY2018 revenue.
- Routine litigation was reported, with no material adverse effect expected; management’s provisions for ordinary-course litigation were not material. The company reported $150,000 of unrecognized tax benefits and said potential changes were not expected to have a material effect.
- Revenue from asphalt-plant contracts uses percentage-of-completion estimates. The company expected adoption of the new revenue-recognition standard in FY2019 to have no material impact. Management and the external auditor concluded internal control over financial reporting was effective at September 30, 2018.
Important facts for investors to verify
- Whether infrastructure spending and customer demand sustain sales as backlog has declined.
- Whether negative operating cash flow reflects temporary securities and working-capital movements or persists as the business grows.
- Investment portfolio allocation, valuation changes, and effects on earnings and liquidity.
- Exposure to steel, labor, and other cost inflation, and the company’s ability to maintain margins.
- Revenue-recognition estimates and collection of the $11.9 million in costs and estimated earnings in excess of billings.
- Tax effects, including the reported tax benefits and remaining $150,000 of unrecognized tax benefits.