Gencor Industries, Inc. — Q1 FY2017 10-Q
Reporting period: Quarter ended December 31, 2016; comparisons are with the quarter ended December 31, 2015 unless stated otherwise. Gencor manufactures heavy equipment, including asphalt plants, combustion systems and fluid heat-transfer systems. Its business is seasonal and tied in part to highway construction spending.
Financial performance and position
| Metric | Q1 FY2017 / Dec. 31, 2016 | Prior comparable period / Sept. 30, 2016 |
|---|---|---|
| Net revenue | $15.783 million | $13.258 million; up 19.0% year over year |
| Gross margin | 26.3% | 24.8% |
| Operating income | $1.544 million; 9.8% of revenue | $1.115 million; 8.4% of revenue |
| Income before taxes | $1.992 million | $2.094 million |
| Net income | $1.394 million | $1.575 million |
| Basic and diluted EPS | $0.10 | $0.11; prior-year share data adjusted for stock split |
| Cash from operating activities | $2.585 million | $(0.765) million |
| Capital expenditures | $0.252 million | $0.029 million |
| Cash and cash equivalents | $20.562 million | $18.219 million at Sept. 30, 2016 |
| Marketable securities | $86.386 million | $85.938 million at Sept. 30, 2016 |
| Working capital | $116.8 million | $115.2 million at Sept. 30, 2016 |
| Debt | No long-term debt; no credit facility | No debt at Sept. 30, 2016 |
Revenue growth and improved cost absorption lifted gross and operating margins. Production costs were $11.633 million, product engineering and development $0.416 million, and SG&A $2.190 million. Net income declined despite stronger operations: investment interest and dividend income fell to $0.041 million from $0.385 million, security gains fell to $0.407 million from $0.593 million, and the effective tax rate rose to 30.0% from 24.8%. The prior-period tax rate benefited from a $0.256 million increase in the estimate of a fiscal 2015 federal tax benefit.
Operating cash flow benefited from a $3.033 million increase in customer deposits, while costs and estimated earnings in excess of billings increased $1.770 million and inventories increased $0.903 million. Cash increased $2.343 million during the quarter. The company says substantial marketable-security purchases and maturities primarily reflect recurring transactions in U.S. Treasury bills. Securities are liquidatable, but include market, interest-rate and credit risks.
Changes, outlook and risks
- Management attributed the 19.0% revenue increase to continued positive effects from the FAST Act and customers placing orders earlier amid optimism about 2017 and beyond. Backlog was $40.8 million at December 31, 2016, versus $31.2 million a year earlier.
- SG&A increased $0.405 million, mainly due to added headcount and higher sales commissions; engineering and development expense increased $0.034 million with staffing.
- No numerical earnings or revenue guidance was provided. Management’s forward-looking statements include expectations about margins, product sales and financing, but results depend on customer financial condition, economic and competitive conditions, and demand.
- Demand is seasonal and sensitive to domestic and Canadian infrastructure spending, oil prices, freight costs, and steel prices. The company may be unable to pass higher input or freight costs through to customers.
- Contract revenue uses percentage-of-completion accounting based on labor costs and estimated total labor costs; changes in cost estimates or anticipated losses may affect reported results. Management expects costs incurred on contracts at quarter-end to be billed and collected within one year.
- Approximately 10.0% of quarterly revenue came from entities owned by a global company, compared with 2.7% in the prior-year quarter.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It said there were no material changes to previously disclosed risk factors, no material current legal proceedings, and no off-balance-sheet arrangements.
Investor verification points
- Check whether the $40.8 million backlog converts to shipments, revenue and cash collections, given the seasonal order and delivery cycle.
- Monitor contract estimates, unbilled costs and estimated earnings, customer deposits, and inventory for changes in working-capital needs or project risk.
- Assess whether improved gross and operating margins persist as revenue grows and whether higher staffing, commissions, steel and freight costs pressure profitability.
- Review the composition, valuation and performance of the $86.386 million securities portfolio, including exposure to market, interest-rate and credit risks.
- Track the concentrated customer contribution and dependence on highway funding and customer demand; the filing provides no quantified forecast or guarantee of future results.