Gencor Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. Gencor manufactures heavy equipment, including asphalt plants, combustion systems and fluid heat-transfer systems. Its business is seasonal and tied largely to highway construction.
Financial performance
| Metric | Quarter ended March 31, 2020 | Six months ended March 31, 2020 |
|---|---|---|
| Revenue | $26.0 million, down 2.5% year over year | $44.0 million, down 8.3% |
| Gross margin | 28.2%, versus 37.2% | 26.5%, versus 30.9% |
| Operating income / margin | $4.1 million / 15.7% | $5.3 million / 11.9% |
| Net income (loss) | $(0.7) million; $(0.04) per diluted share | $1.8 million; $0.12 per diluted share |
| Operating cash flow | Not presented for the quarter | $9.2 million, versus $4.8 million |
Quarterly pretax results included a $5.7 million net realized and unrealized investment loss, compared with a $2.2 million gain in the prior-year quarter. For the six months, investment losses were $4.4 million, versus a $57,000 gain. These losses reflected the decline in domestic equity markets associated with COVID-19.
Balance sheet and liquidity
- At March 31, 2020, cash and cash equivalents were $18.7 million and marketable securities were $102.3 million. The securities included government securities, corporate bonds, equities, funds and money funds.
- Working capital was $149.6 million, compared with $150.4 million at September 30, 2019. Total liabilities were $12.3 million; the company reported no short- or long-term debt.
- Six-month capital expenditures were $718,000. Backlog was $24.5 million, versus $24.2 million at March 31, 2019.
Changes and management commentary
Management attributed lower revenue for the six months to a normalization in order levels after significant growth in recent years. Lower gross margins reflected comparison with unusually strong equipment pricing in the prior-year period. Operating income and margins declined in both comparative periods. Engineering and development expense fell, while SG&A rose, primarily due to increased headcount, travel and trade-show costs.
Customer deposits increased to $4.7 million from $1.9 million at September 30, 2019, while costs and estimated earnings in excess of billings decreased to $8.8 million from $13.8 million. Management attributed these movements to timing of contract revenue recognition and customer payments.
Outlook, risks and unusual items
- The filing provides no quantitative earnings or revenue guidance. Management said the full COVID-19 impact was uncertain and could materially affect demand, operations, cash flows and financial position if conditions persisted or worsened. It reported no material operational impact to date as of the financial-statement issuance.
- Key risks include COVID-19-related disruption to customers, suppliers and transportation; customer financial condition and demand; steel and other input costs; and seasonal, infrastructure-funding and competitive factors.
- Gencor disclosed potential Investment Company Act classification risk because of the size of its investment securities relative to assets. It believes it is primarily a manufacturer and not an investment company, but an SEC or court challenge could entail significant expense and regulatory consequences.
- The company changed inventory accounting from LIFO to FIFO in fiscal 2019, retrospectively adjusting prior periods. It adopted lease accounting in fiscal 2020; the filing says adoption did not significantly affect the statements.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It said ordinary-course legal proceedings were not believed material.
Important facts for investors to verify
- Subsequent results and order trends, including any COVID-19 effects on customers, suppliers, backlog and the ability to deliver products.
- Investment-portfolio composition, valuation and volatility, and developments regarding the company’s Investment Company Act status.
- Whether gross margins recover from the prior-year pricing comparison and how steel, freight and other input costs affect profitability.
- Collection and billing of contract assets, customer deposits, and the conversion of backlog into revenue and cash flow.