Gencor Industries, Inc. — Form 10-Q Summary
Business context and reporting period. Gencor manufactures heavy machinery for highway construction and environmental control, including asphalt plants, combustion systems and fluid heat-transfer systems. This filing covers the quarter and six months ended March 31, 2018, the second quarter and first half of the fiscal year ending September 30, 2018. Results are seasonal, with orders generally concentrated from October through February and shipments before June.
Financial performance and position
| Metric | Quarter ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Net revenue | $30.829 million; +36.9% year over year | $53.951 million; +40.8% year over year |
| Gross margin | 28.4%, versus 29.6% | 25.7%, versus 28.2% |
| Operating income / margin | $5.091 million / 16.5%; prior margin 18.0% | $6.782 million / 12.6%; prior margin 14.6% |
| Net income | $3.764 million, versus $3.415 million | $6.110 million, versus $4.809 million |
| Diluted earnings per share | $0.26, versus $0.23 | $0.41, versus $0.33 |
| Operating cash flow | $2.319 million for the six months, versus $9.139 million in the prior-year period |
At March 31, 2018, cash and cash equivalents were $22.883 million and marketable securities were $88.004 million. Working capital was $128.2 million. The company had no short- or long-term debt and said it did not currently require a credit facility. Backlog was $45.6 million, compared with $42.9 million a year earlier. Capital expenditures were $2.709 million for the six months.
Material changes and management commentary
- Revenue growth reflected strong domestic asphalt plant and component demand, which management attributed to the FAST Act and positive customer outlook.
- Margins declined year over year. Management cited higher material costs, particularly steel, and increased manufacturing overhead to support higher production. Engineering and development spending and SG&A also rose, reflecting staffing, commissions, advertising and trade-show costs.
- Six-month net income benefited from a lower effective tax rate: 11.5%, versus 30.0% a year earlier. The rate included a $0.7 million tax benefit from remeasuring deferred tax liabilities following the Tax Cuts and Jobs Act. Management described the estimate as subject to change as guidance is clarified.
- Investment results were a headwind: net realized and unrealized losses on marketable securities were $719,000 for the quarter and $558,000 for the six months, compared with gains in the prior-year periods. Interest and dividend income increased.
- Operating cash flow was lower year over year. The filing cites increased costs and estimated earnings in excess of billings, lower customer deposits, and changes in receivables and payables among the working-capital movements.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management expressed optimism about domestic demand but cautioned that results depend on customer financial condition, economic and competitive conditions, and product demand. Other disclosed exposures include steel and other raw-material costs, potential steel and aluminum tariffs, oil-price effects on paving demand and freight costs, and market, interest-rate and credit risks in the investment portfolio. The company noted that it may not be able to pass all cost increases to customers. Seasonality can also affect reported sales and operating results.
Three customers each accounted for at least 13.3% of quarterly revenue; the filing reports three customers at 10.1%, 12.7% and 7.8% of six-month revenue. Gencor said ordinary-course legal proceedings were not believed material and reported no material change in its previously disclosed risk factors. Disclosure controls were judged effective, with no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether strong orders and the $45.6 million backlog convert to shipments and revenue, given the company’s seasonal business pattern.
- Whether gross and operating margins stabilize as steel costs, tariffs and production overhead evolve.
- How much of reported earnings growth is attributable to the one-time $0.7 million deferred-tax remeasurement benefit and investment results.
- Whether operating cash flow improves as contract assets, customer deposits and other working-capital balances change.
- Customer concentration and the composition, valuation and risk exposure of the $88.004 million investment portfolio.