Gencor Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016. The company manufactures heavy machinery for highway construction and environmental control, including asphalt plants, combustion systems, and fluid heat transfer systems. Its business is seasonal.
Financial performance
| Metric | Quarter ended June 30, 2016 | Quarter ended June 30, 2015 | Nine months ended June 30, 2016 | Nine months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $19.863 million | $10.940 million | $55.199 million | $30.981 million |
| Gross margin | 25.9% | 21.9% | 25.1% | 20.6% |
| Operating income | $2.793 million | $0.345 million | $6.780 million | $0.210 million |
| Operating margin | 14.1% | 3.2% | 12.3% | 0.7% |
| Net income | $2.114 million | $0.266 million | $5.319 million | $0.354 million |
| Diluted earnings per share | $0.22 | $0.03 | $0.55 | $0.04 |
Management attributed higher revenue and margins principally to stronger asphalt-plant and related-component sales, improved cost absorption, and increased order activity following passage of the FAST Act. SG&A rose to $1.979 million for the quarter and $5.954 million for the nine months, while declining as a share of revenue to 10.0% and 10.8%, respectively.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was a use of $0.270 million, versus $2.933 million provided in the prior-year period. The principal working-capital use was a $7.341 million increase in costs and estimated earnings in excess of billings.
- Capital expenditures were $0.158 million; financing provided $0.164 million from stock-option exercises. Cash declined $0.264 million to $10.888 million from September 30, 2015.
- At June 30, cash and cash equivalents were $10.888 million and marketable securities were $85.612 million. Working capital was $112.2 million, compared with $105.0 million at September 30, 2015.
- No short- or long-term interest-bearing debt was outstanding; the company said it did not currently require a credit facility. Current liabilities totaled $7.641 million.
- Total assets were $125.894 million and shareholders’ equity was $118.253 million. Backlog was $21.4 million.
Material changes, outlook, and risks
- Revenue increased 81.6% for the quarter and 78.2% for the nine-month period year over year; net income also increased substantially from the prior-year periods.
- Costs and estimated earnings in excess of billings increased to $9.737 million from $2.396 million at fiscal year-end. The filing attributes this to several large percentage-of-completion contracts near completion and says a significant portion was billed and collected after quarter-end.
- One global company’s entities accounted for 30.6% of quarterly revenue and 14.6% of nine-month revenue, up from 18.8% and 10.2%, respectively, in the comparable 2015 periods.
- The FAST Act authorized five years of transportation spending, with 2016 funding approximately 5% above 2015 projected funding. The company cited renewed customer optimism but provided no specific company revenue or earnings guidance. Backlog is not necessarily indicative of near-term revenue, and interim results may not predict full-year results.
- Risks include seasonal demand, dependence on highway-construction activity and government funding, oil-price effects on asphalt demand and freight costs, steel-price and supply fluctuations, customer financial condition, competition, and market, interest-rate, and credit risks in the investment portfolio. The company cautioned that it may not recover all increased costs.
- Trading-security gains and losses are recognized in earnings. Nine-month realized and unrealized gains were $0.567 million versus losses of $0.309 million in 2015. The nine-month 2016 effective tax rate was 33.8%, positively affected by a $0.256 million increase in the prior-year federal tax benefit estimate.
Important facts for investors to verify
- Whether the post-quarter billing and collection of contract assets reduced the $9.737 million unbilled balance and converted into cash as expected.
- Whether the $21.4 million backlog converts to shipments and revenue, given production lead times and seasonal demand.
- The sustainability of the improved gross and operating margins as revenue levels and cost absorption change.
- The effect of the major customer concentration and exposure to highway funding, oil, and steel prices.
- The composition, liquidity, and market-risk exposure of the $85.612 million securities portfolio.