Gencor Industries, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019; filed December 11, 2019. The filing also reports fourth-quarter revenue. Gencor manufactures asphalt plants and related highway-construction, combustion, and heat-transfer equipment.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $81.3 million | $98.6 million |
| Gross profit / margin | $22.4 million / 27.6% | $26.8 million / 27.2% |
| Operating income | $9.5 million | $13.9 million |
| Net income | $10.2 million | $12.7 million |
| Diluted EPS | $0.69 | $0.86 |
| Cash provided by (used in) operations | $4.2 million | $(12.0) million |
- Fourth-quarter revenue was $14.5 million, down 29.5% from $20.5 million in the prior-year quarter.
- Cash and cash equivalents were $10.3 million and marketable securities were $105.3 million at year-end, totaling $115.6 million. Working capital was $150.4 million, versus $139.7 million a year earlier.
- Gencor had no short- or long-term debt, no credit facility, and no outstanding letters of credit at September 30, 2019. Capital expenditures were $2.1 million.
- Net investment interest and dividend income was $2.3 million; net realized and unrealized investment gains were $1.0 million. The investment portfolio is exposed to market, interest-rate, and credit risks.
Changes versus the prior year
- Revenue declined 17.5%, which management attributed to fewer orders and a slowing impact from the FAST Act. Operating income decreased by $4.4 million and net income by $2.5 million, primarily reflecting lower revenue.
- Gross margin improved modestly, to 27.6% from 27.2%, reflecting cost management and operational improvements, partly offset by lower production volumes. SG&A fell 3.4% but increased as a share of revenue, to 11.9% from 10.1%; product engineering and development expense rose 13.0% to $3.3 million.
- Operating cash flow improved from a use of $12.0 million to a source of $4.2 million. In FY2019, inventory growth of $3.5 million and lower customer deposits of $2.6 million used cash; the FY2018 comparison included a $15.0 million investment of operating cash in marketable securities.
- Year-end backlog decreased to $36.9 million from $43.8 million. Separately, backlog including orders through the filing date was $27.3 million at December 1, 2019, compared with $28.0 million at December 1, 2018.
- The effective tax rate rose to 20.5% from 15.7%; FY2018 included $0.8 million of tax benefits related to the Tax Cuts and Jobs Act.
Outlook, risks, and notable items
- No specific revenue or earnings guidance is provided. Management noted that the FAST Act was scheduled to expire in 2020 and that no replacement federal infrastructure bill had been approved at the time of the report.
- Demand is seasonal and cyclical, tied to highway-construction spending, government funding, order timing, and replacement needs. Other stated risks include steel and oil-price volatility, freight and labor costs, competition, weather, and supply interruptions.
- Custom-equipment revenue recognized over time depends on estimates of total labor costs and contract progress; revisions to estimates can affect reported revenue and margins. Year-end contract assets—revenue recognized in excess of billings—were $13.8 million, which the company expected to bill and collect within one year.
- In the fourth quarter, the company changed inventory costing from LIFO to FIFO and retrospectively adjusted comparative periods. The change increased FY2018 net income by $130,000 and September 30, 2018 retained earnings by $2.8 million; it did not affect previously reported cash flows.
- Cash dividends are not anticipated in the foreseeable future. Class B shareholders, held entirely by company officers, elect approximately 75% of the board, creating concentrated voting control.
- Management and the independent auditor concluded internal control over financial reporting was effective. Ordinary-course litigation was disclosed; management did not expect it to have a material adverse effect. No material environmental compliance costs were expected under currently enacted rules.
Important facts for investors to verify
- Whether federal and state highway funding, including any successor to the FAST Act, supports a recovery in orders; monitor backlog and subsequent shipments.
- Whether the lower revenue trend and the FY2019 inventory build convert into cash, and whether contract assets are billed and collected as expected.
- The sustainability of gross-margin improvement amid lower volume and potential steel, labor, oil, and freight cost changes.
- The composition, valuation, and market-risk exposure of the $105.3 million securities portfolio and its contribution to earnings.
- The retrospective FIFO adjustments and key estimates for contract costs, inventory obsolescence, and taxes; the filing reports a $4.7 million slow-moving and obsolete inventory reserve.