Gencor Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2017; comparable periods ended June 30, 2016. Gencor manufactures heavy machinery, including asphalt plants, combustion systems and fluid heat-transfer systems. Its business is seasonal and tied largely to highway construction.
Financial performance
| Metric | Quarter 2017 | Quarter 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $23.743 million | $19.863 million | $62.052 million | $55.199 million |
| Gross margin | 28.2% | 25.9% | 28.2% | 25.1% |
| Operating income | $3.794 million | $2.793 million | $9.398 million | $6.780 million |
| Operating margin | 16.0% | 14.1% | 15.1% | 12.3% |
| Net income | $2.588 million | $2.114 million | $7.397 million | $5.319 million |
| Diluted EPS | $0.18 | $0.15 | $0.50 | $0.37 |
- Quarterly revenue increased 19.5%; nine-month revenue increased 12.4%. Management attributed growth to continued strength in asphalt plant and component orders, customer optimism and the FAST Act.
- Higher revenue and improved cost absorption drove higher gross and operating margins. Nine-month product engineering and development and selling, general and administrative costs rose, reflecting increased headcount, sales-force costs, commissions and trade-show spending.
- Quarterly net realized and unrealized investment losses were $253,000, compared with $464,000 of gains in the prior-year quarter. Nine-month investment gains were $810,000, versus $567,000. Investment returns affect reported earnings.
- The effective tax rate was 30.5% for the quarter and 30.2% for the nine months, compared with 37.0% and 33.8%, respectively, in the prior-year periods. The prior-year nine-month rate benefited from a $256,000 increase in the estimated federal tax benefit.
Cash, liquidity and debt
- Cash and cash equivalents were $25.219 million at June 30, 2017; marketable securities were $87.132 million. The securities were primarily government securities, with equity, mutual fund and ETF holdings also reported.
- Working capital was $122.8 million, compared with $115.2 million at September 30, 2016. Total current assets were $135.659 million and current liabilities $12.829 million.
- The company reported no short- or long-term interest-bearing debt. Total liabilities were $13.151 million.
- Operating cash flow was $7.718 million for the nine months, compared with cash used of $270,000 in the prior-year period. Capital expenditures used $854,000; stock-option exercises provided $136,000. Cash increased by $7.0 million.
- Backlog was $37.9 million at June 30, 2017, up from $21.4 million a year earlier. Management cautions that backlog is not a reliable indicator of upcoming revenue given order and shipment timing.
Outlook, risks and other matters
- No specific financial guidance was provided. Management cited favorable customer sentiment and highway construction demand, while noting dependence on economic conditions, government highway funding, Canadian infrastructure spending, crude-oil prices and industry trends.
- Risks include seasonal demand, customer financial condition, competition, steel and other raw-material cost fluctuations, and fuel and freight costs. The company may not be able to pass all cost increases to customers.
- Orders are typically received between October and February, with significant shipments before June. Asphalt-plant lead times are generally 90–160 days; the company notes a seasonal slowdown in the third and fourth calendar quarters.
- Two customers each accounted for more than 10% of quarterly revenue (12.8% and 14.8%); one global company’s related entities accounted for 15.1%. Management reported no material change in risk factors from its 2016 Form 10-K and no legal proceedings believed material.
- Marketable securities are trading securities measured at fair value, so market movements can affect earnings and equity. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether backlog converts into orders, shipments and revenue, accounting for seasonal timing and the disclosed lead times.
- Whether customer concentration persists or changes, especially given the two customers newly exceeding 10% of quarterly revenue.
- Whether gross-margin improvement and higher operating profitability are sustained as sales levels and cost absorption change.
- The composition, liquidity and market-risk exposure of the $87.132 million securities portfolio, and its contribution to reported earnings.
- Whether steel, oil, freight and other input-cost increases can be passed through without weakening demand or margins.