Gencor Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2018 first quarter, ended December 31, 2017; comparisons are with the quarter ended December 31, 2016 unless otherwise noted. Gencor manufactures asphalt plants, combustion systems, fluid heat-transfer systems, and related equipment. Its business is seasonal, with orders typically strongest from October through February.
Financial performance
| Metric | Quarter ended Dec. 31, 2017 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net revenue | $23.122 million | $15.783 million | Up 46.5% |
| Gross profit / margin | $5.083 million / 22.0% | $4.150 million / 26.3% | Profit dollars rose; margin declined |
| Operating income | $1.691 million | $1.544 million | Up $147,000 |
| Income before taxes | $2.149 million | $1.992 million | Up $157,000 |
| Income tax expense (benefit) | $(197,000) | $598,000 | 2017 includes tax-law-related benefit |
| Net income / diluted EPS | $2.346 million / $0.16 | $1.394 million / $0.10 | Net income up 68.3% |
| Cash provided by operations | $3.617 million | $2.585 million | Up $1.032 million |
| Capital expenditures | $1.954 million | $252,000 | Primarily manufacturing machinery |
Revenue growth substantially outpaced operating-income growth as production costs increased with higher output and gross margin contracted. Product engineering and development expense rose $284,000, and selling, general and administrative expense rose $502,000. Net income also benefited from a $0.7 million deferred-tax-liability remeasurement following enactment of the Tax Cuts and Jobs Act; the reported quarterly tax benefit was $197,000.
Liquidity, balance sheet, and orders
- At December 31, 2017, cash and cash equivalents were $24.863 million and marketable securities were $88.340 million. The securities are held in a portfolio of government securities, corporate bonds, equities, mutual funds, ETFs, and cash/money funds.
- Working capital was $125.0 million, compared with $124.7 million at September 30, 2017. Total current assets were $138.422 million and current liabilities were $13.427 million.
- The company reported no long-term debt and no credit facility; management said it did not currently require one. Total liabilities were $14.302 million.
- Backlog was $50.2 million at December 31, 2017, compared with $40.8 million a year earlier.
- Operating cash flow was $3.617 million; investing cash outflow was $1.954 million, entirely reported as capital expenditures; financing cash inflow was $267,000 from stock-option exercises. Cash increased $1.930 million during the quarter.
Outlook, commentary, and risks
- Management attributed stronger orders to the FAST Act and anticipated domestic infrastructure spending, and described domestic highway contractors’ outlook as positive. The filing provides no quantified earnings or revenue guidance.
- Management said manufacturing overhead was increased to support higher production, with annual revenues having doubled over the prior two years. It also cited additional staffing, commissions, advertising, and trade-show costs.
- Demand depends on economic conditions, government highway funding, Canadian infrastructure spending, spare-parts demand, oil prices, and industry consolidation. Higher oil prices can raise asphalt and freight costs; steel-price increases or supply constraints may also pressure results if costs cannot be passed through.
- The business is seasonal. Results for this quarter are not necessarily indicative of the fiscal year.
- Marketable securities are exposed to interest-rate, market, and credit risks; management cautioned that changes in these risks could adversely affect results or equity. There was a $161,000 net realized and unrealized gain on marketable securities in the quarter, versus $407,000 in the prior-year quarter.
- The company planned to adopt the new revenue-recognition standard in fiscal 2019 and did not expect a material impact; it was still evaluating the transition method. Management identified contract estimates, including estimated costs and percentage of completion, as requiring judgment.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. It said there were no material changes in risk factors from the fiscal 2017 Form 10-K and did not believe ordinary-course legal proceedings were material.
Key facts for investors to verify
- Whether the $50.2 million backlog converts to shipments and revenue as expected, given seasonality and contract timing.
- Whether gross margin recovers as production scales, and whether higher overhead and input costs can be managed or passed to customers.
- The extent to which earnings growth reflects operating performance versus the one-time $0.7 million tax remeasurement benefit.
- Portfolio composition, valuation sensitivity, and investment risk associated with the $88.340 million in marketable securities.
- Customer concentration: four customers represented 19.3%, 13.9%, 12.6%, and 12.0% of quarterly revenue, respectively; each had contributed less than 1% in the prior-year comparable period.