Gencor Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2013, compared with the periods ended March 31, 2012. Gencor manufactures heavy equipment principally for highway construction, including asphalt plants, combustion systems and fluid heat transfer systems. Its business is seasonal.
Financial results
| Metric | Quarter ended March 31, 2013 | Quarter ended March 31, 2012 | Six months ended March 31, 2013 | Six months ended March 31, 2012 |
|---|---|---|---|---|
| Revenue | $17.737 million | $19.339 million | $22.685 million | $26.203 million |
| Gross margin | 24.4% | 21.0% | 20.9% | 18.3% |
| Operating income (loss) | $1.888 million | $0.987 million | $(0.102) million | $(0.626) million |
| Net income | $2.977 million | $2.766 million | $2.001 million | $3.641 million |
| Diluted earnings per share | $0.31 | $0.29 | $0.21 | $0.38 |
- Quarterly revenue fell 8.3%; management attributed continued weakness to subdued domestic roadbuilding activity and state tax-revenue shortfalls. Improved manufacturing efficiencies and lower spending lifted gross margin and quarterly operating income.
- Six-month revenue declined 13.4%. The operating loss narrowed, but six-month net income decreased, principally amid substantially lower investment gains: $0.743 million versus $4.838 million. Quarterly investment gains were $1.269 million versus $2.611 million.
- Interest and dividend income was $0.553 million in each quarter and $1.243 million for the six months, versus $1.123 million a year earlier.
- Operating cash flow was $3.674 million for the six months, down from $12.517 million. Capital expenditures were $0.637 million. Cash at March 31 was $6.398 million, compared with $3.361 million at September 30, 2012.
- At March 31, cash was $6.398 million and marketable securities were $81.361 million. Current assets were $107.861 million and current liabilities $8.934 million; working capital was approximately $98.9 million. The company reported no short- or long-term debt.
- Total assets were $116.142 million and shareholders’ equity $105.586 million. Customer deposits rose to $3.193 million from $0.480 million at September 30, 2012, primarily reflecting down payments on several large jobs.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management said it was conserving cash, right-sizing operations and reviewing processes and supplier relationships to reduce costs, while continuing investment in product engineering and development.
- Demand is affected by economic conditions, highway funding, customer finances, infrastructure activity, oil prices and industry consolidation. Management cited steel and fuel/freight cost volatility; the company may not be able to pass all cost increases to customers. The business is seasonal, and reported sales and earnings can fluctuate accordingly.
- Management noted that MAP-21 authorized two years of federal highway, transit and safety programs, while future infrastructure funding and demand remain uncertain. Marketable securities also carry market, interest-rate and credit risks.
- An April 2013 favorable IRS ruling related to research and development credits for 2006–2008 led the company to record a $750,000 tax receivable and reduce tax provision by that amount. The final audit was not complete. The company is pursuing credits for later years, but recorded no amounts for them because they could not yet be determined.
- The six-month tax benefit was 5.4% of pretax income (versus a 32.2% tax expense rate in the prior-year period); the quarterly effective tax rate was 20.0% versus 33.7%.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether domestic roadbuilding demand, bookings and shipments improve, and how seasonality affects the next quarters.
- Whether improved gross margins and cost reductions can be sustained as revenue changes.
- The final IRS audit outcome and collectability of the $750,000 receivable, plus any subsequent R&D credits.
- The composition, valuation and risk exposure of the $81.361 million investment portfolio, and the effect of future market movements on earnings.
- Cash conversion and working-capital trends, including customer deposits, inventory and contract costs not yet billed.