GENCOR INDUSTRIES INC quarterly report, Q1 FY2019

Business context and reporting period

Gencor Industries, Inc. manufactures heavy machinery, including asphalt plants, combustion systems and fluid heat-transfer systems. This Form 10-Q covers the first quarter of fiscal 2019, the three months ended December 31, 2018, compared with the quarter ended December 31, 2017. The business is seasonal, with orders typically concentrated from October through February and shipments largely before June.

Financial performance and liquidity

At December 31, 2018, cash and cash equivalents were $4.269 million and marketable securities were $104.445 million, for combined cash and securities of approximately $108.7 million. The company reported no long-term debt. Working capital was $136.2 million, versus $136.6 million at September 30, 2018. Total assets were $153.6 million and shareholders’ equity was $142.5 million.

Material changes versus the prior comparable period

• Revenue fell $1.795 million, or approximately 7.8%, reflecting a moderate slowdown in orders following significant growth in the prior year.
• Gross margin improved to 23.1% from 22.0%, which management attributed to cost management and operational improvements. Lower SG&A, including reduced commissions and advertising and trade-show costs, helped lift operating income despite lower revenue.
• Net income declined to $313,000 from $2.346 million. The main swing was marketable-securities performance: a $2.147 million net realized and unrealized loss versus a $161,000 net gain in the prior-year quarter. Higher interest and dividend income, $534,000 versus $293,000, partly offset the loss.
• The prior-year quarter included a $700,000 tax benefit from remeasuring deferred taxes following U.S. tax reform; the current-quarter effective tax rate was 19.9%.
• Backlog was $34.8 million at December 31, 2018, down from $50.2 million a year earlier.

Management commentary, outlook and risks

Management cited seasonal demand patterns and identified highway-infrastructure funding, economic conditions, customer finances, industry demand, steel and other raw-material prices, and fuel and freight costs as factors that may affect results. It described ongoing investment in product development and efforts to improve processes and control costs. The filing provides no specific revenue or earnings guidance, and cautions that quarterly results are not necessarily indicative of the full fiscal year.

Cash used in operations was attributed in part to higher contract assets and inventory and lower customer deposits. Inventory increased $2.015 million, including equipment whose delivery was delayed at customers’ request; accounts payable rose $1.755 million as raw-material purchases increased to meet backlog. Management said it expected all $13.319 million of contract assets at quarter-end to be billed and collected within one year. Marketable securities are trading investments measured at fair value, exposing reported earnings to market fluctuations. Four customers accounted for 24.7%, 22.9%, 14.8% and 13.7% of quarterly revenue, respectively. The company reported no material changes to previously disclosed risk factors, no material legal proceedings, and no off-balance-sheet arrangements.

Important facts for investors to verify

• Whether the lower backlog and moderation in orders continued after the quarter, considering the company’s seasonal order and shipment cycle.
• The composition, liquidity and subsequent fair-value performance of the $104.445 million securities portfolio, and the effect of investment gains or losses on earnings.
• Customer concentration and the collectability and timing of billing for the $13.319 million in contract assets.
• Whether inventory growth and delayed customer-requested deliveries converted into shipments and cash, and whether operating cash flow improved.
• Exposure to steel, fuel and freight costs, and the extent to which cost increases can be passed on to customers.