Gencor Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter ended December 31, 2020, the first quarter of fiscal 2021. Comparisons below are with the quarter ended December 31, 2019 unless otherwise noted. The filing is unaudited.
Business context
Gencor manufactures asphalt plants and pavers, combustion systems, and fluid heat-transfer systems for highway construction and related markets. Its business is seasonal, with orders generally concentrated from October through February. On October 1, 2020, Gencor acquired Volvo CE’s Blaw-Knox paver product line and related assets for an initial purchase price of approximately $14.4 million, funded with cash. Blaw-Knox generated no revenue in the quarter while its facility was being prepared for production.
Financial performance
| Metric | Quarter ended Dec. 31, 2020 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $18.964 million | $18.030 million | Up $0.934 million, or 5.2%; growth primarily reflected higher parts and component sales. |
| Gross profit and margin | $2.981 million; 15.7% | $4.320 million; 24.0% | Margin fell 8.3 percentage points. Approximately $1.5 million of Blaw-Knox start-up under-absorption costs weighed on the quarter; excluding these costs, management said margin would have been 23.5%. |
| Operating income (loss) | $(1.058) million | $1.172 million | Turned to a loss, primarily due to acquisition-related start-up costs and higher expenses. |
| Net income | $1.551 million | $2.489 million | Down 37.7%. |
| Basic and diluted EPS | $0.11 | $0.17 | Down $0.06 per share. |
| Operating cash flow | $3.705 million | $4.047 million | Down $0.342 million. |
| Investing cash flow | $(15.332) million | $(0.006) million | Included the $14.4 million Blaw-Knox acquisition and $0.932 million of capital expenditures. |
Revenue composition shifted substantially: equipment sales recognized over time were $4.132 million versus $12.090 million, while equipment sales recognized at a point in time were $10.136 million versus $1.907 million. Parts and component sales increased to $3.931 million from $3.146 million. The filing attributes the revenue increase mainly to parts and components.
Operating expenses were $4.039 million, up from $3.148 million. Product engineering and development expense rose to $0.845 million from $0.766 million, primarily due to Blaw-Knox engineering wages. SG&A increased to $3.194 million from $2.382 million, reflecting acquisition-related professional fees, salaries, travel and other costs, as well as higher advertising expense.
Other income included $0.804 million of interest and dividend income, including $0.456 million collected from a customer due to permitting delays, and $2.193 million of net realized and unrealized gains on marketable securities. Income before tax was $1.939 million; income tax expense was $0.388 million, a 20.0% effective rate.
Financial position and liquidity
- At December 31, 2020, cash and cash equivalents were $23.957 million and marketable securities were $92.049 million, totaling approximately $116.0 million. Securities were stated as liquidatable at any time.
- Gencor reported no short- or long-term debt. Total liabilities were $10.541 million and shareholders’ equity was $162.771 million.
- Working capital was $151.3 million, compared with $153.2 million at September 30, 2020. Current assets were $160.066 million and current liabilities were $8.727 million.
- Backlog was $32.1 million at December 31, 2020, versus $30.9 million a year earlier.
- Inventory was $35.473 million, including approximately $11.0 million acquired with Blaw-Knox. Slow-moving and obsolete inventory allowances were $4.966 million, up from $4.617 million at September 30, 2020.
- Cash and cash equivalents declined by $11.627 million during the quarter, principally reflecting the acquisition and capital expenditures. The company also reported $0.932 million in capital expenditures, primarily for systems software and facility leasehold improvements.
Outlook, risks and unusual items
- The filing provides no specific financial guidance or quantified forecast. Management said Blaw-Knox’s production facility was being readied, but gave no production start date or expected contribution.
- Management said operations had not been significantly impacted by COVID-19 as of the financial statement issuance date, but emphasized uncertainty around the pandemic’s effects on customers, suppliers, demand and the workforce.
- Key business sensitivities include customer financial condition, highway infrastructure funding, economic and competitive conditions, steel and other raw-material prices, liquid asphalt and fuel prices, and the ability to pass cost increases through to customers.
- Management identified approximately $1.5 million of Blaw-Knox under-absorbed manufacturing labor and overhead and approximately $0.5 million of acquisition-related SG&A costs as notable first-quarter burdens. The acquisition purchase-price allocation remained subject to post-closing adjustments.
- Three customers accounted for 15.5%, 12.0% and 10.5% of quarterly revenue, respectively. This concentration may increase exposure to individual customer conditions.
- The company noted normal seasonality and stated that the first and fourth fiscal quarters often have lower sales and operating results. The FAST Act extension maintained current funding levels through September 2021.
- Management reported no material changes to previously disclosed risk factors, no material current legal proceedings, and no material changes in internal control over financial reporting. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether and when Blaw-Knox begins production, and its subsequent revenue, gross-margin and cash-flow contribution; also check final purchase-price adjustments.
- Whether reported gross margins recover as start-up costs and steel-price pressures change, and whether additional Blaw-Knox costs arise.
- The sustainability of earnings given the contribution of investment gains and the $0.456 million customer payment related to permitting delays.
- Marketable securities’ composition, valuation exposure and performance, alongside the company’s substantial cash and investment balances.
- Customer concentration, backlog conversion, seasonal demand, and the effect of COVID-19, infrastructure funding and input-cost movements on orders and profitability.