Gencor Industries, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017; filed December 6, 2017. Gencor manufactures asphalt plants, combustion systems, and fluid heat-transfer equipment for highway construction and related industries.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $80.6 million | $70.0 million |
| Gross profit / margin | $21.2 million / 26.2% | $17.5 million / 25.0% |
| Operating income / margin | $10.2 million / 12.7% | $7.8 million / 11.2% |
| Net income | $8.4 million | $7.0 million |
| Diluted EPS | $0.57 | $0.48 |
| Cash from operations | $6.1 million | $7.0 million |
| Cash and marketable securities | $110.8 million | $104.2 million |
| Long-term debt | None | None |
- Revenue increased 15.2%; management attributed demand to the federal FAST Act and increased state and local infrastructure programs. Fourth-quarter revenue rose 25.4% year over year to $18.6 million, while quarterly net income fell to $1.0 million from $1.7 million.
- Higher volume improved gross margin and overhead absorption. Product engineering and development expense rose 37% to $2.1 million; SG&A rose 7.8% to $8.8 million, but declined as a share of revenue to 10.9% from 11.6%.
- Net investment gains on marketable securities were $1.3 million, versus $0.8 million in FY 2016; investment interest and dividend income was $0.7 million. The effective tax rate increased to 30.9% from 25.1%.
- Operating cash flow was lower despite higher earnings, principally reflecting a $5.1 million inventory increase, partly offset by a $4.1 million increase in customer deposits. Capital expenditures were $1.6 million.
Liquidity and balance sheet
At September 30, 2017, current assets were $137.1 million and current liabilities $12.4 million; working capital was $124.7 million. Cash and cash equivalents were $22.9 million, and marketable securities were $87.9 million. The company reported no debt, credit facility, or off-balance-sheet arrangements. Its securities portfolio is exposed to market, interest-rate, and credit risks.
Outlook, risks, and notable items
- No numerical earnings or revenue guidance was provided. Management expressed confidence in demand and cited infrastructure funding, product development, quality, service, and cost-control efforts as priorities.
- Backlog was reported as $61.3 million at fiscal year-end, versus $43.2 million a year earlier. Separately, the filing reported $46.0 million as of December 1, 2017, versus $32.1 million on that date in 2016; the different dates and figures merit reconciliation. Backlog is not presented as a reliable forecast of quarterly or annual revenue.
- Key risks include cyclical highway-construction demand and dependence on government funding; a major customer represented 13% of FY 2017 revenue, and another customer represented approximately 10%. Steel and labor costs, oil-price effects on paving activity, competition, order timing, and contract-estimate revisions can affect results.
- The company uses percentage-of-completion accounting for asphalt-plant contracts, requiring estimates of labor costs and margins. It reported no material litigation claims in the financial-statement notes; Item 3 describes ordinary-course matters and immaterial provisions.
- On October 5, 2017, the company agreed to purchase leased vehicles from Marcar Leasing, owned by family members of the chairman, for $320,000, ending further lease obligations to Marcar.
- No cash dividends were paid in the last two fiscal years, and none were anticipated for the foreseeable future. Class B holders elect approximately 75% of the board; officers and directors beneficially owned approximately 96.8% of Class B shares.
- Management and the auditor concluded internal control over financial reporting was effective as of September 30, 2017. The auditor gave an unqualified opinion on the financial statements and controls.
Important facts for investors to verify
- Reconcile the $61.3 million September 30 backlog with the $46.0 million reported as of December 1, including fulfillment, cancellations, or other changes.
- Assess the durability of demand tied to federal, state, and local infrastructure programs and the company’s customer concentration.
- Review quarterly earnings variability, contract margin estimates, and the effects of higher inventories on cash conversion.
- Evaluate the composition, valuation, and risk exposure of the $87.9 million securities portfolio and its contribution to reported earnings.
- Review the related-party vehicle purchase and continuing governance implications of Class B voting control.