Business context and reporting period
Gencor Industries, Inc. designs, manufactures, and services equipment for highway construction and related markets, including asphalt plants, pavers, combustion systems, and fluid heat transfer systems. This Form 10-Q covers the fiscal quarter and nine months ended June 30, 2021; the company’s business is seasonal. The Blaw-Knox paver line acquired from Volvo CE began production in the quarter ended March 31, 2021.
Financial results and liquidity
| Metric | Quarter ended June 30, 2021 | Prior-year quarter | Nine months ended June 30, 2021 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $24.919 million | $22.940 million | $65.235 million | $66.963 million |
| Gross profit | $5.605 million | $5.385 million | $14.731 million | $17.043 million |
| Gross margin | 22.5% | 23.5% | 22.6% | 25.5% |
| Operating income | $1.227 million | $2.014 million | $1.407 million | $7.274 million |
| Net income | $2.335 million | $4.322 million | $6.174 million | $6.156 million |
| Diluted earnings per share | $0.16 | $0.29 | $0.42 | $0.42 |
- Quarterly revenue increased 8.6%, with approximately $2.3 million from paver equipment and parts sales. Nine-month revenue declined 2.6%; paver revenue was approximately $3.9 million.
- Nine-month cash provided by operations was $8.130 million, versus $9.405 million. Investing activities used $16.226 million, including $13.777 million for the Blaw-Knox assets and $2.449 million of capital expenditures. Cash declined $8.040 million to $27.544 million from September 30, 2020.
- At June 30, 2021, marketable securities were $95.345 million and working capital was $155.9 million. The company reported no short- or long-term debt. Total liabilities were $13.823 million.
- Backlog was $28.5 million at June 30, 2021, compared with $11.7 million a year earlier.
Material changes and unusual items
- Operating income fell in both comparison periods, despite higher quarterly revenue. Management attributed pressure to Blaw-Knox startup and operating costs, higher steel and OEM parts prices, and increased product engineering and SG&A expenses. Nine-month gross profit included approximately $3.4 million of unabsorbed paver-line manufacturing labor and overhead.
- Investment results materially affected reported earnings: nine-month net realized and unrealized gains on marketable securities were $4.873 million, compared with losses of $1.465 million in the prior-year period. Quarterly gains were $1.386 million, versus $2.888 million.
- The $13.8 million final Blaw-Knox purchase price was funded with cash and included $10.4 million of inventory and $3.4 million of fixed assets; no liabilities were assumed. Inventory rose to $40.832 million from $27.090 million, partly reflecting the acquired inventory and production needs.
- One customer represented 17.5% of quarterly revenue; no customer represented at least 10% of nine-month revenue. The effective income tax rate was 20% in both reported comparison periods.
Outlook, commentary, and risks
The filing provides no quantified earnings or revenue guidance. Management said operations had not been significantly affected by COVID-19 as of issuance, but the pandemic’s future effects remained uncertain, including possible impacts on demand and the company’s ability to meet customer needs if suppliers are disrupted. Management also identified seasonality, steel and other input-cost volatility, freight and liquid-asphalt prices, customer financial health, and infrastructure spending as factors affecting results. The FAST Act extension maintained federal transportation funding levels through September 2021. Management said it would continue product-development investment and review costs and supplier relationships.
The company reported no material changes to previously disclosed risk factors, no material current legal proceedings, and effective disclosure controls. No material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether the higher backlog converts to shipments and cash generation, given the business’s seasonal order and delivery cycle.
- Whether Blaw-Knox production can absorb startup labor and overhead and improve gross margins; also monitor steel and OEM parts costs.
- How much net income depends on marketable-securities gains, and how investment portfolio performance affects earnings and liquidity.
- Customer concentration and exposure to COVID-19-related demand or supplier disruptions.
- The sustainability of operating cash flow, considering the acquisition, elevated inventory, and ongoing paver-line investment.