UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2017
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD: |
From to
Commission File Number:001-11703
GENCOR INDUSTRIES, INC.
| Delaware | 59-0933147 | |
(State or other jurisdiction of
| (I.R.S. Employer Identification No.) | |
| 5201 North Orange Blossom Trail, Orlando, Florida | 32810 | |
| (Address of principal executive offices) | (Zip Code) | |
(407)290-6000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in RuleRule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated Filer | ☒ | |||
| Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ | |||
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at | |
Common stock, $.10 par value | ||
Class B stock, $.10 par value |
Index | Page | |||||||
Part I. | Financial Information | |||||||
Item 1. | Financial Statements | |||||||
| 3 | ||||||||
| 4 | ||||||||
| 5 | ||||||||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 6 | |||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | ||||||
Item 3. | ||||||||
| 15 | ||||||||
Item 4. | 15 | |||||||
Part II. | Other Information | |||||||
Item 6. | 16 | |||||||
| 17 | ||||||||
Introductory Note: Caution Concerning Forward-Looking Statements
This Form10-Q Report and the Company’s other communications and statements may contain “forward-looking statements,” including statements about the Company’s beliefs, plans, objectives, goals, expectations, estimates, projections and intentions. These statements are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond the Company’s control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements. All forward-looking statements, by their nature, are subject to risks and uncertainties. The Company’s actual future results may differ materially from those set forth in its forward-looking statements. For information concerning these factors and related matters, see Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Report, and the following sections of the Company’s Annual Report on Form10-K for the year ended September 30, 2016:2017: (a) “Risk Factors” in Part I, and (b) “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II. However, other factors besides those referenced could adversely affect the Company’s results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by the Company herein speak as of the date of this Report. The Company does not undertake to update any forward-looking statements,statement, except as required by law.
Unless the context otherwise indicates, all references in this Report to the “Company,” “Gencor,” “we,” “us,” or “our,” or similar words are to Gencor Industries, Inc. and its subsidiaries.
Condensed Consolidated Balance Sheets
| March 31, | September 30, | |||||||||||||||
| 2017 | 2016 | |||||||||||||||
| (Unaudited) |
| December 31, 2017 (Unaudited) | September 30, 2017 | |||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 27,036,000 | $ | 18,219,000 | $ | 24,863,000 | $ | 22,933,000 | ||||||||
Marketable securities at fair value (cost $87,004,000 at March 31, 2017 and $86,203,000 at September 30, 2016) | 87,204,000 | 85,938,000 | ||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $217,000 at March 31, 2017 and $195,000 at September 30, 2016 | 1,692,000 | 1,110,000 | ||||||||||||||
Marketable securities at fair value (cost $87,605,000 at December 31, 2017 and $86,967,000 at September 30, 2017) | 88,340,000 | 87,886,000 | ||||||||||||||
Accounts receivable, less allowance for doubtful accounts of $240,000 at December 31, 2017 and $207,000 at September 30, 2017 | 1,317,000 | 1,184,000 | ||||||||||||||
Costs and estimated earnings in excess of billings | 1,680,000 | 4,921,000 | 5,727,000 | 6,768,000 | ||||||||||||
Inventories, net | 14,598,000 | 11,634,000 | 16,925,000 | 16,687,000 | ||||||||||||
Prepaid expenses and other current assets | 1,289,000 | 1,598,000 | ||||||||||||||
Prepaid expenses & other current assets | 1,250,000 | 1,660,000 | ||||||||||||||
|
|
|
| |||||||||||||
Total Current Assets | 133,499,000 | 123,420,000 | 138,422,000 | 137,118,000 | ||||||||||||
|
|
|
| |||||||||||||
Property and equipment, net | 5,054,000 | 5,239,000 | ||||||||||||||
Property and equipment, net of accumulated depreciation | 7,376,000 | 5,722,000 | ||||||||||||||
Other assets | 53,000 | 53,000 | 53,000 | 53,000 | ||||||||||||
|
|
|
| |||||||||||||
Total Assets | $ | 138,606,000 | $ | 128,712,000 | $ | 145,851,000 | $ | 142,893,000 | ||||||||
|
| |||||||||||||||
|
| |||||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts payable | $ | 3,141,000 | $ | 1,443,000 | $ | 3,315,000 | $ | 1,320,000 | ||||||||
Customer deposits | 7,279,000 | 4,484,000 | 7,313,000 | 8,628,000 | ||||||||||||
Accrued expenses | 2,614,000 | 2,264,000 | 2,799,000 | 2,426,000 | ||||||||||||
|
|
|
| |||||||||||||
Total Current Liabilities | 13,034,000 | 8,191,000 | 13,427,000 | 12,374,000 | ||||||||||||
|
|
|
| |||||||||||||
Deferred and other income taxes | 424,000 | 316,000 | 875,000 | 1,601,000 | ||||||||||||
|
|
|
| |||||||||||||
Total Liabilities | 13,458,000 | 8,507,000 | 14,302,000 | 13,975,000 | ||||||||||||
|
|
|
| |||||||||||||
Commitments and contingencies | ||||||||||||||||
Shareholders’ Equity: | ||||||||||||||||
Preferred stock, par value $.10 per share; 300,000 shares authorized; none issued | — | — | ||||||||||||||
Common stock, par value $.10 per share; 15,000,000 shares authorized; 12,130,329 and 12,111,079 shares issued and outstanding at March 31, 2017 and September 30, 2016, respectively | 1,213,000 | 1,211,000 | ||||||||||||||
Class B Stock, par value $.10 per share; 6,000,000 shares authorized; 2,263,857 shares issued and outstanding | 226,000 | 226,000 | ||||||||||||||
Shareholders’ equity: | ||||||||||||||||
Preferred stock, par value $.10 per share; authorized 300,000 shares; none issued | — | — | ||||||||||||||
Common stock, par value $.10 per share; 15,000,000 shares authorized; 12,181,837 shares and 12,154,829 shares issued and outstanding at December 31, 2017 and September 30, 2017, respectively | 1,218,000 | 1,215,000 | ||||||||||||||
Class B Stock, par value $.10 per share; 6,000,000 shares authorized; 2,288,857 and 2,263,857 shares issued and outstanding at December 31, 2017 and September 30, 2017, respectively | 229,000 | 226,000 | ||||||||||||||
Capital in excess of par value | 11,019,000 | 10,887,000 | 11,457,000 | 11,178,000 | ||||||||||||
Retained earnings | 112,690,000 | 107,881,000 | 118,645,000 | 116,299,000 | ||||||||||||
|
|
|
| |||||||||||||
Total Shareholders’ Equity | 125,148,000 | 120,205,000 | 131,549,000 | 128,918,000 | ||||||||||||
|
|
|
| |||||||||||||
Total Liabilities and Shareholders’ Equity | $ | 138,606,000 | $ | 128,712,000 | $ | 145,851,000 | $ | 142,893,000 | ||||||||
|
|
|
| |||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income
(Unaudited)
| For the Quarters Ended March 31, | For the Six Months Ended March 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
Net revenue | $ | 22,526,000 | $ | 22,078,000 | $ | 38,309,000 | $ | 35,336,000 | ||||||||
Costs and expenses: | ||||||||||||||||
Production costs | 15,869,000 | 16,637,000 | 27,502,000 | 26,613,000 | ||||||||||||
Product engineering and development | 470,000 | 379,000 | 886,000 | 761,000 | ||||||||||||
Selling, general and administrative | 2,127,000 | 2,190,000 | 4,317,000 | 3,975,000 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| 18,466,000 | 19,206,000 | 32,705,000 | 31,349,000 | |||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income | 4,060,000 | 2,872,000 | 5,604,000 | 3,987,000 | ||||||||||||
Other income (expense), net: | ||||||||||||||||
Interest and dividend income, net of fees | 162,000 | 204,000 | 203,000 | 589,000 | ||||||||||||
Net realized and unrealized gains (losses) on marketable securities | 656,000 | (490,000 | ) | 1,063,000 | 103,000 | |||||||||||
Other | — | 1,000 | — | 2,000 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
| 818,000 | (285,000 | ) | 1,266,000 | 694,000 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Income before income tax expense | 4,878,000 | 2,587,000 | 6,870,000 | 4,681,000 | ||||||||||||
Income tax expense | 1,463,000 | 957,000 | 2,061,000 | 1,476,000 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income | $ | 3,415,000 | $ | 1,630,000 | $ | 4,809,000 | $ | 3,205,000 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Basic Income per Common Share: | ||||||||||||||||
Net income per share * | $ | 0.24 | $ | 0.11 | $ | 0.33 | $ | 0.22 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted Income per Common Share: | ||||||||||||||||
Net income per share * | $ | 0.23 | $ | 0.11 | $ | 0.33 | $ | 0.22 | ||||||||
|
|
|
|
|
|
|
| |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
GENCOR INDUSTRIES, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Six Months Ended March 31, | ||||||||
| 2017 | 2016 | |||||||
Cash flows from operations: | ||||||||
Net income | $ | 4,809,000 | $ | 3,205,000 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Purchases of marketable securities | (306,744,000 | ) | (141,432,000 | ) | ||||
Proceeds from sale and maturity of marketable securities | 306,339,000 | 140,636,000 | ||||||
Change in fair value of marketable securities | (861,000 | ) | 105,000 | |||||
Deferred income taxes | 108,000 | 538,000 | ||||||
Depreciation and amortization | 605,000 | 720,000 | ||||||
Loss on disposal of property and equipment | — | (10,000 | ) | |||||
Provision for doubtful accounts | 50,000 | 30,000 | ||||||
Stock-based compensation | 36,000 | 16,000 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (632,000 | ) | (666,000 | ) | ||||
Costs and estimated earnings in excess of billings | 3,241,000 | 7,000 | ||||||
Inventories | (2,964,000 | ) | (1,075,000 | ) | ||||
Prepaid expenses and other current assets | 309,000 | 263,000 | ||||||
Accounts payable | 1,698,000 | 891,000 | ||||||
Customer deposits | 2,795,000 | 2,356,000 | ||||||
Accrued expenses | 350,000 | 391,000 | ||||||
|
|
|
| |||||
Total adjustments | 4,330,000 | 2,770,000 | ||||||
|
|
|
| |||||
Cash flows provided by operating activities | 9,139,000 | 5,975,000 | ||||||
|
|
|
| |||||
Cash flows used in investing activities: | ||||||||
Capital expenditures | (420,000 | ) | (85,000 | ) | ||||
|
|
|
| |||||
Cash flows used in investing activities | (420,000 | ) | (85,000 | ) | ||||
|
|
|
| |||||
Cash flows from financing activities: | ||||||||
Proceeds from stock option exercises | 98,000 | 101,000 | ||||||
|
|
|
| |||||
Cash flows provided by financing activities | 98,000 | 101,000 | ||||||
|
|
|
| |||||
Net increase in cash | 8,817,000 | 5,991,000 | ||||||
Cash and cash equivalents at: | ||||||||
Beginning of period | 18,219,000 | 11,152,000 | ||||||
|
|
|
| |||||
End of period | $ | 27,036,000 | $ | 17,143,000 | ||||
|
|
|
| |||||
| For the Quarters Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
Net revenue | $ | 23,122,000 | $ | 15,783,000 | ||||
Costs and expenses: | ||||||||
Production costs | 18,039,000 | 11,633,000 | ||||||
Product engineering and development | 700,000 | 416,000 | ||||||
Selling, general and administrative | 2,692,000 | 2,190,000 | ||||||
|
|
|
| |||||
| 21,431,000 | 14,239,000 | |||||||
|
|
|
| |||||
Operating income | 1,691,000 | 1,544,000 | ||||||
Other income (expense), net: | ||||||||
Interest and dividend income, net of fees | 293,000 | 41,000 | ||||||
Realized and unrealized gains on marketable securities, net | 161,000 | 407,000 | ||||||
Other | 4,000 | — | ||||||
|
|
|
| |||||
| 458,000 | 448,000 | |||||||
|
|
|
| |||||
Income before income tax expense (benefit) | 2,149,000 | 1,992,000 | ||||||
Income tax expense (benefit) | (197,000 | ) | 598,000 | |||||
|
|
|
| |||||
Net income | $ | 2,346,000 | $ | 1,394,000 | ||||
|
|
|
| |||||
Basic Income per Common Share: | ||||||||
Net income per share | $ | 0.16 | $ | 0.10 | ||||
|
|
|
| |||||
Diluted Income per Common Share: | ||||||||
Net income per share | $ | 0.16 | $ | 0.10 | ||||
|
|
|
| |||||
See accompanying Notes to Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Quarters Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 2,346,000 | $ | 1,394,000 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Purchases of marketable securities | (53,513,000 | ) | (177,343,000 | ) | ||||
Proceeds from sale and maturity of marketable securities | 53,177,000 | 177,196,000 | ||||||
Change in fair value of marketable securities | (118,000 | ) | (301,000 | ) | ||||
Deferred income taxes | (726,000 | ) | 46,000 | |||||
Depreciation and amortization | 300,000 | 310,000 | ||||||
Provision for doubtful accounts | — | 50,000 | ||||||
Stock-based compensation | 18,000 | 18,000 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (133,000 | ) | 266,000 | |||||
Costs and estimated earnings in excess of billings | 1,041,000 | (1,770,000 | ) | |||||
Inventories | (238,000 | ) | (903,000 | ) | ||||
Prepaid expenses & other current assets | 410,000 | 62,000 | ||||||
Accounts payable | 1,995,000 | 448,000 | ||||||
Customer deposits | (1,315,000 | ) | 3,033,000 | |||||
Accrued expenses | 373,000 | 79,000 | ||||||
|
|
|
| |||||
Total adjustments | 1,271,000 | 1,191,000 | ||||||
|
|
|
| |||||
Cash flows provided by operating activities | 3,617,000 | 2,585,000 | ||||||
|
|
|
| |||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (1,954,000 | ) | (252,000 | ) | ||||
|
|
|
| |||||
Cash flows used in investing activities | (1,954,000 | ) | (252,000 | ) | ||||
|
|
|
| |||||
Cash flows from financing activities: | ||||||||
Proceeds from stock option exercises | 267,000 | 10,000 | ||||||
|
|
|
| |||||
Cash flows provided by financing activities | 267,000 | 10,000 | ||||||
|
|
|
| |||||
Net increase in cash and cash equivalents | 1,930,000 | 2,343,000 | ||||||
Cash and cash equivalents at: | ||||||||
Beginning of period | 22,933,000 | 18,219,000 | ||||||
|
|
|
| |||||
End of period | $ | 24,863,000 | $ | 20,562,000 | ||||
|
|
|
| |||||
See accompanying Notes to Condensed Consolidated Financial Statements
Notes to Condensed Consolidated Financial Statements
For the Quarter Ended December 31, 2017
(Unaudited)
Note 1 - 1—Basis of Presentation
The accompanying Condensed Consolidated Financial Statementscondensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all material adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included in the interim financial information.included. Operating results for the quarter and six months ended MarchDecember 31, 2017 are not necessarily indicative of the results that may be expected for the year ending September 30, 2017.2018.
The accompanying Condensed Consolidated Balance Sheet at September 30, 20162017 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the Consolidated Financial Statementsconsolidated financial statements and notes thereto included in the Gencor Industries, Inc. Annual Report on Form10-K for the year ended September 30, 2016.
Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which is a part of FASB’s Simplification initiative. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment awards issued by entities to their employees, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted the provisions of ASU 2016-09 during the quarter ended March 31, 2017 with no material impact on the Company’s financial position, results of operations or cash flows.2017.
Note 2 - 2—Marketable Securities
Marketable debt and equity securities are categorized as trading securities and are thus marked to market and stated at fair value. Fair value is determined using the quoted closing or latest bid prices for Level 1 investments and market standard valuation methodologies for Level 2 investments. Realized gains and losses on investment transactions are determined by specific identification and are recognized as incurred in the condensed consolidated statements of income. Net unrealized gains and losses are reported in the condensed consolidated statements of income in the current period and represent the change in the fair value of investment holdings during the period.
Fair Value Measurements
The fair value of financial instruments is presented based upon a hierarchy of levels that prioritizes the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The fair value of marketable equity securities, mutual funds, exchange-traded funds, mutual funds,corporate bonds, government securities, and cash and money funds are substantially based on quoted market prices (Level 1). Corporate and municipal bonds are valued using market standard valuation methodologies, including: discounted cash flow methodologies, and matrix pricing or other similar techniques. The inputs to these market standard valuation methodologies include, but are not limited to: interest rates, credit standing of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, maturity, estimated duration and assumptions regarding liquidity and estimated future cash flows. In addition to bond characteristics, the valuation methodologies incorporate market data, such as actual trades completed, bids and actual dealer quotes, where such information is available. Accordingly, the estimated fair values are based on available market information and judgments about financial instruments (Level 2). Fair values of the Level 2 investments if any, are provided by the Company’s professional investment management firm.
The following table sets forth, by level, within the fair value hierarchy, the Company’s assets measured at fair value as of MarchDecember 31, 2017:
| Fair Value Measurements | Fair Value Measurements | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
Equities | $ | 9,182,000 | $ | — | $ | — | $ | 9,182,000 | $ | 10,777,000 | $ | — | $ | — | $ | 10,777,000 | ||||||||||||||||
Mutual Funds | 5,411,000 | — | — | 5,411,000 | 8,730,000 | — | — | 8,730,000 | ||||||||||||||||||||||||
Exchange-Traded Funds | 1,372,000 | — | — | 1,372,000 | 4,508,000 | — | — | 4,508,000 | ||||||||||||||||||||||||
Corporate Bonds | — | 16,387,000 | — | 16,387,000 | ||||||||||||||||||||||||||||
Government Securities | 69,712,000 | — | — | 69,712,000 | 42,499,000 | — | — | 42,499,000 | ||||||||||||||||||||||||
Cash and Money Funds | 1,527,000 | — | — | 1,527,000 | 5,439,000 | — | — | 5,439,000 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total | $ | 87,204,000 | $ | — | $ | — | $ | 87,204,000 | $ | 71,953,000 | $ | 16,387,000 | $ | — | $ | 88,340,000 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net unrealized gains included in the Condensed Consolidated Statements of Income forlosses recognized during the quarter and six months ended MarchDecember 31, 2017 on trading securities still held as of MarchDecember 31, 2017 were $311,000 and $465,000, respectively.$(184,000). There were no transfers of investments between Level 1 and Level 2 during the six monthsquarter ended MarchDecember 31, 2017.
The following table sets forth by level, within the fair value hierarchy, the Company’s assets measured at fair value as of September 30, 2016:2017:
| Fair Value Measurements | Fair Value Measurements | |||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
Equities | $ | 2,408,000 | $ | — | $ | — | $ | 2,408,000 | $ | 11,338,000 | $ | — | $ | — | $ | 11,338,000 | ||||||||||||||||
Mutual Funds | 5,212,000 | — | — | 5,212,000 | 7,155,000 | — | — | 7,155,000 | ||||||||||||||||||||||||
Exchange-Traded Funds | 510,000 | — | — | 510,000 | 3,417,000 | — | — | 3,417,000 | ||||||||||||||||||||||||
Corporate Bonds | — | 7,196,000 | — | 7,196,000 | ||||||||||||||||||||||||||||
Government Securities | 69,583,000 | — | — | 69,583,000 | 54,542,000 | — | — | 54,542,000 | ||||||||||||||||||||||||
Cash and Money Funds | 8,225,000 | — | — | 8,225,000 | 4,238,000 | — | — | 4,238,000 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total | $ | 85,938,000 | $ | — | $ | — | $ | 85,938,000 | $ | 80,690,000 | $ | 7,196,000 | $ | — | $ | 87,886,000 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Net unrealized gains included in the Condensed Consolidated Statements of Income forrecognized during the quarter and six months ended MarchDecember 31, 2016 on trading securities still held as of MarchDecember 31, 2016 were $647,000 and $1,590,000, respectively.$153,000. There were no transfers of investments between Level 1 and Level 2 during the six monthsquarter ended MarchDecember 31, 2016.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term nature of these items.
Note 3 - 3—Inventories
Inventories are valued at the lower of cost or market, with cost being determined principally by using thelast-in,first-out (“LIFO”) method and market defined as replacement cost for raw materials and net realizable value for work in process and finished goods. Appropriate consideration is given to obsolescence, excessive levels, deterioration, possible alternative uses and other factors in determining net realizable value. The cost of work in process and finished goods includes materials, direct labor, variable costs and overhead. The Company evaluates the need to record inventory allowancesadjustments on all inventories, including raw material, work in process, finished goods, spare parts and used equipment. Used equipment acquired by the Company ontrade-in from customers is included in inventory and carried at estimated net realizable value. Unless specific circumstances warrant different treatment regarding inventory obsolescence, the cost basiscarrying value of inventories three to four years old isare reduced by 50%, while the cost basiscarrying value of inventories four to five years old isare reduced by 75%, and the cost basiscarrying value of inventories greater than five years old isare reduced to zero. Inventory is typically reviewed for obsolescence on an annual basis computed as of September 30, the Company’s fiscal year end. If significant known changes in trends, technology or other specific circumstances that warrant consideration occur during the year, then the impact on obsolescence is considered at that time. No such provisions were made during the quarter or six months ended March 31, 2017.
Net inventories at MarchDecember 31, 2017 and September 30, 20162017 consist of the following:
| March 31, 2017 | September 30, 2016 | December 31, 2017 | September 30, 2017 | |||||||||||||
Raw materials | $ | 7,924,000 | $ | 7,072,000 | $ | 11,001,000 | $ | 9,407,000 | ||||||||
Work in process | 1,787,000 | 976,000 | 1,234,000 | 3,098,000 | ||||||||||||
Finished goods | 4,846,000 | 3,545,000 | 4,674,000 | 4,166,000 | ||||||||||||
Used equipment | 41,000 | 41,000 | 16,000 | 16,000 | ||||||||||||
|
|
|
| |||||||||||||
| $ | 14,598,000 | $ | 11,634,000 | $ | 16,925,000 | $ | 16,687,000 | |||||||||
|
|
|
| |||||||||||||
Note 4 - 4—Costs and Estimated Earnings in Excess of Billings
Costs and estimated earnings in excess of billings on uncompleted contracts as of MarchDecember 31, 2017 and September 30, 20162017 consist of the following:
| March 31, 2017 | September 30, 2016 | December 31, 2017 | September 30, 2017 | |||||||||||||
Costs incurred on uncompleted contracts | $ | 14,498,000 | $ | 8,898,000 | $ | 14,252,000 | $ | 10,250,000 | ||||||||
Estimated earnings | 4,789,000 | 3,124,000 | 4,221,000 | 3,161,000 | ||||||||||||
|
|
|
| |||||||||||||
| 19,287,000 | 12,022,000 | 18,473,000 | 13,411,000 | |||||||||||||
Billings to date | 17,607,000 | 7,101,000 | 12,746,000 | 6,643,000 | ||||||||||||
|
|
|
| |||||||||||||
Costs and estimated earnings in excess of billings | $ | 1,680,000 | $ | 4,921,000 | $ | 5,727,000 | $ | 6,768,000 | ||||||||
|
|
|
| |||||||||||||
Note 5 - 5—Earnings per Share Data
The Condensed Consolidated Financial Statements include basic and diluted earnings per share information. The following table sets forth the computation of basic and diluted earnings per share for the quarters and six months ended MarchDecember 31, 2017 and 2016:
| Quarter Ended March 31, | Six Months Ended March 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
Net Income | $ | 3,415,000 | $ | 1,630,000 | $ | 4,809,000 | $ | 3,205,000 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Common Shares: | ||||||||||||||||
Weighted average common shares outstanding | 14,390,000 | 14,320,000 | 14,384,000 | 14,314,000 | ||||||||||||
Effect of dilutive stock options | 207,000 | 169,000 | 210,000 | 146,000 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted shares outstanding | 14,597,000 | 14,489,000 | 14,594,000 | 14,460,000 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Basic: | ||||||||||||||||
Net earnings per share | $ | 0.24 | $ | 0.11 | $ | 0.33 | $ | 0.22 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted: | ||||||||||||||||
Net earnings per share | $ | 0.23 | $ | 0.11 | $ | 0.33 | $ | 0.22 | ||||||||
|
|
|
|
|
|
|
| |||||||||
On July 11, 2016, the Company’s Board of Directors approved a three-for-two split of the Company’s common and Class B stock to be effected in the form of a 50% stock dividend. As a result, shareholders received one additional share of common or Class B stock for every two shares they held of the respective class of stock as of the record date. These shares were distributed on August 1, 2016, to shareholders of record as of the end of business on July 22, 2016. All share and per share data (except par value) have been adjusted to reflect the effect of the stock split for all periods presented. The number of shares of common and Class B stock issuable upon exercise of outstanding stock options were proportionately increased in accordance with terms of the respective plans. The number of authorized shares, as reflected on the Condensed Consolidated Balance Sheets, was not affected by the stock split and, accordingly, has not been adjusted.
Net income Common Shares: Weighted-average common shares outstanding Effect of dilutive stock options Weighted-average diluted shares outstanding Basic: Net income per share Diluted: Net income per share December 31, 2017 December 31, 2016 $ 2,346,000 $ 1,394,000 14,458,000 14,380,000 265,000 209,000 14,723,000 14,589,000 $ 0.16 $ 0.10 $ 0.16 $ 0.10
Basic earnings per share is based on the weighted-average number of shares outstanding. Diluted earnings per share is based on the sum of the weighted-average number of shares outstanding plus common stock equivalents. The weighted-average shares issuable upon the exercise of stock options included in the diluted earnings per share calculation for the quarter and six months ended March 31, 2017 were 469,000 and 475,000, respectively, which equates to 207,000 and 210,000 dilutive common stock equivalents, respectively.
Weighted-average shares issuable upon the exercise of stock options included in the diluted earnings per share calculation for the quarter and six months ended MarchDecember 31, 2017 were 401,000, which equates to 265,000 dilutive common stock equivalents. Weighted-average shares issuable upon the exercise of stock options included in the diluted earnings per share calculation for the quarter ended December 31, 2016 were 476,000 and 481,000, respectively,482,000, which equatesequated to 169,000 and 146,000209,000 dilutive common stock equivalents, respectively. Thereequivalents. Weighted-average shares issuable upon the exercise of stock options, which were nonot included in the diluted earnings per share calculations because they were anti-dilutive, shareswere zero for the quarters and six month periods ended MarchDecember 31, 2017 and 2016.
Note 6 - 6—Customers with 10% (or greater) of Net Revenues
NetApproximately 5.7% of net revenues from our three largest customers represented 15.0%, 13.5%,in the quarter ended December 31, 2017 and 13.0%10.0% of net revenues for the quarter ended December 31, 2016 were from entities owned by a global company.
Four other customers accounted for 19.3%, 13.9%, 12.6% and 12.0% of net revenues, respectively, for the quarter ended December 31, 2017. Net revenues for each of these four customers were less than 1% during the prior year comparative periods.
Note 7—Income Taxes
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law by President Donald Trump. The Tax Reform Act significantly lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system and imposing repatriation tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. As a result of the Tax Reform Act, the Company recorded a tax benefit of $0.7 million due to re-measurement of its deferred tax liability, in the three months ended March 31, 2017, and 8.8%, 8.0% and 7.6% of net revenues for the six months ended MarchDecember 31, 2017. There were no significant revenues recognized from these three customers forThe tax benefit represents the three or six months ended March 31, 2016.Company’s current best estimates. The amounts incorporate assumptions made based upon the Company’s current interpretation of the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Gencor Industries, Inc. (the “Company”) is a leading manufacturer of heavy machinery used in the production of highway construction materials, synthetic fuels, and environmental control equipment. The Company’s core products include asphalt plants, combustion systems and fluid heat transfer systems. The Company’s products are manufactured in two facilities in the United States.
Because the Company’s products are sold primarily to the highway construction industry, the business is seasonal in nature. Traditionally, the Company’s customers do not purchase new equipment for shipment during the summer and fall months to avoid disrupting their peak season for highway construction and repair work. The majority of orders for the Company’s products are thus received between October and February, with a significant volume of shipments occurring prior to June. The principal factors driving demand for the Company’s products are the overall economic conditions, the level of government funding for domestic highway construction and repair, Canadian infrastructure spending, the need for spare parts, fluctuations in the price of crude oil (liquid asphalt as well as fuel costs), and a trend towards larger plants resulting from industry consolidation.
On July 6, 2012, President Obama signed a $118 billion transportation bill, Moving Ahead for Progress in the 21st Century Act (“MAP-21”). MAP-21 included a final three-month extension of the previous SAFETEA-LU bill at then current spending levels combined with a new two-year, $105 billion authorization of the federal highway, transit, and safety programs effective October 1, 2012. The bill provided states with two years of funding to build roads, bridges, and transit systems. On August 8, 2014, President Obama signed a $10.8 billion ten-month bill to fund federal highway and mass-transit programs through May 31, 2015. On May 29, 2015, MAP-21 was extended through July 31, 2015. On July 31, 2015, President Obama signed a three-month extension of MAP-21 which provided $8 billion in funding for the Highway Trust Fund from August 1, 2015 through October 29, 2015. Two additional short-term extensions were approved between October 29, 2015 and December 4, 2015.
On December 4, 2015, President Obama signed into law a five-year, $305 billion transportation bill, Fixing America’s Surface Transportation Act (the “FAST Act”). The FAST Act reauthorized the collection of the 18.4 cents per gallon gas tax that is typically used to pay for transportation projects. It also included $70 billion from other areas of the federal budget to close a $16 billion annual funding deficit. The bill includes spending of more than $205 billion on roads and highways over five years. The 2016 funding levels are approximately 5% above 2015 projected funding, with annual increases between 2.0% and 2.5% from 2016 through 2020.
California’s Senate Bill 1 (“SB1”), the Road Repair and Accountability Act of 2017, was signed into law on April 28, 2017. The legislative package invests $54 billion over the next decade to fix roads, freeways and bridges in communities across California and puts more dollars towards transit and safety. These funds will be allocated to state and local projects.
The Canadian government has also enacted major infrastructure stimulus programs. In 2007, the Building Canada Plan provided $33 billion in infrastructure funding through 2014. The 2014 New Building Canada Fund is one component within the $53 billion 2014 New Building Canada Plan. The 2014 New Building Canada Fund provided funding for infrastructure projects at the national, provincial and local levels.
In addition to government funding and overall economic conditions, fluctuations in the price of oil, which is a major component of asphalt mix, may affect the Company’s financial performance. An increase in the price of oil increases the cost of liquid asphalt and could, therefore, decrease demand for hot mix asphalt paving materials and certain of the Company’s products. Increases in oil prices also drive up the cost of gasoline and diesel, which results in increased freight costs. Where possible, the Company will pass increased freight costs on to its customers. However, the Company may not be able to recapture all of the increased costs and thus could have a negative impact on the Company’s financial performance.
Steel is a major component used in manufacturing the Company’s equipment. The Company is subject to fluctuations in market prices for raw materials such as steel. If the Company is unable to purchase materials it requires or is unable to pass on price increases to its customers or otherwise reduce its cost of goods sold, its business results of operations and financial condition may be adversely affected.
The Company believes its strategy of continuing to invest in product engineering and development and its focus on delivering the highest quality products and superior service will strengthen the Company’s market position. The Company continues to review its internal processes to identify inefficiencies and cost-reduction opportunities. The Company will continue to scrutinize its relationships with external suppliers to ensure it is achieving the highest quality materials and services at the most competitive cost.
Results of Operations
Quarter Ended MarchDecember 31, 2017 versus MarchDecember 31, 2016
Net revenues for the quarterquarters ended MarchDecember 31, 2017 increased $448,000and December 31, 2016 were $23,122,000 and $15,783,000, respectively, an increase of $7,339,000 or 46.5%. The FAST Act, along with plans to $22,526,000 from $22,078,000 forincrease domestic infrastructure spending at the quarter ended March 31, 2016. The Companyfederal level, has continuedresulted in an increase in asphalt plant and component orders. Domestic highway contractors continue to see increased demand for its equipment during the second quarter of 2017.have a positive outlook supported by favorable market conditions.
As a percent of sales, gross profit margin increased to 29.6%margins were 22.0% in the quarter ended MarchDecember 31, 2017, from 24.6%compared to 26.3% in the quarter ended MarchDecember 31, 2016. The higher grossGross profit margin was duemargins declined as the Company increased its manufacturing overhead to improved efficiencies and cost absorption onsupport the significantly higher production, volumes.as annual revenues have doubled over the past two years.
Product engineering and development expenses increased $91,000$284,000 for the quarter ended MarchDecember 31, 2017 as compared to the quarter ended MarchDecember 31, 2016, due to increased staffing.staffing to meet the higher demands for our engineered products. Selling, general and administrative (“SG&A”) expenses decreased $63,000 inincreased $502,000 to $2,692,000 for the quarter ended MarchDecember 31, 2017, compared to the quarter ended MarchDecember 31, 2016. Headcount additions, higher sales commissions, and increased advertising and trade show expenses to capitalize on the renewed optimism within the highway construction industry contributed to most of the increase in SG&A expenses.
As a percentageresult of netthe improved revenues, SG&A expenses decreased to 9.4%, compared to 9.9% in the prior year quarter.
The Company had higher operating income of $4,060,000$1,691,000 for the quarter ended MarchDecember 31, 2017 versus $2,872,000operating income of $1,544,000 for the quarter ended MarchDecember 31, 2016. Operating margins improved to 18.0%, compared to 13.0% in the prior year quarter. The increase in operating income was due to improved gross profit margins.
For the quarter ended MarchDecember 31, 2017, interest and dividend income, net of fees, from the investment portfolio was $162,000,$293,000 as compared to $204,000 for$41,000 in the quarter ended MarchDecember 31, 2016. NetThe increase was due to additional interest income from investments in corporate bonds. The net realized and unrealized gains on marketable securities were $656,000$161,000 for the quarter ended MarchDecember 31, 2017 as compared to net realized and unrealized losses of $(490,000)versus $407,000 for the quarter ended MarchDecember 31, 2016.
The effective income tax rate for the quarter ended MarchDecember 31, 2017 was a benefit of (9.2%) compared to expense of 30.0% versus 37.0% for the quarter ended MarchDecember 31, 2016. The 2017 benefit resulted from a $0.7 million adjustment to the net deferred tax liability as a result of applying the lower corporate tax rates to comply with the recently enacted Tax Reform.
Net income for the quarter ended MarchDecember 31, 2017 was $3,415,000,$2,346,000 or $.23$0.16 basic and diluted earnings per diluted share versus $1,630,000,net income of $1,394,000 or $.11$0.10 basic and diluted earnings per diluted share for the quarter ended MarchDecember 31, 2016. The increase in net income was due to the improved sales, higher gross and operating margins, and higher investment income.
Six Months Ended March 31, 2017 versus March 31, 2016
Net sales for the six months ended March 31, 2017 and 2016 were $38,309,000 and $35,336,000, respectively, an increase of 8.4% as the positive impact of the FAST Act continued to aid results.
Gross profit margin increased to 28.2% in the six months ended March 31, 2017 from 24.7% in the six months ended March 31, 2016. The higher gross profit margin resulted from increased net revenues, improved efficiencies and cost absorption.
Product engineering and development expenses increased $125,000 in the six months ended March 31, 2017, compared to the six months ended March 31, 2016. SG&A expenses increased $342,000 in the six months ended March 31, 2017, compared to the six months ended March 31, 2016. As a percentage of net revenues, SG&A expenses were 11.3%, compared to 11.2% in the prior year six months. The higher expenses in 2017 were due to increased headcount and sales commissions from improved net revenues.
The Company had operating income of $5,604,000 for the six months ended March 31, 2017 versus $3,987,000 for the six months ended March 31, 2016. The improved operating results were due to increased net revenues and gross profit margins. Operating margins improved to 14.6%, compared to 11.3% in the six months ended March 31, 2016.
For the six months ended March 31, 2017, interest and dividend income, net of fees, from the investment portfolio was $203,000, as compared to $589,000 in 2016. Net realized and unrealized gains on marketable securities were $1,063,000 for the six months ended March 31, 2017 versus $103,000 for the six months ended March 31, 2016.
The effective income tax rate for the six months ended March 31, 2017 was 30.0% versus 31.5% for the six months ended March 31, 2016. The effective income tax rate for the six months ended March 31, 2016 was positively impacted by a $256,000 increase in the prior year federal tax benefit estimate. Net income for the six months ended March 31, 2017 was $4,809,000, or $.33 per diluted share, versus $3,205,000, or $.22 per diluted share, for the six months ended March 31, 2016. The increase in net income was due to the improved net revenues and gross profit margins, and higher investment income.
Liquidity and Capital Resources
The Company generates capital resources through operations and returns on its investments.
The Company had no long-term or short-term debt outstanding at MarchDecember 31, 2017 or September 30, 2016.2017. The Company does not currently require a credit facility. As of MarchDecember 31, 2017, the Company had funded $135,000 in cash deposits at insurance companies to cover related collateral needs.
As of MarchDecember 31, 2017, the Company had $27,036,000$24,863,000 in cash and cash equivalents, and $87,204,000$88,340,000 in marketable securities, including $69,712,000$42,499,000 in government securities, $9,182,000$16,387,000 in corporate bonds, $10,777,000 in equities, $5,411,000$8,730,000 in mutual funds, and $1,372,000$4,508,000 in exchange-traded funds and $1,527,000$5,439,000 in cash and money funds. The marketable securities are invested through a global professional investment management firm. These securities may be liquidated at any time into cash and cash equivalents.
The Company’s backlog was $42.9$50.2 million at MarchDecember 31, 2017, compared to $31.6$40.8 million at MarchDecember 31, 2016. The Company’s working capital (defined as current assets less current liabilities) was equal to $120.5$125.0 million at MarchDecember 31, 2017 and $115.2$124.7 million at September 30, 2016. Cash provided by operations during the six months ended March 31, 2017 was $9,139,000.2017. The significant purchases, sales and maturities of marketable securities shown on the Condensed Consolidated Statementscondensed consolidated statements of Cash Flowscash flows reflect the recurring purchase and sale of United States treasury bills. Accounts receivable increased $632,000 as parts sales increasedCash provided by operations during the quarter ended MarchDecember 31, 2017 as compared to the quarter ended September 30, 2016.was $3,617,000. Costs and estimated earnings in excess of billings decreased $3,241,000 with$1,041,000 and customer deposits decreased $1,315,000, reflecting the percentage of completion and timing of customer paymentsrecognition of revenues on open percentage-of-completion jobs. Inventories increased $2,964,000 reflecting an increase in jobs-in-progress at MarchDecember 31, 2017, compared to September 30, 2016.2017. Accounts payable increased $1,698,000 reflectingfrom increased parts and raw material purchases. Customer deposits increased $2,795,000 withpurchases for production to meet the increasegrowth in the number of open percentage-of-completion jobs, compared to September 30, 2016.customer orders.
Cash flows used in investing activities for the six monthsquarter ended MarchDecember 31, 2017 of $420,000 were$1,954,000 related to capital expenditures.expenditures, primarily new manufacturing machinery for handling and processing raw materials. Cash flows fromprovided by financing activities of $98,000 during$267,000 for the six monthsquarter ended MarchDecember 31, 2017 reflectrelated to proceeds from the proceeds received fromexercise of stock option exercises.options.
Seasonality
The Company primarily manufactures and sellsis concentrated in the manufacturing of asphalt plants and related components, andwhich is typically subject to a seasonal slow-down during the third and fourth quarters of the calendar year. This slow-down often results in lower reported sales and operating results during the first and fourth quarters of each fiscal year ended September 30.
Forward-Looking Information
This Report on Form10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which represent the Company’s expectations and beliefs, including, but not limited to, statements concerning gross margins, sales of the Company’s products and future financing plans. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company’s control. Actual results may differ materially depending on a variety of important factors, including the financial condition of the Company’s customers, changes in the economic and competitive environments and demand for the Company’s products.
For information concerning these factors and related matters, see the following sections of the Company’s Annual Report on Form10-K for the year ended September 30, 2016:2017: (a) “Risk Factors” in Part I and (b) “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II. However, other factors besides those referenced could adversely affect the Company’s results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by the Company herein speak as of the date of this Report. The Company does not undertake to update any forward-looking statements, except as required by law.
Critical Accounting Policies, Estimates and Assumptions
The Company believes the following discussion addresses its most critical accounting policies, which are those that are most important to the portrayal of the financial condition and results of operations and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Accounting policies, in addition to the critical accounting policies referenced below, are presented in Note 1 to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form10-K for the year ended September 30, 2016,2017, “Accounting Policies.”
Estimates and Assumptions
In preparing the Condensed Consolidated Financial Statements, the Company uses certain estimates and assumptions that may affect reported amounts and disclosures. Estimates and assumptions are used, among other places, when accounting for certain revenue (e.g., contract accounting), expense, and asset and liability valuations. The Company believes that the estimates and assumptions made in preparing the Condensed Consolidated Financial Statements are reasonable, but are inherently uncertain. Assumptions may be incomplete or inaccurate and unanticipated events may occur. The Company is subject to risks and uncertainties that may cause actual results to differ from estimated results.
Revenues & Expenses
Revenues from contracts for the design, manufacture and sale of asphalt plants are recognized under thepercentage-of-completion method. Thepercentage-of-completion method of accounting for these contracts recognizes revenue, net of any promotional discounts, and costs in proportion to actual labor costs incurred as compared with total estimated labor costs expected to be incurred during the entire contract.Pre-contract costs are expensed as incurred. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Revenue recognized in excess of amounts billed is classified as current assets under “costs and estimated earnings in excess of billings.” The Company anticipates that all incurred costs associated with these contracts at MarchDecember 31, 2017, will be billed and collected within one year.
Revenues from all other contracts for the design and manufacture of custom equipment, for service and for parts sales, net of any discounts and return allowances, are recorded when the following four revenue recognition criteria are met: product is delivereddelivered/ownership is transferred or service is performed, persuasive evidence of an arrangement exists, the selling price is fixed or determinable, and collectability is reasonably assured.
Return allowances,In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers: (Topic 606) (“ASU 2014-09”), amending its accounting guidance related to revenue recognition. Under this ASU and subsequently issued amendments, revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which reduce product revenue, are estimated using historical experience.the entity expects to be entitled in exchange for those goods or services. The Company’s customers may qualifystandard is effective for certain cash rebates generally basedannual periods beginning after December 15, 2017. The Company plans to adopt the new standard in fiscal 2019. The Company does not expect the adoption of this standard to have a material impact on its results of operations and is currently evaluating which one of the level of sales attained during a twelve-month period. two retrospective methods will be used for implementation.
Provisions for these rebates, as well as estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded. Returns and allowances, which reduce product revenue, are estimated using historical experience.
Product warranty costs are estimated using historical experience and known issues and are charged to production costs as revenue is recognized.
All product engineering and development costs, and selling, general and administrative expenses are charged to operations as incurred. Provision is made for any anticipated contract losses in the period that the loss becomes evident.
The allowance for doubtful accounts is determined by performing a specific review of all account balances greater than 90 days past due and other higher risk amounts to determine collectability and also adjusting for any known customer payment issues with account balances in theless-than-90-day past due aging buckets. Account balances are charged off against the allowance for doubtful accounts when they are determined to be uncollectable. Any recoveries of account balances previously considered in the allowance for doubtful accounts reduce future additions to the allowance for doubtful accounts.
Inventories
Inventories are valued at the lower of cost or market, with cost being determined principally by using thelast-in,first-out (“LIFO”) method and market defined as replacement cost for raw materials and net realizable value for work in process and finished goods. Appropriate consideration is given to obsolescence, excessive levels, deterioration, possible alternative uses and other factors in determining net realizable value. The cost of work in process and finished goods includes materials, direct labor, variable costs and overhead. The Company evaluates the need to record inventory adjustments on all inventories, including raw material, work in process, finished goods, spare parts and used equipment. Used equipment acquired by the Company ontrade-in from customers is carried at estimated net realizable value. Unless specific circumstances warrant different treatment regarding inventory obsolescence, the cost basis of inventories three to four years old are reduced by 50%, while the cost basis of inventories four to five years old are reduced by 75%, and the cost basis of inventories greater than five years old are reduced to zero. Inventory is typically reviewed for obsolescence on an annual basis computed as of September 30, the Company’s fiscal year end. If significant known changes in trends, technology or other specific circumstances that warrant consideration occur during the year, then the impact on obsolescence is considered at that time.
Investments
Marketable debt and equity securities are categorized as trading securities and are thus marked to market and stated at fair value. Fair value is determined using the quoted closing or latest bid prices for Level 1 investments and market standard valuation methodologies for Level 2 investments. Realized gains and losses on investment transactions are determined by specific identification and are recognized as incurred in the condensed consolidated statements of income. Net unrealized gains and losses are reported in the condensed consolidated statements of income in the current period and represent the change in the fair value of investment holdings during the period.
Long-LivedLong Lived Asset Impairment
Property and equipment, and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess over its fair value of the asset’s carrying value. Fair value is generally determined using a discounted cash flow analysis.
Off-Balance Sheet Arrangements
None
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company operates manufacturing facilities and sales offices principally locatedat two locations in the United States. The Company is subject to business risks inherent innon-U.S. activities, including political and economic uncertainty, import and export limitations, and market risk related to changes in interest rates and foreign currency exchange rates. ThePeriodically, the Company may use derivative financial instruments consisting primarily of interest rate hedge agreements to manage exposure to interest rate changes. The Company’s objective in managing its exposure to changes in interest rates on any future variable rate debt is to limit the impact on earnings and cash flow and reduce overall borrowing costs.
At MarchDecember 31, 2017 and September 30, 2016,2017, the Company had no debt outstanding. outstanding and there was no credit facility in place. The Company does not currently require a credit facility but continues to evaluate its needs and options for such a facility.
The Company’s marketable securities are invested primarily in cash and money funds, equities, mutual funds, exchange-traded funds, corporate bonds, and government securities mutual funds and exchange-traded funds through a global professional investment management firm.advisor. Investment securities are exposed to various risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of securities, it is possible that changes in these risk factors could have an adverse material impact on the Company’s results of operations or equity.
The Company’s sensitivity analysis for interest rate risk excludes accounts receivable, accounts payable and accrued liabilities because of the short-term maturity of such instruments. The analysis does not consider the effect on other variables, such as changes in sales volumes or management’s actions with respect to levels of capital expenditures, future acquisitions or planned divestures, all of which could be significantly influenced by changes in interest rates.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and PrincipalChief Financial and Accounting Officer evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based upon that evaluation, the Chief Executive Officer and the PrincipalChief Financial and Accounting Officer concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures are effective.
Because of inherent limitations, the Company’s disclosure controls and procedures, no matter how well-designedwell designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of such disclosure controls and procedures are met and no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company havehas been detected.
Changes in Internal Control over Financial Reporting
The Company’s management, including the Chief Executive Officer and PrincipalChief Financial and Accounting Officer, has reviewed the Company’s internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting during the quarter and six months ended MarchDecember 31, 2017 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is engaged in legal proceedings in the ordinary course of business. We do not believe any current legal proceedings are material to our business.
ITEM lA.1A. RISK FACTORS
There have been no material changes in our risk factors from those set forth in Part I, Item 1A, “Risk Factors” contained in our Annual Report on Form 10-K10K for the period ended September 30,2016,30, 2017, as filed with the SEC on December 2, 2016.6, 2017.
| (a) | Exhibits |
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as amended | |
31.2 | Certification of | |
32 | Certifications of Chief Executive Officer and | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | XBRL Taxonomy Extension Label Linkbase | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| GENCOR INDUSTRIES, INC. |
| /s/ John E. Elliott |
| John E. Elliott |
| Chief Executive Officer |
|
| /s/ Eric E. Mellen |
Eric E. Mellen |
Chief Financial Officer |
| (Principal Financial and Accounting Officer) |
|
17