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| GENC > SEC Filings for GENC > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
Overview
Our strong financial performance in the first quarter gave way to significantly weaker performance in the second quarter of fiscal 2009. The global financial crisis has led to a decrease in the number of orders of our larger capital equipment, though this has been offset partially by an increase in sales of our aftermarket parts and ancillary services. Overall, we expect the second half of fiscal year 2009 to remain challenging.
For the long term, we believe our strategy of continuing to invest heavily in Product Engineering and Development and our focus on delivering a higher quality product and superior service will strengthen our market position when demand for capital equipment rebounds. In the short term, the current economic outlook leaves us with little confidence there will be a marked improvement in the economy for the balance of 2009. In response to our short-term outlook, we have already taken aggressive actions to right size our cost structure and have taken other steps to preserve the healthy state of our balance sheet.
These actions include adjustments to workforce and staffing, reduced purchases of raw materials and reductions in selling, general, and administrative expenses. We continue to review our internal processes to identify efficiencies and cost reductions and will continue scrutinizing our relationships with external suppliers to ensure we are achieving the highest-quality products and services at the most competitive cost.
We also completed the transition of our investment portfolio to a more conservative strategy during this quarter by investing less in equities and more in bonds.
We continue to remain uncertain as to the state of the overall economy, and the impact, if any, the various governmental stimulus programs will have on revenues during the second half of 2009. However, we feel the actions we are taking to right size our cost structure now will prepare us for the future in the event of continued softness in demand for our larger capital equipment. Additionally, we will selectively and strategically build inventory in key product lines so we will be best positioned to meet or exceed expectations of our customers in terms of delivery time when the economic environment improves and access to capital is restored.
Results of Operations
Net sales for the three months ended March 31, 2009 and 2008 were $15,416 and $24,573, respectively. Domestic sales during the three months ended March 31, 2009 and 2008 were $15,143 and $24,178, respectively, reflecting a decrease of $9,035 from the second quarter of fiscal 2008. Domestic sales were lower than the prior year's comparable quarter primarily due to the overall worsening of the economy and tightening of credit availability.
Foreign sales decreased $122 in the three months ended March 31, 2009 compared to the three months ended March 31, 2008.
Net sales for the six months ended March 31, 2009 and 2008 were $34,676 and $42,905, respectively. Domestic sales during the six months ended March 31, 2009 and 2008 were $33,610 and $41,953, respectively, reflecting a decrease of $8,343. Domestic sales were lower than the comparable period in the prior year primarily due to the overall worsening of the economy and tightening of credit availability.
Gross profit percentage decreased from 28% in the three months ended March 31, 2008 to 13% in the three months ended March 31, 2009. Gross profit percentage decreased from 26% for the six months ended March 31, 2008 to 21% in the six-months ended March 31, 2009. Overall, the decreases in gross profit margin were due primarily to decreases in revenues with a lag in reducing our cost structure to be in line with expectations for revenue.
Our revenues are concentrated in the asphalt-related business and are subject to a seasonal slow-down during the third and fourth quarters of the calendar year. We cannot predict what impact the recession and tightening of the credit markets in the second half of fiscal 2008 and first half of fiscal 2009 will have on future earnings.
Selling and administrative expense increased $244 for the six months ended March 31, 2009 compared to the six months ended March 31, 2008. This was due primarily to an increase in professional fees and services. Selling and administrative expense decreased $392 for the three months ended March 31, 2009 compared to the three months ended March 31, 2008, due mainly to decreases in personnel and also decreases in commissions associated with a decrease in revenue for the quarter ended March 31, 2009.
We recognized income from investees (Carbontronics) of $48 in the six-month period ended March 31, 2009. We recognized income from investees (Carbontronics) of $15,625 in the six-month period ended March 31, 2008. We did not recognize income from investees (Carbontronics) in either of the quarters ended March 31, 2009 or 2008.
The operations of Carbontronics LLC consisted of the receipt of contingent payments from the sales from the plants and the distribution thereof to its members. Carbontronics LLC had no other significant operations or assets. The operations of Carbontronics II, LLC consisted of the receipt of royalty payments from the plants and the distribution thereof to its members. Carbontronics II, LLC had no other significant operations or assets. Any income arising from these investments was dependent upon tax credits (adjusted for operating losses at the fuel plants) being generated as a result of synthetic fuel production, which were recorded as received. These distributions were subject to state and Federal income taxes. Distributions from these entities depended upon the production of these operations qualifying for tax credits under Section 29 of the Internal Revenue Code and the ability to economically produce and market synthetic fuel produced by the plants.
The existing tax credit legislation expired at the end of calendar year 2007. Consequently, the four synthetic fuel plants were decommissioned. The plants were sold or transferred to site owners in exchange for a release of all contracted liabilities related to the removal of plants from the sites. The administrative partner has informed us that there were no operations in calendar 2008 and almost all of the partnership affairs were finalized in 2008. It is not possible to predict the amount, if any, of final distributions from the partnerships upon the final disposition and winding-up of operations.
For the three months ended March 31, 2009, and for the six months ended March 31, 2009, the change in value of our marketable securities was a gain of $470, and a loss of $1,463, respectively. For the three months ended March 31, 2008, and for the six months ended March 31, 2008, the change in value of our marketable securities was a loss of $1,358, and $865, respectively. All of these decreases are the result of decreases in the market value of the securities held in the portfolio.
Included in other income for the six months ended March 31, 2008 was the receipt of $4,100 in resolution of an outstanding claim against a former service provider less related legal costs of $700. The terms of the settlement are confidential and we do not expect any further collections or expenses related to this matter.
Income tax expense decreased by $1,038 and $8,987 as compared to the corresponding three month and six month periods ended March 31, 2009, respectively. This is reflective of decreases in pre-tax income for the comparable periods of the prior fiscal year.
Liquidity and Capital Resources
We generate our capital resources primarily through operations. Over the past three years, we also received cash from distributions from investees (Carbontronics). However, we did not receive significant distributions from Carbontronics for the three-month reporting period ended March 31, 2009, nor do we expect to receive significant distributions from Carbontronics in subsequent periods.
We entered into a Revolving Credit and Security Agreement with PNC Bank, N.A. The Agreement established a three year revolving $20 million credit facility and was renewed through July 31, 2009. The facility provides for advances based on accounts receivable, inventory and real estate. The facility includes a $2 million limit on letters of credit. At March 31, 2009, we had $1 million of letters of credit outstanding. The interest rate at March 31, 2009, is at LIBOR plus 2.00% and subject to change based upon the Fixed Charge Coverage Ratio. We are required to maintain a Fixed Charge Coverage Ratio of 1.1:1. There are no required repayments as long as there are no defaults and there is adequate eligible collateral. Substantially all of our assets are pledged as security under the Agreement. We had no long term debt outstanding at March 31, 2009 or 2008.
As of March 31, 2009, we had $8 million in cash and cash equivalents, and $53 million in marketable securities. The marketable securities are invested through a professional investment advisor. The securities may be liquidated at any time into cash and cash equivalents.
Our backlog is at $3.9 million at March 31, 2009 versus $16.1 million at March 31, 2008. Orders have reduced significantly as a result of the recession and credit tightening in the second half of fiscal 2008 and first half of fiscal 2009.
In terms of working capital (defined as current assets less current liabilities), our balance of $90 million for the six month period ended March 31, 2009, was in line with a working capital balance of $90 million at September 30, 2008.
Cash provided from Operations during the six months period ended March 31, 2009 was $4.7 million. This was driven in part by favorable reductions in accounts receivable and inventory.
Cash used for Investing activities during the six months period ended March 31, 2009 was $0.1 million and resulted from the purchase of fixed assets.
In terms of Financing activities, there were no cash disbursements or receipts during the quarter ended March 31, 2009.
Seasonality
We are concentrated in the asphalt-related business and subject to a seasonal slow-down during the third and fourth quarters of the calendar year. Traditionally, our 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. This slow-down often results in lower reported sales and earnings and/or losses during the first and fourth quarters of our fiscal year ended September 30.
Forward-Looking Information
This Report on Form 10-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 our expectations and beliefs, including, but not limited
to, statements concerning gross margins, sales of our products and future
financing plans. These statements by their nature
involve substantial risks and uncertainties, certain of which are beyond our control. Actual results may differ materially depending on a variety of important factors, including the financial condition of our customers, changes in the economic and competitive environments and demand for our products.
For information concerning these factors and related matters, see the following sections of our Annual Report on Form 10-K for the year ended September 30, 2008: (a) "Risk Factors" in Part I, Item 1A and (b) "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7. However, other factors besides those referenced could adversely affect our 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 us herein speak as of the date of this Report. We do not undertake to update any forward-looking statement, except as required by law.
Critical Accounting Policies, Estimates and Assumptions
We believe the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our 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 our consolidated financial statement included in our Annual Report on Form 10-K for the year ended September 30, 2008, "Accounting Policies."
Estimates and Assumptions
In preparing the consolidated financial statements, we use 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. We believe the estimates and assumptions made in preparing the consolidated financial statements are reasonable, but are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate and unanticipated events may occur. We are subject to risks and uncertainties that may cause actual results to differ from estimated results.
Revenues
Revenues from contracts for the design and manufacture of certain custom equipment are recognized under the percentage-of-completion method. Revenues from all other sales are recorded as the products are shipped or service is performed.
The percentage-of-completion method of accounting for long term contracts recognizes revenue in proportion to actual labor costs incurred as compared with total estimated labor costs expected to be incurred during the entire contract. All 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.
Investments
We mark to market all trading securities and record any unrealized gain or loss as income or loss in the current period.
Investment in Unconsolidated Investees
We owned a 45% interest in Carbontronics LLC and a 25% interest in Carbontronics Fuels LLC and Carbontronics II LLC. These interests were obtained as part of contracts to build four synthetic fuel production plants during 1998. We have no basis in these equity investments or requirement to provide future funding. Any income arising from these investments was dependent upon tax credits (adjusted for operating losses at the fuel plants) being generated as a result of synthetic fuel production, which were recorded as received. The synthetic fuel tax credit legislation expired at the end of calendar year 2007.
Off-Balance Sheet Arrangements
None
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