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| GENC > SEC Filings for GENC > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
Overview
Sales continued to weaken during our third fiscal quarter as the roadbuilding industry languishes under the current economic conditions. Although the much-ballyhooed "Stimulus" program announced by President Obama at the beginning of the year was to have placed billions of federal money with States which had highway projects engineered and "shovel ready", precious little has actually happened. As of this point in time, very few unemployed construction workers have left the unemployment lines and donned the orange jackets of road construction workers.
Our backlog of proposals to prospective buyers of asphalt plants and major pieces of equipment is in excess of $200 million, but very little movement is occurring as contractors are waiting for the States to move forward with the projects, or for availability of bank financing. In the meantime, the nation's roads continue to languish in need of repair or expansion. We remain optimistic that this is a temporary situation and hopeful that orders of our larger capital equipment will improve in fiscal 2010, although at this time, the magnitude of that improvement cannot be determined.
Fortunately, the reduction in sales of our larger equipment has resulted in part in an increase in sales of components, aftermarket parts, and ancillary services as many customers are choosing to maintain versus replace or upgrade their equipment.
In the short term, the current economic outlook leaves us with little confidence that there will be a marked improvement in the economy and the roadbuilding industry for the balance of 2009.
For the long term, we believe our strategy of continuing to invest heavily in Product Engineering and Development and our focus on delivering a high-quality product and superior service will strengthen our market position when demand for capital equipment rebounds. In response to our short-term outlook, we have already taken aggressive actions to conserve cash, right size our operations and cost structure, and will continue to do so based on our forecasts. 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 feel we are taking the appropriate actions to right size our cost structure which will prepare us for the future when the current deterrents to our market dissipate. Additionally, we will continue to strategically build inventory in key product lines so we will be best positioned to meet and exceed expectations of our customers in terms of delivery time when the economic environment improves and access to capital is restored.
Overall, we expect our fourth fiscal quarter ending September 30, 2009 to remain challenging, but are optimistic that significant improvement, and return to normalcy will begin during the last quarter of this calendar year. In the meantime, we are managing our strong cash reserves, and investments prudently, and profitably, with view to growing the company organically, as well as by acquisition, if the opportunity arises.
Results of Operations
Net sales for the three months ended June 30, 2009 and 2008 were $11,674 and $23,907, respectively. Domestic sales during the three months ended June 30, 2009 and 2008 were $11,653 and $22,670, respectively, reflecting a decrease of $11,017. Domestic sales were lower than the prior year's comparable quarter. We believe this was primarily due to the overall worsening of the economy and tightening of credit availability. Foreign sales decreased $1,127 in the three months ended June 30, 2009 compared to the three months ended June 30, 2008.
Net sales for the nine months ended June 30, 2009 and 2008 were $46,350 and $66,812, respectively. Domestic sales during the nine months ended June 30, 2009 and 2008 were $45,264 and $64,713, respectively, reflecting a decrease of $19,449. Domestic sales were lower than the comparable period in the prior year. We believe this was primarily due to the overall worsening of the economy and tightening of credit availability.
Gross profit percentage decreased from 20% in the three months ended June 30, 2008 to 17% in the three months ended June 30, 2009. Gross profit percentage decreased from 24% for the nine months ended June 30, 2008 to 20% in the nine-months ended June 30, 2009. Overall, the decreases in gross profit margin were due primarily to decreases in revenues with less than a proportionate decrease in our existing cost structure.
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 current recession will have on future earnings.
Selling, general, and administrative expense decreased $803 for the nine months ended June 30, 2009 compared to the nine months ended June 30, 2008. Selling and administrative expense decreased $1,090 for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. These reductions were primarily the result of decreases in personnel, deferral or cancellation of discretionary expenses, and also decreases in commissions associated with decreases in revenue versus comparable periods.
We recognized income from investees (Carbontronics) of $48 in the nine-month period ended June 30, 2009. We recognized income from investees (Carbontronics) of $15,625 in the nine-month period ended June 30, 2008. We did not recognize income from investees (Carbontronics) in either of the three-month periods ended June 30, 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 synthetic fuel 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 June 30, 2009, and for the nine months ended June 30, 2009, the change in value of our marketable securities was a gain of $174, and a loss of $1,288, respectively. During the quarter ended June 30, 2009, we transferred $6,000 from our operating cash accounts to our investment portfolio. After this transfer, the cost basis in our investments portfolio grew from $46,000 to $52,000. For the three months ended June 30, 2008, and for the nine months ended June 30, 2008, the change in value of our marketable securities was a loss of $2, and $867, respectively. All of these decreases were the result of decreases in the market value of the securities held in the portfolio.
Included in other income for the nine months ended June 30, 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 $441 and $9,429 as compared to the corresponding three month and nine month periods ended June 30, 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 June 30, 2009, nor do we expect to receive significant distributions from Carbontronics in subsequent periods.
We maintained 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 provided for advances based on accounts receivable, inventory, and real estate. The facility included a $2 million limit on letters of credit. At June 30, 2009, we had $1.1 million of letters of credit outstanding. The interest rate at June 30, 2009, is at LIBOR plus 2.00% and subject to change based upon the Fixed Charge Coverage Ratio. We were required to maintain a Fixed Charge Coverage Ratio of 1.1:1. There were no required repayments as long as there were no defaults and there was adequate eligible collateral. Substantially all of our assets were pledged as security under the Agreement. We had no long term debt outstanding at June 30, 2009 or 2008. Prior to expiration of our credit facility with PNC Bank, we elected to amend this agreement as disclosed under the heading, "Contractual Obligations", as set forth below in this Item 2.
As of June 30, 2009, we had $3.8 million in cash and cash equivalents, and $58.7 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 $2.6 million at June 30, 2009 versus $18.9 million at June 30, 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. We are uncertain whether the decline in backlog was experienced by the industry as a whole.
In terms of working capital (defined as current assets less current liabilities), our balance of $89 million for the nine month period ended June 30, 2009, was in line with a working capital balance of $90 million at September 30, 2008.
Cash provided by Operations during the nine months ended June 30, 2009 was $126 thousand. This was driven in part by a reduction of revenue.
Cash utilized for Investing activities during the nine months period ended June 30, 2009 was $205 thousand and was primarily the result of capital expenditures. We historically operated a manufacturing facility and sales office in the United Kingdom. The revenues of the UK operations have been insignificant to our financial results. In June 2009, we sold our UK operations for $648 thousand dollars (not including transaction costs of $22 thousand dollars) and recognized a loss of $447 thousand dollars. We retained ownership of the building and land, the brand
name ("General Combustion"), and the associated intellectual property (e.g., engineering drawings). Consequently, and going forward, we currently do not expect to have Market Risk associated with the UK operations.
In terms of Financing activities, there were no cash disbursements or receipts during the quarter ended June 30, 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."
SFAS No. 165, "Subsequent Events" (SFAS 165): In May 2009, the FASB issued SFAS 165, "Subsequent Events". This pronouncement establishes general standards of accounting for and disclosure of events which occur after the balance sheet date but before the financial statements are issued or are available to be issued. SFAS 165 provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions which occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures an entity should make regarding events or transactions which occurred after the balance sheet date. We adopted SFAS 165 during the third quarter of fiscal 2009, and its application had no impact on our condensed consolidated financial statements. We evaluated subsequent events through the date the accompanying financial statements were issued, August 10, 2009.
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.
Contractual Obligations
We amended the Revolving Credit and Security Agreement with PNC Bank, N.A., on July 23, 2009. The original agreement was set to expire on July 31, 2009, and rather than let it expire, we elected to amend this agreement and reduce the amount of the credit facility from $20 million to $1.5 million. The facility also includes a $1.285 million limit on letters of credit, which is reduced from our original $2 million limit. We elected to reduce our credit facility at this time because we believe the higher amount associated with the original line was not needed. We are currently evaluating other options for a revolving credit facility.
Pursuant to the Third Amendment to the Revolving Credit and Security Agreement with PNC Bank, N.A., our credit facility shall continue until April 30, 2010, unless terminated sooner. We secured this revolving credit facility with a pledge of $2 million of assets from our investment portfolio by opening a separate bank account with PNC Bank, N.A. This pledge is governed by the Pledge Agreement with PNC Bank, N.A., dated July 23, 2009. In connection with the Third Amendment to the Revolving Credit and Security Agreement with PNC Bank, N.A., all representations, warranties, covenants, rights, duties and obligations set forth in the original agreement continue to apply, except as modified.
Off-Balance Sheet Arrangements
None
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