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GENC > SEC Filings for GENC > Form 10-Q on 14-May-2013All Recent SEC Filings

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Form 10-Q for GENCOR INDUSTRIES INC


14-May-2013

Quarterly Report


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, infrastructure development in emerging economies, 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.

In August 2005, the federal government passed the Safe, Accountable, Flexible and Efficient Transportation Equity Act - A Legacy for Users ("SAFETEA-LU"). This bill appropriated a multi-year guaranteed funding of $286.5 billion for federal highway, transit and safety programs that expired on September 30, 2009. On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 ("ARRA"), which included approximately $27.5 billion for highway and bridge construction activities. The ARRA and any future legislation approved by Congress could reduce infrastructure funding levels. In addition, funding restrictions can be imposed on states that do not comply with certain federal policies. On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment ("HIRE") Act. This law extended authorization of the surface transportation programs previously funded under SAFETEA-LU through December 31, 2010 at 2009 levels. In addition, the HIRE Act authorized a one-time transfer of $19.5 billion from the general fund to the Highway Trust Fund related to previously foregone interest payments. On December 22, 2010, President Obama signed into law the Continuing Appropriations and Surface Transportation Extensions Act, 2011 extending funding for federal surface transportation programs authorized under SAFETEA-LU through March 4, 2011. On March 4, 2011, President Obama signed into law the Surface Transportation Extension Act of 2011 providing an extension of Federal-aid highway, transit and other programs funded out of the Highway Trust Fund through September 30, 2011. On September 17, 2011, President Obama signed an eighth extension of SAFETEA-LU, authorizing funding at 2011 levels through March 31, 2012. On March 30, 2012, the President signed into law the Surface Transportation Extension Act of 2012, a 90-day extension of the existing federal transportation reauthorization. The bill contained no policy changes and extended current programs and funding levels through June 30, 2012, pending enactment of a multi-year law reauthorizing such programs.

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 includes a final three-month extension of SAFETEA-LU combined with a new two-year, $105 billion authorization of the federal highway, transit, and safety programs effective October 1, 2012. The bill provides states with two years of funding to build roads, bridges, and transit systems.

The Canadian government enacted major infrastructure stimulus programs which benefitted the Company. In 2007, the Building Canada Plan provided $33 billion in infrastructure funding through 2014. As part of the Building Canada Plan, the Gas Tax Fund was approved in 2009, providing $2 billion in annual infrastructure spending. The Infrastructure Canada Plan provided $4 billion in additional infrastructure funding from 2009 through 2011.

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 asphalt and certain of the Company's products. Increases in oil prices also drive up the cost of gasoline, 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. Fluctuations in the price of steel can have a significant impact on the Company's financial results. Where possible, the Company will pass on increased steel costs to its customers. However, the Company may not be able to recapture all of the increased steel costs and thus its financial results could be negatively affected.

Over the long term, the Company believes its strategy of continuing to invest in product engineering and development and its focus on delivering high-quality products and superior service will strengthen the Company's market position when demand for its products rebound. In response to the short-term outlook, the Company has taken actions to conserve cash, right-size its operations and cost structure. The Company continues to review its internal processes to identify inefficiencies and cost reductions and will continue reviewing its relationships with suppliers to ensure the Company is achieving the highest quality products and services at the most competitive prices.

Results of Operations

Quarter Ended March 31, 2013 versus March 31, 2012

Net revenues for the quarters ended March 31, 2013 and 2012 were $17,737,000 and $19,339,000, respectively, a decrease of $1,602,000 or 8.3%. Revenues in the quarter continued to be below prior-year levels, as the domestic roadbuilding industry languishes under current economic conditions and resulting shortfall in state tax revenues. The Company's operations are concentrated in the asphalt-related business and are typically subject to a seasonal slow-down during the third and fourth quarters of the calendar year.

As a percent of sales, gross profit margins increased from 21.0% in the quarter ended March 31, 2012 to 24.4% in the quarter ended March 31, 2013. The gross margin increase was primarily due to reduced spending and improved manufacturing efficiencies.

Product engineering and development expenses decreased $102,000 to $454,000 in the quarter ended March 31, 2013, consistent with reduced sales. Selling, general and administrative expenses decreased $539,000 in the quarter ended March 31, 2013 as a result of reduced sales and lower legal expenses.

The Company had operating income of $1,888,000 for the quarter ended March 31, 2013 versus $987,000 for the quarter ended March 31, 2012. The improvement in operating income was due to improved gross margins and reduced selling, general and administrative expenses.

For the quarters ended March 31, 2013 and 2012, investment interest and dividend income, net of fees, from the investment portfolio was $553,000. The net realized and unrealized gains on marketable securities were $1,269,000 for the quarter ended March 31, 2013 versus net realized and unrealized gains of $2,611,000 for the quarter ended March 31, 2012.

In April 2013, the Company received a favorable IRS ruling on its research and development tax credits on amended returns filed for tax years 2006 through 2008. Although the final audit results are not complete, the Company has recorded a tax receivable, and reduced its tax provision for the quarter and six months ended March 31, 2013, in the amount of $750,000.

The effective income tax rate for the quarter ended March 31, 2013 was 20.0% versus 33.7% for the quarter ended March 31, 2012. In addition to the positive impact of the research and development tax credits on the fiscal 2013 tax expense, the effective income tax rates for both years were impacted by tax-exempt interest income and premium amortization on municipal bonds.

Six Months Ended March 31, 2013 versus March 31, 2012

Net sales for the six months ended March 31, 2013 and 2012 were $22,685,000 and $26,203,000, respectively, a decrease of 13.4%.

Gross profit margins increased to 20.9% in the six months ended March 31, 2013 from 18.3% in the six months ended March 31, 2012. The improved gross margins resulted from reduced spending and improved manufacturing efficiencies.


Product engineering and development expenses decreased $193,000 on reduced sales. Selling, general and administrative expenses decreased $377,000 in the six months ended March 31, 2013 compared to the six months ended March 31, 2012 on reduced sales and lower legal expenses.

The Company had an operating loss of $(102,000) for the six months ended March 31, 2013 versus an operating loss of $(626,000) for the six months ended March 31, 2012. The improved operating results were due to higher gross margins and reduced selling, general and administrative expenses.

For the six months ended March 31, 2013, investment interest and dividend income, net of fees, from the investment portfolio was $1,243,000 as compared to $1,123,000 in the 2012 comparable period. The net realized and unrealized gains on marketable securities were $743,000 for the six months ended March 31, 2013 versus net realized and unrealized gains of $4,838,000 for the six months ended March 31, 2012.

In April 2013, the Company received a favorable IRS ruling on its research and development tax credits on amended returns filed for tax years 2006 through 2008. Although the final audit results are not complete, the Company has recorded a tax receivable, and reduced its tax provision for the quarter and six months ended March 31, 2013, in the amount of $750,000.

The effective income tax rate for the six months ended March 31, 2013 was a benefit of 5.4% versus expense of 32.2% for the six months ended March 31, 2012. In addition to the positive impact of the research and development tax credits on the fiscal 2013 tax expense, the effective income tax rates in both years were impacted by tax-exempt interest income and premium amortization on municipal bonds.

Liquidity and Capital Resources

The Company does not currently require a credit facility but continues to review and evaluate its needs and options for such a facility.

The Company had no long-term or short-term debt outstanding at March 31, 2013 or September 30, 2012. The Company has funded $362,000 in cash deposits at insurance companies to cover related collateral needs.

As of March 31, 2013, the Company had $6,398,000 in operating cash, and $81,361,000 in its investment portfolio, including $18,222,000 in equities, $20,520,000 in mutual funds, $4,833,000 in exchange traded funds, $35,370,000 in fixed income investments and $2,416,000 in cash and money funds (see Note 2). These marketable securities are invested through a professional investment management firm. These securities may be liquidated at any time into cash and cash equivalents.

The Company's working capital (defined as current assets less current liabilities) was equal to $98.9 million at March 31, 2013 and $96.2 million at September 30, 2012. For the six months ended March 31, 2013, customer deposits increased as down payments were made in the current quarter on several large jobs. Prepaid expenses and other current assets increased primarily from the $750,000 tax receivable related to research and development tax credits on amended returns filed for tax years 2006 through 2008 (see Note 6). Inventories and accounts payable increased with the increased production as compared to September 2012.

Cash provided by operations during the six months ended March 31, 2013 was $3,674,000 primarily from net income and customer deposits on new bookings. Cash flows used in investing activities for the six months ended March 31, 2013 of $637,000 were related to capital expenditures. There were no cash disbursements or receipts related to financing activities during the six months ended March 31, 2013.

Seasonality

The Company's operations are concentrated in the asphalt-related business and are 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 earnings or losses during the first and fourth quarters of each 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 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 Form 10-K for the year ended September 30, 2012: (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 Form 10-K for the year ended September 30, 2012, "Accounting Policies."

Estimates and Assumptions

In preparing the 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 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 the percentage-of-completion method. The percentage-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 March 31, 2013 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 delivered or service is performed, persuasive evidence of an arrangement exists, the selling price is fixed or determinable, and collectability is reasonably assured.

Return allowances, which reduce product revenue, are estimated using historical experience. The Company's customers may qualify for certain cash rebates generally based on the level of sales attained during a twelve-month period. 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.

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 the less-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.

Investments

The Company marks to market all trading securities and records any unrealized gains or losses as income or loss in the current period.

Long-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


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