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GENC > SEC Filings for GENC > Form 10-Q on 13-Aug-2013All Recent SEC Filings

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Form 10-Q for GENCOR INDUSTRIES INC


13-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Gencor Industries, Inc. ("Gencor" or 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 May. 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, and 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 prior years. 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 the overall economic conditions, fluctuations in the price of oil, which is a significant cost 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 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 higher freight costs 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.


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Steel is a major raw material 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 higher steel costs to its customers. However, the Company may not be able to recapture all of the higher steel costs and thus its financial results could be negatively affected.

For the long term, the Company believes the strategy of continuing to invest in product engineering and development and its focus on delivering a high-quality product 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 aggressive actions to conserve cash, right-size its operations and cost structure, and will continue to do so based on its forecast. These actions included adjustments to workforce, reduced purchases of raw materials and reductions in selling, general, and administrative expenses. The Company continues to review its internal processes to identify inefficiencies and cost reduction opportunities. It will continue to scrutinize its relationships with external suppliers to ensure the Company is achieving the highest quality materials and services at the most competitive cost.

Results of Operations

Quarter Ended June 30, 2013 versus June 30, 2012

Net revenue for the quarters ended June 30, 2013 were $18,690,000 as compared to $22,986,000 for the quarter ended June 30, 2012, a decrease of 18.7%. Revenues in the quarter were below prior-year levels, as the domestic road-building industry languishes from a reduction in federal and state highway projects. 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 net revenue, gross profit margins increased from 25.0% in the quarter ended June 30, 2012 to 26.6% in the quarter ended June 30, 2013. Gross margins improved in 2013 primarily due to reduced material costs and improved manufacturing efficiencies.

Product engineering and development expenses decreased $250,000 to $420,000 in the quarter ended June 30, 2013, as compared to the quarter ended June 30, 2012, on cost containment initiatives. Selling, general and administrative expenses decreased $811,000 to $1,867,000 in the quarter ended June 30, 2013, compared to $2,678,000 in the quarter ended June 30, 2012, as a result of reduced sales, headcount reductions and lower legal expenses.

The Company had operating income of $2,683,000 for the quarter ended June 30, 2013 versus operating income of $2,401,000 for the quarter ended June 30, 2012. The improvement in operating income was due to improved gross margins and reduced product development, engineering and selling, general and administrative expenses.

For the quarter ended June 30, 2013, investment interest and dividend income, net of fees, from the investment portfolio was $516,000, as compared to $581,000 in the quarter ended June 30, 2012. The lower interest and dividend income was due to a reduction in municipal bond holdings. The net realized and unrealized gain on marketable securities was $145,000 for the quarter ended June 30, 2013 versus net realized and unrealized loss of $(1,290,000) for the quarter ended June 30, 2012.

In July 2013, the Company received a favorable IRS ruling on its research and development tax credits on its 2009 amended tax return. Although the final audit results are not complete, the Company has recorded a tax receivable, and reduced its tax provision for the quarter ended June 30, 2013, in the amount of $350,000.

The effective income tax rate for the quarter ended June 30, 2013 was 26.0% versus 30.1% for the quarter ended June 30, 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.


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Nine Months Ended June 30, 2013 versus June 30, 2012

Net revenue for the nine months ended June 30, 2013 and 2012 were $41,375,000 and $49,189,000, respectively, a decrease of 15.9%.

As a percent of net revenue, gross profit margins increased to 23.5% in the nine months ended June 30, 2013 from 21.4% in the nine months ended June 30, 2012. The higher gross margins resulted from reduced spending and improved manufacturing efficiencies.

Product engineering and development expenses decreased $442,000. Selling, general and administrative expenses decreased $1,189,000 in the nine months ended June 30, 2013, compared to the nine months ended June 30, 2012, on reduced sales, headcount reductions and lower legal expenses.

The Company had operating income of $2,581,000 for the nine months ended June 30, 2013 versus operating income of $1,775,000 for the nine months ended June 30, 2012. The improved operating results were due to higher gross margins and reduced product development, engineering and selling, general and administrative expenses.

For the nine months ended June 30, 2013, investment interest and dividend income, net of fees, from the investment portfolio was $1,759,000, as compared to $1,704,000 in the 2012 comparable period. The net realized and unrealized gains on marketable securities were $888,000 for the nine months ended June 30, 2013 versus net realized and unrealized gains of $3,548,000 for the nine months ended June 30, 2012.

The Company has received favorable IRS rulings on its research and development tax credits on amended returns filed for tax years 2006 through 2009. Although the final audit results are not complete, the Company has recorded a tax receivable, and reduced its tax provision for the nine months ended June 30, 2013, in the amount of $1,100,000.

The effective income tax rate for the nine months ended June 30, 2013 was 14.7% versus 31.7% for the nine months ended June 30, 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.

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 interest bearing debt outstanding at June 30, 2013 or September 30, 2012. As of June 30, 2013, the Company has funded $362,000 in cash deposits at insurance companies to cover related collateral needs.

As of June 30, 2013, the Company had $8,491,000 in operating cash, and $82,023,000 in its investment portfolio, including $13,726,000 in equities, $26,384,000 in mutual funds, $18,632,000 in municipal bonds, $15,821,000 in corporate bonds, $5,394,000 in exchange traded funds and $2,066,000 in cash and money funds (see Note 2). The investment portfolio is managed by a global investment management firm. The securities in the portfolio may be liquidated into cash at any time.

The Company's working capital (defined as current assets less current liabilities) was $102.4 million at June 30, 2013 and $96.2 million at September 30, 2012. For the nine months ended June 30, 2013, customer deposits increased as down payments were made in the current period on several projects. Prepaid expenses and other current assets increased primarily from the $1,100,000 tax receivable related to research and development tax credits on amended returns filed for tax years 2006 through 2009 (see Note 6).

Cash provided by operations during the nine months ended June 30, 2013 was $6,237,000 primarily from net income and customer deposits on new bookings. Cash flows used in investing activities for


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the nine months ended June 30, 2013 of $1,107,000 were related to capital expenditures on manufacturing equipment. There were no cash disbursements or receipts related to financing activities during the nine months ended June 30, 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 revenues, and earnings or losses during the first and fourth quarters of each fiscal year ended September 30.

Customers with 10% (or greater) of Net Revenues

Approximately 2% of net revenues in the June 30, 2013 quarter and 44% of net revenues for the June 30, 2012 quarter were from multiple entities owned by a global company. For the nine months ended June 30, 2013 and June 30, 2012, this company represented 13% and 27% of total net revenue, respectively. Prior to 2012, this company represented less than 10% of annual net revenues.

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, some 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.


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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 June 30, 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 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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