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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM
10-Q
 
 
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2022
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
incorporation or organization)
  
(IRS 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)
 
 
Securities registered or to be registered pursuant to Section 12(b) of the Act
 
Title of Each Class
  
Trading
Symbol(s)
  
Name of Exchange
on which registered
Common Stock ($.10 Par Value)
  
GENC
  
NYSE American LLC
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 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
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 Rule
12b-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 August 5, 2022
  
Common
Stock
, $.10 par value
      12,338,845 shares  
Class B
Stock
, $.10 par value
      2,318,857 shares  
 
 
 
GENCOR INDUSTRIES, INC.
 
Index
        
Page
  
Part I. Financial Information         
       
     Item 1.    Financial Statements         
       
          Condensed Consolidated Balance Sheets – June 30, 2022 (Unaudited) and September 30, 2021      4  
       
          Condensed Consolidated Statements of Operations – Quarters and Nine Months Ended June 30, 2022 and 2021 (Unaudited)      5  
       
          Condensed Consolidated Statements of Shareholders’ Equity – Nine Months Ended June 30, 2022 and 2021 (Unaudited)      6  
       
          Condensed Consolidated Statements of Cash Flows – Nine Months Ended June 30, 2022 and 2021 (Unaudited)      7  
       
          Notes to Condensed Consolidated Financial Statements (Unaudited)      8  
       
     Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      15  
       
     Item 3.    Quantitative and Qualitative Disclosures about Market Risk      21  
       
     Item 4.    Controls and Procedures      21  
   
Part II. Other Information         
       
     Item 1.    Legal Proceedings      22  
       
     Item 1A.    Risk Factors      22  
       
     Item 6.    Exhibits      23  
     
Signatures           24  
 
2
Caution Concerning Forward-Looking Statements
This Quarterly Report on Form
10-Q
(this “Quarterly Report”) and the Company’s other communications and statements may contain 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”), including statements about the Company’s beliefs, plans, objectives, goals, expectations, estimates, projections and intentions. All forward-looking statements, by their nature, 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 Company’s actual future results may differ materially from those set forth in the Company’s forward-looking statements depending on a variety of important factors, including the financial condition of the Company’s customers, changes in the economic and competitive environments, demand for the Company’s products, the duration and scope of the coronavirus
(“COVID-19”)
pandemic and its variants, actions government entities and businesses take in response to the
COVID-19
pandemic, including mandatory business closures; the impact of the pandemic and actions taken on regional economies; and the pace of recovery when the
COVID-19
pandemic subsides. In addition, on February 24, 2022, Russian forces invaded Ukraine. The impact to Ukraine as well as actions taken by other countries, including new and stricter sanctions imposed by the U.S. and other countries and companies against officials, individuals, regions, and industries in Russia, and actions taken by Russia and certain other countries in response to such sanctions, could result in a disruption in our supply chain and higher costs of our products. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements.
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, 2021: (a) Part I, Item 1A, “Risk Factors” and (b) Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. 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 statement made by the Company herein speaks as of the date of this Quarterly Report. The Company does not undertake to update any forward-looking statements, except as required by law.
Unless the context otherwise indicates, all references in this Quarterly Report to the “Company,” “Gencor,” “we,” “us,” or “our,” or similar words are to Gencor Industries, Inc. and its subsidiaries.
 
3
Part I. Financial Information
 
Item 1.
Financial Statements
GENCOR INDUSTRIES, INC.
Condensed Consolidated Balance Sheets
 
    
June 30, 2022

(Unaudited)
     
September 30,
2021
  
ASSETS
      
Current assets:
      
Cash and cash equivalents
    $ 19,474,000      $ 23,232,000  
Marketable securities at fair value (cost of $95,216,000 at June 30, 2022 and $93,690,000 at September 30, 2021)
      91,116,000        94,976,000  
Accounts receivable, less allowance for doubtful accounts of $353,000 at June 30, 2022 and $321,000 at September 30, 2021
      4,198,000        2,622,000  
Costs and estimated earnings in excess of billings
      1,366,000        1,903,000  
Inventories, net
      48,244,000        41,888,000  
Prepaid expenses and other current assets
      3,720,000        2,202,000  
  
 
 
     
 
 
  
Total current assets
      168,118,000        166,823,000  
  
 
 
     
 
 
  
Property and equipment, net
      11,919,000        11,801,000  
Deferred and other income taxes
      783,000        —    
Other long-term assets
      550,000        838,000  
  
 
 
     
 
 
  
Total Assets
    $ 181,370,000      $ 179,462,000  
  
 
 
     
 
 
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
      
Current liabilities:
      
Accounts payable
    $ 5,001,000      $ 3,105,000  
Customer deposits
      7,436,000        5,244,000  
Accrued expenses
      1,997,000        2,645,000  
Current operating lease liabilities
      413,000        393,000  
  
 
 
     
 
 
  
Total current liabilities
      14,847,000        11,387,000  
Deferred and other income taxes
      —          394,000  
Non-current
operating lease liabilities
      84,000        392,000  
  
 
 
     
 
 
  
Total liabilities
      14,931,000        12,173,000  
  
 
 
     
 
 
  
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; 12,338,845 shares issued and outstanding at June 30, 2022 and September 30, 2021
      1,234,000        1,234,000  
Class B Stock, par value $.10 per share; 6,000,000 shares authorized; 2,318,857 shares issued and outstanding at June 30, 2022 and September 30, 2021
      232,000        232,000  
Capital in excess of par value
      12,590,000        12,590,000  
Retained earnings
      152,383,000        153,233,000  
  
 
 
     
 
 
  
Total shareholders’ equity
      166,439,000        167,289,000  
  
 
 
     
 
 
  
Total Liabilities and Shareholders’ Equity
    $ 181,370,000      $ 179,462,000  
  
 
 
     
 
 
  
See accompanying Notes to Condensed Consolidated Financial Statements
 
4
GENCOR INDUSTRIES, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
 
    
For the Quarters Ended

June 30,
     
For the Nine Months Ended

June 30,
  
    
2022
    
2021
     
2022
    
2021
  
Net revenue
    $ 29,647,000     $ 24,919,000      $ 80,407,000     $ 65,235,000  
Cost of goods sold
      23,968,000       19,314,000        64,831,000       50,504,000  
  
 
 
    
 
 
     
 
 
    
 
 
  
Gross profit
      5,679,000       5,605,000        15,576,000       14,731,000  
Operating expenses:
          
Product engineering and development
      951,000       1,176,000        3,219,000       3,089,000  
Selling, general and administrative
      2,577,000       3,202,000        9,340,000       10,235,000  
  
 
 
    
 
 
     
 
 
    
 
 
  
Total operating expenses
      3,528,000       4,378,000        12,559,000       13,324,000  
  
 
 
    
 
 
     
 
 
    
 
 
  
Operating income
      2,151,000       1,227,000        3,017,000       1,407,000  
Other income (expense), net:
          
Interest and dividend income, net of fees
      304,000       306,000        877,000       1,437,000  
Net realized and unrealized gains (losses) on marketable securities, net
      (3,693,000 )      1,386,000        (4,758,000 )      4,873,000  
Other
      (1,000 )      —          (139,000 )      —    
  
 
 
    
 
 
     
 
 
    
 
 
  
Total other income (expense), net
      (3,390,000 )      1,692,000        (4,020,000 )      6,310,000  
  
 
 
    
 
 
     
 
 
    
 
 
  
Income (loss) before income tax expense (benefit)
      (1,239,000 )      2,919,000        (1,003,000 )      7,717,000  
Income tax expense (benefit)
      (224,000 )      584,000        (153,000 )      1,543,000  
  
 
 
    
 
 
     
 
 
    
 
 
  
Net income (loss)
    $ (1,015,000 )    $ 2,335,000      $ (850,000 )    $ 6,174,000  
  
 
 
    
 
 
     
 
 
    
 
 
  
Basic Income (Loss) per Common Share:
          
Net income (loss) per share
    $ (0.07 )    $ 0.16      $ (0.06 )    $ 0.42  
  
 
 
    
 
 
     
 
 
    
 
 
  
Diluted Income (Loss) per Common Share:
          
Net income (loss) per share
    $ (0.07 )    $ 0.16      $ (0.06 )    $ 0.42  
  
 
 
    
 
 
     
 
 
    
 
 
  
See accompanying Notes to Condensed Consolidated Financial Statements
 
5
GENCOR INDUSTRIES, INC.
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)
 
For the Nine Months Ended June 30, 2022
  
     Common Stock      Class B Stock      Capital in
Excess of		      Retained     Total
Shareholders’		  
     Shares      Amount      Shares      Amount      Par Value      Earnings     Equity  
September 30, 2021
      12,338,845      $ 1,234,000        2,318,857      $ 232,000      $ 12,590,000      $ 153,233,000     $ 167,289,000  
Net loss
      —          —          —          —          —          (274,000 )      (274,000 ) 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
December 31, 2021
      12,338,845      $ 1,234,000        2,318,857      $ 232,000      $ 12,590,000      $ 152,959,000     $ 167,015,000  
Net income
      —          —          —          —          —          439,000       439,000  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
March 31, 2022
      12,338,845      $ 1,234,000        2,318,857      $ 232,000      $ 12,590,000      $ 153,398,000     $ 167,454,000  
Net loss
      —          —          —          —          —          (1,015,000 )      (1,015,000 ) 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
June 30, 2022
      12,338,845      $ 1,234,000        2,318,857      $ 232,000      $ 12,590,000      $ 152,383,000     $ 166,439,000  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
See accompanying Notes to Condensed Consolidated Financial Statements
 
For the Nine Months Ended June 30, 2021
  
     Common Stock      Class B Stock      Capital in
Excess of		      Retained     Total
Shareholders’		  
     Shares      Amount      Shares      Amount      Par Value      Earnings     Equity  
September 30, 2020
      12,287,337      $ 1,229,000        2,318,857      $ 232,000      $ 12,331,000      $ 147,428,000     $ 161,220,000  
Net income
      —          —          —          —          —          1,551,000       1,551,000  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
December 31, 2020
      12,287,337      $ 1,229,000        2,318,857      $ 232,000      $ 12,331,000      $ 148,979,000      $ 162,771,000   
Net income
      —          —          —          —          —          2,288,000       2,288,000  
Stock options exercised
      11,000        1,000        —          —          55,000        —         56,000  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
March 31, 2021
      12,298,337      $ 1,230,000        2,318,857      $ 232,000      $ 12,386,000      $ 151,267,000     $ 165,115,000  
Net income
      —          —          —          —          —          2,335,000       2,335,000  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
June 30, 2021
      12,298,337      $ 1,230,000        2,318,857      $ 232,000      $ 12,386,000      $ 153,602,000     $ 167,450,000  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
    
 
 
  
See accompanying Notes to Condensed Consolidated Financial Statements
 
6
GENCOR INDUSTRIES, INC.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 2022 and 2021
(Unaudited)
 
    
2022
    
2021
  
Cash flows from operating activities:
                 
     
Net income (loss)
    $ (850,000 )    $ 6,174,000  
Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities:

                 
Purchase of marketable securities
      (101,913,000 )      (101,040,000 ) 
Proceeds from sale and maturity of marketable securities
      100,705,000       99,638,000  
Change in value of marketable securities
      5,068,000       (4,445,000 ) 
Deferred and other income taxes
      (1,177,000 )      457,000  
Depreciation and amortization
      2,063,000       1,931,000  
Provision for doubtful accounts
      140,000       125,000  
     
Changes in assets and liabilities, excluding the initial effects of business acquisitions:
                 
Accounts receivable
      (1,716,000 )      (1,253,000 ) 
Costs and estimated earnings in excess of billings
      537,000       7,090,000  
Inventories
      (6,356,000 )      (3,357,000 ) 
Prepaid expenses and other current assets
      (1,518,000 )      (44,000 ) 
Accounts payable
      1,896,000       2,678,000  
Customer deposits
      2,192,000       (92,000 ) 
Accrued expenses and other current liabilities
      (645,000 )      268,000  
    
 
 
    
 
 
  
Total adjustments
      (724,000 )      1,956,000  
    
 
 
    
 
 
  
Cash flows (used in) provided by operating activities
      (1,574,000 )      8,130,000  
    
 
 
    
 
 
  
Cash flows from investing activities:
                 
Acquisition of Blaw-Knox assets
      —         (13,777,000 ) 
Capital expenditures
      (2,184,000 )      (2,449,000 ) 
    
 
 
    
 
 
  
Cash flows used in investing activities
      (2,184,000 )      (16,226,000 ) 
    
 
 
    
 
 
  
Cash flows from financing activities:
                 
Proceeds from stock option exercises
      —         56,000  
    
 
 
    
 
 
  
Cash flows provided by financing activities
      —         56,000  
    
 
 
    
 
 
  
Net decrease in cash and cash equivalents
      (3,758,000 )      (8,040,000 ) 
Cash and cash equivalents at:
                 
Beginning of period
      23,232,000       35,584,000  
    
 
 
    
 
 
  
End of period
    $ 19,474,000     $ 27,544,000  
    
 
 
    
 
 
  
Non-cash
investing and financing activities:
                 
Operating lease
right-of-use
assets
    $ —       $ 254,000  
Operating lease liabilities
    $ —       $ 254,000  
See accompanying Notes to Condensed Consolidated Financial Statements
 
7
GENCOR INDUSTRIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form
10-Q
and Article 10 of Regulation
S-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. Operating results for the quarter and nine months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending September 30, 2022.
The accompanying Condensed Consolidated Balance Sheet at September 30, 2021 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.
On October 1, 2020, the Company acquired the Blaw-Knox paver line and associated assets, including inventory, fixed assets and related intellectual property, from Volvo CE. The acquisition provided the Company entry into the asphalt paver sector of the asphalt industry. The acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” The initial purchase price of approximately $14.4 million, which was subject to post-closing adjustments, was funded by cash on hand. After post-closing adjustments transacted during the quarter ended March 31, 2021, the final purchase price was $13.8 million, including $10.4 million in inventory and $3.4 million in fixed assets. There were no liabilities assumed. The accompanying condensed consolidated financial statements as of June 30, 2022 and September 30, 2021, and for the quarters and nine months ended June 30, 2022 and 2021, include the assets, liabilities and operating results of the paver line as of and for the periods then ended.
These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form
10-K
for the year ended September 30, 2021 filed with the Securities and Exchange Commission on December 17, 2021.
Recent Accounting Pronouncements
There were no accounting pronouncements recently issued or newly effective that had or are expected to have a material impact on the Company’s consolidated financial statements.
COVID-19
Pandemic
The Company continues to monitor and evaluate the risks to public health and the overall business activity related to the
COVID-19
pandemic, including impacts on its employees, customers, suppliers and financial results. As of the date of issuance of this Quarterly Report, the Company’s operations have not been significantly impacted. However, the full impact of the
COVID-19
pandemic continues to evolve subsequent to the quarter ended June 30, 2022 and as of the date this Quarterly Report is issued. As such, the full magnitude that the
COVID-19
pandemic will have on the Company’s financial condition and future results of operations is uncertain. Management continues to monitor the situation on the Company’s financial condition, operations, suppliers, industry, customers, and workforce. As the spread of
COVID-19
and its variants continues, the Company’s ability to meet customer demands for products may be impacted or its customers may experience adverse business consequences due to
COVID-19
and its variants. Reduced demand for products or ability to meet customer demand (including as a result of disruptions at the Company’s suppliers) could have a material adverse effect on its business operations and financial performance.
 
8
Global, market and economic conditions may negatively impact our business, financial condition and share price
Concerns over inflation, geopolitical issues, global financial markets and the
COVID-19
pandemic have led to increased economic instability and expectations of slower global economic growth. Our business may be adversely affected by any such economic instability or unpredictability. Russia’s invasion of Ukraine and related sanctions has led to increased oil and natural gas prices. Such sanctions and disruptions to the global economy may lead to additional inflation and may disrupt the global supply chain and could have a material adverse effect on our ability to secure supplies. The increased cost of oil, along with increased or prolonged periods of inflation, would likely increase our costs in the form of higher wages, further inflation on supplies and equipment necessary to operate our business. There is a risk that one or more of our suppliers could be negatively affected by global economic instability, which could adversely affect our ability to operate efficiently and timely complete our operational goals.
Note 2 - Marketable Securities and Fair Value Measurements
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 operations. Net changes in
unrealized
gains and losses are
reporte
d in the condensed consolidated statements of operations in the current 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 (stocks), mutual funds, exchange-traded funds, government securities, and cash and money funds, are substantially based on quoted market prices (Level 1). Corporate 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 are provided by the Company’s professional investment management firms. From time to time the Company may transfer cash between its marketable securities portfolio and operating cash and cash equivalents.
 
9
The following table sets forth, by level, within the fair value hierarchy, the Company’s marketable securities measured at fair value as of June 30, 2022:
 
     Fair Value Measurements  
     Level 1      Level 2      Level 3      Total  
Equities
    $ 15,457,000      $ —        $ —        $ 15,457,000  
Mutual Funds
      10,767,000        —          —          10,767,000  
Exchange-Traded Funds
      5,450,000        —          —          5,450,000  
Corporate Bonds
      —          28,669,000        —          28,669,000  
Government Securities
      27,949,000        —          —          27,949,000  
Cash and Money Funds
      2,824,000        —          —          2,824,000  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 62,447,000      $ 28,669,000      $ —        $ 91,116,000  
    
 
 
     
 
 
     
 
 
     
 
 
  
Net unrealized losses reported during the quarter and nine months ended June 30, 2022, were $(3,855,000) and $(5,386,000), respectively. There were no transfers of investments between Level 1 and Level 2 during the nine months ended June 30, 2022.
The following table sets forth by level, within the fair value hierarchy, the Company’s assets measured at fair value as of September 30, 2021:
 
     Fair Value Measurements  
     Level 1      Level 2      Level 3      Total  
Equities
    $ 14,734,000      $ —        $ —        $ 14,734,000  
Mutual Funds
      10,357,000        —          —          10,357,000  
Exchange-Traded Funds
      9,458,000        —          —          9,458,000  
Corporate Bonds
      —          24,853,000        —          24,853,000  
Government Securities
      30,999,000        —          —          30,999,000  
Cash and Money Funds
      4,575,000        —          —          4,575,000  
    
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 70,123,000      $ 24,853,000      $ —        $ 94,976,000  
    
 
 
     
 
 
     
 
 
     
 
 
  
Net unrealized gains and (losses) reported during the quarter and nine months ended June 30, 2021, were $(219,000) and $2,284,000, respectively. There were no transfers of investments between Level 1 and Level 2 during the nine months ended June 30, 2021.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, customer deposits and accrued expenses approximate fair value because of the short-term nature of these items.
Note 3 – Inventories
Inventories are valued at the lower of cost or net realizable value with cost being determined under the first in, first out method and net realizable value defined as the estimated selling price of goods less reasonable costs of completion and delivery. 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 on
trade-in
from customers is carried at estimated net realizable value. Unless specific circumstances warrant different treatment regarding inventory obsolescence, an allowance is established to reduce the cost basis of inventories three to four years old by 50%, the cost basis of inventories four to five years old by 75%, and the cost basis of inventories greater than five years old 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.
 
10
Net inventories at June 30, 2022 and September 30, 2021 consist of the following:
 
     June 30, 2022      September 30, 2021  
Raw materials
    $ 30,796,000      $ 25,858,000  
Work in process
      7,881,000        6,280,000  
Finished goods
      9,567,000        9,730,000  
Used equipment
      —          20,000  
    
 
 
     
 
 
  
     $ 48,244,000      $ 41,888,000  
    
 
 
     
 
 
  
Slow-moving and obsolete inventory allowances were $7,975,000 and $5,397,000 at June 30, 2022 and September 30, 2021, respectively.
Note 4 – Costs and Estimated Earnings in Excess of Billings
Costs and estimated earnings in excess of billings on uncompleted contracts as of June 30, 2022 and September 30, 2021 consist of the following:
 
     June 30, 2022      September 30, 2021  
Costs incurred on uncompleted contracts
    $ 20,074,000      $ 11,483,000  
Estimated earnings
      6,279,000        4,395,000  
    
 
 
     
 
 
  
       26,353,000        15,878,000  
Billings to date
      24,987,000        13,975,000  
    
 
 
     
 
 
  
Costs and estimated earnings in excess of billings
    $ 1,366,000      $ 1,903,000  
    
 
 
     
 
 
  
Note 5 – Earnings (Loss) per Share Data
The condensed consolidated financial statements include basic and diluted earnings (loss) per share information. The following table sets forth the computation of basic and diluted earnings (loss) per share for the quarters and nine months ended June 30, 2022 and 2021:
 
     Quarter Ended June 30,      Nine Months Ended June 30,  
     2022      2021      2022      2021  
Net Income (loss)
    $ (1,015,000 )     $ 2,335,000      $ (850,000 )     $ 6,174,000  
    
 
 
     
 
 
     
 
 
     
 
 
  
Common Shares:
                                    
Weighted average common shares outstanding
      14,658,000        14,617,000        14,658,000        14,613,000  
Effect of dilutive stock options
      —          132,000        —          129,000  
    
 
 
     
 
 
     
 
 
     
 
 
  
Diluted shares outstanding
      14,658,000        14,749,000        14,658,000        14,742,000  
    
 
 
     
 
 
     
 
 
     
 
 
  
Basic:
                                    
Net income (loss) per share
    $ (0.07 )     $ 0.16      $ (0.06 )     $ 0.42  
    
 
 
     
 
 
     
 
 
     
 
 
  
Diluted:
                                    
Net income (loss) per share
    $ (0.07 )     $ 0.16      $ (0.06 )     $ 0.42  
    
 
 
     
 
 
     
 
 
     
 
 
  
Basic earnings (loss) per
share are based on the weighted-average number of shares outstanding. Diluted earnings per share are based on the sum of the weighted-average number of shares outstanding plus common stock equivalents. As of September 30, 2021, no options were available for granting of awards under the 2009 Incentive Compensation Plan (the “2009 Plan”) and as of November 1, 2021, there were no outstanding stock options under the 2009 Plan.
 
11
For the quarter and nine months ended June 30, 2022, there were no common stock equivalents included in the diluted earnings per share calculation. The weighted-average shares issuable upon the exercise of stock options included in the diluted earnings per share calculation for the quarter and nine months ended June 30, 2021 were 252,000 and 252,000, respectively, which equates to 132,000 and 129,000 dilutive common stock equivalents, respectively. There were no anti-dilutive shares for the quarter and nine months ended June 30, 2022 and June 30, 2021.
Note 6 – Customers with 10% (or greater) of Net Revenues
During the quarter ended June 30, 2022, two customers accounted for 15.2% and 14.5% of net revenues, respectively. During the nine months ended June 30, 2022, no customer accounted for 10% or greater of net revenues.
During the quarter ended June 30, 2021, one customer accounted for 17.5% of net revenues. During the nine months ended June 30, 2021, no customer accounted for 10% or more of net revenues.
Note 7 – Income Taxes
Income taxes are provided for the tax effects of transactions reported in the condensed consolidated financial statements and primarily consist of taxes currently due, plus deferred taxes.
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns using current tax rates. The Company and its domestic subsidiaries file a consolidated federal income tax return.
Deferred tax assets and liabilities are measured using the rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse and the credits are expected to be used. The effect on deferred tax assets and liabilities of the change in tax rates is recognized in income in the period that includes the enactment date. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, the Company is more likely than not to realize the benefit of a deferred tax asset and whether a valuation allowance is needed for some portion or all of a deferred tax asset. No such valuation allowances were recorded as of June 30, 2022 and September 30, 2021.
The Company’s income tax provision is based on management’s estimate of the effective tax rate for the full year. The tax provision in any period will be affected by, among other things, permanent, as well as temporary differences in the deductibility of certain items, in addition to changes in tax legislation. As a result, the Company may experience significant fluctuations in the effective book tax rate (that is, its tax expense divided by
pre-tax
book income) from period to period. The Company’s effective tax rates for the quarters and nine months ended June 30, 2022 and June 30, 2021 reflect the impact of the reduced rates under the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act) which was signed into law on December 22, 2017.
Note 8 – Revenue Recognition and Related Costs
The Company recognizes revenue under ASU
No. 2014-09,
Revenue from Contracts with Customers
(Topic 606). The following table disaggregates the Company’s net revenue by major source for the quarters and nine months ended June 30, 2022 and 2021:
 
     Quarter Ended June 30,      Nine Months Ended June 30,  
     2022      2021      2022      2021  
Equipment sales recognized over time
    $ 9,248,000      $ 6,507,000      $ 30,020,000      $ 14,509,000  
Equipment sales recognized at a point in time
      13,729,000        12,258,000        28,402,000        31,959,000  
Parts and component sales
      5,419,000        5,240,000        18,243,000        16,001,000  
Freight revenue
      972,000        996,000        3,050,000        2,888,000  
Other
      279,000        (82,000 )       692,000        (122,000 ) 
    
 
 
     
 
 
     
 
 
     
 
 
  
Net revenue
    $ 29,647,000      $ 24,919,000      $ 80,407,000      $ 65,235,000  
    
 
 
     
 
 
     
 
 
     
 
 
  
 
12
Revenues from contracts with customers for the design, manufacture and sale of custom equipment are recognized over time when the performance obligation is satisfied by transferring control of the equipment. Control of the equipment transfers over time, as the equipment is unique to the specific contract and thus does not create an asset with an alternative use to the Company. Revenues and costs are recognized in proportion to actual labor costs incurred, as compared with total estimated labor costs expected to be incurred, during the entire contract. All incremental costs related to obtaining a contract are expensed as incurred, as the amortization period is less than one year. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined.
Contract assets (excluding accounts receivable) under contracts with customers represent revenue recognized in excess of amounts billed on equipment sales recognized over time. These contract assets were $1,366,000 at June 30, 2022 and $1,903,000 at September 30, 2021, and are included in current assets as costs and estimated earnings in excess of billings on the Company’s condensed consolidated balance sheets. The Company anticipates that all of the contract assets at June 30, 2022, will be billed and collected within one year.
Revenues from all other contracts for the design and manufacture of equipment, for service and for parts sales, net of any discounts and return allowances, are recorded at a point in time when control of the goods or services has been transferred. Control of the goods or service typically transfers at time of shipment or upon completion of the service.
Payment for equipment under contract with customers is typically due prior to shipment. Payment for services under contract with customers is due as services are completed. Accounts receivable related to contracts with customers for equipment sales were $79,000 and $210,000 at June 30, 2022 and September 30, 2021, respectively.
Product warranty costs are estimated using historical experience and known issues and are charged to production costs as revenue is recognized.
Under certain contracts with customers, recognition of a portion of the consideration received may be deferred and recorded as a contract liability if the Company has to satisfy a future obligation, such as to provide installation assistance. There were no contract liabilities other than customer deposits at June 30, 2022 and September 30, 2021. Customer deposits related to contracts with customers were $7,436,000 and $5,244,000 at June 30, 2022 and September 30, 2021, respectively, and are included in current liabilities on the Company’s condensed consolidated balance sheets.
The Company records revenues earned for shipping and handling as freight revenue at the time of shipment, regardless of whether or not it is identified as a separate performance obligation. The cost of shipping and handling is classified as cost of goods sold concurrently with the revenue recognition.
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 category. Account balances are charged off against the allowance for doubtful accounts when they are determined to be uncollectible. Any recoveries of account balances previously considered in the allowance for doubtful accounts reduce future additions to the allowance for doubtful accounts. The allowance for doubtful accounts also includes an estimate for returns and allowances. Provisions for 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 known issues and historical experience.
 
13
Note 9 – Leases
The Company leases certain equipment under
non-cancelable
operating leases. Future minimum rental payments under these leases at June 30, 2022 were immaterial.
On August 28, 2020, the Company entered into a three-year operating lease for property related to the manufacturing and warehousing of the Blaw-Knox paver product line which was acquired on October 1, 2020. The lease term is for the period beginning on September 1, 2020 through August 31, 2023. In accordance with ASU
2016-02,
the Company recorded a ROU asset totaling $970,000 and related lease liabilities at inception. On October 9, 2020, the Company entered into an operating lease for additional warehousing space for Blaw-Knox inventory. The original lease term was for one year beginning November 2020 with automatic
one-year
renewals. In accordance with ASU
2016-02,
the Company recorded a ROU asset totaling $254,000 and related lease liabilities at inception. An additional $39,000 was recorded as a ROU asset and related lease liability in October 2021 to reflect the impact of the lease renewal. In March 2022, the ROU asset and related liability was reduced by $39,000 to reflect the impact of a reduction in the square footage being leased.
For the quarter and nine months ended June 30, 2022, operating lease costs were $
99,000
and $
301,000
, respectively, and cash payments related to these operating leases were $
104,000
and $
320,000
, respectively. For the quarter and nine months ended June 30, 2021, operating lease costs were $
106,000
and $
301,000
, respectively, and cash payments related to these operating leases were $
105,000
and $
349,000
, respectively.
Other information concerning the Company’s operating lease accounted for under ASC 842 guidelines as of June 30, 2022 and September 30, 2021, is as follows:
 
     June 30, 2022     September 30, 2021  
Operating lease ROU asset included in other long-term assets
    $ 497,000     $ 785,000  
Current operating lease liability
    $ 413,000     $ 393,000  
Non-current
operating lease liability
    $ 84,000     $ 392,000  
Weighted average remaining lease term (in years)
      1.25       2.00  
Weighted average discount rate used in calculating ROU asset
      4.0 %      4.0 % 
Future annual minimum lease payments as of June 30, 2022 are as follows:
 
Fiscal Year
    Annual Lease Payments  
2022 (remaining 3 months)
    $ 105,000  
2023
      398,000  
2024
      7,000  
    
 
 
  
Total
      510,000  
Less interest
      (13,000 ) 
    
 
 
  
Present value of lease liabilities
    $ 497,000  
    
 
 
  
Note 10 – Segment Information
The Company has one reporting segment, equipment for the highway construction industry. Based on evaluation of the criteria of ASC 280 – Segment Reporting, including the nature of products and services, the nature of the production processes, the type of customers and the methods used to distribute products and services, the Company determined that its operating segments meet the requirements for aggregation. The Company designs, manufactures and sells asphalt plants and pavers, combustion systems and fluid heat transfer systems for the highway construction industry and environmental and petrochemical markets. The Company’s products are manufactured at three facilities in the United States. The Company also services and sells parts for its equipment.
Note 11 - Subsequent Events
On July 19, 2022, the Company announced that it was transferring the listing of its common stock, $0.10
per share par value (“Common Stock”), to the NYSE American LLC (“NYSE American”) from the NASDAQ Global Market (“NASDAQ”). Listing and trading of the Company’s Common Stock on NASDAQ ended at market close on July 29, 2022 and listing and trading of its Common Stock on the NYSE American commenced at market open on August 1, 2022 under its current ticker
symbol ‘GENC’.
 
14
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
This Quarterly Report contains certain “forward-looking statements” within the meaning of 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, income from investees and litigation. 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, the performance of the investment portfolio and the 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, 2021: (a) Part I, Item 1A, “Risk Factors” and (b) Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. 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 Quarterly Report. The Company does not undertake to update any forward-looking statement, except as required by law.
Overview
Gencor is a leading manufacturer of heavy machinery used in the production and application of highway construction materials and environmental control equipment. The Company’s core products include asphalt plants, combustion systems, fluid heat transfer systems and asphalt pavers. The Company’s products are manufactured at three 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 reduce their purchases of new equipment for shipment during the summer and fall months to avoid disrupting their peak season for highway construction and related 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 in the late winter and spring. 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 liquid asphalt, and a trend towards larger more efficient asphalt plants.
On November 15, 2021, President Biden signed into law a five-year, $1.2 trillion infrastructure bill, the Infrastructure Investment and Jobs Act (the “IIJ Act”), including $550 billion in new spending and reauthorization of $650 billion in previously allocated funds. The IIJ Act provides $110 billion for the nation’s highways, bridges and roads.
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. Additionally, numerous other states have taken steps to increase their gas tax revenues in recent years.
Fluctuations in the price of carbon steel, which is a significant cost and material used in the manufacturing of the Company’s equipment, may affect the Company’s financial performance. 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, then its business results of operations and financial condition may be adversely affected. As discussed under the heading “Results of Operations,” the recent increases in steel prices contributed to reduced gross profit margins during the current quarter.
Also, a significant increase in the price of liquid asphalt could 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 higher costs and, thus, such higher costs could have a negative impact on the Company’s financial performance.
 
15
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 suppliers to ensure it is achieving the highest quality materials and services at the most competitive cost.
COVID-19
Pandemic
The Company continues to monitor and evaluate the risks to public health and the overall business activity related to the coronavirus
(“COVID-19”)
pandemic, including impacts on its employees, customers, suppliers and financial results. As of the date of issuance of this Quarterly Report, the Company’s operations have not been significantly impacted. However, the full impact of the
COVID-19
pandemic continues to evolve subsequent to the quarter ended June 30, 2022 and as of the date this Quarterly Report is issued. As such, the full magnitude that the
COVID-19
pandemic will have on the Company’s financial condition and future results of operations is uncertain. Management continues to monitor the Company’s financial condition, operations, suppliers, industry, customers, and workforce. As the spread of
COVID-19
and its variants continues, the Company’s ability to meet customer demands for products may be impacted or its customers may experience adverse business consequences due to
COVID-19
and its variants. Reduced demand for products or ability to meet customer demand (including as a result of disruptions at the Company’s suppliers) could have a material adverse effect on its business operations and financial performance.
Global, market and economic conditions may negatively impact our business, financial condition and share price
Concerns over inflation, geopolitical issues, global financial markets and the
COVID-19
pandemic have led to increased economic instability and expectations of slower global economic growth. Our business may be adversely affected by any such economic instability or unpredictability. Russia’s invasion of Ukraine and related sanctions has led to increased oil and natural gas prices. Such sanctions and disruptions to the global economy may lead to additional inflation and may disrupt the global supply chain and could have a material adverse effect on our ability to secure supplies. The increased cost of oil, along with increased or prolonged periods of inflation, would likely increase our costs in the form of higher wages, further inflation on supplies and equipment necessary to operate our business. There is a risk that one or more of our suppliers could be negatively affected by global economic instability, which could adversely affect our ability to operate efficiently and timely complete our operational goals.
Results of Operations
Quarter Ended June 30, 2022 versus June 30, 2021
Net revenues for the quarters ended June 30, 2022 and June 30, 2021 were $29,647,000 and $24,919,000, respectively, an increase of $4,728,000 or 19.0%. The higher revenues reflect increased bookings in anticipation of funding of the new five year, $1.2 trillion infrastructure bill, the IIJ Act, signed into law in November 2021.
As a percent of sales, gross profit margins were 19.2% in the quarter ended June 30, 2022, compared to 22.5% in the
quarter
ended June 30, 2021. Higher manufacturing costs associated with wages, steel, and purchased parts continued to impact the Company’s operating results for the quarter ended June 30, 2022.
Product engineering and development expenses decreased $225,000 to $951,000 for the quarter ended June 30, 2022, as compared to $1,176,000 for the quarter ended June 30, 2021 due primarily to reduced payroll. Selling, general and administrative (“SG&A”) expenses decreased by $625,000 to $2,577,000 for the quarter ended June 30, 2022, compared to $3,202,000 for the quarter ended June 30, 2021. The decrease in SG&A expenses was due to reduced headcount and lower professional fees.
Operating income increased from $1,227,000 for the quarter ended June 30, 2021 to $2,151,000 for the quarter ended June 30, 2022, due primarily to increased sales and reduced SG&A and product engineering and development expenses.
 
16
For the quarter ended June 30, 2022, interest and dividend income, net of fees, was $304,000 as compared to $306,000 in the quarter ended June 30, 2021. The net realized and unrealized losses on marketable securities were $(3,693,000) for the quarter ended June 30, 2022 versus net realized and unrealized gains of $1,386,000 for the quarter ended June 30, 2021. The fiscal 2022 investment losses reflect the decline in equity markets due primarily to higher interest rates, inflation, and the Federal Reserve’s recent monetary tightening policy.
The effective income tax rate for the quarter ended June 30, 2022 was a benefit of 18.0% versus expense of 20.0% for the quarter ended June 30, 2021, based on the expected annual effective income tax rate.
Net loss for the quarter ended June 30, 2022 was $(1,015,000), or $(0.07) per basic and diluted share, versus net income of $2,335,000, or $0.16 per basic and diluted share, for the quarter ended June 30, 2021. The net loss for the current quarter ended June 30, 2022, was due primarily to the net investment losses on marketable securities partially offset by the impact of increased sales and reduced SG&A and product engineering and development expenses.
Nine Months Ended June 30, 2022 versus June 30, 2021
Net sales for the nine months ended June 30, 2022 and 2021 were $80,407,000 and $65,235,000, respectively, an increase of $15,172,000 or 23.3%. The higher revenues reflect increased bookings in anticipation of funding of the new five year, $1.2 trillion infrastructure bill, the IIJ Act, signed into law in November 2021. There were no revenues generated by Blaw-Knox during the first quarter of fiscal 2021, as the facility was being readied to begin production.
Gross profit margins decreased to 19.4% for the nine months ended June 30, 2022 from 22.6% for the nine months ended June 30, 2021. Increases in wages, steel and purchased parts prices contributed to the lower overall gross margins during the nine months ended June 30, 2022.
Product engineering and development expenses increased $130,000 in the nine months ended June 30, 2022,
compared
to the nine months ended June 30, 2021 due primarily to salary increases in the first quarter of fiscal 2022 partially offset by reduced payroll in the current quarter ended June 30, 2022, as well as a full nine months of engineering wages and benefits related to Blaw-Knox. SG&A expenses decreased $895,000 in the nine months ended June 30, 2022, compared to the nine months ended June 30, 2021. The decrease in SG&A expenses from a full nine months of wages and benefits related to Blaw-Knox employees was offset by reduced headcount and lower professional fees.
The Company had operating income of $3,017,000 for the nine months ended June 30, 2022 versus $1,407,000 for the nine months ended June 30, 2021. The improved operating income was due primarily to the improved revenues and reduced SG&A expenses.
For the nine months ended June 30, 2022, interest and dividend income, net of fees, from the investment portfolio was $877,000, as compared to $1,437,000 for the nine months ended June 30, 2021. Interest income for the nine months ended June 30, 2021, included $456,000 of interest collected from a customer. Net realized and unrealized losses on marketable securities was $(4,758,000) for the nine months ended June 30, 2022 versus net realized and unrealized gains of $4,873,000 for the nine months ended June 30, 2021. The fiscal 2022 investment losses reflect the decline in equity markets due to higher interest rates, inflation, and the Federal Reserve’s recent monetary tightening policy.
The effective income tax rates for the nine months ended June 30, 2022 was a benefit of 15.3% compared to expense of 20.0% for the nine months ended June 30, 2021, based on the expected annual effective income tax rate.
Net loss for the nine months ended June 30, 2022 was $(850,000), or $(0.06) per basic and diluted share, versus $6,174,000, or $0.42 per basic and diluted share for the nine months ended June 30, 2021. The net loss for the nine months ended June 30, 2022, was due primarily to the net investment losses on marketable securities partially offset by the impact of increased sales and reduced SG&A expenses.
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 June 30, 2022 or September 30, 2021. As of June 30, 2022, the Company has funded $85,000 in cash deposits at insurance companies to cover related collateral needs. In April 2020, a financial institution issued an irrevocable standby letter of credit (“letter of credit”) on
 
17
behalf of the Company for the benefit of one of the Company’s insurance carriers. The maximum amount that can be drawn by the beneficiary under the letter of credit is $150,000. The letter of credit expires in April 2023, unless terminated earlier, and can be extended, as provided by the agreement. The Company intends to renew the letter of credit for as long as the Company does business with the beneficiary insurance carrier. The letter is collateralized by restricted cash of the same amount on any outstanding drawings. To date, no amounts have been drawn under the letter of credit.
As of June 30, 2022, the Company had $19,474,000 in cash and cash equivalents, and $91,116,000 in marketable securities, including $28,669,000 in corporate bonds, $15,457,000 in equities, $10,767,000 in mutual funds, $5,450,000 in exchange-traded funds, $27,949,000 in government securities, and $2,824,000 in cash and money funds. The 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 backlog was $40.2 million at June 30, 2022 compared to $28.5 million at June 30, 2021. The Company’s working capital (defined as current assets less current liabilities) was $153.3 million at June 30, 2022 and $155.4 million at September 30, 2021. Cash used in operating activities during the nine months ended June 30, 2022 was $1,574,000. The significant purchases, sales and maturities of marketable securities shown on the condensed consolidated statements of cash flows reflect the recurring purchases and sales of United States treasury bills. Inventories increased by $6.4 million due to progress on several large contract orders where revenue is recognized at a point in time, raw material and wage price increases and some stock build to adjust for the increasing lead times from suppliers. Prepaid expenses increased $1.5 million due to estimated income tax deposits in excess of accrued income taxes, annual insurance contract renewals as well as deposits made on new equipment. Accounts payable increased $1.9 million with increased raw material purchases. Customer deposits increased by $2.2 million reflecting down payments on contract projects, including recent orders where revenues are recognized over time but work is yet to begin.
Cash flows used in investing activities for the nine months ended June 30, 2022 of $2,184,000 were related to capital expenditures, primarily for manufacturing processing and finishing equipment.
Seasonality
The Company’s primary business is the manufacture of asphalt plants and related components and asphalt pavers. These products typically experience a seasonal slowdown during the third and fourth quarters of the calendar year. This slowdown often results in lower reported sales and operating results during the first and fourth quarters of the fiscal year ended September 30.
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, 2021, “Nature of Operations and Summary of Significant 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.
 
18
Revenues & Expenses
The Company recognizes revenue under ASU
No. 2014-09,
Revenue from Contracts with Customers
(Topic 606). Revenues from contracts with customers for the design, manufacture and sale of custom equipment are recognized over time when the performance obligation is satisfied by transferring control of the equipment. Control of the equipment transfers over time, as the equipment is unique to the specific contract and thus does not create an asset with an alternative use to the Company. Revenues and costs are recognized in proportion to actual labor costs incurred, as compared with total estimated labor costs expected to be incurred, during the entire contract. All incremental costs related to obtaining a contract are expensed as incurred, as the amortization period is less than one year. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined.
Contract assets (excluding accounts receivable) under contracts with customers represent revenue recognized in excess of amounts billed on equipment sales recognized over time. These contract assets were $1,366,000 and $1,903,000 at June 30, 2022 and September 30, 2021, respectively, and are included in current assets as costs and estimated earnings in excess of billings on the Company’s condensed consolidated balance sheets. The Company anticipates that all of the contract assets at June 30, 2022, will be billed and collected within one year.
Revenues from all other contracts for the design and manufacture of equipment, for service and for parts sales, net of any discounts and return allowances, are recorded at a point in time when control of the goods or services has been transferred. Control of the goods or service typically transfers at time of shipment or upon completion of the service.
Payment for equipment under contract with customers is typically due prior to shipment. Payment for services under contract with customers is due as services are completed. Accounts receivable related to contracts with customers for equipment sales were $79,000 and $210,000 at June 30, 2022 and September 30, 2021, respectively.
Product warranty costs are estimated using historical experience and known issues and are charged to production costs as revenue is recognized.
Under certain contracts with customers, recognition of a portion of the consideration received may be deferred and recorded as a contract liability if the Company has to satisfy a future obligation, such as to provide installation assistance. There were no contract liabilities other than customer deposits at June 30, 2022 and September 30, 2021. Customer deposits related to contracts with customers were $7,436,000 and $5,244,000 at June 30, 2022 and September 30, 2021, respectively, and are included in current liabilities on the Company’s condensed consolidated balance sheets.
The Company records revenues earned for shipping and handling as freight revenue at the time of shipment, regardless of whether or not it is identified as a separate performance obligation. The cost of shipping and handling is classified as cost of goods sold concurrently with the revenue recognition.
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 category. Account balances are charged off against the allowance for doubtful accounts when they are determined to be uncollectible. Any recoveries of account balances previously considered in the allowance for doubtful accounts reduce future additions to the allowance for doubtful accounts. The allowance for doubtful accounts also includes an estimate for returns and allowances. Provisions for 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 known issues and historical experience.
 
19
Inventories
Inventories are valued at the lower of cost or net realizable value, with cost being determined under the first in, first out method and net realizable value defined as the estimated selling price of goods less reasonable costs of completion and delivery. 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 on
trade-in
from customers is carried at estimated net realizable value. Unless specific circumstances warrant different treatment regarding inventory obsolescence, an allowance is established to reduce the cost basis of inventories three to four years old by 50%, the cost basis of inventories four to five years old by 75%, and the cost basis of inventories greater than five years old 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.
Marketable Securities and Fair Value Measurements
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-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
 
20
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
 
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s President (who is currently serving as the Company’s Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer) evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule
13a-15(e)
under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the President and the Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly 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-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 have been detected.
Changes in Internal Control over Financial Reporting
The Company’s management, including the President and Chief Financial 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 nine months ended June 30, 2022 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
21
Part II. Other Information
 
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 1A.
Risk Factors
Our business, operations, and financial condition are subject to various risks and uncertainties. The risk factors described in Part I, Item 1A, “Risk Factors” contained in our Annual Report on Form 10K for the year ended September 30, 2021, as filed with the SEC on December 17, 2021, should be carefully considered, together with the other information contained or incorporated by reference in this Quarterly Report on Form
10-Q
and in our other filings filed with the SEC in connection with evaluating us, our business, and the forward-looking statements contained in this Quarterly Report on Form
10-Q.
During the nine months ended June 30, 2022, there have been no material changes from the risk factors previously disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form
10-K,
for the year ended September 30, 2021, other than the addition of the following risk factor:
Global, market and economic conditions may negatively impact our business, financial condition and share price
Concerns over inflation, geopolitical issues, global financial markets and the
COVID-19
pandemic have led to increased economic instability and expectations of slower global economic growth. Our business may be adversely affected by any such economic instability or unpredictability. Russia’s invasion of Ukraine and related sanctions has led to increased oil and natural gas prices. Such sanctions and disruptions to the global economy may lead to additional inflation and may disrupt the global supply chain and could have a material adverse effect on our ability to secure supplies. The increased cost of oil, along with increased or prolonged periods of inflation, would likely increase our costs in the form of higher wages, further inflation on supplies and equipment necessary to operate our business. There is a risk that one or more of our suppliers could be negatively affected by global economic instability, which could adversely affect our ability to operate efficiently and timely complete our operational goals.
Our marketable securities, including cash and money funds, equities, corporate bonds, mutual funds, exchange-traded funds, and government securities invested through a professional investment management firm are subject to general credit, liquidity, market and interest rate risks, instability in the global financial markets, or other factors. As a result of recent market volatility, the value of our investments has declined, may continue to fluctuate, and may continue to have a negative effect on our financial results and, if we need to liquidate our investments to fund operations, then the availability of cash to fund our operations may be reduced. Net losses relating to marketable securities reported during the quarter and nine months ended June 30, 2022 were $3,693,000 and $4,020,000, respectively.
 
22
Item 6.
Exhibits
 
Exhibit 31.1    Certification of Principal Executive Officer Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as amended
Exhibit 31.2    Certification of Chief Financial Officer Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as amended
Exhibit 32    Certifications of Principal Executive Officer and Chief Financial Officer Pursuant to 18 U. S. C. Section 1350
Exhibit 101.1    Inline Interactive Data File
Exhibit 101.INS    XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Exhibit 101.SCH    Inline XBRL Schema Document
Exhibit 101.CAL    Inline XBRL Calculation Linkbase Document
Exhibit 101.DEF    Inline XBRL Definition Linkbase Document
Exhibit 101.LAB    Inline XBRL Label Linkbase Document
Exhibit 101.PRE    Inline XBRL Presentation Linkbase Document
Exhibit 104    The cover page from the Company’s Quarterly Report on Form
10-Q
for the quarter ended June 30, 2022, formatted in Inline XBRL (included in Exhibit 101)
 
23
SIGNATURES
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/ Marc G. Elliott
Marc G. Elliott
President
(Principal Executive Officer)
August 12, 2022
/s/ Eric E. Mellen
Eric E. Mellen
Chief Financial Officer
(Principal Financial and Accounting Officer)
August 12, 2022
 
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