Item 8. Financial Statements and Supplementary Data
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
G ENCOR I NDUSTRIES , I NC .
Page
Report of Independent Registered Public Accounting Firm
22
Consolidated Balance Sheets as of September 30, 2020 and 2019
23
Consolidated Income Statements for the years ended September 30, 2020 and 2019
24
Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2020 and 2019
25
Consolidated Statements of Cash Flows for the years ended September 30, 2020 and 2019
26
Notes to Consolidated Financial Statements
27
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Gencor Industries, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Gencor Industries, Inc. (the “Company”) as of September 30, 2020 and 2019, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the two-year
period ended September 30, 2020, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of September 30, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the years in the two-year
period ended September 30, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinions.
/s/ MSL, P.A.
MSL, P.A.
Certified Public Accountants
We have served as the Company’s auditor since 2001.
Orlando, Florida
December 18, 2020
22
Part I. Financial Information
GENCOR INDUSTRIES, INC.
Consolidated Balance Sheets
As of September 30, 2020 and 2019
2020
2019
ASSETS
Current assets:
Cash and cash equivalents
$
35,584,000
$
10,302,000
Marketable securities at fair value (cost of $ 89,514,000 at September 30, 2020 and $ 104,176,000 at September 30, 2019)
89,498,000
105,322,000
Accounts receivable, less allowance for doubtful accounts of $ 442,000 at September 30, 2020 and $ 459,000 at September 30, 2019
1,992,000
1,603,000
Costs and estimated earnings in excess of billings
6,405,000
13,838,000
Inventories, net
27,090,000
25,366,000
Prepaid expenses
1,189,000
499,000
Total current assets
161,758,000
156,930,000
Property and equipment, net
8,341,000
8,389,000
Other long-term assets
995,000
53,000
Total Assets
$
171,094,000
$
165,372,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
1,728,000
$
1,907,000
Customer deposits
3,853,000
1,918,000
Accrued expenses
2,605,000
2,660,000
Current operating lease liabilities
328,000
—
Total current liabilities
8,514,000
6,485,000
Deferred and other income taxes
746,000
3,372,000
Non-current operating lease liabilities
614,000
—
Total liabilities
9,874,000
9,857,000
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; 12,287,337 shares and 12,277,337 shares issued and outstanding at September 30, 2020 and 2019, respectively
1,229,000
1,228,000
Class B Stock, par value $ .10 per share; 6,000,000 shares authorized; 2,318,857 shares and 2,308,857 shares issued and outstanding at September 30, 2020 and 2019, respectively
232,000
231,000
Capital in excess of par value
12,331,000
12,159,000
Retained earnings
147,428,000
141,897,000
Total shareholders’ equity
161,220,000
155,515,000
Total Liabilities and Shareholders’ Equity
$
171,094,000
$
165,372,000
See accompanying Notes to Consolidated Financial Statements
23
GENCOR INDUSTRIES, INC.
Consolidated Income Statements
For the Years Ended September 30, 2020 and 2019
2020
2019
Net revenue
$
77,420,000
$
81,329,000
Cost of goods sold
58,467,000
58,917,000
Gross profit
18,953,000
22,412,000
Operating expenses:
Product engineering and development
3,061,000
3,295,000
Selling, general and administrative
10,356,000
9,647,000
Total operating expenses
13,417,000
12,942,000
Operating income
5,536,000
9,470,000
Other income (expense), net:
Interest and dividend income, net of fees
2,321,000
2,307,000
Realized and unrealized gains (losses) on marketable securities, net
( 1,160,000
)
1,047,000
Other
( 16,000
)
—
1,145,000
3,354,000
Income before income tax expense
6,681,000
12,824,000
Income tax expense
1,150,000
2,628,000
Net income
$
5,531,000
$
10,196,000
Basic earnings per common share
$
0.38
$
0.70
Diluted earnings per common share
$
0.38
$
0.69
See accompanying Notes to Consolidated Financial Statements
24
GENCOR INDUSTRIES, INC.
Consolidated Statements of Shareholders’ Equity
For the Years Ended September 30, 2020 and 2019
Common Stock
Class B Stock
Capital in
Excess of
Par Value
Retained
Earnings
Total
Shareholders’
Equity
Shares
Amount
Shares
Amount
September 30, 2018 *
12,252,337
$
1,225,000
2,288,857
$
229,000
$
11,862,000
$
131,701,000
$
145,017,000
Net income
—
—
—
—
—
10,196,000
10,196,000
Stock-based compensation
—
—
—
—
71,000
—
71,000
Stock options exercised
25,000
3,000
20,000
2,000
226,000
—
231,000
September 30, 2019
12,277,337
$
1,228,000
2,308,857
$
231,000
$
12,159,000
$
141,897,000
$
155,515,000
Net income
—
—
—
—
—
5,531,000
5,531,000
Stock-based compensation
—
—
—
—
71,000
—
71,000
Stock options exercised
10,000
1,000
10,000
1,000
101,000
—
103,000
September 30, 2020
12,287,337
$
1,229,000
2,318,857
$
232,000
$
12,331,000
$
147,428,000
$
161,220,000
See accompanying Notes to Consolidated Financial Statements
*
The balances as of September 30, 2018, have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 2 to the Consolidated Financial Statements.
25
GENCOR INDUSTRIES, INC.
Consolidated Statements of Cash Flows
For the Years Ended September 30, 2020 and 2019
2020
2019
Cash flows from operating activities:
Net income
$
5,531,000
$
10,196,000
Adjustments to reconcile net income to cash provided by operating activities:
Purchase of marketable securities
( 131,635,000
)
( 188,066,000
)
Proceeds from sale and maturity of marketable securities
146,122,000
188,047,000
Change in value of marketable securities
1,337,000
( 1,245,000
)
Deferred and other income taxes
( 2,626,000
)
732,000
Depreciation and amortization
1,643,000
1,600,000
Provision for doubtful accounts
50,000
175,000
Loss on disposal of assets
—
4,000
Stock-based compensation
71,000
71,000
Changes in assets and liabilities:
Accounts receivable
( 439,000
)
( 785,000
)
Costs and estimated earnings in excess of billings
7,433,000
( 1,938,000
)
Inventories
( 1,724,000
)
( 3,476,000
)
Prepaid expenses
( 690,000
)
849,000
Accounts payable
( 179,000
)
69,000
Customer deposits
1,935,000
( 2,645,000
)
Accrued expenses
( 55,000
)
575,000
Total adjustments
21,243,000
( 6,033,000
)
Cash flows provided by operating activities
26,774,000
4,163,000
Cash flows from investing activities:
Capital expenditures
( 1,595,000
)
( 2,104,000
)
Cash flows used in investing activities
( 1,595,000
)
( 2,104,000
)
Cash flows from financing activities:
Proceeds from stock option exercises
103,000
231,000
Cash flows provided by financing activities
103,000
231,000
Net increase in cash and cash equivalents
25,282,000
2,290,000
Cash and cash equivalents at:
Beginning of year
10,302,000
8,012,000
End of year
$
35,584,000
$
10,302,000
Non-cash
investing and financing activities:
Operating lease right-of-use
assets
$
942,000
$
—
Operating lease liabilities
942,000
—
See accompanying Notes to Consolidated Financial Statements
26
GENCOR INDUSTRIES, INC.
Notes to Consolidated Financial Statements
For the Years Ended September 30, 2020 and 2019
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Gencor Industries, Inc. and its subsidiaries (collectively, the “Company”) is a diversified, heavy machinery manufacturer for the production of highway construction materials and environmental control machinery and equipment.
These consolidated financial statements include the accounts of Gencor Industries, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Accounting Pronouncements and Policies
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(Topic 606) (“ASU 2014-09”),
amending its accounting guidance related to revenue recognition. Under this ASU and subsequently issued amendments, revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted ASU 2014-09
in the first quarter of fiscal 2019. The Company elected to adopt the standard using the modified retrospective method. The adoption of ASU 2014-09
did not have a significant impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842) (“ASU 2016-02”).
With adoption of this standard, lessees will have to recognize most leases as a right-of-use
asset and a lease liability on their balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are similar to those applied in current lease accounting. ASU 2016-02
must be applied on a modified retrospective basis and is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company adopted ASU 2016-02 in the first quarter of fiscal 2020. The initial adoption of ASU 2016-02 did not have a significant impact on its consolidated financial statements. During the fourth quarter of fiscal 2020, the Company entered into a new operating lease which resulted in reporting a right-of-use (“ROU”) asset and related lease liabilities of approximately $ 970,000 (see Note 9 – Leases) .
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation
(Topic 718): Scope of Modification Accounting
(“ASU 2017-09”).
The new guidance clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. ASU 2017-09
is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2017-09
in the first quarter of fiscal 2019. The adoption of ASU 2017-09
did not have a significant impact on its consolidated financial statements.
No other accounting pronouncements recently issued or newly effective have had, or are expected to have, a material impact on the Company’s consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
27
Earnings per Share
The consolidated financial statements include basic and diluted earnings per share (“EPS”) information. Basic EPS is based on the weighted-average number of shares outstanding. Diluted EPS is based on the sum of the weighted-average number of shares outstanding plus common stock equivalents.
The weighted-average shares issuable upon the exercise of stock options included in the diluted EPS calculation at September 30, 2020 were 256,000 , which equates to 125,000 dilutive common stock equivalents. For the year ended September 30, 2019, the weighted-average shares issuable upon the exercise of stock options included in the diluted EPS calculation were 307,000 , which equates to 157,000 dilutive common stock equivalents. Weighted-average shares issuable upon the exercise of stock options, which were not included in the diluted EPS calculation because they were anti-dilutive, were 7,000 in 2020 and zero in 2019.
The following presents the calculation of the basic and diluted EPS for the years ended September 30, 2020 and 2019:
2020
2019
Net Income
Shares
EPS
Net Income
Shares
EPS
Basic EPS
$
5,531,000
14,595,000
$
0.38
$
10,196,000
14,551,000
$
0.70
Common stock equivalents
125,000
157,000
Diluted EPS
$
5,531,000
14,720,000
$
0.38
$
10,196,000
14,708,000
$
0.69
Cash Equivalents
Cash equivalents consist of short-term certificates of deposit and deposits in money market accounts with original maturities of three months or less.
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 consolidated income statements. Net changes in unrealized gains and losses are reported in the consolidated income statements 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.
28
The following table sets forth by level, within the fair value hierarchy, the Company’s assets measured at fair value as of September 30, 2020:
Fair Value Measurements
Level 1
Level 2
Level 3
Total
Equities
$
11,949,000
$
—
$
—
$
11,949,000
Mutual Funds
9,595,000
—
—
9,595,000
Exchange-Traded Funds
10,344,000
—
—
10,344,000
Corporate Bonds
—
27,877,000
—
27,877,000
Government Securities
16,147,000
—
—
16,147,000
Cash and Money Funds
13,586,000
—
—
13,586,000
Total
$
61,621,000
$
27,877,000
$
—
$
89,498,000
Net unrealized losses reported during fiscal 2020 on trading securities still held as of September 30, 2020, were $( 1,091,000 ). There were no transfers of investments between Level 1 and Level 2 during the year ended September 30, 2020.
In the fourth quarter of fiscal 2020, the Company liquidated approximately $ 17.0 million of its investments.
The cash was used to fund the acquisition of the Blaw-Knox paver business and associated assets, including inventory, fixed assets and related intellectual property, from Volvo CE (see Note 12 - Subsequent Events for additional information).
The following table sets forth by level, within the fair value hierarchy, the Company’s assets measured at fair value as of September 30, 2019:
Fair Value Measurements
Level 1
Level 2
Level 3
Total
Equities
$
10,412,000
$
—
$
—
$
10,412,000
Mutual Funds
3,987,000
—
—
3,987,000
Exchange-Traded Funds
5,163,000
—
—
5,163,000
Corporate Bonds
—
38,690,000
—
38,690,000
Government Securities
45,171,000
—
—
45,171,000
Cash and Money Funds
1,899,000
—
—
1,899,000
Total
$
66,632,000
$
38,690,000
$
—
$
105,322,000
Net unrealized gains reported during fiscal 2019 on trading securities still held as of September 30, 2019, were $ 737,000 . There were no transfers of investments between Level 1 and Level 2 during the year ended September 30, 2019.
In fiscal 2019, the Company transferred a net $ 2.0 million from the marketable securities portfolio to operating cash and cash equivalents.
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.
Foreign Currency Transactions
Gains and losses resulting from foreign currency transactions are included in income and were not significant during the years ended September 30, 2020 and 2019.
Risk Management
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents, marketable securities, and accounts receivable. The Company maintains its cash accounts in various domestic financial institutions which may from time to time exceed federally insured limits. Operating cash is retained overnight in non-interest-bearing accounts which allow for offsets to treasury service charges. The marketable securities include investments in cash and money funds, mutual funds, exchange traded funds (“ETF’s”), corporate bonds, government securities and stocks through professional investment management firms. Investment securities are exposed to various risks, such as interest rate, market and credit risks.
29
The Company’s customers are not concentrated in any specific geographic region, but are concentrated in the road and highway construction industry. The Company extends limited credit on parts sales to its customers based upon their credit-worthiness. Generally, the Company requires a significant up-front deposit before beginning manufacturing on complete asphalt plant and component orders, and requires full payment subject to hold-back provisions prior to shipment. The Company establishes an allowance for doubtful accounts based upon the credit risk of specific customers, historical trends and other pertinent information.
Inventories
Inventories are valued at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price of goods less reasonable costs of completion and delivery. During the fourth quarter of fiscal 2019, the Company changed its method for accounting for cost of inventories from the last-in,
first-out
(“LIFO”) method to the first-in,
first-out
(“FIFO”) method. As required by accounting principles generally accepted in the United States of America (“GAAP”), the Company reflected this change in accounting principle on a retrospective basis, resulting in changes to the historical periods presented.
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.
Changes in the allowance for slow-moving and obsolete inventories are as follows:
2020
2019
Balance, beginning of year
$
4,700,000
$
4,543,000
Charged to cost of sales
401,000
304,000
Disposal of inventory, net of recoveries
( 484,000
)
( 147,000
)
Balance, end of year
$
4,617,000
$
4,700,000
Property and Equipment
Property and equipment are stated at cost (see Note 4). Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the related assets, as follows:
Years
Land improvements
15
Buildings & improvements
6 - 40
Equipment
2 - 10
Impairments
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 of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. No such impairment losses were recorded during the years ended September 30, 2020 and 2019.
3 0
Revenues and Expenses
The Company adopted the provisions of ASU No. 2014-09
and related amendments effective for the quarter ended December 31, 2018 using the modified retrospective method. The adoption of this standard did not have a material impact on the timing or amounts of revenues recognized by the Company, and, as such, no cumulative effect adjustment was recorded with the adoption of the standard.
The following table disaggregates the Company’s net revenue by major source for the years ended September 30, 2020 and 2019:
2020
2019
Equipment sales recognized over time
$
35,579,000
$
43,489,000
Equipment sales recognized at a point in time
23,642,000
19,987,000
Parts and component sales
13,896,000
13,356,000
Freight revenue
3,983,000
4,130,000
Other
320,000
367,000
Net revenue
$
77,420,000
$
81,329,000
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 $ 6,405,000 and $ 13,838,000 at September 30, 2020 and 2019, respectively, and are included in current assets as costs and estimated earnings in excess of billings on the Company’s consolidated balance sheets. The Company anticipates that all of the contract assets at September 30, 2020, 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 s
ervices
are completed. Accounts receivable related to contracts with customers for equipment sales were $ 223,000 and $ 301,000 at September 30, 2020 and September 30, 2019, respectively.
Product warranty costs are estimated using historical experience and known issues and are charged to production costs as revenue is recognized.
Changes in the accrual for warranty and related costs are composed of the following:
2020
2019
Balance, beginning of year
$
277,000
$
400,000
Warranties issued
375,000
140,000
Warranties settled
( 353,000
)
( 263,000
)
Balance, end of year
$
299,000
$
277,000
31
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 historical experience.
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 September 30, 2020 and September 30, 2019. Customer deposits related to contracts with customers were $ 3,853,000 and $ 1,918,000 at September 30, 2020 and 2019, respectively, and are included in current liabilities on the Company’s 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 production costs 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.
Changes in the allowance for doubtful accounts are composed of the following:
2020
2019
Balance, beginning of year
$
459,000
$
313,000
Provision for doubtful accounts
50,000
175,000
Provision for estimated returns and allowances
205,000
315,000
Uncollectible accounts written off
( 5,000
)
( 71,000
)
Returns and allowances issued
( 267,000
)
( 273,000
)
Balance, end of year
$
442,000
$
459,000
Shipping and Handling Costs
Shipping and handling costs are included in production costs in the consolidated income statements.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and primarily consist of taxes currently due, plus deferred taxes (see Note 6 – Income 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 September 30, 2020 and 2019.
32
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 fiscal 2020 and 2019 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.
Comprehensive Income
For the years ended September 30, 2020 and 2019, other comprehensive income is equal to net income.
Reporting Segments and Geographic Areas
The Company has one reportable segment. For fiscal 2020 and 2019, total revenues of $ 77,420,000 and $ 81,329,000 , and total long-term assets of $ 9,336,000 and $ 8,442,000 , respectively, were attributed to the United States. Revenues are attributed to geographic areas based on the location of the assets producing the revenues.
Customers with 10% (or greater) of Net Revenues
No customer accounted for 10 % or more of fiscal 2020 or 2019 net revenues.
Subsequent Events
Management has evaluated events occurring from September 30, 2020 through the date these consolidated financial statements were filed with the Securities and Exchange Commission for proper recording and disclosure herein.
On October 1, 2020, the Company acquired the Blaw-Knox paver business and associated assets, including inventory, fixed assets and related intellectual property,
from Volvo CE. The acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” The purchase price of approximately $ 14.4 million was funded by cash on hand (see Note 12 - Subsequent Events for additional information).
NOTE 2 - INVENTORIES
Inventories are valued at the lower of cost or net realizable value. During the fourth quarter of fiscal 2019, the Company changed its method for accounting for cost of inventories from the LIFO method to the FIFO method. The Company believes the FIFO method improves financial reporting by better reflecting the current value of inventory on the consolidated balance sheets, by more closely aligning the flow of physical inventory with the accounting for the inventory, and by providing better matching of revenues and ex p
enses.
Net inventories consist of the following:
September 30,
2020
2019
Raw materials
$
14,607,000
$
14,158,000
Work in process
3,633,000
1,397,000
Finished goods
8,810,000
9,811,000
Used equipment
40,000
—
Inventories, net
$
27,090,000
$
25,366,000
Slow-moving and obsolete inventory reserves were $ 4,617,000 and $ 4,700,000 at September 30, 2020 and 2019, respectively.
33
NOTE 3 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
Costs and estimated earnings in excess of billings on uncompleted contracts as of September 30, 2020 and 2019 consisted of the following:
September 30,
2020
2019
Costs incurred on uncompleted contracts
$
10,390,000
$
18,707,000
Estimated earnings
4,680,000
9,063,000
15,070,000
27,770,000
Billings to date
8,665,000
13,932,000
Costs and estimated earnings in excess of billings
$
6,405,000
$
13,838,000
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of September 30, 2020 and 2019:
September 30,
2020
2019
Land and improvements
$
3,323,000
$
3,323,000
Buildings and improvements
13,547,000
13,462,000
Equipment
16,305,000
14,809,000
33,175,000
31,594,000
Less: Accumulated depreciation and amortization
( 24,834,000
)
( 23,205,000
)
Property and equipment, net
$
8,341,000
$
8,389,000
Property and equipment includes approximately $ 14,300,000 and $ 12,866,000 of fully depreciated assets, which remained in service during fiscal 2020 and 2019, respectively.
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consist of the following as of September 30, 2020 and 2019:
September 30,
2020
2019
Payroll and related accruals
$
1,608,000
$
1,759,000
Warranty and related accruals
299,000
277,000
Professional fees
247,000
205,000
Income tax accruals
225,000
175,000
Other
226,000
244,000
Accrued expenses
$
2,605,000
$
2,660,000
34
NOTE 6 - INCOME TAXES
The provision for income tax expense consists of:
Year Ended September 30,
2020
2019
Current:
Federal
$
3,430,000
$
2,297,000
State
346,000
148,000
Total current
3,776,000
2,445,000
Deferred:
Federal
( 2,436,000
)
52,000
State
( 190,000
)
131,000
Total deferred
( 2,626,000
)
183,000
Income tax expense
$
1,150,000
$
2,628,000
A reconciliation of the federal statutory tax rate to the total tax provision is as follows:
Year Ended September 30,
2020
2019
Federal income taxes computed at the statutory rate
21.0
%
21.0
%
State income taxes, net of federal benefit
1.3
%
1.6
%
Research & development tax refunds & credits
( 6.3
%)
( 1.9
%)
Dividend received deduction
( 1.2
%)
( 0.6
%)
263A Section 481(a) adjustment
1.5
%
—
Other, net
0.9
%
0.4
%
Effective income tax rate
17.2
%
20.5
%
Deferred income tax assets and liabilities consist of the following:
September 30,
2020
2019
Deferred Tax Assets:
Accrued liabilities and reserves
$
340,000
$
344,000
Allowance for doubtful accounts
98,000
104,000
Inventory
369,000
98,000
Stock-based compensation
81,000
82,000
Net operating losses carryforwards
5,000
7,000
Gross Deferred Income Tax Assets
893,000
635,000
Deferred and Other Tax Liabilities:
Domestic international sales corporation
( 329,000
)
( 464,000
)
Percentage of completion
—
( 2,048,000
)
Property and equipment
( 1,158,000
)
( 1,080,000
)
Unrealized gain on investments
( 2,000
)
( 265,000
)
Unrecognized tax benefits
( 150,000
)
( 150,000
)
Gross Deferred and Other Income Tax Liabilities
( 1,639,000
)
( 4,007,000
)
Net Deferred and Other Income Tax Assets (Liabilities)
$
( 746,000
)
$
( 3,372,000
)
35
Total income taxes paid in fiscal 2020 and 2019 were $ 3,850,000 and $ 1,150,000 , respectively. The fiscal 2020 income taxes paid includes $ 2,050,000 of tax payments due on the filing of the Company’s Form 3115 with the Internal Revenue Service to reflect the revenue recognition method change to the percentage of completion method for tax purposes pursuant to Internal Revenue Code Sections 460 and 451(b).
GAAP prescribes a comprehensive model for the financial recognition, measurement, classification, and disclosure of
uncertain tax positions. GAAP contains a two-step
approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, based on the technical merits of the position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
Significant judgment is required in evaluating the Company’s uncertain tax position and determining the Company’s provision for taxes. Although the Company believes the reserves of unrecognized tax benefits (“UTB’s”) are reasonable, no assurance can be given that the final outcome of these matters will not be different from that which is reflected in the Company’s historical income tax provision and accruals. The Company adjusts these reserves in light of changing facts and circumstances. As of September 30, 2020 and 2019, the Company had UTB’s of $ 150,000 . There were no additional accruals of UTB’s during fiscal years ended September 30, 2020 and 2019.
The Company recognizes interest and penalties accrued related to UTB’s as a component of income tax expense. There were no additional accruals of interest expense nor penalties during fiscal years ended September 30, 2020 and 2019. It is reasonably possible that the amount of the UTB’s with respect to certain unrecognized tax positions will increase or decrease during the next 12 months. The Company does not expect the change to have a material effect on its results of operations or its financial position. The only expected potential reason for change would be the ultimate results stemming from any examinations by taxing authorities. If recognized, the entire amount of UTB’s would have an impact on the Company’s effective income tax rate.
The effective income tax rate for fiscal 2020 was 17.2 % versus 20.5 % in fiscal 2019.
In fiscal 2019, the Company generated $ 241,000 of federal research and development credits (“R&D Credits”), all of which were used. In fiscal 2020, the Company generated $ 421,000 of R&D Credits, all of which were used. There were no R&D Credits carryforwards as of September 30, 2020.
As of September 30, 2018, the Company had $ 87,000 in Florida state research and development tax credits (“Florida R&D Credits”) carryforwards. The Company did no t receive any additional Florida R&D Credits in fiscal 2020 or fiscal 2019. The Company used the $ 87,000 of Florida R&D Credits carryforwards from fiscal 2018 in fiscal 2019. There were no Florida R&D Credits carryforwards at September 30, 2020.
The Company files U.S. federal income tax returns, as well as Florida and Iowa income tax returns. The Company’s U.S. federal income tax returns filed for tax years prior to fiscal year ended September 30, 2017 are generally no longer subject to examination by taxing authorities due to the expiration of the statute of limitations.
NOTE 7 - RETIREMENT BENEFITS
The Company has a voluntary 401(k) employee benefit plan, which covers all eligible, domestic employees. The Company makes discretionary matching contributions subject to a maximum level, in accordance with the terms of the plan. The Company charged approximately $ 290,000 and $ 282,000 to expense under the provisions of the plan during the years ended September 30, 2020 and 2019, respectively.
NOTE 8 - LONG-TERM DEBT AND ARRANGEMENTS WITH FINANCIAL INSTITUTIONS
The Company had no long-term debt outstanding at September 30, 2020 or 2019. The Company does not currently require a credit facility.
As of September 30, 2020, total cash deposits with insurance companies covering collateral needs were $ 85,000 .
36
In April 2020, a financial institution issued an irrevocable standby letter of credit (“letter of credit”) on 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 2021, 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.
NOTE 9 - LEASES
The Company leases certain equipment under non-cancelable operating leases. Future minimum rental payments under these leases at September 30, 2020 are immaterial. Total rental expense for the fiscal years ended September
30, 2020 and 2019 was $ 37,000 and $ 40,000 , respectively.
On August 28, 2020, the Company entered into a three -year
operating lease for property related to the manufactur ing
and warehousing of the Blaw-Knox paver business
which was acquired after September 30, 2020 (refer to Note 12 – Subsequent Events for additional information
). The lease term is for the period 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.
For the year ended September 30, 2020, operating lease cost was
$ 28,000 which was accrued at September 30, 2020 and paid in October 2020. There were no cash payments related to this operating lease in fiscal 2020.
Other information concerning the Company’s operating lease accounted for under ASC 842 guidelines is as follows:
As of September 30, 2020
Operating lease ROU asset included in other long-term assets
$
942,000
Current operating lease liability
328,000
Non-current operating lease liability
614,000
Weighted average remaining lease term (in years)
2.92
Weighted average discount rate used in calculating ROU
asset
4.0
%
Future annual minimum lease payments as of September 30, 2020 are as follows:
Fiscal Year
Annual Lease Payments
2021
$
335,000
2022
343,000
2023
322,000
Total
1,000,000
Less interest
( 58,000
)
Present value of lease liabilities
$
942,000
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in legal proceedings arising out of the normal course of business, none of which we believe will have a material adverse effect on our business, financial condition or results of operations. Claims made in the ordinary course of business may be covered in whole or in part by insurance.
COVID-19
Pandemic
The Company continues to monitor and evaluate the risks to public health and the slowdown in overall business activity related to the novel coronavirus (“COVID-19”)
pandemic, including impacts on its employees, customers, suppliers and financial results. As of the date of issuance of these Consolidated Financial Statements, 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 and year ended September 30, 2020 and as of the date these Consolidated Financial Statements are issued. As such, the full magnitude that the COVID-19
pandemic will have on
37
the Company’s financi a
l condition and future results of operations is uncertain. Management is actively monitoring the situation on the Company’s financial condition, operations, suppliers, industry, customers, and workforce. As the spread of COVID-19
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.
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.
NOTE 11 - SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
Shareholders’ Equity
Under the Company’s Certificate of Incorporation, as amended, certain rights of the holders of the Company’s common stock are modified by shares of Class B stock for as long as such shares shall remain outstanding. During that period, holders of common stock will have the right to elect approximately 25 % of the Company’s Board of Directors, and conversely, holders of Class B stock will be entitled to elect approximately 75 %
of the Company’s Board of Directors. During the period when shares of common stock and Class B stock are outstanding, certain matters submitted to a vote of shareholders will also require approval of the holders of common stock and Class B stock, each voting separately as a class. Common stock and Class B shareholders have equal rights with respect to dividends, preferences, and rights, including rights in liquidation.
Stock-Based Compensation
On March 17, 2009, the shareholders of the Company approved the 2009 Incentive Compensation Plan (the “2009 Plan”). The 2009 Plan provides that the total number of shares of Company stock that may be subject to the granting of awards under the 2009 Plan (“Awards”)
equals
800,000 shares of common stock and 160,000 shares of Class B stock
, subject to adjustment pursuant to the terms of
the 2009 Plan. Persons eligible to receive Awards under the 2009 Plan include employees, directors, consultants and other persons who provide services to the Company. The 2009 Plan imposes individual limitations on the amount of certain Awards, in part, to comply with Internal Revenue Code, Section 162(m).
As of September 30, 2020 and 2019
, all outstanding common stock options
issued under the 2009 Plan
had been fully vested. These options amounted to 177,492 at September 30, 2020. As long as the employees remain
employed by the Company, these options are exercisable through October 1, 2021.
As of September 30, 2020 and 2019
, 45,000 outstanding Class B stock options
issued under the 2009 Plan
were fully vested and are exercisable through October 1, 2021 as long as the employee remains employed by the Company. In addition, 30,000 outstanding Class B stock options
issued under the 2009 Plan
were fully vested at September 30, 2020, and were 75 % vested as of September 30, 2019,
and are exercisable through September 26, 2026 as long as the employee remains employed by the Company.
As of September 30, 2020,
no
options
are available for granting of Awards under the 2009 Plan.
38
Th e
following table summarizes option activity under the 2009
Plan:
Number of
Shares
Average
Exercise Price
Per Share
Options outstanding at September 30, 2018
317,492
$
5.984
Options exercised during fiscal 2019
( 45,000
)
$
5.126
Options outstanding at September 30, 2019
272,492
$
6.126
Options exercised during fiscal 2020
( 20,000
)
$
5.126
Options outstanding at September 30, 2020
252,492
$
6.205
No options were granted, forfeited or cancelled during the years ended September 30, 2020 or September 30, 2019. The weighted average remaining contractual life on the options outstanding as of September 30, 2020 is
1.6 years under the 2009 Plan.
NOTE 12 - SUBSEQUENT EVENTS
O n
October 1, 2020, the Company acquired the Blaw-Knox paver business and associated assets, including inventory, fixed assets and related intellectual property, from Volvo CE .
The acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” The purchase price of approximately $ 14.4 million, which is subject to post-closing adjustments, was funded by cash on hand. Due to COVID-19 constraints, as well as limited time since the acquisition date, the Company is still in the process of completing the initial accounting for the business combination. As a result, the specific amounts for the major classes of assets acquired are not provided. There were no liabilities assumed.
This acquisition provides the Company entry into the hot mix paver segment of the asphalt industry.
39
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None