What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-02-12 compared with 2020-08-06 · 59 added, 98 removed, 86 unchanged (65% of the section changed)

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Forward-Looking Information

This Quarterly Report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which represent the Company’s expectations and beliefs, including, but not limited to, statements concerning gross margins, sales of the Company’s products and future financing plans.

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, demand for the Company’s products, the duration and scope of the coronavirus (“COVID-19”)

pandemic, actions governments, businesses, and individuals take in response to the COVID-19

pandemic, including mandatory business closures and restrictions on onsite commercial interactions;

the impact of the pandemic and actions taken in response to the pandemic on global and regional economies and economic activity;

the pace of recovery when the COVID-19

pandemic subsides;

and general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth.

For information concerning these factors and related matters, see the Caution Regarding Forward-Looking Statements, and this Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Quarterly Report, Part II, Item 1A, “Risk Factors,” in the Quarterly Report on Form 10-Q

for the quarter ended March 31, 2020, and the following sections of the Company’s Annual Report on Form 10-K

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, 2020:

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The Company does not undertake to update any forward-looking statements, except as required by law.

Gencor Industries, Inc.

(the “Company”), is a leading manufacturer of heavy machinery used in the production of highway construction materials and environmental control equipment.

The Company’s core products include asphalt plants, combustion systems and fluid heat transfer systems.

The Company’s products are manufactured in two facilities in the United States.

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.

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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 crude oil (liquid asphalt as well as fuel costs), and a trend towards larger more efficient asphalt plants.

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 December 4, 2015, President Obama signed into law a five-year, $305 billion transportation bill, Fixing America’s Surface Transportation Act (the “FAST Act”).

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The bill included spending of more than $205 billion on roads and highways over five years.

The 2016 funding levels were approximately 5% above 2015 projected funding, with annual increases between 2.0% and 2.5% from 2016 through 2020.

The FAST Act is scheduled to expire in September 2020.

The 2016 funding levels were approximately 5% above 2015 projected funding, with annual increases between 2.0% and 2.5% from 2016 through September 2020.

On the eve of its expiration, a one-year

extension to the FAST Act was passed and signed into law.

extension maintains current funding levels under the FAST Act through September 2021.

California’s Senate Bill 1 (“SB1”), the Road Repair and Accountability Act of 2017, was signed into law on April 28, 2017.

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These funds will be allocated to state and local projects.

Additionally, at least twenty-five other states have taken steps to increase their gas tax revenues in recent years.

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.

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Results of Operations

Quarter Ended June 30, 2020 versus June 30, 2019

Net revenue for the quarter ended June 30, 2020 was $22,940,000, as compared to $18,848,000 for the quarter ended June 30, 2019, an increase of $4,092,000, or 21.7%.

The increase in net revenue was due to the timing of and shipment of orders for equipment sales.

As a percent of net revenue, gross profit margins were 23.5% in the quarter ended June 30, 2020 compared to 25.2% in the quarter ended June 30, 2019.

The gross profit margins achieved in the current quarter were impacted by a higher percentage of revenues generated from plant and equipment sales compared with parts sales, which have a higher gross margin.

Product engineering and development expenses were $849,000 in the quarter ended June 30, 2020, compared to $881,000 for the quarter ended June 30, 2019, as a result of reduced travel expense.

Selling, general and administrative (“SG&A”) expenses increased by $51,000 to $2,522,000 in the quarter ended June 30, 2020, compared to $2,471,000 in the quarter ended June 30, 2019 as a result of increased sales headcount.

The Company had operating income of $2,014,000 for the quarter ended June 30, 2020 versus operating income of $1,398,000 for the quarter ended June 30, 2019.

Operating margins were 8.8% for the quarter ended June 30, 2020, compared to 7.4% in the prior year.

The increase in operating margins was due to higher revenues and production volumes.

For the quarter ended June 30, 2020, interest and dividend income, net of fees, from the investment portfolio was $512,000, as compared to $567,000 in the quarter ended June 30, 2019.

Net realized and unrealized gains on marketable securities were $2,888,000 for the quarter ended June 30, 2020 versus net unrealized and realized gains of $1,090,000 for the quarter ended June 30, 2019.

The current quarter investment gains reflect a recovery in the domestic equity markets after the initial declines from the impact of the COVID-19

pandemic in the quarter ended March 31, 2020

The effective income tax rate for the quarters ended June 30, 2020 and 2019 was 20.0%.

Net income for the quarter ended June 30, 2020 was $4,322,000, or $0.29 per diluted share, versus $2,444,000, or $0.17 per diluted share, for the quarter ended June 30, 2019.

Nine Months Ended June 30, 2020 versus June 30, 2019

Net revenue for the nine months ended June 30, 2020 and 2019 were $66,963,000 and $66,845,000, respectively, an increase of $118,000.

Gross profit margins decreased to 25.5% in the nine months ended June 30, 2020 from 29.3% in the nine months ended June 30, 2019.

The gross profit margins achieved in the prior year benefitted from an unusually strong pricing environment for plant and equipment sales.

Product engineering and development expenses decreased by $123,000 in the nine months ended June 30, 2020, compared to the nine months ended June 30, 2019.

SG&A expenses increased $330,000 in the nine months ended June 30, 2020, compared to the nine months ended June 30, 2019.

As a percentage of net revenues, SG&A expenses were 11.1% for the nine months ended June 30, 2020, compared to 10.7% for the nine months ended June 30, 2019.

The higher SG&A expenses in 2020 were due to increased headcount, travel and trade show expenses during the first nine months of fiscal 2020.

The Company had operating income of $7,274,000 for the nine months ended June 30, 2020 versus operating income of $10,016,000 for the nine months ended June 30, 2019, on lower gross profit margins and higher SG&A expenses.

Operating margins were 10.9% for the nine months ended June 30, 2020, compared to 15.0% for the nine months ended June 30, 2019.

For the nine months ended June 30, 2020, interest and dividend income, net of fees, from the investment portfolio was $1,907,000, as compared to $1,608,000 for the prior period.

The increase was due to additional interest income from a larger investment in corporate bonds and higher average yield to maturities.

The net realized and unrealized losses on marketable securities were $(1,465,000) for the nine months ended June 30, 2020 versus net realized and unrealized gains of $1,147,000 for the nine months ended June 30, 2019.

The current year investment losses reflect the decline in the domestic equity markets from the impact of the COVID-19

The effective income tax rate for the nine months ended June 30, 2020 and June 30, 2019 was 20.0%.

Net income for the nine months ended June 30, 2020 was $6,156,000, or $0.42 per diluted share, versus $10,217,000, or $0.69 per diluted share, for the nine months ended June 30, 2019.

In March 2020, the WHO declared the outbreak of COVID-19

as a pandemic based on the rapid increase in global exposure.

continues to spread throughout world, including the United States.

pandemic continues to impact economic conditions, which could impact the short-term and long-term demand from our customers and, therefore, has the potential to negatively impact our results of operations, cash flows, and financial position in the future.

Management continues to monitor the situation and any impact on our financial condition and results of operations.

Quarter Ended December 31, 2020 versus December 31, 2019

Net revenues for the quarters ended December 31, 2020 and December 31, 2019 were $18,964,000 and $18,030,000, respectively, an increase of $934,000.

The improved revenues reflect an increase in parts and component sales over the comparative quarter in the prior year.

There were no revenues generated by Blaw-Knox during the quarter ended December 31, 2020, as the facility is being readied to begin production.

As a percent of sales, gross profit margins were 15.7% in the quarter ended December 31, 2020, compared to 24.0% in the quarter ended December 31, 2019.

The gross profit margins for the quarter ended December 31, 2020 were impacted by approximately $1.5 million of unabsorbed manufacturing labor and overhead expenses related to the Blaw-Knox paver product line.

Excluding these expenses, the gross profit margin for the quarter ended December 31, 2020, would have been 23.5%, with increases in steel prices contributing to the lower overall gross margins.

Product engineering and development expenses increased $79,000 to $845,000 for the quarter ended December 31, 2020, as compared to $766,000 for the quarter ended December 31, 2019, due primarily to engineering wages related to the Blaw-Knox paver product line.

Selling, general and administrative (“SG&A”) expenses increased by $812,000 to $3,194,000 for the quarter ended December 31, 2020, compared to the quarter ended December 31, 2019.

The increase in SG&A expenses was primarily due to professional fees, salaries, travel and other general expenses of approximately $0.5 million related to the acquisition.

In addition, increased advertising expenses contributed to the higher SG&A expenses during the first quarter of fiscal 2021.

Operating income decreased from $1,172,000 for the quarter ended December 31, 2019 to an operating loss of $(1,058,000) for the quarter ended December 31, 2020, due primarily to the operational start-up

costs related to the acquisition.

For the quarter ended December 31, 2020, interest and dividend income, net of fees, was $804,000 as compared to $632,000 in the quarter ended December 31, 2019.

Interest income for the quarter ended December 31, 2020, included $456,000 collected from a customer due to permitting delays.

The net realized and unrealized gains on marketable securities were $2,193,000 for the quarter ended December 31, 2020 versus $1,317,000 for the quarter ended December 31, 2019, due to a strong domestic stock market during the quarter ended December 31, 2020.

The effective income tax rate for the quarters ended December 31, 2020 and December 31, 2019, was 20.0% based on the expected annual effective income tax rate.

Net income for the quarter ended December 31, 2020 was $1,551,000 or $0.11 basic and diluted earnings per share versus net income of $2,489,000 or $0.17 basic and diluted earnings per share for the quarter ended December 31, 2019.

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, 2020 or September 30, 2019.

As of June 30, 2020, the Company has funded $85,000 in cash deposits at insurance companies to cover related collateral needs.

The Company had no long-term or short-term debt outstanding at December 31, 2020 or September 30, 2020.

As of December 31, 2020, 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 behalf of the Company for the benefit of one of the Company’s insurance carriers.

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To date, no amounts have been drawn under the letter of credit.

As of June 30, 2020, the Company had $18,564,000 in cash and cash equivalents, and $105,675,000 in marketable securities, including $38,058,000 in corporate bonds, $12,089,000 in equities, $3,983,000 in mutual funds, $7,140,000 in exchange-traded funds, $33,789,000 in government securities, and $10,616,000 in cash and money funds.

The marketable securities are invested through professional investment management firms.

As of December 31, 2020, the Company had $23,957,000 in cash and cash equivalents, and $92,049,000 in marketable securities, including $27,392,000 in corporate bonds, $15,129,000 in equities, $13,260,000 in mutual funds, $15,775,000 in exchange-traded funds, $16,056,000 in government securities, and $4,437,000 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 $11.7 million at June 30, 2020, compared to $11.9 million at June 30, 2019.

The Company’s working capital (defined as current assets less current liabilities) was $154.7 million at June 30, 2020 and $150.4 million at September 30, 2019.

Cash provided by operations during the nine months ended June 30, 2020 was $9,405,000.

The Company’s backlog was $32.1 million at December 31, 2020 compared to $30.9 million at December 31, 2019.

The Company’s working capital (defined as current assets less current liabilities) was $151.3 million at December 31, 2020 and $153.2 million at September 30, 2020.

Cash provided by operations during the quarter ended December 31, 2020 was $3,705,000.

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.

Deferred income taxes decreased by $2.1 million reflecting payments of taxes due of $1.9 million 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).

Costs and estimated earnings in excess of billings decreased $3,774,000 and customer deposits increased $733,000, reflecting the timing of revenue recognition and payments on customer contracts recognized over time, at June 30, 2020.

Final payment on one plant remained open at June 30, 2020 as this customer has experienced delays in permitting and thus has not taken possession of their equipment.

We anticipate payment and shipment of this plant when the customer’s permit is issued.

Inventories decreased $804,000 reflecting final shipments on equipment sales recognized at a point in time prior to June 30, 2020.

Cash flows used in investing activities for the nine months ended June 30, 2020 of $1,246,000 were related to capital expenditures, primarily for new manufacturing machinery used for cutting raw materials and systems’ software.

Cash provided by financing activities of $103,000 for the nine months ended June 30, 2020 related to proceeds from the exercise of stock options.

The Company’s primary business is the manufacture of asphalt plants and related components and typically experiences a seasonal slowdown during the third and fourth quarters of the calendar year.

Costs and estimated earnings in excess of billings decreased by $1.7 million, inventories decreased by $2.6 million (excluding the $11.0 million of inventory acquired with the Blaw-Knox paver product line) and customer deposits decreased by $1.2 million reflecting the completion and shipment of several large contract jobs during the quarter ended December 31, 2020.

Cash flows used in investing activities for the quarter ended December 31, 2020 of $15,332,000 were related to the acquisition of the Blaw-Know paver product line and subsequent capital expenditures, primarily for systems software and leasehold improvements for the Blaw-Knox manufacturing facility.

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.

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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, 2019, “Accounting Policies.”

for the year ended September 30, 2020, “Nature of Operations and Summary of Significant Accounting Policies.”

Estimates and Assumptions

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Revenues & Expenses

As discussed 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, 2019, under the heading “Accounting Pronouncements and

Policies.”, the Company adopted the provisions of ASU No.

and its 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 Company recognizes revenue under ASU No.

Revenue from Contracts with Customers

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.

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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 $10,064,000 at June 30, 2020 and $13,838,000 at September 30, 2019 and are included in current assets as costs and estimated earnings in excess of billings on the Company’s condensed consolidated balance sheets at June 30, 2020 and September 30, 2019, respectively.

The Company anticipates that all these contract assets at June 30, 2020, will be billed and collected within one year.

These contract assets were $4,709,000 and $6,405,000 at December 31, 2020 and September 30, 2020, 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 December 31, 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.

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Payment for equipment under contract with customers is typically due prior to shipment.

Payment for services under contract with customers is due as certain milestones are completed.

Accounts receivable related to contracts with customers for equipment sales was $281,000 at June 30, 2020 and $301,000 at September 30, 2019.

Payment for services under contract with customers is due as services are completed.

Accounts receivable related to contracts with customers for equipment sales were $346,000 at December 31, 2020 and $223,000 at September 30, 2020.

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, 2020 and September 30, 2019.

Customer deposits related to contracts with customers were $2,651,000 at June 30, 2020 and $1,918,000 at September 30, 2019, and are included in current liabilities on the Company’s condensed consolidated balance sheets at June 30, 2020 and September 30, 2019, respectively.

There were no contract liabilities other than customer deposits at December 31, 2020 and September 30, 2020.

Customer deposits related to contracts with customers were $2,697,000 at December 31, 2020 and $3,853,000 at September 30, 2020 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.

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.

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.

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The allowance for doubtful accounts is determined by performing a specific review of all account balances greater than 90 days past due and other higher risk amounts to determine collectability, and also adjusting for any known customer payment issues with account balances in the less-than-90-day

past due aging buckets.

Account balances

are charged off against the allowance for doubtful accounts when they are determined to be uncollectable.

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.

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 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 expenses.

The change in accounting method will also require the Company to make a conforming change for U.S.

income tax purposes.

As required by GAAP, the Company has reflected this change in accounting principle on a retrospective basis, resulting in changes to the historical periods presented.

The retrospective application of the change resulted in an increase in the Company’s September 30, 2018 and September 30, 2017 retained earnings of $2,838,000 (net of $838,000 in taxes) and $2,708,000 (net of $792,000 in taxes) respectively, and an increase to the Company’s net income of $130,000 (net of $45,000 in taxes) for the year ended September 30, 2018.

This change did not affect our previously reported cash flows from operating, investing or financing activities nor did it have a significant impact on the previously reported quarterly operating results for fiscal 2019.

All inventories are valued at the lower of cost or net realizable value, with cost being determined under the FIFO method and net realizable value defined as the estimated selling price of goods less reasonable costs of completion and delivery (see Note 3 to Condensed Consolidated Financial Statements).

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 materials, work in process, finished goods, spare parts and used equipment.

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, the cost basis of inventories three to four years old are reduced by 50%, while the cost basis of inventories four to five years old are reduced by 75%, and the cost basis of inventories greater than five years old are reduced to zero.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis