GENCOR INDUSTRIES INC 10-Q

Item 1. Financial Statements GENCOR INDUSTRIES, INC. Condensed Consolidated Balance Sheets March 31, 2021 (Unaudited) September 30, 2020 ASSETS Current assets: Cash and cash equivalents $ 29,417,000 $ 35,584,000 Marketable securities at fair value (cost of $ 91,159,000 at March 31, 2021 and $ 89,514,000 at September 30, 2020) 93,646,000 89,498,000 Accounts receivable, less allowance for doubtful accounts of $ 373,000 at March 31, 2021 and $ 442,000 at September 30, 2020 3,543,000 1,992,000 Costs and estimated earnings in excess of billings — 6,405,000 Inventories, net 38,104,000 27,090,000 Prepaid expenses 1,204,000 1,189,000 Total current assets 165,914,000 161,758,000 Property and equipment, net 12,252,000 8,341,000 Other long-term assets 1,054,000 995,000 Total Assets $ 179,220,000 $ 171,094,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 2,697,000 $ 1,728,000 Customer deposits 6,026,000 3,853,000 Accrued expenses 3,134,000 2,605,000 Current operating lease liabilities 412,000 328,000 Total current liabilities 12,269,000 8,514,000 Deferred and other income taxes 1,247,000 746,000 Non-current operating lease liabilities 589,000 614,000 Total liabilities 14,105,000 9,874,000 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; 12,298,337 shares and 12,287,337 shares issued and outstanding at March 31, 2021 and September 30, 2020, respectively 1,230,000 1,229,000 Class B Stock, par value $ . 10 per share; 6,000,000 shares authorized; 2,318,857 shares issued and outstanding at March 31, 2021 and September 30, 2020 232,000 232,000 Capital in excess of par value 12,386,000 12,331,000 Retained earnings 151,267,000 147,428,000 Total shareholders’ equity 165,115,000 161,220,000 Total Liabilities and Shareholders’ Equity $ 179,220,000 $ 171,094,000 See accompanying Notes to Condensed Consolidated Financial Statements 4 GENCOR INDUSTRIES, INC. Condensed Consolidated Statements of Operations (Unaudited) For the Quarters Ended March 31, For the Six Months Ended March 31, 2021 2020 2021 2020 Net revenue $ 21,352,000 $ 25,993,000 $ 40,316,000 $ 44,023,000 Cost of goods sold 15,206,000 18,655,000 31,189,000 32,365,000 Gross profit 6,146,000 7,338,000 9,127,000 11,658,000 Operating expenses: Product engineering and development 1,069,000 689,000 1,914,000 1,455,000 Selling, general and administrative 3,838,000 2,561,000 7,032,000 4,943,000 Total operating expenses 4,907,000 3,250,000 8,946,000 6,398,000 Operating income (loss) 1,239,000 4,088,000 181,000 5,260,000 Other income (expense), net: Interest and dividend income, net of fees 327,000 763,000 1,130,000 1,395,000 Net realized and unrealized gains (losses) on marketable securities, net 1,294,000 ( 5,670,000 ) 3,488,000 ( 4,353,000 ) Other — — — ( 10,000 ) 1,621,000 ( 4,907,000 ) 4,618,000 ( 2,968,000 ) Income (loss) before income tax expense (benefit) 2,860,000 ( 819,000 ) 4,799,000 2,292,000 Income tax expense (benefit) 572,000 ( 164,000 ) 960,000 458,000 Net income (loss) $ 2,288,000 $ ( 655,000 ) $ 3,839,000 $ 1,834,000 Basic Income (Loss) per Common Share $ 0.16 $ ( 0.04 ) $ 0.26 $ 0.13 Diluted Income (Loss) per Common Share $ 0.16 $ ( 0.04 ) $ 0.26 $ 0.12 See accompanying Notes to Condensed Consolidated Financial Statements 5 GENCOR INDUSTRIES, INC. Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) For the Six Months Ended March 31, 2021 Common Stock Class B Stock Capital in Excess of Par Value Retained Earnings Total Shareholders’ Equity Shares Amount Shares Amount 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 For the Six Months Ended March 31, 2020 Common Stock Class B Stock Capital in Excess of Par Value Retained Earnings Total Shareholders’ Equity Shares Amount Shares Amount 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 — — — — — 2,489,000 2,489,000 Stock-based compensation — — — — 18,000 — 18,000 December 31, 2019 12,277,337 $ 1,228,000 2,308,857 $ 231,000 $ 12,177,000 $ 144,386,000 $ 158,022,000 Net loss — — — — — ( 655,000 ) ( 655,000 ) Stock-based compensation — — — — 17,000 — 17,000 March 31, 2020 12,277,337 $ 1,228,000 2,308,857 $ 231,000 $ 12,194,000 $ 143,731,000 $ 157,384,000 See accompanying Notes to Condensed Consolidated Financial Statements 6 GENCOR INDUSTRIES, INC. Condensed Consolidated Statements of Cash Flows For the Six Months Ended March 31, 2021 and 2020 (Unaudited) 2021 2020 Cash flows from operating activities: Net income $ 3,839,000 $ 1,834,000 Adjustments to reconcile net income to cash provided by operating activities: Purchase of marketable securities ( 54,048,000 ) ( 73,393,000 ) Proceeds from sale and maturity of marketable securities 53,067,000 72,181,000 Change in value of marketable securities ( 3,167,000 ) 4,259,000 Deferred and other income taxes 501,000 ( 2,863,000 ) Depreciation and amortization 1,210,000 831,000 Provision for doubtful accounts 25,000 25,000 Stock-based compensation — 35,000 Changes in assets and liabilities: Accounts receivable ( 1,576,000 ) ( 788,000 ) Costs and estimated earnings in excess of billings 6,405,000 5,046,000 Inventories (excluding the effect of the Blaw-Knox acquisition) ( 629,000 ) ( 1,697,000 ) Prepaid expenses ( 15,000 ) ( 1,645,000 ) Accounts payable 969,000 2,473,000 Customer deposits 2,173,000 2,795,000 Accrued expenses 529,000 61,000 Total adjustments 5,444,000 7,320,000 Cash flows provided by operating activities 9,283,000 9,154,000 Cash flows from investing activities: Acquisition of Blaw- Knox assets ( 13,777,000 ) — Capital expenditures ( 1,729,000 ) ( 718,000 ) Cash flows used in investing activities ( 15,506,000 ) ( 718,000 ) Cash flows from financing activities: Proceeds from stock option exercises 56,000 — Cash flows provided by financing activities 56,000 — Net increase (decrease) in cash and cash equivalents ( 6,167,000 ) 8,436,000 Cash and cash equivalents at: Beginning of year 35,584,000 10,302,000 End of year $ 29,417,000 $ 18,738,000 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 six months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending September 30, 2021. The accompanying Condensed Consolidated Balance Sheet at September 30, 2020 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 Construction Equipment North America, LLC (“Volvo CE”). The acquisition provides 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 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 March 31, 2021, include the assets, liabilities and operating results of the paver line for the quarter and six months then ended. There were no paver equipment revenues during the quarter ended December 31, 2020, as the facility was being readied for production which began in the quarter ended March 31, 2021. For further information, refer to the consolidated financial statements and notes thereto included in the Gencor Industries, Inc. Annual Report on Form 10-K for the year ended September 30, 2020. Recent Accounting Pronouncements In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). With adoption of this standard, lessees are required 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. ASU 2016-02 must be applied on a modified retrospective basis and was 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 three-year operating lease for property related to the manufacturing and warehousing of the paver line which resulted in reporting a right-of-use (“ROU”) asset and related lease liabilities of approximately $ 970,000 . On October 9, 2020, the Company entered into a second operating lease for additional warehousing space for the p a ver inventory. The lease term is 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 (see Note 9 – Leases). In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820) (ASU 2018-13). The updated guidance improves the disclosure requirements on fair value measurements, including, among other things, addition of certain disclosures related to level 3 fair value measurements, and removal of disclosure requirements for (i) the amount and reasons for transfers between level 1 and level 2 of the fair value hierarchy, and (ii) policy and timing of transfers between fair value hierarchy levels. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted ASU 2018-13 during the quarter ended December 31, 2020. The application of this guidance did not have a material effect on our disclosures. 8 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. COVID-19 Pandemic The Company continues to monitor and evaluate the risks related to the COVID-19 pandemic, including impacts on its employees, customers, suppliers and financial results. As of the date of issuance of these Condensed 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 ended March 31, 2021 and as of the date these Condensed Consolidated Financial Statements are 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 is actively monitoring the Company’s financial condition, operations, suppliers, industry, customers, and workforce. As the COVID-19 pandemic 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 from the Company’s suppliers) could have a material adverse effect on its business operations and financial performance. 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 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. 9 The following table sets forth, by level, within the fair value hierarchy, the Company’s marketable securities measured at fair value as of March 31, 2021: Fair Value Measurements Level 1 Level 2 Level 3 Total Equities $ 20,423,000 $ — $ — $ 20,423,000 Mutual Funds 13,238,000 — — 13,238,000 Exchange-Traded Funds 16,552,000 — — 16,552,000 Corporate Bonds — 25,169,000 — 25,169,000 Government Securities 16,000,000 — — 16,000,000 Cash and Money Funds 2,264,000 — — 2,264,000 Total $ 68,477,000 $ 25,169,000 $ — $ 93,646,000 Net unrealized gains and (losses) included in the Condensed Consolidated Statements of Operations for the quarter and six months ended March 31, 2021, were $ 596,000 and $ 2,503,000 , respectively. 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 gains and (losses) included in the Condensed Consolidated Statements of Operations for the quarter and six months ended March 31, 2020, were $( 6,029,000 ) and $( 4,839,000 ), respectively. 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 line and associated assets, including inventory, fixed assets and related intellectual property, from Volvo CE, as well as pay for capital expenditures and other startup costs to get the paver line’s manufacturing facility ready for production. 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. Net realizable value is 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 March 31, 2021 and September 30, 2020 consist of the following: March 31, 2021 September 30, 2020 Raw materials $ 24,884,000 $ 14,607,000 Work in process 5,942,000 3,633,000 Finished goods 7,238,000 8,810,000 Used equipment 40,000 40,000 $ 38,104,000 $ 27,090,000 Included in raw materials at March 31, 2021 was approximately $ 10.4 million of inventory acquired in the Blaw-Know acquisition. Slow-moving and obsolete inventory allowances were $ 5,049,000 and $ 4,617,000 at March 31, 2021 and September 30, 2020, respectively. Note 4 – Costs and Estimated Earnings in Excess of Billings Costs and estimated earnings in excess of billings on uncompleted contracts as of March 31, 2021 and September 30, 2020 consist of the following: March 31, 2021 September 30, 2020 Costs incurred on uncompleted contracts $ 7,192,000 $ 10,390,000 Estimated earnings 2,631,000 4,680,000 9,823,000 15,070,000 Billings to date 9,823,000 8,665,000 Costs and estimated earnings in excess of billings $ — $ 6,405,000 Note 5 – Earnings per Share Data The Condensed Consolidated Financial Statements include basic and diluted earnings per share information. The following table sets forth the computation of basic and diluted earnings per share for the quarters and six months ended March 31, 202 1 and 20 20 : Quarter Ended March 31, Six Months Ended March 31, 2021 2020 2021 2020 Net Income (Loss) 2,288,000 $ ( 655,000 ) $ 3,839,000 $ 1,834,000 Common Shares: Weighted average common shares outstanding 14,614,000 14,586,000 14,611,000 14,586,000 Effect of dilutive stock options 133,000 — 129,000 128,000 Diluted shares outstanding 14,747,000 14,586,000 14,740,000 14,714,000 Basic: Net income (loss) per share $ 0.16 $ ( 0.04 ) $ 0.26 $ 0.13 Diluted: Net income (loss) per share $ 0.16 $ ( 0.04 ) $ 0.26 $ 0.12 Basic earnings 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. The weighted-average shares issuable upon the exercise of stock options included in the diluted earnings per share calculation for the quarter ended March 31, 2021 were 252,000 , which equates to 133,000 dilutive common stock equivalents. For the quarter ended March 31, 2020, there were no common stock equivalents included in the diluted earnings per share calculation as their impact would be anti-dilutive. The weighted-average shares issuable upon the exercise of stock options included in the diluted earnings per share calculation for the six months ended March 31, 2021 11 were 252,000 , which equat e s to 129,000 dilutive common stock equivalents. The weighted-average shares issuable upon the exercise of stock options included in the diluted earnings per share calculation for the six months ended March 31, 2020 were 260,000 , which equates to 128,000 dilutive common stock equivalents. There were 30,000 weighted-average shares issuable upon the exercise of stock options, which were not included in the diluted earnings per share calculation for the six months ended March 31, 2020 becaus e they were anti-dilutive. There were no anti-dilutive shares for the quarter and six months ended March 31, 2021. Note 6 – Customers with 10% (or greater) of Net Revenues During the quarter ended March 31, 2021, one customer accounted for 12.0 % of net revenues. During the six months ended March 31, 2021, no customer accounted for 10 % or greater of net revenues. Three other customers accounted for 12.3 %, 11.2 % and 10.7 % of net revenues, respectively, for the quarter ended March 31, 2020. During the six months ended March 31, 2020, one of these three customers accounted for 10.4 % of net revenues. Note 7 – 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. 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 March 31, 2021 and September 30, 2020. 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 six months ended March 31, 2021 and March 31, 2020 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 six months ended March 31, 2021 and 2020: Quarter Ended March 31, Six Months Ended March 31, 2021 2020 2021 2020 Equipment sales recognized over time $ 3,870,000 $ 9,829,000 $ 8,002,000 $ 21,919,000 Equipment sales recognized at a point in time 9,565,000 10,044,000 19,701,000 11,951,000 Parts and component sales 6,830,000 4,675,000 10,761,000 7,821,000 Freight revenue 1,147,000 1,201,000 1,892,000 2,104,000 Other ( 60,000 ) 244,000 ( 40,000 ) 228,000 Net revenue $ 21,352,000 $ 25,993,000 $ 40,316,000 $ 44,023,000 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. There were no contract assets at March 31, 2021 and $ 6,405,000 in contract assets at September 30, 2020. These contract assets are included in current assets as costs and estimated earnings in excess of billings on the Company’s condensed consolidated balance sheets. 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 $ 298,000 and $ 223,000 at March 31, 2021 and September 30, 2020, respectively. Product warranty costs are estimated using historical experience and known issues and are charged to production costs as revenue is recognized. 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 March 31, 2021 and September 30, 2020. Customer deposits related to contracts with customers were $ 6,026,000 and $ 3,853,000 at March 31, 2021 and September 30, 2020, 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 March 31, 2021 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 paver 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 p a ver inventory. The lease term is 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. For the quarter and six months ended March 31, 2021, operating lease costs were $ 105,000 and $ 194,000 , respectively, and cash payments related to these operating leases were $ 116,000 and $ 232,000 , respectively. Other information concerning the Company’s operating lease accounted for under ASC 842 guidelines as of March 31, 2021 and September 30, 2020, is as follows: March 31, 2021 September 30, 2020 Operating lease ROU asset included in other long-term assets $ 1,001,000 $ 942,000 Current operating lease liability 412,000 328,000 Non-current operating lease liability 589,000 614,000 Weighted average remaining lease term (in years) 2.50 2.92 Weighted average discount rate used in calculating ROU asset 4.0 % 4.0 % Future annual minimum lease payments as of March 31, 2021 are as follows: Fiscal Year Annual Lease Payments 2021 (remaining 6 months) $ 233,000 2022 419,000 2023 400,000 Total 1,052,000 Less interest ( 51,000 ) Present value of lease liabilities $ 1,001,000 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 spare parts for its equipment. 14