What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-12-17 compared with 2020-12-18 · 68 added, 67 removed, 119 unchanged (53% of the section changed)

8 unchanged sentences

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

Gencor 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, fluid heat transfer systems and asphalt pavers.

Gencor is a leading manufacturer of heavy machinery used in the production of highway construction equipment and materials and environmental control equipment.

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

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

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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”).

The FAST Act reauthorized the collection of the 18.4 cents per gallon gas tax that is typically used to pay for transportation projects.

It also included $70 billion from other areas of the federal budget to close a $16 billion annual funding deficit.

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 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.

On November 15, 2021, President Biden signed into law a five-year, $1.2 trillion infrastructure bill, the Infrastructure Investment and Jobs Act (the “IIJ Act”), including $550 billion in new spending and reauthorization of $650 billion in previously allocated funds.

The IIJ Act provides $110 billion for the nation’s highways, bridges and roads.

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

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The Company will continue to scrutinize its relationships with suppliers to ensure it is achieving the highest quality materials and services at the most competitive cost.

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 this Annual Report, the Company’s operations have not been significantly impacted.

However, the full impact of the COVID-19

pandemic continues to evolve subsequent to the quarter and year ended September 30, 2021 and as of the date this Annual Report is issued.

As such, the full magnitude that the COVID-19

pandemic will have on the Company’s financial condition and future results of operations is uncertain.

Management continues to monitor the Company’s financial condition, operations, suppliers, industry, customers, and workforce.

If the spread of COVID-19

and its variants continues, the Company’s ability to meet customer demands for products may be impacted or its customers may experience adverse business consequences due to COVID-19

and its variants.

Reduced demand for products or ability to meet customer demand (including as a result of disruptions at the Company’s suppliers) could have a material adverse effect on its business operations and financial performance.

Results of Operations

Year ended September 30, 2021 compared with the year ended September 30, 2020

Net revenue for the year ended September 30, 2020 decreased 4.8% to $77.4 million from $81.3 million for the year ended September 30, 2019.

Net revenue for the fourth quarter of 2020 decreased 27.8% to $10.5 million compared to $14.5 million for the quarter ended September 30, 2019.

The decrease in revenues reflects a decline in orders from prior year as the impact of the FAST Act, which was set to expire at the end of September 2020, has slowed.

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.

Gross profit for fiscal 2020 was 24.5% of net revenue versus 27.6% of net revenue in fiscal 2019.

The reduced gross profit margins resulted from lower margins on contract jobs related to new products and overall lower production volumes.

Product engineering and development (“PED”) expenses decreased by $234,000 or 7.1% to $3,061,000 from $3,295,000 in fiscal 2019 due to reduced supplies, consulting and travel expenses.

Selling, general and administrative (“SG&A”) expenses increased $709,000 or 7.3% to $10,356,000 from $9,647,000 in fiscal 2019.

The higher SG&A expenses in 2020 were due to increased headcount, trade show and professional expenses.

SG&A expenses as a percentage of net revenue increased to 13.4%, compared to 11.9% in the prior year.

Fiscal 2020 had operating income of $5,536,000 versus $9,470,000 in fiscal 2019 based on lower net revenues and increased selling expenses.

On October 1, 2020, the Company completed the acquisition of the Blaw-Knox paver business and associated assets, including inventory fixed assets and related intellectual property, for a purchase price of approximately $14.4 million, subject to post-closing adjustments.

The acquisition expands the Company’s product offerings by adding highway class asphalt pavers to its asphalt plant and related equipment products.

Operations will continue with Blaw-Knox’s current management and workforce at a manufacturing facility located in Chambersburg, Pennsylvania.

The financial information included in the Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report and in the accompanying Consolidated Financial Statements is that of Gencor prior to the acquisition of Blaw-Knox because the acquisition was completed after September 30, 2020, the annual period covered by the Consolidated Financial Statements included in this Annual Report.

Accordingly, the historical information included in this Annual Report, unless otherwise indicated, is that of Gencor prior to the acquisition.

Net revenue for the year ended September 30, 2021 increased 10.1% to $85.3 million from $77.4 million for the year ended September 30, 2020.

The increase in net revenue was due primarily to paver equipment and parts sales of approximately $6.1 million for the year ended September 30, 2021, compared with no paver related revenues in fiscal 2020.

Net revenue for the fourth quarter of fiscal 2021 increased 91.7% to $20.0 million compared to $10.5 million for the quarter ended September 30, 2020.

The increase in net revenues reflected improved orders from prior year in anticipation of the signing of a new highway bill to replace the FAST Act, which after two temporary extensions, would have expired on December 3, 2021.

In addition, net revenue for the fourth quarter of fiscal 2021 includes $2.2 million of paver equipment and parts sales compared with no paver related revenues in the fourth quarter of fiscal 2020.

Gross profit margins decreased to 21.3% in fiscal 2021 from 24.5% in fiscal 2020.

The gross profit margins for the year ended September 30, 2021 were negatively impacted by approximately $4.6 million of unabsorbed manufacturing labor and overhead expenses related to the paver line.

In addition, increases in labor rates and steel and OEM parts prices contributed to the lower overall gross margins during the year ended September 30, 2021.

Product engineering and development (“PED”) expenses in fiscal 2021 increased by $1,217,000 to $4,278,000 from $3,061,000 in fiscal 2020 primarily due to engineering wages related to the paver line.

Selling, general and administrative (“SG&A”) expenses in fiscal 2021 increased $2,843,000 to $13,199,000 from $10,356,000 in fiscal 2020.

The higher SG&A expenses were primarily due to expenses related to the paver line and professional fees to support business development efforts.

Fiscal 2021 had operating income of $701,000 versus $5,536,000 in fiscal 2020.

The decrease in operating income was due primarily to the operational and start-up

costs related to the Blaw-Knox asset acquisition and professional fees to support business development efforts.

On October 1, 2020, the Company acquired the Blaw-Knox assets, including inventory, fixed assets and related intellectual property, from Volvo Construction Equipment North America, LLC (“Volvo CE”).

The acquisition provided the Company entry into the asphalt paver sector of the asphalt industry.

The acquisition was accounted for as a business combination under ASC 805, “Business Combinations.” The initial purchase price of approximately $14.4 million, which was subject to post-closing adjustments, was funded by cash on hand.

After post-closing adjustments transacted during 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 consolidated financial statements as of and for the year ended September 30, 2021, include the assets, liabilities and operating results of the paver line.

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.

As of September 30, 2021 and 2020, the cost basis of the investment portfolio was $93.7 million and $89.5 million, respectively.

During the fourth quarter of 2020, approximately $17.0 million of investments were liquidated.

The cash was used to fund the acquisition of the Blaw-Knox paver business (see Note 12 - Subsequent Events to Consolidated Financial Statements for additional information).

For both years ended September 30, 2020 and 2019, net interest and dividend income was $2.3 million.

The net realized and unrealized gains (losses) on marketable securities were $(1.2) million in fiscal 2020 versus $1.0 million in fiscal 2019.

The total cash, cash equivalents and investments balance at September 30, 2020 was $125.1 million, compared to the September 30, 2019 cash, cash equivalents and investments balance of $115.6 million, an increase of $9.5 million.

For the year ended September 30, 2021, interest and dividend income, net of fees, from the investment portfolio was $1,306,000, as compared to $2,321,000 for year ended September 30, 2020.

Interest income for the year ended September 30, 2021, also included $456,000 of interest collected from a customer.

The higher interest income from the investment portfolio in fiscal 2020 reflects the impact from a larger investment in corporate bonds and a higher average yield to maturity.

The fiscal 2021 corporate bonds were reduced as the related investments were partially liquidated to fund the Blaw-Knox acquisition.

Net realized and unrealized gains on marketable securities were $4,171,000 for the year ended September 30, 2021 versus net realized and unrealized losses of $(1,160,000) for the year ended September 30, 2020.

The fiscal 2020 investment losses reflect the decline in the domestic equity markets from the impact of the COVID-19

The total cash, cash equivalents and investments balance at September 30, 2021 was $118.2 million, compared to the September 30, 2020 cash, cash equivalents and investments balance of $125.1 million, a decrease of $6.9 million.

The effective income tax rate for fiscal 2021 was 12.5% versus 17.2% in fiscal 2020.

In fiscal 2021, the Company generated $335,000 of federal research and development tax credits (“R&D Credits”), all of which were used in fiscal 2021.

In fiscal 2020, the Company generated $421,000 of 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 in fiscal 2020.

There were no R&D Credits carryforwards as of September 30, 2021 or 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 not receive any additional Florida R&D Credits in fiscal 2019 or fiscal 2020.

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 or September 30, 2019.

Net income for the year ended September 30, 2021 was $5,805,000 or $0.39 per diluted share versus net income of $5,531,000 or $0.38 per diluted share for the year ended September 30, 2020.

The decrease in net income was primarily due to the lower net revenues, higher SG&A expenses and lower investment income.

Liquidity and Capital Resources

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As of September 30, 2021, the Company had $23.2 million in cash and cash equivalents, and $95.0 million in marketable securities.

The marketable securities are invested through professional investment management firms.

The marketable securities are invested through a professional investment management firm.

The securities may be liquidated at any time into cash and cash equivalents.

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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-Know paver product line (see Note 12 - Subsequent Events to Consolidated Financial Statements for additional information).

The cash was primarily used to fund the acquisition of the Blaw-Knox assets.

Year ended September 30, 2021 compared with the year ended September 30, 2020

Cash provided by operations in fiscal 2021 was $3,820,000, primarily resulting from net income.

The significant purchases, sales and maturities of marketable securities shown on the consolidated statements of cash flows reflect the recurring purchases and sales of United States treasury bills.

The decrease in costs and estimated earnings in excess of billings of $4.5 million reflects the completion and shipment of several large contracts with revenues recognized over time during the year ended September 30, 2021.

Excluding the impact of the Blaw-Knox acquisition, inventories increased by $4.4 million primarily due to progress on several large contract orders where revenue is recognized at a point in time and some stock build to compensate for the longer lead times from suppliers.

Accounts payable increased by $1.4 million due to the additional payables related to the Blaw-Knox business along with the increase in inventory.

Customer deposits increased $1.4 million, reflecting the down payments on contract jobs, including several recent orders where revenues are recognized over time but work is yet to begin.

Cash provided by operations in fiscal 2020 was $26,774,000, primarily resulting from the sale of investment securities and net income.

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Customer deposits increased $1.9 million, reflecting the down payments on these jobs.

Cash provided by operations in fiscal 2019 was $4,163,000, primarily resulting from net income.

The increase in inventories of $3.5 million reflected the impact of a product build to meet the anticipated demand for the Company’s products at the start of fiscal 2020.

The increase in costs and estimated earnings in excess of billings of $1.9 million reflects the ongoing progress on customer contracts with revenues recognized over time prior to final billing and payment of amounts due in advance of shipment.

Customer deposits decreased $2.6 million, reflecting the application of down payments on those jobs.

Cash used in investing activities during the year ended September 30, 2020 of $1,595,000 and $2,104,000 for the year ended September 30, 2019, related primarily to capital expenditures for manufacturing equipment.

Cash provided by financing activities of $103,000 in fiscal 2020 and $231,000 in fiscal 2019 related to proceeds from the exercise of stock options.

Cash flows used in investing activities for the year ended September 30, 2021 of $16,436,000 were related to the acquisition of the Blaw-Knox paver line and subsequent capital expenditures, primarily for systems software and leasehold improvements for the paver line’s manufacturing facility.

Cash provided by financing activities of $264,000 for the year ended September 30, 2021, related to proceeds from the exercise of stock options.

Cash used in investing activities during the year ended September 30, 2020 of $1,595,000 for the year ended September 30, 2020, related primarily to capital expenditures for manufacturing equipment.

Cash provided by financing activities of $103,000 in fiscal 2020 related to proceeds from the exercise of stock options.

Critical Accounting Policies, Estimates and Assumptions

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Revenues & Expenses

As previously 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, 2018, 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 accounts for revenues and related expenses under the provisions of ASU No.

Revenue from Contracts with Customers

(Topic 606), as amended (“ASU No.

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.

Revenues and related 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.

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Any recoveries of account balances previously considered in the allowance for doubtful accounts reduce future additions to the allowance for doubtful accounts.

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,

(“LIFO”) method to the first-in,

(“FIFO”) method.

The Company believes the FIFO method improved 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 also required the Company to make a 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 now 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 2 to Consolidated Financial Statements).

Inventories are valued at the lower of cost or net realizable value, with cost being determined under the first-in,

(“FIFO”) method and net realizable value defined as the estimated selling price of goods less reasonable costs of completion and delivery (see Note 2 to Consolidated Financial Statements).

Appropriate consideration is given to obsolescence, excessive levels, deterioration, possible alternative uses and other factors in determining net realizable value.

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Fair value is generally determined using a discounted cash flow analysis.

The overall effects of inflation on the Company’s business during the periods discussed have not been significant.

The Company monitors the prices it charges for its products and services on an ongoing basis and believes that it will be able to adjust those prices to take into account future changes in the rate of inflation.

The overall effects of inflation on the Company’s business during fiscal 2021 have been significant relative to prior years.

The Company monitors the prices it charges for its products and services on an ongoing basis and has been able to adjust its prices to take into account future changes in the rate of inflation.

Contractual Obligations

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

On August 28, 2020, the Company entered into a three year operating lease for property related to the manufacturing and warehousing of the Blaw-Knox paver business which was acquired after September 30, 2020 (refer to Note 12 – Subsequent Events to Consolidated Financial Statements for additional information).

On August 28, 2020, the Company entered into a three year operating lease for property related to the manufacturing and warehousing of the Blaw-Knox paver business.

The lease term is for the period September 1, 2020 through August 31, 2023.

On October 9, 2020, the Company entered into an operating lease for additional warehousing space for paver inventory.

The lease term is for one year beginning November 2020 with automatic one-year

Sheet Arrangements

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-K

Item 7. Management’s Discussion and Analysis