What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-10 compared with 2022-08-12 · 57 added, 86 removed, 94 unchanged (60% of the section changed)

4 unchanged sentences

Actual results may differ materially depending on a variety of important factors, including the financial condition of the Company’s customers, changes in the economic and competitive environments, the performance of the investment portfolio and the demand for the Company’s products.

For information concerning these factors and related matters, see the following sections of the Company’s Annual Report on Form 10-K

for the year ended September 30, 2021:

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, 2022:

(a) Part I, Item 1A, “Risk Factors” and (b) Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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

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.

Gencor designs, manufactures and sells hot mix asphalt plants, combustion systems, fluid heat transfer systems and pavers for the highway construction industry and environmental and petrochemical markets.

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

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

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

The legislative package invests $54 billion over the next decade to fix roads, freeways and bridges in communities across California and puts more dollars towards transit and safety.

These funds will be allocated to state and local projects.

Additionally, numerous other states have taken steps to increase their gas tax revenues in recent years.

Fluctuations in the price of carbon steel, which is a significant cost and material used in the manufacturing of the Company’s equipment, may affect the Company’s financial performance.

The Company is subject to fluctuations in market prices for raw materials, such as steel.

If the Company is unable to purchase materials it requires or is unable to pass on price increases to its customers or otherwise reduce its cost of goods sold, then its business results of operations and financial condition may be adversely affected.

As discussed under the heading “Results of Operations,” the recent increases in steel prices contributed to reduced gross profit margins during the current quarter.

If the Company is unable to purchase materials it requires or is unable to pass on price increases to its customers or otherwise reduce its cost of goods sold, its business results of operations and financial condition may be adversely affected.

Also, a significant increase in the price of liquid asphalt could decrease demand for hot mix asphalt paving materials and certain of the Company’s products.

1 unchanged sentence

Where possible, the Company will pass increased freight costs on to its customers.

However, the Company may not be able to recapture all of the higher costs and, thus, such higher costs could have a negative impact on the Company’s financial performance.

The Company believes its strategy of continuing to invest in product engineering and development and its focus on delivering the highest quality products and superior service will strengthen the Company’s market position.

The Company continues to review its internal processes to identify inefficiencies and cost-reduction opportunities.

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

The Company continues to monitor and evaluate the risks to public health and the overall business activity related to the coronavirus (“COVID-19”)

pandemic, including impacts on its employees, customers, suppliers and financial results.

However, the Company may not be able to recapture all of the higher costs and thus could have a negative impact on the Company’s financial performance.

On July 19, 2022, the Company announced that it was transferring the listing of its common stock, $0.10 per share par value (“Common Stock”), to the NYSE American LLC (“NYSE American”) from the NASDAQ Global Market (“NASDAQ”).

Listing and trading of the Company’s Common Stock on NASDAQ ended at market close on July 29, 2022 and listing and trading of its Common Stock on the NYSE American commenced at market open on August 1, 2022 under its current ticker symbol ‘GENC’.

COVID-19 Pandemic

The Company continues to monitor and evaluate the risks to public health and the overall business activity related to the COVID-19 pandemic, including impacts on its employees, customers, suppliers and financial results.

As of the date of issuance of this Quarterly Report, the Company’s operations have not been significantly impacted.

However, the full impact of the COVID-19

pandemic continues to evolve subsequent to the quarter ended June 30, 2022 and as of the date this Quarterly Report is issued.

As such, the full magnitude that the COVID-19

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

However, the full impact of the COVID-19 pandemic continues to evolve subsequent to the quarter ended December 31, 2022 and as of the date this Quarterly Report is issued.

As such, the full magnitude of the effect that the COVID-19 pandemic will have on the Company’s financial condition and future results of operations is uncertain.

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

As the spread of COVID-19

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

and its variants.

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

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

Global, market and economic conditions may negatively impact our business, financial condition and share price

Concerns over inflation, geopolitical issues, global financial markets and the COVID-19

pandemic have led to increased economic instability and expectations of slower global economic growth.

Concerns over inflation, geopolitical issues, global financial markets and the COVID-19 pandemic have led to increased economic instability and expectations of slower global economic growth.

Our business may be adversely affected by any such economic instability or unpredictability.

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There is a risk that one or more of our suppliers could be negatively affected by global economic instability, which could adversely affect our ability to operate efficiently and timely complete our operational goals.

As of the date of issuance of this Quarterly Report, the Company’s operations have not been significantly impacted.

Changes in our tax rates or exposure to additional tax liabilities could adversely affect our earnings and financial condition

Beginning in 2022, the TCJA eliminated the option of expensing all research and development expenditures in the current year, instead requiring amortization over five years pursuant to IRC Section 174.

In the future, Congress may consider legislation that would eliminate the capitalization and amortization requirement.

There is no assurance that the requirement will be deferred, repealed or otherwise modified.

The requirement is effective for the Company’s fiscal year 2023, beginning October 1, 2022.

The Company will continue to make additional estimated federal tax payments based on the current Section 174 tax law.

The impact of Section 174 on the Company’s cash from operations depends primarily on the amount of research and development expenditures incurred and whether the IRS issues guidance on the provision which differs from our current interpretation.

Results of Operations

Quarter Ended June 30, 2022 versus June 30, 2021

Net revenues for the quarters ended June 30, 2022 and June 30, 2021 were $29,647,000 and $24,919,000, respectively, an increase of $4,728,000 or 19.0%.

The higher revenues reflect increased bookings in anticipation of funding of the new five year, $1.2 trillion infrastructure bill, the IIJ Act, signed into law in November 2021.

As a percent of sales, gross profit margins were 19.2% in the quarter ended June 30, 2022, compared to 22.5% in the quarter

ended June 30, 2021.

Higher manufacturing costs associated with wages, steel, and purchased parts continued to impact the Company’s operating results for the quarter ended June 30, 2022.

Product engineering and development expenses decreased $225,000 to $951,000 for the quarter ended June 30, 2022, as compared to $1,176,000 for the quarter ended June 30, 2021 due primarily to reduced payroll.

Selling, general and administrative (“SG&A”) expenses decreased by $625,000 to $2,577,000 for the quarter ended June 30, 2022, compared to $3,202,000 for the quarter ended June 30, 2021.

The decrease in SG&A expenses was due to reduced headcount and lower professional fees.

Operating income increased from $1,227,000 for the quarter ended June 30, 2021 to $2,151,000 for the quarter ended June 30, 2022, due primarily to increased sales and reduced SG&A and product engineering and development expenses.

For the quarter ended June 30, 2022, interest and dividend income, net of fees, was $304,000 as compared to $306,000 in the quarter ended June 30, 2021.

The net realized and unrealized losses on marketable securities were $(3,693,000) for the quarter ended June 30, 2022 versus net realized and unrealized gains of $1,386,000 for the quarter ended June 30, 2021.

The fiscal 2022 investment losses reflect the decline in equity markets due primarily to higher interest rates, inflation, and the Federal Reserve’s recent monetary tightening policy.

The effective income tax rate for the quarter ended June 30, 2022 was a benefit of 18.0% versus expense of 20.0% for the quarter ended June 30, 2021, based on the expected annual effective income tax rate.

Net loss for the quarter ended June 30, 2022 was $(1,015,000), or $(0.07) per basic and diluted share, versus net income of $2,335,000, or $0.16 per basic and diluted share, for the quarter ended June 30, 2021.

The net loss for the current quarter ended June 30, 2022, was due primarily to the net investment losses on marketable securities partially offset by the impact of increased sales and reduced SG&A and product engineering and development expenses.

Nine Months Ended June 30, 2022 versus June 30, 2021

Net sales for the nine months ended June 30, 2022 and 2021 were $80,407,000 and $65,235,000, respectively, an increase of $15,172,000 or 23.3%.

The higher revenues reflect increased bookings in anticipation of funding of the new five year, $1.2 trillion infrastructure bill, the IIJ Act, signed into law in November 2021.

There were no revenues generated by Blaw-Knox during the first quarter of fiscal 2021, as the facility was being readied to begin production.

Gross profit margins decreased to 19.4% for the nine months ended June 30, 2022 from 22.6% for the nine months ended June 30, 2021.

Increases in wages, steel and purchased parts prices contributed to the lower overall gross margins during the nine months ended June 30, 2022.

Product engineering and development expenses increased $130,000 in the nine months ended June 30, 2022, compared

to the nine months ended June 30, 2021 due primarily to salary increases in the first quarter of fiscal 2022 partially offset by reduced payroll in the current quarter ended June 30, 2022, as well as a full nine months of engineering wages and benefits related to Blaw-Knox.

SG&A expenses decreased $895,000 in the nine months ended June 30, 2022, compared to the nine months ended June 30, 2021.

The decrease in SG&A expenses from a full nine months of wages and benefits related to Blaw-Knox employees was offset by reduced headcount and lower professional fees.

The Company had operating income of $3,017,000 for the nine months ended June 30, 2022 versus $1,407,000 for the nine months ended June 30, 2021.

The improved operating income was due primarily to the improved revenues and reduced SG&A expenses.

For the nine months ended June 30, 2022, interest and dividend income, net of fees, from the investment portfolio was $877,000, as compared to $1,437,000 for the nine months ended June 30, 2021.

Interest income for the nine months ended June 30, 2021, included $456,000 of interest collected from a customer.

Net realized and unrealized losses on marketable securities was $(4,758,000) for the nine months ended June 30, 2022 versus net realized and unrealized gains of $4,873,000 for the nine months ended June 30, 2021.

The fiscal 2022 investment losses reflect the decline in equity markets due to higher interest rates, inflation, and the Federal Reserve’s recent monetary tightening policy.

The effective income tax rates for the nine months ended June 30, 2022 was a benefit of 15.3% compared to expense of 20.0% for the nine months ended June 30, 2021, based on the expected annual effective income tax rate.

Net loss for the nine months ended June 30, 2022 was $(850,000), or $(0.06) per basic and diluted share, versus $6,174,000, or $0.42 per basic and diluted share for the nine months ended June 30, 2021.

The net loss for the nine months ended June 30, 2022, was due primarily to the net investment losses on marketable securities partially offset by the impact of increased sales and reduced SG&A expenses.

Quarter Ended December 31, 2022 versus December 31, 2021

Net revenues for the quarters ended December 31, 2022 and December 31, 2021 were $25,825,000 and $20,106,000, respectively, an increase of $5,719,000 or 28.4%.

The improved revenues were in contract equipment sales, paver and parts sales.

As a percent of sales, gross profit margins improved to 22.5% in the quarter ended December 31, 2022, compared to 18.4% in the quarter ended December 31, 2021 on increased production and favorable price realization.

Product engineering and development expenses decreased $452,000 to $897,000 for the quarter ended December 31, 2022, as compared to $1,349,000 for the quarter ended December 31, 2021, due primarily to reduced wages and benefits on lower headcount.

Selling, general and administrative (“SG&A”) expenses decreased by $600,000 to $2,799,000 for the quarter ended December 31, 2022, compared to $3,399,000 for the quarter ended December 31, 2021.

The decrease in SG&A expenses was primarily due to reduced wages and benefits on lower headcount and reduced professional expenses.

The Company had operating income of $2,119,000 for the quarter ended December 31, 2022 as compared to an operating loss of $(1,043,000) for the quarter ended December 31, 2021.

The improved operating results were due to higher net revenues and lower operating expenses for the quarter ended December 31, 2022.

For the quarter ended December 31, 2022, the Company had net non-operating income of $2,455,000 compared to $700,000 for the quarter ended December 31, 2021.

Included in net non-operating income for the quarter ended December 31, 2022 were net realized and unrealized gains on marketable securities of $1,962,000 compared to $423,000 for the quarter ended December 31, 2021.

The higher gains in fiscal 2023 were due to a stronger domestic stock market during the quarter ended December 31, 2022.

The effective income tax rates for the quarters ended December 31, 2022 and December 31, 2021 were 24.0% and 20.0%, respectively.

The higher tax rate in fiscal 2023 is due to an anticipated reduction in research and development tax credits, effective for the Company’s fiscal 2023.

Net income for the quarter ended December 31, 2022 was $3,476,000, or $0.24 per basic and diluted share, compared to a net loss of $(274,000), or $(0.02) per basic and diluted share for the quarter ended December 31, 2021.

Liquidity and Capital Resources

The Company generates capital resources through operations and returns on its investments.

The Company had no long-term or short-term debt outstanding at June 30, 2022 or September 30, 2021.

As of June 30, 2022, the Company has funded $85,000 in cash deposits at insurance companies to cover related collateral needs.

In April 2020, a financial institution issued an irrevocable standby letter of credit (“letter of credit”) on

behalf of the Company for the benefit of one of the Company’s insurance carriers.

The Company had no long-term or short-term debt outstanding at December 31, 2022 or September 30, 2022.

As of December 31, 2022, the Company has funded $85,000 in cash deposits at insurance companies to cover related collateral needs.

In April 2020, a financial institution issued an irrevocable standby letter of credit (“letter of credit”) on 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.

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

As of June 30, 2022, the Company had $19,474,000 in cash and cash equivalents, and $91,116,000 in marketable securities, including $28,669,000 in corporate bonds, $15,457,000 in equities, $10,767,000 in mutual funds, $5,450,000 in exchange-traded funds, $27,949,000 in government securities, and $2,824,000 in cash and money funds.

As of December 31, 2022, the Company had $5,978,000 in cash and cash equivalents, and $91,718,000 in marketable securities, including $36,697,000 in corporate bonds, $5,524,000 in equities, $5,423,000 in mutual funds, $4,825,000 in exchange-traded funds, $33,925,000 in government securities, and $5,324,000 in cash and money funds.

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

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

The Company’s backlog was $40.2 million at June 30, 2022 compared to $28.5 million at June 30, 2021.

The Company’s working capital (defined as current assets less current liabilities) was $153.3 million at June 30, 2022 and $155.4 million at September 30, 2021.

Cash used in operating activities during the nine months ended June 30, 2022 was $1,574,000.

The Company’s backlog was $42.5 million at December 31, 2022 compared to $58.0 million at December 31, 2021.

The Company’s working capital (defined as current assets less current liabilities) was $154.3 million at December 31, 2022 and $150.1 million at September 30, 2022.

Cash flows used in operations during the quarter ended December 31, 2022, were $2,898,000.

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

Inventories increased by $6.4 million due to progress on several large contract orders where revenue is recognized at a point in time, raw material and wage price increases and some stock build to adjust for the increasing lead times from suppliers.

Prepaid expenses increased $1.5 million due to estimated income tax deposits in excess of accrued income taxes, annual insurance contract renewals as well as deposits made on new equipment.

Accounts payable increased $1.9 million with increased raw material purchases.

Customer deposits increased by $2.2 million reflecting down payments on contract projects, including recent orders where revenues are recognized over time but work is yet to begin.

Cash flows used in investing activities for the nine months ended June 30, 2022 of $2,184,000 were related to capital expenditures, primarily for manufacturing processing and finishing equipment.

Accounts receivable increased $1,738,000 compared to September 30, 2022, primarily from increased paver and parts sales.

Costs and estimated earnings in excess of billings increased $2,832,000 with the timing of inventory build and percentage of completion recognition on plant sales where revenue is recognized over time.

Inventories increased by $3,500,000 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 increasing lead times from suppliers.

Customer deposits increased $2,523,000 reflecting down payments and final payments on contract jobs not yet shipped.

Cash flows used in investing activities for the quarter ended December 31, 2022 of $705,000 were related to capital expenditures, primarily for manufacturing processing and finishing equipment.

The Company’s primary business is the manufacture of asphalt plants and related components and asphalt pavers.

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The Company believes the following discussion addresses its most critical accounting policies, which are those that are most important to the portrayal of the financial condition and results of operations and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

for the year ended September 30, 2021, “Nature of Operations and Summary of Significant Accounting Policies.”

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, 2022, “Nature of Operations and Summary of Significant Accounting Policies.”

Estimates and Assumptions

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The Company recognizes revenue under ASU No.

Revenue from Contracts with Customers

2014-09, Revenue from Contracts with Customers (Topic 606).

Revenues from contracts with customers for the design, manufacture and sale of custom equipment are recognized over time when the performance obligation is satisfied by transferring control of the equipment.

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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 $1,366,000 and $1,903,000 at June 30, 2022 and September 30, 2021, respectively, and are included in current assets as costs and estimated earnings in excess of billings on the Company’s condensed consolidated balance sheets.

The Company anticipates that all of the contract assets at June 30, 2022, will be billed and collected within one year.

These contract assets were $4,950,000 and $2,118,000 at December 31, 2022 and September 30, 2022, 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, 2022, will be billed and collected within one year.

Revenues from all other contracts for the design and manufacture of equipment, for service and for parts sales, net of any discounts and return allowances, are recorded at a point in time when control of the goods or services has been transferred.

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

Accounts receivable related to contracts with customers for equipment sales were $79,000 and $210,000 at June 30, 2022 and September 30, 2021, respectively.

Accounts receivable related to contracts with customers for equipment sales were $133,000 and $142,000 at December 31, 2022 and September 30, 2022, respectively.

Product warranty costs are estimated using historical experience and known issues and are charged to production costs as revenue is recognized.

Under certain contracts with customers, recognition of a portion of the consideration received may be deferred and recorded as a contract liability if the Company has to satisfy a future obligation, such as to provide installation assistance.

There were no contract liabilities other than customer deposits at June 30, 2022 and September 30, 2021.

Customer deposits related to contracts with customers were $7,436,000 and $5,244,000 at June 30, 2022 and September 30, 2021, respectively, and are included in current liabilities on the Company’s condensed consolidated balance sheets.

There were no contract liabilities other than customer deposits at December 31, 2022 and September 30, 2022.

Customer deposits related to contracts with customers were $8,387,000 and $5,864,000 at December 31, 2022 and September 30, 2022, 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.

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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.

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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.

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.

11 unchanged sentences

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

Sheet Arrangements

Off-Balance Sheet Arrangements

Quantitative and Qualitative Disclosures about Market Risk

1 unchanged sentence

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