Item 8. Financial Statements and Supplementary Data
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
21
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INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
G ENCOR
I NDUSTRIES
, I NC
.
Page
Report of Independent Registered Public Accounting Firm
23
Consolidated Balance Sheets as of September 30, 2023 and 2022
26
Consolidated Statements of Operations for the years ended September 30, 2023 and 2022
27
Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2023 and 2022
28
Consolidated Statements of Cash Flows for the years ended September 30, 2023 and 2022
29
Notes to Consolidated Financial Statements
30
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Gencor Industries, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Gencor Industries, Inc. (the “Company”) as of September 30, 2023 and 2022, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years ended September 30, 2023 and 2022, and the related notes (collectively referred to as the consolidated financial statements). We have also audited the Company’s internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023 and 2022, and the results of its operations and its cash flows for each of the years ended September 30, 2023 and 2022, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control – Integrated Framework (2013)
issued by COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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Table of Contents
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and the receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Slow-Moving and Obsolete Inventories
As disclosed in Note 1 of the notes to the Company’s consolidated financial statements, the Company records an estimated allowance for slow-moving and obsolete inventories to state the Company’s inventories at the lower of cost or net realizable value. The Company relies on, among other things, past usage, sales experience, recent order and quote activity, possible alternative uses, future sales forecasts, and its strategic business plan to develop the estimate. As a result of management’s assessment, the Company recorded an allowance for slow-moving and obsolete inventories of approximately $9,813,000 as of September 30, 2023.
Auditing management’s estimate of the allowance for slow-moving and obsolete inventories involved subjective evaluation and high degree of auditor judgement due to significant assumptions involved in estimating future inventory turnover and sales.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested operating effectiveness of certain internal controls that address the risks of material misstatement relating to recording inventory at the lower of cost or net realizable value. We tested the accuracy and completeness of the underlying data used in calculating the inventory allowance, including testing of a sample of inventory usage transactions, and recomputed the allowance calculation. We also evaluated the Company’s ability to accurately estimate the assumptions used to develop the estimate by comparing historical allowance amounts to the history of actual inventory write-offs. Furthermore, we reviewed management’s business plan and forecasts of future sales.
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Revenue from Contracts with Customers Where Revenue Is Recognized Over Time
As disclosed in Note 1 of the notes to the Company’s consolidated financial statements, the Company recognizes revenues from contracts with customers for the design, manufacture and sale of custom equipment 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. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. The Company recorded approximately $34,150,000 in revenue from custom equipment sales contracts during the year ended September 30, 2023.
Auditing management’s estimate of total estimated labor costs expected to be incurred for the entire contract with respect to incomplete contracts, and the percentage of completion on those contracts as of the end of the year involved subjective evaluation and a high degree of auditor judgement due to significant assumptions involved in estimating total labor costs to complete.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested operating effectiveness of certain internal controls that address the risks of material misstatement relating to recording revenue from contracts with customers where revenue is recognized over time. We tested the accuracy and completeness of the underlying data used in calculating the percentage of completion on incomplete contracts, including review of contracts, change orders, and underlying labor and material costs, and recomputed the percentage of completion on individual contracts. We also evaluated the Company’s ability to accurately estimate the assumptions used to develop the estimate by comparing historical cost estimates to actual costs on completed contracts.
We have served as the Company’s auditor since 2001.
/s/ MSL, P.A.
MSL, P.A.
Certified Public Accountants
PCAOB ID Number:
569
Orlando, Florida
December 13
, 2023
2 5
Table of Contents
Part I. Financial Information
GENCOR INDUSTRIES, INC.
Consolidated Balance Sheets
As of September 30, 2023 and 2022
ASSETS
2023
2022
Current assets:
Cash and cash equivalents
$
17,031,000
$
9,581,000
Marketable securities at fair value (cost of $ 85,514,000 at September 30, 2023 and $ 94,879,000 at
September 30, 2022)
84,252,000
89,300,000
Accounts receivable, less allowance for doubtful accounts of $ 545,000 at September 30, 2023 and $ 370,000 at September 30, 2022
2,467,000
2,996,000
Costs and estimated earnings in excess of billings
1,508,000
2,118,000
Inventories, net
71,527,000
55,815,000
Prepaid expenses
2,169,000
2,669,000
Total current assets
178,954,000
162,479,000
Property and equipment, net
13,246,000
13,491,000
Deferred and other income taxes
3,167,000
2,893,000
Other long-term assets
381,000
450,000
Total Assets
$
195,748,000
$
179,313,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
3,269,000
$
4,251,000
Customer deposits
6,815,000
5,864,000
Accrued expenses
3,753,000
1,885,000
Current operating lease liabilities
328,000
390,000
Total current liabilities
14,165,000
12,390,000
Non-current
operating lease liabilities
—
6,000
Total liabilities
14,165,000
12,396,000
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; 12,338,845 shares issued and
outstanding at September 30, 2023 and 2022
1,234,000
1,234,000
Class B Stock, par value $. 10 per share; 6,000,000 shares authorized; 2,318,857 shares issued and outstanding at
September 30, 2023 and 2022
232,000
232,000
Capital in excess of par value
12,590,000
12,590,000
Retained earnings
167,527,000
152,861,000
Total shareholders’ equity
181,583,000
166,917,000
Total Liabilities and Shareholders’ Equity
$
195,748,000
$
179,313,000
See accompanying Notes to Consolidated Financial Statements
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GENCOR INDUSTRIES, INC.
Consolidated Statements of Operations
For the Years Ended September 30, 2023 and 2022
2023
2022
Net revenue
$
105,075,000
$
103,479,000
Cost of goods sold
76,038,000
82,935,000
Gross profit
29,037,000
20,544,000
Operating expenses:
Product engineering and development
3,458,000
4,325,000
Selling, general and administrative
12,154,000
12,052,000
Total operating expenses
15,612,000
16,377,000
Operating income
13,425,000
4,167,000
Other income (expense), net:
Interest and dividend income, net of fees
2,108,000
1,305,000
Realized and unrealized gains (losses) on marketable securities, net
3,243,000
( 7,009,000
)
Other
—
( 156,000
)
5,351,000
( 5,860,000 )
Income (loss) before income tax expense (benefit)
18,776,000
( 1,693,000
)
Income tax expense (benefit)
4,110,000
( 1,321,000
)
Net income (loss)
$
14,666,000
$
( 372,000
)
Basic earnings (loss) per common share
$
1.00
$
( 0.03
)
Diluted earnings (loss) per common share
$
1.00
$
( 0.03
)
See accompanying Notes to Consolidated Financial Statements
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GENCOR INDUSTRIES, INC.
Consolidated Statements of Shareholders’ Equity
For the Years Ended September 30, 2023 and 2022
Common Stock
Class B Stock
Capital in
Excess of
Retained
Total
Shareholders’
Shares
Amount
Shares
Amount
Par Value
Earnings
Equity
September 30, 2021
12,338,845
$
1,234,000
2,318,857
$
232,000
$
12,590,000
$
153,233,000
$
167,289,000
Net loss
—
—
—
—
—
( 372,000
)
( 372,000
)
September 30, 2022
12,338,845
$
1,234,000
2,318,857
$
232,000
$
12,590,000
$
152,861,000
$
166,917,000
Net income
—
—
—
—
—
14,666,000
14,666,000
September 30, 2023
12,338,845
$
1,234,000
2,318,857
$
232,000
$
12,590,000
$
167,527,000
$
181,583,000
See accompanying Notes to Consolidated Financial Statements
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Table of Contents
GENCOR INDUSTRIES, INC.
Consolidated Statements of Cash Flows
For the Years Ended September 30, 2023 and 2022
2023
2022
Cash flows from operating activities:
Net income (loss)
$
14,666,000
$
( 372,000
)
Adjustments to reconcile net income (loss) to cash flows provided by (used in) operating activities:
Purchase of marketable securities
( 172,341,000
)
( 135,551,000
)
Proceeds from sale and maturity of marketable securities
180,285,000
133,966,000
Change in value of marketable securities
( 2,896,000
)
7,261,000
Deferred and other income taxes
( 274,000
)
( 3,287,000
)
Depreciation and amortization
2,834,000
2,823,000
Provision for doubtful accounts
290,000
194,000
Loss on disposal of assets
157,000
—
Changes in assets and liabilities, excluding the initial effects of business combinations:
Accounts receivable
239,000
( 568,000
)
Costs and estimated earnings in excess of billings
610,000
( 215,000
)
Inventories
( 15,712,000
)
( 13,927,000
)
Prepaid expenses
500,000
( 467,000
)
Accounts payable
( 982,000
)
1,146,000
Customer deposits
951,000
620,000
Accrued expenses and other
1,869,000
( 758,000
)
Total adjustments
( 4,470,000
)
( 8,763,000
)
Cash flows provided by (used in) operating activities
10,196,000
( 9,135,000
)
Cash flows used in investing activities:
Capital expenditures
( 2,746,000
)
( 4,516,000
)
Cash flows used in investing activities
( 2,746,000
)
( 4,516,000
)
Net increase (decrease) in cash and cash equivalents
7,450,000
( 13,651,000
)
Cash and cash equivalents at:
Beginning of year
9,581,000
23,232,000
End of year
$
17,031,000
$
9,581,000
Non-cash
investing and financing activities:
Operating lease right-of-use
assets
$
352,000
$
—
Operating lease liabilities
$
352,000
$
—
See accompanying Notes to Consolidated Financial Statements
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GENCOR INDUSTRIES, INC.
Notes to Consolidated Financial Statements
For the Years Ended September 30, 2023 and 2022
NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Gencor Industries, Inc. and its subsidiaries (collectively, the “Company”) is a diversified, heavy machinery manufacturer for the production of highway construction materials and environmental control machinery and equipment. 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.
These consolidated financial statements include the accounts of Gencor Industries, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Accounting Pronouncements and Policies
There are no accounting pronouncements recently issued or newly effective that had, or are expected to have, a material impact on the Company’s consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Earnings (Loss)
per Share
The consolidated financial statements include basic and diluted earnings (loss) per share (“EPS”) information. Basic EPS is based on the weighted-average number of shares outstanding. Diluted EPS is based on the sum of the weighted-average number of shares outstanding plus common stock equivalents. There were no common stock equivalents as of September 30, 2023 and September 30, 2022.
The following presents the calculation of the basic and diluted EPS for the years ended September 30, 2023 and 2022:
2023
2022
Net Income
Shares
EPS
Net Loss
Shares
EPS
Basic EPS
$
14,666,000
14,658,000
$
1.00
$
( 372,000
)
14,658,000
$
( 0.03
)
Common stock equivalents
—
—
Diluted EPS
$
14,666,000
14,658,000
$
1.00
$
( 372,000
)
14,658,000
$
( 0.03
)
Cash Equivalents
Cash equivalents consist of short-term certificates of deposit and deposits in money market accounts with original maturities of three months or less.
Marketable Securities and Fair Value Measurements
Marketable debt and equity securities are categorized as trading securities and are thus marked to market and stated at fair value. Fair value is determined using the quoted closing or latest bid prices for Level 1 investments and market standard valuation methodologies for Level 2 investments. Realized gains and losses on investment transactions are determined by specific identification and are recognized as incurred in the consolidated statements of operations. Net changes in unrealized gains and losses are reported in the consolidated statements of operations in the current period.
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Table of Contents
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.
The following table sets forth by level, within the fair value hierarchy, the Company’s assets measured at fair value as of September 30, 2023:
Fair Value Measurements
Level 1
Level 2
Level 3
Total
Exchange-Traded Funds
$
3,327,000
$
—
$
—
$
3,327,000
Corporate Bonds
—
33,160,000
—
33,160,000
Government Securities
47,672,000
—
—
47,672,000
Cash and Money Funds
93,000
—
—
93,000
Total
$
51,092,000
$
33,160,000
$
—
$
84,252,000
Net unrealized gains reported during fiscal 2023 on trading securities still held as of September 30, 2023, were $ 4,316,000 . There were no transfers of investments between Level 1 and Level 2 during the year ended September 30, 2023.
$ 10,000,000 was transferred from the investment portfolio to cash to fund operating needs of the business during fiscal 2023.
The following table sets forth by level, within the fair value hierarchy, the Company’s assets measured at fair value as of September 30, 2022:
Fair Value Measurements
Level 1
Level 2
Level 3
Total
Equities
$
12,149,000
$
—
$
—
$
12,149,000
Mutual Funds
5,337,000
—
—
5,337,000
Exchange-Traded Funds
4,794,000
—
—
4,794,000
Corporate Bonds
—
37,339,000
—
37,339,000
Government Securities
29,327,000
—
—
29,327,000
Cash and Money Funds
354,000
—
—
354,000
Total
$
51,961,000
$
37,339,000
$
—
$
89,300,000
Net unrealized losses reported during fiscal 2022 on trading securities still held as of September 30, 2022, were $( 6,864,000 ). There were no transfers of investments between Level 1 and Level 2 during the year ended September 30, 2022.
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The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, customer deposits and accrued expenses approximate fair value because of the short-term nature of these items.
Foreign Currency Transactions
Gains and losses resulting from foreign currency transactions are included in income and were not significant during the years ended September 30, 2023 and 2022.
Risk Management
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents, marketable securities, and accounts receivable. The Company maintains its cash accounts in various domestic financial institutions which may from time to time exceed federally insured limits. Operating cash is retained in overnight sweep accounts which allow for offsets to treasury service charges. The marketable securities include investments in cash and money funds, mutual funds, exchange traded funds (“ETF’s”), corporate bonds, government securities and equities
through professional investment management firms. Investment securities are exposed to various risks, such as interest rate, market and credit risks.
The Company’s customers are not concentrated in any specific geographic region, but are concentrated in the road and highway construction industry. The Company extends limited credit on parts sales to its customers based upon their credit-worthiness. Generally, the Company requires a significant up-front
deposit before beginning manufacturing on complete asphalt plant and component orders, and requires full payment subject to hold-back provisions prior to shipment. The Company establishes an allowance for doubtful accounts based upon the credit risk of specific customers, historical trends and other pertinent information.
Inventories
Inventories are valued at the lower of cost or net realizable value, 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. Appropriate consideration is given to obsolescence, excessive levels, deterioration, possible alternative uses and other factors in determining net realizable value. The cost of work in process and finished goods includes materials, direct labor, variable costs and overhead. The Company evaluates the need to record inventory adjustments on all inventories, including raw material, work in process, finished goods, spare parts and used equipment. Used equipment acquired by the Company on trade-in
from customers is carried at estimated net realizable value. Unless specific circumstances warrant different treatment regarding inventory obsolescence, an allowance is established to reduce the cost basis of inventories three to four years old by 50 %, the cost basis of inventories four to five years old by 75 %, and the cost basis of inventories greater than five years old to zero . Inventory is typically reviewed for obsolescence on an annual basis computed as of September 30, the Company’s fiscal year end. If significant known changes in trends, technology or other specific circumstances that warrant consideration occur during the year, then the impact on obsolescence is considered at that time.
Changes in the allowance for slow-moving and obsolete inventories are as follows:
2023
2022
Balance, beginning of year
$
8,192,000
$
5,397,000
Charged to cost of sales
2,147,000
2,966,000
Disposal of inventory, net of recoveries
( 526,000
)
( 171,000
)
Balance, end of year
$
9,813,000
$
8,192,000
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Property and Equipment
Property and equipment are stated at cost (see Note 4). Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the related assets, as follows:
Years
Land improvements
15
Buildings & improvements
6 - 40
Equipment
2 - 10
Impairments
Property and equipment, and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. No such impairment losses were recorded during the years ended September 30, 2023 and 2022.
Revenues and Expenses
The Company accounts for revenues and related expenses under the provisions of ASU No. 2014-09.
The following table disaggregates the Company’s net revenue by major source for the years ended September 30, 2023 and 2022:
2023
2022
Equipment sales recognized over time
$
34,150,000
$
37,572,000
Equipment sales recognized at a point in time
40,138,000
36,898,000
Parts and component sales
25,298,000
23,856,000
Freight revenue
4,664,000
4,709,000
Other
825,000
444,000
Net revenue
$
105,075,000
$
103,479,000
Revenues from contracts with customers for the design, manufacture and sale of custom equipment are recognized over time when the performance obligation is satisfied by transferring control of the equipment. Control of the equipment transfers over time, as the equipment is unique to the specific contract and thus does not create an asset with an alternative use to the Company. Revenues and costs are recognized in proportion to actual labor costs incurred, as compared with total estimated labor costs expected to be incurred, during the entire contract. All incremental costs related to obtaining a contract are expensed as incurred, as the amortization period is less than one year. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined.
Contract assets (excluding accounts receivable) under contracts with customers represent revenue recognized in excess of amounts billed on equipment sales recognized over time. These contract assets were $ 1,508,000 and $ 2,118,000 at September 30, 2023 and 2022, respectively, and are included in current assets as costs and estimated earnings in excess of billings on the Company’s consolidated balance sheets. The Company anticipates that all of the contract assets at September 30, 2023, will be billed and collected within one year .
Revenues from all other contracts for the design and manufacture of equipment, for service and for parts sales, net of any discounts and return allowances, are recorded at a point in time when control of the goods or
services has been transferred. Control of the goods or service typically transfers at time of shipment or upon completion of the service.
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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 services are completed. Accounts receivable related to contracts with customers for equipment sales were $ 114,000 and $ 142,000 at September 30, 2023 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.
Changes in the accrual for warranty and related costs as of September 30, 2023 and 2022 consisted of the following:
2023
2022
Balance, beginning of year
$
244,000
$
291,000
Warranties issued
523,000
110,000
Warranties settled
( 401,000
)
( 157,000
)
Balance, end of year
$
366,000
$
244,000
Provisions for estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. Returns and allowances, which reduce product revenue, are estimated using historical experience.
Under certain contracts with customers, recognition of a portion of the consideration received may be deferred and recorded as a contract liability if the Company has to satisfy a future obligation, such as to provide installation assistance. There were no contract liabilities other than customer deposits at September 30, 2023 and September 30, 2022. Customer deposits related to contracts with customers were $ 6,815,000 and $ 5,864,000 at September 30, 2023 and 2022, respectively, and are included in current liabilities on the Company’s consolidated balance sheets.
The Company records revenues earned for shipping and handling as freight revenue at the time of shipment, regardless of whether or not it is identified as a separate performance obligation. The cost of shipping and handling is classified as production costs concurrently with the revenue recognition.
All product engineering and development costs, and selling, general and administrative expenses are charged to operations as incurred. Provision is made for any anticipated contract losses in the period that the loss becomes evident.
The allowance for doubtful accounts is determined by performing a specific review of all account balances greater than 90 days past due and other higher risk amounts to determine collectability, and also adjusting for any known customer payment issues with account balances in the less-than-90-day
past due aging category. Account balances are charged off against the allowance for doubtful accounts when they are determined to be uncollectible. Any recoveries of account balances previously considered in the allowance for doubtful accounts reduce future additions to the allowance for doubtful accounts. The allowance for doubtful accounts also includes an estimate for returns and allowances. Provisions for estimated returns and allowances and other adjustments, are provided for in the same period the related sales are recorded. Returns and allowances, which reduce product revenue, are estimated using known issues and historical experience.
Changes in the allowance for doubtful accounts as of September 30, 2023 and 2022 consisted of the following:
2023
2022
Balance, beginning of year
$
370,000
$
321,000
Provision for doubtful accounts
290,000
194,000
Provision for estimated returns and allowances
335,000
267,000
Uncollectible accounts written off
( 65,000
)
( 81,000
)
Returns and allowances issued
( 385,000
)
( 331,000
)
Balance, end of year
$
545,000
$
370,000
Shipping and Handling Costs
Shipping and handling costs are included in production costs in the consolidated statements of operations.
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Income Taxes
Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and primarily consist of taxes currently due, plus deferred taxes (see Note 6 – Income Taxes).
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns using current tax rates. The Company and its domestic subsidiaries file a consolidated federal income tax return.
Deferred tax assets and liabilities are measured using the rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse and the credits are expected to be used. The effect on deferred tax assets and liabilities of the change in tax rates is recognized in income in the period that includes the enactment date. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, the Company is more likely than not to realize the benefit of a deferred tax asset and whether a valuation allowance is needed for some portion or all of a deferred tax asset. No such valuation allowances were recorded as of September 30, 2023 and 2022.
The Company’s income tax provision is based on management’s estimate of the effective tax rate for the full year. The tax provision in any period will be affected by, among other things, permanent, as well as temporary differences in the deductibility of certain items, in addition to changes in tax legislation. As a result, the Company may experience significant fluctuations in the effective book tax rate (that is, its tax expense divided by pre-tax
book income) from period to period. The Company’s effective tax rates for fiscal 2023 and 2022 reflect the impact of the reduced rates under the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) which was signed into law on December 22, 2017.
Comprehensive Income
For the years ended September 30, 2023 and 2022, other comprehensive income is equal to net income.
Reporting Segments and Geographic Areas
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.
For fiscal 2023 and 2022, total revenues of $ 105,075,000 and $ 103,479,000 , and total long-term assets of $ 16,794,000 and $ 16,834,000 , respectively, were attributed to the United States. Revenues are attributed to geographic areas based on the location of the assets producing the revenues.
Customers with 10% (or greater) of Net Revenues
During the year ended September 30, 2023, one customer accounted for 14.8 % of net revenue. No customer accounted for 10 % or more of net revenue for the year ended September 30, 2022.
Subsequent Events
Management has evaluated events occurring from September 30, 2023 through the
date these consolidated financial statements were filed with the Securities and Exchange Commission for proper recording and disclosure herein.
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NOTE 2 – INVENTORIES
Inventories are valued at the lower of cost or net realizable value.
Net inventories as of September 30, 2023 and 2022 consisted of the following:
September 30,
2023
2022
Raw materials
$
35,918,000
$
31,975,000
Work in process
22,923,000
13,903,000
Finished goods
12,686,000
9,937,000
Inventories, net
$
71,527,000
$
55,815,000
Slow-moving and obsolete inventory reserves were $ 9,813,000 and $ 8,192,000 at September 30, 2023 and 2022, respectively.
NOTE 3 – COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
Costs and estimated earnings in excess of billings on uncompleted contracts as of September 30, 2023 and 2022 consisted of the following:
September 30,
2023
2022
Costs incurred on uncompleted contracts
$
18,468,000
$
12,660,000
Estimated earnings
7,939,000
4,780,000
26,407,000
17,440,000
Billings to date
24,899,000
15,322,000
Costs and estimated earnings in excess of billings
$
1,508,000
$
2,118,000
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 2023 and 2022 consisted of the following:
September 30,
2023
2022
Land and improvements
$
3,425,000
$
3,329,000
Buildings and improvements
14,882,000
13,578,000
Equipment
27,249,000
26,521,000
45,556,000
43,428,000
Less: Accumulated depreciation and amortization
( 32,310,000
)
( 29,937,000
)
Property and equipment, net
$
13,246,000
$
13,491,000
Property and equipment includes approximately $ 22,693,000 and $ 20,467,000 of fully depreciated assets, which remained in service during fiscal 2023 and 2022, respectively. Also, included in property and
equipment as of September 30, 2023 and 2022 is approximately $ 1,295,000 and $ 1,702,000 , respectively, of assets not yet placed in operation and, therefore, not subject to depreciation during the years ended September 30, 2023 and 2022, respectively.
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NOTE 5 – ACCRUED EXPENSES
Accrued expenses as of September 30, 2023 and 2022 consisted of the following:
September 30,
2023
2022
Payroll and related accruals
$
1,315,000
$
1,083,000
Warranty and related accruals
366,000
244,000
Property tax accruals
235,000
233,000
Income taxes payable
1,379,000
—
Professional fees
169,000
243,000
Other
289,000
82,000
Accrued expenses
$
3,753,000
$
1,885,000
NOTE 6 – INCOME TAXES
The provision for income tax expense (benefit) consisted of the following:
Year Ended September 30,
2023
2022
Current:
Federal
$
4,151,000
$
1,680,000
State
279,000
317,000
Total current
4,430,000
1,997,000
Deferred:
Federal
( 328,000
)
( 2,701,000
)
State
8,000
( 617,000
)
Total deferred
( 320,000
)
( 3,318,000
)
Income tax expense (benefit)
$
4,110,000
$
( 1,321,000
)
A reconciliation of the federal statutory tax rate to the total tax provision (benefit) is as follows:
Year Ended September 30,
2023
2022
Federal income taxes computed at the statutory rate
21.0
%
( 21.0
%)
State income taxes, net of federal benefit
1.4
%
( 11.8
%)
Research & development tax refunds & credits
—
( 28.8
%)
Dividend received deduction
( 0.3
%
)
( 6.4
%)
Other, net
( 0.2
%
)
( 10.0
%)
Effective income tax rate
21.9
%
( 78.0
%)
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Deferred income tax assets and liabilities as of September 30, 2023 and 2022 consisted of the following:
September 30,
2023
2022
Deferred Tax Assets:
Accrued liabilities and reserves
$
352,000
$
155,000
Allowance for doubtful accounts
123,000
83,000
Inventory
3,901,000
3,166,000
Unrealized loss on investments
554,000
1,272,000
Net operating losses carryforwards
331,000
352,000
Gross Deferred Income Tax Assets
5,261,000
5,028,000
Deferred and Other Tax Liabilities:
Domestic international sales corporation
—
( 136,000
)
Property and equipment
( 1,918,000
)
( 1,868,000
)
Unrecognized tax benefits
( 176,000
)
( 131,000
)
Gross Deferred and Other Income Tax Liabilities
( 2,094,000
)
( 2,135,000
)
Net Deferred and Other Income Tax Assets
$
3,167,000
$
2,893,000
Total income taxes paid in fiscal 2023 and 2022 were $ 2,300,000 and $ 2,839,000 , respectively.
GAAP prescribes a comprehensive model for the financial recognition, measurement, classification, and disclosure of
uncertain tax positions. GAAP contains a two-step
approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, based on the technical merits of the position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
Significant judgment is required in evaluating the Company’s uncertain tax position and determining the Company’s provision for taxes. Although the Company believes the reserves of unrecognized tax benefits (“UTB’s”) are reasonable, no assurance can be given that the final outcome of these matters will not be different from that which is reflected in the Company’s historical income tax provision and accruals. The Company adjusts these reserves in light of changing facts and circumstances. As of September 30, 2023 and 2022, the Company had UTB’s of $ 176,000 and $
131,000 . The Company accrued $ 45,000 and $ 131,000 of UTB’s in the years ended September 30, 2023 and September 30, 2022, respectively. UTB’s of $ 150,000 at September 30, 2021 were used in the year ended September 30, 2022.
The Company recognizes interest and penalties accrued related to UTB’s as a component of income tax expense. There were no additional accruals of interest expense nor penalties of significance during fiscal years ended September 30, 2023 and 2022. It is reasonably possible that the amount of the UTB’s with respect to certain unrecognized tax positions will increase or decrease during the next 12 months. The Company does not expect the change to have a material effect on its results of operations or its financial position. The only expected potential reason for change would be the ultimate results stemming from any examinations by taxing authorities. If recognized, the entire amount of UTB’s would have an impact on the Company’s effective income tax rate.
The effective income tax rate for fiscal 2023 was 21.9 % versus ( 78.0 %) in fiscal 2022.
In fiscal 2022, the Company generated $ 475,000 of federal research and development tax credits (“R&D Credits”), all of which were used in fiscal 2022. There were no R&D Credits generated in fiscal 2023 and there were no carryforwards of R&D Credits as of September 30, 2023 or September 30, 2022.
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The Company files U.S. federal income tax returns, as well as Florida, Iowa and Pennsylvania income tax returns. The Company’s U.S. federal income tax returns filed for tax years prior to fiscal year ended September 30, 2020 are generally no longer subject to examination by taxing authorities due to the expiration of the statute of limitations.
NOTE 7 – RETIREMENT BENEFITS
The Company has a voluntary 401(k) employee benefit plan, which covers all eligible, domestic employees. The Company makes discretionary matching contributions subject to a maximum level, in accordance with the terms of the plan. The Company charged approximately $ 343,000 and $ 425,000 to expense under the provisions of the plan during the years ended September 30, 2023 and 2022, respectively.
NOTE 8 – LONG-TERM DEBT AND ARRANGEMENTS WITH FINANCIAL INSTITUTIONS
The Company had no long-term debt outstanding at September 30, 2023 or 2022. The Company does not currently require a credit facility.
In April 2020, a financial institution issued an irrevocable standby letter of credit (“letter of credit”) on behalf of the Company for the benefit of one of the Company’s insurance carriers. The maximum amount that can be drawn by the beneficiary under the letter of credit is $ 150,000 . The letter of credit expires in April 2024, unless terminated earlier, and can be extended, as provided by the agreement. The Company intends to renew the letter of credit for as long as the Company does business with the beneficiary insurance carrier. The letter is collateralized by restricted cash of the same amount on any outstanding drawings. To date, no amounts have been drawn under the letter of credit.
NOTE 9 – LEASES
The Company leases certain equipment under non-cancelable
operating leases. Future minimum rental payments under these leases at September 30, 2023 are immaterial. Total rental expense for the fiscal years ended September 30, 2023 and 2022 was $ 47,000 and $ 57,000 , respectively.
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 assets. The lease term was 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. In March 2023, the Company extended the lease term through August 31, 2024. In accordance with ASU 2016-02,
the Company recorded a ROU asset totaling $ 352,000 and related lease liabilities upon extension.
On October 9, 2020, the Company entered into an operating lease for additional warehousing space. The original lease term was 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. An additional $ 39,000 was recorded as a ROU asset and related lease liability in October 2021 to reflect the impact of the lease renewal. In March 2022, the ROU asset and related liability was reduced by $ 39,000 to reflect the impact of a reduction in the square footage being leased.
For the year ended September 30, 2023, operating lease costs were $ 429,000 and cash payments related to these operating leases were $ 458,000 . For the year ended September 30, 2022, operating lease costs were $ 425,000 and cash payments related to
these operating leases were $ 396,000 .
Other information concerning the Company’s operating lease accounted for under ASC 842 guidelines as of September 30, 2023 and September 30, 2022, is as follows:
September 30, 2023
September 30, 2022
Operating lease ROU asset included in other long-term assets
$
328,000
$
396,000
Current operating lease liability
328,000
390,000
Non-current
operating lease liability
—
6,000
Weighted average remaining lease term (in years)
0.51
1.00
Weighted average discount rate used in calculating ROU asset
4.5
%
4.0
%
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Future annual minimum lease payments as of September 30, 2023 are as follows:
Fiscal Year
Annual Lease Payments
2024
$
336,000
Less interest
( 8,000
)
Present value of lease liabilities
$
328,000
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in legal proceedings arising out of the normal course of business, none of which we believe will have a material adverse effect on our business, financial condition or results of operations. Claims made in the ordinary course of business may be covered in whole or in part by insurance.
NOTE 11 – SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION
Shareholders’ Equity
Under the Company’s Certificate of Incorporation, as amended, certain rights of the holders of the Company’s common stock are modified by shares of Class B stock for as long as such shares shall remain outstanding. During that period, holders of common stock will have the right to elect approximately 25 % of the Company’s Board of Directors, and conversely, holders of Class B stock will be entitled to elect approximately 75 % of the Company’s Board of Directors. During the period when shares of common stock and Class B stock are outstanding, certain matters submitted to a vote of shareholders will also require approval of the holders of common stock and Class B stock, each voting separately as a class. Common stock and Class B shareholders have equal rights with respect to dividends, preferences, and rights, including rights in liquidation.
Stock-Based Compensation
On March 17, 2009, the shareholders of the Company approved the 2009 Incentive Compensation Plan (the “2009 Plan”). The 2009 Plan expired on October 1, 2021 , and 30,000 remaining outstanding options were cancelled on November 1, 2021 . There were no other equity compensation plans and arrangements previously approved by security holders as of September 30, 2023 and September 30, 2022.
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ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None