GENCOR INDUSTRIES INC - Quarter Report: 2003 December (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

OR

FOR THE TRANSITION PERIOD From                                      to                                     

Commission file number 0-3821

GENCOR INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

5201 North Orange Blossom Trail, Orlando, Florida 32810

    (Address of principal executive offices)                                                          (Zip Code)

(407) 290-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes     X                     No             

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

Yes                              No     X    

Indicate number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

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GENCOR INDUSTRIES, INC.

Index

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Part I. Financial Information

Item 1. Financial Statements

GENCOR INDUSTRIES, INC.

Condensed Consolidated Balance Sheets

In thousands, except share amounts

See notes to condensed consolidated financial statements.

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GENCOR INDUSTRIES, INC.

Unaudited Condensed Consolidated Income Statements

In thousands, except per share amounts

See notes to condensed consolidated financial statements.

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GENCOR INDUSTRIES, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

In thousands

See notes to condensed consolidated financial statements.

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GENCOR INDUSTRIES, INC.

Notes to Condensed Consolidated Financial Statements

All amounts in thousands, except per share amounts

Note 1 – Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all material adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended December 31, 2003 are not necessarily indicative of the results that may be expected for the year ended September 30, 2004.

The balance sheet at September 30, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Gencor Industries, Inc. Annual Report on Form 10-K for the year ended September 30, 2003.

Note 2 – Inventories

The components of inventory consist of the following:

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Note 3 – Earnings Per Share Data

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated.

Note 4 – Comprehensive Income (Loss)

The total comprehensive income (loss) for the three-months ended December 31, 2003 and 2002 was $260 and $1,656, respectively. Total comprehensive income (loss) differs from net income (loss) due to gains and losses resulting from foreign currency translation, which are reflected separately in the shareholders’ equity section of the balance sheet under the caption “Accumulated other comprehensive loss.” Gains and losses resulting from foreign currency transactions are included in income.

Note 5 – Income From Investees

During the first quarter of fiscal 2003, the Company received cash distributions of $4,239 from its 45% interest in Carbontronics LLC and 25% interest in Carbontronics II LLC and Carbontronics Fuels LLC. These interests were obtained as part of contracts to build four synthetic fuel production plants during 1998. During the first quarter of fiscal 2004, no distributions were received. Any distribution by the investments has been suspended pending the results of the current IRS examination of the partnerships. The Company has no basis in these investments nor requirement to provide future funding. Any income arising from these investments is dependent upon tax credits (adjusted for operating losses at the fuel plants) being generated as a result of synthetic fuel production, which will be recorded as received.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Net sales for the quarters ended December 31, 2003 and 2002 were $11.9 million and $13.3 million, respectively. Domestic sales during the first quarter of fiscal 2004 were $11.2 million reflecting an increase of $2.4 million from year ago levels. Foreign sales were $3.8 million below the prior year as a portion of the UK operations were consolidated in the US to better control costs and margins.

Gross margins as a percent of net sales increased by 7.1% during the quarter ended December 31, 2003 from year ago levels. Gross margins improved on the lower consolidated sales as a result of the consolidation of the UK operations and higher domestic volume.

Product engineering and development costs combined with selling and administrative expenses have decreased from year ago levels, reflecting the consolidation of certain UK operations and the Company’s efforts to maintain the cost savings initiatives instituted during the first quarter of fiscal 2002. Selling and administrative expense includes $270 of costs related to the tender offer withdrawn in December 2003.

Other Income (Expense)

Interest expense for the first quarter of fiscal 2004 decreased by $436 from the first quarter of fiscal 2003, reflecting the refinancing in August 2003 with the corresponding decrease in our lending rate and a reduction in the debt balance.

There were no distributions from investments in Carbontronics LLC, Carbontronics II LLC, and Carbontronics Fuels LLC, in the first quarter of fiscal 2004. The investments are currently being examined by the Internal Revenue Service. Any distributions have been suspended subject to the results of the IRS examination. Distributions were $4,239 in the first quarter of 2003. Future benefits realizable by the Company on the synthetic fuel production plants depend on whether the production from these plants will continue to qualify for tax credits under Section 29 of the Internal Revenue Code and the ability to economically produce and successfully market synthetic fuel produced by the plants.

Income tax expense decreased by $1.3 million from year ago levels, reflecting the decrease in pre-tax income.

Liquidity and Capital Resources

On August 1, 2003, the Company entered into a Revolving Credit and Security Agreement with PNC Bank, N.A. The Agreement established a three year revolving $20 million credit facility. The facility provides for advances based on accounts receivable, inventory and real estate. As of December 31, 2003, the Company had $3.5 million borrowed on the facility. The facility includes a $2 million limit on letters of credit. At December 31, 2003, the Company had $.3 million of letters of credit outstanding. The interest rate at December 31, 2003, is at prime (4.00%) and subject to change based upon the Fixed Charge Coverage Ratio. The Company is required to maintain a Fixed Charge Coverage Ratio of 1.1:1. There are no required repayments as long as there are no defaults and there is adequate eligible collateral. Substantially all of Company’s assets are pledged as security under the Agreement.

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Seasonality

The Company is concentrated in the asphalt-related business and is subject to a seasonal slow-down during the third and fourth quarters of the calendar year. Traditionally, the Company’s customers do not purchase new equipment for shipment during the summer and fall months to avoid disrupting their peak season for highway construction and repair work. This slow-down often results in lower reported sales and earnings and or losses during the first and fourth quarters of the Company’s fiscal year ended September 30.

Forward-Looking Information

This Form 10-Q contains certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which represent the Company’s expectations and beliefs, including, but not limited to, statements concerning gross margins, sales of the Company’s products and future financing plans. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company’s control. Actual results may differ materially depending on a variety of important factors, including the financial condition of the Company’s customers, changes in the economic and competitive environments and demand for the Company’s products.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company operates manufacturing facilities and sales offices principally located in the United States and the United Kingdom. The Company is subject to business risks inherent in non-U.S. activities, including political and economic uncertainty, import and export limitations, and market risk related to changes in interest rates and foreign currency exchange rates. The Company’s principal currency exposure against the U.S. dollar is the British pound. Periodically, the Company has used derivative financial instruments consisting primarily of interest rate hedge agreements to manage exposures to interest rate changes. The Company’s objective in managing its exposure to changes in interest rates on its variable rate debt is to limit the impact of such changes on earnings and cash flow and to reduce its overall borrowing costs.

At December 31, 2003, the Company had $3.5 million of debt outstanding. Under the Credit Agreement, the Company’s borrowings will bear interest at variable rates based upon the prime rate. The Company performed a sensitivity analysis assuming a hypothetical 1% adverse movement in the interest rates on the debt outstanding at the end of December 2003. Such a movement in interest rates would cause the Company to recognize additional quarterly interest expense of approximately $9 along with a corresponding decrease in cash flows.

The above sensitivity analysis for interest rate risk excludes accounts receivable, accounts payable and accrued liabilities because of the short-term maturity of such instruments. The analysis does not consider the effect on other variables such as changes in sales volumes or management’s actions with respect to levels of capital expenditures, future acquisitions or planned divestitures, all of which could be significantly influenced by changes in interest rates and cause the results to differ significantly from those indicated by the sensitivity analysis.

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Item 4. Controls and Procedures

The Company’s President and Chief Financial Officer evaluated the Company’s disclosure controls and procedures within 90 days of the filing date of this quarterly report. Based upon this evaluation, the Company’s President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that it files with the Securities and Exchange Commission.

There were no significant changes in the Company’s internal controls or, to the knowledge of the management of the Company, in other factors that could significantly affect internal controls subsequent to the evaluation date.

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Part II. Other Information

Item 6. Exhibits and Reports on Form 8-K

None.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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