GENCOR INDUSTRIES INC - Annual Report: 2004 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – K

For the Fiscal Year Ended September 30, 2004

Commission File No. 0-3821

GENCOR INDUSTRIES, INC.

5201 North Orange Blossom Trail

Orlando, Florida 32810

Registrant’s Telephone Number, Including Area Code:

(407) 290-6000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock ($.10 Par Value)

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 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 filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x  Yes    ¨  No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    ¨  Yes    x  No

The aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the most recently completed second fiscal quarter was $34,141,302.

Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practicable date: 7,026,070 shares of Common Stock ($.10 par value) and 1,786,398 shares of Class B Stock ($.10 par value) as of December 14, 2004.

List hereunder the following documents if incorporated by reference and the part of the Form 10-K into which the document is incorporated.

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PART I

ITEM 1. BUSINESS

General

Gencor Industries, Inc. and its subsidiaries (the “Company”) is a leading manufacturer of heavy machinery used in the production of highway construction materials, synthetic fuels, and environmental control equipment. The Company’s products are manufactured in two facilities in the United States and one facility located in the United Kingdom. The Company’s products are sold through a combination of Company sales representatives and independent dealers and agents located throughout the world.

The Company designs and manufactures machinery and related equipment used primarily for the production of asphalt and highway construction materials. The Company’s principal core products include asphalt plants, combustion systems and fluid heat transfer systems. Gencor Industries, Inc.’s technical and design capabilities, environmentally friendly process technology and wide range of products have enabled it to become a leading producer of equipment worldwide. The Company believes it has the largest installed base of asphalt production plants in the United States.

Because the Company’s products are sold primarily to the highway construction industry, the business is seasonal in nature. The majority of orders for the Company’s products are received between November and February, with a significant volume of shipments occurring prior to May. The principal factors driving demand for the Company’s products are the level of government funding for domestic highway construction and repair, infrastructure development in emerging economies, the need for spare parts and a trend towards larger plants resulting from asphalt contractor and plant consolidation.

In 1968, the foundation of the Company was formed by the merger of Mechtron Corporation with General Combustion, Inc. and Genco Manufacturing, Inc. The new entity reincorporated in Delaware in 1969 and adopted the name Mechtron International Corporation in 1970. In 1985, the Company began a series of acquisitions into related fields starting with the Beverley Group Ltd. in the United Kingdom. Hy-Way Heat Company, Inc. and the Bituma Group were acquired in 1986. In 1987, the Company changed its name to Gencor Industries, Inc. and acquired the Davis Line Inc. (Hetherington and Berner) and its subsidiaries in 1988.

In January 1998, the Company finalized agreements with Carbontronics, LLC (“CLLC”) pursuant to which the Company sold, manufactured, and installed four synthetic fuel production plants. These plants were sold by CLLC to a limited partnership (“LP”), Carbontronics Synfuel Investors, LLC, which is now the owner of the plants. The Company was paid in full for these plants in 1998. In addition to payment for the plants, the Company received a partnership interest of 45% in CLLC. Also, the Company subsequently received a 25% partnership position in the General Partner (“GP”) of the LP and in Carbontronics II, LLC (“C2LLC”). The remaining interests in the GP, CLLC, and C2LLC are owned by other, unrelated entities. An administrative member of the GP, not the Company, is responsible for administration of the day-to-day affairs of the GP and LP. The Company is entitled to appoint only one of the three members of the GP Management Committee and has 1/3 of the voting rights thereof. As a part of the partnership positions in CLLC, C2LLC, and the GP, the Company has the potential for income subject to the performance of the partnership. 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.

On August 8, 2003, Gencor Industries, Inc. (“Gencor”) was notified by its investee General Partner that the income tax returns for its synthetic fuel producing partnership are being audited. As previously reported, the Limited Partners may declare a “Tax Event” and suspend further distributions indefinitely. Gencor was informed that the Limited Partners have declared a “Tax Event” and therefore future distributions had ceased.

On December 12, 2003, Gencor was notified by the General Partner that the IRS had issued rulings dated December 10, 2003 to the producing partnership concluding that, if the partnership adheres to the specified production methods and chemistry, the partnership will be entitled to the section 29 credit for the production of qualified fuel that is sold to unrelated persons.

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Although the IRS now advises that it is satisfied with the chemical testing procedures, it is proceeding with a general IRS audit. Therefore the previously imposed Tax Event continues and the Limited Partners are not allowing revenue to be distributed to Gencor until satisfactory conclusion of the audit. The Company records the income as the distributions are received and does not project or forecast amounts, if any, or timing of future distributions.

Products

Asphalt Plants. The Company manufactures and produces hot-mix asphalt plants used in the production of asphalt paving materials. The Company also manufactures related asphalt plant equipment including hot mix storage silos, fabric filtration systems, cold feed bins and other plant components. The Company H&B (Hetherington and Berner) business built the first asphalt batch plant in 1894 and is the world’s oldest asphalt plant line. The Company’s subsidiaries, Bituma Corporation, formerly known as Boeing Construction Company, developed the continuous process for asphalt production, which has been adopted as the United States industry’s standard technology, as well as patented the counterflow technology, several adaptations of which have become the new standard, which recaptures and burns emissions and vapors, resulting in a cleaner and more efficient process. The Company manufactures a very comprehensive range of fully mobile batch plants, as well as mobile shredders and trommel screens.

Combustion Systems and Industrial Incinerators. The Company manufactures combustion systems, which are large burners that can transform most solid, liquid or gaseous fuels into usable energy, or burn multiple fuels, alternately or simultaneously. Through its subsidiary General Combustion, the Company has been a significant source of combustion systems for the asphalt and aggregate drying industries since the 1950’s. The Company also manufactures soil decontamination machinery, as well as combustion systems for rotary dryers, kilns, fume and liquid incinerators, boilers and tank heaters. The Company believes maintenance and fuel costs are lower for its burners because of their superior design.

Fluid Heat Transfer Systems. The Company’s General Combustion subsidiaries in the USA and U.K. manufacture the Hy-Way heat and Beverley lines of thermal fluid heat transfer systems and specialty storage tanks for a wide array of industry uses. Thermal fluid heat transfer systems are similar to boilers, but use high temperature oil instead of water. Thermal fluid heaters have been replacing steam pressure boilers as the best method of heat transfer for storage, heating and pumping viscous materials (i.e., asphalt, chemicals, heavy oils, etc.) in many industrial and petrochemical applications worldwide. The Company believes the high efficiency design of its thermal fluid heaters can outperform competitive units in many types of process applications. Heaters are available for vertical, horizontal and underground tanks in steel, stainless steel, and other materials designed to meet large or small specific job requirements.

Product Engineering and Development

The Company is engaged in product engineering and development efforts to expand its product lines and to further develop more energy efficient and environmentally compatible systems.

Significant developments include the use of cost effective, non-fossil fuels, biomass (bagasse, municipal solid waste, sludge and wood waste), refuse-derived fuel, coal and coal mixtures, the economical recycling of old asphalt and new designs of environmentally compatible asphalt plants. Product engineering and development activities are directed toward more efficient methods of producing asphalt and lower cost fluid heat transfer systems. In addition, efforts are also focused on developing combustion systems that operate at higher temperatures and offer a higher level of environmental compatibility.

Sources of Supply and Manufacturing

Substantially all products sold by the Company and its subsidiaries are manufactured or assembled by the Company, except for procured raw materials and hardware. The Company purchases a large quantity of steel, raw materials and hardware used to manufacture its products from hundreds of suppliers and is not dependent on any single supplier. Periodically, the Company reviews the cost effectiveness of internal manufacturing versus outsourcing its product lines to independent third parties and currently believes it has the internal capability to produce the highest quality product at the lowest cost. This, however, may change from time to time.

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Seasonality

The Company is concentrated in the asphalt-related business and 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.

Competition

The markets for the Company’s products are highly competitive. Within a given product line, the industry remains fairly concentrated, with typically a small number of companies competing for the majority of a product line’s industry sales. The principal competitive factors include technology and overall product design, dependability and reliability of performance, brand recognition, pricing and after-the-sale customer support. Management believes its ability to compete depends upon its continual efforts to improve product performance and dependability, competitively price its products, and provide the best customer support and service in the industry.

Sales and Marketing

The Company’s products and services have been marketed internationally through a combination of Company-employed sales representatives and independent dealers and agents. Each of the Company’s business groups has been responsible for marketing its products and services with support from the corporate sales and marketing department.

Sales Backlog

The Company’s manufacturing processes allow for a relatively short turnaround from the order date to shipment date of usually less than ninety (90) days. Therefore, the size of the Company’s backlog should not be viewed as an indicator of the Company’s annualized revenues or future financial results. The Company’s backlog was approximately $13 million and $12 million as of December 1, 2004 and December 18, 2003, respectively.

Licenses, Patents and Trademarks

The Company holds numerous patents covering technology and applications related to various products, equipment and systems, and numerous trademarks and trade names registered with the U.S. Patent and Trademark Office and in various foreign countries. In general, the Company depends upon technological capabilities, manufacturing quality control and application know-how, rather than patents or other proprietary rights in the conduct of its business. The Company believes the expiration of any one of these patents, or a group of related patents, would not have a material adverse effect on the overall operations of the Company.

Government Regulations

The Company believes its design and manufacturing processes meet all industry and governmental agency standards that may apply to its entire line of products, including all domestic and foreign environmental, structural, electrical and safety codes. The Company’s products are designed and manufactured to comply with Environmental Protection Agency regulations. Certain state and local regulatory authorities have strong environmental impact regulations. While the Company believes that such regulations have helped, rather than restricted its marketing efforts and sales results, there is no assurance that changes to federal, state, local, or foreign laws and regulations will not have a material adverse effect on the Company’s products and earnings in the future.

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Environmental Matters

The Company is subject to various federal, state, local and foreign laws and regulations relating to the protection of the environment. The Company believes it is in material compliance with all applicable environmental laws and regulations. The Company does not expect any material impact on future operating costs as a result of compliance with currently enacted environmental regulations.

The Company has conducted environmental assessments consistent with recognized standards of due diligence on properties and businesses which it acquired. These assessments had not identified contamination resulting from acquired properties that would be reasonably likely to result in a material adverse effect on the Company’s business, results of operations, or financial condition.

Employees

As of September 30, 2004, the Company employed a total of 299 employees; there were 289 employees in the domestic U.S. operations and 10 employees in the U.K. operations. The Company has collective bargaining agreements covering production and maintenance employees at its Marquette, Iowa facilities. The remaining domestic employees are not represented by a labor union or collective bargaining agreement. The Company believes that its relationship with its employees is good.

ITEM 2. PROPERTIES

The following table lists the properties owned or leased by the Company as of September 30, 2004:

As of September 30, 2004, the Company still owns offices and manufacturing facility in Araraquara, Brazil. This facility is approximately 295,000 square feet of space on 29.2 acres. This facility is part of the discontinued operations. The Leicester, England facility is included in Assets held for sale as of September 30, 2004.

ITEM 3. LEGAL PROCEEDINGS

The Company has various litigation and claims pending as of the date of this Form 10-K which have occurred in the ordinary course of business, and which may be covered in whole or in part by insurance. Management has reviewed all litigation matters arising in the ordinary course of business and, upon advice of counsel, has made provisions, not deemed material, for any estimable losses and expenses of litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company’s stock is traded over the counter on the Pink Sheets. Following are the high and low per share closing bid prices for our common stock for the periods indicated:

As of December 14, 2004, there were 377 holders of Common Stock of record and 7 holders of Class B Stock of record.

Dividend Policy

The Company has not paid any dividends during the last two fiscal years and there is no intention to pay cash dividends in the foreseeable future.

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EQUITY COMPENSATION PLAN

In the following table is information about our common stock that may be issued upon exercise of options, warrants and rights under all of our existing equity compensation plans and arrangements as of September 30, 2004, including the 1997 Stock Option Plan and the 1992 Stock Option Plan.

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

“Forward-Looking” Information

This Form 10-K 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, income from investees and litigation. 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, whether or not the Company receives income from its investees, and demand for the Company’s products.

Results of Operations

Year ended September 30, 2004 compared with the year ended September 30, 2003

Net sales for the years ended September 30, 2004 and 2003 were $54.1 million and $55.9 million, respectively. Domestic sales during this period for 2004 and 2003 were $52.3 million and $43.1 million, respectively. The decline in sales is related to reduced foreign sales primarily due to the increased competition and consolidation of a portion of its UK operation in the US to better control costs and margins.

Gross margins as a percent of net sales were 29.4% in 2004 and 24.1% of sales for 2003. In 2003, foreign margins were only 14% and therefore a portion of the UK operations was consolidated into the US operation. Domestic margins were negatively affected by $.6 million in 2004 and $1.5 million in 2003 due to an increase in the LIFO reserve.

Product engineering and development costs increased 12% during 2004 due to additional engineering staff. Selling and administrative expenses decreased $3.1 million (24%) during 2004 as over $3.6 million of costs in 2003 were eliminated in the consolidation of certain UK operations into the US. Selling and administrative expenses includes $270 of costs related to the tender offer withdrawn in December 2003.

Operating (loss) was ($1,173) in 2003 as a result of foreign operating losses of $2.8 million and $1.5 million of increases in the domestic LIFO inventory reserves. Operating income increased to $4.2 million and 8% of net sales for 2004, as a result of increased domestic business and the consolidation of certain foreign operations.

Interest expense during 2004 is less than 2003 due to reduced average borrowings and a lower interest rate. The debt was refinanced on August 1, 2003 with interest at the prime rate.

Income from investees consisted of cash distributions of $13,428 in 2003. There were no distributions from investments in Carbontronics LLC, Carbontronics II LLC, and Carbontronics Fuels LLC, in 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. 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 taxes were 37% of pre-tax income for 2004 and 34% for 2003. The effective rate was higher in 2004 primarily due to state income taxes.

Year ended September 30, 2003 compared with the year ended September 30, 2002

Net sales for the years ended September 30, 2003, and 2002, were $55.9 million and $67.5 million, respectively. Domestic sales during this period for 2003 and 2002 were $43.1 million and $41.2 million, respectively. The decline related to reduced foreign sales primarily due to the stalling of Asian sales in the spring due to the SARS epidemic and lower order intake. Increased competition resulted in fewer foreign orders. The Company consolidated a portion of its UK operation in the US to better control costs and margins.

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Gross margins as a percent of net sales were 24.1% in 2003 and 24.5% of sales for 2002. Foreign margins were only 14% and therefore a portion of the UK operations was consolidated into the US operation. Domestic margins were negatively affected by $1.5 million increase in the LIFO reserve.

Product engineering and development costs remained constant during 2003. Selling and administrative expenses increased $414 (3%) during 2003. Restructuring costs, which consist of legal and professional fees relating to the reorganization in 2002, were $302 for fiscal 2002.

Operating income (loss) was ($1,173) in 2003 versus $2,059 in 2002. This was a result of foreign operating losses of $2.8 million and $1.5 million of increases in the domestic LIFO inventory reserves.

Interest expense during 2003 is less than 2002 due to reduced borrowings and a lower interest rate. The debt was refinanced on August 1, 2003 with interest at the prime rate.

Income from investees includes cash distributions of $13,428 received during the first three fiscal quarters of 2003. There were distributions of $1,526 in fiscal 2002. 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 taxes were 34% of pre-tax income for 2003. Net income for 2003 was $7,260 from continuing operations, while 2002 included $1,829 from continuing operations and $241 from discontinued operations.

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. The facility includes a $2 million limit on letters of credit. At September 30, 2004, the Company had $.3 million of letters of credit outstanding. The interest rate at September 30, 2004, is at prime (4.75%) 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. The borrowings under the previous credit agreements were paid in full with cash and proceeds from this new Revolving Credit and Security Agreement.

Critical Accounting Policies, Estimates and Assumptions

The Company believes the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s 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. Accounting policies, in addition to the critical accounting policies referenced below, are presented in Note 1 to the Company’s consolidated financial statements, “Accounting Policies.”

Estimates and Assumptions

In preparing the consolidated financial statements, the Company uses certain estimates and assumptions that may affect reported amounts and disclosures. Estimates and assumptions are used, among other places, when accounting for certain revenue (e.g., contract accounting), expense, and asset and liability valuations. Management believes that the estimates and assumptions made in preparing the consolidated financial statements are reasonable, but are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate and unanticipated events may occur. The Company is subject to risks and uncertainties that may cause actual results to differ from estimated results.

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Revenues

Revenues from contracts for the design and manufacture of certain custom equipment are recognized under the percentage-of-completion method. Revenues from all other sales are recorded as the products are shipped or service is performed.

The percentage-of-completion method of accounting for long term contracts recognizes revenue in proportion to actual labor costs incurred as compared with total estimated labor costs expected to be incurred during the entire contract. All 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.

Investment in Unconsolidated Investees

As of September 30, 2004, 2003 and 2002, the Company owns a 45% interest in Carbontronics LLC and a 25% interest in Carbontronics Fuels LLC and Carbontronics II LLC. These interests were obtained as part of contracts to build four synthetic fuel production plants during 1998. The Company has no basis in these equity investments or 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. The Company received no distributions in 2004 and distributions of $13,428 and $1,526, during 2003 and 2002 respectively. Any distributions by the investments have been suspended pending the results of the current IRS examination of the partnerships.

Inflation

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.

Contractual Obligations

The following table summarizes the Company’s outstanding borrowings and long-term contractual obligations at September 30, 2004:

The long-term debt facility matures in 2006 and is expected to be renewed or refinanced at that time. The Company also has $300 of letters of credit outstanding. The letters of credit are for one year and have been renewed annually.

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ITEM 7A. 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 will use 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 their impact on earnings and cash flow and reduce its overall borrowing costs.

At September 30, 2004, the Company had approximately $5.7 million of debt outstanding. Under the Revolving Credit and Security Agreement, substantially all of the Company’s borrowings will bear interest at variable rates based upon the prime rate. The Company performed a sensitivity analysis assuming a hypothetical 10% adverse movement in the interest rates on the debt outstanding at the end of 2004. Such a movement in interest rates would cause the Company to recognize additional interest expense of approximately $27,000 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 divestures, 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

GENCOR INDUSTRIES, INC.

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

Board of Directors

Gencor Industries, Inc.

Orlando, Florida

We have audited the accompanying consolidated balance sheets of Gencor Industries, Inc. and subsidiaries as of September 30, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity and cash flows for the years ended September 30, 2004, 2003 and 2002. Our audits also included the financial statement schedule listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We did not audit the financial statements of certain wholly-owned subsidiaries, whose statements reflect total assets constituting 4% and 5% of consolidated assets as of September 30, 2004 and 2003, and total revenues constituting 3%, 5% and 5% of consolidated revenues for the years ended September 30, 2004, 2003 and 2002, respectively. Those statements were audited by other auditors whose reports have been furnished to us and, our opinion, insofar as it relates to the amounts included those subsidiaries, is based solely on the reports of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the audit reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gencor Industries, Inc. and subsidiaries as of September 30, 2004 and 2003, and the results of their operations and their cash flows for the years ended September 30, 2004, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

MOORE STEPHENS LOVELACE, P.A.

Certified Public Accountants

Orlando, Florida

November 24, 2004

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GENCOR INDUSTRIES, INC.

Consolidated Balance Sheets

(In thousands, except per share data)

See accompanying notes to consolidated financial statements.

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GENCOR INDUSTRIES, INC.

Consolidated Statements of Income

(In thousands, except per share data)

See accompanying notes to consolidated financial statements.

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GENCOR INDUSTRIES, INC.

Consolidated Statements of Shareholders’ Equity

(In thousands)

For the Years Ended September 30, 2004, 2003 and 2002

See accompanying notes to consolidated financial statements.

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GENCOR INDUSTRIES, INC.

Consolidated Statements of Cash Flows

In Thousands