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GENCOR INDUSTRIES INC - Quarter Report: 2004 June (Form 10-Q)

For The Period Ended June 30, 2004
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE PERIOD ENDED June 30, 2004

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD From              to             

 

Commission file number 0-3821

 


 

GENCOR INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware   59-0933147

(State or other jurisdiction of

incorporated or organization)

 

(I.R.S. Employer

Identification No.)

 

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.

 

Class


 

Outstanding at July 28, 2004


Common stock, $.10 par value

  6,921,570 shares

Class B stock, $.10 par value

  1,798,398 shares

 



Table of Contents

GENCOR INDUSTRIES, INC.

 

Index

 

               Page

Part I.

  

Financial Information

    
    

Item 1.

  

Financial Statements

    
         

Condensed consolidated balance sheets – June 30, 2004 (Unaudited) and September 30, 2003

   3
         

Unaudited condensed consolidated income statements – Three - and Nine-months ended June 30, 2004 and 2003

   4
         

Unaudited condensed consolidated statements of cash flows – Nine-months ended June 30, 2004 and 2003

   5
         

Notes to unaudited condensed consolidated financial statements

   6
    

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   8
    

Item 3.

  

Quantitative and Qualitative Disclosure of Market Risk

   10
    

Item 4.

  

Controls and Procedures

   11

Part II.

  

Other Information

    
    

Item 6.

  

Exhibits and Reports on Form 8-K

   12

Signatures

        13

 

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Table of Contents

Part I. Financial Information

 

Item 1. Financial Statements

 

GENCOR INDUSTRIES, INC.

Condensed Consolidated Balance Sheets

In thousands, except share amounts

 

    

June 30

2004


   

September 30

2003


 
     (Unaudited)        

ASSETS

                

Current assets:

                

Cash and cash equivalents

   $ 310     $ 734  

Accounts receivable, less allowance for doubtful accounts of $2,498 ($2,428 at September 30, 2003)

     3,495       3,344  

Inventories

     11,456       12,560  

Deferred Income Taxes

     1,066       1,066  

Prepaid expenses

     1,007       1,627  
    


 


Total current assets

     17,334       19,331  
    


 


Property and equipment, net

     11,438       11,585  

Assets held for sale

     5,672       5,672  

Other assets

     3,895       4,046  
    


 


Total assets

   $ 38,339     $ 40,634  
    


 


LIABILITIES AND SHAREHOLDERS’ EQUITY

                

Current liabilities:

                

Accounts payable

   $ 3,469     $ 3,448  

Customer deposits

     1,244       1,106  

Income and other taxes payable

     4,262       3,639  

Accrued expenses

     9,354       8,325  
    


 


Total current liabilities

     18,329       16,518  

Long-term debt

     806       5,321  

Deferred Income Taxes

     577       2,877  

Other liabilities

     3,309       3,309  
    


 


Total liabilities

     23,021       28,025  
    


 


Shareholders’ equity:

                

Preferred stock, par value $.10 per share; authorized 300,000 shares; none issued

     —         —    

Common stock, par value $.10 per share; 15,000,000 shares authorized; 6,988,970 shares issued (6,971,470 shares issued September 30, 2003)

     699       697  

Class B stock, par value $.10 per share; 6,000,000 shares authorized: 1,890,398 shares issued

     189       189  

Capital in excess of par value

     11,370       11,343  

Retained Earnings

     10,776       8,143  

Accumulated other comprehensive loss

     (5,917 )     (5,964 )

Subscription receivable from officer

     (95 )     (95 )

Common stock in treasury, 179,400 shares at cost

     (1,704 )     (1,704 )
    


 


       15,318       12,609  
    


 


Total liabilities and shareholders’ equity

   $ 38,339     $ 40,634  
    


 


 

See notes to unaudited condensed consolidated financial statements.

 

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GENCOR INDUSTRIES, INC.

Unaudited Condensed Consolidated Income Statements

In thousands, except per share amounts

 

     Three Months Ended
June 30


    Nine Months Ended
June 30


 
     2004

    2003

    2004

    2003

 

Net sales

   $ 12,407     $ 14,134     $ 42,816     $ 48,324  

Costs and expenses:

                                

Costs of products sold

     8,573       9,609       29,764       35,591  

Product engineering and development

     454       436       1,411       1,309  

Selling, general and administrative

     2,419       3,998       7,490       10,370  
    


 


 


 


       11,446       14,043       38,665       47,270  
    


 


 


 


Operating income

     961       91       4,151       1,054  

Other income (expense):

                                

Interest income

     3       42       14       108  

Interest expense

     (29 )     (308 )     (131 )     (1,251 )

Income from investees

     —         4,780       —         13,428  

Miscellaneous

     11       65       129       12  
    


 


 


 


       (15 )     4,579       12       12,297  
    


 


 


 


Income before income taxes

     946       4,670       4,163       13,351  

Income taxes

     302       2,382       1,530       5,816  
    


 


 


 


Net income

   $ 644     $ 2,288     $ 2,633     $ 7,535  
    


 


 


 


Per common share:

                                

Basic and diluted earnings per share:

                                

Basic earnings per share

   $ 0.07     $ 0.26     $ 0.30     $ 0.87  
    


 


 


 


Diluted earnings per share

   $ 0.07     $ 0.26     $ 0.28     $ 0.85  
    


 


 


 


 

See notes to unaudited condensed consolidated financial statements.

 

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GENCOR INDUSTRIES, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

In thousands

 

     Nine Months Ended
June 30


 
     2004

    2003

 

Operating activities:

                

Net income

   $ 2,633     $ 7,535  

Adjustments to reconcile net income to cash provided by (used for) operating activities:

                

Deferred income taxes

     (2,300 )     —    

Depreciation and amortization

     619       706  

Income from investees

     —         (13,428 )

Bad debt expense

     260       1,474  

Change in assets and liabilities

                

Accounts receivable

     (411 )     1,767  

Inventories

     1,104       4,911  

Prepaid expenses

     620       807  

Other assets

     27       9  

Accounts payable

     21       (2,122 )

Customer deposits

     138       418  

Income and other taxes payable

     623       4,784  

Accrued expenses and other

     1,029       (1,510 )
    


 


Total adjustments

     1,730       (2,184 )
    


 


Net cash provided by operating activities

     4,363       5,351  
    


 


Investing activities:

                

Distributions from unconsolidated investees

     —         13,428  

Capital expenditures

     (348 )     (84 )

Stock options exercised

     17       —    
    


 


Net cash provided by (used for) investing activities

     (331 )     13,344  
    


 


Financing activities:

                

Repayment of debt

     (4,515 )     (15,142 )
    


 


Net cash used for financing activities

     (4,515 )     (15,142 )
    


 


Effect of exchange rate changes on cash and cash equivalents

     59       255  
    


 


Increase (decrease) in cash and cash equivalents

     (424 )     3,808  

Cash and cash equivalents, beginning of period

     734       12,305  
    


 


Cash and cash equivalents, end of period

   $ 310     $ 16,113  
    


 


 

See notes to unaudited condensed consolidated financial statements.

 

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GENCOR INDUSTRIES, INC.

 

Notes to Unaudited 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- and nine-month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending 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:

 

     June 30
2004


   September 30
2003


Raw materials

   $ 5,888    $ 5,437

Work in process

     2,138      2,898

Finished goods

     2,445      3,274

Used equipment

     985      951
    

  

     $ 11,456    $ 12,560
    

  

 

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Note 3 – Earnings Per Share Data

 

The following table sets forth the computation of basic and diluted earnings per share:

 

    

Three Months

Ended June 30


  

Nine Months

Ended June 30


     2004

   2003

   2004

   2003

Net income

   $ 644    $ 2,288    $ 2,633    $ 7,535
    

  

  

  

Denominator (shares in thousands):

                           

Weighted average shares outstanding

     8,684      8,682      8,683      8,682

Effect of dilutive stock options

     991      190      738      190
    

  

  

  

Denominator for diluted EPS computation

     9,675      8,872      9,421      8,872
    

  

  

  

Per common share:

                           

Basic:

                           
    

  

  

  

Net income

   $ 0.07    $ 0.26    $ 0.30    $ 0.87
    

  

  

  

Diluted:

                           
    

  

  

  

Net income

   $ 0.07    $ 0.26    $ 0.28    $ 0.85
    

  

  

  

 

Note 4 – Comprehensive Income (Loss)

 

Total comprehensive income for the three-and nine-months ended June 30, 2004 was $634 and $2,680 respectively, which compares to the total comprehensive income for the three- and nine-months ended June 30, 2003 of $2,277 and $7,512, respectively. Total comprehensive income differs from net income due to unrealized 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.” Realized gains and losses resulting from foreign currency transactions are included in income.

 

Note 5 – Income From Investees

 

During the three- and nine months ended June 30, 2003, the Company received cash distributions of $4,780 and $13,428, respectively 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. No distributions were received during fiscal year 2004. 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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Table of Contents

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

 

Results of Operations

 

Net sales for the nine-months ended June 30, 2004 and 2003 were $42.8 million and $48.3 million, respectively. Domestic sales for the nine-month period of fiscal 2004 increased $3.1 million from year ago levels. Foreign sales were $8.6 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 4.2% during the nine months ended June 30, 2004 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, as a result of the consolidation of certain UK operations. Selling and administrative expense includes $270 of costs related to the tender offer withdrawn in December 2003.

 

Sales for the three months ended June 30, 2004 were $1.7 million lower than the prior year. Domestic sales decreased $1.2 million and foreign revenues were lower than the prior year by $.5 million due to the consolidation of certain UK operations. Margins were maintained and selling and administrative expenses decreased due to the consolidation.

 

Interest expense for the three- and nine- month period of fiscal 2004 decreased by $279 and $1,120, respectively from the previous years, 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 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 $4,780 and $13,428 for the three- and nine-months ended June 30, 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 $2.1 million for the three month period and decreased $4.3 million for the nine- month period, respectively of fiscal 2004, 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 June 30, 2004, the Company had $.8 million borrowed on the facility. The facility includes a $2 million limit on letters of credit. At June 30, 2004, the Company had $.3 million of letters of credit outstanding. The interest rate at June 30, 2004, is at prime less .25% (3.75%) 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 the Company’s assets are pledged as security under the Agreement.

 

8


Table of Contents

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 21-E 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.

 

9


Table of Contents

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 June 30, 2004, the Company had approximately $.8 million of debt outstanding. Under the Credit Agreement the Company’s borrowings bear interest at variable rates based upon the prime rate less .25%. The Company performed a sensitivity analysis assuming a hypothetical 1% adverse movement in the interest rates on the debt outstanding at the end of June 2004. Such a movement in interest rates would cause the Company to recognize additional interest expense for the nine-month period ended June 30, 2004 of approximately $6 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.

 

10


Table of Contents

Item 4. Controls and Procedures

 

The Company’s President and Chief Financial Officer evaluated the Company’s disclosure controls and procedures as of the end of the period covered by 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.

 

11


Table of Contents

Part II. Other Information

 

Item 6. Exhibits and Reports on Form 8-K

 

(a) Exhibits

 

31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32   Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b) 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.

 

   

GENCOR INDUSTRIES, INC.

August 13, 2004

  By:  

/s/ E.J. Elliott


       

E.J. Elliott, Chairman and President

August 13, 2004

  By:  

/s/ Scott W. Runkel


       

Scott W. Runkel, Chief Financial Officer

 

13