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GENCOR INDUSTRIES INC - Quarter Report: 2005 June (Form 10-Q)

Form 10-Q
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, 2005

 

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 15, 2005


Common stock, $.10 par value   7,189,470 shares
Class B stock, $.10 par value   1,642,998 shares

 



Table of Contents

GENCOR INDUSTRIES, INC.

 

Index

 

                   Page

Part I. Financial Information

    
          Item 1.  

Financial Statements

    
             

Condensed consolidated balance sheets – June 30, 2005 (Unaudited) and September 30, 2004

   3
             

Unaudited condensed consolidated statements of operations – Three – and Nine-months ended June 30, 2005 and 2004

   4
             

Unaudited condensed consolidated statements of cash flows – Nine-months ended June 30, 2005 and 2004

   5
             

Notes to unaudited condensed consolidated financial statements

   6
          Item 2.  

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

   9
          Item 3.  

Quantitative and Qualitative Disclosure of Market Risk

   11
          Item 4.  

Controls and Procedures

   12

Part II. Other Information

    
          Item 5.  

Other Information

   13
          Item 6.  

Exhibits and Reports on Form 8-K

   13

Signatures

   14

 

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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 per share data)

 

     June 30
2005


    September 30,
2004


 
     (Unaudited)        
ASSETS             

Current assets:

                

Cash and cash equivalents

   $ 923     $ 550  

Marketable securities at market value (Cost $25,000)

     25,323       —    

Accounts receivable, less allowance for doubtful accounts of $959 ($1,214 at September 30, 2004)

     3,648       2,401  

Other receivables

     170       120  

Inventories, net

     18,486       16,944  

Deferred income taxes

     602       602  

Prepaid expenses

     1,100       1,578  
    


 


Total current assets

     50,252       22,195  

Property and equipment, net

     8,413       11,317  

Assets held for sale

     5,401       5,449  

Other assets

     552       3,851  
    


 


Total assets

   $ 64,618     $ 42,812  
    


 


LIABILITIES AND SHAREHOLDERS’ EQUITY                 

Current liabilities:

                

Accounts payable

   $ 3,776     $ 3,477  

Customer deposits

     455       1,099  

Income and other taxes payable

     756       4,372  

Accrued expenses

     2,962       9,489  
    


 


Total current liabilities

     7,949       18,437  

Long-term debt

     —         5,701  

Deferred income taxes

     10,501       71  

Other liabilities

     —         3,309  
    


 


Total liabilities

     18,450       27,518  
    


 


Commitments and contingencies

                

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; 7,276,870 shares and 7,093,470 shares issued at June 30, 2005 and September 30, 2004, respectively

     728       709  

Class B stock, par value $.10 per share; 6,000,000 shares authorized; 1,734,998 shares and 1,878,398 shares issued at June 30, 2005 and September 30, 2004, respectively

     173       188  

Capital in excess of par value

     11,765       11,467  

Retained earnings

     36,892       10,747  

Accumulated other comprehensive income (loss)

     (1,591 )     (6,018 )

Subscription receivable from officer

     (95 )     (95 )

Common stock in treasury, 179,400 shares at cost

     (1,704 )     (1,704 )
    


 


Total shareholders’ equity

     46,168       15,294  
    


 


     $ 64,618     $ 42,812  
    


 


 

See notes to condensed consolidated financial statements.

 

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Table of Contents

GENCOR INDUSTRIES, INC.

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share data)

 

    

Three Months Ended

June 30,


   

Nine Months Ended

June 30,


 
     2005

    2004

    2005

    2004

 

Net revenue

   $ 14,846     $ 12,407     $ 39,902     $ 42,816  

Costs and expenses:

                                

Production costs

     11,478       8,573       30,162       29,764  

Product engineering and development

     452       454       1,465       1,411  

Selling, general and administrative

     2,485       2,419       6,964       7,490  
    


 


 


 


       14,415       11,446       38,591       38,665  

Operating income

     431       961       1,311       4,151  

Other income (expense):

                                

Interest income

     25       3       81       14  

Interest expense

     (19 )     (29 )     (142 )     (131 )

Income from Investees

     6,964       —         34,346       —    

Increase in value of marketable securities

     446       —         323       —    

Miscellaneous

     19       11       56       129  
    


 


 


 


       7,435       (15 )     34,664       12  
    


 


 


 


Income before income taxes

     7,866       946       35,975       4,163  

Income taxes

     210       302       9,830       1,530  
    


 


 


 


Net income

   $ 7,656     $ 644     $ 26,145     $ 2,633  
    


 


 


 


Basic and diluted earnings per common share:

                                

Basic earnings per share

   $ .87     $ .07     $ 2.97     $ .30  
    


 


 


 


Diluted earnings per share

   $ .77     $ .07     $ 2.73     $ .28  
    


 


 


 


 

See notes to 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,


 
     2005

    2004

 

Cash flows from operations:

                

Net income

   $ 26,145     $ 2,633  

Adjustments to reconcile net income to cash provided (used) by operations:

                

Marketable securities

     (25,323 )     —    

Deferred income taxes

     10,430       (2,300 )

Depreciation and amortization

     610       619  

Income from investees

     (34,346 )     —    

Provision for allowance for doubtful accounts

     (255 )     260  

Change in assets and liabilities:

                

Accounts receivable

     (992 )     (221 )

Other receivables

     (50 )     (190 )

Inventories

     (1,542 )     1,104  

Prepaid expenses

     478       620  

Other assets

     —         27  

Accounts payable

     928       21  

Customer deposits

     (644 )     138  

Income and other taxes payable

     (2,262 )     623  

Accrued expenses

     (816 )     1,029  
    


 


Total adjustments

     (53,784 )     1,730  
    


 


Cash provided by (used for) operations

     (27,639 )     4,363  
    


 


Cash flows from (used for) investing activities:

                

Stock options exercised

     301       17  

Distributions from unconsolidated investees

     34,346       —    

Capital expenditures

     (1,063 )     (348 )

Proceeds from assets held for sale

     48       —    
    


 


Cash from (used for) investing activities

     33,632       (331 )
    


 


Cash flows used for financing activities:

                

Net repayment of debt

     (5,701 )     (4,515 )
    


 


Cash provided (used) for financing activities

     (5,701 )     (4,515 )
    


 


Effect of exchange rate changes on cash

     81       59  
    


 


Net increase (decrease) in cash

     373       (424 )

Cash and cash equivalents at:

                

Beginning of period

     550       734  
    


 


End of period

   $ 923     $ 310  
    


 


 

See notes to 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, 2005 are not necessarily indicative of the results that may be expected for the year ending September 30, 2005.

 

The balance sheet at September 30, 2004 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, 2004.

 

Note 2 – Marketable Securities

 

Marketable securities are categorized as trading securities and stated at market value. Market value is determined using the quoted closing or latest bid prices. Realized gains and losses on investment transactions are determined by specific identification and are recognized as incurred in the statements of operations. Net unrealized gains and losses are reported in the statements of operations and represent the change in the market value of investment holdings during the reporting period.

 

Note 3 – Inventories

 

The components of inventory consist of the following:

 

     June 30,
2005


   September 30,
2004


Raw materials

   $ 7,640    $ 7,294

Work in process

     5,037      4,574

Finished goods

     4,565      4,083

Used equipment

     1,244      993
    

  

     $ 18,486    $ 16,944
    

  

 

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Note 4 – 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,


(in thousands)

 

   2005

   2004

   2005

   2004

Net income

   $ 7,656    $ 644    $ 26,145    $ 2,633
    

  

  

  

Denominator:

                           

Weighted average shares outstanding

   $ 8,832    $ 8,684    $ 8,817    $ 8,683

Effect of dilutive stock options

     1,089      991      749      738
    

  

  

  

Denominator for diluted EPS computation

   $ 9,921    $ 9,675    $ 9,566    $ 9,421
    

  

  

  

Per common share:

                           

Basic:

                           
    

  

  

  

Net income

   $ 0.87    $ 0.07    $ 2.97    $ 0.30
    

  

  

  

Diluted:

                           
    

  

  

  

Net income

   $ 0.77    $ 0.07    $ 2.73    $ 0.28
    

  

  

  

 

Note 5 – Comprehensive Income (Loss)

 

Total comprehensive income for the three-and nine-months ended June 30, 2005 was $7,623 and $26,226 respectively, which compares to the total comprehensive income for the three- and nine- months ended June 30, 2004 of $634 and $2,680, 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.

 

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Note 6 – Income From Investees

 

The Company owns a 45% interest in Carbontronics LLC and a 25% interest in Carbontronics Fuels LLC and Carbontronics II LLC. These interests were earned as part of the value of risk on 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 fiscal 2004, and did receive distributions of $13,428 and $1,526, during 2003 and 2002 respectively.

 

In 2003, the Company was notified by its investee General Partner that the income tax returns for its synthetic fuel producing partnership were being audited. As previously reported, the Limited Partners may declare a “Tax Event” and suspend further distributions indefinitely. The Company was informed that the Limited Partners had declared a “Tax Event” and therefore future distributions had ceased.

 

On January 5, 2005, the Company was informed that the IRS had concluded its examination of the investees with no material adverse findings. As a result, distributions suspended since August of 2003 resumed and the Company received distributions of $6,964 and $34,346, respectively, for the three- and nine- months ended June 30, 2005. These distributions are subject to state and Federal income taxes.

 

Future benefits from our synthetic fuel investments depend on whether the production from these plants will continue to qualify for tax credits under Section 29 of the Internal Revenue Code; the ability to economically produce and market the synthetic fuel produced by these plants; future IRS reviews, and the world price of crude oil (as per the provisions of Section 29 of the IRS Code, if the average price of crude oil reaches a certain level the tax credits will terminate). The recent escalation in oil prices raise serious doubt on the continued availability of tax credits under Section 29 for the future. If oil prices remain at the current levels or increase, the tax credits could phase-out or terminate. The existing tax credit legislation is scheduled to expire at the end of the calendar year 2007. Any one of the above eventualities may interrupt, reduce, or terminate further distributions.

 

Note 7 – Discontinued Operations

 

On June 23, 2005, the assets of our discontinued operation in Brazil were disposed of with all proceeds used to pay liens and claims against the property. The net assets were fully reserved in 2001 when the other assets of the discontinued operation were sold. Other Assets of $3.2 million, Property and Equipment of $3.5 million, Accounts Payable, Income and Other Taxes Payable and Accruals of $2.9 million, Other Liabilities of $3.3 million, and Accumulated Translation Loss of $4.3 million were charged to the impairment reserve with no resulting gain or loss on the disposition.

 

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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 quarters ended June 30, 2005 and 2004 were $14.8 million and $12.4 million, respectively. Domestic sales during the third quarter of fiscal 2005 were $14.5 million reflecting an increase of $2.3 million from year ago levels. Net sales for the nine-months ended June 30, 2005 and 2004 were $39.9 million and $42.8 million, respectively. Domestic sales during the nine- months of fiscal 2005 were $38.9 million reflecting a decrease of $3.0 million from year ago levels. Domestic sales for the nine-months were lower than the prior year’s due to the timing of finalizing certain orders and delays in customers obtaining required permits. The Company’s revenues are concentrated in the asphalt-related business and subject to a seasonal slow-down during the third and fourth quarters of the calendar year. Foreign sales for the three- and nine- months ended June 30, 2005 increased by $.1 million from the prior year.

 

Gross margins as a percent of net sales decreased by 8.2% during the quarter from year ago levels due to higher raw material cost, lower margins on several sales and a LIFO adjustment of $.2 million in the quarter. Gross margins as a percent of net sales decreased by 6.1% during the nine-months from year ago levels due to lower sales volumes, higher raw material costs, lower margins on several sales and a LIFO adjustment of $.3 million in the nine-months.

 

Product engineering and development costs combined with selling and administrative expenses for the nine- months have decreased from year ago levels. Selling and administrative expense decreased due to lower sales commission on lower volume.

 

The Company received no distributions in fiscal 2004 from its interest in Carbontronics LLC, Carbontronics Fuels LLC and Carbontronics II LLC. Distributions suspended since August 2003 resumed and the Company received distributions totaling $6,964 and $34,346, respectively, for the three- and nine-months ended June 30, 2005. Future distributions from these partnerships depend upon the production of these operations continuing to qualify for tax credits under Section 29 of the Internal Revenue Code and the ability to economically produce and market synthetic fuel produced by the plants.

 

Interest expense for the three- months ended June 30, 2005 decreased by $10, respectively from the prior year. Interest expense for the nine- months ended June 30, 2005 increased by $11, respectively from the previous year, reflecting an increase in interest rates, an increase in debt balance as of December 31, 2004 and a lower balance during the second and third fiscal quarters.

 

Income tax expense decreased by $.1 million and increased by $8.3 million for the three- and nine- month period, respectively from the previous year, reflecting the increase in pre-tax income. The tax provision for the quarter and nine- months ended June 30, 2005, includes a reduction of $2.5 million in the tax contingency reserve as a result of resolution of prior year filings and expiration of the statute of limitations. Deferred taxes are a result of Income from Investees which is deferred for income tax purposes until the next fiscal year

 

In June 2005, the assets of our discontinued operation in Brazil were disposed of with all proceeds used to pay liens and claims against the property. The net assets were fully reserved in 2001 when the other assets of the discontinued operation were sold. Other Assets of $3.2 million, Property and Equipment of $3.5 million, Accounts Payable, Income and Other Taxes Payable and Accruals of $2.9 million, Other Liabilities of $3.3 million, and Accumulated Translation Loss of $4.3 million were charged to the impairment reserve with no resulting gain or loss on the disposition.

 

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Table of Contents

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, 2005, the Company had no monies borrowed on the facility. The facility includes a $2 million limit on letters of credit. At June 30, 2005, the Company had $.3 million of letters of credit outstanding. The interest rate at June 30, 2005, is at prime less .25% (6.00%) 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 the Company’s assets are pledged as security under the Agreement.

 

Long term bank debt was paid in full and the Company invested $25 million in marketable securities as a result of the positive cash flow for the nine-months ended June 30, 2005.

 

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.

 

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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 June 30, 2005, the Company had no debt outstanding. Under the Credit Agreement, the Company’s borrowings will bear interest at variable rates based upon the prime rate.

 

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Item 4. Controls and Procedures

 

The Company’s Chairman 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 during our most recently completed fiscal quarter.

 

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Part II. Other Information

 

Item 5. Other Information

 

The Company’s next Annual Meeting of Shareholders will be held on September 12, 2005 at 9:00 a.m. local time, at the Company’s Corporate Offices, 5201 North Orange Blossom Trail, Orlando, Florida. The record date for the meeting has been set for August 22, 2005.

 

On August 11, 2005, the Compensation Committee approved a bonus for the Chairman of the Company. The bonus will be ¾ of 1% of the income received by the Company from its synthetic fuels investees during and for the fiscal year ending September 30, 2005.

 

Item 6. Exhibits and Reports on Form 8-K

 

(a) Exhibits

 

10.12   First Amendment to the Stock Option Plan Agreement.
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.

 

May 20, 2005- Gencor Receives Cash Distribution from Investees.

 

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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 15, 2005   By:  

/s/ E.J. Elliott


        E.J. Elliott, Chairman and Chief Executive Officer
August 15, 2005   By:  

/s/ Scott W. Runkel


        Scott W. Runkel, Chief Financial Officer

 

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