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

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE PERIOD ENDED March 31, 2005

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 per share data)

See notes to condensed consolidated financial statements.

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GENCOR INDUSTRIES, INC.

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share data)

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- and six- months ended March 31, 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 – Inventories

The components of inventory consist of the following:

Note 3 – Earnings Per Share Data

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

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Note 4 – Comprehensive Income (Loss)

The total comprehensive income (loss) for the three-and six- months ended March 31, 2005 was $18,820 and $18,603, respectively, compared to the total comprehensive income for the three- and six-months ended March 31, 2004 of $1,765 and $2,035, 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

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, nor the quarter ended December 31, 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 are 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 have 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 totaling $27,382 during the second quarter in fiscal 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; and the ability to economically produce and market the synthetic fuel produced by these plants; future IRS reviews, and as well the world price of crude oil, as per the provisions of the SEC 29 IRS Code, if the average price of crude oil reaches a certain level the tax credits will terminate. Any one of the above eventualities may interrupt, reduce, or terminate further distributions.

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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 March 31, 2005 and 2004 were $15.9 million and $18.5 million, respectively. Domestic sales during the second quarter of fiscal 2005 were $15.6 million reflecting a decrease of $2.5 million from year ago levels. Domestic sales were lower than the prior year’s quarter 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 were unchanged from the prior year.

Gross margins as a percent of net sales decreased by 4.9% during the six-months ended March 31, 2005 from year ago levels due to lower sales volumes, lower margins on several sales and a LIFO adjustment of $.2 million in the quarter.

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

Other Income (Expense)

Interest expense for the three- and six- month period of fiscal 2005 decreased by $13 and increased by $20, 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 quarter.

Income tax expense increased by $8.7 million and $8.4 for the three- and six- month period, respectively from the previous year, reflecting the increase in pre-tax income. Deferred taxes are a result of Income from Investees which is deferred for income tax purposes until the next fiscal year.

The Company received no distributions in fiscal 2004, nor the quarter ended December 31, 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 $27,382 during the second quarter in fiscal 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.

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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 March 31, 2005, the Company had no monies borrowed on the facility. The facility includes a $2 million limit on letters of credit. At March 31, 2005, the Company had $.3 million of letters of credit outstanding. The interest rate at March 31, 2005, is at prime less .25% (5.50%) 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.

Long term bank debt was paid in full and the Company invested $18 million in marketable securities as a result of the positive cash flow for the quarter ended March 31, 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 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 March 31, 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 subsequent to the evaluation date.

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Part II. Other Information

Item 6. Exhibits and Reports on Form 8-K

January 6, 2005- Anticipation of Cash Distributions 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.

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