GENCOR INDUSTRIES INC - Quarter Report: 2010 December (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2010
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: 001-11703
GENCOR INDUSTRIES, INC.
| 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated Filer | ¨ | |||
| Non-accelerated Filer | ¨ (Do not check if a smaller reporting company) | Smaller Reporting Company | x | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class |
Outstanding at February 11, 2011 | |
| Common stock, $.10 par value |
8,008,632 shares | |
| Class B stock, $.10 par value |
1,509,238 shares |
Table of Contents
Index
| Page | ||||||||
| Part I. |
||||||||
| Item 1. |
Financial Statements |
|||||||
| Condensed Consolidated Balance Sheets – December 31, 2010 (Unaudited) and September 30, 2010 |
3 | |||||||
| 4 | ||||||||
| 5 | ||||||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) |
6 | |||||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
9 | ||||||
| Item 3. |
13 | |||||||
| Item 4. |
13 | |||||||
| Part II. |
||||||||
| Item 6. |
14 | |||||||
| 15 | ||||||||
Introductory Note: Caution Concerning Forward-Looking Statements
This Form 10-Q Report and the Company’s other communications and statements may contain “forward-looking statements,” including statements about the Company’s beliefs, plans, objectives, goals, expectations, estimates, projections and intentions. These statements are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond the Company’s control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements. All forward-looking statements, by their nature, are subject to risks and uncertainties. The Company’s actual future results may differ materially from those set forth in its forward-looking statements. For information concerning these factors and related matters, see Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Report, and the following sections of the Company’s Annual Report on Form 10-K for the year ended September 30, 2010: (a) “Risk Factors” in Part I, and (b) “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II. However, other factors besides those referenced could adversely affect the Company’s results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by the Company herein speak as of the date of this Report. The Company does not undertake to update any forward-looking statement, except as required by law.
Unless the context otherwise indicates, all references in this Report to the “Company,” “Gencor,” “we,” “us,” or “our,” or similar words are to Gencor Industries, Inc. and its subsidiaries.
2
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Condensed Consolidated Balance Sheets
| December 31, 2010 |
September 30, 2010 |
|||||||
| (Unaudited) | ||||||||
| ASSETS |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 1,869,000 | $ | 3,004,000 | ||||
| Marketable securities at fair value (cost $70,293,000 at December 31, 2010 and $69,501,000 at September 30, 2010) |
76,474,000 | 73,327,000 | ||||||
| Account receivable, less allowance for doubtful accounts of $1,482,000 at December 31, 2010 and $1,803,000 at September 30, 2010 |
1,487,000 | 1,979,000 | ||||||
| Costs and estimated earnings in excess of billings |
2,480,000 | 580,000 | ||||||
| Inventories, net |
18,022,000 | 17,341,000 | ||||||
| Deferred income taxes |
— | 660,000 | ||||||
| Prepaid expenses |
2,168,000 | 2,205,000 | ||||||
| Total Current Assets |
102,500,000 | 99,096,000 | ||||||
| Property and equipment, net |
7,717,000 | 7,773,000 | ||||||
| Other assets |
356,000 | 358,000 | ||||||
| Total Assets |
$ | 110,573,000 | $ | 107,227,000 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
| Current Liabilities: |
||||||||
| Account payable |
$ | 2,085,000 | $ | 1,373,000 | ||||
| Customer deposits |
2,897,000 | 1,478,000 | ||||||
| Accrued expenses |
3,232,000 | 3,323,000 | ||||||
| Deferred income taxes |
200,000 | — | ||||||
| Total Current Liabilities |
8,414,000 | 6,174,000 | ||||||
| Deferred and other income taxes |
2,525,000 | 2,525,000 | ||||||
| Total Liabilities |
10,939,000 | 8,699,000 | ||||||
| Commitments and contingencies |
||||||||
| Shareholder’s 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; |
||||||||
| 8,103,632 shares issued and 8,008,632 shares outstanding at December 31, 2010, and at September 30, 2010 |
810,000 | 810,000 | ||||||
| Class B Stock, par value $.10 per share; 6,000,000 shares authorized; |
||||||||
| 1,509,238 shares issued and outstanding |
151,000 | 151,000 | ||||||
| Capital in excess of par value |
10,542,000 | 10,542,000 | ||||||
| Company shares held in treasury, at cost; 95,000 shares |
(738,000 | ) | (738,000 | ) | ||||
| Retained earnings |
88,869,000 | 87,763,000 | ||||||
| Total Shareholders’ Equity |
99,634,000 | 98,528,000 | ||||||
| Total Liabilities and Shareholders’ Equity |
$ | 110,573,000 | $ | 107,227,000 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
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Unaudited Condensed Consolidated Statements of Operations
(Unaudited)
| For the Quarters
Ended December 31, |
||||||||
| 2010 | 2009 | |||||||
| Net revenue |
$ | 7,785,000 | $ | 11,070,000 | ||||
| Costs and expenses: |
||||||||
| Production costs |
6,809,000 | 9,443,000 | ||||||
| Product engineering and development |
529,000 | 538,000 | ||||||
| Selling, general and administrative |
2,103,000 | 2,440,000 | ||||||
| 9,441,000 | 12,421,000 | |||||||
| Operating loss |
(1,656,000 | ) | (1,351,000 | ) | ||||
| Other income (expenses): |
||||||||
| Interest and dividend income, net of fees |
609,000 | 635,000 | ||||||
| Income from investees |
— | 163,000 | ||||||
| Realized and unrealized gains (losses) on marketable securities |
2,538,000 | 168,000 | ||||||
| Other |
19,000 | 29,000 | ||||||
| 3,166,000 | 995,000 | |||||||
| Income (loss) before income tax expense (benefit) |
1,510,000 | (356,000 | ) | |||||
| Income tax expense (benefit) |
405,000 | (132,000 | ) | |||||
| Net Income (Loss) |
$ | 1,105,000 | $ | (224,000 | ) | |||
| Basic Income (Loss) per Common Share: |
||||||||
| Net income (loss) per share |
$ | 0.12 | $ | (0.02 | ) | |||
| Diluted Income (Loss) per Common Share: |
||||||||
| Net income (loss) per share |
$ | 0.12 | $ | (0.02 | ) | |||
See accompanying Notes to Condensed Consolidated Financial Statements
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Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Quarter
Ended December 31, |
||||||||
| 2010 | 2009 | |||||||
| Cash flows from operations: |
||||||||
| Net income (loss) |
$ | 1,105,000 | $ | (224,000 | ) | |||
| Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: |
||||||||
| Purchases of marketable securities |
(5,047,000 | ) | (17,715,000 | ) | ||||
| Proceeds from sale and maturity of marketable securities |
4,768,000 | 15,690,000 | ||||||
| Change in fair value of marketable securities |
(2,868,000 | ) | 325,000 | |||||
| Deferred income taxes |
860,000 | (260,000 | ) | |||||
| Depreciation and amortization |
191,000 | 222,000 | ||||||
| Income from investees |
— | (163,000 | ) | |||||
| Provision for doubtful accounts |
90,000 | 120,000 | ||||||
| Change in assets and liabilities: |
||||||||
| Accounts receivable |
403,000 | (966,000 | ) | |||||
| Costs and estimated earnings in excess of billings |
(1,899,000 | ) | (72,000 | ) | ||||
| Inventories |
(681,000 | ) | 1,139,000 | |||||
| Prepaid expenses |
37,000 | 924,000 | ||||||
| Account payable |
712,000 | 118,000 | ||||||
| Customer deposits |
1,419,000 | 2,656,000 | ||||||
| Accrued expenses and other |
(90,000 | ) | 293,000 | |||||
| Total adjustments |
(2,105,000 | ) | 2,311,000 | |||||
| Cash flows provided (used) by operating activities |
(1,000,000 | ) | 2,087,000 | |||||
| Cash flows provided (used) by investing activities: |
||||||||
| Distributions from unconsolidated investees |
— | 163,000 | ||||||
| Capital expenditures |
(135,000 | ) | — | |||||
| Cash flows provided (used) by investing activities |
(135,000 | ) | 163,000 | |||||
| Net increase (decrease) in cash and cash equivalents |
(1,135,000 | ) | 2,250,000 | |||||
| Cash and cash equivalents at: |
||||||||
| Beginning of period |
3,004,000 | 3,677,000 | ||||||
| End of period |
$ | 1,869,000 | $ | 5,927,000 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 notes 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 quarter ended December 31, 2010 are not necessarily indicative of the results that may be expected for the year ending September 30, 2011.
The accompanying Condensed Consolidated Balance Sheet at September 30, 2010 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and notes thereto included in the Gencor Industries, Inc. Annual Report on Form 10-K for the year ended September 30, 2010.
Note 2 - Marketable Securities
Marketable securities are categorized as trading securities and stated at fair value. Fair 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 fair value of investment holdings during the period.
Note 3 - Fair Value Measurements
The fair value of financial instruments is presented based upon a hierarchy of levels that prioritizes the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
If available, quoted market prices are used to value investments. Municipal bonds are valued at the closing price reported by the most active market on which the individual securities are traded (Level 1).
The following tables set forth, by level, within the fair value hierarchy, the Company’s assets measured at fair value as of December 31, 2010:
| Fair Value Measurements | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Equities |
$ | 31,907,000 | $ | — | $ | — | $ | 31,907,000 | ||||||||
| Corporate & Municipal Bonds |
42,781,000 | — | — | 42,781,000 | ||||||||||||
| Cash & Money Funds |
1,786,000 | — | — | 1,786,000 | ||||||||||||
| $ | 76,474,000 | $ | — | $ | — | $ | 76,474,000 | |||||||||
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Unrealized gains as of December 31, 2010 were $5,783,000. Estimated interest accrued on the corporate and municipal bond portfolio was $399,000 at December 31, 2010.
The following tables set forth, by level, within the fair value hierarchy, the Company’s assets measured at fair value as of September 30, 2010:
| Fair Value Measurements | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Equities |
$ | 28,829,000 | $ | — | $ | — | $ | 28,829,000 | ||||||||
| Corporate & Municipal Bonds |
43,229,000 | — | — | 43,229,000 | ||||||||||||
| Cash & Money Funds |
1,269,000 | — | — | 1,269,000 | ||||||||||||
| $ | 73,327,000 | $ | — | $ | — | $ | 73,327,000 | |||||||||
Unrealized gains as of September 30, 2010 were $3,238,000. Estimated interest accrued on the corporate and municipal bond portfolio was $588,000 at September 30, 2010.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term nature of these items.
Note 4 - Inventories
Net inventories at December 31, 2010 and September 30, 2010 consist of the following:
| December 31, 2010 |
September 30, 2010 |
|||||||
| Raw materials |
$ | 10,709,000 | $ | 11,349,000 | ||||
| Work in process |
2,260,000 | 1,343,000 | ||||||
| Finished goods |
4,179,000 | 4,068,000 | ||||||
| Used equipment |
874,000 | 581,000 | ||||||
| $ | 18,022,000 | $ | 17,341,000 | |||||
At December 31, 2010 and September 30, 2010, cost is determined by the last-in, first-out (“LIFO”) method of computing inventories.
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Note 5 – Costs and Estimated Earnings in Excess of Billings
Costs and estimated earnings in excess of billings on uncompleted contracts as of December 31, 2010 and September 30, 2010 consist of the following:
| December 31, 2010 | September 30, 2010 | |||||||
| Costs incurred on uncompleted contracts |
$ | 3,810,000 | $ | 357,000 | ||||
| Estimated earnings |
1,303,000 | 387,000 | ||||||
| 5,113,000 | 744,000 | |||||||
| Billings to date |
2,633,000 | 164,000 | ||||||
| Costs and estimated earnings in excess of billings |
$ | 2,480,000 | $ | 580,000 | ||||
Note 6 – Earnings per Share Data
The following table sets forth the computation of basic and diluted earnings per share for the quarters ended December 31, 2010 and 2009:
| Quarter Ended December 31 |
||||||||
| 2010 | 2009 | |||||||
| Net income (loss) |
$ | 1,105,000 | $ | (224,000 | ) | |||
| Common Shares: |
||||||||
| Weighted average common shares outstanding |
9,518,000 | 9,613,000 | ||||||
| Effect of dilutive stock options |
— | — | ||||||
| Diluted shares outstanding |
9,518,000 | 9,613,000 | ||||||
| Basic: |
||||||||
| Net income (loss) per share |
$ | 0.12 | $ | (0.02 | ) | |||
| Diluted: |
||||||||
| Net income (loss) per share |
$ | 0.12 | $ | (0.02 | ) | |||
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview
Gencor Industries, Inc., (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 core products include asphalt plants, combustion systems and fluid heat transfer systems. The Company’s products are manufactured in two facilities in the United States.
Because the Company’s products are sold primarily to the highway construction industry, the business is seasonal in nature. 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. The majority of orders for the Company’s products are thus received between October and February, with a significant volume of shipments occurring prior to May. The principal factors driving demand for the Company’s products are the overall economic conditions, the level of government funding for domestic highway construction and repair, infrastructure development in emerging economies, the need for spare parts, fluctuations in the price of crude oil (liquid asphalt as well as fuel costs), and a trend towards larger plants resulting from industry consolidation.
In August 2005, the federal government passed the Safe, Accountable, Flexible and Efficient Transportation Equity Act - A Legacy for Users (“SAFETEA-LU”). This bill appropriated a multi-year guaranteed funding of $286.5 billion for federal highway, transit and safety programs that expired on September 30, 2009. On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”), which included approximately $27.5 billion for highway and bridge construction activities. The ARRA and any future legislation approved by Congress could reduce infrastructure funding levels. In addition, funding restrictions can be imposed on states that do not comply with certain federal policies. On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment (“HIRE”) Act. This law extends authorization of the surface transportation programs previously funded under SAFETEA-LU through December 31, 2010 at 2009 levels. In addition, the HIRE Act authorizes a one-time transfer of $19.5 billion from the general fund to the highway trust fund related to previously foregone interest payments. On December 22, 2010, President Obama signed into law the Continuing Appropriations and Surface Transportation Extensions Act, 2011 extending funding for federal surface transportation programs authorized under SAFETEA-LU through March 4, 2011. The temporary extension was included in a Continuing Resolution passed by Congress to provide short-term appropriations at fiscal year 2010 funding levels for federal agencies and departments. This is the sixth extension of SAFETEA-LU, which expired September 30, 2009. Although this should help stabilize the federal highway program, the Company believes a new multi-year highway program would have the greatest positive impact on the road construction industry and allow its customers to plan and execute longer term projects. The Company believes that its customers are waiting on the states to move forward with potential projects as their purchasing decisions are significantly influenced by the federal government’s legislation on federal road building funding. The Company believes any new funding will have a positive impact on the Company’s financial performance, although the magnitude of that improvement cannot be determined.
Economic downturns like the one currently being experienced generally result in reduced purchasing within the Company’s served markets and thus have a direct impact on sales and tend to increase the pricing pressures on the Company’s products resulting in lower pricing and margins. The Company’s typical sales of asphalt plants are in the $2 to $4 million range and may require the Company’s customers to obtain financing. The current state of the financial markets and tightening of credit sources have had an adverse impact on the Company’s customers towards purchasing new equipment. On the positive side, the reduced value of the US dollar has resulted in more interest from international markets.
In addition to government funding and the overall economic conditions, fluctuations in the price of oil, which is a major component of asphalt mix, may affect the Company’s financial performance. An increase in the price of oil increases the cost of liquid asphalt and could therefore decrease demand for asphalt and certain of the Company’s products. The Company does not currently foresee the fluctuations in oil prices having a significant impact on its financial performance.
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Steel is a major component used in manufacturing the Company’s equipment. Steel prices were at historically high levels during 2008 and the Company increased sales prices during 2008 to offset the rising steel costs. During the fourth quarter of 2008, steel prices retreated sharply from their 2008 highs and continued the downward trend through the first half of 2009 with subsequent moderate increases during the remainder of 2009 and in 2010. In the current economy and competitive environment, the Company does not expect to be able to raise prices should steel costs run up again in the current year. Thus, financial results could be negatively affected.
For the long term, the Company believes the strategy of continuing to invest heavily in product engineering and development and its focus on delivering a high-quality product and superior service will strengthen the Company’s market position when demand for its products rebound. In response to the short-term outlook, the Company has taken aggressive actions to conserve cash, right size its operations and cost structure, and will continue to do so based on its forecasts. These actions included adjustments to workforce and staffing, reduced purchases of raw materials and reductions in selling, general, and administrative expenses. The Company continues to review its internal processes to identify efficiencies and cost reductions and will continue scrutinizing its relationships with external suppliers to ensure the Company is achieving the highest-quality products and services at the most competitive cost.
Results of Operations
Quarter Ended December 31, 2010 versus December 31, 2009
Net revenues for the quarters ended December 31, 2010 and 2009 were $7,785,000 and $11,070,000, respectively. During the quarter ended December 31, 2010, the Company noted that the historical timing of asphalt equipment orders had been pushed back as its customers awaited the outcome of the mid-term elections. This impacted the production schedule and resulted in lower revenues in the quarter. The Company’s operations are concentrated in the asphalt-related business and subject to a seasonal slow-down during the third and fourth quarters of the calendar year.
As a percent of sales, gross profit margins decreased from 14.7% in the quarter ended December 30, 2009 to 12.5% in the quarter ended December 30, 2010. Gross margins decreased in 2010 primarily due to reduced absorption related to the decrease in production volumes.
Product engineering and development expenses decreased $9,000 in the quarter ended December 31, 2010 as compared to the quarter ended December 31, 2009. Selling, general and administrative expenses decreased $337,000 in the quarter ended December 31, 2010 compared to the quarter ended December 31, 2009 due to reduced headcount and lower commission’s expense related to decreased revenues.
The Company had an operating loss of $(1,656,000) for the quarter ended December 31, 2010 versus an operating loss of $(1,351,000) for the quarter ended December 31, 2009. The increased operating loss was primarily due to the reduction in revenues.
For the quarter ended December 31, 2010, net investment interest and dividend income, net of fees, from the investment portfolio was $609,000 as compared to $635,000 in the quarter ended December 31, 2009. The net realized and unrealized gains on marketable securities were $2,538,000 for the quarter ended December 31, 2010 versus net realized and unrealized gains of $168,000 for the quarter ended December 31, 2009.
The effective income tax rate for the quarters ended December 31, 2010 and December 31, 2009 was 26.8% and a benefit of 37.1%, respectively. The tax rate in the quarter ended December 31, 2010 was impacted by the operating losses in the quarter along with tax exempt interest income.
Liquidity and Capital Resources
The Company generates capital resources through operations and returns on investments.
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The Company had previously maintained a Revolving Credit and Security Agreement (“Credit Agreement”) with PNC Bank, N.A. which expired on April 30, 2010. The Company does not currently require a credit facility but continues to review and evaluate its needs and options for such a facility.
The Company had no long-term or short-term debt outstanding at December 31, 2010 or September 30, 2010. In March 2010 the Company replaced its outstanding letters of credit by funding $975,000 in cash deposits at insurance companies to cover related collateral needs.
As of December 31, 2010, the Company had $1,869,000 in cash and cash equivalents, and $76,474,000 in marketable securities. The marketable securities are invested through a professional investment advisor. The securities may be liquidated at any time into cash and cash equivalents.
The Company’s working capital (defined as current assets less current liabilities) was equal to $94.1 million at December 31, 2010 and $92.9 million at September 30, 2010. For the quarter ended December 31, 2010, inventory, costs and estimated earnings in excess of billings, and customer deposits increased as the Company received orders for several asphalt plants during the quarter ended December 31, 2010 and began manufacturing for delivery during the first quarter of calendar 2011. Accounts payable increased with the increased inventory.
Cash used in operations during the quarter ended December 31, 2010 was $1,000,000. Cash flows from investing activities during the quarter ended December 31, 2010 were related to capital expenditures. There were no cash disbursements or receipts related to financing activities during the quarter ended December 31, 2010.
Seasonality
The Company’s operations are concentrated in the asphalt-related business and are subject to a seasonal slow-down during the third and fourth quarters of the calendar year. This slow-down often results in lower reported sales and earnings and/or losses during the first and fourth quarters of each fiscal year ended September 30.
Forward-Looking Information
This Report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and 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.
For information concerning these factors and related matters, see the following sections of the Company’s Annual Report on Form 10-K for the year ended September 30, 2010: (a) “Risk Factors” in Part I and (b) “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II. However, other factors besides those referenced could adversely affect the Company’s results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by the Company herein speak as of the date of this Report. The Company does not undertake to update any forward-looking statements, except as required by law.
Critical Accounting Policies, Estimates and Assumptions
The Company believes the following discussion addresses its most critical accounting policies, which are those that are most important to the portrayal of the 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 included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2010, “Accounting Policies.”
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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. The Company 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.
Revenues
Revenues from contracts for the design and manufacture of certain custom equipment are recognized under the percentage-of-completion method. 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. Revenues from all other sales are recorded as the products are shipped or service is performed.
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.
The estimated costs of product warranties are charged to production costs as revenue is recognized.
Investments
The Company marks to market all trading securities and records any unrealized gains or losses as income or loss in the current period.
Off-Balance Sheet Arrangements
None
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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. 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 may 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 any future variable rate debt is to limit the impact on earnings and cash flow and reduce overall borrowing costs.
At December 31, 2010 and September 30, 2010 the Company had no debt outstanding. The Company’s marketable securities are invested primarily in stocks and corporate and municipal bonds through a professional investment advisor. Investment securities are exposed to various risks such as interest rate, market and credit. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of securities, it is possible that changes in these risk factors could have an adverse material impact on the Company’s results of operations or equity.
The Company’s 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.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Principal Financial and Accounting Officer evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e)) under the Exchange Act as of the end of the period covered by this Report. Based upon that evaluation, the Chief Executive Officer and the Principal Financial and Accounting Officer concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures are effective.
Because of inherent limitations, the Company’s disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of such disclosure controls and procedures are met and no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company has been detected.
Changes in Internal Control over Financial Reporting
The Company’s management, including the Chief Executive Officer and Principal Financial and Accounting Officer, has reviewed the Company’s internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2010 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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| Item 6. | Exhibits |
| (a) | Exhibits |
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as amended | |
| 31.2 | Certification of President and Principal Financial and Accounting Officer Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as amended | |
| 32 | Certifications of Chief Executive Officer and Principal Financial and Accounting Officer Pursuant to 18 U. S. C. Section 1350. | |
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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. |
| /s/ E. J. Elliott |
| E. J. Elliott |
| Chairman and Chief Executive Officer |
| February 14, 2011 |
| /s/ Marc G. Elliott |
| Marc G. Elliott |
| President and Principal Financial and Accounting Officer |
| February 14, 2011 |
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