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GENCOR INDUSTRIES INC - Quarter Report: 2010 December (Form 10-Q)

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

GENCOR INDUSTRIES, INC.

Index

 

             Page  

Part I.

 

Financial Information

  
 

Item 1.

 

Financial Statements

  
   

Condensed Consolidated Balance Sheets – December 31, 2010 (Unaudited) and September 30, 2010

     3   
   

Condensed Consolidated Statements of Operations – Quarters ended December  31, 2010 and 2009 (Unaudited)

     4   
   

Condensed Consolidated Statements of Cash Flows – Quarters ended December  31, 2010 and 2009 (Unaudited)

     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.

 

Quantitative and Qualitative Disclosures about Market Risk

     13   
 

Item 4.

 

Controls and Procedures

     13   

Part II.

 

Other Information

  
 

Item 6.

 

Exhibits

     14   

Signatures

       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.

 

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Table of Contents

Part I. Financial Information

GENCOR INDUSTRIES, INC.

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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GENCOR INDUSTRIES, INC.

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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GENCOR INDUSTRIES, INC.

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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GENCOR INDUSTRIES, INC.

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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Part II. Other Information

 

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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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.

/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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