GENCOR INDUSTRIES INC - Quarter Report: 2020 March (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

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 incorporation or organization)		(IRS 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)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act

 

Title of Each Class		Trading Symbol(s)		Name of Exchange on which registered
Common Stock ($.10 Par Value)		GENC		NASDAQ Global Market

 

 

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 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  ☑    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☑    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☐		Accelerated Filer		☑
Non-accelerated Filer		☐		Smaller Reporting Company		☑
Emerging Growth Company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☑

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 May 1, 2020
Common stock, $.10 par value		12,277,337 shares
Class B stock, $.10 par value		2,308,857 shares

 

 

 

GENCOR INDUSTRIES, INC.

 

Index				Page
Part I.		Financial Information
		Item 1.   Financial Statements
		Condensed Consolidated Balance Sheets – March  31, 2020 (Unaudited) and September 30, 2019			4
		Condensed Consolidated Statements of Operations – Quarters and Six Months Ended March 31, 2020 and 2019 (Unaudited)			5
		Condensed Consolidated Statements of Shareholders’ Equity – Six Months Ended March 31, 2020 and 2019 (Unaudited)			6
		Condensed Consolidated Statements of Cash Flows – Six Months Ended March  31, 2020 and 2019 (Unaudited)			7
		Notes to Condensed Consolidated Financial Statements (Unaudited)			8
		Item  2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
		Item  3.   Quantitative and Qualitative Disclosures about Market Risk			20
		Item 4.   Controls and Procedures			20
Part II.		Other Information
		Item 1A.   Risk Factors			21
		Item 6.   Exhibits			23
Signatures					24

 

2

Caution Concerning Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Quarterly Report”) and the Company’s other communications and statements may contain 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”), 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. 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, demand for the Company’s products, the duration and scope of the coronavirus (“COVID-19”) pandemic, actions governments, and businesses take in response to the COVID-19 pandemic, including mandatory business closures; the impact of the pandemic and actions taken on regional economies; the pace of recovery when the COVID-19 pandemic subsides. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements.

For information concerning these factors and related matters, see Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Part II, Item 1A, “Risk Factors” in this Quarterly Report, and the following sections of the Company’s Annual Report on Form 10-K for the year ended September 30, 2019: (a) Part I, Item 1A, “Risk Factors” and (b) Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. 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 Quarterly Report. The Company does not undertake to update any forward-looking statements, except as required by law.

Unless the context otherwise indicates, all references in this Quarterly Report to the “Company,” “Gencor,” “we,” “us,” or “our,” or similar words are to Gencor Industries, Inc. and its subsidiaries.

 

3

Part I. Financial Information

GENCOR INDUSTRIES, INC.

Condensed Consolidated Balance Sheets

 

		March 31, 2020				September 30, 2019
ASSETS		(Unaudited)
Current Assets:
Cash and cash equivalents		$	18,738,000			$	10,302,000
Marketable securities at fair value (cost $105,967,000 at March 31, 2020 and $104,176,000 at September 30, 2019)			102,275,000				105,322,000
Accounts receivable, less allowance for doubtful accounts of $474,000 at March 31, 2020 and $459,000 at September 30, 2019			2,366,000				1,603,000
Costs and estimated earnings in excess of billings			8,792,000				13,838,000
Inventories, net			27,063,000				25,366,000
Prepaid expenses and other current assets			2,144,000				499,000
Total Current Assets			161,378,000				156,930,000
Property and equipment, net			8,276,000				8,389,000
Other assets			53,000				53,000
Total Assets		$	169,707,000			$	165,372,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	4,380,000			$	1,907,000
Customer deposits			4,713,000				1,918,000
Accrued expenses			2,721,000				2,660,000
Total Current Liabilities			11,814,000				6,485,000
Deferred and other income taxes			509,000				3,372,000
Total Liabilities			12,323,000				9,857,000
Commitments and contingencies
Shareholders’ Equity:
Preferred stock, par value $.10 per share; 300,000 shares authorized; none issued			—				—
Common stock, par value $.10 per share; 15,000,000 shares authorized; 12,277,337 shares issued and outstanding at March 31, 2020 and September 30, 2019			1,228,000				1,228,000
Class B Stock, par value $.10 per share; 6,000,000 shares authorized; 2,308,857 shares issued and outstanding at March 31, 2020 and September 30, 2019			231,000				231,000
Capital in excess of par value			12,194,000				12,159,000
Retained earnings			143,731,000				141,897,000
Total Shareholders’ Equity			157,384,000				155,515,000
Total Liabilities and Shareholders’ Equity		$	169,707,000			$	165,372,000

See accompanying Notes to Condensed Consolidated Financial Statements

 

4

GENCOR INDUSTRIES, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

		For the Quarters Ended March 31,								For the Six Months Ended March 31,
		2020				2019				2020				2019
Net revenue		$	25,993,000			$	26,670,000			$	44,023,000			$	47,997,000
Costs and expenses:
Production costs			18,655,000				16,759,000				32,365,000				33,169,000
Product engineering and development			689,000				823,000				1,455,000				1,546,000
Selling, general and administrative			2,561,000				2,474,000				4,943,000				4,664,000
			21,905,000				20,056,000				38,763,000				39,379,000
Operating income			4,088,000				6,614,000				5,260,000				8,618,000
Other income (expense), net:
Interest and dividend income, net of fees			763,000				507,000				1,395,000				1,041,000
Net realized and unrealized gains (losses) on marketable securities			(5,670,000	)			2,204,000				(4,353,000	)			57,000
Other			—				—				(10,000	)			—
			(4,907,000	)			2,711,000				(2,968,000	)			1,098,000
Income (loss) before income tax expense (benefit)			(819,000	)			9,325,000				2,292,000				9,716,000
Income tax expense (benefit)			(164,000	)			1,865,000				458,000				1,943,000
Net income (loss)		$	(655,000	)		$	7,460,000			$	1,834,000			$	7,773,000
Basic Income (Loss) per Common Share:
Net income (loss) per share		$	(0.04	)		$	0.51			$	0.13			$	0.53
Diluted Income (Loss) per Common Share:
Net income (loss) per share		$	(0.04	)		$	0.51			$	0.12			$	0.53

See accompanying Notes to Condensed Consolidated Financial Statements

 

5

GENCOR INDUSTRIES, INC.

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

For the Six Months Ended March 31, 2020

 

		Common Stock								Class B Stock								Capital in Excess of				Retained				Total Shareholders’
		Shares				Amount				Shares				Amount				Par Value				Earnings				Equity
September 30, 2019			12,277,337			$	1,228,000				2,308,857			$	231,000			$	12,159,000			$	141,897,000			$	155,515,000
Net income			—				—				—				—				—				2,489,000				2,489,000
Stock-based compensation			—				—				—				—				18,000				—				18,000
December 31, 2019			12,277,337			$	1,228,000				2,308,857			$	231,000			$	12,177,000			$	144,386,000			$	158,022,000
Net loss			—				—				—				—				—				(655,000	)			(655,000	)
Stock-based compensation			—				—				—				—				17,000				—				17,000
March 31, 2020			12,277,337			$	1,228,000				2,308,857			$	231,000			$	12,194,000			$	143,731,000			$	157,384,000

For the Six Months Ended March 31, 2019

 

		Common Stock								Class B Stock								Capital in Excess of				Retained				Total Shareholders’
		Shares				Amount				Shares				Amount				Par Value				Earnings *				Equity *
September 30, 2018			12,252,337			$	1,225,000				2,288,857			$	229,000			$	11,862,000			$	131,701,000			$	145,017,000
Net income			—				—				—				—				—				313,000				313,000
Stock-based compensation			—				—				—				—				17,000				—				17,000
December 31, 2018			12,252,337				1,225,000				2,288,857				229,000				11,879,000				132,014,000				145,347,000
Net income			—				—				—				—				—				7,460,000				7,460,000
Stock-based compensation			—				—				—				—				18,000				—				18,000
March 31, 2019			12,252,337			$	1,225,000				2,288,857			$	229,000			$	11,897,000			$	139,474,000			$	152,825,000

See accompanying Notes to Condensed Consolidated Financial Statements

 

*	The balances as of September 30, 2018, December 31, 2018 and March 31, 2019, and the amounts for the quarter and six months ended March 31, 2019, have been adjusted to reflect the change in inventory accounting method, as described in Note 3 to the Condensed Consolidated Financial Statements.

 

6

GENCOR INDUSTRIES, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Six Months Ended March 31,
		2020				2019
Cash flows from operations:
Net income		$	1,834,000			$	7,773,000
Adjustments to reconcile net income to cash provided by operating activities:
Purchases of marketable securities			(73,393,000	)			(112,663,000	)
Proceeds from sale and maturity of marketable securities			72,181,000				113,767,000
Change in fair value of marketable securities			4,259,000				(202,000	)
Deferred income taxes			(2,863,000	)			(156,000	)
Depreciation and amortization			831,000				783,000
Provision for doubtful accounts			25,000				50,000
Stock-based compensation			35,000				35,000
Changes in assets and liabilities:
Accounts receivable			(788,000	)			(1,469,000	)
Costs and estimated earnings in excess of billings			5,046,000				(2,113,000	)
Inventories			(1,697,000	)			(1,925,000	)
Prepaid expenses and other current assets			(1,645,000	)			978,000
Accounts payable			2,473,000				317,000
Customer deposits			2,795,000				(543,000	)
Accrued expenses			61,000				202,000
Total adjustments			7,320,000				(2,939,000	)
Cash flows provided by operating activities			9,154,000				4,834,000
Cash flows used in investing activities:
Capital expenditures			(718,000	)			(1,260,000	)
Cash flows used in investing activities			(718,000	)			(1,260,000	)
Net increase in cash			8,436,000				3,574,000
Cash and cash equivalents at:
Beginning of period			10,302,000				8,012,000
End of period		$	18,738,000			$	11,586,000

See accompanying Notes to Condensed Consolidated Financial Statements

 

7

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 and six months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020.

The accompanying Condensed Consolidated Balance Sheet at September 30, 2019 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, 2019.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), amending its accounting guidance related to revenue recognition. Under this ASU and subsequently issued amendments, revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted ASU 2014-09 in the first quarter of fiscal 2019. The Company elected to adopt the standard using the modified retrospective method. The adoption of ASU 2014-09 did not have a significant impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). With adoption of this standard, lessees will have to recognize most leases as a right-of-use asset and a lease liability on their balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification is based on criteria that are similar to those applied in prior lease accounting. ASU 2016-02 must be applied on a modified retrospective basis and is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company adopted ASU 2016-02 in the first quarter of fiscal 2020. The adoption of ASU 2016-02 did not have a significant impact on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). The new guidance clarifies when a change to the terms or conditions of a share based payment award must be accounted for as a modification. ASU 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2017-09 in the first quarter of fiscal 2019. The adoption of ASU 2017-09 did not have a significant impact on its consolidated financial statements.

No other accounting pronouncements recently issued or newly effective have had, or are expected to have, a material impact on the Company’s consolidated financial statements.

 

8

COVID-19 Pandemic

The Company continues to monitor and evaluate the risks to public health and the slowdown in overall business activity related to the COVID-19 pandemic, including potential impacts on our employees, customers, suppliers and financial results. To date, there have been no material impacts to the Company’s operations as a result of COVID-19. As the situation remains fluid, it is difficult to predict the duration and scope of the pandemic and its impact on the Company’s business. However, it may result in a material adverse impact to the Company’s financial position, operations and cash flows if conditions persist or worsen.

Note 2—Marketable Securities

Marketable debt and equity securities are categorized as trading securities and are thus marked to market and stated at fair value. Fair value is determined using the quoted closing or latest bid prices for Level 1 investments and market standard valuation methodologies for Level 2 investments. Realized gains and losses on investment transactions are determined by specific identification and are recognized as incurred in the condensed consolidated statements of income. Net unrealized gains and losses are reported in the condensed consolidated statements of income in the current period and represent the change in the fair value of investment holdings during the period.

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.

The fair value of marketable equity securities, mutual funds, exchange-traded funds, government securities and cash and money funds are substantially based on quoted market prices (Level 1). Corporate bonds are valued using market standard valuation methodologies, including: discounted cash flow methodologies, matrix pricing or other similar techniques. The inputs to these market standard valuation methodologies include, but are not limited to: interest rates, credit standing of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, maturity, estimated duration and assumptions regarding liquidity and estimated future cash flows. In addition to bond characteristics, the valuation methodologies incorporate market data, such as actual trades completed, bids and actual dealer quotes, where such information is available. Accordingly, the estimated fair values are based on available market information and judgments about financial instruments (Level 2). Fair values of the Level 2 investments, if any, are provided by the Company’s professional investment management firm.

The following table sets forth by level, within the fair value hierarchy, the Company’s assets measured at fair value as of March 31, 2020:

 

		Fair Value Measurements
		Level 1				Level 2				Level 3				Total
Equities		$	12,458,000			$	—			$	—			$	12,458,000
Mutual Funds			2,290,000				—				—				2,290,000
Exchange-Traded Funds			4,005,000				—				—				4,005,000
Corporate Bonds			—				39,721,000				—				39,721,000
Government Securities			40,315,000				—				—				40,315,000
Cash and Money Funds			3,486,000				—				—				3,486,000
Total		$	62,554,000			$	39,721,000			$	—			$	102,275,000

Net unrealized gains and (losses) included in the Condensed Consolidated Statements of Income for the quarter and six months ended March 31, 2020, were $(6,029,000) and $(4,839,000), respectively. There were no transfers of investments between Level 1 and Level 2 during the six months ended March 31, 2020.

 

9

The following table sets forth by level, within the fair value hierarchy, the Company’s assets measured at fair value as of September 30, 2019:

 

		Fair Value Measurements
		Level 1				Level 2				Level 3				Total
Equities		$	10,412,000			$	—			$	—			$	10,412,000
Mutual Funds			3,987,000				—				—				3,987,000
Exchange-Traded Funds			5,163,000				—				—				5,163,000
Corporate Bonds			—				38,690,000				—				38,690,000
Government Securities			45,171,000				—				—				45,171,000
Cash and Money Funds			1,899,000				—				—				1,899,000
Total		$	66,632,000			$	38,690,000			$	—			$	105,322,000

Net unrealized gains and (losses) included in the condensed consolidated statements of income for the quarter and six months ended March 31, 2019, were $1,645,000 and $(780,000), respectively. There were no transfers of investments between Level 1 and Level 2 during the six months ended March 31, 2019.

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 3—Inventories

Inventories are valued at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price of goods less reasonable costs of completion and delivery. During the fourth quarter of fiscal 2019, the Company changed its method for accounting for cost of inventories from the last-in, first-out (“LIFO”) method to the first-in, first-out (“FIFO”) method. As required by accounting principles generally accepted in the United States of America (“GAAP”), the Company reflected this change in accounting principle on a retrospective basis, resulting in changes to the historical periods presented. The Company believes the FIFO method improves financial reporting by better reflecting the current value of inventory on the consolidated balance sheets, by more closely aligning the flow of physical inventory with the accounting for the inventory, and by providing better matching of revenues and expenses.

The fiscal 2018 consolidated financial statements were retrospectively adjusted to apply the new method of FIFO cost accounting for inventories. The cumulative effect of this change on periods prior to those presented herein resulted in an increase in retained earnings of $2,708,000. There was no material impact to the previously reported unaudited interim fiscal 2018 quarterly condensed consolidated results of operations or statements of income as a result of the retrospective application of the change in inventory accounting principle.

Appropriate consideration is given to obsolescence, excessive levels, deterioration, possible alternative uses and other factors in determining net realizable value. The cost of work in process and finished goods includes materials, direct labor, variable costs and overhead. The Company evaluates the need to record inventory adjustments on all inventories, including raw material, work in process, finished goods, spare parts and used equipment. Used equipment acquired by the Company on trade-in from customers is carried at estimated net realizable value. Unless specific circumstances warrant different treatment regarding inventory obsolescence, the cost basis of inventories three to four years old are reduced by 50%, while the cost basis of inventories four to five years old are reduced by 75%, and the cost basis of inventories greater than five years old are reduced to zero. Inventory is typically reviewed for obsolescence on an annual basis computed as of September 30, the Company’s fiscal year end. If significant known changes in trends, technology or other specific circumstances that warrant consideration occur during the year, then the impact on obsolescence is considered at that time.

 

10

Net inventories at March 31, 2020 and September 30, 2019 consist of the following:

 

		March 31, 2020				September 30, 2019
Raw materials		$	15,155,000			$	14,158,000
Work in process			3,092,000				1,397,000
Finished goods			8,776,000				9,811,000
Used equipment			40,000				—
		$	27,063,000			$	25,366,000

Slow-moving and obsolete inventory reserves were $4,518,000 and $4,700,000 at March 31, 2020 and September 30, 2019, respectively.

Note 4—Costs and Estimated Earnings in Excess of Billings

Costs and estimated earnings in excess of billings on uncompleted contracts as of March 31, 2020 and September 30, 2019 consist of the following:

 

		March 31, 2020				September 30, 2019
Costs incurred on uncompleted contracts		$	17,950,000			$	18,707,000
Estimated earnings			7,489,000				9,063,000
			25,439,000				27,770,000
Billings to date			16,647,000				13,932,000
Costs and estimated earnings in excess of billings		$	8,792,000			$	13,838,000

Note 5—Earnings per Share Data

The Condensed Consolidated Financial Statements include basic and diluted earnings per share information. The following table sets forth the computation of basic and diluted earnings per share for the quarters and six months ended March 31, 2020 and 2019:

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2020				2019				2020				2019
Net Income (Loss)		$	(655,000	)		$	7,460,000			$	1,834,000			$	7,773,000
Common Shares:
Weighted average common shares outstanding			14,586,000				14,541,000				14,586,000				14,541,000
Effect of dilutive stock options			—				167,000				128,000				164,000
Diluted shares outstanding			14,586,000				14,708,000				14,714,000				14,705,000
Basic:
Net earnings (loss) per share		$	(0.04	)		$	0.51			$	0.13			$	0.53
Diluted:
Net earnings (loss) per share		$	(0.04	)		$	0.51			$	0.12			$	0.53

Basic earnings per share is based on the weighted-average number of shares outstanding. Diluted earnings per share is based on the sum of the weighted-average number of shares outstanding plus common stock equivalents.

For the quarter ended March 31, 2020, there were no common stock equivalents included in the diluted earnings per share calculation. The weighted-average shares issuable upon the exercise of stock options included in the diluted earnings per share calculation for the six months ended March 31, 2020 were 260,000, which equates to 128,000 dilutive common stock equivalents. There were 30,000 weighted-average shares issuable upon the exercise of stock

 

11

options, which were not included in the diluted earnings per share calculation for the six months ended March 31, 2020 because they were anti-dilutive. The weighted-average shares issuable upon the exercise of stock options included in the diluted earnings per share calculation for the quarter and six months ended March 31, 2019 were 317,000 and 317,000, respectively, which equates to 167,000 and 164,000 dilutive common stock equivalents, respectively. There were no anti-dilutive shares for the quarter and six months ended March 31, 2019.

Note 6—Customers with 10% (or greater) of Net Revenues

During the quarter ended March 31, 2020, three customers accounted for 12.3%, 11.2% and 10.7% of net revenues. During the six months ended March 31, 2020, one of these three customers accounted for 10.4% of net revenues.

Two different customers accounted for 14.2% and 11.2% of net revenues for the quarter ended March 31, 2019. One of these two customers plus two other customers accounted for 13.9%, 13.9% and 11.8% of net revenues for the six months ended March 31, 2019.

Note 7—Income Taxes

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law by President Donald Trump. The Tax Reform Act significantly lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities for tax years beginning after December 31, 2017, implementing a territorial tax system and imposing repatriation tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.

On the condensed consolidated balance sheet as of March 31, 2020, deferred income taxes decreased $2.9 million as compared to September 30, 2019, reflecting payment of taxes due of $1.9 million on the filing of the Company’s Form 3115 with the Internal Revenue Service to reflect the revenue recognition method change to the percentage of completion method for tax purposes pursuant to Internal Revenue Code Sections 460 and 451(b).

The Company’s income tax provision is based on management’s estimate of the effective tax rate for the full year. The tax provision in any period will be affected by, among other things, permanent, as well as temporary differences in the deductibility of certain items, in addition to changes in tax legislation. As a result, the Company may experience significant fluctuations in the effective book tax rate (that is, its tax expense divided by pre-tax book income) from period to period. The Company’s effective tax rates for the first six months of fiscal 2020 and 2019 reflect the impact of the reduced rates under the Tax Reform Act.

Note 8—Revenue Recognition and Related Costs

As discussed in Note 1, the Company adopted the provisions of ASU No. 2014-09 and related amendments effective for the quarter ended December 31, 2018 using the modified retrospective method. The adoption of this standard did not have a material impact on the timing or amounts of revenues recognized by the Company, and, as such, no cumulative effect adjustment was recorded with the adoption of the standard.

The following table disaggregates the Company’s net revenue by major source for the quarter and six months ended March 31, 2020 and 2019:

 

		Quarter Ended March 31,								Six Months Ended March 31,
		2020				2019				2020				2019
Equipment sales recognized over time		$	9,829,000			$	12,006,000			$	21,919,000			$	28,359,000
Equipment sales recognized at a point in time			10,044,000				8,929,000				11,951,000				10,443,000
Parts and component sales			4,675,000				4,466,000				7,821,000				7,517,000
Freight revenue			1,201,000				1,030,000				2,104,000				1,432,000
Other			244,000				239,000				228,000				246,000
Net revenue		$	25,993,000			$	26,670,000			$	44,023,000			$	47,997,000

 

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Revenues from contracts with customers for the design, manufacture and sale of custom equipment are recognized over time when the performance obligation is satisfied by transferring control of the equipment. Control of the equipment transfers over time as the equipment is unique to the specific contract and thus does not create an asset with an alternative use to the Company. Revenues and costs are recognized in proportion to actual labor costs incurred, as compared with total estimated labor costs expected to be incurred, during the entire contract. All incremental costs related to obtaining a contract are expensed as incurred as the amortization period is less than one year. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined.

Contract assets (excluding accounts receivable) under contracts with customers represent revenue recognized in excess of amounts billed on equipment sales recognized over time. These contract assets were $8,792,000 at March 31, 2020 and $13,838,000 at September 30, 2019 and are included in current assets as costs and estimated earnings in excess of billings on the Company’s condensed consolidated balance sheets at March 31, 2020 and September 30, 2019, respectively. The Company anticipates that all these contract assets at March 31, 2020, will be billed and collected within one year.

Revenues from all other contracts for the design and manufacture of equipment, for service and for parts sales, net of any discounts and return allowances, are recorded at a point in time when control of the goods or services has been transferred. Control of the goods or service typically transfers at time of shipment or upon completion of the service.

Payment for equipment under contract with customers is typically due prior to shipment. Payment for services under contract with customers is due as certain milestones are completed. Accounts receivable related to contracts with customers for equipment sales was $247,000 at March 31, 2020 and $301,000 at September 30, 2019.

Product warranty costs are estimated using historical experience and known issues and are charged to production costs as revenue is recognized. Provisions for estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded. Returns and allowances, which reduce product revenue, are estimated using historical experience.

Under certain contracts with customers, recognition of a portion of the consideration received may be deferred and recorded as a contract liability if the Company has to satisfy a future obligation, such as to provide installation assistance. There were no contract liabilities other than customer deposits at March 31, 2020 and September 30, 2019. Customer deposits related to contracts with customers were $4,713,000 at March 31, 2020 and $1,918,000 at September 30, 2019, and are included in current liabilities on the Company’s condensed consolidated balance sheets at March 31, 2020 and September 30, 2019, respectively.

The Company records revenues earned for shipping and handling as freight revenue at the time of shipment, regardless of whether or not it is identified as a separate performance obligation. The cost of shipping and handling is classified as production costs concurrently with the revenue recognition.

Note 9—Subsequent Events

In January 2020, the World Health Organization (the “WHO”) announced a global health emergency because of a new strain of coronavirus COVID-19 originating in Wuhan, China and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure.

As of the date of issuance of these unaudited Condensed Consolidated Financial Statements, our operations have not been significantly impacted. However, the full impact of the COVID-19 pandemic continues to evolve subsequent to the three and six months ended March 31, 2020 and as of the date these unaudited Condensed Consolidated Financial Statements are issued. As such, the full magnitude that the COVID-19 pandemic will have on our financial condition and future results of operations is uncertain. Management is actively monitoring the situation on our financial condition, operations, suppliers, industry, customers, and workforce. As the spread of COVID-19 continues, our ability to meet customer demands for products may be impacted or our customers may experience adverse business consequences due to COVID-19. Reduced demand for products or ability to meet customer demand (including as a result of disruptions at our suppliers and vendors) could have a material adverse effect on our business operations and financial performance.

 

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

Forward-Looking Information

This Quarterly Report 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, demand for the Company’s products, the duration and scope of the coronavirus (“COVID-19”) pandemic, actions governments, businesses, and individuals take in response to the COVID-19 pandemic, including mandatory business closures and restrictions on onsite commercial interactions; the impact of the pandemic and actions taken in response to the pandemic on global and regional economies and economic activity; the pace of recovery when the COVID-19 pandemic subsides; and general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth.

For information concerning these factors and related matters, see the Caution Regarding Forward-Looking Statements, this Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Part II, Item 1A, “Risk Factors,” in this Quarterly Report and the following sections of the Company’s Annual Report on Form 10-K for the year ended September 30, 2019: (a) Part I, Item 1A, “Risk Factors” and (b) Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. 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 Quarterly Report. The Company does not undertake to update any forward-looking statements, except as required by law.

Overview

Gencor Industries, Inc. (the “Company”), is a leading manufacturer of heavy machinery used in the production of highway construction materials 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 reduce their purchases of new equipment for shipment during the summer and fall months to avoid disrupting their peak season for highway construction and related 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 in the late winter and spring. 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, Canadian infrastructure spending, the need for spare parts, fluctuations in the price of crude oil (liquid asphalt as well as fuel costs), and a trend towards larger more efficient asphalt plants.

On December 4, 2015, President Obama signed into law a five-year, $305 billion transportation bill, Fixing America’s Surface Transportation Act (the “FAST Act”). The FAST Act reauthorized the collection of the 18.4 cents per gallon gas tax that is typically used to pay for transportation projects. It also included $70 billion from other areas of the federal budget to close a $16 billion annual funding deficit. The bill included spending of more than $205 billion on roads and highways over five years. The 2016 funding levels were approximately 5% above 2015 projected funding, with annual increases between 2.0% and 2.5% from 2016 through 2020. The FAST Act is scheduled to expire in September 2020.

California’s Senate Bill 1 (“SB1”), the Road Repair and Accountability Act of 2017, was signed into law on April 28, 2017. The legislative package invests $54 billion over the next decade to fix roads, freeways and bridges in communities across California and puts more dollars towards transit and safety. These funds will be allocated to state and local projects. Additionally, at least twenty-five other states have taken steps to increase their gas tax revenues in recent years.

 

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Fluctuations in the price of carbon steel, which is a significant cost and material used in the manufacturing of the Company’s equipment, may affect the Company’s financial performance. The Company is subject to fluctuations in market prices for raw materials, such as steel. If the Company is unable to purchase materials it requires or is unable to pass on price increases to its customers or otherwise reduce its cost of goods sold, its business results of operations and financial condition may be adversely affected.

Also, a significant increase in the price of liquid asphalt could decrease demand for hot mix asphalt paving materials and certain of the Company’s products. Increases in oil prices also drive up the cost of gasoline and diesel, which results in increased freight costs. Where possible, the Company will pass increased freight costs on to its customers. However, the Company may not be able to recapture all of the higher costs and thus could have a negative impact on the Company’s financial performance.

The Company believes its strategy of continuing to invest in product engineering and development and its focus on delivering the highest quality products and superior service will strengthen the Company’s market position. The Company continues to review its internal processes to identify inefficiencies and cost-reduction opportunities. The Company will continue to scrutinize its relationships with suppliers to ensure it is achieving the highest quality materials and services at the most competitive cost.

Results of Operations

Quarter Ended March 31, 2020 versus March 31, 2019

Net revenues for the quarter ended March 31, 2020 decreased by $677,000 to $25,993,000, from $26,670,000, for the quarter ended March 31, 2019. The decline in revenues reflects a slight slowdown in equipment orders from the prior year. As a percent of sales, gross profit margins were 28.2% in the quarter ended March 31, 2020, compared to 37.2% in the quarter ended March 31, 2019. The gross margin achieved in quarter ended March 31, 2019, benefitted from an unusually strong pricing environment for plant and equipment sales.

Product engineering and development expenses decreased $134,000 for the quarter ended March 31, 2020, compared to the quarter ended March 31, 2019. Selling, general and administrative (“SG&A”) expenses increased $87,000 in the quarter ended March 31, 2020, compared to the quarter ended March 31, 2019. Increased headcount, travel and trade show expenses resulted in the increase in SG&A expenses during the second quarter of fiscal 2020. As a percentage of net revenues, SG&A expenses were 9.8% in the quarter ended March 31, 2020, compared to 9.3% in the prior year.

The Company had operating income of $4,088,000 for the quarter ended March 31, 2020 versus $6,614,000 for the quarter ended March 31, 2019. Operating margins were 15.7% in the quarter ended March 31, 2020, compared to 24.8% in the quarter ended March 31, 2019. The decrease in operating margins was due primarily to lower gross margin.

For the quarter ended March 31, 2020, interest and dividend income, net of fees, from the investment portfolio was $763,000, compared to $507,000 for the quarter ended March 31, 2019. The increase was due to additional interest income from a larger investment in corporate bonds and higher average yield to maturities. Net realized and unrealized losses on marketable securities were $(5,670,000) for the quarter ended March 31, 2020, compared to net realized and unrealized gains of $2,204,000 for the quarter ended March 31, 2019. The current quarter investment losses reflect the decline in the domestic equity markets from the impact of the COVID-19 pandemic.

The effective income tax rate for the quarter ended March 31, 2020 was a benefit of (20.0%) versus expense of 20.0% for the quarter ended March 31, 2019. Net loss for the quarter ended March 31, 2020 was $(655,000), or ($0.04) per diluted share, versus net income of $7,460,000, or $0.51 per diluted share, for the quarter ended March 31, 2019.

 

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Six Months Ended March 31, 2020 versus March 31, 2019

Net sales for the six months ended March 31, 2020 and 2019 were $44,023,000 and $47,997,000, respectively, a decrease of $3,974,000, reflecting a normalizing in order level from the significant growth in business over the past couple of years.

Gross profit margins decreased to 26.5% in the six months ended March 31, 2020 from 30.9% in the six months ended March 31, 2019. The gross margin achieved in quarter ended March 31, 2019, benefitted from an unusually strong pricing environment for plant and equipment sales.

Product engineering and development expenses decreased $91,000 in the six months ended March 31, 2020, compared to the six months ended March 31, 2019. SG&A expenses increased $279,000 in the six months ended March 31, 2020, compared to the six months ended March 31, 2019. As a percentage of net revenues, SG&A expenses were 11.2% for the six months ended March 31, 2020, compared to 9.7% in the six months ended March 31, 2019. The higher SG&A expenses in 2020 were due to increased headcount, travel and trade show expenses during the first six months of fiscal 2020.

The Company had operating income of $5,260,000 for the six months ended March 31, 2020 versus $8,618,000 for the six months ended March 31, 2019. Operating margins were 11.9% for the six months ended March 31, 2020, compared to 18.0% in the six months ended March 31, 2019.

For the six months ended March 31, 2020, interest and dividend income, net of fees, from the investment portfolio was $1,395,000, as compared to $1,041,000 for the six months ended March 31, 2019. The increase was due to additional interest income from a larger investment in corporate bonds and higher average yield to maturities. Net realized and unrealized losses on marketable securities were $(4,353,000) for the six months ended March 31, 2020 versus net realized and unrealized gains of $57,000 for the six months ended March 31, 2019. The current year investment losses reflect the decline in the domestic equity markets from the impact of the COVID-19 pandemic.

The effective income tax rate for the six months ended March 31, 2020 and March 31, 2019 was 20.0%. Net income for the six months ended March 31, 2020 was $1,834,000, or $0.12 per diluted share, versus $7,773,000, or $0.53 per diluted share for the six months ended March 31, 2019.

COVID-19 pandemic

In March 2020, the WHO declared the outbreak of COVID-19 as a pandemic based on the rapid increase in global exposure. COVID-19 continues to spread throughout world, including the United States.    The COVID-19 pandemic continues to impact economic conditions, which could impact the short-term and long-term demand from our customers and, therefore, has the potential to negatively impact our results of operations, cash flows, and financial position in the future. Management continues to monitor the situation and any impact on our financial condition and results of operations.

Liquidity and Capital Resources

The Company generates capital resources through operations and returns on its investments.

The Company had no long-term or short-term debt outstanding at March 31, 2020 or September 30, 2019. The Company does not currently require a credit facility. As of March 31, 2020, the Company had funded $85,000 in cash deposits at insurance companies to cover related collateral needs.

As of March 31, 2020, the Company had $18,738,000 in cash and cash equivalents, and $102,275,000 in marketable securities, including $40,315,000 in government securities, $39,721,000 in corporate bonds, $12,458,000 in equities, $4,005,000 in exchange-traded funds, $2,290,000 in mutual funds, and $3,486,000 in cash and money funds. The marketable securities are invested through two professional investment management firms. These securities may be liquidated at any time into cash and cash equivalents.

 

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The Company’s backlog was $24.5 million at March 31, 2020, compared to $24.2 million at March 31, 2019. The Company’s working capital (defined as current assets less current liabilities) was equal to $149.6 million at March 31, 2020 and $150.4 million at September 30, 2019. Cash provided by operations during the six months ended March 31, 2020 was $9,154,000. The significant purchases, sales and maturities of marketable securities shown on the Condensed Consolidated Statements of Cash Flows primarily are from the purchase and sale of United States treasury bills with very short durations. Deferred income taxes decreased $2.9 million reflecting payments of taxes due of $1.9 million on the filing of the Company’s Form 3115 with the Internal Revenue Service to reflect the revenue recognition method change to the percentage of completion method for tax purposes pursuant to Internal Revenue Code Sections 460 and 451(b). In addition, net deferred income tax liabilities were reduced due to the large unrealized losses on marketable equity securities. Accounts receivable increased $788,000 as parts sales increased during the quarter ended March 31, 2020, as compared to the quarter ended September 30, 2019. Costs and estimated earnings in excess of billings decreased $5,046,000, and customer deposits increased $2,795,000, reflecting the timing of revenue recognition and payments on customer contracts recognized over time, at March 31, 2020. Inventories increased $1,697,000 reflecting manufacturing progress on equipment sales recognized at a point in time at March 31, 2020. Prepaid expenses and other current assets increased $1,645,000 primarily related to payments on insurance policies which benefit the whole year, and expenses related to the CONEXPO-CON/AGG trade show in March 2020. Accounts payable increased $2,473,000 with the increased inventory and timing of payments.

Cash flows used in investing activities for the six months ended March 31, 2020 of $718,000 were related to capital expenditures, primarily for new machinery used for cutting raw materials and systems’ software.

Seasonality

The Company’s primary business is the manufacture and sale of asphalt plants and related components and is 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 operating results during the first and fourth quarters of each fiscal year ended September 30.

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, 2019, under the heading “Accounting Pronouncements and Policies.”

Estimates and Assumptions

In preparing the Condensed 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 Condensed Consolidated Financial Statements are reasonable, but are inherently uncertain. 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 & Expenses

As discussed 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, 2019, under the heading “Accounting Pronouncements and Policies”, the Company adopted the provisions of ASU No. 2014-09 and its related amendments effective for the quarter ended December 31, 2018 using the modified retrospective method. The adoption of this standard did not have a material impact on the timing or amounts of revenues recognized by the Company, and, as such, no cumulative effect adjustment was recorded with the adoption of the standard.

 

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Revenues from contracts with customers for the design, manufacture and sale of custom equipment are recognized over time when the performance obligation is satisfied by transferring control of the equipment. Control of the equipment transfers over time as the equipment is unique to the specific contract and thus does not create an asset with an alternative use to the Company. Revenues and costs are recognized in proportion to actual labor costs incurred, as compared with total estimated labor costs expected to be incurred during the entire contract. All incremental costs related to obtaining a contract are expensed as incurred, as the amortization period is less than one year. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined.

Contract assets (excluding accounts receivable) under contracts with customers represent revenue recognized in excess of amounts billed on equipment sales recognized over time. These contract assets were $8,792,000 at March 31, 2020 and $13,838,000 at September 30, 2019 and are included in current assets as costs and estimated earnings in excess of billings on the Company’s condensed consolidated balance sheets at March 31, 2020 and September 30, 2019, respectively. The Company anticipates that all these contract assets at March 31, 2020, will be billed and collected within one year.

Revenues from all other contracts for the design and manufacture of equipment, for service and for parts sales, net of any discounts and return allowances, are recorded at a point in time when control of the goods or services has been transferred. Control of the goods or service typically transfers at time of shipment or upon completion of the service.

Payment for equipment under contract with customers is typically due prior to shipment. Payment for services under contract with customers is due as certain milestones are completed. Accounts receivable related to contracts with customers for equipment sales were $247,000 at March 31, 2020 and $301,000 at September 30, 2019.

Product warranty costs are estimated using historical experience and known issues and are charged to production costs as revenue is recognized.

Under certain contracts with customers, recognition of a portion of the consideration received may be deferred and recorded as a contract liability if the Company has to satisfy a future obligation, such as to provide installation assistance. There were no contract liabilities other than customer deposits at March 31, 2020 and September 30, 2019. Customer deposits related to contracts with customers were $4,713,000 at March 31, 2020 and $1,918,000 at September 30, 2019, and are included in current liabilities on the Company’s condensed consolidated balance sheets at March 31, 2020 and September 30, 2019, respectively.

The Company records revenues earned for shipping and handling as freight revenue at the time of shipment, regardless of whether or not it is identified as a separate performance obligation. The cost of shipping and handling is classified as cost of goods sold concurrently.

Provisions for estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded. Returns and allowances, which reduce product revenue, are estimated using historical experience.

All product engineering and development costs, and 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 allowance for doubtful accounts is determined by performing a specific review of all account balances greater than 90 days past due and other higher risk amounts to determine collectability and also adjusting for any known customer payment issues with account balances in the less-than-90-day past due aging buckets. Account balances are charged off against the allowance for doubtful accounts when they are determined to be uncollectable. Any recoveries of account balances previously considered in the allowance for doubtful accounts reduce future additions to the allowance for doubtful accounts.

 

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Inventories

Inventories are valued at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price of goods less reasonable costs of completion and delivery. During the fourth quarter of fiscal 2019, the Company changed its method for accounting for cost of inventories from the LIFO method to the FIFO method. The Company believes the FIFO method improves financial reporting by better reflecting the current value of inventory on the consolidated balance sheets, by more closely aligning the flow of physical inventory with the accounting for the inventory, and by providing better matching of revenues and expenses. The change in accounting method will also require the Company to make a conforming change for U.S. income tax purposes. As required by GAAP, the Company has reflected this change in accounting principle on a retrospective basis, resulting in changes to the historical periods presented. The retrospective application of the change resulted in an increase in the Company’s September 30, 2018 and September 30, 2017 retained earnings of $2,838,000 (net of $838,000 in taxes) and $2,708,000 (net of $792,000 in taxes) respectively, and an increase to the Company’s net income of $130,000 (net of $45,000 in taxes) for the year ended September 30, 2018. This change did not affect our previously reported cash flows from operating, investing or financing activities nor did it have a significant impact on the previously reported quarterly operating results for fiscal 2019.

All inventories are now valued at the lower of cost or net realizable value, with cost being determined under the FIFO method and net realizable value defined as the estimated selling price of goods less reasonable costs of completion and delivery (see Note 2 to Consolidated Financial Statements). Appropriate consideration is given to obsolescence, excessive levels, deterioration, possible alternative uses and other factors in determining net realizable value. The cost of work in process and finished goods includes materials, direct labor, variable costs and overhead. The Company evaluates the need to record inventory adjustments on all inventories, including raw materials, work in process, finished goods, spare parts and used equipment. Used equipment acquired by the Company on trade-in from customers is carried at estimated net realizable value. Unless specific circumstances warrant different treatment regarding inventory obsolescence, the cost basis of inventories three to four years old are reduced by 50%, while the cost basis of inventories four to five years old are reduced by 75%, and the cost basis of inventories greater than five years old are reduced to zero. Inventory is typically reviewed for obsolescence on an annual basis computed as of September 30, the Company’s fiscal year end. If significant known changes in trends, technology or other specific circumstances that warrant consideration occur during the year, then the impact on obsolescence is considered at that time.

Investments

Marketable debt and equity securities are categorized as trading securities and are thus marked to market and stated at fair value. Fair value is determined using the quoted closing or latest bid prices for Level 1 investments and market standard valuation methodologies for Level 2 investments. Realized gains and losses on investment transactions are determined by specific identification and are recognized as incurred in the condensed consolidated statements of income. Net unrealized gains and losses are reported in the condensed consolidated statements of income in the current period and represent the change in the fair value of investment holdings during the period.

Long-Lived Asset Impairment

Property and equipment and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess over its fair value of the asset’s carrying value. Fair value is generally determined using a discounted cash flow analysis.

Off-Balance Sheet Arrangements

None

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

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 Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly 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 Quarterly 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 have 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 and six months ended March 31, 2020 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 1. Legal Proceedings

From time to time the Company is engaged in legal proceedings in the ordinary course of business. We do not believe any current legal proceedings are material to our business.

Item 1A. Risk Factors

Our business, operations, and financial condition are subject to various risks and uncertainties. The risk factors described in Part I, Item 1A, “Risk Factors” contained in our Annual Report on Form 10K for the year ended September 30, 2019, as filed with the SEC on December 11, 2019, should be carefully considered, together with the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in our other filings filed with the SEC in connection with evaluating us, our business, and the forward-looking statements contained in this Quarterly Report on Form 10-Q. During the quarter ended March 31, 2020, there have been no material changes from the risk factors previously disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K, for the year ended September 30, 2019, except as follows:

The Company’s business, results of operations, financial condition, cash flows, and the stock price of our common stock could be adversely affected by the COVID-19 pandemic.

Our business, results of operations financial condition, cash flows, and the stock price of our common stock can be adversely affected by pandemics or other public health emergencies, such as the recent outbreak of COVID-19. In March 2020, the WHO declared COVID-19 as a pandemic. The COVID-19 pandemic has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures.

The outbreak of COVID-19 and any preventive or protective actions taken by governmental authorities may have a material adverse effect on our operations, supply chain, customers, and transportation networks, including business shutdown or disruptions. The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, depends upon the severity and duration of the outbreak and the effectiveness of actions taken globally to contain or mitigate its effect. Any resulting financial impact cannot be estimated reasonably at this time, but may materially adversely affect our business, results of operations, financial condition, and cash flows. Even after the COVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting economic recession or depression. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets, which has and may continue to adversely impact our stock price, our ability to access capital markets, and the value of our investment portfolio. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in our Annual Report on Form 10-K for the year ended September 30, 2019, such as those relating to our products and financial performance.

The Company may suffer adverse consequences if it is deemed an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”).

Under Section 3(a)(1)(A) of the Investment Company Act, a company is deemed to be an investment company if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities. We believe that we are not an investment company under Section 3(a)(1)(A) of the Investment Company Act because we do not hold ourselves out as being engaged primarily in the business of investing, reinvesting, or trading in securities. Rather, we have been a manufacturer of heavy equipment used in the production of asphalt for highway construction and environmental control equipment for over 50 years. Our core products include asphalt plants, combustion systems, and fluid heat transfer systems.

 

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Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an investment company if it is engaged, or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis. As reflected on our balance sheet at March 31, 2020, we own a significant amount of marketable securities, which include cash, cash equivalents, government and corporate bonds, mutual funds, exchange-traded funds and equities. Section 3(a)(2) defines the term “investment securities”, as used in Section 3(a)(1)(C) to include all marketable securities except government securities and cash and cash equivalents. The value of the Company’s investment securities exceeds 40% of the value of our total assets (excluding government securities and cash items). Because of the value of our investment securities, we may be deemed an investment company. We believe that we are not an investment company under Section 3(a)(1)(C) of the Investment Company Act because we do not propose to engage in the business of investing, reinvesting, owning, holding, or trading in securities. In addition, even if we were deemed an investment company under Section 3(a)(1)(C), we believe that we qualify for an exemption from the definition of an investment company as we are primarily engaged in a business other than that of investing, reinvesting, owning, holding, or trading in securities. As noted above, we are primarily engaged in the manufacturing of heavy equipment. If the Securities and Exchange Commission (the “SEC”) or a court challenged our status as an operating company, we could incur significant legal expenses.

If we are deemed to be, and were required to register as, an investment company, we would be forced to comply with the legal requirements of the Investment Company Act that would regulate the manner in which we would be permitted to conduct our business activities. As an investment company, we would be (i) subjected to disclosure and accounting guidance geared toward investment, rather than operating, companies; (ii) significantly limited in our ability to borrow money, issue options, issue multiple classes of stock and debt, and engage in transactions with affiliates; and (iii) required to undertake significant costs and expenses to meet other disclosure, reporting, and regulatory requirements to which we would be subject as a registered investment company.

 

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Item 6. 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 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.
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Schema
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase
101.DEF*		XBRL Taxonomy Extension Definition Linkbase
101.LAB*		XBRL Taxonomy Extension Label Linkbase
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase

 

*	Filed herewith

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

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