Gencor Industries(GENC) - 2019 Q4 - Annual Report

Part I Item 1: Business Gencor Industries, Inc. is a leading US-based manufacturer of heavy machinery for highway construction and environmental control sectors - Gencor is a leading manufacturer of heavy machinery used in highway construction materials production and environmental control equipment, with products manufactured in two U.S. facilities[11] - The company's principal products are asphalt plants, combustion systems, and fluid heat transfer systems, positioning Gencor as a leading producer of hot mix asphalt plants in North America[12] - Business is seasonal, with most orders received between October and February, and demand primarily driven by federal and state highway construction funding[13] Sales Backlog | Date | Backlog (in millions) | | :--- | :--- | | December 1, 2019 | $27.3 | | December 1, 2018 | $28.0 | - As of September 30, 2019, the company had 334 full-time employees, with a collective bargaining agreement covering employees at the Marquette, Iowa facility[33] Item 1A: Risk Factors The company faces significant risks related to the cyclical highway construction industry, government funding dependence, and investment portfolio volatility - The business is highly dependent on the cyclical commercial highway construction industry and the level of government funding for infrastructure projects[38][39] - Customer concentration has decreased, with the largest customer accounting for 6% of net revenue in fiscal 2019, down from 13% in fiscal 2017, and no single customer accounted for 10% or more of revenue in fiscal 2019 or 2018[40] - The company's investment portfolio, consisting of various marketable securities, is subject to market, interest rate, and credit risks which could materially impact financial results[46] - Operating results fluctuate quarterly due to the timing of large orders, the seasonal nature of the industry, and fluctuations in the market value of its securities portfolio[47][68] - Company officers hold 100% of Class B stock, entitling them to elect 75% of the Board of Directors, giving management effective voting control and significant influence over corporate matters[57] - The company does not anticipate paying cash dividends in the foreseeable future, intending to retain earnings to finance business requirements[63] Item 1B: Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[70] Item 2: Properties Gencor owns two primary operating properties in the United States: a 72-acre facility in Marquette, Iowa, and a 27-acre corporate office and manufacturing facility in Orlando, Florida Owned Operating Properties as of September 30, 2019 | Location | Acreage | Building Square Footage | Principal Function | | :--- | :--- | :--- | :--- | | Marquette, Iowa | 72.0 | 137,000 | Offices and manufacturing | | Orlando, Florida | 27.0 | 215,000 | Corporate offices and manufacturing | Item 3: Legal Proceedings The company is involved in various litigation and claims that have arisen in the ordinary course of business, which management does not consider material - The company has pending litigation and claims from the ordinary course of business, which management believes are not material and may be covered by insurance[71] Item 4: Mine Safety Disclosures The company reports no mine safety disclosures - There are no mine safety disclosures to report[72] Part II Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Gencor's common stock trades on the Nasdaq Global Market under 'GENC', with 211 common stock holders and 6 Class B stock holders as of September 30, 2019, and no cash dividends anticipated - The company's common stock is traded on the Nasdaq Global Market under the symbol 'GENC'[73] - As of September 30, 2019, there were 211 holders of common stock and 6 holders of Class B stock, with no cash dividends paid in the last two fiscal years and no plans for future payments[74] Equity Compensation Plan Information as of September 30, 2019 | Plan | Securities to be Issued upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | 2009 Incentive Compensation Plan | 272,492 | $6.126 | 582,000 * | Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a 17.5% decrease in net revenue for fiscal 2019, improved gross profit margin, and a strong liquidity position with no long-term debt Overview Gencor's business is seasonal and primarily serves the highway construction industry, with demand influenced by government funding, crude oil prices, and steel costs - The business is seasonal, with demand driven by government funding for highway construction, such as the five-year, $305 billion FAST Act signed in 2015[80][81] - Financial performance is affected by fluctuations in the price of carbon steel, a primary raw material, and liquid asphalt, which impacts demand for paving materials[83][85] Results of Operations For fiscal year 2019, net revenue decreased by 17.5% to $81.3 million, while gross profit margin slightly improved to 27.6%, resulting in a net income of $10.2 million Fiscal Year 2019 vs. 2018 Financial Highlights | Metric | FY 2019 | FY 2018 | % Change | | :--- | :--- | :--- | :--- | | Net Revenue | $81.3M | $98.6M | -17.5% | | Gross Profit Margin | 27.6% | 27.2% | +0.4 p.p. | | Operating Income | $9.5M | $13.9M | -31.7% | | Net Income | $10.2M | $12.7M | -19.7% | | Diluted EPS | $0.69 | $0.86 | -19.8% | - The decrease in revenues is attributed to a decline in orders as the impact of the FAST Act, scheduled to expire in 2020, has slowed[87] - The effective income tax rate for fiscal 2019 was 20.5%, compared to 15.7% in fiscal 2018, with the 2018 rate lower due to a $0.8 million benefit from re-measuring deferred tax liabilities under the Tax Reform Act[93] Liquidity and Capital Resources The company maintains a strong liquidity position with no long-term debt, $10.3 million in cash, and $105.3 million in marketable securities as of September 30, 2019 - The company had no long-term debt outstanding at September 30, 2019 or 2018[98] Liquidity and Backlog Summary (as of Sept 30) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Cash & Cash Equivalents | $10.3M | $8.0M | | Marketable Securities | $105.3M | $104.1M | | Working Capital | $150.4M | $139.7M | | Backlog | $36.9M | $43.8M | - Cash provided by operations was $4.2 million in fiscal 2019, a significant improvement from the $12.0 million cash used in operations in fiscal 2018[101][102] Critical Accounting Policies, Estimates and Assumptions Key accounting policies involve significant estimates for revenue recognition on custom equipment contracts, and a retrospective change in inventory costing method from LIFO to FIFO was implemented in Q4 2019 - Revenue from custom equipment contracts is recognized over time, proportional to actual labor costs incurred compared to total estimated labor costs[107] - During the fourth quarter of fiscal 2019, the company changed its inventory accounting method from last-in, first-out (LIFO) to first-in, first-out (FIFO)[117] - The change to FIFO was applied retrospectively, resulting in an increase to retained earnings of $2.84 million as of September 30, 2018, and an increase to net income of $130,000 for the year ended September 30, 2018[118] - Marketable securities are categorized as trading securities and are stated at fair value, with unrealized gains and losses reported in the consolidated income statements[120] Item 8: Financial Statements and Supplementary Data This section includes the independent auditor's report and the company's consolidated financial statements for fiscal years 2019 and 2018, retrospectively adjusted for the LIFO to FIFO inventory accounting change Report of Independent Registered Public Accounting Firm The independent auditor, Moore Stephens Lovelace, P.A., issued an unqualified opinion on Gencor's consolidated financial statements and the effectiveness of internal controls, noting the change in inventory accounting from LIFO to FIFO - The auditor issued an unqualified (clean) opinion on the consolidated financial statements for the two-year period ended September 30, 2019[130] - The auditor also concluded that the Company maintained effective internal control over financial reporting as of September 30, 2019[130] - The report highlights a change in accounting principle, where the company changed its method of accounting for inventory to FIFO from the LIFO method used in prior years[131] Consolidated Financial Statements The consolidated financial statements detail the company's financial position and performance, showing total assets of $165.4 million and net income of $10.2 million for fiscal 2019 Consolidated Balance Sheet Highlights (as of Sept 30) | Account | 2019 | 2018 (Adjusted) | | :--- | :--- | :--- | | Total Current Assets | $156.9M | $148.2M | | Total Assets | $165.4M | $156.1M | | Total Current Liabilities | $6.5M | $8.5M | | Total Shareholders' Equity | $155.5M | $145.0M | Consolidated Income Statement Highlights (Year Ended Sept 30) | Account | 2019 | 2018 (Adjusted) | | :--- | :--- | :--- | | Net Revenue | $81.3M | $98.6M | | Gross Profit | $22.4M | $26.8M | | Operating Income | $9.5M | $13.9M | | Net Income | $10.2M | $12.7M | Consolidated Cash Flow Highlights (Year Ended Sept 30) | Account | 2019 | 2018 (Adjusted) | | :--- | :--- | :--- | | Cash from Operating Activities | $4.2M | ($12.0M) | | Cash from Investing Activities | ($2.1M) | ($3.6M) | | Cash from Financing Activities | $0.2M | $0.6M | | Net Change in Cash | $2.3M | ($14.9M) | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies, including the adoption of ASU 2014-09, the retrospective adjustment for the LIFO to FIFO inventory change, and composition of financial statement line items - The company adopted the new revenue recognition standard (ASU 2014-09) in the first quarter of fiscal 2019 using the modified retrospective method, which did not have a significant impact on its financial statements[155] Disaggregation of Net Revenue (Year Ended Sept 30) | Revenue Source | 2019 | 2018 | | :--- | :--- | :--- | | Equipment sales recognized over time | $43.5M | $70.8M | | Equipment sales recognized at a point in time | $20.0M | $11.5M | | Parts and component sales | $13.4M | $11.6M | | Freight revenue | $4.1M | $4.5M | | Total Net Revenue | $81.3M | $98.6M | - The change from LIFO to FIFO inventory accounting resulted in a retrospective increase to fiscal 2018 net inventories by $3.7 million and a decrease to cost of goods sold by $175,000[206] - The company had no long-term debt outstanding at September 30, 2019 or 2018[221] Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, or financial statement disclosure - There were no changes in or disagreements with accountants on accounting and financial disclosure[235] Item 9A: Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, and management maintained effective internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[235][237] - Management's assessment concluded that the company maintained effective internal control over financial reporting as of September 30, 2019, based on the COSO framework[239] - There were no changes in internal control over financial reporting during the year that materially affected, or are reasonably likely to materially affect, the company's internal control[240] Item 9B: Other Information The company reports no other information under this item - None[242] Part III Item 10: Directors, Executive Officers and Corporate Governance The information required for this item is incorporated by reference from the company's Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the Registrant's 2020 Proxy Statement[242] Item 11: Executive Compensation The information required for this item is incorporated by reference from the company's Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the Registrant's 2020 Proxy Statement[243] Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item is incorporated by reference from the company's Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the Registrant's 2020 Proxy Statement[244] Item 13: Certain Relationships and Related Transactions, and Director Independence The information required for this item is incorporated by reference from the company's Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the Registrant's 2020 Proxy Statement[245] Item 14: Principal Accounting Fees and Services The information required for this item is incorporated by reference from the company's Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the Registrant's 2020 Proxy Statement[246] Part IV Item 15: Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, including corporate governance documents, compensation plans, and certifications - This item lists all exhibits filed with the Form 10-K, including corporate documents, compensation plans, certifications, and XBRL data files[247][249] Item 16: Form 10-K Summary The company reports no summary under this item - None[249]