GENCOR INDUSTRIES INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)


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"Forward-Looking" Information
This Annual Report contains certain "forward-looking statements" within the
meaning of 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, income from
investees and litigation. 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, the performance of the investment
portfolio and the demand for the Company's products.
For information concerning these factors and related matters, see "Risk Factors"
in Part I, Item 1A in this Annual Report. 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 Annual Report. The Company does not undertake to update
any forward-looking statements, except as required by law.
Overview
Gencor is a leading manufacturer of heavy machinery used in the production of
highway construction equipment and materials and environmental control
equipment. The Company's core products include asphalt pavers, hot mix asphalt
plants, combustion systems, fluid heat transfer systems and asphalt pavers. The
Company's products are manufactured at three 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
liquid asphalt, and a trend towards larger more efficient asphalt plants.
On November 15, 2021, President Biden signed into law a five-year, $1.2 trillion
infrastructure bill, the Infrastructure Investment and Jobs Act (the "IIJ Act"),
including $550 billion in new spending and reauthorization of $650 billion in
previously allocated funds. The IIJ Act provides $110 billion for the nation's
highways, bridges and roads.
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,
numerous other states have taken steps to increase their gas tax revenues in
recent years.
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.

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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.
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 novel coronavirus
("COVID-19")
pandemic, including impacts on its employees, customers, suppliers and financial
results. As of the date of issuance of this Annual Report, the Company's
operations have not been significantly impacted. However, the full impact of the
COVID-19
pandemic continues to evolve subsequent to the quarter and year ended
September 30, 2021 and as of the date this Annual Report is issued. As such, the
full magnitude that the
COVID-19
pandemic will have on the Company's financial condition and future results of
operations is uncertain. Management continues to monitor the Company's financial
condition, operations, suppliers, industry, customers, and workforce. If the
spread of
COVID-19
and its variants continues, the Company's ability to meet customer demands for
products may be impacted or its customers may experience adverse business
consequences due to
COVID-19
and its variants. Reduced demand for products or ability to meet customer demand
(including as a result of disruptions at the Company's suppliers) could have a
material adverse effect on its business operations and financial performance.
Results of Operations
Year ended September 30, 2021 compared with the year ended September 30, 2020
Net revenue for the year ended September 30, 2021 increased 10.1% to
$85.3 million from $77.4 million for the year ended September 30, 2020. The
increase in net revenue was due primarily to paver equipment and parts sales of
approximately $6.1 million for the year ended September 30, 2021, compared with
no paver related revenues in fiscal 2020.
Net revenue for the fourth quarter of fiscal 2021 increased 91.7% to
$20.0 million compared to $10.5 million for the quarter ended September 30,
2020. The increase in net revenues reflected improved orders from prior year in
anticipation of the signing of a new highway bill to replace the FAST Act, which
after two temporary extensions, would have expired on December 3, 2021. In
addition, net revenue for the fourth quarter of fiscal 2021 includes
$2.2 million of paver equipment and parts sales compared with no paver related
revenues in the fourth quarter of fiscal 2020.
Gross profit margins decreased to 21.3% in fiscal 2021 from 24.5% in fiscal
2020. The gross profit margins for the year ended September 30, 2021 were
negatively impacted by approximately $4.6 million of unabsorbed manufacturing
labor and overhead expenses related to the paver line. In addition, increases in
labor rates and steel and OEM parts prices contributed to the lower overall
gross margins during the year ended September 30, 2021.
Product engineering and development ("PED") expenses in fiscal 2021 increased by
$1,217,000 to $4,278,000 from $3,061,000 in fiscal 2020 primarily due to
engineering wages related to the paver line. Selling, general and administrative
("SG&A") expenses in fiscal 2021 increased $2,843,000 to $13,199,000 from
$10,356,000 in fiscal 2020. The higher SG&A expenses were primarily due to
expenses related to the paver line and professional fees to support business
development efforts.

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Fiscal 2021 had operating income of $701,000 versus $5,536,000 in fiscal 2020.
The decrease in operating income was due primarily to the operational and
start-up
costs related to the Blaw-Knox asset acquisition and professional fees to
support business development efforts.
On October 1, 2020, the Company acquired the Blaw-Knox assets, including
inventory, fixed assets and related intellectual property, from Volvo
Construction Equipment North America, LLC ("Volvo CE"). The acquisition provided
the Company entry into the asphalt paver sector of the asphalt industry. The
acquisition was accounted for as a business combination under ASC 805, "Business
Combinations." The initial purchase price of approximately $14.4 million, which
was subject to post-closing adjustments, was funded by cash on hand. After
post-closing adjustments transacted during quarter ended March 31, 2021, the
final purchase price was $13.8 million, including $10.4 million in inventory and
$3.4 million in fixed assets. There were no liabilities assumed. The
accompanying consolidated financial statements as of and for the year ended
September 30, 2021, include the assets, liabilities and operating results of the
paver line. There were no paver equipment revenues during the quarter ended
December 31, 2020, as the facility was being readied for production which began
in the quarter ended March 31, 2021.
As of September 30, 2021 and 2020, the cost basis of the investment portfolio
was $93.7 million and $89.5 million, respectively. For the year ended
September 30, 2021, interest and dividend income, net of fees, from the
investment portfolio was $1,306,000, as compared to $2,321,000 for year ended
September 30, 2020. Interest income for the year ended September 30, 2021, also
included $456,000 of interest collected from a customer. The higher interest
income from the investment portfolio in fiscal 2020 reflects the impact from a
larger investment in corporate bonds and a higher average yield to maturity. The
fiscal 2021 corporate bonds were reduced as the related investments were
partially liquidated to fund the Blaw-Knox acquisition. Net realized and
unrealized gains on marketable securities were $4,171,000 for the year ended
September 30, 2021 versus net realized and unrealized losses of $(1,160,000) for
the year ended September 30, 2020. The fiscal 2020 investment losses reflect the
decline in the domestic equity markets from the impact of the
COVID-19
pandemic. The total cash, cash equivalents and investments balance at
September 30, 2021 was $118.2 million, compared to the September 30, 2020 cash,
cash equivalents and investments balance of $125.1 million, a decrease of
$6.9 million.
The effective income tax rate for fiscal 2021 was 12.5% versus 17.2% in fiscal
2020.
In fiscal 2021, the Company generated $335,000 of federal research and
development tax credits ("R&D Credits"), all of which were used in fiscal 2021.
In fiscal 2020, the Company generated $421,000 of R&D Credits, all of which were
used in fiscal 2020. There were no R&D Credits carryforwards as of September 30,
2021 or September 30, 2020.
Net income for the year ended September 30, 2021 was $5,805,000 or $0.39 per
diluted share versus net income of $5,531,000 or $0.38 per diluted share for the
year ended September 30, 2020.
Liquidity and Capital Resources
The Company generates capital resources through operations and returns from its
investments.
The Company had no long-term debt outstanding at September 30, 2021 or 2020. As
of September 30, 2021, the Company has funded $85,000 in cash deposits at
insurance companies to cover collateral needs. In April 2020, a financial
institution issued an irrevocable standby letter of credit ("letter of credit")
on behalf of the Company for the benefit of one of the Company's insurance
carriers. The maximum amount that can be drawn by the beneficiary under the
letter of credit is $150,000. The letter of credit expires in April 2022, unless
terminated earlier, and can be extended, as provided by the agreement. The
Company intends to renew the letter of credit for as long as the Company does
business with the beneficiary insurance carrier. The letter is collateralized by
restricted cash of the same amount on any outstanding drawings. To date, no
amounts have been drawn under the letter of credit.

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As of September 30, 2021, the Company had $23.2 million in cash and cash
equivalents, and $95.0 million in marketable securities. The marketable
securities are invested through a professional investment management firm. The
securities may be liquidated at any time into cash and cash equivalents.
The Company's backlog, which includes orders received through the filing date of
this Annual Report, was $64.1 million at September 30, 2021 versus $34.6 million
at September 30, 2020. The Company's working capital was $155.4 million at
September 30, 2021 versus $153.2 million at September 30, 2020.
The significant purchases, sales and maturities of marketable securities shown
on the consolidated statements of cash flows typically reflect the frequent
purchase and sale of United States treasury bills. In the fourth quarter of
fiscal 2020, the Company liquidated approximately $17.0 million of its
investments. The cash was primarily used to fund the acquisition of the
Blaw-Knox assets.
Year ended September 30, 2021 compared with the year ended September 30, 2020
Cash provided by operations in fiscal 2021 was $3,820,000, primarily resulting
from net income. The significant purchases, sales and maturities of marketable
securities shown on the consolidated statements of cash flows reflect the
recurring purchases and sales of United States treasury bills. The decrease in
costs and estimated earnings in excess of billings of $4.5 million reflects the
completion and shipment of several large contracts with revenues recognized over
time during the year ended September 30, 2021. Excluding the impact of the
Blaw-Knox acquisition, inventories increased by $4.4 million primarily due to
progress on several large contract orders where revenue is recognized at a point
in time and some stock build to compensate for the longer lead times from
suppliers. Accounts payable increased by $1.4 million due to the additional
payables related to the Blaw-Knox business along with the increase in inventory.
Customer deposits increased $1.4 million, reflecting the down payments on
contract jobs, including several recent orders where revenues are recognized
over time but work is yet to begin.
Cash provided by operations in fiscal 2020 was $26,774,000, primarily resulting
from the sale of investment securities and net income. The decrease in costs and
estimated earnings in excess of billings of $7.4 million reflects the completion
of customer contracts with revenues recognized over time that were open at the
end of fiscal 2019 and the reduced number of such contracts open at the end of
fiscal 2020. The increase in inventories of $1.7 million reflects the progress
on several contract jobs where revenues are recognized at a point in time.
Customer deposits increased $1.9 million, reflecting the down payments on these
jobs.
Cash flows used in investing activities for the year ended September 30, 2021 of
$16,436,000 were related to the acquisition of the Blaw-Knox paver line and
subsequent capital expenditures, primarily for systems software and leasehold
improvements for the paver line's manufacturing facility. Cash provided by
financing activities of $264,000 for the year ended September 30, 2021, related
to proceeds from the exercise of stock options.
Cash used in investing activities during the year ended September 30, 2020 of
$1,595,000 for the year ended September 30, 2020, related primarily to capital
expenditures for manufacturing equipment. Cash provided by financing activities
of $103,000 in fiscal 2020 related to proceeds from the exercise of stock
options.
Critical Accounting Policies, Estimates and Assumptions
The Company believes the following discussion addresses it's most critical
accounting policies, which are those that are most important to the portrayal of
the Company's 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 Consolidated Financial
Statements, "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. 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
The Company accounts for revenues and related expenses under the provisions of
ASU
No. 2014-09,
Revenue from Contracts with Customers
(Topic 606), as amended ("ASU
No. 2014-09").
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
related 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 $1,903,000 and $6,405,000 at
September 30, 2021 and 2020, respectively, and are included in current assets as
costs and estimated earnings in excess of billings on the Company's consolidated
balance sheets. The Company anticipates that all of the contract assets at
September 30, 2021, 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 services
are completed. Accounts receivable related to contracts with customers at
September 30, 2021 and September 30, 2020 were $210,000 and $223,000,
respectively.
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
September 30, 2021 and September 30, 2020. Customer deposits related to
contracts with customers were $5,244,000 and $3,853,000 at September 30, 2021
and 2020, respectively, and are included in current liabilities on the Company's
consolidated balance sheets.
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.

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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.
Inventories
Inventories are valued at the lower of cost or net realizable value, with cost
being determined under the
first-in,
first-out
("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, an
allowance is established to reduce the cost basis of inventories three to four
years old by 50%, the cost basis of inventories four to five years old by 75%,
and the cost basis of inventories greater than five years old 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 consolidated income statements. Net unrealized
gains and losses are reported in the consolidated income statements 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.
Inflation
The overall effects of inflation on the Company's business during fiscal 2021
have been significant relative to prior years. The Company monitors the prices
it charges for its products and services on an ongoing basis and has been able
to adjust its prices to take into account future changes in the rate of
inflation.
Contractual Obligations
The Company had no long-term or short-term debt as of September 30, 2021 and
there was no long-term debt facility in place at September 30, 2021.

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In April 2020, a financial institution issued an irrevocable standby letter of
credit ("letter of credit") on behalf of the Company for the benefit of one of
the Company's insurance carriers. The maximum amount that can be drawn by the
beneficiary under the letter of credit is $150,000. The letter of credit expires
in April 2022, unless terminated earlier, and can be extended, as provided by
the agreement. The Company intends to renew the letter of credit for as long as
the Company does business with the beneficiary insurance carrier. The letter is
collateralized by restricted cash of the same amount on any outstanding
drawings. To date, no amounts have been drawn under the letter of credit.
On August 28, 2020, the Company entered into a three year operating lease for
property related to the manufacturing and warehousing of the Blaw-Knox paver
business. The lease term is for the period September 1, 2020 through August 31,
2023. On October 9, 2020, the Company entered into an operating lease for
additional warehousing space for paver inventory. The lease term is for one year
beginning November 2020 with automatic
one-year
renewals.
Off-Balance
Sheet Arrangements
None

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