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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

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

 

FOR THE PERIOD ENDED December 31, 2004

 

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 0-3821

 


 

GENCOR INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware   59-0933147

(State or other jurisdiction of

incorporated or organization)

 

(I.R.S. Employer

Identification No.)

 

5201 North Orange Blossom Trail, Orlando, Florida 32810

(Address of principal executive offices) (Zip Code)

 

(407) 290-6000

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x

 

Indicate number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

Class


 

Outstanding at January 31, 2005


Common stock, $.10 par value   7,026,070 shares
Class B stock, $.10 par value   1,798,398 shares

 



Table of Contents

GENCOR INDUSTRIES, INC.

 

Index

 

             Page

Part I.

  Financial Information     
    Item 1.   Financial Statements     
        Condensed consolidated balance sheets – December 31, 2004 (Unaudited) and September 30, 2004    3
        Unaudited condensed consolidated statement of operations - Three months ended December 31, 2004 and 2003    4
        Unaudited condensed consolidated statements of cash flows – Three months ended December 31, 2004 and 2003    5
        Notes to condensed consolidated financial statements    6
    Item 2.   Management’s Discussion and Analysis of Financial Position and Results of Operations    8
    Item 3.   Quantitative and Qualitative Disclosure About Market Risk    10
    Item 4.   Controls and Procedures    11

Part II.

  Other Information     
    Item 6.   Exhibits and Reports on Form 8-K    12

Signatures

   13

 

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Part I. Financial Information

 

Item 1. Financial Statements

 

GENCOR INDUSTRIES, INC.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

    

December 31,

2004


   

September 30,

2004


 
      
     (Unaudited)        

ASSETS

                

Current assets:

                

Cash and cash equivalents

   $ 440     $ 550  

Accounts receivable, less allowance for doubtful accounts of $1,250 ($1,214 at September 30, 2004)

     2,130       2,401  

Other receivables

     180       120  

Inventories, net

     18,737       16,944  

Deferred income taxes

     602       602  

Prepaid expenses

     1,385       1,578  
    


 


Total current assets

     23,474       22,195  

Property and equipment, net

     11,805       11,317  

Assets held for sale

     5,449       5,449  

Other assets

     3,811       3,851  
    


 


Total assets

   $ 44,539     $ 42,812  
    


 


LIABILITIES AND SHAREHOLDERS’ EQUITY

                

Current liabilities:

                

Accounts payable

   $ 3,896     $ 3,477  

Customer deposits

     3,081       1,099  

Income and other taxes payable

     3,712       4,372  

Accrued expenses

     9,372       9,489  
    


 


Total current liabilities

     20,061       18,437  

Long-term debt

     5,974       5,701  

Deferred income taxes

     71       71  

Other liabilities

     3,309       3,309  
    


 


Total liabilities

     29,415       27,518  
    


 


Commitments and contingencies

                

Shareholders’ equity:

                

Preferred stock, par value $.10 per share; authorized 300,000 shares; none issued

     —         —    

Common stock, par value $.10 per share; 15,000,000 shares authorized; 7,014,070 shares and 7,093,470 shares issued at December 31, 2004 and September 30, 2004, respectively

     711       709  

Class B stock, par value $.10 per share; 6,000,000 shares authorized; 1,878,398 shares issued at December 31, 2004 and September 30, 2004

     188       188  

Capital in excess of par value

     11,513       11,467  

Retained earnings

     10,403       10,747  

Accumulated other comprehensive income (loss)

     (5,892 )     (6,018 )

Subscription receivable from officer

     (95 )     (95 )

Common stock in treasury, 179,400 shares at cost

     (1,704 )     (1,704 )
    


 


Total shareholders’ equity

     15,124       15,294  
    


 


     $ 44,539     $ 42,812  
    


 


 

See notes to condensed consolidated financial statements.

 

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GENCOR INDUSTRIES, INC.

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share data)

 

    

Three Months Ended

December 31,


 
     2004

    2003

 

Net revenue

   $ 9,107     $ 11,920  

Costs and expenses:

                

Production costs

     6,821       8,507  

Product engineering and development

     495       491  

Selling, general and administrative

     2,168       2,513  
    


 


       9,484       11,511  
    


 


Operating income (loss)

     (377 )     409  

Other income (expense):

                

Interest income

     3       7  

Interest expense

     (91 )     (56 )

Miscellaneous

     3       85  
    


 


       85       36  
    


 


Income (loss) before income taxes

     (462 )     445  
    


 


Income taxes (benefit)

     (118 )     197  
    


 


Net income (loss)

   $ (344 )   $ 248  
    


 


Basic and diluted earnings per common share:

                

Basic earnings per share

   $ (.04 )   $ .03  
    


 


Diluted earnings per share

   $ (.04 )   $ .03  
    


 


 

See notes to condensed consolidated financial statements.

 

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GENCOR INDUSTRIES, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

In Thousands

 

     Three Months Ended
December 31,


 
     2004

    2003

 

Cash flows from operations:

                

Net income (loss)

   $ (344 )   $ 248  

Adjustments to reconcile net income to cash provided (used) by operations:

                

Depreciation and amortization

     201       235  

Income from investees

     —         —    

Provision for allowance for doubtful accounts

     (36 )     90  

Change in assets and liabilities - net of businesses sold:

                

Accounts receivable

     307       411  

Other receivables

     (60 )     —    

Inventories

     (1,793 )     (2,268 )

Prepaid expenses

     193       5  

Other assets

     —         70  

Accounts payable

     419       808  

Customer deposits

     1,982       1,714  

Income and other taxes payable

     (660 )     114  

Accrued expenses

     (117 )     137  
    


 


Total adjustments

     436       1,316  
    


 


Cash provided by operations

     92       1,564  
    


 


Cash flows from (used for) investing activities:

                

Stock options exercised

     48       —    

Capital expenditures

     (649 )     (96 )
    


 


Cash from (used for) investing activities

     (601 )     (96 )
    


 


Cash flows used for financing activities:

                

Repayment of debt

     —         (1,836 )

Net Borrowings

     273       —    
    


 


Cash provided (used) for financing activities

     273       (1,836 )
    


 


Effect of exchange rate changes on cash

     126       12  
    


 


Net increase (decrease) in cash

     (110 )     (356 )

Cash and cash equivalents at:

                

Beginning of quarter

     550       734  
    


 


End of quarter

   $ 440     $ 378  
    


 


 

See accompanying notes to condensed consolidated financial statements.

 

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GENCOR INDUSTRIES, INC.

 

Notes to Condensed Consolidated Financial Statements

All amounts in thousands, except per share amounts

 

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 footnotes 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 three months ended December 31, 2004 are not necessarily indicative of the results that may be expected for the year ended September 30, 2005.

 

The balance sheet at September 30, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in the Gencor Industries, Inc. Annual Report on Form 10-K for the year ended September 30, 2004.

 

Note 2 – Inventories

 

The components of inventory consist of the following:

 

    

December 31,

2004


  

September 30,

2004


       

Raw materials

   $ 7,737    $ 7,294

Work in process

     4,186      4,574

Finished goods

     5,506      4,083

Used equipment

     1,308      993
    

  

     $ 18,737    $ 16,944
    

  

 

Note 3 – Earnings Per Share Data

 

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated.

 

     Three Months Ended
December 31,


     2004

    2003

Net income (loss)

   $ (344 )   $ 248
    


 

Denominator (shares in thousands):

              

Weighted average shares outstanding

   $ 8,797     $ 8,682

Effect of dilutive stock options

     —         499
    


 

Denominator for diluted EPS computation

   $ 8,797     $ 9,181
    


 

Per common share:

              

Basic:

              

Net income (loss)

   $ (0.04 )   $ 0.03
    


 

Diluted:

              

Net income (loss)

   $ (0.04 )   $ 0.03
    


 

 

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Note 4 – Comprehensive Income (Loss)

 

The total comprehensive income (loss) for the three-months ended December 31, 2004 and 2003 was ($218) and $260, respectively. Total comprehensive income (loss) differs from net income (loss) due to gains and losses resulting from foreign currency translation, which are reflected separately in the shareholders’ equity section of the balance sheet under the caption “Accumulated other comprehensive loss.” Gains and losses resulting from foreign currency transactions are included in income.

 

Note 5 – Income From Investees and Subsequent Event

 

The Company owns a 45% interest in Carbontronics LLC and a 25% interest in Carbontronics Fuels LLC and Carbontronics II LLC. These interests were obtained as part of contracts to build four synthetic fuel production plants during 1998. The Company has no basis in these equity investments or requirement to provide future funding. Any income arising from these investments is dependent upon tax credits (adjusted for operating losses at the fuel plants) being generated as a result of synthetic fuel production, which will be recorded as received. The Company received no distributions in fiscal 2004, nor the quarter ended December 31, 2004, and did receive distributions of $13,428 and $1,526, during 2003 and 2002 respectively.

 

In 2003, the Company was notified by its investee General Partner that the income tax returns for its synthetic fuel producing partnership are being audited. As previously reported, the Limited Partners may declare a “Tax Event” and suspend further distributions indefinitely. The Company was informed that the Limited Partners have declared a “Tax Event” and therefore future distributions had ceased.

 

On January 5, 2005, the Company was informed that the IRS had concluded its examination of the investees with no material adverse findings. As a result, distributions suspended since August of 2003 resumed and on January 11, 2005, the Company received $24.1 million in cash distributions. These distributions are subject to state and Federal income taxes.

 

Future benefits from our synthetic fuel investments depend on whether the production from these plants will continue to qualify for tax credits under Section 29 of the Internal Revenue Code; and the ability to economically produce and market the synthetic fuel produced by these plants; future IRS reviews, and as well the world price of crude oil. Any one of these eventualities may interrupt, reduce, or terminate further distributions.

 

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

 

Results of Operations

 

Net sales for the quarters ended December 31, 2004 and 2003 were $9.1 million and $11.9 million, respectively. Domestic sales during the first quarter of fiscal 2005 were $8.8 million reflecting a decrease of $2.8 million from year ago levels. Domestic sales were lower than the prior year’s quarter due to the timing of finalizing certain orders and delays in customers obtaining required permits. The Company’s revenues are concentrated in the asphalt-related business and subject to a seasonal slow-down during the third and fourth quarters of the calendar year. Foreign sales were unchanged from the prior year.

 

Gross margins as a percent of net sales decreased by 3.5% during the quarter ended December 31, 2004 from year ago levels due to lower sales volumes not fully absorbing overhead in the quarter.

 

Product engineering and development costs combined with selling and administrative expenses have decreased from year ago levels. Selling and administrative expense last year includes $270 of costs related to the tender offer withdrawn in December 2003.

 

Other Income (Expense)

 

Interest expense for the first quarter of fiscal 2005 increased by $35, from the first quarter of fiscal 2004, reflecting an increase in interest rates and an increase in debt balance.

 

Income tax expense decreased by $.3 million from year ago levels, reflecting the decrease in pre-tax income.

 

The Company received no distributions in fiscal 2004, nor the quarter ended December 31, 2004 from its interest in Carbontronics LLC, Carbontronics Fuels LLC and Carbontronics II LLC. Distributions suspended since August 2003 resumed and on January 11, 2005, the Company received $24.1 million in cash distributions. Future distributions from these partnerships depend upon the production of these operations continuing to qualify for tax credits under Section 29 of the Internal Revenue Code and the ability to economically produce and market synthetic fuel produced by the plants.

 

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Liquidity and Capital Resources

 

On August 1, 2003, the Company entered into a Revolving Credit and Security Agreement with PNC Bank, N.A. The Agreement established a three year revolving $20 million credit facility. The facility provides for advances based on accounts receivable, inventory and real estate. As of December 31, 2004, the Company had $6.0 million borrowed on the facility. The facility includes a $2 million limit on letters of credit. At December 31, 2004, the Company had $.3 million of letters of credit outstanding. The interest rate at December 31, 2004, is at prime less .25% (5.00%) and subject to change based upon the Fixed Charge Coverage Ratio. The Company is required to maintain a Fixed Charge Coverage Ratio of 1.1:1. There are no required repayments as long as there are no defaults and there is adequate eligible collateral. Substantially all of Company’s assets are pledged as security under the Agreement.

 

Seasonality

 

The Company is concentrated in the asphalt-related business and is subject to a seasonal slow-down during the third and fourth quarters of the calendar year. Traditionally, the Company’s customers do not purchase new equipment for shipment during the summer and fall months to avoid disrupting their peak season for highway construction and repair work. This slow-down often results in lower reported sales and earnings and or losses during the first and fourth quarters of the Company’s fiscal year ended September 30.

 

Forward-Looking Information

 

This Form 10-Q contains certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which represent the Company’s expectations and beliefs, including, but not limited to, statements concerning gross margins, sales of the Company’s products and future financing plans. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company’s control. Actual results may differ materially depending on a variety of important factors, including the financial condition of the Company’s customers, changes in the economic and competitive environments and demand for the Company’s products.

 

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Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company operates manufacturing facilities and sales offices principally located in the United States and the United Kingdom. The Company is subject to business risks inherent in non-U.S. activities, including political and economic uncertainty, import and export limitations, and market risk related to changes in interest rates and foreign currency exchange rates. The Company’s principal currency exposure against the U.S. dollar is the British pound. Periodically, the Company has used derivative financial instruments consisting primarily of interest rate hedge agreements to manage exposures to interest rate changes. The Company’s objective in managing its exposure to changes in interest rates on its variable rate debt is to limit the impact of such changes on earnings and cash flow and to reduce its overall borrowing costs.

 

At December 31, 2004, the Company had $6.0 million of debt outstanding. Under the Credit Agreement, the Company’s borrowings will bear interest at variable rates based upon the prime rate. The Company performed a sensitivity analysis assuming a hypothetical 1% adverse movement in the interest rates on the debt outstanding at the end of December 2004. Such a movement in interest rates would cause the Company to recognize additional quarterly interest expense of approximately $15 along with a corresponding decrease in cash flows.

 

The above sensitivity analysis for interest rate risk excludes accounts receivable, accounts payable and accrued liabilities because of the short-term maturity of such instruments. The analysis does not consider the effect on other variables such as changes in sales volumes or management’s actions with respect to levels of capital expenditures, future acquisitions or planned divestitures, all of which could be significantly influenced by changes in interest rates and cause the results to differ significantly from those indicated by the sensitivity analysis.

 

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Item 4. Controls and Procedures

 

The Company’s President and Chief Financial Officer evaluated the Company’s disclosure controls and procedures within 90 days of the filing date of this quarterly report. Based upon this evaluation, the Company’s President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that it files with the Securities and Exchange Commission.

 

There were no significant changes in the Company’s internal controls or, to the knowledge of the management of the Company, in other factors that could significantly affect internal controls subsequent to the evaluation date.

 

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Part II. Other Information

 

Item 6. Exhibits and Reports on Form 8-K

 

(a) Exhibits

 

31.1   

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2   

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32    Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.

 

(b) Reports on Form 8-K.

 

December 21, 2004 - Announcement of Fiscal 2004 Results

 

January 6, 2005 - Anticipation of Cash Distributions from Investees

 

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SIGNATURES

 

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

 

   

GENCOR INDUSTRIES, INC.

February 10, 2005

 

By:

 

/s/ E.J. Elliott


       

E.J. Elliott, Chairman and President

February 10, 2005

 

By:

 

/s/ Scott W. Runkel


       

Scott W. Runkel, Chief Financial Officer

 

 

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