GENCOR INDUSTRIES INC

Quarter Ended December 31, 2023 versus December 31, 2022

Net revenues for the quarter ended December 31, 2023 of $26,018,000 increased slightly over net revenues for the quarter ended December 31, 2022 of $25,825,000. Increased revenues from parts sales and contract equipment sales recognized over time were mostly offset by decreased revenues from contract equipment sales recognized at a point in time.

As a percent of sales, gross profit margins improved to 29.0% in the quarter ended December 31, 2023, compared to 22.5% in the quarter ended December 31, 2022 on improved manufacturing efficiencies and favorable price realization.

Product engineering and development expenses decreased $96,000 to $801,000 for the quarter ended December 31, 2023, as compared to $897,000 for the quarter ended December 31, 2022, due to reduced headcount. Selling, general and administrative (“SG&A”) expenses increased $551,000 to $3,350,000 for the quarter ended December 31, 2023, compared to $2,799,000 for the quarter ended December 31, 2022. The increase in SG&A expenses was primarily due to increased trade shows and professional expenses.

The Company had operating income of $3,383,000 for the quarter ended December 31, 2023 as compared to $2,119,000 for the quarter ended December 31, 2022. The increased operating income was due to improved gross profit margins for the quarter ended December 31, 2023.

For the quarter ended December 31, 2023, the Company had netnon-operating income of $2,235,000 compared to $2,455,000 for the quarter ended December 31, 2022. Net interest and dividend income for the quarter ended December 31, 2023 was $716,000 compared to $493,000 for the quarter ended December 31, 2022. The increase was primarily due to higher rates earned on fixed income investments coupled with the Company reallocating a majority of its holdings in equities to fixed income in January 2023. Net realized and unrealized gains on marketable securities for the quarter ended December 31, 2023 were $1,519,000 compared to $1,962,000 for the quarter ended December 31, 2022.

The effective income tax rates for the quarters ended December 31, 2023 and December 31, 2022 were 23.0% and 24.0%, respectively. Net income for the quarter ended December 31, 2023 was $4,326,000, or $0.30 per basic and diluted share, compared to net income of $3,476,000, or $0.24 per basic and diluted share for the quarter ended December 31, 2022.

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 as of December 31, 2023 or September 30, 2023. 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 2024, 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.

As of December 31, 2023, the Company had $18,559,000 in cash and cash equivalents, and $86,231,000 in marketable securities, including $30,501,000 in corporate bonds, $3,462,000 in exchange-traded funds, $52,104,000 in government securities, and $164,000 in cash and money funds. The marketable securities are invested through a professional investment management firm. These securities may be liquidated at any time into cash and cash equivalents.

The Company’s backlog was $61.3 million at December 31, 2023 compared to $42.5 million at December 31, 2022. The Company’s working capital (defined as current assets less current liabilities) was $169.8 million at December 31, 2023 and $164.8 million at September 30, 2023. Cash flows provided by operations during the quarter ended December 31, 2023, were $1,894,000. The significant purchases, sales and maturities of marketable securities shown on the condensed consolidated statements of cash flows, reflect the recurring purchases and sales of United States treasury bills. Accounts receivable increased $1,561,000 compared to September 30, 2023, primarily from increased parts sales. Costs and estimated earnings in excess of billings increased $4,656,000 with the timing of inventory build and percentage of completion recognition on plant sales where revenue is recognized over time. Customer deposits increased $5,887,000 reflecting down payments and final payments on contract jobs not yet shipped.

Cash flows used in investing activities for the quarter ended December 31, 2023 of $366,000 were related to capital expenditures, primarily for building improvements and handling equipment.

Seasonality

The Company’s primary business is the manufacture of asphalt plants and related components and asphalt pavers. These products typically experience a seasonal slowdown during the third and fourth quarters of the calendar year. This slowdown often results in lower reported sales and operating results during the first and fourth quarters of the 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, 2023, “Nature of Operations and Summary of Significant Accounting 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

The Company recognizes revenue under ASUNo. 2014-09, Revenue from Contracts with Customers (Topic 606). 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 $6,164,000 and $1,508,000 at December 31, 2023 and September 30, 2023, respectively, and are included in current assets as costs and estimated earnings in excess of billings on the Company’s condensed consolidated balance sheets. The Company anticipates that all of the contract assets at December 31, 2023, 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 for equipment sales were $76,000 and $114,000 at December 31, 2023 and September 30, 2023, 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 December 31, 2023 and September 30, 2023. Customer deposits related to contracts with customers were $12,702,000 and $6,815,000 at December 31, 2023 and September 30, 2023, respectively, and are included in current liabilities on the Company’s condensed 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 with the revenue recognition.

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 theless-than-90-day past due aging category. Account balances are charged off against the allowance for doubtful accounts when they are determined to be uncollectible. Any recoveries of account balances previously considered in the allowance for doubtful accounts reduce future additions to the allowance for doubtful accounts. The allowance for doubtful accounts also includes an estimate for returns and allowances. 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 known issues and historical experience.

Inventories

Inventories are valued at the lower of cost or net realizable value, with cost being determined under the first in, first out method and net realizable value defined as the estimated selling price of goods less reasonable costs of completion and delivery. 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 ontrade-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.

Marketable Securities and Fair Value Measurements

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 income statements. Net unrealized gains and (losses) are reported in the condensed consolidated income statements 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