GENCOR INDUSTRIES INC

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Gencor Industries, Inc. and its subsidiaries (collectively, the “Company”) is a diversified, heavy machinery manufacturer for the production of highway construction materials and environmental control machinery and equipment. The Company’s core products include asphalt plants, combustion systems, fluid heat transfer systems and asphalt pavers. The Company’s products are manufactured at three facilities in the United States.

These consolidated financial statements include the accounts of Gencor Industries, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Accounting Pronouncements and Policies

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

Use of Estimates

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Earnings per Share

The consolidated financial statements include basic and diluted earnings per share (“EPS”) information. Basic EPS is based on the weighted-average number of shares outstanding. Diluted EPS is based on the sum of the weighted-average number of shares outstanding plus common stock equivalents. There were no equity compensation plans and arrangements previously approved by security holders as of September 30, 2024 and 2023 and there are no common stock equivalents as of September 30, 2024 and September 30, 2023.

The following presents the calculation of the basic and diluted EPS for the years ended September 30, 2024 and 2023:

Cash Equivalents

Cash equivalents consist of short-term certificates of deposit and deposits in money market accounts with original maturities of three months or less.

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 consolidated income statements. Net changes in unrealized gains and losses are reported in the consolidated income statements in the current 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 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, and 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 are provided by the Company’s professional investment management firms. From time to time the Company may transfer cash between its marketable securities portfolio and operating cash and cash equivalents.

The following table sets forth by level, within the fair value hierarchy, the Company’s assets measured at fair value as of September 30, 2024:

Net unrealized gains and losses reported during fiscal 2024 on trading securities still held as of September 30, 2024, were $2,412,000. There wereno transfers of investments between Level 1 and Level 2 during the year ended September 30, 2024.

The following table sets forth by level, within the fair value hierarchy, the Company’s assets measured at fair value as of September 30, 2023:

Net unrealized gains and losses reported during fiscal 2023 on trading securities still held as of September 30, 2023, were $4,316,000. There wereno transfers of investments between Level 1 and Level 2 during the year ended September 30, 2023. $10,000,000 was transferred from the investment portfolio to cash to

fund

operating needs of the business during fiscal 2023.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, customer deposits and accrued expenses approximate fair value because of the short-term nature of these items.

Foreign Currency Transactions

Gains and losses resulting from foreign currency transactions are included in income and were not significant during the years ended September 30, 2024 and 2023.

Risk Management

Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and cash equivalents, marketable securities, and accounts receivable. The Company maintains its cash accounts in various domestic financial institutions which may from time to time exceed federally insured limits. Operating cash is retained in overnight sweep accounts which allow for offsets to treasury service charges. The marketable securities include investments in cash and money funds, mutual funds, exchange traded funds (“ETF’s”), corporate bonds, government securities and equities through professional investment management firms. Investment securities are exposed to various risks, such as interest rate, market and credit risks.

The Company’s customers are not concentrated in any specific geographic region, but are concentrated in the road and highway construction industry. The Company extends limited credit on parts sales to its customers based upon their credit-worthiness. Generally, the Company requires a significant

up-front

deposit before beginning manufacturing on complete asphalt plant and component orders, and requires full payment subject to hold-back provisions prior to shipment. The Company establishes an allowance for credit losses based upon the credit risk of specific customers, historical trends and other pertinent information.

Inventories

Inventories are 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. Appropriate consideration is given to obsolescence, excessive levels, physical 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, an allowance is established to reduce the cost basis of inventories three tofour years old by 50%, the cost basis of inventories four tofive years old by 75%, and the cost basis of inventories greater than five years old tozero. 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.

Changes in the allowance for slow-moving and obsolete inventories are as follows:

Property and Equipment

Property and equipment are stated at cost (see Note 4). Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the related assets, as follows:

Impairments

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 of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. No such impairment losses were recorded during the years ended September 30, 2024 and 2023.

Revenues and Expenses

The Company accounts for revenues and related expenses under the provisions of ASU

No. 2014-09

–

Revenue from Contracts with Customers (Topic 606)

.

The following table disaggregates the Company’s net revenue by major source for the years ended September 30, 2024 and 2023:

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 $9,339,000 and $1,508,000 at September 30, 2024 and 2023, respectively, and are included in current assets on the Company’s consolidated balance sheets. The Company anticipates that all of the contract assets at September 30, 2024, will be billed and collected withinone 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 $163,000 and $114,000 at September 30, 2024 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.

Changes in the accrual for warranty and related costs as of September 30, 2024 and 2023 consisted of the following:

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 September 30, 2024 and 2023. Customer deposits related to contracts with customers

were $5,018,000 and $6,815,000 at September 30, 2024 and 2023, 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 production costs 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 credit losses 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 category. Account balances are charged off against the allowance for credit losses when they are determined to be uncollectible. Any recoveries of account balances previously considered in the allowance for credit losses reduce future additions to the allowance for credit losses. The allowance for credit losses 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.

Changes in the allowance for credit losses as of September 30, 2024 and 2023 consisted of the following:

Income Taxes

Income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and primarily consist of taxes currently due, plus deferred taxes (see Note 6 – Income Taxes).

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns using current tax rates. The Company and its domestic subsidiaries file a consolidated federal income tax return.

Deferred tax assets and liabilities are measured using the rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse and the credits are expected to be used. The effect on deferred tax assets and liabilities of the change in tax rates is recognized in income in the period that includes the enactment date. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, the Company is more likely than not to realize the benefit of a deferred tax asset and whether a valuation allowance is needed for some portion or all of a deferred tax asset. No such valuation allowances were recorded as of September 30, 2024 and 2023.

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 fiscal 2024 and 2023 reflect the impact of the reduced rates under the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) which was signed into law on December 22, 2017.

Comprehensive Income

For the years ended September 30, 2024 and 2023, other comprehensive income is equal to net income.

Reporting Segments and Geographic Areas

The Company has one reporting segment, equipment for the highway construction industry. Based on evaluation of the criteria of ASC 280 – Segment Reporting, including the nature of products and services, the nature of the production processes, the type of customers and the methods used to distribute products and services, the Company determined that its operating segments meet the requirements for aggregation. The Company designs, manufactures and sells asphalt plants and pavers, combustion systems and fluid heat transfer systems, for the highway construction industry and environmental and petrochemical markets. The Company’s products are manufactured at three facilities in the United States. The Company also services and sells spare parts for its equipment.

For fiscal 2024 and 2023, total revenues of $113,166,000 and $105,075,000, and total long-term assets of $15,279,000 and $16,970,000, respectively, were attributed to the United States. Revenues are attributed to geographic areas based on the location of the assets producing the revenues.

Customers with 10% (or greater) of Net Revenues

During the year ended September 30, 2024,

one

customer accounted for 11.3% of net revenue. One customer accounted for 14.8% of net revenue for the year ended September 30, 2023.

Subsequent Events

Management has evaluated events occurring from September 30, 2024 through the date these

consolidated

financial statements were filed with the Securities and Exchange Commission for proper recording and disclosure herein.

Reclassifications

Certain amounts in the September 30, 2023 consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no impact on previously reported net income for the year ended September 30, 2023.

NOTE 2 – INVENTORIES

Inventories are valued at the lower of cost or net realizable value.

Net inventories as of September 30, 2024 and 2023 consisted of the following:

Slow-moving and obsolete inventory reserves were $13,331,000 and $9,813,000 at September 30, 2024 and 2023, respectively.

NOTE 3 – CONTRACT ASSETS

Contract assets reflect costs and estimated earnings in excess of billings on uncompleted contracts and consisted of the following as of September 30, 2024 and 2023:

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment as of September 30, 2024 and 2023 consisted of the following:

Property and equipment includes approximately $23,365,000 and $22,693,000 of fully depreciated assets, which remained in service during fiscal 2024 and 2023,

respectively

. Also, included in property and equipment as of September 30, 2024 and 2023 is approximately $1,327,000 and $1,295,000, respectively, of assets not yet placed in operation and, therefore, not subject to depreciation during the years ended September 30, 2024 and 2023, respectively.

NOTE 5 – ACCRUED EXPENSES

Accrued expenses as of September 30, 2024 and 2023 consisted of the following:

NOTE 6 – INCOME TAXES

The provision for income tax expense consisted of the following:

A reconciliation of the federal statutory tax rate to the total tax provision is as follows:

Deferred income tax assets and liabilities as of September 30, 2024 and 2023 consisted of the following:

Total income taxes paid in fiscal 2024 and 2023 were $7,860,000 and $2,300,000, respectively.

GAAP prescribes a comprehensive model for the financial recognition, measurement, classification, and disclosure of

uncertain tax positions. GAAP contains a

two-step

approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, based on the technical merits of the position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

Significant judgment is required in evaluating the Company’s uncertain tax position and determining the Company’s provision for taxes. Although the Company believes the reserves of unrecognized tax benefits (“UTB’s”) are reasonable, no assurance can be given that the final outcome of these matters will not be different from that which is reflected in the Company’s historical income tax provision and accruals. The Company adjusts these reserves in light of changing facts and circumstances. As of September 30, 2024 and 2023, the Company had UTB’s of $

1,376,000 and $

176,000

, respectively. The Company accrued $1.2 million of UTB’s in the year ended September 30, 2024.

The Company accrued $45,000 of UTB’s in the year ended September 30, 2023.

A reconciliation of the beginning and ending amount of our unrecognized tax benefits for the year ended September 30, 2024 is as follows:

The Company recognizes interest and penalties accrued related to UTB’s as a component of income tax expense. There were

no

additional accruals of interest expense nor penalties of significance during fiscal years ended September 30, 2024 and 2023. It is reasonably possible that the amount of the UTB’s with respect to certain unrecognized tax positions will increase or decrease during the next 12 months. The Company does not expect the change to have a material effect on its results of operations or its financial position. The only expected potential reason for change would be the ultimate results stemming from any examinations by taxing authorities. If recognized, the entire amount of UTB’s would have an impact on the Company’s effective income tax rate.

The effective income tax rate for fiscal 2024 was 29.8% versus 21.9% in fiscal 2023.

There wereno R&D Credits generated in fiscal 2024 or 2023 and there wereno carryforwards of R&D Credits as of September 30, 2024 or September 30, 2023.

The Company files U.S. federal income tax returns, as well as income tax returns in multiple state jurisdictions. No income tax returns are currently under examination by taxing authorities. The Company’s U.S. federal income tax returns filed for tax years prior to fiscal year ended September 30, 2021 are generally no longer subject to examination by taxing authorities due to the expiration of the statute of limitations. With a few exceptions, the Company is no longer subject to state and local income tax examinations for periods prior to fiscal 2020.

NOTE 7 – RETIREMENT BENEFITS

The Company has a voluntary 401(k) employee benefit plan, which covers all eligible, domestic employees. The Company makes discretionary matching contributions subject to a maximum level, in accordance with the terms of the plan. The Company charged approximately $373,000 and $343,000 to expense under the provisions of the plan during the years ended September 30, 2024 and 2023, respectively.

NOTE 8 – LONG-TERM DEBT AND ARRANGEMENTS WITH FINANCIAL INSTITUTIONS

The Company hadno long-term debt outstanding at September 30, 2024 or 2023. The Company does not currently require a credit facility.

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

February 2026

, 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.

NOTE 9 – LEASES

The Company leases certain equipment under

non-cancelable

operating leases. Future minimum rental payments under these leases at September 30, 2024 are immaterial. Total rental expense for both of the fiscal years ended September 30, 2024 and

2023 was $47,000.

On August 28, 2020, the Company entered into athree-year operating lease for property related to the manufacturing and warehousing. The lease term was for the period beginning on September 1, 2020 through August 31, 2023.

In accordance with ASU

2016-02

–

Leases (Topic 842)

, the Company recorded a

right-of-use

(“ROU”) asset totaling

$970,000 and related lease liabilities at inception. In March 2023, the Company extended the lease term through August 31, 2024. In accordance with ASU

2016-02,

the Company recorded a ROU asset totaling $352,000 and related lease liabilities upon extension. In March 2024, the Company extended the lease term through August 31, 2025. In accordance with ASU

2016-02,

the Company recorded a ROU asset totaling $361,000 and related lease liabilities upon extension.

For the year ended September 30, 2024, operating lease costs were $432,000 and cash payments related to these operating leases were $463,000. For the year ended September 30, 2023, operating lease costs were $429,000 and cash payments related to these operating leases were $458,000.

Other information concerning the Company’s operating lease accounted for under ASC 842 guidelines as of September 30, 2024 and September 30, 2023, is as follows:

Future annual minimum lease payments as of September 30, 2024 are as follows:

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Litigation

The Company is involved in legal proceedings arising out of the normal course of business, none of which we believe will have a material adverse effect on our business, financial condition or results of operations. Claims made in the ordinary course of business may be covered in whole or in part by insurance.

NOTE 11 – SHAREHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Shareholders’ Equity

Under the Company’s Certificate of Incorporation, as amended, certain rights of the holders of the Company’s common stock are modified by shares of Class B stock for as long as such shares shall remain outstanding. During that period,

holders

of common stock will have the right to elect approximately 25% of the Company’s Board of

Directors

, and conversely, holders of Class B stock will be entitled to elect approximately 75% of the Company’s Board of Directors. During the period when shares of common stock and Class B stock are outstanding, certain matters submitted to a vote of shareholders will also require approval of the holders of common stock and Class B stock, each voting separately as a class. Common stock and Class B shareholders have equal rights with respect to dividends, preferences, and rights, including rights in liquidation.

Stock-Based Compensation

There were no equity compensation plans and arrangements previously approved by security holders as of September 30, 2024 and 2023.