UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
OR
Commission file number 0-3821
GENCOR INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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 July 16, 2003
Common stock, $.10 par value
Class B stock, $.10 par value
Item 1.
Item 2.
Item 3.
Item 4.
Item 6.
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Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
In thousands, except share amounts
June 30
2003
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $1,194 ($1,234 at September 30, 2002)
Inventories
Prepaid expenses
Total current assets
Property and equipment, net
Goodwill, net of accumulated amortization
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Notes payable
Current portion of long-term debt
Accounts payable
Customer deposits
Income and other taxes payable
Accrued expenses
Total current liabilities
Long-term debt
Other liabilities
Total liabilities
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; 6,971,470 shares issued
Class B stock, par value $.10 per share; 6,000,000 shares authorized: 1,890,398 shares issued
Capital in excess of par value
Retained Earnings
Accumulated other comprehensive loss
Subscription receivable from officer
Common stock in treasury, 179,400 shares at cost
Total liabilities and shareholders’ equity
See notes to unaudited condensed consolidated financial statements.
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Unaudited Condensed Consolidated Income Statements
In thousands, except per share amounts
Net sales
Costs and expenses:
Costs of products sold
Product engineering and development
Selling, general and administrative
Restructuring costs
Operating income
Other income (expense):
Interest income
Interest expense
Income from investees
Miscellaneous
Income from continuing operations before income taxes
Income taxes
Income from continuing operations
Discontinued operations
Income from discontinued operations, net of income taxes
Net income
Per common share:
Basic:
Diluted:
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Unaudited Condensed Consolidated Statements of Cash Flows
In thousands
Operating activities:
Adjustments to reconcile net income to cash provided by (used for) operating activities:
Depreciation and amortization
(Gain) Loss on disposition of property and equipment
Write-off deferred loan costs
Bad debt expense
Other noncash items
Change in assets and liabilities net of disposed business
Accounts receivable
Accrued expenses and other
Total adjustments
Net cash provided by (used for) operating activities
Investing activities:
Distributions from unconsolidated investees
Capital expenditures
Proceeds from sale of property and equipment
Net cash provided by investing activities
Financing activities:
Repayment of debt
Net cash used for financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
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Notes to Unaudited 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- and nine-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending September 30, 2003.
The balance sheet at September 30, 2002 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, 2002.
Note 2 – Inventories
The components of inventory consist of the following:
Raw materials
Work in process
Finished goods
Used equipment
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Note 3 – Earnings Per Share Data
The following table sets forth the computation of basic and diluted earnings per share:
Income from discontinued operations
Denominator (shares in thousands):
Weighted average shares outstanding
Effect of dilutive stock options
Denominator for diluted EPS computation
Continuing operations
Note 4 – Comprehensive Income (Loss)
Total comprehensive income for the three-and nine-months ended June 30, 2003 was $2,277 and $7,512 respectively, which compares to the total comprehensive income for the three- and nine-months ended June 30, 2002 of $894 and $2,268, respectively. Total comprehensive income differs from net income due to unrealized 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.” Realized gains and losses resulting from foreign currency transactions are included in income.
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Note 5 – Income From Investees
During the first, second and third quarters of fiscal 2003, the Company received cash distributions of $4,239, $4,409 and $4,780, respectively, from its 45% interest in Carbontronics LLC and 25% interest in Carbontronics II LLC and Carbontronics Fuels LLC. These interests were acquired in 1998. The Company has no cost basis in these investments nor requirement to provide future funding. Any income to be derived from these investments is dependent upon tax credits (adjusted for operating losses at the fuel plants) being generated from synthetic fuel production, which are recorded when and if received. The income and distributions projected for fiscal years 1998, 1999, 2000, and 2001 failed in total to materialize. During the first and second quarter of fiscal 2002, distributions of $465 and $1,061, respectively were received. The Company received no distributions in the third quarter of fiscal 2002.
The synthetic fuels industry which encompasses the Company’s investment as described herein is driven by Section 29 of the Internal Revenue Service first adopted in 1980 and designed to provide tax credit incentives to stimulate the development of alternative energy sources. To qualify for such Section 29 tax credits, a tax payer has to meet a long and stringent list of controls and requirements which for each producer of synthetic fuels culminates in a Private Letter Ruling (PLR) issued by the IRS. As a consequence, the historical performance of the entities comprising the Company’s interests in synfuel production has been one of frequent disruptions, and total unpredictability as to when and if any income and distribution thereof may occur. Further, the Limited Partners of these entities have the right to suspend any and all payments under certain conditions and circumstances, including initiations of IRS review (Tax Event).
After the three quarterly distributions of fiscal 2003, in June 2003 the IRS announced that it had reason to question the scientific validity of certain test procedures and results that have been presented to it by taxpayers with interests in synfuel operations as evidence that the required “significant chemical change” has indeed, occurred so as to qualify as synthetic fuel, and is currently reviewing information regarding these test procedures and practices. Accordingly, the IRS has suspended the issuance of PLR’s. In addition, the IRS indicated that it may revoke existing PLR’s that relied on the procedures and results under review if it determines that those test procedures and results do not demonstrate that a significant chemical change has occurred.
The Company believes that under the current pronouncements and actions by the IRS, a significant risk exists that such may be a “Tax Event”, in which case further distributions to Gencor will cease.
Under these circumstances, the Company cannot predict when, if ever, there will be any further distributions, nor in what amount, if any.
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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 nine-months ended June 30, 2003 and 2002 were $48.3 million and $51.2 million, respectively a decrease of $2.9 million or 5.6%. Domestic sales for the nine-month period of fiscal 2003 were $38.7 million reflecting a $5.9 million increase from year ago levels. The increase in domestic sales is primarily due to some recovery of our industry from the September 11 events. Decreased asphalt plant orders at one of the Company’s wholly owned U.K. subsidiaries partially eroded the increase in domestic sales. Net sales for the third quarter of fiscal 2003 reflected a decrease of approximately $3.7 million over the same period of the previous year. The foreign operations accounted for $6.2 million of the decline due to unfavorable market conditions in the U.K., increased competition in the Asian market, as well as the effect of the SARS epidemic. Domestic sales for the third quarter increased by $2.5 million from year ago levels.
Gross margins as a percent of net sales improved by 1% during the nine-months ended June 30, 2003 from year ago levels. Domestic margins improved 4.6% and 1.0% during the three- and nine -month periods ended June 30, 2003. Higher volume and margins on larger contracts contributed to the improvement in domestic margins. Gross margins from foreign sales declined in the three and nine-month periods of fiscal 2003, due to the unfavorable market conditions in the U.K., increased competition in the Asian market, and the effect of the SARS epidemic.
Product engineering and development costs remained constant during the nine-month periods ended 2003 and compared to the quarter ended June 30, 2003. Selling, general and administrative expenses increased $712 and $817 during the three and nine-month periods ended June 30, 2003. The increase in reserve for doubtful accounts due to the consolidation of foreign operations contributed to $1.2 million of the increase during the three and nine –month periods ended June 30, 2003. Domestic selling, general and administrative expenses decreased 7.3% and 6.5% during the three and nine -month periods ended June 30, 2003.
Operating income was $91 in the third quarter and $1.1 million in the nine months of fiscal 2003, compared to $958 for the quarter and $1.8 million for the nine months of fiscal 2002. Operating losses were $1.9 million at a foreign operation in the third quarter and $3.0 million in the nine months of fiscal 2003, compared to operating income of $351 for the quarter and $349 for the nine months of fiscal 2002.
As a result of the recent and nine months unfavorable operating results referred to above, the operations of Gencor International Limited (GIL), one of the Company’s wholly-owned U.K. subsidiaries, are being consolidated with the Domestic operations. Effective July 3, 2003, with the concurrence of our secured senior lender, the U.K. subsidiary was placed into Administration with a court appointed Administrator. The Administrator will manage GIL for the benefit of all creditors. The Company intends to retain all intellectual property and real property and continue the international business, managed and operated domestically by a new subsidiary. The Company does not expect a loss related to this consolidation.
Restructuring costs, primarily legal and professional fees relating to the reorganization were $302 during the first nine-months of fiscal 2002. There were no restructuring costs for the first nine-months of fiscal 2003.
Other Income (Expense)
Interest expense declined $246 and $486 for the three and nine-month periods of fiscal 2003 from the pervious year, reflecting the reduction in the debt balance and lower interest rates.
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After the three quarterly distributions of fiscal 2003, in June 2003 the IRS announced that it had reason to question the scientific validity of certain test procedures and results that have been presented to it by taxpayers with interests in synfuel operations as evidence that the required “significant chemical change” has, indeed, occurred so as to qualify as synthetic fuel, and is currently reviewing information regarding these test procedures and practices. Accordingly, the IRS has suspended the issuance of PLR’s. In addition, the IRS indicated that it may revoke existing PLR’s that relied on the procedures and results under review if it determines that those test procedures and results do not demonstrate that a significant chemical change has occurred.
The Company believes that under the current pronouncements and actions by the IRS, a significant risk exists that such may be a “Tax Event”, in which case distributions to Gencor will cease.
Under these circumstances, the Company can not predict when, if ever there will be any further distributions, nor in what amount, if any.
Income Taxes
Income tax expense increased by $2.1 million and $5.0 million for the three and nine-month periods of fiscal 2003, reflecting the increase in pre-tax income.
Liquidity and Capital Resources
On December 27, 2001, the Company and its Senior Secured Lenders signed an Amended and Restated Senior Secured Credit Agreement, which specifies monthly principal payments of $320 beginning December 2001 and continuing through July 2002, then increasing to $400 in August 2002 and continuing to August 2005, with the remaining balance due September 6, 2005. It is management’s intention to refinance any remaining balance. The interest rate during the term of the loan is based upon the prime rate plus 2%. During fiscal 2002, the Company paid $4,000 in principal and during the first nine months of fiscal 2003, paid an additional $15,142. The Amended and Restated Secured Credit Agreement includes certain other financial and restrictive covenants.
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The Company is presently negotiating for new financing with a new lender to provide a less costly revolving credit facility. New financing is expected to be in place before the end of August.
Pursuant to its Amended Plan of Reorganization, on January 29, 2002 the Company made a principal payment of $488 on the industrial revenue bond. Monthly principal and interest payments of $38 are scheduled to continue until the balance is paid-off in March 2005.
The current ratio of 1.22:1.00 and working capital of $6.4 million at June 30, 2003 compares to the current ratio of 1.59:1.00 and working capital of $16.3 million a year earlier, which reflects the payment of $15.1 million for long term debt reduction.
Cash provided (used) by operations increased from ($515) during the first nine months of fiscal 2002 to $5.3 million for the same period of fiscal 2003. The $5.8 million improvement reflects favorable net cash inflows from increases in customer deposits of $418, income taxes payable of $4.8 million, and decreases in accounts payable of $2.1 million, accrued expenses of $1.5 million, accounts receivable of $1.8 million, and inventories of $4.9 million. Cash used in financing activities reflected principal payments of $14,782 against the secured loan agreements, and $360 against the Industrial Revenue Bond.
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 income from tax credits to the Company, the final expenses related to the U.K. Administration of GIL, 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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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 June 30, 2003, the Company had approximately $15.4 million of debt outstanding. Under the Amended and Restated Secured Credit Agreement, substantially all of the Company’s borrowings bear interest at variable rates based upon the prime rate plus 2%. The Company performed a sensitivity analysis assuming a hypothetical 1% adverse movement in the interest rates on the debt outstanding at the end of June 2003. Such a movement in interest rates would cause the Company to recognize additional interest expense for the nine-month period ended June 30, 2003 of approximately $185 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 influenced significantly 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
10.2 Indemnification Agreement for Directors and Officers
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by E.J. Elliott and Scott W. Runkel.
None.
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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.
/s/ E.J. Elliott
/s/ Scott W. Runkel
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CERTIFICATIONS
I, Mr. E.J. Elliott, certify that:
July 23, 2003
E.J. Elliott
Chairman and President
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I, Mr. Scott W. Runkel
Scott W. Runkel
Chief Financial Officer
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