Gencor Industries Inc: Form 10-Q for the period ended Mar 31, 2025

Forward-Looking Information

This Quarterly 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 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 the following sections of the Company’s Annual Report on Form 10-K for the year ended September 30, 2024: (a) Part I, Item 1A, “Risk Factors” and (b) Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, 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 issuance of this Quarterly Report. The Company does not undertake to update any forward-looking statement, 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, and fluid heat transfer systems. 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.

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.

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.

Concerns over inflation, geopolitical issues and global financial markets have led to increased economic instability and expectations of slower global economic growth. Our business may be adversely affected by any such economic instability or unpredictability. Russia’s invasion of Ukraine and related sanctions as well as the conflict between Israel and Iran have led to increased energy prices. Such sanctions and disruptions to the global economy may lead to additional inflation and may disrupt the global supply chain and could have a material adverse effect on our ability to secure supplies. The increased cost of oil, along with increased or prolonged periods of inflation, would likely increase our costs in the form of higher inflation on supplies necessary to operate our business. Additionally, the armed conflict involving Hamas and Israel, as well as further escalation of tensions among Israel, the U.S., and various countries in the Middle East, including hostilities involving Iran, and North Africa, may cause increased inflation in energy and logistics costs and could further cause general economic conditions in the U.S. or abroad to deteriorate. There is a risk that one or more of our suppliers could be negatively affected by global economic instability, which could adversely affect our ability to operate efficiently and timely complete our operational goals. As of the date of issuance of this Quarterly Report, the Company’s operations have not been significantly impacted.

Results of Operations

Quarter Ended March 31, 2025 versus March 31, 2024

Net revenue for the quarter ended March 31, 2025 decreased $2,472,000, or 6.1%, to $38,204,000, from $40,676,000 for the quarter ended March 31, 2024. The decrease in net revenue was primarily in contract equipment sales recognized at a point in time, which resulted from the timing of shipments. As a percent of net revenue, gross profit margins decreased slightly to 29.7% in the quarter ended March 31, 2025, compared to 30.3% in the quarter ended March 31, 2024.

Product engineering and development expenses decreased $212,000 to $681,000 for the quarter ended March 31, 2025, as compared to $893,000 for the quarter ended March 31, 2024 on reduced headcount. Selling, general and administrative (“SG&A”) expenses decreased $165,000 to $4,192,000 for the quarter ended March 31, 2025, compared to $4,357,000 for the quarter ended March 31, 2024 on reduced commissions on lower sales.

Operating income decreased 8.4%, or $592,000, from $7,072,000 for the quarter ended March 31, 2024 to $6,480,000 for the quarter ended March 31, 2025, on reduced net revenue.

For the quarter ended March 31, 2025, the Company had net other income of $1,756,000, compared to $1,008,000 for the quarter ended March 31, 2024. Interest and dividend income, net of fees, was $1,158,000 in the quarter ended March 31, 2025 as compared to $803,000 in the quarter ended March 31, 2024. The increase was primarily due to higher rates earned on higher cash balances and fixed income investments. The net realized and unrealized gains on marketable securities were $598,000 for the quarter ended March 31, 2025, compared to $205,000 for the quarter ended March 31, 2024.

The effective income tax rates for the quarters ended March 31, 2025 and March 31, 2024, were 26.0% and 23.0%, respectively, based on the expected annual effective income tax rate.

Net income for the quarter ended March 31, 2025 decreased $127,000 or 2.0% to $6,095,000, or $0.42 basic and diluted net income per common share, from $6,222,000, or $0.42 basic and diluted net income per common share, for the quarter ended March 31, 2024. The slightly lower net income resulted primarily from the lower net revenues and higher taxes partially offset by increased net non-operating income.

Six Months Ended March 31, 2025 versus March 31, 2024

Net revenue for the six months ended March 31, 2025 and 2024 were $69,620,000 and $66,694,000, respectively, an increase of $2,926,000 or 4.4%. Increased revenues from contract equipment sales recognized over time were partially offset by lower contract equipment sales recognized at a point in time and lower parts and component sales and freight revenues.

Gross profit margins decreased to 28.8% for the six months ended March 31, 2025 from 29.8% for the six months ended March 31, 2024. The slightly lower margins were driven by the reduced parts and components sales which have a higher margin percentage compared to contract equipment sales.

Product engineering and development expenses decreased $337,000 to $1,357,000 for the six months ended March 31, 2025, compared to $1,694,000 for the six months ended March 31, 2024, due primarily to lower headcount. SG&A expenses decreased $147,000 to $7,560,000 for the six months ended March 31, 2025, compared to $7,707,000 the six months ended March 31, 2024.

The Company had operating income of $11,104,000 for the six months ended March 31, 2025, compared to $10,455,000 for the six months ended March 31, 2024. The increase in operating income was due primarily to the increased net revenue and lower product engineering and development expenses.

For the six months ended March 31, 2025, the Company had net other income of $2,290,000, compared to $3,243,000 for the six months ended March 31, 2024. Interest and dividend income, net of fees, was $2,147,000 for the six months ended March 31, 2025, as compared to $1,519,000 for the six months ended March 31, 2024. The increase in interest and dividend income, net of fees, for the six months ended March 31, 2025, was primarily due to higher rates earned on fixed income investments and higher cash balances. Net realized and unrealized gains on marketable securities were $143,000 for the six months ended March 31, 2025, compared to $1,724,000 for the six months ended March 31, 2024. Bond yields rose during the six months ended March 31, 2025, due to stronger economic data and higher inflation. The higher yields negatively impacted the value of our bond holdings.

The effective income tax rates for the six months ended March 31, 2025 and March 31, 2024 were 26.0% and 23.0%, respectively, based on the expected annual effective income tax rate. Net income for the six months ended March 31, 2025 was $9,912,000, or $0.68 basic and diluted net income per common share, compared to $10,548,000, or $0.72 basic and diluted net income per common share for the six months ended March 31, 2024. The lower net income and earnings per share resulted primarily from the reduced net non-operating income and higher tax rates.

Liquidity and Capital Resources

The Company generates capital resources through operations and returns on its investments. We believe these sources of capital will satisfy our liquidity needs in both the short and long term.

The Company had no long-term or short-term debt outstanding at March 31, 2025 or September 30, 2024. 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 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.

As of March 31, 2025, the Company had $52,270,000 in cash and cash equivalents, and $91,405,000 in marketable securities, including $31,762,000 in corporate bonds, $5,591,000 in exchange-traded funds, $1,015,000 in mutual funds, $52,821,000 in government securities, and $216,000 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 $27.8 million at March 31, 2025 compared to $50.4 million at March 31, 2024. The Company’s working capital (defined as current assets less current liabilities) was $193.2 million at March 31, 2025 and $182.2 million at September 30, 2024. Cash flows provided by operating activities during the six months ended March 31, 2025 was $27,248,000. Accounts receivable increased $3,175,000, due primarily to increased parts sales in the quarter ended March 31, 2025 compared to the quarter ended September 30, 2024. Contract assets decreased $4,959,000 and contract liabilities increased $2,796,000 with the timing of inventory build and percentage of completion recognition on plant sales where revenue is recognized over time. Inventories decreased $8,670,000 due to paver sales and the completion and shipment on several large contract orders where revenue is recognized at a point in time. Accounts payable increased $1,551,000 due to the timing of purchase order receipts.

Cash flows used in investing activities for the six months ended March 31, 2025 of $460,000 were related to capital expenditures, primarily for land 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, 2024, “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 ASU No. 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 $4,380,000 and $9,339,000 at March 31, 2025 and September 30, 2024, respectively, and are included in current assets on the Company’s condensed consolidated balance sheets. Contract liabilities (excluding customer deposits) under contracts with customers represent amounts billed in excess of revenue recognized on equipment sales recognized over time. These contract liabilities were $2,796,000 and zero at March 31, 2025 and September 30, 2024, respectively, and are included in current liabilities on the Company’s condensed consolidated balance sheets. The Company anticipates that all of the contract assets at March 31, 2025, 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 $161,000 and $163,000 at March 31, 2025 and September 30, 2024 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 such contract liabilities at March 31, 2025 and September 30, 2024. Customer deposits related to contracts with customers were $5,550,000 and $5,018,000 at March 31, 2025 and September 30, 2024, 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 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.

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 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.

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 statements of income. Net unrealized gains and (losses) are reported in the condensed consolidated statements of income 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. There were no impairment losses in the quarters and six months ended March 31, 2025 and March 31, 2024.

Off-Balance Sheet Arrangements

None.

Evaluation of Disclosure Controls and Procedures

The Company’s President (who is currently serving as the Company’s Principal Executive Officer) and Chief Financial Officer (Principal Financial and Accounting Officer) evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the President and the Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report, the Company’s disclosure controls and procedures were not effective at the reasonable assurance level solely as a result of the material weaknesses management identified in our internal control over financial reporting, as described in our Annual Report on Form 10-K for the year ended September 30, 2024.

Because of inherent limitations, the Company’s disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of such disclosure controls and procedures are met, and no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Material Weaknesses in Internal Control over Financial Reporting

As previously reported in our Annual Report on Form 10-K for the year ended September 30, 2024, management identified the following material weaknesses in internal control over financial reporting as of September 30, 2024, which were not remediated as of March 31, 2025:

• Ineffective information technology general controls (ITGCs), particularly as such controls related to user access, program change management, security, and ineffective complementary user-organization controls, which limited management’s ability to rely on technology-dependent controls relevant to the preparation of the Company’s consolidated financial statements. As a result, information technology-dependent manual and automated controls that rely on the affected ITGCs, or information from the information technology systems with affected ITGCs, were also ineffective.
• Ineffective design, implementation, and operation of controls over key third-party service provider System and Organizational Controls reports.
• Ineffective controls over the period end close process, including over the review and approval process of journal entries, account reconciliations, and segregation of duties.
• Inadequate documentation and design of controls related to various key financial statement accounts and assertions.
• Inadequate risk assessment, control activities, information and communication, and monitoring components of the Company’s internal control framework such that internal control weaknesses were not detected, communicated, addressed with mitigating control activities, or remediated on a timely basis.

Management’s Plan of Remediation of Material Weaknesses

Management, with oversight by our Audit Committee, is actively engaged in the planning for, and implementation of, remediation efforts to address the material weaknesses previously described in our Annual Report on Form 10-K for the year ended September 30, 2024 and to improve our internal control over financial reporting.

In response to the material weaknesses previously described, we plan to continue efforts already underway to remediate the material weaknesses in internal control over financial reporting, including the following:

• We are in the process of conducting a risk assessment over our internal control environment, and we are reviewing and prioritizing individual control deficiencies for remediation, including those which aggregated to the above material weaknesses.
• We are in the process of documenting and executing remediation action items, including expansion of mitigating controls where appropriate.

Management and our Audit Committee will monitor these specific remedial measures and the effectiveness of our overall control environment. The identified material weaknesses in internal control over financial reporting will only be considered remediated when the relevant controls have operated effectively for a sufficient period of time for management to conclude that they have been remediated. We can provide no assurance as to when the remediation of these material weaknesses will be completed.

Changes in Internal Control over Financial Reporting

The Company’s management, including the President and Chief Financial Officer, has reviewed the Company’s internal control over financial reporting. Except for the remediation efforts described above in connection with the previously identified material weaknesses, there were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2025 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Our business, operations, and financial condition are subject to various risks and uncertainties. The risk factors described in Part I, Item 1A, “Risk Factors” contained in our Annual Report on Form 10-K for the year ended September 30, 2024, as filed with the SEC on June 27, 2025, should be carefully considered, together with the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in our other filings filed with the SEC in connection with evaluating us, our business, and the forward-looking statements contained in this Quarterly Report on Form 10-Q. During the six months ended March 31, 2025, there have been no material changes from the risk factors previously disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K, for the year ended September 30, 2024.