Introductory Note: Caution Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”) and the Company’s other communications and statements may contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements about the Company’s beliefs, plans, objectives, goals, expectations, estimates, projections and intentions. All forward-looking statements, by their nature, are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond the Company’s control. The Company’s actual future results may differ materially from those set forth in the Company’s forward-looking statements depending on a variety of important factors, including the financial condition of the Company’s customers, changes in the economic and competitive environments and demand for the Company’s products. In addition, the impact of the invasion by Russia into Ukraine and the conflict between Israel and Hamas, as well as actions taken by other countries, including the U.S., in response to such conflicts, could result in a disruption in our supply chain and higher costs of our products. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements.
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, 2023: (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 statement made by the Company herein speaks as of the date of this Quarterly Report. The Company does not undertake to update any forward-looking statements, except as required by law.
Unless the context otherwise indicates, all references in this Quarterly Report to the “Company,” “Gencor,” “we,” “us,” or “our,” or similar words are to Gencor Industries, Inc. and its subsidiaries.
3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 future financing plans, income from investees 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, 2023: (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 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.
14
On July 19, 2022, the Company announced that it was transferring the listing of its common stock, $0.10 per share par value (“Common Stock”), to the NYSE American LLC (“NYSE American”) from the NASDAQ Global Market (“NASDAQ”). Listing and trading of the Company’s Common Stock on NASDAQ ended at market close on July 29, 2022 and listing and trading of its Common Stock on the NYSE American commenced at market open on August 1, 2022 under its current ticker symbol ‘GENC’.
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 has 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 wages, further inflation on supplies and equipment necessary to operate our business. Additionally, the armed conflict involving Hamas and Israel, as well as further escalation of tensions between Israel, the U. S., and various countries in the Middle East 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.
Beginning in 2022, the TCJA eliminated the option of expensing all research and development expenditures in the current year, instead requiring amortization over five years pursuant to IRC Section 174. In the future, Congress may consider legislation that would eliminate the capitalization and amortization requirement. There is no assurance that the requirement will be deferred, repealed or otherwise modified. The requirement was effective for the Company’s fiscal year 2023, beginning October 1, 2022. The Company will continue to make additional estimated federal tax payments based on the current Section 174 tax law. The impact of Section 174 on the Company’s cash from operations depends primarily on the amount of research and development expenditures incurred and whether the IRS issues guidance on the provision which differs from our current interpretation.
Results of Operations
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 net non-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.
15
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.”
16
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 $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.
17
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 the less-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 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 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
18
Part II. Other Information
Item 1. Legal Proceedings
From time to time the Company is engaged in legal proceedings in the ordinary course of business. We do not believe any current legal proceedings are material to our business.
Item 1A. Risk Factors
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 10K for the year ended September 30, 2023, as filed with the SEC on December 13, 2023, 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 quarter ended December 31, 2023, 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, 2023, other than the addition of the following risk factor:
Changes in our tax rates or exposure to additional tax liabilities could adversely affect our earnings and financial condition
Beginning in 2022, the Tax Cuts and Jobs Act of 2017 eliminated the option of expensing all research and development expenditures in the current year, instead requiring amortization over five years pursuant to IRC Section 174. In the future, Congress may consider legislation that would eliminate the capitalization and amortization requirement. There is no assurance that the requirement will be deferred, repealed or otherwise modified. The requirement was effective for the Company’s fiscal year 2023, beginning October 1, 2022. The Company will continue to make additional estimated federal tax payments based on the current Section 174 tax law. The impact of Section 174 on the Company’s cash from operations depends primarily on the amount of research and development expenditures incurred and whether the IRS issues guidance on the provision which differs from the Company’s current interpretation.
Item 5. Other Information
Rule 10b5-1 Plan Adoptions and Modifications
None.
20
Marketable Securities and Fair Value Measurements
|
3 Months Ended |
Dec. 31, 2023 |
|---|
| Investments, Debt and Equity Securities [Abstract] |
|
| Marketable Securities and Fair Value Measurements |
Note 2—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 changes in unrealized gains and losses are reported in the condensed consolidated income statements in the current period. 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 marketable equity securities (stocks), mutual funds, 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 marketable securities measured at fair value as of December 31, 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange-Traded Funds |
|
$ |
3,462,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,462,000 |
|
Corporate Bonds |
|
|
— |
|
|
|
30,501,000 |
|
|
|
— |
|
|
|
30,501,000 |
|
Government Securities |
|
|
52,104,000 |
|
|
|
— |
|
|
|
— |
|
|
|
52,104,000 |
|
Cash and Money Funds |
|
|
164,000 |
|
|
|
— |
|
|
|
— |
|
|
|
164,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55,730,000 |
|
|
$ |
30,501,000 |
|
|
$ |
— |
|
|
$ |
86,231,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net unrealized gains recognized during the quarter ended December 31, 2023 on trading securities still held as of December 31, 2023 were $1,359,000. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange-Traded Funds |
|
$ |
3,327,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,327,000 |
|
Corporate Bonds |
|
|
— |
|
|
|
33,160,000 |
|
|
|
— |
|
|
|
33,160,000 |
|
Government Securities |
|
|
47,672,000 |
|
|
|
— |
|
|
|
— |
|
|
|
47,672,000 |
|
Cash and Money Funds |
|
|
93,000 |
|
|
|
— |
|
|
|
— |
|
|
|
93,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
51,092,000 |
|
|
$ |
33,160,000 |
|
|
$ |
— |
|
|
$ |
84,252,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net unrealized gains recognized during the quarter ended December 31, 2022 on trading securities still held as of December 31, 2022 were $2,332,000. 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.
|
Revenue Recognition and Related Costs
|
3 Months Ended |
Dec. 31, 2023 |
|---|
| Revenue from Contract with Customer [Abstract] |
|
| Revenue Recognition and Related Costs |
Note 8 – Revenue Recognition and Related Costs The Company recognizes revenue under 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 quarters ended December 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended December 31, |
|
| |
|
2023 |
|
|
2022 |
|
Equipment sales recognized over time |
|
$
|
9,833,000 |
|
|
$ |
7,329,000 |
|
Equipment sales recognized at a point in time |
|
|
7,181,000 |
|
|
|
11,498,000 |
|
Parts and component sales |
|
|
7,796,000 |
|
|
|
5,901,000 |
|
Freight revenue |
|
|
1,135,000 |
|
|
|
1,046,000 |
|
Other |
|
|
73,000 |
|
|
|
51,000 |
|
| |
|
|
|
|
|
|
|
|
Net revenue |
|
$
|
26,018,000 |
|
|
$ |
25,825,000 |
|
| |
|
|
|
|
|
|
|
| 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 the 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. |
Basis of Presentation (Policies)
|
3 Months Ended |
Dec. 31, 2023 |
|---|
| Accounting Policies [Abstract] |
|
| Recent Accounting Pronouncements |
Recent Accounting Pronouncements No accounting pronouncements recently issued or newly effective have had, or are expected to have, a material impact on the Company’s condensed consolidated financial statements.
|
| Marketable Securities |
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 changes in unrealized gains and losses are reported in the condensed 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 marketable equity securities (stocks), mutual funds, 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 marketable securities measured at fair value as of December 31, 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange-Traded Funds |
|
$ |
3,462,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,462,000 |
|
Corporate Bonds |
|
|
— |
|
|
|
30,501,000 |
|
|
|
— |
|
|
|
30,501,000 |
|
Government Securities |
|
|
52,104,000 |
|
|
|
— |
|
|
|
— |
|
|
|
52,104,000 |
|
Cash and Money Funds |
|
|
164,000 |
|
|
|
— |
|
|
|
— |
|
|
|
164,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55,730,000 |
|
|
$ |
30,501,000 |
|
|
$ |
— |
|
|
$ |
86,231,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net unrealized gains recognized during the quarter ended December 31, 2023 on trading securities still held as of December 31, 2023 were $1,359,000. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange-Traded Funds |
|
$ |
3,327,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,327,000 |
|
Corporate Bonds |
|
|
— |
|
|
|
33,160,000 |
|
|
|
— |
|
|
|
33,160,000 |
|
Government Securities |
|
|
47,672,000 |
|
|
|
— |
|
|
|
— |
|
|
|
47,672,000 |
|
Cash and Money Funds |
|
|
93,000 |
|
|
|
— |
|
|
|
— |
|
|
|
93,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
51,092,000 |
|
|
$ |
33,160,000 |
|
|
$ |
— |
|
|
$ |
84,252,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net unrealized gains recognized during the quarter ended December 31, 2022 on trading securities still held as of December 31, 2022 were $2,332,000. 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.
|
| 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. |
| Earnings per Share |
The following table sets forth the computation of basic and diluted income (loss) per share for the quarters ended December 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended December 31, |
|
| |
|
2023 |
|
|
2022 |
|
Net Income |
|
$ |
4,326,000 |
|
|
$ |
3,476,000 |
|
| |
|
|
|
|
|
|
|
|
Common Shares: |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
14,658,000 |
|
|
|
14,658,000 |
|
Common stock equivalents |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
Diluted shares outstanding |
|
|
14,658,000 |
|
|
|
14,658,000 |
|
| |
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
0.30 |
|
|
$ |
0.24 |
|
| |
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
Net income per share |
|
$ |
0.30 |
|
|
$ |
0.24 |
|
| |
|
|
|
|
|
|
|
| The Company’s 2009 Incentive Compensation Plan expired on October 1, 2021. There were other existing equity compensation plans and arrangements previously approved by security holders as of December 31, 2023 and 2022. |
| Income Taxes |
Income taxes are provided for the tax effects of transactions reported in the condensed consolidated financial statements and primarily consist of taxes currently due, plus deferred taxes. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the condensed 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 December 31, 2023 and September 30, 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 the quarters ended December 31, 2023 and December 31, 2022 reflect income tax rates under the Tax Cuts and Jobs Act of 2017 (the “TCJA”). Beginning in 2022, the TCJA eliminated the option of expensing all research and development expenditures in the current year, instead requiring amortization over five years pursuant to IRC Section 174. In the future, Congress may consider legislation that would eliminate the capitalization and amortization requirement. There is no assurance that the requirement will be deferred, repealed or otherwise modified. The requirement became effective for the Company’s fiscal year 2023, beginning October 1, 2022. The Company will continue to make additional estimated federal tax payments based on the current Section 174 tax law. The impact of Section 174 on the Company’s cash from operations depends primarily on the amount of research and development expenditures incurred and whether the IRS issues guidance on the provision which differs from the Company’s current interpretation.
|
| Revenue Recognition and Related Costs |
The Company recognizes revenue under 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 quarters ended December 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended December 31, |
|
| |
|
2023 |
|
|
2022 |
|
Equipment sales recognized over time |
|
$
|
9,833,000 |
|
|
$ |
7,329,000 |
|
Equipment sales recognized at a point in time |
|
|
7,181,000 |
|
|
|
11,498,000 |
|
Parts and component sales |
|
|
7,796,000 |
|
|
|
5,901,000 |
|
Freight revenue |
|
|
1,135,000 |
|
|
|
1,046,000 |
|
Other |
|
|
73,000 |
|
|
|
51,000 |
|
| |
|
|
|
|
|
|
|
|
Net revenue |
|
$
|
26,018,000 |
|
|
$ |
25,825,000 |
|
| |
|
|
|
|
|
|
|
| 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 the 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. |
| Leases |
The Company leases certain equipment under non-cancelable operating leases. Future minimum rental payments under these leases at December 31, 2023 were immaterial. On August 28, 2020, the Company entered into a three-year operating lease for property related to 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, the Company recorded a 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. On October 9, 2020, the Company entered into an operating lease for additional warehousing space for inventory. The original lease term was for one year beginning November 2020 with automatic one-year renewals. In accordance with ASU 2016-02, the Company recorded a ROU asset totaling $254,000 and related lease liabilities at inception. An additional $39,000 was recorded as a ROU asset and related lease liability in October 2021 to reflect the impact of the lease renewal. In March 2022, the ROU asset and related liability was reduced by $39,000 to reflect the impact of a reduction in the square footage being leased. For the quarter ended December 31, 2023, operating lease costs and cash payments related to these operating leases were $109,000. For the quarter ended December 31, 2022, operating lease costs were $107,000 and cash payments related to these operating leases were $133,000. Other information concerning the Company’s operating lease accounted for under ASC 842 guidelines as of December 31, 2023 and September 30, 2023, is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2023 |
|
|
September 30, 2023 |
|
| Operating lease ROU asset included in other long-term
assets |
|
$
|
235,000 |
|
|
$ |
328,000 |
|
| Current operating lease liability |
|
|
235,000 |
|
|
|
328,000 |
|
Non-current operating lease liability |
|
|
— |
|
|
|
— |
|
| Weighted average remaining lease term (in years) |
|
|
0.75 |
|
|
|
0.51 |
|
| Weighted average discount rate used in calculating ROU
asset |
|
|
5.0 |
% |
|
|
4.5 |
% | Future annual minimum lease payments as of December 31, 2023 are as follows:
|
|
|
|
|
| Fiscal Year |
|
Annual Lease Payments |
|
| 2024 (remaining nine months) |
|
$
|
239,000 |
|
| Less interest |
|
|
(4,000 |
) |
| |
|
|
|
|
| Present value of lease liabilities |
|
$
|
235,000 |
|
| |
|
|
|
|
|
