UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-Q

10-Q/A
(Amendment No. 1)
☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30, 2020

OR

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD: From
to

Commission File Number:
001-11703

GENCOR INDUSTRIES, INC.

Delaware
59-0933147

(State or other jurisdiction
of

incorporation or organization)

(IRS Employer

Identification No.)

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)

Securities registered or to be registered pursuant to Section 12(b) of the Act

Title of Each Class

Trading

Symbol(s)

Name of Exchange

on which registered

Common Stock ($.10 Par Value)
GENC
NASDAQ Global Market

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 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  ☑☒     No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☑☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.

Large accelerated filer
☐
Accelerated Filer
☒
 
Non-accelerated
Filer
☐
Smaller Reporting Company
☒
 Accelerated Filer
Emerging Growth Company
☐
 ☑
Non-accelerated Filer
 ☐Smaller Reporting Company☑
Emerging Growth Company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  ☑

☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

Outstanding at May 1,July 31, 2020

Common stock, $.10 par value
12,277,337
12,287,337 shares
Class B stock, $.10 par value
2,308,857
2,318,857 shares

Explanatory Note
Gencor Industries, Inc. (the “Company”) is filing this Amendment No. 1 on Form
10-Q/A
(the “Form
10-Q/A”)
to the Company’s Quarterly Report on Form
10-Q
for the quarter ended June 30, 2020, filed with the Securities and Exchange Commission on August 6, 2020 (the “Form
10-Q”),
solely to correct an error in certain amounts disclosed in Note 2 to the Condensed Consolidated Financial Statements.
The Form
10-Q
incorrectly stated that the changes in net unrealized gains and (losses) included in the condensed consolidated statements of income for the quarter and nine months ended June 30, 2020, were $(857,000) and $3,979,000, respectively, when it should have stated that the changes in net unrealized gains and (losses) included in the condensed consolidated statements of income for the quarter and nine months ended June 30, 2020, were $3,979,000 and $(857,000), respectively.
The Form
10-Q
also incorrectly stated that the changes in net unrealized gains and (losses) included in the condensed consolidated statements of income for the quarter and nine months ended June 30, 2019, were $3,979,000 and $(857,000), respectively, when it should have stated that the changes in net unrealized gains and (losses) included in the condensed consolidated statements of income for the quarter and nine months ended June 30, 2019, were $(123,000) and $684,000, respectively.
This Form
10-Q/A
should be read in conjunction with the Form
10-Q,
which, as amended hereby, continues to be as of the date of the Form
10-Q.
Except as specifically noted above, this Form
10-Q/A
does not amend, restate, modify or update the information in the Form
10-Q.
Accordingly, this Form
10-Q/A
does not reflect events occurring after the filing of the Form
10-Q
or amend, restate, modify or update any related or other disclosures or information contained therein. As required by Rule
12b-15
under the Securities Exchange Act of 1934, as amended, new certifications by the Company’s Chief Executive Officer and Chief Financial Officer are being filed herewith as exhibits to this Form
10-Q/A
(Exhibit 31.1, Exhibit 31.2, and Exhibit 32).
GENCOR INDUSTRIES, INC.

Index
Page
Part I.
Financial Information
   
Page
Item 1.
Financial Statements
 

Part I.

 

Financial Information

 

Item 1.   Financial Statements

Condensed Consolidated Balance Sheets – March  31,June 30, 2020 (Unaudited) and September 30, 2019

4
  4 
 

Condensed Consolidated Statements of OperationsIncome – Quarters and SixNine Months Ended March 31,June 30, 2020 and 2019 (Unaudited)

5
  5 
 

Condensed Consolidated Statements of Shareholders’ Equity – SixQuarters and Nine Months Ended March 31,June 30, 2020 and 2019 (Unaudited)

6
  6 
 

Condensed Consolidated Statements of Cash Flows – SixQuarters and Nine Months Ended March  31,June 30, 2020 and 2019 (Unaudited)

7
  7 
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8
  8 

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

14
  14 

Item 3.
Quantitative and Qualitative Disclosures about Market Risk

20
  
Item 4.
Controls and Procedures
20
 
Part II.
Other Information

Item 4.   Controls and Procedures

  20 
Item 1.
Legal Proceedings
21

Part II.

Other Information

Item 1A.   Risk Factors

  21 
Item 1A.
Risk Factors
21

Item 6.   Exhibits

  23
Item 6.
Exhibits
21
 

Signatures

24
22

2

Caution Concerning Forward-Looking Statements

This Quarterly Report on Form
10-Q (this
(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. These statements 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. 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, demand for the Company’s products, the duration and scope of the coronavirus
(“COVID-19”)
pandemic, actions governments, and businesses take in response to the
COVID-19
pandemic, including mandatory business closures; the impact of the pandemic and actions taken on regional economies; the pace of recovery when the
COVID-19
pandemic subsides. 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 Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” andOperations” in this Quarterly Report, Part II, Item 1A, “Risk Factors” in thisthe Quarterly Report on Form
10-Q
for the quarter ended March 31, 2020, and the following sections of the Company’s Annual Report on Form
10-K
for the year ended September 30, 2019: (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 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

Part I. Financial Information

GENCOR INDUSTRIES, INC.

Condensed Consolidated Balance Sheets

   

March 31,

2020

   September 30,
2019		 
ASSETS  (Unaudited)   

 

 

Current Assets:

    

Cash and cash equivalents

  $18,738,000   $10,302,000 

Marketable securities at fair value (cost $105,967,000 at March 31, 2020 and $104,176,000 at September 30, 2019)

   102,275,000    105,322,000 

Accounts receivable, less allowance for doubtful accounts of $474,000 at March 31, 2020 and $459,000 at September 30, 2019

   2,366,000    1,603,000 

Costs and estimated earnings in excess of billings

   8,792,000    13,838,000 

Inventories, net

   27,063,000    25,366,000 

Prepaid expenses and other current assets

   2,144,000    499,000 
  

 

 

   

 

 

 

Total Current Assets

   161,378,000    156,930,000 
  

 

 

   

 

 

 

Property and equipment, net

   8,276,000    8,389,000 

Other assets

   53,000    53,000 
  

 

 

   

 

 

 

Total Assets

  $169,707,000   $165,372,000 
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current Liabilities:

    

Accounts payable

  $4,380,000   $1,907,000 

Customer deposits

   4,713,000    1,918,000 

Accrued expenses

   2,721,000    2,660,000 
  

 

 

   

 

 

 

Total Current Liabilities

   11,814,000    6,485,000 
  

 

 

   

 

 

 

Deferred and other income taxes

   509,000    3,372,000 
  

 

 

   

 

 

 

Total Liabilities

   12,323,000    9,857,000 
  

 

 

   

 

 

 

Commitments and contingencies

    

Shareholders’ Equity:

    

Preferred stock, par value $.10 per share; 300,000 shares authorized; none issued

   —      —   

Common stock, par value $.10 per share; 15,000,000 shares authorized; 12,277,337 shares issued and outstanding at March 31, 2020 and September 30, 2019

   1,228,000    1,228,000 

Class B Stock, par value $.10 per share; 6,000,000 shares authorized; 2,308,857 shares issued and outstanding at March 31, 2020 and September 30, 2019

   231,000    231,000 

Capital in excess of par value

   12,194,000    12,159,000 

Retained earnings

   143,731,000    141,897,000 
  

 

 

   

 

 

 

Total Shareholders’ Equity

   157,384,000    155,515,000 
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

  $169,707,000   $165,372,000 
  

 

 

   

 

 

 

 
June 30,
2020
  
September 30,
2019
 
 
(Unaudited)
   
ASSETS
      
Current Assets:
      
Cash and cash equivalents
 $
18,564,000
  $
10,302,000
 
Marketable securities at fair value (cost $105,388,000 at June 30, 2020 and $104,176,000 at September 30, 2019)
  
105,675,000
   
105,322,000
 
Accounts receivable, less allowance for doubtful accounts of $419,000 at June 30, 2020 and $459,000 at September 30, 2019
  
1,609,000
   
1,603,000
 
Costs and estimated earnings in excess of billings
  
10,064,000
   
13,838,000
 
Inventories, net
  
24,562,000
   
25,366,000
 
Prepaid expenses and other current assets
  
1,649,000
   
499,000
 
         
Total Current Assets
  
162,123,000
   
156,930,000
 
Property and equipment, net
  
8,391,000
   
8,389,000
 
Other assets
  
53,000
   
53,000
 
         
Total Assets
 $
170,567,000
  $
165,372,000
 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY
      
Current Liabilities:
      
Accounts payable
 $
2,089,000
  $
1,907,000
 
Customer deposits
  
2,651,000
   
1,918,000
 
Accrued expenses and other current liabilities
  
2,694,000
   
2,660,000
 
         
Total Current Liabilities
  
7,434,000
   
6,485,000
 
Deferred and other income taxes
  
1,306,000
   
3,372,000
 
         
Total Liabilities
  
8,740,000
   
9,857,000
 
         
Commitments and contingencies
    
Shareholders’ equity:
      
Preferred stock, par value $.10 per share; 300,000 shares authorized; NaN issued
  
—
   
—  
 
Common stock, par value $.10 per share; 15,000,000 shares authorized;
 
12,287,337
 
shares issued and outstanding at June 30, 2020 and
 
12,277,337 shares issued and outstanding at September 30, 2019
  
1,229,000
   
1,228,000
 
Class B Stock, par value $.10 per share; 6,000,000 shares authorized;
 
2,318,857 shares issued and outstanding at June 30, 2020 and
 
2,308,857 shares issued and outstanding at September 30, 2019
  
232,000
   
231,000
 
Capital in excess of par value
  
12,313,000
   
12,159,000
 
Retained earnings
  
148,053,000
   
141,897,000
 
         
Total Shareholders’ Equity
  
161,827,000
   
155,515,000
 
         
Total Liabilities and Shareholders’ Equity
 $
170,567,000
  $
165,372,000
 
         
See accompanying Notes to Condensed Consolidated Financial Statements

4

GENCOR INDUSTRIES, INC.

Condensed Consolidated Statements of Operations

Income

(Unaudited)

   For the Quarters Ended
March 31,		   For the Six Months Ended
March 31,		 
   2020  2019   2020  2019 

Net revenue

  $25,993,000  $26,670,000   $44,023,000  $47,997,000 

Costs and expenses:

      

Production costs

   18,655,000   16,759,000    32,365,000   33,169,000 

Product engineering and development

   689,000   823,000    1,455,000   1,546,000 

Selling, general and administrative

   2,561,000   2,474,000    4,943,000   4,664,000 
  

 

 

  

 

 

   

 

 

  

 

 

 
   21,905,000   20,056,000    38,763,000   39,379,000 
  

 

 

  

 

 

   

 

 

  

 

 

 

Operating income

   4,088,000   6,614,000    5,260,000   8,618,000 

Other income (expense), net:

      

Interest and dividend income, net of fees

   763,000   507,000    1,395,000   1,041,000 

Net realized and unrealized gains (losses) on marketable securities

   (5,670,000)   2,204,000    (4,353,000)   57,000 

Other

   —     —      (10,000)   —   
  

 

 

  

 

 

   

 

 

  

 

 

 
   (4,907,000)   2,711,000    (2,968,000)   1,098,000 
  

 

 

  

 

 

   

 

 

  

 

 

 

Income (loss) before income tax expense (benefit)

   (819,000)   9,325,000    2,292,000   9,716,000 

Income tax expense (benefit)

   (164,000)   1,865,000    458,000   1,943,000 
  

 

 

  

 

 

   

 

 

  

 

 

 

Net income (loss)

  $(655,000)  $7,460,000   $1,834,000  $7,773,000 
  

 

 

  

 

 

   

 

 

  

 

 

 

Basic Income (Loss) per Common Share:

      

Net income (loss) per share

  $(0.04)  $0.51   $0.13  $0.53 
  

 

 

  

 

 

   

 

 

  

 

 

 

Diluted Income (Loss) per Common Share:

      

Net income (loss) per share

  $(0.04)  $0.51   $0.12  $0.53 
  

 

 

  

 

 

   

 

 

  

 

 

 

 
For the Quarters Ended
June 30,
  
For the Nine Months Ended
June 30,
 
 
2020
  
2019
  
2020
  
2019
 
Net revenue
 $
22,940,000
  $
18,848,000
  $
66,963,000
  $
66,845,000
 
Costs and expenses:
            
Production costs
  
17,555,000
   
14,098,000
   
49,920,000
   
47,267,000
 
Product engineering and development
  
849,000
   
881,000
   
2,304,000
   
2,427,000
 
Selling, general and administrative
  
2,522,000
   
2,471,000
   
7,465,000
   
7,135,000
 
                 
  
20,926,000
   
17,450,000
   
59,689,000
   
56,829,000
 
Operating income
  
2,014,000
   
1,398,000
   
7,274,000
   
10,016,000
 
Other income (expense), net:
            
Interest and dividend income, net of fees
  
512,000
   
567,000
   
1,907,000
   
1,608,000
 
Net realized and unrealized gains (losses) on marketable securities
  
2,888,000
   
1,090,000
   
(1,465,000
)  
1,147,000
 
Other
  
(10,000
)  
—  
   
(20,000
)  
—  
 
                 
  
3,390,000
   
1,657,000
   
422,000
   
2,755,000
 
Income before income tax expense
  
5,404,000
   
3,055,000
   
7,696,000
   
12,771,000
 
Income tax expense
  
1,082,000
   
611,000
   
1,540,000
   
2,554,000
 
                 
Net income
 $
4,322,000
  $
2,444,000
  $
6,156,000
  $
10,217,000
 
                 
Basic Income per Common Share:
            
Net income per share
 $
0.30
  $
0.17
  $
0.42
  $
0.70
 
                 
Diluted Income per Common Share:
            
Net income per share
 $
0.29
  $
0.17
  $
0.42
  $
0.69
 
                 
See accompanying Notes to Condensed Consolidated Financial Statements

5

GENCOR INDUSTRIES, INC.

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

For the SixNine Months Ended March 31,June 30, 2020

   Common Stock   Class B Stock   Capital in
Excess of		   Retained  Total
Shareholders’		 
   Shares   Amount   Shares   Amount   Par Value   Earnings  Equity 

September 30, 2019

   12,277,337   $1,228,000    2,308,857   $231,000   $12,159,000   $141,897,000  $155,515,000 

Net income

   —      —      —      —      —      2,489,000   2,489,000 

Stock-based compensation

   —      —      —      —      18,000    —     18,000 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

December 31, 2019

   12,277,337   $1,228,000    2,308,857   $231,000   $12,177,000   $144,386,000  $158,022,000 

Net loss

   —      —      —      —      —      (655,000)   (655,000) 

Stock-based compensation

   —      —      —      —      17,000    —     17,000 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

March 31, 2020

   12,277,337   $1,228,000    2,308,857   $231,000   $12,194,000   $143,731,000  $157,384,000 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

For the Six Months Ended March 31, 2019

   Common Stock   Class B Stock   Capital in
Excess of		   Retained   Total
Shareholders’		 
   Shares   Amount   Shares   Amount   Par Value   Earnings *   Equity * 

September 30, 2018

   12,252,337   $1,225,000    2,288,857   $229,000   $11,862,000   $131,701,000   $145,017,000 

Net income

   —      —      —      —      —      313,000    313,000 

Stock-based compensation

   —      —      —      —      17,000    —      17,000 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2018

   12,252,337    1,225,000    2,288,857    229,000    11,879,000    132,014,000    145,347,000 

Net income

   —      —      —      —      —      7,460,000    7,460,000 

Stock-based compensation

   —      —      —      —      18,000    —      18,000 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2019

   12,252,337   $1,225,000    2,288,857   $229,000   $11,897,000   $139,474,000   $152,825,000 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 
Common Stock
  
Class B Stock
  
Capital in
Excess of
  
Retained
Earnings
  
Total
Shareholders’
Equity
 
 
Shares
  
Amount
  
Shares
  
Amount
 
Par Value
September 30, 2019
  
12,277,337
  $
1,228,000
   
2,308,857
  $
231,000
  $
12,159,000
  $
141,897,000
  $
155,515,000
 
Net income
  
—  
   
—  
   
—  
   
—  
   
—  
   
2,489,000
   
2,489,000
 
Stock-based compensation
  
—  
   
—  
   
—  
   
—  
   
18,000
   
—  
   
18,000
 
                             
December 31, 2019
  
12,277,337
   
1,228,000
   
2,308,857
   
231,000
   
12,177,000
   
144,386,000
   
158,022,000
 
Net loss
  
—  
   
—  
   
—  
   
—  
   
—  
   
(655,000
)  
(655,000
)
Stock-based compensation
  
—  
   
—  
   
—  
   
—  
   
17,000
   
—  
   
17,000
 
                             
March 31, 2020
  
12,277,337
   
1,228,000
   
2,308,857
   
231,000
   
12,194,000
   
143,731,000
   
157,384,000
 
Net income
  
—  
   
—
   
—  
   
—
   
—
   
4,322,000
   
4,322,000
 
Stock-based compensation
  
—  
   
—
   
—  
   
—
   
18,000
   
—
   
18,000
 
Stock options exercised
  
10,000
   
1,000
   
10,000
   
1,000
   
101,000
   
—
   
103,000
 
                             
June 30, 2020
  
12,287,337
  $
1,229,000
   
2,318,857
  $
232,000
  $
12,313,000
  $
148,053,000
  $
161,827,000
 
                             
See accompanying Notes to Condensed Consolidated Financial Statements

For the Nine Months Ended June 30, 2019
 
Common Stock
  
Class B Stock
  
Capital in
Excess of
  
Retained
Earnings
 
*
  
Total
Shareholders’
Equity
 
*
 
 
Shares
  
Amount
  
Shares
  
Amount
 Par Value
September 30, 2018
  
12,252,337
  $
1,225,000
   
2,288,857
  $
229,000
  $
11,862,000
  $
131,701,000
  $
145,017,000
 
Net income
  
—  
   
—  
   
—  
   
—  
   
—  
   
313,000
   
313,000
 
Stock-based compensation
  
—  
   
—  
   
—  
   
—  
   
17,000
   
—  
   
17,000
 
                             
December 31, 2018
  
12,252,337
   
1,225,000
   
2,288,857
   
229,000
   
11,879,000
   
132,014,000
   
145,347,000
 
Net income
  
—  
   
—  
   
—  
   
—  
   
—  
   
7,460,000
   
7,460,000
 
Stock-based compensation
  
—  
   
—  
   
—  
   
—  
   
18,000
   
—  
   
18,000
 
                             
March 31, 2019
  
12,252,337
   
1,225,000
   
2,288,857
   
229,000
   
11,897,000
   
139,474,000
   
152,825,000
 
Net income
  
—  
   
—  
   
—  
   
—  
   
—  
   
2,444,000
   
2,444,000
 
Stock-based compensation
  
—  
   
—  
   
—  
   
—  
   
18,000
   
—  
   
18,000
 
                             
June 30, 2019
  
12,252,337
  $
1,225,000
   
2,288,857
  $
229,000
  $
11,915,000
  $
141,918,000
  $
155,287,000
 
See accompanying Notes to Condensed Consolidated Financial Statements
*

The balances as of September 30, 2018, December 31, 2018, and March 31, 2019 and June 30, 2019, and the amounts for the quarter and sixnine months ended March 31,June 30, 2019, have been adjusted to reflect the change in inventory accounting method, as described in Note 3 to the Condensed Consolidated Financial Statements.

6

GENCOR INDUSTRIES, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

   For the Six Months Ended
March 31,		 
   2020  2019 

Cash flows from operations:

   

Net income

  $1,834,000  $7,773,000 

Adjustments to reconcile net income to cash provided by operating activities:

   

Purchases of marketable securities

   (73,393,000)   (112,663,000) 

Proceeds from sale and maturity of marketable securities

   72,181,000   113,767,000 

Change in fair value of marketable securities

   4,259,000   (202,000) 

Deferred income taxes

   (2,863,000)   (156,000) 

Depreciation and amortization

   831,000   783,000 

Provision for doubtful accounts

   25,000   50,000 

Stock-based compensation

   35,000   35,000 

Changes in assets and liabilities:

   

Accounts receivable

   (788,000)   (1,469,000) 

Costs and estimated earnings in excess of billings

   5,046,000   (2,113,000) 

Inventories

   (1,697,000)   (1,925,000) 

Prepaid expenses and other current assets

   (1,645,000)   978,000 

Accounts payable

   2,473,000   317,000 

Customer deposits

   2,795,000   (543,000) 

Accrued expenses

   61,000   202,000 
  

 

 

  

 

 

 

Total adjustments

   7,320,000   (2,939,000) 
  

 

 

  

 

 

 

Cash flows provided by operating activities

   9,154,000   4,834,000 
  

 

 

  

 

 

 

Cash flows used in investing activities:

   

Capital expenditures

   (718,000)   (1,260,000) 
  

 

 

  

 

 

 

Cash flows used in investing activities

   (718,000)   (1,260,000) 
  

 

 

  

 

 

 

Net increase in cash

   8,436,000   3,574,000 

Cash and cash equivalents at:

   

Beginning of period

   10,302,000   8,012,000 
  

 

 

  

 

 

 

End of period

  $18,738,000  $11,586,000 
  

 

 

  

 

 

 

 
For the Nine Months Ended
June 30,
 
 
2020
  
2019
 
Cash flows from operations:
      
Net income
 $
6,156,000
  $
10,217,000
 
Adjustments to reconcile net income to cash flows provided by operating activities:
      
Purchases of marketable securities
  
(112,668,000
)  
(152,063,000
)
Proceeds from sale and maturity of marketable securities
  
110,805,000
   
152,678,000
 
Change in fair value of marketable securities
  
1,510,000
   
(1,324,000
)
Deferred income taxes
  
(2,066,000
)  
(25,000
)
Depreciation and amortization
  
1,244,000
   
1,188,000
 
Provision for doubtful accounts
  
50,000
   
100,000
 
Stock-based compensation
  
53,000
   
53,000
 
Changes in assets and liabilities:
      
Accounts receivable
  
(56,000
)  
(589,000
)
Costs and estimated earnings in excess of billings
  
3,774,000
   
(8,622,000
)
Inventories
  
804,000
   
(1,781,000
)
Prepaid expenses and other current assets
  
(1,150,000
)  
959,000
 
Accounts payable
  
182,000
   
756,000
 
Customer deposits
  
733,000
   
(2,101,000
)
Accrued expenses and other current liabilities
  
34,000
   
577,000
 
         
Total adjustments
  
3,249,000
   
(10,194,000
)
         
Cash flows provided by operating activities
  
9,405,000
   
23,000
 
         
Cash flows used in investing activities:
      
Capital expenditures
  
(1,246,000
)  
(1,600,000
)
         
Cash flows used in investing activities
  
(1,246,000
)  
(1,600,000
)
Cash flows from financing activities:
        
Proceeds from stock option exercises
  
103,000
 
 
 
—  
 
Cash flows provided by financing activities
  
103,000
   
—  
 
Net increase (decrease) in cash
  
8,262,000
   
(1,577,000
)
Cash at:
      
Beginning of period
  
10,302,000
   
8,012,000
 
         
End of period
 $
18,564,000
  $
6,435,000
 
         
See accompanying Notes to Condensed Consolidated Financial Statements

7

GENCOR INDUSTRIES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1—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 notes 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 quarter and sixnine months ended March 31,June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020.

The accompanying Condensed Consolidated Balance Sheet at September 30, 2019 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and notes thereto included in the Gencor Industries, Inc. Annual Report on Form
10-K
for the year ended September 30, 2019.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASUNo.
 2014-09,
Revenue from Contracts with Customers (Topic
(Topic 606) (“ASU
2014-09”),
amending its accounting guidance related to revenue recognition. Under this ASU and subsequently issued amendments, revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted ASU
2014-09
in the first quarter of fiscal 2019. The Company elected to adopt the standard using the modified retrospective method. The adoption of ASU
2014-09
did not have a significant impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No.2016-02,
 Leases
 (Topic 842) (“ASU2016-02”). With adoption of this standard, lessees will have to
must
recognize most leases as aright-of-use asset and a lease liability on their balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification is based on criteria that are similar to those applied in prior lease accounting. ASU2016-02 must be applied on a modified retrospective basis and is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company adopted ASU2016-02 in the first quarter of fiscal 2020. The adoption of ASU2016-02 did not have a significant impact on its consolidated financial statements.

In May 2017, the FASB issued ASU
2017-09,Compensation—
Compensation - Stock Compensation (Topic
(Topic 718):
Scope of Modification Accounting (“
(“ASU
2017-09”).
The new guidance clarifies when a change to the terms or conditions of a share based payment award must be accounted for as a modification. ASU
2017-09
is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU
2017-09
in the first quarter of fiscal 2019. The adoption of ASU
2017-09
did not have a significant impact on its consolidated financial statements.

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

8

COVID-19
Pandemic

The Company continues to monitor and evaluate the risks to public health and the slowdown in overall business activity related to the
COVID-19
pandemic, including potential impacts on our employees, customers, suppliers and financial results. ToAs of the date thereof issuance of these unaudited Condensed Consolidated Financial Statements, our operations have not been no material impactssignificantly impacted. However, the full impact of the
COVID-19
pandemic continues to evolve subsequent to the Company’squarter and nine months ended June 30, 2020 and as of the date these unaudited Condensed Consolidated Financial Statements are issued. As such, the full magnitude that the
COVID-19
pandemic will have on our financial condition and future results of operations is uncertain. Management is actively monitoring the situation on our financial condition, operations, suppliers, industry, customers, and workforce. As the spread of
COVID-19
continues, our ability to meet customer demands for products may be impacted or our customers may experience adverse business consequences due to
COVID-19.
Reduced demand for products or ability to meet customer demand (including as a result ofCOVID-19. As the situation remains fluid, it is difficult to predict the duration disruptions at our suppliers and scope of the pandemic and its impact on the Company’s business. However, it may result invendors) could have a material adverse impact to the Company’s financial position,effect on our business operations and cash flows if conditions persist or worsen.

financial performance.

Note 2—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 statements of income. NetChanges in 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.

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, mutual funds, exchange-traded funds, government securities, and cash and money funds are substantially based on quoted market prices (Level 1). Corporate and municipal bonds are valued using market standard valuation methodologies, including: discounted cash flow methodologies, 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, if any, are provided by the Company’s professional investment management firm.

The following table sets forth, by level, within the fair value hierarchy, the Company’s assetsmarketable securities measured at fair value as of March 31,June 30, 2020:

   Fair Value Measurements 
   Level 1   Level 2   Level 3   Total 

Equities

  $12,458,000   $—     $—     $12,458,000 

Mutual Funds

   2,290,000    —      —      2,290,000 

Exchange-Traded Funds

   4,005,000    —      —      4,005,000 

Corporate Bonds

   —      39,721,000    —      39,721,000 

Government Securities

   40,315,000    —      —      40,315,000 

Cash and Money Funds

   3,486,000    —      —      3,486,000 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $62,554,000   $39,721,000   $—     $102,275,000 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net

 
Fair Value Measurements
 
 
Level 1
  
Level 2
  
Level 3
  
Total
 
Equities
��$
12,089,000
  $
—
  $
—
  $
12,089,000
 
Mutual Funds
  
3,983,000
   
—
   
—
   
3,983,000
 
Exchange-Traded Funds
  
7,140,000
   
—
   
—
   
7,140,000
 
Corporate Bonds
  
—
   
38,058,000
   
—
   
38,058,000
 
Government Securities
  
33,789,000
   
—
   
—
   
33,789,000
 
Cash and Money Funds
  
10,616,000
   
—
   
—
   
10,616,000
 
                 
 
Total
 $
67,617,000
  $
38,058,000
  $
—
  $
105,675,000
 
                 
9
Changes in net unrealized gains and (losses) included in the Condensed Consolidated Statementscondensed consolidated statements of Incomeincome for the quarter and sixnine months ended March 31,June 30, 2020, were $(6,029,000)
$3,979,000
 and $(4,839,000)
$
(857,000),
 respectively. There were no0 transfers of investments between Level 1 and Level 2 during the sixnine months ended March 31,June 30, 2020.

9

The following table sets forth by level, within the fair value hierarchy, the Company’s assets measured at fair value as of September 30, 2019:

 
Fair Value Measurements
 
 
Level 1
  
Level 2
  
Level 3
  
Total
 
Equities
 $
10,412,000
  $
—  
  $
—  
  $
10,412,000
 
Mutual Funds
  
3,987,000
   
—  
   
—  
   
3,987,000
 
Exchange-Traded Funds
  
5,163,000
   
—  
   
—  
   
5,163,000
 
Corporate Bonds
  
—  
   
38,690,000
   
—  
   
38,690,000
 
Government Securities
  
45,171,000
   
—  
   
—  
   
45,171,000
 
Cash and Money Funds
  
1,899,000
   
—  
   
—  
   
1,899,000
 
                 
 
Total
 $
66,632,000
  $
38,690,000
  $
—  
  $
105,322,000
 
                 

Net

Changes in net unrealized gains and (losses) included in the condensed consolidated statements of income for the quarter and sixnine months ended March 31,June 30, 2019, were $1,645,000$(123,000) and $(780,000),$684,000, respectively. There were no0 transfers of investments between Level 1 and Level 2 during the sixnine months ended March 31,June 30, 2019.

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

Note 3—3 – Inventories

Inventories are valued at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price of goods less reasonable costs of completion and delivery. During the fourth quarter of fiscal 2019, the Company changed its method for accounting for cost of inventories from the
last-in,
first-out
(“LIFO”) method to the
first-in,
first-out
(“FIFO”) method. As required by accounting principles generally accepted in the United States of America (“GAAP”), the Company reflected this change in accounting principle on a retrospective basis, resulting in changes to the historical periods presented. The Company believes the FIFO method improves financial reporting by better reflecting the current value of inventory on the consolidated balance sheets, by more closely aligning the flow of physical inventory with the accounting for the inventory, and by providing better matching of revenues and expenses.

The fiscal 2018 consolidated financial statements were retrospectively adjusted to apply the new method of FIFO cost accounting for inventories. The cumulative effect of this change on periods prior to those presented herein resulted in an increase in retained earnings of $2,708,000. There was no0 material impact to the previously reported unaudited interim fiscal 2018 quarterly condensed consolidated results of operations or statements of income as a result of the retrospective application of the change in inventory accounting principle.

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, the cost basis of inventories three to four years old are reduced by 50%, while the cost basis of inventories four to five years old are reduced by 75%, and the cost basis of inventories greater than five years old are reduced 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.

10

Net inventories at March 31,June 30, 2020 and September 30, 2019 consist of the following:

   March 31, 2020   September 30, 2019 

Raw materials

  $15,155,000   $14,158,000 

Work in process

   3,092,000    1,397,000 

Finished goods

   8,776,000    9,811,000 

Used equipment

   40,000    —   
  

 

 

   

 

 

 
  $27,063,000   $25,366,000 
  

 

 

   

 

 

 

 
June 30,
 
2020
  
September 30,
 
2019
 
Raw materials
 $
15,090,000
  $
14,158,000
 
Work in process
  
580,000
   
1,397,000
 
Finished goods
  
8,852,000
   
9,811,000
 
Used equipment
  
40,000
   
—  
 
         
 $
24,562,000
  $
25,366,000
 
         
Slow-moving and obsolete inventory reserves
allow
ances
were $4,518,000$4,569,000 and $4,700,000 at March 31,June 30, 2020 and September 30, 2019, respectively.

Note 4—4 – Costs and Estimated Earnings in Excess of Billings

Costs and estimated earnings in excess of billings on uncompleted contracts as of March 31,June 30, 2020 and September 30, 2019 consist of the following:

   March 31, 2020   September 30, 2019 

Costs incurred on uncompleted contracts

  $17,950,000   $18,707,000 

Estimated earnings

   7,489,000    9,063,000 
  

 

 

   

 

 

 
   25,439,000    27,770,000 

Billings to date

   16,647,000    13,932,000 
  

 

 

   

 

 

 

Costs and estimated earnings in excess of billings

  $8,792,000   $13,838,000 
  

 

 

   

 

 

 

 
June 30,
 
2020
  
September 30,
 
2019
 
Costs incurred on uncompleted contracts
 $
13,792,000
  $
18,707,000
 
Estimated earnings
  
5,555,000
   
9,063,000
 
         
  
19,347,000
   
27,770,000
 
Billings to date
  
9,283,000
   
13,932,000
 
         
Costs and estimated earnings in excess of billings
 $
10,064,000
  $
13,838,000
 
         
Note 5—5 – Earnings per Share Data

The Condensed Consolidated Financial Statements include basic and diluted earnings per share information.

The following table sets forth the computation of basic and diluted earnings per share for the quarters and sixnine months ended March 31,June 30, 2020 and 2019:

   Quarter Ended March 31,   Six Months Ended March 31, 
   2020   2019   2020   2019 

Net Income (Loss)

  $(655,000)   $7,460,000   $1,834,000   $7,773,000 
  

 

 

   

 

 

   

 

 

   

 

 

 

Common Shares:

        

Weighted average common shares outstanding

   14,586,000    14,541,000    14,586,000    14,541,000 

Effect of dilutive stock options

   —      167,000    128,000    164,000 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted shares outstanding

   14,586,000    14,708,000    14,714,000    14,705,000 
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic:

        

Net earnings (loss) per share

  $(0.04)   $0.51   $0.13   $0.53 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Net earnings (loss) per share

  $(0.04)   $0.51   $0.12   $0.53 
  

 

 

   

 

 

   

 

 

   

 

 

 

 
Quarter Ended June 30,
  
Nine Months Ended
 
June 30,
 
 
2020
  
2019
  
2020
  
2019
 
Net Income
 $
4,322,000
  $
2,444,000
  $
6,156,000
  $
10,217,000
 
                 
Common Shares:
            
Weighted average common shares outstanding
  
14,601,000
   
14,541,000
   
14,592,000
   
14,541,000
 
Effect of dilutive stock options
  
118,000
   
164,000
   
125,000
   
163,000
 
                 
Diluted shares outstanding
  
14,719,000
   
14,705,000
   
14,717,000
   
14,704,000
 
                 
Basic:
            
Net earnings per share
 $
0.30
  $
0.17
  $
0.42
  $
0.70
 
                 
Diluted:
            
Net earnings per share
 $
0.29
  $
0.17
  $
0.42
  $
0.69
 
                 
Basic earnings per share isare based on the weighted-average number of shares outstanding. Diluted earnings per share isare based on the sum of the weighted-averageweighted average number of shares outstanding plus common stock equivalents.

For the quarter ended March 31, 2020, there were no common stock equivalents included in the diluted earnings per share calculation. The weighted-average shares issuable upon the exercise of stock options included in the diluted earnings per share calculation for the six months ended March 31, 2020 were 260,000, which equates to 128,000 dilutive common stock equivalents. There were 30,000 weighted-average shares issuable upon the exercise of stock

11

options, which were not included in the diluted earnings per share calculation for the six months ended March 31, 2020 because they were anti-dilutive.

The weighted-average shares issuable upon the exercise of stock options included in the diluted earnings per share calculation for the quarter and sixnine months ended March 31,June 30, 2020 were 250,000 and 257,000, respectively, which equates to 118,000 and 125,000 dilutive common stock equivalents, respectively.
There were 7,000 weighted-average shares issuable upon the exercise of stock options, which were not included in the diluted earnings per share calculation for the quarter ended June 30, 2020 because they were anti-dilutive.
The weighted-average shares
11
issuable upon the exercise of stock options included in the diluted earnings per share calculation for the quarter and nine months ended June 30, 2019 were 317,000 and 317,000, respectively, which equates to 167,000164,000 and 164,000163,000 dilutive common stock equivalents, respectively. There were no0 anti-dilutive
shares for the quarter end
ed
June 30, 2019, and sixfor the nine months ended March 31,June 30, 2020 and June 30, 2019.

Note 6—6 – Customers with 10% (or greater) of Net Revenues

During the quarter ended March 31,June 30, 2020, three customers accounted for 12.3%16.5%, 11.2%13.3% and 10.7%12.6% of net revenues. During the sixnine months ended March 31,June 30, 2020, one of these threeno customers accounted for 10.4%10% or more of net revenues.

Two different customers accounted for 14.2% and 11.2% of net revenues for

During the quarter ended March 31, 2019. OneJune 30, 2019, 
one customer accounted for 20.3% of these two customers plus twonet revenues
. Two other customers accounted for 13.9%, 13.9%10.5% and 11.8%10.1% of net revenues, respectively, for the sixnine months ended March 31,June 30, 2019.

Note 7—7 – Income Taxes

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law by President Donald Trump. The Tax Reform Act significantly lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities for tax years beginning after December 31, 2017, implementing a territorial tax system and imposing repatriation tax on deemed repatriated earnings of foreign subsidiaries. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.

On the condensed consolidated balance sheet as of March 31,June 30, 2020, deferred income taxes decreased $2.9$2.1 million as compared to September 30, 2019, reflecting payment of taxes due of $1.9 million on the filing of the Company’s Form 3115 with the Internal Revenue Service to reflect the revenue recognition method change to the percentage of completion method for tax purposes pursuant to Internal Revenue Code Sections 460 and 451(b).

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 first sixnine months of fiscal 2020 and 2019 reflect the impact of the reduced rates under the Tax Reform Act.

Note 8—8 – Revenue Recognition and Related Costs

As discussed in Note 1, the Company adopted the provisions of ASUNo.
 2014-09
and related amendments effective for the quarter ended December 31, 2018 using the modified retrospective method. The adoption of this standard did not have a material impact on the timing or amounts of revenues recognized by the Company, and, as such, no cumulative effect adjustment was recorded with the adoption of the standard.

The following table disaggregates the Company’s net revenue by major source for the quarter and sixnine months ended March 31,June 30, 2020 and 2019:

   Quarter Ended March 31,   Six Months Ended March 31, 
   2020   2019   2020   2019 

Equipment sales recognized over time

  $9,829,000   $12,006,000   $21,919,000   $28,359,000 

Equipment sales recognized at a point in time

   10,044,000    8,929,000    11,951,000    10,443,000 

Parts and component sales

   4,675,000    4,466,000    7,821,000    7,517,000 

Freight revenue

   1,201,000    1,030,000    2,104,000    1,432,000 

Other

   244,000    239,000    228,000    246,000 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

  $25,993,000   $26,670,000   $44,023,000   $47,997,000 
  

 

 

   

 

 

   

 

 

   

 

 

 

12

 
Quarter Ended June 30,
  
Nine Months Ended June 30,
 
 
2020
  
2019
  
2020
  
2019
 
Equipment sales recognized over time
 $
10,350,000
  
$
7,844,000  $
32,269,000
  
$
36,203,000 
Equipment sales recognized at a point in time
  
8,995,000
   6,747,000   
20,946,000
   17,190,000 
Parts and component sales
  
2,671,000
   2,870,000   
10,492,000
   10,387,000 
Freight revenue
  
822,000
   1,312,000   
2,926,000
   2,744,000 
Other
  
102,000
   75,000   
330,000
   321,000 
                 
Net revenue
 $
22,940,000
  
$
18,848,000  $
66,963,000
  
$
66,845,000 
                 

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
12
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 $8,792,000$10,064,000 at March 31,June 30, 2020 and $13,838,000 at September 30, 2019 and are included in current assets as costs and estimated earnings in excess of billings on the Company’s condensed consolidated balance sheets at March 31,June 30, 2020 and September 30, 2019, respectively. The Company anticipates that all these contract assets at March 31,June 30, 2020, 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 certain milestones are completed. Accounts receivable related to contracts with customers for equipment sales was $247,000$281,000 at March 31,June 30, 2020 and $301,000 at September 30, 2019.

Product warranty costs are estimated using historical experience and known issues and are charged to production costs as revenue is recognized. Provisions for estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded. Returns and allowances, which reduce product revenue, are estimated using historical experience.

Under certain contracts with customers, recognition of a portion of the consideration received may be deferred and recorded as a contract liability if the Company has to satisfy a future obligation, such as to provide installation assistance. There were no contract liabilities other than customer deposits at March 31,June 30, 2020 and September 30, 2019. Customer deposits related to contracts with customers were $4,713,000$2,651,000 at March 31,June 30, 2020 and $1,918,000 at September 30, 2019, and are included in current liabilities on the Company’s condensed consolidated balance sheets at March 31,June 30, 2020 and September 30, 2019, respectively.

The Company records revenues earned for shipping and handling as freight revenue at the time of shipment, regardless of whether or not it is identified as a separate performance obligation. The cost of shipping and handling is classified as production costs concurrently with the revenue recognition.

Note 9—9 – Subsequent Events

In January 2020, the World Health Organization (the “WHO”) announced a global health emergency because of a new strain of coronavirusCOVID-19 originating in Wuhan, China and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified theCOVID-19 outbreak as a pandemic based on the rapid increase in global exposure.

As of the date of issuance of these unaudited Condensed Consolidated Financial Statements, our operations have not been significantly impacted. However, the full impact of theCOVID-19 pandemic continues to evolve subsequent to the three and six months ended March

On July 31, 2020 Gencor announced that it has signed an agreement to acquire the Blaw-Knox paver business and asassociated assets from Volvo CE. The Blaw-Knox business, name, and associated assets will transfer to Gencor, including the manufacturing production line currently located at Shippensburg Pennsylvania.
The proposed deal, which is expected to be finalized in Gencor’s first quarter of fiscal 2021, will allow Gencor to manufacture and develop Volvo CE’s current North American paver product line under the date these unaudited Condensed Consolidated Financial Statements are issued. As such,Blaw-Knox brand. Gencor is expected to continue marketing and servicing the full magnitude that theCOVID-19 pandemic will have on our financial condition and future results of operations is uncertain. Management is actively monitoring the situation on our financial condition, operations, suppliers, industry, customers, and workforce. As the spread ofCOVID-19 continues, our ability to meet customer demands for products may be impacted or our customers may experience adverse business consequences due toCOVID-19. Reduced demand for products or ability to meet customer demand (including as a result of disruptions at our suppliers and vendors) could have a material adverse effect on our business operations and financial performance.

Blaw-Knox paver line through selected Volvo CE dealers.

13

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 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”), 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 the financial condition of the Company’s customers, changes in the economic and competitive environments, demand for the Company’s products, the duration and scope of the coronavirus
(“COVID-19”)
pandemic, actions governments, businesses, and individuals take in response to the
COVID-19
pandemic, including mandatory business closures and restrictions on onsite commercial interactions; the impact of the pandemic and actions taken in response to the pandemic on global and regional economies and economic activity; the pace of recovery when the
COVID-19
pandemic subsides; and general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth.

For information concerning these factors and related matters, see the Caution Regarding Forward-Looking Statements, and this Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” andin this Quarterly Report, Part II, Item 1A, “Risk Factors,” in thisthe Quarterly Report on Form
10-Q
for the quarter ended March 31, 2020, and the following sections of the Company’s Annual Report on Form
10-K
for the year ended September 30, 2019: (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 statements, except as required by law.

Overview

Gencor Industries, Inc. (the “Company”), is a leading manufacturer of heavy machinery used in the production of highway construction materials and environmental control equipment. The Company’s core products include asphalt plants, combustion systems and fluid heat transfer systems. The Company’s products are manufactured in two 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 crude oil (liquid asphalt as well as fuel costs), and a trend towards larger more efficient asphalt plants.

On December 4, 2015, President Obama signed into law a five-year, $305 billion transportation bill, Fixing America’s Surface Transportation Act (the “FAST Act”). The FAST Act reauthorized the collection of the 18.4 cents per gallon gas tax that is typically used to pay for transportation projects. It also included $70 billion from other areas of the federal budget to close a $16 billion annual funding deficit. The bill included spending of more than $205 billion on roads and highways over five years. The 2016 funding levels were approximately 5% above 2015 projected funding, with annual increases between 2.0% and 2.5% from 2016 through 2020. The FAST Act is scheduled to expire in September 2020.

California’s Senate Bill 1 (“SB1”), the Road Repair and Accountability Act of 2017, was signed into law on April 28, 2017. The legislative package invests $54 billion over the next decade to fix roads, freeways and bridges in communities across California and puts more dollars towards transit and safety. These funds will be allocated to state and local projects. Additionally, at least twenty-five other states have taken steps to increase their gas tax revenues in recent years.

14

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.

Results of Operations

Quarter Ended March 31,June 30, 2020 versus March 31,June 30, 2019

Net revenuesrevenue for the quarter ended March 31,June 30, 2020 decreased by $677,000was $22,940,000, as compared to $25,993,000, from $26,670,000,$18,848,000 for the quarter ended March 31, 2019.June 30, 2019, an increase of $4,092,000, or 21.7%. The declineincrease in revenues reflects a slight slowdown innet revenue was due to the timing of and shipment of orders for equipment orders from the prior year. sales.
As a percent of sales,net revenue, gross profit margins were 28.2%23.5% in the quarter ended March 31,June 30, 2020 compared to 37.2%25.2% in the quarter ended March 31,June 30, 2019. The gross marginprofit margins achieved in the current quarter ended March 31, 2019, benefittedwere impacted by a higher percentage of revenues generated from an unusually strong pricing environment for plant and equipment sales.

sales compared with parts sales, which have a higher gross margin.

Product engineering and development expenses decreased $134,000were $849,000 in the quarter ended June 30, 2020, compared to $881,000 for the quarter ended March 31, 2020, compared to the quarter ended March 31, 2019.June 30, 2019, as a result of reduced travel expense. Selling, general and administrative (“SG&A”) expenses increased $87,000by $51,000 to $2,522,000 in the quarter ended March 31,June 30, 2020, compared to the quarter ended March 31, 2019. Increased headcount, travel and trade show expenses resulted in the increase in SG&A expenses during the second quarter of fiscal 2020. As a percentage of net revenues, SG&A expenses were 9.8%$2,471,000 in the quarter ended March 31, 2020, compared to 9.3% in the prior year.

June 30, 2019 as a result of increased sales headcount.

The Company had operating income of $4,088,000$2,014,000 for the quarter ended March 31,June 30, 2020 versus $6,614,000operating income of $1,398,000 for the quarter ended March 31,June 30, 2019. Operating margins were 15.7% in8.8% for the quarter ended March 31,June 30, 2020, compared to 24.8%7.4% in the quarter ended March 31, 2019.prior year. The decreaseincrease in operating margins was due primarily to lower gross margin.

higher revenues and production volumes.

For the quarter ended March 31,June 30, 2020, interest and dividend income, net of fees, from the investment portfolio was $763,000,$512,000, as compared to $507,000$567,000 in the quarter ended June 30, 2019. Net realized and unrealized gains on marketable securities were $2,888,000 for the quarter ended June 30, 2020 versus net unrealized and realized gains of $1,090,000 for the quarter ended June 30, 2019. The current quarter investment gains reflect a recovery in the domestic equity markets after the initial declines from the impact of the
COVID-19
pandemic in the quarter ended March 31, 2020
The effective income tax rate for the quarters ended June 30, 2020 and 2019 was 20.0%.
Net income for the quarter ended June 30, 2020 was $4,322,000, or $0.29 per diluted share, versus $2,444,000, or $0.17 per diluted share, for the quarter ended June 30, 2019.
15
Nine Months Ended June 30, 2020 versus June 30, 2019
Net revenue for the nine months ended June 30, 2020 and 2019 were $66,963,000 and $66,845,000, respectively, an increase of $118,000.
Gross profit margins decreased to 25.5% in the nine months ended June 30, 2020 from 29.3% in the nine months ended June 30, 2019. The gross profit margins achieved in the prior year benefitted from an unusually strong pricing environment for plant and equipment sales.
Product engineering and development expenses decreased by $123,000 in the nine months ended June 30, 2020, compared to the nine months ended June 30, 2019. SG&A expenses increased $330,000 in the nine months ended June 30, 2020, compared to the nine months ended June 30, 2019. As a percentage of net revenues, SG&A expenses were 11.1% for the nine months ended June 30, 2020, compared to 10.7% for the nine months ended June 30, 2019. The higher SG&A expenses in 2020 were due to increased headcount, travel and trade show expenses during the first nine months of fiscal 2020.
The Company had operating income of $7,274,000 for the nine months ended June 30, 2020 versus operating income of $10,016,000 for the nine months ended June 30, 2019, on lower gross profit margins and higher SG&A expenses. Operating margins were 10.9% for the nine months ended June 30, 2020, compared to 15.0% for the nine months ended June 30, 2019.
For the nine months ended June 30, 2020, interest and dividend income, net of fees, from the investment portfolio was $1,907,000, as compared to $1,608,000 for the prior period. The increase was due to additional interest income from a larger investment in corporate bonds and higher average yield to maturities. NetThe net realized and unrealized losses on marketable securities were $(5,670,000)$(1,465,000) for the quarter ended March 31, 2020, compared to net realized and unrealized gains of $2,204,000 for the quarter ended March 31, 2019. The current quarter investment losses reflect the decline in the domestic equity markets from the impact of theCOVID-19 pandemic.

The effective income tax rate for the quarter ended March 31, 2020 was a benefit of (20.0%) versus expense of 20.0% for the quarter ended March 31, 2019. Net loss for the quarter ended March 31, 2020 was $(655,000), or ($0.04) per diluted share, versus net income of $7,460,000, or $0.51 per diluted share, for the quarter ended March 31, 2019.

15

Six Months Ended March 31, 2020 versus March 31, 2019

Net sales for the sixnine months ended March 31, 2020 and 2019 were $44,023,000 and $47,997,000, respectively, a decrease of $3,974,000, reflecting a normalizing in order level from the significant growth in business over the past couple of years.

Gross profit margins decreased to 26.5% in the six months ended March 31, 2020 from 30.9% in the six months ended March 31, 2019. The gross margin achieved in quarter ended March 31, 2019, benefitted from an unusually strong pricing environment for plant and equipment sales.

Product engineering and development expenses decreased $91,000 in the six months ended March 31, 2020, compared to the six months ended March 31, 2019. SG&A expenses increased $279,000 in the six months ended March 31, 2020, compared to the six months ended March 31, 2019. As a percentage of net revenues, SG&A expenses were 11.2% for the six months ended March 31, 2020, compared to 9.7% in the six months ended March 31, 2019. The higher SG&A expenses in 2020 were due to increased headcount, travel and trade show expenses during the first six months of fiscal 2020.

The Company had operating income of $5,260,000 for the six months ended March 31, 2020 versus $8,618,000 for the six months ended March 31, 2019. Operating margins were 11.9% for the six months ended March 31, 2020, compared to 18.0% in the six months ended March 31, 2019.

For the six months ended March 31, 2020, interest and dividend income, net of fees, from the investment portfolio was $1,395,000, as compared to $1,041,000 for the six months ended March 31, 2019. The increase was due to additional interest income from a larger investment in corporate bonds and higher average yield to maturities. Net realized and unrealized losses on marketable securities were $(4,353,000) for the six months ended March 31,June 30, 2020 versus net realized and unrealized gains of $57,000$1,147,000 for the sixnine months ended March 31,June 30, 2019. The current year investment losses reflect the decline in the domestic equity markets from the impact of the

COVID-19
pandemic.

The effective income tax rate for the sixnine months ended March 31,June 30, 2020 and March 31,June 30, 2019 was 20.0%. Net income for the sixnine months ended March 31,June 30, 2020 was $1,834,000,$6,156,000, or $0.12$0.42 per diluted share, versus $7,773,000,$10,217,000, or $0.53$0.69 per diluted share, for the sixnine months ended March 31,June 30, 2019.

COVID-19
pandemic

In March 2020, the WHO declared the outbreak of
COVID-19
as a pandemic based on the rapid increase in global exposure.
COVID-19
continues to spread throughout world, including the United States. The
COVID-19
pandemic continues to impact economic conditions, which could impact the short-term and long-term demand from our customers and, therefore, has the potential to negatively impact our results of operations, cash flows, and financial position in the future. Management continues to monitor the situation and any impact on our financial condition and results of operations.

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 at March 31,June 30, 2020 or September 30, 2019. The Company does not currently require a credit facility. As of March 31,June 30, 2020, the Company hadhas funded $85,000 in cash deposits at insurance companies to cover related collateral needs.

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 2021, 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.

16
As of March 31,June 30, 2020, the Company had $18,738,000$18,564,000 in cash and cash equivalents, and $102,275,000$105,675,000 in marketable securities, including $40,315,000$38,058,000 in corporate bonds, $12,089,000 in equities, $3,983,000 in mutual funds, $7,140,000 in exchange-traded funds, $33,789,000 in government securities, $39,721,000 in corporate bonds, $12,458,000 in equities, $4,005,000 in exchange-traded funds, $2,290,000 in mutual funds, and $3,486,000$10,616,000 in cash and money funds. The marketable securities are invested through two professional investment management firms. These securities may be liquidated at any time into cash and cash equivalents.

16

The Company’s backlog was $24.5$11.7 million at March 31,June 30, 2020, compared to $24.2$11.9 million at March 31,June 30, 2019. The Company’s working capital (defined as current assets less current liabilities) was equal to $149.6$154.7 million at March 31,June 30, 2020 and $150.4 million at September 30, 2019. Cash provided by operations during the sixnine months ended March 31,June 30, 2020 was $9,154,000.$9,405,000. The significant purchases, sales and maturities of marketable securities shown on the Condensed Consolidated Statementscondensed consolidated statements of Cash Flows primarily are fromcash flows reflect the purchaserecurring purchases and salesales of United States treasury bills with very short durations.bills. Deferred income taxes decreased $2.9by $2.1 million reflecting payments of taxes due of $1.9 million on the filing of the Company’s Form 3115 with the Internal Revenue Service to reflect the revenue recognition method change to the percentage of completion method for tax purposes pursuant to Internal Revenue Code Sections 460 and 451(b). In addition, net deferred income tax liabilities were reduced due to the large unrealized losses on marketable equity securities. Accounts receivable increased $788,000 as parts sales increased during the quarter ended March 31, 2020, as compared to the quarter ended September 30, 2019. Costs and estimated earnings in excess of billings decreased $5,046,000,$3,774,000 and customer deposits increased $2,795,000,$733,000, reflecting the timing of revenue recognition and payments on customer contracts recognized over time, at March 31,June 30, 2020. Final payment on one plant remained open at June 30, 2020 as this customer has experienced delays in permitting and thus has not taken possession of their equipment. We anticipate payment and shipment of this plant when the customer’s permit is issued. Inventories increased $1,697,000decreased $804,000 reflecting manufacturing progressfinal shipments on equipment sales recognized at a point in time at March 31,prior to June 30, 2020. Prepaid expenses and other current assets increased $1,645,000 primarily related to payments on insurance policies which benefit the whole year, and expenses related to theCONEXPO-CON/AGG trade show in March 2020. Accounts payable increased $2,473,000 with the increased inventory and timing of payments.

Cash flows used in investing activities for the sixnine months ended March 31,June 30, 2020 of $718,000$1,246,000 were related to capital expenditures, primarily for new manufacturing machinery used for cutting raw materials and systems’ software.

Cash provided by financing activities of $103,000 for the nine months ended June 30, 2020 related to proceeds from the exercise of stock options.
Seasonality

The Company’s primary business is the manufacture and sale of asphalt plants and related components and is subject totypically experiences a seasonal slow-downslowdown during the third and fourth quarters of the calendar year. This slow-downslowdown often results in lower reported sales and operating results during the first and fourth quarters of eachthe 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 Statementsconsolidated financial statements included in the Company’s Annual Report on Form
10-K
for the year ended September 30, 2019, under the heading “Accounting Pronouncements and Policies.”

Estimates and Assumptions

In preparing the Condensed Consolidated Financial Statements,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 Statementscondensed 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

As discussed in Note 1 to the Company’s Consolidated Financial Statementsconsolidated financial statements included in the Company’s Annual Report on Form
10-K
for the year ended September 30, 2019, under the heading “Accounting Pronouncements and Policies”
17
Policies.”, the Company adopted the provisions of ASU
No. 2014-09
and its related amendments effective for the quarter ended December 31, 2018 using the modified retrospective method. The adoption of this standard did not have a material impact on the timing or amounts of revenues recognized by the Company, and, as such, no cumulative effect adjustment was recorded with the adoption of the standard.

17

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 $8,792,000$10,064,000 at March 31,June 30, 2020 and $13,838,000 at September 30, 2019 and are included in current assets as costs and estimated earnings in excess of billings on the Company’s condensed consolidated balance sheets at March 31,June 30, 2020 and September 30, 2019, respectively. The Company anticipates that all these contract assets at March 31,June 30, 2020, 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 certain milestones are completed. Accounts receivable related to contracts with customers for equipment sales were $247,000was $281,000 at March 31,June 30, 2020 and $301,000 at September 30, 2019.

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 March 31,June 30, 2020 and September 30, 2019. Customer deposits related to contracts with customers were $4,713,000$2,651,000 at March 31,June 30, 2020 and $1,918,000 at September 30, 2019, and are included in current liabilities on the Company’s condensed consolidated balance sheets at March 31,June 30, 2020 and September 30, 2019, respectively.

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.

Provisions for estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded. Returns and allowances, which reduce product revenue, are estimated using historical experience.

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 buckets. Account balances
18
are charged off against the allowance for doubtful accounts when they are determined to be uncollectable. Any recoveries of account balances previously considered in the allowance for doubtful accounts reduce future additions to the allowance for doubtful accounts.

18

Inventories

Inventories are valued at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price of goods less reasonable costs of completion and delivery. During the fourth quarter of fiscal 2019, the Company changed its method for accounting for cost of inventories from the LIFO method to the FIFO method. The Company believes the FIFO method improves financial reporting by better reflecting the current value of inventory on the consolidated balance sheets, by more closely aligning the flow of physical inventory with the accounting for the inventory, and by providing better matching of revenues and expenses. The change in accounting method will also require the Company to make a conforming change for U.S. income tax purposes.
As required by GAAP, the Company has reflected this change in accounting principle on a retrospective basis, resulting in changes to the historical periods presented. The retrospective application of the change resulted in an increase in the Company’s September 30, 2018 and September 30, 2017 retained earnings of $2,838,000 (net of $838,000 in taxes) and $2,708,000 (net of $792,000 in taxes) respectively, and an increase to the Company’s net income of $130,000 (net of $45,000 in taxes) for the year ended September 30, 2018. This change did not affect our previously reported cash flows from operating, investing or financing activities nor did it have a significant impact on the previously reported quarterly operating results for fiscal 2019.

All inventories are now valued at the lower of cost or net realizable value, with cost being determined under the FIFO method and net realizable value defined as the estimated selling price of goods less reasonable costs of completion and delivery (see Note 23 to Condensed Consolidated Financial Statements). 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 materials, 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, the cost basis of inventories three to four years old are reduced by 50%, while the cost basis of inventories four to five years old are reduced by 75%, and the cost basis of inventories greater than five years old are reduced 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.

Investments

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(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(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.

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Off-Balance
Sheet Arrangements

None

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and 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 Securities Exchange Act of 1934, as amended)Act) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and the Principal Financial and Accounting Officer concluded that, as of the end of the period covered by this Quarterly Report, the Company’s disclosure controls and procedures are effective.

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.

Changes in Internal Control over Financial Reporting

The Company’s management, including the Chief Executive Officer and Principal Financial and Accounting Officer, has reviewed the Company’s internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting during the quarter and sixnine months ended March 31,June 30, 2020 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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, 2019, as filed with the SEC on December 11, 2019, 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 March 31,June 30, 2020, 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, 2019, except as follows:

The Company’s business, results of operations, financial condition, cash flows, and the stock price of our common stock could be adversely affected by theCOVID-19 pandemic.

Our business, results of operations financial condition, cash flows, and the stock price of our common stock can be adversely affected by pandemics or other public health emergencies, such as the recent outbreak ofCOVID-19. In March 2020, the WHO declaredCOVID-19 as a pandemic. TheCOVID-19 pandemic has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures.

The outbreak ofCOVID-19 and any preventive or protective actions taken by governmental authorities may have a material adverse effect on our operations, supply chain, customers, and transportation networks, including business shutdown or disruptions. The extent to whichCOVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, depends upon the severity and duration of the outbreak and the effectiveness of actions taken globally to contain or mitigate its effect. Any resulting financial impact cannot be estimated reasonably at this time, but may materially adversely affect our business, results of operations, financial condition, and cash flows. Even after theCOVID-19 pandemic has subsided, we may experience materially adverse impacts to our business due to any resulting economic recession or depression. Additionally, concerns over the economic impact ofCOVID-19 have caused extreme volatility in financial and other capital markets, which has and may continue to adversely impact our stock price, our ability to access capital markets, and the value of our investment portfolio. To the extent theCOVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks describedPart II, Item 1A, “Risk Factors” in our AnnualQuarterly Report on

Form10-K 10-Q,
for the year ended September 30, 2019, such as those relating to our products and financial performance.

The Company may suffer adverse consequences if it is deemed an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”).

Under Section 3(a)(1)(A) of the Investment Company Act, a company is deemed to be an investment company if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities. We believe that we are not an investment company under Section 3(a)(1)(A) of the Investment Company Act because we do not hold ourselves out as being engaged primarily in the business of investing, reinvesting, or trading in securities. Rather, we have been a manufacturer of heavy equipment used in the production of asphalt for highway construction and environmental control equipment for over 50 years. Our core products include asphalt plants, combustion systems, and fluid heat transfer systems.

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Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an investment company if it is engaged, or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis. As reflected on our balance sheet atquarter end March 31, 2020, we own a significant amount of marketable securities, which include cash, cash equivalents, government and corporate bonds, mutual funds, exchange-traded funds and equities. Section 3(a)(2) defines the term “investment securities”, as used in Section 3(a)(1)(C) to include all marketable securities except government securities and cash and cash equivalents. The value of the Company’s investment securities exceeds 40% of the value of our total assets (excluding government securities and cash items). Because of the value of our investment securities, we may be deemed an investment company. We believe that we are not an investment company under Section 3(a)(1)(C) of the Investment Company Act because we do not propose to engage in the business of investing, reinvesting, owning, holding, or trading in securities. In addition, even if we were deemed an investment company under Section 3(a)(1)(C), we believe that we qualify for an exemption from the definition of an investment company as we are primarily engaged in a business other than that of investing, reinvesting, owning, holding, or trading in securities. As noted above, we are primarily engaged in the manufacturing of heavy equipment. If the Securities and Exchange Commission (the “SEC”) or a court challenged our status as an operating company, we could incur significant legal expenses.

If we are deemed to be, and were required to register as, an investment company, we would be forced to comply with the legal requirements of the Investment Company Act that would regulate the manner in which we would be permitted to conduct our business activities. As an investment company, we would be (i) subjected to disclosure and accounting guidance geared toward investment, rather than operating, companies; (ii) significantly limited in our ability to borrow money, issue options, issue multiple classes of stock and debt, and engage in transactions with affiliates; and (iii) required to undertake significant costs and expenses to meet other disclosure, reporting, and regulatory requirements to which we would be subject as a registered investment company.

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2020.

Item 6. Exhibits

  31.1*Exhibit 31.1  Certification of Chief Executive Officer Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as amended
  31.2*Exhibit 31.2  Certification of PrincipalChief Financial and Accounting Officer Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as amended
  32*Exhibit 32  Certifications of Chief Executive Officer and PrincipalChief Financial and Accounting Officer Pursuant to 18 U. S. C. Section 1350.1350
101.INS*Exhibit 101.1Interactive Data File
101.INS  XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCHXBRL Schema Document
101.SCH*101.CAL  XBRL Taxonomy Extension SchemaCalculation Linkbase Document
101.CAL*101.DEF  XBRL Taxonomy Extension CalculationDefinition Linkbase Document
101.DEF*101.LAB  XBRL Taxonomy Extension DefinitionLabel Linkbase Document
101.LAB*101.PRE  XBRL Taxonomy Extension LabelPresentation Linkbase Document
101.PRE*104  The cover page from the Company’s Quarterly Report on Form
10-Q
for the quarter ended June 30, 2020, formatted in Inline XBRL Taxonomy Extension Presentation Linkbase(included in Exhibit 101)

*

Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.

GENCOR INDUSTRIES, INC.
/s/ John E. Elliott
John E. Elliott
Chief Executive Officer
May 4,August 7, 2020
/s/ Eric E. Mellen
Eric E. Mellen
Chief Financial Officer
(Principal Financial and Accounting Officer)
May 4,August 7, 2020

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