All other schedules are omitted because they are not applicable or the required information is shown in the consolidated
financial statements or notes thereto.
The
management of Gencor Industries, Inc. (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Companys internal control system is designed to provide
reasonable assurance to the Companys management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. There are inherent limitations in the effectiveness of all internal control systems no matter how well designed. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the
preparation and presentation of financial statements. Furthermore, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of a change in circumstances or conditions.
In order to ensure that the Companys internal control over financial reporting is effective, management regularly assesses such controls and did so most
recently as of September 30, 2016. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes the Company maintained effective internal control over financial reporting as of September 30, 2016. Moore Stephens Lovelace, P.A., the Companys independent registered
public accountant firm, has issued an attestation report on the Companys internal control over financial reporting as of September 30, 2016.
Notes to Consolidated Financial Statements
For the Years Ended September 30, 2016 and 2015
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Gencor Industries, Inc. and its subsidiaries (collectively, the Company) is a diversified, heavy machinery manufacturer for the production of
highway construction materials, synthetic fuels and environmental control machinery and equipment.
These consolidated financial statements include the
accounts of Gencor Industries, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
New Accounting Pronouncements and Policies
In November
2015, the Financial Accounting Standards Board issued guidance on the balance sheet classification of deferred taxes, which requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. The
guidance is effective for financial statements issued for annual and interim periods beginning after December 15, 2016, with earlier application permitted. The Company applied this guidance to their financial statements for the year ended
September 30, 2015 and retrospectively to all periods presented. The retrospective implementation did not result in any changes to the Companys financial statements for the year ended September 30, 2014.
No other new accounting pronouncements issued or effective during the fiscal 2016 have had or are expected to have a material impact on the Companys
consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Earnings per Share (EPS)
The consolidated financial statements include basic and diluted earnings (loss) per share (EPS) information. Basic earnings per share are based on
the weighted average number of shares outstanding. Diluted earnings per share are based on the sum of the weighted average number of shares outstanding plus common stock equivalents.
On July 11, 2016, the Companys Board of Directors approved a three-for-two split of the Companys common and Class B stock to be effected in
the form of a 50% stock dividend. As a result, shareholders received one additional share of common or Class B stock for every two shares they held of the respective class of stock as of the record date. These shares were distributed on
August 1, 2016, to shareholders of record as of the end of business on July 22, 2016. All share and per share data (except par value) have been adjusted to reflect the effect of the stock split for all periods presented. The number of
shares of common and Class B stock issuable upon exercise of outstanding stock options were proportionately increased in accordance with terms of the respective plans (see Note 11). The number of authorized shares as reflected on the Consolidated
Balance Sheets was not affected by the stock split and accordingly has not been adjusted.
Weighted-average shares issuable upon the exercise of stock
options included in the diluted earnings per share calculation as of September 30, 2016 were 480,000 which equates to 190,000 dilutive common stock equivalents on a post stock split basis. For the year ended September 30, 2015, there were
no common stock equivalents included in the diluted earnings per share calculations, as to do so would have been anti-dilutive. Weighted-average shares issuable upon the exercise of stock options, which were not included in the diluted earnings per
share calculation because they were anti-dilutive, were zero in 2016 and 512,000 in 2015 on a post stock split basis.
29
The following presents the calculation of the basic and diluted earnings (loss) per share for the years ended
September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Net Income
|
|
|
Shares
|
|
|
EPS
|
|
|
Net Loss
|
|
|
Shares
|
|
|
EPS
|
|
Basic EPS
|
|
$
|
7,043,000
|
|
|
|
14,334,000
|
|
|
$
|
0.49
|
|
|
$
|
(1,819,000
|
)
|
|
|
14,283,000
|
|
|
$
|
(0.13
|
)
|
Common stock equivalents
|
|
|
|
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
7,043,000
|
|
|
|
14,524,000
|
|
|
$
|
0.48
|
|
|
$
|
(1,819,000
|
)
|
|
|
14,283,000
|
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents
Cash
equivalents consist of short-term certificates of deposit and deposits in money market accounts with original maturities of three months or less.
Marketable Securities
Marketable debt and equity
securities are categorized as trading securities and are thus marked to market and stated at fair value. Fair value is determined using the quoted closing or latest bid prices for Level 1 investments and market standard valuation methodologies for
Level 2 investments. Realized gains and losses on investment transactions are determined by specific identification and are recognized as incurred in the consolidated statements of operations. Net changes in unrealized gains and losses are reported
in the consolidated statements of operations in the current period.
Fair Value Measurements
The fair value of financial instruments is presented based upon a hierarchy of levels that prioritizes the inputs of valuation techniques used to measure fair
value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). A financial
instruments 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, and matrix pricing or other similar techniques. The inputs to these market standard valuation methodologies include, but are not limited to: interest rates, credit
standing of the issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, maturity, estimated duration and assumptions regarding liquidity and estimated future cash flows. In addition to bond characteristics, the valuation
methodologies incorporate market data, such as actual trades completed, bids and actual dealer quotes, where such information is available. Accordingly, the estimated fair values are based on available market information and judgments about
financial instruments (Level 2). Fair values of the Level 2 investments (if any) are provided by the Companys professional investment management firm.
The following table sets forth by level, within the fair value hierarchy, the Companys assets measured at fair value as of September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Equities
|
|
$
|
2,408,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,408,000
|
|
Mutual Funds
|
|
|
5,212,000
|
|
|
|
|
|
|
|
|
|
|
|
5,212,000
|
|
Exchange-Traded Funds
|
|
|
510,000
|
|
|
|
|
|
|
|
|
|
|
|
510,000
|
|
Government Securities
|
|
|
69,583,000
|
|
|
|
|
|
|
|
|
|
|
|
69,583,000
|
|
Cash and Money Funds
|
|
|
8,225,000
|
|
|
|
|
|
|
|
|
|
|
|
8,225,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,938,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
85,938,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Net unrealized gains and (losses) reported during fiscal 2016 on trading securities still held as of
September 30, 2016, were $2,502,000. There were no transfers of investments between Level 1 and Level 2 during the year ended September 30, 2016.
The following table sets forth by level, within the fair value hierarchy, the Companys assets measured at fair value as of September 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Equities
|
|
$
|
20,915,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20,915,000
|
|
Mutual Funds
|
|
|
11,885,000
|
|
|
|
|
|
|
|
|
|
|
|
11,885,000
|
|
Exchange-Traded Funds
|
|
|
4,086,000
|
|
|
|
|
|
|
|
|
|
|
|
4,086,000
|
|
Government Securities
|
|
|
43,883,000
|
|
|
|
|
|
|
|
|
|
|
|
43,883,000
|
|
Cash and Money Funds
|
|
|
3,588,000
|
|
|
|
|
|
|
|
|
|
|
|
3,588,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
84,357,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
84,357,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains and (losses) reported during fiscal 2015 on trading securities still held as of September 30, 2015,
were $(4,882,000). There were no transfers of investments between Level 1 and Level 2 during the year ended September 30, 2015.
The carrying amounts
of cash and cash equivalents, accounts receivable, accounts payable, customer deposits and accrued expenses approximate fair value because of the short-term nature of these items.
Foreign Currency Transactions
Gains and losses resulting
from foreign currency transactions are included in income and were not significant during the years ended September 30, 2016 and 2015.
Risk
Management
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents,
marketable securities, and accounts receivable. The Company maintains its cash accounts in various domestic financial institutions which may from time to time exceed federally insured limits. Operating cash is retained overnight in
non-interest-bearing accounts which allow for offsets to treasury service charges. The marketable securities are invested in cash and money funds, mutual funds, exchange-traded funds (ETFs), government securities and stocks through a
professional investment advisor. Investment securities are exposed to various risks, such as interest rate, market and credit risks.
The Companys
customers are not concentrated in any specific geographic region, but are concentrated in the road and highway construction industry. The Company extends limited credit to its customers based upon their credit- worthiness and generally requires a
significant up-front deposit before beginning construction and full payment subject to hold-back provisions prior to shipment on complete asphalt plant and component orders. The Company establishes an allowance for doubtful accounts based upon the
credit risk of specific customers, historical trends and other pertinent information.
Inventories
Inventories are valued at the lower of cost or market, with cost being determined principally by using the last-in, first-out (LIFO) method and
market defined as replacement cost for raw materials and net realizable value for work in process and finished goods (see Note 2). 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
31
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 Companys 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.
Property
and Equipment
Property and equipment are stated at cost (see Note 4). Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the related assets, as follows:
|
|
|
|
|
Years
|
Land improvements
|
|
5
|
Buildings and improvements
|
|
6-40
|
Equipment
|
|
2-10
|
Impairments
Property and
equipment and intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. An impairment loss would be
recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess
over its fair value of the assets carrying value. Fair value is generally determined using a discounted cash flow analysis. No such impairment loss was recorded during the years ended September 30, 2016 and 2015.
Revenues and Expenses
Revenues from contracts for the
design, manufacture and sale of asphalt plants are recognized under the percentage-of-completion method. The percentage-of-completion method of accounting for these contracts recognizes revenue, net of any promotional discounts, and costs in
proportion to actual labor costs incurred, as compared with total estimated labor costs expected to be incurred during the entire contract. Pre-contract costs are expensed as incurred. Changes to total estimated contract costs or losses, if any, are
recognized in the period in which they are determined. Revenue recognized in excess of amounts billed is classified as current assets under costs and estimated earnings in excess of billings. The Company anticipates that all incurred
costs associated with these contracts at September 30, 2016, will be billed and collected within one year.
Revenues from all other contracts for the
design and manufacture of custom equipment, for service and for parts sales, net of any discounts and return allowances, are recorded when the following four revenue recognition criteria are met: product is delivered/ownership is transferred or
service is performed, persuasive evidence of an arrangement exists, the selling price is fixed or determinable, and collectability is reasonably assured.
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.
Product warranty costs are estimated using historical experience and
known issues and are charged to production costs as revenue is recognized.
All product engineering and development costs, and selling, general and
administrative expenses are charged to operations as incurred. Provision is made for any anticipated contract losses in the period that the loss becomes evident.
The allowance for doubtful accounts is determined by performing a specific review of all account balances greater than 90 days past due and other higher risk
amounts to determine collectability and also adjusting for any known customer payment issues with account balances in the less-than-90-day past due aging category. Account balances are charged off against the allowance for doubtful accounts when
they are determined to be uncollectable. Any recoveries of account balances previously considered in the allowance for doubtful accounts reduce future additions to the allowance for doubtful accounts.
32
Shipping and Handling Costs
Shipping and handling costs are included in production costs in the consolidated statements of operations.
Income Taxes
Income taxes are provided for the tax
effects of transactions reported in the consolidated financial statements and consist primarily of taxes currently due, plus deferred taxes (see Note 6).
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated
financial statements or tax returns using current tax rates. The Company and its domestic subsidiaries file a consolidated federal income tax return.
Deferred tax assets and liabilities are measured using the rates expected to apply to taxable income in the years in which the temporary differences are
expected to reverse and the credits are expected to be used. The effect on deferred tax assets and liabilities of the change in tax rates is recognized in income in the period that includes the enactment date. All available evidence, both positive
and negative, is considered to determine whether, based on the weight of that evidence, the Company is more likely than not to realize the benefit of a deferred tax asset and whether a valuation allowance is needed for some portion or all of a
deferred tax asset. No such valuation allowances were recorded as of September 30, 2016 and 2015.
Comprehensive Income
For the years ended September 30, 2016 and 2015, other comprehensive income (loss) is equal to net income (loss).
Reporting Segments
Information concerning principal
geographic areas is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
Long-Term
|
|
|
|
|
|
Long-Term
|
|
|
|
Revenues
|
|
|
Assets
|
|
|
Revenues
|
|
|
Assets
|
|
United States
|
|
$
|
69,991,000
|
|
|
$
|
5,292,000
|
|
|
$
|
39,230,000
|
|
|
$
|
7,778,000
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
69,991,000
|
|
|
$
|
5,292,000
|
|
|
$
|
39,230,000
|
|
|
$
|
7,778,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues are attributed to geographic areas based on the location of the assets producing the revenues.
Customers with 10% (or greater) of Net Revenues
Approximately 9% of total net revenue in the quarter ended September 30, 2016 and 34% of total net revenue for the quarter ended September 30, 2015
was from one or more separate U.S. corporate entities ultimately affiliated with a foreign-based global company. For the years ended September 30, 2016 and 2015, this company represented 14% and 15% of total net revenue, respectively.
Reclassifications and Adjustments
Certain prior year
amounts in the consolidated financial statements have been reclassified to conform to the fiscal 2016 presentation. All historical share and per share data in the consolidated financial statements and notes thereto have been restated to give
retroactive recognition of the Companys three-for-two stock split. In the Consolidated Statements of Shareholders Equity, for all periods presented, the par value of the additional shares was reclassified from capital in excess of par
value to common stock. Refer to Note 10 & Note 11 for additional information regarding the stock split.
33
NOTE 2 INVENTORIES, NET
Net inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
7,072,000
|
|
|
$
|
6,090,000
|
|
Work in process
|
|
|
976,000
|
|
|
|
1,849,000
|
|
Finished goods
|
|
|
3,545,000
|
|
|
|
4,563,000
|
|
Used equipment
|
|
|
41,000
|
|
|
|
268,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,634,000
|
|
|
$
|
12,770,000
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2016 and 2015, cost is determined by the LIFO method for inventories. The estimated current cost of
inventories exceeded their LIFO basis by approximately $4,766,000 and $5,343,000 at September 30, 2016 and 2015, respectively. Slow moving and obsolete inventory reserves were $3,869,000 and $3,310,000 at September 30, 2016 and 2015,
respectively.
NOTE 3 COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
Costs and estimated earnings in excess of billings on uncompleted contracts as of September 30, 2016 and 2015 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Costs incurred on uncompleted contracts
|
|
$
|
8,898,000
|
|
|
$
|
4,547,000
|
|
Estimated earnings
|
|
|
3,124,000
|
|
|
|
1,114,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,022,000
|
|
|
|
5,661,000
|
|
Billings to date
|
|
|
7,101,000
|
|
|
|
3,265,000
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings
|
|
$
|
4,921,000
|
|
|
$
|
2,396,000
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Land and improvements
|
|
$
|
3,323,000
|
|
|
$
|
3,323,000
|
|
Buildings and improvements
|
|
|
12,886,000
|
|
|
|
12,883,000
|
|
Equipment
|
|
|
8,599,000
|
|
|
|
9,152,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,808,000
|
|
|
|
25,358,000
|
|
Less: Accumulated depreciation and amortization
|
|
|
(19,569,000
|
)
|
|
|
(18,970,000
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
5,239,000
|
|
|
$
|
6,388,000
|
|
|
|
|
|
|
|
|
|
|
Property and equipment includes approximately $8,777,000 and $6,678,000 of fully depreciated assets, which remained in service
during fiscal 2016 and 2015, respectively.
34
NOTE 5 ACCRUED EXPENSES
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Payroll and related accruals
|
|
$
|
1,330,000
|
|
|
$
|
894,000
|
|
Warranty and related accruals
|
|
|
401,000
|
|
|
|
204,000
|
|
Professional fees
|
|
|
133,000
|
|
|
|
97,000
|
|
Other
|
|
|
400,000
|
|
|
|
257,000
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
2,264,000
|
|
|
$
|
1,452,000
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 INCOME TAXES
The provision for income tax expense (benefit) consists of:
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Years Ended September 30,
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2016
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2015
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Current:
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Federal
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$
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679,000
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$
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261,000
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State
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31,000
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37,000
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Total current
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710,000
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298,000
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Deferred:
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Federal
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1,768,000
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(1,871,000
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)
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State
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(121,000
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)
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(154,000
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Total deferred
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1,647,0000
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(2,025,000
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)
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Income tax expense (benefit)
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$
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2,357,000
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$
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(1,727,000
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)
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A reconciliation of the federal statutory tax rate to the total tax provision is as follows:
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Years Ended September 30,
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2016
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2015
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Federal income taxes computed at the statutory rate
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34.0
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%
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(34.0
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%)
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State income taxes, net of federal benefit
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1.5
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%
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(3.3
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%)
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Research & development tax refunds & credits
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(2.8
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%)
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(5.2
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%)
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Dividend received deduction
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(2.2
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%)
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Domestic production activities deduction
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(1.9
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%)
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Domestic international sales corporation benefits
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(5.8
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%)
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Other, net
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(3.4
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%)
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(0.4
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%)
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Effective income tax rate
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25.2
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%
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(48.7
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%)
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35
Deferred tax assets and liabilities consist of the following:
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September 30,
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2016
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2015
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Deferred Tax Assets:
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Accrued liabilities and reserves
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$
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331,000
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$
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255,000
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Allowance for doubtful accounts
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70,000
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133,000
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Inventory
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632,000
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R&D tax credits carryforwards
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871,000
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1,114,000
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Stock-based compensation
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140,000
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194,000
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Net operating losses carryforwards
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73,000
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48,000
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Unrealized loss on investments
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85,000
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1,023,000
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Other
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62,000
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14,000
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Gross Deferred Tax Assets
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2,264,000
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2,781,000
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Deferred and Other Tax Liabilities:
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Domestic international sales corporation
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(577,000
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)
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Inventory
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(43,000
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)
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Percentage of completion
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(1,158,000
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)
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(415,000
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)
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Property and equipment
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(683,000
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)
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(806,000
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Unrecognized tax benefits
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(150,000
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)
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(150,000
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)
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Other
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(12,000
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)
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(36,000
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Gross Deferred and Other Tax Liabilities
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(2,580,000
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)
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(1,450,000
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)
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Net Deferred and Other Income Tax Assets (Liabilities)
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$
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(316,000
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)
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$
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1,331,000
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Total income taxes paid in fiscal 2016 and 2015 were $1,105,000 and $200,000, respectively.
Accounting principles generally accepted in the United States of America (GAAP) prescribes a comprehensive model for the financial recognition,
measurement, classification, and disclosure of uncertain tax positions. GAAP contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, based on the technical merits of the position. The second step is to measure the tax benefit as the largest amount that is more than
50% likely of being realized upon settlement.
Significant judgment is required in evaluating the Companys uncertain tax position and determining
the Companys provision for taxes. Although the Company believes the reserves of unrecognized tax benefits (UTBs) are reasonable, no assurance can be given that the final outcome of these matters will not be different from
that which is reflected in the Companys historical income tax provision and accruals. The Company adjusts these reserves in light of changing facts and circumstances. As of September 30, 2016 and 2015, the Company had UTBs of
$150,000. There were no additional accruals of UTBs during fiscal years ended September 30, 2016 and 2015.
The Company recognizes interest and
penalties accrued related to UTBs as a component of income tax expense. There were no additional accruals of interest expense nor penalties during fiscal years ended September 30, 2016 and 2015. It is reasonably possible that the amount
of the UTBs with respect to certain unrecognized tax positions will increase or decrease during the next 12 months. The Company does not expect the change to have a material effect on its results of operations or its financial position. The
only expected potential reason for change would be the normal expiration of the statute of limitations or the ultimate results stemming from any examinations by taxing authorities. If recognized, the entire amount of UTBs would have an impact
on the Companys effective tax rate.
The effective income tax rate for fiscal 2016 was 25.2% versus a benefit of (48.7%) in fiscal 2015. As of
September 30, 2015, the Company had $900,000 in research and development tax credits (R&D Credits) carry-forwards. In fiscal 2016, there was a net usage of R&D Credits of $253,000 bringing the total R&D Credits
carry-forwards to $647,000 at September 30, 2016. The $647,000 of R&D Credits carry-forwards, which are included in net deferred and other income tax liabilities of $(316,000) at September 30, 2016, expire in fiscal years 2031 through
2035.
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As of September 30, 2015, the Company had $214,000 in Florida state research and development tax credits
(Florida R&D Credits) carry-forwards. The Company received additional net Florida R&D Credits of $10,000 in fiscal 2016. The $224,000 of Florida R&D Credits, which are included in net deferred and other income tax liabilities
of $(316,000) at September 30, 2016, expire in fiscal 2020.
The Company files U.S. federal income tax returns, as well as income tax returns in
various states. The Companys U.S. federal income tax returns and most state returns, filed for tax years prior to fiscal year ended September 30, 2013 are no longer subject to examination by taxing authorities due to the expiration of the
statute of limitations.
NOTE 7 RETIREMENT BENEFITS
The Company has a voluntary 401(k) employee benefit plan, which covers all eligible, domestic employees. The Company makes discretionary matching contributions
subject to a maximum level, in accordance with the terms of the plan. The Company charged approximately $178,000 and $159,000 to expense under the provisions of the plan during the fiscal years 2016 and 2015, respectively.
NOTE 8 LONG-TERM DEBT
The Company had no
long-term debt outstanding at September 30, 2016 or 2015. The Company does not currently require a credit facility, but continues to evaluate its needs and options for such a facility.
As of September 30, 2016, total cash deposits with insurance companies covering collateral needs were $135,000.
NOTE 9 COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain equipment under non-cancelable operating leases. Future minimum rental commitments under these leases at September 30,
2016 totaled $186,000 and are due over the next three years, of which $66,000 is due during the year ending September 30, 2017.
Total rental expense
for the fiscal years ended September 30, 2016 and 2015 was $200,000 and $182,000, respectively.
Litigation
The Company has various pending litigation and other claims. Those claims which are made in the ordinary course of business may be covered in whole or in part
by insurance, and if found against the Company, management does not believe these matters will have a material effect on the Companys financial position, results of operations or cash flows. Management has reviewed all litigation matters
arising in the ordinary course of business and has made provisions, not deemed material, for any estimable losses and expenses of litigation.
NOTE 10
SHAREHOLDERS EQUITY
Under the Companys amended certificate of incorporation, certain rights of the holders of the Companys
common stock are modified by shares of Class B stock for as long as such shares shall remain outstanding. During that period, holders of common stock will have the right to elect approximately 25% of the Companys Board of Directors, and
conversely, Class B stock will be entitled to elect approximately 75% of the Companys Board of Directors. During the period when common stock and Class B stock are outstanding, certain matters submitted to a vote of shareholders will also
require approval of the holders of common stock and Class B stock, each voting separately as a class. Common stock and Class B shareholders have equal rights with respect to dividends, preferences, and rights, including rights in liquidation.
37
Stock Split
On July 11, 2016, the Companys Board of Directors approved a three-for-two split of the Companys common and Class B stock to be effected in
the form of a 50% stock dividend. As a result, shareholders received one additional share of common or Class B stock for every two shares they held of the respective class of stock as of the record date. These shares were distributed on
August 1, 2016, to shareholders of record as of the end of business on July 22, 2016.