Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017; filed May 11, 2017. Cemtrex operates Electronics Manufacturing Services (EMS) and Industrial Products & Services (IPS), including industrial services, emissions monitoring, and air-filtration products. Results include acquisitions of Advanced Industrial Services (AIS) and Periscope; management attributes much of the growth to those acquisitions.
Key financial results
| Metric | Three months ended March 31, 2017 | Six months ended March 31, 2017 |
|---|---|---|
| Revenue | $30.50 million, up 61% | $59.90 million, up 86% |
| Gross profit / margin | $9.36 million / 31%, approximately flat | $19.06 million / 32%, versus 30% a year earlier |
| Operating income | $0.76 million, versus $0.90 million | $2.75 million, versus $1.36 million |
| Net income | $0.41 million, versus $0.83 million | $1.82 million, versus $1.52 million |
| Basic / diluted EPS | $0.04 / $0.04 | $0.18 / $0.18 |
| Operating cash flow | Six-month cash provided: $0.63 million, versus $1.87 million |
Quarterly net margin was about 1%, versus 4% in the prior-year quarter; six-month net margin was about 3%, versus 5%. The quarter’s operating margin was about 2.5%, versus 4.7% a year earlier. For the quarter, IPS revenue increased 19% to $15.32 million and EMS revenue increased 152% to $15.19 million. For the six months, IPS revenue rose 38% to $28.56 million and EMS revenue rose 173% to $31.35 million.
Balance sheet, liquidity, and financing
- At March 31, 2017, cash and equivalents were $15.96 million, restricted cash $0.86 million, current assets $46.21 million, and current liabilities $19.80 million. Working capital was $26.41 million, versus $11.77 million at September 30, 2016.
- Total assets were $63.67 million and total liabilities $29.67 million; shareholders’ equity was $34.00 million. Liabilities declined from $40.34 million at September 30, 2016.
- Listed borrowing balances included a $3.23 million revolving line, $1.51 million of convertible notes, $2.02 million current portion of long-term liabilities, $5.67 million of bank loans, $0.52 million of notes payable, and a $3.59 million mortgage. The filing does not provide a single total-debt figure.
- Six-month investing cash use was $1.63 million, including $1.34 million to repurchase and retire common shares. Financing provided $10.91 million, principally reflecting the rights offering. Cash increased $9.91 million to $15.96 million.
- The rights offering and standby placement raised $14.02 million gross through Series 1 preferred stock and warrants. Series 1 shares carry cumulative annual dividends of 10% of purchase price and rank senior to common stock for dividends and liquidation; related warrants have a $6.31 exercise price and five-year term. The company paid $0.33 million in Series 1 dividends during the six months.
Material changes, outlook, and risks
- Quarterly revenue grew substantially, primarily because of Periscope, while six-month growth also reflected AIS. Quarterly net income fell 50%, despite higher revenue, as operating expenses rose 74% and other expense increased. Management cited litigation-related legal and marketing costs, increased sales and marketing activity, fixed-asset disposal losses, and interest on acquisition and convertible debt.
- Six-month gross margin improved to 32% from 30%, which management attributed to product and service mix. Six-month net income rose 20%, but net margin declined to about 3% from 5%.
- Management plans to pursue organic growth and acquisitions, subject to market and competitive conditions. It expects long-term and working-capital needs may periodically exceed operating cash flow and says it will likely seek additional equity or debt capital; it cautions that funding availability and timing are uncertain. No quantified earnings or revenue guidance is provided.
- Three securities class-action complaints against the company and certain executives were pending and expected to be consolidated. Cemtrex denies the allegations, intends to defend itself, and separately sued the blogger whose post the complaints cite, seeking $170 million. The filing provides no clear estimate of any potential loss or litigation-related liability.
- Other disclosed risks include economic and competitive conditions, manufacturing or supplier problems, ability to maintain credit arrangements, regulatory changes affecting environmental-control products, and dependence on external capital. Management reported disclosure controls were effective as of March 31, 2017, with no material change in internal control over financial reporting during the quarter.
- A common-stock cash dividend was declared April 19, 2017 for holders of record March 31; the amount is not stated in the provided filing text.
Important facts for investors to verify
- How much of revenue and earnings growth is attributable to acquired businesses, and how their performance and margins compare with the legacy operations.
- The recurring versus one-time components of legal, marketing, asset-disposal, and interest costs, and the expected impact of the securities litigation.
- Debt maturities, borrowing availability and covenants, and the company’s need and capacity to raise further capital, including the cost of Series 1 preferred dividends.
- The sustainability of operating cash flow and working capital, given six-month operating cash flow of $0.63 million and management’s stated expectation of potential funding needs.
- The tax presentation: the statement shows tax amounts in parentheses while reported net income exceeds pretax income in both periods; confirm the treatment and reconciliation in the underlying statements.
- The filing contains apparent MD&A wording or period-label errors, including the comparative operating-expense sentence and a cash-flow comparison described as a three-month period despite the statements presenting six-month figures; verify against the financial statements.