Cemtrex, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015; comparisons are to FY2014. This is an annual report, not a standalone fourth-quarter report. Cemtrex operates in electronics manufacturing services (EMS) and environmental products and systems (EPS), including emission monitoring, air filtration, and environmental controls. Its EMS business includes the ROB Group, acquired in 2013.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $56.89 million | $47.65 million | +19% |
| Gross profit | $16.32 million | $15.60 million | +5% |
| Gross margin | 28.7% | 32.7% | Down 4.0 percentage points |
| Operating income | $2.50 million | $3.01 million | Down 17% |
| Net income | $2.84 million | $2.67 million | +6% |
| Net margin | 5.0% | 5.6% | Down 0.6 percentage points |
| Basic / diluted EPS | $0.41 / $0.40 | $0.39 / $0.39 | As reported |
| Cash from operations | $4.04 million | ($2.34 million) | Improved $6.38 million |
EPS attributed EPS revenue growth of $13.98 million to higher Southeast Asian orders; EMS revenue declined $4.75 million, which management attributed primarily to the euro’s decline against the U.S. dollar. The filing does not provide a clear segment revenue breakdown. Gross margin fell because of lower-margin projects. Operating expenses rose 10% to $13.82 million, though declined as a share of revenue to 24% from 26%.
Other income was $834,290 and interest expense was $496,281, producing net other income of $338,009 versus net other expense of $283,348 in FY2014. Management said the change primarily reflected forgiveness of third-party debt to ROB Systems. The increase in net income therefore occurred despite lower operating income. The income tax provision was $917, compared with $60,962.
Financial position and liquidity
- At September 30, 2015, cash was $1.49 million, up from $146,095; working capital was $4.69 million, down from $5.28 million.
- Current assets were $13.52 million and current liabilities $8.83 million (approximately 1.53x current ratio). Accounts receivable rose 18% to $4.77 million; inventory increased 2% to $6.37 million.
- Total liabilities were $15.42 million, compared with $16.20 million a year earlier. Balance-sheet debt and notes included $2.13 million of short-term bank debt, $1.27 million of convertible notes, $654,020 of current long-term liabilities, $2.38 million of long-term bank loans, $4.09 million of mortgage debt, and $119,055 due to a related party.
- Investing activities used $956,046, including $1.52 million for property and equipment, partly offset by redemption of $559,815 in short-term investments. Financing activities used $1.74 million; proceeds from $2.04 million of convertible notes were offset by debt repayments.
- Management said cash on hand and cash generated from operations should cover current operating needs during FY2016, but substantial growth or new-product investment could require additional capital.
Outlook, risks, and notable items
- Management described the outlook for products and services as “fairly strong,” citing expected continued interest in air quality, emission monitoring, and environmental controls. No quantified forecast was provided.
- Key risks include uncertain customer demand and order timing, lower-margin competition, dependence on enforcement of environmental regulations, product and technology obsolescence, international currency and operating risks, and the need to maintain adequate credit and working capital. Management also noted that profitability may not continue.
- Convertible notes outstanding at year-end carried 8%–10% interest and conversion prices of 65%–75% of market price after a six-month period; 371,069 shares had already been issued to satisfy $658,000 of notes. These terms create potential dilution.
- Subsequent to year-end, Cemtrex issued two additional convertible notes totaling $1.015 million and issued 369,265 shares upon conversion of $574,000 of notes through December 11, 2015.
- On December 15, 2015, the company acquired Advanced Industrial Services for approximately $7.5 million, plus $476,340 of acquisition expenses. Consideration included $5.0 million cash, a $1.5 million seller note, and $1.0 million in stock. The filing describes related bank financing, including a $5.25 million term loan and a $3.5 million working-capital line. AIS was reported to have averaged approximately $23 million in annual revenue and $2.4 million in normalized EBITDA in 2013–2014.
- The company completed a one-for-six reverse stock split in April 2015 and began trading on Nasdaq Capital Market in June 2015. It reported no legal proceedings and no cash dividends paid or expected in the foreseeable future.
- The auditor gave an unqualified opinion on the consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- Whether reported FY2015 earnings and operating cash generation are sustainable, given lower operating income and the debt-forgiveness benefit.
- Actual segment performance, margins, and the extent to which EMS revenue was affected by euro exchange rates; the filing does not clearly show segment revenue figures.
- Convertible-note balances, conversion activity, share issuance, and potential dilution under below-market conversion terms.
- Liquidity and debt capacity after the AIS acquisition, including the cash outlay, new borrowing, seller note, and working-capital needs.
- Whether management’s qualitative outlook and stated FY2016 liquidity expectation remain valid amid acquisition integration, customer-order variability, and regulatory or currency risks.