Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2014; comparisons are to the three months ended December 31, 2013 unless otherwise noted. Cemtrex provides electronics manufacturing services, environmental control and air-filtration products, and emissions-monitoring instruments. The ROB Group acquisition, completed in October 2013, expanded its electronics manufacturing business.
Financial performance
| Metric | Quarter ended Dec. 31, 2014 | Quarter ended Dec. 31, 2013 |
|---|---|---|
| Revenue | $13.84 million | $8.96 million |
| Gross profit / margin | $4.02 million / 29% | $2.82 million / 32% |
| Operating income | $401,235 | $457,677 |
| Net income | $396,872 | $416,552 |
| Basic and diluted EPS | $0.01 | $0.01 |
| Operating cash flow | $1.49 million provided | $7.33 million used |
Revenue rose 54%. Environmental Products and Systems revenue increased 212% to $7.34 million, attributed to stronger demand. Electronics Manufacturing Services revenue declined about 2% to $6.50 million; management cited euro weakness and shipment timing. Net income fell about 5%, and net margin declined from approximately 5% to 3%. General and administrative expense was reported as $3.62 million in the income statement; the MD&A gives a different operating-expense figure, discussed below.
Gross profit increased in dollars, but the reported gross margin fell to 29% from 32%. Management’s discussion says the margin percentage increased due to higher-margin jobs, which conflicts with the reported figures.
Cash, liquidity and debt
At December 31, 2014, cash and equivalents were $1.12 million, up from $146,095 at September 30, 2014; short-term investments were $312,382, down from $559,815. Working capital was $7.07 million, versus $7.63 million at September 30. Current assets were $11.74 million and current liabilities $4.66 million. Operating cash flow benefited principally from a $999,764 reduction in trade receivables. Investing activities provided $97,396, mainly from redeeming short-term investments; financing activities used $619,537, chiefly for bank-loan repayments.
Reported balances included bank loans of $5.12 million, mortgage payable of $4.60 million, related-party notes payable of $1.68 million, convertible notes of $358,000, and a $687,000 current portion of long-term liabilities. The filing describes German bank borrowings at stated interest rates of 4.00%–4.95%, a 3.00% mortgage, and related-party notes at 5%. Interest expense was $140,612, compared with $54,358 a year earlier.
Outlook, risks and notable items
- Management said cash on hand and operating cash generation should be sufficient for current operations through fiscal 2015. It cautioned that significant sales growth, particularly in new products, could require substantial capital and that insufficient capital could constrain growth.
- Risks identified include economic and business conditions, competition and pricing, manufacturing or supplier problems, access to credit, and changes in standards governing environmental products. The filing gives no quantitative earnings or revenue guidance.
- The company issued two 8% convertible notes totaling $358,000 during the quarter. They mature in nine months and, after six months, may be converted at the holder’s option at 65% of market price. A further $150,000, 8% convertible note with similar conversion terms was issued February 6, 2015, with a 12-month maturity.
- Commitments include office and warehouse leases and a 17-year mortgage on the German facility. Management reported disclosure controls as effective and no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Reconcile operating expenses: the income statement reports $3,621,822 of general and administrative expense, while MD&A reports operating expenses of $3,640,822 and describes a $1,273,761 increase.
- Clarify gross-margin commentary: the reported margin declined from 32% to 29%, contrary to MD&A’s statement that the margin percentage increased.
- Confirm the income-tax presentation: the statements show $318,172 of pretax income, a $78,700 tax benefit, and $396,872 of net income; the line-item sign and net-income arithmetic should be checked against the original filing.
- Assess potential dilution and repayment needs from the convertible notes, including the subsequent February 2015 issuance and the 65%-of-market conversion feature.
- Evaluate whether cash-flow improvement from receivables collections is repeatable, and monitor the company’s stated reliance on sufficient credit and capital for growth.