Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2017. The filing was signed August 14, 2017. Cemtrex operates Electronics Manufacturing Services (EMS) and Industrial Products & Services (IPS) businesses.
Financial performance
| Metric | Three months ended June 30, 2017 | Year-over-year | Nine months ended June 30, 2017 | Year-over-year |
|---|---|---|---|---|
| Revenue | $27.81 million | Up 13% | $87.71 million | Up 54% |
| Gross profit / margin | $9.93 million / 36% | 33% margin prior year | $28.99 million / 33% | 31% margin prior year |
| Operating income | $1.41 million | Down from $1.70 million | $4.15 million | Up from $3.06 million |
| Net income | $1.18 million | Down 17% | $3.00 million | Up 2% |
| Net income available to common shareholders | $1.18 million | Prior year: $1.43 million | $2.67 million | Prior year: $2.95 million |
| Diluted earnings per share | $0.11 | Prior year: $0.16 | $0.26 | Prior year: $0.36 |
Quarterly revenue was $13.47 million for IPS (up 8%) and $14.34 million for EMS (up 17%). Nine-month revenue was $42.02 million for IPS (up 27%) and $45.68 million for EMS (up 93%). Management attributed growth principally to increased shipments and project work in IPS and the Periscope acquisition in EMS; it also cited the AIS acquisition in discussing the nine-month increase.
Quarterly operating expenses rose 32% to $8.53 million; management attributed the increase to sales and marketing activity and Periscope. Nine-month operating expenses rose 68% to $24.83 million, reflecting sales and marketing and the AIS and Periscope acquisitions. Nine-month other expense was $1.03 million, versus $39,000 the prior year, primarily reflecting asset-disposal losses and interest on acquisition loans and convertible notes.
Cash flow, liquidity, and debt
- At June 30, 2017, cash and equivalents were $13.24 million, restricted cash $0.81 million, working capital $28.80 million, and total assets $65.23 million. Current assets were $47.36 million and current liabilities $18.56 million.
- For the nine months, operating activities used $1.16 million of cash, compared with providing $4.89 million in the prior-year period. Investing activities used $2.01 million; financing activities provided $10.37 million. Cash increased by $7.20 million from September 30, 2016.
- Accounts receivable increased 7% to $14.58 million and inventory increased 18% to $16.57 million from September 30, 2016. Management linked the inventory rise to orders and shipments delayed by customers’ internal production issues.
- Total liabilities were $28.33 million, down from $40.34 million at September 30, 2016. June 30 balances included a $2.82 million revolving credit line, $5.49 million in bank loans, $3.79 million mortgage payable, $0.52 million convertible notes, and $2.02 million current portion of long-term liabilities. Related-party notes were reported as zero, after an exchange for preferred shares and warrants.
- The January–February 2017 rights offering and standby placement generated $14.02 million gross proceeds. The offering issued Series 1 preferred shares with cumulative 10% annual dividends and warrants. Management said additional external capital may be needed for growth and working capital, and that financing availability and timing are uncertain.
Changes, outlook, and risks
- Revenue growth was acquisition-influenced; reported net income grew only 2% for the nine months, while net income available to common shareholders and diluted EPS declined from the prior-year period.
- The company reported 1,735,858 Series 1 preferred shares outstanding at June 30. The preferred shares carry cumulative 10% dividends, priority over common shares in liquidation, and two votes per share; they are not convertible. Common shares outstanding were 10,207,739 at June 30 and 10,248,533 as of August 7.
- Management’s plan includes organic expansion and acquisitions when conditions permit, but it provided no quantified earnings, revenue, or cash-flow guidance. It expects working-capital and investment needs may exceed operating cash generation and anticipates that it may seek further equity or debt financing.
- Management identified risks including economic and competitive conditions, pricing, manufacturing or supplier problems, maintaining credit arrangements, and changes in environmental standards. It reported no material inflation impact and no disclosable subsequent events through August 14, 2017.
- Three securities class-action complaints and a related derivative complaint were pending. Cemtrex denied the allegations and said it intended to defend the litigation; it cautioned that litigation could be costly and adversely affect business, results, or cash flows. The company’s separate suit against a blogger was voluntarily dismissed after it could not serve the defendant, with the right to refile reserved.
- Management concluded disclosure controls were effective as of June 30, 2017, and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of reported growth reflects acquired businesses versus organic growth, and how acquisition-related costs affect profitability.
- Whether operating cash flow can recover as receivables and inventory rise, including the timing of delayed customer shipments.
- Debt maturities, credit-line availability, and the company’s potential need for additional financing; also account for the preferred stock’s cumulative dividend and voting terms.
- The status and potential financial exposure of the securities class actions and derivative litigation.
- Confirm comparative-period and per-share figures against the filed financial statements; the filing’s MD&A gives third-quarter total other expense as $(50,143), while the statement of operations reports $(50,413).