Cemtrex, Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the quarter and six months ended March 31, 2018, Cemtrex’s fiscal second quarter. The company operates Electronics Manufacturing Services (EMS) and Industrial Products & Services (IPS), and is developing smart technology, IoT, and virtual/augmented reality products.
Financial performance
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Revenue | $20.60 million, down 32% year over year | $52.98 million, down 12% |
| Gross profit / margin | $7.84 million / 38%, versus $9.36 million / 31% | $18.37 million / 35%, versus $19.06 million / 32% |
| Operating income | $0.16 million, versus $0.76 million | $1.03 million, versus $2.75 million |
| Net income | $0.42 million, up 2% | $1.16 million, down 36% |
| Diluted EPS | $0.04, unchanged | $0.11, versus $0.18 |
- Quarterly IPS revenue fell 38% to $9.57 million; EMS revenue fell 27% to $11.03 million. For the six-month period, IPS revenue declined 25% to $21.51 million while EMS revenue was nearly flat at $31.48 million.
- Quarterly general and administrative expense decreased 13% to $7.43 million, but rose 4% for the six-month period to $16.94 million. Research and development expense was $0.25 million for the quarter and $0.40 million for six months.
- Other income was $0.51 million in the quarter; management attributed the favorable result to one-time debt forgiveness connected with the German factory consolidation. Interest expense for the quarter was $0.20 million.
Cash, liquidity, and debt
- At March 31, 2018, cash and equivalents were $9.25 million and restricted cash was $1.61 million. Working capital was $22.69 million, down from $26.37 million at September 30, 2017.
- Six-month operating cash flow was $5.57 million, compared with $0.79 million a year earlier. Investing activities used $7.95 million, primarily for fixed-asset investment; financing activities provided $1.26 million. Cash and restricted cash together declined by approximately $1.12 million from the start of the period.
- Current liabilities were $16.23 million. Borrowings included a $3.29 million revolving credit line, $4.57 million in bank loans, $2.35 million in notes payable, $3.95 million in mortgage debt, and $2.02 million in current long-term liabilities. The filing does not provide a single total-debt figure.
- Management says growth and working-capital needs may periodically exceed operating cash generation and anticipates that additional external capital may be needed. It cautions that financing may not be available on acceptable terms or in sufficient amounts.
Material changes, outlook, and risks
- The company consolidated two German EMS factories into one Neulingen location in January 2018, aiming for economies of scale. It sold ROB Cemtrex Automotive at an approximately $157,000 loss and said two lost Paderborn customers are expected to reduce EMS revenue for the next few quarters and the remainder of fiscal 2018. Management remained optimistic about longer-term EMS growth.
- Management attributed weaker IPS demand partly to reduced demand for environmental products following deregulation of emissions standards. It cited lower IPS sales, R&D, and sales-and-marketing costs as factors affecting six-month earnings.
- On March 23, 2018, Cemtrex acquired approximately 46% of Vicon Industries, plus a warrant for another 1.5 million shares, in exchange for 1,012,625 Cemtrex shares. The $2.91 million investment is accounted for under the equity method. Cemtrex’s CEO became Vicon’s CEO, and two Cemtrex executives joined Vicon’s board.
- Series 1 preferred stock carries cumulative dividends at 10% annually. In April 2018, the company paid $915,808 of preferred dividends in additional Series 1 preferred stock.
- Three securities class-action complaints and a related derivative complaint are pending. Cemtrex denies the allegations and intends to defend itself; it says litigation is inherently unpredictable and may be costly or disruptive. The company disclosed insurance with a $150,000 deductible.
- Management reported disclosure controls were effective as of March 31, 2018, but identified and corrected a deficiency involving reporting a complex foreign-subsidiary sale and said it was working to add accounting staff.
Important facts for investors to verify
- Whether lost EMS customers and softer IPS environmental-product demand continue to weigh on revenue and earnings.
- Whether operating cash flow can support planned investment and working-capital needs, or whether external financing will be required.
- The performance and accounting effects of the Vicon investment, including the impact of Cemtrex’s equity-method share of results.
- The status and potential financial exposure of the securities and derivative litigation.
- The effect of the 10% cumulative preferred dividend obligation and the company’s issuance of stock to satisfy obligations.