Cemtrex, Inc. — Form 10-Q Summary
Business context and reporting period: Cemtrex reported its first quarter of fiscal 2018, the three months ended December 31, 2017, with comparative results for the three months ended December 31, 2016. Its two segments are Electronics Manufacturing Services (EMS) and Industrial Products & Services (IPS). The filing is unaudited.
Financial performance
| Metric | Quarter ended Dec. 31, 2017 | Quarter ended Dec. 31, 2016 |
|---|---|---|
| Revenue | $32.38 million | $29.40 million |
| Gross profit / gross margin | $10.52 million / approximately 33% | $9.70 million / approximately 33% |
| Operating income | $0.87 million | $1.99 million |
| Net income | $0.73 million | $1.41 million |
| Net income margin | Approximately 2% | Approximately 5% |
| Operating cash flow | $2.52 million | $0.28 million |
| Capital expenditures | $2.34 million | $0.20 million |
Revenue increased 10%. EMS revenue rose 27% to $20.44 million, while IPS revenue fell 10% to $11.94 million. Net income declined 48%, and diluted earnings per share were $0.07 versus $0.14. Interest expense was $0.37 million; the income-tax provision was $0.06 million.
Cash and equivalents were $12.42 million at quarter-end, excluding restricted cash of $1.58 million. Working capital was $27.62 million, compared with $26.37 million at September 30, 2017. Current assets were $47.19 million and current liabilities $19.57 million. Operating cash flow benefited in part from executing previously delayed in-house orders and a $3.80 million inventory reduction; accounts receivable increased $2.38 million.
Reported liabilities included a $3.99 million revolving line of credit, $4.92 million in long-term bank loans, $2.40 million in long-term notes payable, a $3.84 million mortgage, and $2.09 million in current long-term liabilities. The company issued a new $2.30 million note in November 2017, bearing 8% interest and due after 18 months. Outstanding convertible notes were satisfied through issuance of 149,088 common shares for $220,000.
Material changes and management commentary
- Management attributed higher revenue to increased EMS shipments. Lower IPS sales were attributed primarily to reduced demand for environmental-control products following deregulation of emissions standards.
- Management said higher research and development and sales and marketing costs contributed to lower earnings. The statement of operations reports operating expenses of $9.66 million, up from $7.71 million.
- The company consolidated its two German EMS factories into one Neulingen location. It lost two Paderborn customers going into 2018 and expects lower EMS revenue for the next few quarters, while expressing optimism about longer-term growth and new business wins.
- Cemtrex formed Cemtrex Advanced Technologies in 2017 to develop proprietary and third-party IoT products, and acquired certain Pune, India assets in December 2017 for software and prototype development related to virtual/augmented reality and smart technology.
- Inventory fell to $12.85 million; the inventory-obsolescence allowance increased by $0.62 million to $1.03 million.
Outlook, liquidity, and risks
The filing provides no numerical earnings or revenue guidance. Management expects acquisition, organic-growth, and working-capital needs periodically to exceed operating cash generation and says it will likely seek additional external capital through common or preferred stock or debt, subject to market conditions. It cautions that available cash flows and financing may not be sufficient to meet expansion and working-capital needs. Series 1 preferred shares carry cumulative annual dividends of 10% of purchase price.
Three alleged securities class actions and a related derivative action were pending. The company denies the allegations and intends to defend itself; it says litigation is unpredictable and could be costly or adversely affect results or cash flows, notwithstanding insurance coverage. Other stated risks include economic and competitive conditions, manufacturing or supplier problems, credit availability, and changes in government standards. Management reported disclosure controls were effective as of December 31, 2017 and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Financial-statement inconsistencies: MD&A gives operating expenses as $9.98 million in one passage, while the statement of operations and another MD&A calculation indicate $9.66 million. Reconcile the reported figure.
- Property and equipment: The balance sheet reports net property and equipment of $22.38 million, while Note 9 reports $20.46 million at December 31, 2017. Clarify the correct balance.
- Near-term operating impact: Track the revenue and margin effects of the two lost EMS customers, the German factory consolidation, and the IPS demand decline.
- Liquidity and financing: Monitor working-capital requirements, the 8% note maturity, potential external capital needs, and the cost of cumulative Series 1 preferred dividends.
- Litigation and inventory: Review developments in the securities and derivative cases and assess whether the higher obsolescence allowance adequately reflects inventory risk.