Cemtrex, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2016. This is an annual report, not a standalone fourth-quarter report. The filing compares FY2016 with FY2015.
Business context
Cemtrex operates two segments: Industrial Products and Services (IPS), including industrial equipment installation, emissions monitoring, and air filtration; and Electronics Manufacturing Services (EMS). FY2016 included contributions from the December 2015 acquisition of Advanced Industrial Services (AIS) and the May 2016 acquisition of Periscope’s electronics and logistics operations.
Financial performance and position
| Metric | FY2016 / September 30, 2016 | FY2015 / September 30, 2015 |
|---|---|---|
| Revenue | $93.7 million | $56.9 million |
| Gross profit / margin | $29.2 million / 31% | $16.3 million / 29% |
| Operating income | $5.1 million | $2.5 million |
| Net income | $5.0 million; 5% of revenue | $2.8 million; 5% of revenue |
| Basic / diluted earnings per share | $0.59 / $0.58 | $0.41 / $0.40 |
| Operating cash flow | $7.9 million | $3.9 million |
| Cash and cash equivalents | $6.0 million | $1.5 million |
| Working capital | $11.8 million | $4.7 million |
| Total assets | $56.0 million | $22.5 million |
| Total liabilities | $40.3 million | $15.4 million |
Revenue rose 65% and net income rose 76%, with management attributing the increase primarily to the AIS and Periscope acquisitions and also citing higher-margin projects. IPS revenue was about $49.2 million and EMS revenue was $44.5 million. Management reported acquisition contributions of $16.8 million from AIS and $18.7 million from Periscope, with smaller increases from existing businesses.
Cash used in investing activities was $17.1 million, including $16.5 million for acquisitions. Financing activities provided $13.8 million, including proceeds from bank loans, convertible notes, other notes, and affiliated loans. Receivables increased to $13.6 million and inventory to $14.1 million. Management reported approximately $24.2 million of total indebtedness, including $3.7 million of convertible notes; approximately $7.9 million was classified as current. The balance sheet reports $3.7 million in current convertible notes and $6.4 million in long-term bank loans, among other borrowings.
Outlook, risks, and unusual items
- Management described its market outlook as fairly strong, citing expected interest in emissions monitoring and environmental-control products. It believed cash on hand and operating cash generation would cover FY2017 current operations, while warning that growth or acquisitions could require substantial additional capital. No quantified earnings or revenue guidance was provided.
- In December 2016, the company began a rights offering seeking up to $15 million through preferred-stock units with cumulative 10% annual dividends and two five-year warrants per unit. The filing states that proceeds were uncertain and that future financing could be costly or dilute common shareholders.
- Variable-price convertible notes could create substantial dilution: certain notes convert at 75% or 80% of market prices. The company also had fixed-price convertible notes and had issued common shares to settle convertible debt during FY2016.
- Other significant risks include high debt and refinancing needs, reliance on acquisitions, customer order variability and working-capital demands, intense competition, changing environmental regulations, foreign operations and currency exposure, and dependence on key executives. The company disclosed related-party borrowing from Ducon Technologies and a lease with that company.
- Management reported no goodwill impairment and no legal proceedings. The financial statements received an unqualified audit opinion. Management concluded internal and disclosure controls were effective; auditor attestation of internal control was not included, consistent with the company’s reporting exemptions.
Important facts for investors to verify
- Reconcile inconsistencies in the filing: FY2015 net income is stated as both $2.838 million and $2.383 million in the MD&A; operating expenses are stated as both $13.282 million and $13.822 million; and IPS revenue appears as both $49.224 million and $49.244 million. The financial statements report net income of $2.838 million, operating expenses of $13.822 million, and IPS revenue of $49.244 million.
- Confirm cash figures: the balance sheet reports $6.046 million at September 30, 2016, while a liquidity passage refers to $5.825 million. The filing does not clearly reconcile the difference.
- Review debt maturities, covenants, related-party financing, and the status and final proceeds of the $15 million rights offering, as well as potential dilution from convertible notes, warrants, and issued shares.
- Assess the acquired businesses’ standalone and ongoing contribution. Pro forma acquisition disclosures differ from reported results and include materially different FY2015 results for Periscope-inclusive pro forma operations.
- Check the full financial-statement notes and subsequent filings for updates to acquisition plans, financing, foreign-held cash, and working-capital requirements. The filing states that most FY2016 cash was held by foreign subsidiaries and treated as indefinitely reinvested.