Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Quarter ended December 31, 2015 (first quarter of fiscal 2016); comparison is the quarter ended December 31, 2014 unless otherwise noted. The filing is unaudited. Cemtrex provides electronics manufacturing services and industrial products and services, including emissions monitoring and air filtration. It acquired Advanced Industrial Solutions, Inc. (AIS) on December 15, 2015.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 / comparator |
|---|---|---|
| Revenue | $13.315 million | $13.843 million; down 4% |
| Gross profit / margin | $3.873 million / approximately 29% | $4.023 million / approximately 29% |
| Operating income / margin | $467,000 / approximately 3.5% | $401,000 / approximately 2.9% |
| Net income / diluted EPS | $692,000 / $0.09 | $397,000 / $0.06 |
| Operating cash flow | $1.550 million provided | $1.309 million provided |
| Investing cash flow | $7.561 million used | $97,000 provided |
| Financing cash flow | $6.905 million provided | $434,000 used, per cash-flow statement |
At December 31, 2015, cash and equivalents were $2.380 million and restricted cash was $624,000. Working capital was $5.794 million, versus $4.694 million at September 30, 2015. Current assets were $19.389 million and current liabilities were $13.595 million. Total liabilities were $25.994 million, compared with $15.419 million at September 30. Debt includes a $3.717 million revolving line, $1.865 million of convertible notes, bank loans, mortgage debt, and acquisition-related notes; the filing does not provide a single consolidated debt figure.
Material changes and management commentary
- Industrial products and services revenue rose 7% to $7.865 million, primarily reflecting AIS, acquired shortly before quarter-end. Electronics manufacturing services revenue fell 16% to $5.449 million; management cited euro weakness and shipment timing.
- Net income increased 74%, which management attributed to lower operating expenses and income from forgiveness of debt in the electronics manufacturing services group. Operating expenses declined 6% to $3.406 million, mainly due to lower salaries, benefits, and insurance.
- Other income was $351,000, versus $58,000 in the prior-year quarter; interest expense was $175,000. The filing says the positive other-income result was primarily due to debt forgiveness.
- AIS was acquired for stated consideration of $7.5 million: $5.0 million from a bank loan, $1.5 million in seller notes, and $1.0 million in Cemtrex common stock. The purchase-price allocation was preliminary and subject to adjustment.
- Investing cash use was primarily for the AIS acquisition. Financing cash inflows were primarily bank borrowing for that acquisition. Management expects long-term and working-capital needs to periodically exceed operating cash flow and says it uses debt and equity as well as internally generated cash to fund growth.
Outlook, risks, and contingencies
The filing provides no quantified earnings or revenue guidance. Management describes a strategy of organic growth and acquisitions. Risks identified include economic and business conditions, competition and pricing, manufacturing or supplier problems, access to sufficient credit, and changes in governmental standards affecting environmental-control products. The company reported no subsequent events requiring disclosure and no material change in internal control over financial reporting; management said disclosure controls were effective as of December 31, 2015.
Important facts for investors to verify
- Net income and tax presentation: The statement reports pretax income of $642,221, a tax line of $(50,174), and net income of $692,395. The net-income figure reflects adding the tax benefit, despite the line’s parentheses; MD&A describes a tax benefit. Confirm the intended sign and presentation.
- Receivables inconsistency: The balance sheet reports net accounts receivable of $8.146 million at December 31, while MD&A cites $7.895 million for that date. The filing text does not clearly reconcile the values.
- Prior-year financing cash flow: The cash-flow statement reports $434,197 used in Q1 FY2015, while MD&A reports $619,537 used. Confirm the correct comparative amount.
- Acquisition and financing: Review AIS’s preliminary purchase-price allocation, contribution to results, integration, and the terms and repayment capacity of the associated bank and seller debt.
- Convertible notes and dilution: $1.865 million of convertible notes were outstanding at quarter-end, with conversion prices set at a percentage of market price; 483,791 shares were issued during the quarter to satisfy $774,000 of notes. Verify remaining conversion exposure and potential dilution.