Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended June 30, 2016; filed August 15, 2016. The unaudited consolidated statements compare with the periods ended June 30, 2015. Cemtrex operates electronics manufacturing and industrial products and services businesses. Results include Advanced Industrial Services (AIS), acquired December 15, 2015, and Periscope business assets, acquired May 31, 2016.
Financial performance
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Nine months ended June 30, 2016 | Nine months ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $24.715 million | $14.666 million | $56.938 million | $42.839 million |
| Gross profit / margin | $8.159 million / 33% | $4.252 million / 29% | $17.864 million / 31% | $12.520 million / 29% |
| Operating income | $1.697 million | $0.681 million | $3.059 million | $1.880 million |
| Net income | $1.431 million | $0.943 million | $2.953 million | $2.421 million |
| Diluted earnings per share | $0.16 | $0.14 | $0.36 | $0.35 |
For the quarter, revenue rose 69% and net income rose 52% year over year. For the nine months, revenue rose 33% and net income rose 22%. Management attributed much of the growth to the acquisitions; EMS revenue also benefited from completion of customer orders delayed in the prior quarter. Gross margin improved, which management attributed to product and service mix. Operating expenses increased 81% in the quarter and 39% year to date, reflecting acquired operations and, in part, Periscope-related one-time costs and corporate marketing. Nine-month net margin was approximately 5%, versus 6% a year earlier.
Cash flow, balance sheet, and financing
- Operating cash flow: $4.891 million provided in the nine months, compared with $3.107 million provided in 2015. Investing activities used $16.673 million, principally for acquisitions; financing activities provided $12.671 million. Cash increased $0.890 million to $2.377 million. Restricted cash was $0.884 million.
- Liquidity: Working capital was $9.927 million at June 30, 2016, versus $4.694 million at September 30, 2015. Current assets were $33.180 million and current liabilities were $23.253 million. Receivables were $11.237 million and inventory was $14.532 million, both substantially higher than at fiscal year-end, largely due to acquisitions.
- Debt and liabilities: Total liabilities were $39.365 million, compared with $15.419 million at September 30, 2015. Balance-sheet obligations included $2.723 million on a revolving credit line, $2.031 million of convertible notes, $7.095 million of bank loans, $3.912 million of mortgage debt, $3.319 million of related-party notes, and other notes and current long-term obligations. Interest expense was $0.598 million for the nine months.
- Equity and dilution: Common shares outstanding were 9,290,968 at June 30 and 9,410,947 as of August 8. During the nine months, 1,769,177 shares were issued to satisfy $2.560 million of convertible notes. The company had reserved 4 million shares for potential conversion of outstanding notes.
Material changes, outlook, and risks
- AIS was acquired for approximately $7.5 million, funded with cash, bank financing, a seller note, and stock. Periscope assets were acquired for approximately $8.9 million, funded with $4.903 million cash, a $0.718 million seller note, and $3.299 million borrowed from related party Ducon Technologies. Periscope’s purchase-price allocation was preliminary.
- Management intends to pursue organic growth and acquisitions and expects working-capital and longer-term needs to periodically exceed operating cash flow. It anticipates that additional external capital may be needed through equity and/or debt; no quantified earnings or revenue guidance is provided.
- Management cautioned that financing may not be available on reasonable terms. Equity financing could dilute shareholders; debt could impose restrictive covenants and reduce operating flexibility. Other cited risks include economic and competitive conditions, manufacturing or supplier problems, credit availability, and changes to environmental-product standards.
- On July 14, 2016, the company issued a $1.055 million, 10% convertible note due in 12 months, convertible at $5 per share after six months at the holder’s option.
- Management reported that disclosure controls were effective as of June 30, 2016, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported growth and profitability is attributable to acquired businesses, and how the acquisitions perform after integration.
- Working-capital conversion, particularly the collection of receivables and use of elevated inventory, and the availability of cash beyond reported cash equivalents.
- Debt maturities, borrowing conditions and covenants, related-party financing terms, and the company’s ability to fund further growth without unfavorable financing.
- Potential dilution from outstanding convertible notes, reserved conversion shares, and subsequent financing; compare share counts across reporting dates.
- Final valuation and accounting for the Periscope acquisition, which the filing describes as preliminary, and the effect of acquisition-related costs on recurring earnings.