Cemtrex, Inc. — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2017, compared with the year ended September 30, 2016. This is an annual report; the supplied filing text does not provide standalone fourth-quarter results.
Business context
Cemtrex operates two segments: Electronics Manufacturing Services (EMS), including electronic design, assembly and integration; and Industrial Products & Services (IPS), including industrial installation and maintenance services and air-filtration and environmental-control products. Growth during the year reflected acquisitions, particularly Periscope in EMS, as well as increased sales. In July 2017, the company formed Cemtrex Advanced Technologies to pursue proprietary and third-party IoT products.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Revenue | $120.63 million | $93.70 million | Up 29% |
| IPS revenue | $56.57 million | $49.24 million | Up 15% |
| EMS revenue | $64.06 million | $44.46 million | Up 44% |
| Gross profit / margin | $39.91 million / 33% | $29.21 million / 31% | Margin improved on higher-margin projects |
| Operating income | $5.12 million | $5.06 million | Nearly flat despite higher sales |
| Net income | $4.39 million | $4.99 million | Down 12% |
| Net income available to common shareholders | $3.19 million | $4.99 million | FY2017 included $1.20 million in preferred dividends |
| Basic / diluted EPS | $0.32 / $0.31 | $0.59 / $0.59 | Lower in FY2017 |
| Cash from operations | $1.11 million | $7.90 million | Declined, primarily with higher receivables and inventory |
Operating expenses rose 44% to $34.80 million, attributed to higher research and development, sales and marketing, acquisition costs, and Periscope. Interest expense increased to $0.92 million from $0.67 million; other income fell to about $0.31 million from $1.69 million, which the company attributed to one-time FY2016 income.
At September 30, 2017, cash and equivalents were $10.44 million, restricted cash was $1.53 million, working capital was $26.37 million, and total assets were $70.18 million. Accounts receivable was $15.46 million and inventory was $17.27 million. Operating cash flow fell substantially year over year; investing activities used $6.96 million, including $5.68 million for property and equipment, while financing activities provided $10.25 million, principally from the rights offering. The filing says cash on hand and expected operating cash flow should meet FY2018 operating needs, but cautions that growth may require additional capital.
Total indebtedness was described as approximately $16 million, including a $4.47 million revolving credit balance, bank loans, a mortgage, notes and $0.22 million of convertible notes. About $2.1 million was classified as current. The company raised $14.02 million gross through its rights offering; net proceeds reported in the cash-flow statement were $12.82 million. Series 1 preferred stock carries cumulative annual dividends of 10% of purchase price.
Changes, outlook and material risks
- Revenue growth was acquisition-led, with Periscope contributing to EMS and AIS contributing to IPS. The filing also attributes growth to increased sales in existing businesses.
- Management described the outlook for its products and services as “fairly strong” and plans to pursue organic growth, emerging technologies and selective acquisitions. No quantitative revenue or earnings guidance is provided.
- Management identified working-capital needs and potential reliance on additional equity or debt financing as risks to growth. Additional financing may be unavailable on acceptable terms and equity issuance could dilute shareholders.
- The company disclosed three securities class-action complaints and a related derivative action, which it intends to contest. It says outcomes are unpredictable and insurance may not cover all costs or liabilities.
- Cemtrex was pursuing a potential acquisition of Key Tronic Corp.; Key Tronic had not responded positively to prior and current proposals. Completion, terms, costs and benefits were uncertain.
- Other key risks include substantial debt and debt-service needs, customer order variability, acquisition integration, foreign-currency exposure, competition and technology changes, changing environmental regulations, and reliance on key executives. The company reported management’s assessment that disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Investor verification priorities
- Reconcile the income-tax figures: the statements and MD&A report a FY2017 provision of $115,648, but the tax footnote table reports total tax of $2,006,648. Confirm the correct amount and related net-income presentation.
- Check other inconsistent reported figures: FY2017 other income is shown as $313,817 in MD&A and $313,837 in the statements; FY2016 financing cash flow is reported as $13.21 million in MD&A and $13.81 million in the cash-flow statement.
- Review debt maturities, revolving-credit availability and covenants, and whether operating cash generation can fund working capital, capital spending and planned expansion.
- Assess the ongoing cost and potential exposure from the securities and derivative litigation, and confirm the status of any proposed Key Tronic transaction.
- Evaluate the preferred stock’s cumulative 10% dividend, dilution from outstanding warrants and equity-linked securities, and the difference between net income and income available to common shareholders.