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As we predicted, China Fire’s business has hit a rough patch due to weakness in China’s iron and steel industry -- a segment of major customers for the company. Revenue was flat year-over-year and gross margin declined from 64% to 54%.

The full press release is here:

And although the company failed to release a cash flow statement (boo!), the business continues to look like it’s in a little bit of trouble from this perspective. Accounts receivable are up 21.5% year-over-year to $34.4mm and unbilled receivables are up an incredible 90% year-over-year to $55.3mm. That unbilled receivables number is also up more than 20% sequentially. In other words, the company was only able to achieve zero growth while aggressively booking work performed as revenue even though they have yet to send out an invoice. Given that this work is generally being performed for a struggling segment of customers (again, iron and steel) who are causing the company to keep writing up doubtful accounts, CFSG could be looking at a disaster if that sector doesn’t turn around.

I had started to get interested in CFSG again, but these numbers give me significant pause with regard to revenue recognition, and it’s very difficult to get a sense of the actual health of the business here.

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