Smith-Midland Corporation — Q3 2017 Form 10-Q
Business context and reporting period. Smith-Midland manufactures, sells, leases, installs and licenses precast concrete products used mainly in construction, highway, utility and farming markets. This unaudited report covers the quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $11.48 million | $12.40 million | $31.71 million | $30.09 million |
| Gross profit | $3.24 million | $4.12 million | $9.43 million | $7.47 million |
| Operating income | $1.23 million | $2.65 million | $3.68 million | $3.14 million |
| Net income | $748,254 | $1.69 million | $2.32 million | $2.02 million |
| Diluted EPS | $0.15 | $0.34 | $0.46 | $0.41 |
| Operating cash flow | Not presented separately | Not presented separately | $1.68 million | $886,000 |
- Revenue declined 7% in Q3 but increased 5% year to date. Gross margin was approximately 28% in Q3 versus 33% a year earlier, and approximately 30% year to date versus 25%.
- Q3 operating income fell 54% and net income fell 56%; nine-month operating income rose 17% and net income rose 15%.
- Q3 product sales increased 21%, but service revenue fell 54%, chiefly reflecting lower barrier rentals and shipping and installation revenue. Year-to-date product sales increased 8%; total service revenue was approximately flat.
- For the nine months, cash used in investing was $2.56 million, including $2.57 million of capital expenditures. Operating cash flow less capital expenditures was approximately negative $893,000. Cash and equivalents decreased $1.07 million to $2.45 million.
Financial position and material changes
- At September 30, cash and equivalents were $2.45 million and available-for-sale securities were $1.08 million. Current assets were $18.17 million and current liabilities $7.50 million; working capital was approximately $10.67 million.
- Total debt obligations were $3.68 million, including $638,103 due within 12 months. Debt declined during the first nine months; the company reported compliance with loan covenants. Approximately 93% of debt was at fixed rates.
- Billed trade receivables increased to $10.77 million from $7.19 million at year-end. Management attributed the cash decrease mainly to higher receivables, capital purchases and debt repayments. Days sales outstanding was 75 versus 74 at December 31, 2016.
- Capital expenditures were $2.57 million, below $3.29 million in the prior-year period. The company planned approximately $500,000 of additional spending for the rest of 2017.
- General and administrative expense rose 49% in Q3 and 45% year to date. Management cited the Columbia, South Carolina facility and restricted-stock compensation; nine-month stock compensation was $289,596. Selling expense also increased, partly due to additional sales staffing.
Outlook, risks and other notable items
- Management expected sales to remain strong and steady for the remainder of 2017 and continue into 2018, and anticipated backlog growth in Q4 from large projects being bid. These expectations were not assured.
- Backlog was approximately $21.7 million as of November 14, 2017, versus $23.9 million a year earlier; substantially all was expected to be produced within 12 months. The company said it was bidding on large projects that could increase backlog.
- Management cited strong barrier demand, projects expected to support Slenderwall production through Q1 2018, and potential growth in barrier rentals. It expected utility and farm sales to remain at current levels or slightly lower and shipping and installation to remain flat through year-end.
- Management said anticipated operating cash flow and access to credit were expected to fund operations for at least 12 months, while noting the $2 million receivables- and inventory-secured credit line had expired at September 30 and was being renewed, with completion expected by year-end. A separate $1.5 million equipment credit commitment had no balance outstanding.
- Risks include construction cyclicality and seasonality, adverse weather, public infrastructure spending, project execution and customer payment timing, rising raw-material costs, financing availability, debt service and potential interest-rate changes. The company noted winter months may bring reduced revenue and profits.
- The company expected the revenue-recognition standard effective January 1, 2018 to have minimal financial-statement impact; it had not selected a transition method. No material litigation was reported. Disclosure controls were deemed effective, and no material change in internal control was reported.
Key facts for investors to verify
- Whether the credit-line renewal was completed and on what terms, and whether the company maintains adequate liquidity through seasonal working-capital needs.
- Whether receivables and retainage are collected as expected, given the increase in billed receivables and 75-day DSO.
- Whether backlog converts to revenue and margins, particularly for barrier and Slenderwall projects, and whether the expected Q4 backlog increase materializes.
- Whether elevated Q3 costs and higher G&A persist, and how raw-material inflation affects margins.
- Whether planned capital spending, debt repayments and operating cash flow support the company’s stated 12-month funding outlook.