Smith-Midland Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Smith-Midland manufactures, sells, leases, installs and licenses precast concrete products, principally for construction, transportation, utilities and farming customers.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $10.40 million | $5.98 million | $21.50 million | $18.04 million |
| Gross profit | $3.12 million | $1.52 million | $5.32 million | $3.66 million |
| Operating income (loss) | $1.77 million | $0.22 million | $1.35 million | $(0.22) million |
| Net income (loss) | $1.15 million | $0.11 million | $0.87 million | $(0.19) million |
| Diluted EPS | $0.23 | $0.02 | $0.18 | $(0.04) |
- Revenue increased 74% in Q3 and 19% year to date. Q3 gross margin was approximately 30% versus 25% a year earlier; nine-month gross margin was approximately 25% versus 20%.
- Q3 operating margin was approximately 17% versus 4%; nine-month operating margin was approximately 6%, compared with a loss in the prior-year period.
- Cash used by operations was $1.56 million for the nine months, compared with $1.73 million provided in 2014. The working-capital outflow included a $6.17 million increase in billed receivables.
- Cash and cash equivalents were $0.99 million at September 30, down from $3.57 million at year-end 2014. Available-for-sale investments were $1.03 million. Capital expenditures were $0.86 million.
- Total debt was $2.42 million, including $0.37 million current maturities. The company reported a $2.00 million revolving credit line with no balance outstanding and a separate $1.00 million equipment-line commitment. It was in compliance with loan covenants.
- Current assets were $15.47 million and current liabilities $6.20 million. Receivables were $10.36 million billed and unbilled combined; inventory was $2.17 million.
Material changes and drivers
- Q3 product sales and leasing rose 40% to $8.75 million, while barrier rentals surged to $3.14 million from $0.75 million. The rental increase largely reflected temporary barrier contracts for the September 2015 Papal visit in Washington, D.C., and Philadelphia; management cautioned that such projects are uncommon and may not recur.
- Wall sales strengthened, particularly Slenderwall, miscellaneous wall panels and architectural panels over the nine-month period. Barrier sales and Easi-Set/Easi-Span building sales declined year to date; utility and farm product sales increased.
- Shipping and installation revenue rose 14% in Q3 but declined 26% for the nine months, reflecting weak activity earlier in the year. Management expected Q4 shipping and installation to improve, while indicating full-year revenue would remain below 2014.
- Management attributed improved operating results to higher product and special-project revenue, better production efficiencies and improved fixed-cost absorption. Cost of goods sold as a percentage of revenue excluding royalties fell year over year for both the quarter and nine-month period.
- The filing records a $240,000 Q3 adjustment to accounts receivable and revenue relating to the prior year, which management said was immaterial to both periods.
Outlook, risks and other disclosures
- Management said production had more than doubled from Q1 2015 and expected high production through year-end and into 2016, subject to weather. It anticipated strong Slenderwall activity into 2016, relatively strong soundwall revenue, and moderate royalty growth.
- Sales backlog was approximately $14.1 million as of November 12, 2015, versus $12.9 million a year earlier; substantially all was expected to be produced within 12 months. Repeat-customer sales, historically $5–$7 million annually, are additional to reported backlog.
- The company planned approximately $150,000 in additional capital purchases for the remainder of 2015. Management believed operating cash flow and available credit would be sufficient for at least 12 months, but gave no assurance.
- Key risks include construction-market cyclicality, adverse winter weather, project timing and execution, customer payment delays, financing availability, raw-material costs, and potential seasonal working-capital needs. The principal bank note bears fixed interest of 3.99%; the revolving line carries a variable rate.
- No material litigation or significant subsequent events were reported. Management concluded disclosure controls were effective as of September 30, 2015.
Important facts for investors to verify
- Whether the Q3 Papal-visit rental revenue and margins are nonrecurring, and how much of the Q3 earnings improvement persists without it.
- Receivable collection and operating cash conversion, given the sharp cash decline and negative nine-month operating cash flow.
- Backlog conversion, project schedules and the expected timing of the identified Q4 shipments and 2016 work.
- The nature and accounting support for the $240,000 prior-year revenue and receivable adjustment.
- Seasonal liquidity needs, debt covenant compliance and availability of the committed credit facilities.