Smith-Midland Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 30, 2018; comparisons are with Q3 and the first nine months of 2017. Amounts are in thousands of dollars except per-share data. The company manufactures, leases, licenses, sells, and installs precast concrete products, primarily for construction, highway, utility, and farming markets.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $9,544 | $11,481 | $28,502 | $31,706 |
| Gross profit | $2,593 | $3,178 | $6,994 | $9,345 |
| Operating income | $664 | $1,231 | $1,022 | $3,680 |
| Net income | $520 | $748 | $790 | $2,317 |
| Diluted EPS | $0.10 | $0.15 | $0.15 | $0.46 |
- Revenue fell 17% in Q3 and 10% for the nine-month period. Gross margin was approximately 27.2% versus 27.7% in Q3, and 24.5% versus 29.5% for nine months. Operating margin was approximately 7.0% versus 10.7% in Q3, and 3.6% versus 11.6% for nine months.
- Q3 product sales declined 27%, partly offset by growth in barrier rentals and shipping and installation. Nine-month SlenderWall sales rose to $4,203 from $912 and soundwall sales to $7,339 from $5,024; barrier sales fell to $5,624 from $9,684.
- Nine-month cash from operations was $5,718 versus $1,676; investing used $6,048 and financing used $373. Cash declined by $703 to $2,687. Operating cash flow included a $5,389 increase in the deferred buy-back lease obligation; the related $4,400 deferred lease asset was recorded in investing activities.
- At September 30, cash was $2,687 and available-for-sale securities were $1,094. Current assets were $19,488 and current liabilities $7,373. Notes payable totaled $3,403, including $659 due within 12 months; unused credit facilities totaled $5,500. The company reported compliance with loan covenants.
Changes, outlook, and risks
- Management attributed weaker sales and operating income in part to a customer barrier buy-back agreement: product proceeds are accounted for as an operating lease, deferring revenue. Deliveries began in Q2 2018, are expected to finish by Q2 2019, and the buy-back option is expected to expire when the customer completes its project, anticipated in 2022. Barrier rental revenue is recognized over the project period.
- Management expected continued profit for the remainder of 2018, but gave no assurance. Backlog was approximately $31.0 million at November 5, 2018, compared with $21.7 million a year earlier. Management expected 2018 soundwall sales to exceed 2017 and building sales to match or exceed 2017.
- Raw-material prices, including steel, had risen; management expected further increases through 2018. Columbia plant margins were pressured by design issues on soundwall projects that required additional steel and labor; the company was negotiating change orders to address current contracts. Management also cited lower margins at the Columbia plant and increased operating expenses.
- A North Carolina plant expansion was underway, estimated to cost $3.3 million and funded through bank financing. Completion was expected by the end of Q1 2019, with production anticipated in Q2 2019; cost, timing, financing, completion, and success are not assured.
- Other risks include construction cyclicality and weather, dependence on financing and public infrastructure spending, project execution and contract specifications, and the possibility of inadequate working capital. Days sales outstanding was 76 versus 75 at year-end 2017, with retainage on large projects contributing to receivables. Management believed operating cash flow and credit availability would cover needs for at least 12 months, subject to no assurance.
- The company adopted Topic 606 in 2018 using the modified retrospective method and reported no material impact. It reclassified prior interim cash-flow presentation for deferred buy-back lease assets; management said the misclassification was not material and did not affect income or balance sheets. Disclosure controls were deemed effective; no material litigation was reported.
Important facts for investors to verify
- How much of reported operating cash flow reflects the buy-back lease liability, and how will cash receipts and deferred revenue evolve as deliveries continue?
- Whether Columbia soundwall contract change orders recover added steel and labor costs, and whether plant margins improve.
- Backlog conversion, customer concentration, project timing, and the expected profitability of the large soundwall and SlenderWall projects.
- Final cost, financing terms, schedule, and operating contribution of the North Carolina expansion; also monitor the $3,500 annual capital-expenditure covenant and unused credit facilities.
- Whether rising material costs, retainage, and seasonal working-capital needs affect liquidity or earnings beyond management’s stated outlook.