Smith-Midland Corporation — Q3 2016 Form 10-Q
Business context and period: The company manufactures, leases, licenses, sells and installs precast concrete products, including highway barriers, soundwalls, wall panels and utility products. This unaudited report covers the three and nine months ended September 30, 2016; comparisons are with the same 2015 periods.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $12.40 million | $10.40 million | $30.09 million | $21.50 million |
| Gross profit | $4.12 million | $3.12 million | $7.47 million | $5.32 million |
| Operating income | $2.70 million | $1.77 million | $3.21 million | $1.35 million |
| Net income | $1.69 million | $1.15 million | $2.02 million | $873,000 |
| Diluted EPS | $0.34 | $0.23 | $0.41 | $0.18 |
- Revenue increased 19% in Q3 and 40% year to date. Product sales rose 37% and 43%, respectively; year-to-date shipping and installation revenue more than doubled. Barrier sales were especially strong, while barrier rental revenue declined.
- Gross margin was approximately 33% in Q3 versus 30% a year earlier, and about 25% year to date versus 25%. Management attributed improvement to product mix, higher-margin sales and lower direct labor per unit; Columbia facility start-up costs weighed on results earlier in 2016.
- Cash from operations was $886,000 for the first nine months, compared with cash used of $1.56 million in 2015. Investing activities used $3.30 million, including $3.29 million of capital expenditures. Cash declined $790,000 to $945,000; available-for-sale investments were $1.08 million.
- At September 30, current assets were $15.89 million and current liabilities $6.18 million. Accounts receivable, billed, was $9.98 million. The filing reports $3.74 million of debt obligations, including $637,000 due within 12 months, and a separate $352,000 outstanding on the line of credit. Total liabilities were $10.40 million.
Material changes and notable items
- In July, the company acquired a 39-acre, approximately 40,000-square-foot precast facility near Columbia, South Carolina, for $1.55 million. The purchase was funded partly by a $1.318 million, 15-year fixed-rate loan at 5.29%; the facility adds production capacity and has begun pursuing local work.
- Capital expenditures for the nine months were $3.29 million, versus $865,000 in 2015. Management planned approximately $750,000 of additional spending for the balance of 2016, including up to $500,000 for Columbia equipment.
- The bank’s annual capital-expenditure limit had been exceeded in Q2, and the company received a waiver. Management reported compliance with loan covenants at September 30.
- Sales backlog was approximately $18.9 million at November 10, versus $14.1 million a year earlier; substantially all was expected to be produced within 12 months. Management also cited customary repeat-customer business of $5 million to $7 million annually, excluding royalties and rentals.
Outlook, risks and contingencies
- Management expected strong sales to continue into 2017 and expressed positive earnings expectations for the remainder of 2016 and 2017. It cited new Slenderwall projects scheduled to begin in early 2017, improving soundwall and barrier opportunities, and anticipated strength in standard rentals. These are management expectations, not formal earnings guidance.
- Key risks include construction-industry cyclicality and seasonality, adverse weather, availability of public infrastructure funding, project execution and specification requirements, customer payment timing, financing availability, increased debt and interest costs, and rising costs for cement, aggregates and other materials. Winter months may bring lower revenue or losses.
- Most debt was at fixed rates; the line of credit bears a variable prime rate and matures September 12, 2017. Management believed operating cash flow and available credit would fund operations for at least 12 months, but gave no assurance.
- The company reported no material litigation. It was evaluating the effects of new revenue-recognition and lease accounting standards. Management said disclosure controls were effective and reported no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether strong backlog converts to revenue and cash on schedule, particularly as customer payments typically arrive 35 to 90 days after production.
- Columbia facility utilization, start-up costs, additional equipment spending and contribution to margins and earnings.
- Reconciliation of reported debt obligations with balance-sheet notes payable and the separately disclosed line-of-credit balance, as well as covenant headroom and upcoming maturities.
- Sustainability of margin improvement amid material-cost increases, changing product mix and seasonal working-capital needs.
- The filing’s MD&A expense discussion appears inconsistent with the financial statements for nine-month general and administrative and selling expenses; verify the underlying amounts. The statements report G&A of $2.70 million and selling expense of $1.63 million for 2016, versus $2.43 million and $1.58 million, respectively, in 2015.