Smith-Midland Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. Smith-Midland manufactures, sells, leases and installs precast concrete products, principally for construction, transportation, utilities and farming markets.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Revenue | $5.64 million | $6.89 million; down 18% |
| Gross profit and margin | $730,006; 13.0% | $1.82 million; 26.4% |
| Operating income (loss) | $(536,491) | $552,369 |
| Net income (loss) | $(328,536); $(0.07) per share | $309,071; $0.06 per share |
| Cash from operations | $(66,972) | $(305,253) |
| Cash and cash equivalents | $2.88 million | $3.14 million at Dec. 31, 2013 |
| Available-for-sale securities | $952,068 | $915,341 at Dec. 31, 2013 |
| Total debt | $2.87 million, including $375,411 due within 12 months | $2.91 million at Dec. 31, 2013 |
| Current assets / current liabilities | $13.25 million / $3.62 million | $14.04 million / $4.06 million at Dec. 31, 2013 |
Gross margin fell sharply as lower activity left sales insufficient to absorb production overhead; two jobs also carried below-normal margins. Cost of goods sold was 95% of revenue excluding royalties, versus 77% a year earlier. General and administrative expense rose 22% to $769,071, while selling expense declined 18% to $539,480. Interest expense was $28,757. The company recorded a $231,000 income tax benefit.
Investing activities used $147,863, including $139,994 of capital expenditures; financing activities used $37,396 after $92,555 of debt repayments. The $2 million revolving line had no borrowings at quarter-end and matured September 12, 2014; a separate $1 million equipment credit commitment also expired on that date. Management said operating cash flow and available credit were expected to fund operations for at least 12 months, but gave no assurance. Average days sales outstanding rose to 100 from 91 at year-end 2013.
Material changes and business drivers
- Product sales declined 11%; total wall sales fell 40%, including a 76% drop in Slenderwall sales. Barrier sales rose 6% and Easi-Set/Easi-Span building sales rose 9%.
- Barrier rental revenue fell 86%, mainly because Q1 2013 included a one-time Presidential Inauguration rental contract. Shipping and installation revenue increased 58% as previously manufactured projects began shipping or being installed; royalties rose 38%.
- Management attributed the quarter’s weakness primarily to exceptionally severe winter weather, missed production days and delayed projects, compounded by slow construction activity in the company’s markets and the absence of the prior-year inauguration rental.
- Cash plus investment securities totaled approximately $3.84 million at March 31. Total assets were $17.84 million, down from $18.66 million at year-end; stockholders’ equity was $11.11 million.
Outlook, risks and contingencies
Management expected Q2 sales and profit to improve from Q1 as weather delays eased and production increased. It anticipated 2014 increases in building sales, royalties, core barrier rentals and shipping/installation revenue; it expected utility and farm sales to improve only slightly and miscellaneous sales to be flat or slightly higher. These are management expectations, not formal financial guidance. The May 5, 2014 sales backlog was approximately $10.0 million, versus $10.6 million a year earlier; substantially all was expected to be produced within 12 months. Repeat-customer business has historically added $5–$7 million annually.
Risks cited include winter seasonality and weather, weak or cyclical construction markets, uncertainty about profitable operations and debt repayment, access to financing, project execution and contract margins, availability of public construction funding, litigation and regulatory matters. The company noted that a 1% increase in interest rates would reduce annual income by approximately $7,000; its mortgage had been refinanced at a fixed 3.99% rate. Raw-material inflation was described as low. No material litigation or significant subsequent events were reported. Disclosure controls were considered effective, with no material change in internal controls reported.
Important facts for investors to verify
- Whether Q2 production recovery and the expected improvement in sales and profit materialize, and how winter-related delays affect margins.
- Whether the $10.0 million backlog converts to timely, profitable production, particularly given lower-margin bids and project concentration.
- Collection of receivables and retainage, the elevated 100-day sales-outstanding measure, and the company’s ability to maintain operating liquidity.
- Renewal or replacement of the revolving and equipment credit commitments due to expire September 12, 2014.
- Whether the severe year-over-year earnings decline is reversed and whether recurring revenue offsets the unusually high Q1 2013 barrier rental comparison.