Smith-Midland Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Smith-Midland manufactures and sells, leases, installs, and licenses precast concrete products, serving construction, transportation, utilities, and farming markets. The interim financial statements are unaudited.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $6.91 million | $7.54 million | $19.93 million | $20.17 million |
| Gross profit | $1.76 million | $2.12 million | $4.63 million | $5.04 million |
| Gross margin | 25.5% | 28.1% | 23.2% | 25.0% |
| Operating income | $485,000 | $1.02 million | $687,000 | $1.55 million |
| Net income | $272,000 | $689,000 | $358,000 | $985,000 |
| Diluted EPS | $0.06 | $0.14 | $0.07 | $0.20 |
Revenue declined approximately 8% in Q3 and 1% year to date. Gross margin and operating income weakened in both comparisons; management attributed the margin pressure mainly to projects bid at lower-than-normal margins and higher operating expenses. Q3 other expense included $58,520, compared with $11,750 of other income in the prior-year quarter.
Cash flow, liquidity, and debt
- Operating cash flow was negative $499,000 for the first nine months, versus positive $1.38 million in 2012. The principal working-capital pressure was a $2.62 million increase in billed receivables; customer deposits rose $614,000.
- Cash was $2.20 million at September 30, down from $4.37 million at year-end. The company also held $909,000 of available-for-sale securities; combined cash and securities were approximately $3.11 million.
- Current assets were $13.37 million and current liabilities $3.46 million. Accounts receivable billed was $7.37 million. Days sales outstanding, excluding unbilled revenue, increased to 92 days from 80 days at December 31, 2012, which management attributed to customer retainage.
- Total debt was approximately $2.84 million, including $334,000 due within 12 months, compared with approximately $2.99 million at year-end. Nine-month debt repayments were $2.29 million and proceeds from long-term borrowings were $2.14 million, including refinancing of the primary mortgage.
- The $2 million revolving credit line was renewed in September 2013 and carries a variable prime-based rate with a one-year maturity. The company also had a commitment for a $1 million equipment credit line. Management believed operating cash flow and available credit would fund operations for at least 12 months, but gave no assurance.
Investing cash outflow was $1.53 million, including $548,000 of property and equipment purchases and purchases of available-for-sale securities. The securities generated a $68,631 realized loss and unrealized losses were recorded in other comprehensive income. The primary mortgage was refinanced at a fixed 3.99%; management estimated each 1% increase in rates on outstanding debt would reduce annual income by approximately $7,000.
Material changes and business developments
- Q3 product sales increased 12%, but service revenue fell 44%, including shipping and installation revenue down 35% and barrier rentals down 79%. The rental comparison reflected a large 2012 convention-related contract.
- For the first nine months, wall sales rose 46%, led by Slenderwall; total product sales increased 9%. Service revenue declined 19%, including shipping and installation down 35%.
- Slenderwall sales increased substantially as more projects entered production. Management said the product generally offers higher margins than architectural panels and expected the sales trend to continue through year-end.
- Management reported sales backlog of approximately $13.2 million as of November 3, 2013, versus $7.5 million a year earlier. The increase reflected two large Slenderwall contracts and one large soundwall contract; substantially all backlog was expected to be produced within 12 months. Recurring repeat business, typically $5 million to $7 million annually, is additional to the stated backlog.
Outlook, risks, and other items
Management expected Q4 sales and earnings to exceed Q3, citing current backlog; this was an expectation, not formal numeric guidance. It also anticipated higher shipping and installation activity as projects begin delivery, while expecting utility and farm sales to remain flat in Q4 and royalty income to decline slightly. Management stated that building sales could improve in 2014 and that raw-material prices were expected to remain relatively stable.
Risks highlighted include construction-market weakness and cyclicality, weather-related seasonality, availability and terms of financing, ability to meet project specifications and schedules, customer payment delays and retainage, contract margins, and possible litigation outcomes. Management noted that the company reported a loss in Q2 2013 and that winter months may bring lower revenues or losses. No material litigation or significant subsequent events were reported. Disclosure controls were deemed effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether the $13.2 million backlog converts to production, revenue, and cash on schedule, and how much is attributable to the large contracts.
- Whether gross margins recover from lower-margin projects and whether Slenderwall growth offsets weakness in other product and service lines.
- Receivable collection, retainage, and operating cash flow trends, particularly given higher DSO and negative nine-month operating cash flow.
- Debt maturities, renewal and availability of revolving and equipment credit, and compliance with any borrowing terms.
- The investment securities’ valuation and the effects of realized and unrealized losses.