Smith-Midland Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Smith-Midland manufactures, sells, leases, licenses and installs precast concrete products for construction, transportation, utilities and farming markets.
Financial performance and position
- Revenue: $8.06 million, up 92% from $4.20 million in Q1 2015. Product sales and leasing were $6.23 million; shipping and installation revenue was $1.49 million; royalties were $329,000.
- Profitability: Gross profit was $1.28 million, versus $530,000; gross margin was approximately 15.9%, compared with 12.6%. Operating loss narrowed to $134,000 from $833,000. Net loss was $89,777, or $0.02 per diluted share, compared with a $524,369 loss, or $0.11 per share.
- Cash flow: Operating activities used $715,000, compared with $1.04 million used in Q1 2015. Investing activities used $970,000, chiefly reflecting $967,000 of capital expenditures. Financing provided $372,000, including new borrowings. Cash fell by $1.31 million to $423,000.
- Liquidity: Available-for-sale investment securities were $1.06 million at quarter-end. Accounts receivable, including unbilled receivables, totaled $8.03 million. Management said operating cash flow and available credit were expected to support operations for at least 12 months, but gave no assurance.
- Debt: Total debt was $2.88 million, including $494,000 due within 12 months, versus approximately $2.51 million at December 31, 2015. The $1.51 million mortgage bears fixed interest of 3.99%; $352,000 was drawn on a $2.0 million revolving line carrying a variable prime rate and maturing September 12, 2016. The company reported compliance with loan covenants.
Changes and drivers versus Q1 2015
- Soundwall sales rose to $2.40 million from $291,000; total wall sales increased 123%. Barrier sales rose 233%, while barrier rentals increased 121% and shipping and installation revenue rose 149%.
- Architectural panel sales fell 78% and Slenderwall sales fell 88%, primarily because significant projects had been completed in 2015. Utility and farm sales declined 10%; miscellaneous product sales declined 69%. Royalties were approximately flat.
- Cost of goods sold rose 85%, less than revenue growth; management attributed improved cost as a percentage of revenue partly to higher-volume absorption of fixed costs. However, discounted pricing on some soundwall projects and Columbia, South Carolina facility startup costs weighed on results.
- Capital expenditures increased to $967,000 from $194,000. The company attributed the decline in cash chiefly to higher receivables, capital purchases and debt repayment.
Outlook, risks and other notable items
- Management expected soundwall, miscellaneous wall, barrier and shipping/installation activity to remain strong during 2016. It anticipated Slenderwall sales to increase in 2016 and 2017, citing a $2.0 million project starting production in May and a $3.2 million project expected to start later in 2016.
- Sales backlog was approximately $20.7 million as of May 12, 2016, versus $17.7 million a year earlier; substantially all was estimated for production within 12 months. Management also cited recurring annual repeat-customer business of $5 million to $7 million, excluding royalties and barrier rentals.
- The company planned approximately $1.0 million of additional capital purchases for the remainder of 2016, subject to bank approval; Columbia-related equipment could account for up to $500,000. The Columbia facility purchase was not completed as of the filing; production was being conducted in leased space, with further startup costs expected.
- Risks include seasonal winter slowdowns and weather, construction-industry cyclicality, dependence on infrastructure funding and project schedules, customer payment timing, possible financing constraints, rising raw-material costs, execution of major contracts, and variable-rate borrowing. Management noted average billed-receivable days outstanding of 88 days.
- Management warned there was no assurance of profitable operations or ability to meet debt obligations. No material litigation or significant subsequent events were reported. Disclosure controls were deemed effective as of March 31, 2016.
Important facts for investors to verify
- Whether the large backlog converts to timely, profitable revenue, particularly given discounted soundwall contracts and project execution requirements.
- The pace and total cost of the Columbia facility launch and proposed purchase, and whether production offsets startup costs.
- Receivables collection, operating cash flow and liquidity as cash stood at $423,000 while receivables and capital spending were elevated.
- Refinancing or repayment plans for the revolving line maturing September 12, 2016, covenant compliance, and the effect of additional borrowing on debt service.
- Whether management’s 2016 sales expectations are achieved despite seasonality, customer schedule changes, and product-mix effects on margins.