Smith-Midland Corporation — Q3 2014 Form 10-Q
Business and period: The company manufactures, sells, leases, and licenses precast concrete products, primarily for construction, transportation, utilities, and farming. This unaudited report covers the three and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $5.98 million | $6.91 million | $18.04 million | $19.93 million |
| Gross profit (margin) | $1.52 million (25.4%) | $1.76 million (25.5%) | $3.66 million (20.3%) | $4.63 million (23.2%) |
| Operating income (loss) | $188,891 | $484,965 | $(251,316) | $686,831 |
| Net income (loss) | $112,490 | $271,909 | $(186,065) | $358,065 |
| Diluted EPS | $0.02 | $0.06 | $(0.04) | $0.07 |
- Revenue fell 13% in Q3 and 9% for the nine-month period. Q3 net margin was about 1.9%, versus 3.9%; nine-month net margin was about -1.0%, versus 1.8%.
- Nine-month operating cash flow was $1.73 million, compared with cash used of $499,000 in 2013. Cash increased by $1.10 million to $4.24 million. The filing attributes the cash improvement primarily to collections of receivables.
- Capital expenditures were $399,000; net cash used in investing activities was $404,000. Financing activities used $226,000, including $281,000 of debt repayments.
- At September 30, cash and available-for-sale securities totaled $5.24 million. Current assets were $12.96 million and current liabilities $3.39 million.
- Total debt was $2.69 million, including $369,000 due within 12 months, versus approximately $2.91 million at year-end 2013. Stockholders’ equity was $11.27 million.
Changes and operating drivers
- Lower product sales drove the revenue decline: Q3 product sales fell 29%, and nine-month product sales fell 14%. Wall-panel sales were notably weaker, especially Slenderwall and architectural panels; prior-year projects had ended or were delayed.
- Service revenue increased 38% in Q3, mainly reflecting higher barrier rentals from a Washington-area project and increased shipping and installation. For nine months, service revenue was nearly flat: higher shipping and installation was offset by lower barrier rentals, including the comparison with 2013’s Presidential Inauguration rental contract.
- Nine-month gross margin declined to 20.3% from 23.2%. Management attributed the deterioration primarily to lower production and sales volumes, which spread fixed costs over a smaller revenue base. Q3 gross margin was broadly stable year over year.
- General and administrative expense rose 7% for both comparative periods. Nine-month selling expense declined; Q3 selling expense increased modestly.
Outlook, liquidity, and risks
- Management expected Q4 to be similar to Q3 and anticipated a more meaningful recovery beginning in 2015, citing awarded projects and increased bidding activity. These are expectations, not quantified formal guidance.
- Backlog was approximately $12.9 million as of November 5, 2014, compared with $13.2 million a year earlier; substantially all was expected to be produced within 12 months. Management also cited recurring annual repeat-customer business historically ranging from $5 million to $7 million.
- Management said expected operating cash flow and credit-line availability should fund operations for at least 12 months, but gave no assurance. The $2 million line of credit and $1 million equipment line renewals had bank approval on substantially similar terms but were still awaiting the president’s signature at the report date.
- Key risks include construction-industry cyclicality, winter weather and seasonality, project timing and execution, competitive bidding, availability of financing, debt-service capacity, and possible interest-rate exposure. The company noted that a 1% rate increase would reduce annual income by about $8,000; its refinanced mortgage carries a fixed 3.99% rate.
- The company reported a Q1 loss, small Q2 and Q3 profits, and a nine-month loss. It stated that raw-material inflation had been modest. No material litigation or significant subsequent events were reported; disclosure controls were assessed as effective.
Investor facts to verify
- Whether awarded projects start on schedule and convert into production, revenue, and cash collections, particularly during 2015.
- Execution and signed renewal of the two credit facilities, and liquidity through the seasonally weaker winter months.
- Whether sales volume recovers enough to improve fixed-cost absorption and restore operating profitability.
- Backlog conversion, receivable collections, and customer payment timing, given production costs are incurred before many customer payments arrive.