Smith-Midland Corporation — Q1 2019 Form 10-Q
Business and period: The company manufactures, sells, rents, licenses, ships and installs precast concrete products, principally for construction, highway, utility and agricultural markets. This filing covers the three months ended March 31, 2019; comparative figures are for Q1 2018. Dollar amounts below are in thousands except per-share data.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $10,189 | $9,125; up 12% |
| Gross profit / margin | $2,222 / 21.8% | $1,591 / 17.4% |
| Operating income (loss) | $447 | $(553) |
| Net income (loss) | $331 | $(422) |
| Diluted EPS | $0.06 | $(0.08) |
| Operating cash flow | $2,459 | $(427) |
| Capital expenditures | $1,049 | $860 |
- Revenue gains came mainly from SlenderWall, Easi-Set/Easi-Span buildings, barrier rentals, and shipping and installation. Product sales were nearly flat overall; service revenue rose 61% to $2,686.
- Gross margin improved as a greater share of revenue came from higher-margin SlenderWall and barrier rentals. Cost of goods sold was 81% of revenue excluding royalties, versus 85% in Q1 2018, as reported by management.
- Operating cash flow benefited notably from lower billed and unbilled receivables and inventory. Cash was $3,033 and available-for-sale investment securities were $1,134 at quarter-end, versus $1,946 and $1,107 at December 31, 2018.
- Current assets were $18,114 and current liabilities $8,898, implying a current ratio of about 2.0. Total liabilities were $19,961; stockholders’ equity was $19,277.
- Notes payable totaled $3,325, including $719 due within 12 months. The company also had a $1,500 construction line-of-credit balance under a $4,000 facility; the line carried a variable prime rate and matured September 18, 2019. Management expected it to convert to long-term debt when financing closed in 2019. The company reported compliance with its loan covenants.
Changes, outlook and notable matters
- Revenue increased $1,064 year over year, and the company returned to profit from a prior-year loss. General and administrative expenses fell 22% to $1,208, and selling expenses fell 16% to $567.
- Revenue mix shifted: SlenderWall sales rose 72% to $1,963 and building sales rose 106% to $1,034; barrier sales fell 30% to $1,591 and soundwall sales fell 15% to $2,114. Barrier rentals increased 85% to $573.
- A customer buy-back guarantee affects barrier revenue recognition. The company recognizes related proceeds over the project’s usage period as rental revenue rather than recognizing the full amount as product sales. Deliveries were expected to finish in Q3 2019; rental-related net profits may continue through the expected 2022 option expiration.
- Management expected sales and margins to increase over the remainder of 2019 compared with Q1, but gave no assurance. It expected 2019 building sales to match or exceed 2018, barrier sales to be lower than 2018, and raw-material prices to rise. Interest expense was expected to increase due to financing for the North Carolina expansion.
- Sales backlog was approximately $31.2 million at May 6, 2019, versus $38.4 million a year earlier. Most backlog was expected to be produced within 12 months, with some projects extending several years.
- The North Carolina plant expansion was estimated to cost $3.3 million, increase production and storage capacity, and be completed in Q3 2019. The filing cautions that cost, financing, schedule, completion and success are not assured. Management planned approximately $2,500 of additional capital purchases during the rest of 2019, excluding the expansion.
- Other risks include construction-market cyclicality and seasonality, adverse weather, public infrastructure funding, project execution and specifications, customer payment delays and retainage, access to financing, and possible increases in material costs and interest expense. Days sales outstanding, excluding unbilled revenue, rose to 93 days from 86 days at year-end, mainly due to retainage on large projects. Management believed operating cash flow and available credit would fund operations for at least 12 months, but provided no assurance.
- The company adopted the new lease standard on January 1, 2019 and recognized approximately $400 of right-of-use assets and lease liabilities. It reported no material litigation and effective disclosure controls as of March 31, 2019.
Investor verification points
- Confirm conversion and final terms of the $1,500 construction draw, and financing and completion costs for the North Carolina expansion.
- Track backlog conversion, especially the year-over-year backlog decline, and the expected production and delivery schedule.
- Assess the profitability and cash-flow timing of the customer buy-back contract, including the option’s expected 2022 expiration and any potential exercise.
- Monitor receivable collections, retainage, DSO, and the availability of working-capital financing as construction activity changes seasonally.
- Compare actual revenue mix, raw-material costs, capital spending and interest expense with management’s 2019 expectations.