Smith-Midland Corporation — Q1 2017 Form 10-Q
Period: Three months ended March 31, 2017; compared with the three months ended March 31, 2016. The company manufactures, sells, leases, installs, and licenses precast concrete products, primarily for construction, transportation, utilities, and agriculture.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $9.50 million | $8.06 million |
| Gross profit | $3.32 million | $1.28 million |
| Gross margin | 34.9% | 15.9% |
| Operating income (loss) | $1.36 million | $(0.15) million |
| Net income (loss) | $857,201 | $(89,777) |
| Diluted EPS | $0.17 | $(0.02) |
| Operating cash flow | $1.51 million | $(0.71) million |
Revenue increased 18%. Product sales declined 15% to $4.95 million, while service revenue more than doubled to $4.55 million, driven chiefly by barrier rentals. Royalties rose 31% to $431,426. Cost of goods sold fell 9%; management cited a more profitable sales mix, completion of discounted soundwall work in the prior-year quarter, improved labor efficiency, and a high-margin special barrier-rental project. Gross margin improved substantially.
General and administrative expense rose 62% to $1.35 million, partly reflecting the Columbia, South Carolina facility and $151,032 of restricted-stock compensation. Selling expense increased 3% to $609,804. Interest expense was $46,427, up from $28,149, primarily due to borrowings for property and equipment. Income tax expense was $486,000, versus a $63,000 benefit in Q1 2016.
Financial position and liquidity
At March 31, 2017, cash and cash equivalents were $4.42 million and available-for-sale investments were $1.06 million. Current assets were $15.90 million against current liabilities of $4.93 million. Total debt obligations were $3.98 million, including $627,094 due within 12 months; the company reported compliance with loan covenants. It had a $2.0 million revolving credit line and a $1.5 million equipment-line commitment, neither drawn.
Cash increased $901,030 during the quarter. Investing activities used $665,001, including $674,316 of capital expenditures; financing activities provided $55,301. Inventory increased $1.22 million to $3.80 million, primarily from barrier production for scheduled 2017 deliveries. Billed receivables declined from year-end, and average days sales outstanding was 60 days, versus 74 days for the year ended December 31, 2016.
Outlook, risks, and notable items
- Management expected sales strength to continue through 2017 and expressed positive expectations for earnings, while cautioning that results are not assured. Two Slenderwall projects were expected to begin production around midyear.
- Backlog was approximately $27.4 million as of May 12, 2017, versus $20.7 million a year earlier; substantially all was expected to be produced within 12 months. Repeat-customer business, historically $5 million to $7 million annually excluding royalties and barrier rentals, is additional to backlog.
- Management anticipated approximately $800,000 of further 2017 capital purchases. Subsequent to quarter-end, the company purchased approximately 45 acres in Reidsville, North Carolina, for potential regional expansion.
- Barrier rental revenue included an uncommon large special project; management noted that such projects can cause significant quarter-to-quarter variability. Soundwall sales were lower year over year, but management cited full-price current contracts and potential bids for additional projects. Prospective awards are not assured.
- Risks include construction-industry cyclicality and seasonality, adverse weather, public infrastructure spending, project execution and timing, raw-material cost increases, financing availability, debt service, and possible higher interest expense. The filing says raw-material prices had risen slightly and could continue increasing into 2018.
- The company reported no material litigation and no material change in internal control over financial reporting. Management concluded disclosure controls were effective. The company was evaluating adoption of the new revenue standard and expected minimal impact.
Key facts for investors to verify
- How much of the revenue and margin improvement reflects recurring product and rental activity versus the special barrier-rental project and prior-year discounted soundwall comparison.
- Whether the $27.4 million backlog converts to revenue and cash within the stated timeframe, and whether expected Slenderwall and barrier awards are secured.
- Whether inventory growth, planned capital spending, and debt service remain manageable as projects progress.
- Whether raw-material costs, seasonal working-capital needs, and the expiration date of the $2.0 million revolving line (September 12, 2017) affect liquidity or margins.