Smith-Midland Corp. (SMID)

[littlefish]

The company typically has a little more potential overhead cost to deal with seasonally in Q4 and Q1 due to weather (snow days/ice/etc) and such.

I wasn't thrilled with gross margins in Q4 given the whole lean manufacturing going on for so long, previous quarters where they earned better on those kinds of revenue #s in prior years, reduced steel and fuel prices helping, etc (and SGA was higher than I would have liked but think some of that G&A increase involves the shipping and install segment where there's a use tax).

I am thinking at least some of that lazy bottom line #/margin pressure was from several potential items that could have been a bit disruptive.

For instance, the company spent less than $900K on PPE thru 9 months but jumped it to over $1.6 million total at year end. Probably indicative of them anticipating increased production for awhile IMO.

So there very well may have been some disruption with moving/installing/using/tweaking equipment in Q4 given the PPE spend they had.

This often leads to better margins in a Q or two and continuing on but it takes a little time to settle into improved production results/training up on new equipment/tweaking production layout and all that kind of real world stuff that happens in manufacturing upgrades/upkeep.

The Papal visit happened right at the very end of Q3 so maybe there were some slight disruptive items like getting people and equipment back into place after that (no idea, just saying there were potential real world items with that 'monumental' project winding down late September that might have dragged a bit on Q4).

And as they mention in their reports, shipping and installation revenues have a use tax attached that I think gets categorized as G&A. From Q3 2015 report where they had light shipping and install:

"The increase in general and administrative expenses was due an increase in salaries partially offset by a decrease in use tax which was caused by a reduction in installation revenue."

So they had a decrease in use tax from lower Shipping & Installation revs in Q3 but had increased costs from the employee raises given in April. This might also mean Q1 (like Q4 2015) will have a bit higher G&A since there should be continued shipping and install work.
From the annual:

"Several of our larger customers are late in having their stored material products sent to their final destinations followed by their appropriate installation. Currently our storage yard is filled with stored material causing our revenues from shipping and installation to be less in 2015 compared to 2014. 2016 should improve over 2015 as of our current storage of the sold products will begin to ship and install in 2016."

They have made some mistakes in the past with money they've earned but much of that was with headwinds aimed at their industry and I think this time we are entering a prolonged moderate period of recovery.

So as mentioned Q1 might also carry a bit of elevated G&A cost given the potential for S&I revenue and the use tax associated with it.

I think after Q1, things will start to look pretty solid and I at least expect Q1 to be profitable as things pick up further with time.

I also think the company has a chance to increase pricing more on their main highway products such as JJ Hooks and Softsound Soundwall going forward.

This time around in 2016 we have: a bit of stability with the FAST Act, a pretty long list of under-served infrastructure needs in the country and their markets, a good amount of backlog, noticeable DOT increase spends in Virginia and North Carolina that should fuel projects for the next several years (helped by the FAST Act), some help from many commodity items like fuel/steel currently, and potentially we have an expansion project that shouldn't be too capital intensive and was formerly a Coreslab operation before closing some time between 2011-2014 I believe.

The expansion in SC (assuming gets done) will be happening with the tailwind backdrop vs the past decade of headwind backdrop so I'm with giving management the opportunity to show they can do this successfully now that they have a few things working in their favor compared to I think mid 2000s when it didn't work out for them and the industry in general was more expanded.

We'll see what the coming years bring but I'm hopeful we will start to see a little margin expansion on most products, better royalties earned, higher barrier rental revs, higher revenues overall, expansion opportunity, and an improved more financially stable company over time doing a better job with return on assets and equity than in the past to help us long term shareholders out.

All IMO only.