Smith-Midland Corporation — Q2 2016 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2016. Smith-Midland manufactures, sells, leases, licenses, and installs precast concrete products, serving construction, utilities, farming, and transportation customers. Its products include highway barriers, soundwalls, building panels, and utility products.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $9.64 million | $6.90 million | $17.70 million | $11.10 million |
| Gross profit | $2.07 million | $1.67 million | $3.35 million | $2.20 million |
| Operating income (loss) | $652,355 | $416,778 | $518,492 | $(416,090) |
| Net income (loss) | $418,924 | $244,857 | $329,148 | $(279,512) |
| Diluted EPS | $0.08 | $0.05 | $0.07 | $(0.06) |
- Q2 gross margin was approximately 21.5%, versus 24.2% a year earlier; six-month gross margin was approximately 18.9%, versus 19.8%.
- Six-month operating cash flow was negative $205,344, improving from negative $958,371. Capital expenditures were $1.26 million, compared with $506,893.
- Cash and cash equivalents were $779,504 at June 30, 2016; available-for-sale investments were $1.08 million. Cash declined from $1.74 million at year-end 2015.
- Total debt obligations were approximately $3.03 million, including $748,012 due within 12 months. Total liabilities were $9.07 million and stockholders’ equity was $11.74 million.
- Accounts receivable, billed and unbilled, totaled approximately $8.61 million. Management reported 81 days sales outstanding, excluding unbilled revenue, versus 88 days at year-end 2015.
Material changes and management commentary
- Revenue rose 40% in Q2 and 59% for the first half. Growth was driven by soundwall, barrier, barrier rentals, and shipping and installation; architectural and Slenderwall sales declined.
- For the first half, soundwall sales increased 467% and barrier sales increased 162%. Shipping and installation revenue increased 147%. Royalties were nearly flat.
- Management attributed improved profitability to higher sales, a stronger mix of higher-margin products, and lower production labor costs. Columbia facility start-up costs weighed on first-half cost of goods sold, with additional start-up costs expected.
- The company reported a first-quarter 2016 net loss of approximately $88,000, followed by Q2 net income of $419,000.
- Sales backlog was approximately $13.3 million as of August 11, 2016, down from $18.0 million a year earlier; substantially all was expected to be produced within 12 months. Management noted recurring repeat-customer business historically contributes $5 million to $7 million annually, excluding royalties and barrier rentals.
Outlook, risks, and unusual items
- Management expected stronger Q3 2016 net income, strong soundwall and barrier activity through the rest of 2016, and continued shipping and installation activity. It also anticipated approximately $750,000 of additional 2016 capital purchases, including up to $500,000 for Columbia. These are expectations, not guarantees.
- On July 21, 2016, the company completed a $1.55 million purchase of a 39-acre precast facility near Columbia, South Carolina. The acquisition was financed in part by a new $1.3175 million, 15-year bank loan at a fixed 5.29% rate; the remainder came from cash resources.
- The company exceeded its $1 million annual capital-expenditure covenant limit and received a bank waiver. A $2 million revolving credit line had $602,022 outstanding and matured September 12, 2016. The filing also described a separate $1 million equipment credit commitment, with $417,990 outstanding at June 30.
- Management said operating cash flow and available credit were expected to fund operations for at least 12 months, but cautioned that this was not assured. Risks include construction cyclicality and weather, customer payment timing, financing availability, debt service, contract execution, and seasonal working-capital needs.
- No material litigation was reported. Disclosure controls were deemed effective; the company reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the company’s refinancing or repayment of the revolving credit balance due September 12, 2016, and the terms and availability of its credit facilities.
- Track cash conversion, receivable collections, capital spending, and the impact of Columbia start-up costs on margins and liquidity.
- Assess whether the $13.3 million backlog and management’s stated project expectations convert into revenue on schedule, especially given the year-over-year backlog decline.
- Reconcile MD&A expense disclosures: the six-month general and administrative and selling-expense figures do not agree with the financial statements. The filing’s MD&A also cites 2015 six-month operating loss of $416,778, while the statements report $416,090.