Smith-Midland Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; balance-sheet comparisons are against December 31, 2010. The company manufactures, sells, leases, installs and licenses precast concrete products, primarily for construction, utilities and agriculture. Its customers are concentrated in the Mid-Atlantic, Northeast and Midwest.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $7.15 million | $7.69 million | $14.76 million | $14.04 million |
| Gross profit | $1.75 million | $2.13 million | $3.35 million | $4.11 million |
| Operating income | $392,389 | $873,011 | $660,008 | $1.71 million |
| Net income | $254,544 | $511,195 | $442,436 | $1.01 million |
| Diluted EPS | $0.05 | $0.11 | $0.09 | $0.21 |
- Revenue and profitability: Q2 revenue fell 7%; six-month revenue rose 5%. Operating income fell 55% in Q2 and 61% for the half year; net income declined about 50% and 56%, respectively. Gross margin was approximately 24.5% in Q2 versus 27.7%, and 22.7% for the half year versus 29.3%. Operating margin was approximately 5.5% and 4.5% for the respective 2011 periods, down from 11.3% and 12.2%.
- Cash flow: First-half operating activities provided $780,520, compared with $1.32 million used in the prior-year period. Investing activities used $280,750, chiefly reflecting $301,678 in capital expenditures; financing activities provided $479,198. Cash increased $978,968 to $3.55 million.
- Liquidity and debt: Current assets were $13.26 million and current liabilities $2.68 million at June 30 (current ratio approximately 5.0). Debt obligations totaled $3.60 million, including $449,174 due within 12 months. The filing reports no amounts outstanding on two credit facilities when they matured after quarter-end.
- Working capital: Accounts receivable, billed and unbilled, totaled about $6.58 million, down from $8.17 million at year-end; inventory rose $636,686 to $2.48 million. Days sales outstanding, excluding unbilled revenue, increased to 84 days from 67 at year-end.
Material changes and management commentary
- Q2 product sales and leasing declined 13%, while shipping and installation revenue increased 93%. For the first half, product sales declined 2% and shipping and installation revenue increased 128%.
- Soundwall and highway barrier sales weakened, reflecting the wind-down of a large Maryland soundwall production contract and fewer federal and state road projects. Royalties and barrier rentals also declined. Architectural and Slenderwall sales, miscellaneous product sales, and shipping and installation revenue partly offset these declines.
- Cost of goods sold rose to 81% of revenue excluding royalties for the first half, from 76% a year earlier. Management cited higher steel and fuel prices and a less profitable contract mix; it said it was working to improve production processes and reduce raw-material costs. Higher general and administrative expenses also weighed on results.
- Management described construction conditions in its primary service area as weak and competition as intense, pressuring margins on larger projects. It expected barrier sales to increase only slightly, if at all, for the rest of 2011; building sales to improve slightly; and shipping and installation revenue to remain above 2010 levels.
- Sales backlog was approximately $8.1 million at August 2, 2011, versus $11.0 million a year earlier; substantially all was expected to be produced within 12 months. Management also cited recurring repeat-customer business historically ranging from $5 million to $7 million annually.
Outlook, risks and unusual items
- The $2 million line of credit and $1 million equipment line matured July 7, 2011. No balances were outstanding at maturity. The company was negotiating renewal with Summit Community Bank and expected renewal by the end of Q3, but gave no assurance it would occur.
- Management believed operating cash flow and anticipated credit lines would fund operations for at least 12 months, while noting uncertainty around financing availability. Planned 2011 capital spending remained under evaluation and depended on operating performance and available funds.
- Variable-rate debt creates interest-rate exposure: management estimated each 1 percentage-point increase in rates affecting outstanding debt would reduce annual income by approximately $35,000. Longer customer payment times, contract retentions, construction cyclicality, adverse weather, raw-material costs and project execution were also identified risks.
- The filing reports no material litigation and no significant subsequent events other than the credit-facility maturities. No formal earnings guidance was provided. Management noted the interim results are not necessarily indicative of future periods.
Important facts for investors to verify
- Whether the expired credit facilities were renewed, and on what terms.
- Whether the $8.1 million backlog converts to production, revenue and acceptable margins as expected.
- Whether steel and fuel costs, contract mix and manufacturing improvements change gross margins.
- Whether collections improve given 84-day days sales outstanding and contract retentions.
- Whether weaker government road-project activity continues to affect barrier sales, rentals and royalty income.