Smith-Midland Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Dollar amounts are in thousands, except per-share data. The company manufactures, sells, rents, licenses, and installs precast concrete products, primarily for construction, highway, utility, and farming markets.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $10,450 | $10,852 | $20,275 | $21,041 |
| Gross profit | $2,377 | $2,156 | $3,978 | $4,378 |
| Operating income | $573 | $373 | $532 | $821 |
| Net income | $441 | $288 | $403 | $628 |
| Diluted EPS | $0.09 | $0.06 | $0.08 | $0.12 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2,582 | $2,136 |
- Q2 gross margin was 22.7%, compared with 19.9% a year earlier. For the first half, gross margin was 19.6%, versus 20.8%.
- Revenue fell 4% in both Q2 and the first half. First-half net income declined about 36%; the company reported a $38 net loss in Q1 followed by Q2 net income of $441.
- Cash was $4,404 at June 30, up from $1,364 at year-end 2019; available-for-sale securities were $1,189, versus $1,176. Current assets were $20,101 and current liabilities $10,077.
- Notes payable totaled approximately $8,022, including $2,057 of current maturities, compared with approximately $5,011 at December 31, 2019. The $4,000 revolving credit facility had no balance outstanding and matured October 1, 2020.
- Capital expenditures were $2,326 in the first half. Total assets were $44,331 and stockholders’ equity was $21,224 at June 30.
Changes and business drivers
- Product sales declined 9% in Q2 and the first half. Lower SlenderWall, highway barrier, and Easi-Set/Easi-Span building sales were partly offset by architectural and miscellaneous wall sales.
- Barrier rental revenue rose 56% in Q2 and 42% in the first half, reflecting higher rental activity and recognition of deferred buy-back lease revenue. Management is shifting emphasis from barrier sales to rentals.
- Q2 operating income improved on higher gross profit and rental mix. First-half operating income declined because of lower sales volumes and higher cost of goods sold relative to revenue; management cited retained wage and labor costs despite lower production.
- First-half cash from operations exceeded the prior-year period. Cash also benefited from financing proceeds, including the PPP loan.
Outlook, risks, and unusual items
- Management said COVID-19 had reduced backlog and production, caused employee absences, restricted bidding in some states, and delayed some materials. The full effects on 2020 results, liquidity, and financial condition could not be estimated.
- Backlog was approximately $25.6 million as of August 3, 2020, versus $27.6 million a year earlier; management attributed the decline mainly to reduced bidding activity. Most backlog was expected to be produced within 12 months, with some projects extending longer.
- Management expected cash flow, the PPP loan, and availability under the credit line—expected to be renewed—to fund operations for at least 12 months, while cautioning that no assurance could be given. The filing provides no quantified earnings or revenue guidance.
- The company received a $2,692 PPP loan at 1% interest in April. It was recorded as debt; some or all may be forgiven subject to program requirements. The filing does not establish the amount or timing of any forgiveness.
- The March refinancing included a $2,701 note, partly supporting Midland site improvements. Debt also includes a North Carolina facility mortgage and other loans. The company reported compliance with bank covenants at June 30.
- The credit line’s October 1, 2020 maturity, customer collection delays, retainage, and a 99-day average DSO (up from 89 days at 2019 year-end) are liquidity considerations. The company also disclosed potential funding needs if a customer exercises a guaranteed buy-back option.
- No material litigation was reported. Management identified no material change in internal control over financial reporting and concluded disclosure controls were effective.
Key investor verification points
- Confirm renewal or replacement of the $4,000 credit facility, which was due to mature shortly after the reporting date.
- Track PPP loan forgiveness eligibility, utilization, and accounting treatment; the loan was still reported as payable.
- Monitor backlog conversion, new awards, and the continuing effects of COVID-19 on bidding, production, staffing, supplies, and public infrastructure spending.
- Assess collection of receivables and retainage, including the increase in DSO and the allowance for doubtful accounts.
- Review debt growth, required repayments, capital spending, and funding exposure under the customer buy-back guarantee.