Smith-Midland Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial amounts below are in thousands of dollars, except per-share data. Smith-Midland manufactures, sells, leases, licenses, and installs precast concrete products, primarily for construction, highway, utility, and agricultural markets.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $10,852 | $9,833 | $21,041 | $18,958 |
| Gross profit | $2,156 | $2,976 | $4,378 | $4,567 |
| Operating income | $373 | $911 | $821 | $358 |
| Net income | $273 | $691 | $604 | $270 |
| Diluted EPS | $0.05 | $0.14 | $0.12 | $0.05 |
| Operating cash flow | Not separately provided | Not separately provided | $2,136 | $1,647 |
- Revenue rose 10% in Q2 and 11% in the first half. Product sales increased 6% and 3%, respectively; service revenue (rentals, royalties, shipping, and installation) increased 22% and 36%.
- Gross margin was approximately 19.9% in Q2 2019 versus 30.3% a year earlier, and 20.8% for the first half versus 24.1%. Management attributed the pressure to higher wages and labor costs, competitive pricing, and a greater mix of lower-margin shipping and installation work.
- First-half operating income improved despite lower gross profit, primarily as selling and administrative expenses declined. Q2 operating income and net income fell substantially year over year as gross profit weakened.
- First-half investing cash outflow was $2,366, including $1,996 of property and equipment purchases; financing cash outflow was $75. Cash declined $305 to $1,641. Available-for-sale investment securities were $1,156.
Balance sheet, debt, and liquidity
- At June 30, 2019, current assets were $17,915 and current liabilities $9,461; total assets were $39,498 and total liabilities $19,868. Stockholders’ equity was $19,630.
- Notes payable totaled $3,208, including $740 of current maturities. A separate construction line-of-credit balance was $1,500; it was drawn against a $4,000 facility and carried a variable prime rate. The company said it expected the construction balance to convert to long-term debt when financing closed in 2019.
- The construction line matured September 18, 2019. Management believed operating cash flow and available credit would fund operations for at least 12 months, but gave no assurance. The company reported compliance with its loan covenants.
- Average days sales outstanding, excluding unbilled revenue, rose to 100 days from 86 days at year-end 2018, mainly due to retainage on large projects. The company cited customer payment delays and seasonal winter cash needs as liquidity risks.
Material changes, outlook, and risks
- Revenue growth came mainly from Easi-Set/Easi-Span building sales, barrier rentals, and shipping and installation. Soundwall and SlenderWall sales declined in Q2; first-half soundwall sales also fell. First-half building sales rose 123%, while barrier rentals rose 79%.
- A customer buy-back guarantee means certain barrier deliveries are accounted for as rentals rather than product sales. Deliveries were expected to finish by year-end 2019, with related rental revenue and net profit recognition continuing until the option expires, expected in 2022.
- Management expected second-half 2019 sales to exceed first-half sales, with soundwall sales trending up, increased building sales in Q3, and utility sales steady or slightly higher. It expected 2019 barrier sales below 2018, but saw potential for future growth under new MASH TL3 requirements. These expectations are qualified and are not firm guidance.
- Sales backlog was approximately $27.6 million at August 2, 2019, down from $35.3 million a year earlier, reflecting large prior-year orders and competitive pricing pressure. Most backlog was expected to be produced within 12 months, though some projects extend longer.
- The North Carolina plant expansion was estimated to cost $3.3 million, funded by bank financing and cash, with production expected to begin in Q3 2019. Management cautioned that cost, financing, schedule, completion, and success were not assured. Planned additional 2019 capital purchases were approximately $2.0 million, excluding the expansion.
- Management expected labor costs to continue rising and raw-material prices to increase slightly during the rest of 2019. Other stated risks include construction-market cyclicality, weather, public infrastructure spending, competition, financing availability, contract execution, and the ability to generate sufficient revenue from expanded capacity.
- In July 2019, the company agreed to purchase used highway safety barriers and crash-cushion attenuators over about one year, at below current manufacturing costs; estimated total value was $2.2 million, subject to quantities purchased.
- The company reported no material litigation, no defaults upon senior securities, and effective disclosure controls as of June 30, 2019.
Important facts for investors to verify
- Whether gross margins recover despite wage pressure, competitive pricing, and lower-margin service mix.
- Completion, cost, financing conversion, and production ramp of the North Carolina expansion.
- Collection of receivables and retainage, given the increase in DSO and the seasonal working-capital needs.
- Timing and accounting impact of the customer buy-back arrangement, including the expected 2022 option expiry.
- Backlog conversion and whether management’s second-half sales expectations are achieved.
- Use, purchase quantities, and economic benefit of the $2.2 million used-barrier agreement.