Smith-Midland Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; filed August 10, 2017. Smith-Midland manufactures, leases, licenses, sells and installs precast concrete products, serving construction, utilities and agriculture markets.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $10.73 million | $9.64 million | $20.23 million | $17.70 million |
| Gross profit | $2.88 million | $2.07 million | $6.19 million | $3.35 million |
| Operating income | $1.09 million | $0.63 million | $2.45 million | $0.49 million |
| Net income | $0.71 million | $0.42 million | $1.57 million | $0.33 million |
| Diluted EPS | $0.14 | $0.08 | $0.31 | $0.07 |
- Margins: Gross margin was approximately 26.8% in Q2 2017 versus 21.5% in Q2 2016, and 30.6% for the first half versus 18.9%. Operating margin was approximately 10.2% and 12.1%, respectively, compared with 6.6% and 2.8% in the prior-year periods.
- Cash flow: First-half operating cash flow was $1.27 million, versus cash used of $0.21 million in 2016. Capital expenditures were $2.16 million; investing cash use was $2.16 million. Cash declined by $0.92 million to $2.60 million. The company paid $49,414 in dividends.
- Liquidity and debt: At June 30, cash and cash equivalents were $2.60 million and available-for-sale securities were $1.08 million. Current assets were $17.28 million and current liabilities $7.01 million. Debt totaled $3.83 million, including $0.63 million due within 12 months. A $2.0 million revolving line and a $1.5 million equipment-credit commitment were unused. The company reported covenant compliance.
- Working capital: Billed trade receivables rose to $9.25 million from $7.19 million at year-end; inventory increased to $3.44 million from $2.58 million. Average days sales outstanding was 70 days, down from 74 days at year-end 2016.
Material changes versus the prior period
- First-half revenue increased 14%, while net income increased to $1.57 million from $0.33 million. Q2 revenue increased 11% and net income rose to $0.71 million from $0.42 million.
- Barrier sales rose 86% for the first half, and barrier-rental revenue rose 253%, partly reflecting a special first-quarter project. Soundwall sales fell 46%; Slenderwall sales were zero in the first half. Product-sales revenue was nearly flat for the six-month period, while service revenue increased 50%.
- Management attributed improved profitability primarily to a more favorable mix, including higher-margin barrier sales and rentals, lower labor costs and limited raw-material price increases. The Columbia, South Carolina facility operated at full production during the first half, compared with its start-up phase in 2016.
- General and administrative expense increased 43% for the first half, including $220,314 of restricted-stock compensation and costs associated with the Columbia facility. Selling expense increased 12%.
Outlook, risks and other notable items
- Management said sales remained strong, expected production to be supported at full capacity into 2018 by backlog, and anticipated continued profitability for the rest of 2017, while cautioning that results were not assured. It planned approximately $1.4 million of additional capital purchases during the rest of 2017.
- Backlog was approximately $30.2 million as of August 10, 2017, versus $18.3 million a year earlier; substantially all was estimated for production within 12 months. Management cited two large Slenderwall projects starting in July, an awarded I-395 barrier contract planned for late 2017, and expectations for additional barrier work.
- Risks include construction-industry cyclicality and seasonality, adverse weather, public infrastructure funding, contract execution and timing, raw-material cost increases, financing availability, and customer payment timing. Management noted that production costs are incurred before many customer payments and some architectural retainage is held until project completion.
- Debt is predominantly fixed-rate; management estimated that a 1% increase in rates on outstanding debt would reduce annual income by approximately $2,400. Raw-material prices had risen slightly and were expected to continue increasing into 2018.
- The company reported no material litigation, effective disclosure controls at June 30, 2017, and no material change in internal control over financial reporting during the quarter. It was evaluating the impact of adopting the new revenue-recognition guidance.
Important facts for investors to verify
- Whether the $30.2 million backlog converts to production, revenue and cash on the expected schedule, particularly the I-395 and Slenderwall projects.
- Whether the strong first-half margins persist as product mix changes and soundwall sales recover or remain weak.
- Collection of increased receivables and the effect of inventory buildup, customer retainage and payment timing on operating cash flow.
- Execution and funding of planned capital spending, debt service and facility utilization, including the revolving line’s September 12, 2017 maturity.
- The effects of rising material costs, seasonality, and the reported restricted-stock awards on future expenses and share dilution.