Smith-Midland Corporation — Q2 2013 Form 10-Q
Business context and period: The company manufactures, sells, leases and licenses precast concrete products, serving construction, utilities and agriculture markets, primarily in the eastern and midwestern United States. This unaudited filing covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $6.13 million | $6.64 million | $13.03 million | $12.63 million |
| Gross profit | $1.05 million | $1.92 million | $2.87 million | $2.88 million |
| Operating income (loss) | ($351,000) | $727,000 | $202,000 | $535,000 |
| Net income (loss) | ($223,000) | $424,000 | $86,000 | $296,000 |
| Diluted EPS | ($0.05) | $0.09 | $0.02 | $0.06 |
| Operating cash flow | Not separately reported for the quarter | ($741,000) | $907,000 |
Q2 gross margin was approximately 17.2%, down from 28.9%; first-half gross margin was approximately 22.0%, versus 22.8%. First-half operating margin was approximately 1.5%, versus 4.2%. The filing reports no quarter-specific cash-flow statement.
- Revenue mix and changes: Q2 revenue fell 8%, while first-half revenue rose 3%. Q2 product sales increased 6%, led by Slenderwall; service revenue fell 30%, including lower barrier rentals and shipping and installation. First-half barrier rentals benefited from the January 2013 Presidential Inauguration rental, while first-half Slenderwall sales rose substantially.
- Cash flow and investment: First-half operating cash use was $741,000. Investing activities used $2.21 million, including $1.99 million for available-for-sale securities and $245,000 for property and equipment. Financing activities used $121,000 net. Cash declined to $1.29 million from $4.37 million at year-end; the company also held $1.93 million of available-for-sale securities.
- Liquidity and debt: At June 30, current assets were $13.26 million and current liabilities $3.43 million, giving working capital of $9.83 million. Notes payable totaled $2.86 million, of which $335,000 was due within 12 months. The $2 million bank credit line and $1 million equipment line had expired in May; the bank had approved renewals, but closing was still in process. Management said expected operating cash flow and renewed credit availability should fund operations for at least 12 months, but gave no assurance.
Management commentary, outlook and risks
Management attributed Q2’s sales decline to weak construction conditions in its markets and said lower production and fixed-overhead absorption, low-margin work, and higher selling, general and administrative costs contributed to the loss. Salary expense had increased after prior temporary reductions were reversed. Management is emphasizing proprietary Slenderwall products and being more selective about low-margin bids.
Management expected sales and gross profit to improve in the second half, citing a higher backlog and large Slenderwall and soundwall contracts. Backlog was approximately $13.7 million as of August 6, 2013, versus $8.4 million about a year earlier; substantially all was expected to be produced within 12 months. Repeat-customer business, historically $5 million to $7 million annually, is additional to the reported backlog. Planned second-half plant and equipment upgrades totaled approximately $500,000.
Key risks include continued weakness and seasonality in construction, weather, contract execution and margins, customer retainage and collection timing, and dependence on renewed credit facilities. Average days sales outstanding increased from 80 days at year-end 2012 to 88 days at June 30, 2013. Management estimated each 1% increase in interest rates affecting outstanding debt would reduce annual income by about $29,000. The filing reported no material litigation and no significant subsequent events; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether the approved bank credit-line renewals closed, and their final terms and availability.
- Whether the $13.7 million backlog converts to production, revenue and profitable margins as expected.
- Whether receivable collections and days sales outstanding improve, given the first-half operating cash outflow.
- Whether Q2 margin pressure from low-margin projects and under-absorbed overhead persists or reverses in the second half.
- Whether planned capital spending and debt service can be supported by operating cash generation and available liquidity.