Smith-Midland Corporation — Q1 2012 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. Smith-Midland manufactures, sells, leases, installs and licenses precast concrete products, primarily for construction, transportation, utility and farming markets.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $5.99 million | $7.62 million | Down 21% |
| Gross profit | $1.02 million | $1.59 million | Down 36% |
| Operating income (loss) | $(191,472) | $320,497 | Turned to loss |
| Net income (loss) | $(127,375) | $187,892 | Turned to loss |
| Basic and diluted EPS | $(0.03) | $0.04 | Turned to loss |
| Operating cash flow | $825,916 | $(142,511) | Improved |
Gross margin was approximately 17.0%, versus 20.9% a year earlier; operating margin was approximately (3.2)%, versus 4.2%. Management reported cost of goods sold at 89% of revenue excluding royalties, up from 83%, citing lower-margin project mix and competitive bidding. Interest expense was $35,251, broadly unchanged. The 2012 tax benefit was $98,000, compared with $103,000 of tax expense in 2011.
Product sales fell 33% to $3.99 million, with wall sales down 52%, building sales down 43%, and utility and farm sales down 51%. Shipping and installation revenue increased 27% to $1.54 million; royalties rose 16% to $383,571. Miscellaneous product sales increased 80%, partly reflecting rail station, bridge parapet and underground vault contracts.
Financial position and liquidity
At March 31, 2012, cash was $2.90 million, current assets were $12.04 million and current liabilities were $2.42 million (current ratio approximately 5.0). Total notes payable were $3.30 million, including $396,033 scheduled to mature within 12 months. Cash increased $768,225 during the quarter. Operating cash flow benefited particularly from collections of billed receivables; customer deposits fell $809,234. Investing activities provided $51,010, including asset-sale proceeds, while financing activities used $108,701 for debt repayments. Capital purchases were $7,269.
Accounts receivable, billed, declined to $5.76 million from $7.19 million at year-end; inventory declined to $1.72 million from $1.95 million. Average days sales outstanding improved to 91 days from 95 days at December 31, 2011. Management said expected operating cash flow and available credit should fund operations for at least 12 months, while noting this is not assured.
Material changes, outlook and risks
- Management attributed weaker results to the construction slowdown, lower sales and intense competition that reduced margins on large projects. It implemented February layoffs and salary reductions across its main manufacturing operation, estimating annualized savings of approximately $2.0 million.
- Management anticipated slight or no improvement in government road-project activity for the remainder of 2012. It expected building sales to improve slightly, shipping and installation revenue to remain stable, and barrier rentals to increase slightly. These expectations are not guarantees.
- As of May 15, 2012, backlog was approximately $8.1 million, versus $6.0 million around the same date in 2011; substantially all was expected to be produced within 12 months. Repeat-customer business, historically $5–7 million annually, is separate from backlog.
- After quarter-end, the company renewed its $2.0 million Summit Community Bank line of credit on May 10, 2012, with no balance outstanding at renewal. It bears a variable rate initially at 4.75%, matures May 10, 2013, and is secured by receivables, inventory and other business assets. A separate $1.0 million equipment financing commitment was also obtained, with a stated rate of prime plus 0.5% and a 4.75% floor. Both facilities include lender approval requirements and a minimum tangible-equity covenant.
- Risks include continued unprofitable operations, construction-market weakness and seasonality, contract execution and margin risk, customer payment timing, debt refinancing and variable interest rates. Management estimated that each 1% increase in rates on outstanding debt would reduce annual income by approximately $33,000. The filing also identifies governance limitations, including one independent director and no audit committee financial expert.
- The company reported no material litigation, no material change in internal controls, and effective disclosure controls as of March 31, 2012. Management cautioned that interim results are not necessarily indicative of future periods.
Important facts for investors to verify
- Whether sales and margins recover as lower-margin contracts progress and whether the projected cost savings are realized without impairing production or future earnings.
- Conversion of the $8.1 million backlog into revenue, profitability and cash, alongside the timing and scale of repeat-customer orders.
- Availability and actual use of renewed credit facilities, compliance with lender covenants, and the company’s ability to meet debt maturities.
- Receivable collections, customer-deposit movements and working-capital needs, particularly through the seasonal winter slowdown.
- Exposure to variable interest rates and the effect of construction-market, weather, raw-material-cost and project-performance changes.