Smith-Midland Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Smith-Midland manufactures, sells, leases and installs precast concrete products, serving construction, utility and agricultural markets, primarily in the eastern and midwestern United States.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $6.894 million | $5.990 million; up 15% |
| Gross profit | $1.816 million; 26.3% margin | $1.016 million; 17.0% margin |
| Operating income (loss) | $552,369; 8.0% margin | $(191,472); (3.2)% margin |
| Net income (loss) | $309,071; $0.06 diluted EPS | $(127,375); $(0.03) diluted EPS |
| Operating cash flow | $(305,253) | $825,916 |
| Cash and available-for-sale securities | $3.914 million combined | $4.367 million cash and no reported securities at December 31, 2012 |
| Debt | $2.948 million total; $335,199 due within 12 months | Debt declined during the quarter after $86,023 of repayments |
| Current assets / liabilities | $12.648 million / $2.507 million | Current ratio approximately 5.0 |
Cash plus securities decreased by approximately $454,000 from year-end. Operating cash use primarily reflected the increase in billed trade receivables; investing cash use included a $1.999 million purchase of Virginia bond-fund securities and $112,668 of capital spending. The company reported no outstanding balance on its $2.0 million revolving credit line at quarter-end. The filing states that the revolving line matured May 10, 2013, and a separate $1.0 million equipment-line commitment expired May 9, 2013.
Material changes and drivers
- Revenue growth and the return to profitability were driven in part by a sharp increase in barrier rentals, including rentals for the January 2013 Presidential Inauguration. Barrier rentals were $1.549 million, versus $79,031 a year earlier.
- Product sales increased 8%. Slenderwall sales rose 204%, barrier sales 38%, and Easi-Set/Easi-Span building sales 76%. Architectural panel sales fell 84%, miscellaneous product sales fell 73%, and shipping and installation revenue fell 54%.
- Cost of goods sold rose only 2% while revenue increased 15%. Management attributed improved gross margin to lower staffing, improved asset utilization, and high margins on inauguration barrier rentals; it also cited proprietary Slenderwall work.
- Royalty revenue declined 15%, partly because Q1 2012 included a large Slenderwall royalty payment. Management said a Canadian licensee had begun a relatively large Slenderwall project, with royalties expected to start in Q2 2013.
Outlook, risks and other items
- No formal earnings or revenue guidance was provided. Management expects building sales to improve in 2013 based on orders and bidding activity; it expects core barrier rentals to be broadly consistent with the prior-year period and shipping/installation revenue to be consistent with 2012 by year-end. These expectations are not assurances.
- Sales backlog was approximately $6.2 million as of May 7, 2013, down from approximately $8.1 million a year earlier. Substantially all backlog projects were expected to be produced within 12 months. Repeat-customer business, historically $5 million to $7 million annually, is additional to backlog.
- Management cited weak construction conditions, intense competition, the cyclical and seasonal nature of construction, weather, project execution requirements, availability of public construction funding, and uncertainty over future profitability and financing. Winter conditions can reduce sales and profits.
- Variable-rate debt exposes the company to interest-rate increases; management estimated each 1% increase affecting outstanding debt would reduce annual income by approximately $30,000. Management believed anticipated operating cash flow and credit availability would fund operations for at least 12 months, but gave no assurance.
- Management planned to limit remaining-2013 capital purchases to production needs, while noting approximately $500,000 of planned plant and equipment upgrades. Raw-material inflation was modest, and management expected prices to remain relatively stable through 2013.
- The company reported no material litigation, no significant subsequent events, and effective disclosure controls as of March 31, 2013. The filing notes the board had five members, of whom two were outside independent directors.
Investor facts to verify
- Whether the credit facilities expiring in May 2013 were renewed, replaced or otherwise made available after quarter-end.
- Whether Q1 profitability and gross-margin improvement persist after the one-time inauguration rental contribution and amid the lower backlog.
- Collections and working-capital trends, particularly billed receivables, which increased by $1.115 million during the quarter, and the resulting operating cash use.
- Conversion of the $6.2 million backlog and repeat-customer demand into revenue, including the timing of Slenderwall royalties and installation work.
- Actual capital spending, debt repayment and interest-rate exposure relative to management’s plans and estimates.