Smith-Midland Corporation — Q2 2015 Form 10-Q
Business context and reporting period
Precast concrete products manufacturer serving construction, utility, farming and transportation customers, primarily in the eastern and midwestern United States. This unaudited report covers the quarter and six months ended June 30, 2015; comparisons are to the corresponding 2014 periods.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $6.90 million | $6.43 million | $11.10 million | $12.07 million |
| Gross profit | $1.67 million | $1.41 million | $2.20 million | $2.14 million |
| Operating income (loss) | $416,778 | $96,284 | $(416,090) | $(440,207) |
| Net income (loss) | $244,857 | $29,981 | $(279,512) | $(298,555) |
| Diluted EPS | $0.05 | $0.01 | $(0.06) | $(0.06) |
Revenue rose 7.3% in Q2 but fell 8.0% for the first half. Gross margin increased to about 24.2% in Q2 from 21.9%; for the first half it was about 19.8% versus 17.7%. Q2 net margin was about 3.6% versus 0.5%; the first-half net loss narrowed modestly. Six-month operating cash flow was negative $958,371, versus positive $63,238 in 2014. Investing cash outflow was $509,415, including $506,893 of property and equipment purchases; financing cash outflow was $162,879. Cash fell to $1.94 million from $3.57 million at year-end.
At June 30, cash and available-for-sale securities totaled about $2.95 million. Total debt was $2.41 million, of which $361,514 was due within 12 months. The company had no borrowings on its $2.0 million revolving credit line. Current assets were $12.87 million and current liabilities $4.53 million. Accounts receivable, net, was $6.49 million; inventory was $1.88 million. Stockholders’ equity was $10.20 million.
Material changes and management commentary
- Q2 improvement reflected higher product sales, particularly architectural panels, barriers, utility/farm products and royalties, alongside lower general and administrative and selling expenses. Product sales rose 22.3% in Q2; shipping and installation revenue fell 41.6%.
- First-half revenue declined mainly because shipping and installation revenue fell 43.7%, building sales fell 44.4%, and barrier sales fell 26.4%; these declines more than offset growth in wall panels and utility/farm products.
- Management attributed the first-half net loss mainly to the $524,369 loss in Q1, partly offset by Q2 earnings. Backlog was approximately $17.8 million at June 30, up from $9.6 million a year earlier; substantially all was expected to be produced within 12 months.
- Management expected July production and sales improvement, anticipated the remaining first-quarter loss could be recovered in Q3, expected Q4 earnings to be positive, and believed positive quarterly earnings could continue into 2016. These are expectations, not guarantees. It also expected sales and shipping/installation activity to improve in the second half as projects moved into production and delivery.
Liquidity, risks and other disclosures
The principal bank note carried a fixed 3.99% rate, monthly payments of $25,642, and was secured principally by company assets. The company reported covenant compliance. The $2.0 million revolving line bore a variable prime rate and was scheduled to mature September 12, 2015; a separate $1.0 million equipment line was available. Management believed operating cash flow and credit availability would fund operations for at least 12 months, but gave no assurance. Planned additional capital purchases were approximately $300,000 in the remainder of 2015.
Liquidity pressure includes slower collections and customer retainage: days sales outstanding rose to 105 from 88 at year-end 2014. Production costs may be incurred 35–90 days before customer payment. The company cited construction-industry cyclicality, weather and seasonality, public infrastructure funding, project execution and financing availability among key uncertainties. It noted that the first quarter is typically seasonally weaker and winter losses may require working capital. Raw material prices had increased slightly, with only modest further increases expected.
No material litigation or significant subsequent events were reported. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The filing notes governance risk: the four-member board had only one outside independent director.
Important facts for investors to verify
- Whether the $17.8 million backlog converted to timely production, shipment, collection and profitable revenue, and whether management’s Q3, Q4 and 2016 expectations were achieved.
- Whether receivables and retainage were collected and operating cash flow improved after the first-half cash use.
- The status, renewal or replacement terms of the revolving credit line maturing September 12, 2015, and ongoing compliance with debt covenants.
- Whether planned capital spending and project costs stayed within cash resources and financing limits.
- How product mix, shipping and installation revenue, seasonality and construction-market conditions affected margins and earnings.