Smith-Midland Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. The interim financial statements are unaudited. Smith-Midland manufactures, sells, leases, installs and licenses precast concrete products, primarily for construction, transportation, utilities and farming markets.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $7.54 million | $6.13 million | $20.17 million | $20.89 million |
| Gross profit (margin) | $2.06 million (27.4%) | $0.66 million (10.7%) | $4.89 million (24.2%) | $4.00 million (19.2%) |
| Operating income (margin) | $1.02 million (13.5%) | $(0.60) million (-9.7%) | $1.55 million (7.7%) | $0.16 million (0.8%) |
| Net income (loss) | $0.69 million | $(0.47) million | $0.98 million | $(0.03) million |
| Diluted EPS | $0.14 | $(0.10) | $0.20 | $(0.01) |
Q3 revenue increased 23%, while nine-month revenue declined 3%. Nine-month product sales fell 19%, partly offset by 48% growth in service revenue. For Q3, product sales were nearly flat and service revenue increased 98%. Q3 cost of goods sold was essentially unchanged year over year despite higher revenue.
Cash flow and balance sheet: Nine-month operating cash flow was $1.38 million, compared with cash used of $0.45 million in 2011. Investing activities provided $13,457; financing activities used $332,325, including $332,325 of debt repayments. Cash rose to $3.20 million from $2.13 million at December 31, 2011. At September 30, total debt was $3.07 million, including $329,497 due within 12 months; no borrowings were outstanding on the $2.0 million revolving credit line. Current assets were $13.72 million and current liabilities $3.03 million. Capital expenditures were $50,940.
Material changes and management commentary
- Profitability improved substantially versus 2011, which management attributed to cost reductions, lower employee costs, improved cost of goods sold, increased sales and a more favorable mix of short-term, higher-margin work.
- Q3 barrier sales rose 159%; nine-month barrier sales rose 54%, primarily from government road-project contracts. Barrier rental revenue also surged, including temporary projects associated with the NATO Conference and the national political conventions. Management expects some further rental growth from an awarded highway project.
- Wall sales decreased 17% in Q3 and 38% for the nine months. Management cited weak construction activity and intense competition; recently awarded wall contracts were bid at lower gross margins. Utility and farm product sales also declined materially.
- Management expected building sales to improve slightly for the rest of 2012, royalties to remain near Q3 levels, and shipping revenue to be relatively flat. It expected installation revenue to decrease as current projects move from production to installation in 2013. These are qualified expectations, not formal earnings guidance.
- Sales backlog was approximately $7.5 million on November 6, 2012, down from $9.7 million around the comparable 2011 date; substantially all was expected to be produced within 12 months. Repeat-customer business, historically $5–$7 million annually, is additional to the backlog.
Liquidity, risks and other disclosures
Management believed operating cash flow and available credit would be sufficient for at least the next 12 months, but noted that customer payment timing (typically 35–75 days after production), seasonal winter slowdowns and working-capital needs could constrain liquidity. Days sales outstanding, excluding unbilled revenue, improved to 89 days from 95 days at year-end 2011. The company had $848,848 of unbilled receivables.
Risks highlighted include weak and cyclical construction markets, weather, competition and lower-margin bidding, dependence on public funding and project execution, financing availability, and variable-rate debt. Management estimated that a 1% interest-rate increase would reduce annual income by approximately $31,000. The filing reports no material litigation, no significant subsequent events, and effective disclosure controls. No market-risk disclosure was applicable.
Important facts for investors to verify
- Whether improved margins and earnings persist after cost reductions and unusually profitable short-term projects, particularly as lower-margin wall contracts enter production.
- Whether the sharp increase in barrier rentals and service revenue is repeatable; some Q3 rental revenue related to one-time events.
- Backlog conversion, new awards, and the effect of the backlog decline on future revenue, alongside the separately reported repeat-customer business.
- Collections and working-capital trends, especially unbilled receivables, customer deposits, seasonal cash needs and access to credit facilities that mature in May 2013.
- The MD&A describes the $984,686 year-to-date net income as relating to the “six months” ended September 30 in one passage; the financial statements report it for the nine months ended September 30.