Smith-Midland Corporation — Q3 2011 Form 10-Q
Business context and reporting period
The company manufactures, sells, leases and licenses precast concrete products used mainly in construction, transportation, utilities and farming. This unaudited report covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods unless stated otherwise.
Financial performance
| Metric | Three months ended Sept. 30, 2011 | Nine months ended Sept. 30, 2011 |
|---|---|---|
| Revenue | $6.13 million, down 32% | $20.89 million, down 9% |
| Gross profit / margin | $0.66 million / 10.7% (2010: $2.83 million / 31.4%) | $4.00 million / 19.2% (2010: $6.94 million / 30.1%) |
| Operating income (loss) | $(0.61) million (2010: $1.46 million) | $0.05 million (2010: $3.17 million) |
| Net income (loss) | $(0.47) million (2010: $0.90 million); $(0.10) per share | $(0.03) million (2010: $1.91 million); $(0.01) per share |
| Operating cash flow | Not reported for the quarter | $(0.45) million (2010: $(0.11) million) |
For the nine months, investing activities used $0.32 million and financing activities provided $0.37 million. Cash declined $0.40 million to $2.18 million from year-end 2010. Capital spending was $0.34 million, versus $1.01 million in the prior-year period.
At September 30, cash was $2.18 million, current assets $12.90 million and current liabilities $2.72 million. Total notes payable were $3.49 million, including $0.43 million due within twelve months. Total liabilities were $6.44 million. The filing reports no dividend information in the supplied text.
Material changes and management commentary
- Q3 revenue fell chiefly as a large Maryland soundwall project wound down, barrier sales weakened, and a prior-year miscellaneous-product contract did not recur. Nine-month product sales declined 15%; increased shipping and installation revenue partly offset the decrease.
- Management attributed margin pressure to intense competitive bidding and less profitable project mix, higher steel and fuel costs, and lower production revenue against relatively fixed costs. Cost of goods sold excluding royalties was 94% of revenue excluding royalties in Q3, versus 72% a year earlier; nine-month figures were 85% versus 74%.
- Accounts receivable days outstanding increased from 67 days at year-end 2010 to 91 days for the nine months ended September 30, 2011. Management cited contract retainage, payment schedules and slower customer payments. Inventory increased $0.41 million to $2.25 million from year-end.
- The company borrowed $575,000 in April 2011 for improvements to its commercial building site and repaid $310,519 of debt during the nine months. Its $2 million line of credit and $1 million equipment line matured July 7 with no balance outstanding; renewal discussions were ongoing.
Outlook, risks and contingencies
Management expected slight improvement in Q4 results, but gave no assurance. It anticipated modest or no improvement in government road-project activity, while expecting building sales to improve slightly and product sales to recover from Q3 levels. A large building order was scheduled for production and delivery in 2012. Sales backlog was approximately $9.7 million as of November 7, 2011, compared with $12.0 million a year earlier; substantially all was expected to be produced within twelve months. Management also cited historically recurring customer business of $5 million–$7 million annually.
Key risks include weak construction and government spending, seasonality and adverse weather, competitive pricing, raw-material and fuel costs, customer payment delays, contract execution and specification requirements, financing availability, and variable-rate debt. Management estimated each 1% increase in rates affecting outstanding debt would reduce annual income by approximately $35,000. Renewal of the expired credit lines was expected but not assured. Management believed cash flow and anticipated credit availability would fund operations for at least twelve months, also without assurance. The filing reports no material litigation and no significant subsequent events; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether the expired credit facilities were renewed, and on what terms.
- Collection timing for receivables and whether days outstanding and operating cash flow improve.
- Profitability and execution of new wall, barrier and building contracts, including the 2012 building order.
- Whether backlog converts to revenue as expected and how competitive bidding and input costs affect margins.
- The nature of the $86,254 nine-month “other, net” income item; the filing text does not clearly explain its source.
- Management identified governance limitations: one independent director among four, no separate audit committee, and no audit committee financial expert.