Smith-Midland Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The company manufactures, sells, leases, and licenses precast concrete products, serving construction, utility, and agricultural markets, primarily in the eastern and midwestern United States.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $6.43 million | $6.13 million | $12.07 million | $13.03 million |
| Gross profit | $1.41 million | $1.05 million | $2.14 million | $2.87 million |
| Gross margin | 21.9% | 17.2% | 17.7% | 22.0% |
| Operating income (loss) | $96,284 | $(350,503) | $(440,207) | $201,866 |
| Net income (loss) | $29,981 | $(222,915) | $(298,555) | $86,156 |
| Diluted EPS | $0.01 | $(0.05) | $(0.06) | $0.02 |
- Revenue mix and changes: Q2 revenue rose 5%, supported by higher shipping and installation revenue (+25%), Easi-Set/Easi-Span building sales (+67%), and soundwall sales. Six-month revenue fell 7%; lower Slenderwall, barrier, and barrier-rental revenue outweighed growth in shipping and installation, buildings, and royalties.
- Margins and earnings: Q2 gross profit improved despite only modest revenue growth; management attributed the margin improvement to higher production and sales volume and weaker-margin projects in Q2 2013. For the six-month period, lower revenue and winter-related low production reduced gross profit and turned operating results and net income negative.
- Cash flow: Six-month operating cash flow was $63,238, versus cash used of $741,400 in 2013. Investing activities used $218,197 and financing activities used $132,540. Cash declined $287,499 to $2.85 million.
- Liquidity and debt: June 30 cash was $2.85 million and available-for-sale securities were $981,524. Debt totaled $2.78 million, including $373,347 due within 12 months; the company repaid $187,700 during the half-year. No amount was drawn on the $2 million revolving credit line. Total current assets were $13.04 million and current liabilities $3.40 million.
- Working capital considerations: Trade billed receivables were $6.55 million. Average days sales outstanding rose to 96 days from 91 at year-end, which management attributed to customer retainage and slow payment on a large contract. Inventory was $1.53 million, down from $1.94 million at year-end.
Outlook, risks, and unusual items
- Management expected results to be slightly better over the remainder of 2014, while stating that it expected the company’s recovery to begin in earnest in 2015. It cited large awarded projects scheduled to begin production early in 2015 and increased bidding activity. No formal earnings or revenue guidance was provided.
- As of August 5, 2014, backlog was approximately $9.6 million, versus $13.7 million a year earlier; substantially all was expected to be produced within 12 months. Management also cited recurring repeat-customer business historically ranging from $5 million to $7 million annually.
- Management described the unusually cold winter as a major cause of Q1 production weakness and loss; improved weather and higher Q2 activity enabled a small quarterly profit. Construction cyclicality, weather, public infrastructure funding, project execution, financing availability, and customer payment timing remain risks.
- The $2 million revolving line and $1 million equipment-line commitment were both scheduled to expire September 12, 2014. Management believed operating cash flow and credit availability would be sufficient for at least 12 months, but gave no assurance. It also noted debt repayment risk and limited board independence (one outside independent director among four members).
- The company reported no material litigation and no significant subsequent events through the filing date. It reported no material change in internal controls.
Important facts for investors to verify
- Whether the expiring credit facilities were renewed or replaced, and whether liquidity remained adequate as projects progressed.
- Whether the $9.6 million backlog converted to revenue as expected, particularly the awarded projects expected to start in 2015.
- Whether production volumes and gross margins recovered after the winter disruption, and how Q3/Q4 results compared with management’s qualitative outlook.
- Whether receivable collection and days sales outstanding improved, especially for the large slow-paying contract.
- Whether six-month losses and lower year-over-year backlog indicate a continuing demand or profitability weakness despite Q2’s return to profitability.