Smith-Midland Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The company manufactures, sells, leases and licenses precast concrete products, primarily for construction, utilities and farming markets. Financial statements are unaudited.
Financial performance
- Q2 revenue: $6.64 million, down 7% from $7.15 million. Net income was $423,537, up from $254,544; diluted EPS was $0.09 versus $0.05.
- First-half revenue: $12.63 million, down 14% from $14.76 million. Net income was $296,162, down from $442,436; diluted EPS was $0.06 versus $0.09.
- Margins: Q2 gross margin was approximately 27.2%, compared with 24.5% a year earlier; operating margin was approximately 11.0%, versus 6.1%. First-half gross margin was approximately 22.3%, versus 22.7%, and operating margin was approximately 4.2%, versus 5.1%.
- Cash flow: First-half operating cash flow was $907,262, compared with $780,520. Investing activities provided $42,659; financing activities used $220,024. Cash increased to $2.86 million from $2.13 million at year-end.
- Liquidity and debt: Current assets were $12.39 million and current liabilities $2.24 million. Debt obligations totaled $3.18 million, including $357,051 due within 12 months. The $2 million revolving credit line had no balance outstanding; a separate $1 million equipment credit commitment was available.
Changes and management commentary
- First-half product sales fell 28%, led by declines in wall products, especially Slenderwall, and utility/farm products. Barrier sales rose 24%, while service revenue rose 28%, including a sharp increase in barrier rentals tied mainly to services for the May 2012 NATO Conference in Chicago. Royalty income increased 22%.
- Management attributed weaker first-half results to the construction slowdown, lower sales and aggressive bidding that reduced margins on some projects. Q2 profitability improved year over year, which management primarily attributed to cost reductions.
- Layoffs and salary reductions implemented in February were expected to generate approximately $2 million in annualized savings. Management said reductions could be rescinded if the economy and construction industry meaningfully recover.
- Capital expenditures were $8,334 in the first half; management expected only production-needs purchases for the rest of 2012. Days sales outstanding improved to 90 days from 95 days at year-end 2011.
Outlook, risks and contingencies
- At August 7, 2012, backlog was approximately $8.4 million, compared with $8.1 million around the same date in 2011; substantially all was expected to be produced within 12 months. Management also cited historical annual repeat-customer business of $5 million to $7 million.
- Management expected some improvement in building sales and anticipated barrier sales could continue rising, but expected only slight growth, if any, in government road-project activity for the remainder of 2012. It expected shipping to remain relatively flat and raw-material prices to remain stable. These are expectations, not guarantees.
- Key risks include weak and cyclical construction markets, weather and seasonality, competitive contract bidding and margin pressure, contract execution and specification requirements, financing availability, indebtedness and variable interest rates. A 1% rate increase on outstanding debt was estimated to reduce annual income by approximately $32,000. Management believed operating cash flow and credit availability would fund operations for at least 12 months, but gave no assurance.
- The company reported no material litigation and no significant subsequent events through the filing date. Management noted governance limitations: only one of four directors was independent, the board performed the audit committee role, and no director qualified as an audit committee financial expert.
Important facts for investors to verify
- Whether the Q2 earnings improvement is sustainable given the first-half revenue decline and lower first-half operating income.
- Backlog conversion, new contract awards and whether competitive bidding continues to pressure project margins.
- Whether cost reductions and improved collections can support cash generation as customer deposits declined by approximately $777,000 in the first half.
- Debt repayment needs, variable-rate exposure and availability and terms of the credit facilities, including their stated 2013 expiration dates.
- Seasonal working-capital needs and the company’s progress against its stated outlook; the filing provides no formal earnings guidance.