UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20182019
or☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission File Number1-13752
Smith-Midland Corporation
(Exact name of Registrant as specified in its charter)
Delaware | 54-1727060 |
| |
Delaware | 54-1727060 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | (I.R.S. EmployerIdentification No.) |
5119 Catlett Road, P.O. Box 300
Midland, VA 22728
(Address, zip code of principal executive offices)
(540)439-3266
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
| Trading Symbol
| Name of each exchange on which registered
|
Common Stock, $0.01 par value per share
| SMID | OTCQX |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑þ No ☐o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑þ No ☐o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company”,company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Emerging growth company oLarge accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☑ |
Emerging growth company | ☐ | | |
Non-accelerated filer o Smaller reporting company þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐o No ☑þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $.01$0.01 par value, outstanding as of August 1, 2018 : 5,080,3952, 2019: 5,134,492 shares, net of treasury shares
SMITH-MIDLAND CORPORATION
Form 10-Q Index
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PART I. FINANCIAL INFORMATION | Page |
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Item 1. | Financial Statements | |
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| Condensed Consolidated Balance Sheets, June 30, 20182019 (Unaudited) and December 31, 20172018 | |
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| Condensed Consolidated Statements of Operations (Unaudited) for the three months ended June 30, 20182019 and June 30, 20172018
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| Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended June 30, 20182019 and June 30, 20172018
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| Condensed Consolidated Statements of Operations (Unaudited) for the six months ended June 30, 20182019 and June 30, 20172018 | |
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| Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the six months ended June 30, 20182019 and June 30, 20172018 | |
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Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the six months ended June 30, 2019 and June 30, 2018 | |
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| Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 20182019 and June 30, 20172018
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| Notes to Condensed Consolidated Financial Statements (Unaudited) | |
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Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
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Item 4. | Controls and Procedures | |
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PART II. OTHER INFORMATION |
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Item 1. | Legal Proceedings | |
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Item 1A. | Risk Factors | |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
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Item 3. | Defaults Upon Senior Securities | |
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Item 4. | Mine Safety Disclosures | |
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Item 5. | Other Information | |
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Item 6. | Exhibits | |
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| Signatures | |
PART I — FINANCIAL INFORMATION
ITEMITEM 1. Financial Statements
SMITH-MIDLANDSMITH-MIDLAND CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
ASSETS | | |
Current assets | | |
Cash
| $1,641
| $1,946 |
Investment securities, available-for-sale, at fair value | 1,156
| 1,107 |
Accounts receivable, net | | |
Trade - billed (less allowance for doubtful accounts of $270 and $214), including contract retentions
| 11,085
| 12,281 |
Trade - unbilled | 267
| 1,313 |
Inventories, net | | |
Raw materials | 499
| 1,005 |
Finished goods (less reserves of $39) | 2,504
| 2,555 |
Prepaid expenses and other assets | 553
| 480 |
Refundable income taxes | 210
| 909 |
| | |
Total current assets | 17,915
| 21,596 |
| | |
Property and equipment, net | 15,894
| 14,102 |
| | |
Deferred buy-back lease asset, net | 5,376
| 5,304 |
| | |
| 313
| 367 |
| | |
Total assets | $39,498
| $41,369 |
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ASSETS | June 30, 2018 (Unaudited) | | December 31, 2017 |
Current assets | | | |
Cash and cash equivalents | $ | 839 |
| | $ | 3,390 |
|
Investment securities, available-for-sale, at fair value | 1,097 |
| | 1,098 |
|
Accounts receivable, net | | | |
Trade - billed (less allowance for doubtful accounts of $211 and $208) | 11,262 |
| | 8,967 |
|
Trade - unbilled | 1,272 |
| | 251 |
|
Inventories, net | | | |
Raw materials | 904 |
| | 819 |
|
Finished goods (less reserves of $39) | 2,188 |
| | 2,696 |
|
Prepaid expenses and other assets | 441 |
| | 452 |
|
Refundable income taxes | 1,325 |
| | 1,359 |
|
| | | |
Total current assets | 19,328 |
| | 19,032 |
|
| | | |
Property and equipment, net | 10,434 |
| | 9,867 |
|
| | | |
Deferred buy-back lease asset, net | 2,986 |
| | — |
|
| | | |
Other assets | 269 |
| | 326 |
|
| | | |
Total assets | $ | 33,017 |
| | $ | 29,225 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
SMITH-MIDLAND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY | | |
Current liabilities | | |
Accounts payable - trade | $2,560
| $4,212 |
Accrued expenses and other liabilities | 184
| 610 |
Deferred revenue | 1,418
| 1,112 |
Accrued compensation | 822
| 1,556 |
Dividend payable | — | 281 |
Line-of-credit construction draw | 1,500 | 1,000 |
Deferred buy-back lease obligation | 889 | 720 |
Operating lease liabilities | 107
| — |
Current maturities of notes payable | 740
| 711 |
Customer deposits
| 1,241
| 1,658 |
| | |
Total current liabilities | 9,461
| 11,860 |
| | |
Deferred revenue | 610 | 570 |
Deferred buy-back lease obligation | 5,738 | 5,873 |
Operating lease liabilities | 252 | — |
Notes payable - less current maturities | 2,468
| 2,792 |
Deferred tax liability | 1,339
| 1,427 |
| | |
Total liabilities | 19,868
| 22,522 |
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Stockholders’ equity | | |
Preferred stock, $.01 par value; authorized 1,000,000 shares, none issued and outstanding | — | — |
Common stock, $.01 par value; authorized 8,000,000 shares; 5,225,245 and 5,223,245 issued and 5,134,492 and 5,112,825 outstanding, respectively | 52 | 51 |
Additional paid-in capital | 6,126
| 5,973 |
Treasury stock, at cost, 40,920 shares | (102) | (102) |
Accumulated other comprehensive loss | (12) | (37) |
Retained earnings | 13,566
| 12,962 |
| | |
Total stockholders' equity | 19,630 | 18,847 |
| | |
Total liabilities and stockholders' equity | $39,498 | $41,369 |
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LIABILITIES AND STOCKHOLDERS' EQUITY | June 30, 2018 (Unaudited) | | December 31, 2017 |
Current liabilities | | | |
Accounts payable - trade | $ | 2,986 |
| | $ | 3,059 |
|
Accrued expenses and other liabilities | 588 |
| | 588 |
|
Deferred revenue | 1,198 |
| | 1,144 |
|
Accrued compensation | 687 |
| | 1,231 |
|
Income taxes payable | 80 |
| | — |
|
Dividend payable | — |
| | 256 |
|
Current maturities of notes payable | 693 |
| | 637 |
|
Customer deposits | 1,227 |
| | 919 |
|
| | | |
Total current liabilities | 7,459 |
| | 7,834 |
|
| | | |
Deferred buy-back lease obligation | 3,733 |
| | — |
|
Notes payable - less current maturities | 2,878 |
| | 2,896 |
|
Deferred tax liability | 1,287 |
| | 1,290 |
|
| | | |
Total liabilities | 15,357 |
| | 12,020 |
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| |
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Stockholders’ equity | | | |
Preferred stock, $.01 par value; authorized 1,000,000 shares, none issued and outstanding | — |
| | — |
|
Common stock, $.01 par value; authorized 8,000,000 shares; 5,225,648 and 5,214,148 issued and 5,080,395 and 5,047,895 outstanding, respectively | 51 |
| | 51 |
|
Additional paid-in capital | 5,917 |
| | 5,719 |
|
Treasury stock, at cost, 40,920 shares | (102 | ) | | (102 | ) |
Accumulated other comprehensive loss | (32 | ) | | (19 | ) |
Retained earnings | 11,826 |
| | 11,556 |
|
| | | |
Total stockholders' equity | 17,660 |
| | 17,205 |
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Total liabilities and stockholders' equity | $ | 33,017 |
| | $ | 29,225 |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
SMITH-MIDLAND
SMITH-MIDLAND CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
| | | Three Months Ended June 30, | Three Months Ended June 30, |
| 2018 | | 2017 | | |
Revenue | | | | |
Product sales | $ | 6,943 |
| | $ | 7,611 |
| $7,327 | $6,943 |
Barrier rentals | 340 |
| | 302 |
| 582 | 340 |
Royalty income | 506 |
| | 473 |
| 429 | 506 |
Shipping and installation revenue | 2,044 |
| | 2,342 |
| 2,514
| 2,044 |
| | | | |
Total revenue | 9,833 |
| | 10,728 |
| 10,852 | 9,833 |
| | | | |
Cost of goods sold | 6,857 |
| | 7,851 |
| 8,696 | 6,857 |
| | | | |
Gross profit | 2,976 |
| | 2,877 |
| 2,156 | 2,976 |
| | | | |
Operating expenses | | | | |
General and administrative expenses | 1,452 |
| | 1,133 |
| 1,143 | 1,452 |
Selling expenses | 613 |
| | 651 |
| 640 | 613 |
| | | | |
Total operating expenses | 2,065 |
| | 1,784 |
| 1,783 | 2,065 |
| | | | |
Operating income | 911 |
| | 1,093 |
| 373 | 911 |
| | | | |
Other income (expense) | | | | |
Interest expense | (44 | ) | | (45 | ) | (40) | (44) |
Interest income | 9 |
| | 9 |
| 11 | 9 |
Gain on sale of assets | 31 |
| | 4 |
| 10 | 31 |
Other income | 9 |
| | 13 |
| 5
| 9 |
| | | | |
Total other income (expense) | 5 |
| | (19 | ) | (14)
| 5 |
| | | | |
Income before income tax expense | 916 |
| | 1,074 |
| 359 | 916 |
| | | | |
Income tax expense | 225 |
| | 363 |
| 86 | 225 |
| | | | |
Net income | $ | 691 |
| | $ | 711 |
| $273 | $691 |
| | | | |
Basic and diluted earnings per share | $ | 0.14 |
| | $ | 0.14 |
| $0.05 | $0.14 |
| | | | |
Weighted average number of common shares outstanding: | | | | |
Basic | 5,080 |
| | 5,045 |
| 5,134 | 5,080 |
Diluted | 5,104 |
| | 5,095 |
| 5,143 | 5,104 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
SMITH-MIDLAND
SMITH-MIDLAND CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
| | | Three Months Ended June 30, | Three Months Ended June 30, |
| 2018 | | 2017 | | |
Net income | $ | 691 |
| | $ | 711 |
| $273
| $691
|
Other comprehensive income, net of tax: | | | | |
Net unrealized holding gain (1) | 1 |
| | 7 |
| 10
| 1 |
| | | | |
Comprehensive income | $ | 692 |
| | $ | 718 |
| $283
| $692
|
| | | | |
(1) Unrealized gains on available-for-sale securities are shown net of income tax expense of $1$3 and $3$1 for June 30, 20182019 and 2017,2018, respectively.
The accompanying notes are an integral part of the condensed consolidated financial statements.
SMITH-MIDLAND
SMITH-MIDLAND CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
| | | Six Months Ended June 30, | Six Months Ended June 30, |
| 2018 | | 2017 | | |
Revenue | | | | |
Products sales | $ | 14,396 |
| | $ | 12,559 |
| |
Product sales | | $14,831
| $14,396
|
Barrier rentals | 649 |
| | 2,825 |
| 1,163
| 649
|
Royalty income | 727 |
| | 904 |
| 735
| 727
|
Shipping and installation revenue | 3,186 |
| | 3,937 |
| 4,312
| 3,186
|
| | | | |
Total revenue | 18,958 |
| | 20,225 |
| 21,041
| 18,958
|
| | | | |
Cost of goods sold | 14,391 |
| | 14,031 |
| 16,663
| 14,391
|
| | | | |
Gross profit | 4,567 |
| | 6,194 |
| 4,378
| 4,567
|
| | | | |
Operating expenses | | | | |
General and administrative expenses | 2,919 |
| | 2,483 |
| 2,350
| 2,919
|
Selling expenses | 1,290 |
| | 1,261 |
| 1,207 | 1,290
|
| | | | |
Total operating expenses | 4,209 |
| | 3,744 |
| 3,557
| 4,209
|
| | | | |
Operating income | 358 |
| | 2,450 |
| 821
| 358 |
| | | | |
Other income (expense) | | | | |
Interest expense | (90 | ) | | (91 | ) | (85) | (90) |
Interest income | 19 |
| | 19 |
| 21 | 19
|
Gain on sale of assets | 55 |
| | 16 |
| 12 | 55
|
Other income | 18 |
| | 24 |
| 20
| 18 |
| | | | |
Total other income (expense) | 2 |
| | (32 | ) | (32)
| 2 |
| | | | |
Income before income tax expense | 360 |
| | 2,418 |
| 789
| 360 |
| | | | |
Income tax expense | 90 |
| | 849 |
| 185
| 90
|
| | | | |
Net income | $ | 270 |
| | $ | 1,569 |
| $604
| $270 |
| | | | |
Basic and diluted income per share | $ | 0.05 |
| | $ | 0.31 |
| |
Basic and diluted earnings per share | | $0.12
| $0.05
|
| | | | |
Weighted average number of common shares outstanding: | | | | |
Basic | 5,076 |
| | 5,026 |
| 5,134 | 5,076
|
Diluted | 5,101 |
| | 5,065 |
| 5,141
| 5,101
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
SMITH-MIDLAND
SMITH-MIDLAND CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
| | | Six Months Ended June 30, | Six Months Ended June 30, |
| 2018 | | 2017 | | |
Net income | $ | 270 |
| | $ | 1,569 |
| $604
| $270
|
Other comprehensive income (loss), net of tax: | | | | |
Net unrealized holding gain (loss)(1) | (13 | ) | | 7 |
| |
Net unrealized holding gain (loss) (1) | | 25 | (13) |
| | | | |
Comprehensive income | $ | 257 |
| | $ | 1,576 |
| $629 | $257
|
| | | | |
(1) Unrealized gains (losses) on available for saleavailable-for-sale securities are shown net of income tax expense (benefit) of $(4)$8 and $1$(4) for June 30, 20182019 and 2017,2018, respectively.
The accompanying notes are an integral part of the condensed consolidated financial statements.
SMITH-MIDLAND
SMITH-MIDLAND CORPORATION AND SUBSIDIARIES CONDENSEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
Cash flows from operating activities: | | | |
Net income | $ | 270 |
| | $ | 1,569 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 504 |
| | 460 |
|
Gain on sale of assets | (55 | ) | | (16 | ) |
Allowance for doubtful accounts | 3 |
| | (150 | ) |
Stock compensation | 186 |
| | 220 |
|
Deferred taxes | (3 | ) | | 29 |
|
(Increase) decrease in | | | |
Accounts receivable - billed | (2,298 | ) | | (1,915 | ) |
Accounts receivable - unbilled | (1,021 | ) | | 32 |
|
Inventories | 424 |
| | (865 | ) |
Prepaid expenses and other assets | 45 |
| | (213 | ) |
Deferred buy-back lease asset, net | (2,986 | ) | | — |
|
Refundable income taxes | 33 |
| | 168 |
|
Increase (decrease) in | | | |
Accounts payable - trade | (73 | ) | | 390 |
|
Accrued expenses and other liabilities | — |
| | 400 |
|
Deferred revenue | 54 |
| | 672 |
|
Accrued compensation | (543 | ) | | (301 | ) |
Accrued income taxes payable | 80 |
| | — |
|
Deferred buy-back lease obligation | 3,733 |
| | — |
|
Customer deposits | 308 |
| | 790 |
|
Net cash provided by (used in) operating activities | (1,339 | ) | | 1,270 |
|
Cash flows from investing activities: | | | |
Purchases of investment securities available-for-sale | (16 | ) | | (21 | ) |
Purchases of property and equipment | (1,057 | ) | | (2,159 | ) |
Proceeds from sale of fixed assets | 67 |
| | 22 |
|
Net cash used in investing activities | (1,006 | ) | | (2,158 | ) |
Cash flows from financing activities: | | | |
Proceeds from long-term borrowings | 350 |
| | 183 |
|
Repayments of long-term borrowings | (312 | ) | | (287 | ) |
Dividends paid on common stock | (256 | ) | | (49 | ) |
Proceeds from options exercised | 12 |
| | 117 |
|
Net cash used in financing activities | (206 | ) | | (36 | ) |
Net decrease in cash and cash equivalents | (2,551 | ) | | (924 | ) |
Cash and cash equivalents | | | |
Beginning of period | 3,390 |
| | 3,523 |
|
End of period | $ | 839 |
| | $ | 2,599 |
|
| | Additional Paid-in Capital
| | Accumulated Other Comprehensive Loss
| | |
Balance, December 31, 2018
| $51 | $5,973 | $(102) | $(37) | $12,962 | $18,847 |
Net unrealized holding gain
| — | — | — | 25
| — | 25
|
Vesting of restricted stock
| 1
| 153
| — | — | — | 154
|
Net income
| — | — | — | — | 604
| 604
|
Balance, June 30, 2019
| $52
| $6,126
| $(102) | $(12) | $13,566
| $19,630
|
| | Additional Paid-in Capital
| | Accumulated Other Comprehensive Loss
| | |
Balance, December 31, 2017
| $51 | $5,719 | $(102) | $(19) | $11,556 | $17,205 |
Net unrealized holding loss
| — | —
| — | (13) | — | (13) |
Proceeds from options exercised
| — | 12
| — | — | — | 12
|
Vesting of restricted stock
| — | 186
| — | — | — | 186
|
Net income
| — | —
| — | — | 270 | 270 |
Balance, June 30, 2018
| $51 | $5,917
| $(102) | $(32) | $11,826
| $17,660
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
SMITH-MIDLAND
SMITH-MIDLAND CORPORATION AND SUBSIDIARIES NOTESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)
(in thousands)
| Six Months Ended June 30, |
| | |
Cash flows from operating activities: | | |
Net income
| $604 | $270 |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation and amortization | 873 | 504 |
Gain on sale of assets | (12) | (55) |
Allowance for doubtful accounts | 56 | 3 |
Stock compensation | 154 | 186 |
Deferred taxes | (90 )
| (3) |
(Increase) decrease in | | |
Accounts receivable - billed | 1,141 | (2,298) |
Accounts receivable - unbilled | 1,046 | (1,021) |
Inventories | 557 | 424 |
Prepaid expenses and other assets | (41 )
| 45 |
Refundable income taxes | 697 | 33 |
Increase (decrease) in | | |
Accounts payable - trade | (1,653) | (73)
|
Accrued expenses and other liabilities | (426) | — |
Deferred revenue | 345 | 54 |
Accrued compensation | (734) | (543)
|
Accrued income taxes payable
| — | 80 |
Deferred buy-back lease obligation
| 36 | 3,733 |
Customer deposits | (417)
| 308 |
Net cash provided by operating activities | 2,136 | 1,647 |
Cash flows from investing activities: | | |
Purchases of investment securities available-for-sale | (16) | (16) |
Purchases of property and equipment | (1,996) | (1,057) |
Deferred buy-back lease asset | (361) | (2,986 )
|
Proceeds from sale of fixed assets | 7 | 67 |
Net cash used in investing activities | (2,366) | (3,992) |
Cash flows from financing activities: | | |
Proceeds from the line-of-credit construction draw | 500 | — |
Proceeds from long-term borrowings | 49 | 350 |
Repayments of long-term borrowings | (343) | (312) |
Dividends paid on common stock | (281) | (256) |
Proceeds from options exercised | — | 12 |
Net cash used in financing activities | (75)
| (206) |
Net decrease in cash
| (305 )
| (2,551) |
Cash
| | |
Beginning of period | 1,946 | 3,390 |
End of period | $1,641 | $839 |
| | |
Cash payments for interest | $85 | $90 |
Cash payments for income taxes | $35 | $9 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
SMITH-MIDLAND CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. – INTERIM FINANCIAL REPORTING
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, and with the instructions to Form 10-Q and Article 10 and Regulation S-X. Accordingly, we have condensed or omitted certain information and footnote disclosures that are included in our annual financial statements. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, summary of significant accounting policies, and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2017.2018. The condensed consolidated December 31, 20172018 balance sheet was derived from the audited financial statements included in the Form 10-K. Dollar amounts in the footnotes are stated in thousands, except for per share data.
In the opinion of management, these condensed consolidated financial statements reflect all adjustments (which consist of normal, recurring adjustments) necessary for a fair presentation of the financial position and results of operations and cash flows for the periods presented. The results disclosed in the condensed consolidated statements of operations are not necessarily indicative of the results to be expected in any future periods.
Recent Accounting Pronouncements
On February 25, 2016,Fair Value Measurement. In August 2018, the FASB issued ASU No. 2016-02, Leases (Topic 842)2018-13, “Fair Value (“FV”) Measurement (Topic 820). Adoption” Among other modifications, the standard removes the requirements to disclose: (i) the amount of and reasons for transfers between Level 1 and Level 2 of the FV hierarchy; (ii) the policy for timing transfers between levels; and (iii) the valuation process for Level 3 FV measurements. The standard will require public entities to disclose: (a) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 FV measurements held at the end of the reporting period; and (b) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 FV measurements. The additional disclosure requirements should be applied prospectively for the most recent interim or annual period presented in the fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented. The amendments in this ASU requires lessees to recognize assets and liabilities for most leases. For public business entities the guidance isstandard are effective for financial statements issued for annual periods beginningfiscal years ending after December 15, 2018, and interim periods within those annual periods and early2019. Early adoption is permitted. The Company is currently evaluatingpermitted, and an entity may adopt the impactremoved or modified disclosures and delay the adoption of new disclosures until the effective date. We have not completed our assessment of the standard but we do not expect the adoption to have a material impact on the Company’sCompany's consolidated financial position, results of operations and cash flows.
Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued guidance on the measurement of credit losses on certain financial instruments. The guidance introduces a new impairment model known as the current expected credit loss model that will replace the incurred loss impairment methodology currently included under GAAP. This guidance requires entities to present certain investments in debt securities, trade accounts receivable and other financial assets at their net carrying value of the amount expected to be collected on the financial statements. The guidance will be effective for the Company on January 1, 2020, and must be applied on a modified retrospective basis with early adoption permitted. The Company does not expect the guidance to have a material impact on its results of operations, financial position, cash flows and disclosures.
Recently Adopted Accounting Pronouncements
On May 28, 2014,Leases. In 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842).” Topic 842 establishes a new lease accounting model for leases. The most significant changes include the clarification of the definition of a lease, the requirement for lessees to recognize for all leases a right-of-use asset and a lease liability in the consolidated balance sheet, and additional quantitative and qualitative disclosures which are designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. Expenses are recognized in the consolidated statement of income in a manner similar to current accounting guidance. Lessor accounting under the new standard is substantially unchanged. We adopted this standard, and all related amendments thereto, effective January 1, 2019, using the transition approach, which applies the provisions of the new guidance at the effective date without adjusting the comparative periods presented. We have elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carry forward the historical accounting relating to lease identification and classification for existing leases upon adoption. We have made an accounting policy election to keep leases with an initial term of 12 months or less off the consolidated balance sheet. We have finalized our evaluation of the impacts that the adoption of this accounting guidance on the consolidated financial statements and have approximately $400 of right-of-use assets, included in property and equipment, and liabilities recognized in our consolidated balance sheet, amortized over the expected lives of the leases upon adoption.
Comprehensive Income. In February 2018, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220). Adoption” This standard provides an option to reclassify stranded tax effects within accumulated other comprehensive income (loss) (“AOCI”) to retained earnings due to the U.S. federal corporate income tax rate change in the Tax Cuts and Jobs Act of this ASU requires that an entity recognize the amount of revenue to which it expects to be entitled2017. This standard was effective for the transfer of promised goods or services to customers. The ASU replaced most existing revenue recognition guidance in U.S. GAAP when it became effective. The standard allowed for application retrospectively to each prior period presented (full retrospective method) or retrospectively with the cumulative effect recognized as of the date of initial application (modified retrospective method). The Company adopted the new revenue guidance effective January 1, 2018 using the modified retrospective method to all contracts that were not substantially complete at the date of adoption. The adoption of Topic 606interim and annual reporting periods beginning after December 15, 2018. We did not have, and is not expectedexercise the option to have, a material impact on the timing or amount of revenue recognized as compared to the Company's previous revenue recognition policies. Accordingly, there was no adjustment recorded to beginning retained earnings for cumulative impact of adoption on January 1, 2018.make this reclassification.
Revenue Recognition
Product Sales - Over Time
Under Topic 606, the Company recognizes revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for goods or services provided. Revenue associated with contracts with customers is recognized over time as the Company's performance creates or enhances customer controlled assets or creates or enhances an asset with no alternative use, which the Company has an enforceable right to receive compensation as defined under the contract for performance completed. To determine the amount of revenue to recognize over time, the Company recognizes revenue over the contract terms based on the output method. The Company applied the "as-invoiced" practical expedient as the amount of consideration the Company has the right to invoice corresponds directly with the value of the Company's performance to date.
As the output method is driven by units produced, the Company recognizes revenues based on the value transferred to the customer relative to the remaining value to be transferred. The Company also matches the costs associated with the units produced. If a contract is projected to result in a loss, the entire contract loss is recognized in the period when the loss was first determined and the amount of the loss updated in subsequent reporting periods. Revenue recognition also includes an amount related to a contract asset or contract liability. If the recognized revenue is greater than the amount billed to the customer, a contract asset is recorded in accounts receivable - unbilled. Conversely, if the amount billed to the customer is greater than the recognized revenue, a contract liability is recorded in customer deposits on uncompleted contracts.deposits. Changes in the job performance, job conditions and final contract settlements are factors that influence management’s assessment of total contract value and therefore, profit and revenue recognition.
A portion of the work the Company performs requires financial assurances in the form of performance and payment bonds or letters of credit at the time of execution of the contract. Some contracts include retention provisions of up to 10% which are generally withheld from each progress payment as retainage until the contract work has been completed and approved.
Product Sales - Point in Time
For certain product sales that do not meet the over time criteria, under Topic 606 the Company recognizes revenue when the product has been shipped to the destination in accordance with the terms outlined in the contract where a present obligation to pay exists as they have gained physical possessioncontrol of the product.
Accounts Receivable and Contract Balances
The timing of when we bill our customers is generally dependent upon advance billing terms, milestone billings based on the completion of certain phases of the work, or when services are provided or products are shipped. Projects with performance obligations recognized over time that have costs and estimated earnings recognized to date in excess of cumulative billings, are reported on our Condensed Consolidated Balance Sheets as "Accounts receivable - unbilled". Projects with performance obligations recognized over time that have cumulative billings in excess of costs and estimate earnings recognized to date, are reported on our Condensed Consolidated Balance Sheets as customer deposits (i.e. contract liabilities).
Any uncollected billed amounts for our performance obligations recognized over time, including contract retentions, are recorded within accounts receivable. At June 30, 20182019 and December 31, 2017,2018, accounts receivable included contract retentions (in thousands) of approximately $1,381$1,576 and $1,065,$1,704, respectively.
Our billed and unbilled revenue may be exposed to potential credit risk if our customers should encounter financial difficulties, and we maintain reserves for specifically-identified potential uncollectible receivables. At June 30, 20182019 and December 31, 2017,2018, our allowances for doubtful accounts (in thousands) were $211$270 and $208,$214, respectively.
Effect of Adopting ASC Topic 606
As discussed in Recently Adopted Accounting Pronouncements, no adjustment to beginning 2018 retained earnings was recorded as a result of our adoption of Topic 606 due to no changes in the methods and/or timing of our revenue recognition for our uncompleted contracts. Further, the difference in our results of the first and second quarter 2018 between application of the new standard on our contracts and what results would have been if such contracts had been reported using the accounting standards previously in effect, for such contracts, did not change.
Sales
Sale to CustomersCustomer with a Buy-Back Guarantee
The Company entered into a buy-back agreement with one specific customer. Under this agreement, the Company guaranteed to buy-back product at a predetermined price at the end of the long-term project, subject to the condition of the product. Although the Company receives payment in full as the product is produced, we are required to account for these transactions as operating leases. The amount of sale proceeds equal to the buy-back obligation, included in "Deferred buy-back lease obligation" in the liabilities section of the consolidated balance sheet, is deferred until the buy-back is exercised.exercised or expired. The remaining sale proceeds are deferred in the same account and recognized on a straight-line basis over the usage period, when deliveredsuch usage period commencing on delivery to the job-site untiland ending at the time the buy-back is exercised.exercised or expired. The Company capitalizes the cost of the product on the consolidated balance sheet as a deferredshown in "Deferred buy-back lease asset, net,net", and depreciates the value, less salvageresidual value, to cost of leasing revenue in "Cost of goods sold" over the estimated economicuseful life of the asset.
In the case the customer does not exercise the buy-back option and retains ownership of the product at the end of the usage period, the guarantee buy-backbuyback liability and any deferred revenue balances related to the product are settled to revenue, and the net book value of the asset is expensed to cost of leasing revenue. If the customer exercises the buy-back guarantee option, the Company purchases the product back in the amount equal to the buy-backbuyback guarantee, we settle any remaining deferred balances, in excess of the buy-back payment, to leasing revenue, and we reclassify the net book value of the product on the consolidated balance sheet to property"Inventories" or "Property and equipment.equipment, net" depending on the intended use at the time. The revenue is being recognized in accordance with Topic 840, Leases.Leases.
Barrier Rentals - Leasing Fees
Leasing fees are paid by customers at the beginning of the lease agreementperiod and are recorded as deferred revenue. The deferred revenue is then recognized each month as lease income for the duration of the lease, in accordance with Topic 840, Leases.Leases. Topic 840 is applied, as Topic 606-10-15-2 provides a scope exception for lease contracts.
Royalty Income
The Company licenses certain products to other precast companies to producemanufacture the Company's products to engineering specifications under the licensing agreements. The agreements are typically for five year terms and require royalty payments from 4% to 6% of total sales of licensed products, which are paid on a monthly basis. The revenues from licensing agreements are recognized in the month earned, in accordance with Topic 606-10-55-65.
Shipping and Installation
Shipping and installation revenues are recognized as a distinct performance obligation in the period the shipping and installation services are provided to the customer, in accordance with Topic 606.
Disaggregation of Revenue
In the following table, revenue is disaggregated by primary sources of revenue (in thousands):revenue:
| | Three Months Ended June 30
| |
| | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
| 2018 | 2017 | Change | % of Change | | 2018 | 2017 | Change | % of Change | |
Product Sales: | | | | | | |
Soundwall Sales | $ | 2,525 |
| $ | 1,429 |
| $ | 1,096 |
| 77% | | $ | 5,005 |
| $ | 2,656 |
| $ | 2,349 |
| 88% | $1,939 | $2,525 | $(586) | (23)% | $4,053 | $5,005 | $(952)
| (19)%
|
Architectural Panel Sales | 245 |
| — |
| 245 |
| 100% | | 457 |
| 18 |
| 439 |
| 2,439% | 424 | 245 | 179 | 73% | 424 | 457 | (33)
| (7)%
|
SlenderWall Sales | 1,422 |
| — |
| 1,422 |
| 100% | | 2,565 |
| — |
| 2,565 |
| 100% | 772 | 1,422 | (650)
| (46)% | 2,735 | 2,565 | 170 | 7%
|
Miscellaneous Wall Sales | 267 |
| 709 |
| (442 | ) | (62)% | | 759 |
| 1,372 |
| (613 | ) | (45)% | 406 | 267 | 139 | 52% | 769 | 759 | 10 | 1%
|
Barrier Sales | 1,590 |
| 3,912 |
| (2,322 | ) | (59)% | | 3,875 |
| 6,069 |
| (2,194 | ) | (36)% | 1,817 | 1,590 | 227 | 14% | 3,408 | 3,875 | (467)
| (12)%
|
Easi-Set and Easi-Span Building Sales | 560 |
| 1,061 |
| (501 | ) | (47)% | | 1,062 |
| 1,397 |
| (335 | ) | (24)% | 1,335 | 560 | 775 | 138% | 2,369 | 1,062 | 1,307 | 123%
|
Utility and Farm Product Sales | 246 |
| 350 |
| (104 | ) | (30)% | | 460 |
| 808 |
| (348 | ) | (43)% | |
Miscellaneous Product Sales | 88 |
| 150 |
| (62 | ) | (41)% | | 213 |
| 239 |
| (26 | ) | (11)% | |
Utility Sales | | 449 | 246 | 203 | 83% | 757 | 460 | 297 | 65%
|
| | 185 | 88 | 97 | 110% | 316 | 213 | 103 | 47%
|
Total Product Sales | 6,943 |
| 7,611 |
| (668 | ) | (9)% | | 14,396 |
| 12,559 |
| 1,837 |
| 15% | 7,327 | 6,943 | 384 | 6% | 14,831 | 14,396 | 435 | 3%
|
Barrier Rentals | 340 |
| 302 |
| 38 |
| 13% | | 649 |
| 2,825 |
| (2,176 | ) | (77)% | 582 | 340 | 242 | 71% | 1,163 | 649 | 514 | 79%
|
Royalty Income | 506 |
| 473 |
| 33 |
| 7% | | 727 |
| 904 |
| (177 | ) | (20)% | 429 | 506 | (77)
| (15)% | 735 | 727 | 8 | 1%
|
Shipping and Installation Revenue | 2,044 |
| 2,342 |
| (298 | ) | (13)% | | 3,186 |
| 3,937 |
| (751 | ) | (19)% | 2,514 | 2,044 | 470 | 23% | 4,312 | 3,186 | 1,126 | 35%
|
Total Service Revenue | 2,890 |
| 3,117 |
| (227 | ) | (7)% | | 4,562 |
| 7,666 |
| (3,104 | ) | (40)% | 3,525 | 2,890 | 635 | 22% | 6,210 | 4,562 | 1,648 | 36%
|
| | | | | |
Total Revenue | $ | 9,833 |
| $ | 10,728 |
| $ | (895 | ) | (8)% | | $ | 18,958 |
| $ | 20,225 |
| $ | (1,267 | ) | (6)% | $10,852 | $9,833 | $1,019 | 10% | $21,041 | $18,958 | $2,083 | 11%
|
Warranties
Smith-MidlandThe Company's products are typically sold pursuant to an implicit warranty as to merchantability only. Warranty claims are reviewed and resolved on a case by case method. Although the Company does incur costs for these types of expense, historically the amount of expense is minimal.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Segment Reporting
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and assess performance. The Company currently operates in one operating and reportable business segment for financial reporting purposes.
Reclassifications of Certain Items Included within Comparable Prior Year Periods and Previous Current Year Interim Periods
Certain minor reclassifications have been made to prior year amounts to conform to current year presentation.
presentation, including separation of current and non-current portion of deferred revenue and deferred buy-back lease obligation.
NOTE 2. – NET INCOME PER SHARE
Basic earnings per common share exclude all common stock equivalents, primarily restricted stock awards, and is computed using the weighted average number of common shares outstanding during the period. The diluted earnings per common share calculation reflects the potential dilutive effect of securities that could share in earnings of the Company. As of June 30, 2018,2019, there are no outstanding stock options. For periods prior to June 30, 20182019 outstanding options were excluded from the diluted earnings per share calculation when they would have an anti-dilutive effect. Earnings per share are calculated as follows (in thousands, except earnings per share):follows:
| | | Three Months Ended June 30, | Three Months Ended June 30, |
| 2018 | | 2017 | | |
Basic income per share | | | | |
| | | | |
Net income | $ | 691 |
| | $ | 711 |
| $273
| $691
|
| | | | |
Weighted average shares outstanding | 5,080 |
| | 5,045 |
| 5,134 | 5,080
|
| | | | |
Basic income per share | $ | 0.14 |
| | $ | 0.14 |
| $0.05
| $0.14
|
| | | | |
Diluted income per share | | | | |
| | | | |
Net income | $ | 691 |
| | $ | 711 |
| $273
| $691
|
| | | | |
Weighted average shares outstanding | 5,080 |
| | 5,045 |
| 5,134 | 5,080
|
Dilutive effect of stock options and restricted stock | 24 |
| | 50 |
| 9
| 24
|
| | | | |
Total weighted average shares outstanding | 5,104 |
| | 5,095 |
| 5,143
| 5,104 |
| | | | |
Diluted income per share | $ | 0.14 |
| | $ | 0.14 |
| $0.05
| $0.14
|
| | | | |
| Six Months Ended June 30, |
| | |
Basic income per share | | |
| | |
Net income
| $604
| $270
|
| | |
Weighted average shares outstanding | 5,134 | 5,076
|
| | |
Basic income per share | $0.12
| $0.05
|
| | |
Diluted income per share | | |
| | |
Net income
| $604
| $270
|
| | |
Weighted average shares outstanding | 5,134 | 5,076
|
Dilutive effect of stock options and restricted stock | 7
| 25
|
| | |
Total weighted average shares outstanding | 5,141
| 5,101
|
| | |
Diluted income per share | $0.12
| $0.05
|
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
Basic income per share | | | |
| | | |
Net income | $ | 270 |
| | $ | 1,569 |
|
| | | |
Weighted average shares outstanding | 5,076 |
| | 5,026 |
|
| | | |
Basic income per share | $ | 0.05 |
| | $ | 0.31 |
|
| | | |
Diluted income per share | | | |
| | | |
Net income | $ | 270 |
| | $ | 1,569 |
|
| | | |
Weighted average shares outstanding | 5,076 |
| | 5,026 |
|
Dilutive effect of stock options and restricted stock | 25 |
| | 39 |
|
| | | |
Total weighted average shares outstanding | 5,101 |
| | 5,065 |
|
| | | |
Diluted income per share | $ | 0.05 |
| | $ | 0.31 |
|
NOTE 3. – NOTES PAYABLE (dollar amounts in thousands)
The Company has a mortgage note payable to Summit Community Bank (the “Bank”), with a balance of $937$661 as of June 30, 2018.2019. The note has a maturity date of September 20, 2021 and a fixed interest rate of 3.99% annually with monthly payments of $26 and is secured by principally all of the assets of the Company. Under the terms of the note, the Bank will permit chattel mortgages on purchased equipment not to exceed $250 for any one individual loan so long as the Company is not in default.
The Company has a mortgage note payable to the Bank for the the purchase of the Columbia, South Carolina facility. Such loan is evidenced by a promissory note dated July 19, 2016. The note provides for a 15 year term, a fixed annual interest rate of 5.29%, monthly fixed payments of $11 and a security interest in favor of the Bank in respect ofto the land, building and fixtures purchased with the proceeds of the loan. The balance of the loan at June 30, 20182019 was $1,203.$1,137.
The Company additionally has 1514 smaller installment loans with annual interest rates between 2.94% and 5.29%5.75%, maturing between 2020 and 2024, with varying balances totaling $1,431.$1,410.
Under the loan agreementcovenants with the Bank, the Company is limited to annual capital expenditures of $1,500.$3,500. The Company is in compliance with all covenants pursuant to the loan agreementagreements as of June 30, 2018.2019.
The
In addition to the notes payable discussed above, the Company also has a $2,000$4,000 line of credit secured by accounts receivable and inventory,with the Bank that had a balance of which none was outstanding$1,500 at June 30, 2018.2019 used to fund the construction of the North Carolina expansion, which will be converted to long-term debt when the financing closes in 2019. The line of credit is evidenced by a commercial revolving promissory note with the Bank, which carries a variable interest rate equalof prime and matures on September 18, 2019. The loan is collateralized by a first lien position on the Company's accounts receivable and inventory and a second lien position on all other business assets. Key provisions of the line of credit require the Company, (i) to obtain bank approval for capital expenditures in excess of $3,500 during the term of the loan; and (ii) to obtain bank approval prior to its funding any acquisition. On September 18, 2018 the Company received a Commitment Letter from the Bank to provide a guidance line of credit specifically to purchase business equipment in an amount up to $1,500. The commitment provides for the purchase of equipment with minimum advances of $50 for which a note payable will be executed with a term not to exceed five years with an interest rate at the Wall Street Journal'sJournal prime rate. In addition,rate plus 0.5% with a floor of 4.49% per annum. The loan is collateralized by a first lien position on all equipment purchased under the Company has aline. The commitment fromfor the Bank in the amount of $1,500 for an equipment line of credit. Neitherguidance line of credit carried a balance atmatures on September 17, 2019. As of June 30, 2018.2019, the Company had not purchased any equipment pursuant to the $1,500 commitment.
NOTE 4. – STOCK COMPENSATION
In accordance with ASC 718, the Company had no stock option expense for the three and six months ended June 30, 2018 and June 30, 2017. The Company uses the Black-Scholes option-pricing model to measure the fair value of stock options granted to employees. In 2016, the Company's Board of Directors replaced the 2008 Stock Option Plan with the 2016 Equity Incentive Plan, which does not provide for the issuance of options. Consequently, the Company cannot issue any additional options, if, and until, a new stock option plan is approved by the Board of Directors.
The following table summarizes options outstanding at June 30, 2018:
|
| | | | | |
| Number of Shares | Weighted Average Exercise Price |
Balance, December 31, 2017 | 10,333 |
| $ | 1.21 |
|
Granted | — |
| — |
|
Forfeited | — |
| — |
|
Exercised | (10,333 | ) | (1.21 | ) |
| | |
Outstanding options at June 30, 2018 | — |
| $ | — |
|
| | |
Outstanding exercisable options at June 30, 2018 | — |
| $ | — |
|
| | |
The fair value of restricted stock awards is estimated to be the market price of the Company's common stock at the close of the date of grant. Restricted stock activity during the six months ended June 30, 20182019 is as follows:
| | | Weighted Average Grant Date Fair Value per Share |
| | Number of Shares | Weighted Average Grant Date Fair Value per Share | |
Balance, December 31, 2017 | 125,333 |
| $ | 5.13 |
| |
Balance, December 31, 2018 | | 69,500 | $5.19 |
Granted | 2,500 |
| 7.00 |
| 2,000 | 7.43 |
Vested | (22,167 | ) | (5.62 | ) | (21,667) | (5.63) |
Forfeited | (1,333 | ) | (4.95 | ) | — |
| | | |
Non-vested, end of period | 104,333 |
| $ | 5.14 |
| 49,833 | $5.15 |
| | | |
Awards are being amortized to expense ratably, on an annual basis, over a three year vesting term, except one grant in January 20182019 for 2,5002,000 shares of restricted stock, and one grant in January 20172018 for 15,0002,500 shares of restricted stock, which both vested upon grant. There was stock compensation expense of approximately $186,000$154 for the six months ended June 30, 20182019 and $220,000$186 for the six months ended June 30, 2017.2018. The total unrecognized compensation cost as of June 30, 20182019 related to the non-vested restricted stock is approximately $535,000.$128.
NOTE 5. – SUBSEQUENT EVENTS
In July 2019, the Company entered into an agreement to purchase used highway safety barrier and crash cushion attenuators, at a rate below current manufacturing costs, over approximately a one year period. Under the agreement, title will transfer to the Company upon physical inspection and acceptance. The Company estimates the total purchase value to $2.2 million, which can vary based upon actual quantities purchased.
ITEMITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report and related documents include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act 1934. Forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause the Company’s actual results, performance (financial or operating), or achievements expressed or implied by such forward looking statements not to occur or be realized. Such forward looking statements generally are based upon the Company’s best estimates of future results, performance or achievement, based upon current conditions and the most recent results of operations. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “continue,” or similar terms, variations of those terms or the negative of those terms. Potential risks and uncertainties include, among other things, such factors as:
no assurance on profitable operations; in this respect, while●
While the Company was profitable for the years ended December 31, 2018 and 2017, and 2016, and the second quarter of 2018, it reported a net loss for the three months ended March 31, 2018.first half of 2019, there are no assurances that the Company can remain profitable in future periods,
●
our debt level decreasedincreased in 2017,2018 and increased duringin the first six months of 2018,2019, and our ability to satisfy the same cannot be assured,
●
the continued availability of financing in the amounts, at the times, and on the terms required, to support our future business and capital projects,
●
the extent to which we are successful in developing, acquiring, licensing or securing patents for proprietary products,
●
changes in economic conditions specific to any one or more of our markets (including the availability of public funds and grants for construction),
●
the highly competitive nature of our industry and our ability to effectively compete,
●
changes in general economic conditions in the Company’s primary service areas,
●
the ability to generate sufficient revenues to justify our expansion of manufacturing facilities,
●
adverse weather, which inhibits the demand for our products,
●
our compliance with governmental regulations,
●
the outcome of future litigation, if any,
●
on material construction projects, our ability to produce and install product that conforms to contract specifications and in a time frame that meets the contract requirements,
●
the cyclical nature of the construction industry,
●
our exposure to increased interest expense payments should interest rates change,
●
the Company’s Board of Directors, which is composed of five members, has only two outside, independent directors, and
●
the other factors and information disclosed and discussed in other sections of this Report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018.
Investors and shareholders should carefully consider such risks, uncertainties and other information, disclosures and discussions which contain cautionary statements identifying important factors that could cause actual results to differ materially from those provided in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
The Company invents, develops, manufactures, markets, leases, licenses, sells, and installs a broad array of precast concrete products for use primarily in the construction, highway, utilities and farming industries. The Company's customers are primarily general contractors and federal, state, and local transportation authorities located in the Mid-Atlantic, Northeastern, Midwestern regions and parts of the Southeastern region of the United States. The Company's operating strategy has involved producing innovative and proprietary products, including SlenderWall™, a patented, lightweight, energy efficient concrete and steel exterior insulated wall panel for use in building construction; J-J Hooks® Highway Safety Barrier, a positive-connected highway safety barrier; Sierra Wall, a sound barrier primarily for roadside use; and Easi-Set® transportable concrete buildings, also patented. In addition, the Company produces custom order precast concrete products with various architectural surfaces, as well as generic highway sound barriers, utility vaults, and farm products such as cattleguards.
The Company was incorporated in Delaware on August 2, 1994. Prior to a corporate reorganization completed in October 1994, the Company conducted its business primarily through Smith-Midland Virginia, which was incorporated in 1960 as Smith Cattleguard Company, a Virginia corporation, and which subsequently changed its name to Smith-Midland Corporation in 1985. The Company’s principal offices are located at 5119 Catlett Road, Midland, Virginia 22728 and its telephone number is (540) 439-3266. As used in this report, unless the context otherwise requires, the term the “Company” refers to Smith-Midland Corporation and its subsidiaries.
The Company had (in thousands) a net lossincome of $421$331 for the first quarter 20182019 and net income of $691$273 for the second quarter of 2018,2019, resulting in net income of $270$604 for the six months ended June 30, 2018.2019. The cost of goods sold as a percent of revenue, not including royalties, for the three and six months ended June 30, 20182019 was 74%83% and 79%82%, respectively, as compared to 77%74% and 73%79% for the three and six months ended June 30, 2017,2018, respectively. The decrease in cost of goods sold as a percentage of revenue, not including royalties, for the second quarter of 2018, compared to the second quarter of 2017, is mainly due to a decrease in direct labor costs. The increase in cost of goods sold as a percentage of revenue, not including royalties, for the three and six months ended June 30, 2019, compared to the three and six months ended June 30, 2018, compared to the same period in 2017, is mainly due to a short-term, high risk special projectincreased wages and the associated labor costs, flat selling prices for certain products due to competitive pricing pressure, and the increase in shipping and installation which occurred intypically have lower margins than product sales, as compared to the first quarter 2017 that hadhalf 2018 costs when there were higher margins than typical manufacturing. margin jobs.Total sales for the three and six month periods ended June 30, 2019 were $10,852 and $21,041, respectively, compared to $9,833 and $18,958 for the three and six months ended June 30, 2018, are lower thanrespectively. The increase was mainly from the same period in 2017 mainly dueEasi-Set building sales, and barrier rentals, which were impacted favorably from the deferred buy-back revenue recognition, and shipping and installation revenue. With respect to the deferred revenue associatedbarrier customer contract described in Note 1 ("Sale to Customer with the guaranteed buy-back agreement fora Buy-Back Guarantee"), although barrier of $3,733. Although the barrier revenue isproduct sales from this contract are not currently being recognized, the Company will recognize theis recognizing barrier rental revenue overwhich will continue through the life of the customer's project. Production at each manufacturing plant continuesAccordingly, once all product is delivered to this customer, the Company will nonetheless continue to recognize the net profits from this project until the buy-back option is either exercised or expired. Delivery of product commenced in the second quarter of 2018 and is expected to be strong, rental orderscompleted by the end of 2019. The buy-back option expires when the customer completes the project utilizing the barrier, which is expected to be in 2022. Thus, whereas the Company will likely have completed its production and delivery/installation obligations in 2019, it will nonetheless continue to increase, and royalties show a positive trend. The current backlog of $35.3 million supports revenues into 2019.recognize net profits through 2022. Management anticipates continued profitexpects sales to increase for the remaindersecond half of 2018,2019 as compared to the first six months of 2019, although no assurance can be given.
Results of Operations (dollar amounts in thousands, except per share data)
Three and six months endedJune 30, 2018 2019compared to the three and six months endedJune 30, 20172018
Sales include revenues from product sales, royalty income, barrier rentalrentals, royalty income, and shipping and installation income.revenues. Product sales are further divided into soundwall, architectural and SlenderWall™ panels, miscellaneous wall panels, highway barrier, Easi-Set® and Easi-Span® buildings, utility and farm products, and miscellaneous precast products. The following table summarizes the sales by product type and comparison for the three and six month periods ended June 30, 2018,2019 and 2017.2018.
Revenue by Type (Disaggregated Revenue)
| Three Months Ended June 30
| |
| | | | | | | | |
Soundwall Sales | $1,939 | $2,525 | $(586) | (23)% | $4,053 | $5,005 | $(952)
| (19)%
|
Architectural Panel Sales | 424 | 245 | 179 | 73% | 424 | 457 | (33)
| (7)%
|
SlenderWall Sales | 772 | 1,422 | (650)
| (46)% | 2,735 | 2,565 | 170 | 7%
|
Miscellaneous Wall Sales | 406 | 267 | 139 | 52% | 769 | 759 | 10 | 1%
|
Barrier Sales | 1,817 | 1,590 | 227 | 14% | 3,408 | 3,875 | (467)
| (12)%
|
Easi-Set and Easi-Span Building Sales | 1,335 | 560 | 775 | 138% | 2,369 | 1,062 | 1,307 | 123%
|
Utility Sales | 449 | 246 | 203 | 83% | 757 | 460 | 297 | 65%
|
| 185 | 88 | 97 | 110% | 316 | 213 | 103 | 47%
|
Total Product Sales | 7,327 | 6,943 | 384 | 6% | 14,831 | 14,396 | 435 | 3%
|
Barrier Rentals | 582 | 340 | 242 | 71% | 1,163 | 649 | 514 | 79%
|
Royalty Income | 429 | 506 | (77)
| (15)% | 735 | 727 | 8 | 1%
|
Shipping and Installation Revenue | 2,514 | 2,044 | 470 | 23% | 4,312 | 3,186 | 1,126 | 35%
|
Total Service Revenue | 3,525 | 2,890 | 635 | 22% | 6,210 | 4,562 | 1,648 | 36%
|
| | | | | | | | |
Total Revenue | $10,852 | $9,833 | $1,019 | 10% | $21,041 | $18,958 | $2,083 | 11%
|
Revenue By Type (Disaggregated Revenue)
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | 2017 | Change | % of Change | | 2018 | 2017 | Change | % of Change |
Product Sales: | | | | | | | | | |
Soundwall Sales | $ | 2,525 |
| $ | 1,429 |
| $ | 1,096 |
| 77% | | $ | 5,005 |
| $ | 2,656 |
| $ | 2,349 |
| 88% |
Architectural Panel Sales | 245 |
| — |
| 245 |
| 100% | | 457 |
| 18 |
| 439 |
| 2,439% |
SlenderWall Sales | 1,422 |
| — |
| 1,422 |
| 100% | | 2,565 |
| — |
| 2,565 |
| 100% |
Miscellaneous Wall Sales | 267 |
| 709 |
| (442 | ) | (62)% | | 759 |
| 1,372 |
| (613 | ) | (45)% |
Barrier Sales | 1,590 |
| 3,912 |
| (2,322 | ) | (59)% | | 3,875 |
| 6,069 |
| (2,194 | ) | (36)% |
Easi-Set and Easi-Span Building Sales | 560 |
| 1,061 |
| (501 | ) | (47)% | | 1,062 |
| 1,397 |
| (335 | ) | (24)% |
Utility and Farm Product Sales | 246 |
| 350 |
| (104 | ) | (30)% | | 460 |
| 808 |
| (348 | ) | (43)% |
Miscellaneous Product Sales | 88 |
| 150 |
| (62 | ) | (41)% | | 213 |
| 239 |
| (26 | ) | (11)% |
Total Product Sales | 6,943 |
| 7,611 |
| (668 | ) | (9)% | | 14,396 |
| 12,559 |
| 1,837 |
| 15% |
Barrier Rentals | 340 |
| 302 |
| 38 |
| 13% | | 649 |
| 2,825 |
| (2,176 | ) | (77)% |
Royalty Income | 506 |
| 473 |
| 33 |
| 7% | | 727 |
| 904 |
| (177 | ) | (20)% |
Shipping and Installation Revenue | 2,044 |
| 2,342 |
| (298 | ) | (13)% | | 3,186 |
| 3,937 |
| (751 | ) | (19)% |
Total Service Revenue | 2,890 |
| 3,117 |
| (227 | ) | (7)% | | 4,562 |
| 7,666 |
| (3,104 | ) | (40)% |
| | | | | | | | | |
Total Revenue | $ | 9,833 |
| $ | 10,728 |
| $ | (895 | ) | (8)% | | $ | 18,958 |
| $ | 20,225 |
| $ | (1,267 | ) | (6)% |
Soundwall Sales - Soundwall sales increaseddecreased for the three and six month periods ended June 30, 20182019 when compared to the same periods in 2017.2018. The significant increasedecrease for the three month period in soundwall sales is because all three production facilities are currently producing soundwall projects. Our newest and largest soundwall contract, awardedmainly attributed to the reduction in April 2018, is expected to be produced and delivered over a three year period. This project will help maintain higher soundwall production with lower sales prices at the North Carolina and sales overSouth Carolina plants in the next several years.first half of 2019. The Virginia plant has increased soundwall production for their largest order ever, which will continue production into 2020. With the current backlog and continued increase in highway work, management expects soundwall sales to trend up for the remainder of the year and the full year 2018 soundwall sales to surpass the full year 2017 soundwall sales.2019.
Architectural Panel Sales - Architectural panel sales increased duringfor the three and six month periodsmonths ended June 30, 2018,2019 compared to the same periodsperiod in 2017. Although architectural panel sales increased over2018, and decreased slightly for the prior year, revenue will remain at a low volume throughsix months ended June 30, 2019 compared to the remainder ofsame period in 2018. There will continue to be production during 2018, as the Company is close to finalizing the contract onremainder of 2019, at a low volume that will not be a large SlenderWall project, for which architectural panels areportion of revenue. Architectural panel sales continue to be a complimentsmaller complimentary product in design.to the Company's high profile proprietary product SlenderWall.
SlenderWallTM- There were significant SlenderWall panel sales decreased for the three month period ended June 30, 2019 as compared to the same period in 2018, and increased for the six month period ended June 30, 2019 as compared to the same period in 2018. The Company finished producing a major SlenderWall project during the first quarter 2019, while only producing a couple smaller projects during the second quarter 2019. The Company continues to focus sales initiatives for SlenderWall with the hiring of a new regional sales manager for the proprietary product.
Miscellaneous Wall Sales - Miscellaneous wall sales increased for the three and six month periods ended June 30, 2018, as compared to no sales in the same periods of 2017. SlenderWall sales are projected to continue through the remainder of 2018 as production of a large project is expected to run through the end of the year 2018 and into 2019. This proprietary product continues to remain a focus of the sales team, with the long-term expectation of expanding SlenderWall sales in both the Charlotte, North Carolina and Atlanta, Georgia markets to match growth in the Southeast United States.
Miscellaneous Wall Sales - Miscellaneous wall sales decreased for the three and six month periods ended June 30, 2018, when2019 compared to the same periods in 2017.2018. The Company had avery few miscellaneous wall projects that finished induring the first quartersix months of 2019 and 2018. With varying market demand, miscellaneous wall sales are expected to be flat or trend downremain low for the remainder of 2018; however, the Company continues to bid on2019 until selective miscellaneous wall projects as they are released, as some projectswhich can be veryhighly profitable due to their unique characteristics.
Barrier Sales - - Barrier sales decreasedincreased during the three and six month periodsperiod ended June 30, 2018,2019 compared to the same periodsperiod in 2017.2018, and decreased during the six month period ended June 30, 2019 compared to the same period in 2018. Although barrier production has increased, a largedecreased during the more recent six month period, the Company completed production of its largest barrier order ever during the second quarter of 2019. A portion of barrier production is not being recognized as barrier sales due to the guaranteed buy-back contract,agreement with a customer; instead the Company will recognizeis recognizing the income as barrier rental revenue over the duration of the project, for which deliveries began in the second quarter of 2018 and are expected to be completed by the end of 2019.Accordingly, during and after product delivery to this customer, the year 2018.Company will recognize the revenue as barrier rental revenue until the buy-back option is either exercised by the customer, or expired, which is expected to be in 2022. Thus, whereas the Company is likely to have completed its production and delivery of all product in 2019, it will recognize net profits through 2022. Management expects barrier sales to be lower for the remainder of 20182019 as compared to annual barrier sales for 2017 due to2018. Beyond 2019, future barrier sales growth is expected with the buy-back guarantee.new MASH TL3 requirements which the Company product line can satisfy, although no assurance can be given.
Easi-Set® and Easi-Span® Building Sales - Building and restroom sales decreasedincreased significantly for the three and six month periods ended June 30, 2018,2019 compared to the same periods in 2017.2018. The Company continues to see an increase in bids in the local markets ofhas increased building production at all three manufacturing facilities. Bids from theThe Company has recently seen competitive pricing pressure in certain building and restroom sales. The Columbia, South Carolina plant have picked up significantly.started producing a large building order during the second quarter 2019. Management expects the Company will seethere to be an increase during the third quarter of 2019 in building and restroom sales in 2018 over 2017.sales.
Utility and Farm Product Sales - Utility and farm products sales decreasedincreased in the three and six month periods ended June 30, 2018, as2019 compared to the same periods in 2017.2018. Utility products are tied closely with infrastructure spending by federal, state and local governments. With the passage of the federal highway bill,The Company continues to bid on utility projects and growth in residential and commercial construction, sales and bidsis competitive on these products are slowly improving. Althoughlarger quantities, although there are competitors who specialize in lower priced utility products, the Company is much more competitive on large contracts.products. Management believes utility product sales will remain at the current level or slightly increase during the remainder of 2018.2019.
Miscellaneous Product Sales - Miscellaneous productssales are products produced anditems sold that do not meet the criteria defined for other revenue categories. Miscellaneous product sales decreasedincreased for the three and six month periods ended June 30, 2018, as2019 compared to the same periodsperiod in 2017.2018. Management believes that miscellaneous product sales will decreaseremain low for the remainder of the year.
Barrier Rentals - Barrier rentals increased significantly for the three and six month periodperiods ended June 30, 2018 as2019 compared to the same periodperiods in 2017.2018. The increase is mainly due to a focus on providing additionalthe recognition of revenue associated with the guaranteed buy-back agreement deferral. The Company's core barrier rental services to customers. Barrier rentals decreased significantlyfleet also showed an increase for the three and six month periodperiods ended June 30, 2018,2019 compared to the same periodperiods in 2017. The decrease is mainly due to a special project that occurred in the first quarter of 2017. Excluding the special project in 2017, barrier rental sales in the first six months of 2018 increased when compared to the same period in 2017.2018. With the Company expanding the barrier rental services, management believes it has the potential to increase barrier rental revenue for the remainder of 2018,2019, and moving forward as the outlays for infrastructure spending by federal and state governments continue to increase. As stated above in Barrier Sales, barrier rental revenue will continue to be positively effected for future periods due to the accounting treatment afforded to the guaranteed buy-back agreement with a customer.
Royalty Income - Royalties increaseddecreased for the three month period ended June 30, 2018,2019 compared to the same period in 2017. The Company had strong royalty revenue in the second quarter 2018, for barrier and SlenderWall. Royalties decreasedslightly increased for the six month period ended June 30, 2018 as2019 compared to the same period in 2017. The decrease was due2018. Royalties for barrier and buildings increased for the six month period ended June 30, 2019 compared to the slow first quartersame period for 2018. SlenderWall royalties for the six months ended June 30, 2019 lag behind the same period in 2018, for barrier, which was attributable to poor weather conditions in the southern states.as projects can be multi-year initiatives. Management continues to seek new licensee opportunities to expand product offerings around the world. With steady increaseincreases in construction and infrastructure spending, management believes royalty revenue will continuebe higher in 2019 as compared to increase through the end of 2018, although no assurance can be given.
Shipping and Installation - Shipping revenue results from shipping our products to the customers' final destination and is recognized when the shipping services take place. Installation activities include installation of our products at the customers’ construction sites. Installation revenue results when attaching architectural and SlenderWall panels to a building, installing an Easi-Set® building at a customers' sites or setting any of our other precast products at a site specific to the requirements of the owner. Shipping and installation revenue decreasedincreased for the three and six month periods ended June 30, 2018,2019, compared to the same periods in 2017.2018. The decrease resultedincrease is mainly derived from minimalshipping and installation associated with barrier, barrier rental deliveries, and SlenderWall installation and deliveries, which increased significantly in the first quartersix months of 2018, mainly deriving from previously produced SlenderWall projects that were shipped and installed during2019 compared to the same period in 2017.first six months of 2018. The Company expectscontinues to expand shipping and installation services through additional products such as barrier and barrier rental. Management expects shippingrentals to help drive top and installation to increase through the end of 2018, although no assurance can be given.bottom line performance.
Cost of Goods Sold - Total cost of goods sold for the three months ended June 30, 2018 decreased2019 increased by $994 , or 13%,$1,839 from the same period in 2017.2018. Total cost of goods sold, as a percentage of total revenue, not including royalties, was 74%83% for the three months ended June 30, 2018, a decrease2019, an increase from 77%74% for the same period in 2017. The decrease in cost of goods sold as a percentage of revenue, not including royalties, for the second quarter of 2018, compared to the same period in 2017, is mainly due to a decrease in direct labor costs. 2018. Total cost of goods sold for the six months ended June 30, 20182019 increased by $360, or 2%,$2,272 from the same period in 2017.2018. Total cost of goods sold, as a percentage of total revenue, not including royalties, was 79%82% for the six months ended June 30, 2018,2019, an increase from 73%79% for the same period in 2017.2018. The increase is due to increased wages and the associated labor costs, flat selling prices for certain products due to competitive pricing pressure, and the increase in cost of goods sold shipping and installation which typically have lower margins than product sales, as a percentage of revenue, not including royalties, for the first six months of 2018, compared to the same period in 2017, is mainly due to a short-term, high risk special project which occurred in the first quarter 2017 that hadhalf 2018 costs when there were higher margins than typical manufacturing. The increase also resulted from design issues on soundwall projects at the Columbia, South Carolina plant, which required the Company to incorporate more steel than estimated in the projects and also increased the associated direct labor.margin jobs. The Company has corrected these design issues on future bids, but is still in negotiationsexpects labor costs to rectify the current contracts through change orders. The Company expectscontinue to increase and raw material prices to continue toslightly increase throughduring the remainder of 2018.2019, although it has had slight decreases in steel prices. The Company continues to seek vendor pricing opportunities, and focuses on lean production methods to improve quality, create capacity, and eliminate process waste, while driving value to the customer.
General and Administrative Expenses - For the three months ended June 30, 20182019 the Company's general and administrative expenses increaseddecreased by $319, or 28%,$310 to $1,452$1,143 from $1,133$1,452 during the same period in 2017,2018, and for the six months ended June 30, 20182019 the Company's general and administrative expenses increaseddecreased by $436, or 18%,$569 to $2,919$2,350 from $2,483 during the same period in 2017.$2,919. The increaseddecreased general and administrative expenses for the three and six month periods ended June 30, 20182019 is mainly attributed to an increasea decrease in non-cash stock compensation as compared to the same period in 2018, and a decrease in salaries use taxand associated with SlenderWall sales, and an increase in bad debt expense.benefits. General and administrative expense as a percentage of total revenue was 15%11% and 12%15% for the six months ended June 30, 2019 and 2018, and 2017, respectively. The total unrecognized compensation cost related to non-vested restricted stock is approximately $535 as of June 30, 2018.
Selling Expenses - Selling expenses for the three months ended June 30, 2018 decreased2019 slightly increased to $613$640 from $651$613 for the same period in 2017, or 2%. The decrease was mainly due to a reduction in advertising and marketing costs for the period.2018. Selling expenses for the six months ended June 30, 2018 increased2019 slightly decreased to $1,290$1,207 from $1,261$1,290 for the same period in 2017, or 6%. The increase in sales expense for the six month period was mainly related to an increase in salaries.2018. As the Company grows, additional selling expenses will be incurred. Management expects selling expenses to increase in 20182019 as compared to 2017.2018.
Operating Income - The Company had operating income for the three month period ended June 30, 20182019 of $911,$373 compared to operating income of $1,093$911 for the same period in 2017.2018. The decrease in operating income for the three month period ended June 30, 20182019 compared to the same period in 2017,2018, was primarilymainly due to an increasethe reduction in general and administrative expenses.gross profit margins. The Company had operating income for the six month period ended June 30, 20182019 of $358,$821 compared to operating income of $2,450$358 for the same period in 2017.2018. The decreaseincrease in operating income for six month period ended June 30, 2018, compared to the same period in 2017, wasis mainly due to an increase in cost of goods sold asincreased sales and a percentage of revenue, excluding royalties, an increasereduction in general and administrative expenses, and the higher margin special project, which occurred in the first quarter 2017.costs.
Interest Expense - Interest expense was $44$40 and $45,$44 for the three month period ended June 30, 20182019 and 2017,2018, respectively. Interest expense was $90$85 and $91,$90 for the six month period ended June 30, 2019 and 2018, and 2017, respectively. AlthoughThe Company expects interest expense to slightly increase for the Company added two small loans atfull year 2019, as compared to the end offull year 2018, due to the first quarter 2018, larger loan balances continue to be paid down and are towardsdebt financing on the end of the loan periods.North Carolina expansion project.
Income Tax Expense - The Company had an income tax expense of $86 with an effective rate of 23% for the three months ended June 30, 2019 compared to income tax expense of $225 with an effective rate of 25% for the three months ended June 30, 2018, compared to income tax expense of $363 with an effective rate of 34%24% for the same period in 2017.2018. The Company had an income tax expense of $90$185 with an effective rate of 25%23% for the six months ended June 30, 2018,2019 compared to income tax expense of $849$90 with an effective tax rate of 35%25% for the same period in 2017.The change in tax rate is due to adoption of the Tax Cuts and Jobs Act during December 2017, which lowered the Federal tax rate from 34% to 21% prospectively.2018.
Net Income - The Company had net income of $691$273 for the three months ended June 30, 2018,2019, compared to net income of $711$691 for the same period in 2017.2018. The basic and diluted income per share was $0.14$0.05 for the three months ended June 30, 2018,2019, and the basic and diluted income per share was $0.14 for the three months ended June 30, 2017. 2018. The Company had a net income of $270$604 for the six months ended June 30, 2018,2019, compared to net income of $1,569$270 for the same period in 2017.2018. The basic and diluted income per share was $0.12 for the six months ended June 30, 2019, and the basic and diluted income per share was $0.05 for the six months ended June 30, 2018, and the basic and diluted income per share was $0.31 for the six months ended June 30, 2017.2018.
Liquidity and Capital Resources (dollar amounts in thousands)
The Company financed its capital expenditures and operating requirements for the first six months of 20182019 primarily from cash balances and notes payable to a bank.the line-of-credit construction draws. The Company had $3,571$3,208 of debt obligations at June 30, 2018,2019, of which $693$740 was scheduled to mature within twelve months.months, along with the line of credit balance of $1,500. During the six months ended June 30, 2018,2019, the Company made repayments of outstanding debt in the amount of $312$343 and received $350$49 in proceeds of borrowings for the financing of two yard cranes.a vehicle. The Company had draws on the line of credit of $500 during the six months ended June 30, 2019.
The Company has a mortgage note payable to Summit Community Bank (the “Bank”) with a balance of $937$661 as of June 30, 2018.2019. The note has a maturity date of September 20, 2021 and a fixed interest rate of 3.99% annually with monthly payments of $26 and is secured by principally all of the assets of the Company. Under the terms of the note, the Bank will permit chattel mortgages on purchased equipment not to exceed $250 for any one individual loan so long as the Company is not in default.
The Company has a mortgage note payable to the Bank for the the purchase of the Columbia, South Carolina facility. Such loan is evidenced by a promissory note, dated July 19, 2016. The note provides for a 15 year term, a fixed annual interest rate of 5.29%, monthly fixed payments of $11 and a security interest in favor of the Bank in respect ofto the land, building and fixtures purchased with the proceeds of the loan. The balance of the loan at June 30, 20182019 was $1,203.$1,137.
The Company additionally has 1514 smaller installment loans with annual interest rates between 2.94% and 5.29%, maturing between 2020 and 2024, with varying balances totaling $1,431.$1,410.
Under the loan agreementcovenants with the Bank, the Company is limited to annual capital expenditures of $1,500.$3,500, excluding the deferred buy-back lease asset. The Company is in compliance with all covenants pursuant to the loan agreements.
The
In addition to the notes payable discussed above, the Company also has a $2,000$4,000 line of credit securedwith the Bank that had a balance of $1,500 at June 30, 2019 used to fund the construction of the North Carolina expansion, which will be converted to long-term debt when the financing closes in 2019. The line of credit is evidenced by a commercial revolving promissory note which carries a variable interest rate of prime and matures on September 18, 2019. The loan is collateralized by a first lien position on the Company's accounts receivable and inventory. In addition,inventory and a second lien position on all other business assets. Key provisions of the line of credit require the Company, has(i) to obtain bank approval for capital expenditures in excess of $3,500 per annum during the term of the loan; and (ii) to obtain bank approval prior to its funding any acquisition. On September 18, 2018 the Company received a commitmentCommitment Letter from the Bank in the amount of $1,500 for an equipment line of credit. Neitherto provide a guidance line of credit carriedspecifically to purchase business equipment in an amount up to $1,500. The commitment provides for the purchase of equipment with minimum advances of $50 for which a balancenote payable will be executed with a term not to exceed five years with an interest rate at the Wall Street Journal prime rate plus 0.5% with a floor of 4.49% per annum. The loan is collateralized by a first lien position on all equipment purchased under the line. The commitment for the guidance line of credit matures on September 17, 2019. As of June 30, 2018.2019, the Company had not purchased any equipment pursuant to the $1,500 commitment.
At June 30, 2018,2019, the Company had cash and cash equivalents totaling $839$1,641 and $1,097 of investment securities totaling $1,156, compared to cash and cash equivalents totaling $3,390$1,946 and $1,098 of investment securities totaling $1,107 at December 31, 2017.2018. Investment securities at June 30, 20182019 consist of shares of USVAX (a Virginia Bond Fund). The decrease in cash is primarily the result of the increase in accounts receivable atpurchase of capital expenditures for the six months ended June 30, 20182019 as compared to the balance at December 31, 2017, due to increased production and billings toward the end of the second quarter and an increase in retainage on several large projects. The purchase of capital assets and the repayment of notes payable were also factors in the decrease of cash and cash equivalents.2018.
Capital spending for the six months ended June 30, 20182019 totaled $1,057,$1,996, as compared to $2,159$1,057 for the same period in 2017.2018. The 20182019 expenditures were mainly for newthe North Carolina plant expansion along with yard cranes and miscellaneous manufacturing equipment. The Company plans to make additional capital purchases of approximately $1,500$2,000 over the remainder of the year, excluding anythe North Carolina plant expansions. The Company is currently in the process of increasing its annual capital expenditure limits with the Bank to remain in compliance with loan covenants.expansion. The additional 20182019 expenditures are expected to be for rental barrier, land improvements, and miscellaneous manufacturing equipment.
The Company received approval from the Bank for the financing of the North Carolina expansion and for additional land expansions at the Virginia manufacturing plant. The expansions are excluded from the capital expenditure limitations in the loan agreements with the Bank. Both projects are expected to begin in the third quarter 2018. See "North Carolina Plant Expansion" below.
The Company's two mortgage notes payable are financed at fixed rates of interest. This leaves the Company almost impervious to fluctuating interest rates. Increases in such rates will only slightly affect the interest paid by the Company on an annual basis. Approximately 94%95% of the Company's debt obligations are financed at a fixed interest rate so that each 1% increase in the interest rates of the Company’s outstanding debt will reduce income by approximately $2 annually.
The Company’s cash flow from operations is affected by production schedules set by contractors, which generally provide for payment 35 to 90 days after the products are produced and with some architectural contracts, retainage may be held until the entire project is completed. This payment schedule may result in liquidity problems for the Company because it must bear a portion of the cost of production before it receives payment from its customers. The Company’s average days sales outstanding (DSO), excluding the effect of unbilled revenue, was 78100 days for the six months ended June 30, 20182019 compared to 7586 days for the year ended December 31, 2017.2018. The increase in DSO is mainly due to retainage being withheld on multiple large projects. Although no assurances can be given, the Company believes that anticipated cash flow from operations and the availability under the lines of credits will be sufficient to finance the Company’s operations for at least the next 12 months.
The Company’s inventory was $3,092$3,003 at June 30, 20182019 and $3,515$3,560 at December 31, 2017,2018, or a decrease of $423.$557. The decrease in inventory is due to sales of finished goods on hand at December 31, 2017.2018 and the decrease in raw materials for use in production during the first half of 2019. Inventory turnover was 9.8,10.9, annualized for the six months ended June 30, 2018,2019, compared to 7.29.8 for the same period in 2017.2018.
Critical Accounting Policies and Estimates
The Company’s critical accounting policies are more fully described in its Summary of Accounting Policies to the Company’s consolidated financial statements on Form 10-K for the year ended December 31, 2017.2018. There have been no changes as of June 30, 2018.2019.
Seasonality
The Company services the construction industry primarily in areas of the United States where construction activity may be inhibited by adverse weather during the winter. As a result, the Company may experience reduced revenues from December through February and realize a more significant part of its revenues during the other months of the year. The Company may experience lower profits, or losses, during the winter months, and as such, must have sufficient working capital to fund its operations at a reduced level until the spring construction season. The failure to generate or obtain sufficient working capital during the winter may have a material adverse effect on the Company.
Inflation
Raw material costs for the Company, cement, steel, aggregates, and other direct materials used in production have increasedremained flat for the first six months of 2018. Steel tariffs have impacted pricing, as the demand for steel has also increased.2019. The Company anticipates raw material prices will continue to increase over the remainder of 2018,2019, although no assurance can be given regarding future pricing.
Sales Backlog
As of August 1, 2018,2, 2019, the Company’s sales backlog was approximately $35.3$27.6 million, as compared to approximately $30.2$35.3 million at the same time in 2017.2018. The decrease is mainly due to the large orders booked in early 2018 combined with competitive pricing pressure on recent bids. It is estimated that majority of the projects in the sales backlog will be produced within 12 months, with a portion extending several years.
North Carolina Plant Expansion
The Company currently owns 46 acres on which it plans to buildis in the process of building a 15,000 square foot manufacturing plant with additional space for future expansion.expansion in North Carolina. This expansion is estimated to cost $3.3 million$3,300 and will increase production and storage capacity. The project will beis being funded through bank financing.financing and cash. Management expects completion of the new facility by the end of the first quarter 2019 with manufacturing expectedand production to begincommence during the secondthird quarter 2019 at the new facility.2019. The current North Carolina facility will remain operational during the construction of the new plant, and future use is not determined at this time.with production continuing during the transition to the new facility. There can be no assurance as to the cost, financing, timetable, completion, or success of this project.
ITEMITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
ITEMITEM 4. Controls and Procedures
(a) Disclosure controls and procedures
The Company carried out our evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at June 30, 2018.2019.
(b) Changes in Internal Control over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the three months ended June 30, 20182019 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
PART II — OTHER INFORMATION
ITEMITEM 1. Legal Proceedings
The Company is not presently involved in any litigation of a material nature.
ITEMITEM 1A. Risk Factors
Not required
ITEMITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Mine Safety Disclosures
Not applicable
ITEM 5. Other Information
None
ITEM 3. Defaults Upon Senior Securities
None
I
ITEM 4. Mine Safety Disclosures
Not applicable
ITEM 5. Other Information
None
ITEMTEM 6. Exhibits
|
| |
Exhibit No. | | Exhibit Description |
31.1 | | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. |
31.2 | | Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. |
32.1 | | Certification pursuant 18 U.S.C. Section 1350 as adapted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INS | | XBRL Instance Document. |
101.SCH | | XBRL Taxonomy Extension Schema Document. |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | |
| | SMITH-MIDLAND CORPORATION (Registrant) | |
| | | | |
Date: | August 2, 20188, 2019
| By: | /s/ Ashley B. Smith | |
| | | Ashley B. Smith, Chief Executive Officer | |
| | | (Principal Executive Officer) | |
| | | | |
| | | | |
Date: | August 2, 20188, 2019
| By: | /s/ Adam J. Krick | |
| | | Adam J. Krick, Chief Financial Officer | |
| | | (Principal Financial Officer) | |
Smith-Midland Corporation
Exhibit Index to Quarterly Report on Form 10-Q
For The Three Months Ended June 30, 2018
28
|
| |
Exhibit
No
| Exhibit Description |
31.1 | |
31.2 | |
32.1 | |
101.INS | XBRL Instance Document. |
101.SCH | XBRL Taxonomy Extension Schema Document. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |