ITEM 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:
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While the Company is profitable year to date as of June 30, 2016, there are no assurances that the Company can remain profitable in future periods,
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our debt level increased during the first and second quarter of 2016 and our ability to satisfy the same cannot be assured,
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the continued availability of financing in the amounts, at the times, and on the terms required, to support our future business and capital projects,
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the extent to which we are successful in developing, acquiring, licensing or securing patents for proprietary products,
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changes in economic conditions specific to any one or more of our markets (including the availability of public funds and grants for construction),
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changes in general economic conditions in the Company’s primary service area,
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adverse weather, which inhibits the demand for our products,
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our compliance with governmental regulations,
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the outcome of future litigation, if any,
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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,
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the cyclical nature of the construction industry,
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our exposure to increased interest expense payments should interest rates change,
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the Company’s Board of Directors, which is composed of five members, has only two outside, independent directors, and
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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, 2015
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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, 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 and water and feed troughs.
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 incurred a net loss for the first quarter of 2016 in the amount of $88,000 and net income of $419,000 for the second quarter of 2016, resulting in net income of $329,000 for the
six months ended June 30, 2016
. The cost of goods sold as a percent of revenue, not including royalties, for the three months ended June 30, 2016 was 83% compared to 88% for
the three months ended March 31, 2016. The decrease in the cost of goods sold as a percent of revenue, not including royalties, was due to increased revenues of higher margin products such as barrier, barrier rentals and soundwall (where all discounted soundwall production and revenue were completed in the prior quarter), as well as a reduction in production man-hours, thereby reducing direct labor costs. Management believes this trend will continue into the third quarter of 2016 leading to increased net income for the third quarter.
Results of Operations
Three and six
months ended
June 30, 2016
compared to the
three and six
months ended
June 30, 2015
Revenue By Type
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Three Months Ended June 30,
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Six Months Ended June 30,
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2016
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2015
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Change
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% of Change
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2016
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2015
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Change
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% of Change
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Product Sales:
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Soundwall Sales
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$
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2,491,244
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$
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571,905
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$
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1,919,339
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336%
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$
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4,890,911
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$
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862,948
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$
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4,027,963
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467%
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Architectural Panel Sales
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166,101
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1,047,436
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(881,335
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)
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(84)%
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295,992
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1,628,741
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(1,332,749
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)
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(82)%
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Slenderwall Sales
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352,968
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708,293
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(355,325
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)
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(50)%
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410,813
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1,204,165
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(793,352
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)
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(66)%
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Miscellaneous Wall Sales
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586,453
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206,734
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379,719
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184%
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1,346,067
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338,060
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1,008,007
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298%
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Total Wall Sales
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3,596,766
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2,534,368
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1,062,398
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42%
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6,943,783
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4,033,914
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2,909,869
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72%
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Barrier Sales
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1,813,274
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812,111
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1,001,163
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123%
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3,266,150
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1,248,409
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2,017,741
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162%
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Easi-Set and Easi-Span Building Sales
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649,552
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773,600
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(124,048
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(16)%
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1,230,117
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1,154,958
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75,159
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7%
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Utility and Farm Product Sales
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599,753
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828,246
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(228,493
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(28)%
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937,532
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1,205,318
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(267,786
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(22)%
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Miscellaneous Product Sales
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87,348
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468,516
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(381,168
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(81)%
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211,509
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865,631
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(654,122
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)
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(76)%
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Total Product Sales
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6,746,693
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5,416,841
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1,329,852
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25%
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12,589,091
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8,508,230
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4,080,861
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48%
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Royalty Income
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481,775
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482,675
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(900
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—%
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810,490
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814,810
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(4,320
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(1)%
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Barrier Rentals
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409,280
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184,155
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225,125
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122%
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800,588
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361,503
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439,085
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121%
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Shipping and Installation Revenue
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2,002,271
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813,894
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1,188,377
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146%
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3,494,934
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1,413,147
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2,081,787
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147%
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Total Service Revenue
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2,893,326
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1,480,724
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1,412,602
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95%
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5,106,012
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2,589,460
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2,516,552
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97%
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Total Revenue
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$
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9,640,019
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$
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6,897,565
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$
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2,742,454
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40%
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$
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17,695,103
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$
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11,097,690
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$
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6,597,413
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59%
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Wall Panel Sales
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Wall sales are generally large contracts issued by general contractors for production and delivery of a specific wall panel for a specific construction project. Changes in the mix of wall sales depend on what contracts are being bid and what projects are in production during the period. Overall wall panel sales increased significantly during the
three and six
months ended
June 30, 2016
, compared to the same period in
2015
. The following describes the changes by product type:
Soundwall sales increased by significantly for the
three and six
month period ended
June 30, 2016
when compared to the same periods in
2015
. With more funds available from the federal and state highway programs, soundwall contracts continue be plentiful and the Company has been able to get its share of the available bids. We continue to be awarded contracts and management believes soundwall sales will continue to be strong through the remainder of 2016. Prices have continued to improve and the Company expects prices to remain at the current level through the remainder of 2016 and into 2017. Our new facility, located in Columbia, South Carolina, is beginning to review local soundwall bids and hopes to be awarded soundwall contracts by 2017.
Architectural panel sales decreased significantly during the three and six month periods ended
June 30, 2016
, compared to the same periods in
2015
. The Company had one large architectural project in 2015 and there is only one small project in production in 2016. While the construction economy has been trending up since 2015, the volume of architectural projects continues to be less than that of other wall panel projects and the pricing has continued to remain low. The Company continues
to bid on this work, however, since our production and sales of other products have been relatively strong, we are not bidding architectural projects with low margins and consequently we are not winning the bids.
Slenderwall panel sales decreased during the three and six month periods ended
June 30, 2016
when compared to the same period in
2015
. The decrease resulted from the completion of two Slenderwall projects during 2015. The Company has a $2 million Slenderwall project that began production in July of 2016 and has been awarded a $3.2 million Slenderwall project that is anticipated to start production later in 2016 or early 2017. Over the past six months, there have been fewer Slenderwall projects to bid, but there are several Slenderwall projects coming up for bid in the next few months.
Miscellaneous wall panels significantly increased for the
three and six month periods ended June 30, 2016,
when compared to the same periods in
2015
. The Company began a miscellaneous project in the fourth quarter of 2015 that will run through 2016 for approximately $2.5 million. We expect sales to continue to be strong for the remainder of 2016 for miscellaneous wall panels. The market seems to be strong in this area as we have bid on several other projects that we have a good chance to be awarded.
Barrier Sales
- Barrier sales increased significantly during the
three and six month periods ended June 30, 2016,
compared to the same periods in
2015
. With the federal and state governments investing in highway and infrastructure improvements, the sale of barrier continues to be strong in all three of our manufacturing plants, including our new plant just closed in Columbia, South Carolina. Our South Carolina company continues to produce barrier under its $3.5 million barrier contract started earlier in the year. Several more sales/barrier rental contracts are being reviewed now for bid, indicating that barrier sales and rentals should be strong for the remainder of 2016.
Easi-Set® and Easi-Span® Building Sales
- Building and restroom sales decreased by 16% for the
three months ended June 30, 2016
, compared to the same period in
2015
. The decrease in sales was mainly due to the end of a large contract with the government for restroom sales in state parks and other outside venues. The contract was for lower priced restrooms and with the economy improving, management decided not to re-bid the contract. Sales for the
six months ended June 30, 2016
increased by 7% due to sales earlier in the year under the government contract just ended. Management believes the Company will see a slight increase in building and restroom sales for the remainder of 2016 as requests for bids has increased and several new projects are underway.
Utility and Farm Product Sales
- Utility and farm products sales decreased moderately over the
three and six month periods ended June 30, 2016,
compared to the same periods in
2015
. The Company received a large order for manholes on a local highway project for which delivery began in the fourth quarter of 2015 and has continued production during 2016. The project is running behind schedule and the contractor has slowed its production requirements, however, management believes it will pick back up this summer. Utility products are tied closely with infrastructure spending by federal, state and local governments and with the passage of the federal highway bill, sales and bids on these products are slowly improving. Management believes these products will remain level during the second half of 2016.
Miscellaneous Product Sales
- Miscellaneous products are products produced and sold that do not meet the criteria defined for other revenue categories. Miscellaneous product sales decreased significantly for the
three and six month periods ended June 30, 2016,
, compared to the same periods in
2015
. The decrease in was due mainly to the completion of several miscellaneous projects early in 2016. We currently have several smaller projects in production. Management believes that miscellaneous sales will remain relatively flat during the remainder of the year.
Royalty Income
- Royalty revenue was relatively flat for the
three and six month periods ended June 30, 2016,
compared to the same periods in
2015
. Building royalties were down during the periods, however, barrier royalties were up slightly during the periods leaving income flat. Management believes that royalty income will increase over the remainder of
2016
as the Company is aware of two Slenderwall projects currently in production by one of our licensees as well as an increase in other activities by licensees.
Barrier Rentals
- Barrier rentals increased significantly for the
three and six month periods ended June 30, 2016,
compared to the same periods in
2015
. The increase in barrier rentals was due to the federal and state investment in highway and infrastructure projects. In addition the increase was partly due to a small special rental project made in the first and second quarters of 2016 at increased margins. Management is aware of several special rental projects coming up during in the second half of 2016 and is endeavoring to obtain these projects which also sell at increased margins.
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 site. Installation revenue results when attaching architectural wall panels to a building, installing an Easi-Set® building at a customers' site or setting any of our other precast products at a site specific to the requirements of the owner. Shipping and installation revenue increased by approximately by 146% for the
three and six month periods ended June 30, 2016,
compared to the same periods in
2015
. The Company was involved in several installation projects during the first and second quarters of 2016, while very little installation was being done in the same quarters of 2015. As discussed in Form 10-K for the year ended December 31, 2015, our storage yard was filled to capacity with several large projects waiting to be shipped to customers in 2016. During the both quarters of 2016 we began shipping many of these projects as well as much of the soundwall being produced during 2016, thereby, increasing our shipping revenue as well as installation revenue. Management believes this trend will continue through 2016.
Cost of Goods Sold
- Total cost of goods sold for the
three months ended June 30, 2016
, increased by $
2,341,101
, or
45%
, from the same period in 2015. Total cost of goods sold, as a percentage of total revenue, not including royalties, was
83%
for the
three months ended June 30, 2016
, relatively unchanged from 82% for the same period in 2015. Total cost of goods sold for the
six months ended June 30,
increased by $
5,448,059
, or
49%
, from the same period in 2015. The increase was due mainly to the increase in sales for the periods concerned. Total cost of goods sold, as a percentage of total revenue, not including royalties, was
85%
for the
six months ended June 30,
and
87%
for the same period in 2015. The slight decrease in cost of goods sold, as a percentage of total revenue, not including royalties, was caused by increased sales, sale of higher margin products in the second quarter as well as fixed costs being spread over a higher revenue base. The start-up costs for the Columbia, South Carolina plant had a negative impact on the cost of goods sold percentage, primarily in the first quarter of 2016. There will be additional startup costs over the next several months in respect to the Columbia plant that should be partially offset by sales of the barrier being produced and sold. The Company has encountered some price increases in some raw materials, partially offset by temporary decreases in steel prices. Inflation continues to remain relatively low and management believes inflation will continue to remain relatively low for the remainder of the 2016.
General and Administrative Expenses
– For the
three months ended June 30, 2016
the Company's general and administrative expenses increased by $
151,259
, or
20%
, to $
897,616
from $
746,357
during the same period in
2015
and for the
six months ended June 30,
2016, the Company's general and administrative expenses increased by $
110,363
, or
7%
, to $
1,128,502
from $
1,018,774
during the same period in 2015. The increase for both periods was due to an increase in salaries, rent for the Columbia facility, and higher repairs and maintenance partially offset by lower use taxes and office expenses. General and administrative expense as a percentage of total revenue was
9%
and
11%
for the
three months ended June 30, 2016
and
2015
, respectively. General and administrative expense as a percentage of total revenue was
10%
and
15%
for the
six months ended June 30, 2016
and
2015
, respectively.
Selling Expenses
– Selling expenses for the
three months ended June 30, 2016
increased to $
537,696
from $
514,760
for the same period in
2015
or
4%
. The increase was due mainly to increased salary and advertising expense partially offset by lower general office expenses. Selling expenses for the
six months ended June 30,
2016 increased to $
1,128,502
from $
1,018,774
for the same period in
2015
or
11%
. The increase in selling expenses for the period were due to increased salaries and advertising expense partially offset by lower general office expenses.
Operating Income/Loss
– The Company had an operating income for the
three months ended June 30, 2016
of $
652,355
compared to operating income of $
416,778
for the same period in
2015
. The increase in operating income for the three months ended
June 30, 2016
compared to the same period in
2015
was primarily due to increased sales of product. The Company had an operating income for the
six months ended June 30, 2016
of $
518,492
compared to an operating loss of $
416,778
for the same period in
2015
. The increase in operating income for the six months ended
June 30, 2016
compared to the same period in
2015
was primarily due to increased sales of product and a lower cost of goods sold for the period as a percentage of total revenue, not including royalties.
Interest Expense
– Interest expense was higher for the
three and six month periods ended June 30, 2016,
compared to the same period in
2015
. The increase for the periods was due primarily to increased borrowings for the
three and six month periods ended June 30, 2016,
used for the purchase of 6 acres of land adjacent to our Midland, VA facility for storage of products purchased by customers prior to delivery and the purchase of equipment used in production.
Income Tax Expense/Benefit
– The Company had an income tax expense of $
219,000
with an effective rate of
34%
for the
three months ended June 30, 2016
compared to an income tax income expense of $
149,000
with an effective rate of
38%
for the same period in
2015
. The Company had an income tax expense of $
156,000
with an effective rate of
32%
for the
six months ended June 30, 2016
, compare to a tax benefit of $
186,000
with a effective rate of
40%
for the same period in 2015.
Net Income/Loss
– The Company had net income of
$418,924
for the
three months ended June 30, 2016
, compared to net income of
$244,857
for the same period in
2015
. The basic and diluted income per share was
$0.09
and
$0.08
for the three months ended June 30, 2016, respectively, and the basic and diluted income per share was $.05 for the three months ended June 30, 2015. The Company had net income of
$329,148
for the
six months ended June 30, 2016
, compared to a net loss of $
279,512
for the same period in
2015
. The basic and diluted income per share was
$0.07
for the six months ended June 30, 2016, and the basic and diluted loss per share was $.06 for the six months ended June 30, 2015.
Liquidity and Capital Resources
The Company financed its capital expenditures and operating requirements for the first half of
2016
primarily from cash balances and notes payable to a bank. The Company had
$3,031,947
of debt obligations at
June 30, 2016
, of which $
748,012
was scheduled to mature within twelve months. During the six months ended
June 30, 2016
, the Company made repayments of outstanding debt in the amount $
195,576
.
The Company has a mortgage note payable to Summit Community Bank (the “Bank”), with a balance of $1,453,369 as of
June 30, 2016
. The note has a maturity date of September 12, 2021 and a fixed interest rate of 3.99% annually with monthly payments of $25,642 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 $250,000 for any one individual loan as long as the Company is not in default. The Company additionally has eight smaller installment loans with a balance totaling $558,566. Also, the Company is limited to $1,000,000 for annual capital expenditures. At
June 30, 2016
, the Company was in compliance with all covenants pursuant to the loan agreement except for the limitation for the purchase of capital assets in the amount of $1,000,000 for which the Company received a waiver from the bank.
The Company also has a $2,000,000 line of credit, of which $602,022 was outstanding at
June 30, 2016
. The line is evidenced by a commercial revolving promissory note with the Bank, which carries a variable interest rate of prime and matures on September 12, 2016. In addition, the Company has a commitment from the Bank in the amount of $1,000,000 for an equipment line of credit, of which, the Company has used $427,110.
At
June 30, 2016
, the Company had cash and cash equivalents totaling
$779,504
and $
1,084,309
of investment securities available for sale compared to cash and cash equivalents totaling
$1,735,621
and $
1,041,790
of investment securities available for sale at
December 31, 2015
. Investment securities available for sale at
June 30, 2016
consist of shares of USVAX (a Virginia Bond Fund). The decrease in cash is primarily the result of higher level of accounts receivable at
June 30, 2016
than at December 31, 2015, the purchase of capital assets and the repayment of notes payable.
Capital spending totaled $
1,260,659
for the
six months ended June 30, 2016
, as compared to $
506,893
for the same period in
2015
. The
2016
expenditures were for land, new construction vehicles, additional rental barrier and miscellaneous manufacturing equipment. The Company plans to make additional capital purchases of approximately $750,000 over the remainder of the year. Some of the capital purchases for the remainder of the year will be for equipment to outfit the recently purchased Columbia facility. The capital purchases for Columbia could be as high as $500,000 which will provide rolling stock and production equipment needed to run the facility. During the period ended June 30, 2016, the Company exceeded a bank loan covenant limiting the purchase of capital assets to $1,000,000.
The Company's mortgage note payable is financed at a fixed rate of 3.99% per annum. This leaves the Company almost impervious to fluctuating interest rates. Increases in such rates will only slightly affect the interest paid by the Company annually. Slightly more that 50% 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 $1,500 annually due to the fluctuating interest rates.
On July 21, 2016, in order to finance the Columbia, South Carolina purchase described above, the Company borrowed $1,317,500 from the Bank. Such loan is evidenced by a promissory note, dated July 19, 2016 (the “Note”). The Note provides for a 15 year term, a fixed annual interest rate of 5.29%, monthly fixed payments of $10,672.91 and a security interest in favor of the Bank in respect of the land, building and fixtures purchased with the proceeds of the loan.
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. 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, excluding the effect of unbilled revenue was 81 days for the six months ended
June 30, 2016 compared to 88 days for the year ended December 31, 2015. The Company purchased an accounts receivable tracking and collection system during the year to help reduce the days sales outstanding for collections. 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 twelve months.
The Company’s inventory was
$2,702,769
at
June 30, 2016
and at December 31, 2015 was
$2,494,284
, or an increase of
$208,485
. Inventory turnover was 8.3, annualized, for the six months ended
June 30, 2016
, compared to 10.0 for the same period in 2015.
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, 2015
. The preparation of consolidated financial statements in conformity with accounting principles generally accepted within the United States of America requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. In preparing these consolidated financial statements, management has made its best estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below, however, application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and as a result, actual results could differ from these estimates.
The Company evaluates the adequacy of its allowance for doubtful accounts at the end of each quarter. In performing this evaluation, the Company analyzes the payment history of its significant past due accounts, subsequent cash collections on these accounts and comparative accounts receivable aging statistics. Based on this information, along with other related factors, the Company develops what it considers to be a reasonable estimate of the uncollectible amounts included in accounts receivable. This estimate involves significant judgment by the management of the Company. Actual uncollectible amounts may differ from the Company’s estimate.
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, aggregates and other direct materials used in production, except for steel that has decreased slightly, had a slight increase in 2015 and the first six months of 2016 and the Company anticipates prices will increase only slightly over the remainder of 2016.
Sales Backlog
As of
August 11, 2016
, the Company’s sales backlog was approximately $13.3 million, as compared to approximately $18.0 million at the same time in 2015. It is estimated that substantially all of the projects in the sales backlog will be produced within 12 months. The Company also maintains a regularly occurring repeat customer business, which should be considered in addition to the ordered production backlog described above. These orders typically have a quick turn around and represent purchases of a significant portion of the Company’s inventoried standard products, such as highway safety barrier, utility and Easi-Set® and Easi-Span® building products. Historically, this regularly occurring repeat customer business has ranged from $5.0 million to $7.0 million annually which excludes royalties and barrier rental.