Smith-Midland Corporation - 10-Q quarterly report FY

(540) 439-3266

The accompanying condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, and with the instructions to Form 10-Q and Article 10 of 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 and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2008.  The December 31, 2008 balance sheet was derived from audited financial statements included in the Form 10-K.

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 income are not necessarily indicative of the results to be expected in any future periods.

The Company has evaluated subsequent events from the date of the financial statements through the date of the filing of this Form 10-Q.  During this period, no material recognizable subsequent events were identified.

Revenue Recognition

The Company primarily recognizes revenue on the sale of its standard precast concrete products at shipment date, including revenue derived from any projects to be completed under short-term contracts.  Installation of the Company’s standard products is typically performed by the customer; however, in some circumstances, the Company will install certain products which are accomplished at the time of delivery.  The installation activities are usually completed the day of delivery or the following day.  In utility building sales, the majority of the buildings are erected on the Company’s site and delivered completely installed.

Leasing fees are paid at the beginning of the lease agreement and recorded to a deferred revenue account.  As the revenue is earned each month during the contract, the amount earned is recorded as lease income and an equivalent amount is debited to deferred revenue.

Royalties are recognized as revenue as they are earned.  The Company licenses certain other precast companies to produce its licensed products to our engineering specifications under licensing agreements.  The agreements are typically for five year terms and require royalty payments from 4% to 6% which are paid on a monthly basis.  The revenue from licensing agreements is recognized in the month earned.

Certain sales of Soundwall, architectural precast panels and Slenderwall™ concrete products revenue is recognized using the percentage of completion method for recording revenues on long term contracts pursuant to the FASB ASC 605-35-25.  The contracts are executed by both parties and clearly stipulate the requirements for progress payments and a schedule of delivery dates.  Provisions for estimated losses on contracts are made in the period in which such losses are determined.

Shipping revenues are recognized in the period the shipping services are provided to the customer.

Certain immaterial reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to the 2009 presentation.

Basic earnings per common share exclude all dilutive stock options and are computed using the weighted average number of common shares outstanding during the period. The diluted earnings per common share calculation reflect the potential dilutive effect of securities that could share in earnings of an entity.  Outstanding options excluded from the diluted earnings per share calculation because they would have an anti-dilutive effect were 260,666 and 440,491 from the three months ended September 30, 2009 and 2008, respectively and 310,666 and 312,666 from the nine months ended September 30, 2009 and 2008, respectively.

In accordance with SFAS 123R, stock option expense for the three months ended September 30, 2009 and 2008 was $19,699 and $40,286 respectively, and for the nine months ended September 30, 2009 and 2008 was $71,231 and $102,359, respectively.  The Company uses the Black-Scholes option-pricing model to measure the fair value of stock options granted to employees.  The Company did not issue any stock options for the nine months ended September 30, 2009.

The following table summarized options outstanding at September 30, 2009:

In April 2009, the FASB issued guidance now codified as ASC 825-10, “Interim Disclosures about Fair Value of Financial Instruments” (“ASC 825-10”).  ASC 825-10 amends prior authoritative guidance to require disclosures about the fair values of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  ASC 825-10 became effective for interim and annual reporting periods ending after June 15, 2009 and was adopted by the Company for the period ended June 30, 2009 with no material effect.

In May 2009, the FASB issued guidance now codified as FASB ASC Topic 855-10 “Subsequent Events” (“ASC 855-10”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date.  The Statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognitions or disclosure in the financial statements the circumstances under which an entity should recognize events or transactions that occurred after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  ASC 855-10 became effective for the Company for the period ended June 30, 2009 and is to be applied prospectively.  The impact of adoption was not significant.

As of November 12, 2009, the date on which the Company issued these financial statements, management has evaluated events and transactions occurring subsequent to September 30, 2009 and has determined that there have been no significant events or transactions that provide additional evidence about conditions of the Company that existed as of the balance sheet date.

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.

Revenue:  Total revenues for the three months ended September 30, 2009, were $7,552,175 compared to total revenues of $7,754,476 for the same period in 2008, a decrease of $203,301 or 3%.  Total product sales and leasing revenue were $5,514,234 for the three months ended September 30, 2009, compared to $6,061,235 for the same period in 2008, a decrease of $547,001 or 9%.  In the wall sales category, soundwall sales were $230,691 for the three months ended September 30, 2009, as compared to $1,525,784 for the same period in 2008, a decrease of $1,295,093 or 85%.  Architectural wall sales were $867,063 for the three months ended September 30, 2009, compared to $556,167 for the same period in 2008, an increase of $310,897 or 56%.  There were no Slenderwall™ sales in the three months ended September 30, 2009 or 2008.  Total wall sales for the three months ended September 30, 2009, were $1,097,754 compared to $2,081,951 for the same period in 2008, a decrease of $984,196 or 47%.  The decrease in wall sales was due primarily to a concentration of Company efforts in connection with a $1,007,000 contract to provide the State of Virginia with pre-stressed concrete highway slabs for a pilot program.  Sales of the highway slabs were $780,848 for the three month period ended September 30, 2009, with no comparative sales for the same period in 2008.  Sales of Easi-Set® precast buildings were $1,157,804 for the three months ended September 30, 2009, compared to $698,319 for the same period in 2008, an increase of $459,486 or 66%.  Management believes the increase in sales of Easi-Set® precast buildings relates primarily to smaller projects being funded by city and state governments rather than large, less economical projects.  In addition, stimulus funds are being made available for these types of projects.  Sales of utility and farm products were $526,845 for the three months ended September 30, 2009, compared to $792,789 for the same period in 2008, a decrease of $265,944 or 34%.  The decrease in utility and farm products is the result of the economic downturn in the construction industry overall.  Sales of highway barrier were $1,734,027 for the three months ended September 30, 2009, compared to $1,738,356 for the same period ended in 2008, a decrease of $4,329 or .2%.  Royalty revenues were $435,157 for the three months ended September 30, 2009, compared to $517,909 for the same period in 2008, a decrease of $82,752 or16%.  The reduction is the result of the economic downturn in the construction industry overall.  Shipping and installation revenues were $1,602,784 for the three months ended September 30, 2009, compared to $1,175,332 for the same period in 2008, an increase of $427,452 or 36%.  This increase in shipping and installation revenue relates primarily to the increase in architectural sales which require installation as part of the contract.

Cost of Goods Sold:  Total cost of goods sold for the three months ended September 30, 2009, was $5,471,205 compared to $6,234,087 for the same period in 2008, a decrease of $762,882 or 12%.  While sales decreased by only 3% for the three months ended September 30, 2009, over the same period in 2008, the cost of goods sold decreased by 12% during the same time period.  The decrease in the cost of goods sold was attributable to lower cost of raw materials and fuel.  In addition, with the implementation of lean manufacturing in late 2008, the Company was able to reduce overtime as well as reduce waste in several manufacturing processes.  Lean manufacturing is defined as the process of using the minimum amount of total resources – man, materials, money, machines, etc. – to produce a product and deliver it on time.  As a result of the moderating costs and the implementation of lean manufacturing, the cost of goods sold as a percentage of total revenue, not including royalties, for the three months ended September 30, 2009, was 77% compared to 86% for the same period in 2008.  The Company plans to continue to make the reduction of manufacturing costs the highest priority in 2009 through the implementation of lean manufacturing practices.

General and Administrative Expenses:  Total general and administrative expenses for the three months ended September 30, 2009, were $822,647 compared to $821,951 for the same period in 2008, an increase of $696 or less than 1%.

Selling Expenses:  Selling expenses for the three months ended September 30, 2009 were $498,934 compared to $557,053 for the same period in 2008, a decrease of $58,119 or 10%.  The decrease was primarily due to decreased advertising costs and lower sales commissions.

Operating Income:  The Company had operating income of $759,389 for the three months September 30, 2009, compared to $141,385 for the same period in 2008, an increase of $618,004 or 437%.  The increase in operating income was primarily the result of lower cost of goods sold as a percentage of revenues as described more fully above.

Interest expense:  Interest expense was $46,252 for the three months ended September 30, 2009, compared to $82,673 for the same period in 2008, a decrease of $36,421 or 44%.  The decrease was due primarily to a decrease in prevailing interest rates and lower outstanding debt during the current period.

Net Income:  The Company had net income of $491,191 for the three months ended September 30, 2009, compared to net income of $25,616 for the same period in 2008.  The basic and diluted net income per common share for the three month period ending September 30, 2009, were $.11 and $.10 respectively, as compared to $.01 (basic and diluted) for the same period in 2008.

Revenue:  Total revenue for the nine months ended September 30, 2009, were $24,283,700 compared to $21,527,495 for the same period in 2008, an increase of $2,756,205 or 13%.  Total product sales and leasing were $18,998,458 for the nine months ended September 30, 2009, compared to $17,383,865 for the same period in 2008, an increase of $1,614,593 or 9%.  In the wall sales category, soundwall sales were $2,883,122 for the nine months ended September 30, 2009, compared to $6,112,230 for the same period in 2008, a decrease of $3,229,108 or 53%.  Architectural wall sales were $5,188,272 for the nine months ended September 30, 2009, compared to $1,377,656 for the same period in 2008, an increase of $3,810,616 or 277%.  There were no Slenderwall™ sales in the nine months ended September 30, 2009 or 2008.  Total wall sales were $8,071,394 for the nine months ended September 30, 2009, compared to $7,489,886 for the same period ended in 2008, an increase of $581,508 or 8%.  In addition, the Company had sales of $780,848 for the nine month period ended September 30, 2009, for pre-stressed concrete highway slabs for the State of Virginia pilot program, while there were no comparative sales in the same period in 2008.  Sales of Easi-set® precast buildings were $2,850,413 for the nine months ended September 30, 2009, compared to $1,847,400 for the same period in 2008, an increase of $1,003,013 or 54%.  Management believes the increase in sales of Easi-Set® precast buildings relates primarily to smaller projects being funded by city and state governments rather than large, less economical projects.  Sales of utility and farm products were $1,671,946 for the nine months ended September 30, 2009, compared to $2,135,634 for the same period in 2008, a decrease of $463,688 or 22%.  The decrease in utility and farm products is the result of the economic downturn in the construction industry overall.  Sales of highway barrier were $3,328,396 for the nine months ended September 30, 2009, compared to $4,591,323 for the same period ended in 2008, a decrease of $1,262,927 or 28%.  The decrease is due in part to the downturn in federal and state spending on highway projects; however, the Company has received several large highway barrier orders for delivery in the fourth quarter of 2009, which may help offset the decrease.  The additional orders are partially the result of stimulus money awarded to states for highway work.  Royalty revenue for the nine months ended September 30, 2009 was $1,271,026 compared to $1,217,571 for the same period ended 2008, an increase of $53,455 or 4%.  Shipping and installation were 4,014,216 for the nine months ended September 30, 2009, compared to $2,926,059 the same period in 2008, an increase of $1,088,157 or 37%.  The increase was primarily due to increased shipping activity related to the rental of highway barrier for the presidential inauguration during the month of January 2009 in Washington, D.C. and an increase in the sale of architectural products which require installation.

Cost of Goods Sold:  Total cost of goods sold for the nine months ended September 30, 2009 was $16,688,328 compared to $16,614,581for the same period ended in 2008, an increase of $73,747 or less than 1%.  While total sales were up by 13%, the cost of goods sold decreased as a percent of sales.  Because of the downturn in economic conditions, raw material costs began to moderate in late 2008 and with the implementation of lean manufacturing in late 2008, the cost of goods sold as a percent of revenue, not including royalties, decreased from 82% for the nine months ended September 30, 2008, to 73% for the nine months ended September 30, 2009.  The Company continues to make the reduction of manufacturing costs the highest priority in 2009 through the implementation of lean manufacturing practices.

General and Administrative Expenses:  General and administrative expenses for the nine months ended September 30, 2009, were $2,396,617 compared to $2,348,168 for the same period in 2008, an increase of $48,449 or 2%.

Selling Expenses:  Selling expenses for the nine months ended September 30, 2009 were $1,626,215 compared to $1,820,661 for the same period in 2008, a decrease of $194,446 or 11%.  The decrease was primarily due to decreased advertising costs and lower sales commissions.

Operating Income:  The Company had operating income of $3,572,540 for the six months September 30, 2009, compared to $744,085 for the same period in 2008, an increase of $2,828,455 or 380%.  The increase in operating income was primarily the result of increased sales and decreased cost of goods sold as a percentage of revenues.

Interest expense:  Interest expense was $167,585 for the nine months ended September 30, 2009, compared to $266,530 for the same period in 2008, a decrease of $98,945 or 37%.  The decrease was due primarily to a decrease in prevailing interest rates and lower outstanding debt during the current period.

Net Income:  The Company had net income of $2,128,870 for the nine months ended September 30, 2009, as compared to $276,641 for the same period in 2008, an increase of $1,852,229 or 670%.  The basic and diluted net income per common share for the nine month period ending September 30, 2009 were $.46 and $.45, respectively, compared to $.06 (basic and diluted) for the same period in 2008.

The Company’s cash flow from operations is affected by production schedules set by contractors, which generally provide for payment 35 to 75 days after the products are produced.  This payment schedule has resulted in liquidity problems in the past for the Company because it must bear the cost of production for its products before it receives payment.  The Company’s days sales outstanding decreased from 76 days at December 31, 2008 to 68 days at September 30, 2009.  Although no assurances can be given, the Company believes that anticipated cash flow from operations and the available line of credit will be sufficient to finance the Company’s operations for at least the next twelve months.

Seasonality

Inflation

Production Backlog

Not Applicable

(a)  Disclosure controls and procedures

The Company held its Annual Meeting of Stockholders on August 5, 2009 (“2009 Annual Meeting”).  There were two proposals presented by the management of the Company and both were approved as follows:

The election of the following individuals to serve as directors until the next annual meeting or until their successors are duly elected and qualified.

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.

Date: November 12, 2009

Date November 12, 2009