Smith-Midland Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited results; dollar amounts below are in thousands unless noted. Smith-Midland manufactures, sells, leases, licenses, and installs precast concrete products, including highway barriers, soundwalls, SlenderWall panels, and transportable buildings.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $15,651 | $11,956 | $43,191 | $35,644 |
| Gross profit | $3,577 | $2,082 | $7,529 | $6,961 |
| Operating income | $1,502 | $4 | $576 | $928 |
| Net income | $1,266 | $5 | $565 | $796 |
| Diluted EPS | $0.24 | $0.00 | $0.11 | $0.15 |
- Q3 gross margin was approximately 22.9%, versus 17.4% a year earlier; nine-month gross margin was approximately 17.4%, versus 19.5%. Management’s cost-of-goods-sold measure, excluding royalties, was 81% and 86% of revenue for Q3 and nine months, respectively, compared with 89% and 85%.
- Nine-month operating cash flow was $3,463, compared with cash used of $3,333 in 2022. Investing cash outflow was $3,879, including $4,131 of property and equipment purchases. Cash declined to $5,849 from $6,726 at December 31, 2022.
- At September 30, current assets were $29,893 and current liabilities $12,925. Notes payable totaled $5,887, including $627 current; all outstanding notes carried fixed rates. The $5,000 variable-rate bank credit line had no balance outstanding and was extended to December 1, 2023. The company reported compliance with loan covenants.
- Accounts receivable, net, was $16,842, up from $16,223 at year-end. Inventory was $4,208, versus $3,818. Average DSO was reported as 116 days; management expected receivables and DSO to decline with collection efforts.
Changes versus the comparable period
- Revenue increased 31% in Q3 and 21% for the first nine months. Product sales rose 54% and 51%, respectively, led by SlenderWall, soundwall, and miscellaneous wall sales. Service revenue fell 3% in Q3 and 16% year to date, primarily reflecting lower barrier rental revenue and, year to date, lower shipping and installation revenue.
- Q3 operating income improved substantially, mainly on higher revenue and a lower cost-of-goods-sold ratio. Nine-month operating income and net income declined, reflecting higher relative production costs, general and administrative expenses, and lower rental revenue. The company reported a $782 net loss in Q2 2023.
- Nine-month results included approximately $400 of costs to remake panels for a specific project. Material and labor inflation continued to pressure margins. G&A included a $275 net expense from a Q2 wire-fraud incident, after insurance proceeds received to date.
Outlook, risks, and notable items
- Management gave qualitative, not formal numeric, outlook. It expected SlenderWall sales to trend lower in the remainder of 2023; barrier sales to be higher for full-year 2023 than 2022; and barrier rental revenue, excluding special projects, to trend higher in the remainder of 2023. These expectations are not assured.
- Reported sales backlog was approximately $60.2 million, versus $51.4 million a year earlier; most projects were expected to be produced within 12 months, with some extending several years. The filing gives November 1, 2023 in one passage and August 1, 2023 in another as the date of the $60.2 million backlog figure.
- Management believed cash, expected operating cash flow, and available credit would fund operations for at least 12 months, while cautioning that weaker production, sales, or collections could create liquidity problems. Winter seasonality, construction cyclicality, project timing, inflation, customer collections, and financing availability are cited risks.
- Disclosure controls were deemed ineffective because of a material weakness in the methodology for estimating the allowance for doubtful accounts. Management revised the methodology and planned to test operating effectiveness as part of year-end procedures. Management nevertheless stated that the financial statements fairly present the company’s condition in all material respects.
- The company reported that it had picked up all barrier under the customer buy-back agreement by September 30 and expected no further costs under that purchase. A material wire-fraud incident occurred in Q2; payment procedures were revised, and any further insurance recovery was uncertain. No material litigation was reported.
Important facts for investors to verify
- Reconcile the backlog measurement date: the filing cites both November 1 and August 1, 2023 for the $60.2 million figure.
- Review subsequent filings for receivables collections, DSO trends, cash generation, and use or renewal of the credit line, which was scheduled to mature December 1, 2023.
- Track remediation and testing of the material weakness in credit-loss estimation, and any additional insurance recovery related to wire fraud.
- Assess whether Q3 margin improvement is sustainable given lower year-to-date operating income, inflation, the panel-remake cost, and expected SlenderWall sales declines.
- The DSO discussion compares 116 days for the nine months ended September 30, 2023 with 99 days for the three months ended September 30, 2022; verify the intended comparable period.