Smith-Midland Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with FY2020. Unless otherwise noted, financial amounts below are in millions of dollars. The company manufactures, rents, licenses, sells and installs precast concrete products, including highway barriers, soundwalls, building panels and utility products.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $50.642 | $43.862 | +15% |
| Gross profit | $14.420 | $11.042 | +31% |
| Operating income | $6.168 | $3.759 | +64% |
| Net income | $7.570 | $2.665 | +184% |
| Diluted EPS | $1.45 | $0.51 | +$0.94 |
| Cash from operating activities | $9.126 | $7.487 | +$1.639 |
Reported gross margin was approximately 28.5% in 2021 versus 25.2% in 2020; operating margin was approximately 12.2% versus 8.6%. Management reports gross margin excluding royalties of 25% versus 22%, attributing improvement mainly to higher-margin barrier rentals. Net income includes a $2.692 million gain from full forgiveness of the company’s PPP loan; the forgiveness also reduced the effective tax rate to 16.8% from 29.7%.
Revenue growth was led by barrier rentals, up 44% to $9.925 million, including short-term special projects; shipping and installation rose 17% to $10.001 million, royalties rose 31% to $2.216 million, and product sales rose 6% to $28.500 million. SlenderWall sales increased 89% to $1.795 million and utility sales increased 88% to $2.468 million. Architectural sales rose 34%, while miscellaneous wall sales fell 30% and barrier sales fell 15%.
Fourth quarter and material period changes
Fourth-quarter revenue was $10.017 million, down from $11.073 million in Q4 2020. Net income was $24,000 versus $713,000. Management cited prior-year one-time special projects, delayed customer production approvals, and higher materials and labor costs. The company disclosed a net operating loss for Q4 2021, although quarterly net income remained slightly positive.
FY2021 operating performance benefited from higher revenues and rental mix, but the year-over-year increase in net income also reflects the one-time PPP forgiveness gain. Operating expenses rose: general and administrative expense increased 9% to $5.416 million, chiefly from stock compensation, and selling expense increased 24% to $2.836 million, reflecting sales hiring and advertising.
Cash, debt and liquidity
At December 31, 2021, cash was $13.492 million, versus $8.764 million a year earlier; current assets were $27.751 million and current liabilities $13.909 million. Total assets were $53.325 million and stockholders’ equity was $31.750 million. Operating cash flow was $9.126 million; investing activities used $3.654 million and financing activities used $744,000. Capital spending, including financed additions, was $5.367 million, versus $2.627 million in 2020.
Year-end notes payable totaled $4.192 million, of which $468,000 was due within 12 months. The $4.0 million revolving credit line was undrawn at year-end and matures October 2022. The company reported compliance with loan covenants. In February 2022 it financed previously acquired Midland property with a new $2.805 million, 4.09% fixed-rate, 15-year note. Management believes cash, expected operating cash flow and available credit should fund operations for at least 12 months, subject to business conditions.
Receivables were $10.013 million billed and $439,000 unbilled, net of a $437,000 doubtful-account allowance; days sales outstanding increased to 91 from 89. Inventory rose to $2.845 million from $2.194 million. Management identifies the long collection cycle and contract retainage as liquidity considerations.
Outlook, risks and notable items
- No formal earnings or revenue guidance is provided. Management expects Q1 2022 to face inflation and customer-approval delays similar to Q4 2021, but expects higher sales volumes in Q2 and Q3, citing backlog growth.
- Backlog was approximately $29.0 million on March 14, 2022, versus $19.6 million around the same date in 2021. Most projects are expected to be produced within 12 months, though some extend over multiple years.
- Management expects 2022 capital spending of approximately $8 million, including about $5 million for rental barriers and $3 million for yard development and miscellaneous manufacturing equipment. It plans to expand the rental fleet and continue pursuing SlenderWall and infrastructure work. Special-project rental revenue is not expected to repeat at the 2021 rate; growth in core rentals is anticipated.
- Management expects continued raw-material and labor inflation in 2022. COVID-19 resurgence, supply delays, workforce interruptions, customer payment risk, project delays or cancellations, weather, construction cyclicality, public infrastructure funding and interest costs could adversely affect results.
- Customer concentration is notable: two customers represented 23% of 2021 revenue; one customer represented 17% of year-end trade receivables. The filing says no vendor represented more than 10% of purchases.
- The company bought Midland property from former Chairman Rodney I. Smith for $295,000, supported by an independent valuation; the company also continues to pay him $99,000 annually in patent royalties while using the covered inventions. No material litigation was reported.
- The independent auditor issued an unqualified opinion. Accounts receivable valuation was identified as a critical audit matter. Management concluded internal controls and disclosure controls were effective; auditor attestation of internal controls was not included under rules applicable to the company.
Investor verification points
- Separate recurring operating earnings from the $2.692 million PPP forgiveness gain and assess the Q4 operating loss and earnings trend.
- Track whether the March 2022 backlog converts to revenue on schedule, particularly the large-project and rental components.
- Verify rental-fleet utilization and returns against the planned approximately $5 million fleet expansion and total 2022 capital spending.
- Monitor receivable collections, retainage, customer concentration and the adequacy of the doubtful-account allowance.
- Assess the impact of continued materials and labor inflation, supply delays, and the February 2022 property financing on margins, cash flow and debt.