Smith-Midland Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited results; amounts below are in millions of dollars unless noted. Smith-Midland manufactures, sells, rents, licenses, ships, and installs precast concrete products, primarily for construction, highway, utility, and farming markets.
Financial performance and position
| Metric | Q1 2023 / Mar. 31, 2023 | Comparable period / Dec. 31, 2022 |
|---|---|---|
| Revenue | $12.842 | $10.435 in Q1 2022 |
| Gross profit; gross margin | $2.166; 16.9% | $1.648; 15.8% in Q1 2022 |
| Operating income (loss); margin | $0.054; 0.4% | $(0.173); (1.7%) in Q1 2022 |
| Net income (loss); diluted EPS | $0.080; $0.02 | $(0.119); $(0.02) in Q1 2022 |
| Operating cash flow | $(1.555) | $(1.193) in Q1 2022 |
| Cash | $3.936 | $6.726 at Dec. 31, 2022 |
| Current assets / current liabilities | $30.580 / $13.188 | Current ratio about 2.3x |
| Notes payable | $6.194 total | $0.636 current; $5.558 long-term |
| Capital expenditures | $1.164 cash purchases of property and equipment | $0.196 in Q1 2022 |
Revenue rose 23%, driven primarily by higher barrier sales. Product sales increased 41% to $8.242 million; barrier sales rose 202% to $2.759 million, while barrier rentals fell 25% to $1.120 million. Gross margin improved as higher production increased overhead absorption, SlenderWall (a higher-margin product) contributed more, and Q1 contracts reflected inflationary costs. Operating expenses increased to $2.112 million, including higher credit-loss, payroll, and sales staffing costs. Interest expense was $0.064 million versus $0.048 million.
Cash declined by $2.790 million during the quarter. The company used $1.555 million in operating cash, with receivables and inventory growth partly offset by increased customer deposits; investing activities used $1.082 million and debt repayments used $0.153 million. Net billed receivables were $17.867 million, unbilled receivables $2.534 million, and inventory $4.991 million at quarter-end. Average DSO, excluding unbilled revenue, was 122 days versus 102 days in Q1 2022. The $5.0 million bank line of credit had no balance outstanding and matures October 1, 2023.
Outlook, risks, and notable items
- Sales backlog was approximately $51.4 million on May 1, 2023, versus $32.7 million a year earlier; most is expected to be produced within 12 months, though some projects extend several years.
- Management expects approximately $5 million of 2023 capital spending, including a batch-plant system, yard development, barrier buy-back completion, and manufacturing equipment. It expects cash resources, operating cash flow, and available credit to fund operations for at least 12 months, but provides no assurance.
- Management described expected category trends for 2023, including higher barrier sales, royalty income, and utility sales, and improving barrier rentals excluding special projects. These are expectations, not guaranteed guidance.
- Risks include elevated receivables and collection uncertainty, longer payment cycles, inflation in materials and labor, seasonality and weather, construction-market cyclicality, project timing and execution, financing availability, and possible higher interest expense if variable-rate borrowing is used.
- The company is completing a barrier buy-back commitment with an estimated total purchase price of $5 million; it continued acquiring barrier beyond the original 210,000 linear feet covered by the deferred buy-back obligation.
- Management concluded disclosure controls were not effective at March 31, 2023 because of a material weakness in the methodology for estimating the allowance for doubtful accounts. The company revised its methodology and reported a $0.937 million allowance at quarter-end. Management nevertheless stated the financial statements were fairly presented in all material respects.
- No material litigation was reported. The company said it complied with its loan covenants at quarter-end. Outstanding notes carry fixed rates; the undrawn line has a variable rate.
Important facts for investors to verify
- Whether receivables are collected as expected and DSO declines; also monitor the allowance for credit losses and remediation of the material weakness.
- Whether the backlog converts into revenue and profit on schedule, particularly given project timing, inflation, and the quarter’s reliance on barrier sales.
- Whether planned capital spending and completion of the barrier buy-back support rental growth without further straining cash and liquidity.
- Whether the $5 million credit line is renewed or replaced before its October 1, 2023 maturity, and whether the company remains within loan covenants.