Smith-Midland Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unless stated otherwise, financial amounts below are in millions of dollars. Smith-Midland manufactures and sells precast concrete products and systems, and leases and licenses products, primarily for construction, highway, utility and agricultural markets.
Financial results and key metrics
- Revenue: Q2 revenue was $13.253 million, up 8% from $12.307 million a year earlier. First-half revenue was $23.688 million, down 14% from $27.523 million.
- Profit: Q2 net income was $0.910 million, or $0.17 per diluted share, versus $0.985 million, or $0.19, in Q2 2021. First-half net income was $0.791 million, or $0.15 per diluted share, compared with $3.852 million, or $0.74, in 2021. First-half 2022 included a $0.119 million Q1 loss.
- Margins and operating income: Q2 gross profit was $3.230 million (24.4% of revenue), versus $3.314 million (26.9%) a year earlier. First-half gross profit was $4.878 million (20.6%), versus $9.035 million (32.8%). Operating income was $1.096 million in Q2 and $0.922 million for the first half, down from $1.278 million and $5.079 million, respectively. The company also reported cost of goods sold, excluding royalties, at 80% and 84% of revenue for Q2 and first-half 2022, versus 77% and 70% in 2021.
- Cash flow and liquidity: First-half operating cash flow was negative $2.685 million, versus positive $5.702 million in 2021; investing cash flow was negative $0.909 million and financing cash flow positive $2.527 million. Cash was $12.425 million at June 30, down from $13.492 million at year-end. Management cited increased receivables and income-tax payments as cash uses. Days sales outstanding, excluding unbilled revenue, rose to 96 from 91 at year-end.
- Debt: Notes payable totaled approximately $6.718 million at June 30, including $0.613 million of current maturities. The company drew $2.805 million in February to finance previously acquired Midland, Virginia property. It had no balance on its $4 million revolving credit line, which matures October 1, 2022. The company reported compliance with loan covenants.
- Balance sheet: Total assets were $55.012 million and stockholders’ equity was $32.793 million at June 30. Inventory was $3.531 million, up from $2.845 million at year-end.
Material changes and management commentary
- First-half revenue declined mainly because 2021 included substantial short-term special barrier-rental projects. Lower soundwall and architectural panel sales also weighed on product revenue. Q2 revenue increased, supported by a large North Carolina barrier sale, higher barrier rentals, and increased shipping and installation revenue.
- Management attributed weaker margins to lower production and reduced fixed-overhead absorption, higher material and labor costs, and the comparison with higher-margin special rental projects in early 2021.
- As of August 1, 2022, sales backlog was approximately $35.7 million, versus $26.0 million a year earlier. Management estimated most backlog projects would be produced within 12 months, with some extending several years.
- Management expected 2022 capital spending of approximately $8 million, including about $5 million for barrier fleet expansion, $1.5 million for yard development and $1.5 million for manufacturing equipment. First-half capital spending was $1.962 million.
Outlook, risks and unusual items
- On April 13, 2022, the company amended a customer buy-back agreement and agreed to repurchase the covered barrier plus approximately 115,000 additional linear feet for an estimated total of $5 million. Completion was anticipated by year-end 2022. The filing says costs above the previously deferred obligation will be accounted for as incurred.
- Management expected full-year 2022 barrier-rental revenue to be below 2021 because of prior-year special projects, while expecting growth in rentals from the core fleet as capacity expands. It also expected higher utility sales and royalties, and continued inflation in materials and labor. These expectations are not assurances.
- Risks include ongoing supply-chain delays, possible COVID-19 impacts, inflation, collection delays, construction-market cyclicality, weather and project delays, and higher debt and interest expense. Management said it believed cash, expected operating cash flow and available credit would fund operations for at least 12 months, but cautioned that weaker performance or collections could create liquidity or covenant problems.
- The company reported no material litigation. Management concluded disclosure controls were effective at June 30, 2022; no material change in internal control was reported.
Important facts for investors to verify
- Progress and final costs for the $5 million barrier buy-back, including any costs above the deferred obligation and the timing of the planned fleet deployment.
- Whether the $4 million revolving credit line was renewed or replaced before its October 1, 2022 maturity.
- Whether backlog converts to revenue on schedule, particularly given drawing-approval and supply-chain delays.
- Whether receivables and operating cash flow improve, and whether material and labor inflation continues to pressure gross margins.
- Whether planned capital spending and higher debt support rental-fleet growth without weakening liquidity or covenant compliance.