Smith-Midland Corporation — Q1 2020 Form 10-Q
Reporting period: Quarter ended March 31, 2020. The company manufactures, sells, leases, licenses, and installs precast concrete products, primarily for construction, transportation, utility, and farming markets. Amounts below are in thousands of dollars except per-share data.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $9,825 | $10,189 |
| Gross profit / gross margin | $1,600 / 16.3% | $2,222 / 21.8% |
| Operating income (loss) / margin | ($42) / (0.4%) | $447 / 4.4% |
| Net income (loss) | ($38) | $331 |
| Basic and diluted EPS | ($0.01) | $0.06 |
| Cash from operations | $1,256 | $2,459 |
| Capital expenditures | $669 | $1,049 |
Revenue declined 4% year over year. Product sales fell 9% to $6,852; service revenue (rentals, royalties, shipping, and installation) rose 11% to $2,973. Cost of goods sold rose to 83.7% of total revenue from 78.2%, compressing gross margin; management attributed the deterioration chiefly to maintaining wage and labor costs as production volumes declined. General and administrative expense decreased 13% to $1,051, while selling expense increased to $591 from $567.
Liquidity, debt, and balance sheet
- At March 31, cash was $2,198 and available-for-sale investment securities were $1,162, totaling $3,360, versus $2,540 at December 31, 2019. Current assets were $17,103 and current liabilities $7,725 (current ratio approximately 2.2).
- Operating cash flow was positive, but lower than the prior-year quarter. The filing attributes the cash increase primarily to collections of billed receivables; billed receivables decreased while unbilled receivables increased.
- Notes payable totaled approximately $5,507, including $847 current and $4,660 long-term, versus $5,011 at year-end. The company had no balance on its $4,000 revolving credit line at quarter-end; it matured October 1, 2020 and carried a variable prime rate. The company reported compliance with its bank covenants.
- On March 27, the company refinanced existing loans with a $2,701 fixed-rate note at 3.99%, payable over 10 years; the transaction included $678 for Midland property improvements and released the lien on the Columbia, South Carolina facility. Approximately 99% of debt obligations were fixed-rate.
- On April 16, after quarter-end, the company received a $2,692 PPP loan at 1%, potentially forgivable subject to program rules. The filing describes monthly payments beginning November 2020 and maturity in April 2022.
Material changes and management commentary
- The largest product-sales decline was SlenderWall, down 53% to $923, primarily because Q1 2019 included completion of a major project. Soundwall sales fell 11%; Easi-Set and Easi-Span building sales fell 46%. Architectural sales were $767 versus none in the prior-year quarter, and miscellaneous wall sales increased 149% to $903.
- Barrier rentals increased 29% to $742, supported by more rented product and recognition of deferred buy-back lease revenue. Management is shifting emphasis from barrier sales to rentals, with results dependent in part on highway spending.
- Management reported COVID-19-related backlog reduction, lower production, employee absences, restrictions on bidding in some states, and material-delivery delays. It said the pandemic’s full financial and liquidity effects could not be estimated and that revenue expectations could go unmet if regional economic harm is severe.
- Sales backlog was approximately $26.6 million as of May 1, 2020, compared with $31.2 million a year earlier; management attributed the reduction mainly to lower bidding activity. Most backlog was expected to be produced within 12 months, with some projects extending longer.
- Average days sales outstanding, excluding unbilled revenue, increased to 96 days from 89 days at year-end, partly because of retainage on large projects. Management cited collection timing, customer credit, and working-capital needs as liquidity risks.
- Management believed operating cash flow, available credit, and the subsequent PPP loan would fund operations for at least the next 12 months, but cautioned that this depended on operating performance and collections. No specific earnings or revenue guidance was provided. The company also expects interest expense to increase slightly for full-year 2020 versus 2019.
Key investor verification points
- Track backlog, new awards, production levels, and COVID-19 effects on bidding, staffing, suppliers, and customer payments.
- Monitor gross margins and whether wage and labor costs adjust to production volumes.
- Review receivable collections, retainage, DSO, and operating cash flow for signs of liquidity pressure.
- Confirm refinancing terms, covenant compliance, revolving-credit availability and renewal, and total debt service requirements.
- Verify PPP loan use and any forgiveness determination under applicable requirements.
- Assess whether the rental-fleet strategy and architectural projects convert into sustained revenue and cash generation.
Period note: The income-statement table header in the filing text says “Three Months Ended March 30,” while the filing period and related statements and notes refer to March 31.