Smith-Midland Corporation (NASDAQ: SMID) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. The company manufactures, sells, leases, licenses and installs precast concrete products, primarily for construction, highway, utility and agricultural markets.
Financial performance
Dollar amounts below are in millions except per-share data. Balance-sheet comparisons are against December 31, 2022.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $14.698 | $13.253 | $27.540 | $23.688 |
| Gross profit | $1.786 | $3.230 | $3.952 | $4.878 |
| Gross margin | 12.2% | 24.4% | 14.4% | 20.6% |
| Operating income (loss) | $(0.981) | $1.096 | $(0.926) | $0.922 |
| Net income (loss) | $(0.782) | $0.910 | $(0.701) | $0.791 |
| Diluted earnings (loss) per share | $(0.15) | $0.17 | $(0.13) | $0.15 |
| Cash from (used in) operations | — | — | $1.082 | $(2.685) |
| Capital expenditures | — | — | $2.974 | $1.962 |
Revenue grew 11% in Q2 and 16% in the first half, led by product sales, while lower barrier rentals, royalties, and shipping and installation revenue partly offset growth. Q2 product sales increased 58%; total service revenue declined 38%. Cost of goods sold was 87.9% of Q2 revenue and 85.6% of first-half revenue, versus 75.6% and 79.4% a year earlier. Management separately reports cost of goods sold excluding royalties at 92% and 89%, respectively, versus 80% and 84%.
Financial position and liquidity
- Cash was $4.727 million, down from $6.726 million at year-end. Current assets were $28.475 million and current liabilities $13.006 million.
- Notes payable totaled $6.041 million ($0.629 million current and $5.412 million long-term); no balance was drawn on the $5 million revolving credit line at June 30. Outstanding notes carry fixed rates of 2.90%–4.09%; the undrawn line has a variable prime-based rate.
- Operating cash flow was positive in the first half, but investing activities used $2.775 million, primarily reflecting capital spending. Customer deposits increased $2.248 million and contributed to operating cash flow.
- Net accounts receivable was $16.554 million versus $16.223 million at year-end; inventory was $4.752 million versus $3.818 million. The company cited 131 days sales outstanding for the first half of 2023 versus 96 days for the three months ended June 30, 2022.
- Management expects approximately $5 million of 2023 capital expenditures, including a barrier-fleet storage lot and a South Carolina batch plant system. It believes cash, expected operating cash flow and available credit will fund operations for at least 12 months, while noting this depends on collections and operating performance.
Changes, outlook and notable items
- Profitability deteriorated despite higher sales: Q2 shifted from operating income of $1.096 million and net income of $0.910 million to operating loss of $0.981 million and net loss of $0.782 million. Management attributed weaker margins partly to about $0.4 million of costs to remake panels for a project, lower high-margin barrier rental revenue, and higher materials and labor costs.
- Q2 general and administrative expense included a $0.342 million one-time expense from a wire-fraud incident. The company revised payment procedures; potential insurance recovery is uncertain.
- Sales backlog was approximately $60.9 million as of August 1, 2023, compared with $35.7 million a year earlier; most backlog projects were expected to be produced within 12 months, with some extending longer. Management expects several product categories and barrier rentals to improve or remain similar during the rest of 2023, but repeatedly cautions that these expectations are not assured. SlenderWall sales were expected to trend slightly lower than in the first half.
- Management expects interest expense for 2023 to exceed 2022 because of higher debt. Inflation in raw materials and labor continued to pressure costs. Construction seasonality, weather, project timing and customer collections can affect results and liquidity.
- The $5 million revolving credit line and the separate $1.5 million equipment-financing commitment were both stated to mature October 1, 2023. The filing does not provide a subsequent renewal or replacement status. The company reported compliance with loan covenants at June 30.
- Disclosure controls were deemed ineffective at June 30 because of a material weakness in the methodology for estimating the allowance for doubtful accounts. Management described revised estimation procedures and remediation efforts. The company adopted the expected-credit-loss standard in January 2023, reducing opening retained earnings by approximately $63,000.
- The company had no material litigation disclosed. No customer exceeded 10% of receivables, but two customers represented approximately 12% and 15% of Q2 revenue.
Important facts for investors to verify
- Whether the revolving credit line and equipment-financing commitment were renewed or replaced after their October 1, 2023 maturities.
- Subsequent collection of receivables, DSO trends, and any deterioration in credit-loss estimates or customer balances.
- Progress and costs on the panel-remake project, the barrier buy-back commitment, and planned capital projects.
- Whether any funds from the wire-fraud loss were recovered through insurance, and whether control weaknesses have been remediated and independently validated.
- Conversion of the reported backlog into production, revenue and cash, including customer concentration and project timing.