Smith-Midland Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. The company manufactures, sells, leases, licenses, and installs precast concrete products, primarily for construction, highway, utility, and farming markets. Amounts below are in thousands of dollars except per-share data.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $11,956 | $13,100 | $35,644 | $40,625 |
| Gross profit | $2,082 | $3,202 | $6,961 | $12,237 |
| Gross margin | 17.4% | 24.4% | 19.5% | 30.1% |
| Operating income | $4 | $1,268 | $928 | $6,347 |
| Net income | $5 | $3,694 | $796 | $7,546 |
| Diluted EPS | $0.00 | $0.71 | $0.15 | $1.45 |
- Nine-month operating cash flow was negative $3,333, compared with positive $7,562 in 2021. Investing cash outflow was $1,727; financing provided $2,376. Cash declined to $10,808 from $13,492 at December 31, 2021.
- At September 30, current assets were $29,043 and current liabilities $10,858. Total assets were $54,277 and total liabilities $21,353.
- Notes payable totaled approximately $6,567, including $619 current maturities; the comparable year-end total was approximately $4,192. The $5,000 revolving credit facility had no balance outstanding at quarter-end. Fixed-rate notes ranged from 3.64% to 4.09% for the principal loans; interest expense was $187 for nine months, versus $145.
Changes versus prior-year periods
- Revenue fell 9% in Q3 and 12% for the first nine months. Nine-month product sales declined 10%, while barrier rental revenue declined 44%, largely reflecting the absence of short-term special rental projects recorded in 2021. Q3 product sales were nearly flat, but soundwall and SlenderWall sales fell substantially.
- Margins weakened: management attributed higher cost of goods sold to inflation in materials and labor, lower production and overhead absorption, and the mix shift away from higher-margin special barrier rentals.
- Nine-month net income fell to $796 from $7,546. The 2021 comparison included a $2,692 gain from forgiveness of a Paycheck Protection Program loan.
- Trade billed receivables rose to $13,175 from $10,013 at year-end; management reported average days sales outstanding of 99 days, compared with 91 days for 2021. Inventory increased to $3,984 from $2,845.
Outlook, liquidity, and notable items
- Sales backlog was approximately $51.4 million on October 24, 2022, versus $28.5 million a year earlier. Management said most backlog was expected to be produced within 12 months, with some projects spanning several years.
- Management expected soundwall, SlenderWall, and barrier sales to trend higher in Q4 than Q3, while architectural, building, and miscellaneous product sales were expected to be lower or similar. Management expected full-year 2022 barrier rentals to be below 2021 due to unusual prior-year projects, but royalty income to exceed 2021. These are estimates, not guarantees.
- Management planned approximately $6,500 of 2022 capital spending, including about $5,000 for a barrier fleet expansion tied to a customer buy-back, $500 for yard development, and $1,000 for manufacturing equipment. Approximately $2,800 was expected to be paid in Q4. The company agreed to repurchase 325,000 linear feet of barrier for an estimated $5,000; it anticipated completing the buy-back by year-end.
- The company reported compliance with loan covenants and believed cash, expected operating cash flows, and available credit would fund operations for at least 12 months, while cautioning that this was not assured. It reported a $5,000 bank line with no quarter-end borrowing; an October 1, 2022 renewal and a separate equipment financing commitment of up to $1,500 were subsequent events.
- Key risks include continuing supply-chain delays, inflation, construction cyclicality and adverse weather, slower customer collections, COVID-19-related disruption, project delays and drawing approvals, and the ability to sustain profitability and service increased debt. Management expected inflationary pressures on materials and labor to continue through 2022.
- No material litigation was reported. Disclosure controls were assessed as effective; no material change in internal control was reported.
Investor facts to verify
- Reconcile the MD&A statement comparing Q3 2021 operating income: it cites $1,934, while the income statement reports $1,268. The income statement reports Q3 2022 operating income of $4.
- Monitor conversion of the $51.4 million backlog into production, revenue, and cash, including the effects of customer approval delays and supply constraints.
- Track receivable collections, working-capital needs, and cash use against planned capital spending and the barrier buy-back.
- Assess whether margins recover as material and labor costs, production levels, and rental mix change, and whether earnings remain positive without the prior-year PPP forgiveness gain.
- Confirm the terms and use of the renewed revolving facility and equipment commitment, as well as compliance with debt covenants and repayment capacity.