Smith-Midland Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are to the corresponding 2020 periods. Smith-Midland manufactures, sells, rents, licenses, and installs precast concrete products, principally for construction, highway, utility, and agricultural markets. Financial amounts below are in thousands of dollars except per-share data.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $12,307 | $10,450 | $27,523 | $20,275 |
| Gross profit | $3,314 | $2,377 | $9,035 | $3,978 |
| Gross margin | 26.9% | 22.7% | 32.8% | 19.6% |
| Operating income | $1,278 | $573 | $5,079 | $532 |
| Net income | $985 | $441 | $3,852 | $403 |
| Diluted EPS | $0.19 | $0.09 | $0.74 | $0.08 |
| Operating cash flow | Not stated separately | Not stated separately | $5,702 | $2,582 |
Revenue rose 18% in Q2 and 36% in the first half. First-half growth was driven substantially by barrier rentals, up to $6,958 from $1,650, including short-term special projects concentrated in Q1. Product sales grew 8% in the first half; royalty income increased 63%, and shipping and installation revenue increased 9%. Management attributed improved cost ratios and profitability mainly to higher-margin barrier rentals and the special projects. Q2 net margin was approximately 8.0%, versus 4.2%; first-half net margin was approximately 14.0%, versus 2.0%.
Balance sheet, liquidity, and debt
- At June 30, cash was $13,194 and available-for-sale investments were $1,243, versus cash of $8,764 and investments of $1,228 at year-end 2020. Current assets were $30,200 and current liabilities $14,042, a current ratio of approximately 2.15.
- Operating cash flow of $5,702 was supported by earnings and increases in deferred revenue and payables, partly offset by higher billed receivables and inventory. Capital expenditures were $926; cash increased $4,430 to $13,194.
- Notes payable totaled approximately $4,515, plus a $2,692 PPP loan classified as current at quarter-end. The company reported no balance on its $4,000 revolving credit line. It was in compliance with loan covenants.
- On July 9, 2021, the PPP loan was forgiven in full; the company expected to recognize $2,692 as other income in Q3 2021. The revolving credit line matures October 1, 2021. Management said available cash, expected operating cash flow, and credit-line availability should fund operations for at least 12 months, subject to uncertainty.
Changes, outlook, and risks
- Management expects barrier rental revenue to benefit from growth in the core rental fleet, but cautioned that special-project revenue will not recur at the Q1 2021 pace. Plans include further rental-fleet investment and approximately $1,000 of maintenance capital spending plus approximately $1,000 to manufacture additional rental barriers.
- Management anticipated lower soundwall and architectural sales in the second half, with a shift toward SlenderWall production; lower barrier sales in the Delaware-to-Virginia region as the strategy shifts toward rentals; and increased selling expenses. The company reported a new SlenderWall project beginning production at the end of Q2, but noted awards on pending bids are not assured.
- Backlog was approximately $26.0 million as of August 2, 2021, compared with $25.6 million a year earlier; most was expected to be produced within 12 months, with some projects extending several years. This is not a revenue forecast.
- COVID-19 resurgence and continuing supply-chain material delays could affect production, collections, liquidity, and results. Other risks include rising raw-material costs, project delays and weather, construction cyclicality, customer credit and receivable collection, and dependence on public infrastructure funding. Raw-material costs had risen slightly in the first half; further slight increases were anticipated.
- Seasonality may depress winter revenue and profits. The company reported no material litigation, effective disclosure controls, and no material change in internal control over financial reporting during the quarter. No formal earnings guidance was provided.
Investor facts to verify
- Whether rental growth and margins can be sustained without the first-quarter special projects, and how much of backlog converts to revenue on schedule.
- Execution and profitability of the new SlenderWall project, the planned rental-fleet expansion, and associated capital spending.
- Collection of receivables and the impact of supply delays and material-cost inflation; first-half billed receivables rose to $11,826 from $9,798 at year-end.
- Completion or renewal of the $4,000 credit facility before its October 1, 2021 maturity, and the accounting recognition of PPP forgiveness in Q3.