Smith-Midland Corporation — Q3 2020 Form 10-Q
Business context and period. The company manufactures, sells, rents, licenses and installs precast concrete products, primarily for construction, highway, utility and farming markets. This filing covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Figures below are in millions of dollars unless stated otherwise.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $12.515 | $13.209 | $32.789 | $34.249 |
| Gross profit | $3.841 | $2.593 | $7.818 | $6.971 |
| Operating income | $2.049 | $0.753 | $2.581 | $1.573 |
| Net income | $1.549 | $0.579 | $1.952 | $1.207 |
| Diluted EPS | $0.30 | $0.11 | $0.38 | $0.24 |
- Revenue decreased 5% in Q3 and 4% year to date. Product sales fell 24% in Q3 and 14% year to date; higher barrier rental revenue partly offset declines.
- Gross margin, calculated from reported gross profit and revenue, rose to about 30.7% in Q3 from 19.6%, and to 23.8% year to date from 20.4%. Management attributes stronger margins primarily to rentals, which typically carry higher margins, and certain short-term rental projects.
- Nine-month operating cash flow was $5.978, versus $2.990 in 2019. Investing cash outflow was $2.379; financing cash inflow was $2.486. Cash increased by $6.085 to $7.449.
- At September 30, cash was $7.449 and available-for-sale investments were $1.208. Current assets were $22.238 versus current liabilities of $9.472. Notes payable totaled $7.780, including current maturities; the $4.000 bank line of credit had no balance outstanding. Approximately 99% of debt was fixed-rate, and the company reported covenant compliance.
- Capital spending for the first nine months was $2.501, compared with $3.392 in 2019. The company reported DSO of 90 days, versus 89 days at year-end 2019, with retainage on large projects contributing to collection timing.
Material changes and management commentary
- Barrier rentals rose to $3.171 in Q3 from $0.625 and to $4.820 year to date from $1.787. The increase reflected more rental volume, special projects and recognition of deferred buy-back lease revenue. Management is shifting emphasis from barrier sales to rentals.
- Product sales weakened, notably SlenderWall (down 97% in Q3 and 73% year to date) and Easi-Set/Easi-Span buildings (down 74% and 59%). Management cites the completion of larger prior-year projects and project-based timing. Architectural and miscellaneous wall sales increased year to date.
- The company reported a $0.038 net loss in Q1, followed by net income of $0.441 in Q2 and $1.549 in Q3.
- As of November 2, 2020, sales backlog was approximately $20.6 million, down from $28.5 million a year earlier, mainly reflecting reduced bidding activity. Most backlog projects were expected to be produced within 12 months, with some extending several years. The filing provides no quantified full-year revenue or earnings guidance.
- Management said it could not estimate COVID-19’s full-year impact. Reported effects included lower backlog and production, employee absences, state bidding restrictions and minor supply delays. Potential further risks include delayed or canceled public projects, reduced infrastructure funding, customer collection problems and supplier disruption.
- The company received a $2.692 PPP loan in April; forgiveness remained subject to program requirements and was not established in this filing. On October 21, after quarter-end, the bank committed up to $1.500 for equipment financing. The existing $4.000 line of credit was renewed October 1, also after quarter-end. Management believed available cash, operating cash flow and credit availability would fund operations for at least 12 months, while cautioning that COVID-19 could impair expectations.
- Other risks include construction seasonality, weather and project delays, reliance on public construction spending, debt-service capacity, customer exercise of a guaranteed buy-back arrangement and limited access to public equity markets. Management expects raw-material prices to remain flat for the rest of 2020, but gives no assurance.
Investor verification priorities
- Verify backlog conversion, new awards and bidding activity, particularly given the year-over-year backlog decline and COVID-related uncertainties.
- Track the durability and profitability of barrier rentals, including the contribution from deferred buy-back lease revenue and special projects.
- Review collections, retainage, DSO and allowance for doubtful accounts; the company cited bad-debt write-offs tied to retainage on two large jobs.
- Confirm the status and amount of PPP loan forgiveness, and monitor debt balances, maturities, covenant compliance and use of the post-quarter-end equipment financing commitment.
- Reconcile a filing inconsistency: the financial statements and revenue table report nine-month 2019 revenue of $34.249 million, while one MD&A passage states $32.249 million. The filing does not explain this discrepancy.