Smith-Midland Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; balance-sheet comparisons are to December 31, 2020. Smith-Midland manufactures, sells, rents, licenses, and installs precast concrete products, serving construction, highway, utility, and farming markets. Figures below are in millions of dollars except per-share data and percentages.
Financial results and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $13.10 | $12.52 | $40.63 | $32.79 |
| Gross profit | $3.20 | $3.84 | $12.24 | $7.82 |
| Gross margin | 24.4% | 30.7% | 30.1% | 23.8% |
| Operating income | $1.27 | $2.05 | $6.35 | $2.58 |
| Net income | $3.69 | $1.55 | $7.55 | $1.95 |
| Diluted EPS | $0.71 | $0.30 | $1.45 | $0.38 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $7.56 | $5.98 |
- Nine-month revenue grew 24%, driven principally by barrier rentals, shipping and installation, and royalties. Q3 revenue grew 5% year over year.
- Q3 gross profit and operating income declined despite higher revenue. Management cited COVID-related lower production and higher labor costs at the Virginia plant, as well as stronger-margin special barrier projects in Q3 2020.
- Nine-month net income included a $2.69 gain from full forgiveness of the Paycheck Protection Program loan. Excluding this gain, reported net income would have been approximately $4.85 million; this is a simple subtraction, not a company-reported adjusted measure.
- Cash was $15.00 million and available-for-sale investments were $1.24 million at September 30, versus $8.76 million and $1.23 million, respectively, at year-end 2020. Current assets were $33.11 million and current liabilities $13.03 million (calculated current ratio: 2.54); working capital was $20.08 million.
- Notes payable totaled $4.37 million, including $0.49 million current maturities; the $2.69 million PPP loan was forgiven in July. The existing $4.00 million revolving credit line had no outstanding balance. The company reported compliance with loan covenants.
- Cash from operations was $7.56 million; investing cash use was $0.76 million and financing cash use was $0.57 million. Capital expenditures were $1.21 million for the nine months.
Changes, outlook, and risks
- Revenue mix shifted: nine-month barrier rental revenue rose 80% to $8.67 million, while Q3 rentals fell 46% year over year to $1.71 million, reflecting fewer short-term special projects than in Q3 2020. Product sales increased 9% for the nine months.
- Management expects continued growth in core barrier rentals but cautions that exceptional short-term project revenue is not expected to recur at the same rate. Planned remaining-2021 spending was approximately $1.00 million for maintenance and another $1.00 million for rental barrier capacity.
- Management reported sales backlog of approximately $28.5 million as of November 1, 2021, compared with $20.6 million a year earlier; most was expected to be produced within 12 months, with some extending several years.
- Other stated expectations included lower soundwall and architectural sales in Q4, higher SlenderWall emphasis, and higher utility sales versus Q4 2020. These are estimates and carry no assurance.
- Raw material costs had increased during the first nine months; management anticipated further slight increases. The company continued to experience supply-chain material delays. Other risks include COVID-19 effects on operations and customers, construction cyclicality and weather, project delays, receivable collection timing, and seasonal winter working-capital needs.
- Liquidity commentary: management believed cash, anticipated operating cash flow, and available credit would fund operations for at least 12 months, while warning that weaker operating performance or collections could create liquidity or covenant pressure. Average DSO was 87 days for the nine months, versus 89 days for 2020.
- Subsequent events: the bank renewed the $4.00 million credit line in October 2021 and issued a commitment for an equipment line of up to $1.50 million. No equipment had been purchased under that commitment as of September 30.
Key facts for investors to verify
- How much of nine-month earnings growth is recurring operating performance versus the one-time $2.69 million PPP forgiveness gain.
- Whether barrier rental growth can persist as special projects normalize, and whether planned fleet investment earns adequate returns.
- Backlog conversion, project timing, production capacity, and the effects of supply delays and rising material and labor costs on margins.
- Receivable collections and liquidity, particularly given project retainage and the company’s 87-day DSO.
- Execution of SlenderWall and utility growth initiatives and the actual Q4 sales and spending outcomes versus management’s estimates.