Smith-Midland Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Smith-Midland manufactures, sells, rents, licenses, and installs precast concrete products, primarily for construction, highway, utility, and agricultural markets. It reports one operating segment. Dollar amounts below are in thousands unless stated otherwise.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $10,435 | $15,218 | Down 31% |
| Gross profit / margin | $1,648 / 15.8% | $5,722 / 37.6% | Margin down 21.8 percentage points |
| Operating income (loss) | $(173) / (1.7%) | $3,802 / 25.0% | Turned to a loss |
| Net income (loss) | $(119) | $2,867 | Turned to a loss |
| Basic and diluted EPS | $(0.02) | $0.55 | Lower |
| Operating cash flow | $(1,193) | $4,302 | Down $5,495 |
Cost of goods sold was $8,787, versus $9,496 a year earlier. Management reported COGS at 88% of revenue excluding royalties, compared with 64%, citing the prior-year mix of higher-margin special barrier rentals and lower production volume that reduced fixed-overhead absorption. General and administrative expense fell to $1,159 from $1,325; selling expense rose to $662 from $595. Interest expense was $48, compared with $42.
Revenue mix and material year-over-year changes
- Product sales declined 21% to $5,851. Architectural panel sales fell 59% and barrier sales fell 39%; SlenderWall sales were $956 versus none reported in Q1 2021, reflecting a large project. Utility sales rose 74% to $466.
- Barrier rental revenue fell 74% to $1,485, largely because Q1 2021 included significant short-term special projects. Management said core fleet rental revenue nevertheless increased 12% year over year.
- Shipping and installation revenue rose 67% to $2,672, mainly with increased SlenderWall and architectural panel activity. Royalty income was $427, up 2%.
- Management attributed lower revenue to the absence of prior-year special rental projects and delays in customer drawing approvals that postponed production on certain projects.
Cash, liquidity, debt, and commitments
- Cash was $14,818 at March 31, 2022, versus $13,492 at December 31, 2021. Current assets were $31,507 and current liabilities $14,569; working capital was $16,938.
- Cash from operations was $(1,193), including increases in billed receivables of $2,064 and inventory of $480. Investing cash use was $157; financing provided $2,676, including $2,805 of long-term borrowing.
- Notes payable totaled $6,868, including $607 current and $6,261 long-term, versus $4,192 at year-end. The increase primarily reflects financing for previously acquired Midland, Virginia property. The company also had a $4,000 revolving credit line with no amount drawn at quarter-end, maturing October 1, 2022.
- Debt is at fixed rates of 2.90% to 4.09%, except the undrawn revolving line, which has a variable prime-based rate. The company reported compliance with its loan covenants at March 31. It says it expects cash, operating cash flow, and available credit to fund operations for at least 12 months, while cautioning that this depends on results and collections.
- Capital spending was $196 in Q1. Management planned approximately $8,000 of 2022 capital expenditures, including about $5,000 for barrier rental fleet expansion, $1,500 for yard development, and $1,500 for manufacturing equipment.
- Average days sales outstanding, excluding unbilled revenue, increased to 102 days from 91 days for full-year 2021. Inventory turnover was 12.6 annualized, versus 15.4 for the comparable 2021 quarter.
Outlook, risks, and unusual items
- As of May 2, 2022, backlog was approximately $32.7 million, versus $29.0 million a year earlier; most was expected to be produced within 12 months, with some projects extending longer.
- Management expected SlenderWall and utility sales and core barrier rentals to increase during 2022; it expected architectural, barrier, and miscellaneous product sales to be lower or remain broadly similar in stated categories. It expected total 2022 barrier rentals to be below 2021 because of the prior-year special projects. These expectations are not assurances; the filing provides no consolidated revenue or earnings guidance.
- Management cited continuing supply-chain delays and inflation in cement, aggregates, steel, and labor, which it expected to persist through 2022. Other risks include construction seasonality and weather, project delays, customer collections, COVID-19 effects, financing availability, and possible covenant or liquidity pressure if operating performance deteriorates.
- Subsequent event: On April 13, 2022, the company amended and exercised a customer barrier buy-back arrangement, increasing the quantity to 325,000 linear feet. The estimated total purchase price is $5,000, and completion was anticipated by year-end 2022. A portion was already recorded as a deferred buy-back obligation; excess costs are to be accounted for as incurred.
- One customer represented 15% of Q1 revenue and two customers together represented 45%. No material litigation was reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether delayed drawing approvals and supply-chain constraints ease, and whether production and margins recover from the Q1 decline.
- Actual cost, timing, and accounting impact of the $5,000 barrier buy-back, including how much exceeds the previously recorded obligation.
- Customer concentration, receivable collections, and DSO trends, given negative operating cash flow and the reported 102-day DSO.
- Execution and funding of the planned 2022 capital program, debt service, and the status or renewal of the revolving credit line maturing October 1, 2022.
- Whether backlog converts to revenue on schedule and whether management’s product-category expectations are achieved.