Smith-Midland Corporation — FY2020 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2020, with comparison to FY2019. Smith-Midland manufactures, sells, rents, installs and licenses precast concrete products, including highway barriers, soundwalls, building panels and precast buildings. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | FY2020 / Dec. 31, 2020 | FY2019 / Dec. 31, 2019 |
|---|---|---|
| Revenue | $43.862 | $46.691 |
| Gross profit; gross margin | $11.042; 25.2% | $9.969; 21.4% |
| Operating income; operating margin | $3.759; 8.6% | $2.546; 5.5% |
| Net income; diluted EPS | $2.665; $0.51 | $1.949; $0.38 |
| Operating cash flow | $7.487 | $3.932 |
| Cash and available-for-sale securities | $8.764 cash; $1.228 securities | $1.364 cash; $1.176 securities |
| Current assets; current liabilities | $23.341; $8.900 | $19.031; $9.602 |
| Notes payable, excluding PPP loan | $4.936, including $0.740 current | $5.011 |
- Barrier rentals rose 176% to $6.879; product sales fell 17% to $26.776. The company reported that increased rentals and higher-margin special projects improved margins.
- Capital spending was $2.627, down from $4.513. Investing activities used $2.421; financing activities provided $2.334.
- The company also had a $2.692 PPP loan outstanding at year-end, separate from the $4.936 of notes payable shown above. It applied for full forgiveness; approval and amount forgiven were not assured.
- DSO was 89 days in both years. Accounts receivable was $10.5, including $1.7 of retainage, net of a $0.4 allowance for doubtful accounts.
Material changes versus FY2019
- Revenue declined 6%, largely from lower SlenderWall sales (down 81%), Easi-Set/Easi-Span building sales (down 51%) and barrier sales (down 36%).
- Barrier rental revenue increased $4.391 to $6.879, partly offsetting the product-sales decline. Management described rental growth as consistent with its strategy to shift from barrier sales to rentals.
- Gross profit increased $1.073 and operating income increased 48%, despite lower revenue. Net income rose 37%; the effective tax rate increased to 29.7% from 21.9%.
- Operating cash flow increased to $7.487, aided by collections of billed receivables. Cash rose to $8.764. Property and equipment, net, increased to $18.602 from $17.735.
- The company did not declare a dividend in 2020, after eight consecutive years of dividends. Cash-flow statements report $0.282 of dividends paid during 2020.
Outlook, risks and unusual items
- Management could not estimate COVID-19’s full effects on FY2021. Reported impacts included reduced revenue and backlog, lower production, employee absences, bidding restrictions in some states, reduced bidding activity and minor supply delays. Further customer payment issues, project delays or cancellations, workforce disruption and funding constraints were identified as risks.
- Backlog was approximately $19.6 as of March 8, 2021, versus $30.9 around the same date in 2020. Management attributed the decline to fewer bidding opportunities and delayed awards; it expected backlog to increase but gave no assurance. Most backlog projects were expected to be produced within 12 months, with some extending into 2022.
- Management estimated FY2021 capital spending at approximately $2.0, excluding acquisitions and plant expansions, which were not then anticipated. Plans could change with pandemic effects.
- The $4.0 revolving credit line had no balance at year-end and matured October 1, 2021. A separate equipment-financing commitment of up to $1.5 was unused at year-end. The company said it was compliant with loan covenants and believed available resources could fund operations for at least 12 months.
- Debt covenants include a $3.5 annual capital-expenditure limit and $10.0 minimum tangible net worth. Most debt was fixed-rate; the PPP loan remained subject to forgiveness rules and potential repayment.
- Seasonality and construction-industry cyclicality may affect production, collections and profitability. Legal proceedings were described as not material; the auditor identified receivables valuation as a critical audit matter, citing judgment around retainage, disputes and collectability.
- The company reported no material litigation and management concluded internal controls over financial reporting and disclosure controls were effective. The financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Whether the backlog decline reversed, and whether expected infrastructure and SlenderWall/architectural awards converted into production and revenue.
- The outcome and timing of PPP loan forgiveness, and the company’s repayment obligations if forgiveness is denied or partial.
- Receivable collections, retainage disputes and adequacy of the doubtful-account allowance, particularly given the 89-day DSO and pandemic-related customer risks.
- Whether barrier rentals can sustain growth and margins, including the effects of fleet investment, buy-back lease accounting and public infrastructure spending.
- Renewal or replacement of the revolving credit line and compliance with debt covenants as debt service and capital needs continue.