This Quarterly Report and related documents include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act 1934. Forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause the Company's actual results, performance (financial or operating), or achievements expressed or implied by such forward looking statements not to occur or be realized. Such forward looking statements generally are based upon the Company's best estimates of future results, performance or achievement, based upon current conditions and the most recent results of operations. Forward-looking statements may be identified by the use of forward-looking terminology such as "may," "will," "expect," "believe," "estimate," "anticipate," "continue," or similar terms, variations of those terms or the negative of those terms. Potential risks and uncertainties include, among other things, such factors as:
Investors and shareholders should carefully consider such risks, uncertainties and other information, disclosures and discussions which contain cautionary statements identifying important factors that could cause actual results to differ materially from those provided in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview; Potential Effect of the COVID-19 Outbreak
The Company invents, develops, manufactures, markets, leases, licenses, sells, and installs a broad array of precast concrete products and systems for use primarily in the construction, highway, utilities, and farming industries. The Company's customers are primarily general contractors and federal, state, and local transportation authorities located in the Mid-Atlantic, Northeastern, Midwestern regions and parts of the Southeastern region of the United States. The Company's operating strategy has involved producing innovative and proprietary products, including SlenderWall™, a patented, lightweight, energy-efficient concrete and steel exterior insulated wall panel for use in building construction; J-J Hooks® Highway Safety Barrier, a positive-connected highway safety barrier; Sierra Wall, a sound barrier primarily for roadside use; and Easi-Set® transportable concrete buildings, also patented. In addition, the Company produces custom order precast concrete products with various architectural surfaces, as well as generic highway sound barriers, utility vaults, and farm products such as cattleguards.
The Company was incorporated in Delaware on August 2, 1994. Prior to a corporate reorganization completed in October 1994, the Company conducted its business primarily through Smith-Midland Virginia, which was incorporated in 1960 as Smith Cattleguard Company, a Virginia corporation, and subsequently changed its name to Smith-Midland Corporation in 1985. The Company's principal offices are located at 5119 Catlett Road, Midland, Virginia 22728 and its telephone number is (540) 439-3266. As used in this report, unless the context otherwise requires, the term the "Company" refers to Smith-Midland Corporation and its subsidiaries.
As a part of the construction industry, the Company's sales and net income may vary greatly from quarter to quarter over a given year. Because of the cyclical nature of the construction industry, many factors not under our control, such as weather and project delays, affect the Company's production schedule, possibly causing momentary slowdowns in sales and net income. As a result of these factors, the Company is not always able to earn a profit for each period, therefore, please read Management's Discussion and Analysis of Financial Condition and Results of Operations and the accompanying financial statements with these factors in mind.
The full impact of the COVID-19 outbreak, including a recent resurgence in the United States, continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic may have on the Company's financial condition, liquidity, and future results of operations. The Company had previously experienced an adverse impact to its business by a reduction in revenues in 2020 from that of 2019, a reduction in backlog during 2020 from that in 2019, lower production volumes, employee absence, and bidding restrictions within certain key states such as Maryland and North Carolina. The Company is currently experiencing delays in receipt of materials through its supply chain. The Company may be further negatively impacted in the following respects:
a) by the potential inability of customers of the Company to pay amounts owed to the Company for products or services already provided should their businesses suffer setbacks; this risk is heightened by the relatively long lag time experienced by the Company in collecting accounts receivable (see "Liquidity and Capital Resources" below);
b) by potential supply side issues should our vendors experience hardships, and have to reduce or terminate operations, due to the COVID-19 outbreak, impacting the Company's sourcing of materials;
c) by increased adverse effects on our workforce due to contracting or taking care of a relative who has contracted COVID-19, or have been quarantined by a medical professional; in this respect, our workforce had previously been impacted with an effect on operations at all locations, but this impact has substantially diminished as of the filing date, but no assurance can be provided as to future impacts, particularly in view of new coronavirus outbreaks;
d) in the event that any of the three states in which we have facilities provide for the quarantine of our manufacturing employees, our production manufacturing will be significantly affected;
e) in the event that any of the states in which we sell our products and services may eliminate, cancel, or delay projects due to monetary limitations resulting from the COVID-19 outbreak; in this respect, the Company had previously seen a reduction in bidding activity;
f) the reduction of state infrastructure budgets due to the reduction in funding through the gas tax, or other funding sources;
g) the increase in the overall loan defaults, which in turn impacts the banking sector's ability to fund projects in which the Company's products may be utilized; and
h) in the event that economic hardships force the Company to default on loan payments, our loans may be called and our ability to borrow under our bank line of credit could cease;
Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the ultimate effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for the remainder of 2022 or future years.
The discussions below, including without limitation with respect to liquidity, are subject to the future effects of the COVID-19 outbreak. In this respect, should the outbreak cause serious economic harm in our areas of operation, our revenue expectations are unlikely to be fulfilled.
The Company had (in thousands) a net loss of $119 for the three months ended March 31, 2022, compared to net income of $2,867 for the three months ended March 31, 2021. The cost of goods sold as a percent of revenue, not including royalties, for the three months ended March 31, 2022, was 88%, as compared to 64% for the three months ended March 31, 2021. The increase in cost of goods sold as a percentage of revenue, not including royalties, for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, is due mainly to short-term special barrier rental projects that occurred in the first quarter of 2021, which typically carry higher margins than product sales, as well as to the reduced absorption of overhead due to the reduced production volume. Total revenues for the three-month period ended March 31, 2022 were $10,435 compared to $15,218 for the three-month period ended March 31, 2021. The decrease is mainly from barrier rentals, which the prior period included significant revenues from short-term special barrier rental projects. Additionally, the Company experienced delays in approvals of customer drawings and therefore delaying production on certain projects. Total general and administrative expenses for the three-month period ended March 31, 2022 were $1,159 compared to $1,325 for the three-month period ended March 31, 2021. The decrease is related to a decrease in salaries and wages. Total selling expenses increased from for the three-month period ended March 31, 2022 to $662 from $595 for the three-month period ended March 31, 2021 due to the hiring of additional of sales personnel. As of May 2, 2022, the Company's sales backlog was approximately $32.7 million, as compared to approximately $29.0 million at the same time in 2021.
Results of Operations (dollar amounts in thousands, except per share data)
Three months ended March 31, 2022, compared to the three months ended March 31, 2021
Revenue includes product sales, barrier rentals, royalty income, and shipping and installation revenues. Product sales are further divided into soundwall, architectural and SlenderWall™ panels, miscellaneous wall panels, highway barrier, Easi-Set® and Easi-Span® buildings, utility products, and miscellaneous precast products. The following table summarizes the sales by product type and comparison for the three month period ended March 31, 2022, and 2021. As indicated in "Overview; Potential Effect of COVID-19 Outbreak" above, should a resurgence of the COVID-19 outbreak cause serious economic harm in our area of operations, our revenue expectations are unlikely to be fulfilled.
The revenue items: soundwall sales, architectural panel sales, SlenderWall sales, miscellaneous wall sales, miscellaneous sales, barrier rentals, and royalty income are recognized as revenue over time. The revenue items: barrier sales, Easi-Set and Easi-Span building sales, utility sales, and shipping and installation revenue are recognized as revenue at a point in time.
Soundwall Sales - Soundwall sales were lower for the three month period ended March 31, 2022, compared to the same period in 2021. The decrease is mainly due to lower production, as the Company has temporarily experienced delays in customer drawing approvals. Soundwall sales are expected to trend slightly higher throughout 2022 as compared to first quarter 2022 results, although no assurance can be given.
Architectural Sales - Architectural sales decreased for the three months ended March 31, 2022, compared to the same period in 2021. This decrease is related to a shift in production during the first quarter 2022 from architectural sales to SlenderWall sales as production of a large architectural project that began in the first quarter 2021 concluded during the third quarter 2021. Architectural sales are expected to trend slightly lower throughout 2022, as compared to 2021, with a projected shift to more SlenderWall sales.
SlenderWall Sales - SlenderWall sales increased for the three month period ended March 31, 2022, as compared to the same period in 2021. The Company was awarded a large SlenderWall project which began production in 2021 and continued into the first quarter of 2022. SlenderWall sales are expected to trend higher for 2022, as compared to 2021. The Company continues to focus sales initiatives on SlenderWall with multiple bids awaiting awards, but no assurance can be given as to the success of this endeavor.
Miscellaneous Wall Sales - Miscellaneous wall sales decreased for the three month period ended March 31, 2022 compared to the same period in 2021 due to the decreased amount of retaining wall projects in production. Miscellaneous wall sales are expected to trend similarly for the remainder of 2022 as compared to the first quarter of 2022, although no assurance can be provided.
Barrier Sales - Barrier sales decreased during the three month period ended March 31, 2022, compared to the same period in 2021. The main reason for the decrease is reduced demand for barrier production in North Carolina and South Carolina and continued efforts to shift from barrier sales to barrier rental in Virginia. Barrier sales are expected to trend lower throughout than in previous periods, in line with the Company's strategic shift to barrier rentals.
Easi-Set® and Easi-Span® Building Sales - Building and restroom sales decreased for the three month period ended March 31, 2022, compared to the same period in 2021 mainly due to decreased building sales at the North Carolina and Virginia manufacturing facilities. Building and restroom sales are expected to continue to trend similarly for the remainder of 2022 as compared to 2021, although no assurance can be provided.
Utility Sales - Utility sales increased for the three month period ended March 31, 2022, compared to the same period in 2021. The Company continues to competitively bid on utility projects to gain market share and has recently won multiple data center projects increasing the sales volume of dry utility vaults. Utility sales are expected to increase for the full year 2022 as compared to 2021, although no assurance can be provided.
Miscellaneous Product Sales - Miscellaneous products are products that are produced or sold that do not meet the criteria defined for other revenue categories. Examples would include precast concrete slabs, concrete blocks, or small add-on items. Miscellaneous product sales decreased for the three month period ended March 31, 2022, compared to the same period in 2021. The change is mainly attributed to specialty concrete blocks produced at the North Carolina plant during the first quarter of 2021. Miscellaneous product sales are expected to remain lower throughout 2022, although no assurance can be provided.
Barrier Rentals - Barrier rentals decreased significantly for the three month period ended March 31, 2022, compared to the same period in 2021. The decrease is mainly due to the significant revenues generated from aja few short-term special projects that occurred during the first quarter of 2021. Revenue from the Company's core rental barrier fleet increased by 12% for the three month period ended March 31, 2022 compared to the three month period ended March 31, 2021. Due to the infrequent nature of special projects, full year 2022 barrier rentals are expect to be lower than full year 2021 barrier rentals. The Company expects increased barrier rentals of the core rental fleet throughout 2022, although no assurance can be provided.
Royalty Income - Royalties slightly increased for the three month period ended March 31, 2022, compared to the same period in 2021. Infrastructure spending continues to drive royalties, and the Company expects royalties to increase for 2022 compared to 2021, although no assurance can be given.
Shipping and Installation - Shipping revenue results from shipping our products to the customers' final destination and is recognized when the shipping services take place. Installation activities include the installation of our products at the customers' construction sites. Installation revenue is recognized when attaching architectural and SlenderWall panels to a building, installing an Easi-Set® building at customers' sites, or setting any of our other precast products at a site, specific to the requirements of the owner. Shipping and installation revenue increased for the three month period ended March 31, 2022, compared to the same period in 2021. The increase is mainly attributed to the increase in shipping and installation of SlenderWall and architectural panels during the first three months of 2022 as compared to the first three months of 2021.
Cost of Goods Sold - Total cost of goods sold as a percent of revenue, not including royalties, for the three months ended March 31, 2022, was 88%, as compared to 64% for the three months ended March 31, 2021. The increase in cost of goods sold as a percentage of revenue, not including royalties, for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, is mainly due to short-term barrier rental special projects that occurred in the first quarter of 2021, which typically carry higher margins than product sales, and to a lesser extent, the reduced absorption of fixed overhead due to lower production volume.
General and Administrative Expenses - For the three months ended March 31, 2022, the Company's general and administrative expenses decreased by $166 to $1,159 from $1,325 during the same period in 2021. The decrease in general and administrative expenses for the three month period ended March 31, 2022, are mainly attributed to a decrease in salaries and wages as management continues to assess and monitor total general and administrative expenses. General and administrative expense as a percentage of total revenue was 11% and 9% for the three month period ended March 31, 2022, and 2021, respectively.
Selling Expenses - Selling expenses for the three months ended March 31, 2022, increased to $662 from $595 for the same period in 2021. Selling expenses increased for the three month period ended March 31, 2022 compared to the three month period ended March 31, 2021 due to additional salespersons hired and increased marketing expenses. The Company expects selling expenses to increase in future periods with the plan for additional sales associates and increased advertising spending aligning with the strategy to increase SlenderWall sales and barrier rentals.
Operating Income (Loss) - The Company had an operating loss for the three month period ended March 31, 2022, of $173 compared to operating income of $3,802 for the same period in 2021. The decrease is mainly due to a few short-term special barrier rental projects that occurred in the first quarter of 2021, which typically carry higher margins than product sales as well as a significant decrease in product sales.
Interest Expense - Interest expense was $48 and $42 for the three month periods ended March 31, 2022 and 2021, respectively. The Company expects interest expense for 2022 to be higher compared to the full year of 2021 due to the increased level of indebtedness.
Income Tax Expense (Benefit) - The Company had an income tax benefit of $40 with an effective rate of 25% for the three months ended March 31, 2022, compared to income tax expense of $941 with an effective rate of 25% for the same period in 2021.
Net Income (Loss) - The Company had a net loss of $119 for the three months ended March 31, 2022, compared to net income of $2,867 for the same period in 2021. The basic and diluted loss per share was $0.02 for the three months ended March 31, 2022, and the basic and diluted earnings per share was $0.55 for the three months ended March 31, 2021.
Liquidity and Capital Resources (dollar amounts in thousands)
Reference is made to "Overview; Potential Effect of COVID-19 Outbreak" above in the context of the discussion below.
The Company has a mortgage note payable to Summit Community Bank (the "Bank") for the construction of its North Carolina facility. The note carries a ten-year term at a fixed interest rate of 3.64% annually per the Promissory Note Rate Conversion Agreement, with monthly payments of $22, and is secured by all of the assets of Smith-Carolina and a guarantee by the Company. The loan matures on October 10, 2029. The balance of the note payable on March 31, 2022 was $1,762.
On March 27, 2020, the Company completed the refinancing of existing loans with a note payable to the Bank in the amount of $2,701. A portion of the funds, $678, was secured for improvements to an existing five-acre parcel for additional storage at the Midland, Virginia plant. The loan is collateralized by a first lien position on the Virginia property, building, and assets. The refinance also released the lien on the Smith-manufacturing plant in Hopkins, South Carolina (Columbia).
The interest rate per the Promissory Note is fixed at 3.99% per annum, with principal and interest payments payable monthly over 120 months in the amount of $27. The loan matures on March 27, 2030. The balance of the note payable on March 31, 2022 was $2,245.
On February 10, 2022, the Company completed the financing for its prior acquisition of certain real property in Midland, VA totaling approximately 29.8 acres with a note payable to the Bank in the amount of $2,805. The loan is collateralized by a first lien position on the related real property. The interest rate is fixed at 4.09% per annum, with principal and interest payments payable monthly over 180 months in the amount of $21. The loan matures on February 10, 2037. The balance of the note payable on March 31, 2022 was $2,794.
The Company additionally has 2 smaller installment loans with annual interest rates of 2.90% and 3.99%, maturing in 2025, with balances totaling $67.
Under the loan covenants with the Bank, the Company is limited to annual capital expenditures of $3,500 and must maintain tangible net worth of $10,000. The Company received a special exception to the capital expenditure covenant from the Bank to purchase barrier during 2022 for $5,000 (see Note 5 Commitments under Item 1 of the Financial Statements). The Company is in compliance with all covenants pursuant to the loan agreements as of March 31, 2022.
In addition to the notes payable discussed above, the Company has a $4,000 line of credit with the Bank with no balance outstanding as of March 31, 2022. The line of credit is evidenced by a commercial revolving promissory note which carries a variable interest rate of prime, with a floor of 3.50% per annum, and matures on October 1, 2022. The loan is collateralized by a first lien position on the Company's accounts receivable and inventory and a second lien position on all other business assets. Key provisions of the line of credit require the Company (i) to obtain bank approval for capital expenditures in excess of $3,500 during the term of the loan and (ii) to obtain bank approval prior to its funding of any acquisition. On October 21, 2021, the Company received a Commitment Letter from the Bank to provide a guidance line of credit specifically to purchase business equipment in an amount up to $1,500. The commitment provides for the purchase of equipment for which a note payable will be executed with a term not to exceed five years with an interest rate at the Wall Street Journal prime rate plus 0.50% with a floor of 3.50% per annum. The loan is collateralized by a first lien position on all equipment purchased under the line. The commitment for the guidance line of credit matures on October 21, 2022. As of March 31, 2022, the Company had not purchased any equipment pursuant to the $1,500 commitment.
On March 31, 2022, the Company had cash totaling $14,818 compared to cash totaling $13,492 on December 31, 2021. The increase in cash is primarily the result of the financing that occurred during the three month period ended March 31, 2022.
Capital spending for the three months ended March 31, 2022, totaled $196, as compared to $376 for the same period in 2021. The 2022 expenditures were primarily for the purchase of new trailers and a new enterprise resource planning software. The Company intends to invest approximately $8,000 for the full year 2022, which includes a significant expansion in the barrier rental fleet with approximate costs of $5,000, and approximately $1,500 for yard development, and $1,500 for miscellaneous manufacturing equipment, excluding acquisitions and plant expansions (which none are anticipated at this time), although no assurance can be provided.
The Company's outstanding notes payable are financed at fixed rates of interest. This leaves the Company almost impervious to fluctuating interest rates.
The Company's cash flow from operations is affected by production schedules set by contractors, which generally provide for payment 30 to 90 days after the products are produced, and with some architectural contracts, retainage may be held until the entire project is completed. This payment schedule may result in liquidity challenges for the Company because it must bear a portion of the cost of production before it receives payment from its customers. The Company's average days sales outstanding (DSO), excluding the effect of unbilled revenue, was 102 days for the three months ended March 31, 2022, compared to 91 days for the year ended December 31, 2021.
If actual results regarding the Company's production, sales, and subsequent collections on customer receivables are materially inconsistent with management's expectations, the Company may in the future encounter cash flow and liquidity issues. If the Company's operational performance deteriorates significantly, it may be unable to comply with existing financial covenants and could cause defaults and acceleration under its loan agreements and lose access to the credit facility. Although no assurances can be given, the Company believes that its current cash resources, anticipated cash flow from operations, and the availability under the line of credit will be sufficient to finance the Company's operations for at least the next 12 months.
The Company's inventory was $3,325 on March 31, 2022, and $2,845 on December 31, 2021, or an increase of $480. The increase in inventory is mainly due to the increase of finished goods inventory on-hand compared to the prior year related to large utility projects in Virginia and large barrier projects in North Carolina. Inventory turnover was 12.6, annualized for the three months ended March 31, 2022, compared to 15.4, annualized for the same period in 2021.
Critical Accounting Policies and Estimates
The Company's critical accounting policies are more fully described in its Summary of Accounting Policies to the Company's consolidated financial statements on Form 10-K for the year ended December 31, 2021. There have been no changes as of March 31, 2022.
The Company services the construction industry primarily in areas of the United States where construction activity may be inhibited by adverse weather during the winter. As a result, the Company may experience reduced revenues from December through February and realize a more significant part of its revenues during the other months of the year. The Company may experience lower profits, or losses, during the winter months, and as such, must have sufficient working capital to fund its operations at a reduced level until the spring construction season. The failure to generate or obtain sufficient working capital during the winter may have a material adverse effect on the Company.
Management believes that the Company's operations were affected by inflation during the three month period ended March 31, 2022 and for the full year 2021, particularly in the purchases of certain raw materials such as cement and aggregates, steel, and also with labor costs. The Company believes that raw material pricing and labor costs will continue to increase in 2022, although no assurance can be given regarding future pricing or costs.
As of May 2, 2022, the Company's sales backlog was approximately $32.7 million, as compared to approximately $29.0 million at the same time in 2021. It is estimated that the majority of the projects in the sales backlog will be produced within 12 months, with a portion extending several years.
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