SMITH-MIDLAND CORPORATION The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company (including the Notes thereto) included elsewhere in this report. Dollar amounts are in thousands, except for per share amounts.
The Company generates revenues primarily from the sale, leasing, licensing, shipping and installation of precast concrete products and systems for the construction, utility and farming industries. The Company's operating strategy has involved producing and marketing innovative and proprietary products, including SlenderWall™, a patent pending, lightweight, energy efficient concrete and steel exterior wall panel for use in building construction; J-J Hooks® Barrier, a patented positive-connected highway safety barrier; Sierra Wall™, a patented sound barrier primarily for roadside use; transportable concrete buildings; and SoftSound™, a highway sound attenuation system. In addition, the Company produces utility vaults; farm products such as cattleguards; and custom order precast concrete products with various architectural surfaces.
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 outside of the Company's control, such as weather and project delays, affect the Company's production schedule, possibly causing a momentary slowdown 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.
On
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The full impact of the COVID-19 outbreak, including a recent resurgence in
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 as of the financial statement date 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 potential 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. Although the Company experienced a loss in the first quarter of 2020 and reduced revenues for the year 2020 as compared to 2019, as well as experiencing factors described above, given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to ultimately estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity for 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.
11 Overview
Overall, the Company's financial bottom line performance was significantly
higher in 2021 when compared to 2020. The Company had net income for 2021 in the
amount of
Results of Operations
Year ended
For the year ended
Revenue by Type (Disaggregated Revenue) 2021 2020 Change % Change Product Sales: Soundwall Sales$ 8,025 $ 7,499 $ 526 7 % Architectural Sales 4,932 3,668 1,264 34 % SlenderWall Sales 1,795 948 847 89 % Miscellaneous Wall Sales 2,352 3,371 (1,019 ) (30 )% Barrier Sales 4,686 5,507 (821 ) (15 )% Easi-Set and Easi-Span Building Sales 3,036 2,935 101 3 % Utility Sales 2,468 1,310 1,158 88 % Miscellaneous Sales 1,206 1,538 (332 ) (22 )% Total Product Sales 28,500 26,776 1,724 6 % Barrier Rentals 9,925 6,879 3,046 44 % Royalty Income 2,216 1,688 528 31 % Shipping and Installation Revenue 10,001 8,519 1,482 17 % Total Service Revenue 22,142 17,086 5,056 30 % Total Revenue$ 50,642 $ 43,862 $ 6,780 15 % 12
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 panel sales slightly increased by 7% in 2021
compared to 2020 due primarily to increased production during 2021 at the
Architectural Sales - Architectural panel sales increased by 34% in 2021 compared to 2020. The Company was awarded a large architectural project which began production in the fourth quarter of 2020, with the majority of production occurring in 2021. Architectural sales are expected to decrease during 2022, as compared to 2021, with an anticipated shift to more SlenderWall sales, although no assurance can be provided.
SlenderWall Sales - SlenderWall panel sales increased by 89% in 2021 when compared to 2020. SlenderWall sales are generated on a project basis, and success is determined by the number and dollar value of projects awarded and produced in any particular period. The increase is mainly attributable to one large project which started production at the end of the second quarter 2021. Currently, the Company has the largest quantity of bids out for the SlenderWall product in history and expects to be awarded multiple projects in the near future. The Company continues to focus sales initiatives on SlenderWall, but no assurance can be given as to the success of this endeavor.
Miscellaneous Wall Sales - Miscellaneous wall sales can be highly customized precast concrete products or retaining and lagging panels that do not fit other product categories. Miscellaneous wall sales decreased by 30% in 2021 when compared to 2020 due to the decreased amount of retaining wall projects in production. Miscellaneous sales are expected to trend similar in 2022, as compared to 2021, although no assurance can be provided.
Barrier Sales - Barrier sales decreased by 15% in 2021 when compared to 2020.
The main reason for the decrease is due to reduced barrier production demand in
Easi-Set® and Easi-Span®
Utility Sales - Utility products are mainly comprised of underground utility vaults used in infrastructure construction. Utility product sales increased by 88% in 2021 compared to 2020. 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 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, blocks or small
add-on items. For 2021, miscellaneous product sales decreased by 22% when
compared to 2020. The change is mainly attributed to specialty concrete blocks
produced at the
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Barrier Rentals - Barrier rentals increased significantly in 2021 as compared to 2020 due to the higher quantity of linear feet rented over the previous year and, to a greater extent, a few short-term special projects during 2021. A substantial portion of the total revenue from these special projects was earned in the first quarter 2021. As indicated above, the Company is shifting its focus to barrier rentals compared to barrier sales with the significant increase in the rental fleet beginning in late 2019, and continued plans to significantly increase the fleet during 2022. Future barrier rental revenues are not expected to continue trending at the same rate as in 2021 due to the nature and frequency of the short-term special barrier projects in the early part of that period, however the Company generally expects increased barrier rentals of the core rental fleet for future periods, although no assurance can be given.
Royalty Income - Royalties significantly increased by 31% in 2021 as compared to
2020. The increase in royalties is mainly due to the increase in barrier
royalties during 2021 compared to 2020. Infrastructure spending continues to
drive royalties, and the Company anticipates 2022 royalties to increase compared
to 2021 with the approval of the J-J Hooks barrier in
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 installation of our products at the customers' construction site. Installation revenue results when attaching architectural wall panels to a building, installing an Easi-Set® building at a customers' site, setting highway barrier, or setting any of our other precast products at a site specific to the requirements of the owner. Shipping and installation revenues increased by 17% for 2021 when compared to 2020. The increase is mainly attributed to the increase in shipping, setting, and offloading associated with core barrier rentals during 2021 as compared to the prior year.
Cost of Goods Sold - Total cost of goods sold for the year ended
General and Administrative Expenses - For the year ended
Selling Expenses - Selling expenses for the year ended
Operating Income - The Company had operating income for the year ended
Interest Expense - Interest expense was
Income Tax Expense - The Company had income tax expense of
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Net Income - The Company had net income of
Liquidity and Capital Resources
The Company financed its capital expenditures requirements for 2021 with cash
flows from operations, cash balances on hand and notes payable to a bank. The
Company had
The Company has a mortgage note payable to
On
Additionally, the Company has 3 smaller installment loans with annual interest
rates between 2.9% and 4.5%, maturing between 2022 and 2025, with varying
balances totaling
Subsequent to
Under the loan covenants with the Bank, the Company is limited to annual capital
expenditures of
In addition to the notes payable discussed above, on
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The Company also has a
At
Capital spending, including financed additions, increased from
The Company's notes payable are financed at fixed rates of interest. This leaves the Company almost impervious to fluctuating interest rates. Increases in such rates will only affect the interest paid by the Company if new debt is obtained with a variable interest rate.
The Company's cash flow from operations is affected by production schedules set by contractors, which generally provide for payment 45 to 75 days after the products are produced and with some architectural contracts, retainage may be held until the entire project is completed. This payment schedule could result in liquidity problems for the Company because it must bear the cost of production for its products before it receives payment. The Company's days sales outstanding (DSO) in 2021 and 2020 were 91 and 89 days, respectively. 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 at
Critical Accounting Policies
The Company's significant accounting policies are more fully described in its
Summary of Accounting Policies to the Company's consolidated financial
statements. The preparation of financial statements in conformity with
accounting principles generally accepted within
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The Company evaluates the adequacy of its allowance for doubtful accounts at the end of each quarter. In performing this evaluation, the Company analyzes the payment history of its significant past due accounts, subsequent cash collections on these accounts, comparative accounts receivable aging statistics, and other customer specific considerations existing and known as of the time of the analysis. Based on this information, along with other related factors, the Company develops what it considers to be a reasonable estimate of the uncollectible amounts included in accounts receivable. This estimate involves significant judgment by the management of the Company. Actual uncollectible amounts may differ from the Company's estimate.
The Company recognizes revenue on the sale of its standard precast concrete products, and the associated shipping and installation revenue, at shipment date, including revenue derived from any projects to be completed under short-term contracts. Leasing and royalties are recognized as revenue over time. Certain sales of soundwall, SlenderWall, and other architectural concrete products are recognized over time because as the Company's performance creates or enhances customer controlled assets or creates or enhances an asset with no alternative use, and the Company has an enforceable right to receive compensation. Over time product contracts are estimated based on the number of units produced (output method) during the period multiplied by the unit rate stated in the contract. As the output method is driven by units produced, the Company recognizes revenues based on the value transferred to the customer relative to the remaining value to be transferred. The Company also matches the costs associated with the units produced. If a contract is projected to result in a loss, the entire contract loss is recognized in the period when the loss was first determined and the amount of the loss updated in subsequent reporting periods. Revenue recognition also includes an amount related to a contract asset or contract liability. If the recognized revenue is greater than the amount billed to the customer, a contract asset is recorded in accounts receivable trade - unbilled. Conversely, if the amount billed to the customer is greater than the recognized revenue, a contract liability is recorded in customer deposits. Changes in the job performance, job conditions and final contract settlements are factors that influence management's assessment of total contract value and therefore, profit and revenue recognition.
Seasonality
The Company services the construction industry primarily in areas of
Inflation
Management believes that the Company's operations were affected by inflation in 2021 and 2020, 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 increase in 2022, although no assurance can be given regarding future pricing or costs.
Backlog
As of
The risk exists that recessionary economic conditions and the coronavirus outbreak may adversely affect the Company more than it has experienced to date. To mitigate these economic and other risks, the Company has a broader product offering than most competitors and has historically been a leader in innovation and new product development in the industry. The Company is continuing this strategy through the development, marketing and sales efforts for its new products.
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The Company continues to evaluate both production and administrative processes, and has streamlined many of these processes through lean activities. During 2021 and 2020, the Company, through lean activities, continued to see positive effects in production and office areas. The lean business philosophy is a long-term, customer focused approach to continuous improvement by eliminating waste and providing value. It is management's intention to continue on the lean journey while implementing a lean culture throughout the Company to help reach our goals for 2022. The Company's lean efforts are aimed to increase quality to the customer, significantly reduce defects, while increasing production capacity and sales volume. In order to meet these goals, substantial improvements through lean tools and lean thinking are being implemented company wide.
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