Forward-looking statements
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:
? Although the final impact is uncertain at this time, the resurgence of
the coronavirus epidemic may significantly affect the finances of the Company
the situation, liquidity and results of operations. In this regard, the Company
had already suffered the following negative impacts on its business:
reduction in the order book in 2020 compared to 2019, decrease in production volumes,
employee absences and bidding restrictions in some key states. The
The company continues to experience delays in receiving materials through
its supply chain. ? while the Company had net income for the three and nine months ended
2019, there can be no assurance that the Company will be able to remain profitable in
future periods; in connection with this risk, the Company suffered a loss for the
quarter endedMarch 31, 2020 ,
? our level of debt increased in 2020, and our ability to meet it cannot
be assured,
? our ability to collect accounts receivable may be affected by the
coronavirus outbreak,
? the continued availability of funding in the amounts, times and
the conditions required to support our future business and investment projects,
? while we have expended significant funds in recent years to increase
manufacturing and rental capacity, there can be no assurance that we will achieve
significantly greater revenues,
? the extent to which we are successful in developing, acquiring, licensing or
securing patents for proprietary products,
? changes in economic conditions specific to one or more of our markets
(including the availability of public funds and subsidies for construction),
? changes in general economic conditions in our main service areas,
? adverse weather, which inhibits the demand for our products, or the installation or completion of projects,
? our compliance with government regulations,
? potential decreases in our order book from one year to the next,
? our ability to produce and install products on building materials projects
in accordance with the contract specifications and within a timeframe in accordance with
contract requirements,
? the cyclical nature of the construction sector,
? our exposure to increased interest payments if interest rates
change, and
? other factors and information disclosed and discussed in other sections
of this report and in our annual report on Form 10-K for the fiscal year
endedDecember 31, 2020 .
Investors and shareholders should carefully consider these 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 forward-looking statements. We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
14 Table of Contents
Overview; Potential effect of the COVID-19 epidemic
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 ofthe United States . The Company's operating strategy has involved producing innovative and proprietary products, including SlenderWallâ¢, 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 inDelaware onAugust 2, 1994 . Prior to a corporate reorganization completed inOctober 1994 , the Company conducted its business primarily throughSmith-Midland Virginia , which was incorporated in 1960 asSmith Cattleguard Company , a Virginia corporation, and subsequently changed its name toSmith-Midland Corporation in 1985. The Company's principal offices are located at5119 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 toSmith-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. OnJanuary 30, 2020 , theWorld Health Organization ("WHO") announced a global health emergency because of a new strain of coronavirus originating inWuhan, China (the "COVID-19 outbreak") and the risks to the international community as the virus spread globally beyond its point of origin. InMarch 2020 , theWHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase
in exposure globally.
The full impact of the COVID-19 outbreak, including a recent resurgence inthe 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 will 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 asMaryland andNorth 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 relativewho has contracted COVID-19, or have been quarantined by a medical professional; in this respect, our workforce had previously been impacted as of this 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 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 could eliminate, cancel or delay projects due to monetary limitations resulting from the COVID-19 outbreak; in this regard, the Company had previously noted a reduction in tendering activity;
f) reduction in state infrastructure budgets due to reduced funding through gasoline tax or other sources of funding;
g) the increase in the total number of defaults, which in turn has an impact on the ability of the banking sector to finance projects in which the Company’s products can be used; 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 the remainder of 2021 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. 15 Table of Contents The Company had (in thousands) net income of$2,867 for the first quarter 2021, net income of$985 for the second quarter 2021, and net income of$3,694 for the third quarter 2021, resulting in net income of$7,546 for the nine months endedSeptember 30, 2021 . Profitability for the three and nine months endedSeptember 30, 2021 was positively impacted by the forgiveness of the PPP loan (described below in Liquidity and Capital Resources) in the amount of$2,692 . The cost of goods sold as a percent of revenue, not including royalties, for the three and nine months endedSeptember 30, 2021 was 80% and 73%, respectively, as compared to 72% and 79% for the three and nine months endedSeptember 30, 2020 . The increase in cost of goods sold as a percentage of revenue, not including royalties, for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 , is due in part to impacts of COVID-19 at the Virginia plant which reduced production volumes and increased labor costs. In addition, during the third quarter 2020, there were one-time special barrier projects, which typically have slightly higher margins due to risk and complexity, which improved the margin compared to the third quarter 2021. The decrease in cost of goods sold as a percentage of revenue, not including royalties, for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , is mainly due to the increase in barrier rental revenues, which typically have higher margins than product sales, and the increase in short-term special barrier rental projects, which carry slightly higher margins due to the complexity and risk of the projects. Total revenues for the three and nine month periods endedSeptember 30, 2021 were$13,100 and$40,625 , compared to$12,515 and$32,789 for the three and nine month periods endedSeptember 30, 2020 . The increase for the more recent nine month period was mainly from the barrier rentals, which included multiple short-term special barrier rental projects and, to a lesser extent, a continued increase in linear feet rented over the prior year of the core rental fleet. Future barrier rental revenues are not expected to continue to trend at the same rate as in the first quarter of 2021 due to the nature and frequency of the short-term special barrier projects, although the Company anticipates continued growth of core rental revenues. Results of Operations (dollar amounts in thousands, except per share data)
Three and nine months completed
Revenue includes product sales, barrier rentals, royalty income, and shipping and installation revenues. Product sales are further divided into soundwall, architectural and SlenderWall⢠panels, miscellaneous wall panels, highway barrier, Easi-Set® and Easi-Span® buildings, utility products, and miscellaneous precast products. The following table summarizes the sales by product type and comparison for the three and nine month periods endedSeptember 30, 2021 and 2020. As indicated in "Overview; Potential Effect of COVID-19 Outbreak" above, should a resurgence of the COVID-19 outbreak cause serious economic harm in our area of operations, our revenue expectations are unlikely to be fulfilled.
Revenue by Type (Disaggregated Revenue) Three Months EndedSeptember 30
Nine months ended
2021 2020 Change % Change 2021 2020 Change % Change Soundwall Sales$ 2,407 $ 1,736 $ 671 39 %$ 6,496 $ 5,824 $ 672 12 % Architectural Panel Sales 406 696 (290 ) (42 )% 3,843 2,229 1,614 72 % SlenderWall Sales 1,027 26 1,001 3,850 % 1,247 949 298 31 % Miscellaneous Wall Sales 520 963 (443 ) 46 )% 1,804 2,994 (1,190 ) (40 )% Barrier Sales 1,022 1,679 (657 ) (39 )%
3,578 3,949 (371 ) (9 )% Easi-Set and Easi-Span Building Sales 676 643 33 5 % 2,278 1,971 307 16 % Utility Sales 891 254 637 251 % 1,628 1,043 585 56 % Miscellaneous Sales 256 488 (232 ) (48 )% 994 1,077 (83 ) (8 )% Total Product
Sales 7,205 6,485 720 11 % 21,868 20,036 1,832 9 % Barrier Rentals 1,708 3,171 (1,463 ) (46 )% 8,667 4,820 3,847 80 %
Royalty Income 676 484 192 40 % 1,788 1,165 623 53 % Shipping and Installation Revenue 3,511 2,375 1,136 48 % 8,302 6,768 1,534 23 % Total Service Revenue 5,895 6,030 (135 ) (2 )% 18,757 12,753 6,004 47 % Total Revenue$ 13,100 $ 12,515 $ 586 5 %$ 40,625 $ 32,789 $ 7,836 24 %
The revenue items: soundwall sales, architectural panel sales, SlenderWall sales, miscellaneous wall 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, miscellaneous sales, and shipping and installation revenue are recognized as revenue at a point in time. Soundwall Sales - Soundwall sales were higher for the three and nine month periods endedSeptember 30, 2021 compared to the same periods in 2020. The increase is mainly due to production at the Virginia plant for the largest soundwall contract in Company history, which was initially awarded during 2018, and for which production is expected through 2021. Soundwall sales are expected to trend slightly lower during the last quarter of 2021. Architectural Sales - Architectural sales decreased for the three months endedSeptember 30, 2021 compared to the same period in 2020, and significantly increased for the nine months endedSeptember 30, 2021 compared to the same period in 2020. The Company was awarded a large architectural project which began production the fourth quarter 2020 and continued production during the first and second quarters 2021. With the large architectural project finishing up in the second quarter 2021, a decrease occurred in the third quarter 2021, but an overall increase was experienced for the nine month period endedSeptember 30, 2021 compared to the same period in 2020. Architectural sales are expected to decrease in the last quarter of 2021, as compared to the last quarter of 2020, with a projected shift to more SlenderWall sales. SlenderWall Sales - SlenderWall sales increased for the three and nine month periods endedSeptember 30, 2021 as compared to the same periods in 2020. The Company was recently awarded a large SlenderWall project which began production at the end of the second quarter 2021. The Company continues to focus sales initiatives on SlenderWall with multiple bids awaiting awards, but no assurance can be given as to success of this endeavor. 16 Table of Contents
Miscellaneous Wall Sales - Miscellaneous wall sales decreased for the three and nine month periods endedSeptember 30, 2021 compared to the same periods in 2020 due to the decreased amount of retaining wall projects in production. Miscellaneous wall sales are expected to trend similar to the third quarter 2021 during the fourth quarter 2021, although no assurance can be provided. Barrier Sales - Barrier sales decreased during the three and nine month periods endedSeptember 30, 2021 compared to the same periods in 2020. The main reason for the decrease is due to reduced barrier production demand inNorth Carolina andSouth Carolina , combined with the increase in the core fleet of barrier rentals. Aligning with the Company's strategy to shift to barrier rentals versus barrier sales in theDelaware to Virginia region, barrier sales are expected to trend lower than previous periods. Easi-Set® and Easi-Span®Building Sales - Building and restroom sales increased for the three and nine month periods endedSeptember 30, 2021 compared to the same periods in 2020 mainly due to increased building sales at all three manufacturing facilities during the first nine months of 2021 as compared to the prior year. Building and restroom sales are expected to continue to trend similar to the third quarter 2021 during the fourth quarter 2021, although
no assurance can be provided. Utility Sales - Utility sales increased for the three and nine month periods endedSeptember 30, 2021 compared to the same periods in 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 the fourth quarter 2021 from the comparable prior year period, 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 and nine month periods endedSeptember 30, 2021 compared to the same periods in 2020. The change is mainly attributed to specialty concrete blocks produced at theNorth Carolina plant which began in 2020 and significantly decreased during the third quarter 2021. Miscellaneous product sales are expected to remain lower during the fourth quarter 2021. Barrier Rentals - Barrier rentals decreased significantly for the three month period endedSeptember 30, 2021 compared to the same period in 2020 mainly due to multiple short-term special projects during the third quarter 2020, compared to one smaller special project during the third quarter 2021. The Company continued to increase its core rental barrier fleet year over year. Barrier rentals increased significantly for the nine month period endedSeptember 30, 2021 compared to the same period in 2020 due to the higher quantity of linear feet rented than 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 increase the fleet during the remainder of 2021 and upcoming years. Future barrier rental revenues are not expected to continue trending at the same rate as in the first three months of 2021 due to the nature and frequency of the short-term special barrier projects in 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 for the three and nine month periods endedSeptember 30, 2021 compared to the same periods in 2020. The increase in royalties is mainly due to the increase in barrier royalties during the first nine months of 2021 compared to the same period in 2020. Infrastructure spending continues to drive royalties, and the Company anticipates fourth quarter 2021 royalties to be slightly lower compared to the first three quarters of the year, 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 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 and nine month periods endedSeptember 30, 2021 , compared to the same periods in 2020. The increase is mainly attributed to the increase in shipping, setting, and offloading associated with barrier rentals during the first nine months of 2021 as compared to the prior year. 17 Table of Contents
Cost of Goods Sold - Total cost of goods sold as a percent of revenue, not including royalties, for the three and nine months endedSeptember 30, 2021 was 80% and 73%, respectively, as compared to 72% and 79% for the three and nine months endedSeptember 30, 2020 . The increase in cost of goods sold as a percentage of revenue, not including royalties, for the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 , is due in part to impacts of COVID-19 at the Virginia plant which reduced production volumes and increased labor costs. In addition, during the third quarter 2020, there were one-time special barrier projects, which typically have slightly higher margins due to risk and complexity, that improved margins compared to the third quarter 2021. The decrease in cost of goods sold as a percentage of revenue, not including royalties, for the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 , is mainly due to the increase in barrier rental revenues, which typically have higher margins than product sales, and the increase in short-term special barrier rental projects, which carry slightly higher margins due to the complexity and risk of the projects. General and Administrative Expenses - For the three months endedSeptember 30, 2021 the Company's general and administrative expenses decreased by$56 to$1,215 from$1,271 during the same period in 2020, and for the nine months endedSeptember 30, 2021 the Company's general and administrative expenses increased by$327 to$3,880 from$3,553 . The increased general and administrative expenses for the nine month period endedSeptember 30, 2021 is mainly attributed to stock compensation and an increase in salaries and wages. General and administrative expense as a percentage of total revenue was 9% and 10% for the three month periods endedSeptember 30, 2021 and 2020, respectively, and 10% and 11% for the nine month periods endedSeptember 30, 2021 and 2020, respectively. Selling Expenses - Selling expenses for the three months endedSeptember 30, 2021 increased to$719 from$521 for the same period in 2020, and selling expenses for the nine months endedSeptember 30, 2021 increased to$2,010 from$1,684 for the same period in 2020. Selling expenses increased during the periods due to additional sales persons 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 operating income for the three month period endedSeptember 30, 2021 of$1,268 compared to operating income of$2,049 for the same period in 2020. The decrease in operating income for the three month period endedSeptember 30, 2021 compared to the same period in 2020, was mainly due to a higher cost of goods sold, not including royalties, as a percent of revenues for the most recent period. The Company had operating income for the nine month period endedSeptember 30, 2021 of$6,347 compared to operating income of$2,581 for the same period in 2020. The increase in operating income for the nine month period endedSeptember 30, 2021 compared to the same period in 2020, was mainly due to the increase in gross profit associated with the increase in total sales, mainly deriving from royalties and barrier rentals. Operating results for the 2020 periods were also adversely affected due to COVID-19 related factors. Interest Expense - Interest expense was$47 and$53 for the three month periods endedSeptember 30, 2021 and 2020, respectively. Interest expense was$145 and$166 for the nine month periods endedSeptember 30, 2021 and 2020, respectively. The Company expects interest expense to continue to decrease for the full year 2021, as compared to the full year 2020 with the refinancing of debt inMarch 2020 and the payoff of two long-term notes during 2021. Income Tax Expense (Benefit) - The Company had income tax expense of$442 with an effective rate of 11% for the three months endedSeptember 30, 2021 compared to income tax expense of$469 with an effective rate of 23% for the same period in 2020. The Company had income tax expense of$1,711 with an effective rate of 18% for the nine months endedSeptember 30, 2021 compared to income tax expense of$588 with an effective rate of 23% for the same period in 2020. The decrease in the effective tax rate is due to the exclusion of$2,692 from federal taxable income related to PPP loan forgiveness under section 1106(i) of the CARES Act. Net Income (Loss) - The Company had net income of$3,694 for the three months endedSeptember 30, 2021 , compared to net income of$1,549 for the same period in 2020. The basic and diluted earnings per share was$0.71 for the three months endedSeptember 30, 2021 , and the basic and diluted earnings per share was$0.30 for the three months endedSeptember 30, 2020 . The Company had net income of$7,546 for the nine months endedSeptember 30, 2021 , compared to net income of$1,952 for the same period in 2020. The basic and diluted earnings per share was$1.45 for the nine months endedSeptember 30, 2021 , and the basic and diluted earnings per share was$0.38 for the nine months endedSeptember 30, 2020 . Profitability for the three and nine months endedSeptember 30, 2021 was positively impacted by the forgiveness of the PPP loan (described below in Liquidity and Capital Resources) in the amount of$2,692 . 18 Table of Contents
Cash and capital resources (amounts in thousands of dollars)
Reference is made to the âOverview; Potential effect of the COVID-19 outbreak âabove in the context of the discussion below.
The Company has a mortgage note payable toSummit Community Bank (the "Bank") for the construction of itsNorth 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 onOctober 10, 2029 . The balance of the note payable atSeptember 30, 2021 was$1,862 . OnMarch 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 in the amount of$678 were secured for improvements to an existing five acre parcel for additional storage at theMidland, 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-Columbia plant inHopkins, 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 onMarch 27, 2030 . The balance of the note payable atSeptember 30, 2021 was$2,363 .
The Company also has 4 smaller installment loans with annual interest rates between 2.90% and 6.84%, maturing between 2021 and 2025, with variable balances totaling
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 is in compliance with all covenants pursuant to the loan agreements
as ofSeptember 30, 2021 . In addition to the notes payable discussed above, onApril 16, 2020 , the Company obtained a loan, evidenced by a promissory note, under the Paycheck Protection Program (the "PPP") from the Bank in the amount of$2,692 . The PPP provides for loans to qualifying businesses, the proceeds of which may only be used for payroll costs, rent, utilities, mortgage interest, and interest on other pre-existing indebtedness. The interest rate per the promissory note, datedApril 16, 2020 and executed by the Company in favor of the Bank, was fixed at 1.00% per annum, with principal and interest payments starting thirty (30) days after the amount of forgiveness is determined under section 1106 of the CARES Act. The proceeds of the loan were required to be utilized pursuant to the requirements of the PPP, and all or a portion of the loan could be forgiven in accordance with the PPP applicable rules, regulations, and guidelines. OnJuly 9, 2021 , the Company received loan forgiveness for the full amount of the loan of$2,692 . Also 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 ofSeptember 30, 2021 . The line of credit is evidenced by a commercial revolving promissory note which carries a variable interest rate of prime and matures onOctober 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 any acquisition. OnOctober 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 theWall 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 onOctober 21, 2022 . As ofSeptember 30, 2021 , the Company had not purchased any equipment pursuant to the$1,500 commitment.
TO
Capital spending for the nine months endedSeptember 30, 2021 totaled$1,210 , as compared to$2,501 for the same period in 2020. The 2021 expenditures were mainly for the purchase of rental barrier, miscellaneous manufacturing equipment, and a vehicle. The Company intends to continue capital spending on maintenance capital expenditures as needed over the remainder of the year, which is expected to be approximately$1,000 . With the increase in barrier rental bidding and activity, the Company plans to purchase used barrier and manufacture barrier to increase the rental fleet capacity, which is expected to cost an additional$1,000 . The Company's three mortgage 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 slightly affect the interest paid by the Company on an annual basis. Approximately 99% of the Company's debt obligations are financed at a fixed interest rate, after consideration of the Promissory Note Rate Conversion Agreement, so that each 1% increase in the interest rates of the Company's outstanding debt will reduce income by approximately$1 annually, excluding the impact of fair value changes in the Promissory Note Rate Conversion Agreement. 19 Table of Contents
The Company's cash flow from operations is affected by production schedules set by contractors, which generally provide for payment 35 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 problems 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 87 days for the nine months endedSeptember 30, 2021 compared to 89 days for the year endedDecember 31, 2020 . The decrease in DSO is mainly due to collection of retainage and the collection of amounts due under multiple large projects occurring in the first quarter 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$3,196 atSeptember 30, 2021 and$2,194 atDecember 31, 2020 , or an increase of$1,002 . The increase in inventory is mainly due to the increase of raw materials on-hand compared to the prior year due to strategic measures to purchase certain materials, when available, that may be more susceptible to supply chain issues. Inventory turnover was 16.3, annualized for the nine months endedSeptember 30, 2021 , compared to 14.9, annualized
for the same period in 2020.
Critical accounting conventions and estimates
The Company’s critical accounting policies are further described in its Summary of Accounting Policies for the Company’s Consolidated Financial Statements on Form 10-K for the year ended.
Seasonality The Company services the construction industry primarily in areas ofthe 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. Inflation Raw material costs for the Company, cement, steel, aggregates, and other direct materials used in production have increased for the first nine months of 2021. The Company anticipates raw material prices to slightly increase for the remainder of 2021, although no assurance can be given regarding future pricing. Sales Backlog
As ofNovember 1, 2021 , the Company's sales backlog was approximately$28.5 million , as compared to approximately$20.6 million at the same time in 2020. It is estimated that majority of the projects in the sales backlog will be produced within 12 months, with a portion extending several years. 20 Table of Contents
© Edgar online, source