Smith-Midland Corporation — FY 2011 Form 10-K
Business and period: The company manufactures, sells, rents, installs and licenses precast concrete products, including highway barriers, soundwalls, building panels, utility vaults and portable concrete buildings. This annual report covers the year ended December 31, 2011; comparisons are with FY 2010. The company is a smaller reporting company, and its common stock trades on the OTC Bulletin Board under SMID.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $26.70 million | $31.71 million |
| Gross profit / margin | $4.60 million / 17.2% | $9.03 million / 28.5% |
| Operating income (loss) / margin | $(364,836) / (1.4)% | $3.93 million / 12.4% |
| Net income (loss) | $(351,680) | $2.41 million |
| Diluted earnings (loss) per share | $(0.07) | $0.50 |
| Cash from (used in) operating activities | $(83,106) | $1.12 million |
| Cash and cash equivalents at year-end | $2.13 million | $2.57 million |
| Total notes payable, including current maturities | $3.40 million | $3.23 million |
Year-end current assets were $12.70 million and current liabilities $2.98 million, a working-capital surplus of approximately $9.72 million. Net property and equipment was $4.62 million; total assets were $17.53 million and stockholders’ equity $10.73 million. The company’s principal bank note was $2.42 million, secured principally by company assets; other debt included a $545,499 bank note, capital leases and installment notes. The company reported compliance with its loan covenants at year-end. Gross margin fell materially, reflecting lower revenue and competitive pricing pressure.
Material changes versus FY 2010
- Revenue declined 15.8%; product sales fell 20.0%. Soundwall sales dropped 83.0%, primarily after completion of a large Maryland project, while architectural-panel and Slenderwall sales rose substantially.
- Barrier sales fell 36.5%, and barrier rental revenue fell 34.4%, which management attributed to reduced publicly funded highway activity. Easi-Set/Easi-Span building sales declined 17.4%.
- Shipping and installation revenue increased 20.9%, partly because more architectural panels requiring installation were sold.
- Cost of goods sold decreased only 2.6%, much less than revenue; it rose to 83% of revenue from 72%. Operating results moved from $3.93 million of income to a $364,836 loss.
- Interest expense decreased to $136,067 from $155,748. The company recorded a $136,000 income tax benefit versus $1.38 million of tax expense in 2010.
- Operating activities used $83,106 of cash, versus providing $1.12 million. Capital expenditures were $742,735, down from $1.17 million; cash declined by $442,482 during 2011.
Outlook, risks and other notable matters
- Management expected competitive pricing to persist through the first half of 2012, anticipated flat barrier sales, and believed Slenderwall, building and utility-product sales could improve. These are expectations, not guarantees.
- Management forecast approximately $500,000 of 2012 capital spending and reported a sales backlog of about $7.8 million as of March 23, 2012, versus approximately $11 million at roughly the same time in 2010. Most backlog projects were scheduled for shipment in 2012. Repeat standard-product business historically contributed approximately $5–$7 million annually.
- Management believed cash flow would be sufficient for operations and necessary capital spending for at least 12 months, but noted that customer payment timing and retainage can strain liquidity. Days sales outstanding rose to 95 days from 67 days.
- Key risks include construction-market weakness and dependence on government-funded projects, weather and seasonality, low-price competition, project execution and payment delays, variable-rate debt and financing availability, and the commercial acceptance and permitting of newer products. Management estimated a 1% interest-rate increase would reduce annual income by approximately $34,000.
- Beach Prisms remained subject to environmental approvals; Virginia issued a permit in 2011, while further approvals were being pursued. The company cautioned that there is no assurance of commercial acceptance for Beach Prisms or H2Out.
- The company reported no material litigation and no subsequent events requiring disclosure or adjustment. The auditor issued an unqualified opinion on the financial statements. Management concluded internal controls and disclosure controls were effective; the auditor did not attest to internal-control effectiveness.
- Governance risks disclosed include only one independent director, no separate audit committee, and no audit committee financial expert. The bank loan generally restricts cash dividends without prior written consent; the company reported no history of cash dividends.
Most important facts for investors to verify
- Whether 2012 revenue and margins recovered from the sharp FY 2011 decline, particularly as the large soundwall contract rolled off and competitive pricing continued.
- Conversion, timing and collection of the $7.8 million backlog, including the effect of project delays, retainage and elevated receivable days.
- Operating cash generation, available liquidity and compliance with bank covenants; confirm debt balances, variable-rate exposure and collateral or capital-spending restrictions.
- Progress on Beach Prisms permits and commercial sales, and whether Slenderwall, building and utility-product growth materialized.
- Governance and related-party arrangements, including the CEO’s annual $99,000 patent royalty and $24,000 annual property lease, and the limited independent-board and audit oversight disclosed.