Smith-Midland Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparisons are with FY 2017. The company manufactures, sells, rents, installs, and licenses precast concrete products, including highway barriers, soundwalls, SlenderWall panels, and precast buildings. Financial amounts below are in thousands of dollars unless stated otherwise.
Key financial results
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $40,220 | $41,717 | Down 3.6% |
| Gross profit | $10,490 | $11,464 | Down $974 |
| Gross margin | 26.1% | 27.5% | Down 1.4 percentage points |
| Operating income | $2,216 | $3,715 | Down 40.2% |
| Operating margin | 5.5% | 8.9% | Down 3.4 percentage points |
| Net income | $1,687 | $2,684 | Down 37.1% |
| Basic and diluted EPS | $0.33 | $0.53 | Down $0.20 |
| Cash from operations | $8,472 | $2,926 | Up $5,546 |
| Capital spending | $5,234 | $2,741 | Up $2,493 |
Revenue mix and operating drivers
- Product sales were nearly flat at $29,159, up 0.4%. Soundwall sales grew 30.3% to $9,867 and SlenderWall sales rose 172.1% to $5,572.
- Barrier sales fell 35.6% to $7,264; barrier rental revenue fell 59.5% to $1,729, partly reflecting a large short-term rental project in 2017 and a customer buy-back arrangement in 2018.
- Shipping and installation revenue increased 17.6% to $7,657. Royalties declined 11.1% to $1,675.
- Cost of goods sold declined 1.7% to $29,730, but rose to 77% of revenue excluding royalties from 76%. Management cited product mix, higher steel and cement costs, and the unusually high-margin 2017 rental project.
- General and administrative expenses increased 8.0% to $5,675; selling expenses increased 4.1% to $2,599.
Liquidity, cash flow, and debt
- Year-end cash was $1,946, down from $3,390; available-for-sale investment securities were $1,107, compared with $1,098. Cash and investments together totaled $3,053.
- Operating activities provided $8,472, including a $6,592 increase in the deferred buy-back lease obligation. Investing activities used $10,642, including $5,507 for the buy-back lease asset and $5,234 for property and equipment. Financing activities provided $726.
- Total debt obligations were $4,503 at year-end, versus $3,533 in 2017; $1,711 was scheduled to mature within twelve months. The company reported covenant compliance at December 31, 2018.
- A $4,000 bank line of credit had a $1,000 construction draw outstanding for the North Carolina expansion, expected to be converted to long-term debt in 2019. The company also had a separate $4,000 revolving credit facility, with no balance reported at year-end.
- Current assets were $21,596 and current liabilities were $11,711. Accounts receivable, including billed and unbilled amounts, increased; days sales outstanding rose to 86 from 75, largely due to retainage on large SlenderWall projects.
Material changes, outlook, and risks
- Management attributed much of the decline in operating income and net income to accounting for a guaranteed buy-back agreement with one customer. At year-end, the related deferred obligation was $6,592 and the deferred lease asset was $5,304. Barrier deliveries were expected to finish in Q2 2019; management expected related profit recognition to continue through 2022, when the customer’s project and buy-back option are expected to conclude.
- Management described 2019 sales as stable and cited a $31.1 million backlog as of March 5, 2019, up from $29.5 million around the same date in 2018. It expected 2019 to be another strong financial year, but gave no quantified earnings or revenue guidance and cautioned that awards and results are not assured.
- A new 15,000-square-foot North Carolina plant was under construction, with an estimated cost of $3.3 million and expected completion and start of manufacturing in Q3 2019. Management anticipated 2019 capital spending of $2.0 million, plus $2.2 million for plant expansion.
- Management expected interest expense to increase in 2019 as expansion borrowing proceeds. It said raw-material prices might remain flat or increase slightly.
- Key risks include construction-industry cyclicality, adverse weather and project delays, dependence on public infrastructure funding and approvals, competition, customer payment timing and credit risk, financing availability, higher interest rates, and uncertainty around new-product acceptance and Beach Prisms permitting. The company said Beach Prisms permits may be delayed and orders could be cancelled.
- The company paid dividends in 2018 but said future dividends are not assured and will depend on earnings, capital needs, and other factors. Management reported effective financial reporting and disclosure controls; the external auditor gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
Most important facts for investors to verify
- How the buy-back agreement’s deferred revenue, costs, lease asset, and obligation will affect reported revenue, earnings, cash flows, and the eventual buy-back outcome.
- Whether the $31.1 million backlog converts to production and customer collections on schedule, especially given higher receivables and retainage.
- Final cost, financing, timing, and production ramp-up for the North Carolina expansion, and the resulting debt and interest burden.
- Whether margins recover as product mix changes and steel, cement, labor, and other operating costs evolve.
- Whether management’s expectations for 2019 soundwall, SlenderWall, rental, royalty, and building activity are realized, and whether required project and environmental approvals are obtained.