Smith-Midland Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are to fiscal 2016. Smith-Midland develops, manufactures, sells, leases, installs and licenses precast concrete products, including highway barriers, soundwalls, building panels and modular buildings.
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $41.717 million | $40.050 million | +4.2% |
| Gross profit / gross margin | $11.581 million / 27.8% | $10.349 million / 25.8% | Margin +2.0 percentage points |
| Operating income / margin | $3.715 million / 8.9% | $4.336 million / 10.8% | Income down $621,000 |
| Net income | $2.684 million | $2.835 million | Down 5.3% |
| Basic / diluted EPS | $0.53 / $0.53 | $0.57 / $0.56 | Lower year over year |
| Operating cash flow | $2.926 million | $3.995 million | Down $1.069 million |
| Capital expenditures | $2.741 million | $3.745 million | Down $1.004 million |
| Total notes payable | $3.533 million | $3.933 million | Down $400,000 |
At year-end, cash was $3.390 million and available-for-sale investments were $1.098 million. The $2 million revolving credit line had no balance outstanding and matured September 12, 2018. Current maturities of debt were $637,000; the company reported compliance with loan covenants. Current assets were $19.032 million versus current liabilities of $7.834 million.
Revenue growth reflected higher barrier sales and rentals, SlenderWall sales and royalties. Cost of goods sold rose 1.5%, slower than revenue, and gross margin improved, helped by product mix and a large, higher-margin short-term barrier rental. Higher general and administrative expenses—up 38% to $5.370 million—and selling expenses—up 17.6% to $2.496 million—more than offset that improvement at the operating-income level. Management cited increased stock compensation and salaries; stock compensation was $411,000 in 2017.
Material changes and notable items
- Barrier sales rose 20.5% to $11.276 million and barrier rental revenue rose 26.3% to $4.267 million. The rental increase was driven mainly by one large short-term project.
- Utility and farm product sales fell 27.7% to $1.492 million; shipping and installation revenue fell 10.5% to $6.510 million. Soundwall sales declined 3.4%, while SlenderWall sales increased 23.5% to $2.048 million.
- Accounts receivable and inventory increased; inventory rose $937,000 to $3.515 million, reflecting raw materials and goods prepared for expected 2018 barrier orders. DSO was 75 days versus 74 days in 2016.
- The company recorded a provisional $664,000 tax benefit from the Tax Cuts and Jobs Act. Its effective tax rate was 28.3%, compared with 34.0% in 2016; the company said its tax accounting remained subject to refinement.
- A $0.05-per-share special dividend was declared in December 2017 and paid January 9, 2018. The filing says future dividends are not assured.
Outlook, risks and other disclosures
- Management reported a backlog of approximately $29.5 million as of March 5, 2018, versus approximately $22.4 million at about the same time in 2017. Most was expected to be produced within 12 months, with some extending into 2019. Management cited potential large soundwall and SlenderWall projects and expected 2018 to be another strong year; these expectations are not assured.
- Management estimated 2018 capital spending of approximately $2 million, excluding acquisitions, and expected raw-material prices, including steel, to rise somewhat. The company was discussing an increase in its bank capital-expenditure limit.
- Key risks include construction-industry cycles, weather and project delays, reliance on public funding and approvals, competitive pricing, financing availability, interest-rate exposure, timely production and installation, and obtaining permits for Beach Prisms erosion-control projects. Beach Prisms had no sales in 2017 or 2016; permits could be delayed and orders canceled.
- The company reported no material litigation and stated it believed it substantially complied with applicable safety and environmental regulations. It noted that government inspection or approval delays could affect payment.
- Management concluded internal financial-reporting controls and disclosure controls were effective at year-end; the auditor did not attest to internal controls. The board had two independent directors out of five and no separately designated audit committee.
Investor verification priorities
- Confirm conversion and timing of the $29.5 million backlog, including the large soundwall, SlenderWall and I-66 barrier work, and assess project execution and margins.
- Review whether higher operating expenses, stock-based compensation and staffing costs persist, and whether gross-margin improvement offsets them.
- Monitor cash conversion, receivables, inventory and working-capital needs, particularly during seasonal winter slowdowns.
- Verify debt maturities, covenant compliance, renewal or replacement of the revolving credit line, and financing for planned capital expenditures.
- Assess the final accounting for the tax-law change and the adoption of the new revenue-recognition standard in 2018.
- Reconcile an apparent inconsistency in Note 9: its 2016 “income available to common shareholder” is shown as $1.462 million, while the income statement and MD&A report 2016 net income of $2.835 million.