Smith-Midland Corporation — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019; comparisons are with FY 2018. Amounts are in millions of dollars unless noted. Smith-Midland manufactures, sells, rents, installs and licenses precast concrete products, principally for construction, highway, utility and farming markets.
Financial performance
| Metric | FY 2019 | FY 2018 | Change / context |
|---|---|---|---|
| Revenue | $46.691 | $40.220 | Up 16.1% |
| Gross profit | $9.969 | $10.490 | Down 5.0%; gross margin was 21.4%, versus 26.1% |
| Operating income | $2.546 | $2.216 | Up 14.9% |
| Net income | $1.959 | $1.687 | Up 16.1% |
| Diluted EPS | $0.38 | $0.33 | Up $0.05 |
| Cash from operations | $3.932 | $8.472 | Lower, chiefly reflecting working-capital movements and buy-back lease accounting |
| Cash and available-for-sale investments | $2.540 | $3.053 | Cash was $1.364; investments were $1.176 |
| Total debt | $5.011 | $4.503 | $0.925 due within 12 months; $4.000 revolving line had no balance at year-end |
Management reported gross margins excluding royalties of 18% in 2019 versus 23% in 2018, attributing the decline mainly to higher, lower-margin shipping and installation revenue. General and administrative expense fell 13.9% to $4.887; selling expense declined 2.4% to $2.536. Interest expense was $0.179, and the effective tax rate was 21.9% versus 25.3%.
Current assets were $19.031 and current liabilities $9.602, implying working capital of approximately $9.429. Inventory declined $1.318 to $2.242. Operating cash flow was more than offset by $4.741 of investing outflows, mainly for the North Carolina plant expansion, rental barrier and equipment; financing provided $0.227. Capital spending was $4.513, compared with $5.234 in 2018. DSO increased to 89 days from 86, partly due to SlenderWall project retainage.
Revenue mix and changes
- Product sales rose 10.5% to $32.228. Easi-Set/Easi-Span building sales increased 180.8% to $5.937, largely due to a large governmental order; barrier sales rose 18.1% to $8.582; utility sales rose 30.5% to $1.608.
- Shipping and installation revenue grew 34.6% to $10.303, and barrier rentals rose 43.9% to $2.488. These categories supported revenue growth but contributed to lower margins.
- Soundwall sales fell 21.6% to $7.736; SlenderWall sales fell 9.1% to $5.063. Royalty income was nearly unchanged at $1.672; a significant barrier licensee generated no royalties in 2019 and its license was terminated in December.
Outlook, risks and unusual items
- Management expected FY 2020 to be another strong financial year, but noted weaker-than-expected first-quarter production. Backlog was $30.9 million as of March 5, 2020, versus approximately $31.1 million a year earlier. Most backlog was expected to be produced within 12 months, with some extending into 2021.
- The new North Carolina facility began production in Q4 2019 and is expected to double capacity versus the former facility; management anticipated production growth there toward late 2020. The barrier rental fleet expanded to 250,000 linear feet and added 75 crash-cushion attenuators.
- The filing warns that COVID-19’s effects on 2020 revenue, liquidity and operations could not be estimated. Management’s outlook and planned $2.000 of 2020 capital spending were subject to the pandemic’s impact. No assurance was given that the company would remain profitable or meet its sales expectations.
- A customer buy-back guarantee requires certain barrier transactions to be accounted for as operating leases. At year-end, the balance sheet included a $5.042 deferred buy-back lease asset and $6.149 of related obligations, current and long-term combined. Related revenue is recognized over the usage period or when the option is exercised or expires; timing and ultimate economics merit attention.
- Other risks include construction-industry cyclicality, weather and seasonal winter weakness, public-project budgets, competition, contract execution and approval, customer credit and collection timing, financing availability, and environmental or safety compliance. There was no material litigation reported. The company said it was in compliance with loan covenants.
- Approximately 95% of debt was fixed-rate; the $4.000 line of credit was variable-rate and matured October 1, 2020. The company stated expected operating cash flow and available credit should fund operations and necessary capital spending for at least 12 months, subject to uncertainty, including COVID-19.
- The company paid $0.281 in dividends in 2019. Continued dividends are not assured and depend on earnings, capital needs, financial position, covenants and other factors. Management assessed internal control over financial reporting and disclosure controls as effective; the auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
Investor verification priorities
- Track COVID-19 effects on production, backlog conversion, customer projects, cash flow and the company’s 2020 outlook.
- Reconcile margin trends and determine whether revenue growth can translate into improved gross profit, particularly as shipping and installation mix changes.
- Review the buy-back guarantee’s deferred balances, revenue recognition, customer option timing and the impact on reported rental revenue and cash flows.
- Monitor debt maturities, covenant and credit-line renewals, liquidity, retainage collections and DSO.
- Check whether new North Carolina capacity and the expanded rental fleet generate the expected utilization, sales and returns on capital.