Smith-Midland Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing is an annual report, not a standalone fourth-quarter report. The company manufactures, sells, rents, installs and licenses precast concrete products, including highway barriers, sound walls, building panels and utility products. In July 2016 it acquired a 40,000-square-foot South Carolina facility for $1.55 million.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $40.05 million | $29.20 million |
| Gross profit / margin | $10.35 million / 25.8% | $7.11 million / 24.3% |
| Operating income / margin | $4.34 million / 10.8% | $1.58 million / 5.4% |
| Net income | $2.84 million | $1.04 million |
| Basic / diluted EPS | $0.57 / $0.56 | $0.21 / $0.21 |
| Cash from operations | $3.99 million | $0.02 million |
| Capital expenditures | $3.74 million | $1.64 million |
Cash and cash equivalents were $3.52 million, available-for-sale securities $1.05 million, and total debt $3.93 million at year-end. Debt included $0.59 million due within 12 months; the $2.0 million revolving line had no balance outstanding. Current assets were $15.87 million versus current liabilities of $5.06 million. Operating cash flow rose substantially, while investing activities used $3.71 million, mainly for the South Carolina facility and equipment.
Material changes versus FY2015
- Revenue grew 37.1%; net income increased to $2.84 million from $1.04 million. Cost of goods sold fell to 74% of revenue from 76%, while overhead remained relatively contained.
- Product sales rose 38.7%. Barrier sales increased 241.8% to $9.36 million and sound-wall sales increased 143.9% to $7.84 million; shipping and installation revenue more than doubled to $7.27 million.
- SlenderWall sales declined 46.0%, architectural panels 70.1%, and barrier rentals 14.4%. No Beach Prisms sales were recorded in 2016.
- Total debt increased from $2.51 million to $3.93 million, primarily reflecting financing for the South Carolina acquisition and equipment. Interest expense rose 58% to $163,000.
- Days sales outstanding improved to 74 days from 88 days. Inventory turns declined to 7.7 from 10.0, partly because the company built barrier inventory in anticipation of prospective highway projects.
Outlook, risks and unusual items
- Management described 2017 prospects as strong, citing a backlog of approximately $18 million as of March 8, 2017, up from $12.9 million a year earlier, plus recurring standard-product business historically worth $5 million to $7 million annually. Management cautioned that several large projects were delayed into the second quarter and that awards are not assured.
- Management anticipated 2017 capital spending of approximately $1.5 million, excluding acquisitions, and slightly lower shipping and installation revenue than in 2016. It expected raw-material prices could rise.
- Results are exposed to construction cycles, weather, project timing, public budgets, competitive bidding, customer collections and financing availability. Winter seasonality can reduce sales and profits. Management reported a first-quarter 2016 net loss, despite full-year profitability.
- Approvals and environmental permits remain important uncertainties for products and projects. Beach Prisms sales depend on obtaining site permits; a number of state approvals for highway barriers and sound-wall products also affect addressable demand. The company noted pending patent applications and expiration of certain earlier patents.
- The bank waived the company’s 2016 capital-expenditure covenant overage. The revolving credit line matured September 12, 2017; continued access to financing and compliance with loan terms remain relevant. The company said it expected operating cash flow to cover operations and necessary capital spending for at least 12 months.
- The company reported no material litigation, although ordinary-course disputes may arise. It stated that internal financial-reporting and disclosure controls were effective; the external auditor did not attest to internal-control effectiveness. The five-member board had two independent directors and no separate standing audit committee.
- A special dividend of $0.01 per share was declared in December 2016 and paid in January 2017; the prior-year special dividend was $0.04 per share. Future dividends are not assured.
Most important facts for investors to verify
- Whether the expected sound-wall and highway-barrier awards convert to signed contracts, production and cash collections, and whether the reported backlog is realized on schedule.
- Whether the new South Carolina facility generates adequate sales and margins to support its acquisition cost, added debt and operating expenses.
- Whether working-capital needs, inventory buildup and customer payment timing remain manageable as sales expand.
- Debt maturities, covenant compliance and availability or renewal of credit facilities after the revolving line’s September 2017 maturity.
- Progress on permits, product approvals, patent protection and commercial adoption of newer offerings, particularly Beach Prisms and H2Out.