Smith-Midland Corporation — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report; the filing text does not provide a clear set of standalone fourth-quarter results. Smith-Midland manufactures, sells, rents, installs and licenses precast concrete products, including highway barriers, wall panels and portable buildings. Its markets are tied to construction activity and public infrastructure spending.
Financial performance and liquidity
- Revenue: $29.20 million, up 30.0% from $22.47 million. Product sales rose 30.6%; barrier-rental revenue increased 189.0% to $3.95 million, partly reflecting temporary Papal-visit projects. Royalties rose 9.4% to $1.74 million.
- Profitability: Gross profit was $7.11 million, versus $3.85 million; gross margin improved to approximately 24.3% from 17.1%. Operating income was $1.67 million, compared with an operating loss of $1.19 million. Net income was $1.04 million, or $0.21 per diluted share, versus a net loss of $0.80 million, or $0.16 per share.
- Cash flow: Operating activities provided just $18,890, down from $1.43 million. Investing activities used $1.65 million, principally for property and equipment; financing activities used $206,797. Cash and cash equivalents fell to $1.74 million from $3.57 million. Available-for-sale investments were $1.04 million.
- Balance sheet and liquidity: Total assets were $18.85 million and stockholders’ equity was $11.39 million. Current assets were $13.51 million versus current liabilities of $4.53 million. Billed accounts receivable increased to $6.80 million from $4.09 million; inventory rose to $2.49 million from $1.73 million.
- Debt and capital spending: Notes payable totaled $2.51 million, including $352,022 drawn on a $2.0 million revolving line, versus $2.59 million a year earlier. The principal bank note carried a fixed 3.99% rate. Capital expenditures were $1.64 million, compared with $465,826 in 2014.
- Other: Interest expense declined to $103,086 from $116,229. Income tax expense was $557,000, versus a $498,000 tax benefit in 2014. The company paid a special dividend of $0.04 per share in December 2015.
Material changes versus 2014
- Results turned profitable as revenue increased and cost of goods sold fell to 76% of revenue from 83%.
- Wall-panel sales increased 69.8%, including SlenderWall sales up 88.9%. Utility and farm product sales increased 66.7%.
- Building sales fell 22.4%, barrier sales fell 11.0%, and shipping and installation revenue fell 15.5%. Management attributed lower shipping and installation revenue partly to customer delays in taking delivery of stored products.
- Cash from operations weakened substantially despite higher earnings, amid growth in receivables and inventory.
Outlook, risks and notable items
- Management expected 2016 capital spending of approximately $1.0 million and said operating cash flow, with adequate project management, should fund operations and necessary capital expenditures for at least 12 months; this is a forward-looking expectation, not a guarantee.
- Backlog was approximately $18 million as of March 4, 2016, compared with $12.9 million about a year earlier; most was scheduled for shipment in 2016. Management also cited recurring standard-product business historically worth $5 million–$7 million annually.
- Management expected barrier rentals to be lower in 2016 because the exceptional 2015 event-related contracts may not recur. It anticipated growth in some product lines, while noting architectural revenue could decline slightly and project awards remain uncertain.
- After year-end, the company signed an agreement to purchase a South Carolina facility for $1.55 million, subject to conditions, with planned financing of $1.24 million and the balance from cash. It also reported a $3.5 million highway-barrier contract for a North Carolina customer. These are post-period developments, and the facility purchase was not yet completed at the report date.
- Risks include construction cyclicality, weather and seasonal working-capital needs, dependence on government-funded projects and approvals, customer collection and project execution risk, financing availability, interest-rate exposure, and uncertainty around permits and market acceptance for newer products. Beach Prisms permitting remained difficult; commercial acceptance of Beach Prisms and H2Out was not assured.
- The company reported compliance with loan covenants except that it obtained a waiver for 2015 capital expenditures above the $1.0 million limit; it also received approval for a prior dividend. Its bank debt is secured principally by company assets. The filing reports no material litigation and an unmodified independent audit opinion. Management concluded internal and disclosure controls were effective, but auditor attestation of internal controls was not provided.
Important facts for investors to verify
- Whether the $18 million backlog converts to revenue and cash on the stated schedule, and whether the $3.5 million barrier contract is delivered profitably.
- Whether receivables and inventory convert to cash; operating cash flow was only $18,890 despite reported net income of $1.04 million.
- Completion, financing and operating costs of the South Carolina facility purchase, including the anticipated additional equipment spending.
- How 2016 results perform without the unusual Papal-visit rental revenue, and whether core rental activity grows as management expects.
- Whether Beach Prisms obtain required permits and whether new products and licensing arrangements achieve commercial acceptance.
- Loan covenant headroom, the revolving line’s September 2016 maturity, and the sustainability of dividends given capital needs.
- Governance oversight: the filing states the four-member board had one independent director and no separate standing audit committee or audit committee financial expert.