Smith-Midland Corporation — FY 2014 Form 10-K
Business and period: Annual report for the fiscal year ended December 31, 2014, filed March 31, 2015. Smith-Midland manufactures, sells, leases, installs and licenses precast concrete products, including highway barriers, building panels, soundwalls and precast buildings. Its markets depend substantially on construction activity and public infrastructure spending.
Financial performance
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $22.47 million | $27.71 million |
| Gross profit | $3.85 million | $6.57 million |
| Gross margin | 17.1% | 23.7% |
| Operating income (loss) | $(1.19) million | $1.28 million |
| Net income (loss) | $(804,838) | $691,502 |
| Diluted earnings (loss) per share | $(0.16) | $0.14 |
| Cash from operating activities | $1.43 million | $819,846 |
- Revenue declined 18.9%. Product sales fell 22.1% to $15.24 million; service revenue fell 11.1% to $7.23 million. Royalties rose 3.1% to $1.59 million.
- By product category, wall panel sales fell 43.1% to $5.32 million, including a 63.9% decline in SlenderWall sales. Barrier sales declined 23.6%; barrier rentals fell 41.1%, partly because 2013 included Presidential Inauguration rentals. Building sales increased 6.1%.
- Cost of goods sold fell 12%, less than revenue, and increased to 83% of revenue from 76%. Management attributed weaker margins partly to lower production against relatively stable fixed overhead and competitive pricing.
- Cash from operations increased, supported in part by a $3.20 million reduction in billed receivables. Investing activities used $498,049; financing activities used $491,960, including $174,239 in dividends. Cash increased $436,342.
- At year-end, cash was $3.57 million and available-for-sale securities were $1.01 million. Current assets were $11.94 million versus current liabilities of $2.93 million. Inventory was $1.73 million, down from $1.94 million.
- Total notes payable were $2.59 million, down from $2.91 million; current maturities were $363,821. No balance was drawn on the $2 million revolving line of credit at year-end. The company reported compliance with loan covenants, with bank approval for the cash dividend.
Material changes and unusual items
- Management reported a fourth-quarter 2014 sales reduction of $3.3 million and a net loss of $618,774 compared with fourth-quarter 2013. The filing does not provide a clear fourth-quarter revenue or prior-year fourth-quarter net-income figure in the supplied text.
- Cold weather and project-owner financing issues delayed expected production into spring 2015. Management said the resulting fourth-quarter shortfall extended into the first quarter of 2015.
- The 2014 income-tax benefit was $498,000, compared with tax expense of $391,000 in 2013, reflecting the pretax loss. The 2013 results also included a $68,680 loss on available-for-sale securities; none was recorded in 2014.
- The company paid a special dividend of $0.035 per share in December 2014, compared with $0.03 per share in 2013. Future dividends are not assured and require bank consent under the loan agreement.
Outlook, risks and contingencies
- Management expected 2015 to be profitable. It cited more than $10 million of project commitments received in the fourth quarter and into the first quarter, with production expected to start in 2015; this amount should not be assumed to be incremental to the reported backlog.
- As of March 4, 2015, backlog was approximately $12.9 million, up from $10.6 million about a year earlier; most backlog work was scheduled for shipment in 2015. The company also described recurring standard-product business historically worth approximately $5 million to $7 million annually.
- Management anticipated 2015 capital spending of approximately $750,000 and stated that operating cash flow was expected to fund operations and necessary capital expenditures for at least 12 months, subject to project management and other conditions.
- Key risks include construction cyclicality, winter weather and seasonality, dependence on public construction budgets and project financing, competitive pricing, delayed customer payments and potential working-capital pressure. Management also identified financing availability, interest rates, contract performance, regulatory compliance, litigation and product acceptance as risks.
- Beach Prisms sales depend on permits and environmental approvals; management said approvals had been difficult to obtain and further sales were uncertain. Commercial acceptance of Beach Prisms and H2Out is also not assured.
- The company reported no material litigation currently pending and stated ordinary-course disputes were not expected to materially affect its financial position. The auditor issued an unqualified opinion on the financial statements; it did not provide an attestation opinion on internal control. Management concluded internal financial-reporting controls were effective.
- Governance considerations disclosed include one independent director on a four-member board, no separate audit committee, and no audit committee financial expert.
Most important facts for investors to verify
- Whether delayed projects convert to production, shipments and collections on schedule, and whether the $12.9 million backlog is delivered during 2015.
- Whether revenue recovery improves plant utilization and gross margin after the 2014 decline; review the detailed quarterly results when available.
- Cash conversion and working-capital needs, particularly receivables, retainage, customer deposits and seasonal operating requirements.
- Debt repayments, renewal or replacement of the revolving credit line maturing September 12, 2015, and compliance with lender restrictions.
- Actual 2015 capital spending, profitability and dividend decisions against management’s expectations.
- Permit progress for Beach Prisms and evidence of commercial demand for newer products, alongside the company’s concentrated board independence and oversight structure.