Smith-Midland Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparison is FY 2012. This is an annual report, not a separate fourth-quarter earnings report. The filing does not provide a clear standalone Q4 financial-results value.
Business context
Smith-Midland manufactures, sells, leases, installs and licenses precast concrete products for construction, highway, utility and farming markets. Key offerings include SlenderWall panels, J-J Hooks highway barriers, precast buildings and sound barriers. The company operates through five wholly owned subsidiaries and is a smaller reporting company whose common stock trades on the OTC Bulletin Board as SMID.
Financial performance
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $27.71 million | $24.89 million | +11.3% |
| Gross profit | $6.57 million | $5.45 million | +20.7% |
| Gross margin | 23.7% | 21.9% | +1.8 percentage points |
| Operating income | $1.28 million | $0.69 million | +$0.59 million |
| Operating margin | 4.6% | 2.8% | +1.8 percentage points |
| Net income | $691,502 | $376,691 | +83.6% |
| Diluted EPS | $0.14 | $0.08 | +$0.06 |
| Cash from operations | $819,846 | $2.89 million | -$2.07 million |
- SlenderWall sales rose to $4.50 million from $604,000, reflecting about seven projects in production; management attributed much of the earnings improvement to this proprietary product.
- Total product sales increased 20.6% to $19.58 million, while service revenue declined 6.1% to $8.13 million. Shipping and installation revenue fell 17.6%, partly because completed product was held in storage pending shipment or installation.
- Cost of goods sold was 76% of revenue, versus 78% in 2012. Management cited higher sales against relatively stable fixed overhead, while warning that aggressive competitor pricing continued to pressure margins.
- General and administrative expense increased 16% to $3.09 million; selling expense increased 5% to $2.32 million. Interest expense was $132,026, and income tax expense was $391,000.
- FY 2013 cash from operations was lower mainly amid a $2.54 million increase in billed receivables. Days sales outstanding rose to 91 from 80; management said two large customers paid after year-end.
Balance sheet, debt and liquidity
- At December 31, 2013, cash was $3.14 million and available-for-sale investments were $915,341, compared with cash of $4.37 million and no such investments at year-end 2012.
- Current assets were $14.04 million and current liabilities were $4.06 million. Inventory was $1.94 million, down from $2.10 million.
- Total notes payable were $2.91 million, including $364,204 due within one year. The main $2.10 million bank refinancing carried a fixed 3.99% rate and had a $2.04 million year-end balance; debt was secured by substantially all company assets.
- Investing activities used $1.87 million, largely for securities purchases and capital equipment. Capital spending increased to $908,609 from $110,275. Financing activities used $180,293, including a $144,489 cash dividend.
- Loan covenants limit annual capital expenditures to $1 million without bank approval, restrict cash dividends without prior approval, and require at least $5 million in net worth. The company reported compliance, with bank approval obtained for its 2013 dividend.
Outlook, commentary and risks
- Management expected approximately $750,000 of capital spending in 2014 and believed operating cash flow would fund operations and necessary capital expenditures for at least 12 months; this was an expectation, not a guarantee.
- Backlog of inventoried products and unbilled construction contracts was approximately $10.6 million as of March 4, 2014, versus $6.7 million around the same time in 2013. Most backlog projects were scheduled to ship during 2014. Management also cited recurring standard-product business historically worth about $5 million to $7 million annually.
- Management expected 2014 growth in building, utility and barrier rental activity, and anticipated higher shipping and installation revenue as stored product was delivered. It also expected continued price competition and modest raw-material cost increases.
- Risks include construction-industry cyclicality, public funding and project timing, weather seasonality, customer collection delays, debt-service and financing needs, contract execution and approval risks, and competitive pricing. The company warned it may not remain profitable; it reported a second-quarter 2013 loss despite full-year profitability.
- Beach Prisms sales and broader adoption remain dependent on environmental permits; management said approvals had been difficult to obtain. Commercial acceptance of Beach Prisms and H2Out was uncertain.
- The company declared and paid a special dividend of $0.03 per share in December 2013. Future dividends were uncertain and subject to lender restrictions and board discretion. The filing reports a $68,680 loss on investment securities and a $41,014 accumulated other comprehensive loss at year-end.
- No material litigation was reported. The independent auditor gave an unqualified opinion on the financial statements; management concluded internal controls were effective, but the auditor did not attest to that assessment.
Most important facts for investors to verify
- Whether the large SlenderWall projects and the $10.6 million reported backlog convert to timely shipments, installation, collections and sustainable margins.
- Whether receivables and DSO improve, particularly collections from the two large customers identified by management.
- Whether operating cash flow can support planned capital spending, debt payments and seasonal working-capital needs.
- Whether the 2014 growth assumptions for highway barriers, rentals, buildings and utilities are supported by funded projects and actual awards.
- Whether competitive price pressure, permitting hurdles and investment-security losses materially affect future profitability or liquidity.