Smith-Midland Corporation — FY 2012 Form 10-K
Business context and reporting period. The company manufactures, sells, leases, installs and licenses precast concrete products, including highway barriers, wall panels, transportable buildings and utility products. This annual report covers the fiscal year ended December 31, 2012; the filing also highlights a significant fourth-quarter loss.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $24.89 million | $26.70 million |
| Gross profit / gross margin | $5.45 million / 21.9% | $4.60 million / 17.2% |
| Operating income (loss) | $687,762 | $(364,836) |
| Net income (loss) | $376,691 | $(351,680) |
| Diluted EPS | $0.08 | $(0.07) |
| Cash from operating activities | $2.89 million | $(83,106) |
| Cash and cash equivalents at year-end | $4.37 million | $2.13 million |
| Total notes payable and capital leases | $2.99 million | $3.40 million |
- Revenue fell 6.8%; product sales declined 21.1%, partly offset by service revenue growth of 41.7%. Cost of goods sold decreased 12%, and gross margin improved to 21.9% from 17.2%.
- Full-year net income contrasts with a fourth-quarter net loss of $607,995. Management attributed the quarterly loss chiefly to weak construction activity, about $160,000 in intellectual-property litigation expenses, and reinstatement of salaries and partial repayment of salary reductions.
- Year-end current assets were $12.48 million and current liabilities $2.60 million, for working capital of approximately $9.88 million. DSO improved to 80 days from 95 days.
- Operating cash flow benefited substantially from a $2.60 million reduction in billed receivables; customer deposits also declined by $893,202. Capital spending was $110,275, down from $742,735 in 2011.
- Debt included a $2.21 million bank note at prime plus 0.5% and a $499,007 variable-rate note. Debt was secured principally by company assets; the company reported compliance with loan covenants, with bank approval obtained for the 2012 cash dividend.
Material changes versus the prior year
- Revenue and product sales contracted, while the mix shifted toward barrier rentals, shipping and installation. Barrier rentals rose 250.6%, including special-event projects; shipping and installation revenue rose 24.8%.
- Wall panel sales fell 36.5%; SlenderWall sales declined 72.4% and architectural panel sales declined 42.7%. Soundwall sales rose 38.3%, barrier sales 29.0%, and Easi-Set/Easi-Span building sales 10.2%.
- Operating results turned positive, principally as cost of goods sold fell as a share of revenue and operating expenses declined. The company also moved from negative to positive operating cash flow.
- The company paid its first dividend, a special $0.05 per share distribution totaling $240,632. Its loan agreement generally restricts cash dividends without bank consent.
Outlook, commentary and risks
- Management expected profitability for at least the first three quarters of 2013, citing two newly awarded large SlenderWall projects, the January 2013 presidential inauguration barrier-rental contract and a possible large architectural project. The architectural project was only verbally committed and not assured.
- As of March 4, 2013, backlog was approximately $6.7 million, versus approximately $7.8 million at about the same time in 2011; most backlog projects were scheduled to ship in 2013. Repeat standard-product business historically contributed approximately $5–7 million annually.
- Management anticipated approximately $500,000 of 2013 capital spending and some modest raw-material cost increases. It believed operating cash flow would fund operations and necessary capital spending for at least 12 months, but gave no assurance.
- Key risks include cyclical and weak construction demand, dependence on public budgets and project funding, price competition, winter seasonality, variable-rate debt and financing availability, contract execution and collection timing, regulatory approvals, and uncertain commercial acceptance of newer products. Beach Prisms lacked required approvals in some states; H2Out and Beach Prisms had no assured commercial acceptance.
- The company settled a 2012 J-J Hooks intellectual-property infringement case by requiring the defendant to become a royalty-paying licensee. The filing reports no material litigation currently pending.
- The filing flags governance and staffing concerns: only two of five directors were independent, and the company had experienced high employee turnover. The 401(k) company match was suspended after January 2012 to reduce costs.
Most important facts for investors to verify
- Whether the reported 2013 project awards converted into production, revenue and cash collection, and whether the verbal architectural commitment became a contract.
- Whether margins remain improved after special-event rentals, salary reinstatement and competitive pricing pressures; the fourth-quarter loss underscores the volatility of results.
- How much of operating cash flow reflected sustainable earnings versus working-capital movements, particularly receivable collections and customer-deposit changes.
- Current debt balances, variable interest-rate exposure, covenant headroom and the bank’s restrictions on dividends and capital expenditures.
- Backlog conversion, customer concentration and repeat-business trends, as well as permitting and sales progress for Beach Prisms and H2Out.