SMITH MIDLAND CORP 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company (including the Notes thereto) included elsewhere in this report. Dollar and share amounts are in thousands, except for per share amounts. The Company generates revenues primarily from the sale, leasing, licensing, shipping and installation of precast concrete products and systems for the construction, utility and farming industries. The Company's operating strategy has involved producing and marketing innovative and proprietary products, including SlenderWall™, a patent pending, lightweight, energy efficient concrete and steel exterior wall panel for use in building construction; J-J Hooks ® Barrier, a patented positive-connected highway safety barrier; Sierra Wall™, a patented sound barrier primarily for roadside use; transportable concrete buildings; and SoftSound™, a highway sound attenuation system. In addition, the Company produces utility vaults; farm products such as cattleguards; and custom order precast concrete products with various architectural surfaces. As a part of the construction industry, the Company's sales and net income may vary greatly from quarter to quarter over a given year. Because of the cyclical nature of the construction industry, many factors outside of the Company’s control, such as weather and project delays, affect the Company's production schedule, possibly causing a momentary slowdown in sales and net income. As a result of these factors, the Company is not always able to earn a profit for each period, therefore, please read Management's Discussion and Analysis of Financial Condition and Results of Operations and the accompanying financial statements with these factors in mind. 13 Overview Overall, the Company’s financial bottom line performance was significantly greater in 2024 when compared to 2023. The Company had net income for 2024 of $7,675 compared to net income of $795 for 2023. Total revenue increased by $18,928 to $78,508 in 2024 from $59,580 in 2023. The increase in sales is mainly from barrier rentals, shipping and installation, and utility product sales. Fourth quarter 2024 revenues were $18,528 compared to $16,389 in the fourth quarter 2023. The increase in revenue for the fourth quarter 2024 as compared to the fourth quarter 2023 was primarily due to an increase in soundwall sales, architectural sales, utility sales, miscellaneous sales, Easi-Set building sales, and shipping and installation revenue. Cost of sales as a percentage of revenue, not including royalties, decreased to 78% in 2024 compared to 86% in 2023. Cost of sales as a percentage of revenue, not including royalties, decreased to 80% for the fourth quarter 2024 as compared to 85% for the fourth quarter 2023. Operating income was $9,899 for 2024, as compared to $1,118 for 2023. Operating expenses for 2024 was $10,111 compared to $9,534 in 2023. The increase is due to a minor increase in general and administrative expenses. Total operating expense was $2,519 for the fourth quarter 2024 and $2,580 for the fourth quarter 2023. Income tax expense for 2024 was $2,143, or an effective tax rate of 21.7%, as compared to $528, or an effective tax rate of 40.0% for 2023, adversely affecting net income in 2023. The greater percentage in 2023 was mainly due to an increase in state tax liability for a true-up of state tax expense. As of March 3, 2025, the Company’s sales backlog was approximately $59.5 million, as compared to approximately $60.8 million around the same time in the prior year. It is estimated that most of the projects in the current sales backlog will be produced within 12 months, but a few will be produced over multiple years. The Company anticipates greater sales volumes throughout 2025, although no assurance can be provided. The Company also anticipates funding related to the Infrastructure Investment and Jobs Act to continue coming through the state and local governments in 2025 and beyond to further promote growth in the revenue backlog related to the highway and transportation markets, although no assurance can be provided. State and local programs that support infrastructure spending, including gas tax increases, special tax districts, new funding mechanisms are increasing in number and size as these entities increase their role in infrastructure investment. The Company continues to increase marketing and sales efforts towards SlenderWall sales and barrier rentals, in line with long-term strategic objectives. In view of the policies of the new Administration and DOGE, including without limitation with respect to government spending cutbacks and tariffs, there can be no assurance of anticipated levels of infrastructure spending. Results of Operations Year ended December 31, 2024 compared to the year ended December 31, 2023 For the year ended December 31, 2024, the Company had total revenue of $78,508 compared to total revenue of $59,580 for the year ended December 31, 2023, an increase of $18,928 or 32%. Revenue includes product sales, barrier rentals, royalty income, and shipping and installation revenues. Product sales are further divided into soundwall, architectural and SlenderWall™ panels, miscellaneous wall panels, highway barriers, Easi-Set ® /Easi-Span ® buildings, utility products, and miscellaneous precast products. The following table summarizes the revenue by type and a comparison for the years ended December 31, 2024 and 2023 (in thousands): Revenue by Type (Disaggregated Revenue) 2024 2023 Change % Change Product Sales: Soundwall Sales $ 11,825 $ 7,671 $ 4,154 54 % Architectural Sales 4,205 1,131 3,074 272 % SlenderWall Sales - 5,312 (5,312 ) (100 )% Miscellaneous Wall Sales 5,104 6,418 (1,314 ) (20 )% Barrier Sales 3,882 7,827 (3,945 ) (50 )% Easi-Set and Easi-Span Building Sales 6,666 4,712 1,954 41 % Utility Sales 7,751 2,857 4,894 171 % Miscellaneous Sales 6,191 2,820 3,371 120 % Total Product Sales 45,624 38,748 6,876 18 % Barrier Rentals 12,019 6,330 5,689 90 % Royalty Income 3,261 2,633 628 24 % Shipping and Installation Revenue 17,604 11,869 5,735 48 % Total Service Revenue 32,884 20,832 12,052 58 % Total Revenue $ 78,508 $ 59,580 $ 18,928 32 % The revenue items: soundwall sales, architectural panel sales, SlenderWall sales, miscellaneous wall sales, miscellaneous sales, barrier rentals, and royalty income are recognized as revenue over time. The revenue items: barrier sales, Easi-Set and Easi-Span building sales, utility sales, and shipping and installation revenue are recognized as revenue at a point in time. 14 Soundwall Sales – Soundwall panel sales increased by 54% in 2024 compared to 2023. The increase is due to higher production volumes at all three plants, as the Company increased production output to execute and deliver on the Company’s increased backlog. The Company expects soundwall panel sales to be similar in 2025 as compared to 2024, although no assurance can be provided. Architectural Sales – Architectural panel sales increased by 272% in 2024 compared to 2023. The increase is related to production of two architectural projects that started production at the end of the first quarter of 2024. Architectural sales are expected to be similar in 2025, as compared to 2024, although no assurance can be provided. SlenderWall Sales – SlenderWall panel sales decreased by 100% in 2024 compared to 2023. A SlenderWall project was in production during the first half of 2023, and the Company did not have a SlenderWall project in production during 2024. The Company continues to focus sales initiatives on SlenderWall, but no assurance can be given as to the success of this endeavor. SlenderWall sales are expected to increase in 2025 compared to 2024, as several SlenderWall projects are anticipated to start in the first half of 2025. Miscellaneous Wall Sales – Miscellaneous wall sales are highly customized precast concrete products or retaining and lagging panels that do not fit other product categories. Miscellaneous wall sales decreased by 20% in 2024 when compared to 2023 due lower production volumes in the second and third quarter 2024. Miscellaneous sales are expected to be similar in 2025, as compared to 2024, although no assurance can be provided. Barrier Sales – Barrier sales decreased by 50% in 2024 when compared to 2023. The decrease is due to the completion of large barrier projects in North Carolina and South Carolina during 2023. The decrease is consistent with the Company’s focus to shift from barrier sales to barrier rentals. Barrier sales are expected to trend lower in 2025 than previous years as the Company continues to shift from barrier sales to barrier rentals. Easi-Set ® and Easi-Span® Building Sales – The Easi-Set ® Buildings program includes Easi-Set ® , plant assembled and Easi-Span ® , site assembled, and an extensive line of pre-engineered restrooms. Building sales increased by 41% in 2024 as compared to 2023 due to increased sales at all locations, reflecting general product sale fluctuations. Building and restroom sales are expected to trend higher during 2025 as compared to 2024 due to demand from increased sales and marketing, although no assurance can be provided. Utility Sales – Utility products are mainly comprised of underground utility vaults used in infrastructure construction. Utility product sales increased by 171% in 2024 compared to 2023. The increase is related to the increase in the market for dry utility vaults to support the growth in data centers. Utility sales are expected to be similar during 2025 as compared to 2024, although no assurance can be provided. Miscellaneous Product Sales – Miscellaneous products are products that are produced or sold that do not meet the criteria defined for other revenue categories. Examples would include precast concrete slabs, blocks or small add-on items. For 2024, miscellaneous product sales increased by 120% when compared to 2023. The increase is mainly from the Virginia plant that started production on one large project for the production of precast beams and platforms. Miscellaneous product sales are expected to trend lower during 2025 as compared to 2024, although no assurance can be provided. 15 Barrier Rentals – Barrier rentals increased by 90% in 2024 as compared to 2023. Revenue from the Company’s core rental barrier fleet increased by 52% in 2024 as compared to 2023. This increase is attributed to an increase in utilization of rental barrier. Barrier rental revenue also increased due to multiple special barrier projects occurring and completed during the third quarter 2024. As indicated above, the Company is continuing to shift its focus to barrier rentals compared to barrier sales with the significant increase in the rental fleet that occurred during prior years. Barrier rental revenue, excluding revenue from special barrier projects, is expected to trend higher in 2025 as compared to barrier rental revenue, excluding revenue from special barrier projects, in 2024, as funding is expected to increase related to the Infrastructure Investment and Jobs Act, although no assurance can be given. Royalty Income – Royalties increased by 24% in 2024 as compared to 2023. The increase in royalties is mainly due to the increase in barrier royalties during 2024 compared to 2023. As funding increases related to the Infrastructure Investment and Jobs Act, as anticipated, the Company expects 2025 royalties to continue to increase compared to 2024, although no assurance can be given. Shipping and Installation – Shipping revenue results from shipping our products to the customers' final destination and is recognized when the shipping services take place. Installation activities include installation of our products at the customers’ construction site. Installation revenue results when attaching architectural wall panels to a building, installing an Easi-Set ® building at a customers' site, setting highway barrier, or setting any of our other precast products at a site specific to the requirements of the owner. Shipping and installation revenues increased by 48% for 2024 when compared to 2023. The increase is mainly attributed to the increase in shipping and installation of SlenderWall and architectural panels. This increase in shipping and installation revenue correlates with the increased production of SlenderWall panels that occurred, and for which revenue was previously recognized, throughout 2023. Cost of Sales – Total cost of sales for the year ended December 31, 2024 was $58,498, an increase of $9,570, or 20%, from $48,928 for the year ended December 31, 2023. Total cost of sales as a percentage of total revenue, not including royalties, decreased to 78% for the year ended December 31, 2024 from 86% for the year ended December 31, 2023. The decrease in cost of sales as a percentage of revenue, not including royalties, is mainly due to higher revenue levels in 2024 than in 2023 having a favorable effect on margins reflecting the absorption of fixed overhead costs. In addition, the decrease in cost of sales as a percentage of revenue, not including royalties, was due to production throughout 2024 related to contracts that factored in the rising inflationary costs experienced throughout 2022 and 2023, and a one-time expense related to panels the Company chose to remake for one specific customer related to defective steel from a supplier used in the initial product in 2023. General and Administrative Expenses – For the year ended December 31, 2024, the Company's general and administrative expenses increased by $564, or 9%, to $6,554 from $5,990 during the same period in 2023. General and administrative expenses for the year ended December 31, 2023 increased over the prior year due higher salary and wage rates, and an increase in the allowance for credit losses. General and administrative expenses were 8% and 10% of revenues for the years ended December 31, 2024 and 2023, respectively. Selling Expenses – Selling expenses for the year ended December 31, 2024 increased by $13, or 0%, to $3,557 from $3,544 for the year ended December 31, 2023. The Company expects selling expenses to increase in future periods with the plan for additional sales associates and increased advertising spending aligning with the strategy to increase SlenderWall sales and barrier rentals. Operating Income – The Company had operating income for the year ended December 31, 2024 of $9,899 compared to operating income of $1,118 for the year ended December 31, 2023, an increase of $8,781, or 785%. The increase in operating income was mainly due to the increase in revenues, decrease in cost of sales as a percentage of revenue, and a relatively flat operating expenses as a percent of revenue. Income Tax Expense – The Company had income tax expense of $2,143 for the year ended December 31, 2024 compared to income tax expense of $528 for the year ended December 31, 2023. The Company had an effective rate of 21.7% for the year ended December 31, 2024 compared to an effective rate of 40.0% for the same period in 2023. The decrease in the effective tax rate is attributed to the increase in the Company’s state tax liability for a true-up of state tax expense during 2023. Net Income – The Company had net income of $7,675 for the year ended December 31, 2024, compared to net income of $795 for the same period in 2023. The basic and diluted earnings per share was $1.45 for 2024 compared to basic and diluted earnings per share of $0.15 for the year ended December 31, 2023. There were 5,289 basic and diluted weighted average shares outstanding in 2024, and 5,258 basic and 5,292 diluted weighted average shares outstanding in 2023. 16 Liquidity and Capital Resources The Company financed its capital expenditures for 2024 with cash balances on hand. The Company had $5,094 of debt obligations at December 31, 2024, of which $658 is scheduled to mature within twelve months. During the twelve months ended December 31, 2024, the Company made repayments of outstanding debt in the amount $635. The Company has a mortgage note payable to Burke & Herbert Bank & Trust Company, formally Summit Community Bank (the “Bank”) for the construction of its North Carolina facility. The note carries a ten-year term at a fixed interest rate of 3.64% annually per the Promissory Note Rate Conversion Agreement, with monthly payments of $22, and is secured by all of the assets of Smith-Carolina and a guarantee by the Company. The balance of the note payable at December 31, 2024 was $1,166. The Company also has a note payable to the Bank in the amount of $1,536 as of December 31, 2024. The loan is collateralized by a first lien position on the Midland, VA plant, building, and assets. The interest rate per the Promissory Note is fixed at 3.99% per annum, with principal and interest payments payable monthly over 120 months in the amount of $27. The loan matures on March 27, 2030. On February 10, 2022, the Company completed the financing for its acquisition of certain real property in Midland, VA from the fourth quarter of 2021, totaling approximately 29.8 acres, with a note payable to the Bank. The balance of the note payable at December 31, 2024 was $2,379. The loan is collateralized by a first lien position on the related real property. The interest rate is fixed at 4.09% per annum, with principal and interest payments payable monthly over 180 months for $21. The loan matures on February 10, 2037. The Company additionally has one smaller installment loan with an annual interest rate of 2.90%, maturing in 2025, with a balance totaling $13. Under the loan covenants with the Bank, the Company is limited to annual capital expenditures of $5,000 and has received a waiver for 2024 from the Bank. Also under the loan covenants with the Bank, the Company must maintain tangible net worth of $25,000. The Company is in compliance with all covenants pursuant to the loan agreements as of December 31, 2024. In addition to the notes payable discussed above, the Company has a $5,000 line of credit with the Bank with no balance outstanding as of December 31, 2024. The line of credit is evidenced by a commercial revolving promissory note, which carries a variable interest rate of prime, with a floor of 4.99%. The line of credit was renewed on January 1, 2025 and matures January 1, 2026. The loan is collateralized by a first lien position on the Company's accounts receivable and inventory and a second lien position on all other business assets. Key provisions of the line of credit required the Company (i) to obtain bank approval for capital expenditures in excess of $5,000 during the term of the loan and (ii) to obtain bank approval prior to its funding of any acquisition. On October 1, 2023, the Company received a Commitment Letter from the Bank to provide a guidance line of credit specifically to purchase business equipment in an amount up to $1,500. The commitment provided for the purchase of equipment for which a note payable will be executed with a term not to exceed five years with an interest rate at the Wall Street Journal prime rate plus 0.50% with a floor of 3.50% per annum. The loan is collateralized by a first lien position on all equipment purchased under the line. The commitment for the guidance line of credit matured on October 1, 2024. As of October 31, 2024, the Company had not purchased any equipment pursuant to the $1,500 commitment. 17 At December 31, 2024, the Company had cash totaling $7,548 compared to cash totaling $9,175 at December 31, 2023. Cash provided by operations was $5,584. Cash disbursements from investing activity was $6,576. Cash repayments on borrowings was $635. The decrease in cash is primarily the result of cash used for capital expenditures, specifically the expansion of the manufacturing facility in North Carolina. Capital spending, including financed additions, increased from $5,010 in 2023 to $6,629 in 2024. Capital expenditures in 2024 were primarily related to spending for the expansion of the North Carolina production facility and new manufacturing equipment. The Company anticipates capital spending for 2025 to be approximately $5,000, which includes forms for increased production capacity, and miscellaneous manufacturing equipment. Anticipated capital expenditures excludes acquisitions. The Company's notes payable are financed at fixed rates of interest. This leaves the Company almost impervious to fluctuating interest rates. Increases in such rates will only affect the interest paid by the Company if new debt is obtained, or an available line of credit is drawn upon, with a variable interest rate. The Company’s cash flow from operations is affected by production schedules set by contractors, which generally provide for payment 45 to 75 days after the products are produced and with some contracts, retainage may be held until the entire project is completed. This payment schedule could result in liquidity problems for the Company because it must bear the cost of production for its products before it receives payment. The Company's days sales outstanding (DSO) in 2024 and 2023 were 88 and 113 days, respectively. Although no assurances can be given, the Company believes that its current cash resources, anticipated cash flow from operations, and the availability under the line of credit will be sufficient to finance the Company’s operations for at least the next 12 months. The Company’s accounts receivable balance, net of allowance for credit losses, at December 31, 2024 was $19,420, compared to accounts receivable balance, net of allowance for credit losses, of $17,209 at December 31, 2023. The increase is primarily the result of increased revenue. The Company expects DSO to trend downwards, with increased collection efforts, although no assurance can be provided. The Company’s inventory at December 31, 2024 was $6,677 and at December 31, 2023 was $5,150, an increase of $1,528. The annual inventory turns for 2024 and 2023 were 10.0 and 15.0, respectively. Critical Accounting Policies and Estimates The Company’s significant accounting policies are more fully described in its Summary of Accounting Policies to the Company’s consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted within the United States of America requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related notes. In preparing these consolidated financial statements, management has made its best estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below, however, application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties and as a result, actual results could differ from these estimates. Allowance for Credit Losses -The Company evaluates the adequacy of its allowance for credit losses at the end of each quarter. In performing this evaluation, the Company analyzes the payment history of its significant past due accounts, subsequent cash collections on these accounts, comparative accounts receivable aging statistics, macro-economic conditions, and other customer specific considerations existing and known as of the time of the analysis. Based on this information, along with other related factors, the Company develops an estimate of the uncollectible amounts included in accounts receivable. This estimate involves significant judgment by the management of the Company. Actual uncollectible amounts may differ from the Company’s estimate. Over-Time Revenue Recognition- The Company recognizes revenue on the sale of its standard precast concrete products, and the associated shipping and installation revenue, at shipment date, including revenue derived from any projects to be completed under short-term contracts. Leasing and royalties are recognized as revenue over time. Certain sales of soundwall, SlenderWall, and other architectural concrete products are recognized over time because as the Company's performance creates or enhances customer-controlled assets or creates or enhances an asset with no alternative use, and the Company has an enforceable right to receive compensation. Over time product contracts are estimated based on the number of units produced (output method) during the period multiplied by the unit rate stated in the contract. As the output method is driven by units produced, the Company recognizes revenues based on the value transferred to the customer relative to the remaining value to be transferred. The Company also matches the costs associated with the units produced. If a contract is projected to result in a loss, the entire contract loss is recognized in the period when the loss was first determined and the amount of the loss updated in subsequent reporting periods. Revenue recognition also includes an amount related to a contract asset or contract liability. If the recognized revenue is greater than the amount billed to the customer, a contract asset is recorded in accounts receivable trade - unbilled. Conversely, if the amount billed to the customer is greater than the recognized revenue, a contract liability is recorded in customer deposits. Changes in the job performance, job conditions and final contract settlements are factors that influence management’s assessment of total contract value and therefore, profit and revenue recognition. 18 Seasonality The Company services the construction industry primarily in areas of the United States where construction activity may be inhibited by adverse weather during the winter. As a result, the Company may experience reduced revenues from December through February and realize the substantial part of its revenues during the other months of the year. The Company may experience lower profits, or losses, during the winter months, and as such, must have sufficient working capital to fund its operations at a reduced level until the spring construction season. The failure to generate or obtain sufficient working capital during the winter may have a material adverse effect on the Company. Inflation Management believes that the Company's operations were affected by inflation in 2024 and 2023, particularly in the purchases of labor costs will increase in 2025, although no assurance can be given regarding future pricing or costs. Backlog As of March 3, 2025, the Company's sales backlog was approximately $59.5 million as compared to approximately $60.8 million at approximately the same time in 2024. It is estimated that most of the projects in the sales backlog will be produced within 12 months, but a few will be produced over multiple years. The backlog remained consistent with the prior year level due to continued sales efforts for products to be produced at all three manufacturing facilities, as well as consistent sales efforts in barrier rentals. The Company expects the backlog to increase with continued bidding on large infrastructure and SlenderWall/architectural projects, although no assurance can be given. The risk exists that recessionary economic conditions may adversely affect the Company more than it has experienced to date. To mitigate these economic and other risks, the Company has a broader product offering than most competitors and has historically been a leader in innovation and new product development in the industry. The Company is continuing this strategy through the development, marketing and sales efforts for its new products. The Company continues to evaluate both production and administrative processes, and has streamlined many of these processes through lean activities. During 2024 and 2023, the Company, through lean activities, continued to see positive effects in production and office areas. The lean business philosophy is a long-term, customer focused approach to continuous improvement by eliminating waste and providing value. It is management's intention to continue on the lean journey while implementing a lean culture throughout the Company to help reach our goals for 2025. The Company's lean efforts are aimed to increase quality to the customer, significantly reduce defects, while increasing production capacity and sales volume. In order to meet these goals, substantial improvements through lean tools and lean thinking are being implemented company wide. 19 Item 7A. Quantitative and Qualitative Disclosures about Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data The consolidated financial statements, which appear beginning on page F-1, are filed as part of this report. Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable.