ARTS WAY MANUFACTURING CO INC

Previous wording

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “report”) and the audited consolidated financial statements and related notes thereto included in Part II, Item 8, “Financial Statements and Supplementary Data,” as well as Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended November 30, 2023. Some of the statements in this report may be forward-looking statements that reflect our current view on future events, future business, industry and other conditions, our future performance, and our plans and expectations for future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. Many of these forward-looking statements are located in this report under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but they may appear in other sections as well. Forward-looking statements in this report generally relate to: (i) our expectations with respect to order backlog, future demand for products, expected product mix and resulting sales; (ii) our beliefs regarding the sufficiency of working capital and cash flows; (iii) our expectation that we will continue to be able to renew or obtain financing on reasonable terms when necessary as well as our continued positive relationship with our creditors and lenders; (iv) our beliefs regarding production capabilities; (v) our intentions and beliefs relating to our costs, business strategies, and future performance, including without limitation, the impact of cost cutting measures, process improvement measures and new product development; (vi) our beliefs regarding the impact and potential actions with respect to discontinuing our Tools segment, including without limitation, potential cash that may be generated by the sale of related real estate and other assets; (vii) our beliefs regarding our early order program providing a picture of future demand; (viii) our expected financial results, including without limitation, our expected results for the Modular and Agricultural Products segments; and (ix) our expectations regarding receiving Employer Retention Credit Refunds; and (x) our expectations concerning our primary capital and cash flow needs.

Current wording

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “report”) and the audited consolidated financial statements and related notes thereto included in Part II, Item 8, “Financial Statements and Supplementary Data,” as well as Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended November 30, 2023. Some of the statements in this report may be forward-looking statements that reflect our current view on future events, future business, industry and other conditions, our future performance, and our plans and expectations for future operations and actions. In some cases you can identify forward-looking statements by the use of words such as “may,” “should,” “anticipate,” “believe,” “expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,” “potential,” “continue,” or the negative of these terms or other similar expressions. Many of these forward-looking statements are located in this report under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but they may appear in other sections as well. Forward-looking statements in this report generally relate to: (i) our expectations with respect to order backlog, future demand for products, expected product mix and resulting sales; (ii) our beliefs regarding the sufficiency of working capital and cash flows; (iii) our expectation that we will continue to be able to renew or obtain financing on reasonable terms when necessary as well as our continued positive relationship with our creditors and lenders; (iv) our beliefs regarding production capabilities; (v) our intentions and beliefs relating to our costs, business strategies, and future performance, including without limitation, the impact of cost cutting measures, process improvement measures and new product development; (vi) our beliefs regarding the impact and potential actions with respect to discontinuing our Tools segment, including without limitation, potential cash that may be generated by the sale of related real estate and other assets and our belief that Modular and Agricultural Products present greater opportunity for long-term stockholder returns in comparison to our discontinued Tools segment; (vii) our beliefs regarding our early order program providing a picture of future demand; (viii) our expected financial results, including without limitation, our expected results for the Modular and Agricultural Products segments; and (ix) our expectations regarding receiving Employer Retention Credit Refunds; and (x) our expectations concerning our primary capital and cash flow needs.

Previous wording

Our consolidated corporate sales from continuing operations for the three- month periods ended February 29, 2024 were $ 5,723,000 compared to $7,087,000 during the same respective period in fiscal 2023, a $1,364,000, or 19.2%, decrease for the three months. Consolidated gross margin for the three-month period ended February 29, 2024 was 25.7% compared to 30.9% for the same period in fiscal 2023.

Current wording

Our consolidated corporate sales from continuing operations for the three- and six-month periods ended May 31, 2024 were $ 6,730,000 and $12,454,000 compared to $8,224,000 and $15,311,000 during the same respective periods in fiscal 2023, a $1,494,000, or 18.2%, decrease for the three months and a decrease of $2,857,000, or 18.7% decrease for the six months. Consolidated gross margin for the three-month and six-month periods ended May 31, 2024 was 28.3% and 27.1% compared to 26.6% and 28.5% for the same periods in fiscal 2023.

Previous wording

Our first quarter sales in our Agricultural Products segment were $4,236,000 compared to $5,445,000 during the same period of fiscal 2023, a decrease of $1,209,000, or 22.2%. We experienced a decrease in demand on our fall 2023 early order program for the first time in three years. While cattle and sugar commodity prices remain strong through the first fiscal quarter of 2024, corn, soybean, hog and wheat prices are all down significantly from where they were a year ago. With the softening of the agriculture economy, we are expecting decreases in farm income levels from the past two fiscal years and expect that will continue to affect sales in our Agricultural Products segment. We are also seeing increased inventory on dealer lots compared to a year ago and in turn have seen a slowdown in orders. We have put cost cutting measures in place to partially mitigate the effect on cash flow from decreased sales. In our first fiscal quarter for 2024, we began right-sizing our staffing, including layoffs of non-production employees and offering early retirement incentives to employees at retirement age. We plan to continue to focus on investments that move our operational improvement strategy towards increased automation and production efficiency. From a sales standpoint, we are working with dealers to help move field inventory to generate more sales opportunities for our products. We are also focused on new dealer acquisitions to penetrate geographic markets that our competitors have a stronghold on. Our engineering team is developing new products for market including a sonar-leveling kit for our beet defoliator, a litter spreader kit for our manure spreaders and technological updates to our grinder mixers. Gross margin for our agricultural products segment for the three-month period ended February 29, 2024 was 26.9% compared to 34.2% for the same period in fiscal 2023. Our gross margin decreased primarily due to the decrease in sales, but was also burdened by inflationary price increases in supplies used in manufacturing and health and general insurance costs. We expect to be able to operate for fiscal 2024 on decreased sales as we build on the strides we've made as a company over the past five years.

Current wording

Our second quarter sales in our Agricultural Products segment were $4,555,000 compared to $6,368,000 during the same period of fiscal 2023, a decrease of $1,813,000, or 28.5%. For the six months ended May 31, 2024, our sales were $8,792,000 compared to $11,813,000, a decrease of $3,021,000, or 25.6% for the same period of 2023. In February of 2024, the US Department of Agriculture reported a 25% expected decline in farm income levels for 2024 due to weaker row crop prices and expected increases in production expenses. Our sales year to date have mirrored the USDA's sentiments on projected farm income. Incoming orders on the fall 2023 and spring 2024 early order programs declined for the first time in three years. As we approach mid-year of calendar 2024, live cattle, lean hogs, sugar beet and milk commodity prices are all exceeding their five year averages while corn, soybeans and wheat commodity prices are all down significantly from where they were a year ago. High interest rates are putting additional pressure on farmer's bottom lines and also reducing the amount of inventory dealers are able to carry on their lots. We expect sales are going to be more speculative in the near future and product availability will be a key factor in sales success moving forward. We began cost cutting measures in the first quarter of fiscal 2024 to partially mitigate the effect on cash flow from decreased sales, including layoffs of non-production employees and offering early retirement incentives to employees at retirement age. We also entered the Iowa Work Force Development's voluntary workshare program in April 2024, which eliminates the need for additional production layoffs by allowing us to cut employee's hours while employees receive unemployment benefits for lost hours. We will be putting additional focus on investments that move our operational improvement strategy towards increased automation and production efficiency as we move forward in fiscal 2024. From a sales standpoint, we continue to work with dealers to help move field inventory to generate more sales opportunities for our products. We are targeting new dealer acquisitions to penetrate geographic markets in which we lack a substantial presence. Gross margin for our Agricultural Products segment for the three-month and six-month periods ended May 31, 2024 was 29.0% and 28.0%, respectively compared to 28.3% and 31.0% for the same periods in fiscal 2023. We primarily attribute our gross margin decrease to the decrease in sales, but our margins were also burdened by inflationary price increases in supplies used in manufacturing and health and general insurance costs. We expect a continued focus on driving overheads costs down as 2024 continues.

Previous wording

Our first quarter sales in our Modular Buildings segment were $1,487,000 compared to $1,642,000 for the same period in fiscal 2023, a decrease of $155,000, or 9.4%. Despite a larger backlog in the first fiscal quarter of 2024 compared to the prior year, we saw a decrease in sales for the fiscal quarter. Delays on stamped drawings with state agencies hindered further progress on our contracts for the quarter. We were able to get the drawings approved in the second quarter of fiscal 2024 to further progress on the contracts. We reduced some of our workforce's hours when faced with these delays in the first fiscal quarter of 2024 and also built a stock agricultural building for future sale. Our Modular Buildings segment is carrying the largest backlog we have seen in 10 years as we progress into the second quarter of fiscal 2024. Gross margin for the three- month period ended February 29, 2024 was 22.3% compared to 19.7% for the same respective period in fiscal 2023. The Modular Buildings segment typically sees higher margins on research projects, which made up the majority of our revenue for the first quarter of fiscal 2024 compared to a higher percentage of agricultural buildings in the first quarter of fiscal 2023. This, coupled with increased billing rates, has led to improved margins in this segment over the last 15 months. We are expecting increased sales compared to fiscal 2023 based on the projects we currently have under contract and on contracts expected to close.

Current wording

Our second quarter sales in our Modular Buildings segment were $2,175,000 compared to $1,856,000 for the same period in fiscal 2023, an increase of $319,000, or 17.2%. For the six months ended May 31, 2024 our sales were $3,662,000 compared to $3,498,000 for the same period of fiscal 2023, an increase of $164,000, or 4.7%. Two large research projects are driving the sales increase for the three- and six- month periods. We anticipate seeing increased sales quarter on quarter for the remainder of fiscal 2024 due to the strength of our backlog. Gross margin for the three- and six-month period ended May 31, 2024 was 26.9% and 25.0%, respectively, compared to 20.7% and 20.2% for the same respective periods in fiscal 2023. The Modular Buildings segment typically sees higher margins on research projects, which made up the majority of our revenue for the first six months of fiscal 2024, compared to a higher percentage of agricultural buildings in the first quarter of fiscal 2023. This, coupled with increased billing rates, has led to improved margins in this segment over the last 18 months.

Previous wording

Our consolidated selling expenses from continuing operations for the three months ended February 29, 2024 were $463,000 compared to $531,000 for the same period in fiscal 2023, a decrease of $68,000, or 12.8%. The decrease in selling expenses is related mainly to decreases in commission expense. Decreased sales in the Agricultural Products segment and the addition of an inside salesperson contributed to the decrease in commission expense. We did attend a tradeshow in the first quarter of fiscal 2024 that we don't typically attend and did see increased selling expenses comparatively from that. Our Modular Buildings segment also utilizes commissions on agricultural building sales and we saw a significant decrease in these sales comparatively. We would have experienced further decreases in selling expenses year on year, but we did attend a large tradeshow in Q1 of fiscal 2024 for our Agricultural Products segment. Selling expenses as a percentage of sales was 8.1% for the three months ended February 29, 2024 compared to 7.5% for three months ended February 28, 2023.

Current wording

Consolidated selling expenses from continuing operations for the three months ended May 31, 2024 were $398,000 compared to $511,000 for the same period 2023. Our consolidated selling expenses from continuing operations for the six months ended May 31, 2024 were $860,000 compared to $1,042,000 for the same period in fiscal 2023, a decrease of $182,000, or 17.5%. The decrease in selling expenses is related mainly to decreases in commission expense. Decreased sales in the Agricultural Products segment and the addition of an inside salesperson contributed to the decrease in commission expense. Our Modular Buildings segment also utilizes commissions on agricultural building sales and we saw a significant decrease in these sales comparatively. Selling expenses as a percentage of sales was 6.9% for the six months ended May 31, 2024 compared to 6.8% for six months ended May 31, 2023.

Previous wording

Consolidated engineering expenses from continuing operations were $160,000 for the three- month period ended February 29, 2024 compared to $128,000 for the same period in fiscal 2023. The increase in engineering expense is related to increased health insurance costs and rising wages. Engineering expenses as a percentage of sales were 2.8% for the three- month periods ended February 29, 2024 compared to 1.8% for the same respective periods in fiscal 2023.

Current wording

Consolidated engineering expenses from continuing operations were $107,000 and $267,000 for the three- and six-month period ended May 31, 2024, respectively compared to $140,000 and $269,000 for the same periods in fiscal 2023. Engineering expenses as a percentage of sales were 2.1% for the six months ended May 31, 2024 compared to 1.8% for the same respective periods in fiscal 2023.

Previous wording

Consolidated administrative expenses from continuing operations for the three- month period ended February 29, 2024 were $1,230,000 compared to $984,000 for the same respective period in fiscal 2023. Administrative expenses as a percentage of sales were 21.5% for the three- month period ended February 29, 2024 compared to 13.9% for the same respective period in fiscal 2023. Administrative expenses increased year on year primarily due to the addition of skilled staff in accounting and human resources. We also accrued approximately $100,000 of early retirement incentives for employees of retirement age that are retiring mid-March of 2024. The retirement incentive was offered to help right-size our workforce. We also saw increased administrative costs year on year from the amortization of our cloud computing arrangement implementation.

Current wording

Consolidated administrative expenses from continuing operations for the three- and six-month period ended May 31, 2024 were $1,233,000 and $2,464,000, respectively, compared to $1,099,000 and $2,083,000 for the same respective period in fiscal 2023. Administrative expenses as a percentage of sales were 19.8% for the six months ended May 31, 2024 compared to 13.6% for the same respective period in fiscal 2023. Administrative expenses increased year on year primarily due to the addition of skilled staff in accounting and human resources. We also paid out approximately $188,000 of early retirement incentives for employees of retirement age that retired mid-March of 2024. The retirement incentive was offered to help right-size our workforce. We also saw increased information technology costs year on year from rising prices and the amortization of our cloud computing arrangement implementation which will be fully amortized after the second quarter of fiscal 2025.

Previous wording

The consolidated order backlog net of discounts for continuing operations as of April 3, 2024 was $11,416,000 compared to $12,007,000 as of April 3, 2023, a 4.9% decrease. The Agricultural Products segment order backlog was $2,476,000 as of April 3, 2024 compared to $7,798,000 in fiscal 2023, a 68.2% decrease. Our incoming orders slowed in the fall of 2023 as backlog of the previous year’s pent-up demand was filled. In February 2024, the USDA estimated a 25.5% decrease in net farm income tied to lower crop and livestock cash receipts and continued increases in production costs. We will rely on our brand reputation, strength of sales team and product availability to drive sales activity for fiscal 2024. The backlog for the Modular Buildings segment was $8,940,000 as of April 3, 2024, compared to $4,209,000 in fiscal 2023, a 112.4% increase. Two large research projects make up the bulk of our current backlog. We expect completion of these projects in fiscal 2024 which would put us on track for nearly a 48% revenue increase from the 2023 fiscal year. We have additional contracts and quoting activity that we expect could provide additional upside for fiscal 2024. Our order backlog is not necessarily indicative of future revenue to be generated from such orders due to the possibility of order cancellations and dealer discount arrangements we may enter into from time to time.

Current wording

The consolidated order backlog net of discounts for continuing operations as of July 8, 2024 was $7,867,000 compared to $10,236,000 as of July 8, 2023, a 23.1% decrease. The Agricultural Products segment order backlog was $1,348,000 as of July 8, 2024 compared to $6,764,000 in fiscal 2023, an 80.1% decrease. Decreases in expected net farm income coupled with high interest rates in fiscal 2024 has suppressed demand for agricultural products across the North American market. We will rely on our brand reputation, strength of sales team and product availability to drive sales activity for the remainder of fiscal 2024. The backlog for the Modular Buildings segment was $6,519,000 as of July 8, 2024, compared to $3,472,000 in fiscal 2023, an 87.8% increase. We continue to see strong demand for research-type modulars in our Modular Buildings segment as we progress through the third quarter of fiscal 2024. While ag modular building demand is down, continued quoting activity on the research side shows promise into fiscal 2025. Our order backlog is not necessarily indicative of future revenue to be generated from such orders due to the possibility of order cancellations and dealer discount arrangements we may enter into from time to time.

Previous wording

Our primary sources of funds for the three months ended February 29, 2024 were cash generated by our receivables, contracts in progress, customer deposits and line of credit. We carried over close to $1.9 million in accounts receivable from the end of fiscal 2023 that we expect to be strong source of cash for fiscal 2024. We also expect the backlog of our contracts in progress in the Modular Buildings segment to be a primary source of cash in fiscal 2024 along with the increased inventory balance in our Agricultural Products segment. Despite incoming orders being down, we received a significant amount of deposits on our early order program in the first fiscal quarter which also helped fund operations for the three months ended February 29, 2024. We expect the sale of real estate of our Tools segment and $1.2 million of net Employer Retention Credit refunds to provide material inflows of cash, although the timing of these transactions are unknown. We expect our primary capital needs for the remainder of fiscal 2024 to relate to operating costs, purchases of equipment that improve our operations, and the retirement of debt.

Current wording

Our primary source of funds for the six months ended May 31, 2024 was cash generated by contracts in progress in the Modular Buildings segment. We are utilizing favorable billing terms to provide positive cash flow on the large research projects we have under contract. Our inventory levels at November 30, 2023 were heightened compared to recent history and the reduction of those inventory levels over the six months ended May 31, 2024 generated positive cash for us. We also carried over close to $1.9 million in accounts receivable from floorplan sales in our Agricultural Products segment at the end of fiscal 2023 that provided a strong cash influx over the first six months of fiscal 2024. A large reduction in accounts payable was our biggest cash outflow for the first six months of fiscal 2024. The heightened inventory balance at November 30 coupled with reduced inventory spending drove this decrease. For the remainder of fiscal 2024, we expect our primary sources of cash to be collection of floorplan receivables, sales and inventory reduction activities. We expect our construction contracts to be fairly cash neutral for the remainder of the fiscal year while operating expenses and retirement of debt will be our biggest cash consumption activities. We expect the sale of real estate of our Tools segment and $1.2 million of net Employer Retention Credit refunds to provide material inflows of cash, although the timing of these transactions are unknown.

Previous wording

We have $5,500,000 on a revolving line of credit with Bank Midwest that, as of February 29, 2024, had an outstanding principal balance of $4,880,437. This line of credit was renewed on March 4, 2024 and is scheduled to mature on March 30, 2025.

Current wording

We have $5,500,000 on a revolving line of credit with Bank Midwest that, as of May 31, 2024, had an outstanding principal balance of $3,950,437. This line of credit was renewed on March 4, 2024 and is scheduled to mature on March 30, 2025.