ARTS WAY MANUFACTURING CO INC

Previous 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.

Current wording

Our consolidated corporate sales from continuing operations for the three- and nine-month periods ended August 31, 2024 were $ 5,876,000 and $18,329,000 compared to $8,117,000 and $23,429,000 during the same respective periods in fiscal 2023, a $2,241,000, or 27.6%, decrease for the comparative three months and a decrease of $5,100,000, or 21.8%, for the comparative nine months. Consolidated gross margin for the three and nine months ended August 31, 2024 was 28.9% and 27.7% compared to 28.3% and 28.5% for the same periods in fiscal 2023.

Previous 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.

Current wording

Our third quarter sales in our Agricultural Products segment were $2,988,000 compared to $5,530,000 during the same period of fiscal 2023, a decrease of $2,542,000, or 46.0%. For the nine months ended August 31, 2024, our Agricultural Products segment sales were $11,779,000 compared to $17,343,000, during the same period of 2023, a decrease of $5,564,000, or 32.1%. 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 fallen in line with the USDA's early sentiments on projected farm income. In September 2024, the USDA revised their projection to an expected 9.6% decrease in net farm income. This number is propped up by large feedlot operations where livestock prices remain above the five-year average and in general animal/animal product cash receipts are expected to be up 7.1% from 2023. Incoming whole good orders remained scarce in the third quarter of fiscal 2024 as row crop prices, including corn, soybeans and wheat, were down 18-24% from the five-year average. Sugar prices remain around 8% above the five-year average as of this report, but the overall agriculture economy sentiment is negative. High interest rates continue to put pressure on farmer's bottom lines, are prohibitive to equipment financing arrangements and floorplan programs. We enacted initial 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 remain focused on trimming operating expenses and reducing overall inventory while remaining efficient in our production process. 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 nine-month periods ended August 31, 2024 was 27.2% and 27.8%, respectively, compared to 26.0% and 29.4% for the same periods in fiscal 2023. We primarily attribute our year to date gross margin decrease to the decrease in sales, which have diminished our economies of scale, but also our margins are 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 for the remainder of fiscal 2024 and fiscal 2025.

Previous 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.

Current wording

Our third quarter sales in our Modular Buildings segment were $2,888,000 compared to $2,587,000 for the same period in fiscal 2023, an increase of $301,000, or 11.6%. For the nine months ended August 31, 2024, our Modular Buildings sales were $6,550,000, compared to $6,086,000 for the same period of fiscal 2023, an increase of $464,000, or 7.6%. Two large research projects are driving the sales increase for the three- and nine- month periods. We expect a strong finish to fiscal 2024 as we expect to close out one of the two large research products in the fourth quarter. Gross margin in the Modular Buildings segment for the three- and nine-month periods ended August 31, 2024 was 30.7% and 27.5%, respectively, compared to 33.4% and 25.8% 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 nine months of fiscal 2024, compared to a higher percentage of agricultural buildings in fiscal 2023. This, coupled with increased billing rates, has led to improved margins in this segment over the last 24 months.

Previous 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.

Current wording

Consolidated selling expenses from continuing operations for the three months ended August 31, 2024 were $381,000, compared to $566,000 for the same period in fiscal 2023. Our consolidated selling expenses from continuing operations for the nine months ended August 31, 2024 were $1,241,000, compared to $1,609,000 for the same period in fiscal 2023, a decrease of $368,000, or 22.9%. 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 6.8% for the nine months ended August 31, 2024 compared to 6.9% for nine months ended August 31, 2023.

Previous 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.

Current wording

Consolidated engineering expenses from continuing operations were $79,000 and $346,000 for the three- and nine-month periods ended August 31, 2024, respectively, compared to $171,000 and $439,000 for the same periods in fiscal 2023. The decrease in engineering expenses is related to budget cuts made at the beginning of fiscal 2024. Engineering expenses as a percentage of sales were 1.9% for the nine months ended August 31, 2024, compared to 1.9% for the same respective periods in fiscal 2023.

Previous 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.

Current wording

Consolidated administrative expenses from continuing operations for the three- and nine-month periods ended August 31, 2024 were $1,087,000 and $3,550,000, respectively, compared to $1,095,000 and $3,178,000 for the same respective period in fiscal 2023. Administrative expenses as a percentage of sales were 19.4% for the nine months ended August 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

Consolidated net loss from continuing operations was $5,000 for the three-month period ended May 31, 2024, compared to net income of $330,000 for the same period in fiscal 2023. For the six months ended May 31, 2024, our consolidated net loss was $429,000 compared to net income of $680,000 for the same period of fiscal 2023. While we had positive operating income from continuing operations for the three months ended May 31, 2024, high interest rates on our debt, have put strain on our bottom line in fiscal 2024. We expect that our sales in the Agricultural Products segment will continue to follow the 25% farm income decrease trend predicted by the USDA. We will rely on inventory reduction, debt retirement and cost cutting to minimize losses in an attempt again to generate net income from this segment. The Modular Buildings segment recorded revenue increases and profitability for both the three and six months ended May 31, 2024. We anticipate continued positive performance from this segment due to strong backlog for the remainder of fiscal 2024.

Current wording

Consolidated net income from continuing operations was $2,000 for the three-month period ended August 31, 2024, compared to net income of $241,000 for the same period in fiscal 2023. For the nine months ended August 31, 2024, our consolidated net loss was $427,000 compared to net income of $921,000 for the same period of fiscal 2023. While we had positive operating income from continuing operations for the second straight fiscal quarter, high interest rates have put strain on our bottom line in fiscal 2024. We expect it may be another twelve months before we see some sales stabilization in the Agricultural Products segment due to ongoing market conditions. Inventory reduction, debt retirement and cost cutting to maximize cash flow will be key over the next 18 months to weather the current conditions. The Modular Buildings segment recorded revenue increases and profitability for both the three and nine months ended August 31, 2024. We anticipate continued positive performance from this segment for the remainder of fiscal 2024 as we close out current backlog.

Previous 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.

Current wording

The consolidated order backlog net of discounts for continuing operations as of October 3, 2024 was $5,600,000 compared to $5,605,000 as of October 3, 2023, a 0.1% decrease. The Agricultural Products segment order backlog was $708,000 as of October 3, 2024 compared to $4,143,000 in fiscal 2023, an 82.9% decrease. Expected decreases in net farm income from struggling row crop prices coupled with high interest rates in fiscal 2024 has suppressed demand for agricultural products across the North American market. We expect future rate cuts to have a positive effect on the agriculture equipment market and expect a period of maybe 6 to 12 months where incoming orders remain slow while existing inventory is consumed from dealer lots. As of the date of this report we are in the first phase of our early order program. We will have a better gauge on how fiscal 2025 is going to shape up once our early order program expires. The backlog for the Modular Buildings segment was $4,892,000 as of October 3, 2024, compared to $1,462,000 in fiscal 2023, an 234.6% increase. We continue to see strong demand for research-type modulars in our Modular Buildings segment as we progress through the fourth quarter of fiscal 2024. We have also noticed an uptick in Agricultural modular building demand in the past 30 days or so. 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 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.

Current wording

Our primary source of funds for the nine months ended August 31, 2024 was cash generated by operating activities bolstered by contracts in progress in the Modular Buildings segment. Favorable billing terms have allowed us to stay cash positive while we complete 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 nine months ended August 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 nine months of fiscal 2024. A large reduction in accounts payable was our biggest cash outflow for the first nine 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 receivables and inventory reduction activities. While we are over billed in our Modular Buildings contracts, close to $1 million of these billings are still in accounts receivable. We expect our construction contracts cash in and outflows to be close to even for the remainder of the fiscal year while operating expenses and retirement of debt will be our biggest cash consumption activities. The sale of real estate of our Tools segment in October 2024 for $1.8 million should net close to $1.7 million in cash after closing expenses. We expect to retire short and long-term debt with the proceeds. We also expect $1.2 million of net Employer Retention Credit refunds to provide a material inflow of cash, although the timing of this transaction is unknown.

Previous 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.

Current wording

We have $5,500,000 on a revolving line of credit with Bank Midwest that, as of August 31, 2024, had an outstanding principal balance of $3,867,437. This line of credit was renewed on March 4, 2024 and is scheduled to mature on March 30, 2025.