ARTS WAY MANUFACTURING CO INC

Previous wording

Our Agricultural Products segment continued its profitability for the third straight year in fiscal 2023. Our Modular Buildings segment added a strong financial performance for fiscal 2023. Our consolidated revenues from continued operations increased 18.1% year on year and we had $1,531,000 of income from continuing operations for the fiscal year ended November, 30 2023.

Current wording

Our Agricultural Products segment saw a 34.7% decline in revenue in fiscal 2024 due to suppressed commodity prices, high borrowing rates and saturated inventory levels. Our Modular Buildings segment increased revenues by 25.9% and recorded strong profitability. Our consolidated revenues from continued operations decreased 19.1% year on year, and we had $461,000 of operating income from continuing operations for the fiscal year ended November 30, 2024.

Previous wording

We finished the year ended November 30, 2023 with approximately $763,000 of consolidated net income from continued operations and saw our working capital increase by approximately $824,000.

Current wording

We finished the year ended November 30, 2024 with approximately $94,000 of consolidated net loss from continued operations, $307,000 of net income and saw our working capital increase by approximately $802,000.

Previous wording

We expect to have access to capital as needed throughout fiscal 2024 from the collection of receivables, sale of inventory, the expected receipt of approximately $1.2 million of gross proceeds from a filed Employee Retention Credit and the potential sale of our Ohio real estate. Due to the timing of filing an ERC claim after the IRS announced a moratorium on processing applications, and uncertainty surrounding the nature and timing of the claim approval and subsequent payment process, recognition of the claim is deferred until payment is received. Accordingly the claim has not been recorded in receivables, assets, or income. On November 30, 2023 we had $1,086,480 available on our line of credit and $2,337,903 of excess collateral towards our borrowing base. Our working capital remained strong at approximately $5,690,000 in fiscal 2023 with a current ratio of 1.61. Our banking relationship remains positive and we expect it to only strengthen as our balance sheet continues to improve through the retirement of debt. We believe that our current cash and financing arrangements will provide sufficient cash to finance operations for the next 12 months. We expect to continue to rely on cash from financing activities to supplement our cash flows from operations in order to meet our liquidity and capital expenditure needs in the near future.

Current wording

We expect to have access to capital as needed throughout fiscal 2025 from the collection of receivables, sale of inventory and the expected receipt of approximately $1.2 million of gross proceeds from a filed Employee Retention Credit or ERC. Due to the timing of filing an ERC claim after the IRS announced a moratorium on processing applications, and uncertainty surrounding the nature and timing of the claim approval and subsequent payment process, recognition of the claim is deferred until payment is received. Accordingly, the claim has not been recorded in receivables, assets, or income. On November 30, 2024 we had $3,571,563 available on our line of credit and $930,036 of excess collateral towards our borrowing base. Our working capital remained strong at approximately $6,492,000 in fiscal 2024 with a current ratio of 1.98. Our banking relationship remains positive, and we expect it to only strengthen as our balance sheet continues to improve through the retirement of debt. We believe that our current cash and financing arrangements will provide sufficient cash to finance operations for the next 12 months. We expect to continue to rely on cash from financing activities to supplement our cash flows from operations in order to meet our liquidity and capital expenditure needs in the near future.

Previous wording

In accordance with ASC 606, revenue is measured based on consideration specified in a contract with a customer and recognized when we satisfy the performance obligation specified in each contract.

Current wording

In accordance with Accounting Standards Codification, or ASC, 606, revenue is measured based on consideration specified in a contract with a customer and recognized when we satisfy the performance obligation specified in each contract.

Previous wording

In certain circumstances, upon the customer’s written request, we may recognize revenue when production is complete, and the goods are ready for shipment. At the customer’s request, we will bill the customer upon completing all performance obligations, but before shipment. The customer dictates that we ship the goods per its direction from our manufacturing facility, as is customary with this type of agreement, in order to minimize shipping costs. The written agreement with the customer specifies that the goods will be delivered on a schedule to be determined by the customer, with a final specified delivery date, and that we will segregate the goods from our inventory, such that they are not available to fill other orders. This agreement also specifies that the customer is required to purchase all goods manufactured under this agreement. Title of the goods will pass to the customer when the goods are complete and ready for shipment, per the customer agreement. At the transfer of title, all risks of ownership have passed to the customer, and the customer agrees to maintain insurance on the manufactured items that have not yet been shipped. We have operated using bill and hold agreements with certain customers for many years, with consistent satisfactory results for both the customers and us. The credit terms on this agreement are consistent with the credit terms on other sales. All risks of loss are shouldered by the customer, and there are no exceptions to the customer’s commitment to accept and pay for these manufactured goods. Revenues recognized when goods were ready for shipment in fiscal 2023 were approximately $3,110,000 compared to $1,010,000 in fiscal 2022.

Current wording

In certain circumstances, upon the customer’s written request, we may recognize revenue when production is complete, and the goods are ready for shipment. At the customer’s request, we will bill the customer upon completing all performance obligations, but before shipment. The customer dictates that we ship the goods per its direction from our manufacturing facility, as is customary with this type of agreement, in order to minimize shipping costs. The written agreement with the customer specifies that the goods will be delivered on a schedule to be determined by the customer, with a final specified delivery date, and that we will segregate the goods from our inventory, such that they are not available to fill other orders. This agreement also specifies that the customer is required to purchase all goods manufactured under this agreement. Title of the goods will pass to the customer when the goods are complete and ready for shipment, per the customer agreement. At the transfer of title, all risks of ownership have passed to the customer, and the customer agrees to maintain insurance on the manufactured items that have not yet been shipped. We have operated using bill and hold agreements with certain customers for many years, with consistent satisfactory results for both the customers and us. The credit terms on this agreement are consistent with the credit terms on other sales. All risks of loss are shouldered by the customer, and there are no exceptions to the customer’s commitment to accept and pay for these manufactured goods. Revenues recognized when goods were ready for shipment in fiscal 2024 were approximately $1,073,000 comp ared to $3,110,000 in fiscal 2023.

Previous wording

Our consolidated net sales from continuing operations totaled $30,281,000 for the 2023 fiscal year, which represents a 18.1% increase from our consolidated net sales of $25,646,000 for the 2022 fiscal year. We increased revenue in both our Agricultural Products and Modular Building segments in fiscal 2023. Our consolidated gross profit as a percentage of net sales increased to 28.3% in the 2023 fiscal year compared to 27.1% of net sales in the 2022 fiscal year. Our consolidated operating expenses from continuing operations increased by 11.4%, from $6,334,000 in the 2022 fiscal year to $7,053,000 in the 2023 fiscal year. The majority of our corporate general and administrative expenses are borne by our Agricultural Products segment, including costs to be public. The Agricultural Products segment represented $5,920,000 of our total consolidated operating expenses, while our Modular Buildings segment represented $1,133,000.

Current wording

Our consolidated net sales from continuing operations totaled $24,499,000 for the 2024 fiscal year, which represents a 19.1% decrease from our consolidated net sales of $30,281,000 for the 2023 fiscal year. We increased revenue in our Modular Buildings segment while our Agricultural Products segment was met with difficult market conditions in fiscal 2024. Our consolidated gross profit as a percentage of net sales increased to 29.8% in the 2024 fiscal year compared to 28.3% of net sales in the 2023 fiscal year. Our consolidated operating expenses from continuing operations decreased by 2.9%, from $7,053,000 in the 2023 fiscal year to $6,849,000 in the 2024 fiscal year. The majority of our corporate general and administrative expenses are borne by our Agricultural Products segment, including costs associated with being a public company. The Agricultural Products segment represented $5,665,000 of our total consolidated operating expenses, while our Modular Buildings segment represented $1,184,000.

Previous wording

Our consolidated operating income from continuing operations for the 2023 fiscal year was $1,531,000 compared to operating income of $605,000 for the 2022 fiscal year. Our Agricultural Products segment had operating income of $664,000, and our Modular Buildings segment had operating income of $867,000.

Current wording

Our consolidated operating income from continuing operations for the 2024 fiscal year was $461,000 compared to operating income of $1,531,000 for the 2023 fiscal year. Our Agricultural Products segment had an operating loss of $1,510,000, and our Modular Buildings segment had operating income of $1,971,000.

Previous wording

Consolidated net income for the 2023 fiscal year was $267,000 compared to net income of $98,000 in the 2022 fiscal year.

Current wording

Consolidated net income for the 2024 fiscal year was $307,000 compared to net income of $267,000 in the 2023 fiscal year.

Previous wording

Our effective tax rate for the 2023 and 2022 fiscal years was 29.8% and 16.4%, respectively. The primary driver for the increase in effective tax rate was due to add backs related to differences in restricted stock values at grant and vest date and non-deductible meals expense.

Current wording

Our effective tax rate for the 2024 and 2023 fiscal years was 30.3% and 29.9%, respectively.

Previous wording

*Modular Buildings.*Our Modular Buildings segment’s net sales for the 2023 fiscal year were $7,814,000 compared to $4,734,000 for the 2022 fiscal year, an increase of $3,080,000, or 65.1%. We saw an increase in agricultural sales in fiscal 2023 from the continued strength of the agricultural market and also landed a large research product that drove up sales. Our Modular Building segment's gross profit for the 2023 fiscal year was 25.6% compared to 10.5% during the 2022 fiscal year. Sales volume played a key factor in increasing our gross profit for fiscal 2023. We also increased our billing rates to combat rising labor and overhead costs from fiscal 2022 that led to better margins in fiscal 2023. Operating expenses for the 2023 fiscal year were $1,133,000 compared to $1,095,000 for the 2022 fiscal year, an increase of $38,000, or 3.5%. This increase was primarily due to increased selling expenses from additional commissions paid on an increase in agricultural building sales. Total income from operations from our Modular Buildings segment during the 2023 fiscal year was $867,000 compared to operating loss of $600,000 in the 2022 fiscal year. We took steps in fiscal 2023 to improve our project management team to increase profitability on projects and to provide better service to our customers. We believe our brand and sales lead funnel is providing us with increased sales potential in fiscal 2024.

Current wording

*Modular Buildings.*Our Modular Buildings segment’s net sales for the 2024 fiscal year were $9,836,000 compared to $7,814,000 for the 2023 fiscal year, an increase of $2,022,000, or 25.9%. While our agricultural products building sales suffered under the same adverse market conditions of our Agricultural Products segment, we saw increased demand in the research markets for our modular products, which led to a 124% increase in research sales. Our Modular Building segment's gross profit percentage for the 2024 fiscal year was 32.1% compared to 25.6% during the 2023 fiscal year. Our project performance in fiscal 2024 exceeded expectations as our workforce was consistently under budget on production disciplines. We are also historically more efficient when our shop is busy and perform better on research projects as we often have more contingency built in than traditional ag modulars. Operating expenses for the 2024 fiscal year were $1,184,000 compared to $1,133,000 for the 2023 fiscal year, an increase of $51,000, or 4.5%. This increase is primarily due to increased bonus payout for excellent fiscal 2024 performance. Total income from operations from our Modular Buildings segment during the 2024 fiscal year was $1,971,000 compared to operating income of $867,000 in the 2023 fiscal year. Our project management team continued to build on fiscal 2023 strides to increase profitability on projects and to provide better service to our customers. This focus translated to some of the best results we have seen in this operating segment and we believe our sales funnel leading into fiscal 2025 can deliver similar performance.

Previous wording

We are subject to a number of trends and uncertainties that may affect our short-term or long-term liquidity, sales revenues, and operations. Similar to other farm equipment manufacturers, we are affected by items unique to the farm industry, including fluctuations in farm income resulting from the change in commodity prices, crop damage caused by weather and insects, government farm programs, interest rate fluctuations, and other unpredictable variables. Other uncertainties include our OEM customers and the decisions they make regarding their current supply chain structure, inventory levels, and overall business conditions. Management believes that our business is dependent on the farming industry for the bulk of our sales revenues. As such, our business tends to reap the benefits of increases in farm net income, as farmers tend to purchase equipment in lucrative times and forgo purchases in less profitable years. Direct government payment over the past few years and costs of agricultural production are increasing; further increases in the value of production will benefit our business, while any future decreases in the value of production will decrease farm net income and may negatively affect our financial results.

Current wording

We are subject to a number of trends and uncertainties that may affect our short-term or long-term liquidity, sales revenues, and operations. Similar to other farm equipment manufacturers, we are affected by items unique to the farm industry, including fluctuations in farm income resulting from changes in commodity prices, crop damage caused by weather and insects, government farm programs, interest rate fluctuations, and other unpredictable variables. Other uncertainties include our OEM customers and the decisions they make regarding their current supply chain structure, inventory levels, and overall business conditions. Management believes that our business is dependent on the farming industry for the bulk of our sales revenues. As such, our business tends to reap the benefits of increases in farm net income, as farmers tend to purchase equipment in lucrative times and forgo purchases in less profitable years. Direct government payment over the past few years and costs of agricultural production are increasing; further increases in the value of production will benefit our business, while any future decreases in the value of production will decrease farm net income and may negatively affect our financial results.

Previous wording

Our main source of funds during the 2023 fiscal year was cash generated by financing activities. Income from continuing operations, sale of inventory and property, plant and equipment of our discontinued operations and the use of our line of credit were used to fund our operating and investing activities. A large increase in receivables consumed cash in 2023 as we used extended terms to increase our sales in fiscal 2023. We also consumed significant cash increasing our inventory to stay ahead of supply chain delays. We expect to be driving these inventory levels down in fiscal 2024 as many of our vendor lead times are returning to pre pandemic levels. We used approximately $841,000 in fiscal 2023 for purchases of property, plant and equipment, primarily facility upgrades and manufacturing equipment to improve operational efficiency. We expect our primary capital needs for fiscal 2024 to be operating expenses. We also expect to use cash in fiscal 2024 to acquire additional equipment that improves automation and efficiency in our manufacturing process. These additions will help us drive out costs to improve product margins and be more competitive in our industry. We expect to receive approximately $1,200,000 of net proceeds from the Employee Retention Credit in fiscal 2024 and estimate expected net proceeds of approximately $2,000,000 upon sale of our Ohio real estate, which we expect will be used to retire a significant portion of our debt and fund capex needs as discussed above. Due to the timing of filing an ERC claim after the IRS announced a moratorium on processing applications, and uncertainty surrounding the nature and timing of the claim approval and subsequent payment process, recognition of the claim is deferred until payment is received. Accordingly the claim has not been recorded in receivables, assets, or income.

Current wording

Our main source of funds during the 2024 fiscal year was cash generated by operating activities of approximately $2,869,000. We utilized favorable billing schedules in our Modular Buildings segment to generate approximately $1,654,000 in positive cash flow for our fiscal 2024 projects. We also generated approximately $983,000 of cash from the collection of extended term and other outstanding receivables at fiscal 2023 year end, predominately from our Agricultural Products segment. We were also able to reduce our inventory level in fiscal 2024 from higher than normal inventory level at the end of fiscal 2023, to generate approximately $551,000 of positive cash. We expect to be able to continue to decrease inventory in fiscal 2025 to provide positive cash. Our net loss plus noncash adjustment items also provided approximately $1,358,000 in cash in fiscal 2024. Our discontinued operations provided approximately $1,271,000 in positive cash flow primarily from the sale of our remaining real estate. Our largest uses of cash in fiscal 2024 were the payment of accounts payable, purchases of property, plant, and equipment, and retirement of debt, including the payoff of our roof loan and a large decrease in our operating line of credit. We expect our primary capital needs for fiscal 2025 to be operating expenses and continued retirement of debt. We expect our operating expenses to be down significantly in fiscal 2025 as we have right-sized our staff for incoming demand. We expect to use available cash or financing in fiscal 2025 to acquire equipment that we identify as improving efficiency in our manufacturing process. We will be focused on increasing efficiency and margin gains to make the most out of our expected sales in fiscal 2025. We expect to receive approximately $1,200,000 of net proceeds from the Employee Retention Credit in fiscal 2025. Due to the timing of filing an ERC claim after the IRS announced a moratorium on processing applications, and uncertainty surrounding the nature and timing of the claim approval and subsequent payment process, recognition of the claim is deferred until payment is received. Accordingly the claim has not been recorded in receivables, assets, or income.

Previous wording

We have a Bank Midwest credit facility consisting of a $5,000,000 revolving line of credit and a $500,000 reserve line of credit, pursuant to which we had borrowed a combined $4,413,520, with $1,086,480 remaining, as of November 30, 2023, and two term loans, which had outstanding principal balances of $2,080,718 and $336,858 as of November 30, 2023. The revolving line of credit is being used for working capital purposes. We also have three Economic Injury Disaster Loans provided by the U.S. Small Business Administration with an aggregate principal balance of $482,078 as of November 30, 2023. $160,599 of the EIDL balance is tied to our discontinued operation and is expected to be paid upon liquidation of the real estate.

Current wording

We have a Bank Midwest credit facility consisting of a $5,500,000 revolving line of credit, pursuant to which we had borrowed $1,928,437, with $3,571,563 remaining, as of November 30, 2024, and one term loan, which had an outstanding principal balance of $1,779,877 as of November 30, 2024. The revolving line of credit is being used for working capital purposes. We also have two Economic Injury Disaster Loans provided by the U.S. Small Business Administration with an aggregate principal balance of $315,089 as of November 30, 2024.

Previous wording

Our loans require us to comply with various covenants, including maintaining certain financial ratios and obtaining prior written consent from Bank Midwest for any investment in, acquisition of, or guaranty relating to another business or entity. We were out of compliance with our debt to worth ratio covenant in place under the Bank Midwest loans as of November 30, 2023. Bank Midwest has issued a waiver for the noncompliance as of November 30, 2023.

Current wording

Our loans require us to comply with various covenants, including maintaining certain financial ratios and obtaining prior written consent from Bank Midwest for any investment in, acquisition of, or guaranty relating to another business or entity. We were in compliance with covenants in place under the Bank Midwest loans as of November 30, 2024.