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, 2024. 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,” "foresee," 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 that normalizing dealer equipment stock levels may positively impact future demand for our agricultural products (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; (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, 2024. 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,” “foresee,“ 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 that normalizing dealer equipment stock levels may positively impact future demand for our agricultural products (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 concerning our primary capital and cash flow needs.

Previous wording

Our consolidated corporate sales from continuing operations for the three- month period ended February 28, 2025 were $ 5,141,000 compared to $5,723,000 during the same period in fiscal 2024, a $582,000, or 10.2%, decrease for the comparative three months. Consolidated gross margin for the three months ended February 28, 2025 was 29.1% compared to 25.7% for the same period in fiscal 2024.

Current wording

Our consolidated corporate sales from continuing operations for the three- and six-month period ended May 31, 2025 were $ 6,337,000, and $11,478,000, respectively, compared to $6,730,000 and $12,454,000, respectively, during the same periods in fiscal 2024. For the three months ended May 31, 2025, we saw a sales decrease of $393,000, or 5.8%, from the same period in fiscal 2024. For the six months ended May 31, 2025, we saw a sales decrease of $976,000, or 7.8%, from the same period in fiscal 2024. Consolidated gross margin for the three and six months ended May 31, 2025 was 32.5% and 31.0%, respectively, compared to 28.3% and 27.1%, respectively, for the same periods in fiscal 2024.

Previous wording

Our 2025 first fiscal quarter sales in our Agricultural Products segment were $2,948,000 compared to $4,236,000 during the same period of fiscal 2024, a decrease of $1,288,000, or 30.4%. After a period of heightened demand in fiscal 2023, we started to see a decline in demand for our agricultural products in Q1 2024 due to rising interest rates, declining commodity prices and decreases in expected net farm incomes as high as 30% compared to the previous year. The leveling off of demand in this period drove the decrease in sales from Q1 of fiscal 2024 to Q1 of fiscal 2025. In Q1 of fiscal 2025, we are still battling high interest rates and low row crop commodity prices but are starting to see improvement in dealer equipment stock levels. Equipment dealer lots were oversaturated for much of fiscal 2024 and slowed incoming demand for us. We expect destocking to continue in fiscal 2025, which we believe will increase demand for our products moving forward. The agriculture market is highly cyclical, and we believe fiscal 2024 was the bottom of the cycle. We spent the majority of fiscal 2024 right-sizing our production and administrative staff to help us weather the agricultural downturn. We believe we are at staffing levels where we can see positive earnings and cash flow based on sales levels we have seen in past years of agricultural downturns as long as similar demand persists. While the Federal Reserve most recently held interest rates steady, they reported anticipation of two interest rate cuts for fiscal 2025 and further cuts for fiscal 2026, which we believe will help stimulate all economic growth. We have seen relatively steady demand for our grinder mixer products and beet harvesting equipment in the first fiscal quarter of 2025. We plan to release some product specific programs in fiscal 2025 to continue to turn inventory and unlock cash from product lines where our inventory levels are high. Gross margin for our Agricultural Products segment for the three-month period ended February 28, 2025 was 26.7% compared to 26.9% for the same periods in fiscal 2024. Despite the 30.4% decrease in sales and less variable margin to cover our fixed costs, our gross margin percentage held steady, comparatively, for the first fiscal quarter of 2025 due to cuts to manufacturing expenses we made during fiscal 2024. We expect to see some short term cost increases until the U.S.-based steel manufacturers are able to meet increased American steel demand that could be induced from retaliatory tariffs. The United States currently imports approximately 25% of steel used by industry with Canada, Brazil and Mexico being the top suppliers. The majority of our manufacturing components are sourced in the U.S., however, some of our suppliers do source some of their components from China and other countries. We have been notified of expected tariff charges from some of these suppliers and expect some minor impact from these tariffs on our gross profit.

Current wording

Our 2025 second fiscal quarter sales in our Agricultural Products segment were $4,025,000 compared to $4,555,000 during the same period of fiscal 2024, a decrease of $530,000, or 11.6%. For the six months ended May 31, 2025, our sales in the Agricultural Products segment were $6,973,000 compared to $8,792,000 during the same period of fiscal 2024, a decrease of $1,819,000, or 20.7%. Weakened row crop prices and high interest rates continue to make for a difficult agricultural market through the first six months of fiscal 2025. Livestock prices, predominately cattle, are at all time highs in fiscal 2025 and have driven strong grinder mixer sales activity thus far in fiscal 2025. While we have seen quite a bit of destocking from heightened levels in fiscal 2024, many dealers are not eager to replace their stock at current interest rate levels. The agriculture market is highly cyclical, and we still believe we are at the bottom of the cycle. We anticipate that conditions will improve in the next 12 to 18 months in our market. Our efforts in fiscal 2024 to right-size our production and administrative staff has reduced our operating expenses which is aiding in our efforts to weather the bottom of the cycle. In Q3 of fiscal 2025 we expect to be building stock inventory in order to react to retail opportunities in the second half of fiscal 2025. We will continue to release product specific programs in the second half of fiscal 2025 to turn inventory and unlock cash from product lines where our inventory levels are higher, which has been successful so far in fiscal 2025. Gross margin for our Agricultural Products segment for the three-month period ended May 31, 2025 was 27.2% compared to 29.0% for the same period in fiscal 2024, while our gross margin for the six-month period ended May 31, 2025 was 27.0% compared to 28.0% for the same period of fiscal 2024. The sales decreases for the three and six months periods ended May 31, 2025 compared to fiscal 2024, resulted in less variable margin to cover our fixed costs comparatively. We are seeing steel prices rise as tariff uncertainty impacts domestic demand. We expect U.S.-based steel manufacturers to be able to increase production to meet ongoing demand and note the presence of a major U.S. investment by Nippon Steel for a new US Steel mill. The United States currently imports approximately 25% of steel used by industry with Canada, Brazil and Mexico being the top suppliers. The majority of our manufacturing components are sourced in the U.S., however, some of our suppliers do source some of their components from China and other countries. We have also been seeing tariff charges from some of these suppliers and expect some minor impact from these tariffs on our gross profit.

Previous wording

Our first fiscal quarter sales in our Modular Buildings segment were $2,193,000 compared to $1,487,000 for the same period in fiscal 2024, an increase of $706,000, or 47.5%. A strong demand driven backlog at the end of fiscal 2024 compared to a limited backlog at the end of fiscal 2023 drove our increase in sales for Q1 of fiscal 2025. We continued to see strong demand for our buildings in the first fiscal quarter of 2025, and we intend to focus on moving projects currently under contract in the engineering phase to signed construction contracts in Q2 of fiscal 2025 to continue our strong run from the past two fiscal years. In Q1 of fiscal 2025, we brought on a Director of Business Development and Sales who is transitioning to replace our current President and Director of Sales. We expect the overlap in these positions in fiscal 2025 will provide additional sales opportunities for us in fiscal 2025. We also expect to utilize our outgoing President and Director of Sales as a consultant moving forward to improve sales and maintain customer relationships. Gross margin in the Modular Buildings segment for the three- month period ended February 28, 2025 was 32.3% compared to 22.3% for the same respective period in fiscal 2024. The increased margin is due to increased variable margin on increased sales. Our operations team has also continuously come in on or under budget in their projects in the last 18 months, which has resulted in higher margins and an improved bottom line.

Current wording

Our second fiscal quarter sales in our Modular Buildings segment were $2,312,000 compared to $2,175,000 for the same period in fiscal 2024, an increase of $137,000, or 6.3%. Our Modular Buildings segment sales for the six months ended May 31, 2025 were $4,505,000 compared to $3,662,000 for the same period of fiscal 2024, an increase of $843,000, or 23.0%. Demand for our modular buildings continue to be strong in fiscal 2025. Our expertise and execution in the custom research and laboratory market has established us as an industry leader. There continues to be a copious amount of quoting activity and custom build inquiries in fiscal 2025, despite some concerns about governmental grants and funding. In Q1 of fiscal 2025, we brought on a Director of Business Development and Sales who is transitioning to replace our current President and Director of Sales. The overlap in these positions in fiscal 2025 is providing additional sales capacity for us in fiscal 2025. We also expect to utilize our outgoing President and Director of Sales as a consultant moving forward to improve sales and maintain customer relationships. We are utilizing the transition period to explore new markets where our custom building can offer competitiveness to the marketplace. Gross margin in the Modular Buildings segment for the three- and six-month period ended May 31, 2025 was 41.7% and 37.2%, respectively, compared to 26.9% and 25.0%, respectively, for the same periods in fiscal 2024. The increased margin is due to our team performing under budget on large research projects in fiscal 2025. Investments made in construction software and human capital from years past is coming together to produce results in this segment.

Previous wording

Consolidated selling expenses from continuing operations for the three months ended February 28, 2025 were $350,000, compared to $463,000 for the same period in fiscal 2024. The decrease in selling expenses is due to a reduction of employees on the sales and marketing teams in the Agricultural Products segment. Selling expenses as a percentage of sales was 6.8% for the three months ended February 28, 2025 compared to 8.1% for three months ended February 29, 2024.

Current wording

Consolidated selling expenses from continuing operations for the three months ended May 31, 2025 were $436,000, compared to $398,000 for the same period in fiscal 2024. For the six months ended May 31, 2025, our consolidated selling expenses from continuing operations were $786,000 compared to $860,000 from the same period in fiscal 2024. The decrease in selling expenses is due to a reduction of employees on the sales and marketing teams in the Agricultural Products segment. Selling expenses as a percentage of sales were 6.8% for the six months ended May 31, 2025 compared to 6.9% for six months ended May 31, 2024. The increase is selling expenses as a percentage of sales is due to more commissionable sales in the Modular Buildings segment in the first six months of fiscal 2025 compared to fiscal 2024.

Previous wording

Consolidated engineering expenses from continuing operations were $85,000 for Q1 of fiscal 2025 compared to $160,000 for the same period in fiscal 2024. The decrease in engineering expenses is related to the reduction in our engineer headcount at the beginning of fiscal 2024. We expect to add a product development manager to our team in fiscal 2025 in order to bolster our product offerings. Engineering expenses as a percentage of sales were 1.7% for the three months ended February 28, 2025, compared to 2.8% for the same period in fiscal 2024.

Current wording

Consolidated engineering expenses from continuing operations were $84,000 for Q2 of fiscal 2025 compared to $107,000 for the same period in fiscal 2024. For the six months ended May 31, 2025, consolidated engineering expenses were $169,000 compared to $267,000 for same period in fiscal 2024. The decrease in engineering expenses is related to the reduction in our engineer headcount at the beginning of fiscal 2024. We expect to add a product development manager to our team in fiscal 2025 in order to bolster our product offerings. Engineering expenses as a percentage of sales were 1.5% for the six months ended May 31, 2025, compared to 2.1% for the same period in fiscal 2024.

Previous wording

Consolidated administrative expenses from continuing operations for the three- month period ended February 28, 2025 were $1,059,000 compared to $1,230,000 for the same period in fiscal 2024. Administrative expenses as a percentage of sales were 20.6% for the three months ended February 28, 2025, compared to 21.5% for the same period in fiscal 2024. Administrative expenses decreased year-over-year primarily due to early retirement incentives we offered to help right-size our workforce in Q1 of fiscal 2024, which was not repeated in Q1 of fiscal 2025. We also reduced administrative headcount including our Chairman of the Board stepping in to fill our Chief Executive Officer role in Q4 of fiscal 2024, which positively impacted administrative expenses in Q1 of fiscal 2025 versus Q1 of fiscal 2024.

Current wording

Consolidated administrative expenses from continuing operations for the three- and six-month period ended May 31, 2025 were $1,029,000 and $2,088,000, respectively, compared to $1,233,000 and $2,464,000, respectively, for the same periods in fiscal 2024. Administrative expenses as a percentage of sales were 18.2% for the six months ended May 31, 2025, compared to 19.8% for the same period in fiscal 2024. Administrative expenses decreased year-over-year primarily due to early retirement incentives we offered to help right-size our workforce in Q1 of fiscal 2024, which was not repeated in fiscal 2025. We also reduced administrative headcount including our Chairman of the Board stepping in to fill our Chief Executive Officer role in Q4 of fiscal 2024, which positively impacted administrative expenses in fiscal 2025 versus fiscal 2024.

Previous wording

The consolidated order backlog net of discounts for continuing operations as of April 4, 2025 was $6,201,000 compared to $11,416,000 as of April 4, 2024, a 45.7% decrease. The Agricultural Products segment order backlog was $2,136,000 as of April 4, 2025 compared to $2,476,000 in fiscal 2024, a 13.7% decrease. While our backlog is down in this segment, our incoming orders for agriculture equipment in fiscal 2025 have been more consistent than they were a year ago. We carried a heightened backlog into the 2024 fiscal year that fueled us through Q2 of fiscal 2024. Demand was spotty for the final two quarters of fiscal 2024 due to oversaturation of dealer inventory. Despite continued interest rate pressure and low commodity prices, we believe the ongoing destocking of dealer inventory will continue to give us stable demand in fiscal 2025. The backlog for the Modular Buildings segment was $4,065,000 as of April 4, 2025, compared to $8,940,000 in fiscal 2024, a 54.5% decrease. Modular building demand continues to be strong in fiscal 2025. Our sales leads and projects under engineering contracts are expected to bring us similar revenue results to fiscal 2024 despite not being in backlog yet. 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 7, 2025 was $4,728,000 compared to $7,784,000 as of July 7, 2025, a 39.3% decrease. Immediately following the 2025 planting season, we experienced a period of slow demand in the Agricultural Products segment. The order backlog in this segment was $863,000 as of July 7, 2025 compared to $1,348,000 in fiscal 2024, a 36.0% decrease. As we get into harvest season, we expect to see orders pick up again as yearend tax buying occurs. Livestock operators continue to see record high prices and we expect them to have money to spend while the row crop farmers are continuing to experience five year low commodity prices. The backlog for the Modular Buildings segment was $3,865,000 as of July 7, 2025, compared to $6,436,000 in fiscal 2024, a 39.9% decrease. Despite out recent backlog being down year on year, our Modular building demand continues to be strong in fiscal 2025. Our sales are up 23.0% year to date with strong future expected project closings that we expect will give us similar results to fiscal 2024 for the remainder of our year. 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 three months ended February 28, 2025 was cash generated by financing activities, mainly the use of our line of credit. We saw strong cash inflows from collection of accounts receivable and customer deposits for the three months ended February 28, 2025. Our primary cash consumption activities in Q1 of fiscal 2025 were progress on our construction projects, increased inventory for our beet equipment run in the Agricultural Products segment and payment of accrued expenses. We expect our inventory to be a primary source of cash for the remainder of our fiscal year. We expect our primary cash needs for the remainder of the fiscal year to be fulfillment of construction contracts, operating expenses and the retirement of debt. We also expect $1.2 million of net Employer Retention Credit ("ERC") refunds to provide a material inflow of cash, although the timing of any such refunds is unknown and not within our control. Recent announcements related to the cutting of staff at the U.S. Internal Revenue Service could further impact the processing timeline for outstanding ERC claims such as ours.

Current wording

Our primary source of funds for the six months ended May 31, 2025 was cash generated by operating activities, mainly net income from continuing operations. We received net proceeds of approximately $1,461,000 from Employer Retention Credit refunds in Q2 of fiscal 2025. We also had operating income from continuing operations of approximately $513,000 with an additional $952,000 of non cash reconciling items to net income for the six months ended May 31, 2025. Our primary cash usage activities for the first six months of fiscal 2025 was a reduction of billings in excess of costs through progress on our construction projects, increasing of inventory as we made speculative beet equipment for year end tax buying in the Agricultural Products segment and payment of accrued expenses. We expect progress on construction products and line of credit usage to be a primary source of cash for the remainder of our fiscal year. We expect our primary cash needs for the remainder of the fiscal year to be operating expenses and inventory stocking in the Agricultural Products segment.

Previous wording

As of February 28, 2025, our revolving credit line had an outstanding principal balance of $2,199,437. We renewed our revolving line of credit with Bank Midwest on March 27, 2025, with a scheduled maturity date of March 30, 2026. In our most recent renewal, we dropped our principal balances from $5,500,000 to $4,000,000 and also negotiated an interest rate 75 basis points lower than our previous line of credit. The bank's credit committee has preapproved an additional $1,500,000 of principal for the 2025 renewal, consistent with the borrowing availability of our previous line of credit, in the event we need additional funding.

Current wording

As of May 31, 2025, our revolving credit line had an outstanding principal balance of $1,062,437. We renewed our revolving line of credit with Bank Midwest on March 27, 2025, with a scheduled maturity date of March 30, 2026. In our most recent renewal, we dropped our principal balances from $5,500,000 to $4,000,000 and also negotiated an interest rate 75 basis points lower than our previous line of credit. The bank's credit committee has preapproved an additional $1,500,000 of principal for the 2025 renewal, consistent with the borrowing availability of our previous line of credit, in the event we need additional funding.