Arts Way Manufacturing Co Inc: Form 10-Q for the period ended Feb 28, 2025

Forward-Looking Statements

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.

You should read this report thoroughly with the understanding that our actual results may differ materially from those set forth in the forward-looking statements for many reasons, including events beyond our control and assumptions that prove to be inaccurate or unfounded. We cannot provide any assurance with respect to our future performance or results. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including but not limited to: (i) the impact of changing credit markets on our ability to continue to obtain financing on reasonable terms; (ii) our ability to repay current debt, continue to meet debt obligations and comply with financial covenants; (iii) the effect of inflation as well as general economic conditions, including consumer and governmental spending, on the demand for our products and the cost of our supplies and materials; (iv) impacts caused by fluctuating commodity prices and fluctuating farm income; (v) fluctuations in seasonal demand and our production cycle; (vi) the ability of our suppliers to meet our demands for raw materials and component parts; (vii) fluctuations in the price of raw materials, especially steel and the impact of U.S. tariff policy and retaliatory tariffs on our business; (viii) our ability to predict and meet the demands of each market in which our segments operate; (ix) the impact of future interest rate changes on our business and the demand of our products, or interest rate changes may be different than we currently expect; and (x) other factors described from time to time in our Securities and Exchange Commission filings. We do not intend to update the forward-looking statements contained in this report other than as required by law. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Critical Accounting Policies

Our critical accounting policies involving the more significant judgments and assumptions used in the preparation of our financial statements as of February 28, 2025 remain unchanged from November 30, 2024. Disclosure of these critical accounting policies is incorporated by reference from 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.

Results of Operations

Net Sales and Cost of Sales

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.

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.

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.

Expenses

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.

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.

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.

Net loss from continuing operations

Consolidated net loss from continuing operations was $56,000 for the three-month period ended February 28, 2025, compared to net loss of $424,000 for the same period in fiscal 2024. We saw improved results in the Q1 2025 fiscal quarter despite a 10.2% decrease in sales for the fiscal quarter due to our efforts to reduce staffing and cut expenses in fiscal 2024. We believe we are set up to perform better on reduced sales with upside potential if market conditions become more favorable in fiscal 2025. Based on recent Federal Reserve reports, we expect interest rates to drop and become more conducive to economic growth in fiscal 2025 and we share sentiment with others in our industry that continued dealer destocking would have a positive impact on our operations going forward. Our team is committed to continuing to reduce manufacturing and overhead expenses in fiscal 2025, as we manage the reduced demand we have been experiencing in our Agricultural Products in light of current economic conditions affecting the agriculture system.

Order Backlog

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.

Liquidity and Capital Resources

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.

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.

We believe our current financing arrangements will provide sufficient cash to finance operations and pay debt when due during the next twelve months. We expect to continue to be able to procure financing upon reasonable terms.

Evaluation of Disclosure Controls and Procedures

The persons serving as our principal executive officer and principal financial officer have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period subject to this report. Based on this evaluation, the persons serving as our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of February 28, 2025. Our management has concluded that the consolidated financial statements included in this report present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.