Arts Way Manufacturing Co Inc: Form 10-Q for the period ended May 31, 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; and (ix) 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 May 31, 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- 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.

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.

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.

Expenses

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.

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.

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.

Net income (loss) from continuing operations

Consolidated net income from continuing operations was $1,482,000 for the three-month period ended May 31, 2025, compared to net loss of $5,000 for the same period in fiscal 2024. Our consolidated net income from continuing operations was $1,426,000 for the six months ended May 31, 2025, compared to net loss of $429,000 for the same period in fiscal 2024. Our operating results are improved in both reportable segments year on year. Despite the decrease in sales for our Agricultural Products segment, our operating loss is much improved from a year ago due to cost cutting procedures enacted in fiscal 2024. Our team continues to be committed to reducing manufacturing and overhead expenses in fiscal 2025, as we manage the reduced demand from adverse agricultural economic conditions. We believe, this segment will be poised to capitalize and provide profitability in the event markets improve. Our Modular Buildings segment continues to perform with solid operating income and near record sales. We expect continued success in the Modular Buildings segment as leads continue converting to contract. Our net income for the three and six months ended May 31, 2025 also benefited largely from the receipt of Employee Retention Credit refunds in the approximate amount of $1,154,000 including interest, net of consulting fees to prepare credit and tax study and net of tax.

Order Backlog

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.

Liquidity and Capital Resources

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.

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.

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 May 31, 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.