Arts Way Manufacturing Co Inc: Form 10-Q for the period ended Aug 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," "opportunity," 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 Buildings 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 August 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 nine-month period ended August 31, 2025 were $ 6,432,000, and $17,910,000, respectively, compared to $5,876,000 and $18,329,000, respectively, during the same periods in fiscal 2024. For the three months ended August 31, 2025, we saw a sales increase of $556,000, or 9.5%, from the same period in fiscal 2024. For the nine months ended August 31, 2025, we saw a sales decrease of $419,000, or 2.3%, from the same period in fiscal 2024. Consolidated gross margin for the three and nine months ended August 31, 2025 was 27.5% and 29.7%, respectively, compared to 28.9% and 27.7%, respectively, for the same periods in fiscal 2024.

Our 2025 third fiscal quarter sales in our Agricultural Products segment were $2,983,000 compared to $2,988,000 during the same period of fiscal 2024, a decrease of $5,000, or 0.2%. For the nine months ended August 31, 2025, our sales in the Agricultural Products segment were $9,956,000 compared to $11,779,000 during the same period of fiscal 2024, a decrease of $1,823,000, or 15.5%. We have experienced decreased demand for the last six fiscal quarters due to difficult agricultural market conditions highlighted by high interest rates, increasing input costs and low row crop prices. Although our inventory decreased from heightened levels in fiscal 2024, many dealers are still sitting on inventory from other equipment manufacturers, which hampers our ability to get these dealers to stock more of our equipment. We believe product availability will be key for the next two fiscal quarters to capitalize on retail opportunities and year end tax buying. Strategically, we are continuing to build inventory through our fiscal year end despite low demand in order to be responsive to farmers; needs this fall. Livestock prices, predominately cattle, continue to be at all-time highs in fiscal 2025 and have driven strong grinder mixer sales activity thus far in fiscal 2025. We expect cattle farmers to have strong earnings in 2025 and we could potentially see retail opportunities in an attempt to offset tax liability prior to the calendar year-end. The agriculture market is highly cyclical, and we believe this is the bottom of the cycle. We anticipate that conditions will start to improve in the next 9 to 15 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. Our fall early order program starts in October and runs through January 15th. Gross margin for our Agricultural Products segment for the three-month period ended August 31, 2025 was 18.3% compared to 27.2% for the same period in fiscal 2024, while our gross margin for the nine-month period ended August 31, 2025 was 24.4% compared to 27.8% for the same period of fiscal 2024. The sales decreases for the three- and nine- months periods ended August 31, 2025 compared to the same periods in fiscal 2024, resulted in less variable margin to cover our fixed costs comparatively while inflationary forces also negatively affected our gross margin. Steel prices began to rise in February 2025 due to tariff uncertainty and infrastructure projects that impacted domestic demand. While steel prices have dropped from their peak in April 2025, we have not seen them return to 2024 levels. We are also paying higher prices from tariff charges for imported products, which is negatively affecting our margin. We are exploring reshoring options for these items in an attempt to reduce the gross margin impact. We expect to pass on a 3-5% price increase to our customers with our fall early order program due to rising costs from our suppliers.

Our third fiscal quarter sales in our Modular Buildings segment were $3,449,000 compared to $2,888,000 for the same period in fiscal 2024, an increase of $561,000, or 19.4%. Our Modular Buildings segment sales for the nine months ended August 31, 2025 were $7,954,000 compared to $6,550,000 for the same period of fiscal 2024, an increase of $1,404,000, or 21.4%. Consistent execution on our backlog by our project managers and production team has driven sales up approximately 20% for the quarter and year to date ending August 31, 2025. We continue to grow our reputation with impactful projects in the custom research and laboratory fields in fiscal 2025. Quoting activity and custom build inquiries continue to remain strong as we cross into Q4 of fiscal 2025, despite earlier concerns about a pullback of governmental grants and funding. In Q1 of fiscal 2025, we brought on a Director of Business Development and Sales who replaced our then-serving President and Director of Sales. Our outgoing President and Director of Sales is working part time as a consultant moving forward to maintain customer relationships. With the additional sales help we are exploring new markets where our custom buildings can offer competitiveness to the marketplace including but not limited to: datacenters, wastewater treatment facilities, petroleum and mining analysis labs, chemical production and transportation offices. Gross margin in the Modular Buildings segment for the three- and nine-month period ended August 31, 2025 was 35.4% and 36.4%, respectively, compared to 30.7% and 27.5%, respectively, for the same periods in fiscal 2024. We continue to see strong margins in this segment from increased workforce proficiency and software improvements, which have improved our data analytics and ability to remain within budgeted costs.

Expenses

Consolidated selling expenses from continuing operations for the three months ended August 31, 2025 were $351,000, compared to $381,000 for the same period in fiscal 2024. For the nine months ended August 31, 2025, our consolidated selling expenses from continuing operations were $1,137,000 compared to $1,241,000 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 6.3% for the nine months ended August 31, 2025 compared to 6.8% for nine months ended August 31, 2024.

Consolidated engineering expenses from continuing operations were $87,000 for Q3 of fiscal 2025 compared to $79,000 for the same period in fiscal 2024. For the nine months ended August 31, 2025, consolidated engineering expenses were $257,000 compared to $346,000 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 as we find the right candidate to fit our business in an attempt to bolster our product offerings. Engineering expenses as a percentage of sales were 1.4% for the nine months ended August 31, 2025, compared to 1.9% for the same period in fiscal 2024.

Consolidated administrative expenses from continuing operations for the three- and nine-month period ended August 31, 2025 were $983,000 and $3,071,000, respectively, compared to $1,087,000 and $3,550,000, respectively, for the same periods in fiscal 2024. Administrative expenses as a percentage of sales were 17.1% for the nine months ended August 31, 2025, compared to 19.4% 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. Cloud computing expenses related to upgrading an enterprise resource planning system in the Agricultural Products segment was fully amortized in Q2 of fiscal 2025, and has reduced our administrative expenses in fiscal 2025 and is expected to continue to do so comparatively in fiscal 2026.

Net income (loss) from continuing operations

Consolidated net income from continuing operations was $254,000 for the three-month period ended August 31, 2025, compared to net income of $2,000 for the same period in fiscal 2024. Our consolidated net income from continuing operations was $1,680,000 for the nine months ended August 31, 2025, compared to net loss of $427,000 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. Cost cutting procedures enacted in fiscal 2024 in the Agricultural Products segment has stabilized our operating results while the agriculture market waits for a rebound. We remain focused on maintaining our agricultural product reputation and price competitiveness to ensure our brand endures the current slowdown. We have identified some existing product line opportunities to capitalize on in fiscal 2026 that we believe help drive up our sales even in a downtown. We believe, this segment will be poised to capitalize and provide profitability when markets do 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 consolidated net income from continuing operations for the nine months ended August 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 October 5, 2025 was $3,532,000 compared to $5,455,000 as of October 5, 2025, a 35.2% decrease. The order backlog in our Agricultural Products segment was $847,000 as of October 5, 2025 compared to $708,000 in fiscal 2024, a 19.7% increase. We expect to see fall orders pick up as yearend tax buying occurs for cattle farmers who are seeing record beef prices. The backlog for the Modular Buildings segment was $2,685,000 as of October 5, 2025, compared to $4,747,000 in fiscal 2024, a 43.4% decrease. The backlog decrease is due mostly to the timing of when project contracts were signed. We expect similar results in this segment due to project opportunities we are quoting that are not under contract 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 nine months ended August 31, 2025 was cash generated by financing activities, mainly the use of our line of credit. Our line usage increased as we fulfilled obligations on our contracts in progress in the Modular Buildings segment; moving from a position where we were overbilled by approximately $1,715,000 at November 30, 2024 to our position at August 31, 2025, underbilled by approximately $307,000. Our line usage is also up due to increasing inventory in the Agricultural Products segment as we build stocking inventory to be responsive to end user needs. With equipment dealers not in a position to stock, we need to be able to react to retail opportunities quickly. We received a cash boost in Q2 of fiscal 2025, receiving net proceeds of approximately $1,461,000 from Employer Retention Credit refunds. Collection of accounts receivable and an increase in accounts payable drove cash in for the nine months ended August 31, 2025. We also had operating income from continuing operations of approximately $858,000 for the nine months ended August 31, 2025 with approximately $687,000 of non-cash reconciling items. We expect progress on construction products to be a major generator of cash and line of credit usage to remain steady for the remainder of fiscal 2025. We expect our primary cash needs for the remainder of the fiscal year to be inventory increases in the Agricultural Products segment and capital needs including fixing a portion of our roof and equipment that increases our production efficiency.

As of August 31, 2025, our revolving credit line had an outstanding principal balance of $2,672,437. 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. Bank Midwest'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 August 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.