ART'S-WAY MANUFACTURING CO., INC.

(ARTW)
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04/14ARTS WAY MANUFACTURING CO INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)
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Art's Way Manufacturing : ARTS WAY MANUFACTURING CO INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

10/14/2021 | 02:44pm EDT

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, 2020. 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," 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 warranty costs and order backlog; (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; (iv) the impact of recently issued accounting pronouncements; (v) our intentions and beliefs relating to our costs, business strategies, and future performance; (vi) our expected financial results; (vii) our expectations concerning our primary capital and cash flow needs; (viii) our expectations with respect to debt covenant compliance and related activities; and (ix) our expectations regarding the impact of COVID-19 on our business condition and results of operations.

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 general economic conditions, including consumer and governmental spending, on the demand for our products and the cost of our supplies and materials; (iv) the ongoing COVID-19 pandemic; (v) fluctuations in seasonal demand and our production cycle; and (vi) 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.

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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, 2021 remain unchanged from November 30, 2020. 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, 2020.




Results of Operations



Net Sales and Cost of Sales



Our consolidated corporate sales for the three- and nine-month periods ended August 31, 2021 were $6,592,000 and $17,703,000, respectively, compared to $6,465,000 and $16,937,000 during the same respective periods in fiscal 2020, a $127,000, or a 2.0%, increase for the three months and a $766,000, or 4.5%, increase for the nine months. We saw sales growth of over 26% in both our Agricultural Products and Tools segments for Q3 of fiscal 2021, respectively, while we saw approximately a 43% decrease in our Modular Buildings segment for such period. Year-to-date, our Agricultural Products and Tools segments both saw increased sales from a year ago while the Modular Buildings segment was down approximately 32%. Consolidated gross margin for the three-month period ended August 31, 2021 was 26.4% compared to 14.3% for the same period in fiscal 2020. Consolidated gross margin for the nine-month period ended August 31, 2021 was 25.4% compared to 17.1% for the same period in fiscal 2020. We saw increased gross margin improvement on all three segments for the three months ended August 31, 2021, while we also had gross margin improvement in two of our three segments for the nine months ended August 31, 2021.

Our third quarter sales in the Agricultural Products segment were $4,660,000 compared to $3,671,000 during the same period of fiscal 2020, an increase of $989,000, or 26.9%. Our year-to-date Agricultural Product sales were $12,017,000 compared to $9,695,000 during the same period in fiscal 2020, an increase of $2,322,000, or 24.0%. We attribute the large increase in revenue to a strengthening agricultural economy that is producing five to ten year highs in commodity and livestock prices along with government assistance programs that provided farmers with much needed government assistance during the COVID-19 pandemic. Compared to the nine months ending August 30, 2020, we had a 71% increase in our grinder mixer sales, a 60% increase in beet equipment and a 13% increase in manure spreader sales. We expect continued demand in the fourth quarter with our current ag backlog up 269% from a year ago. Supplier delays have improved but are not gone completely. We also continue to receive price increases from our suppliers. Further price increases before our early order program will be necessary to maintain strong margins on our products. It is currently challenging to get production employees on board with the lack of available workforce in our community and a highly competitive job market. We are taking steps to automate production tasks with the use of robotic welding and other new equipment to help us increase efficiency and output. Gross margin for our Agricultural Products segment for the three-month period ended August 31, 2021 was 27.4% compared to 21.5% for the same period in fiscal 2020. Gross margin for our Agricultural Products segment for the nine-month period ended August 31, 2021 was 29.6% compared to 21.3% for the same period in fiscal 2020. The increased gross margin in fiscal 2021 is a reflection of continuous improvement initiatives enacted over the past few years that have boosted our workforce production efficiency, product eliminations that have improved our margins and eliminated production floor disruption, price increases enacted to combat rising material prices and fixed overhead spread over a larger production base.




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Our third quarter sales in the Modular Buildings segment were $1,313,000 compared to $2,319,000 for the same period in fiscal 2020, a decrease of $1,006,000, or 43.4%. Sales in our Modular Buildings segment for the nine months ended August 31, 2021 were $3,798,000 compared to $5,575,000 for the same period in fiscal 2020, a decrease of $1,777,000, or 31.9%. The decrease in sales for the quarter and the year is largely due to the completion of a large laboratory project in the third quarter of fiscal 2021. While revenue is down the quality of our revenue has improved. Gross margin for the three- and nine-month periods ended August 31, 2021 was 25.8% and 14.8%, respectively, compared to 2.4% and 8.6% for the same respective periods in fiscal 2020. The large laboratory product had thinner margins than our typical construction projects because of the sheer volume of the contract and the role of general contractor we took on during the project, which is not our typical role. The modular buildings segment has a strong backlog moving into the fourth quarter which can provide positive results as long as supply chain delays do not affect our construction material deliveries.

Our Tools segment had sales of $619,000 and $1,888,000 during the three- and nine-month periods ended August 31, 2021, respectively, compared to $475,000 and $1,667,000 for the same respective periods in fiscal 2020, a 30.3% increase and a 13.3% increase, respectively. The increase in sales for the quarter and year to date fiscal 2021 is due to better economic conditions than existed a year ago during the height of the COVID-19 pandemic. While the oil and gas industry demand has not returned to its pre-pandemic levels, it is improved over a year ago. Gross margin was 20.0% for both the three- and nine-month periods ended August 31, 2021, compared to 17.1% and 21.1% for the same respective periods in fiscal 2020. The gross margin increase in Q3 of fiscal 2021 is due to increased sales volume available to cover fixed costs while the year-to-date gross margin decrease is due to the need to increase production wages to hire and retain production employees.



Expenses


Our third quarter consolidated selling expenses were $532,000 compared to $370,000 for the same period in fiscal 2020. Our year-to-date selling expenses were $1,549,000 in fiscal 2021 compared to $1,227,000 for the same period in fiscal 2020. The Agricultural Products segment contributed largely to the increase in selling expenses as we added a product development manager in November of 2020 to help us bring new products to market and improve on existing product lines. We also underwent a rebranding effort in our Agricultural Products segment that included a new logo, promotional videos and updated website which contributed to the increase in selling expenses. Additionally, we saw increased commissions as a result of increased sales in the Agricultural Products segment. The modular buildings segment also had increased commission expenses as a surge of ag buildings were sold in Q3 of fiscal 2021. Selling expenses as a percentage of sales were 8.1% and 8.7% for the three- and nine-month periods ended August 31, 2021, respectively, compared to 5.7% and 7.3% for the same respective periods in fiscal 2020.

Consolidated engineering expenses were $144,000 and $387,000 for the three- and nine-month periods ended August 31, 2021, respectively, compared to $129,000 and $361,000 for the same respective periods in fiscal 2020. The increase in engineering expenses were related to wage increases implemented to retain skilled engineers in a highly competitive job market. Engineering expenses as a percentage of sales were 2.2% and 2.2% for the three- and nine-month periods ended August 31, 2021, respectively, compared to 2.0% and 2.1% for the same respective periods in fiscal 2020.

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Consolidated administrative expenses for the three- and nine-month periods ended August 31, 2021 were $902,000 and $2,627,000, respectively, compared to $939,000 and $3,216,000 for the same respective periods in fiscal 2020. The decrease in administrative expenses is the result of non-recurring expenses incurred in 2020 including approximately $133,000 of recruitment expense for management recruitment, dual management salaries of approximately $68,000 as we transitioned our Chief Executive Officer and director of materials positions, approximately $54,000 for the implementation of our OEM customer's product line in the tools segment, and additional expense of $280,000 that included stock granted to new management staff, payout of employment agreements and bonus accruals for incentives offered by the Compensation Committee of the Board for fiscal 2020 targets. We also had $197,000 of pandemic-related expense related to employment rewards for keeping our operations running safely during the COVID-19 pandemic. Administrative expenses as a percentage of sales were 13.7% and 14.8% for the three- and nine-month periods ended August 31, 2021, respectively, compared to 14.5% and 19.0% for the same respective periods in fiscal 2020.



Net Income (Loss)


Consolidated net income was $56,000 for the three-month period ended August 31, 2021 compared to net loss of $(424,000) for the same period in fiscal 2020. Our consolidated net loss for the nine months ended August 31, 2021 was $(195,000) compared to $(1,663,000). We have now reported two straight quarters with net income after a long stretch of losses. The overall health of the agricultural economy has stabilized our primary business segment while operational improvements made during our down years have proven to increase our productivity in this time of high demand. We have combated labor shortages, rising material costs and supply chain delays well to this point, but believe the economic effects of COVID-19 have hampered greater earnings potential. We are set up well in regards to backlog to have a strong finish to fiscal 2021.



Order Backlog


The consolidated order backlog net of discounts as of October 8, 2021, was $5,941,000 compared to $3,440,000 as of October 8, 2020, an increase of $2,501,000 or 73%. The Agricultural Products segment order backlog was $3,598,000 as of October 8, 2021, compared to $974,000 in fiscal 2020 an increase of $2,624,0000 or 269%. We expect strong demand for our agricultural products to continue into 2022. The backlog for the modular buildings segment was $1,998,000 as of October 8, 2021, compared to $2,124,000 in fiscal 2020. Approximately $1,610,000 of the fiscal 2020 comparative backlog was related to a large project that had a lower profit margin than our typical projects. Because of this, we expect better results in Q4 of fiscal 2021 despite the lower backlog. The backlog for the tools segment was $345,000 as of October 8, 2021, compared to $341,000 in fiscal 2020. The oil and gas industry business we were accustomed to has not yet returned to pre-pandemic levels, however, we are still seeing strong demand on our other products. 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.

Potential Impact of COVID-19

Management cannot predict the future impact of the COVID-19 pandemic; however, we are seeing lasting effects of the pandemic negatively affect our supply chain. Employment disruptions, increased material costs and overall demand for products have delayed the receipt of parts and components needed for production. We anticipate continued delays over the next few quarters. This problem is widespread and does not create an advantage for our competitors.

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Liquidity and Capital Resources

A primary source of funds for the nine months ended August 31, 2021 was cash provided by financing activities, mainly the use of our line of credit. Cash deposits in our first and second early order programs were also a primary source of cash for us in the nine months ending August 31, 2021. Our primary use of cash was related to increasing inventory levels to meet the high levels of demand. With uncertainty on component availability, prolonged lead times and rising prices, we have been bringing in inventory far earlier than previous years, which is consuming the availability on our line of credit. We expect our primary capital needs for the remainder of fiscal 2021 to relate to operating costs, primarily production costs, fulfillment of customer deposits, and the retirement of debt. We expect to convert $1,050,000 of current debt to long-term debt in the fourth quarter of fiscal 2021 provided our EIDL loan modifications are approved and processed with the SBA and also expect our line of credit to decrease as we turn through inventory in the fourth fiscal quarter.

We have a $5,000,000 revolving line of credit with Bank Midwest that, as of August 31, 2021, had an outstanding principal balance of $4,290,030. This line of credit is scheduled to mature on March 30, 2022.

We believe cash from operations and 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.

Off Balance Sheet Arrangements

None.

© Edgar Online, source Glimpses

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