UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________
FORM 10-QSB
(Mark One)
[x] Quarterly report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934. For the quarterly period ended
February 28, 2007
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period
from ______ to ______
Commission File No. 0-5131
ART'S-WAY MANUFACTURING CO., INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 42-0920725
(State or Other Jurisdiction I.R.S. Employer Identification No.
of Incorporation or Organization)
Hwy 9 West, Armstrong, Iowa
50514
(Address of Principal Executive Offices)
(712) 864-3131
Issuer's Telephone Number, Including Area Code
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No __
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes __ No X
Number of common shares outstanding as of April 16, 2007: 1,978,176
Transitional Small Business Disclosure Format (check one): Yes _ No X
ARTS-WAY MANUFACTURING CO., INC.
Consolidated Statements of Operations
Condensed
(Unaudited)
Three Months Ended
February February
2007 2006
Net sales $ 5,275,037 $ 4,302,088
Cost of goods sold 3,776,777 2,926,683
Gross profit 1,498,260 1,375,405
Expenses:
Engineering 79,088 91,040
Selling 232,347 192,259
General and administrative 679,826 601,448
Total expenses 991,261 884,747
Income from operations 506,999 490,658
Other income (expense):
Interest expense (105,971) (82,342)
Other 182,689 16,636
Total other expense 76,718 (65,706)
Income before income taxes 583,717 424,952
Income tax 203,388 152,983
Net income $ 380,329 $ 271,969
Net income per share:
Basic $ 0.19 $ 0.14
Diluted 0.19 0.14
Common shares and equivalent outstanding:
Basic 1,978,176 1,964,009
Diluted 1,982,502 1,976,443
See accompanying notes to consolidated financial statements.
ARTS-WAY MANUFACTURING CO., INC.
Consolidated Balance Sheets
Condensed
(Unaudited)
February November
Assets 2007 2006
Current assets:
Cash $ 3,287,818 $ 2,072,121
Accounts receivable-customers, net
of allowance for doubtful accounts
of $115,437 and $108,372 in
February and November, respectively 2,950,415 2,313,290
Inventories, net 6,826,294 5,998,175
Profit in excess of billings 12,396 0
Deferred taxes 672,000 672,000
Insurance Recievable 871,400 0
Other current assets 200,396 163,114
Total current assets 14,820,719 11,218,700
Property, plant, and equipment, net 2,846,402 3,185,298
Deferred taxes 100,000 100,000
Other assets 96,478 110,240
Total assets $ 17,863,599 $ 14,614,238
Liabilities and Stockholders Equity
Current liabilities:
Notes payable to bank $ 412,527 $ 0
Current portion of term debt 270,058 220,559
Accounts payable 1,350,553 587,555
Customer deposits 1,834,258 424,205
Billings in Excess of Cost and Profit 473,092 57,266
Accrued expenses 1,347,635 1,427,658
Total current liabilities 5,688,123 2,717,243
Term debt, excluding current portion 3,749,149 3,852,372
Total liabilities 9,437,272 6,569,615
Stockholders equity:
Common stock $0.01 par value.
Authorized 5,000,000 shares;
issued 1,978,176 and 1,963,176 shares
in 2007 and 2006 19,782 19,782
Additional paid-in capital 1,767,072 1,765,697
Retained earnings 6,639,473 6,259,144
Total stockholders equity 8,426,327 8,044,623
Total liabilities and
stockholders equity $ 17,863,599 $ 14,614,238
See accompanying notes to consolidated financial statements.
ARTS-WAY MANUFACTURING CO., INC.
Consolidated Statements of Cash Flows
Condensed
(Unaudited)
Three Months Ended
February February
2007 2006
Cash flows from operations:
Net income $ 380,329 $ 271,970
Adjustments to reconcile net
income to net cash provided by operating
activities:
Stock based compensation 1,375 1,256
(Gain) Loss on sale of property, plant,
and equipment 334,040 0
Depreciation and amortization 75,957 53,429
Deferred income taxes 0 140,000
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable (637,125) (1,413,037)
Inventories (828,119) (11,610)
Other current assets (37,282) (27,471)
Insurance Recievable (871,400) 0
Other, net 13,762 0
Increase (decrease) in:
Accounts payable 762,998 161,551
Billings in Excess of Costs 403,430 0
Customer deposits 1,410,053 1,152,694
Accrued expenses (80,023) (88,316)
Net cash provided by
operating activities 927,995 240,466
Cash flows from investing activities:
Purchases of property, plant,
and equipment (71,101) (334,497)
Net cash (used in)
investing activities (71,101) (334,497)
Cash flows from financing activities:
Net change in line of credit 412,527 43,484
Payments of notes payable to bank (53,724) (44,151)
Proceeds from the exercise of
stock options 0 11,599
Net cash provided by (used in)
financing activities 358,803 10,932
Net increase/(decrease)
in cash 1,215,697 (83,099)
Cash at beginning of period 2,072,121 1,198,238
Cash at end of period $ 3,287,818 $ 1,115,139
Supplemental disclosures of cash flow information:
Cash paid/(received) during the period for:
Interest $ 105,970 $ 90,906
Income taxes 282,000 12,902
See accompanying notes to consolidated financial statements.
ART'S-WAY MANUFACTURING CO., INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement Presentation
The financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The
financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's Annual Report on
Form 10-KSB for the year ended November 30, 2006. The results of
operations for the first quarter ended February 28, 2007 are not
necessarily indicative of the results for the fiscal year ending
November 30, 2007.
2. INVENTORIES
Major classes of inventory are:
February 28, November 30,
2007 2006
Raw material $ 4,334,572 $ 3,260,897
Work-in-process 591,591 981,979
Finished goods 3,001,967 2,886,860
Total $ 7,928,129 $ 7,129,736
Less reserves 1,101,836 1,131,561
Inventories $ 6,826,294 $ 5,998,175
3. ACCRUED EXPENSES
Major components of accrued expenses are:
February 28, November 30,
2007 2006
Salaries, wages and commissions $ 461,447 $ 464,609
Accrued warranty expense 221,089 230,740
Income tax 257,716 356,712
Other 407,423 375,597
Total $ 1,347,675 $ 1,427,658
4. PRODUCT WARRANTY
The Company offers limited warranties of various lengths to its
customers depending on the specific product and terms of the
customer purchase agreement. The average length of the warranty
period is one year from date of purchase. The Company's warranties
require it to repair or replace defective products during the
warranty period at no cost to the customer. The Company records a
liability for estimated costs that may be incurred under its warranties.
The costs are estimated based on historical experience and any specific
warranty issues that have been identified. Although historical warranty
costs have been within expectations, there can be no assurance that
future warranty costs will not exceed historical amounts. The Company
periodically assesses the adequacy of its recorded warranty liability
and adjusts the balance as necessary.
Changes in the Company's product warranty liability for the three months
ended February 28, 2007 and February 28, 2006 are as follows:
2007 2006
Balance, beginning $230,740 $131,832
Settlements made in cash or in-kind (107,694) (110,413)
Warranties issued 98,043 63,021
Balance, ending $221,089 $84,440
5. LOAN AND CREDIT AGREEMENTS
The Company has a revolving line of credit for $3,500,000 with advances
funding the working capital, letter of credit and corporate credit card
needs that matures on April 30, 2007. The interest rate is West Bank's
prime interest rate, adjusted daily. Monthly interest only payments are
required and the unpaid principal is due on the maturity date.
Collateral consists of a first position on assets owned by the Company
including, but not limited to inventories, accounts receivable,
machinery and equipment. As of February 28, 2007 and 2006, the Company
had borrowed approximately $413,000 and $43,000, respectively. Total
amount available for borrowing at February 28, 2007 was $3,087,000.
Other terms and conditions of the debt with West Bank include providing
monthly internally prepared financial reports including accounts
receivable aging schedules and borrowing base certificates and year-end
audited financial statements. The borrowing base shall limit advances
from line of credit to 60% of accounts receivable less than 90 days, 60%
of finished goods inventory, 50% of raw material inventory and 50% of
work-in-process inventory plus 40% of appraisal value of machinery and
equipment.
J. Ward McConnell, Jr. was required to personally guarantee
the debt with West Bank on an unlimited and unconditional basis. The
guarantee of the term debt shall be reduced after the first three years
to a percentage representing his ownership of the Company. Mr.
McConnell's guarantee shall be removed from the term debt in the event
that his ownership interest in the Company is reduced to a level less
than 20% after the first three years of the loan. The Company
compensates Mr. McConnell for his personal guarantee at an annual
percentage rate of 2% of the outstanding balance to be paid monthly.
Guarantee fee payments to Mr. McConnell were approximately $15,000 and
$14,000, for the quarter ended February 28, 2007, and 2006,
respectively.
A summary of the Company's term debt is as follows:
February 28, November 30,
2007 2006
West Bank loan payable in monthly
installments of $17,776 including
interest at Bank's prime rate plus
1.5%, due March 31, 2023 (A) (B) $ 1,689,348 $ 1,701,843
West Bank loan payable in monthly
installments of $10,000 including
interest at Bank's prime rate plus
1.5%, due March 31, 2015 (A) (B) $ 935,657 $ 943,034
West Bank loan payable in monthly
installments of $22,063 including
interest at Bank's prime rate plus
1.0% due April 2016 $1,394,202 $1,428,054
Total term debt $ 4,019,207 $ 4,072,931
Less current portion of term debt $ 270,058 $ 220,559
Term debt, excluding current portion $ 3,749,149 $ 3,852,372
(A) Notes are supported by a guarantee issued by the United States
Department of Agriculture (USDA) for 75% of the loan amount outstanding.
Collateral for these loans are primarily real estate with a second
position on assets securing the line of credit. The USDA subordinates
collateral rights in all assets other than real estate in an amount
equal to West Bank's other credit commitments.
(B) Covenants include, but are not limited to, restrictions on
payment of dividends, debt service coverage ratio, debt/tangible net
worth ratio, current ratio, limitation on capital expenditures, and
tangible net worth.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2006, the FASB issued Financial Interpretation No. 48,
Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109 (Issued 6/06). This Interpretation prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. It also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. For the Company, the
Statement is effective for fiscal years beginning after
December 15, 2006. The Company is assessing the effects of Financial
Interpretation No. 48.
7. STOCK OPTION PLANS
On January 25, 2007 the Board of Directors adopted the 2007 Non-Employee
Directors' Stock Option Plan. Options will be granted to non-employee
directors to purchase shares of common stock of the Company at a price
not less than fair market value at the date the options are granted.
Non-employee directors are automatically or initially granted options to
purchase 1,000 shares of common stock annually upon their election to
the Board, which are automatically vested. Options granted are
nonqualified stock options. The option price and terms are set by the
Compensation Committe of the Board of Directors of the Company.
On February 5, 2007 the Board of Directors adopted the 2007 Employee
Stock Option Plan subject to Stockholder approval at the Annual
Stockholders meeting on April 26, 2007.
8. SEGMENT INFORMATION
On October 4, 2005, the Company purchased certain assets of Vessels
Systems, Inc. which created a separate operating segment. On August 2,
2006, the Company purchased certain assets of Tech Space, Inc. which
created a third operating segment. Prior to these acquisitions the
Company operated in one reportable segment.
The Company's reportable segments are strategic business units that
offer different products. They are managed separately because each
business requires different technology and marketing strategies.
There are three reportable segments: agricultural products, pressurized
vessels and modular buildings. The agricultural products segment
fabricates and sells farming products as well as replacement parts for
these products in the United States and worldwide. Export sales amounted
to $844,000 and $0 in 2006 and 2005 respectively. The pressurized vessel
segment produces pressurized tanks. The modular building segment
produces modular buildings for animal containment and various laboratory
uses.
The accounting policies applied to determine the segment information are
the same as those described in the summary of significant accounting
policies. Management evaluates the performance of each segment based on
profit or loss from operations before income taxes, exclusive of
nonrecurring gains and losses.
Approximate financial information with respect to the reportable
segments is as follows. The agricultural products, pressurized vessels,
and modular building segment information are for the first quarter ended
February 28, 2007 and February 28, 2006.
February 28, 2007
Agricultural Pressurized Modular Consolidated
Products Vessels Buildings
Revenue from
external customers $3,272,000 $1,052,000 $ 951,000 $5,275,000
Income from operations 288,000 209,000 10,000 507,000
Income before tax 236,000 187,000 161,000 584,000
Segment profit 149,000 125,000 106,000 380,000
Total Assets 13,497,000 1,842,000 2,525,000 17,864,000
Capital expenditures 65,000 6,000 0 71,000
Depreciation 60,000 12,000 4,000 76,000
February 28, 2006
Agricultural Pressurized Modular Consolidated
Products Vessels Buildings
Revenue from
external customers $3,628,000 $674,000 0 $4,302,000
Income from operations 478,000 13,000 0 491,000
Income before tax 409,000 16,000 0 425,000
Segment profit 262,000 10,000 0 272,000
Total Assets 13,046,000 247,000 0 13,293,000
Capital expenditures 320,000 14,000 0 334,000
Depreciation 42,000 11,000 0 53,000
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto appearing
elsewhere in this report. Management's discussion and analysis contains
forward-looking statements that involve risks and uncertainties,
including but not limited to, quarterly fluctuations in results;
customer demand for our products; economic conditions; the achievement
of lower costs and expenses; the continued availability of financing in
the amount and on the terms required to support future business; and
other risks detailed from time to time in our other Securities and
Exchange Commission filings. Actual results may differ materially from
management's expectations.
(a) Plan of Operation
In the current fiscal year we plan to continue growth through new
product development and when appropriate acquisition. We continue to
look for new and better ways to improve our product offerings for our
end users. We persist in our attempt to improve our efficiencies,
through the implementation of lean manufacturing processes.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations
(i) Critical Accounting Policies
Our critical accounting policies involving the more significant
judgments and assumptions used in the preparation of the financial
statements as of February 28, 2007 have remained unchanged from November
30, 2006. These policies involve revenue recognition, inventory
valuation and income taxes. Disclosure of these critical accounting
policies is incorporated by reference under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
in our Annual Report on Form 10-KSB for the year ended November 30,
2006.
(ii) Results of Operations
Our consolidated net sales for the first quarter of 2007 increased 23%
to $5,275,000 as compared to $4,302,000 for 2006. A majority of this
increase was due to the inclusion of Art's-Way Scientific, Inc., net
sales of $950,000, for the first quarter which was acquired in August of
2006 and therefore was not included in last year's first quarter.
Art's-Way Manufacturing had revenues totaling $3,273,000 for the first
quarter, compared to $3,629,000 for the same period in 2006. This
decrease was due to a reduction in sales to our OEM dealers for blowers.
Art's-Way Vessels had revenues totaling $1,052,000 for the first
quarter, compared to $674,000 for the same period in 2006.
Art's-Way Manufacturing's gross profit decreased in the quarter to 28%
as compared to 32% in 2006. The decrease was due primarily to the
addition of Art's-Way Scientific. When we purchased Art's-Way Scientific
we also purchased their backlog and had to honor pricing from the prior
owners. Art's-Way Scientific's gross profit was 20% for the first
quarter of 2007. Art's-Way Manufacturing's gross profit was 30% while
Art's-Way Vessel's was 32%.
Operating expenses for the quarter increased $107,000 compared to 2006.
However, as a percent of sales, operating expenses decreased by two
percentage points- 19% in 2007 compared to 21% in 2006. Art's-Way
Manufacturing's operating expense as a percentage of sales decreased
from 20% in 2005 to 18% in 2006. Art's-Way Vessel operating expenses as
a percentage of sales were 12%.
General and administrative expenses for the quarter increased $78,000 as
compared to 2006. Substantially all of the increase was due to the
addition of Art's-Way Scientific.
Engineering expenses are down $12,000 for the first quarter of 2007 as
compared to 2006.
Selling expenses were up for the first quarter of 2007 by $40,000. This
is almost entire due to the addition of Art's-Way Scientific, which had
selling expenses of $38,000.
We experienced an increase in interest expense of $24,000 in the first
quarter of 2007 as a result of a rise in the prime interest rate from
the first quarter of 2006. Other income increased by $166,053 in 2007
compared to 2006. This is the result of accounting for the fire and
insurance in Monona, Iowa.
On January 16th, 2007, one of our buildings in Monona, Iowa, was
completely destroyed by fire. The building housed the production and
offices for Art's-Way Scientific. The 36,000 square foot building was a
stick built structure with steel siding. We were insured for the loss of
the building, its contents as well as the disruption in business. We are
currently working with our insurance company to settle the claim. At
this time we have received $250,000 towards the claim and we have booked
a receivable for the estimated loss of the building of $871,000. We have
incurred costs in excess of $900,000 related to the fire, to include
$334,000 in loss of fixed assets. We are currently working from one of
our other buildings in Monona, Iowa. We are in the process of
determining where we will be rebuilding. It is our intent to be in a new
building by September 2007. We continue to manufacture buildings and
have not lost any orders to date.
The order backlog as of March 31, 2007 is $12,112,000 compared to
$5,436,000 one year ago. Art's-Way Manufacturing's order backlog as of
March is $3,899,000, Art's-Way Vessels is $2,149,000, and Art's-Way
Scientific is $6,064,000.
(iii) Liquidity and Capital Resources
Our main source of funds in the first quarter came from customer
deposits which increased $1,410,000 over our 2006 year end. This is a
traditional increase for us as our beet programs ran in the first
quarter and we offer discounts to our customers for making down payments
on their orders. We are working to settle the insurance claim for the
building, inventory and assets that were destroyed in Monona, Iowa. We
have currently recorded a loss on the assets of $334,000 due to the
fire. We are also showing a receivable increase of $871,000 that relates
directly to the expected insurance proceeds on the building. Accounts
receivable are up $637,000 over our November year end balance. This
increase is due to the sales of our blowers to OEM dealers in the last
month of the quarter. Inventories increased $828,000. This increase is
offset by the decrease in our accounts payable of $763,000, due to
bringing in large quantities of steel for our upcoming building of sugar
beet equipment.
See footnote 5 of the notes to the consolidated condensed financial
statements for a discussion of our credit facilities.
Item 3
CONTROLS AND PROCEDURES
Senior management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us
in the reports that we file or submit under the Exchange Act is (a)
accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure; and (b) recorded,
processed, summarized and reported, within the time specified in the
SEC's rules and forms. Since that evaluation process was completed there
have been no significant changes in our disclosure controls or in other
factors that could significantly affect these controls.
There were no changes in our internal control over financial reporting,
identified in connection with this evaluation that occurred during the
period covered by this report that materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Part II - Other Information
ITEM 1. LEGAL PROCEEDINGS
During the period covered by this report, we were not a party to any
legal action or claim which was other than routine litigation incidental
to our business.
ITEM 6. EXHIBITS
See Exhibit Index on page 15 of this report.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ART'S-WAY MANUFACTURING CO., INC.
By: ___________________________ By: _________________________
E.W. Muehlhausen Carrie L. Majeski
President Chief Financial Officer
Date:______________________ Date:____________________
Exhibits Index
10.1 Non-Employee Director's Stock Option Plan
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1 Certification of Chief Executive Officer under 18 U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer under 18 U.S.C. Section 1350.