UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-QSB
x |
Quarterly
report pursuant to section 13 or 15(d) of the Securities Exchange
Act of
1934
|
|
For the quarterly period ended August
31,
2008 |
¨ |
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 of Incorporation or Organization)
|
|
I.R.S.
Employer Identification No.
|
5556
Highway 9, 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 September 11, 2008: 3,974,352
Transitional
Small Business Disclosure Format (check one): Yes ¨
No
x
ART’S-WAY
MANUFACTURING CO., INC.
Consolidated
Balance Sheets
|
|
(Unaudited)
|
|
|
|
|
|
August
|
|
November
|
|
|
|
2008
|
|
2007
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
|
|
$
|
295,066
|
|
$
|
612,201
|
|
Accounts
receivable-customers, net of allowance for doubtful accounts of
$225,286
and $148,636 in 2008 and 2007, respectively
|
|
|
3,247,616
|
|
|
3,087,781
|
|
Inventories,
net
|
|
|
14,044,011
|
|
|
8,636,602
|
|
Deferred
taxes
|
|
|
850,000
|
|
|
773,555
|
|
Cost
and Profit in Excess of Billings
|
|
|
582,221
|
|
|
265,615
|
|
Other
current assets
|
|
|
243,799
|
|
|
408,870
|
|
Total
current assets
|
|
|
19,262,713
|
|
|
13,784,624
|
|
Property,
plant, and equipment, net
|
|
|
6,689,044
|
|
|
5,497,200
|
|
Covenant
not to Compete
|
|
|
255,000
|
|
|
300,000
|
|
Goodwill
|
|
|
375,000
|
|
|
375,000
|
|
Other
Assets
|
|
|
8,308
|
|
|
9,771
|
|
Total
assets
|
|
$
|
26,590,065
|
|
$
|
19,966,595
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Notes
payable to bank
|
|
$
|
2,151,943
|
|
$
|
397,859
|
|
Current
portion of term debt
|
|
|
421,602
|
|
|
250,027
|
|
Accounts
payable
|
|
|
2,830,874
|
|
|
1,368,988
|
|
Customer
deposits
|
|
|
441,463
|
|
|
53,196
|
|
Billings
in Excess of Cost and Profit
|
|
|
407,394
|
|
|
7,675
|
|
Accrued
expenses
|
|
|
1,430,493
|
|
|
1,323,008
|
|
Income
taxes payable
|
|
|
47,500
|
|
|
146,905
|
|
Total
current liabilities
|
|
|
7,731,269
|
|
|
3,547,658
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
Deferred
taxes
|
|
|
430,000
|
|
|
205,998
|
|
Term
debt, excluding current portion
|
|
|
6,190,627
|
|
|
6,069,657
|
|
Total
liabilities
|
|
|
14,351,896
|
|
|
9,823,313
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Common
stock – $0.005 par value. Authorized 5,000,000 shares; issued 3,974,352
and 3,968,352 shares in 2008 and 2007
|
|
|
19,872
|
|
|
19,842
|
|
Additional
paid-in capital
|
|
|
2,019,010
|
|
|
1,828,427
|
|
Retained
earnings
|
|
|
10,199,287
|
|
|
8,295,013
|
|
Total
stockholders’ equity
|
|
|
12,238,169
|
|
|
10,143,282
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
26,590,065
|
|
$
|
19,966,595
|
|
See
accompanying notes to consolidated financial statements.
ART’S-WAY
MANUFACTURING CO., INC.
Consolidated
Statements of Operations
Condensed
|
|
Three
Months Ended
|
|
Year
to Date
|
|
|
|
August
31,
|
|
August
31,
|
|
August
31,
|
|
August
31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net
sales
|
|
$
|
9,420,696
|
|
$
|
8,191,523
|
|
$
|
23,855,763
|
|
$
|
19,165,728
|
|
Cost
of goods sold
|
|
|
7,214,281
|
|
|
5,410,688
|
|
|
17,035,449
|
|
|
13,201,569
|
|
Gross
profit
|
|
|
2,206,415
|
|
|
2,780,835
|
|
|
6,820,314
|
|
|
5,964,159
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
|
|
|
110,031
|
|
|
59,401
|
|
|
259,707
|
|
|
273,510
|
|
Selling
|
|
|
495,658
|
|
|
297,522
|
|
|
1,373,388
|
|
|
750,573
|
|
General
and administrative
|
|
|
730,242
|
|
|
575,348
|
|
|
2,463,615
|
|
|
1,846,250
|
|
Total
expenses
|
|
|
1,335,931
|
|
|
932,271
|
|
|
4,096,710
|
|
|
2,870,333
|
|
Income
from operations
|
|
|
870,484
|
|
|
1,848,564
|
|
|
2,723,604
|
|
|
3,093,826
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(133,164
|
)
|
|
(154,440
|
)
|
|
(399,453
|
)
|
|
(332,651
|
)
|
Other
|
|
|
69,992
|
|
|
(177,309
|
)
|
|
505,706
|
|
|
176,644
|
|
Total
other income
|
|
|
(63,172
|
)
|
|
(331,749
|
)
|
|
106,253
|
|
|
(156,007
|
)
|
Income
before income taxes
|
|
|
807,312
|
|
|
1,516,815
|
|
|
2,829,857
|
|
|
2,937,819
|
|
Income
tax
|
|
|
268,923
|
|
|
586,767
|
|
|
925,582
|
|
|
1,069,312
|
|
Net
income
|
|
$
|
538,389
|
|
$
|
930,048
|
|
$
|
1,904,275
|
|
$
|
1,868,507
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.14
|
|
|
0.24
|
|
|
0.48
|
|
|
0.47
|
|
Diluted
|
|
|
0.13
|
|
|
0.23
|
|
|
0.48
|
|
|
0.47
|
|
See
accompanying notes to consolidated financial statements.
Consolidated
Statements of Cash Flows
Condensed
|
|
Year
To Date
|
|
|
|
August
|
|
August
|
|
|
|
2008
|
|
2007
|
|
Cash
flows from operations:
|
|
|
|
|
|
Net
income
|
|
$
|
1,904,275
|
|
$
|
1,868,507
|
|
Adjustments
to reconcile net income to net cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
145,851
|
|
|
42,766
|
|
(Gain)
Loss on disposal of property, plant, and equipment
|
|
|
(418,269
|
)
|
|
(329,258
|
)
|
Depreciation
expense
|
|
|
392,233
|
|
|
244,112
|
|
Amortization
expense
|
|
|
45,000
|
|
|
-
|
|
Fire
loss of operating supplies
|
|
|
-
|
|
|
(364,409
|
)
|
Deferred
income taxes
|
|
|
147,557
|
|
|
155,349
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(159,835
|
)
|
|
(421,627
|
)
|
Inventories
|
|
|
(5,407,409
|
)
|
|
(1,561,847
|
)
|
Other
current assets
|
|
|
(83,801
|
)
|
|
(30,602
|
)
|
Other,
net
|
|
|
1,464
|
|
|
110,240
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,461,886
|
|
|
280,335
|
|
Contracts
in progress, net
|
|
|
83,113
|
|
|
(223,590
|
)
|
Customer
deposits
|
|
|
388,267
|
|
|
(141,653
|
)
|
Income
taxes payable
|
|
|
(99,405
|
)
|
|
13,181
|
|
Accrued
expenses
|
|
|
107,485
|
|
|
199,318
|
|
Net
cash (used in) operating activities
|
|
|
(1,491,588
|
)
|
|
(159,178
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property, plant, and equipment
|
|
|
(1,584,079
|
)
|
|
(1,269,618
|
)
|
Proceeds
from insurance recoveries
|
|
|
666,591
|
|
|
1,233,633
|
|
Proceeds
from sale of property, plant, and equipment
|
|
|
550
|
|
|
-
|
|
Net
cash (used in) investing activities
|
|
|
(916,938
|
)
|
|
(35,985
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
change in line of credit
|
|
|
1,754,084
|
|
|
390,531
|
|
Payments
of notes payable to bank
|
|
|
(207,455
|
)
|
|
(27,185
|
)
|
Proceeds
from term debt
|
|
|
500,000
|
|
|
-
|
|
Proceeds
from the exercise of stock options
|
|
|
44,762
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
2,091,391
|
|
|
363,346
|
|
Net
increase (decrease) in cash
|
|
|
(317,135
|
)
|
|
168,183
|
|
Cash
at beginning of period
|
|
|
612,201
|
|
|
2,072,121
|
|
Cash
at end of period
|
|
$
|
295,066
|
|
$
|
2,240,304
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid/(received) during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
366,821
|
|
$
|
330,534
|
|
Income
taxes
|
|
|
877,380
|
|
|
863,129
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of noncash investing activities:
|
|
|
|
|
|
|
|
Proceeds
from insurance recoveries
|
|
$
|
666,591
|
|
$
|
1,233,633
|
|
Insurance
recoveries receivable
|
|
|
-
|
|
|
248,872
|
|
Gains
recognized in previous years
|
|
|
(248,872
|
)
|
|
|
|
Net
book value of assets destroyed
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
-
|
|
|
(339,258
|
)
|
Cost
incurred on contracts in progress
|
|
|
-
|
|
|
(379,375
|
)
|
Cost
incurred for plant supplies
|
|
|
|
|
|
(364,409
|
)
|
Inventories
|
|
|
-
|
|
|
(70,205
|
)
|
Gain
on insurance recovery
|
|
$
|
417,719
|
|
$
|
329,258
|
|
|
|
|
|
|
|
|
|
Non
cash financing activity:
|
|
|
|
|
|
|
|
Refinanced
existing debt with West Bank
|
|
|
|
|
$
|
4,100,000.00
|
|
See
accompanying notes to consolidated financial statements.
Notes
to Consolidated Financial Statements
(1) Summary
of Significant Account 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, 2007.
The
results of operations for the nine months ended August 31, 2008 are not
necessarily indicative of the results for the fiscal year ending November 30,
2008.
(2)
Income Per Share
Basic
net
income per common share has been computed on the basis of the weighted average
number of common shares outstanding. Diluted net income per share has been
computed on the basis of the weighted average number of common shares
outstanding plus equivalent shares assuming exercise of stock
options.
Basic
and
diluted earnings per common share have been computed based on the following
as
of August 31, 2008 and 2007:
|
|
For the three months ended
|
|
|
|
August
31,
2008
|
|
August
31,
2007
|
|
Basic:
|
|
|
|
|
|
|
|
Numerator,
net income
|
|
$
|
538,389
|
|
$
|
930,048
|
|
Denominator:
Average number of common shares outstanding
|
|
|
3,972,548
|
|
|
3,956,352
|
|
Basic
earnings per common share
|
|
$
|
0.14
|
|
$
|
0.24
|
|
Diluted
|
|
|
|
|
|
|
|
Numerator,
net income
|
|
$
|
538,389
|
|
$
|
930,048
|
|
Denominator:
Average number of common shares outstanding
|
|
|
3,972,548
|
|
|
3,956,352
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive stock options
|
|
|
17,332
|
|
|
19,552
|
|
|
|
|
3,989,880
|
|
|
3,975,904
|
|
Diluted
earnings per common share
|
|
$
|
0.13
|
|
$
|
0.23
|
|
|
|
For the nine months ended
|
|
|
|
August 31,
2008
|
|
August 31,
2007
|
|
Basic:
|
|
|
|
|
|
|
|
Numerator,
net income
|
|
$
|
1,904,275
|
|
$
|
1,868,507
|
|
Denominator:
Average number of common shares outstanding
|
|
|
3,971,676
|
|
|
3,956,352
|
|
Basic
earnings per common share
|
|
$
|
0.48
|
|
$
|
0.47
|
|
Diluted
|
|
|
|
|
|
|
|
Numerator,
net income
|
|
$
|
1,904,275
|
|
$
|
1,868,507
|
|
Denominator:
Average number of common shares outstanding
|
|
|
3,971,676
|
|
|
3,956,352
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive stock options
|
|
|
22,348
|
|
|
10,498
|
|
|
|
|
3,994,024
|
|
|
3,966,850
|
|
Diluted
earnings per common share
|
|
$
|
0.48
|
|
$
|
0.47
|
|
Shares
and per share data have been adjusted to reflect the two for one stock split
effective July 30, 2008.
Major
classes of inventory are:
|
|
August
31,
2008
|
|
November
30,
2007
|
|
Raw
materials
|
|
$
|
9,505,292
|
|
$
|
4,468,920
|
|
Work
in process
|
|
|
1,378,488
|
|
|
336,108
|
|
Finished
goods
|
|
|
4,777,655
|
|
|
5,033,063
|
|
|
|
$
|
15,661,435
|
|
$
|
9,838,091
|
|
Less:
Reserves
|
|
|
(1,617,424
|
)
|
|
(1,201,489
|
)
|
|
|
$
|
14,044,011
|
|
$
|
8,636,602
|
|
(4) Accrued
Expenses
Major
components of accrued expenses are:
|
|
August
31,
2008
|
|
November
30,
2007
|
|
Salaries,
wages, and commissions
|
|
$
|
868,757
|
|
$
|
562,806
|
|
Accrued
warranty expense
|
|
|
324,415
|
|
|
262,665
|
|
Other
|
|
|
237,321
|
|
|
497,537
|
|
|
|
$
|
1,430,493
|
|
$
|
1,323,008
|
|
(5) Product
Warranty
The
Company offers 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 1 year from the 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 and nine months ended
August 31, 2008 and August 31, 2007 are as follows:
|
|
Three
Months Ended
|
|
|
|
August
31,
2008
|
|
August
31,
2007
|
|
|
|
|
|
|
|
Balance,
beginning
|
|
$
|
240,141
|
|
$
|
253,853
|
|
Settlements
made in cash or in-kind
|
|
|
(2,059
|
)
|
|
58,112
|
|
Warranties
issued
|
|
|
86,333
|
|
|
50,566
|
|
Balance,
ending
|
|
$
|
324,415
|
|
$
|
362,531
|
|
|
|
Nine
Months Ended
|
|
|
|
August
31,
2008
|
|
August
31,
2007
|
|
|
|
|
|
|
|
Balance,
beginning
|
|
$
|
262,665
|
|
$
|
230,740
|
|
Settlements
made in cash or in-kind
|
|
|
(264,537
|
)
|
|
(60,707
|
)
|
Warranties
issued
|
|
|
326,287
|
|
|
192,498
|
|
Balance,
ending
|
|
$
|
324,415
|
|
$
|
362,531
|
|
(6) Loan
and Credit Agreements
The
Company has a revolving line of credit for $3,500,000 that matures on April
30,
2009, with advances funding the working capital, letter of credit and corporate
credit card needs. The interest rate is West Bank’s prime interest rate,
adjusted daily. As of August 31, 2008, the interest rate was 5.0%. 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 August 31, 2008 and November 30, 2007, the
Company had borrowed $2,151,943 and $397,859 respectively, against the line
of
credit. The available amounts remaining on the line of credit were $1,348,057
and $3,102,141 on August 31, 2008 and November 30, 2007, respectively. 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.
On
June
7, 2007 the Company restructured its long-term debt with West Bank. The Company
now has one loan for $4,100,000. The loan was written to mature on May 1, 2017
and bore interest at the U.S. daily 5-year treasury index plus 2.75 bps fixed
for 5 years and was set to adjust to the prevailing same index and margin on
the
fifth anniversary of the loan for the balance of the term. On May 1, 2008,
the
terms of this loan were changed to modify the maturity date, interest rate,
and
payments. The loan, with a principal amount of $3,898,161, will now mature
on
May 1, 2013 and bears interest at 5.75%. Monthly principal and interest payments
in the amount of $42,500 are required, with a final payment of principal and
accrued interest in the amount of $2,304,789 due on May 1, 2013.
The
Company obtained two additional loans in 2007. Both of these loans were to
finance the construction of the new facilities in Monona and Dubuque. On October
9, 2007, the Company obtained a loan for $1,330,000 that bore interest at the
U.S. daily 5-year treasury index plus 2.75 bps, fixed at 7% for 5 years and
then
adjusted to the prevailing same index and margin on the fifth anniversary for
the balance of the term. On May 1, 2008 the terms of this loan were changed
to
modify the maturity date, interest rate, and payments. On May 1, 2008, the
principal amount of the loan was $1,316,003. The new terms changed the maturity
date to May 1, 2013 and the interest rate is now 5.75%. Monthly payments of
$11,000 are required for principal and interest, with a final payment of accrued
interest and principal in the amount of $1,007,294 due on May 1, 2013.
On
November 30, 2007, the Company obtained a construction loan to finance the
Dubuque, Iowa facility. This loan has a principal amount of $1,500,000. The
loan
bore interest at the U.S. daily 5-year treasury index plus 2.75 bps, fixed
at
7.25% for 5 years and then was written to adjust to the prevailing same index
and margin on the fifth anniversary for the balance of the term. On December
19,
2007, the additional $500,000 available was disbursed. On May 1, 2008 the terms
of this loan were changed to modify the maturity date, interest rate, and
payments. On May 1, 2008, the principal amount of the loan was $1,498,063.
The
new terms changed the maturity date to May 1, 2013 and the interest rate is
now
5.75%. Payments of $12,550 are due monthly for principal and interest, with
a
final accrued interest and principal payment in the amount of $1,114,714 due
on
May 1, 2013.
Prior
to
the refinancing discussed above, J. Ward McConnell, Jr. was required to
personally guarantee the debt on the old loans with West Bank on an unlimited
and unconditional basis. The Company compensated 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 $30,000
for the nine months ended August 31, 2007.
A
summary
of the Company’s term debt is as follows:
|
|
August
31,
2008
|
|
November
30,
2007
|
|
|
|
|
|
|
|
West
Bank loan payable in monthly installments of $42,500 including interest
at
5.75% due May 1, 2013 (A)
|
|
|
3,827,603
|
|
|
3,989,684
|
|
|
|
|
|
|
|
|
|
West
Bank loan payable in monthly installments of $11,000 including interest
at
5.75% due May 1, 2013(A)
|
|
|
1,302,275
|
|
|
1,330,000
|
|
West
Bank loan payable in monthly installments of $12,550 including interest
at
5.75% due May 1, 2013 (A)
|
|
|
1,482,351
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
Total
term debt
|
|
|
6,612,229
|
|
|
6,319,684
|
|
Less
current portion of term debt
|
|
|
421,602
|
|
|
250,027
|
|
Term
debt, excluding current portion
|
|
$
|
6,190,627
|
|
$
|
6,069,657
|
|
(A)
Covenants include, but are not limited to, debt service coverage ratio and
debt/tangible net worth ratio. These loans are secured by real estate and an
unlimited guarantee of Art’s-Way Vessels, Inc. and Art’s-Way Scientific,
Inc.
The
Company was in compliance with all debt covenants as of August 31,
2008.
(7) Recently
Issued Accounting Pronouncements
In
June
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 adoption
of
FIN 48 has not had any material impact on the Company’s financial position,
results of operations, or cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosure about fair
value measurements. The statement does not require any new fair value
measurements, but for some entities, the application of the statement will
change current practice. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. FASB Staff Position FAS 157-1 and FAS 157-2 were
issued in February 2008. FSP FAS 157-1 amends SFAS No. 157 to exclude
pronouncements that address the fair value measurement for lease classifications
from the scope of SFAS No. 157. FSP FAS 157-2 delays the effective date of
SFAS
No. 157 to fiscal years beginning after November 15, 2008. This delay does
not
include items that are recognized or disclosed at fair value in the financial
statements on a recurring basis. The applicable elements of FAS 157 that are
currently effective have been adopted by the Company without a material impact
on the financial statements. The elements of FAS 157 that are not yet effective
are not expected to have a material impact on the financial statements.
In
December 2007, the FASB issued FASB Statement No. 141 (Revised 2007) “Business
Combinations,” which requires the Company to record fair value estimates of
contingent consideration and certain other potential liabilities during the
original purchase price allocation, expense acquisistion costs as incurred
and
does not permit certain restructuring activities previously allowed to be
recorded as a component of purchase accounting. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on
or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, except for the presentation and disclosure requirements,
which shall be applied retrospectively for all periods presented. The Company
has not determined the effect that the adoption of SFAS No. 141(R) will have
on
the financial results of the Company.
In
December 2007, the FASB issued FASB Statement No. 160 “Noncontrolling Interests
in Consolidated Financial Statements – an amendment of ARB No. 51,” which causes
noncontrolling interests in subsidiaries to be included in the equity section
of
the balance sheet. SFAS No. 160 applies prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008, except for the
presentation and disclosure requirements, which shall be applied retrospectively
for all periods presented. The Company has not determined the effect that the
adoptions of SFAS No. 160 will have on the financial results of the
Company.
In
December 2007, the SEC published SAB 110, Share-Based
Payment.
The
interpretations in SAB 110 express the SEC staff's views regarding the
acceptability of the use of a "simplified" method, as discussed in SAB 107,
in developing an estimate of expected term of share options in accordance with
FASB Statement No. 123 (Revised) Share-Based
Payment.
The use
of the simplified method requires
our option plan to be consistent with a "plain vanilla" plan and was originally
permitted through December 31, 2007 under SAB 107. In December 2007,
the SEC issued SAB 110, Share-Based
Payment,
to
amend the SEC's views discussed in SAB 107 regarding the use of the
simplified method in developing an estimate of expected life of share options
in
accordance with FAS No. 123(R). SAB 110 is effective for the Company
beginning December 31, 2007. The Company will continue to use the
simplified method until it has the historical data necessary to provide a
reasonable estimate of expected life, in accordance with SAB 107, as
amended by SAB 110.
In
February 2007, the FASB issued SFAS No. 159, the Fair Value Option for Financial
Assets and Financial Liabilities. SFAS 159 provides entities with an option
to
report selected financial assets and liabilities at fair value and establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that select different measurement attributes. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. SFAS No. 159
has
been adopted by the Company, and has had no material impact on its financial
statements.
(8) Stock
Option Plan
On
January 25, 2007 the Board of Directors adopted the 2007 Non-Employee Directors’
Stock Option Plan, which was approved by the stockholders at the Annual
Stockholders’ Meeting on April 24, 2008. 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 granted options to purchase 2,000 shares of common
stock annually or initially upon their election to the Board, which are
automatically vested. Options granted are nonqualified stock options.
On
February 5, 2007 the Board of Directors adopted the 2007 Employee Stock Option
Plan which was approved by the stockholders at the Annual Stockholders’ Meeting
on April 26, 2007.
(9) 2007
Acquisition
Effective
September 5, 2007, the Company acquired the product lines of Miller Pro, Victor
and Badger from Miller-St. Nazianz, Inc. for a cash purchase price of
approximately $2,338,000. The operating results of the acquired business are
reflected in the Company’s consolidated statement of operations from the
acquisition date forward. The acquisition was made to continue the Company’s
growth strategy and diversify its product offerings inside the agricultural
industry. The purchase price was determined based on an arms-length negotiated
value. The transaction was accounted for under the purchase method of
accounting, with the purchase price allocated to the individual assets acquired.
(10) Segment
Information
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. 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.
Three
Months Ended August 31, 2008
|
|
Agricultural
Products
|
|
Pressurized
Vessels
|
|
Modular
Buildings
|
|
Consolidated
|
|
Revenue
from external customers
|
|
$
|
6,685,000
|
|
$
|
25,000
|
|
$
|
2,711,000
|
|
$
|
9,421,000
|
|
Income
from operations
|
|
|
580,000
|
|
|
(241,000
|
)
|
|
531,000
|
|
|
870,000
|
|
Income
before tax
|
|
|
546,000
|
|
|
(279,000
|
)
|
|
540,000
|
|
|
807,000
|
|
Total
Assets
|
|
|
19,274,000
|
|
|
2,643,000
|
|
|
4,673,000
|
|
|
26,590,000
|
|
Capital
expenditures
|
|
|
327,000
|
|
|
41,000
|
|
|
56,000
|
|
|
424,000
|
|
Depreciation
& Amortization
|
|
|
118,000
|
|
|
13,000
|
|
|
24,000
|
|
|
155,000
|
|
Three
Months Ended August 31, 2007
|
|
Agricultural
Products
|
|
Pressurized
Vessels
|
|
Modular
Buildings
|
|
Consolidated
|
|
Revenue
from external customers
|
|
$
|
4,552,000
|
|
$
|
1,319,000
|
|
$
|
2,321,000
|
|
$
|
8,192,000
|
|
Income
from operations
|
|
|
943,000
|
|
|
286,000
|
|
|
620,000
|
|
|
1,849,000
|
|
Income
before tax
|
|
|
679,000
|
|
|
266,000
|
|
|
572,000
|
|
|
1,517,000
|
|
Total
Assets
|
|
|
11,956,000
|
|
|
2,094,000
|
|
|
3,596,000
|
|
|
17,646,000
|
|
Capital
expenditures
|
|
|
34,000
|
|
|
55,000
|
|
|
1,017,000
|
|
|
1,106,000
|
|
Depreciation
& Amortization
|
|
|
60,000
|
|
|
14,000
|
|
|
0
|
|
|
74,000
|
|
Nine
Months Ended August 31, 2008
|
|
Agricultural
Products
|
|
Pressurized
Vessels
|
|
Modular
Buildings
|
|
Consolidated
|
|
Revenue
from external customers
|
|
$
|
15,878,000
|
|
$
|
228,000
|
|
$
|
7,750,000
|
|
$
|
23,856,000
|
|
Income
from operations
|
|
|
1,872,000
|
|
|
(701,000
|
)
|
|
1,553,000
|
|
|
2,724,000
|
|
Income
before tax
|
|
|
1,744,000
|
|
|
(815,000
|
)
|
|
1,901,000
|
|
|
2,830,000
|
|
Total
Assets
|
|
|
19,274,000
|
|
|
2,643,000
|
|
|
4,673,000
|
|
|
26,590,000
|
|
Capital
expenditures
|
|
|
659,000
|
|
|
751,000
|
|
|
175,000
|
|
|
1,585,000
|
|
Depreciation
& Amortization
|
|
|
338,000
|
|
|
34,000
|
|
|
65,000
|
|
|
437,000
|
|
Nine
Months Ended August 31, 2007
|
|
Agricultural
Products
|
|
Pressurized
Vessels
|
|
Modular
Buildings
|
|
Consolidated
|
|
Revenue
from external customers
|
|
$
|
10,927,000
|
|
$
|
3,573,000
|
|
$
|
4,666,000
|
|
$
|
19,166,000
|
|
Income
from operations
|
|
|
1,329,000
|
|
|
816,000
|
|
|
949,000
|
|
|
3,094,000
|
|
Income
before tax
|
|
|
1,008,000
|
|
|
752,000
|
|
|
1,178,000
|
|
|
2,938,000
|
|
Total
Assets
|
|
|
11,956,000
|
|
|
2,094,000
|
|
|
3,596,000
|
|
|
17,646,000
|
|
Capital
expenditures
|
|
|
150,000
|
|
|
72,000
|
|
|
1,048,000
|
|
|
1,270,000
|
|
Depreciation
& Amortization
|
|
|
189,000
|
|
|
39,000
|
|
|
16,000
|
|
|
244,000
|
|
(11) Stock
Split
The
Board
of Directors announced a two-for-one stock split with a record date of July
23,
2008. The stock began trading on the split-adjusted basis on July 31, 2008.
The
Board of Directors has also approved a $0.06 per share dividend for all
stockholders of record on November 15, 2008, which will be paid on or before
November 30, 2008.
(12) Subsequent
Events
None.
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. Some of the statements in this report may contain 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 “Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION,” but they may appear in other sections as well.
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 the reasons described
in
this report. We are not under any duty to update the forward-looking statements
contained in this report. We cannot guarantee future results, levels of
activity, performance or achievements. 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.
(a)
|
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 August
31,
2008 have remained unchanged from November 30, 2007. These policies involve
revenue recognition, inventory valuation and income taxes. Disclosure of these
critical accounting policies is incorporated by reference under Note 1 of the
financial statements in our Annual Report on Form 10-KSB for the year ended
November 30, 2007.
|
(ii) |
Results
of Operations
|
Net
Sales
Our
consolidated net sales for the nine months ended were $23,856,000, representing
a 24.5% increase compared to the same period one year ago. Net sales for the
quarter ended August 31, 2008 increased by $1,229,000 over the same period
in
2007, representing a 15.0% increase. The consolidated increase in net sales
for
the nine month period just ended was due to the increased sales of Art’s-Way
Scientific, Inc. by 66% and Art’s-Way Manufacturing’s sales increase of 45.3%.
These two increases, however, were offset by Art’s-Way Vessels’ decrease in net
sales of 93.6%. Art’s-Way Manufacturing had revenues totaling $15,878,000 for
the nine months just ended, compared to $10,927,000 for the same period in
2007.
The increase in sales for Art’s-Way Manufacturing was largely due to the
$3,410,000 year-to-date sales from the Miller Pro product line. Art’s-Way
Vessels had revenues totaling $228,000 for the nine months just ended, compared
to $3,573,000 for the same period in 2007. Art’s-Way Vessels has hired a general
manager, and is currently in the process of hiring additional staff to fulfill
anticipated production needs. Our general manager is well known in the
industrial water treatment industry, and is very familiar with the types of
tanks we manufacture. The process of rebuilding our sales lost during our move
to a new facility has taken longer than originally anticipated, but we
anticipate that sales will increase in the fourth quarter and throughout 2009
with the general manager’s guidance. Art’s-Way Vessels is expected to increase
production of tanks after completing 80 graders for Art’s-Way Manufacturing.
Art’s-Way Scientific has revenues totaling $7,750,000 for the nine months just
ended, compared to $4,666,000 for the same period in 2007. On January 16, 2007,
Art’s-Way Scientific suffered the loss of the Monona manufacturing facility to
fire. The growth in revenues at Art’s-Way Scientific is primarily due to
resuming full operations in our newly constructed manufacturing facility.
Consolidated
year-to-date gross profit decreased to 28.6% from 31.1% in 2007. This decrease
is due to several different factors. The gross profit for Art’s-Way
Manufacturing decreased from 35.6% for the third quarter in 2007 to 24.4% for
the same period in 2008. While we have been gearing up for full production
of
the Miller Pro product line, we outsourced many items due to the capacity
limitations of our laser cutting machine. We have since purchased a plasma
cutter to reduce these expenses. Our manufacturing wage expenses for the quarter
were $938,000 compared to $675,000 for the same period in 2007. This increase
is
a result of hiring and training additional staff for our increased production.
These factors, along with the rising costs of our inputs, such as steel and
freight, have negatively impacted our gross profits. Art’s-Way Vessels has a
gross profit of -637.7% and 32.7% in the third quarter of 2008 and 2007,
respectively. Certain manufacturing expenses, such as depreciation for
manufacturing equipment and inventory obsolescence, are consistent despite
reduced sales. Also during this time, we had to outsource our engineering work
due to the loss of our staff engineer. This position has since been filled.
Costs for steel and freight also negatively impact the gross profit of Art’s-Way
Vessels . Art’s-Way Scientific’s gross profit for the third quarter of 2008 was
27.2% compared to 31.4%. The combination of these factors has resulted in a
consolidated gross profit of 23.4% for the third quarter of 2008, compared
to
33.9% for the same period in 2007.
Expenses
Consolidated
operating expenses for the nine months just ended increased $1,226,000 compared
to 2007. As a percent of sales, operating expenses increased by 2.2% for the
nine months just ended, up from 15.0% in 2007 to 17.2% in 2008. Art’s-Way
Manufacturing’s year-to-date operating expenses as a percentage of sales were
19.6%, Art’s-Way Vessels’ were 148.3% and Art’s-Way Scientific’s were 8.4%.
General
and administrative expenses for the quarter increased $155,000 as compared
to
the same period in 2007. Much of this increase is due to the gradual addition
of
administrative staff. Year-to-date general and administrative expenses as a
percentage of sales were 10.3% compared to 9.6% in 2007.
Engineering
expenses are down $14,000 for the nine months ended, but increased by $51,000
for the three months ended, compared to the same period in 2007. This increase
is due to a research and development project that was completed in the third
quarter of 2008. As a percentage of sales, year-to-date engineering expenses
are
down from 1.4% in 2007 to 1.1% in 2008.
Selling
expenses are up for the nine months ended by $623,000 compared to the same
period in 2007. As a percentage of sales, year-to-date selling expenses
increased from 3.9% in 2007 to 5.8% in 2008. The majority of the increase is
due
to additional sales staff and trade show expenses for the Miller Pro product
line.
Interest
expense for the nine months ended increased by $67,000 due to the addition
of a
$1,500,000 loan and a $1,330,000 loan in the fourth quarter of 2007, and
increased borrowings on the line of credit. This increase was partially offset
by the reduced interest rates during 2008 compared to 2007.
Other
income increased by $329,000 in the nine months ended August 31, 2008 compared
to the same period in 2007. The increase is primarily due to the timing of
gains
recognized for the fire in Monona in 2007 and 2008, which was included under
the
caption “Other” on the Consolidated Statement of Operations. The accounting for
fire recoveries increased the modular buildings segment and consolidated results
by $417,000 in 2008. Proceeds, and any resulting gain, are recognized in the
period in which claim settlements are reached. As of August 31, 2008, portions
of the insurance settlement for the fire are still pending.
Order
Backlog
The
consolidated order backlog as of September 2008 is $16,947,000 compared to
$12,453,000 one year ago. Art’s-Way Manufacturing’s order backlog as of
September 2008 is $8,207,000 compared to $2,773,000 in 2007. Art’s-Way Vessels
backlog is $105,000 in 2008 compared to $417,000 in 2007. Our lease for our
Dubuque facility for Art’s-Way Vessels expired on October 4, 2007, and we moved
into our newly constructed facility in February 2008. Art’s-Way Scientific’s
backlog is $8,635,000 as of September 2008 compared to $9,263,000 in 2007.
In
2007, the backlog at Art’s-Way Scientific included orders that had been
destroyed by fire during production.
Seasonality
Our
beet
equipment traditionally is shipped mostly during our third quarter. As of August
31, 2008, four beet harvesters were awaiting shipment, which has not happened
in
recent years. These are our largest pieces of machinery and our most expensive
pieces of inventory. This accounts for a portion of the increase in inventory
compared to the same period last year.
Trends
and Uncertainties
The
price
of steel influences our cost of goods sold for Art’s-Way Manufacturing and
Art’s-Way Vessels. In the past, we experienced challenges due to a sharp
increase in the price of steel. We are currently seeing negative effects due
to
the price of steel, and continued increases may have a more significant negative
impact on our cost of goods sold.
Rising
fuel costs also impact our profitability. We primarily transport our finished
products and incoming raw materials by truck and standard carriers; as such,
diesel prices have negatively impacted our cost of goods sold in recent periods.
Similar
to other farm equipment manufacturers, we are affected by items unique to the
farm industry, including items such as fluctuations in farm income resulting
from the change in commodity prices, crop damage caused by weather and insects,
government farm programs, interest rates, and other unpredictable variables.
|
(iii) |
Liquidity
and Capital Resources
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Our
main
source of funds year-to-date came from proceeds from the line of credit, which
increased by $1,754,000 over our 2007 year end. Another source of funds is
the
increase of $1,462,000 in accounts payable at August 31, 2008 compared to our
2007 year end. As of August 31, 2008, several large invoices were payable,
but
within terms. These invoices were related to a significant pending project
at
Art’s-Way Scientific. A significant use of cash was the expenditures for plant
and equipment, primarily due to the construction of the manufacturing facility
in Dubuque, and the purchase of a plasma cutting machine in
Armstrong.
The
majority of cash used by operations was used for purchasing inventory.
Inventories have increased significantly since November 30, 2007, up $5,407,409.
This is partially due to the dramatic increases in the price of steel seen
during the first nine months of 2008. Nearly all of our inventory items at
Art’s-Way Manufacturing and Art’s-Way Vessels are steel based. We have also
increased our purchasing due to the production of items associated with the
newly acquired Miller Pro product line. At August 31, 2008, our inventory of
raw
materials and finished goods for the Miller Pro product line is approximately
$4,033,000.
See
note
6 of the notes to the consolidated condensed financial statements for a
discussion of our credit facilities, as such facilities provided additional
cash
to finance the above mentioned items.
(b)
|
Off
Balance Sheet Arrangements
|
Item
3
CONTROLS
AND PROCEDURES
Senior
management, including the Chief Executive 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 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, 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
2.
Unregistered Sales of Equity Securities
On
August
21, 2008, our Executive Chairman of the Board of Directors, J. Ward McConnell,
Jr., exercised options to purchase 2,000 shares of common stock which were
granted under our 2007 Non-employee Directors’ Stock Option Plan. The exercise
price of the shares was $12.10 per share. The total exercise price of the
options was $24,200, which was paid in cash to the company.
ITEM
3.
Defaults Upon Senior Securities
None.
ITEM
4.
Submission of Matters to a Vote of Security Holders
None.
ITEM
5.
Other Information
None.
ITEM
6.
Exhibits
See
Exhibit Index on page 18 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:
|
/s/
Carrie L. Majeski
|
|
Carrie
L.Majeski
|
|
Chief
Executive Officer/President
(principal
executive and financial
officer)
|
Date:
October 7, 2008
|
Exhibits
Index
Exhibit
No.
|
|
Description
|
|
Method
of
Filing
|
3.1
|
|
Articles
of Incorporation of Art’s-Way Manufacturing Co., Inc.
|
|
1
|
3.2
|
|
Bylaws
of Art’s-Way Manufacturing Co., Inc.
|
|
1
|
31.1
|
|
Certificate
pursuant to 17 CFR 240 13(a)-14(a)
|
|
*
|
32.1
|
|
Certificate
pursuant to 18 U.S.C. Section 1350
|
|
*
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________________
(1) |
Incorporated
by reference to the exhibit of the same number on our annual report
on
Form 10-K for the fiscal year ended August 27,
1989.
|