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, 2006
[ ] 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.
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 17, 2006: 1,973,176
Transitional Small Business Disclosure Format (check one): Yes _ No X
ART'S-WAY MANUFACTURING CO., INC.
Consolidated Statement of Operations
Condensed
(Unaudited)
Three Months Ended
February 28, February 28,
2006 2005
Net Sales $ 4,302,088 $ 3,591,843
Cost of goods sold 2,926,683 2,336,859
Gross Profit 1,375,405 1,254,984
Expenses:
Engineering 91,040 128,920
Selling 192,259 216,872
General and administrative 601,448 377,822
Total expenses 884,747 723,614
Income from operations 490,658 531,370
Other expenses (income):
Interest expense 82,342 50,207
Other, net (16,636) (38,371)
Total other expenses 65,706 11,836
Income before income taxes 424,952 519,534
Income tax expense 152,982 176,642
Net income $ 271,970 $ 342,892
Net income per share:
Basic $ 0.14 $ 0.18
Diluted $ 0.14 $ 0.17
Common shares and equivalent outstanding:
Basic 1,964,009 1,938,176
Diluted 1,976,443 1,964,784
See accompaning notes to consolidated condensed financial statements.
ART'S-WAY MANUFACTURING CO., INC.
Consolidated Balance Sheet
Condensed
(Unaudited)
February 28, November 30,
2006 2005
ASSETS
Current Assets
Cash $ 1,115,139 $ 1,198,238
Accounts receivable-customers, net
of allowance for doubtful accounts
of $54,900 and $46,385 in February
and November, respectively 2,369,428 956,391
Inventories, net 6,507,505 6,525,051
Deferred taxes 684,000 673,000
Other current assets 156,348 128,877
Total current assets 10,832,420 9,481,557
Property, plant and equipment, at cost 12,597,975 12,263,478
Less accumulated depreciation 10,428,950 10,372,818
Net property, plant and equipment 2,169,025 1,890,660
Inventories, noncurrent 174,027 144,871
Deferred taxes 40,000 191,000
Other assets 77,056 74,353
Total Assets $ 13,292,528 $ 11,782,441
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Line of Credit $ 43,484 $ 0
Current portion of long-term debt 135,235 223,946
Accounts payable 692,273 530,722
Customer deposits 1,722,048 569,354
Accrued expenses 648,148 736,464
Total current liabilities 3,241,188 2,060,486
Long-term debt, excluding current portion 2,602,833 2,558,273
Total liabilities 5,844,021 4,618,759
Stockholders' Equity
Common stock - $.01 par value. Authorized
5,000,000 shares; issued 1,968,176
and 1,963,176 shares in February and
in November 19,682 19,632
Additional paid-in capital 1,732,592 1,719,787
Retained earnings 5,696,233 5,424,263
Total stockholders' equity 7,448,507 7,163,682
Total liabilities and stockholders'
equity $ 13,292,528 $ 11,782,441
See accompanying notes to consolidated condensed financial statements.
ART'S-WAY MANUFACTURING CO., INC.
Consolidated Statement of Cash Flow
Condensed
(Unaudited)
Three Months Ended
February 28, February 28,
2006 2005
CASH FLOW FROM OPERATIONS:
Net income $ 271,970 $ 342,892
Adjustment to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 53,429 74,509
Stock based compensation 1,256 0
Deferred income taxes 140,000 178,186
Changes in working capital components:
(Increase) decrease in:
Accounts receivable (1,413,037) (448,597)
Inventories (11,610) (185,186)
Other current assets (27,471) (26,217)
Other 0 165,725
Increase (decrease) in:
Accounts payable 161,551 (150,424)
Customer deposits 1,152,694 1,586,095
Accrued expenses (88,316) 56,157
Net cash provided by
operating activities 240,466 1,593,140
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment (334,497) (11,912)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from/(Principal payments)
on line of credit 43,484 (870,071)
Proceeds from notes payable 0 1,000,000
Principal payments on term debt (44,151) (41,894)
Proceeds from the exercise of stock options 11,599 0
Loan origination fees paid 0 (18,550)
Net cash provided by financing activities 10,932 69,485
Net increase/(decrease) in cash (83,099) 1,650,713
Cash at beginning of period 1,198,238 116,001
Cash at end of period $ 1,115,139 $ 1,766,714
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 90,906 $ 50,207
Income taxes 12,902 14,498
See accompanying notes to consolidated condensed 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, 2005. The results of
operations for the first quarter ended February 28, 2006 are not
necessarily indicative of the results for the fiscal year ending
November 30, 2006.
2. INCOME PER SHARE
At February 28, 2006, we had two stock-based employee compensation
plans, which are described more fully in Note 9 of our 2005 Annual
Report to Stockholders. We adopted Statement No. 123 (Revised 2004),
Share-Based Payment ("SFAS123R") which replaces SFAS No. 123, Accounting
for Stock-Based Compensation and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, effective December 1, 2005.
SFAS123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial
statements based on their fair values. The pro forma disclosures
previously permitted under SFAS No. 123 are no longer an alternative to
financial statement recognition. Upon adoption, we used the prospective
transition method. The prospective method requires that compensation
expense be recorded for all non-vested stock options beginning with the
first quarter after adoption of SFAS123R. Stock-based compensation
expense for the three months ended February 28, 2006 totaled $1,256.
Previously, we applied Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for these plans. Accordingly, prior to December 1, 2005 no
compensation cost had been recognized for its stock options in the
condensed consolidated financial statements when the options were issued
at a price equivalent to the stock price at the time of issuance. Set
forth below is a reconciliation of net income and earnings per share
information for the three months ended February 28, 2005, as if we had
applied the fair value recognition provisions of SFAS 123, Accounting
for Stock-based Compensation, to stock-based employee compensation for
that period.
Three months ended
February 28, 2005
Net income, as reported $ 342,892
Deduct: Total stock-based compensation
expense determined under the fair value
method for all awards, net of tax effects ($ 2,662)
Pro forma net income $ 340,230
Pro forma basic earnings per share .18
Pro forma diluted earnings per share .17
The fair value of each option grant has been estimated using the
Black-Scholes option-pricing model.
3. INVENTORIES
Major classes of inventory are: February 28, November 30,
2006 2005
Raw material $ 2,544,047 $ 2,820,591
Work-in-process 592,482 455,077
Finished goods 3,545,003 3,394,254
Total $ 6,681,532 $ 6,669,922
Less inventories classified
as noncurrent 174,027 144,871
Inventories, current $ 6,507,505 $ 6,525,051
4. ACCRUED EXPENSES
February 28, November 30,
2006 2005
Major components of accrued
expenses are:
Salaries, wages and commissions $ 361,032 $ 371,680
Accrued warranty expense 84,440 131,832
Income taxes 5,782 5,702
Other 196,894 227,250
Total $ 648,148 $ 736,464
5. 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, 2006 and February 28, 2005 are as follows:
2006 2005
Balance, beginning $131,832 $119,912
Settlements made in cash or in-kind (110,413) (23,697)
Warranties issued 63,021 59,719
Balance, ending $84,440 $155,934
6. 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, 2006 and 2005, the Company
had borrowed approximately $43,000 and none, 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.
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 $14,000 and $10,000, for the quarter
ended February 28, 2006, and 2005, respectively.
A summary of the Company's term debt is as follows:
February 28, November 30,
2006 2005
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) $ 1,738,546 $ 1,754,866
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) $ 964,906 $ 974,356
State of Iowa Community Development
Block Grant promissory notes at zero
percent interest, maturity September
2006, with quarterly principal
payments of $11,111 $ 22,222 $ 33,334
State of Iowa Community Development
Block Grant local participation
promissory notes at 4% interest,
maturity September 2006, with
quarterly payments of $7,007 $ 12,394 $ 19,663
Total term debt $ 2,738,068 $ 2,782,219
Less current portion of term debt $ 135,235 $ 223,946
Term debt, excluding current portion $ 2,602,833 $ 2,558,273
(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. During the first quarter ended February 28, 2006, the
Company violated certain debt covenants that were waived.
7. RELATED PARTY TRANSACTIONS
J. Ward McConnell, Jr. owns and operates Adamson Global. During the
first quarter ended February 28, 2006 Adamson sold Art's-Way Vessels,
Inc., certain raw material and equipment for an aggregate price of
approximately $131,000. Adamson also purchased pressurized vessels from
Art's-Way Vessels, Inc. in the first quarter, for an aggregate price of
approximately $65,000. The Company believes that the transactions were
done in accordance with prevailing market terms and conditions.
8. SEGMENT INFORMATION
On October 4, 2005, the Company purchased certain assets of Vessels
Systems, Inc. which created a separate operating segment. Prior to the
date of this acquisition the Company operated in one reportable segment.
Our 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 two reportable segments: agricultural products and pressurized
vessels. The agricultural products segment fabricates and sells farming
products as well as replacement parts for these products throughout the
United States. The pressurized vessel segment produces pressurized
tanks.
The accounting policies applied to determine the segment information are
the same as those described in the summary of significant accounting
policies. Currently interest expense on long-term debt is all located
within the agricultural products segment with no interest being charged
to the pressurized vessels segment related to intercompany borrowings.
Intersegment sales and transfers, if any, are accounted for at
historical cost.
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 and the pressurized
vessels segment information is for the quarter ended February 28, 2006.
Agricultural Pressurized
Products Vessels Consolidated
Revenue from external customers $3,628,000 $674,000 $4,302,000
Income from operations 478,000 13,000 491,000
Income before tax 409,000 16,000 425,000
Segment profit 262,000 10,000 272,000
Total Assets 13,046,000 247,000 13,293,000
Capital expenditures 320,000 14,000 334,000
Depreciation 42,000 11,000 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, 2006 have remained unchanged from
November 30, 2005. 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, 2005.
(ii) Results of Operations
Our consolidated net sales for the first quarter of 2006 increased 20%
to $4,302,000 as compared to $3,592,000 for 2005. A majority of this
increase was due to the inclusion of Art's-Way Vessels, Inc., net sales
of $674,000, for the first quarter which was acquired October 4, 2005
and therefore was not included in last year's first quarter. Art's-Way
Manufacturing had revenues totaling $3,628,000 for the first quarter,
compared to $3,592,000 for the same period in 2005.
Art's-Way Manufacturing's gross profit decreased in the quarter to 31%
as compared to 35% in 2005. The decrease was due primarily to a shift
in the product mix during the quarter as compared to the prior year.
In 2006, we had more OEM equipment sales which have a lower gross
profit margin. In 2005 a higher percentage of our sales consisted of
grinder mixers which have a higher gross profit margin. The lower
gross profit margin was somewhat offset by Art's-Way Vessel's gross
profit margin of 35% for the quarter.
Operating expenses for the quarter increased $161,000 compared to 2005.
However, as a percent of sales, operating expenses remained consistent at
21% in 2006 and 20% in 2005. 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 33%.
General and administrative expenses for the quarter increased $224,000
as compared to 2005. Substantially all of the increase was due to the
addition of Art's-Way Vessels.
Engineering expenses are down $38,000 for the first quarter of 2006 as
compared to 2005. In 2005 we hired an outside engineering firm to aid in
the development of an exportable beet harvester. In the first quarter of
2006 we did not incur those costs.
Selling expenses were also down for the first quarter of 2006 by 25,000.
This was due primarily to the shift in product mix. Our higher OEM sales
in 2006 carry a lower commission rate then our grinder mixer products
which had higher sales levels in the first quarter of 2005. We also
spent approximately $4,000 less on the promotion of our Cherokee Truck
Body line.
We experienced an increase in interest expense of $32,000 in the first
quarter of 2006 as a result of a rise in the prime interest rate from
the first quarter of 2005. Other income is down in 2006 compared to 2005
by $21,000. In 2005 other income included a settlement of a legal
dispute which resulted in approximately $34,000 of other income.
The order backlog as of March 31, 2006 is $5,436,000 compared to
$4,104,000 one year ago. Art's-Way Manufacturing's order backlog as of
March is $3,304,000 while Art's-Way Vessels is $2,132,000. In 2005 our
production of blowers was pushed back to meet the demand of our grinder
mixers. In 2006 we only had about 1/3 of our production of blowers
remaining as of February 28, 2006. Gehl, one of our main competitors in
the grinder mixer market, announced earlier this month, that they were
ceasing operation of their ag product lines. We feel that we are in an
excellent position to capture some of this market share and are
optimistic that this will increase our grinder mixer sales.
(iii)Liquidity and Capital Resources
Late in the first quarter we produced blowers for our OEM customers.
Those blowers were invoiced in the last weeks of the quarter, these
transactions elevated our accounts receivable, with an increase of
$1,413,000. Our customer deposits also increased significantly as our
beet programs ran in the first quarter, we offer discounts to our
customers for making downpayments on their orders.
In late 2005 we entered into an agreement to purchase a new Bystronic
laser, a machine that cuts metal. The agrrement called for three
payments totaling approximately $627,000. We made the second payment
in the first quarter of 2006. Overall our cash position declined by
$83,000. However we believe strongly in investing in our future through
new equipment and acquisitions.
See footnote 6 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.
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: _____________________________
John C. Breitung Carrie L. Majeski
Chief Executive Officer Chief Financial Officer
Date:_____________________ Date:________________________
Exhibits Index
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.