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| ARTW > SEC Filings for ARTW > Form 10-Q on 14-Apr-2009 | All Recent SEC Filings |
14-Apr-2009
Quarterly Report
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and notes thereto included in Item 1
of Part I of this report and the audited consolidated financial statements and
related notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in our Annual Report on Form 10-K
for the fiscal year ended November 30, 2008. 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 OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" but they may appear in other sections as well. Forward-looking
statements in this report generally relate to: (i) our ability to meet our
production schedule and obtain higher profit margins; (ii) the anticipated
benefits of our efforts to improve our disclosure controls and procedures and
remediate the material weakness in our internal control over financial
reporting; (iii) our expectations related to expenses, particularly engineering
expenses; (iv) our beliefs regarding the impact of economic conditions on
revenues; and (v) our beliefs regarding the sufficiency of working capital and
our continued ability to renew or obtain financing when necessary.
You should read this report thoroughly with the understanding that our actual results may differ materially from those set forth in the forward-looking statements for many reasons, including events beyond our control and assumptions that prove to be inaccurate or unfounded. We cannot provide any assurance with respect to our future performance or results. Our actual results or actions could and likely will differ materially from those anticipated in the forward-looking statements for many reasons, including but not limited to: (i) unexpected delays in production; (ii) delays in or obstacles to our ability to successfully improve our disclosure controls and procedures and remediate the material weakness in our internal control over financial reporting; (iii) the impact of tightening credit markets on our ability to renew our line of credit or obtain alternative financing; (iv) the effect of general economic conditions on the demand for our products and the cost of our supplies and materials; (v) unforeseen costs or delays in implementing production of new products; (vi) unforeseen costs or delays in commencing operations at our Salem, South Dakota facility; and (vii) those risks described from time to time in our reports to the Securities and Exchange Commission (including our Annual Report on Form 10-K). We are not under any duty to update the forward-looking statements contained in this report. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.
Critical Accounting Policies
Our critical accounting policies involving the more significant judgments and assumptions used in the preparation of the financial statements as of February 28, 2009 have remained unchanged from November 30, 2008. These policies include revenue recognition, inventory valuation, income taxes and stock-based compensation. Disclosure of these critical accounting policies is incorporated by reference under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended November 30, 2008.
Results of Operations
Net Sales and Cost of Sales
Our consolidated net sales for the first quarter of 2009 were $6,691,000 compared to $6,749,000 for the same period one year ago. Art's-Way Manufacturing, our agricultural products segment, had revenues totaling $4,708,697 for the three months just ended, compared to $4,127,074 for the same period in 2008, which represents a 14.1% increase. This increase in sales for Art's-Way Manufacturing was largely due to the sales of forage boxes and rakes from the Miller Pro product line, which we were not yet producing in the first quarter of 2008. Art's-Way Vessels, our pressurized vessels segment, had revenues totaling $149,084 for the three months just ended, compared to $113,414 for the same period in 2008, which represents a 31.5% increase. These increases were offset, however, by a 26.9% decrease in sales at Art's Way Scientific, our modular buildings segment. Art's Way Scientific had revenues totaling $1,833,085 for the three months just ended, compared to $2,508,026 for the same period in 2008. The decrease in revenues for Art's Way Scientific was the result of a decrease in demand for modular buildings, which management believes was largely due to the impact of current economic conditions on the capital budgets of potential customers.
Consolidated gross profit margin for the first quarter of 2009 was 19.7% compared to 32.2% for the same period one year ago, primarily due to decreases in gross profit margin at Art's-Way Manufacturing and Art's-Way Scientific. The gross profit margin of Art's-Way Manufacturing decreased from 38.4% in the first quarter of 2008 to 21.5% for the same period in 2009. After the purchase of the Miller Pro product line, we had many orders that we were unable to produce in a timely fashion. In order to satisfy our customers, we agreed to sell these goods at the lower prices quoted in 2007. As a result of our production delays, we shipped goods in the first quarter of 2009 that were priced at the end of 2007 and manufactured with materials purchased at higher prices of 2008. We expect to complete our commitments on the 2007 pricing during the second quarter of 2009, and do not anticipate additional production delays after that time.
The gross profit margin of Art's-Way Scientific decreased from 28.6% in the first quarter of 2008 to 20.6% for the same period in 2009. The decrease in gross profit margin at Art's-Way Scientific was primarily due to the decrease in revenue explained above. In addition, gross profit margins at Art's-Way Scientific were negatively impacted during the first quarter by unanticipated cost overruns on a project that was substantially completed during the period.
Expenses
Consolidated operating expenses for the first quarter of fiscal 2009 decreased $143,000 compared to the first quarter of fiscal 2008. As a percentage of sales, operating expenses decreased by 2.0%; 18.2% in 2009 compared to 20.2% in 2008. Year-to-date operating expense as a percentage of sales for each of Art's-Way Manufacturing, Art's-Way Vessels and Art's-Way Scientific was 18.5%, 92.7% and 11.4%, respectively.
General and administrative expenses for the quarter decreased $124,000 as compared to the same period in 2008. The decrease was primarily due to a $60,000 decrease in accrued expenses for management bonuses during the first quarter of 2009 as compared to the first quarter 2008, as a result of a decision of the Board of Directors to eliminate management bonuses. Additionally, the elimination of management bonuses caused a reversal of $100,000 of the bonus that had accrued as of the end of our 2008 fiscal year. Year-to-date general and administrative expenses as a percentage of sales was 10.6% compared to 12.3% in 2008.
Engineering expenses, which are expenses related to research and development and implementation of new product lines, increased $13,000 for the quarter compared to the same quarter in 2008. As a percentage of sales, engineering expenses were 1.3% in the first quarter of 2009, compared to 1.1% for the same period in 2008. These increases are largely due to the process of establishing auger production, which is a new product line that will be offered by Art's-Way Manufacturing and manufactured at a new site in Salem, South Dakota. We expect to continue to incur such expenses throughout the year.
Selling expenses decreased for the quarter by $33,000 compared to the same quarter in 2008. As a percentage of sales, selling expenses decreased to 6.3% in the first quarter of 2009, compared to 6.7% for the same period in 2008.
Interest expense for the first quarter increased slightly due to greater borrowings on our line of credit compared to the first quarter of 2008. Other expenses decreased by $8,000 in the first quarter of 2009 compared to the same period in 2008.
Order Backlog
The consolidated order backlog as of February 28, 2009 was $13,127,000 compared to $20,864,000 as of the end of the first quarter in 2008. Art's-Way Manufacturing's order backlog as of quarter-end was $9,456,000, compared to $15,324,000 in 2008. The majority of this decrease was due to our alleviation of delays in production and shipment of products in our Miller Pro product line, as explained above. The backlog for Art's-Way Vessels was $205,000 at quarter-end, compared to $83,000 in 2008. The backlog for Art's-Way Scientific was $3,466,000 at quarter-end, compared to $5,457,000 in 2008. The decrease in the backlog at Art's Way Scientific is largely due to a reduction in the number of customer orders, which management believes was the result of decreases in capital budgets of many potential customers.
Liquidity and Capital Resources
Our main source of funds year to date came from customer deposits, which increased by $1,260,540, to $1,336,520 over $75,980 at our 2008 year end. This is a traditional increase for us, as our beet programs run in the first quarter and we offer discounts to our customers for making down payments on their orders. This is, however, down dramatically compared to customer deposits of $3,056,525 as of February 29, 2008. During the first quarter of 2009, we also implemented a program on forage boxes that offers discounts for making a down payment on that order. Increased borrowing on our line of credit also provided cash during the first quarter of 2009.
The majority of the cash used by operations during the first quarter of 2009 was due to payments on raw material purchases for the OEM and Miller Pro blower lines of Art's-Way Manufacturing, as well as fulfilling commitments related to production at Art's-Way Scientific. Our accounts payable decreased from $3,425,885 at November 30, 2008 to $1,990,386 on February 28, 2009.
We have a revolving line of credit for $4,500,000, which was increased from $3,500,000 on December 16th, 2008. The line of credit matures on April 30, 2009 and is renewable annually with advances funding the Company's working capital and letter of credit needs. The interest rate is West Bank's prime interest rate, adjusted daily. At no time shall the interest rate be less than 4.00%. As of February 28, 2009, the interest rate was the minimum of 4.0%. Monthly interest only payments are required and the unpaid principal is due on the maturity date. Collateral consists of a first position on our assets and those of our subsidiaries, including, but not limited to, inventories, accounts receivable, machinery and equipment. As of February 28, 2009 and November 30, 2008, we had borrowed $3,463,771 and $2,581,775 respectively, against the line of credit. The available amounts remaining on the line of credit were $1,036,229 and $918,225 on February 28, 2009 and November 30, 2008, 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 limits advances from the 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, we restructured our long-term debt with West Bank into a term loan in the amount of $4,100,000. The loan was written to mature on May 1, 2017 and bore fixed interest at 7.25%. 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 $3,683,949 as of February 28, 2009, will now mature on May 1, 2013 and bears fixed 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.
We obtained two additional loans from West Bank in 2007, for the purpose of financing the construction of our new facilities in Monona and Dubuque. On October 9, 2007, we obtained a loan for $1,330,000 that bore fixed interest at 7%. On May 1, 2008 the terms of this loan were changed to modify the maturity date, interest rate, and payments. On February 28, 2009, the outstanding principal balance was $1,274,415. The current terms are a maturity date of May 1, 2013 and a fixed interest rate of 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, we obtained a construction loan to finance construction of the Dubuque, Iowa facility. This loan had an original principal amount of $1,500,000 and bore fixed interest at 7.25%. On May 1, 2008 the terms of this loan were changed to modify the maturity date, interest rate, and payments. On February 28, 2009, the outstanding principal balance was $1,450,463. The current terms are a maturity date of May 1, 2013 and a fixed interest rate of 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.
We received a debt waiver letter from West Bank for violating the debt/tangible net worth ratio covenant as of November 30, 2008. This waiver is in effect until the covenant is measured again at November 30, 2009.
We believe that cash flows from operating activities will be adequate to meet our working capital needs. We expect to continue to be able to procure financing upon reasonable terms. If we are unable to do so, management is committed to taking action necessary to conserve adequate cash to finance operations.
Off Balance Sheet Arrangements
None.
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