10-Q 1 artsway_10q-083110.htm QUARTERLY REPORT artsway_10q-083110.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[x]
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended August 31, 2010
or
[ ]
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 registrant 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
Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
 
  Large Accelerated filer o    Accelerated filer o
     
  Non-accelerated filer o  (Do not check if a smaller reporting company)   Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

Number of common shares outstanding as of September 16, 2010: 3,992,182

 
 

 
Art’s-Way Manufacturing Co., Inc.
 
Index
 
Page No.
 
PART I – FINANCIAL INFORMATION
1
     
Item 1.
Financial Statements
1
     
 
Consolidated Balance Sheets
 
 
August 31, 2010 and November 30, 2009
1
     
 
Consolidated Statements of Operations Condensed
 
 
Three-month and nine-month periods ended August 31, 2010 and August 31, 2009
2
     
 
Consolidated Statements of Cash Flows Condensed
 
 
Nine-month periods ended August 31, 2010 and August 31, 2009
3
     
 
Notes to Consolidated Financial Statements
4
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
     
Item 4.
Controls and Procedures
16
   
PART II – OTHER INFORMATION
18
     
Item 1.
Legal Proceedings
18
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
18
     
Item 3.
Defaults Upon Senior Securities
18
     
Item 5.
Other Information
18
     
Item 6.
Exhibits
18
   
SIGNATURES
19
   
Exhibit Index
20
 
i

 
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
ART’S-WAY MANUFACTURING CO., INC.
Consolidated Balance Sheets
 
   
(Unaudited)
       
   
August 31,
   
November 30,
 
Assets
 
2010
   
2009
 
Current assets:
           
Cash
  $ 544,612     $ 387,218  
Accounts receivable-customers, net of allowance for doubtful accounts of  $155,743 and $194,185 in 2010 and
               
2009, respectively
    3,126,941       2,347,956  
Inventories, net
    13,978,405       11,928,234  
Deferred taxes
    847,000       882,000  
Cost and Profit in Excess of Billings
    125,212       141,778  
Other current assets
    302,921       1,038,902  
Total current assets
    18,925,091       16,726,088  
Property, plant, and equipment, net
    8,068,296       6,638,661  
Covenant not to Compete
    135,000       180,000  
Goodwill
    375,000       375,000  
Total assets
  $ 27,503,387     $ 23,919,749  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Notes payable to bank
  $ 2,272,000     $ 2,438,892  
Current portion of term debt
    603,136       473,341  
Accounts payable
    1,062,694       439,127  
Customer deposits
    498,035       249,278  
Billings in Excess of Cost and Profit
    115,987       28,884  
Accrued expenses
    1,609,035       791,381  
Income taxes payable
    548,835       422,205  
Total current liabilities
    6,709,722       4,843,108  
Long-term liabilities
               
Deferred taxes
    613,000       613,000  
Term debt, excluding current portion
    6,599,059       5,796,223  
Total liabilities
    13,921,781       11,252,331  
Stockholders’ equity:
               
Common stock – $0.01 par value. Authorized 5,000,000 shares; issued 3,992,182 and 3,990,352 shares in 2010
               
and 2009
    39,922       39,904  
Additional paid-in capital
    2,246,750       2,219,286  
Retained earnings
    11,294,934       10,408,228  
Total stockholders’ equity
    13,581,606       12,667,418  
Total liabilities and stockholders’ equity
  $ 27,503,387     $ 23,919,749  
 
See accompanying notes to consolidated financial statements.
 

 
1

 
 
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,
 
   
2010
   
2009
   
2010
   
2009
 
Net sales
  $ 10,581,783     $ 5,600,464     $ 22,909,802     $ 19,406,975  
Cost of goods sold
    8,004,666       4,298,659       17,437,158       15,320,796  
Gross profit
    2,577,117       1,301,805       5,472,644       4,086,179  
Expenses:
                               
Engineering
    102,042       89,316       309,342       248,445  
Selling
    549,959       436,416       1,476,102       1,249,729  
General and administrative
    654,234       562,814       2,081,037       1,985,972  
Total expenses
    1,306,235       1,088,546       3,866,481       3,484,146  
Income from operations
    1,270,882       213,259       1,606,163       602,033  
Other income (expense):
                               
Interest expense
    (121,085 )     (122,738 )     (310,879 )     (389,434 )
Other
    16,908       8,080       68,869       65,623  
Total other income
    (104,177 )     (114,658 )     (242,010 )     (323,811 )
Income before income taxes
    1,166,705       98,601       1,364,153       278,222  
Income tax expense
    414,903       33,876       477,446       96,984  
Net income
  $ 751,802     $ 64,725     $ 886,707     $ 181,238  
Net income per share:
                               
Basic
    0.19       0.02       0.22       0.05  
Diluted
    0.19       0.02       0.22       0.05  
 
See accompanying notes to consolidated financial statements.

 
2

 
 
ART’S-WAY MANUFACTURING CO., INC.
Consolidated Statements of Cash Flows
Condensed
 
   
Year To Date
 
   
August 31,
   
August 31,
 
   
2010
   
2009
 
Cash flows from operations:
           
Net income (loss)
  $ 886,707     $ 181,238  
Adjustments to reconcile net income to
               
net cash provided (used) by operating activities:
               
Stock based compensation
    19,978       87,664  
Depreciation expense
    491,973       441,229  
Amortization expense
    45,000       45,000  
Deferred income taxes
    35,000       (110,000 )
Changes in assets and liabilities, net of Roda and M&W acquisitions in 2010:
               
(Increase) decrease in:
               
Accounts receivable
    (778,985 )     1,434,276  
Inventories
    (418,009 )     1,241,015  
Other current assets
    735,981       (80,481 )
Income taxes receivable
    -       87,000  
Increase (decrease) in:
               
Accounts payable
    623,567       (2,810,847 )
Contracts in progress, net
    103,669       (37,760 )
Customer deposits
    248,757       19,215  
Income taxes payable
    126,630       35,768  
Accrued expenses
    817,654       (415,078 )
Net cash provided by operating activities
    2,937,922       118,239  
Cash flows from investing activities:
               
Purchases of property, plant, and equipment
    (1,921,608 )     (322,396 )
Purchase of assets of Roda
    (1,179,001 )     -  
Purchase of assets of M&W
    (453,161 )     -  
Net cash (used in) investing activities
    (3,553,770 )     (322,396 )
Cash flows from financing activities:
               
Net change in line of credit
    (166,892 )     776,059  
Net activity as a result of checks issued in excess of deposits
    -       (274,043 )
Payments of notes payable to bank
    (367,369 )     (319,888 )
Proceeds from term debt
    1,300,000       190,000  
Proceeds from the exercise of stock options
    7,503       15,440  
Net cash provided by  financing activities
    773,242       387,568  
Net increase in cash
    157,394       183,411  
Cash at beginning of period
    387,218       103,450  
Cash at end of period
  $ 544,612     $ 286,861  
                 
Supplemental disclosures of cash flow information:
               
Cash paid/(received) during the period for:
               
Interest
  $ 301,980     $ 393,252  
Income taxes
    315,063       95,072  
                 
Supplemental schedule of investing activities:
               
Roda acquisition:
               
Inventories
  $ 1,179,001     $ -  
Cash paid
  $ 1,179,001     $ -  
                 
Supplemental schedule of investing activities:
               
M&W acquisition:
               
Inventories
  $ 453,161     $ -  
Cash paid
  $ 453,161     $ -  
 
See accompanying notes to consolidated financial statements.
 
3

 
 
Notes to Consolidated Financial Statements
 
(1)
Description of the Company
 
Unless otherwise specified, as used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Art’s-Way,” and the “Company,” refer to Art’s-Way Manufacturing Co., Inc., a Delaware corporation headquartered in Armstrong, Iowa, and its wholly-owned subsidiaries.
 
We began operations as a farm equipment manufacturer in 1956.  Since that time, we have become a major worldwide manufacturer of agricultural equipment.  Our principal manufacturing plant is located in Armstrong, Iowa.
 
We have organized our business into three operating segments. Management separately evaluates the financial results of each segment because each is a strategic business unit offering different products and requiring different technology and marketing strategies.  Art’s-Way Manufacturing Co., Inc. manufactures farm equipment under its own and private labels.  Art’s-Way Manufacturing Co., Inc. has two wholly-owned operating subsidiaries.  Art’s-Way Vessels, Inc. (“Art’s-Way Vessels”) manufactures pressure vessels and Art’s-Way Scientific, Inc. (“Art’s-Way Scientific”) manufactures modular buildings for various uses, commonly animal containment and research laboratories. For detailed financial information relating to segment reporting, see Note 13, “Segment Information.”
 
(2)
Summary of Significant Account Policies
 
Statement Presentation
 
The foregoing condensed consolidated financial statements of the Company 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-K for the fiscal year ended November 30, 2009.  The results of operations for the three and nine months ended August 31, 2010 are not necessarily indicative of the results for the fiscal year ending November 30, 2010.
 
(3)
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.
 
 
4

 
Notes to Consolidated Financial Statements
 
Basic and diluted earnings per common share have been computed based on the following as of August 31, 2010 and August 31, 2009:
 
   
For the three months ended
 
   
August 31, 2010
   
August 31, 2009
 
Basic:
           
Numerator, net income
  $ 751,802     $ 64,725  
Denominator: Average number
               
of common shares
               
Outstanding
    3,992,182       3,990,352  
Basic earnings per
               
common share
  $ 0.19     $ 0.02  
Diluted:
               
Numerator, net income
  $ 751,802     $ 64,725  
Denominator: Average number
               
of common shares outstanding
    3,992,182       3,990,352  
                 
Effect of dilutive stock options
    11,584       9,598  
      4,003,766       3,999,950  
Diluted earnings per
               
common share
  $ 0.19     $ 0.02  
 
   
For the nine months ended
 
   
August 31, 2010
   
August 31, 2009
 
Basic:
           
Numerator, net income
  $ 886,707     $ 181,238  
Denominator: Average number
               
of common shares
    3,991,381       3,987,856  
Outstanding
               
Basic earnings per
               
common share
  $ 0.22     $ 0.05  
Diluted:
               
Numerator, net income
  $ 886,707     $ 181,238  
Denominator: Average number
               
of common shares outstanding
    3,991,381       3,987,856  
                 
Effect of dilutive stock options
    9,482       1,767  
      4,000,863       3,989,623  
Diluted earnings per
               
common share
  $ 0.22     $ 0.05  
 
 
5

 
Notes to Consolidated Financial Statements
 
(4)
Inventory
 
Major classes of inventory are:
 
   
August 31, 2010
   
November 30, 2009
 
Raw materials
    $8,361,107       $9,209,873  
Work in process
    427,945       258,621  
Finished goods
    7,166,335       4,060,163  
      $15,955,388       $13,528,657  
Less: Reserves
    (1,976,983 )     (1,600,423 )
      $13,978,405       $11,928,234  
 
(5)
Accrued Expenses
 
Major components of accrued expenses are:
 
   
August 31, 2010
   
November 30, 2009
 
Salaries, wages, and commissions
    $872,672       $425,133  
Accrued warranty expense
    314,750       96,370  
Other
    421,613       269,878  
      $1,609,035       $791,381  
 
(6)
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 one 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.
 
 
6

 
Notes to Consolidated Financial Statements
 
Changes in the Company’s product warranty liability for the three and nine months ended August 31, 2010 and August 31, 2009 are as follows:
 
   
For the three months ended
 
   
August 31, 2010
   
August 31, 2009
 
             
Balance, beginning
    $148,412       $259,899  
Settlements made in cash or in-kind
    (51,842 )     (137,506 )
Warranties accrued
    218,180       77,050  
Balance, ending
    $314,750       $199,443  
 
   
For the nine months ended
 
   
August 31, 2010
   
August 31, 2009
 
             
Balance, beginning
    $96,370       $327,413  
Settlements made in cash or in-kind
    (237,516 )     (361,771 )
Warranties accrued
    455,896       233,801  
Balance, ending
    $314,750       $199,443  

 
(7)
Loan and Credit Agreements
 
The Company has a $6,000,000 revolving line of credit with West Bank (the “Line of Credit”) which matures April 30, 2011.  The Line of Credit 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, with a minimum rate of 4.00%.  As of August 31, 2010, 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.  As of August 31, 2010 and November 30, 2009, the Company had borrowed $2,272,000 and $2,438,892, respectively, against the Line of Credit.  The available amounts remaining on the Line of Credit were $3,728,000 and $3,561,108 on August 31, 2010 and November 30, 2009, respectively.  The borrowing base limits advances from the Line of Credit to 60% of accounts receivable less than 90 days, plus 60% of finished goods inventory, plus 50% of raw material inventory and work-in-process inventory, as calculated at each month-end.  The Company’s obligations under the Line of Credit are evidenced by a Commitment Letter dated April 27, 2010 (the “Commitment Letter”), a Promissory Note dated June 8, 2009, as updated by the Commitment Letter, and certain other ancillary documents.
 
On June 7, 2007, the Company obtained a term loan from West Bank in the amount of $4,100,000.  The loan, which had an outstanding principal balance of $3,221,306 as of August 31, 2010, matures 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.
 
The Company obtained two additional loans from West Bank in 2007 for the purpose of financing the construction of the Company’s new facilities in Monona and Dubuque.  On October 9, 2007, the Company obtained a loan for $1,330,000, which has a maturity date of May 1, 2013 and bears interest at 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 August 31, 2010, the outstanding principal balance on this loan was $1,183,842.
 
 
7

 
Notes to Consolidated Financial Statements
 
On November 30, 2007, the Company obtained a $1,500,000 construction loan to finance construction of the Dubuque, Iowa facility, which has a maturity date of May 1, 2013 and bears interest at 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.  On August 31, 2010 the outstanding principal balance on this loan was $1,346,807.
 
Each of the Company’s loans from West Bank are governed by a Business Loan Agreement dated June 8, 2009 (the “Business Loan Agreement”), as modified by the Commitment Letter, which requires the Company to comply with certain financial and reporting covenants. The Company must provide monthly internally prepared financial reports, including accounts receivable aging schedules and borrowing base and compliance certificates, and year-end audited financial statements.  The Company must maintain a minimum debt service coverage ratio of 1.5, a maximum debt to tangible net worth ration of 1.25, and a minimum tangible net worth of $12,000,000, each as measured at the Company’s fiscal year-end. Further, the Company must obtain West Bank’s prior written consent for capital expenditures that exceed $500,000 annually. The loans are secured by a first position security interest on the assets of the Company and its subsidiaries, including but not limited to, inventories, accounts receivable, machinery, equipment and real estate. The Company and its subsidiaries were required to execute Agreements to Provide Insurance that set forth the insurance requirements for the collateral.
 
If the Company or either of its subsidiaries (as guarantors) commits an event of default under the Business Loan Agreement and fails or is unable to cure that default, West Bank may cease advances under the Line of Credit and has the option of causing all outstanding indebtedness to become immediately due and payable. Events of default include, without limitation: (i) becoming insolvent or subject to bankruptcy proceedings; (ii) defaulting on any obligations to West Bank; (iii) defaulting on any obligations to third parties that would materially affect the ability to perform obligations owed to West Bank; (iv) suffering a material adverse change in financial condition or the value of any collateral; and (v) making false statements to West Bank.
 
The Company was in compliance with all covenants under the Business Loan Agreement as measured on November 30, 2009.  Although compliance with the financial ratio covenants is measured only on an annual basis, the Company internally evaluates such ratios on a quarterly basis.  As of August 31, 2010, the Company was in compliance with all financial ratio covenants under the Business Loan Agreement.  The next measurement date is November 30, 2010.
 
On June 1, 2009, Art’s-Way Scientific received funds from two $95,000 promissory notes in connection with an agreement signed August 7, 2007 between Art’s-Way Scientific and the Iowa Department of Economic Development.  The first $95,000 promissory note is a 0% interest loan requiring 60 monthly payments of $1,583.33, with a final payment due July 1, 2014.  The outstanding principal balance on this note was $72,833 as of August 31, 2010. The second $95,000 promissory note, which had an outstanding principal balance of $95,000 as of August 31, 2010, is a forgivable loan subject to certain contract obligations.  These obligations include maintaining Art’s-Way Scientific’s principal place of business in Iowa, complying with certain tax and insurance requirements, and creating 16 full-time positions and retaining 21 full-time positions in Iowa, which must be maintained for a two-year period. Art’s-Way Manufacturing Co., Inc. has provided a guarantee in connection with these loans to Art’s-Way Scientific.
 
On May 1, 2010, the Company obtained a loan to finance the purchase of an additional facility located in West Union, Iowa to be used as a distribution center, warehouse facility, and manufacturing plant for certain products under the Art’s-Way brand. The funds for this loan were made available by the Iowa Finance Authority by the issuance of tax exempt bonds.  This loan had an original principal amount of $1,300,000 and bears fixed interest at 3.5%. The payments required on this loan began July 1, 2010 and continue until June 1, 2020. The terms of the loan require monthly payments of $12,891.68 for principal and interest. As of August 31, 2010, the outstanding principal balance on this loan was $1,282,407.
 
 
8

 
Notes to Consolidated Financial Statements
 
This loan from the Iowa Finance Authority, which has been assigned to The First National Bank of West Union, is governed by a Manufacturing Facility Revenue Note dated May 28, 2010 and a Loan Agreement dated May 1, 2010 (“the IFA Loan Agreement”), which requires the Company to provide quarterly internally prepared financial reports and year-end audited financial statements and to maintain a minimum debt service coverage ratio of 1.5 to 1.0, which will be measured at November 30 of each year, beginning November 30, 2010.  Among other covenants, the IFA Loan Agreement also requires the Company to maintain proper insurance on, and maintain in good repair, the West Union Facility, and continue to conduct business and remain duly qualified to do business in the State of Iowa.  The loan is secured by a mortgage on the Company’s West Union Facility, pursuant to a Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement dated May 1, 2010 between the Company and The First National Bank of West Union (the “West Union Mortgage”).
 
If the Company fails to make a required payment or perform any other covenant under the IFA Loan Agreement or the West Union Mortgage, becomes subject to bankruptcy or insolvency proceedings, defaults in payment on any of our other loan obligations in excess of $100,000, or if there is a determination that any of the Company’s representations made in the IFA Loan Agreement or related documents are materially false, the Company will be deemed to have committed an event of default under the IFA Loan Agreement.  If the Company does not cure the event of default within the time specified by the IFA Loan Agreement, the lender may cause the entire amount of the loan to be immediately due and payable and take any other action that it is permitted to take at law or in equity to enforce the Company’s performance.
 
A summary of the Company’s term debt is as follows:
 
   
August 31, 2010
   
November 30, 2009
 
             
West Bank loan payable in monthly installments of $42,500 including interest at 5.75%, due May 1, 2013
    $3,221,306       $3,457,625  
                 
West Bank loan payable in monthly installments of $11,000 including interest at 5.75%, due May 1, 2013
    1,183,842       1,230,104  
                 
West Bank loan payable in monthly installments of $12,550 including interest at 5.75%, due May 1, 2013
    1,346,807       1,399,751  
                 
Iowa Finance Authority loan payable in monthly installments of $12,891.68 including interest at 3.5%, due June 1, 2020
    1,282,407       0  
                 
IDED loan payable in monthly installments of $1,583.33 including interest at 0%, due July 1, 2014.
    72,833       87,084  
                 
IDED loan payable in monthly installments of $0 including interest at 0%, due July 1, 2014
    95,000       95,000  
                 
Total term debt
    7,202,195       6,269,564  
Less current portion of term debt
    603,136       473,341  
Term debt, excluding current portion
    $6,599,059       $5,796,223  

 
9

 
Notes to Consolidated Financial Statements
 
(8)
Recently Issued Accounting Pronouncements
 
Fair Value Measurements
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued a statement that 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 was adopted by the Company without a material impact on the financial statements.  In January 2010, the FASB issued an update to amend existing disclosure requirements.  The update requires new disclosures for significant transfers between Levels 1 and 2 in the fair value hierarchy and separate disclosures for purchases, sales, issuances, and settlements in the reconciliation of activity for Level 3 fair value measurements.  This update also clarifies the existing fair value disclosures regarding the level of disaggregation and the valuation techniques and inputs used to measure fair value.  The update is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures on purchases, sales, issuances, and settlements in the roll forward of activity for Level 3 fair value measurements.  Those disclosures are effective for interim and annual periods beginning after December 15, 2010.  The Company does not expect the adoption of this update to have a material impact on the financial results of the Company.
 
(9)
Stock Option Plan
 
On January 25, 2007, the Board of Directors adopted the 2007 Non-Employee Directors’ Stock Option Plan (the “Directors’ Stock Option Plan”), which was approved by the Company’s stockholders at the annual stockholders’ meeting on April 24, 2008.  The Directors’ Stock Option Plan provides that the plan administrator may grant non-employee directors’ options to purchase shares of common stock of the Company at an exercise price not less than fair market value at the date the options are granted.  The Board of Directors has approved a director compensation policy pursuant to which non-employee directors are automatically granted non-qualified stock options to purchase 2,000 shares of common stock annually or initially upon their election to the Board, which are fully vested.
 
On February 5, 2007, the Board of Directors adopted the 2007 Employee Stock Option Plan, which was approved by the Company’s stockholders at the annual stockholders’ meeting on April 26, 2007.  Under this plan, options may be granted to key personnel and consultants at the discretion of the plan administrator. The exercise price of the options must be not less than fair market value at the grant date. The options may be non-qualified or incentive stock options.  The term and vesting conditions of options granted under the plan are at the administrator’s discretion.
 
(10)
2010 Acquisitions
 
Effective January 19, 2010, the company acquired certain assets related to the manure spreader product line of Roda Mfg., Inc.  The acquisition-date fair value of the total consideration transferred was approximately $1,189,900.   The Company expects the allocation of the purchase price to be finalized within one year of the acquisition date.  The operating results of the acquired business are reflected in the Company’s consolidated statement of operations from the acquisition date forward.  The amount of revenue attributable to the Roda Mfg. product line since the acquisition date was $357,753 for the period ended August 31, 2010.  The amount of revenue from all product lines for the combined entity as of August 31, 2010 was $22,909,802, compared with $19,406,975 as of August 31, 2009.  The amounts of expenses for the individual product lines are not separately identifiable as the production and related accounting are integrated. Prior information is not available for the product line.  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 is being accounted for under the acquisition method of accounting, with the purchase price allocated to the individual assets acquired.
 
 
10

 
Notes to Consolidated Financial Statements
 
In addition, effective June 11, 2010, the company acquired certain assets related to the baler product line of M&W, a subsidiary of the Alamo Group. The acquisition-date fair value of the total consideration transferred was approximately $453,000.  The Company expects the allocation of the purchase price to be finalized within one year of the acquisition date.  The operating results of the acquired business are reflected in the Company’s consolidated statement of operations from the acquisition date forward.  The amount of revenue attributable to the M&W baler product line since the acquisition date was $16,644 for the period ended August 31, 2010.  The amount of revenue for the combined entity as of August 31, 2010 was $22,909,802, compared with $19,406,975 as of August 31, 2009.  The amounts of expenses for individual product lines are not separately identifiable as the production and related accounting are integrated.  Prior information is not available for the product line.  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 is being accounted for under the acquisition method of accounting, with the purchase price allocated to the individual assets acquired.
 
(11)
Disclosures About the Fair Value of Financial Instruments
 
The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties.  At August 31, 2010, and November 30, 2009, the carrying amount approximated fair value for cash, accounts receivable, accounts payable, notes payable to bank, and other current and long-term liabilities.  The carrying amounts approximate fair value because of the short maturity of these instruments.  The fair value of the Company’s installment term loans payable also approximate recorded value because the interest rates charged under the loan terms are not substantially different than current interest rates.

(12)
Related Party Transactions

The financial statements of Art’s-Way Manufacturing, Inc. include a sale by our Vessels division to Adamson Global Technology for $250,000.  The terms of this sale were consistent with those of an arm’s length transaction.  Adamson Global Technology is wholly-owned and operated by J. Ward McConnell, Jr., the Executive Chairman of the Board of Directors.

(13)
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.
 
 
11

 
Notes to Consolidated Financial Statements
 
Approximate financial information with respect to the reportable segments is as follows.
 
Three Months Ended August 31, 2010
   
Agricultural Products
   
Pressurized Vessels
   
Modular Buildings
   
Consolidated
 
Revenue from external customers
    $7,725,000       $502,000       $2,355,000       $10,582,000  
Income from operations
    1,092,000       (116,000 )     295,000       1,271,000  
Income before tax
    1,062,000       (171,000 )     276,000       1,167,000  
Total Assets
    20,367,000       3,139,000       3,997,000       27,503,000  
Capital expenditures
    101,000       21,000       9,000       131,000  
Depreciation & Amortization
    135,000       27,000       26,000       188,000  


Three Months Ended August 31, 2009
   
Agricultural Products
   
Pressurized Vessels
   
Modular Buildings
   
Consolidated
 
Revenue from  external customers
    $4,993,000       $242,000       $365,000       $5,600,000  
Income from operations
    733,000       (89,000 )     (431,000 )     213,000  
Income before tax
    687,000       (141,000 )     (447,000 )     99,000  
Total Assets
    18,345,000       2,983,000       3,276,000       24,604,000  
Capital expenditures
    15,000       4,000       9,000       28,000  
Depreciation & Amortization
    115,000       25,000       25,000       165,000  


Nine Months Ended August 31, 2010
   
Agricultural Products
   
Pressurized Vessels
   
Modular Buildings
   
Consolidated
 
Revenue from  external customers
    $15,927,000       $1,245,000       $5,738,000       $22,910,000  
Income from operations
    1,287,000       (344,000 )     663,000       1,606,000  
Income before tax
    1,271,000       (514,000 )     607,000       1,364,000  
Total Assets
    20,367,000       3,139,000       3,997,0000       27,503,000  
Capital expenditures
    1,839,000       37,000       46,000       1,922,000  
Depreciation & Amortization
    382,000       79,000       76,000       537,000  


Nine Months Ended August 31, 2009
   
Agricultural Products
   
Pressurized Vessels
   
Modular Buildings
   
Consolidated
 
Revenue from  external customers
    $15,868,000       $616,000       $2,923,000       $19,407,000  
Income from operations
    1,569,000       (469,000 )     (498,000 )     602,000  
Income before tax
    1,446,000       (610,000 )     (558,000 )     278,000  
Total Assets
    18,345,000       2,983,000       3,276,000       24,604,000  
Capital expenditures
    275,000       38,000       9,000       322,000  
Depreciation & Amortization
    341,000       71,000       74,000       486,000  

 
12

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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, 2009.  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 expectation to remain in compliance with covenants in our loan agreements; (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 order backlog; and (iv) our beliefs regarding the sufficiency of working capital and our continued ability to renew or obtain financing on reasonable terms 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) 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; (ii) the impact of tightening credit markets on our ability to continue to obtain financing on reasonable terms; (iii) our ability to continue to meet debt obligations; (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; and (vi)  other factors described from time to time in our reports to the SEC. We do not intend 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 August 31, 2010 have remained unchanged from November 30, 2009.  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 fiscal year ended November 30, 2009.
 
Results of Operations
 
Net Sales and Cost of Sales
 
Our consolidated corporate sales for the three- and nine- month periods ended August 31, 2010 were $10,582,000 and $22,910,000 respectively, compared to $5,600,000 and $19,407,000 during the same respective periods in 2009, a $4,982,000 increase for the quarter and $3,503,000 increase year-to-date, or 88.9%, and 18.0% respectively.  While all three divisions had increases in sales year-to-date the largest increase can be attributed to our modular buildings segment (“Scientific”).  Consolidated gross profit margin for the third fiscal quarter of 2010 was 24.4% compared to 23.2% during the third fiscal quarter of 2009.  Year-to-date gross margin was 23.9% in fiscal 2010, compared to 21.1% in fiscal 2009.

 
13

 
Our third fiscal quarter sales at our agricultural products segment (“Manufacturing”) were $7,725,000, compared to $4,993,000 during the same period of 2009, a 54.7% increase.  Year-to-date sales were $15,927,000, up from $15,868,000 as of August 31, 2009, a 0.4% increase and a significant improvement over year-to-date results as of the end of the second fiscal quarter.  Although we have experienced decreased sales of Miller Pro products and OEM blowers, we have increased our sales of augers and beet equipment, which yield higher profit margins. Gross margins at Manufacturing for the third fiscal quarter of 2010 were 27.8% compared to 31.0% in fiscal 2009.   Our decreased gross margins for the quarter are primarily due to increased overtime wages in 2010 compared to 2009, and also due to negative material variances due to tighter inventory controls. Our year-to-date gross margins were 27.3%, compared to 26.1% for the same period in 2009.

Our third fiscal quarter sales at Vessels were $502,000, compared to $242,000 for the same period in 2009, a 107.7% increase.  Year-to-date sales were $1,245,000 in fiscal 2010, compared to $616,000 for the same period in 2009, a 101.9% increase.  A large portion of the year-to-date increase is due to a sale for $250,000 to Adamson Global Technology, which is wholly owned and operated by J. Ward McConnell, Jr., our Executive Chairman of the Board of Directors.  Gross margins at Vessels for the third fiscal quarter of 2010 were -5.0%, compared to 5.1% in fiscal 2009.  Year-to-date gross margins were       -4.4%, compared to -21.2% for the same period in 2009.  These increases can be attributed to our larger sales volume.

Our third fiscal quarter sales at Scientific were $2,355,000, compared to $365,000 for the same period in fiscal 2009, a 544.2% increase.  Year-to-date sales were $5,738,000 in fiscal 2010, compared to $2,923,000 for the same period in 2009, a 96.3% increase.  These increases are primarily due to higher demand during 2010, which we believe has resulted from improved economic conditions.    Gross margins at Scientific for the third fiscal quarter of 2010 were 19.4%, compared to -70.6% in 2009.  Year-to-date gross margins were 20.6%, compared to 2.5% for the same period in 2009.  During 2009, our low sales volume negatively impacted our gross margins.
 
Expenses

Our third fiscal quarter consolidated selling expenses were $550,000 compared to $436,000 for the same period in 2009.  Year-to-date selling expenses were $1,476,000 in 2010 compared to $1,250,000 for the same period in 2009.  The increase was primarily due to increased marketing efforts, including attending a greater number of trade shows, creating new product literature and increased advertising, as well as wages for additional sales staff.  Selling expenses as a percentage of sales were 5.2% and 6.4% for the three- and nine-month periods ending August 31, 2010, compared to 7.8% and 6.4% for the same respective periods in 2009.

Consolidated engineering expenses were $102,000 and $309,000 for the three and nine months ended August 31, 2010, compared to $89,000 and $248,000 for the same respective periods in 2009.  These increases were primarily due to the addition of engineering staff in Armstrong, Iowa.  Engineering expenses as a percentage of sales were 1.0% and 1.4% for the three- and nine-month periods ending August 31, 2010, compared to 1.6% and 1.3% for the same respective periods in 2009.

Consolidated administrative expenses for the three months ended August 31, 2010 were $654,000 compared to $563,000 for the same period in 2009.  Year-to-date administrative expenses were $2,081,000 compared to $1,986,000 for the same period in 2009. Administrative expenses as a percentage of sales were 6.2% and 9.1% for the three- and nine-month periods ending August 31, 2010, compared to 10.0% and 10.2% for the same respective periods in 2009.

 
14

 
Order Backlog
 
The consolidated order backlog as of August 31, 2010 was $4,823,000 compared to $6,174,000 as of August 31, 2009.  Manufacturing’s order backlog was $2,884,000 as of August 31, 2010, compared to $3,151,000 in fiscal 2009.  The backlog for Vessels was $655,000 as of August 31, 2010, compared to $511,000 in fiscal 2009. The backlog for Scientific was $1,334,000 as of August 31, 2010, compared to $2,512,000 in fiscal 2009. Our order backlog is not necessarily indicative of future revenue to be generated from such orders due to the possibility of order cancellations and dealer discount arrangements we may enter into from time to time
 
Liquidity and Capital Resources
 
Our main use of funds year-to-date has been for the purchase of both the Roda and M&W product lines, as well as the acquisition of the facility in West Union, Iowa.  Our main sources of funds year-to-date have been cash from operations of approximately $2,938,000, as well as proceeds from financing activities.  Of the $2,938,000 of cash from operations, $1,441,000 is a result of the increased payables and accrued expenses.  The increase in accounts payable is primarily due to increased purchasing for the production of our new manure spreader product line.  The increase in accrued expenses has several factors including increased accruals for our warranties, an accrual for bonuses that was not present at year end, and also increased accrued property taxes due to our new facilities.
 
We have a $6,000,000 revolving line of credit with West Bank, pursuant to which we had borrowed $2,272,000 and $2,438,892 as of August 31, 2010 and November 30, 2009, respectively.  In addition, we have three term loans from West Bank, which had outstanding principal balances of $3,221,306, $1,183,842 and $1,346,806 as of August 31, 2010, respectively.  We have also received funds pursuant to two promissory notes from the Iowa Department of Economic Development. These notes had outstanding principal balances of $95,000 and $72,833 as of August 31, 2010, respectively.  In May 2010, the Iowa Finance Authority also extended us a loan to finance the purchase of a facility. As of August 31, 2010, the outstanding principal balance on this loan was $1,282,407.
 
Our loans require us to comply with various covenants, including maintaining certain financial ratios. We were in compliance with all financial ratio covenants as of November 30, 2009, our last measurement date.
 
For additional information about our financing activities, please refer to note 8 to the audited consolidated financial statements and the discussion entitled “Liquidity and Capital Resources,” each contained in our Annual Report on Form 10-K for the fiscal year ended November 30, 2009, as well as note 7 to the unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report.
 
We believe that our current financing arrangements provide sufficient cash to finance operations for the next 12 months.  We expect to continue to rely on cash from financing activities to supplement our cash flows from operations in order to meet our liquidity and capital expenditure needs in the near future.  We expect to continue to be able to procure financing upon reasonable terms.
 
Off Balance Sheet Arrangements
 
None.
 
 
15

 
Item 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
The person serving as our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this report.  As a result of the material weakness relating to inventory accounting that existed at the end of our fiscal year, which was previously disclosed in Item 9A(T) of our 2009 Annual Report on Form 10-K, the person serving as our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not 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 the person serving as our principal executive officer and principal 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.  As a result of this conclusion, the financial statements for the period covered by this report were prepared with particular attention to the material weakness previously disclosed.
 
We are taking actions to remediate the previously-disclosed material weakness in our internal controls over financial reporting and improve our disclosure controls and procedures. We will continue to evaluate and monitor these efforts and intend to take all appropriate action when and as necessary to ensure we have effective disclosure controls and procedures.
 
Changes in Internal Controls
 
We have made significant progress, and continue to work on remediating the material weakness identified in our 2009 Annual Report on Form 10-K. During the first three quarters of 2010, we continued to improve our physical inventory count procedures to ensure that inventory is properly reflected in our financial statements. We intend to continue to implement and use these procedures throughout the 2010 fiscal year.  No other changes in our internal control over financial reporting occurred during the third fiscal quarter of 2010 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
16

 
PART II – OTHER INFORMATION
 
Item 1. 
Legal Proceedings
 
We are currently not a party to any material pending legal proceedings.
 
Item 2. 
Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
Item 3. 
Defaults Upon Senior Securities
 
None.
 
Item 4. 
(Removed and Reserved.)
 
Item 5. 
Other Information
 
As previously disclosed on our Quarterly Report for the period ending May 31, 2010, on May 10, 2010, we entered into an Asset Purchase Agreement with Alamo Group, Inc., pursuant to which we agreed to acquire the product line of M&W Balers from Alamo Group for a cash purchase price of approximately $453,000.  We completed the acquisition, and paid the purchase price in full, on June 11, 2010.  This price included $453,000 of inventory. The foregoing summary of the asset purchase does not purport to be complete and is qualified in its entirety by reference to our Asset Purchase Agreement with and the Alamo Group, a copy of which is attached as Exhibit 2.1 to our Quarterly Report on Form 10-Q for the period ending May 31, 2010 and is incorporated herein by reference.

Item 6. 
Exhibits
 
See “Exhibit Index” on page 21 of this report.
 
 
17

 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
  ART’S-WAY MANUFACTURING CO., INC.  
     
       
Date:  October 12, 2010
By:
/s/ Carrie L. Majeski  
   
Carrie L. Majeski
 
   
President, Chief Executive Officer and Principal Financial Officer
 
       
 

 
18

 
Art’s-Way Manufacturing Co., Inc.

Exhibit Index
 
Form 10-Q for the Quarterly Period Ending August 31, 2010

Exhibit No.
Description
31.1
Certificate pursuant to 17 CFR 240 13a-14(a)—filed herewith
32.1
Certificate pursuant to 18 U.S.C. Section 1350—filed herewith


 
 
19