ARTW — Q2 2026 Financial Report Analysis

Art's-Way Manufacturing's fiscal second quarter (the three months to May 31, 2026) brought its biggest sales growth in years: revenue rose 23.9% to $7.85 million. Profit went the other way. Net income fell 88% to $173,000, and income from operations (profit from the business itself, before interest and tax) fell 44% to $287,000. Most of the drop in net income comes from a one-time tax refund that inflated last year's quarter. The fall in operating profit does not: gross margin, the share of each sales dollar left after paying for materials and factory labor, dropped from 32.5% to 25.9%. Steel costs squeezed the farm-equipment business, and cost overruns on site work hit the modular-buildings business.

At a glance

• Revenue +23.9% to $7.85M. Both segments grew. Modular Buildings jumped 50.6% to $3.48M while working through backlog carried in from late fiscal 2025, and Agricultural Products rose 8.6% to $4.37M on demand from livestock producers.
• Gross margin 25.9%, down from 32.5%. The company sold more but kept less of each dollar, which is why higher sales produced lower operating profit.
• Order backlog down 37.7% to $2.74M (as of July 7, 2026). Farm-equipment orders are up 63.7%, but modular-building orders are down 62.4%. The segment driving this year's growth has the thinnest order book going into the second half.

Results at a glance

The filing reports only one per-share figure (net income divided by about 5.19 million weighted-average shares). It does not show a separate diluted EPS.

For the first half (six months to May 31), revenue was $14.49M (+26.3%) and income from operations was $617,000 (+20.2% from $513,000). Net income was $370,000, down from $1.43M.

Agricultural Products: more sales, a bigger loss

Farm equipment (grinder-mixers, manure spreaders, bale processors, sugar-beet harvesting equipment) is the larger segment. It sold $4.37M in the quarter, 8.6% more than a year ago. The MD&A credits livestock: "Livestock prices continued to be elevated through the second quarter of fiscal 2026 and are driving the increased demand for our agricultural products." Cattle and dairy operations buy grinder-mixers to prepare feed, and the company says grinder-mixer sales are up about $1.32M year-on-year across the six months. Sugar beets were the weak spot: "Our sugar beet equipment demand is down from prior years, as sugar beet prices declined in the first fiscal quarter of 2026."

The segment's gross margin fell to 24.4% from 27.2%, "due primarily to price increases on steel." After operating expenses, the segment lost $229,000 from operations, compared with a $49,000 loss a year ago (segment note). Its operating expenses rose to $1.30M from $1.14M, mostly G&A ($944K vs $799K). Management says it has "not replaced overhead cut in previous years," but G&A grew anyway.

Management also warns that "Rising steel and oil prices may challenge our margins for the rest of fiscal 2026." For the first half, segment gross margin was 29.1% (vs 27.0%), so Q2's 24.4% is a sharp drop within the year, not just against last year.

Modular Buildings: revenue up by half, margins down by a third

This segment builds and installs prefabricated research laboratories and animal-housing buildings. Q2 revenue rose 50.6% to $3.48M. The company "carried a strong modular building backlog into fiscal 2026, unlike fiscal 2025." Over the six months, research-lab building sales rose about $1.58M (+53.2%) "due to large projects we contracted at the end of fiscal 2025," and agricultural buildings rose about $0.41M (+29.5%).

Gross margin fell to 27.8% from 41.7% in the quarter, and to 24.8% from 37.2% for the half. The MD&A gives three reasons: selling "a warrantied agriculture modular building at cost," "project overages on site work while completing current contracts," and contingency reserves that turned into profit in fiscal 2025's first quarter and did not recur this year. The third reason means last year's margin was itself inflated, so part of the drop is a tough comparison rather than a change in the business. Even so, gross profit was flat at $966K vs $965K on 50% more revenue. Segment operating income slipped to $516K from $559K.

What the headline numbers hide

• The 88% net-income drop is mostly last year's one-off. In Q2 FY2025 the company booked a COVID-era Employee Retention Credit (ERC) refund: $1.62M of credit plus $246K of interest, minus $405K in consulting fees. That is why "Other" income was $1.46M that quarter versus $52K this quarter. Management puts the after-tax benefit at about $1.15M. Taking that out, last year's quarter earned roughly $0.33M (our estimate), so this year's $173K is still down by roughly half, not 88%.
• The MD&A is more upbeat than the quarterly numbers. It says "we did see improved income from operations for both the three and six months ended May 31, 2026." That holds for the six months ($617K vs $513K). It does not hold for the quarter: the income statement shows income from operations of $287K vs $511K.
• Cash conversion is acceptable but thin. Six-month operating cash flow was $510K against $370K of net income. Rising payables (+$606K) helped fund higher receivables (+$516K) and unbilled contract work (+$477K). After $517K of capital spending, free cash flow was about zero. The company ended May with $5,969 in cash and $3.50M drawn on its credit line, up from $3.25M in November. In June it added a $500K reserve line to pay deposits on a new fiber laser and crane system.
• Inventory is still large relative to the business. Net inventory of $11.5M is about 79% of first-half revenue. Management calls holding finished goods "an opportunistic move" because short delivery times win retail sales. Gross finished goods did fall from $5.44M to $4.74M since November, so some of that stock is now being sold. The company also offers dealers "floorplan" terms: dealers can pay up to 360 days later or when the machine sells, whichever is first. This supports sales but delays cash.
• Interest is a growing drag at this scale. Interest expense rose to $113K from $100K, more than a third of the quarter's operating income.

Takeaway: The headline profit drop overstates the problem because last year had a $1.15M one-off tax refund. But the underlying trend is still weaker: on 24% more revenue, operating profit fell 44%, because steel costs and site-work overruns cut gross margin by 6.6 points. And Modular Buildings, the segment behind most of this year's growth, has 62% less backlog than a year ago.

Outlook

Art's-Way gives no numerical guidance. Its qualitative signals point in opposite directions:

• Farm equipment: Ag backlog of $1.41M is up 63.7% from a very weak $0.86M last year. Management says demand is "much improved from a year ago due to higher row crop prices and record cattle prices." Its forward-looking statements also say normalizing dealer stock levels may lift future demand. In other words, dealers who cut back their own inventory over the past two years may need to reorder. A new sugar-beet product and a dedicated beet-territory specialist are meant to offset the weak beet market. Steel is the main risk to margins.
• Modular buildings: Backlog fell to $1.33M from $3.54M. Management says current backlog "is expected to carry us through the third quarter," and expects engineering (design) contracts to convert into construction projects in Q3. It describes quoting activity as strong. Q4 revenue for the segment depends on those conversions actually happening.

Our read: Q3 should still show year-on-year revenue growth while the modular backlog is worked off, but probably at margins nearer this quarter's than last year's. The figure to watch in the next 10-Q is the modular backlog. If design agreements turn into signed construction contracts, the second half can hold up. If backlog stays near $1.3M, the segment that carried fiscal 2026 has little booked work for fiscal 2027. With almost no cash on hand and the credit line funding operations, the company has limited room to absorb further margin pressure.