Art’s-Way Manufacturing Co., Inc. — Q1 FY2024 10-Q Summary
Business context and reporting period
The filing covers the three months ended February 29, 2024. Art’s-Way manufactures agricultural equipment and replacement parts through its Agricultural Products segment and manufactures and installs modular buildings through its Modular Buildings segment. The former Tools segment was discontinued in fiscal 2023 and is presented as discontinued operations for all periods.
The company is a smaller reporting company and reported 5,068,208 common shares outstanding as of April 8, 2024.
Key financial metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Sales from continuing operations | $5.723 million | $7.087 million | Down 19.2% |
| Gross profit | $1.474 million | $2.187 million | Down 32.6% |
| Gross margin | 25.7% | 30.9% | Down 5.2 percentage points |
| Operating income (loss) | $(380,000) | $543,000 | Declined $923,000 |
| Net income (loss) from continuing operations | $(424,000) | $350,000 | Declined $774,000 |
| Net income (loss) | $(465,000) | $342,000 | Declined $807,000 |
| Basic and diluted loss per share | $(0.09) | $0.07 | Unfavorable change |
| Net cash used in operating activities | $(99,000) | $1.269 million provided | Unfavorable change |
Gross profit declined primarily because of lower sales and higher manufacturing, insurance, and other input costs. Selling expense decreased 12.8% to $463,000, while engineering expense increased 25.0% to $160,000 and general and administrative expense increased 25.1% to $1.230 million. Administrative expense included approximately $100,000 of early-retirement incentives and increased cloud-computing amortization.
The Agricultural Products segment generated $4.236 million of revenue, down 22.2%, and incurred an operating loss of approximately $426,000 versus operating income of approximately $502,000 in the prior-year quarter. The Modular Buildings segment generated $1.487 million of revenue, down 9.4%, but remained profitable with approximately $46,000 of operating income.
Balance sheet, cash flow, debt, and liquidity
- Cash was $2,485 at February 29, 2024, compared with $4,014 at November 30, 2023.
- Total assets were $24.254 million and stockholders’ equity was $11.205 million at quarter-end.
- Net inventory was $10.983 million, representing approximately 75% of current assets.
- Accounts receivable were $3.046 million, down from $3.432 million at November 30, 2023.
- The company used $99,000 in total operating cash, including $68,000 used by continuing operations and $32,000 used by discontinued operations.
- Capital expenditures were $281,000, producing total free cash flow before financing of approximately negative $380,000.
- Financing activities provided $379,000, principally from a $467,000 increase in the line of credit, partly offset by debt, lease, and share-withholding payments.
- The $5.5 million Bank Midwest revolving line had a balance of $4.880 million and approximately $620,000 of remaining availability at February 29, 2024, subject to borrowing-base limitations. The rate was 9.25% at quarter-end.
- The revolving line was renewed on March 4, 2024 and now matures March 30, 2025. The renewal reduced the floating rate spread by 0.50 percentage points and removed the debt-to-worth covenant going forward.
- Continuing-operations term debt was $2.713 million, excluding the current portion, and finance lease liabilities totaled $957,000.
- The company was out of compliance with its debt-to-worth covenant at November 30, 2023, but Bank Midwest waived the violation. The next annual covenant measurement is November 30, 2024, except for the monthly working-capital requirement.
Material changes versus the prior comparable period
- Revenue fell 19.2%, driven primarily by a 22.2% decline in Agricultural Products revenue and a 9.4% decline in Modular Buildings revenue.
- Gross margin contracted from 30.9% to 25.7%; Agricultural Products margin declined from 34.2% to 26.9%, while Modular Buildings margin improved from 19.7% to 22.3%.
- The company moved from operating and net income to operating and net losses, with continuing-operations net loss of $424,000.
- Operating cash flow changed from $1.269 million of cash provided to $99,000 of cash used.
- Customer deposits increased to $1.087 million from $416,000, while billings in excess of cost and profit increased to $1.046 million from $351,000.
- Tools generated no revenue in Q1 FY2024 and recorded a $41,000 after-tax loss, compared with $808,000 of revenue and an $8,000 loss in Q1 FY2023.
- The company issued 74,000 shares under its equity plan and withheld 18,458 shares for employee tax obligations, resulting in a higher share count and $66,000 of stock-based compensation expense.
Guidance, outlook, risks, contingencies, and unusual items
Management expects agricultural demand to remain pressured by lower commodity prices, lower farm income, increased dealer inventories, and slower incoming orders. The company initiated cost reductions, including non-production layoffs and early-retirement incentives, and intends to pursue automation, production efficiency, dealer expansion, and new product development.
Management expects Q2 FY2024 to improve from Q1 as the company works through beet-equipment backlog and realizes cost savings. It expects Modular Buildings sales to increase during fiscal 2024 based on current contracts and anticipated contract closings. The Modular Buildings backlog was approximately $8.940 million as of April 3, 2024, including two large research projects, compared with $4.209 million a year earlier. Agricultural Products backlog was $2.476 million, down from $7.798 million.
Consolidated backlog was $11.416 million as of April 3, 2024, down 4.9% year over year. Management cautioned that backlog is not necessarily indicative of future revenue because of cancellations and dealer discount arrangements.
Management believes existing financing arrangements will fund operations and debt payments for the next twelve months. Expected future cash sources include receivable collections, customer deposits, Modular Buildings contract activity, the potential sale of Tools-segment real estate, and approximately $1.2 million of anticipated net Employer Retention Credit refunds; the timing of the real-estate sale and refunds is unknown.
- Key risks include limited cash, high utilization of the revolving credit facility, interest-rate exposure, debt and covenant compliance, and the need to renew or obtain financing on reasonable terms.
- Additional risks include weaker agricultural commodity prices and farm income, dealer inventory levels, seasonal demand, raw-material and steel costs, inflation, supplier constraints, and demand for commercial real estate.
- The Tools segment’s real estate remains held for sale. Certain debt associated with the Tools segment and the Roof Term Loan must be repaid upon sale of the related real estate.
- The company reported no material pending legal proceedings and no senior-debt defaults as of the filing.
- Management concluded that disclosure controls were effective as of February 29, 2024.
Important facts for investors to verify
- Whether Agricultural Products demand, dealer inventories, commodity prices, and backlog stabilize or continue to decline.
- Timing and profitability of the $8.940 million Modular Buildings backlog, including the two large research projects.
- Whether the company can maintain sufficient liquidity with only approximately $620,000 of revolving-credit availability at quarter-end.
- Compliance with the remaining Bank Midwest covenants and the company’s ability to refinance the revolving line before its March 30, 2025 maturity.
- Timing and collectability of the expected $1.2 million Employer Retention Credit refunds and proceeds from the Tools-segment real-estate sale.
- Actual savings from workforce reductions and early-retirement incentives versus the effect of reduced staffing on production capacity.
- Potential further deterioration in receivable credit quality, particularly floorplan receivables and dealer exposure, given management’s expectation of increased credit risk.