Art’s-Way Manufacturing Co., Inc. — Form 10-Q Summary
Business Context and Reporting Period
Art’s-Way Manufacturing is an agricultural equipment manufacturer with three operating segments: Agricultural Products, Modular Buildings, and Tools. This unaudited filing covers the three and six months ended May 31, 2022, compared with the corresponding 2021 periods. The company is a smaller reporting company, and its common stock trades on Nasdaq under the symbol ARTW.
Financial Performance and Position
| Metric | Three Months Ended May 31, 2022 | Three Months Ended May 31, 2021 | Six Months Ended May 31, 2022 | Six Months Ended May 31, 2021 |
|---|---|---|---|---|
| Sales | $7.275 million | $5.710 million | $12.888 million | $11.111 million |
| Gross profit | $2.193 million | $1.722 million | $3.385 million | $2.765 million |
| Gross margin | 30.1% | 30.2% | 26.3% | 24.9% |
| Operating income (loss) | $321,000 | $149,000 | $(116,000) | $(220,000) |
| Net income (loss) | $175,000 | $64,000 | $(231,000) | $(251,000) |
| Basic EPS | $0.04 | $0.01 | $(0.05) | $(0.06) |
At May 31, 2022, total assets were $24.042 million, including $10.887 million of net inventory and $2.481 million of accounts receivable. Cash was only $4,975. Total liabilities were $13.736 million and stockholders’ equity was $10.306 million.
Six-month operating cash flow was negative $281,000, an improvement from negative $1.340 million in the prior-year period. Investing cash flow was negative $500,000, principally from capital expenditures. Financing activities provided $783,000, including a $629,000 increase in the line of credit and $350,000 of roof-term-loan proceeds. Ending cash increased by $2,317 to $4,975.
Debt included $4.703 million outstanding under revolving credit facilities and $3.046 million of term debt. Total finance lease liabilities were $542,000. The company had $846,775 of stated remaining availability under its revolving facilities at May 31, 2022, subject to borrowing-base limitations.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 27.4%, while six-month sales increased 16.0%.
- Agricultural Products sales rose 37.8% in the quarter and 28.8% year to date, supported by high commodity prices, strong demand, and a significant backlog.
- Modular Buildings sales were broadly flat in the quarter but declined 16.4% year to date because the prior-year period included a large construction project.
- Tools sales increased 14.0% in the quarter and 5.1% year to date, but segment margins declined because of staff turnover and higher overhead.
- Six-month gross margin improved to 26.3% from 24.9%, although second-quarter margin was essentially unchanged. Inflation and material costs continued to pressure margins.
- Net inventory increased approximately $1.7 million during the first six months, reflecting advance purchasing, supply-chain disruptions, and higher prices. Customer deposits increased to $1.820 million from $279,000 at November 30, 2021.
- General and administrative expense increased 22.1% year to date, driven by employee retention programs, bonuses, recruitment, and related costs.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management reported a consolidated backlog of $10.781 million as of July 10, 2022, up 45% from $7.416 million a year earlier. Agricultural Products represented $8.643 million, Modular Buildings $1.401 million, and Tools $737,000.
- The Agricultural Products backlog was expected to fill production through the end of calendar 2022. Management expects continued near-term demand but limited new spring-program orders to reduce margin erosion.
- Management expects a strong finish to fiscal 2022 in Modular Buildings and expects improved production capacity and efficiency from automation and new equipment over the next 18 to 24 months.
- The company identified inflation, steel and other raw-material costs, supply-chain disruptions, construction-material delays, labor availability and turnover, seasonal demand, COVID-19 effects, customer cancellations, and financing conditions as significant risks.
- The $5.0 million revolving line matures March 30, 2023; the $550,000 reserve line matures November 30, 2022. The reserve line carried a 6.75% rate at May 31, 2022, while the primary line carried a 6.25% rate.
- The company was previously out of compliance with its debt-to-worth covenant at November 30, 2021, but Bank Midwest waived the resulting default. The next covenant measurement is November 30, 2022. The company stated that it was in compliance with its $4.0 million minimum working-capital requirement at May 31, 2022.
- The company entered into a common-stock purchase agreement with Alumni Capital allowing up to $3.0 million of gross proceeds through June 30, 2023. As of July 15, 2022, only 20,000 commitment shares had been issued and no additional shares had been sold.
- A $350,000 roof term loan was entered into in May 2022, with an estimated $268,176 balloon payment at maturity in May 2027. Subsequent to quarter-end, the company entered into or proposed finance leases for a forklift and a Haas milling machine.
- On June 14, 2022, the company received a $383,904 purchase order for two rental buildings. No material pending legal proceedings were reported, and management stated that disclosure controls were effective.
Important Facts for Investors to Verify
- Verify the company’s ability to refinance or repay the $550,000 reserve line when it matures in November 2022 and the primary revolving line when it matures in March 2023.
- Monitor compliance with the debt-to-worth and debt-service-coverage covenants at the November 30, 2022 measurement date.
- Assess whether backlog converts to revenue and cash flow without significant cancellations, discounts, production delays, or margin deterioration.
- Evaluate inventory growth, customer-deposit obligations, and the effect of the floorplan program, including approximately $463,000 of receivables on extended terms at May 31, 2022.
- Track inflation, steel and construction-material costs, labor turnover, and supply-chain availability, all of which may reduce margins.
- Confirm the timing and dilution effects of any future Alumni Capital equity-line drawdowns.
- Reconcile subsequent equipment leases, capital expenditures, and the rental-building purchase order with future liquidity and debt requirements.