Art’s-Way Manufacturing Co., Inc. — Q3 2022 Form 10-Q Summary
Business Context and Reporting Period
Art’s-Way Manufacturing is an agricultural equipment manufacturer headquartered in Armstrong, Iowa, with three operating segments: Agricultural Products, Modular Buildings, and Tools. This unaudited Form 10-Q covers the three and nine months ended August 31, 2022, compared with the corresponding 2021 periods. The company is a smaller reporting company and reported 4,880,097 common shares outstanding as of October 5, 2022.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Sales | $8.140 million | $6.592 million | $21.029 million | $17.703 million |
| Gross profit | $2.040 million | $1.738 million | $5.426 million | $4.503 million |
| Gross margin | 25.1% | 26.4% | 25.8% | 25.4% |
| Income from operations | $431 thousand | $160 thousand | $315 thousand | $(60) thousand |
| Net income (loss) | $238 thousand | $56 thousand | $6 thousand | $(195) thousand |
| Basic and diluted EPS | $0.05 | $0.01 | $0.00 | $(0.04) |
Q3 net margin was approximately 2.9%, compared with approximately 0.9% in the prior-year quarter. Nine-month net margin was approximately 0.03%, compared with approximately negative 1.1% in 2021. Interest expense was $133 thousand in Q3 and $307 thousand for the nine-month period.
- Segment revenue: Q3 Agricultural Products revenue was $6.345 million, Modular Buildings revenue was $1.131 million, and Tools revenue was $664 thousand. Nine-month revenue was $15.823 million, $3.208 million, and $1.998 million, respectively.
- Segment profitability: Q3 operating income was $676 thousand for Agricultural Products, offset by operating losses of $176 thousand for Modular Buildings and $69 thousand for Tools. Nine-month operating income was $994 thousand for Agricultural Products, compared with losses of $484 thousand and $195 thousand for Modular Buildings and Tools.
- Cash flow: Nine-month operating cash flow was $198 thousand, compared with cash used of $1.248 million in 2021. Investing cash flow was $(1.178) million, primarily due to $1.188 million of capital expenditures. Financing cash flow was $982 thousand.
- Liquidity: Cash was $4 thousand at August 31, 2022. Accounts receivable were $3.820 million and inventory was $10.500 million, up from $2.663 million and $9.210 million at November 30, 2021. Working capital was approximately $4.691 million.
- Debt and leases: The company had $4.559 million outstanding on revolving credit facilities, with $991 thousand of stated availability subject to borrowing-base limitations. Total term debt was $3.024 million, and finance lease liabilities were $815 thousand.
Material Changes Versus the Prior Comparable Period
- Sales increased 23.5% in Q3 and 18.8% for the first nine months. Agricultural Products was the principal driver, with revenue up 36.2% in Q3 and 31.7% year to date.
- Operating results improved substantially, with Q3 operating income rising to $431 thousand from $160 thousand and nine-month results moving from a $60 thousand operating loss to $315 thousand of operating income.
- Consolidated Q3 gross margin declined to 25.1% from 26.4%, while nine-month gross margin improved modestly to 25.8% from 25.4%. Rising material, labor, and overhead costs pressured Modular Buildings and Tools margins.
- Modular Buildings revenue declined 13.9% in Q3 and 15.5% year to date. Its Q3 gross margin fell to 6.5% from 25.8%, primarily due to fixed-price contracts affected by higher material costs and project delays.
- Tools revenue increased, but gross margin declined to 12.2% in Q3 and 13.6% year to date from 20.0% in both prior-year periods because of higher material and overhead costs.
- Inventory, receivables, customer deposits, debt, and lease obligations increased as the company supported higher demand, an expanded floorplan program, capital investment, and production automation.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management reported a consolidated order backlog of $9.078 million as of October 5, 2022, up 49% from $6.097 million a year earlier. Backlog increased 28% in Agricultural Products, 80% in Modular Buildings, and 85% in Tools. Management cautioned that backlog is not necessarily indicative of future revenue because of cancellations and dealer discounts.
- Management expects Agricultural Products backlog to keep production full into the fourth quarter and expects price increases and stabilizing steel prices to support improved margins beginning in Q4 2022 and Q1 2023.
- Two Modular Buildings projects under engineering contracts could add approximately $7 million to fiscal 2023 backlog if closed. The filing does not provide assurance that these projects will be awarded.
- Management identified supplier delays, especially for hydraulics and cylinders, labor constraints, inflation, rising component costs, seasonal demand, and potentially weaker economic conditions as significant risks. COVID-19 effects and access to financing also remain risks.
- The $5.000 million revolving line matures March 30, 2023, and the $550 thousand reserve line matures November 30, 2022. Current stated interest rates were 7.750% and 8.250%, respectively.
- The company was previously out of compliance with its debt-to-worth covenant as of November 30, 2021; Bank Midwest waived that violation. The next covenant measurement date is November 30, 2022. The company stated that it was compliant with its $4.000 million minimum working-capital requirement at August 31, 2022.
- The company believes operations and existing financing will provide sufficient cash for the next twelve months, but cash on hand was minimal and financing availability is material to liquidity.
- During the period, the company entered into a common stock purchase agreement permitting up to $3.000 million of aggregate gross proceeds through June 30, 2023. As of the filing date, 280,000 shares had generated $545,528 of proceeds, with approximately $2.454 million remaining available.
- The company received approximately $369 thousand under Iowa’s Manufacturing 4.0 program, including reimbursement for robotic welders and planned automation equipment. It expects a high-definition plasma cutter to be installed in Q4 2022.
- A $350 thousand roof term loan was issued in August 2022 to repair the Armstrong facility. The filing reports no material pending legal proceedings and no defaults upon senior securities.
Important Facts for Investors to Verify
- Confirm renewal or repayment arrangements for the $550 thousand reserve line maturing November 30, 2022 and the $5.000 million revolving line maturing March 30, 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, particularly the potential Modular Buildings projects and the company’s seasonal Agricultural Products orders.
- Track whether pricing actions, automation, and steel-cost stabilization restore margins in Modular Buildings and Tools.
- Evaluate working-capital needs arising from $10.500 million of inventory, $3.820 million of receivables, and approximately $588 thousand of receivables subject to extended floorplan terms.
- Review future equity issuance under the Alumni Capital agreement, including dilution, discounted issuance prices, and the remaining $2.454 million availability.
- Verify the company’s ability to fund capital expenditures, debt service, customer deposits, and operating needs despite only $4 thousand of reported cash at quarter-end.