Art’s-Way Manufacturing Co., Inc. Form 10-Q Summary
Business Context and Reporting Period
This unaudited Form 10-Q covers the three and nine months ended August 31, 2016, compared with the corresponding 2015 periods. Art’s-Way manufactures agricultural equipment, modular buildings, and steel cutting tools through its Manufacturing, Scientific, and Metals segments. During the quarter, the Company announced the discontinuation and planned liquidation of its Vessels segment, which is presented as discontinued operations.
The Company had 4,109,052 common shares outstanding as of September 16, 2016. It is classified as a smaller reporting company.
Financial Performance and Position
| Metric | Three Months Ended August 31, 2016 | Three Months Ended August 31, 2015 | Nine Months Ended August 31, 2016 | Nine Months Ended August 31, 2015 |
|---|---|---|---|---|
| Sales from continuing operations | $6.431 million | $6.514 million | $17.442 million | $20.605 million |
| Gross profit | $1.242 million | $1.262 million | $4.354 million | $5.416 million |
| Gross margin | 19.3% | 19.4% | 25.0% | 26.3% |
| Income (loss) from continuing operations | $(150,000) | $(716,000) | $807 | $(262,000) |
| Net income (loss) | $(288,000) | $(796,000) | $(264,000) | $(396,000) |
| Net loss per share | $(0.07) | $(0.20) | $(0.06) | $(0.10) |
At August 31, 2016, cash was $501,000, total current assets were $19.215 million, and total assets were $28.983 million. Inventory was $13.667 million, down from $15.184 million at November 30, 2015. Accounts receivable increased to $2.700 million from $1.883 million.
Total current liabilities were $7.714 million, including $3.434 million drawn on the revolving credit line and $1.846 million of current term debt. Total term debt was $4.124 million, compared with $5.949 million at November 30, 2015. Total liabilities were $10.657 million and stockholders’ equity was $18.327 million.
For the nine months, operating activities provided $1.365 million of cash, including $1.282 million from continuing operations. Investing activities provided $1.040 million, primarily reflecting $1.173 million of proceeds from asset sales. Financing activities used $2.351 million, including $1.731 million of term-debt repayments and a $526,000 reduction in the line of credit. Cash increased by $54,000 during the period.
Material Changes Versus the Prior Comparable Period
- Continuing-operations sales declined 1.3% in the third quarter and 15.4% year to date, primarily because of weaker agricultural-equipment demand.
- Year-to-date Manufacturing sales declined 23.1%, while Scientific sales increased 43.5%; Metals sales declined 14.5% because of weakness in the energy industry.
- Gross margin declined 130 basis points year to date to 25.0%, reflecting lower sales volume and fixed-cost absorption.
- The quarterly continuing-operations loss improved substantially because the prior-year quarter included a $619,000 goodwill impairment charge. Year-to-date continuing operations reached approximately break-even.
- The Vessels segment generated a $265,000 net loss for the first nine months, compared with a $134,000 loss in the prior-year period. The Company expects little or no significant Vessels revenue in coming quarters.
- The Ames, Iowa facility was sold for $1.192 million in February 2016, producing a reported gain of approximately $36,000. Proceeds were used to repay term debt.
- Consolidated order backlog as of September 29, 2016 was $1.510 million, down from $2.527 million a year earlier, reflecting the agricultural downturn.
Guidance, Outlook, Risks, and Unusual Items
Management expects operating cash flow and current financing arrangements to fund operations and debt payments for the next twelve months, but expects to continue relying on financing to supplement operating cash flow. The Company stated that it expects to obtain financing on reasonable terms, while acknowledging that this is not assured.
The U.S. Bank revolving credit facility has a $5.0 million commitment, $3.434 million outstanding, and approximately $1.566 million of availability subject to borrowing-base limitations. It matures May 1, 2017. Two U.S. Bank term loans also mature in May 2017, requiring final payments of approximately $283,500 and $890,000.
The Company was in compliance with applicable U.S. Bank covenants as of August 31, 2016. The Company previously failed the Iowa Finance Authority loan’s debt-service-coverage covenant as measured at November 30, 2015, but received a waiver; the next measurement date is November 30, 2016. U.S. Bank covenants include liquidity and EBITDA requirements, with specified exceptions for certain 2016 and early 2017 measurement dates.
Key risks include continued weakness in agricultural demand, declining backlog, seasonal demand and production cycles, commodity and supply costs, the ability to liquidate Vessels assets, debt repayment and refinancing needs, covenant compliance, and access to financing. Warranty costs may exceed historical estimates. No material pending legal proceedings or off-balance-sheet arrangements were reported. Management concluded that disclosure controls were effective and that no material changes to internal control over financial reporting occurred.
Important Facts for Investors to Verify
- Verify the Company’s ability to refinance or repay the revolving credit facility and May 2017 term-loan maturities.
- Monitor compliance with U.S. Bank liquidity, EBITDA, and fixed-charge coverage requirements and the November 30, 2016 Iowa Finance Authority covenant test.
- Assess whether agricultural demand and order backlog stabilize, particularly in the Manufacturing segment.
- Track the timing, proceeds, and potential additional losses from liquidation of the Vessels segment and its remaining assets.
- Reconcile reported cash generation with working-capital movements, asset-sale proceeds, and ongoing debt repayments.
- Evaluate whether the year-to-date improvement in continuing operations is sustainable without the benefit of prior-year impairment charges and asset sales.