Business Context and Reporting Period
Art’s-Way Manufacturing Co., Inc. filed its Form 10-K for the fiscal year ended November 30, 2015. The company manufactures agricultural equipment, pressurized vessels, modular buildings and industrial cutting tools. Agricultural Products represented 74.3% of fiscal 2015 revenue; the other segments were Pressurized Vessels, Modular Buildings and Tools.
The filing is an annual report covering the full fiscal year, not a standalone fourth-quarter report. The company is a smaller reporting company, and its financial statements received an unqualified audit opinion from Eide Bailly LLP.
Financial Performance and Key Metrics
| Metric | Fiscal 2015 | Fiscal 2014 |
|---|---|---|
| Net sales | $27.936 million | $36.170 million |
| Gross profit | $6.984 million | $8.725 million |
| Gross margin | 25.0% | 24.1% |
| Operating income (loss) | $(404,000) | $1.665 million |
| Net income (loss) | $(558,000) | $935,000 |
| Basic and diluted EPS | $(0.14) | $0.23 |
| Net cash provided by operating activities | $285,000 | $1.942 million |
| Capital expenditures | $293,000 | $633,000 |
| Cash balance | $447,000 | $512,000 |
- Sales declined 22.8%, primarily because of weaker agricultural-equipment demand and a more than 70% decline in Universal Harvester reel sales.
- Gross margin improved because of cost reductions and more efficient inventory utilization.
- Operating expenses rose 4.6% to $7.387 million, including a $618,729 non-cash goodwill impairment charge related to Universal Harvester.
- Interest expense was $329,000. The income tax benefit was $307,000, producing an effective tax rate of 35.5% despite the pretax loss.
- Working capital was $12.624 million, down from $13.562 million, and the current ratio declined to 2.72 from 3.09.
Segment Results
| Segment | 2015 Revenue | Change vs. 2014 | 2015 Operating Income (Loss) |
|---|---|---|---|
| Agricultural Products | $20.756 million | Down 25.7% | $(84,000) |
| Pressurized Vessels | $1.610 million | Down 7.3% | $(327,000) |
| Modular Buildings | $3.191 million | Up 7.6% | $150,000 |
| Tools | $2.379 million | Down 32.4% | $(143,000) |
Modular Buildings improved because of higher sales and a $210,000 reimbursement of prior-period warranty expenses arising from a legal settlement. Pressurized Vessels reported lower revenue partly because a large project was produced in fiscal 2015 but was not expected to be delivered and invoiced until fiscal 2016.
Liquidity, Debt and Cash Flow
- Cash flow from operations fell to $285,000 from $1.942 million, while capital expenditures were $293,000.
- The company had $3.960 million drawn on an $8.0 million U.S. Bank revolving credit facility, with approximately $3.027 million available under the borrowing-base calculation.
- A separate $1.5 million revolving facility obtained in July 2015 had no balance outstanding and was fully available at year-end, subject to its terms.
- Term debt totaled approximately $5.949 million, including $1.323 million classified as current. Total liabilities were $12.812 million, down 5.8% from 2014.
- Contractual obligations totaled $10.345 million, including $10.260 million of long-term debt obligations and interest. Approximately $5.516 million was due within one year.
- The company was not in compliance with certain fixed-charge/debt-service coverage covenants at year-end. U.S. Bank and First National Bank of West Union issued waivers, and management stated that no loan default occurred.
- Management stated that existing cash and financing arrangements were sufficient for the next 12 months, but the company expected to continue relying on financing to supplement operating cash flow.
Material Changes, Outlook and Risks
- Management expects weak agricultural market demand to continue through fiscal 2016 and attributed the 2015 decline primarily to overall market conditions rather than loss of market share.
- The Ames, Iowa production facility was classified as held for sale and was under contract for approximately $1.192 million less closing expenses, with closing expected in the first quarter of fiscal 2016. Production of Universal Harvester reels was being absorbed by the Armstrong facility.
- Backlog as of January 25, 2016 was approximately $3.535 million in Agricultural Products, $701,000 in Pressurized Vessels, $686,000 in Modular Buildings and $156,000 in Tools. Management cautioned that backlog fluctuates and is not necessarily indicative of future revenue.
- Primary risks include dependence on farming income and commodity prices, seasonal demand, dealer and OEM decisions, steel and other raw-material costs, supplier performance, access to financing, covenant compliance, warranty and product-liability claims, competition, and the ability to renew credit facilities.
- The company paid a $0.05-per-share dividend in fiscal 2015. Future dividends require consideration of financial condition and lender consent.
- Management reported effective disclosure controls and internal control over financial reporting as of November 30, 2015. The auditor did not provide an internal-control attestation because the company qualifies for the smaller reporting company exemption.
Most Important Facts to Verify
- Whether agricultural demand and Universal Harvester reel sales stabilized or continued to decline after November 30, 2015.
- Completion and proceeds of the Ames facility sale, including closing costs and any resulting gain or loss.
- Renewal or refinancing of the $8.0 million revolving facility and the $1.5 million facility, both of which mature or were scheduled for renewal in 2016.
- Compliance with fixed-charge and debt-service coverage covenants at subsequent measurement dates after the year-end waivers.
- Conversion of the reported backlog into revenue, particularly the delayed Pressurized Vessels project and the Agricultural Products backlog.
- Inventory realizability, warranty reserves and the potential for additional impairment charges given weak demand and substantial inventory balances.
- Whether operating cash flow is sufficient to fund debt maturities, capital expenditures and working-capital needs without increased borrowing.