Art’s-Way Manufacturing Co., Inc. — Form 10-Q Summary
Business Context and Reporting Period
Art’s-Way Manufacturing Co., Inc. is an agricultural equipment manufacturer with four reportable segments: agricultural products, pressurized vessels, modular buildings, and tools. This unaudited Form 10-Q covers the three- and nine-month periods ended August 31, 2015, with balance-sheet comparisons to November 30, 2014. The company is a smaller reporting company and had 4,061,052 common shares outstanding as of September 17, 2015.
Key Financial Metrics
| Metric | Three Months Ended August 31, 2015 | Three Months Ended August 31, 2014 | Nine Months Ended August 31, 2015 | Nine Months Ended August 31, 2014 |
|---|---|---|---|---|
| Sales | $6.886 million | $11.585 million | $21.979 million | $27.291 million |
| Gross profit | $1.265 million | $2.704 million | $5.525 million | $6.372 million |
| Gross margin | 18.4% | 23.3% | 25.0% | 23.4% |
| Operating income (loss) | $(1.004) million | $0.908 million | $(0.260) million | $1.057 million |
| Net income (loss) | $(0.796) million | $0.558 million | $(0.396) million | $0.553 million |
| Diluted EPS | $(0.20) | $0.14 | $(0.10) | $0.14 |
For the nine months, operating cash flow was $39,486, compared with cash used in operations of $884,516 in the prior-year period. Investing cash flow was $(207,718), primarily for $228,624 of capital expenditures. Financing cash flow was $300,056, including a $1.462 million increase in the line of credit, $959,688 of term-debt repayments, and $202,428 of dividends. Cash increased to $643,540 from $511,716 at November 30, 2014.
At August 31, 2015, total assets were $32.705 million and total liabilities were $14.023 million. Inventory was $16.494 million, up from $15.089 million at November 30, 2014, while accounts receivable declined to $1.876 million from $2.962 million. Total term debt was $6.274 million, including $1.313 million current and $4.961 million long-term. The principal balance on the existing $8.0 million revolving line of credit was $4.031 million, with $3.141 million of borrowing capacity available under the borrowing-base formula. A new $1.5 million revolving line of credit had no outstanding balance and was fully available.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 40.6%; nine-month sales declined 19.5%, primarily because of reduced agricultural-product demand.
- Agricultural-products sales decreased 47.5% in the quarter and 22.3% year to date. Universal Harvester reel sales were down nearly 70% year to date.
- The company recorded a $618,729 noncash goodwill impairment charge related to the Universal Harvester reporting unit, reducing goodwill from $993,729 to $375,000.
- Third-quarter and year-to-date net results shifted from profit to loss, reflecting lower volume, operating deleverage, and the goodwill impairment.
- The company’s consolidated order backlog was $3.607 million as of September 29, 2015, down from $5.198 million a year earlier. Agricultural backlog fell to $1.545 million from $3.534 million.
- Modular-buildings sales increased 34.5% in the quarter and 18.9% year to date, while tools sales declined 37.3% and 28.9%, respectively, largely because of weakness in the energy industry.
- The company paid $202,428 in dividends during the first nine months of 2015, compared with no dividends in the prior-year period.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that agricultural demand remains weak and that the company has implemented cost-cutting measures to align resources with demand.
- Management expects operating cash flows and existing financing arrangements to provide sufficient funding for the next twelve months, but expects to continue relying on financing activities to supplement operating cash flow.
- The company expects to renew or otherwise maintain financing on reasonable terms, but identifies credit-market conditions, debt obligations, covenant compliance, seasonal demand, production cycles, economic conditions, material costs, and integration of acquired businesses as significant risks.
- The company was not in compliance with its required fixed-charge coverage ratio of at least 1.15 to 1.00 as of August 31, 2015, primarily because of the third-quarter operating loss. U.S. Bank waived the violation, and management stated that no event of default occurred. The next measurement date is November 30, 2015.
- The $8.0 million line of credit and the new $1.5 million line of credit mature May 1, 2016. The company expects to renew the existing line before maturity.
- The new line of credit supports an extended dealer-payment program of up to nine months. Advances are secured by dealer notes, security agreements, real property, and fixed assets.
- Product warranties generally run for one year. Accrued warranty liability was $278,269 at August 31, 2015; management noted that future warranty costs could exceed historical amounts.
- No material pending legal proceedings or off-balance-sheet arrangements were reported. Management concluded that no subsequent events required recognition in the financial statements.
- Disclosure controls and procedures were evaluated as effective, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether agricultural demand and Universal Harvester reel sales recover, and whether the reduced backlog leads to further revenue pressure.
- Compliance with the fixed-charge coverage covenant at the November 30, 2015 measurement date and the status of the lender waiver.
- Renewal or refinancing of the $8.0 million and $1.5 million credit facilities before their May 1, 2016 maturity.
- Inventory levels, reserves, dealer receivables, and collections under the extended-payment sales incentive program.
- The assumptions supporting the $618,729 goodwill impairment analysis and the remaining $375,000 goodwill balance.
- Whether cost reductions can offset fixed-cost deleverage and restore positive operating margins.
- The sustainability of dividends while operating cash flow remains modest and leverage-dependent financing continues.