Art’s-Way Manufacturing Co., Inc. — Fiscal 2013 Form 10-K Summary
Business Context and Reporting Period
Art’s-Way Manufacturing is a diversified manufacturer of agricultural equipment, pressurized steel vessels, modular research and animal-containment buildings, and steel-cutting tools. The filing covers the fiscal year ended November 30, 2013, with fiscal 2012 as the comparable period. The company is a smaller reporting company listed on the NASDAQ Capital Market under ARTW.
Agricultural Products generated 82.4% of fiscal 2013 revenue, followed by Modular Buildings at 9.5%, Pressurized Vessels at 6.2%, and the newly established Tools segment at 1.9%.
Financial Performance and Key Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $34.227 million | $36.457 million | Down 6.1% |
| Gross profit | $8.366 million | $10.032 million | Down 16.6% |
| Gross margin | 24.4% | 27.5% | Down 3.1 percentage points |
| Operating income | $1.817 million | $4.328 million | Down 58.0% |
| Operating margin | 5.3% | 11.9% | Down 6.5 percentage points |
| Net income | $1.551 million | $2.665 million | Down 41.8% |
| Basic and diluted EPS | $0.38 | $0.66 | Down $0.28 |
| Net cash from operating activities | $(2,344) | $5.004 million | Significant decline |
Interest expense declined to $297,000 from $414,000, while other income increased to $685,000 from $74,000, primarily reflecting approximately $630,000 of gains on the sale of land and a former production facility. The effective tax rate decreased to 29.7% from 33.2%.
At November 30, 2013, cash was $208,000, current assets were $19.751 million, current liabilities were $7.269 million, and working capital was $12.483 million. The current ratio was 2.72, compared with 3.37 in 2012. Inventory was $14.923 million, including reserves of $3.216 million.
Total assets were $32.768 million and stockholders’ equity was $18.294 million. Term debt totaled $7.481 million, including $1.229 million classified as current. The company also had $3.350 million outstanding under an $8.000 million revolving line of credit. Contractual obligations totaled $11.510 million, including $11.472 million of long-term debt obligations.
Capital expenditures were $842,000. Investing activities used $3.343 million, primarily for acquisitions and capital expenditures. Financing activities provided $2.007 million, largely from borrowings under the revolving credit facility. The company paid $405,000 in dividends, or $0.10 per share.
Material Changes Versus the Prior Comparable Period
- Agricultural Products revenue increased 14.1% to $28.199 million, but segment operating income decreased 48.0% to $1.234 million. Gross margin fell to 23.1% from 28.1% because of product mix, acquisition integration, OEM inventory reductions, and labor inefficiencies.
- Modular Buildings revenue decreased 66.4% to $3.240 million and operating income decreased 67.7% to $672,000 after completion in 2012 of a major Stanford University-related project.
- Pressurized Vessels revenue increased 2.2% to $2.137 million. Gross margin improved to 10.9% from 7.0%, although the segment continued to report a $127,000 operating loss.
- The company acquired Agro Trend assets in June 2013 for approximately $311,000, adding snow blowers, agricultural trailers, and dump boxes to Agricultural Products.
- The company acquired Ohio Metal Working Products assets in September 2013 for approximately $3.172 million and established the Tools segment. Tools contributed $651,000 of revenue and $38,000 of operating income during the two months included in fiscal 2013.
- Current liabilities increased 20.2%, while current assets decreased approximately 2.4%. Term debt declined by approximately $985,000, but the company drew $3.350 million on its revolving line to finance the Ohio Metal acquisition.
- Operating cash flow declined from $5.004 million to negative $2,344, reflecting changes in contracts in progress, income taxes payable, accrued expenses, and other working-capital accounts.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that the Pressurized Vessels segment was positioned for a profitable 2014, citing improved quality, delivery consistency, increased sales, and repeat customers. Management also expected financing access to support operations, equipment investments, acquisitions, and debt repayment.
As of January 31, 2014, backlog was approximately $9.168 million for Agricultural Products, $639,000 for Tools, $558,000 for Pressurized Vessels, and $493,000 for Modular Buildings. Management cautioned that backlogs fluctuate and are not necessarily indicative of future revenue.
The company’s principal risks include dependence on farm income and commodity prices, weather and crop conditions, seasonality, dealer and OEM decisions, raw-material availability and steel prices, acquisition integration, competition, product liability and warranty claims, environmental and employment regulations, intellectual property protection, and the ability to retain financing.
The company was not in compliance with the U.S. Bank fixed-charge coverage ratio as of November 30, 2013. U.S. Bank issued a waiver, and no event of default occurred. The next measurement date was February 28, 2014. The revolving credit line was scheduled to mature on May 1, 2014 and was renewable annually.
The filing reports no material legal proceedings and no off-balance-sheet arrangements. Management concluded that disclosure controls and internal control over financial reporting were effective; the auditor was not required to provide an internal-control attestation because of the company’s smaller reporting company status.
Revenue recognized under bill-and-hold arrangements was approximately $788,000 in 2013, compared with $937,000 in 2012. Inventory reserves increased to $3.216 million from $2.466 million. These items, together with percentage-of-completion accounting for Modular Buildings, are important areas for investor review.
Most Important Facts to Verify
- Whether the company renewed or refinanced the $8.000 million revolving line before its May 1, 2014 maturity and obtained permanent financing for the Ohio Metal acquisition.
- Whether the fixed-charge coverage covenant was satisfied at the February 28, 2014 measurement date and thereafter.
- Whether operating cash flow improved after fiscal 2013’s near-zero result and whether working-capital requirements remain elevated.
- Whether Agricultural Products margins recovered after acquisition integration, OEM inventory reductions, and labor inefficiencies.
- Whether the Tools segment and Agro Trend operations generated sustainable growth beyond their limited fiscal 2013 contribution.
- Whether Modular Buildings can replace the revenue and profit contributed by the large 2012 Stanford-related project.
- The adequacy of the $3.216 million inventory reserve and $220,719 warranty accrual, given demand uncertainty and product liability exposure.
- The sustainability of the $0.10 per-share dividend in light of covenant restrictions, low cash, debt maturities, and reliance on financing activities.