Business Context and Reporting Period
Art’s-Way Manufacturing Co., Inc. filed an unaudited Form 10-Q for the quarter and six months ended May 31, 2013. The company manufactures agricultural equipment, pressurized vessels, and modular buildings through three reportable segments: Agricultural Products, Pressurized Vessels, and Modular Buildings. The company had 4,041,552 common shares outstanding as of July 8, 2013.
Financial Performance and Position
| Metric | Three Months Ended May 31, 2013 | Three Months Ended May 31, 2012 | Six Months Ended May 31, 2013 | Six Months Ended May 31, 2012 |
|---|---|---|---|---|
| Net sales | $9.25 million | $11.69 million | $17.67 million | $18.00 million |
| Gross profit | $2.56 million | $3.16 million | $4.93 million | $4.63 million |
| Gross margin | 27.7% | 27.0% | 27.9% | 25.7% |
| Income from operations | $0.80 million | $1.49 million | $1.51 million | $1.86 million |
| Net income | $0.51 million | $0.94 million | $1.33 million | $1.13 million |
| Diluted EPS | $0.13 | $0.23 | $0.33 | $0.28 |
- Six-month operating cash flow was $274,000, compared with $120,000 in the prior-year period. Investing cash flow was $625,000, including $836,000 of proceeds from property sales. Financing cash flow was negative $323,000, principally reflecting $551,000 of bank debt payments.
- Cash increased to $2.12 million at May 31, 2013, from $1.55 million at November 30, 2012.
- Total assets were $31.45 million and stockholders’ equity was $18.43 million at May 31, 2013. Inventory was $14.82 million, up from $14.33 million at November 30, 2012.
- Total term debt was $8.14 million, including $1.28 million current and $6.86 million long term, compared with $8.47 million at November 30, 2012. The company had no balance outstanding on its $8.0 million revolving credit facility.
- Approximate consolidated operating margin was 8.6% for the quarter and 8.6% year to date, compared with 12.8% and 10.3%, respectively, in the prior-year periods.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined $2.44 million, or 20.8%, primarily because Modular Buildings revenue fell $2.17 million following completion of major 2012 contracts. Year-to-date sales declined 1.8%.
- Agricultural Products second-quarter sales decreased 3.6%, but year-to-date sales increased 22.7%, including $2.92 million attributable to the Universal Harvester acquisition.
- Pressurized Vessels sales increased 4.1% for the quarter and 9.5% year to date. Segment gross margin improved to 17.6% for the quarter and 6.2% year to date.
- Modular Buildings gross margin improved to 50.3% for the quarter and 47.4% year to date, compared with 21.3% and 22.2%, respectively, due primarily to cost finalization and expense reductions on completed projects.
- Second-quarter net income declined 45.1%, while year-to-date net income increased 18.1%. Year-to-date results included a $630,000 net gain from sales of excess land and the former Salem, South Dakota facility.
- Selling, engineering, and administrative expenses increased year to date, including higher advertising, engineering staffing, Universal Harvester costs, and a $130,000 prepayment penalty related to refinancing.
- Order backlog declined to $6.32 million from $10.36 million a year earlier, mainly because of completion of a major Modular Buildings contract. Agricultural Products backlog increased to $5.57 million from $4.82 million.
Guidance, Outlook, Risks, and Unusual Items
- No formal quantitative earnings or revenue guidance was provided. Management stated that current financing arrangements are expected to provide sufficient cash for operations for the next twelve months, with financing activities expected to supplement operating cash flow.
- On May 1, 2013, the company refinanced its West Bank term loans with four U.S. Bank loans totaling approximately $6.32 million at a fixed 2.98% rate. The loans require aggregate monthly payments of $93,850 and mature in 2018, with aggregate final payments of approximately $1.37 million.
- The U.S. Bank revolving facility matures May 1, 2014, bears interest at prime with a 3.50% minimum, and was undrawn at quarter-end. The facility and term loans are secured by company assets and contain financial covenants. The company reported compliance at May 31, 2013.
- Key disclosed risks include demand and economic conditions, material and supply costs, access to credit, debt covenant compliance, integration of Universal Harvester, production delays, customer retention, order cancellations, and the ability to renew or obtain financing.
- Warranty liabilities were $527,000 at May 31, 2013, compared with $278,000 a year earlier. Management cautioned that future warranty costs could exceed historical experience.
- On June 25, 2013, after the reporting period, the company acquired selected assets and inventory of Agro Trend in Canada for approximately $313,000 and entered into a consignment arrangement involving approximately $600,000 of finished goods inventory.
- The company reported no material pending legal proceedings, no defaults upon senior securities, and no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether the sharp decline in Modular Buildings revenue and backlog is offset by sustained Agricultural Products growth and the Canadian acquisition.
- The company’s ability to generate sufficient operating cash flow given substantial inventory, customer-deposit movements, and reliance on financing.
- Renewal of the $8.0 million revolving facility before its May 1, 2014 maturity.
- Compliance with the U.S. Bank debt-to-tangible-net-worth and fixed-charge-coverage covenants at the next measurement date, August 31, 2013.
- The sustainability of reported earnings excluding the $630,000 property-sale gain and the effect of the $130,000 refinancing prepayment penalty.
- Warranty claims, inventory reserves, order cancellations, and the timing and profitability of future segment deliveries.