Business Context and Reporting Period
Art’s-Way Manufacturing Co., Inc. is an agricultural equipment manufacturer headquartered in Armstrong, Iowa, with two continuing segments: Agricultural Products and Modular Buildings. The unaudited Form 10-Q covers the three and nine months ended August 31, 2023, compared with the corresponding 2022 periods.
During the third quarter, the Company ceased normal operations of its Tools segment and classified it as discontinued operations. Liquidation is expected to continue through the next two fiscal quarters.
Financial Performance and Position
| Metric | Three Months Ended August 31, 2023 | Three Months Ended August 31, 2022 | Nine Months Ended August 31, 2023 | Nine Months Ended August 31, 2022 |
|---|---|---|---|---|
| Sales from continuing operations | $8.117 million | $7.476 million | $23.429 million | $19.031 million |
| Gross profit | $2.301 million | $1.960 million | $6.671 million | $5.154 million |
| Gross margin | 28.3% | 26.2% | 28.5% | 27.1% |
| Income from continuing operations | $0.241 million | $0.304 million | $0.921 million | $0.191 million |
| Net income (loss) | $(0.074) million | $0.238 million | $0.575 million | $0.006 million |
| Basic net income (loss) per share | $(0.01) | $0.05 | $0.11 | $0.00 |
- Agricultural Products revenue decreased 12.8% in the quarter to $5.530 million, primarily because most beet equipment shipments occurred in the second quarter; nine-month revenue increased 9.6% to $17.343 million.
- Modular Buildings revenue increased 128.7% in the quarter to $2.587 million and 89.7% year to date to $6.086 million, supported by a large research project and agricultural building demand.
- Third-quarter continuing-operations profit declined despite higher revenue because Agricultural Products incurred an operating loss, reflecting lower-margin manure spreader sales, higher component and overhead costs, recruitment costs, and ERP conversion costs.
- Tools generated a discontinued-operations loss of $0.315 million in the quarter and $0.346 million year to date, resulting in consolidated third-quarter net loss.
Cash Flow, Liquidity and Debt
- Net cash used in operating activities was $0.519 million for the first nine months, including $0.999 million used by continuing operations and $0.481 million provided by discontinued operations.
- Net cash used in investing activities was $0.202 million, including $0.569 million of capital expenditures and $0.287 million of net proceeds from asset sales.
- Net cash provided by financing activities was $0.720 million, primarily from a $0.610 million increase in the line of credit and $0.398 million of finance lease proceeds.
- Cash was $4,217 at August 31, 2023, compared with $5,055 at November 30, 2022. Current assets were $16.311 million and current liabilities were $10.205 million.
- The $5.0 million Bank Midwest line of credit had a $4.535 million balance and $0.465 million of stated availability at August 31, 2023, subject to borrowing-base limitations. The interest rate was 9.75%, and the facility matures March 30, 2024.
- A $0.5 million reserve line was undispersed and matures November 30, 2023. Continuing-operations term debt was $2.765 million, and finance lease liabilities totaled $0.905 million.
- Management stated that current financing arrangements are expected to fund operations and debt payments for the next twelve months. The Company relies substantially on financing because operating cash flow was negative.
Material Changes, Outlook and Risks
- The Tools shutdown is a significant strategic change. Management expects approximately $0.950 million of cash generation from liquidation of receivables, inventory and other assets, excluding real estate, against estimated liquidation costs of approximately $0.200 million. Actual results may vary, and the real estate remains listed for sale.
- Management expects the Tools real estate sale to provide a significant cash inflow. The associated Tools EIDL balance was approximately $0.162 million, and the $0.340 million Roof Term Loan is required to be repaid if the Tools real estate is sold.
- Order backlog for continuing operations was $5.221 million as of October 5, 2023, down from $8.424 million a year earlier. Agricultural Products backlog was $3.753 million and Modular Buildings backlog was $1.468 million. Backlog is not necessarily indicative of future revenue.
- The Company began its fiscal 2024 early order program in October 2023. Management expects it to provide an indication of demand but warned that lower commodity prices and rising dealer inventories could reduce agricultural demand.
- Management filed amended payroll tax returns seeking approximately $1.2 million, net of consulting fees, in Employee Retention Credits. The timing and receipt of the refund are uncertain.
- Key risks include covenant compliance, refinancing needs, interest-rate exposure, inflation, steel and other input costs, supply-chain constraints, seasonal demand, dealer inventory levels, order cancellations, and the ability to complete the Tools liquidation.
- The Company was previously out of compliance with its debt-to-worth covenant at November 30, 2022, but Bank Midwest waived the related default. The next annual covenant measurement is November 30, 2023. Management reported effective disclosure controls as of August 31, 2023.
Investor Verification Items
- Verify renewal or refinancing of the $5.0 million line of credit before its March 30, 2024 maturity and availability under the borrowing-base formula.
- Assess November 30, 2023 compliance with working-capital, leverage, tangible-equity and debt-service-coverage covenants.
- Track completion and proceeds of the Tools liquidation, including the real estate sale and repayment obligations tied to that sale.
- Confirm the timing, eligibility and ultimate receipt of the estimated $1.2 million Employee Retention Credit refund.
- Monitor Agricultural Products demand, dealer inventories, commodity prices and gross-margin pressure from component costs and product mix.
- Evaluate whether Modular Buildings backlog and the engineering-only research project convert into reported revenue.
- Reconcile the very low cash balance with continued negative operating cash flow and reliance on revolving debt.