Art’s-Way Manufacturing Co., Inc. — 2023 Q2 Form 10-Q Summary
Business context and reporting period
Art’s-Way Manufacturing is an Iowa-based agricultural equipment manufacturer with three operating segments: Agricultural Products, Modular Buildings, and Tools. The filing covers the three and six months ended May 31, 2023, compared with the corresponding 2022 periods. The company is a smaller reporting company; financial statements are unaudited.
Key financial metrics
| Metric | Three months ended May 31, 2023 | Three months ended May 31, 2022 | Six months ended May 31, 2023 | Six months ended May 31, 2022 |
|---|---|---|---|---|
| Sales | $9.008 million | $7.275 million | $16.903 million | $12.888 million |
| Gross profit | $2.331 million | $2.193 million | $4.680 million | $3.385 million |
| Gross margin | 25.9% | 30.1% | 27.7% | 26.3% |
| Operating income (loss) | $419,000 | $321,000 | $967,000 | $(116,000) |
| Net income (loss) | $307,000 | $175,000 | $649,000 | $(231,000) |
| Basic and diluted EPS | $0.06 | $0.04 | $0.13 | $(0.05) |
Approximate consolidated operating margins were 4.6% for the quarter and 5.7% year to date; approximate net margins were 3.4% and 3.8%, respectively. Interest expense was $163,000 in the quarter and $291,000 year to date.
- Segment revenue: Second-quarter Agricultural Products revenue was $6.368 million, Modular Buildings revenue was $1.856 million, and Tools revenue was $784,000. Six-month revenue was $11.813 million, $3.498 million, and $1.592 million, respectively.
- Cash flow: Six-month operating cash flow was $(623,000), compared with $(281,000) in 2022. Investing cash flow was $(353,000), including $640,000 of capital expenditures. Financing cash flow was $974,000, primarily from increased revolver borrowings and finance lease proceeds.
- Liquidity: Cash was only $2,000 at May 31, 2023, compared with $5,000 at November 30, 2022. Current assets were $15.864 million and current liabilities were $9.888 million.
- Debt and leases: The company had $4.704 million outstanding on its $5.000 million revolving line of credit, leaving $296,000 of stated availability subject to borrowing-base limitations. Term debt totaled $2.952 million, and finance lease liabilities totaled $1.081 million. The revolver bears interest at 9.50% and matures March 30, 2024.
- Working capital: Accounts receivable increased to $3.936 million and net inventory increased to $11.382 million from $10.612 million at November 30, 2022.
- Equity: Stockholders’ equity was $11.873 million at May 31, 2023. Issued common shares increased to 5,110,921, while 92,348 shares were held in treasury. Shares outstanding as of July 12, 2023 were 5,018,573.
Material changes versus the prior comparable period
- Quarterly sales increased 23.8%, while six-month sales increased 31.1%, reflecting higher demand across all three segments.
- Agricultural Products revenue increased 19.8% in the quarter and 24.6% year to date. Production improvements, including robotic weld cells and a high-definition plasma cutter, helped increase throughput.
- Modular Buildings revenue increased 53.5% in the quarter and 68.4% year to date. Segment gross margins improved to 20.7% and 20.2%, respectively, from 15.8% and 11.2%, partly due to pricing actions and better absorption of fixed overhead.
- Consolidated quarterly gross margin declined because beet harvesting equipment, which represented a larger portion of sales, carries lower margins. Six-month gross margin improved year over year.
- Six-month operating results improved from a $116,000 loss to $967,000 of income, and net results improved from a $231,000 loss to $649,000 of income.
- Accounts receivable and inventory increased as the company used its floorplan program and additional financing to support demand and supply-chain requirements. Management identified approximately $1.2 million of cash outflow from higher floorplan receivables.
Guidance, outlook, risks, contingencies, and unusual items
- Tools segment discontinuation: On June 7, 2023, the company announced that it would discontinue the Tools business. Normal operations are scheduled to end July 14, 2023, followed by liquidation of inventory, machinery, equipment, and real estate. The segment remains in continuing operations in this filing.
- Management estimates approximately $950,000 of cash generation from liquidation of receivables, inventory, and other assets, excluding real estate, against estimated liquidation costs of approximately $200,000. The estimate assumes most open orders as of June 7, 2023 are fulfilled.
- The company expects to repay the $162,000 Tools-related SBA loan upon liquidation and may need to repay the $342,000 Bank Midwest Roof Term Loan if the related real estate is sold.
- Management expects current financing arrangements to fund operations and debt payments over the next twelve months, but liquidity is dependent on revolver availability, collection of receivables, inventory reduction, and asset liquidation.
- Order backlog was $10.359 million as of July 7, 2023, essentially unchanged from $10.378 million a year earlier. Agricultural backlog declined to $6.499 million, while Modular Buildings backlog rose to $3.480 million. Tools backlog declined to $380,000.
- The company was out of compliance with its debt-to-worth ratio at November 30, 2022, but Bank Midwest waived the resulting default. The next principal covenant measurement date is November 30, 2023, except for the monthly working-capital requirement.
- Key disclosed risks include limited cash and revolver capacity, variable interest rates, debt covenant compliance, inflation and steel prices, supplier availability, seasonal demand, order cancellations, and execution of the Tools liquidation.
- Administrative expenses increased due partly to added accounting and quality-assurance staff and implementation of a new accounting ERP system, expected to go live in the second half of fiscal 2023.
- A gain of $114,000 was recognized on the sale of an asset held for lease. The company also recorded $132,000 of other income in the quarter, primarily contributing to the improvement in other income versus the prior year.
- No material pending legal proceedings were reported. Management concluded that disclosure controls were effective as of May 31, 2023.
Important facts for investors to verify
- Whether the company can maintain adequate liquidity with only $296,000 of stated revolver availability and minimal cash.
- The terms and outcome of the March 30, 2024 revolver maturity and the November 30, 2023 covenant testing.
- Actual proceeds, costs, timing, and debt repayments associated with the Tools segment liquidation.
- Whether Agricultural Products margins recover after the lower-margin beet equipment production cycle.
- Conversion of the $10.359 million backlog into revenue, including potential cancellations and dealer discounts.
- Implementation costs and operational effects of the new ERP system.
- Collections of floorplan receivables, inventory levels, and the company’s ability to generate positive operating cash flow.