Art’s-Way Manufacturing Co., Inc. — Fiscal 2021 Form 10-K Summary
Business context and reporting period
Filed as an annual report for the fiscal year ended November 30, 2021; the filing does not provide standalone fourth-quarter results. Art’s-Way manufactures agricultural equipment, modular research and animal-containment buildings, and steel-cutting tools through three operating segments.
- Agricultural Products: 67.4% of fiscal 2021 revenue.
- Modular Buildings: 22.7% of fiscal 2021 revenue.
- Tools: 9.9% of fiscal 2021 revenue.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $24.965 million | $22.409 million |
| Gross profit | $6.596 million; 26.4% margin | $2.400 million; 10.7% margin |
| Operating income (loss) | $523,000 | ($3.910 million) |
| Net income (loss) | $213,000 | ($2.103 million) |
| Diluted EPS | $0.05 | ($0.48) |
| Cash flow from operations | ($986,000) | ($856,000) |
| Capital expenditures | $620,000 cash purchases; $820,000 reported by segment | $693,000 |
| Cash at period end | $2,658 | $2,684 |
| Working capital | $4.487 million | $4.137 million |
| Current ratio | 1.58 | 1.67 |
Revenue increased 11.4%. Gross margin improved substantially, aided by pricing actions, higher production efficiency, and the absence of approximately $996,000 of prior-year Agricultural Products inventory obsolescence expense. Operating expenses declined 3.8% to $6.073 million.
At November 30, 2021, total assets were $20.854 million and stockholders’ equity was $10.354 million. Net inventory increased to $9.210 million from $7.762 million, primarily to address supply-chain delays and expected demand. Gross inventory was $11.736 million, against reserves of $2.526 million.
The Company used $1.715 million of additional line-of-credit borrowings. Debt included $4.075 million outstanding on a $5.0 million Bank Midwest revolving facility, $2.260 million on a Bank Midwest term loan, and $450,000 of SBA Economic Injury Disaster Loans. Available revolver capacity was $925,470, subject to borrowing-base limitations.
Material changes versus the prior comparable period
- Agricultural Products revenue rose 28.6% to $16.826 million, and operating results improved to $599,000 of income from a $2.318 million loss.
- Modular Buildings revenue declined 18.8% to $5.678 million as a large multiyear project reached completion, but the segment returned to $74,000 of operating income from a $1.295 million loss.
- Tools revenue increased 5.6% to $2.461 million, while operating loss improved to $150,000 from $297,000; gross margin declined to 17.2% from 21.3% because of higher wages and workforce turnover.
- Cash used in operations increased to $986,000, primarily reflecting an $809,000 inventory increase.
- Other income declined to $57,000 from $1.254 million, largely because fiscal 2020 included $1.243 million of PPP loan forgiveness.
- The Company terminated its CNH OEM agreement as written on October 27, 2021; it remains in effect for one year, and management expects a new agreement at expiration.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects continued improvement in fiscal 2022, supported by higher Agricultural Products demand and backlog, but provides no formal revenue or earnings guidance.
- As of February 2, 2022, backlog was approximately $10.459 million in Agricultural Products, $1.243 million in Modular Buildings, and $503,000 in Tools. Management cautions that backlog fluctuates and may not translate directly into revenue.
- Management expects to invest in automation, including a $161,000 Haas milling machine and robot package and a $297,600 finance lease for three robotic weld cells, to address labor shortages and capacity constraints.
- COVID-19 continued to cause supply-chain disruption, higher material and labor costs, employee absences, and difficulty filling skilled positions. Commodity prices, farm income, weather, government programs, interest rates, customer inventory decisions, steel prices, and international demand may materially affect results.
- The Company was out of compliance with its debt-to-worth covenant by one percentage point at November 30, 2021. Bank Midwest waived the violation and the related event of default. The revolving credit facility matures March 30, 2022.
- The independent auditor identified inventory valuation as a critical audit matter. Inventory valuation depends on assumptions regarding future usage, salability, demand, and net realizable value; additional write-downs may be required.
- Fiscal 2021 included approximately $711,000 of bill-and-hold revenue under the MD&A discussion, while the revenue-recognition note reports approximately $1.622 million recognized at production completion; investors should reconcile this apparent disclosure difference.
- No material legal proceedings were pending or threatened according to management. No dividends were paid in fiscal 2021 or 2020.
Important facts for investors to verify
- Reconcile the bill-and-hold revenue amounts disclosed in different sections of the filing.
- Review the March 30, 2022 revolver maturity, renewal status, borrowing-base availability, interest rate, and covenant compliance.
- Assess whether inventory growth and the $2.526 million reserve adequately reflect demand, obsolescence, and supply-chain conditions.
- Monitor conversion of the reported backlog into shipments, revenue, cash flow, and sustainable margins.
- Evaluate the effect of labor shortages, automation investments, raw-material inflation, and the expected replacement CNH agreement.
- Confirm the timing and terms of requested additional SBA EIDL funding of up to $1.050 million.
- Consider that the Company generated net income but had negative operating cash flow and ended the year with only $2,658 of cash.