Business Context and Reporting Period
Art’s-Way Manufacturing Co., Inc. filed this unaudited Form 10-Q for the three months ended February 28, 2021, with comparative results for the three months ended February 29, 2020. The company manufactures agricultural equipment and replacement parts, modular buildings, and steel cutting tools through its Agricultural Products, Modular Buildings, and Tools segments.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Sales | $5.401 million | $5.026 million | Up 7.5% |
| Gross profit | $1.043 million | $0.977 million | Up 6.7% |
| Gross margin | 19.3% | 19.4% | Down 0.1 percentage point |
| Operating loss | $(0.369) million | $(0.470) million | Improved $0.101 million |
| Net loss | $(0.315) million | $(0.437) million | Improved $0.122 million |
| Basic and diluted loss per share | $(0.07) | $(0.10) | Improved |
| Cash flow from operations | $0.681 million | $(0.960) million | Improved $1.641 million |
| Capital expenditures | $0.164 million | $0.267 million | Down $0.103 million |
Operating expenses were $1.411 million, compared with $1.447 million in the prior-year quarter. The operating margin was approximately negative 6.8%, and the net margin was approximately negative 5.8%.
- Agricultural Products revenue increased 18.5% to $3.500 million, with segment gross margin improving to 25.2% from 19.3%.
- Modular Buildings revenue decreased 11.4% to $1.291 million. Segment gross margin fell to 2.9% from 17.6% because estimated costs increased on a large construction contract.
- Tools revenue decreased 1.0% to $0.610 million, while segment gross margin declined to 20.2% from 24.5% due to a greater mix of lower-margin OEM work.
At February 28, 2021, cash was $3,890. Current assets were $10.191 million and current liabilities were $6.432 million, implying working capital of approximately $3.759 million. Accounts receivable declined to $1.681 million from $2.391 million at November 30, 2020, while net inventory increased to $7.902 million from $7.762 million.
Total liabilities were $9.147 million and stockholders’ equity was $9.635 million. The company had $1.876 million outstanding on its $5.0 million revolving line of credit, with $3.124 million of stated availability, subject to borrowing-base limitations. Term debt totaled $2.790 million, consisting primarily of a Bank Midwest term loan and three SBA Economic Injury Disaster Loans.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because of stronger Agricultural Products demand for grinder mixers, beet equipment, and service parts.
- Consolidated gross margin was substantially stable because improved Agricultural Products margins offset the Modular Buildings contract-related margin erosion and lower Tools margins.
- The net loss narrowed by $122,000, reflecting higher sales and lower general and administrative expenses.
- Operating cash flow changed from a $960,000 use to a $681,000 source, aided by collections of receivables and $1.179 million of customer deposits.
- Customer deposits increased to $1.377 million from $198,000, primarily related to the early order program. Contract liabilities increased to approximately $1.458 million from $276,000.
- Stock-based compensation expense increased to $62,054 from $37,580, and 93,500 restricted shares were issued during the quarter.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management reported the strongest Agricultural Products backlog in five years and expected improved second-quarter fiscal 2021 results. The company stated that strong backlogs were carried into the second quarter in two of its three segments.
- As of April 5, 2021, consolidated backlog was $6.997 million, compared with $7.395 million a year earlier. Agricultural Products backlog rose to $5.456 million from $2.699 million; Modular Buildings backlog declined to $1.205 million from $4.528 million; and Tools backlog increased to $336,000 from $168,000.
- Management expects some margin erosion from higher steel and other commodity prices and has increased prices to offset those costs. Supplier lead times have also increased.
- The company said COVID-19 had little effect on the first quarter but warned that future outbreaks could materially affect operations. Management cited vaccination efforts, improved economic conditions, and increased quoting activity in Modular Buildings as positive developments.
- The company was not in compliance with its $4.0 million minimum working-capital covenant at February 28, 2021. Bank Midwest allowed correction by May 31, 2021. Failure to remedy the issue or obtain acceptance of a corrective plan could result in default.
- The company had previously violated debt service coverage and minimum working-capital covenants at November 30, 2020; Bank Midwest waived those violations. The next annual covenant measurement is November 30, 2021.
- The $5.0 million revolving line of credit was renewed through March 30, 2022. The separate $4.0 million line supporting a letter of credit was renewed in February 2021 and was expected to close in the second quarter as bonding obligations were completed.
- A large Modular Buildings contract experienced unforeseen project issues and increased estimated completion costs, causing significant margin erosion. Investors should monitor final contract profitability and potential additional provisions.
- The company had no material pending legal proceedings, reported no off-balance-sheet arrangements, and stated that disclosure controls were effective as of February 28, 2021.
Important Facts for Investors to Verify
- Whether the company restored compliance with the $4.0 million working-capital covenant by May 31, 2021 and whether Bank Midwest accepted its remediation plan.
- The remaining profitability, cash requirements, and final settlement of the large Modular Buildings contract.
- Whether Agricultural Products backlog converts to revenue without material cancellations, discounts, production delays, or margin pressure.
- The effect of rising steel and lumber prices and extended supplier lead times on future gross margins and delivery schedules.
- The company’s ability to maintain sufficient liquidity despite only $3,890 of cash, ongoing losses, debt maturities, and reliance on revolving credit.
- The sustainability of the reported improvement in operating cash flow, including the effect of customer deposits and working-capital movements.
- The continuing effects of COVID-19, labor availability, vaccinations, and potential disruptions in the company’s Iowa and Ohio operations.