Art’s-Way Manufacturing Co., Inc. — Form 10-Q Summary
Business Context and Reporting Period
Art’s-Way manufactures agricultural equipment and related parts, modular buildings, and steel cutting tools through its Agricultural Products, Modular Buildings, and Tools segments. The filing covers the unaudited three months ended February 28, 2019, compared with the three months ended February 28, 2018. The former Vessels segment is presented as discontinued operations.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Sales | $4.124 million | $5.366 million |
| Gross profit | $605 thousand | $1.120 million |
| Gross margin | 14.7% | 20.9% |
| Income (loss) from operations | $(723) thousand | $(309) thousand |
| Loss from continuing operations | $(606) thousand | $(527) thousand |
| Net loss | $(606) thousand | $(566) thousand |
| Basic and diluted loss per share | $(0.14) | $(0.14) |
| Cash flow from operating activities | $(713) thousand | $495 thousand |
| Capital expenditures | $53 thousand | $64 thousand |
At February 28, 2019, cash was $3 thousand, total current assets were $12.703 million, and total assets were $20.903 million. Current liabilities were $6.002 million, including a $3.642 million revolving line-of-credit balance. Term debt totaled $2.498 million, of which $83 thousand was current. Stockholders’ equity was $12.486 million.
Cash decreased by approximately $267 during the quarter. Investing activities provided $841 thousand, primarily from $894 thousand of proceeds from asset sales, including the December 2018 sale of the West Union facility for $900 thousand. Financing activities used $128 thousand, reflecting $253 thousand of term-debt repayments, partially offset by a $136 thousand increase in the line of credit.
Material Changes Versus the Prior Comparable Period
- Sales declined 23.1%, primarily because of weaker agricultural demand and the liquidation of the Canadian subsidiary. Agricultural Products revenue fell 33.6% to $2.610 million; Tools revenue fell 29.4% to $492 thousand.
- Modular Buildings revenue increased 38.3% to $1.022 million, supported by lease revenue and higher agricultural building sales, but its gross margin declined to 11.7% from 15.7%.
- Consolidated gross margin declined to 14.7% from 20.9%, largely because lower sales reduced absorption of fixed overhead and because of higher modular-building depreciation and staffing costs.
- Operating loss more than doubled to $723 thousand. Selling expense decreased to $343 thousand, while engineering expense increased to $147 thousand and administrative expense was broadly stable at $837 thousand. Administrative expense rose to 20.3% of sales from 15.8%.
- Operating cash flow shifted from $495 thousand provided to $713 thousand used, driven in part by increases in accounts receivable and other assets and a $463 thousand use related to contracts in progress.
- Interest expense increased to $85 thousand from $70 thousand. Q1 2018 included a $298 thousand deferred-tax remeasurement charge associated with the Tax Cuts and Jobs Act; Q1 2019 recorded a $175 thousand income-tax benefit.
- The Company adopted ASC 606 using the modified retrospective method effective December 1, 2018. Management stated that adoption had no material impact and did not require a retained-earnings adjustment.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide formal quantitative earnings or revenue guidance. It expects primary capital needs during the remainder of fiscal 2019 to include operating costs, production, and debt retirement, and believes operating cash flows and current financing arrangements will be sufficient for the next twelve months.
Backlog at April 4, 2019 was $10.233 million, compared with $4.186 million at April 4, 2018. Modular Buildings represented $7.976 million, including an approximately $8.4 million modular research facility scheduled for completion in 2019. Agricultural Products backlog declined to $2.064 million from $3.578 million. Management cautioned that backlog is not necessarily indicative of future revenue because of possible cancellations and dealer discounts.
The $5.0 million Bank Midwest revolving line had $3.642 million outstanding and $1.358 million of remaining availability at February 28, 2019. It was renewed on March 30, 2019 and is scheduled to mature March 30, 2020. A separate $4.0 million revolving facility opened in February 2019 to support bonding obligations for a large modular laboratory project; funds remained undisbursed and were held by the bank in connection with an irrevocable letter of credit.
Bank Midwest covenants include minimum working capital and liquidity ratios, maximum debt-to-worth and minimum tangible-equity requirements, and a debt-service-coverage requirement. The Company was not in compliance with the debt-service-coverage ratio at November 30, 2018, but received a waiver and reported no event of default. Future risks include weak agricultural demand, commodity prices, steel and other input costs, seasonality, financing availability, debt repayment, covenant compliance, and potential order cancellations.
The Company reported no material pending legal proceedings, no defaults upon senior securities, and no off-balance-sheet arrangements. Warranty liabilities were $26 thousand at February 28, 2019. The Company expects to adopt the new lease standard in fiscal 2020 and was evaluating its impact.
Important Facts for Investors to Verify
- Whether the large modular research facility progresses on schedule and converts the reported backlog into revenue and cash flow.
- Whether agricultural demand, pricing, steel costs, and fixed-cost absorption allow Manufacturing gross margins to recover.
- Whether operating cash flow improves from the reported $713 thousand use and supports debt repayment without increased borrowing.
- Availability, renewal terms, interest rates, and covenant compliance for the Bank Midwest credit facilities, including the demand feature on the revolving line.
- Potential effects of order cancellations, dealer discounts, warranty costs, and customer deposits on reported revenue and liquidity.
- The impact of the fiscal 2020 lease-accounting adoption on assets, liabilities, and covenants.