Art’s-Way Manufacturing Co., Inc. — FY2018 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended November 30, 2018, with comparative results for fiscal 2017. Art’s-Way manufactures specialized agricultural equipment, modular scientific and animal-containment buildings, and steel-cutting tools. Continuing operations comprise Agricultural Products, Modular Buildings, and Tools. The Company completed the liquidation of its Canadian subsidiary during fiscal 2018 and sold the remaining real estate of its discontinued Pressurized Vessels segment in March 2018.
Key financial metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales from continuing operations | $19.727 million | $20.715 million | Down 4.8% |
| Gross profit / margin | $3.512 million / 17.8% | $4.082 million / 19.7% | Margin down 190 bps |
| Operating loss from continuing operations | $(3.095) million | $(1.722) million | Loss increased $1.373 million |
| Net loss from continuing operations | $(3.336) million | $(1.369) million | Loss increased $1.967 million |
| Net loss, including discontinued operations | $(3.387) million | $(1.637) million | Loss increased $1.750 million |
| Basic and diluted loss per share | $(0.81) | $(0.39) | Worsened |
| Net cash used in operating activities | $(1.119) million | $0.747 million provided | Declined $1.866 million |
| Cash at year-end | $3,512 | $212,400 | Substantially lower |
Segment revenue was $14.344 million for Agricultural Products, $3.109 million for Modular Buildings, and $2.274 million for Tools. Each segment reported an operating loss: $2.462 million, $566,000, and $67,000, respectively.
At November 30, 2018, current assets were $12.145 million, current liabilities were $5.765 million, working capital was $6.380 million, and the current ratio was 2.11 versus 2.86 in 2017. Net inventory declined to $10.257 million from $11.967 million, while inventory reserves increased to $2.892 million from $2.621 million.
Total liabilities were $8.288 million, including $3.506 million outstanding under a $5.000 million revolving credit line and $2.750 million of term debt. Total stockholders’ equity was $13.037 million, down from $15.991 million.
Material changes versus the prior comparable period
- Agricultural Products revenue declined 6.9%, primarily because the Company ended passthrough beet-equipment sales and liquidated its Canadian operations. The segment margin declined to 17.4% from 18.1%, principally because of higher steel costs.
- Modular Buildings revenue increased 15.1% to $3.109 million, but gross margin fell to 12.0% from 18.3%, and the operating loss increased to $566,000.
- Tools revenue declined 12.8% because of the loss of a high-volume customer. Gross margin decreased to 28.2% from 30.6%.
- Consolidated operating expenses increased 13.8% to $6.607 million, reflecting higher expenses and one-time non-cash charges.
- The Company recorded a $375,000 impairment of Miller Pro goodwill, a $216,000 impairment of the West Union facility, approximately $543,000 of additional inventory reserves, and approximately $298,000 from revaluation of the deferred tax asset following the Tax Cuts and Jobs Act.
- The Canadian subsidiary liquidation resulted in a $253,000 release of cumulative foreign-currency translation adjustment through other income or expense.
- The discontinued Pressurized Vessels segment generated a $51,000 loss in 2018 versus a $268,000 loss in 2017.
Liquidity, debt and cash flow
Operating activities used $1.119 million of cash, while investing activities provided $707,000, primarily due to the sale of discontinued-segment assets. The Company spent $435,000 on property and equipment and $330,000 on assets held for lease. Financing activities provided $203,000, including a $1.043 million increase in the revolving line of credit.
The Bank Midwest revolving facility had $3.506 million outstanding and $1.494 million available at year-end. It bears interest at 6.50% at November 30, 2018, is payable on demand, and otherwise matured March 30, 2019. The Company also had a $2.518 million Bank Midwest term loan and $233,000 outstanding under an Iowa Finance Authority loan. The latter was repaid after the sale of the West Union facility.
The Company violated the debt-service-coverage-ratio covenant at November 30, 2018 under the Bank Midwest and Iowa Finance Authority arrangements. Bank Midwest issued a waiver, and the Iowa Finance Authority loan was paid off in December 2018. Management stated that no event of default had occurred and believed available cash, inventory sales, and financing arrangements would fund operations for the next 12 months.
Guidance, outlook, commentary and risks
Management did not provide quantified revenue or earnings guidance. Its stated strategy is to focus on core product lines, reduce inventory, implement lean manufacturing, retire debt, and improve profitability. Price increases were implemented to offset higher material costs. New agricultural products included expanded grinder-mixer capacity and new manure spreader models.
- Demand remains dependent on farm income, commodity prices, weather, crop conditions, government programs, interest rates, and agricultural customer financing.
- Steel and other raw-material costs pressured margins; supplier availability and international sourcing remain relevant risks.
- Dealer demand, OEM customer supply-chain decisions, seasonality, and the loss or concentration of major customers could affect revenue.
- Liquidity risk is elevated because cash was minimal, operations consumed cash, the revolving facility was payable on demand, and the Company had recently breached a debt covenant.
- Inventory valuation remains a significant estimate and may require additional write-downs if products remain slow-moving or demand assumptions deteriorate.
- Warranty costs, product liability claims, construction-contract estimates, environmental matters, and the realization of deferred tax assets could affect future results.
- The Company reported no material pending legal proceedings, no off-balance-sheet arrangements, and effective disclosure and internal control over financial reporting; the auditor did not provide an internal-control attestation because the Company qualifies as a smaller reporting company.
Important facts for investors to verify
- Whether the Company renewed or refinanced the revolving credit facility after its March 30, 2019 maturity and on what terms.
- Whether operating cash flow and liquidity improved sufficiently to support operations and scheduled debt payments.
- Progress in reducing excess inventory and the potential for further inventory or goodwill impairments.
- Whether material-price increases restored agricultural and consolidated gross margins.
- Recovery prospects for the Modular Buildings segment and replacement of the lost Tools customer.
- Actual effects of the 2019 revenue-recognition adoption and the later lease-accounting adoption.
- The recoverability of the $1.432 million deferred tax asset, including approximately $3.3 million of U.S. net operating losses and approximately $124,000 of tax credits.
- Future dividend policy; no dividends were paid in fiscal 2018 or 2017.