Art’s-Way Manufacturing Co., Inc. — Form 10-K Summary
Reporting period: Fiscal year ended November 30, 2017. The filing is an annual report, although the request identifies the period as 2017 Q4. Art’s-Way is a smaller reporting company that manufactures agricultural equipment, modular buildings and industrial cutting tools. The Pressurized Vessels segment was discontinued in 2016 and is reported as discontinued operations.
Business Context
- Agricultural Products: 74.4% of 2017 continuing-operations revenue; farm machinery, feed-processing equipment, hay and forage equipment, augers, manure spreaders, tillage equipment and sugar beet harvesting products.
- Modular Buildings: 13.0% of revenue; custom modular buildings for agricultural, research, laboratory and containment applications.
- Tools: 12.6% of revenue; carbide-tipped tools, PCD and CBN inserts and tools.
- International sales represented 7.1% of consolidated sales. No customer accounted for more than 4% of consolidated revenue.
Financial Performance and Position
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Continuing-operations sales | $20.715 million | $21.558 million | Down 3.9% |
| Gross profit | $4.082 million | $5.320 million | Down $1.238 million |
| Gross margin | 19.7% | 24.7% | Down 5.0 percentage points |
| Operating loss from continuing operations | $(1.722) million | $(0.431) million | Loss increased $1.291 million |
| Net loss from continuing operations | $(1.369) million | $(0.426) million | Loss increased $0.943 million |
| Discontinued-operations loss | $(0.268) million | $(0.395) million | Improved $0.127 million |
| Net loss | $(1.637) million | $(0.821) million | Loss increased $0.816 million |
| Basic and diluted loss per share | $(0.39) | $(0.20) | Worsened $0.19 |
- Agricultural Products revenue decreased 2.2% to $15.407 million; operating loss increased to $1.381 million from $0.378 million. New products had lower initial margins and reduced production efficiency, while excess whole goods were sold at reduced margins.
- Modular Buildings revenue decreased 26.5% to $2.700 million, and the segment moved from $88,000 of operating income to a $313,000 operating loss.
- Tools revenue increased 22.6% to $2.608 million. Gross margin increased to 30.6% from 24.9%, but higher selling and commission costs left the segment with a $28,000 operating loss.
- Consolidated operating expenses increased modestly to $5.804 million from $5.751 million. Fiscal 2017 included a $70,000 impairment of a paint booth and $183,000 of research and development expense.
Cash Flow, Liquidity and Debt
- Net cash provided by operating activities was $747,000, including $730,000 from continuing operations, compared with $2.382 million in 2016. Inventory reductions provided $1.563 million of operating cash, partly offset by a $500,000 increase in accounts receivable.
- Capital expenditures were $514,000, compared with $274,000 in 2016. Ending cash was $212,000, down from $1.064 million.
- Working capital was $9.383 million versus $10.565 million, while the current ratio improved to 2.86 from 2.50. Management attributed part of the working-capital decrease to the prospective adoption of ASU 2015-17 and debt reclassification.
- The September 2017 Bank Midwest refinancing included a $5.000 million revolving line, a $2.600 million term loan due in 2037 and a $600,000 term loan due in 2019. At November 30, 2017, the revolver balance was $2.463 million and approximately $2.537 million remained available, subject to borrowing-base limits.
- Total term debt was $3.569 million, and total liabilities were $8.389 million, down 14.1% from 2016. The Iowa Finance Authority loan had an outstanding balance of approximately $375,000.
- The Company was not in compliance with debt-service-coverage-ratio covenants at year-end. Bank Midwest and the relevant Iowa lender issued waivers, and management stated that no event of default had occurred.
- Management believes existing cash and financing arrangements are sufficient for the next 12 months, but expects to continue relying on financing to supplement operating cash flow.
Material Changes, Outlook and Unusual Items
- Management expects weak agricultural demand to continue through fiscal 2018, citing depressed farm income and broader market conditions rather than a perceived loss of market share.
- Backlog as of January 29, 2018 was approximately $4.214 million in Agricultural Products, $151,000 in Modular Buildings and $121,000 in Tools. Backlog is subject to cancellations, fulfillment timing and dealer discounts and is not necessarily indicative of future revenue.
- The Pressurized Vessels segment generated no revenue in 2017. In January 2018, the Company accepted an offer of $1.500 million for remaining real estate assets and recorded a $289,000 impairment; closing was expected in the second quarter of fiscal 2018.
- The Agro Trend product line was sold on December 15, 2017, and the Company vacated the related Canadian facility at December 31, 2017.
- The Company adopted accounting guidance affecting inventory measurement and deferred-tax classification. A new U.S. tax law enacted in December 2017 was expected to reduce the reported deferred-tax asset by approximately $300,000 in the first quarter of fiscal 2018.
- Principal risks include continued agricultural weakness, commodity-price and weather exposure, seasonality, raw-material costs, supplier availability, customer and dealer conditions, product-liability and warranty claims, debt refinancing and covenant compliance, and the ability to liquidate discontinued-segment assets.
- The independent auditor issued an unmodified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation because the Company qualifies for the applicable smaller-reporting-company exemption.
Investor Verification Checklist
- Verify the Company’s ability to maintain debt covenants and renew or replace the revolving line, which was payable on demand and had a stated March 1, 2018 maturity absent earlier demand.
- Review post-year-end proceeds and final accounting for the Pressurized Vessels asset disposition and the Agro Trend sale.
- Assess whether agricultural demand, product mix and production efficiency improve enough to restore gross margins.
- Reconcile the reported $747,000 of operating cash flow with the Company’s inventory-reduction strategy and recurring cash-generation capacity.
- Evaluate the realizability of deferred-tax assets, including the estimated $300,000 reduction from the 2017 tax-law change.
- Review backlog quality, customer deposits, percentage-of-completion estimates and potential contract losses in the Modular Buildings segment.
- Confirm warranty exposure, inventory reserves of $2.621 million and the sustainability of the $11.967 million net inventory balance.