Art’s-Way Manufacturing Co., Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six-month period ended May 31, 2016. Art’s-Way manufactures agricultural equipment, pressurized vessels, modular buildings and steel cutting tools through four operating segments. The company is headquartered in Armstrong, Iowa, and reported 4,105,052 common shares outstanding as of June 14, 2016.
Financial performance and position
| Metric | Three months ended May 31, 2016 | Three months ended May 31, 2015 | Six months ended May 31, 2016 | Six months ended May 31, 2015 |
|---|---|---|---|---|
| Sales | $5.741 million | $7.804 million | $12.133 million | $15.093 million |
| Gross profit | $1.500 million | $2.208 million | $3.202 million | $4.260 million |
| Gross margin | 26.1% | 28.3% | 26.4% | 28.2% |
| Income from operations | $(33,000) | $414,000 | $116,000 | $743,000 |
| Net income | $(56,571) | $231,621 | $24,401 | $399,816 |
| Diluted EPS | $(0.01) | $0.06 | $0.01 | $0.10 |
- Six-month operating cash flow was $2.191 million, compared with $306,000 in the prior-year period. The improvement primarily reflected a $1.206 million reduction in inventories and a $513,000 reduction in accounts receivable.
- Investing activities provided $1.101 million, including $1.171 million of net proceeds from asset sales. Capital expenditures were $70,000.
- Financing activities used $3.472 million, including $1.858 million of line-of-credit repayments and $1.614 million of term-debt repayments. No dividends were paid in the first six months of 2016.
- Cash declined to $267,506 at May 31, 2016 from $447,334 at November 30, 2015.
- Total assets were $27.995 million, compared with $31.332 million at November 30, 2015. Current assets were $18.099 million, including $14.493 million of inventory.
- Total debt consisted of $2.102 million outstanding under the principal revolving line of credit and $4.335 million of term debt. Total liabilities were $9.412 million, compared with $12.812 million at November 30, 2015.
Material changes versus the prior comparable period
- Second-quarter sales decreased 26.4%, and year-to-date sales decreased 19.6%, primarily because of lower demand for agricultural products.
- Agricultural Products sales declined 44.0% in the quarter and 33.5% year to date. The segment shifted production from the sold Ames facility to Armstrong.
- Scientific sales increased 205.6% in the quarter and 107.3% year to date, with improved gross margins from higher fixed-cost absorption.
- Vessels’ quarterly gross margin declined to 3.6% from 16.2%, primarily because of employee training. Metals sales also declined, which management attributed largely to weakness in the energy industry.
- Selling, engineering and administrative expenses decreased in absolute dollars, but administrative expense increased as a percentage of sales to 17.3% in the quarter from 14.0%.
- The Ames, Iowa production facility was sold on February 10, 2016 for $1.192 million, producing a gain of approximately $36,000. Proceeds were used to repay term debt.
- The company voluntarily repaid and terminated a U.S. Bank term loan in February 2016 with a payoff of $1.078 million.
Guidance, outlook, risks and unusual items
- Management stated that agricultural demand remained weak and that order volume continued to decline. The filing does not provide formal revenue or earnings guidance.
- The filing reports consolidated order backlog as of July 8, 2016 as “$,335,000”; the source text does not provide a clear value. Segment backlogs were $2.533 million for Agricultural Products, $175,000 for Vessels, $528,000 for Scientific and $98,000 for Metals.
- The company failed its U.S. Bank fiscal-year-to-date EBITDA covenant requiring at least $700,000 as of May 31, 2016. U.S. Bank waived the non-compliance under a July 12, 2016 Second Loan Modification and stated that no event of default occurred.
- The Second Loan Modification reduced the main revolving line’s availability from $6.0 million to $5.0 million, reduced the borrowing-base limit from $4.0 million to $3.75 million, increased the minimum interest rate from 4.50% to 5.00%, and added minimum liquidity requirements beginning August 31, 2016.
- The amended arrangements require specified EBITDA thresholds through November 30, 2016, a minimum liquidity level of $750,000 beginning August 31, 2016, and weekly 13-week cash-flow forecasts.
- The main revolving line and the 2015 line mature May 1, 2017. Two U.S. Bank term loans also mature in May 2017, including final payments of approximately $283,500 and $890,000.
- Management believes operating cash flow and financing arrangements will fund operations for the next twelve months, but expects to continue relying on financing activities. Key risks include weak agricultural demand, seasonal fluctuations, financing availability, debt covenant compliance, material costs and potential warranty costs.
- The company reported no material pending legal proceedings, no off-balance-sheet arrangements and no material changes in internal controls. Disclosure controls were deemed effective.
Important facts for investors to verify
- Confirm the correct consolidated backlog figure as of July 8, 2016, which is unclear in the filing text.
- Review the complete July 12, 2016 Second Loan Modification, including covenant thresholds, liquidity tests, collateral and maturity provisions.
- Assess refinancing and liquidity needs associated with the May 2017 line-of-credit and term-loan maturities.
- Evaluate whether agricultural demand and the company’s backlog are sufficient to restore operating profitability.
- Monitor Vessels’ low gross margin, Scientific’s backlog and performance, and the effect of production consolidation in Armstrong.
- Verify the adequacy of inventory reserves, warranty accruals and the company’s assumptions supporting its liquidity outlook.