Art’s-Way Manufacturing Co., Inc. 2016 Form 10-K Summary
Business Context and Reporting Period
The filing covers the fiscal year ended November 30, 2016, and was filed February 2, 2017. Art’s-Way manufactures agricultural equipment, modular science and animal-containment buildings, and steel-cutting tools. Continuing operations comprise Agricultural Products, Modular Buildings, and Tools. The Pressurized Vessels segment was discontinued during the third quarter of fiscal 2016 and is reported as discontinued operations.
The company is a smaller reporting company listed on Nasdaq under “ARTW.” Approximately 73.1% of fiscal 2016 continuing-operation revenue came from Agricultural Products, 17.0% from Modular Buildings, and 9.9% from Tools. International sales represented 10.2% of consolidated sales.
Financial Performance and Key Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Continuing-operation sales | $21.558 million | $26.326 million | Down 18.1% |
| Gross profit | $5.320 million | $6.912 million | Down 23.0% |
| Gross margin | 24.7% | 26.3% | Down 160 bps |
| Operating loss from continuing operations | $(431,000) | $(77,000) | Loss increased |
| Net loss from continuing operations | $(426,000) | $(310,000) | Loss increased $116,000 |
| Net loss, including discontinued operations | $(821,000) | $(558,000) | Loss increased $263,000 |
| Basic and diluted loss per share | $(0.20) | $(0.14) | Unfavorable |
| Cash flow from operating activities | $2.382 million | $285,000 | Improved |
| Capital expenditures | $274,000 | $239,000 | Increased |
Operating expenses declined 17.7% to $5.751 million, aided by cost reductions and the absence of the $618,729 Universal Harvester goodwill impairment recorded in 2015. Interest expense was $249,000, compared with $302,000 in 2015. Fiscal 2016 operating cash flow benefited substantially from a $1.655 million inventory reduction and a $459,000 decrease in accounts receivable.
At November 30, 2016, cash was $1.064 million, current assets were $17.622 million, current liabilities were $7.057 million, working capital was $10.565 million, and the current ratio was 2.50. Total assets were $27.243 million and total liabilities were $9.766 million.
Segment Results and Material Changes
- Agricultural Products: Revenue fell 24.1% to $15.756 million, gross margin declined to 24.2% from 25.6%, and operating loss increased to $378,000 from $84,000. Management attributed the decline primarily to weak industry-wide agricultural equipment demand rather than loss of market share.
- Modular Buildings: Revenue increased 15.1% to $3.674 million, but operating income declined to $88,000 from $150,000 because higher operating expenses largely offset the revenue increase.
- Tools: Revenue declined 10.6% to $2.128 million, primarily due to weaker demand in the energy industry. Operating loss was $141,000 compared with $143,000 in 2015, aided by lower expenses.
- Pressurized Vessels: Revenue was $1.598 million, compared with $1.610 million in 2015. The segment reported a $617,000 pretax loss in 2016 and is being liquidated, with asset disposition expected during fiscal 2017.
- The company sold its Ames, Iowa facility in February 2016 for $1.192 million and recognized a $36,000 gain after closing expenses. It also sold a Monona storage facility and continued to hold a powder-coat system for sale, which was impaired by $44,858.
Debt, Liquidity, Outlook, and Risks
The company had a $5.0 million U.S. Bank revolving credit facility, with $3.284 million outstanding and $1.559 million of borrowing-base availability at November 30, 2016. Term debt totaled $3.911 million, including $1.808 million classified as current. Contractual obligations totaled $7.344 million, including $7.320 million of long-term debt obligations and interest.
Management stated that current cash and financing arrangements should provide sufficient liquidity for the next 12 months, while acknowledging continued reliance on financing to supplement operating cash flow. The revolving credit facility matured May 1, 2017 and several term loans required substantial payments during 2017 and 2018.
The company was in compliance with U.S. Bank covenants at year-end. It did not meet the Iowa Finance Authority loan’s 1.5-to-1 debt service coverage ratio for November 30, 2016, but the lender issued a waiver and no event of default occurred.
No formal earnings guidance was provided. Management expected weak agricultural market demand to continue through fiscal 2017. Key risks include farm income and commodity-price volatility, seasonality, dealer and OEM decisions, raw-material and steel prices, supplier availability, competition, declining demand for certain tools, warranty and product-liability exposure, covenant compliance, refinancing and liquidity needs, and the ability to liquidate Pressurized Vessels assets.
Backlog as of January 30, 2017 was approximately $5.263 million for Agricultural Products, $716,000 for Modular Buildings, and $135,000 for Tools. Management cautioned that backlog fluctuates and is not necessarily indicative of future revenue. The filing reports no material litigation, no off-balance-sheet arrangements, and effective disclosure and financial-reporting controls. Eide Bailly LLP issued an unqualified audit opinion on the consolidated financial statements.
Most Important Facts to Verify
- Verify the company’s ability to refinance or repay the revolving facility and term debt maturities, particularly the significant 2017 obligations.
- Monitor compliance with the Iowa Finance Authority debt service covenant after the 2016 waiver and assess the next measurement on November 30, 2017.
- Assess whether agricultural demand recovers or continues to pressure Agricultural Products revenue, margins, and inventory levels.
- Track the liquidation of Pressurized Vessels assets, including the remaining property, equipment, inventory, and related liabilities.
- Reconcile discontinued-operation amounts: the filing reports a $617,000 pretax loss from discontinued operations in the consolidated statements, while the MD&A separately references a $598,000 operating loss.
- Evaluate the quality and sustainability of 2016 operating cash flow, which benefited materially from inventory reductions and asset sales.
- Review deferred-tax-asset realizability, including the approximately $75,000 reserve recorded against Canadian net operating loss benefits.