Art’s-Way Manufacturing Co., Inc. — Q1 2013 Form 10-Q Summary
Reporting period: Three months ended February 28, 2013, compared with the three months ended February 29, 2012. The financial statements are unaudited. Art’s-Way manufactures agricultural equipment, pressurized vessels, and modular buildings. The company also included a full quarter of operations from its May 2012 acquisition of Universal Harvester Co., Inc.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $8.415 million | $6.312 million | Up 33.3% |
| Gross profit | $2.369 million | $1.476 million | Up 60.5% |
| Gross margin | 28.2% | 23.4% | Up 4.8 percentage points |
| Income from operations | $713 thousand | $362 thousand | Up 96.8% |
| Income before taxes | $1.261 million | $289 thousand | Up 336.0% |
| Net income | $819 thousand | $193 thousand | Up 323.4% |
| Basic and diluted EPS | $0.20 | $0.05 | Increased |
- Operating margin was approximately 8.5%, compared with 5.7% in the prior-year quarter. Net margin was approximately 9.7%, compared with 3.1%.
- Cash increased to $3.571 million from $1.547 million at November 30, 2012. Total current assets were $21.889 million and current liabilities were $6.931 million.
- Net cash provided by operating activities was $1.606 million, compared with $713 thousand in Q1 2012. Customer deposits contributed significantly to operating cash flow.
- Investing activities provided $691 thousand, including $836 thousand of proceeds from the sale of land and a former facility, partially offset by $144 thousand of capital expenditures.
- Financing activities used $272 thousand, primarily for term-debt repayments. The company had no balance drawn on its $6.0 million revolving line of credit.
- Total term debt was $8.194 million at February 28, 2013, including $1.181 million classified as current. Long-term debt, excluding the current portion, was $7.013 million.
Material changes versus the prior comparable period
- Agricultural products revenue increased 75.6% to $7.004 million. Management attributed the increase primarily to $1.221 million of Universal Harvester sales and $1.177 million related to OEM sales timing. Segment gross margin improved to 28.0% from 26.3%.
- Pressurized vessels revenue increased 19.4% to $394 thousand, but the segment remained unprofitable, with a negative gross margin of 12.5%.
- Modular buildings revenue decreased 49.0% to $1.017 million following substantial completion of large contracts recognized largely during 2012. Segment gross margin improved to 44.9% from 23.5% as project costs were finalized.
- General and administrative expense increased to $1.064 million from $662 thousand, primarily due to management bonus accruals and incremental Universal Harvester costs.
- Other income included a $630 thousand pre-tax gain from the sale of excess Armstrong, Iowa land and the Salem, South Dakota facility. Management stated that the gain was the primary reason for the increase in net income.
- Consolidated backlog was $9.603 million at March 31, 2013, down from $13.810 million at March 31, 2012. The decline primarily reflected completion of the large modular-buildings contract; agricultural backlog increased to $8.729 million.
Guidance, outlook, risks, and unusual items
- Management did not provide formal quantitative revenue or earnings guidance. It stated that existing financing arrangements were expected to provide sufficient cash for operations over the next twelve months and that financing was expected to remain available on reasonable terms.
- The $6.0 million revolving credit facility was scheduled to mature on April 30, 2013. The company was assessing whether renewal was necessary. No balance was outstanding at quarter-end.
- The company reported that its debt service coverage ratios were below the minimum required under the West Bank and Iowa Finance Authority agreements as of February 28, 2013. The company stated that it remained in compliance because the covenants are measured annually, with the next measurement date on November 30, 2013.
- Debt agreements are secured by company assets and contain financial, reporting, default, and change-of-control covenants. A default could permit lenders to stop advances or accelerate repayment.
- Key risks identified by management include credit-market conditions, the ability to meet debt obligations and covenants, Universal Harvester integration, economic conditions affecting demand and input costs, production delays, customer retention, and continued losses in the pressurized vessels segment.
- The Iowa Finance Authority loan interest rate was reduced from 3.5% to 2.75% effective February 1, 2013.
- Warranty liabilities were $575 thousand at February 28, 2013, compared with $184 thousand a year earlier. Management cautioned that future warranty costs could exceed historical levels.
- No material pending legal proceedings, off-balance-sheet arrangements, defaults upon senior securities, or reportable subsequent events were disclosed. Management concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether the revolving credit facility was renewed after its April 30, 2013 maturity date and on what terms.
- Whether the company met its annual debt-service coverage and other financial covenants at the November 30, 2013 measurement date.
- How much of Q1 earnings and operating cash flow was attributable to the nonrecurring $630 thousand asset-sale gain and customer deposits.
- Whether pressurized vessels can reach positive gross margins and whether modular-building revenue normalizes after completion of the major 2012 contracts.
- The sustainability of the agricultural-products growth, including the contribution from Universal Harvester and OEM order timing.
- Whether the reduced backlog, particularly the sharp decline in modular-building backlog, affects subsequent revenue and capacity utilization.
- The adequacy of inventory reserves and warranty accruals, and the company’s ability to service approximately $8.2 million of term debt.