Business Context and Reporting Period
Art’s-Way Manufacturing Co., Inc. is an agricultural equipment manufacturer with three reportable segments: agricultural products, pressurized vessels, and modular buildings. This unaudited Form 10-Q covers the three and nine months ended August 31, 2012, compared with the same periods in 2011, and the balance sheet is compared with November 30, 2011.
On May 10, 2012, the Company acquired the assets of Universal Harvester Co., Inc. for approximately $3.1 million, including $3.0 million of cash and 5,000 shares of common stock. The acquired pickup-reel operations are included in the agricultural products segment.
Key Financial Metrics
| Metric | Three Months Ended August 31 | Nine Months Ended August 31 |
|---|---|---|
| Net sales | $11.5 million, versus $9.3 million | $29.5 million, versus $21.8 million |
| Gross profit | $3.4 million, versus $2.7 million | $8.1 million, versus $5.1 million |
| Gross margin | 29.7%, versus 29.3% | 27.3%, versus 23.6% |
| Income from operations | $1.6 million, versus $1.4 million | $3.5 million, versus $1.3 million |
| Net income | $979,451, versus $1.0 million | $2.1 million, versus $826,002 |
| Diluted earnings per share | $0.24, versus $0.25 | $0.52, versus $0.20 |
Quarterly net income declined modestly despite higher sales and gross profit, primarily reflecting increased general and administrative expense, including management bonus accruals. Interest expense was $129,751 for the quarter and $331,817 year-to-date.
Cash Flow, Liquidity, Debt and Balance Sheet
- Cash provided by operating activities was $2.2 million for the nine months, compared with $851,518 in the prior-year period.
- Investing cash use was $3.5 million, including $3.0 million for the Universal Harvester acquisition and $533,123 for property, plant and equipment.
- Financing activities provided $1.5 million. The Company borrowed $2.9 million of term debt, repaid $746,565 of line-of-credit borrowings and $596,753 of term debt, and had $642,400 outstanding under its revolving line of credit at August 31, 2012.
- Cash increased to $335,836 from $118,924 at November 30, 2011.
- Total assets were $32.9 million and stockholders’ equity was $16.9 million at August 31, 2012.
- Accounts receivable increased to $6.2 million from $2.0 million, while inventory increased to $13.7 million from $13.2 million.
- Total term debt was $8.7 million, including $1.15 million classified as current. Total liabilities were $16.0 million.
- The Company had a $6.0 million revolving credit facility scheduled to mature April 30, 2013, with approximately $5.4 million available at August 31, 2012. Management stated that current financing arrangements are expected to provide sufficient cash for operations for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Consolidated sales increased 24.7% for the quarter and 35.7% year-to-date.
- Agricultural products sales increased 5.2% for the quarter and 11.5% year-to-date, including approximately $2.0 million of year-to-date sales attributable to Universal Harvester.
- Pressurized vessels sales increased 40.4% for the quarter and 10.5% year-to-date. Its year-to-date gross margin improved to 5.9% from negative 6.0%.
- Modular buildings sales increased 159.0% for the quarter and approximately $5.5 million year-to-date, driven primarily by large contracts executed in January and April 2012. Its year-to-date gross margin improved to 27.6% from 15.6%.
- Consolidated selling expense decreased year-to-date, and engineering expense declined. General and administrative expense increased 43.2% year-to-date to $3.1 million.
- Order backlog increased to $4.7 million at August 31, 2012, from $2.6 million at August 31, 2011, primarily due to modular buildings backlog of $2.8 million versus $574,030.
Guidance, Outlook, Risks and Unusual Items
Management stated that Universal Harvester is expected to be accretive to fiscal 2012 earnings and that the Company expects to continue relying on financing activities to supplement operating cash flow. No formal revenue or earnings guidance was provided.
- Backlog is not necessarily indicative of future revenue because of potential cancellations and dealer discount arrangements.
- Risks include tightening credit markets, debt-servicing and covenant compliance, renewal of the revolving credit facility, integration of Universal Harvester, general economic conditions, material and supply costs, production delays, and the ability to retain customers in the vessels and modular buildings segments.
- The Company remains subject to financial covenants, including minimum debt-service coverage, maximum debt-to-tangible-net-worth, and minimum tangible net worth requirements. Management reported compliance as of August 31, 2012; the next measurement date is November 30, 2012.
- Warranty accrual increased to $497,798 from $250,783 one year earlier. Management noted that future warranty costs could exceed historical amounts.
- Chief Financial Officer Jason D. Feucht resigned effective September 5, 2012. The Chief Executive Officer became interim CFO, and the Company stated that this change had not materially affected, or was reasonably likely to materially affect, internal controls.
- The filing states that there were no material pending legal proceedings, defaults upon senior securities, or material subsequent events requiring disclosure.
- The filing checkbox indicates that the Company had not filed all reports required during the preceding 12 months; the filing does not explain the reason.
Facts Investors Should Verify
- Timing and terms of renewal or refinancing of the $6.0 million revolving credit facility maturing April 30, 2013.
- Compliance with debt covenants at the November 30, 2012 measurement date.
- Integration progress, profitability, and final purchase-price allocation for Universal Harvester.
- Revenue recognition, cost estimates, and remaining obligations under the approximately $7.0 million and $1.7 million modular-building contracts.
- Collectibility of the sharply increased accounts receivable balance and adequacy of inventory and warranty reserves.
- Whether the CFO transition affects financial reporting controls or management oversight.
- The reason for the filing’s indication that required prior-period reports had not all been filed.