Business Context and Reporting Period
Art’s-Way Manufacturing Co., Inc. filed this unaudited Form 10-Q for the quarter and six months ended May 31, 2024. The company manufactures agricultural equipment and replacement parts and modular buildings. Reportable segments are Agricultural Products and Modular Buildings. The Tools segment was discontinued in fiscal 2023 and is presented as discontinued operations for all periods.
Financial Results and Metrics
| Metric | Three Months Ended May 31, 2024 | Six Months Ended May 31, 2024 |
|---|---|---|
| Continuing-operations sales | $6.730 million | $12.454 million |
| Gross profit | $1.907 million | $3.380 million |
| Gross margin | 28.3% | 27.1% |
| Operating income (loss) | $0.169 million | $(0.211) million |
| Income (loss) from continuing operations | $(0.005) million | $(0.429) million |
| Net income (loss), including discontinued operations | $(0.033) million | $(0.498) million |
| Basic net income (loss) per share | $(0.01) | $(0.10) |
- Operating cash flow was $1.196 million from continuing operations and $1.148 million including discontinued operations for the first six months, compared with cash used of $0.897 million and $0.623 million, respectively, in the prior-year period.
- Capital expenditures were $0.513 million, resulting in total cash of $4,487 at May 31, 2024, compared with $4,014 at November 30, 2023.
- Working capital was approximately $4.910 million, based on current assets of $13.622 million and current liabilities of $8.712 million.
- Accounts receivable were $2.647 million and net inventory was $10.497 million. Gross inventory was $12.652 million, offset by reserves of $2.155 million.
- The $5.5 million revolving credit facility had an outstanding balance of $3.950 million and $1.550 million of remaining availability, subject to borrowing-base limits. The stated interest rate was 9.25%, and the facility matures March 30, 2025.
- Term debt from continuing operations totaled $2.685 million, including the current portion. Finance lease liabilities totaled $0.902 million. Total liabilities were $11.938 million and stockholders’ equity was $11.233 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 18.2% year over year, while six-month sales declined 18.7%. Agricultural Products sales fell 28.5% in the quarter and 25.6% year to date, reflecting weaker farm income expectations, lower crop prices and high interest rates.
- Modular Buildings sales increased 17.2% in the quarter and 4.7% year to date, driven by two large research projects.
- Second-quarter gross margin improved to 28.3% from 26.6%, but six-month gross margin declined to 27.1% from 28.5%. Modular Buildings margins improved substantially because research projects generally carry higher margins.
- Six-month operating results deteriorated from $0.976 million of operating income in 2023 to a $0.211 million operating loss in 2024. Administrative expense increased 18.3% to $2.464 million, primarily due to additional accounting and human-resources staff, approximately $188,000 of early-retirement incentives, higher information-technology costs and cloud-computing amortization.
- Interest expense increased to $0.322 million from $0.259 million for the first six months, contributing to the continuing-operations loss.
- Cash flow improved principally from collections of floorplan receivables, lower inventory and favorable billings on Modular Buildings contracts. Accounts payable decreased by $1.237 million, partially offsetting those benefits.
- The company repurchased $37,654 of common stock during the first six months and issued shares under its equity incentive plan, resulting in 5,184,172 common shares issued and 112,714 treasury shares at May 31, 2024.
Guidance, Outlook, Risks and Unusual Items
- Backlog as of July 8, 2024 was $7.867 million, down 23.1% year over year. Agricultural Products backlog declined 80.1% to $1.348 million, while Modular Buildings backlog increased 87.8% to $6.519 million.
- Management expects continued pressure on Agricultural Products from lower farm income, weaker crop prices, high interest rates and reduced dealer inventory. It is pursuing cost reductions, inventory reduction, debt retirement, automation, production efficiencies and additional dealer relationships.
- Management expects Modular Buildings sales to increase sequentially through the remainder of fiscal 2024 because of its backlog, particularly research-related projects. The filing does not provide quantitative full-year revenue or earnings guidance.
- Management expects cash sources to include floorplan receivable collections, sales, inventory reductions, the potential sale of Tools-segment real estate and approximately $1.2 million of net Employer Retention Credit refunds. The timing of the real-estate sale and refunds is unknown.
- The company believes its financing arrangements will fund operations and debt payments for the next twelve months, but cash on hand is very low relative to operating needs and the revolving facility matures in March 2025.
- Bank covenants include a minimum monthly working capital requirement and other financial requirements measured primarily on November 30. The company was previously out of compliance with its debt-to-worth ratio as of November 30, 2023; Bank Midwest waived the violation and removed that requirement in the March 2024 renewal.
- The Tools segment generated no revenue in the first six months of 2024 and incurred a $69,465 after-tax loss. Tools-related real estate remains held for sale. The company must repay the related $158,971 EIDL balance and the $330,863 Roof Term Loan if the Tools real estate is sold.
- Key risks include agricultural demand, commodity and farm-income volatility, interest rates, raw-material costs including steel, supplier availability, seasonal demand, credit losses, order cancellations, refinancing and covenant compliance. The company reported no material pending legal proceedings.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether Agricultural Products demand and backlog continue to decline and whether inventory reserves of $2.155 million are adequate.
- Whether the Modular Buildings backlog converts to revenue and cash as expected, including the timing and profitability of research projects.
- The company’s ability to maintain liquidity, reduce inventory, collect floorplan receivables and refinance or renew the revolving credit facility before March 30, 2025.
- The timing and collectability of the approximately $1.2 million Employer Retention Credit refunds and proceeds from the sale of Tools-segment real estate.
- Whether cost reductions and workforce actions offset lower sales, higher interest expense and elevated administrative costs.
- Compliance with remaining Bank Midwest covenants at the November 30, 2024 measurement date and the effect of the discontinued Tools obligations on cash requirements.