Art’s-Way Manufacturing Co., Inc. — Q1 FY2023 Form 10-Q Summary
Business context and reporting period
Art’s-Way Manufacturing is an agricultural equipment manufacturer with three reportable segments: Agricultural Products, Modular Buildings, and Tools. The unaudited quarterly filing covers the three months ended February 28, 2023, compared with the three months ended February 28, 2022. The company is a smaller reporting company and reported no material pending legal proceedings.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Sales | $7.895 million | $5.613 million | +40.7% |
| Gross profit | $2.349 million | $1.192 million | +97.1% |
| Gross margin | 29.8% | 21.2% | +8.6 percentage points |
| Income from operations | $548,587 | $(436,876) | Improved |
| Net income | $342,210 | $(406,489) | Improved |
| Net margin | Approximately 4.3% | Approximately (7.2%) | Improved |
| Basic and diluted EPS | $0.07 | $(0.09) | Improved |
| Net cash provided by operations | $1.269 million | $1.169 million | +8.5% |
| Capital expenditures | $313,657 | $174,133 | Higher |
Segment sales were $5.445 million in Agricultural Products, $1.642 million in Modular Buildings, and $808,000 in Tools. Segment operating income was approximately $502,000, $42,000, and $5,000, respectively.
At February 28, 2023, cash was only $4,012. Accounts receivable were $3.666 million, net inventory was $11.605 million, and total current assets were $15.809 million. Total assets were $25.605 million and stockholders’ equity was $11.541 million.
Total current liabilities were $10.609 million, including a $3.056 million revolving credit balance, $2.797 million of customer deposits, $2.503 million of accounts payable, and $2.974 million of total term debt, of which $100,140 was current. Finance lease liabilities totaled $730,912.
Operating cash flow benefited materially from approximately $1.969 million of additional customer deposits and was offset in part by increases of approximately $945,000 in accounts receivable and $966,000 in inventory. Financing activities used $958,883, including an $868,941 reduction in the line of credit, $42,055 of finance lease principal payments, $27,553 of term debt repayment, and $20,334 of stock repurchases or share withholding.
Material changes versus the prior comparable period
- Sales increased 40.7%, with growth in all three segments.
- Agricultural Products sales rose 30.9%; management attributed the improvement to strong demand, manufacturing efficiency, improved product availability, rebranding, and customer-experience initiatives.
- Modular Buildings sales rose 89.2%, supported by project work in the agricultural and research markets. Management stated that the current backlog contains more research buildings, which generally carry better margins.
- Tools sales rose 38.4%, supported by a more stable workforce, automation, and prior price increases.
- Gross margin improved to 29.8% from 21.2%. Management cited lower steel prices during part of the period, price increases, higher volume, and improved absorption of fixed costs.
- Selling expenses increased to $594,000, while engineering expenses declined slightly to $128,000 and general and administrative expenses increased to $1.078 million. Expenses declined as a percentage of sales.
- The Tools segment recorded an approximately $18,000 inventory write-off and reported a small pretax loss despite operating income.
- Inventory increased from $10.612 million at November 30, 2022 to $11.605 million at February 28, 2023. Accounts receivable increased from $2.722 million to $3.666 million.
- Total debt declined from approximately $6.927 million at November 30, 2022, consisting of the line of credit and term debt, to approximately $6.030 million at February 28, 2023, excluding lease liabilities.
Guidance, outlook, risks, contingencies, and unusual items
Backlog as of April 5, 2023 was $13.042 million, up 16% from $11.210 million a year earlier. Agricultural Products backlog was $8.370 million, Modular Buildings backlog was $4.203 million, and Tools backlog was $469,000. Management expects Modular Buildings to be stronger in fiscal 2023, supported by a large research project, and expects Tools demand and production to remain steady. Backlog is not necessarily indicative of future revenue because of possible cancellations and dealer discounts.
Management expects steel, overhead, and component costs to increase and cautioned that recent steel price increases could pressure margins. Other identified risks include inflation, economic conditions, seasonal demand, supplier availability, raw-material prices, labor-market constraints, credit-market conditions, debt repayment, covenant compliance, and potential future COVID-19 effects.
The company believes current financing arrangements will provide sufficient funds for operations and debt payments during the next twelve months. It had a $5.000 million Bank Midwest revolving line with $3.056 million outstanding and $1.944 million remaining availability at February 28, 2023, subject to borrowing-base limitations. The facility was renewed on March 30, 2023, matures March 30, 2024, and requires monthly interest-only payments. The reported interest rate was 9.25% at February 28, 2023.
The company was out of compliance with its debt-to-worth covenant by 15 percentage points at November 30, 2022. Bank Midwest waived the related default. The next annual covenant measurement date is November 30, 2023, except for the monthly working-capital requirement. The company is required to maintain minimum monthly working capital of $4.0 million and other leverage, equity, and debt-service measures.
On March 30, 2023, the interest rate on the $350,000 roof term loan was changed from a floating rate to a fixed 7.0%. The company also had up to $2.454 million potentially available under its Common Stock Purchase Agreement with Alumni Capital through June 30, 2023, subject to conditions, market prices, ownership limits, and issuance restrictions.
The company adopted no material new accounting standard during the quarter. It expects to adopt the current expected credit loss standard in fiscal 2024 and does not expect a significant impact. Warranty liabilities increased to $194,464 from $115,062 a year earlier. Management concluded that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Important facts for investors to verify
- Whether the strong revenue and margin improvement is sustainable after steel, labor, overhead, and component costs increase.
- The conversion of the $13.042 million backlog into revenue, particularly the large Modular Buildings research project, and the risk of cancellations or discounts.
- Liquidity given the very low cash balance, substantial inventory and receivables, customer-deposit obligations, and the March 30, 2024 revolving-credit maturity.
- Future compliance with Bank Midwest working-capital, leverage, tangible-equity, and debt-service covenants following the prior debt-to-worth violation and waiver.
- The amount and timing of any equity issuance under the Alumni Capital agreement, including dilution and discounted share pricing.
- Whether the company’s operating cash flow remains positive after customer deposits normalize and working capital requirements increase.
- The adequacy of inventory reserves, warranty accruals, and other estimates, including the approximately $18,000 Tools inventory write-off.
- The filing’s EPS note labels the comparison as “twelve months ended,” although the underlying results are presented for three-month periods; investors should verify the intended reporting period.