Art’s-Way Manufacturing Co., Inc. — Form 10-Q Summary
Business Context and Reporting Period
Art’s-Way Manufacturing is an agricultural equipment manufacturer with three operating segments: Agricultural Products, Modular Buildings, and Tools. This unaudited Form 10-Q covers the three months ended February 28, 2022, compared with the three months ended February 28, 2021. The company is a smaller reporting company listed on Nasdaq under ARTW.
Financial Performance and Position
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Sales | $5.613 million | $5.401 million |
| Gross profit | $1.192 million | $1.043 million |
| Gross margin | 21.2% | 19.3% |
| Operating income (loss) | $(437,000) | $(369,000) |
| Net income (loss) | $(406,000) | $(315,000) |
| Basic and diluted loss per share | $(0.09) | $(0.07) |
| Net cash provided by operating activities | $1.169 million | $681,000 |
At February 28, 2022, cash was $3,000, total assets were $20.852 million, and stockholders’ equity was $9.983 million. Net inventory was $9.700 million, up from $9.210 million at November 30, 2021. Accounts receivable declined to $1.583 million from $2.663 million, principally reflecting collections.
Current liabilities were $8.094 million versus current assets of $12.059 million. The company had $3.151 million outstanding on its $5.000 million revolving credit facility, leaving $1.849 million of stated availability, subject to borrowing-base limitations. Term debt totaled $2.716 million, including $2.613 million classified as long term. Interest expense increased to $77,000 from $59,000.
Operating cash flow was supported by a $1.092 million reduction in accounts receivable and a $1.616 million increase in customer deposits, partly offset by a $350,000 increase in inventories and a $506,000 increase in other assets. Investing cash use was $174,000, primarily capital expenditures. Financing cash use was $994,000, including a $924,000 reduction in the line of credit, $23,000 of term-debt repayments, and $35,000 of treasury-stock repurchases.
Material Changes Versus the Prior Comparable Period
- Sales increased 3.9% to $5.613 million, driven by an 18.9% increase in Agricultural Products revenue to $4.161 million.
- Modular Buildings revenue fell 32.8% to $868,000 because a large construction contract was nearing completion in the prior-year quarter.
- Tools revenue declined 4.3% to $584,000, with labor shortages contributing to weaker production and a gross-margin decline to 12.5% from 20.2%.
- Consolidated gross margin improved to 21.2% from 19.3%, but operating expenses increased to $1.629 million from $1.411 million. General and administrative expense rose 23.4% to $1.008 million.
- The net loss widened to $406,000 from $315,000. Management attributed the deterioration to increased losses in Modular Buildings and Tools despite improved Agricultural Products performance.
- Customer deposits increased to $1.895 million from $279,000, largely due to the fall early-order program. Contract liabilities totaled approximately $2.263 million at February 28, 2022.
- Consolidated backlog as of April 8, 2022 was $11.173 million, up 42% from $6.483 million a year earlier. The filing cautions that backlog is not necessarily indicative of future revenue because of cancellations and dealer discounts.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No formal quantitative earnings or revenue guidance was provided. Management expects the first quarter to be seasonally weak and expects Agricultural Products production to increase during the spring and summer.
- Management cited strong commodity prices, record early orders, supply-chain constraints, rising component and freight costs, steel-price volatility, and labor shortages as significant operating factors.
- The company expects to use automation in the Tools segment to address workforce constraints and anticipates margin improvement from price increases implemented in February 2022.
- As of February 28, 2022, the company was approximately $34,000 below its $4.000 million monthly working-capital requirement. Management expects normal second-quarter operations to restore compliance, but failure to do so could result in additional bank review and a potential default if an acceptable remediation plan is not established.
- The company was out of compliance with its debt-to-worth covenant at November 30, 2021; Bank Midwest waived the related default. The next annual covenant measurement is November 30, 2022.
- The $5.000 million revolving credit facility was renewed on March 28, 2022 and matures March 30, 2023. The company reported a 5.00% current interest rate after a March 2022 increase.
- On March 29, 2022, the company entered into an equity purchase agreement providing for potential gross proceeds of up to $3.000 million through sales of common stock at a 3%–5% discount to recent trading prices. The arrangement may cause share dilution and is subject to registration and other conditions.
- Subsequent financing and capital commitments include a finance lease for three robotic weld systems, an expected lift-truck lease, and a $500,000 manufacturing-equipment grant requiring a 25% company match.
- Management states that current financing arrangements should be sufficient to fund operations and debt payments for the next twelve months, but identifies credit-market conditions, covenant compliance, debt repayment, COVID-19 effects, seasonal demand, supplier performance, input costs, and workforce availability as material uncertainties.
- No material pending legal proceedings were reported. Management concluded that disclosure controls were effective as of February 28, 2022.
Important Facts for Investors to Verify
- Whether second-quarter operating performance restores compliance with the $4.000 million working-capital requirement.
- Whether the company maintains compliance with its debt-to-worth and debt-service-coverage covenants at the November 30, 2022 measurement date.
- The availability, pricing, and actual use of the potential $3.000 million equity financing, including resulting dilution.
- Conversion of the $11.173 million backlog into revenue and cash, including cancellations, delivery timing, and dealer discounts.
- Whether price increases offset higher component, freight, wage, and benefit costs without reducing demand.
- Progress in addressing labor shortages through automation, particularly in the Tools segment.
- The company’s ability to fund customer-deposit fulfillment, capital expenditures, lease obligations, and debt maturities while maintaining adequate liquidity.