Art’s-Way Manufacturing Co., Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Art’s-Way Manufacturing is an agricultural equipment and replacement-parts manufacturer with three operating segments: Agricultural Products, Modular Buildings, and Tools. The unaudited filing covers the three and nine months ended August 31, 2021, compared with the corresponding 2020 periods. The company is a smaller reporting company and reported 4,533,972 common shares outstanding as of October 5, 2021.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Sales | $6.592 million | $6.465 million | $17.703 million | $16.937 million |
| Gross profit | $1.738 million | $0.925 million | $4.503 million | $2.897 million |
| Gross margin | 26.4% | 14.3% | 25.4% | 17.1% |
| Income (loss) from operations | $0.160 million | $(0.513) million | $(0.060) million | $(1.908) million |
| Net income (loss) | $0.056 million | $(0.424) million | $(0.195) million | $(1.663) million |
| Basic EPS | $0.01 | $(0.10) | $(0.04) | $(0.38) |
- Q3 sales increased 2.0%; nine-month sales increased 4.5% year over year.
- Cash used in operating activities was $1.248 million for the first nine months, compared with $0.359 million used in the prior-year period. Inventory purchases and higher accounts receivable were significant uses of cash.
- Cash used in investing activities was $0.480 million, including $0.488 million of capital expenditures. Financing activities provided $1.833 million, primarily through increased borrowings under the line of credit.
- Cash increased from $2,684 at November 30, 2020 to $108,006 at August 31, 2021.
- At August 31, 2021, total assets were $21.255 million, current assets were $12.631 million, and stockholders’ equity was $9.885 million. Net inventory was $9.289 million, up from $7.762 million at November 30, 2020.
- The $5.0 million Bank Midwest revolving line had a $4.290 million balance and $0.710 million of stated availability, subject to borrowing-base limitations. The line matures March 30, 2022 and bears interest at 4.75% at the filing date.
- Term debt was $2.753 million, including $2.283 million owed under the Bank Midwest term loan and approximately $0.470 million under SBA Economic Injury Disaster Loans.
Material changes versus the prior comparable period
- Agricultural Products sales rose 26.9% in Q3 and 24.0% year to date, driven by stronger agricultural economics, higher commodity and livestock prices, and increased demand. The segment’s Q3 gross margin improved to 27.4% from 21.5%.
- Modular Buildings sales declined 43.4% in Q3 and 31.9% year to date, primarily because a large laboratory project was completed. Gross margin improved substantially to 25.8% in Q3 from 2.4%, and to 14.8% year to date from 8.6%, partly because the completed project had unusually thin margins.
- Tools sales increased 30.3% in Q3 and 13.3% year to date. Q3 gross margin increased to 20.0%, while year-to-date margin declined to 20.0% from 21.1% due partly to higher production wages.
- Consolidated selling expense increased because of product-development, rebranding, commissions, and higher sales activity. General and administrative expense declined as the prior-year period included management-transition, recruiting, pandemic-related, and other nonrecurring costs.
- Backlog increased 73% to $5.941 million as of October 8, 2021, from $3.440 million a year earlier. Agricultural Products backlog increased 269% to $3.598 million; Modular Buildings backlog was $1.998 million; and Tools backlog was $0.345 million.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects continued agricultural demand and a strong finish to fiscal 2021. It reported two consecutive quarters of net income after an extended period of losses.
- Management expects the $1.050 million of pending SBA EIDL increases to be approved and processed in the fourth quarter, allowing conversion of current debt to longer-term debt and helping restore compliance with the working-capital covenant.
- The company was out of compliance with its Bank Midwest debt-to-net-worth covenant as of August 31, 2021 and expects to require a waiver on or before November 30, 2021. Management projects compliance with the debt-service-coverage covenant at November 30, 2021.
- The company had previously been out of compliance with working-capital requirements and stated that the EIDL proceeds were expected to restore compliance. Failure to obtain the EIDL funding or a required covenant waiver could adversely affect liquidity and borrowing availability.
- Supply-chain delays, sharply higher material prices, labor shortages, and difficulty hiring production employees remain significant risks. Management expects continued delays over the next several quarters and may implement further price increases and automation.
- Management believes operating cash flow and existing financing arrangements will be sufficient for the next twelve months, but the filing cautions that actual results may differ materially from forward-looking expectations.
- The filing reports no material pending legal proceedings, no off-balance-sheet arrangements, and no material subsequent events requiring recognition.
- Product warranty liabilities were $245,680 at August 31, 2021. Future warranty costs could exceed historical experience.
Important facts for investors to verify
- Whether the SBA EIDL increase of $1.050 million was approved and funded, and whether it restored working-capital covenant compliance.
- Whether Bank Midwest granted the anticipated debt-to-net-worth covenant waiver by November 30, 2021 and whether the revolving line was renewed or refinanced before its March 30, 2022 maturity.
- Whether elevated agricultural backlog converts into revenue and cash without material cancellations, discounts, supply-chain delays, or margin erosion.
- Whether material inflation and labor shortages continue to pressure production costs, Tools margins, and fulfillment capacity.
- Whether operating cash flow improves as inventory turns and whether reliance on the nearly fully utilized revolving line decreases.
- The filing text does not provide a clear consolidated order-cancellation rate or a quantified forward revenue forecast; backlog should not be treated as guaranteed revenue.