Art’s-Way Manufacturing Co., Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended August 31, 2019. The company manufactures agricultural equipment and parts, modular buildings, and steel cutting tools. The filing was signed October 10, 2019. Results are unaudited and are not necessarily indicative of full-year performance.
Financial Performance and Liquidity
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Sales | $5.504 million | $5.280 million | $15.375 million | $15.940 million |
| Gross profit | $1.005 million | $1.175 million | $2.569 million | $3.436 million |
| Gross margin | 18.3% | 22.3% | 16.7% | 21.6% |
| Operating loss | $(0.305) million | $(0.559) million | $(1.397) million | $(1.326) million |
| Net loss | $(0.289) million | $(0.767) million | $(1.251) million | $(1.999) million |
| Basic loss per share | $(0.07) | $(0.18) | $(0.29) | $(0.47) |
- Revenue increased 4.2% in the third quarter but declined 3.5% year to date.
- Net cash provided by operating activities was $377,000 for the first nine months, compared with $859,000 of cash used in the prior-year period.
- Investing activities provided $532,000, including $900,000 of proceeds from asset sales, while capital expenditures were $367,000.
- Financing activities used $907,000, including a $596,000 reduction in the line of credit, $294,000 of term-debt repayments, and $17,000 of treasury-stock repurchases.
- Cash was $5,000 at August 31, 2019. Current assets were $12.738 million versus current liabilities of $6.567 million.
- The company had $2.910 million outstanding and $2.090 million available under its $5.0 million revolving line of credit. The line bears interest at 6.0% and is payable on demand, with scheduled maturity on March 30, 2020 if not earlier demanded.
- Total debt was $5.366 million, consisting of the revolving line and $2.457 million of term debt. The company stated that it was in compliance with applicable covenants at the latest measurement date after receiving a prior waiver for a debt-service-coverage-ratio issue; the next measurement date is November 30, 2019.
Material Changes Versus the Prior Comparable Period
- Agricultural products: Q3 revenue declined 18.4% to $3.194 million, and nine-month revenue declined 19.8% to $9.441 million. Management attributed the decline to spring flooding, late planting, weak agricultural conditions, lower demand for portable feed equipment, the Canadian subsidiary liquidation, and the absence of certain prior-year OEM and clearance sales.
- Modular buildings: Q3 revenue increased 133.1% to $1.802 million, and nine-month revenue increased 86.8% to $4.382 million, primarily from an approximately $8.5 million modular research facility project and higher lease revenue.
- Tools: Revenue decreased 14.5% in both the quarter and nine-month period, reflecting the loss of a large-volume customer in the prior year.
- Gross margin declined because of lower agricultural and tools volumes, labor inefficiencies, and lower fixed-cost absorption. The modular buildings segment’s margin improved as project and lease revenue increased.
- Operating expenses declined year over year, including selling, engineering, and administrative expenses. The company also did not repeat the $199,000 asset impairment recorded in Q3 2018 or approximately $520,000 of prior-year West Union facility impairment and mold-remediation costs.
- Year-to-date loss improved primarily because of stronger modular-building results, lower operating expenses, and the absence of discontinued-operations losses. However, the company remained unprofitable.
- Accounts receivable increased to $2.502 million from $1.537 million, while net inventory declined to $9.763 million from $10.257 million. Contract liabilities increased to $1.483 million from $185,000, largely because of a large modular-building milestone invoice.
Guidance, Outlook, Risks, and Unusual Items
- As of October 6, 2019, order backlog was $7.565 million versus $1.384 million a year earlier. The modular-building backlog was $6.173 million, including the research-facility project expected to be completed in spring 2020.
- Management expects the large modular-building contract to continue into spring 2020 and believes operating-improvement initiatives, including warehouse reorganization and a material-review board, should improve efficiency.
- Management believes operating cash flow and current financing arrangements will fund operations and debt payments over the next twelve months and expects to obtain financing on reasonable terms. This outlook depends on continued access to credit, contract execution, and improved operating performance.
- Key risks include agricultural market weakness, seasonal demand, material and labor costs, production inefficiencies, order cancellations, debt repayment and covenant compliance, refinancing risk, and possible increases in warranty costs.
- The $4.0 million 2019 revolving facility supporting an irrevocable letter of credit for the modular project remained undisbursed and held by the bank at August 31, 2019.
- The company adopted ASC 606 using the modified retrospective method with no material impact on previously reported amounts. It planned to adopt the lease standard in fiscal 2020 and expected to recognize right-of-use assets and lease liabilities for office-equipment leases.
- No material pending legal proceedings, defaults, off-balance-sheet arrangements, or subsequent events requiring recognition were reported. Disclosure controls were assessed as effective.
Important Facts for Investors to Verify
- Whether the $8.5 million modular research-facility project remains on schedule, within budget, and collectible under its milestone billing structure.
- Whether the company can restore agricultural-product volumes and gross margins after the 2019 market disruption.
- Available borrowing capacity, borrowing-base calculations, and renewal or repayment plans for the line of credit maturing March 30, 2020.
- Compliance with the November 30, 2019 financial covenants, particularly the debt-service-coverage and working-capital requirements.
- Conversion of the reported $7.565 million backlog into revenue and cash flow, including potential cancellations or dealer discounts.
- Liquidity risk given cash of only $5,000, continuing losses, substantial inventory, and reliance on operating cash flow and bank financing.
- Adequacy of warranty reserves, inventory reserves, deferred tax assets, and contract estimates, all of which depend on management judgments.