Art’s-Way Manufacturing Co., Inc. — Q1 2016 Form 10-Q Summary
Business context and reporting period
Art’s-Way Manufacturing is an agricultural equipment manufacturer with four operating segments: agricultural products, pressurized vessels, modular buildings, and tools. This unaudited quarterly filing covers the three months ended February 29, 2016, compared with the three months ended February 28, 2015. The company had 4,100,052 common shares outstanding as of March 22, 2016.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Sales | $6.392 million | $7.289 million | Down 12.3% |
| Gross profit | $1.702 million | $2.052 million | Down 17.1% |
| Gross margin | 26.6% | 28.2% | Down 160 basis points |
| Income from operations | $149,226 | $329,149 | Down 54.7% |
| Income before taxes | $120,192 | $244,800 | Down 50.9% |
| Net income | $80,962 | $168,195 | Down 51.9% |
| Net margin | 1.3% | 2.3% | Down approximately 100 basis points |
| Basic and diluted EPS | $0.02 | $0.04 | Decreased |
| Cash flow from operations | $619,542 | $77,473 | Improved by $542,069 |
Cash increased to $629,263 at February 29, 2016, from $447,334 at November 30, 2015. Operating cash flow benefited principally from a $1.015 million reduction in inventory, partially offset by a $778,036 increase in accounts receivable.
Investing activities provided $1.136 million, primarily from $1.171 million of net proceeds from asset sales. Financing activities used $1.574 million, including $1.404 million of term-debt repayments. Capital expenditures were $34,694.
Total assets were $29.998 million and total liabilities were $11.386 million at quarter-end. Total debt included $3.790 million outstanding on the primary revolving credit line and $4.545 million of term debt. Stockholders’ equity was $18.612 million.
Material changes versus the prior comparable period
- Agricultural products revenue declined 21.0% to $4.198 million, reflecting weaker demand across agricultural products. Segment operating income declined to $248,000 from $439,000.
- Pressurized vessels revenue increased 28.8% to $679,000, and operating loss improved to $72,000 from $61,000 of loss; management cited higher volume and manufacturing efficiencies.
- Modular buildings revenue increased 45.1% to $943,000, with operating income of $9,000 versus a $67,000 operating loss in the prior year. Management cited improved fixed-cost absorption, partially offset by cost overruns.
- Tools revenue decreased 28.2% to $572,000, and the segment reported a $36,000 operating loss versus $18,000 of operating income, primarily due to weakness in the energy industry.
- Selling expense declined to $484,000 from $565,000, and general and administrative expense declined to $953,000 from $1.043 million. Engineering expense was substantially unchanged at $116,000.
- The company sold its Ames, Iowa facility on February 10, 2016, for $1.192 million, recognizing an approximately $36,000 gain after closing expenses. Proceeds were used to repay term debt.
- The company voluntarily repaid one U.S. Bank term loan for $1.078 million, including principal and accrued interest, on February 10, 2016. Total term debt declined from $5.949 million at November 30, 2015 to $4.545 million at quarter-end.
- No dividend was paid in the first quarter of 2016, compared with $202,428 paid in the prior-year quarter.
Guidance, outlook, risks, contingencies, and unusual items
- No formal quantitative earnings or revenue guidance was provided.
- Order backlog was $4.102 million as of April 11, 2016, down from $5.270 million in April 2015. Agricultural products backlog declined to $2.645 million from $4.588 million. Management attributed lower order volume to the downturn in the agricultural economy and cautioned that backlog is not necessarily indicative of future revenue.
- The $8.0 million primary revolving credit facility and the $1.5 million additional line of credit were scheduled to mature on May 1, 2016. At February 29, 2016, $3.790 million was outstanding on the primary facility, with $3.523 million available under its borrowing base, while the additional facility had no outstanding balance and $1.5 million available. Management expected renewal under similar terms and had begun discussions with the bank.
- The company was not in compliance with the required fixed charge coverage ratio of at least 1.15 to 1.00 as measured at February 29, 2016, primarily because of reduced earnings over the preceding twelve months. U.S. Bank issued a waiver, and management stated that no event of default occurred. The next measurement date was May 31, 2016.
- The company also received a waiver for failure to meet the Iowa Finance Authority loan’s debt service coverage ratio as measured November 30, 2015. The next measurement date is November 30, 2016.
- Management stated that operating cash flows and current financing arrangements should be sufficient to fund operations for the next twelve months, but expects to continue relying on financing to supplement operating cash flows.
- Key risks include weak agricultural and energy markets, seasonal demand, material and operating costs, dependence on financing renewals, covenant compliance, debt repayment requirements, and potential warranty costs exceeding historical estimates.
- The company reported no material pending legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls. The filing text does not identify a material subsequent event requiring recognition.
Important facts for investors to verify
- Whether the revolving credit facilities were renewed on or before the May 1, 2016 maturity date and on what terms.
- Whether the company satisfied the May 31, 2016 fixed charge coverage covenant measurement or required another waiver.
- Whether agricultural demand, segment revenue, gross margins, and backlog stabilized after the quarter.
- Whether the company’s liquidity remains adequate given debt maturities, working-capital needs, and reliance on financing.
- Whether asset-sale proceeds and debt reductions represent a sustainable improvement or primarily a one-time liquidity benefit.
- The effect of continued low volume on inventory reserves, fixed-cost absorption, profitability, and future cash flow.