Business Context and Reporting Period
Art’s-Way Manufacturing Co., Inc. filed its Form 10-K for the fiscal year ended November 30, 2019, filed February 6, 2020. The company operates three segments: Agricultural Products, Modular Buildings, and Tools. It is a smaller reporting company listed on Nasdaq under “ARTW.” The former Pressurized Vessels segment was discontinued and had no 2019 activity.
Key Financial Metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $22.889 million | $19.727 million | +16.0% |
| Gross profit | $3.928 million | $3.512 million | Gross margin 17.2% vs. 17.8% |
| Operating loss | $(1.497) million | $(3.095) million | Loss narrowed $1.598 million |
| Net loss from continuing operations | $(1.420) million | $(3.336) million | Loss narrowed $1.916 million |
| Net loss per share | $(0.33) | $(0.81) | Improved |
| Cash flow from operations | $0.808 million | $(1.027) million | Improved $1.835 million |
- Agricultural Products revenue was $13.508 million, down 5.8%, with a $1.599 million operating loss. The segment represented 59.0% of consolidated revenue.
- Modular Buildings revenue was $7.260 million, up 133.5%, with $0.208 million of operating income. The increase reflected progress on an approximately $8.5 million project and higher lease activity.
- Tools revenue was $2.121 million, down 6.7%, with a $0.106 million operating loss.
- Cash was $3,145 at year-end. Working capital was $6.204 million and the current ratio was 2.19, compared with 2.11 in 2018.
- Net inventory declined to $8.779 million from $10.257 million. Inventory reserves were $2.775 million.
- Total liabilities were $7.553 million, down $0.735 million. Total borrowings declined by approximately $1.241 million.
- The Bank Midwest revolving facility had a $5.000 million capacity, $2.579 million outstanding, and $2.421 million available at November 30, 2019. The borrowing rate was 6.00% at year-end.
- Term debt was $2.436 million, including $85,401 classified as current. Interest expense was $358,174.
- Capital expenditures were $447,025. Investing cash flow was $452,688, principally reflecting proceeds from the sale of the West Union facility.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue increased primarily because Modular Buildings revenue more than doubled, partially offsetting declines in Agricultural Products and Tools.
- Operating expenses decreased 17.9% to $5.425 million. The prior year included approximately $216,000 of West Union facility impairment and $375,000 of Miller Pro goodwill impairment, neither of which recurred in 2019.
- The 2018 loss also included approximately $298,000 from deferred tax asset revaluation, $253,000 from release of a Canadian cumulative translation adjustment, approximately $543,000 of increased inventory reserves, and discontinued-operations losses.
- Operating cash flow turned positive, supported principally by inventory reduction of approximately $1.479 million.
- The company sold its West Union facility for $900,000 in December 2018 and paid off the related loan.
- The company adopted ASC 606 revenue recognition using the modified retrospective method; management reported no material impact on prior or previously disclosed amounts.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No formal quantitative earnings or revenue guidance was provided. Management expressed renewed optimism after Agricultural Products sales increased 59% year over year in the fourth quarter, but noted five consecutive years of annual agricultural sales declines.
- As of January 30, 2020, backlog was approximately $3.592 million in Agricultural Products, $5.106 million in Modular Buildings, and $285,000 in Tools—approximately $8.983 million in total and 266% above the comparable prior-year level. Backlog may fluctuate and is not necessarily indicative of future revenue.
- Management expects the Modular Buildings backlog and a new Tools OEM agreement to support 2020 activity. The large modular project was approximately 55% complete at year-end.
- Liquidity risks include continued operating losses, reliance on inventory sales and financing, the need to renew the revolving facility before its March 30, 2020 maturity, and the need to renew the project-related line of credit before its February 13, 2020 maturity. Management stated that it did not foresee liquidity issues during the next twelve months.
- The company was not in compliance with its debt service coverage ratio at November 30, 2019. Bank Midwest waived the noncompliance, and no event of default had occurred. Other disclosed covenants were met.
- One Modular Buildings customer accounted for more than 21% of 2019 consolidated revenue, creating customer-concentration risk. The highest recurring customer represented just under 10%.
- Key operating risks include agricultural-market conditions, farm income and commodity prices, seasonality, steel and other input costs, dealer and OEM decisions, supply-chain availability, competition, warranty costs, contract-estimate changes, and interest-rate or credit-market conditions.
- Management identified a material weakness in internal control over financial reporting relating to estimation and review of completed subcontract work on modular building contracts. An audit adjustment was recorded; management reported that the weakness did not result in a material misstatement of the 2019 financial statements and was evaluating remediation controls.
- The independent auditor issued an unqualified opinion on the financial statements. The auditor did not provide an opinion on internal control over financial reporting because the company is not required to receive an attestation.
- The company reported no material pending litigation, no off-balance-sheet arrangements, and no subsequent events requiring recognition or disclosure.
Investor Verification Priorities
- Verify completion, remaining costs, margins, billings, and cash collections for the approximately $8.5 million Modular Buildings project.
- Assess whether the Agricultural Products recovery and fourth-quarter sales strength are sustainable after the multi-year downturn.
- Confirm renewal or refinancing of the Bank Midwest revolving facilities and continued compliance with debt covenants.
- Review inventory aging, reserve adequacy, turnover, and the risk of additional write-downs.
- Evaluate the customer concentration represented by the large Modular Buildings contract and the terms of the new Tools OEM agreement.
- Monitor remediation of the material weakness involving subcontract-completion estimates.
- Assess the realizability of the $1.786 million deferred tax asset, supported by approximately $5.033 million of U.S. net operating loss carryforwards and $109,000 of tax credits.
- Confirm that reported backlog converts to revenue and cash without material cancellations, delays, cost overruns, or contract losses.