Art’s-Way Manufacturing Co., Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
Art’s-Way Manufacturing Co., Inc. is a diversified manufacturer with three operating segments: Agricultural Products, Modular Buildings, and Tools. The filing covers the fiscal year ended November 30, 2020, compared primarily with fiscal 2019. The company’s operations were materially affected by the COVID-19 pandemic, particularly after the first quarter.
- Agricultural Products generated 58.4% of fiscal 2020 revenue and sells specialized farm equipment, parts, and OEM products.
- Modular Buildings generated 31.2% of revenue and designs, manufactures, installs, leases, and sells research and animal-containment facilities.
- Tools generated 10.4% of revenue and manufactures carbide, PCD, CBN, and specialty cutting tools.
Financial performance and key metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $22.409 million | $22.889 million | Down 2.1% |
| Gross profit | $2.400 million | $3.928 million | Down 38.9% |
| Gross margin | 10.7% | 17.2% | Down 650 basis points |
| Operating loss | $(3.910) million | $(1.497) million | Loss increased $2.413 million |
| Net loss | $(2.103) million | $(1.420) million | Loss increased $683,900 |
| Loss per diluted share | $(0.48) | $(0.33) | Worsened |
| Cash flow from operations | $(856,000) | $808,000 | Declined $1.664 million |
| Capital expenditures | $693,000 | $447,000 | Increased $246,000 |
Other income of $1.254 million in fiscal 2020, primarily related to Paycheck Protection Program loan forgiveness, partially offset the operating loss. The company recorded an income tax benefit of $856,000 and reported an effective tax rate of 28.9%.
At November 30, 2020, the company had cash of only $2,684, current assets of $10.301 million, current liabilities of $6.165 million, and working capital of $4.137 million. The current ratio declined to 1.67 from 2.19. Net inventory was $7.762 million, after reserves of $3.405 million.
Total debt included a $2.360 million balance on a $5.000 million Bank Midwest revolving line, $2.351 million on the Bank Midwest term loan, and $450,000 of SBA Economic Injury Disaster Loans. Total term debt was $2.808 million. The company reported total liabilities of $8.896 million and stockholders’ equity of $9.907 million.
Segment results
| Segment | 2020 revenue | 2019 revenue | 2020 operating income/(loss) | 2019 operating income/(loss) |
|---|---|---|---|---|
| Agricultural Products | $13.085 million | $13.508 million | $(2.318) million | $(1.599) million |
| Modular Buildings | $6.993 million | $7.260 million | $(1.295) million | $208,000 |
| Tools | $2.331 million | $2.121 million | $(297,000) | $(106,000) |
- Agricultural Products revenue declined 3.1%, but reported gross margin improved to 16.5% from 16.3%. The segment recorded approximately $996,000 of inventory obsolescence expense, primarily for discontinued or reduced product lines.
- Modular Buildings revenue declined 3.7% and gross margin fell to negative 3.7% from 16.1%, primarily because of unforeseen costs, site conditions, subcontractor rework, delays, and liquidated damages on a large construction contract.
- Tools revenue increased 9.9%, supported by a new OEM customer, but gross margin declined to 21.3% from 26.4% as the segment incurred costs to support expected volume and continued weakness in oil and gas markets.
Material changes versus the prior comparable period
- Consolidated gross margin deteriorated materially, while operating expenses increased 16.3% to $6.309 million from $5.425 million.
- The company recorded a $2.103 million net loss versus a $1.420 million loss in 2019.
- Operating cash flow shifted from positive $808,000 to negative $856,000.
- Accounts receivable increased to $2.391 million from $1.680 million, while net inventory decreased by approximately $1.016 million.
- Stockholders’ equity declined by approximately $1.887 million, primarily because of the fiscal-year net loss.
- The company discontinued production of UHC reels and continued reducing non-core and obsolete inventory.
- David King became Chief Executive Officer in the third quarter of fiscal 2020, succeeding Carrie Gunnerson.
- The company adopted new lease accounting guidance and recognized approximately $34,000 of right-of-use assets and lease liabilities at adoption.
Liquidity, debt, outlook, and risks
Management stated that existing cash and financing arrangements should be sufficient for the next twelve months and that no liquidity issues were expected during that period. However, cash on hand was minimal, operating cash flow was negative, and management expects to continue relying on financing activities to supplement operations.
- The $5.000 million revolving line had $2.640 million of stated availability at November 30, 2020, subject to borrowing-base limitations, and was scheduled to mature March 30, 2021.
- The company was out of compliance with its debt service coverage and minimum working capital covenants at year-end. Bank Midwest waived the noncompliance and related default. A January 2021 amendment replaced the prior working capital requirements with a $4.000 million minimum working capital requirement.
- The company received $1.243 million under the PPP, which was fully forgiven in November 2020, and received three EIDL loans totaling $450,000 with 30-year maturities and 3.75% interest.
- As of February 3, 2021, Agricultural Products backlog was approximately $6.363 million versus $3.532 million a year earlier; Tools backlog was $340,000 versus $252,000; and Modular Buildings backlog was $1.226 million versus $4.675 million.
- Management expected improved agricultural demand and Tools sales in fiscal 2021, but expected continued weakness in Modular Buildings demand. No formal quantitative revenue or earnings guidance was provided.
- Management identified COVID-19, farm income and commodity prices, raw-material costs, supply-chain disruptions, dealer demand, OEM decisions, seasonality, contract estimates, warranty costs, debt covenant compliance, and access to financing as significant risks.
A change in estimate on a large Modular Buildings contract resulted in approximately $1.3 million of additional revenue generated since inception compared with approximately $2.8 million of additional estimated costs to complete. Approximately $1 million of revenue was expected to be recognized at a reduced margin in the first quarter of fiscal 2021. The company also increased its inventory obsolescence reserve by approximately $681,000 in November 2020.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective at November 30, 2020, and stated that a material weakness related to estimating completed subcontract work on Modular Buildings contracts had been remediated.
Important facts for investors to verify
- Whether the company can generate positive operating cash flow and reduce its reliance on revolving credit and other financing.
- Compliance with the amended Bank Midwest covenants at the next measurement date of November 30, 2021, and renewal or refinancing of the revolving line.
- The final profitability and cash requirements of the large Modular Buildings contract, including the approximately $1 million of expected reduced-margin revenue.
- The recoverability of the $7.762 million net inventory balance and the potential for additional obsolescence reserves or scrap costs.
- Whether Agricultural Products and Tools backlog converts into revenue and whether Modular Buildings backlog stabilizes.
- The effect of continued COVID-19 disruptions, supply-chain costs, farm income, commodity prices, and oil and gas activity.
- The concentration risk from a Modular Buildings customer representing more than 18% of consolidated revenue in fiscal 2020.
- The company’s ability to realize approximately $2.668 million of deferred tax assets, which depends on generating future taxable income.