Art’s-Way Manufacturing Co., Inc. :ARTW-US: Earnings Analysis: 2016 By the Numbers : March 16, 2017

Art’s-Way Manufacturing Co., Inc. reports financial results for the year ended November 30, 2016.

We analyze the earnings along side the following peers of Art’s-Way Manufacturing Co., Inc. – Deere & Company, AGCO Corporation, Toro Company and Alamo Group Inc. (DE-US, AGCO-US, TTC-US and ALG-US) that have also reported for this period.

Highlights

  • Gross margins narrowed from 23.79% to 23.33% compared to the same period last year, operating (EBITDA) margins now 1.32% from 1.88%.
  • Year-on-year change in operating cash flow of 735.61% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Narrowing of operating (EBIT) margins contributed to decline in earnings, despite some positive contribution from one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016 2015 2014 2013 2012
Relevant Numbers (Annual)
Revenues 21.56 27.94 36.17 34.23 36.46
Revenue Growth (YOY) N/A N/A N/A N/A N/A
Earnings -0.43 -0.56 0.94 1.55 2.67
Earnings Growth (YOY) 23.6 -159.65 -39.72 -41.79 113.4
Net Margin -1.98 -2 2.59 4.53 7.31
EPS -0.2 -0.14 0.23 0.38 0.66
Return on Equity -2.37 -2.95 4.98 8.77 16.76
Return on Assets -1.46 -1.74 2.85 4.85 9.34

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Earnings Growth Analysis

The company’s earnings rose year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations. Gross margins went from 23.33% to 23.79% for the same period last year, while operating margins (EBITDA margins) went from 1.32% to 1.88% over the same time frame.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

ARTW-US‘s decline in gross margins has not produced any significant offsetting improvement in its working capital . This leads Capital Cube to conclude that the decline in gross margins are likely from operating issues and not trade-offs with the balance sheet. Working capital days are currently 196.32 days, compared to last year’s level of 171.07 days.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

ARTW-US‘s change in operating cash flow of 735.61% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings fell, largely because of the narrowing in operating margins, which decreased from -1.44% to -1.79%. The decline in earnings probably would have been worse, were it not for some one-time items that improved pretax margins from -3.10% to -2.43%.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Art’s-Way Manufacturing Co., Inc. manufactures and distributes farm machinery niche products. It operates through the following segments: Agricultural Products, Pressurized Vessels, Tools and Modular Buildings. The Agricultural Products segment manufactures a variety of specialized farm machinery under its own label, including: portable and stationary animal feed processing equipment and related attachments used to mill and mix feed grains into custom animal feed rations; a crop production line that includes grain drill equipment; a line of hay and forage equipment consisting of forage boxes, blowers, running gear, dump boxes and mergers; stalk shredders; a line of portable grain augers; a line of manure spreaders; sugar beet harvesting equipment; a line of land maintenance equipment; moldboard plows, potato harvesters, and reels for combines and swathers under UHC by Art’s Way. The Pressurized Vessels segment produces and sells pressurized vessels, both American Society of Mechanical Engineers code and non-code. It provides a combination of services as a manufacturer and supplier of steel vessels and steel containment systems. Tools segment manufactures standard single point brazed carbide tipped tools as well as polycrystalline diamond and cubic boron nitride inserts and tools through its wholly-owned subsidiary, Ohio Metal Working Products/Art’s Way, Inc., an Ohio corporation. The Modular Buildings segment produces and sells modular buildings, which are custom designed to meet the specific research needs of its customers. It also provides services relating to the design, manufacturing, delivering, installation and renting of the building units that it produces. The company was founded by Arthur Luscombe in 1956 and is headquartered in Armstrong, IA.

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