Forward-Looking Statements
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and notes thereto included in Part
I, Item 1 of this Quarterly Report on Form 10-Q (this "report") and the audited
consolidated financial statements and related notes thereto included in Part II,
Item 8, "Financial Statements and Supplementary Data," as well as Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations," of our Annual Report on Form 10-K for the fiscal year ended
November 30, 2021. Some of the statements in this report may be forward-looking
statements that reflect our current view on future events, future business,
industry and other conditions, our future performance, and our plans and
expectations for future operations and actions. In some cases you can identify
forward-looking statements by the use of words such as "may," "should,"
"anticipate," "believe," "expect," "plan," "future," "intend," "could,"
"estimate," "predict," "hope," "potential," "continue," or the negative of these
terms or other similar expressions. Many of these forward-looking statements are
located in this report under Part I, Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," but they may appear
in other sections as well. Forward-looking statements in this report generally
relate to: (i) our warranty costs and order backlog; (ii) our beliefs regarding
the sufficiency of working capital and cash flows; (iii) our expectation that we
will continue to be able to renew or obtain financing on reasonable terms when
necessary as well as our continued positive relationship with our creditors and
lenders; (iv) the impact of recently issued accounting pronouncements; (v) our
intentions and beliefs relating to our costs, business strategies, and future
performance; (vi) our beliefs concerning our ability to attract and maintain an
adequate workforce in a competitive labor market (vii) our expected financial
results; (viii) our expectations concerning our primary capital and cash flow
needs; and (ix) our expectations regarding the impact of COVID-19 on our
business condition and results of operations.
You should read this report thoroughly with the understanding that our actual
results may differ materially from those set forth in the forward-looking
statements for many reasons, including events beyond our control and assumptions
that prove to be inaccurate or unfounded. We cannot provide any assurance with
respect to our future performance or results. Our actual results or actions
could and likely will differ materially from those anticipated in the
forward-looking statements for many reasons, including but not limited to: (i)
the impact of changing credit markets on our ability to continue to obtain
financing on reasonable terms; (ii) our ability to repay current debt, continue
to meet debt obligations and comply with financial covenants; (iii) the effect
of inflation as well as general economic conditions, including consumer and
governmental spending, on the demand for our products and the cost of our
supplies and materials; (iv) the ongoing COVID-19 pandemic; (v) fluctuations in
seasonal demand and our production cycle; (vi) the ability of our suppliers to
meet our demands for raw materials and component parts; (vii) fluctuations in
the price of raw materials, especially steel; (viii) our ability to predict and
meet the demands of each market in which our segments operate; and (ix) other
factors described from time to time in our Securities and Exchange Commission
filings. We do not intend to update the forward-looking statements contained in
this report other than as required by law. We caution you not to put undue
reliance on any forward-looking statements, which speak only as of the date of
this report. You should read this report and the documents that we reference in
this report and have filed as exhibits completely and with the understanding
that our actual future results may be materially different from what we
currently expect. We qualify all of our forward-looking statements by these
cautionary statements.
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Critical Accounting Policies
Our critical accounting policies involving the more significant judgments and
assumptions used in the preparation of our financial statements as of May 31,
2022 remain unchanged from November 30, 2021. Disclosure of these critical
accounting policies is incorporated by reference from Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of our Annual Report on Form 10-K for the fiscal year ended November
30, 2021.
Results of Operations
Net Sales and Cost of Sales
Our consolidated corporate sales for the three- and six-month periods ended May
31, 2022 were $7,275,000 and $12,888,000, respectively, compared to $5,710,000
and $11,111,000 during the same respective periods in fiscal 2021, a $1,565,000,
or 27.4%, increase for the three months and a $1,777,000, or 16.0%, increase for
the six months. We saw increased revenue and demand in all three business
segments for the three months ended May 31, 2022 and increases in revenue in the
Agricultural Products and Tools segments for the six months ended May 31, 2022.
Consolidated gross margin for the three-month period ended May 31, 2022 was
30.1% compared to 30.2% for the same period in fiscal 2021. Consolidated gross
margin for the six-month period ended May 31, 2022 was 26.3% compared to 24.9%
for the same period in fiscal 2021. The increased margin is due largely to our
Agricultural Products and Modular Buildings segment, as discussed further below.
Our second quarter sales in our Agricultural Products segment were $5,316,000
compared to $3,858,000 during the same period of fiscal 2021, an increase of
$1,458,000, or 37.8%. Our year-to-date agricultural product sales were
$9,477,000 compared to $7,357,000 during the same period in fiscal 2021, an
increase of $2,120,000, or 28.8%. The Company continues to see historic backlog
numbers through Q2 of fiscal 2022 as commodity prices remain near or at all-time
highs. Our sales are up on almost all of our product offerings for the six
months ended May 31, 2022 including beet equipment, manure spreaders, grinder
mixers and land maintenance equipment. We expect strong demand for our products
to continue in the short term as commodity prices remain high with concerns of
global food shortages and with supply chain pressure creating agricultural
equipment availability issues. We have seen repeated disruptions in our supply
chain so far in fiscal 2022. As a result of supply chain disruptions, our
planning department has been placing purchase orders and bringing in inventory
further in advance of production dates than we have historically. This, as well
as price increases, have led to an inventory increase of approximately $1.7
million for the first six months of fiscal 2022. Gross margin for our
agricultural products segment for the three-month period ended May 31, 2022 was
35.5% compared to 36.4% for the same period in fiscal 2021. Gross margin for our
agricultural products segment for the six-month period ended May 31, 2022 was
31.3% compared to 31.1% for the same period in fiscal 2021. In a period of
rising costs, the Company has been proactive to maintain margins through price
increases. The Company expects continued downward pressure on margins as
inflation continues to affect the overall economy. The Company limited new
orders on the spring early order program to mitigate further margin erosion. The
Company's current backlog fills the production schedule through the end of the
2022 calendar year.
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Our second quarter sales in our Modular Buildings segment were $1,209,000
compared to $1,194,000 for the same period in fiscal 2021, an increase of
$15,000, or 1.3%. Our year-to-date sales in our Modular Buildings segment were
$2,077,000 compared to $2,485,000 for the same period in fiscal 2021, a decrease
of $408,000, or 16.4%. While our sales increased in the three months ended May
31, 2022, we did see a decline in sales for the six months ended May 31, 2022,
as we completed a large construction project in the first six months of fiscal
2021 that boosted our revenue for that period. While this project did boost our
revenue in 2021, we expect the margin quality of our fiscal 2022 projects and
backlog to be stronger than the margin quality of the completed project in
fiscal 2021. Our current backlog and quoting activity indicate we should see a
strong finish to fiscal 2022. Gross margin for the three- and six-month periods
ended May 31, 2022 was 15.8% and 11.2%, respectively, compared to 15.7% and 9.1%
for the same respective periods in fiscal 2021. The large construction project
we finished in Q2 of fiscal 2021 brought down our fiscal 2021 margin. Rising
construction material costs has put additional pressure on our gross margin in
fiscal 2022. In addition, we have seen delays in delivery of construction
materials that has increased our lead times on building deliveries.
Our Tools segment had sales of $750,000 and $1,334,000 during the three- and
six-month periods ended May 31, 2022, respectively, compared to $658,000 and
$1,269,000 for the same respective periods in fiscal 2021, a 14.0% increase and
a 5.1% increase, respectively. Sales have rebounded in this segment to our
pre-pandemic levels. As oil prices continue to rise, we expect some of our lost
customers during fiscal 2020 to have demand for tools once again. We installed
new equipment in June to help increase our output and ability to generate more
sales in this time of high demand. Gross margin was 15.6% and 14.2% for the
three- and six-month periods ended May 31, 2021, respectively, compared to 19.9%
and 19.9% for the same respective periods in fiscal 2021. Our gross margin has
decreased year on year due to high staff turnover in fiscal 2022 that has
decreased the efficiency of our direct labor.
Expenses
Our second quarter consolidated selling expenses were $631,000 compared to
$544,000 for the same period in fiscal 2021. Our year-to-date selling expenses
were $1,118,000 in fiscal 2022 compared to $1,017,000 for the same period in
fiscal 2021. Our selling expenses are up in fiscal 2022 due to increased
commission expense from a sales increase and the addition of an inside sales
position that focuses primarily on whole goods to improve the customer service
experience in our agricultural products segment. We also have additional expense
related to trade show participation in fiscal 2022 as COVID-19 restrictions have
loosened. Selling expenses as a percentage of sales were 8.7% for the three- and
six-month periods ended May 31, 2022, compared to 9.5% and 9.2% for the same
respective periods in fiscal 2021.
Consolidated engineering expenses were $144,000 and $278,000 for the three- and
six-month periods ended May 31, 2022, respectively, compared to $122,000 and
$244,000 for the same respective periods in fiscal 2021. The increase in
engineering expenses year on year is due to improved company benefit offering
and salary increases. Engineering expenses as a percentage of sales were 2.0%
and 2.2% for the three- and six-month periods ended May 31, 2022, respectively,
compared to 2.1% and 2.2% for the same respective periods in fiscal 2021.
Consolidated administrative expenses for the three- and six-month periods ended
May 31, 2022 were $1,097,000 and $2,105,000, respectively, compared to $907,000
and $1,724,000 for the same respective periods in fiscal 2021. Administrative
expenses as a percentage of sales were 15.1% and 16.3% for the three- and
six-month periods ended May 31, 2022, respectively, compared to 15.9% and 15.5%
for the same respective periods in fiscal 2021. While administrative expenses
are up dollar wise, they have remained steady as a percentage of sales. We have
spent additional dollars on administrative expenses for employee retention
programs, bonuses, and recruitment.
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Net Income (Loss)
Consolidated net income was $175,000 for the three-month period ended May 31,
2022, compared to $64,000 for the same period in fiscal 2021. Our consolidated
net loss for the six months ended May 31, 2022, was $(231,000) compared to
$(251,000) in the same period in fiscal 2021. The improvement for the three and
six months ended May 31, 2022 is fueled by the success of our Agricultural
Products segment. Despite the success, we believe we can increase certain
production areas by updating capital equipment. We have taken the initial steps
to drive our business towards increased automation and efficiency to maximize
our manufacturing output and drive our costs down by securing funding from
Alumni Capital and Iowa Economic Development's Manufacturing 4.0 program. We
expect to see significant improvement in our operational ability as we are able
to implement new equipment in our facility over the next 24 months. Our Modular
Buildings segment had a slow start to fiscal 2022 but reached profitability each
of the last two months of the fiscal quarter. We are seeing strong demand for
our modular buildings to start out the second half of fiscal 2022. Despite the
sales increase in the Tools segment, we have seen decreased profitability from
employee turnover and rising overhead costs. We are working on additional price
increases and automation to increase our volume and margin in the second half of
fiscal 2022.
Order Backlog
The consolidated order backlog net of discounts as of July 10, 2022, was
$10,781,000 compared to $7,416,000 as of July 10, 2021, an increase of
$3,365,000 or 45%. The Agricultural Products segment order backlog was
$8,643,000 as of July 10, 2022, compared to $6,005,000 in fiscal 2021 an
increase of $2,638,0000 or 44%. We continue to see record backlog amounts in our
Agricultural Products segment due to high commodity prices and a strong product
offering. The backlog for the Modular Buildings segment was $1,401,000 as of
July 10, 2022, compared to $987,000 in fiscal 2021, an increase of $414,000 or
42%. The backlog for the Tools segment was $737,000 as of July 10, 2022,
compared to $424,000 in fiscal 2021, an increase of $313,000 or 74%. With our
backlog up significantly in all three segments, we will be focusing on ways to
increase our production output with automation and new capital equipment over
the next 18 months. Our order backlog is not necessarily indicative of future
revenue to be generated from such orders due to the possibility of order
cancellations and dealer discount arrangements we may enter into from time to
time.
Liquidity and Capital Resources
Our primary source of funds for the six months ended May 31, 2022 was cash
generated by financing activities. We utilized customer deposits of
approximately $1.5 million from our early order program to fund rising inventory
demands from increased backlog and supply chain delays. The Company offered a 3%
discount for a 50% deposit on equipment orders during the program period. The
deposits allowed us to better lock in pricing on materials and maintain product
margins in times of volatility. We also used term debt to fund a roof repair
project for our Armstrong facility. Inventory, modular building contract
fulfillment and deposits on equipment were the primary uses of cash in the first
six months of fiscal 2022. We expect our primary capital needs for the remainder
of fiscal 2022 to relate to operating costs, fulfillment of customer deposits,
purchases of equipment that improve our operations, and the retirement of debt.
We may begin drawing on the $3,000,000 equity line of credit we secured with
Alumni Capital as a source of cash for operational improvements.
We have $5,550,000 combined availability on revolving lines of credit with Bank
Midwest that, as of May 31, 2022, had an outstanding principal balance of
$4,703,225. The $5,000,000 line of credit is scheduled to mature on March 30,
2023 while the additional $550,000 of line availability is scheduled to mature
on November 30, 2022. The Company secured the additional line of credit to help
address increased inventory needs during our beet season and to help with cash
outlay needed for an initial floorplan program.
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Our 2022 early order program affected cash inflows from accounts receivable as
we allowed our customers a floorplan option which allows them to pay us the
sooner of retail date or 180 days. As of May 31, 2022, there is approximately
$463,000 in our accounts receivable on extended floorplan terms that would have
typically been collected by the balance sheet date.
We believe our current operations and financing arrangements will provide
sufficient cash to finance operations and pay debt when due during the next
twelve months. We expect to continue to be able to procure financing upon
reasonable terms.
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