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 August 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 nine-month periods ended
August 31, 2022 were $8,140,000 and $21,029,000, respectively, compared to
$6,592,000 and $17,703,000 during the same respective periods in fiscal 2021, a
$1,548,000, or a 23.5% increase for the three months and a $3,326,000, or 18.8%
increase for the nine months. We saw increased sales in both our Agricultural
Products and Tools segments for the quarter and year to date as discussed more
below. Consolidated gross margin for the three-month period ended August 31,
2022 was 25.1% compared to 26.4% for the same period in fiscal 2021.
Consolidated gross margin for the nine-month period ended August 31, 2022 was
25.8% compared to 25.4% for the same period in fiscal 2021.
Our third quarter sales in the Agricultural Products segment were $6,345,000
compared to $4,660,000 during the same period in fiscal 2021, an increase of
$1,685,000, or 36.2%. Our year-to-date Agricultural Product sales were
$15,823,000 compared to $12,017,000 during the same period in fiscal 2021, an
increase of $3,806,000, or 31.7%. We attribute the large increase in revenue to
an improved fiscal 2022 agricultural economy that produced five-to-ten-year
highs in commodity and livestock prices along with government assistance
programs that provided farmers with much needed government assistance during the
COVID-19 pandemic. We also saw an increase in orders from offering a floor plan
program to allow dealers extended terms in return for stocking inventory.
Compared to the nine months ending August 30, 2021, we have sold 20% more
grinder mixers, shipped 170% more beet equipment, and had a 30% increase in
manure spreader sales. Our backlog moving into Q4 of fiscal 2022 is expected to
keep our production line full until our fall 2022 early order program is
released to build up our fiscal 2023 backlog. We continue to face supplier
delays mainly for hydraulics, cylinders, and other components. We have managed
to keep our production line going through our diverse product offering despite
these supplier delays and continue to place purchase orders out further into
2023 to avoid part shortages. While the job market has been tough for most
employers through COVID-19 we have fared well in hiring and retaining an
adequate workforce. Gross margin for our Agricultural Products segment for the
three-month period ended August 31, 2022 was 29.7% compared to 27.4% for the
same period in fiscal 2021. Gross margin for our Agricultural Products segment
for the nine-month period ended August 31, 2022 was 30.6% compared to 29.6% for
the same period in fiscal 2021. We took steps to automate production tasks in
fiscal 2022 by bringing in three robotic welders. A high-definition plasma
cutter is scheduled to be delivered in Q4 of fiscal 2022 that we expect will
alleviate production bottlenecks and improve quality. While component prices
continue to rise, we have seen steel prices start to level off in Q3 of fiscal
2022. With the help of price increases we believe we can see improved margins
beginning in Q4 of fiscal 2022 and Q1 of fiscal 2023.
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Our third quarter sales in the Modular Buildings segment were $1,131,000
compared to $1,313,000 for the same period in fiscal 2021, a decrease of
$182,000, or 13.9%. Sales in our Modular Buildings segment for the nine months
ended August 31, 2022 were $3,208,000 compared to $3,798,000 for the same period
in fiscal 2021, a decrease of $590,000, or 15.5%. The decrease for the quarter
is due to our workforce focusing on readying rental buildings for sale and lease
to be deployed in Q4 of fiscal 2022. The decrease for the year is due to
contract delays, mainly slowed by funding approvals for large, quoted projects
this segment was working to close at the end of fiscal 2021. Two of these large
projects are under engineering contracts and could provide approximately $7
million to our fiscal 2023 backlog upon closing. We have experienced record
demand and sales for our agricultural buildings in this segment in fiscal 2022.
Gross margin for the three- and nine-month periods ended August 31, 2022 was
6.5% and 9.5%, respectively, compared to 25.8% and 14.8% for the same respective
periods in fiscal 2021. We have seen margins erode in fiscal 2022 due to rising
material costs on contracts which pricing was fixed. Due to competitive job
markets, we maintained higher staffing levels despite a slow first six months of
backlog with expectations a few large projects would be contracted in Q1 of
fiscal 2022.
Our Tools segment had sales of $664,000 and $1,998,000 during the three- and
nine-month periods ended August 31, 2022, respectively, compared to $619,000 and
$1,888,000 for the same respective periods in fiscal 2021, a 7.3% increase and a
5.8% increase, respectively. The increase for the quarter and year to date is
due to price increases to cover rising costs and continued demand for our
products. Our backlog remains strong and labor constraints will be the largest
challenge for this segment heading into Q4 of 2022. Gross margin was 12.2% for
the three- and 13.6% nine-month periods ended August 31, 2022, compared to 20%
for the same respective periods in fiscal 2021. Rising material and overhead
costs have decreased our gross margin for the quarter and year to date periods.
We increased prices near the end of Q3 of fiscal 2022 to help with margin
quality moving forward. We put a Haas milling machine in service in Q3 of fiscal
2022 to improve efficiency and increase output.
Expenses
Our third quarter consolidated selling expenses were $477,000 compared to
$532,000 for the same period in fiscal 2021. Our year-to-date selling expenses
were $1,595,000 in fiscal 2022 compared to $1,549,000 for the same period in
fiscal 2021. Selling expenses as a percentage of sales were 5.9% and 7.6% for
the three- and nine-month periods ended August 31, 2022, respectively, compared
to 8.1% and 8.7% for the same respective periods in fiscal 2021. The decrease in
selling expenses as a percentage of sales for the fiscal 2022 periods is due
largely to less commissionable sales in our Agricultural Products and Tools
segments. We also underwent a rebranding effort in fiscal 2021 that resulted in
increased expenses.
Consolidated engineering expenses were $168,000 and $446,000 for the three- and
nine-month periods ended August 31, 2022, respectively, compared to $144,000 and
$387,000 for the same respective periods in fiscal 2021. The increase in
engineering expenses was related to ongoing employee education and new product
development. Engineering expenses as a percentage of sales were 2.1% for the
three- and nine-month periods ended August 31, 2022, respectively, compared to
2.2% for the same respective periods in fiscal 2021.
Consolidated administrative expenses for the three- and nine-month periods ended
August 31, 2022 were $964,000 and $3,070,000, respectively, compared to $902,000
and $2,627,000 for the same respective periods in fiscal 2021. Administrative
expenses as a percentage of sales were 11.8% and 14.6% for the three- and
nine-month periods ended August 31, 2022, respectively, compared to 13.7% and
14.8% for the same respective periods in fiscal 2021. As a percentage of sales
our administrative expenses are down for both reported periods. However, our
actual dollars spent are up due recruitment costs of a key new employee and from
increased IT costs as we started the planning phase of an ERP upgrade.
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Net Income (Loss)
Consolidated net income was $238,000 for the three-month period ended August 31,
2022 compared to net loss of $56,000 for the same period in fiscal 2021. Our
consolidated net income for the nine months ended August 31, 2022 was $6,000
compared to $(195,000). The strong earnings of our Agricultural Segment are
being overshadowed by struggles in our Modular Building and Tools segments.
Contract delays in the Modular Building segment led to an overstaffed plant for
the first six months of fiscal 2022 while construction costs on projects under
contract continued to rise. While we are carrying a record backlog in the Tools
segment, we struggled with staffing to produce our products. We are taking steps
to reinvest in our business with automation and improved processes to put us in
a position to provide greater earnings going forward.
Order Backlog
The consolidated order backlog net of discounts as of October 5, 2022, was
$9,078,000 compared to $6,097,000 as of October 5, 2021, an increase of
$2,980,000 or 49%. The Agricultural Products segment order backlog was
$4,719,000 as of October 5, 2022, compared to $3,681,000 in fiscal 2021 an
increase of $1,038,0000 or 28%. We continue to see strong demand in our
Agricultural Products segment due to high commodity prices and quality product
offering. The backlog for the Modular Buildings segment was $3,705,000 as of
October 5, 2022, compared to $2,063,000 in fiscal 2021, an increase of
$1,642,000 or 80%. Strong demand for modular ag buildings boosted our backlog in
Q4 of fiscal 2022. The backlog for the Tools segment was $653,000 as of October
5, 2022, compared to $353,000 in fiscal 2021, an increase of $300,000 or 85%.
Demand for our products remains to be high for all three of our business
segments. We are focused on delivering for our customers despite supply chain
and labor challenges as we finish out fiscal 2022. 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 nine months ended August 31, 2022 was cash
generated by financing activities. We used term debt to finance a roof repair
for our Armstrong facility. We also used financing from our line of credit,
proceeds from a stock purchase agreement and customer deposits to fund
heightened inventory needs to keep up with demand and to invest in capital
equipment that improves our operational efficiency. 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. The Company has $2,454,472 available to
draw from Alumni Capital on our common stock purchase agreement. The $545,528
drawn so far has been used for capital improvements and to help with initial
cash needs for our floor plan program.
We have $5,550,000 combined availability on revolving lines of credit with Bank
Midwest that, as of August 31, 2022, had an outstanding principal balance of
$4,559,000. 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 August 31, 2022, there is approximately
$588,000 in our accounts receivable on extended floorplan terms that would have
typically been collected by the balance sheet date.
We received approximately $369,000 from Iowa Economic Development's
Manufacturing 4.0 program in Q3 of fiscal 2022. $244,000 of the funds have
reduced the right-of-use asset as discussed in Note 13 above. The roughly
$144,000 remaining reduced deposits paid in other current assets for a
high-definition plasma cutter and crane that is scheduled to be installed in Q4
of fiscal 2022. The funds for this award are provided by the State and Local
Fiscal Recovery Fund, part of the American Rescue Plan. The total amount of
award available to the Company is $500,000 for which the Iowa Economic
Development reimburses the Company for 75% of eligible capital expenditures that
increase automation or increase operational efficiency. The Company is required
to submit quarterly reports to the Iowa Economic Development through April 30,
2027 under this program and the funds are available for purchases through
December 31, 2024.
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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