Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of Part I of this report and the audited consolidated financial statements and related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended November 30, 2015. Some of the statements in this report may contain 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 “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
expectations regarding our plan to discontinue the operations of our Vessels segment (ii) our warranty costs and order backlog; (iii) our beliefs regarding the sufficiency of working capital and cash flows, and our continued ability to renew or obtain financing on reasonable terms when necessary; (iv) the impact of recently issued accounting pronouncements; (v) our intentions and beliefs relating to our costs
, business strategies, and future performance; (vi) our expected financial results;
and (vii) our expectations concerning our primary capital and cash flow needs
.
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 tightening 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) obstacles related to integration of acquired product lines and businesses; (iv) obstacles related to liquidation of product lines and segments (v) the effect of general economic conditions, including consumer and governmental spending, on the demand for our products and the cost of our supplies and materials; (vi) fluctuations in seasonal demand and our production cycle; and (vii) other factors described from time to time in our reports to the SEC. 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.
Critical Accounting Policies
Our critical accounting policies involving the more significant judgments and assumptions used in the preparation of the financial statements as of August 31, 2016 have remained unchanged from November 30, 2015. Disclosure of these critical accounting policies is incorporated by reference from Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended November 30, 2015
.
Results of Operations – Continuing Operations
Net Sales and Cost of Sales
Our consolidated corporate sales for continuing operations for the
three and nine-month period ended August 31, 2016 were $6,431
,000 and $17,442,000 compared to $6,514,000 and $20,605,000 during the same respective periods in 2015, a $83,000 or 1.3% decrease for the third fiscal quarter, and a $3,163,000 or 15.4% decrease year-to-date. The decreases in revenue are primarily due to the decreased demand for our agricultural products that we have been experiencing for the last year, but is somewhat offset by increases in revenues in our Scientific segment. Consolidated gross margin for the three and nine-month periods ended August 31, 2016 was 19.3% and 25.0% compared to 19.4% and 26.3% for the same respective periods in fiscal 2015.
Our third quarter sales at Manufacturing were $4,992,000 compared to $4,911,000 during the same period of 2015, an increase of $81,000, or 1.6%. Our year-to-date sales at Manufacturing were $12,757,000 compared to $16,592,000 during the same period of 2015, a decrease of $3,835,000 or 23.1%. The year-to-date revenue decrease is due to decreased demand across all of our agricultural products, including our UHC reels product which is now being produced in Armstrong after the sale of the facility in Ames, Iowa. The gross margin of our agricultural products segment for the three and nine-month periods ended August 31, 2016 was 19.0% and 24.9% compared to 18.0% and 27.2% for the same respective periods in 2015. Our decreased gross margins for the third quarter of each fiscal year is due to a larger portion of the revenues from self-propelled beet equipment, which has lower margins. Our year-to-date decreased gross margin is directly related to our decreased sales volume.
Our three and nine-month sales at Scientific were $910,000 and $3,102,000 compared to $1,103,000 and $2,162,000 for the same periods in fiscal 2015, a decrease of $193,000, or 17.5%, for the three-month period, and an increase of $940,000 or 43.5% for the nine-month period. Our increases in revenue are due to increases in our sales of our agricultural buildings, which we believe to be a result of our increased marketing in this area. Gross margin for the quarter and year-to date ended Augusts 31
, 2016 was 20.0% and 26.0% compared to 24.8% and 20.5% for the same period in 2015. The swings in gross margin are largely attributable to the changes in the timing of our revenues, which affects our variable gross margin available to cover fixed costs
.
Metals had sales of $530,000
during the three months ended August 31, 2016, compared to $500,000 for the same period in 2015, a 6.0% increase. Metals had sales of $1,583,000 during the nine months ended August 31, 2016 compared to $1,851,000 for the same period in fiscal 2015, a $268,000 decrease, or 14.5%. The decrease on a year-to-date basis are largely due to a general decline in the energy industry, but is somewhat offset by increases in our sales to other industries, and we will continue our marketing to further this goal. Gross margin was 21.1% and 23.1% for the three- and nine-month periods ending August 31, 2016, compared to 20.6% and 25.1% for the same periods of fiscal 2015, respectively. Our lower revenues and reasonably stable fixed costs affect our gross margins at Metals
.
Expenses
Our third fiscal quarter consolidated selling expenses were $456,000 compared to $508
,000 for the same period in 2015. Our year-to-date consolidated selling expenses were $1,353,000 in 2016 compared to $1,605
,000 for the same period in 2015.The decreases in selling expenses are largely due to decreased commission and salary expense compared to the prior year periods
. Selling expenses as a percentage of sales were 7.1% and 7.8% for the
three and nine-month periods ended August 31, 2016, compared to 7.8% and 7.8% for the same periods in 2015.
Consolidated engineering expenses were $124,000 and $315,000 for the three and nine-month periods ended August 31, 2016, compared to $128,000 and $331,000 from the same periods in 2015.
Engineering expenses as a percentage of sales were 1.9% and 1.8% for the three and nine-month period ended August 31, 2016, compared to 2.0% and 1.6% for the same periods in 2015.
Consolidated administrative expenses for the
three and nine-month periods ended August 31, 2016 were $879,000 and $2,618,000 compared to $906,000 and $2,951
,000 for the same periods in 2015. Administrative expenses as a percentage of sales were 13.7% and 15.0% for the
three and nine-month periods ended August 31, 2016, compared to 13.9% and 14.3% for the same period in 2015.
Income
from Continuing Operations
Consolidated net (loss) from continuing operations was $(150,000) for the three-month period ended August 31, 2016, compared to $(716,000) for the same period in 2015. Consolidated net income (loss) for the nine-month period ended August 31, 2016 was $1,000 compared to $(262,000) for the same period in 2015. The decreased loss from continuing operations in the three- and nine-month periods was largely due to the impairment of goodwill of $618,000 in the third quarter of fiscal 2015, offset by the overall decreased revenues for the nine-month period.
Order Backlog
The consolidated order backlog net of discounts for continuing operations as of September 29, 2016 was $1,510,000 compared to $2,527
,000 as of September 29, 2015. The agricultural products segment order backlog was $773,000 as of September 29, 2016 compared to $1,545
,000 in fiscal 2015. We continue to see decreased order volume as a result of the overall downturn in the agricultural economy. The backlog for the modular buildings segment was $637,000 as of September 29, 2016, compared to $890,000 in fiscal 2015. The backlog for the tools segment was $99,000 as of September 29, 2016, compared to $92,000 in fiscal 2015. 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.
Results of Operations – Discontinued Operations
During our third quarter of fiscal 2016
, we made the decision to exit the pressure vessels industry and are currently working to liquidate the assets. Our third fiscal quarter and year-to-date sales at Vessels were $358,000 and $1,481,000 compared to $372,000 and $1,374,000 for the same respective periods in 2015. While we do have increased sales over fiscal 2015 year to date, we do not expect any significant sales in the coming quarters. Gross margin for the quarter and year-to-date ended August 31, 2016 was (27.1%) and (0.5%) compared to 0.8% and 7.9% in 2015. Gross margin in fiscal 2016 as a whole has been affected negatively by decreased efficiencies. The efficiencies were negatively affected by large projects, training of new production staff during the beginning of the year, and more recently by loss of production staff after our announcement to discontinue operations. Our third fiscal quarter and year-to-date operating expenses at Vessels were $104,000 and $363,000 compared to $108,000 and $280,000 for the same respective periods in 2015.
Liquidity and Capital Resources
Our primary sources of funds for the nine months ended August 31, 2016 were decreases in our inventory balances and the sale of our Ames facility; our primary uses of cash were costs of operation and payments on our line of credit and payments on term debt. We expect our primary capital needs for the remainder of the fiscal year to relate to costs of operation, including production.
We have a $5,000,000 revolving line of credit with U.S. Bank, which, as of August 31, 2016
, had an outstanding principal balance of $3,434,114
. The line of credit is scheduled to mature on May 1, 2017, and is renewable annually. In addition, two of our five outstanding term loans with U.S. Bank are scheduled to mature in May of 2017, with a final payment of principal and accrued interest in the amount of $283,500 due May 10, 2017
and a final payment of principal and accrued interest in the amount of $890,000 due May 25, 2017. For additional information about our financing activities, please refer to Note 9 to the audited consolidated financial statements and to the discussion entitled “Liquidity and Capital Resources,” each contained in our Annual Report on Form 10-K for the fiscal year ended November 30, 2015, as well as Note 8 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report.
We believe that our cash flows from operations and current financing arrangements will provide sufficient cash to finance operations and pay debt when due during the next twelve months. We expect to continue to rely on cash from financing activities to supplement our cash flows from operations in order to meet our liquidity and capital expenditure needs in the near future. We expect to continue to be able to procure financing upon reasonable terms; however, there is no assurance we will be able to do so.
Off Balance Sheet Arrangements
None.