Concerning ForwardLooking Statements
This Quarterly Report on Form 10-Q contains not only historical information, but
also forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Statements that are not historical are forward-looking
and reflect information concerning possible or assumed future results of
operations and planned financing of the Company. In addition, forward-looking
statements may be made orally or in press releases, conferences, reports, on the
Company's web site, or otherwise, in the future by or on behalf of the Company.
When used by or on behalf of the Company, the words "expect," "anticipate,"
"estimate," "believe," "intend," "will," "plan," "predict," "project,"
"outlook," "could," "may," "should" or similar expressions generally identify
forward-looking statements. The entire section entitled "Executive Overview and
Outlook" should be considered forward-looking statements. For these statements,
the Company claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve a number of risks and uncertainties,
including but not limited to those discussed in the "Risk Factors" section in
the Company's Annual Report on Form 10-K for the fiscal year ended August 31,
2021. Readers should not place undue reliance on any forward-looking statement
and should recognize that the statements are predictions of future results or
conditions, which may not occur as anticipated. Actual results or conditions
could differ materially from those anticipated in the forward-looking statements
and from historical results, due to the risks and uncertainties described herein
and in the Company's other public filings with the Securities and Exchange
Commission, including the Company's Annual Report on Form 10-K for the Company's
fiscal year ended August 31, 2021, as well as other risks and uncertainties not
now anticipated. The risks and uncertainties described herein and in the
Company's other public filings are not exclusive and further information
concerning the Company and its businesses, including factors that potentially
could materially affect the Company's financial results, may emerge from time to
time. Except as required by law, the Company assumes no obligation to update
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
COVID-19 Impact
In March 2020, the World Health Organization declared the 2019 coronavirus
disease (COVID-19) a global pandemic. This outbreak has adversely affected
workforces, customers, economies, and financial markets globally, leading to
economic uncertainty. Shelter-in-place or stay-at-home orders have been
implemented from time to time in many of the jurisdictions in which the Company
operates. However, the Company's manufacturing facilities worldwide have
remained open throughout the outbreak with limited exceptions. Accordingly,
COVID-19 has had a limited impact on the Company's manufacturing operations to
date, although the Company continues to experience supply chain challenges,
including increased lead times and limited availability of certain components,
raw material price increases, and labor and transportation logistical
constraints that have contributed to cost increases. During the quarter we
experienced a short-term disruption in labor availability in our Nebraska
manufacturing facility due to an increase in employee absences caused by the
Omicron variant. The pandemic has not had a material adverse effect on the
overall demand for the Company's irrigation or infrastructure products. However,
the pandemic has resulted in a slowdown of some road construction activity and
delays in certain project implementations. While the Company has implemented new
procedures to protect the health and well-being of employees and customers,
costs associated with these procedures have not been material.
The ongoing impact of COVID-19 on the Company's business, results of operations,
or cash flows remains uncertain and depends on numerous evolving factors that
the Company may not be able to accurately predict or effectively respond to,
including, without limitation, the duration and scope of the outbreak, mutations
of COVID-19, actions taken by governments, businesses, and individuals in
response to the outbreak, the effect on economic activity and actions taken in
response, the effect on customers and their demand for the Company's products
and services, and the Company's ability to manufacture, sell, distribute and
service its products, including without limitation as a result of supply chain
challenges, facility closures, social distancing, restrictions on travel, fear
or anxiety by the populace, and shelter-in-place orders. As such, the full
financial impact of COVID-19 on the Company's business is difficult to estimate.
Accounting Policies
In preparing the Company's condensed consolidated financial statements in
conformity with U.S. GAAP, management must make a variety of decisions which
impact the reported amounts and the related disclosures. These decisions include
the selection of the appropriate accounting principles to be applied and the
assumptions on which to base accounting estimates. In making these decisions,
management applies its judgment based on its understanding and analysis of the
relevant circumstances and the Company's historical experience.
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The Company's accounting policies that are most important to the presentation of
its results of operations and financial condition, and which require the
greatest use of judgments and estimates by management, are designated as its
critical accounting policies. See discussion of the Company's critical
accounting policies under Item 7 in the Company's Annual Report on Form 10-K for
the Company's fiscal year ended August 31, 2021. Management periodically
re-evaluates and adjusts its critical accounting policies as circumstances
change. There were no significant changes in the Company's critical accounting
policies during the six months ended February 28, 2022.
Recent Accounting Guidance
See Note 1 - Basis of Presentation and the disclosure therein of recently
adopted accounting guidance to the condensed consolidated financial statements
set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Executive Overview and Outlook
Operating revenues for the three months ended February 28, 2022 were $200.1
million, an increase of 39 percent compared to $143.6 million for the three
months ended February 28, 2021. Irrigation segment revenues increased 52 percent
to $180.7 million and infrastructure segment revenues decreased 23 percent to
$19.4 million. Net earnings for the three months ended February 28, 2022 were
$14.6 million, or $1.32 per diluted share, compared to net earnings of $11.9
million, or $1.08 per diluted share, for the three months ended February 28,
2021.
The primary drivers for the Company's irrigation segment are the need for
irrigated agricultural crop production, which is tied to population growth and
the attendant need for expanded food production, and the need to use water
resources efficiently. These drivers are affected by a number of factors,
including the following:
•
Agricultural commodity prices - As of February 2022, U.S. corn prices have
increased approximately 23 percent and U.S. soybean prices have increased
approximately 18 percent from February 2021. The increases are due to
constrained supply levels globally coupled with higher demand, including an
increase in corn and soybean demand in China. Subsequent to the end of the
quarter, the conflict between Ukraine and Russia has raised additional concerns
regarding available supply of agricultural commodities, further increasing corn
and soybean prices.
•
Net farm income - As of February 2022, the U.S. Department of Agriculture (the
"USDA") estimated U.S. 2022 net farm income to be $113.7 billion, a decrease of
4.5 percent from the USDA's estimated U.S. 2021 net farm income of $119.1
billion. The decrease is primarily related to the decrease in government support
payments.
•
Weather conditions - Demand for irrigation equipment is often positively
affected by storm damage and prolonged periods of drought conditions as
producers look for ways to reduce the risk of low crop production and crop
failures. Conversely, demand for irrigation equipment can be negatively affected
during periods of more predictable or excessive natural precipitation.
•
Governmental policies - A number of governmental laws and regulations can affect
the Company's business, including:
•
The Agriculture Improvement Act of 2018 (the "Farm Bill") was signed into law in
December 2018. The Farm Bill provides a degree of certainty to growers,
including funding for the Environmental Quality Incentives Program, which
provides financial assistance to farmers to implement conservation practices,
and is frequently used to assist in the purchase of center pivot irrigation
systems.
•
Changes to U.S. income tax laws enacted in December 2017 increased the benefit
of certain tax incentives, such as the Section 179 income tax deduction and
Section 168 bonus depreciation, which are intended to encourage equipment
purchases by allowing the entire cost of equipment to be treated as an expense
in the year of purchase rather than amortized over its useful life.
•
Biofuel production continues to be a major demand driver for irrigated corn,
sugar cane and soybeans as these crops are used in high volumes to produce
ethanol and biodiesel. In December 2021, the U.S. Environmental Protection
Agency ("EPA") proposed the Renewable Fuels Standard (RFS) volume requirements
for 2022, 2021, and 2020. The proposed volumes for 2022 are over 3.5 billion
gallons higher than the volume of renewable fuel used in 2020. The EPA is
proposing 2021 volumes at the level it predicts the market will use by the end
of the year, while proposing revisions to the 2020 standards to account for
market challenges, including the COVID-19 pandemic.
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•
Many international markets are affected by government policies such as subsidies
and other agriculturally related incentives. While these policies can have a
significant effect on individual markets, they typically do not have a material
effect on the consolidated results of the Company.
•
Currency - The value of the U.S. dollar fluctuates in relation to the value of
currencies in a number of countries to which the Company exports products and in
which the Company maintains local operations. The strengthening of the dollar
increases the cost in the local currency of the products exported from the U.S.
into these countries and, therefore, could negatively affect the Company's
international sales and margins. In addition, the U.S. dollar value of sales
made in any affected foreign currencies will decline as the value of the dollar
rises in relation to these other currencies.
Demand for irrigation equipment in the U.S. has remained robust over the same
prior year period due to positive farmer sentiment resulting from strong
agricultural commodity prices and a favorable outlook for net farm income.
During this period supply chain constraints such as steel and other raw material
costs as well as freight and logistics costs have continued to persist. These
circumstances have continued to temper operating margins and are expected to
continue to do so until these increased costs can be fully covered by increases
in selling prices. In addition, supply chain constraints impacting availability
of raw materials and trucking resources have contributed to cost increases and
have resulted in extended lead times for deliveries.
The most significant opportunities for growth in irrigation sales over the next
several years continue to be in international markets where irrigation use is
less developed and demand is driven primarily by food security, water scarcity
and population growth. While international irrigation markets remain active with
opportunities for further development and expansion, regional political and
economic factors, including armed conflict, currency conditions and other
factors can create a challenging environment. The Company continues to monitor
the Ukraine and Russia conflict for both short and long-term implications and
has currently suspended business activity in Russia and Belarus. Sales with
Russian and Ukrainian customers historically have represented less than 5% of
consolidated revenues. Additionally, international results are heavily dependent
upon project sales which tend to fluctuate and can be difficult to forecast
accurately.
The infrastructure business continues to be driven by the Company's
transportation safety products, the demand for which largely depends on
government spending for road construction and improvements. The enactment of the
Infrastructure Investment and Jobs Act in November 2021 marked the largest
infusion of federal investment into infrastructure projects in more than a
decade. This legislation introduced $110 billion in incremental federal funding,
planned for roads, bridges, and other transportation projects, which the Company
anticipates will translate into higher demand for its transportation safety
products.
The backlog of unshipped orders at February 28, 2022 was $111.0 million compared
with $101.4 million at February 28, 2021. The irrigation backlog is higher
compared to the prior year while the infrastructure backlog is lower. The
Company's backlog can fluctuate from period to period due to the seasonality,
cyclicality, timing and execution of contracts. Backlog typically represents
long-term projects as well as short lead-time orders, and therefore is generally
not a good indication of the next fiscal quarter's revenues.
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