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,
2022. 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, 2022, 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 coronavirus (COVID-19) a
global pandemic. COVID-19 has had a limited impact on the Company's
manufacturing operations to date. While the Company implemented new procedures
to protect the health and well-being of employees and customers, costs
associated with these procedures have not been material. In addition, the
pandemic has not had a material adverse effect on demand for the Company's
irrigation or infrastructure products; however, the COVID-19 pandemic did result
in a slowdown of road construction activity and delays in certain project
implementations. As pandemic conditions improved and economic activity
increased, the Company experienced a number of supply chain challenges including
increased lead times and limited availability of certain components, significant
raw material inflation, and labor and logistics constraints.
The ongoing effects of the COVID-19 pandemic on the Company's business, results
of operations, or cash flows in future periods remain uncertain and will depend
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 any outbreak; the transmissibility and severity of new variants of
COVID-19; actions taken by governments, businesses, and individuals in response
to any 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, 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.
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.
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, 2022. Management periodically
re-evaluates and
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adjusts its critical accounting policies as circumstances change. There were no
significant changes in the Company's critical accounting policies during the
three months ended November 30, 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 November 30, 2022 were $176.2
million, an increase of 6 percent compared to $166.2 million for the three
months ended November 30, 2021. Irrigation segment revenues increased 4 percent
to $152.1 million and infrastructure segment revenues increased 19 percent to
$24.1 million. Net earnings for the three months ended November 30, 2022 were
$18.2 million, or $1.65 per diluted share, compared to net earnings of $7.9
million, or $0.72 per diluted share, for the three months ended November 30,
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 November 2022, U.S. corn prices have
increased approximately 15 percent and U.S. soybean prices have increased
approximately 18 percent from November 2021. Higher commodity prices are being
sustained by constrained supply levels globally coupled with higher demand. The
continued conflict between Ukraine and Russia has put additional pressure on the
availability of agricultural commodities, further increasing corn, wheat, and
soybean prices.
•
Net farm income - As of December 2022, the U.S. Department of Agriculture (the
"USDA") estimated U.S. 2022 net farm income to be $160.5 billion, an increase of
14 percent from the USDA's estimated U.S. 2021 net farm income of $141.0
billion. A projected increase in cash receipts and other cash farm-related
income has more than offset a decrease in government support payments and higher
cash expenses. If the estimated 2022 net farm income is realized, such income
would be at its highest level since 1973.
•
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. The current Farm Bill will expire at the end of September 2023.
•
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 100 percent of the cost of equipment to be treated as an
expense in the year of purchase rather than amortized over its useful life. This
benefit is scheduled to be phased out over a five-year period, beginning in 2023
when the allowable deduction drops to 80 percent of the cost of equipment.
•
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 2022, the U.S. Environmental Protection
Agency ("EPA") proposed the Renewable Fuels Standard (RFS) volume requirements
for 2023, 2024, and 2025. The proposed volumes for 2023 are comparable to the
volume of renewable fuel estimated to be used in 2022, with years 2024 and 2025
increasing 5 percent and 4 percent, respectively.
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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 the Company has been able to maintain its pricing while
supply chain constraints, such as steel and other raw material costs as well as
freight and logistics costs, eased. The Company expects to continue to actively
track these circumstances and will monitor its prices as increased costs that
are passed through become fully realized.
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 suspended new business activity in Russia and Belarus since February 2022.
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 November 30, 2022 was $129.6 million compared
with $154.8 million at November 30, 2021. 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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