ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included herein and our Consolidated Financial Statements, accompanying notes 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 July 31, 2019. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under “Forward-Looking Statements” and Item 1A, Risk Factors, of this quarterly report on Form 10-Q for the quarter ended January 31, 2020 and of our Annual Report on Form 10-K for the fiscal year ended July 31, 2019.
OVERVIEW
We develop, mine, manufacture and market sorbent products principally produced from clay minerals and, to a lesser extent, other clay-like sorbent materials. Our principal products include agricultural and horticultural chemical carriers, animal health and nutrition products, bleaching clay and fluid purification aids, cat litter, industrial and automotive floor absorbents and sports field products. Our products are sold to two primary customer groups, including customers who resell our products as originally produced to the end consumer and those who use our products as part of their production process or use them as an ingredient in their final finished product. We have two reportable operating segments based on the different characteristics of our two primary customer groups: Retail and Wholesale Products Group and Business to Business Products Group, as described in Note 8 of the Notes to unaudited Condensed Consolidated Financial Statements.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JANUARY 31, 2020 COMPARED TO
SIX MONTHS ENDED JANUARY 31, 2019
CONSOLIDATED RESULTS
Consolidated net sales for the six months ended January 31, 2020 were $142,127,000, a 4% increase compared to net sales of $136,023,000 for the six months ended January 31, 2019. Net sales increased for our Retail and Wholesale Products Group but decreased for our Business to Business Products Group. Segment results are discussed further below.
Consolidated gross profit for the first six months of fiscal year 2020 was $38,893,000, or 27% of net sales, compared to $31,414,000, or 23% of net sales, for the first six months of fiscal year 2019. Lower freight and natural gas costs drove the increase in gross profit. Freight costs declined approximately 21% per manufactured ton for the first six months of fiscal year 2020 compared to the same period in fiscal year 2019 as the result of lower transportation rates from improved truck availability. In addition, costs were higher in the first half of the prior fiscal year due to other one-time events, including a greater number of product transfers between our plants and warehouses to support customer service during the implementation of our new ERP system on August 1, 2018 and disruptions due to Hurricane Michael. Our overall freight costs also vary between periods depending on the mix of products sold and the geographic distribution of our customers. The cost of natural gas used to operate kilns that dry our clay was approximately 29% lower per manufactured ton in the first six months of fiscal year 2020 compared to the first six months of fiscal year 2019. Non-fuel manufacturing costs per manufactured ton were flat compared to the first six months of the prior fiscal year. In contrast, packaging costs per manufactured ton for the first six months of fiscal year 2020 were slightly higher compared to the first six months of fiscal year 2019, due in part to the mix of products produced. In addition, many of our contracts for packaging purchases are subject to periodic price adjustments, which trail changes in underlying commodity prices.
Total SG&A expenses were $28,899,000 for the first six months of fiscal year 2020, a 5% increase compared to $27,584,000 for the first six months of fiscal year 2019. The discussion of the segments' operating incomes below describes the changes in SG&A expenses that were allocated to the operating segments. The remaining unallocated corporate expenses included a higher estimated annual incentive bonus accrual, which was based on performance targets established for each fiscal year. The increased bonus expense was partially offset by a curtailment gain reported upon the freeze of our SERP in the second quarter of fiscal year 2020 (see Note 7 of the Notes to the unaudited Condensed Consolidated Financial Statements). In addition, higher SG&A expenses were reported in the first half of fiscal year 2019 for consulting costs related to our ERP system implemented in the first quarter of the prior fiscal year and legal costs for legal proceedings resolved in the third quarter of the prior fiscal year.
Consolidated net income before taxes for the first six months of fiscal year 2020 was $9,835,000, a 168% increase from net income before taxes of $3,672,000 for the first six months of fiscal year 2019. Results for the first six months of fiscal year 2020 were driven by the factors discussed above, including higher sales and lower freight and natural gas costs, which more than offset the increase in SG&A expenses.
The tax expense for the first six months of fiscal year 2020 was $1,626,000 (an effective tax rate of 16.5%) compared to $456,000 for the first six months of fiscal year 2019 (an effective tax rate of 12.4%). An estimated annual effective tax rate was used in both periods to determine the provision for income taxes, which is based on expected annual taxable income and the assessment of various tax deductions, including depletion. The lower tax rate in fiscal year 2019 primarily relates to the discrete benefit recorded relating to the completion of a federal income tax return examination in the first quarter of that year.
BUSINESS TO BUSINESS PRODUCTS GROUP
Net sales of the Business to Business Products Group for the first six months of fiscal year 2020 were $50,949,000, a decrease of $835,000, or 2%, from net sales of $51,784,000 for the first six months of fiscal year 2019. Net sales of our agricultural and horticultural chemical carrier products decreased approximately 19% for the first six months of fiscal year 2020 compared to the same period in fiscal year 2019. Sales of traditional granules declined due primarily to the loss of a customer, which was partially offset by increased sales to an existing customer. These lower sales were significantly offset by higher sales of other products in the Business to Business Group, including an increase of approximately 11% compared to the first six months of the prior fiscal year for sales of our co-packaged coarse cat litter. Net sales of our animal health and nutrition products also increased approximately 8% compared to the first six months of the prior year. Sales growth occurred for our feed additives primarily in Africa, Mexico and Asia, excluding China. See “Foreign Operations” below for a discussion of sales in China, which were impacted by the spread of the African swine fever in the prior year and the recent novel coronavirus (COVID-19) outbreak (“the coronavirus”). Net sales of our fluids purification products increased approximately 1% compared to the first six months of the prior fiscal year as higher sales to edible oil producers offset lower sales that resulted from a biodiesel processing customer closing operations.
SG&A expenses for the Business to Business Products Group were approximately 7% higher for the first six months of fiscal year 2020 compared to the same period of the prior year, including higher costs for product development and support, increased compensation-related expenses and additional costs to establish our subsidiary in Indonesia.
The Business to Business Products Group’s operating income for the first six months of fiscal year 2020 was $15,848,000, an increase of $1,544,000, or 11%, from operating income of $14,304,000 for the first six months of fiscal year 2019. The improved operating income was driven primarily by the lower freight and natural gas costs discussed in “Consolidated Results” above.
RETAIL AND WHOLESALE PRODUCTS GROUP
Net sales of the Retail and Wholesale Products Group for the first six months of fiscal year 2020 were $91,178,000, an increase of $6,939,000, or 8%, from net sales of $84,239,000 for the first six months of fiscal year 2019. Sales of cat litter drove the sales increase. Total cat litter net sales were approximately 11% higher compared to the first six months of the prior fiscal year, with increased sales for both private label and branded litters. Sales of private label scoopable litter increased to existing customers, some of whom had expanded their selection of our products during the prior fiscal year. Higher sales of private label coarse litter included incremental sales to customers who added these products in the second half of the prior fiscal year. Branded coarse litter and litter box liners sales were also higher compared to the first half of the prior fiscal year. Cat litter sales by our subsidiary in Canada further contributed to the sales increase, as discussed in “Foreign Operations” below. Also included in the Retail and Wholesale Products Group's results were slightly lower sales for our industrial and automotive products compared to the first six months of fiscal year 2019.
SG&A expenses for the Retail and Wholesale Products Group were approximately 7% lower in the first six months of fiscal year 2020 compared to the first six months of fiscal year 2019. Lower advertising expense in the first six months of fiscal year 2020 contributed to the reduction in costs compared to the same period in the prior year; however, we expect spending for advertising in the remainder of fiscal 2020 to result in a higher expense for the full year of fiscal 2020 compared to fiscal year 2019. In addition, non-recurring expenses were incurred in the first half of fiscal year 2019 for customer compliance fees related to shipping and data communication incurred in connection with the implementation of the ERP system.
The Retail and Wholesale Products Group's operating income for the first six months of fiscal year 2020 was $8,968,000, an increase of $6,306,000 from operating income of $2,662,000 for the first six months of fiscal year 2019. The improved operating income was driven by the higher sales and lower SG&A described above, and by lower freight and natural gas costs discussed in “Consolidated Results”.
FOREIGN OPERATIONS
Foreign operations include our subsidiaries in Canada and the United Kingdom, which are reported in the Retail and Wholesale Products Group, and our subsidiaries in China, Mexico and Indonesia, which are reported in the Business to Business Products Group. Net sales by our foreign subsidiaries during the first six months of fiscal year 2020 were $7,154,000, an increase of $672,000, or 10%, compared to net sales of $6,482,000 during the first six months of fiscal year 2019. This increase was attributable primarily to new cat litter business for our Canada subsidiary. Sales of our animal health products by our foreign operations grew to a lesser extent, as higher sales for our subsidiaries in Mexico and Indonesia were mostly offset by lower sales for our subsidiary in China. Sales of animal health products to pork producers in China have not fully recovered since the spread of African swine fever in fiscal year 2019. In addition, our Chinese subsidiary's business operations have been impacted in the second quarter of fiscal year 2020 by the recent outbreak of the coronavirus. Chinese government restrictions to control the spread of the coronavirus disrupted our sales office, limited travel by our salesforce and delayed product shipments. Net sales by our foreign subsidiaries represented 5% of our consolidated net sales during the first six months of both fiscal years 2020 and 2019.
Our foreign subsidiaries reported a net loss of $169,000 for the first six months of fiscal year 2020, compared to net income of $315,000 for the first six months of fiscal year 2019. The lower sales described above for our subsidiary in China and additional costs to establish operations in Indonesia drove the net loss.
Identifiable assets of our foreign subsidiaries as of January 31, 2020 were $10,158,000, compared to $9,643,000 as of January 31, 2019. The increase was attributed primarily to the addition of our subsidiary in Indonesia and new right-of-use lease assets recorded upon the implementation of ASC 842, Leases.
THREE MONTHS ENDED JANUARY 31, 2020 COMPARED TO
THREE MONTHS ENDED JANUARY 31, 2019
CONSOLIDATED RESULTS
Consolidated net sales for the three months ended January 31, 2020 were $71,005,000, a 2% increase compared to net sales of $69,880,000 for the three months ended January 31, 2019. Net sales increased for our Retail and Wholesale Products Group, but decreased for our Business to Business Products Group. Segment results are discussed further below.
Consolidated gross profit for the three months ended January 31, 2020 was $18,958,000, or 27% of net sales, compared to $15,404,000, or 22% of net sales, for the second quarter of fiscal year 2019. Lower freight and natural gas costs drove the increase in gross profit. Freight costs declined approximately 21% for the second quarter of fiscal year 2020 per manufactured ton as the result of lower transportation rates from improved truck availability. Our overall freight costs also vary between periods depending on the mix of products sold and the geographic distribution of our customers. The cost of natural gas used to operate kilns that dry our clay was approximately 36% lower per manufactured ton for the second quarter of fiscal year 2020 compared to the same period of fiscal year 2019. Non-fuel manufacturing costs per ton produced were slightly lower compared to the second quarter in the prior fiscal year. In contrast, packaging costs per manufactured ton were slightly higher compared to the second quarter of the prior fiscal year, driven primarily by the mix of products produced. In addition, many of our contracts for packaging purchases are subject to periodic price adjustments, which trail changes in underlying commodity prices.
Total SG&A expenses were $13,085,000 for the second quarter of fiscal year 2020, a 4% increase compared to $12,577,000 for the second quarter of fiscal year 2019. The discussion below describes the SG&A expenses allocated to the operating segments. The remaining unallocated corporate expenses included a higher estimated annual incentive bonus accrual, which was based on performance targets established for each fiscal year. The increased bonus expense was partially offset by a curtailment gain reported upon the freeze of our SERP in the second quarter of fiscal year 2020 (see Note 7 of the Notes to the unaudited Condensed Consolidated Financial Statements). In addition, lower SG&A expenses were reported in the second quarter of fiscal year 2020 for consulting costs related to our ERP system and costs for legal proceedings resolved in the third quarter of the prior fiscal year.
Consolidated net income before taxes for the second quarter of fiscal year 2020 was $5,758,000, compared to net income before taxes of $2,788,000 for the second quarter of fiscal year 2019. Results for the second quarter of fiscal year 2020 were driven by the factors described above, including higher sales and lower freight and natural gas costs, which more than offset the increase in SG&A expenses.
Tax expense was $1,009,000 for the second quarter of fiscal year 2020, compared to $506,000 for the second quarter of fiscal year 2019, which resulted in an effective tax rate of 18% for the second quarters of both fiscal years. We used an estimated annual
effective tax rate in determining our quarterly provision for income taxes, which is based on expected annual taxable income and the assessment of various tax deductions, including depletion.
BUSINESS TO BUSINESS PRODUCTS GROUP
Net sales of the Business to Business Products Group for the second quarter of fiscal year 2020 were $24,471,000, a decrease of $1,987,000, or 8%, from net sales of $26,458,000 for the second quarter of fiscal year 2019. Net sales of our agricultural and horticultural chemical carrier products decreased 31%, due primarily to the loss of a customer for our traditional granules. Net sales of our fluids purification products decreased approximately 1% for the second quarter of fiscal year 2020. Lower sales due to a plant closing of a biodiesel processing customer was partially offset by higher sales to edible oil producers. Net sales of our animal health and nutrition products were essentially flat as sales growth for our feed additives in Mexico and Asia, excluding China, mostly offset lower sales in China. See “Foreign Operations” below for a discussion of sales in China, which were impacted by the spread of the African swine fever in the prior year and the recent outbreak of the coronavirus. Net sales of our co-packaged coarse cat litter for the second quarter were approximately 8% higher compared to the second quarter of the prior year.
SG&A expenses for the Business to Business Products Group were approximately 11% higher compared to the second quarter of fiscal year 2019, including higher costs for product development and support and compensation-related expenses.
The Business to Business Products Group’s operating income for the second quarter of fiscal year 2020 was $7,552,000, an increase of $280,000, or 4%, from operating income of $7,272,000 in the second quarter of fiscal year 2019. The improved operating income was driven by the lower freight and natural gas costs discussed in “Consolidated Results” above.
RETAIL AND WHOLESALE PRODUCTS GROUP
Net sales of the Retail and Wholesale Products Group for the second quarter of fiscal year 2020 were $46,534,000, an increase of $3,112,000, or 7%, from net sales of $43,422,000 for the second quarter of fiscal year 2019. Total cat litter net sales were 10% higher compared to the second quarter of fiscal year 2019, driven by increased sales of both private label and branded litters. Sales of private label scoopable litter increased to existing customers, some of whom had expanded their selection of our products during the prior fiscal year. Higher sales of private label coarse litter included incremental sales to customers who added these products in the second half of the prior fiscal year. Branded coarse litter and litter box liners sales were also higher compared to the second quarter of the prior year. Cat litter sales by our subsidiary in Canada also contributed to the sales increase, as discussed in “Foreign Operations” below. Also included in the Retail and Wholesale Products Group's results were slightly lower sales for our industrial and automotive products compared to the second quarter of fiscal year 2019.
SG&A expenses for the Retail and Wholesale Products Group were slightly higher to support the increased sales compared to the second quarter of fiscal year 2019.
For the second quarter of fiscal year 2020, the Retail and Wholesale Products Group reported operating income of $5,608,000, an increase of $2,955,000, compared to operating income of $2,653,000 for the second quarter of fiscal year 2019. The improved operating income was driven by the higher sales described above, and by lower freight and natural gas costs discussed above in “Consolidated Results”.
FOREIGN OPERATIONS
Foreign operations included our subsidiaries in Canada and the United Kingdom, which are reported in the Retail and Wholesale Products Group, and our subsidiaries in China, Mexico and Indonesia, which are reported in the Business to Business Products Group. Net sales by our foreign subsidiaries during the second quarter of fiscal year 2020 were $3,505,000, a 15% increase compared to net sales of $3,039,000 in the second quarter of fiscal year 2019. This increase was attributable primarily to new cat litter business and improved sales of industrial absorbents for our Canada subsidiary. Sales of our animal health products by our foreign operations grew to a lesser extent, as higher sales for our Mexico and Indonesia subsidiaries were mostly offset by lower sales for our subsidiary in China. Sales of these products to pork producers in China have not fully recovered since the spread of African swine fever in fiscal year 2019. In addition, business operations of our Chinese subsidiary have been impacted in the second quarter of fiscal year 2020 by the recent outbreak of the coronavirus. Chinese government restrictions to control the spread of the coronavirus disrupted our sales office, limited travel by our salesforce and delayed product shipments. Our foreign subsidiaries' net sales represented approximately 5% and 4% of consolidated net sales during the second quarters of fiscal years 2020 and 2019, respectively.
Our foreign subsidiaries reported a net loss attributable to Oil-Dri of $101,000 for the second quarter of fiscal year 2020 compared to net income of $79,000 for the second quarter of fiscal year 2019. The lower sales described above for our China subsidiary,
higher material costs for our subsidiary in the United Kingdom and additional costs to establish operations in Indonesia drove the net loss.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements include: funding working capital needs; purchasing and upgrading equipment, facilities, information systems and real estate; supporting new product development; investing in infrastructure; repurchasing stock; paying dividends; making pension contributions; and, from time to time, business acquisitions. During the first six months of fiscal year 2020, we principally used cash generated from operations to fund these requirements.
The following table sets forth certain elements of our unaudited Condensed Consolidated Statements of Cash Flows (in thousands):
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended January 31,
|
|
2020
|
|
2019
|
Net cash provided by operating activities
|
$
|
14,270
|
|
|
$
|
2,692
|
|
Net cash (used in) provided by investing activities
|
(7,286
|
)
|
|
455
|
|
Net cash used in financing activities
|
(7,133
|
)
|
|
(6,505
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
(144
|
)
|
|
(24
|
)
|
Net decrease in cash and cash equivalents
|
$
|
(293
|
)
|
|
$
|
(3,382
|
)
|
Net cash provided by operating activities
In addition to net income, as adjusted for depreciation and amortization and other non-cash operating activities, the primary sources and uses of operating cash flows for the first six months of fiscal years 2020 and 2019 were as follows:
Accounts receivable, less allowance for doubtful accounts, increased $213,000 in the first six months of fiscal year 2020 compared to an increase of $4,697,000 in the first six months of fiscal year 2019. Higher sales in the second quarter of fiscal year 2020 compared to the second quarter of 2019 drove the increase in accounts receivable as of January 31, 2020. The accounts receivable balance at the end of the second quarter of fiscal year 2019 was significantly higher due to delays in sending invoices to some customers upon implementation of the new ERP system on August 1, 2018. The variation in accounts receivable balances also reflected differences in the level and timing of collections as well as the payment terms provided to various customers.
Inventory decreased $1,508,000 in the first six months of fiscal year 2020 compared to an increase of $5,607,000 in the first six months of fiscal year 2019. Packaging and finished goods decreased as of January 31, 2020 due to higher production and efforts to better manage our safety stock levels. In addition, our inventory obsolescence reserve increased during the first six months of fiscal year 2020 which is attributable to our focus on inventory management and enhanced data available from our new ERP system. Previously, inventory had increased significantly during the first six months of fiscal year 2019 due to production interruptions and increased safety stock for anticipated disruptions during the new ERP system implementation.
Prepaid expenses decreased $1,561,000 in the first six months of fiscal year 2020 compared to a decrease of $970,000 in the first six months of fiscal year 2019. Lower prepaid advertising costs drove the decrease in the first six months of fiscal year 2020. Lower prepaid taxes was the primary reason for lower prepaid expenses in the first six months of fiscal year 2019. Prepaid expenses also fluctuated in both periods due to the timing of prepayment of insurance premium renewals.
Other assets decreased $731,000 in the first six months of fiscal year 2020 compared to an increase of $422,000 in the first six months of fiscal year 2019. The decrease in fiscal year 2020 related to amortization of our operating lease right-of-use lease assets while the increase in fiscal year 2019 related to additional costs to establish operations in Indonesia.
Accounts payable, including income taxes payable, increased $2,661,000 in the first six months of fiscal year 2020 compared to an increase of $2,295,000 in the first six months of fiscal year 2019. Higher accrued income taxes due to higher net income drove the increase in the first half of fiscal year 2020. Accounts payable increased in the first half of fiscal year 2019 as we managed our cash flow due to issues related to the ERP system implementation. Trade and freight payables also varied in both periods due to the timing of payments, fluctuations in the cost of goods and services we purchased, production volume levels and vendor payment terms.
Accrued expenses decreased $1,602,000 in the first six months of fiscal year 2020 compared to a decrease of $1,390,000 in the first six months of fiscal year 2019. The payout of the prior fiscal year's discretionary incentive bonus reduced accrued salaries
in both fiscal years. Accrued freight also decreased in the first six months of fiscal year 2020, but increased in the first six months of fiscal year 2019 due to cash flow management as described above. Accrued plant expenses also fluctuated due to timing of payments, changes in the cost of goods and services we purchased, production volume levels and vendor payment terms.
Pension and postretirement benefits decreased $5,536,000 in the first six months of fiscal year 2020 compared to an increase in the first six months of fiscal year 2019 of $859,000. See Note 7 of the Notes to the unaudited Condensed Consolidated Financial Statements for explanation of the decrease in fiscal year 2020 upon curtailment of our Pension Plan. The increase in fiscal year 2019 is due to normal increases in benefit obligation due to additional service.
Other liabilities decreased $1,052,000 in the first six months of fiscal year 2020 compared to an increase of $370,000 in the first six months of fiscal year 2019. The decrease in fiscal year 2020 is due to a reclassification of the deferred lease liability to operating lease liabilities. The increase in fiscal year 2019 was due to a new deferred lease liability.
Net cash (used in) provided by investing activities
Cash used in investing activities was $7,286,000 in the first six months of fiscal year 2020 compared to cash provided by investing activities of $455,000 in the first six months of fiscal year 2019. Cash used for capital expenditures was higher for the first quarter of fiscal year 2020 than fiscal year 2019. Net dispositions of investment securities provided cash in the first half of fiscal year 2019; however, no short-term investments were held in fiscal year 2020 due to the low returns available on these investments.
Net cash used in financing activities
Cash used in financing activities of $7,133,000 in the first six months of fiscal year 2020 was higher than cash used in financing activities of $6,505,000 in the first six months of fiscal year 2019, primarily due to increased purchases of treasury stock and a higher dividend payout.
Other
Total cash and investment balances held by our foreign subsidiaries of $2,709,000 as of January 31, 2020 were slightly higher than the January 31, 2019 balances of $2,123,000. See further discussion in “Foreign Operations” above.
On January 31, 2019, we signed a fifth amendment to our credit agreement with BMO Harris Bank N.A. (“BMO Harris”), which expires on January 31, 2024. The agreement provides for a $45,000,000 unsecured revolving credit agreement and a maximum of $10,000,000 for letters of credit. The agreement terms also state that we may select a variable interest rate based on either the BMO Harris prime rate or a LIBOR-based rate, plus a margin that varies depending on our debt to earnings ratio, or a fixed rate as agreed between us and BMO Harris. As of January 31, 2020, the variable rates would have been 5.00% for the BMO Harris prime-based rate or 3.00% for the three-month LIBOR-based rate. The credit agreement contains restrictive covenants that, among other things and under various conditions, limit our ability to incur additional indebtedness or to dispose of assets. The agreement also requires us to maintain a minimum fixed coverage ratio and a minimum consolidated net worth. As of January 31, 2020 and 2019, we were in compliance with the covenants. There were no borrowings during the first six months of either fiscal year 2019 or 2020.
As of January 31, 2020, we had remaining authority to repurchase 1,041,371 shares of Common Stock and 288,925 shares of Class B Stock under a repurchase plan approved by our Board of Directors (the “Board”). Repurchases may be made on the open market (pursuant to Rule 10b5-1 plans or otherwise) or in negotiated transactions. The timing and number of shares repurchased will be determined by our management pursuant to the repurchase plan approved by our Board.
We believe that cash flow from operations, availability under our revolving credit facility, current cash and investment balances and our ability to obtain other financing, if necessary, will provide adequate cash funds for foreseeable working capital needs, capital expenditures at existing facilities, deferred compensation payouts, dividend payments and debt service obligations for at least the next 12 months. We expect both capital expenditures and advertising expense in fiscal year 2020 to be greater than in fiscal year 2019. We do not believe that these increased expenditures will dramatically impact our cash position; however our cash requirements are subject to change as business conditions warrant and opportunities arise.
We continually evaluate our liquidity position and anticipated cash needs, as well as the financing options available to obtain additional cash reserves. Our ability to fund operations, to make planned capital expenditures, to make scheduled debt payments, to contribute to our pension plan and to remain in compliance with all financial covenants under debt agreements, including, but not limited to, the current credit agreement, depends on our future operating performance, which, in turn, is subject to prevailing
economic conditions and to financial, business and other factors. The timing and size of any new business ventures or acquisitions that we complete may also impact our cash requirements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of financial condition and results of operations is based on our unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP for interim financial information and in compliance with instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of these financial statements requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and related disclosures. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. Estimates and assumptions are revised periodically. Actual results could differ from these estimates. See the information concerning our critical accounting policies included under “Management’s Discussion of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended July 31, 2019.