ITEM 2 ‑ Management's Discussion and Analysis of Financial Condition and Results of Operations
Concerning Forward‑Looking 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.
- 17 -
Table of Contents
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.
- 18 -
Table of Contents
•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 $101.4 million at February 28, 2021. The irrigation backlog is higher compared to the prior year while the infrastructure backlog is lower. The Company’s backlog can fluctuate from period to period due to the seasonality, cyclicality, timing and execution of contracts. Backlog typically represents long-term projects as well as short lead-time orders, and therefore is generally not a good indication of the next fiscal quarter’s revenues.
- 19 -
Table of Contents
Results of Operations
For the Three Months ended February 28, 2022 compared to the Three Months ended February 28, 2021
The following section presents an analysis of the Company’s operating results displayed in the condensed consolidated statements of earnings for the three months ended February 28, 2022 and 2021. It should be read together with the industry segment information in Note 13 to the condensed consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
($ in thousands) |
|
February 28, 2022 |
|
|
February 28, 2021 |
|
|
Percent Change |
Consolidated |
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
200,137 |
|
|
$ |
143,577 |
|
|
39% |
Gross profit |
|
$ |
42,944 |
|
|
$ |
41,174 |
|
|
4% |
Gross margin |
|
|
21.5 |
% |
|
|
28.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (1) |
|
$ |
24,606 |
|
|
$ |
25,365 |
|
|
-3% |
Operating income |
|
$ |
18,338 |
|
|
$ |
15,809 |
|
|
16% |
Operating margin |
|
|
9.2 |
% |
|
|
11.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net |
|
$ |
866 |
|
|
$ |
(1,248 |
) |
|
-169% |
Income tax expense |
|
$ |
4,638 |
|
|
$ |
2,685 |
|
|
73% |
Overall income tax rate |
|
|
24.2 |
% |
|
|
18.4 |
% |
|
|
Net earnings |
|
$ |
14,566 |
|
|
$ |
11,876 |
|
|
23% |
|
|
|
|
|
|
|
|
|
Irrigation Segment |
|
|
|
|
|
|
|
|
Segment operating revenues |
|
$ |
180,759 |
|
|
$ |
118,572 |
|
|
52% |
Segment operating income |
|
$ |
24,734 |
|
|
$ |
18,045 |
|
|
37% |
Segment operating margin |
|
|
13.7 |
% |
|
|
15.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
Infrastructure Segment |
|
|
|
|
|
|
|
|
Segment operating revenues |
|
$ |
19,378 |
|
|
$ |
25,005 |
|
|
-23% |
Segment operating income |
|
$ |
324 |
|
|
$ |
6,341 |
|
|
-95% |
Segment operating margin |
|
|
1.7 |
% |
|
|
25.4 |
% |
|
|
(1)Includes $6.7 million and $8.6 million of corporate operating expenses for the three months ended February 28, 2022 and 2021, respectively.
Revenues
Operating revenues for the three months ended February 28, 2022 increased 39 percent to $200.1 million from $143.6 million for the three months ended February 28, 2021, as irrigation revenues increased $62.2 million and infrastructure revenues decreased $5.6 million. The irrigation segment provided 90 percent of the Company’s revenue during the three months ended February 28, 2022 as compared to 83 percent for the three months ended February 28, 2021.
North America irrigation revenues for the three months ended February 28, 2022 of $100.7 million increased $20.6 million, or 26 percent, from $80.2 million for the three months ended February 28, 2021. The increase resulted primarily from higher average selling prices. Unit sales volume was lower year-over-year due to the impact of Omicron-related employee absences on production and shipping capabilities. Demand for irrigation equipment is supported by higher agricultural commodity prices and farm income, while higher average selling prices result from the pass through of higher raw material costs to customers.
International irrigation revenues for the three months ended February 28, 2022 of $80.0 million increased $41.6 million, or 108 percent, from $38.4 million for the three months ended February 28, 2021. The increase resulted from a combination of higher average selling prices and higher unit sales volumes in most international markets. Revenues in Brazil more than tripled compared to the prior year second quarter, and we also completed final deliveries of a large project in Egypt. These increases are the result of positive market fundamentals and from the pass through of higher raw material costs. The overall increase in revenues was partially offset by unfavorable effects of foreign currency translation of approximately $2.1 million compared to the same prior year period.
- 20 -
Table of Contents
Infrastructure segment revenues for the three months ended February 28, 2022 of $19.4 million decreased $5.6 million, or 23 percent, from $25.0 million for the three months ended February 28, 2021. The decrease resulted from lower Road Zipper System sales and lease revenue, which were partially offset by increased sales of road safety products.
Gross Profit
Gross profit for the three months ended February 28, 2022 of $42.9 million increased 4 percent from $41.2 million for the three months ended February 28, 2021. The increase in gross profit resulted from higher irrigation segment revenues that were partially offset by lower infrastructure segment revenues. In addition, gross profit was reduced by the impact of higher input costs that were not fully recovered by higher pricing. Gross profit was also reduced by approximately $2.8 million resulting from the impact of the last-in, first-out ("LIFO") method of accounting for inventory in the irrigation segment. Under LIFO, higher raw material costs are recognized in cost of goods sold rather than in ending inventory values. In addition, costs of approximately $1.8 million were incurred during the quarter related to non-recurring factory maintenance and outside consulting services. Gross margin was 21.5 percent of sales for the three months ended February 28, 2022 compared with 28.7 percent of sales for the three months ended February 28, 2021. In addition to the factors noted above, lower gross margin in the current year period resulted in part from a higher proportion of irrigation revenues, which have a lower gross margin than infrastructure revenues, as compared to the same prior year period.
Operating Expenses
Operating expenses of $24.6 million for the three months ended February 28, 2022 decreased $0.8 million, or 3 percent, compared with $25.4 million for the three months ended February 28, 2021. The decrease resulted primarily from lower employee incentive expense compared to the same prior year period. The prior year included a one-time expense of $1.5 million in equity awards related to the retirement of the Company's chief executive officer.
Other Income (Expense), net
The Company recorded other income of $0.9 million for the three months ended February 28, 2022 compared to other expense of $1.2 million for the three months ended February 28, 2021. The change resulted primarily from higher foreign currency transaction gains compared to the same prior year period.
Income Taxes
The Company recorded income tax expense of $4.6 million and $2.7 million for the three months ended February 28, 2022 and 2021, respectively. The effective income tax rate was 24.2 percent and 18.4 percent for the three months ended February 28, 2022 and 2021, respectively. The impact of discrete items was not significant during the three months ended February 28, 2022 and 2021.
- 21 -
Table of Contents
For the Six Months ended February 28, 2022 compared to the Six Months ended February 28, 2021
The following section presents an analysis of the Company’s operating results displayed in the condensed consolidated statements of earnings for the six months ended February 28, 2022 and 2021. It should be read together with the industry segment information in Note 13 to the condensed consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
($ in thousands) |
|
February 28, 2022 |
|
|
February 28, 2021 |
|
|
Percent Change |
Consolidated |
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
366,288 |
|
|
$ |
252,062 |
|
|
45% |
Gross profit |
|
$ |
80,381 |
|
|
$ |
72,582 |
|
|
11% |
Gross margin |
|
|
21.9 |
% |
|
|
28.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (1) |
|
$ |
48,682 |
|
|
$ |
49,239 |
|
|
-1% |
Operating income |
|
$ |
31,699 |
|
|
$ |
23,343 |
|
|
36% |
Operating margin |
|
|
8.7 |
% |
|
|
9.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
$ |
(3,019 |
) |
|
$ |
(1,900 |
) |
|
59% |
Income tax expense |
|
$ |
6,213 |
|
|
$ |
2,472 |
|
|
151% |
Overall income tax rate |
|
|
21.7 |
% |
|
|
11.5 |
% |
|
|
Net earnings |
|
$ |
22,467 |
|
|
$ |
18,971 |
|
|
18% |
|
|
|
|
|
|
|
|
|
Irrigation Segment |
|
|
|
|
|
|
|
|
Segment operating revenues |
|
$ |
326,667 |
|
|
$ |
205,929 |
|
|
59% |
Segment operating income |
|
$ |
41,946 |
|
|
$ |
28,678 |
|
|
46% |
Segment operating margin |
|
|
12.8 |
% |
|
|
13.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
Infrastructure Segment |
|
|
|
|
|
|
|
|
Segment operating revenues |
|
$ |
39,621 |
|
|
$ |
46,133 |
|
|
-14% |
Segment operating income |
|
$ |
3,090 |
|
|
$ |
10,597 |
|
|
-71% |
Segment operating margin |
|
|
7.8 |
% |
|
|
23.0 |
% |
|
|
(1)Includes $13.3 million and $15.9 million of corporate operating expenses for the six months ended February 28, 2022 and 2021, respectively.
Revenues
Operating revenues for the six months ended February 28, 2022 increased 45 percent to $366.3 million from $252.1 million for the six months ended February 28, 2021, as irrigation revenues increased $120.7 million and infrastructure revenues decreased $6.5 million. The irrigation segment provided 89 percent of the Company’s revenue during the six months ended February 28, 2022 as compared to 82 percent for the six months ended February 28, 2021.
North America irrigation revenues for the six months ended February 28, 2022 of $179.7 million increased $46.7 million, or 35 percent, from $132.9 million for the six months ended February 28, 2021. The increase resulted from a combination of higher irrigation equipment unit sales volume and higher average selling prices. Increased demand for irrigation equipment is supported by higher agricultural commodity prices and farm income, while higher average selling prices result from the pass through of higher raw material costs to customers.
International irrigation revenues for the six months ended February 28, 2022 of $147.0 million increased $74.0 million, or 101 percent, from $73.0 million for the six months ended February 28, 2021. The increase resulted from a combination of higher average selling prices and higher unit sales volumes in most international markets, namely Brazil, Middle East and Europe. These increases are the result of positive market fundamentals and from the pass through of higher raw material costs. The overall increase in revenues was partially offset by unfavorable effects of foreign currency translation of approximately $0.9 million compared to the same prior year period.
Infrastructure segment revenues for the six months ended February 28, 2022 of $39.6 million decreased $6.5 million, or 14 percent, from $46.1 million for the six months ended February 28, 2021. The decrease resulted from lower Road Zipper System sales, which were partially offset by higher Road Zipper System lease revenue and increased sales of road safety products.
- 22 -
Table of Contents
Gross Profit
Gross profit for the six months ended February 28, 2022 of $80.4 million increased 11 percent from $72.6 million for the six months ended February 28, 2021. The increase in gross profit resulted from higher irrigation segment revenues that were partially offset by lower infrastructure segment revenues. In addition, gross profit was reduced by the impact of higher costs of raw materials and other inputs, as well as approximately $8.8 million resulting from the impact of the LIFO method of accounting for inventory, of which $7.8 million impacted the irrigation segment and $1.0 million impacted the infrastructure segment. Under LIFO, higher raw material costs are recognized in cost of goods sold rather than in ending inventory values. Gross margin was 21.9 percent of sales for the six months ended February 28, 2022 compared with 28.8 percent of sales for the six months ended February 28, 2021. In addition to the factors noted above, lower gross margin in the current year period resulted in part from a higher proportion of irrigation revenues, which have a lower gross margin than infrastructure revenues, as compared to the same prior year period.
Operating Expenses
Operating expenses of $48.7 million for the six months ended February 28, 2022 decreased $0.6 million, or 1 percent, compared with $49.2 million for the six months ended February 28, 2021. The decrease resulted primarily from lower employee incentive expenses, partially offset by increases in other areas such as travel, compared to the same prior year period. The prior year included a one-time expense of $1.5 million in equity awards related to the retirement of the Company's chief executive officer.
Other Income (Expense), net
Other expense for the six months ended February 28, 2022 increased $1.1 million compared to the six months ended February 28, 2021. The change resulted primarily from higher foreign currency transaction losses compared to the same prior year period.
Income Taxes
The Company recorded income tax expense of $6.2 million and $2.5 million for the six months ended February 28, 2022 and 2021, respectively. The effective income tax rate was 21.7 percent and 11.5 percent for the six months ended February 28, 2022 and 2021, respectively. The current year period includes a benefit of $0.7 million related to the vesting of share-based compensation awards while the same prior year period includes a benefit of $1.7 million related to the release of a valuation allowance related to net operating loss carryforwards in a foreign jurisdiction.
- 23 -
Table of Contents
Liquidity and Capital Resources
The Company's cash, cash equivalents, and marketable securities totaled $93.9 million at February 28, 2022 compared with $130.3 million at February 28, 2021 and $146.7 million at August 31, 2021. The Company requires cash for financing its receivables and inventories, paying operating expenses and capital expenditures, and for dividends and share repurchases. The Company meets its liquidity needs and finances its capital expenditures from its available cash and funds provided by operations along with borrowings under its credit arrangements described below. The Company’s investments in marketable securities are primarily comprised of United States government securities and investment grade corporate securities. The Company believes its current cash resources, investments in marketable securities, projected operating cash flow, and remaining capacity under its continuing bank lines of credit are sufficient to cover all its expected working capital needs, planned capital expenditures and dividends. The Company may require additional borrowings to fund potential acquisitions in the future.
The Company’s total cash and cash equivalents held by foreign subsidiaries were approximately $37.3 million, $35.8 million, and $38.4 million as of February 28, 2022, February 28, 2021, and August 31, 2021, respectively. The Company considers earnings in foreign subsidiaries to be indefinitely reinvested and would need to accrue and pay incremental state, local, and foreign taxes if such earnings were repatriated to the United States. The Company does not intend to repatriate the funds and does not expect these funds to have a significant impact on the Company’s overall liquidity.
Net working capital was $288.9 million at February 28, 2022, as compared with $260.8 million at February 28, 2021 and $277.9 million at August 31, 2021. Cash used in operating activities totaled $35.9 million during the six months ended February 28, 2022, compared to cash provided by operating activities of $11.1 million during the six months ended February 28, 2021. This change was primarily due to increases in receivables and inventories, both driven by strong irrigation demand, that were partially offset by changes in accounts payable, compared to the same prior year period.
Cash flows used in investing activities totaled $15.6 million during the six months ended February 28, 2022 compared to $17.7 million during the six months ended February 28, 2021. Purchases of marketable securities increased $10.2 million compared to the same prior year period. Purchases of property, plant, and equipment were $6.9 million, compared to $16.6 million in the same prior year period, which included $8.5 million for the land and building purchase in Turkey.
Cash flows used in financing activities totaled $5.5 million during the six months ended February 28, 2022 compared to cash flows used in financing activities of $4.5 million during the six months ended February 28, 2021. The decrease was primarily the result of higher proceeds from the exercise of stock options compared to the same prior year period.
Capital Allocation Plan
The Company’s capital allocation plan is to continue investing in revenue and earnings growth, combined with a defined process for enhancing returns to stockholders. Under the Company’s capital allocation plan, the priorities for uses of cash include:
•Investment in organic growth including capital expenditures and expansion of international markets,
•Dividends to stockholders, along with expectations to increase dividends over time,
•Synergistic acquisitions that provide attractive returns to stockholders, and
•Opportunistic share repurchases taking into account cyclical and seasonal fluctuations.
Capital Expenditures
Capital expenditures for fiscal 2022 are expected to be between $15.0 million and $20.0 million, including equipment replacement, productivity improvements and new product development. The Company’s management does maintain flexibility to modify the amount and timing of some of the planned expenditures in response to economic conditions.
Dividends
In the second quarter of fiscal 2022, the Company paid a quarterly cash dividend to stockholders of $0.33 per common share, or $3.6 million, compared to a quarterly cash dividend of $0.32 per common share, or $3.5 million, in the second quarter of fiscal 2021.
- 24 -
Table of Contents
Share Repurchases
The Company’s Board of Directors authorized a share repurchase program of up to $250.0 million of common stock with no expiration date. Under the program, shares may be repurchased in privately negotiated and/or open market transactions as well as under formalized trading plans in accordance with the guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. There were no shares repurchased during the six months ended February 28, 2022 or 2021. The remaining amount available under the repurchase program was $63.7 million as of February 28, 2022.
Long-Term Borrowing Facilities
Senior Notes. The Company has outstanding $115.0 million in aggregate principal amount of Senior Notes, Series A (the “Senior Notes”). The entire principal of the Senior Notes is due and payable on February 19, 2030. Interest on the Senior Notes is payable semi-annually at a fixed annual rate of 3.82 percent. Borrowings under the Senior Notes are unsecured. The Company used the proceeds of the sale of the Senior Notes for general corporate purposes, including acquisitions and dividends.
Revolving Credit Facility. The Company has outstanding a $50.0 million unsecured Amended and Restated Revolving Credit Facility (the “Revolving Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”) expiring August 26, 2026. The Company intends to use borrowings under the Revolving Credit Facility for working capital purposes and to fund acquisitions. At February 28, 2022 and 2021, the Company had no outstanding borrowings under the Revolving Credit Facility. The amount of borrowings available at any time under the Revolving Credit Facility is reduced by the amount of standby letters of credit issued by Wells Fargo then outstanding. At February 28, 2022, the Company had the ability to borrow up to $50.0 million under the Revolving Credit Facility. The Revolving Credit Facility may be increased by up to an additional $50.0 million at any time, subject to additional commitment approval. The Revolving Credit Facility was amended to transition the benchmark rate from the London Interbank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”). Borrowings under the Revolving Credit Facility bear interest at a variable rate equal to the SOFR plus a margin of between 100 and 210 basis points depending on the Company’s leverage ratio then in effect (which resulted in a variable rate of 1.40 percent at February 28, 2022), subject to adjustment as set forth in the loan documents for the Revolving Credit Facility. Interest is paid on a monthly to quarterly basis depending on loan type. The Company currently pays an annual commitment fee on the unused portion of the Revolving Credit Facility. The fee is between 0.125 percent and 0.2 percent (0.125 percent at February 28, 2022) on the unused balance depending on the Company’s leverage ratio then in effect.
Borrowings under the Revolving Credit Facility have equal priority with borrowings under the Company’s Senior Notes. Each of the credit arrangements described above include certain covenants relating primarily to the Company’s financial condition. These financial covenants include a funded debt to EBITDA leverage ratio and an interest coverage ratio. In the event that the loan documents for the Revolving Credit Facility were to require the Company to comply with any financial covenant that is not already included or is more restrictive than what is already included in the arrangement governing the Senior Notes, then such covenant shall be deemed incorporated by reference for the benefit of holders of the Senior Notes. Upon the occurrence of any event of default of these covenants, including a change in control of the Company, all amounts outstanding thereunder may be declared to be immediately due and payable. At February 28, 2022 and 2021, the Company was in compliance with all financial loan covenants contained in its credit arrangements in place as of each of those dates.
Series 2006A Bonds. Elecsys International LLC, a wholly owned subsidiary of the Company, has outstanding $1.0 million in principal amount of industrial revenue bonds that were issued in 2006 (the “Series 2006A Bonds”). Principal and interest on the Series 2006A Bonds are payable monthly through maturity on September 1, 2026. The interest rate is adjustable every five years based on the yield of the 5-year United States Treasury Notes, plus 0.45 percent (1.72 percent as of February 28, 2022). This rate was adjusted on September 1, 2021 in accordance with the terms of the bonds, and the adjusted rate will be in force through maturity. The obligations under the Series 2006A Bonds are secured by a first priority security interest in certain real estate.
Contractual Obligations and Commercial Commitments
There have been no material changes in the Company’s contractual obligations and commercial commitments as described in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2021.