LINDSAY CORP (LNN) FY 2023 MD&A

ITEM 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Concerning Forward—Looking Statements

This Annual Report on Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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 expectations for future Company performance. 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,” and similar expressions generally identify forward-looking statements. For these statements throughout the Annual Report on Form 10-K, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The entire sections entitled “Financial Overview and Outlook” and “Risk Factors” should be considered forward-looking statements.

Forward-looking statements involve a number of risks and uncertainties, including but not limited to those discussed in the “Risk Factors” section contained in Item 1A. 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, as well as others not now anticipated. The risks and uncertainties described herein 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.

Company Overview

The Company manufactures and markets center pivot, lateral move, and hose reel irrigation systems. The Company also produces and markets irrigation controls, chemical injection systems, remote monitoring and irrigation scheduling systems. These products are used by farmers to increase or stabilize crop production while conserving water, energy, and labor. Through its acquisitions and third-party commercial arrangements, the Company has been able to enhance its capabilities in providing innovative, turn-key solutions to customers through the integration of designs, controls, and pump stations. The Company sells its irrigation products primarily to a world-wide independent dealer network, who resell to their customers, the farmers. The Company’s irrigation production facilities are located in the United States, Brazil, Türkiye (formerly Turkey), France, China and South Africa, and also has distribution and sales operations in the Netherlands, Egypt, Australia, and New Zealand. The Company also manufactures and markets, through distributors and direct sales to customers, various infrastructure products, including moveable barrier systems for traffic lane management, crash cushions, preformed reflective pavement tapes, and other road safety devices, through its production facilities in the United States and Italy, and has produced road safety products in irrigation manufacturing facilities in China, Brazil and Türkiye (formerly Turkey). In addition, the Company’s infrastructure segment produces railroad signals and structures.

For the business overall, the global, long-term drivers of population growth, water conservation and environmental sustainability, the need for increased food production, and the need for safer, more efficient transportation solutions remain positive. Key factors which impact demand for the Company’s irrigation products include total worldwide agricultural crop production, the profitability of agricultural crop production, agricultural commodity prices, net farm income, availability of financing for farmers, governmental policies regarding the agricultural sector, water and energy conservation policies, the regularity of rainfall, regional climate conditions, food security concerns and foreign currency exchange rates. A key factor which impacts demand for the Company’s infrastructure products is the amount of spending authorized by governments to improve road and highway systems. Much of the U.S. highway infrastructure market is driven by government spending programs. For example, the U.S. government funds highway and road improvements through the Federal Highway Trust Fund Program. This program provides funding to improve the nation’s roadway system. In November 2021, the Infrastructure Investment and Jobs Act was enacted and included a five-year reauthorization of the Fixing America's Surface Transportation (FAST) Act. This legislation also introduced $110 billion in incremental federal funding planned for roads, bridges, and other transportation projects, which the Company anticipates may translate into higher demand for its transportation safety products.

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The Company continues to have an ongoing, structured, acquisition process that it expects to generate additional growth opportunities throughout the world and add to its irrigation and infrastructure capabilities. The Company is committed to achieving earnings growth by global market expansion, improvements in margins, and strategic acquisitions.

New Accounting Standards Issued

See Note 2, New Accounting Pronouncements, to the Company’s consolidated financial statements for information regarding recently issued accounting pronouncements.

Critical Accounting Estimates

In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”), management must make a variety of decisions which impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, management applies judgment based on its understanding and analysis of the relevant facts and circumstances. Certain of the Company’s accounting policies are critical, as these policies are most important to the presentation of the Company’s consolidated results of operations and financial condition. They require the greatest use of judgments and estimates by management based on the Company’s historical experience and management’s knowledge and understanding of current facts and circumstances. Management periodically re-evaluates and adjusts the estimates that are used as circumstances change. Following is the accounting policy management considers critical to the Company’s consolidated results of operations and financial condition:

Warranties

The Company’s accounting policy on accounting for its product warranties is critical because it includes significant judgments and estimates by management about the amount, nature, and timing of future product-related warranty costs.

The Company generally warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods and/or usage of the product. At the time a sale is recognized, the Company records the estimated future warranty costs. The Company generally determines its total future warranty liability by applying historical claims rate experience to the amount of equipment that has been sold and is still within the warranty period. In addition, the Company records provisions for known warranty claims.

The Company periodically reviews the assumptions used to determine the liabilities for product warranties and adjusts its assumptions based upon factors such as actual failure rates and cost experience. A number of factors could affect actual failure rates and cost experience, including the amount and timing of new product introductions, changes in manufacturing techniques or locations, components or suppliers used. If actual costs differ from the estimates, an adjustment may be made to the product warranty liability.

Financial Overview and Outlook

Operating revenues in fiscal 2023 were $674.1 million, a 13 percent decrease compared to $770.7 million in the prior year. Irrigation segment revenues decreased 12 percent to $586.0 million and infrastructure segment revenues decreased 16 percent to $88.1 million. Net earnings for fiscal 2023 increased 11 percent to $72.4 million or $6.54 per diluted share compared with $65.5 million or $5.94 per diluted share in the prior year. Despite lower revenues, improved net earnings resulted from gross margin improvement primarily from improved price realization, lower inflationary impact on input costs and a more favorable margin mix of international revenues.

The global drivers for the Company’s irrigation segment are population growth and the attendant need for expanded food production and efficient water use. The need for irrigated agricultural crop production, which depends upon many factors, include the following primary drivers:

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Agricultural commodity prices - During fiscal 2023, agricultural commodity prices remained volatile as they continued to be impacted by weather conditions in various regions of the world, China's fluctuating demand for U.S. exports, and the continued conflict between Ukraine and Russia. Corn prices in August 2023 were approximately 32 percent lower and soybean prices approximately 9 percent lower compared to August 2022.

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Net farm income - As of August 2023, the U.S. Department of Agriculture (the “USDA”) estimated U.S. 2023 net farm income to be $141.3 billion, a decrease of 22.8 percent from the USDA’s final U.S. 2022 net farm income of $183.0 billion. The majority of this projected decrease is coming from a reduction in

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government support payments while cash receipts for crops is projected to decrease by 4 percent. Following record net farm income in 2022, projected net farm income in 2023 remains at a relatively high level historically.

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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 abundant natural precipitation.

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Governmental policies - A number of government laws and regulations can impact the Company’s business, including:

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The Agricultural Improvement Act of 2018 (the “Farm Bill”) was signed into law in December 2018 and 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 Farm Bill will expire by the end of calendar 2023, when it is expected to be either extended or replaced by new legislation. However, there can be no assurance that the Farm Bill will be extended or renewed or that any such legislation will provide subsidies at the same levels as are currently provided under the Farm Bill.

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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 initially allowing 100 percent of the cost of equipment to be treated as an expense in the year of purchase rather than having it amortized over its useful life. This benefit is being phased out by 20 percent per year over a five-year period, beginning in 2023. For calendar 2023, the allowable deduction is 80 percent of the cost of equipment.

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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. On June 21, 2023, the Environmental Protection Agency ("EPA") announced a final rule setting biofuel volume requirements for the Renewable Fuels Standard (RFS) program for 2023, 2024 and 2025. The final volume requirements reflect an increase in total gallons of renewable fuels in each successive year.

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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.

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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 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 declined over the prior year, as farmer sentiment has been negatively impacted by the projected decrease in net farm income, higher interest rates and concerns regarding inflation and general economic uncertainty. This has resulted in customers delaying capital investment decisions. The Company believes this may shift demand for irrigation equipment to later in the calendar year as customers become better-positioned to determine their level of profitability for the current crop year. During this period the Company has been able to maintain its pricing while inflationary pressure on raw material and logistics costs have moderated. The Company expects to continue to actively track these circumstances and will monitor its prices in connection with changes in raw material and other costs.

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 not only by commodity prices and farm income, but also 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,

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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, Ukrainian, and Belarusian customers have historically 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 may translate into higher demand for its transportation safety products as funds are appropriated and states begin to implement projects. A limited positive impact was experienced in fiscal 2023 results and a more positive impact is expected in fiscal 2024 and beyond.

As of August 31, 2023, the Company had an order backlog of $78.7 million compared with $96.8 million at August 31, 2022. The irrigation and infrastructure backlogs are lower compared to the prior year. 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; therefore, it is generally not a good indication of the revenues to be realized in succeeding quarters.

Results of Operations

The following “Fiscal 2023 Compared to Fiscal 2022” section presents an analysis of the Company’s consolidated operating results displayed in the Consolidated Statements of Earnings and should be read together with the information in Note 18, Industry Segment Information, to the consolidated financial statements. A discussion regarding our financial condition and results of operations for fiscal 2022 compared to fiscal 2021 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 31, 2022, filed with the Securities and Exchange Commission (“SEC”) on October 20, 2022, which is available free of charge on the SEC’s website at www.sec.gov and the Company’s website at www.lindsay.com under the tab “Investor Relations – SEC Filings.”

Fiscal 2023 Compared to Fiscal 2022

The following table provides highlights for fiscal 2023 compared with fiscal 2022:

(1)
Includes corporate general and administrative expenses of $31.8 million and $29.4 million for fiscal 2023 and 2022, respectively.

(2)
See Note 18 Industry Segment Information, to the consolidated financial statements, for further details regarding segments.

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Revenues

Operating revenues in fiscal 2023 were $674.1 million, a decrease of 13 percent or $96.7 million, compared to $770.7 million in fiscal 2022. Irrigation segment revenues of $586.0 million, increased $79.8 million, or 12 percent, and infrastructure revenues increased $16.9 million, or 16 percent, compared to the prior fiscal year. The irrigation segment provided 87 percent of Company revenue in fiscal 2023 as compared to 86 percent in fiscal 2022.

North America irrigation revenues in fiscal 2023 were $309.5 million a decrease of 13 percent or $46.1 million, from $355.7 million in fiscal 2022. The decrease resulted from lower unit sales volume which was partially offset by higher average selling prices compared to the prior year. Lower unit sales volume in the current year resulted primarily from farmers delaying capital investment decisions due to a number of factors, including a projected decrease in net farm income, higher interest rates and concerns regarding inflation, and general economic uncertainty, as well as a higher level of storm damage replacement demand in the prior year. Higher average selling prices compared to the prior year resulted from the pass through of higher raw material and other costs to customers.

International irrigation revenues in fiscal 2023 were $276.5 million, a decrease of 11 percent or $33.7 million, from $310.1 million in fiscal 2022. The decrease resulted primarily from the completion of a large Egypt project in the prior year that did not repeat and from lower sales in Ukraine, Russia and Australia. This decrease was partially offset by higher sales in South America. The current year was also impacted by the unfavorable effects of foreign currency translation of approximately $3.9 million compared to the prior fiscal year.

Infrastructure segment revenues in fiscal 2023 were $88.1 million a decrease of $16.9 million, or 16 percent, from $104.9 million in fiscal 2022. The decrease resulted primarily from lower Road Zipper System sales compared to the prior year as there were a number of projects in the prior year that did not repeat. This decrease was partially offset by an increase in Road Zipper System lease revenue and higher sales of road safety products compared to the prior year.

Gross Profit

Gross profit was $213.0 million for fiscal 2023, an increase of $13.8 million, or 7 percent, compared to $199.2 million in fiscal 2022. Gross margin was 31.6 percent of sales for fiscal 2023 compared to 25.8 percent of sales for fiscal 2022. Increased gross profit and gross margin in irrigation resulted primarily from improved price realization, lower inflationary impact on input costs and a more favorable margin mix of international revenues, which more than offset the impact of lower revenues compared to the prior year. Prior year irrigation gross margin was negatively impacted by higher raw material costs, which included approximately $7.8 million in additional expense resulting from the effect of the LIFO method of accounting for certain inventory, compared to a reduction of expense of approximately $2.0 million due to the use of LIFO in fiscal 2023. In addition, costs of approximately $1.8 million were incurred in the prior year related to non-recurring factory maintenance and outside consulting services that did not repeat. Decreased gross profit and gross margin in infrastructure resulted primarily from lower Road Zipper System sales compared to the prior year. This decrease was partially offset by improved price realization and lower inflationary impact on input costs compared to the prior year.

Operating Expenses

The Company’s operating expenses of $110.8 million for fiscal 2023 increased $6.3 million, or 6 percent, compared to fiscal 2022 operating expenses of $104.5 million. The increase resulted primarily from higher employee incentive expense attributable to improved business results, increased spending on new product development and increased personnel costs compared to the prior year.

Other Expense, net

Other expense of $1.8 million for fiscal 2023 decreased $5.0 million compared to $6.8 million in fiscal 2022. The decrease resulted from lower interest expense, higher interest income and a more favorable impact from foreign currency transaction changes compared to the prior year.

Income Taxes

The Company recorded income tax expense of $28.0 million and $22.4 million for fiscal 2023 and 2022, respectively. The effective tax rate was 27.9 percent and 25.5 percent for fiscal 2023 and 2022, respectively. The higher effective income tax rate in fiscal 2023 reflects an increased proportion of earnings in higher rate foreign jurisdictions, primarily Brazil, compared to the prior year.

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Net Earnings

Net earnings for fiscal 2023 were $72.4 million, or $6.54 per diluted share, compared to $65.5 million, or $5.94 per diluted share, for fiscal 2022.

Liquidity and Capital Resources

The Company’s cash, cash equivalents, and marketable securities totaled $166.3 million at August 31, 2023 compared with $116.5 million at August 31, 2022. The increase resulted primarily from an increase in net earnings and a reduction in inventories, along with other changes in working capital. The Company requires cash for financing its receivables and inventories, paying operating expenses and capital expenditures, and for dividends and share repurchases. The Company’s investments in marketable securities are primarily composed of United States government securities and investment grade corporate bonds. The Company meets its liquidity needs and finances its capital expenditures from its available cash and funds provided by operations along with borrowings under the credit arrangements that are described below. In the normal course of business, the Company enters into contracts and commitments which obligate the Company to make future payments. The Company does not have any additional off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 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 of 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 amounted to $64.6 million and $49.0 million as of August 31, 2023, and 2022, respectively. The Company considers earnings of 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 $351.4 million at August 31, 2023 as compared with $316.2 million at August 31, 2022. Cash flows provided by operating activities totaled $119.7 million during the year ended August 31, 2023 compared to $3.0 million provided by operating activities during the prior fiscal year. An increase in cash flows provided by operating activities resulted from an increase in net earnings compared to the prior year, a reduction in inventories compared to an increase in the prior year, and other changes in assets and liabilities compared to the prior year.

Cash flows used in investing activities totaled $47.4 million during the year ended August 31, 2023 compared to $9.0 million during the prior fiscal year. The majority of the increase resulted from $30.8 million for the acquisition of a business in fiscal 2023. Capital spending was $18.8 million in fiscal 2023 compared to $15.6 million in fiscal 2022.

Cash flows used in financing activities totaled $17.3 million during the year ended August 31, 2023 compared to $12.7 million during the prior fiscal year. The change was primarily the result of lower proceeds from the exercise of stock options compared to the prior year. Cash flows used in financing activities consists primarily of dividend payments. Dividends paid in fiscal 2023 increased by $0.5 million over fiscal 2022.

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. Priorities for the use of cash under the Company’s capital allocation plan include:

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Investment in organic growth including capital expenditures and expansion of international markets,

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Synergistic acquisitions that provide attractive returns to stockholders,

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Dividends to stockholders, along with expectations to increase dividends over time, and

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Opportunistic share repurchases taking into account cyclical and seasonal fluctuations.

Capital Expenditures

Capital expenditures for fiscal 2024 are expected to be between $35.0 million and $40.0 million, including equipment replacement, productivity improvements, new product development and commercial growth investments. An increase over recent levels of capital expenditures relates to modernization and productivity improvements planned at certain

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manufacturing facilities. 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 fiscal 2023, the Company paid cash dividends of $1.37 per common share or $15.1 million to stockholders as compared to $1.33 per common share or $14.6 million to stockholders in fiscal 2022.

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 years ended August 31, 2023, 2022 and 2021. The remaining amount available under the repurchase program was $63.7 million as of August 31, 2023.

Long-Term Borrowing Facilities

Senior Notes. The Company has outstanding $115.0 million in aggregate principal amount of unsecured 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 future acquisitions. At August 31, 2023 and 2022, 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 August 31, 2023, 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 6.66 percent at August 31, 2023), 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 August 31, 2023) 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 into the Senior Notes for the benefit of the 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 August 31, 2023 and 2022, the Company was in compliance with all financial loan covenants contained in its credit arrangements in place as of each of those dates.

Inflation

The Company is subject to the effects of changing prices. During fiscal 2022, the Company experienced pricing volatility for purchases of certain commodities, in particular steel and zinc products used in the production of its products, in addition to the availability of labor and logistics. In fiscal 2023, the Company observed steel input cost stabilization and while the overall cost outlook for commodities used in the production of the Company's products is not certain, management believes it can manage these inflationary pressures by introducing appropriate sales price adjustments. However, competitive market pressures may affect the Company’s ability to pass price adjustments along to its customers.

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