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, 2022. Readers should not place undue reliance on any forward-looking statement and should recognize that the statements are predictions of future results or conditions, which may not occur as anticipated. Actual results or conditions could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described herein and in the Company’s other public filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended August 31, 2022, as well as other risks and uncertainties not now anticipated. The risks and uncertainties described herein and in the Company’s other public filings are not exclusive and further information concerning the Company and its businesses, including factors that potentially could materially affect the Company's financial results, may emerge from time to time. Except as required by law, the Company assumes no obligation to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.
COVID-19 Impact
In March 2020, the World Health Organization declared coronavirus (COVID-19) a global pandemic. COVID-19 has had a limited impact on the Company’s manufacturing operations to date. While the Company implemented new procedures to protect the health and well-being of employees and customers, costs associated with these procedures have not been material. In addition, the pandemic has not had a material adverse effect on demand for the Company’s irrigation or infrastructure products; however, the COVID-19 pandemic did result in a slowdown of road construction activity and delays in certain project implementations. As pandemic conditions improved and economic activity increased, the Company experienced a number of supply chain challenges including increased lead times and limited availability of certain components, significant raw material inflation, and labor and logistics constraints.
The ongoing effects of the COVID-19 pandemic on the Company’s business, results of operations, or cash flows in future periods remain uncertain and will depend on numerous evolving factors that the Company may not be able to accurately predict or effectively respond to, including, without limitation: the duration and scope of any outbreak; the transmissibility and severity of new variants of COVID-19; actions taken by governments, businesses, and individuals in response to any outbreak; the effect on economic activity and actions taken in response; the effect on customers and their demand for the Company’s products and services; and the Company’s ability to manufacture, sell, and service its products, including without limitation as a result of supply chain challenges, facility closures, social distancing, restrictions on travel, fear or anxiety by the populace, and shelter-in-place orders.
Accounting Policies
In preparing the Company’s condensed consolidated financial statements in conformity with U.S. GAAP, management must make a variety of decisions which impact the reported amounts and the related disclosures. These decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In making these decisions, management applies its judgment based on its understanding and analysis of the relevant circumstances and the Company’s historical experience.
The Company’s accounting policies that are most important to the presentation of its results of operations and financial condition, and which require the greatest use of judgments and estimates by management, are designated as its critical accounting policies. See discussion of the Company’s critical accounting policies under Item 7 in the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended August 31, 2022. Management periodically re-evaluates and
- 17 -
Table of Contents
adjusts its critical accounting policies as circumstances change. There were no significant changes in the Company’s critical accounting policies during the nine months ended May 31, 2023.
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 May 31, 2023 were $164.6 million, a decrease of 23 percent compared to $214.3 million for the three months ended May 31, 2022. Irrigation segment revenues decreased 24 percent to $142.6 million and infrastructure segment revenues decreased 14 percent to $22.0 million. Net earnings for the three months ended May 31, 2023 were $16.9 million, or $1.53 per diluted share, compared to net earnings of $25.1 million, or $2.28 per diluted share, for the three months ended May 31, 2022.
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 May 2023, U.S. corn prices have increased approximately 15 percent and U.S. soybean prices have decreased approximately 15 percent from May 2022. Commodity price volatility continues to be impacted by weather conditions in various regions of the world, China's demand for U.S. exports, and the continued conflict between Ukraine and Russia.
•Net farm income – As of February 2023, the U.S. Department of Agriculture (the “USDA”) estimated U.S. 2023 net farm income to be $136.9 billion, a decrease of 15.9 percent from the USDA’s estimated U.S. 2022 net farm income of $162.7 billion. Most of this projected decrease is coming from a reduction in government support payments while cash receipts for crops is projected to decrease by 3.1 percent. Following record net farm income in 2022, projected net farm income in 2023 remains at a relatively high level historically.
•Weather conditions – Demand for irrigation equipment is often positively affected by storm damage and prolonged periods of drought conditions as producers look for ways to reduce the risk of low crop production and crop failures. Conversely, demand for irrigation equipment can be negatively affected during periods of more predictable or excessive natural precipitation.
•Governmental policies – A number of governmental laws and regulations can affect the Company’s business, including:
•The Agriculture Improvement Act of 2018 (the “Farm Bill”) was signed into law in December 2018. The Farm Bill provides a degree of certainty to growers, including funding for the Environmental Quality Incentives Program, which provides financial assistance to farmers to implement conservation practices, and is frequently used to assist in the purchase of center pivot irrigation systems. The current Farm Bill will expire at the end of September 2023.
•Changes to U.S. income tax laws enacted in December 2017 increased the benefit of certain tax incentives, such as the Section 179 income tax deduction and Section 168 bonus depreciation, which are intended to encourage equipment purchases by allowing 100 percent of the cost of equipment to be treated as an expense in the year of purchase rather than amortized over its useful life. This benefit is being phased out by 20 percent per year over a five-year period, beginning in 2023 when the allowable deduction dropped to 80 percent of the cost of equipment.
•Biofuel production continues to be a major demand driver for irrigated corn, sugar cane and soybeans as these crops are used in high volumes to produce ethanol and biodiesel. In December 2022, the U.S. Environmental Protection Agency (“EPA”) proposed the Renewable Fuels Standard (RFS) volume requirements for 2023, 2024, and 2025. The proposed volumes for 2023 are comparable to the volume of renewable fuel estimated to be used in 2022, with years 2024 and 2025 increasing 5 percent and 4 percent, respectively.
- 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 declined over the same prior year period, 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. We believe 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 primarily by expansion of agricultural production, food security, water scarcity and population growth. While international irrigation markets remain active with opportunities for further development and expansion, regional political and economic factors, including armed conflict, currency conditions and other factors can create a challenging environment. The Company continues to monitor the Ukraine and Russia conflict for both short and long-term implications and has suspended new business activity in Russia and Belarus since February 2022. Sales with Russian and Ukrainian customers historically have represented less than 5 percent 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 as the funds are appropriated and states begin to implement projects. A limited positive impact is expected on fiscal 2023 results and a more positive impact is expected in fiscal 2024 and beyond.
The backlog of unshipped orders at May 31, 2023 was $94.5 million compared with $98.3 million at May 31, 2022. The irrigation backlog is lower and the infrastructure backlog is higher compared to the prior year. The Company’s backlog can fluctuate from period to period due to the seasonality, cyclicality, timing and execution of contracts. Backlog typically represents long-term projects as well as short lead-time orders, and therefore is generally not a good indication of the next fiscal quarter’s revenues.
- 19 -
Table of Contents
Results of Operations
For the Three Months ended May 31, 2023 compared to the Three Months ended May 31, 2022
The following section presents an analysis of the Company’s operating results displayed in the condensed consolidated statements of earnings for the three months ended May 31, 2023 and 2022. It should be read together with the industry segment information in Note 13 to the condensed consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
($ in thousands) |
|
May 31, 2023 |
|
|
May 31, 2022 |
|
|
Percent Change |
Consolidated |
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
164,553 |
|
|
$ |
214,259 |
|
|
-23% |
Gross profit |
|
$ |
53,221 |
|
|
$ |
61,680 |
|
|
-14% |
Gross margin |
|
|
32.3 |
% |
|
|
28.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (1) |
|
$ |
26,264 |
|
|
$ |
26,518 |
|
|
-1% |
Operating income |
|
$ |
26,957 |
|
|
$ |
35,162 |
|
|
-23% |
Operating margin |
|
|
16.4 |
% |
|
|
16.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net |
|
$ |
(1,225 |
) |
|
$ |
394 |
|
|
-411% |
Income tax expense |
|
$ |
8,851 |
|
|
$ |
10,483 |
|
|
-16% |
Overall income tax rate |
|
|
34.4 |
% |
|
|
29.5 |
% |
|
|
Net earnings |
|
$ |
16,881 |
|
|
$ |
25,073 |
|
|
-33% |
|
|
|
|
|
|
|
|
|
Irrigation Segment |
|
|
|
|
|
|
|
|
Segment operating revenues |
|
$ |
142,571 |
|
|
$ |
188,693 |
|
|
-24% |
Segment operating income |
|
$ |
30,727 |
|
|
$ |
39,567 |
|
|
-22% |
Segment operating margin |
|
|
21.6 |
% |
|
|
21.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Infrastructure Segment |
|
|
|
|
|
|
|
|
Segment operating revenues |
|
$ |
21,982 |
|
|
$ |
25,566 |
|
|
-14% |
Segment operating income |
|
$ |
3,556 |
|
|
$ |
3,779 |
|
|
-6% |
Segment operating margin |
|
|
16.2 |
% |
|
|
14.8 |
% |
|
|
(1)Includes $7.3 million and $8.2 million of corporate operating expenses for the three months ended May 31, 2023 and 2022, respectively.
Revenues
Operating revenues for the three months ended May 31, 2023 decreased 23 percent to $164.6 million from $214.3 million for the three months ended May 31, 2022, as irrigation revenues decreased $46.1 million and infrastructure revenues decreased $3.6 million. The irrigation segment provided 87 percent of the Company’s revenue during the three months ended May 31, 2023 as compared to 88 percent for the three months ended May 31, 2022.
North America irrigation revenues for the three months ended May 31, 2023 of $75.0 million decreased $21.2 million, or 22 percent, from $96.2 million for the three months ended May 31, 2022. The decrease resulted primarily from lower unit sales volumes while average selling prices were comparable to the same prior year period. Lower unit sales volume in the current year period resulted primarily from farmers delaying capital investment decisions due to a number of factors, including general economic uncertainty.
International irrigation revenues for the three months ended May 31, 2023 of $67.5 million decreased $25.0 million, or 27 percent, from $92.5 million for the three months ended May 31, 2022. The decrease resulted primarily from lower sales volumes in Brazil, Australia, Ukraine and Russia compared to the same prior year period. In Brazil, the delayed order activity experienced in the second quarter of this year, connected with the federal government transition following the presidential election in October 2022, continued in the current quarter. The current year was also impacted by the unfavorable effects of foreign currency translation of approximately $2.5 million compared to the same prior year period.
Infrastructure segment revenues for the three months ended May 31, 2023 of $22.0 million decreased $3.6 million, or 14 percent, from $25.6 million for the three months ended May 31, 2022. An increase in Road Zipper System lease revenue was more than offset by lower Road Zipper System sales and lower sales of road safety products compared to the same prior year period.
- 20 -
Table of Contents
Gross Profit
Gross profit for the three months ended May 31, 2023 of $53.2 million decreased 14 percent from $61.7 million for the three months ended May 31, 2022. Gross margin was 32.3 percent of sales for the three months ended May 31, 2023 compared with 28.8 percent of sales for the three months ended May 31, 2022. The decrease in gross profit in both irrigation and infrastructure resulted primarily from lower revenues.
Increased gross margin in irrigation resulted primarily from improved price realization and operating performance compared to the same prior year period. Increased gross margin in infrastructure resulted from a more favorable margin mix of revenue and improved price realization compared to the same prior year period.
Operating Expenses
Operating expenses of $26.3 million for the three months ended May 31, 2023 decreased $0.2 million, or 1 percent, compared with $26.5 million for the three months ended May 31, 2022. Increased selling expense and new product development costs were more than offset by expense reductions in other areas.
Other Income (Expense), net
The Company recorded other expense of $1.2 million for the three months ended May 31, 2023 compared to other income of $0.4 million for the three months ended May 31, 2022. The change resulted primarily from foreign currency transaction losses of $0.9 million in the current year compared to foreign currency transaction gains of $1.3 million in the same prior year period, which was partially offset by a $0.6 million increase in interest income.
Income Taxes
The Company recorded income tax expense of $8.9 million and $10.5 million for the three months ended May 31, 2023 and 2022, respectively. The effective income tax rate was 34.4 percent and 29.5 percent for the three months ended May 31, 2023 and 2022, respectively. The higher effective tax rate reflects an increased proportion of earnings in higher rate foreign jurisdictions, primarily Brazil, compared to the same prior year period.
- 21 -
Table of Contents
For the Nine Months ended May 31, 2023 compared to the Nine Months ended May 31, 2022
The following section presents an analysis of the Company’s operating results displayed in the condensed consolidated statements of earnings for the nine months ended May 31, 2023 and 2022. It should be read together with the industry segment information in Note 13 to the condensed consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
($ in thousands) |
|
May 31, 2023 |
|
|
May 31, 2022 |
|
|
Percent Change |
Consolidated |
|
|
|
|
|
|
|
|
Operating revenues |
|
$ |
506,953 |
|
|
$ |
580,547 |
|
|
-13% |
Gross profit |
|
$ |
160,499 |
|
|
$ |
142,061 |
|
|
13% |
Gross margin |
|
|
31.7 |
% |
|
|
24.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses (1) |
|
$ |
81,679 |
|
|
$ |
75,200 |
|
|
9% |
Operating income |
|
$ |
78,820 |
|
|
$ |
66,861 |
|
|
18% |
Operating margin |
|
|
15.5 |
% |
|
|
11.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
$ |
(3,350 |
) |
|
$ |
(2,625 |
) |
|
28% |
Income tax expense |
|
$ |
22,320 |
|
|
$ |
16,696 |
|
|
34% |
Overall income tax rate |
|
|
29.6 |
% |
|
|
26.0 |
% |
|
|
Net earnings |
|
$ |
53,150 |
|
|
$ |
47,540 |
|
|
12% |
|
|
|
|
|
|
|
|
|
Irrigation Segment |
|
|
|
|
|
|
|
|
Segment operating revenues |
|
$ |
442,430 |
|
|
$ |
515,360 |
|
|
-14% |
Segment operating income |
|
$ |
92,188 |
|
|
$ |
81,513 |
|
|
13% |
Segment operating margin |
|
|
20.8 |
% |
|
|
15.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
Infrastructure Segment |
|
|
|
|
|
|
|
|
Segment operating revenues |
|
$ |
64,523 |
|
|
$ |
65,187 |
|
|
-1% |
Segment operating income |
|
$ |
8,947 |
|
|
$ |
6,869 |
|
|
30% |
Segment operating margin |
|
|
13.9 |
% |
|
|
10.5 |
% |
|
|
(1)Includes $22.3 million and $21.5 million of corporate operating expenses for the nine months ended May 31, 2023 and 2022, respectively.
Revenues
Operating revenues for the nine months ended May 31, 2023 decreased 13 percent to $507.0 million from $580.5 million for the nine months ended May 31, 2022, as irrigation revenues decreased $72.9 million and infrastructure revenues decreased $0.7 million. The irrigation segment provided 87 percent of the Company’s revenue during the nine months ended May 31, 2023 as compared to 89 percent for the nine months ended May 31, 2022.
North America irrigation revenues for the nine months ended May 31, 2023 of $249.3 million decreased $26.3 million, or 10 percent, from $275.6 million for the nine months ended May 31, 2022. The decrease resulted from lower unit sales volume which was partially offset by higher average selling prices compared to the same prior year period. Lower unit sales volume in the current year period resulted primarily from farmers delaying capital investment decisions. Higher average selling prices compared to the same prior year period resulted from the pass through of higher raw material costs to customers.
International irrigation revenues for the nine months ended May 31, 2023 of $193.1 million decreased $46.6 million, or 20 percent, from $239.8 million for the nine months ended May 31, 2022. The decrease resulted primarily from the completion of a large Egypt project in the prior year that did not repeat and lower sales volumes in Brazil, Australia, Ukraine and Russia. Sales and order activity in Brazil was delayed in the second and third quarters connected with the federal government transition. The current year was also impacted by unfavorable effects of foreign currency translation of approximately $5.3 million compared to the same prior year period.
Infrastructure segment revenues for the nine months ended May 31, 2023 of $64.6 million decreased $0.5 million, or 1 percent, from $65.1 million for the nine months ended May 31, 2022. The decrease resulted from higher Road Zipper System sales and lease revenue, which was more than offset by lower sales of road safety products.
- 22 -
Table of Contents
Gross Profit
Gross profit for the nine months ended May 31, 2023 of $160.5 million increased 13 percent from $142.1 million for the nine months ended May 31, 2022. Gross margin was 31.7 percent of sales for the nine months ended May 31, 2023 compared with 24.5 percent of sales for the nine months ended May 31, 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 same prior year period. Prior year irrigation results were negatively impacted by the impact of higher raw material costs, including approximately $7.8 million in additional expense resulting from the impact of the LIFO method of accounting for inventory while the LIFO impact in the current year reduced expense by approximately $1.5 million. 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. Increased gross profit and gross margin in infrastructure resulted from a more favorable margin mix of revenue, improved price realization and lower inflationary impact on input costs compared to the same prior year period. Prior year infrastructure results were negatively impacted by approximately $1.0 million in additional expense resulting from the impact of LIFO while the current year impact was minimal.
Operating Expenses
Operating expenses of $81.7 million for the nine months ended May 31, 2023 increased $6.5 million, or 9 percent, compared with $75.2 million for the nine months ended May 31, 2022. 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 same prior year period.
Other Expense, net
Other expense for the nine months ended May 31, 2023 increased $0.8 million compared to the nine months ended May 31, 2022. The current year period includes $2.0 million of foreign currency transaction losses compared to gains of $0.9 million in the same prior year period. This impact was partially offset by lower interest expense and higher interest income compared to the same prior year period.
Income Taxes
The Company recorded income tax expense of $22.3 million and $16.7 million for the nine months ended May 31, 2023 and 2022, respectively. The effective income tax rate was 29.6 percent and 26.0 percent for the nine months ended May 31, 2023 and 2022, respectively. The higher effective tax rate reflects an increased proportion of earnings in higher rate foreign jurisdictions, primarily Brazil, compared to the same prior year period. In addition, the same prior year period benefited from the impact of larger discrete items.
- 23 -
Table of Contents
Liquidity and Capital Resources
The Company's cash, cash equivalents, and marketable securities totaled $144.4 million at May 31, 2023 compared with $95.7 million at May 31, 2022 and $116.5 million at August 31, 2022. 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 $54.6 million, $37.5 million, and $49.0 million as of May 31, 2023, May 31, 2022, and August 31, 2022, 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 $358.3 million at May 31, 2023, as compared with $301.6 million at May 31, 2022 and $316.2 million at August 31, 2022. Cash provided by operating activities totaled $59.2 million during the nine months ended May 31, 2023, compared to cash used in operating activities of $24.9 million during the nine months ended May 31, 2022. The increase was primarily driven by favorable improvements in working capital, mainly receivables and inventory, partially offset by a decrease in accounts payable compared to the same prior year period.
Cash flows used in investing activities totaled $18.9 million during the nine months ended May 31, 2023 compared to $10.1 million during the nine months ended May 31, 2022. Cash proceeds from the maturities of marketable securities decreased $19.9 million while purchases of marketable securities decreased $13.5 million compared to the same prior year period. Purchases of property, plant, and equipment were $13.3 million, compared to $12.2 million in the same prior year period.
Cash flows used in financing activities totaled $13.5 million during the nine months ended May 31, 2023 compared to cash flows used in financing activities of $9.0 million during the nine months ended May 31, 2022. The change was primarily the result of lower 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 2023 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 third quarter of fiscal 2023, the Company paid a quarterly cash dividend to stockholders of $0.34 per common share, or $3.7 million, compared to a quarterly cash dividend of $0.33 per common share, or $3.6 million, in the third quarter of fiscal 2022.
- 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 nine months ended May 31, 2023 or 2022. The remaining amount available under the repurchase program was $63.7 million as of May 31, 2023.
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 May 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 May 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. Borrowings under the Revolving Credit Facility bear interest at a variable rate equal to the Secured Overnight Financing Rate ("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 6.43 percent at May 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 on the unused balance depending on the Company’s leverage ratio then in effect (which resulted in a fee of 0.125 percent at May 31, 2023).
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 May 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.
Series 2006A Bonds. Elecsys International LLC, a wholly owned subsidiary of the Company, has outstanding $0.8 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 May 31, 2023). 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, 2022.