Lindsay Corporation (LNN) — Q2 FY2022 Form 10-Q
Reporting period: Fiscal second quarter and six months ended February 28, 2022; comparative periods ended February 28, 2021. Lindsay manufactures irrigation systems and infrastructure/road-safety products.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $200.1m (+39%) | $143.6m | $366.3m (+45%) | $252.1m |
| Gross profit / margin | $42.9m / 21.5% | $41.2m / 28.7% | $80.4m / 21.9% | $72.6m / 28.8% |
| Operating income / margin | $18.3m / 9.2% | $15.8m / 11.0% | $31.7m / 8.7% | $23.3m / 9.3% |
| Net earnings | $14.6m | $11.9m | $22.5m | $19.0m |
| Diluted EPS | $1.32 | $1.08 | $2.04 | $1.74 |
- Q2 irrigation revenue rose 52% to $180.8m; infrastructure revenue fell 23% to $19.4m. For the six months, irrigation rose 59% to $326.7m and infrastructure declined 14% to $39.6m.
- Q2 irrigation growth reflected higher pricing and international volume, including strong Brazil sales and final deliveries on a large Egypt project. North American unit volume was lower, partly due to Omicron-related production and shipping absences. Infrastructure weakness chiefly reflected lower Road Zipper System sales and lease revenue.
- Revenue growth translated into modest gross-profit growth because input-cost inflation was not fully recovered through pricing, LIFO inventory accounting reduced gross profit by about $2.8m in Q2 and $8.8m for six months, and the revenue mix shifted toward lower-margin irrigation. Q2 also included about $1.8m of non-recurring factory maintenance and consulting costs.
- Q2 other income was $0.9m versus $1.2m of expense a year earlier, primarily due to foreign-currency transaction gains. Six-month other expense increased to $3.0m from $1.9m, primarily due to foreign-currency transaction losses.
Cash, debt and liquidity
- Six-month operating cash flow was negative $35.9m, versus positive $11.1m a year earlier. The main drivers were increases in receivables ($41.3m cash use) and inventories ($42.4m use), partly offset by higher accounts payable.
- Six-month investing cash use was $15.6m, including $6.9m of capital expenditures; financing cash use was $5.5m, including $7.2m of dividends. Cash and cash equivalents declined to $69.0m from $127.1m at August 31, 2021.
- Cash, cash equivalents and marketable securities totaled $93.9m at February 28, 2022. Net working capital was $288.9m. Management said cash, investments, expected operating cash flow and available credit were sufficient for expected working capital, planned capital spending and dividends.
- Total debt principal was $116.0m, including $115.0m of unsecured senior notes due in 2030. The $50m revolving facility had no borrowings and was fully available; the company reported compliance with financial covenants. The senior notes carry a fixed 3.82% rate.
- Quarterly dividend was $0.33 per share, up from $0.32. No shares were repurchased during the six months; $63.7m remained available under the repurchase program.
Outlook, risks and unusual items
- Fiscal 2022 capital expenditures were expected to be $15m–$20m. Management cited robust U.S. irrigation demand, supported by agricultural commodity prices and farm-income conditions, and international growth opportunities tied to food security, water scarcity and population growth.
- Unshipped order backlog was $111.0m, versus $101.4m a year earlier; irrigation backlog was higher and infrastructure backlog lower. The company cautioned that backlog fluctuates and is not generally a reliable indicator of next-quarter revenue.
- Supply-chain constraints, longer lead times, raw-material and freight costs, labor availability and transportation logistics continued to pressure costs and margins. Management expected cost pressure to persist until selling-price increases fully offset higher costs.
- Following Russia’s invasion of Ukraine, the company said it had suspended business activity in Russia and Belarus. Russian and Ukrainian sales historically represented less than 5% of consolidated revenue. Management was monitoring potential effects; international project timing, political conditions and currency movements also create uncertainty.
- COVID-19 had limited effect on manufacturing to date, but the quarter included a short-term labor disruption at the Nebraska facility related to Omicron. Management noted uncertainty around future pandemic and supply-chain effects.
- Contingencies include product-liability lawsuits involving X-Lite highway end terminals, including a Missouri transportation commission lawsuit, and a U.S. Department of Justice investigation concerning potential False Claims Act violations. The company said losses were not considered probable for the lawsuits, recorded no accrual, and could not estimate a potential loss range; it warned the investigation’s outcome could materially affect the business or financial statements.
- Environmental remediation liability for the Lindsay, Nebraska site was about $15.9m. The proposed remediation plan was not yet approved; a regulator-approved pilot study was being designed, with implementation expected in the second half of calendar 2022. Actual costs could exceed the accrual.
- Six-month income tax expense was $6.2m, with a 21.7% effective rate versus $2.5m and 11.5% a year earlier. The prior-year comparison included a $1.7m tax benefit from release of a foreign valuation allowance; the current period included a $0.7m benefit related to share-based awards.
Important facts for investors to verify
- Whether pricing can continue to offset raw-material, freight and other cost inflation, and whether gross margins recover from the sharp year-over-year decline.
- Whether working-capital investment, particularly receivables and inventory, converts into operating cash as orders are fulfilled.
- Execution, timing and profitability of international irrigation projects, alongside the effects of the Russia-Ukraine conflict and currency movements.
- Developments and potential financial exposure from X-Lite litigation and the federal investigation, and whether environmental remediation estimates change after the pilot study and regulatory review.
- Whether infrastructure demand improves as government-funded road projects progress; current segment revenue and operating income were materially below the prior-year quarter.