Lindsay Corporation — Q3 FY2020 Form 10-Q
Reporting period: Third quarter and nine months ended May 31, 2020. Unless otherwise stated, financial amounts are in U.S. dollars; statements compare with the same periods in 2019.
Business context and results
Lindsay operates in irrigation and infrastructure. Q3 revenue grew modestly, while profitability rose substantially, supported by improved margins, a stronger infrastructure mix, margin initiatives, and the absence of prior-year restructuring costs. COVID-19 shipment and project delays nevertheless affected sales.
Key financial metrics
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Revenue | $123.1m | $121.1m | $346.3m | $342.2m |
| Gross profit | $39.7m | $30.0m | $107.2m | $83.1m |
| Gross margin | 32.2% | 24.8% | 31.0% | 24.3% |
| Operating income | $15.8m | $4.5m | $36.7m | $2.1m |
| Operating margin | 12.9% | 3.7% | 10.6% | 0.6% |
| Net earnings | $10.1m | $2.9m | $24.0m | $0.7m |
| Diluted EPS | $0.93 | $0.27 | $2.21 | $0.06 |
- Segments: Q3 irrigation revenue fell 5% to $93.5m; infrastructure revenue rose 32% to $29.6m. For nine months, irrigation revenue fell 5% to $267.9m, while infrastructure grew 30% to $78.3m.
- Cash flow: Operating cash flow was $16.0m for nine months, versus cash used of $19.6m a year earlier. Investing activities used $28.9m and financing activities used $9.9m. Cash and equivalents ended at $102.5m, down from $127.2m at August 31, 2019.
- Liquidity and debt: Cash plus marketable securities totaled $121.5m; net working capital was $232.0m. Debt principal was $116.4m, including $115.0m of senior notes; the $50m revolver was undrawn and fully available. The company reported compliance with debt covenants.
- Other metrics: Q3 and nine-month dividends declared were $0.32 and $0.94 per share, respectively. Backlog was $78.6m versus $52.5m a year earlier.
Material changes and unusual items
- Q3 revenue increased 2%, but irrigation declined as infrastructure expanded. International irrigation was pressured by currency translation and lower project activity; management cited approximately $3.5m of unfavorable currency impact and $2.0m of COVID-related shipment delays in Q3.
- Management estimated Q3 COVID-related shipment and project delays affected revenue by approximately $14m overall, including approximately $12m of infrastructure revenue. Facilities generally remained open as essential businesses. The ultimate effect on results and cash flows was not reasonably estimable.
- Prior-year results included Foundation for Growth costs: $3.9m in Q3 and $13.2m for nine months, which did not recur. Excluding those costs, operating expenses increased 10% in Q3 and 4% year to date, primarily reflecting higher incentive compensation, partly offset by other reductions.
- Nine-month gross profit included a $1.2m gain on sale of a manufacturing building. Other expense increased, primarily from foreign-currency transaction losses on intercompany balances.
- In April 2020, Lindsay acquired irrigation-monitoring company Net Irrigate for stated consideration of $4.5m, including a contingent earn-out with an initial fair value of $1.2m and a maximum potential payout of $1.5m.
Outlook, risks, and contingencies
- The filing gives no specific revenue or earnings forecast. Management said COVID-19’s ultimate business and financial impact remained uncertain. Fiscal 2020 capital expenditures were expected to be $15m–$20m, with flexibility to adjust timing or amount.
- Management identified agricultural commodity prices, farm income, weather, government programs, currency movements, international project timing, and public infrastructure spending as demand factors. The FAST Act highway-funding authorization was scheduled to expire in September 2020 unless reauthorized. Backlog is not considered a reliable indicator of next-quarter revenue.
- The company accrued $15.4m for groundwater remediation at its Nebraska facility. The plan remained preliminary and subject to regulator input and revised cost or timing estimates; actual costs could exceed the accrual.
- Lindsay is defending X-Lite highway-end-terminal product-liability litigation, including a June 2020 suit by the Missouri Highways and Transportation Commission seeking compensatory and punitive damages. The company said loss was not probable, recorded no accrual, and could not estimate a potential loss range. A U.S. Department of Justice investigation concerning the product and potential False Claims Act violations also remained unresolved; the company could not estimate a loss or outcome.
- Disclosure controls were reported ineffective as of May 31, 2020 because of a previously disclosed material weakness involving evaluation of the recoverability of foreign indirect-tax credits. Management continued remediation and expected to complete it during fiscal 2020, subject to successful testing.
Important facts for investors to verify
- Whether COVID-related delays convert to later shipments and how demand, supply-chain conditions, and currency movements affect subsequent results.
- Progress and final cost of Nebraska environmental remediation, including regulator approval of a definitive plan.
- Developments, potential exposure, and insurance coverage relating to X-Lite litigation and the DOJ investigation.
- Whether the tax-credit control weakness was remediated and disclosure controls became effective after the filing date.
- Quality and timing of the reported backlog, particularly the portion not expected to be fulfilled within twelve months.