Lindsay Corporation (LNN) — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended August 31, 2019. This is an annual report, not a standalone Q4 filing; selected fourth-quarter results are noted below. Lindsay sells agricultural irrigation systems and technology, and road-safety and infrastructure products through its Irrigation and Infrastructure segments.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $444.1 million | $547.7 million |
| Gross profit / margin | $114.6 million / 25.8% | $151.5 million / 27.7% |
| Operating income / margin | $6.1 million / 1.4% | $39.0 million / 7.1% |
| Net earnings | $2.2 million | $20.3 million |
| Diluted EPS | $0.20 | $1.88 |
| Operating cash flow | $3.8 million | $33.9 million |
- Revenue fell 19%; Irrigation revenue declined 20% to $351.5 million and Infrastructure revenue fell 14% to $92.6 million.
- Irrigation operating income was $29.8 million (8.5% margin), versus $41.9 million (9.5%). Infrastructure operating income was $16.6 million (17.9% margin), versus $23.9 million (22.1%).
- Cash and cash equivalents were $127.2 million, down from $160.8 million. Working capital was $231.4 million, compared with $251.0 million.
- Total debt was $116.6 million, including $115.0 million of unsecured senior notes; no borrowings were outstanding on the $50 million revolving facility. The company reported compliance with debt covenants.
- Capital expenditures were $23.2 million, versus $11.1 million. Financing cash outflow was $14.6 million, primarily reflecting dividends of $13.4 million.
- FY2019 Q4 revenue was $101.9 million and net earnings were $1.5 million, or $0.14 diluted EPS. FY2018 Q4 revenue was $123.3 million and net earnings were $5.0 million, or $0.46 diluted EPS.
Material changes and unusual items
- Irrigation revenue included a $78.1 million reduction associated with business divestitures completed in late FY2018 and early FY2019. Excluding divestitures, Irrigation revenue declined 3%.
- Lower gross margin reflected the absence of prior-year high-margin Road Zipper projects and a less favorable North American irrigation sales mix. Infrastructure revenue was also affected by large Road Zipper projects in the prior year that did not repeat.
- FY2019 operating expenses included $15.1 million of Foundation for Growth initiative costs and a $2.7 million valuation adjustment for foreign indirect tax credits. Management reported the initiative’s costs as including consulting, divestiture losses, severance, and plant closures.
- FY2019 earnings were reduced by after-tax Foundation for Growth costs of $11.6 million ($1.07 per diluted share) and the tax-credit adjustment of $1.8 million ($0.17 per diluted share). Management said initiative costs are expected to be recovered through improved future operating income, but acknowledged that full targeted margin improvements may not be achieved.
- Operating cash flow declined partly because of lower earnings and increased inventory. Cash used for investing was $21.2 million; FY2018 investing cash flow included $29.9 million of divestiture proceeds.
Outlook, risks, and contingencies
- Management forecast FY2020 capital expenditures of approximately $15 million to $20 million, with flexibility to adjust timing and amount. No specific revenue or earnings guidance is provided in the filing.
- Management cited long-term demand drivers including food production, water conservation, population growth, and road safety, while noting challenging agricultural conditions, low commodity prices, trade uncertainty, currency effects, and variable international project timing.
- Demand for irrigation equipment is exposed to farm income, commodity prices, weather, financing availability, and agricultural policies. Infrastructure demand depends in part on government transportation spending and compliance with evolving safety standards.
- The company is defending multiple product-liability lawsuits involving its X-Lite end terminal. It reported a June 2019 Department of Justice and U.S. Attorney investigation concerning the product and potential civil False Claims Act violations. The company said it could not estimate potential losses or the outcome; no accrual was recorded for the lawsuits based on its assessment that loss was not probable.
- The Lindsay, Nebraska Superfund-site remediation liability was $15.9 million. The remediation plan remained preliminary and subject to agency input; actual costs could exceed the accrual.
- Management and the auditor reported a material weakness in internal control over financial reporting involving assessment of recoverability of foreign indirect tax credits. The misstatement was corrected before issuance, but the auditor issued an adverse opinion on internal control effectiveness. Management planned remediation during FY2020.
- The company adopted ASC 606 in FY2019; the filing reports that, without adoption, FY2019 revenue would have been $6.4 million lower and operating income $3.4 million lower. Comparability with FY2018 is therefore affected by the accounting change.
Important facts for investors to verify
- Whether sales, margins, and operating cash flow recover, and how much of the FY2019 decline reflects divestitures versus underlying demand.
- Progress and realized savings from Foundation for Growth, including whether management achieves its targeted operating-margin improvements.
- Developments in the X-Lite lawsuits and federal investigation, including any subsequent estimates, claims, or financial exposure.
- Changes to the $15.9 million environmental remediation estimate as regulators review and finalize the site plan.
- Whether the foreign tax-credit control weakness is remediated, and whether the remediation is validated in subsequent reporting.
- Inventory levels, planned capital spending, liquidity, and covenant headroom; confirm the effect of FY2020 lease-accounting adoption, for which the company estimated recognition of a $25.6 million right-of-use asset and $29.4 million lease liability.