Lindsay Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended August 31, 2018. The filing also reports fourth-quarter results; fiscal Q4 is not a separate reporting period for the annual financial statements. Lindsay sells agricultural irrigation systems and technology, and road infrastructure and safety products through its Irrigation and Infrastructure segments.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $547.7 million | $518.0 million |
| Gross profit / margin | $151.5 million / 27.7% | $145.0 million / 28.0% |
| Operating income / margin | $38.6 million / 7.0% | $40.2 million / 7.8% |
| Net earnings | $20.3 million | $23.2 million |
| Diluted earnings per share | $1.88 | $2.17 |
| Operating cash flow | $33.9 million | $39.4 million |
| Capital expenditures | $11.1 million | $8.9 million |
Revenue rose 6%, but net earnings fell 13%. The 40.1% effective tax rate included $2.5 million of U.S. tax reform expense and $1.8 million of tax impacts from divestitures; management reported a 27.4% rate excluding those items. Gross margin declined 0.3 percentage points, and operating margin declined 0.8 points.
Segments: Irrigation revenue increased 5% to $439.9 million, while operating income declined 2% to $41.9 million and margin eased to 9.5% from 10.2%. North American irrigation revenue grew 16% to $294.6 million, supported by higher system volume and selling prices; international irrigation revenue declined 11% to $145.2 million, reflecting reduced project activity and disruption in Brazil. Infrastructure revenue increased 8% to $107.8 million; operating income grew 19% to $23.9 million and margin rose to 22.1%, primarily due to higher Road Zipper sales, including two large projects.
FY2018 fourth quarter: Revenue was $123.3 million versus $131.9 million in FY2017 Q4; net earnings were $5.0 million versus $6.3 million, and diluted EPS was $0.46 versus $0.59.
Liquidity, debt and capital allocation
Cash and cash equivalents were $160.8 million at year-end, up from $121.6 million; working capital was $251.0 million versus $200.9 million. Operating cash flow declined $5.5 million year over year. Investing activities provided $18.1 million, chiefly reflecting $29.9 million of proceeds from business sales. Financing activities used $11.3 million, including $13.0 million of dividends.
Total debt was $116.8 million, principally $115.0 million of unsecured senior notes bearing fixed interest of 3.82% and due in 2030. The company had no revolver borrowings and $44.6 million available under its $50.0 million facility after letters of credit. It reported compliance with debt covenants. The annual dividend was $1.21 per share; no shares were repurchased in FY2018. The repurchase program had $63.7 million remaining.
Changes, outlook and material items
- Foundation for Growth costs were $9.7 million pre-tax, including a $4.1 million loss on divestitures, severance, plant closure and consulting costs. Management targets an 11%–12% operating margin in FY2020, exclusive of market changes, and expects initiative costs to be recovered through improved operating income by then.
- The company sold its pump and filtration businesses and water resource consulting firm in Q4; the company-owned irrigation dealership remained held for sale at year-end. The divested businesses had approximately $80 million of FY2018 revenue combined. One North American infrastructure facility was closed and consolidated with an irrigation facility.
- FY2019 capital expenditures were estimated at $15–$20 million. Management expects historically comparable dividends to continue, subject to business and financial conditions. No specific FY2019 revenue or earnings guidance was provided.
- Management described U.S. irrigation demand as stabilizing in the first half of FY2018, while grower sentiment was tempered by steel-tariff and trade-negotiation uncertainty. It cited international opportunities but noted political, currency and project-timing challenges. Steel and freight costs increased; the company said it generally passed cost increases through, while warning that sustained increases could pressure demand or margins.
- Year-end backlog was $50.0 million, down from $51.8 million. Management cautioned that backlog fluctuates and is generally not a reliable indicator of next-quarter revenue.
Risks and contingencies
- Irrigation demand is exposed to farm income, crop prices, financing, weather and water availability; international sales add currency, political, trade and credit risks. Steel, zinc, freight costs and supplier disruptions may affect profitability.
- Infrastructure demand depends partly on government transportation spending and product certification. New MASH safety standards require testing and development and may affect product competitiveness.
- The company is defending multiple product-liability lawsuits involving its X-Lite end terminal. It reported no accrual because it did not consider a loss probable and could not estimate a loss range.
- Environmental remediation at the Lindsay, Nebraska site had an accrued liability of $16.6 million. The remediation plan remained preliminary and unapproved; actual costs could exceed the accrual, and revisions could materially affect quarterly or annual operating results. The company did not expect additional costs to materially impair liquidity or financial condition.
- Other cited risks include execution of Foundation for Growth, rising interest rates, foreign-exchange movements and cybersecurity disruptions. The filing reported an unqualified audit opinion and effective internal control over financial reporting.
Important facts for investors to verify
- Whether the Foundation for Growth initiative delivers the targeted 11%–12% FY2020 operating margin, and how much further restructuring or divestiture cost is incurred.
- Whether North American irrigation growth persists and international irrigation, particularly Brazil, recovers; track commodity prices, farm income, weather, tariffs and currencies.
- Whether infrastructure growth and margins are sustainable beyond the two large Road Zipper projects, and the impact of MASH compliance on costs and product eligibility.
- Updates on X-Lite litigation and the Nebraska remediation plan, reserve adequacy and cash costs.
- Progress on the remaining irrigation-dealership sale, FY2019 capital spending, operating cash flow and use of cash for dividends, acquisitions or repurchases.