Lindsay Corporation — Q3 FY2016 Form 10-Q
Reporting period: Third quarter and first nine months ended May 31, 2016; comparisons are to the corresponding 2015 periods. Lindsay operates irrigation and infrastructure businesses. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $141.3 | $160.7 | $383.5 | $436.6 |
| Gross profit / margin | $41.8 / 29.6% | $46.4 / 28.9% | $108.7 / 28.3% | $122.9 / 28.1% |
| Operating income / margin | $15.3 / 10.8% | $21.5 / 13.4% | $22.4 / 5.8% | $47.9 / 11.0% |
| Net earnings | $9.6 | $12.9 | $12.5 | $29.5 |
| Diluted EPS | $0.90 | $1.10 | $1.13 | $2.46 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $20.2 | $35.4 |
- Q3 revenue declined 12% and net earnings 25%; nine-month revenue declined 12% and net earnings 58%. Lower sales and higher operating costs weighed on operating income.
- Q3 gross margin improved 0.7 percentage point, mainly from lower materials costs in irrigation and better infrastructure cost leverage. Nine-month gross margin was nearly flat, but operating margin fell substantially.
- Q3 operating expenses increased $1.6 million. Nine-month operating expenses increased $11.4 million, including $11.5 million of incremental environmental remediation expense and $5.1 million of incremental acquired-company expenses.
- By segment, Q3 irrigation revenue fell 11% and operating income fell 17%; infrastructure revenue fell 18% and operating income fell 28%. For nine months, irrigation revenue fell 9% and infrastructure revenue fell 25%.
Balance sheet, liquidity and capital allocation
- At May 31, 2016, cash was $91.5 million, versus $154.0 million a year earlier and $139.1 million at August 31, 2015. Net working capital was $194.6 million.
- Nine-month operating cash flow was $20.2 million; capital expenditures were $10.1 million. Investing used $9.4 million, compared with $73.4 million in the prior year, which included $67.2 million for an acquisition. Financing used $58.2 million, largely reflecting $48.3 million of share repurchases and $9.2 million of dividends.
- Total debt was $117.2 million, principally $115.0 million of unsecured senior notes bearing 3.82% and due in 2030. No revolving-facility borrowings were outstanding; $43.9 million was available after letters of credit. The company reported compliance with its debt covenants.
- Management said cash, projected operating cash flow and available credit were sufficient for expected working capital, planned capital expenditures and dividends. FY2016 capital expenditures were estimated at $12–15 million.
- The company repurchased 688,790 shares for $48.3 million during the nine months; $63.7 million remained authorized. The quarterly dividend was $0.28 per share.
Outlook, risks and unusual items
- Management said a near-term recovery in irrigation demand was not yet supported by a clear catalyst. It cited weak farm-income expectations, uncertainty among growers, pricing pressure and challenging international conditions. Commodity prices had rebounded during the quarter, but remained well below 2013 peaks.
- Management remained confident in long-term demand drivers for efficient irrigation and water use. Infrastructure outlook was described as positive, supported by transportation-safety needs and a five-year U.S. highway funding bill, but tempered by possible economic slowdowns and new road-safety certification requirements beginning to phase in from 2018.
- Backlog was $61.2 million at May 31, 2016, compared with $53.2 million a year earlier. The filing cautions that backlog fluctuates and is generally not a reliable indicator of next-quarter revenue.
- Currency strength reduced Q3 revenue by $1.6 million and operating income by $0.1 million year over year. Management also cited agricultural conditions, weather, government policy, foreign exchange, local competition and variable international project timing as business risks.
- Environmental remediation: After site testing, the company recorded an additional $13.0 million charge in Q2, bringing its accrued remediation liability to approximately $19.6 million at May 31. The EPA and Nebraska environmental agency had not approved a remediation plan; cost estimates were preliminary and could change materially, with excess costs not reasonably estimable. The company did not expect additional expenses to materially affect liquidity or financial condition, though they could materially affect quarterly or annual results.
- No specific full-year revenue or earnings guidance is provided in the filing. Management’s statements about future performance are subject to the risks described in the filing.
Key facts for investors to verify
- Progress toward an EPA- and state-approved remediation plan, and whether the approximately $19.6 million accrual remains adequate.
- Whether irrigation demand, unit volumes and pricing stabilize, particularly in the U.S. and Brazil, and how currency movements affect reported results.
- Timing and margins of Road Zipper Systems projects and other infrastructure orders; backlog should not be treated as a near-term revenue forecast.
- Cash generation and liquidity as the company continues share repurchases, dividends and planned capital spending.
- Future operating expense levels, including remediation, acquired-company costs and investment in product development.