Lindsay Corporation — Q1 FY2013 10-Q Summary
Reporting period: Three months ended November 30, 2012; comparisons are with the three months ended November 30, 2011. Lindsay makes irrigation equipment and infrastructure products, including road safety, Road Zipper, and rail products.
Financial results
- Revenue: $147.4 million, up 24% year over year. Irrigation revenue rose 33% to $134.2 million; infrastructure revenue fell 29% to $13.2 million.
- Profit and margins: Gross profit was $42.9 million, up 42%; gross margin improved to 29.1% from 25.4%. Operating income was $22.3 million versus $5.1 million, with operating margin of 15.1% versus 4.3%. Net earnings were $14.7 million versus $2.9 million; diluted EPS was $1.15 versus $0.23.
- Segment performance: Irrigation operating income increased to $27.5 million from $9.8 million, and segment margin rose to 20.5% from 9.7%. Infrastructure posted an operating loss of $1.3 million versus $1.2 million, with margin declining to -10.0% from -6.4%.
- Cash flow: Operating cash flow was $13.5 million, compared with $6.2 million. Capital expenditures were $2.2 million; investing cash outflow was $3.3 million and financing cash outflow was $1.7 million. Cash increased $8.7 million during the quarter.
- Liquidity and debt: Cash and equivalents were $152.2 million at November 30, 2012; net working capital was $234.2 million. Total debt was $3.2 million, all current, with repayment scheduled by June 10, 2013. The company had no borrowings on its $30 million revolving credit facility and reported compliance with loan covenants. Management said cash, expected operating cash flow, and available credit were sufficient for expected needs, excluding potential acquisitions.
- Shareholder returns: Dividends declared were $0.115 per share, up from $0.090. No shares were repurchased during the quarter.
Material changes and drivers
- Domestic irrigation revenue increased 59%, supported by a 56% increase in systems sold. Management attributed strong U.S. demand to drought concerns, higher commodity prices, and favorable agricultural economics.
- International irrigation revenue declined 6%, primarily due to fewer systems sold and lower Middle East project revenue, partly offset by growth in Canada and Russia.
- Infrastructure revenue declined amid lower road safety, Road Zipper, and rail sales, which management linked to government funding uncertainty and project delays.
- Irrigation gross margin improved about four percentage points through cost improvements, sales leverage, and pricing. Infrastructure gross margin declined about four points due to product mix and lower-volume fixed-cost deleverage.
- Prior-year operating expenses included a $7.2 million environmental remediation charge. No incremental remediation expense was accrued in Q1 FY2013. The reported earnings comparison therefore reflects both stronger current performance and the absence of that prior-year charge.
Outlook, risks, and contingencies
- The filing gives no specific numerical earnings or revenue guidance. Management described agricultural conditions and long-term irrigation demand drivers as favorable, while noting that demand can fluctuate with farm income, commodity prices, drought, subsidies, and tax incentives.
- Quarter-end backlog was $85.1 million, versus $52.8 million a year earlier and $57.1 million at August 31, 2012. Management cautioned that some backlog may represent sales pulled forward from the second half of FY2013 and that backlog varies with seasonality and project timing.
- Infrastructure demand remains challenged by public funding constraints and project delays; project-based revenue and fixed costs can make segment results volatile. Management cited efficiency and pricing initiatives and expressed confidence in the long-term Road Zipper opportunity.
- Environmental remediation liabilities totaled $7.6 million. Further testing and remediation may be required; estimates could change and additional expenses could be material to a quarter or year, although management did not expect them to materially adversely affect liquidity or financial condition.
- Management reported no material changes to previously disclosed risk factors or market-risk disclosures. It stated that disclosure controls were effective and that no material change to internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether strong irrigation demand and margins persist after management’s warning that some orders may have been pulled forward.
- Whether infrastructure sales and profitability recover as government funding and project timing become clearer.
- Whether environmental testing or EPA remediation discussions require changes to the $7.6 million liability.
- Repayment of the remaining $3.2 million BSI term note by June 10, 2013, and renewal of the European subsidiary’s credit line, which was due to expire January 31, 2013.
- How working-capital movements, particularly receivables and inventory, affect operating cash flow as sales change.