Lindsay Corporation — Q2 FY2017 Form 10-Q
Reporting period: Quarter ended February 28, 2017; comparisons are with the quarter ended February 29, 2016. The filing also reports six-month results through February 28, 2017. Dollar amounts below are in millions unless otherwise stated.
Business context and results
Lindsay operates irrigation and infrastructure businesses. Irrigation accounted for 86% of quarterly revenue and 84% of first-half revenue. Quarterly revenue increased as international irrigation demand and infrastructure sales improved; first-half revenue declined because U.S. irrigation sales were weaker.
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Revenue | $124.1 | $120.6 | $234.5 | $242.2 |
| Gross profit / margin | $32.9 / 26.5% | $32.4 / 26.9% | $61.3 / 26.1% | $66.9 / 27.6% |
| Operating income (loss) / margin | $8.5 / 6.9% | $(4.7) / (3.9%) | $11.3 / 4.8% | $7.1 / 2.9% |
| Net earnings (loss) | $5.0 | $(4.1) | $5.9 | $2.8 |
| Diluted EPS | $0.47 | $(0.37) | $0.55 | $0.25 |
Financial position, cash flow, and liquidity
- At February 28, 2017, cash and cash equivalents were $102.8; current assets were $285.7 and current liabilities $90.8. Net working capital was $194.9.
- Total debt was $117.1, primarily $115.0 of 3.82% senior notes due in 2030. The company had no revolver borrowings and could borrow up to $41.5 under its $50.0 revolving facility after letters of credit. The facility’s maturity was extended to February 28, 2020. The company reported compliance with loan covenants.
- For the first six months, operating cash flow was $10.7, versus cash used of $5.0 a year earlier. Investing used $2.5, including $4.2 of capital expenditures; financing used $6.3. Cash increased $1.6 from fiscal year-end.
- Dividends declared were $0.29 per share for the quarter and $0.58 per share for the six months. No shares were repurchased in the first half; $63.7 remained authorized under the repurchase program.
Material changes and management commentary
- Quarterly revenue rose 3%; first-half revenue fell 3%. U.S. irrigation revenue declined 15% both for the quarter and first half, while international irrigation revenue rose 46% for the quarter and 16% for the first half. Infrastructure revenue increased 2% in both periods.
- First-half irrigation segment operating income fell 31% to $16.5, with segment margin declining to 8.4% from 11.6%. Infrastructure segment operating income was $4.6 for the first half, approximately flat year over year.
- Quarterly operating expenses were $12.7 lower than a year earlier, mainly because the prior-year quarter included $13.0 of environmental remediation expense. First-half operating expenses also benefited from that nonrecurring charge, partly offset by higher product development and testing, legal, and consulting costs. The prior-year remediation charge reduced quarterly net earnings by $8.5 after tax, or $0.78 per diluted share.
- Management described continued pressure on U.S. irrigation demand from weak farm income and uncertainty among growers, despite some improvement in commodity prices. International project activity improved, but is variable and difficult to forecast. A stronger U.S. dollar could weigh on international sales and margins.
- Management viewed infrastructure prospects as positive, supported by U.S. highway funding and safety-product demand, but cited potential global economic weakness, constrained public spending, and new road-safety certification requirements beginning to phase in from 2018.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Fiscal 2017 capital expenditures were estimated at $10.0–$13.0, primarily for manufacturing capacity and productivity improvements; management said timing and amount could be adjusted.
- Order backlog was $62.3 at February 28, 2017, up from $52.6 a year earlier and $50.7 at August 31, 2016. The filing cautions that backlog fluctuates and is generally not a reliable indicator of next-quarter revenue.
- The company had an accrued environmental remediation liability of $18.7 for contamination at its Lindsay, Nebraska site. The proposed plan was preliminary and not approved by the EPA or Nebraska regulators; management expected a definitive plan no earlier than fiscal 2018. Costs could exceed the accrual and revisions could materially affect quarterly or annual operating results, although management did not expect additional costs to materially affect liquidity or financial condition.
- Other risks discussed include agricultural commodity prices, farm income, weather, government policies, currency movements, international political and economic conditions, and the timing of infrastructure spending. Management reported no material change in previously disclosed risk factors or market-risk disclosures.
- The company early adopted accounting guidance on deferred-tax classification and share-based payments; management said adoption of the share-based payment guidance had no material financial-statement impact. Revenue-recognition and lease-accounting standards were still under evaluation.
Important facts for investors to verify
- Whether international irrigation growth can continue and offset ongoing weakness in U.S. irrigation demand, and how sales mix affects margins.
- Whether the $18.7 environmental accrual will prove sufficient as regulators review the remediation plan and costs are refined.
- Actual cash generation, capital spending, and use of the $41.5 available revolver capacity, particularly if acquisitions or working-capital needs increase.
- Whether backlog converts to revenue on expected timing; the filing explicitly warns it may not predict next-quarter sales.
- Whether new highway-safety certification requirements, currency changes, and public-spending conditions alter infrastructure performance or international profitability.