Lindsay Corporation — Q2 FY2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended February 29, 2020. Lindsay operates irrigation and infrastructure businesses. Amounts below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Revenue | $113.8 | $109.2 | $223.2 | $221.1 |
| Gross profit / margin | $33.4 / 29.4% | $24.5 / 22.4% | $67.5 / 30.2% | $53.1 / 24.0% |
| Operating income (loss) | $8.6 | $(4.5) | $20.9 | $(2.4) |
| Net earnings (loss) | $5.5 | $(3.4) | $13.9 | $(2.2) |
| Diluted EPS | $0.51 | $(0.32) | $1.28 | $(0.21) |
- Q2 revenue rose 4%; irrigation revenue fell 4% to $92.1 million, while infrastructure revenue increased 62% to $21.7 million. For the six months, revenue rose 1%, with irrigation down 5% and infrastructure up 29%.
- Gross margin improved primarily from a more profitable infrastructure mix and margin-improvement initiatives. Q2 and six-month gross profit also included a $1.2 million gain on sale of a former manufacturing-facility building.
- Operating expenses declined 14% in Q2 and 16% year to date. Prior-year results included Foundation for Growth costs of $5.3 million in Q2 and $9.3 million for the six months; the six-month prior-period after-tax impact was $3.7 million, or $0.34 per diluted share.
- At February 29, cash and cash equivalents were $101.3 million and marketable securities were $18.7 million, totaling $120.0 million. Total debt was $116.5 million, including $115.0 million of senior notes; no revolver borrowings were outstanding, and $50.0 million was available under the facility.
- Current assets were $325.0 million and current liabilities $87.8 million; reported net working capital was $237.2 million. Shareholders’ equity was $277.3 million.
- For the six months, operating cash flow was negative $2.2 million, versus negative $39.8 million a year earlier. Investing cash outflow was $19.0 million and financing cash outflow $6.4 million. Cash declined $25.9 million from fiscal year-end to $101.3 million.
- The company paid quarterly dividends of $0.31 per share. No shares were repurchased; $63.7 million remained available under the repurchase authorization.
Changes, outlook, and management commentary
- North American irrigation sales increased, supported by replacement parts, equipment volume, and engineering services. International irrigation fell amid lower developing-market project activity and unfavorable currency translation; a large prior-year project did not recur in Q2.
- Infrastructure growth reflected higher Road Zipper System sales and lease revenue and increased road-safety product sales. Segment operating income was $6.4 million in Q2, compared with a $0.4 million loss a year earlier.
- Backlog was $104.4 million at February 29, versus $45.6 million a year earlier. Management cautioned that backlog fluctuates and is generally not a reliable indicator of the next quarter’s revenue.
- Management cited long-term opportunities in international irrigation, food production, water efficiency, and infrastructure expansion. Irrigation demand remains sensitive to farm income, commodity prices, weather, policy, and currency; international project sales can be difficult to forecast. The FAST Act highway-funding authorization was scheduled to expire in September 2020.
- Fiscal 2020 capital expenditures were expected to be $15–$20 million; $5.3 million had been spent in the first six months. Management stated liquidity resources, projected operating cash flow, and available credit were sufficient for expected working capital, planned capital spending, and dividends.
- The filing added COVID-19 as a risk following the March 2020 pandemic declaration. The scale of potential operational, demand, supply-chain, and cash-flow impacts was not yet known.
Risks, contingencies, and unusual items
- The company was defending multiple product-liability lawsuits concerning X-Lite highway-barrier end terminals. It recorded no accrual, said a loss was not considered probable, and could not estimate a potential loss range.
- The Department of Justice and U.S. Attorney’s Office were investigating potential False Claims Act violations related to X-Lite. The company could not estimate a loss or predict the outcome; the matter could have a material adverse effect.
- An estimated $15.6 million environmental-remediation liability was accrued for groundwater contamination near the Lindsay, Nebraska facility. The plan remained preliminary and unapproved; actual costs could exceed the estimate, though management did not expect additional costs to materially affect liquidity or financial condition.
- Disclosure controls were deemed ineffective at quarter-end because of a previously reported material weakness in controls over valuation of foreign indirect-tax credits. The related prior-year misstatement was corrected before issuance; remediation was ongoing, with completion expected during fiscal 2020.
- Adoption of lease accounting in fiscal 2020 resulted in initial recognition of a $26.2 million right-of-use asset and $29.5 million lease liability.
Most important facts for investors to verify
- Whether infrastructure growth, margin gains, and the elevated backlog convert into sustained revenue and earnings, particularly given weaker international irrigation activity.
- The potential financial and operational consequences of the X-Lite investigation and product-liability litigation.
- Whether the environmental remediation plan is approved and whether the $15.6 million accrual remains adequate.
- Progress and testing results for remediation of the material weakness in tax-credit controls.
- COVID-19 effects on demand, manufacturing, supply chains, and cash flows, which were uncertain at the filing date.
- Execution of the $15–$20 million capital-spending plan and maintenance of liquidity, covenant compliance, and dividends.