Lindsay Corporation — Q1 FY2019 Form 10-Q
Reporting period: Three months ended November 30, 2018. Comparisons are with the three months ended November 30, 2017, unless otherwise noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2019 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $112.0 million | $124.5 million | Down 10% |
| Gross profit / margin | $28.6 million / 25.6% | $32.4 million / 26.0% | Profit down 12%; margin down 0.4 percentage points |
| Operating income / margin | $2.0 million / 1.8% | $6.2 million / 5.0% | Down 67% |
| Net earnings | $1.2 million | $3.2 million | Down 62% |
| Diluted EPS | $0.11 | $0.30 | Down $0.19 |
| Operating cash flow | $(14.3) million | $(5.0) million | Cash use increased $9.3 million |
Cash and equivalents were $137.2 million at November 30, 2018, versus $160.8 million at August 31, 2018. Net working capital was $242.3 million. Total debt was $116.7 million, including $115.0 million of senior notes; $44.6 million was available under the revolving credit facility after letters of credit. The company reported compliance with its loan covenants.
Capital expenditures were $5.7 million, compared with $2.0 million a year earlier. Fiscal 2019 capital expenditure guidance is $15 million to $20 million. The quarterly dividend was $0.31 per share, versus $0.30 a year earlier.
Segment results and material changes
- Irrigation: Revenue declined 15% to $87.6 million; segment operating income was $7.8 million, approximately flat, and margin rose to 8.9% from 7.6%. North America revenue fell 17%, including $14.0 million attributed to completed divestitures; excluding divestitures, North America revenue increased 5%. International revenue fell 13%, affected by currency translation and lower project sales in developing markets.
- Infrastructure: Revenue increased 15% to $24.3 million; operating income rose 27% to $4.2 million and margin increased to 17.1% from 15.5%. Higher Road Zipper System sales more than offset lower road-safety product sales.
- Unshipped-order backlog was $48.9 million, down from $80.3 million a year earlier. The filing attributes approximately $13.0 million of the decrease to divestitures and $14.0 million to completion of a large infrastructure project. Management cautions backlog is not generally a reliable indicator of next-quarter revenue.
- Q1 results included $4.0 million of pretax Foundation for Growth costs, mainly consulting fees, plus severance and a business-sale loss. Management stated these costs reduced after-tax earnings by $2.9 million, or $0.27 per diluted share. The initiative also contributed to divestitures and lower reported irrigation revenue.
The company adopted ASC 606 using the modified retrospective method in fiscal 2019. Adoption increased opening retained earnings by $0.5 million. For this quarter, the filing shows revenue of $111.951 million as reported versus $105.783 million without ASC 606, and operating income of $2.040 million versus an operating loss of $1.240 million without adoption. Prior-year figures were not restated, so reported year-over-year comparisons are not on the same accounting basis.
Outlook, risks and contingencies
- Management’s stated Foundation for Growth objective is an 11%–12% operating margin in fiscal 2020, excluding market changes; it expects initiative costs to be recovered through improved operating income in fiscal 2020.
- Management expects constrained North American irrigation demand amid lower forecast farm income and pressured crop prices. Demand is also sensitive to weather, farm economics, government programs, currency, and international project timing.
- Infrastructure has continued to grow and improve profitability, but government spending uncertainty and updated highway-safety certification requirements may affect costs and competitive positioning.
- Management said cash resources, projected operating cash flow, and available credit are sufficient for expected working capital, planned capital expenditures, and dividends. Potential acquisitions could require additional borrowing.
- The company reported $16.4 million of environmental remediation liabilities for its Lindsay, Nebraska site. The remediation plan remains preliminary and subject to regulatory review; actual costs and timing could change and could materially affect results in a period, although management does not expect additional expenses to materially harm liquidity or financial condition.
- The company is defending product-liability lawsuits involving X-Lite highway-barrier end terminals. It recorded no accrual because it did not consider a loss probable and could not estimate a loss range; it maintains insurance and expects the industry’s litigation attention may lead to additional suits.
- The filing reports no material changes to previously disclosed risk factors or market-risk disclosures. Management stated disclosure controls were effective as of November 30, 2018.
Important facts for investors to verify
- How the ASC 606 adoption affected reported revenue and operating income, and how to interpret comparisons with the unadjusted prior-year period.
- Whether irrigation demand, international project sales, currency effects, and backlog develop in line with management’s outlook.
- Progress and eventual costs of the Foundation for Growth initiative relative to its fiscal 2020 margin objective.
- Actual fiscal 2019 capital spending versus the $15 million–$20 million range, and cash generation as working capital needs change.
- Developments in the Nebraska remediation plan and X-Lite litigation, including any changes to estimated liabilities or potential exposure.