Lindsay Corporation — Q3 FY2018 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2018; comparisons are with the same periods in 2017. Lindsay makes irrigation and infrastructure products. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $169.6 | $151.5 | $424.4 | $386.0 |
| Gross profit / margin | $51.5 / 30.4% | $45.9 / 30.3% | $119.2 / 28.1% | $107.2 / 27.8% |
| Operating income / margin | $18.7 / 11.0% | $17.4 / 11.5% | $32.0 / 7.5% | $28.7 / 7.4% |
| Net earnings | $10.4 | $11.0 | $15.3 | $16.8 |
| Diluted EPS | $0.96 | $1.02 | $1.42 | $1.58 |
| Operating cash flow | Not presented for quarter | $8.2 | $24.5 |
Q3 revenue rose 12%, while net earnings fell 5%. Year-to-date revenue increased 10%, but net earnings declined 9%. Q3 gross margin was nearly flat; operating margin decreased as expenses grew faster than sales. The year-to-date effective tax rate was 45.2%, versus 33.1% a year earlier.
Segment results
- Irrigation: Q3 revenue increased 7% to $128.4 million, while segment operating income fell 29% to $11.7 million and margin declined to 9.1% from 13.8%. For nine months, revenue rose 9% to $343.6 million, but operating income declined 4% to $31.5 million.
- Infrastructure: Q3 revenue increased 31% to $41.2 million and operating income rose 78% to $14.2 million. For nine months, revenue rose 16% to $80.8 million and operating income increased 59% to $20.1 million. Growth was driven largely by Road Zipper System sales.
Cash, liquidity and debt
- At May 31, cash and cash equivalents were $111.8 million; current assets were $350.4 million and current liabilities $98.7 million. Net working capital was $251.7 million, including $27.4 million of net assets held for sale.
- Total debt was $116.8 million, including $115.0 million of senior notes; no revolving-credit borrowings were outstanding. Available revolver capacity was $44.6 million after letters of credit. Cash exceeded total debt by approximately $5.0 million.
- Nine-month operating cash flow was $8.2 million, down from $24.5 million, primarily due to working-capital needs supporting higher sales. Investing cash use was $9.7 million, including $6.9 million of capital expenditures; financing cash use was $7.9 million, including $9.7 million of dividends paid.
Material changes, outlook and risks
- Foundation for Growth and divestitures: Q3 included $7.6 million of pre-tax initiative costs, including a $6.0 million write-down of businesses held for sale; the filing says the quarter’s net earnings were reduced by $7.5 million after tax, or $0.70 per diluted share. Nine-month initiative costs were $9.9 million. Management expects these costs and additional future costs to be recovered through improved operating income in FY2020; its stated objective is an 11%–12% operating margin in FY2020, excluding market changes.
- The company committed to sell its filtration and pump systems businesses and one company-owned irrigation dealership, all in Irrigation. Their combined annual revenue is approximately $70 million; divestitures are expected to reduce revenue but benefit operating margins. The filtration and pump sale agreement was signed after quarter-end, with closing anticipated in Q4; the dealership sale was expected before calendar year-end. The company also planned to close an infrastructure manufacturing facility before year-end.
- Management expects FY2018 capital expenditures of $8–$10 million. Unshipped-order backlog was $55.8 million, down from $70.1 million a year earlier; backlog is seasonal and not generally a reliable indicator of next-quarter revenue.
- Market risks include weak farm-income conditions, uncertainty around steel tariffs and trade negotiations, rising steel and freight costs, weather, currency movements, and variable international project activity. Management reported that it has generally passed cost increases through to customers but warned sustained increases could pressure demand or margins.
- Environmental remediation liability was $16.8 million. The remediation plan remained preliminary and subject to EPA and state review; actual costs could differ from the accrual. Lindsay is defending product-liability lawsuits involving X-Lite highway end terminals; it recorded no accrual because it did not consider a loss probable and said it could not estimate a potential loss range.
- Management said current cash, expected operating cash flow, and available credit were sufficient for expected working capital, planned capital expenditures and dividends. The company was in compliance with debt covenants. Disclosure controls were deemed effective, with no material change in internal control reported.
Investor facts to verify
- Whether planned divestitures close on schedule and at values consistent with the held-for-sale estimates, and how the approximately $70 million of annual revenue affects margins and results.
- How much of the decline in cash generation reflects temporary working-capital investment versus persistent cash-flow pressure.
- Whether irrigation profitability recovers amid farm-income, steel, freight and international-market pressures, and whether infrastructure growth continues after large project deliveries.
- How the FY2020 margin objective, anticipated restructuring costs and the environmental remediation estimate develop.
- The final tax accounting for U.S. Tax Reform and any further effects on tax expense or cash taxes.