Lindsay Corporation — Q2 FY2018 Form 10-Q
Reporting period: Second quarter and first six months of fiscal 2018, ended February 28, 2018. Lindsay manufactures irrigation systems and infrastructure products, reported in Irrigation and Infrastructure segments. Figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $130.3 | $124.1 | $254.9 | $234.5 |
| Gross profit / margin | $35.3 / 27.1% | $32.9 / 26.5% | $67.7 / 26.6% | $61.3 / 26.1% |
| Operating income / margin | $7.1 / 5.4% | $8.5 / 6.9% | $13.3 / 5.2% | $11.3 / 4.8% |
| Net earnings | $1.7 | $5.0 | $4.9 | $5.9 |
| Diluted EPS | $0.16 | $0.47 | $0.46 | $0.55 |
Quarterly revenue grew 5%, while net earnings fell 65%. For the six-month period, revenue grew 9% and net earnings declined 16%. Q2 revenue growth reflected Irrigation (+5%) and Infrastructure (+3%). North American irrigation revenue increased 23% in the quarter, while international irrigation revenue fell 22%, largely because prior-year developing-market projects did not recur. Infrastructure revenue growth was supported by Road Zipper System sales. Segment operating income improved in both businesses, but higher corporate costs weighed on consolidated quarterly operating income.
Cash provided by operations turned to an $8.9 million use in the first six months, versus $10.7 million provided a year earlier, primarily because receivables and inventory increased to support higher sales. Investing used $6.4 million, including $4.7 million of capital expenditures; financing used $4.6 million, including $6.4 million of dividends. Cash declined to $102.2 million from $121.6 million at fiscal year-end. Net working capital was $208.8 million.
Total debt was $116.9 million, principally $115.0 million of 3.82% senior notes; no revolving-facility borrowings were outstanding. The company had $44.6 million of revolver availability after letters of credit and was compliant with its financial covenants. Management said cash, expected operating cash flow, and available credit were sufficient for working capital, planned capital spending, and dividends.
Management commentary, outlook, and risks
- Q2 earnings included $2.6 million of incremental tax expense related to U.S. Tax Reform and $2.3 million of pretax severance and consulting costs for the Foundation for Growth initiative. The tax impact was provisional, including a $1.8 million deemed-repatriation tax estimate and $0.8 million deferred-tax expense; management expected to finalize the accounting by fiscal year-end.
- Foundation for Growth is intended to improve performance; management targets an 11%–12% operating margin in fiscal 2020 without assuming market improvement. Additional initiative costs were expected over coming quarters, with anticipated recovery through improved fiscal 2020 operating income.
- Fiscal 2018 capital expenditures were expected to be $10–$12 million. The quarterly dividend was $0.30 per share. No shares were repurchased; $63.7 million remained authorized for repurchases.
- Management described U.S. irrigation demand as stabilized after a multiyear downturn, but expected meaningful demand growth to remain constrained absent sustained improvement in commodity prices and farm income. USDA projected 2018 U.S. net farm income down 7% year over year. International irrigation opportunities remain subject to political, economic, currency, and project-timing volatility.
- Unshipped-order backlog was $90.2 million versus $62.3 million a year earlier, but the filing cautions that backlog is seasonal and not generally a reliable indicator of next-quarter revenue.
- The company faces product-liability lawsuits involving X-Lite highway terminals. It said losses were not probable, recorded no accrual, and could not estimate a potential loss range. Environmental remediation liabilities were $17.2 million; the plan remained subject to regulator review, and costs or timing could change materially, though management did not expect additional costs to materially affect liquidity or financial condition.
Most important facts for investors to verify
- Whether revenue growth and segment-margin gains persist, particularly given the decline in international irrigation sales and the nonrecurrence of prior-year projects.
- How much quarterly earnings weakness reflects provisional tax items and Foundation for Growth costs, and whether the initiative delivers its fiscal 2020 margin target.
- Whether working-capital investment converts to operating cash flow as sales develop.
- Final U.S. Tax Reform accounting and any resulting changes to tax expense or cash taxes.
- Developments in X-Lite litigation and the EPA/NDEQ remediation plan, including any change to the $17.2 million accrual.