Lindsay Corporation — Q2 FY2012 Form 10-Q
Business context and period. The filing covers the quarter and six months ended February 29, 2012. Lindsay operates in irrigation equipment and infrastructure products, including movable barriers, road-safety products, steel tubing and railroad structures. All dollar amounts below are USD.
Financial performance
- Quarter: Revenue rose 10.0% to $132.1 million. Gross profit increased 7.3% to $36.5 million, while gross margin declined to 27.6% from 28.3%. Operating income grew 11.1% to $18.9 million; operating margin was 14.3% versus 14.2%. Net earnings increased 12.8% to $12.8 million; diluted EPS was $1.00 versus $0.89.
- Six months: Revenue grew 20.1% to $251.3 million and gross profit rose 14.6% to $66.7 million. Gross margin declined to 26.6% from 27.8%. Operating income was up 1.5% to $24.0 million; operating margin fell to 9.6% from 11.3%. Net earnings were nearly unchanged at $15.7 million versus $15.6 million; diluted EPS was $1.23 in both periods.
- Cash flow: Six-month operating cash flow was $4.9 million, compared with $3.9 million. Capital expenditures were $4.7 million; investing activities used $3.1 million and financing activities used $4.5 million. Cash decreased $3.2 million from fiscal year-end.
- Liquidity and debt: Cash was $105.0 million at February 29, 2012, versus $108.2 million at August 31, 2011. Net working capital was $196.5 million. Total debt was $6.4 million, down from $8.6 million at fiscal year-end; the $30 million revolving facility had no borrowings. The company reported compliance with all loan covenants.
- Other: The quarterly dividend was $0.09 per share, compared with $0.085; six-month dividends were $0.18 versus $0.17. The six-month effective tax rate was 34.2%, versus 33.8%.
Material changes and segment trends
- Irrigation: Quarterly revenue increased 27.6% to $117.0 million; six-month revenue rose 43.6% to $217.8 million. Higher U.S. and international system, parts and service sales drove growth. Segment operating margin improved year to date to 15.1% from 14.4%.
- Infrastructure: Quarterly revenue declined 46.9% to $15.1 million, and six-month revenue fell 41.8% to $33.6 million. Lower QMB barrier sales reflected large prior-year projects and delays in anticipated projects. The segment recorded operating losses of $1.0 million in the quarter and $2.1 million year to date, compared with prior-year income of $4.3 million and $8.3 million, respectively.
- Quarterly revenue was the company’s highest second-quarter revenue to date. At February 29, backlog was $87.3 million, versus $64.3 million a year earlier and $52.8 million at November 30, 2011.
Outlook, risks and unusual items
- Management described irrigation demand as robust domestically and internationally, citing relatively high agricultural commodity prices, positive farmer economics and stronger year-to-date quote and order activity than in fiscal 2011. It identified international markets as an important longer-term growth opportunity. The filing gives no quantified earnings or revenue guidance.
- Management said infrastructure demand remains challenging because of government funding constraints and project delays; QMB revenue and profit can be volatile because of project timing and fixed costs. It remained confident in the long-term opportunity for QMB systems.
- A first-quarter environmental charge of $7.2 million was recorded for estimated remediation and operating costs over the next 5 to 10 years at the Lindsay, Nebraska site. The recorded liability was $7.9 million at February 29. Estimates remain uncertain: investigation is incomplete, the EPA has not approved an action plan, and additional costs could significantly exceed the accrual and materially affect quarterly or annual operating results. Management did not expect additional costs to materially harm liquidity or financial condition.
- The environmental charge reduced year-to-date operating income; excluding environmental accruals, management reported a 12.4% operating margin versus 11.6% a year earlier. Management also noted that changes to U.S. farm subsidies or tax credits could affect commodity prices and irrigation demand.
- Foreign currency movements and interest rates are market risks. The company uses derivatives for hedging rather than speculation; the BSI term debt’s variable rate was effectively fixed at 6.05% through a swap. Management said derivative counterparty credit risk was not significant.
- The company stated that ordinary-course legal proceedings were not expected to materially affect its business or financial condition, and that there had been no material change in its previously disclosed risk factors.
Key facts for investors to verify
- Progress of the EPA discussions and site investigation, the approved remediation plan, and any changes to the $7.9 million recorded liability.
- Whether irrigation demand, commodity prices and backlog convert into sales and margins, particularly beyond the primary selling season.
- Timing of delayed QMB projects and the effect of infrastructure segment volatility on consolidated earnings.
- Working-capital needs and cash conversion: inventory increased to $68.6 million from $49.5 million at August 31, while six-month operating cash flow was $4.9 million.
- Debt repayment schedule and continued compliance with credit covenants; the remaining $6.4 million term debt was scheduled to be repaid by June 10, 2013.