Lindsay Corporation (LNN) — Fiscal 2019 Third-Quarter 10-Q
Business context and period. Unaudited results cover the three and nine months ended May 31, 2019; the comparable periods ended May 31, 2018. Lindsay operates irrigation and infrastructure businesses. Unless stated otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Three months ended May 31, 2019 | Prior year | Nine months ended May 31, 2019 | Prior year |
|---|---|---|---|---|
| Revenue | $121.1 | $169.6 | $342.2 | $424.4 |
| Gross profit / margin | $30.0 / 24.8% | $51.5 / 30.4% | $83.1 / 24.3% | $119.2 / 28.1% |
| Operating income / margin | $4.5 / 3.7% | $18.8 / 11.1% | $2.1 / 0.6% | $32.3 / 7.6% |
| Net earnings | $2.9 | $10.4 | $0.7 | $15.3 |
| Diluted EPS | $0.27 | $0.96 | $0.06 | $1.42 |
Segment results. Third-quarter irrigation revenue fell 23% to $98.6 million, while infrastructure revenue fell 45% to $22.4 million. Irrigation operating income was $11.0 million (11.2% margin), versus $11.7 million (9.1%); infrastructure operating income was $3.5 million (15.8%), versus $14.2 million (34.6%). For the nine months, irrigation revenue declined 18% to $282.0 million and infrastructure revenue declined 26% to $60.2 million.
Cash, liquidity and debt. Cash and equivalents were $110.8 million at May 31, down from $160.8 million at August 31, 2018. Current assets were $317.2 million and current liabilities $86.8 million; reported net working capital was $230.3 million. Operating cash flow was negative $19.6 million for the nine months, compared with positive $8.2 million a year earlier. Investing cash outflow was $18.2 million, including $20.2 million of capital expenditures; financing cash outflow was $11.2 million. Total debt principal was $116.6 million, including $115.0 million of senior notes; the $50 million revolver was undrawn, with $50 million available. The company said cash, projected operating cash flow and credit capacity were sufficient for expected working capital, planned capital expenditures and dividends.
Quarterly dividends declared were $0.31 per share; nine-month dividends were $0.93 per share. No shares were repurchased during the nine-month period. The remaining authorization was $63.7 million.
Changes and drivers
- Third-quarter revenue decreased 29%; nine-month revenue decreased 19%. The company attributed declines partly to divestitures completed in late fiscal 2018 and early fiscal 2019, which reduced third-quarter irrigation revenue by $27.2 million and nine-month revenue by $60.8 million.
- Excluding divestitures, North American irrigation revenue rose 5% in the quarter and 2% for the nine months. Flooding and above-average rainfall during March–May weighed on near-term irrigation demand; lower North American equipment volume, lower replacement-parts sales and unfavorable factory absorption also affected results.
- Infrastructure revenue and margins were pressured by lower Road Zipper System sales compared with prior-year large projects that did not recur. Nine-month gross margin also reflected higher warranty costs and lower irrigation volumes.
- Corporate operating expenses increased to $10.1 million for the quarter and $31.5 million for the nine months, from $7.2 million and $19.3 million, respectively. Foundation for Growth costs were $3.9 million pre-tax in the quarter and $13.2 million for the nine months. Third-quarter after-tax costs were $2.6 million, or $0.23 per diluted share.
- Nine-month operating cash flow declined amid lower earnings and increased working capital supporting sales growth. Capital expenditures rose to $20.2 million from $6.9 million.
Outlook, risks and unusual items
- Management’s Foundation for Growth objective is an 11%–12% operating margin in fiscal 2020, assuming no improvement in market conditions from fiscal 2017; it expects initiative costs to be recovered through improved future operating income.
- Fiscal 2019 capital expenditures were expected to be $20–$25 million. Management said timing and amount could be adjusted in response to economic conditions.
- Backlog was $42.5 million at May 31, 2019, versus $55.8 million a year earlier; about $12.4 million of the decline reflected divestitures. A subsequent $15 million Road Zipper System order from Japan was received, with delivery expected to begin in fiscal Q4. Management cautioned that backlog is not generally a reliable indicator of next-quarter revenue.
- Management cited agricultural prices and income, weather, government policy, foreign exchange, international project timing and infrastructure spending as business factors. The company noted that 2019 U.S. farm-income estimates remained below the 10-year average.
- In June 2019, the company was notified of a DOJ and U.S. Attorney investigation concerning its X-Lite end terminal and potential False Claims Act violations. It could not estimate a potential loss or outcome and warned the matter could materially adversely affect the business or financial statements. The company is also defending product-liability lawsuits involving X-Lite; no loss accrual was recorded, and potential losses could not be estimated.
- An environmental remediation liability of $16.1 million was accrued for the Lindsay, Nebraska site. The remediation plan remained preliminary and subject to agency input; actual costs could differ, potentially materially to a period’s results, although the company did not expect additional costs to materially affect liquidity or financial condition.
- The nine-month effective tax rate was unusually high at 523.4%, reflecting a small pre-tax loss, earnings mix and discrete items; the company recorded a $0.8 million tax benefit. Adoption of ASC 606 affected reported nine-month revenue and operating income versus figures without the new standard, and prior-year figures were not restated. The company expected adoption of lease accounting in September 2019 to add potentially material balance-sheet assets and liabilities.
- On May 31, 2019, amendments temporarily increased the permitted funded-debt-to-EBITDA leverage ratio through the quarter ended May 31, 2020; exceeding the original limit during that period could raise senior-note interest by 0.25% or 0.50%, depending on the extent. The company reported compliance with its covenants at May 31, 2019.
Key facts for investors to verify
- Whether revenue, margins and cash generation improve as divestiture effects and Foundation for Growth costs evolve, and whether the fiscal 2020 margin objective remains achievable.
- The causes and duration of working-capital cash use, and the expected timing and returns from the elevated capital spending.
- Developments in the X-Lite DOJ investigation and lawsuits, including any change in loss estimates, insurance coverage or potential exposure.
- EPA/NDEQ decisions and updated cost or timing estimates for environmental remediation.
- The effect of ASC 606 comparability and the balance-sheet impact of lease accounting adoption.