Lindsay Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter ended May 31, 2017; results are compared with the three and nine months ended May 31, 2016. Lindsay manufactures irrigation equipment and infrastructure products, reported in Irrigation and Infrastructure segments. Financial statements are unaudited.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Revenue | $151.5 million | $141.3 million | $386.0 million | $383.5 million |
| Gross profit / margin | $45.9 million / 30.3% | $41.8 million / 29.6% | $107.2 million / 27.8% | $108.7 million / 28.3% |
| Operating income / margin | $17.4 million / 11.5% | $15.3 million / 10.8% | $28.7 million / 7.4% | $22.4 million / 5.8% |
| Net earnings | $11.0 million | $9.6 million | $16.8 million | $12.5 million |
| Diluted EPS | $1.02 | $0.90 | $1.58 | $1.13 |
- Q3 revenue rose 7%, net earnings 14%, and operating income 14%. Gross margin improved 0.7 percentage points, while operating expenses increased 8%, mainly from product development costs and professional fees.
- For the first nine months, revenue increased 1% and net earnings rose 35% (based on reported statement values). Operating expenses fell 9%, principally because the prior-year period included $13.0 million of environmental remediation expense that did not recur. The effective tax rate increased to 33.1% from 31.8%.
- Segments: Q3 Irrigation revenue increased 2% to $120.0 million, while segment operating income was nearly flat at $16.5 million. Infrastructure revenue grew 31% to $31.5 million and segment operating income increased 72% to $8.0 million. Nine-month Irrigation revenue fell 2% to $316.1 million and segment operating income fell 18% to $33.0 million; Infrastructure revenue rose 13% to $69.9 million and operating income rose 36% to $12.6 million.
- Cash flow and investment: Nine-month operating cash flow was $24.5 million, versus $20.3 million. Capital expenditures were $6.2 million, versus $10.1 million; investing cash outflow was $5.0 million. Financing cash outflow was $7.6 million, compared with $58.2 million, primarily because the prior year included $48.3 million of share repurchases. Dividends paid were $9.3 million.
- Liquidity and debt: Cash and equivalents were $113.2 million at May 31, 2017, versus $101.2 million at August 31, 2016. Net working capital was $202.4 million. Total debt was $117.0 million, principally $115.0 million of fixed-rate senior notes; there were no revolver borrowings. Up to $44.0 million remained available under the $50.0 million revolving facility after letters of credit. The company reported compliance with loan covenants.
Outlook, risks and notable items
- Management described near-term irrigation demand as constrained by the agricultural downturn, low projected U.S. farm income, commodity-price conditions, weather and foreign-market uncertainty. It cited long-term opportunities in efficient irrigation, water use and international markets.
- Management’s infrastructure outlook was positive, supported by U.S. highway funding and demand for road-safety products, but qualified by potential global economic slowdowns, public-spending constraints and changing safety certification standards beginning in 2018.
- Backlog was $70.1 million at May 31, 2017, versus $61.2 million a year earlier. Management cautioned that backlog fluctuates and is not generally a reliable indicator of next-quarter revenue.
- Fiscal 2017 capital expenditures were estimated at $8 million–$10 million, mainly for maintenance, replacement and productivity improvements; management said timing and amount could be adjusted for economic conditions.
- The company accrued $18.3 million for environmental remediation at its Lindsay, Nebraska site. The proposed plan had not been approved by regulators, and a definitive plan was not expected until fiscal 2018 or later. Actual costs could exceed the accrual and revisions could materially affect quarterly or annual operating results; the company did not expect additional costs to materially affect liquidity or financial condition.
- Foreign exchange remains a risk to international sales and margins. The company uses currency forwards for hedging and stated it does not use derivatives for speculation.
- The company had early adopted certain accounting updates; adoption of the new revenue-recognition standard was still under assessment, with potential effects involving allocation of contract revenue, timing of recognition and contract acquisition costs.
- The company declared dividends of $0.29 per share in Q3. No shares were repurchased in the first nine months of FY2017; $63.7 million remained under the repurchase authorization.
Important facts for investors to verify
- Whether the irrigation-market recovery is sufficient to improve U.S. unit volumes and segment margins, and whether infrastructure growth continues.
- Progress toward EPA and state approval of the remediation plan, the adequacy of the $18.3 million accrual and any resulting earnings or cash-flow impact.
- Delivery of the $8 million–$10 million capital-spending estimate and the sustainability of operating cash flow amid higher inventory and receivables.
- Availability and terms of the revolving credit facility, covenant compliance, and the timing and cost of the senior-note obligations.
- Potential impacts and implementation approach for the revenue-recognition standard, along with foreign-currency exposure and the effect of changing safety standards.