Lindsay Corporation — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended February 29, 2016; comparisons are to the corresponding periods ended February 28, 2015. Lindsay operates irrigation and infrastructure businesses.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $120.6 million | $141.1 million | $242.2 million | $275.9 million |
| Gross profit / margin | $32.4 million / 26.9% | $39.6 million / 28.0% | $66.9 million / 27.6% | $76.5 million / 27.7% |
| Operating income (loss) / margin | $(4.7) million / (3.9)% | $14.5 million / 10.3% | $7.1 million / 2.9% | $26.4 million / 9.6% |
| Net earnings (loss) | $(4.1) million | $9.0 million | $2.8 million | $16.6 million |
| Diluted EPS | $(0.37) | $0.75 | $0.25 | $1.36 |
- Q2 revenue declined 15%; first-half revenue declined 12%. Irrigation revenue fell 5% in Q2 and 8% year to date; infrastructure revenue fell 47% and 29%, respectively.
- Q2 operating expenses rose 48% to $37.1 million, principally reflecting a $13.0 million environmental remediation charge. Management said this charge reduced Q2 operating margin by 10.8 percentage points and after-tax diluted EPS by $0.79.
- Q2 segment operating income was $11.1 million for irrigation, down 7%, and $1.5 million for infrastructure, down 79%. First-half segment operating income declined 15% for irrigation and 53% for infrastructure.
- For the six months, operating cash flow was a use of $5.0 million, versus $15.6 million provided a year earlier. Capital expenditures were $7.4 million. Cash used in investing was $4.5 million; cash used in financing was $39.0 million, including $32.2 million of share repurchases and $6.2 million of dividends.
- Cash and cash equivalents were $89.5 million at February 29, 2016, compared with $139.1 million at August 31, 2015. Net working capital was $199.5 million.
- Total debt was $117.3 million, primarily $115.0 million of unsecured senior notes due in 2030. No revolver borrowings were outstanding; $43.9 million was available under the $50 million facility after letters of credit. The company reported compliance with debt covenants.
Material changes and management commentary
- The $13.0 million Q2 environmental charge increased the accrued remediation liability to approximately $19.9 million. Testing identified additional contamination near a manufacturing building. Remediation alternatives and costs remained preliminary; discussions with the EPA and Nebraska environmental agency were expected, with a definitive plan potentially not agreed until fiscal 2017 or later. Costs above the accrual cannot yet be reasonably estimated and could materially affect quarterly or annual results, though the company did not expect them to materially harm liquidity or financial condition.
- Infrastructure sales were lower following completion of a $12.7 million Golden Gate Bridge Road Zipper project in the prior year, and also reflected weaker contract and tubing sales. Infrastructure gross margins were pressured by sales mix.
- Irrigation demand faced headwinds from lower commodity prices and farm income. International irrigation revenue was also affected by currency translation; the stronger U.S. dollar reduced Q2 revenue by $4.1 million and operating income by $0.1 million year over year.
- Management cited near-term uncertainty and no significant indicators of improved demand. It noted potential longer-term support from global food production and water-efficiency needs. Infrastructure’s outlook was described as positive, supported by U.S. highway funding, but subject to international economic and government-spending risks.
Liquidity, outlook, and other items
- Management believed cash resources, projected operating cash flow, and available credit were sufficient for expected working capital, planned capital expenditures, and dividends; acquisitions could require additional borrowing. Approximately $24.0 million of cash was held by foreign subsidiaries and was not expected to be repatriated.
- Fiscal 2016 capital expenditures were estimated at $15 million to $20 million, mainly for capacity expansion and productivity improvements; management retained flexibility to adjust timing and amount.
- Backlog was $52.6 million, versus $74.3 million a year earlier and $48.0 million at August 31, 2015. The company cautioned that backlog fluctuates and generally is not a reliable indicator of next-quarter revenue.
- The company repurchased 469,212 shares for $32.2 million in the first half; $79.8 million remained under its authorization. Dividends declared were $0.56 per share for the first half, versus $0.54 a year earlier.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- How EPA and state-agency review affects the remediation plan, timing, and the adequacy of the approximately $19.9 million accrual.
- Whether irrigation demand, farm economics, and foreign exchange improve or continue to weigh on sales and margins.
- Whether infrastructure revenue and backlog convert into orders and earnings after the prior-year Road Zipper project ended.
- Operating cash flow, working-capital trends, and the balance between share repurchases, dividends, and available liquidity.
- Execution and cost absorption at the Turkey facility, and the effect of planned capital expenditures on returns.