Lindsay Corporation — FY2014 Second-Quarter 10-Q
Reporting period: Three and six months ended February 28, 2014. Lindsay’s main businesses are irrigation equipment and infrastructure products. Comparisons below are with the corresponding 2013 periods unless noted.
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | First six months FY2014 | First six months FY2013 |
|---|---|---|---|---|
| Revenue | $152.8 million | $175.5 million | $300.5 million | $322.9 million |
| Gross profit / margin | $42.7 million / 27.9% | $50.4 million / 28.7% | $82.8 million / 27.6% | $93.2 million / 28.9% |
| Operating income / margin | $20.9 million / 13.7% | $29.4 million / 16.8% | $36.9 million / 12.3% | $51.7 million / 16.0% |
| Net earnings | $13.5 million | $19.4 million | $23.7 million | $34.1 million |
| Diluted EPS | $1.04 | $1.50 | $1.83 | $2.65 |
- Q2 revenue fell 13% and net earnings fell 30%; first-half revenue declined 7% and net earnings declined 31%.
- Segment results: Q2 irrigation revenue declined 16% to $135.9 million and segment operating income fell 30% to $24.5 million. Infrastructure revenue increased 32% to $16.9 million, reaching approximately break-even versus a $2.1 million loss. For the first half, irrigation revenue declined 11% to $265.1 million, while infrastructure revenue rose 36% to $35.4 million and returned to segment operating profit of $0.5 million.
- Cash flow and investment: First-half operating cash flow was $32.4 million, versus $26.2 million. Capital expenditures were $5.4 million; investing cash outflow was $6.9 million. Financing cash outflow was $12.6 million, including $6.6 million of share repurchases and $5.0 million of dividends paid.
- Liquidity and debt: Cash was $165.5 million at February 28, 2014, versus $151.9 million at August 31, 2013. Net working capital was $281.7 million. The company had no outstanding long-term debt and reported $24.5 million available on its $30.0 million revolving facility after letters of credit.
Material changes and drivers
- Irrigation weakness, particularly in the U.S., drove the consolidated revenue and earnings decline. U.S. irrigation revenue fell 21% in Q2; management cited lower crop prices and reduced drought-related demand. U.S. irrigation system volumes fell 35% in the quarter.
- Lower sales and fixed-cost deleverage weighed on gross margins. Irrigation margins also faced a less favorable geographic mix; first-half irrigation results included a $2.3 million product-warranty charge.
- The LAKOS acquisition, completed in August 2013, contributed revenue but added $2.2 million to Q2 operating expenses and $4.3 million in the first half.
- Infrastructure improved on higher sales, better product mix and cost leverage. The company reported backlog of $89.3 million, down from $159.3 million a year earlier; that earlier backlog included a large Iraq project. Current backlog includes a $12.8 million Golden Gate Bridge Road Zipper order expected to be recognized in FY2015.
Outlook, risks and unusual items
- Management anticipated lower irrigation-segment revenue for the remainder of FY2014, citing lower agricultural commodity prices, a slower U.S. market and difficult comparisons with prior-year Iraq sales. International growth could be constrained by the Russia-Ukraine political situation. No numerical full-year earnings or revenue guidance is provided.
- Longer-term growth opportunities cited include international irrigation, water conservation and transportation safety. A manufacturing operation in Turkey was planned to be operational early in FY2015. FY2014 capital expenditures were estimated at $15–$20 million.
- The company doubled its quarterly dividend to $0.26 per share and authorized up to $150 million of repurchases through January 2, 2016. It repurchased 78,520 shares for $6.6 million in the first half.
- Environmental remediation remains a contingency: recorded liabilities totaled $6.5 million. The EPA had not approved the remediation plan, and the company said potential costs for contamination under a manufacturing building could not yet be reasonably estimated. Revisions to remediation plans could materially affect results in a quarter or year, though management did not expect a material adverse effect on liquidity or financial condition.
- Warranty accruals were $8.4 million at quarter-end, compared with $5.6 million a year earlier. The filing also identifies agricultural demand, government spending on infrastructure, foreign exchange and execution of project orders as relevant business risks.
- The company reported compliance with credit covenants and effective disclosure controls. It reported no material changes to previously disclosed risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether irrigation demand and segment margins continue to weaken, and how much the decline reflects cyclical conditions versus broader market changes.
- Whether the $8.4 million warranty accrual adequately reflects expected claims, including the first-half warranty matter.
- What further EPA testing and negotiations may require, particularly concerning contamination beneath the manufacturing building and potential costs beyond the recorded $6.5 million liability.
- Timing and conversion of the $89.3 million backlog into revenue, including the Golden Gate Bridge order and exposure to project timing.
- Execution and funding of the Turkey expansion and capital-allocation commitments, including dividends and the remaining $143.4 million repurchase authorization.