Lindsay Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended November 30, 2019, compared with the quarter ended November 30, 2018. Lindsay makes irrigation systems and technologies and infrastructure products, reported in its Irrigation and Infrastructure segments. Dollar amounts below are in millions unless noted.
Financial results
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $109.4 | $112.0 | Down 2% |
| Gross profit / margin | $34.1 / 31.1% | $28.6 / 25.6% | Profit up 19%; margin up 5.5 percentage points |
| Operating expenses | $21.8 | $26.6 | Down 18% |
| Operating income / margin | $12.3 / 11.2% | $2.0 / 1.8% | Operating income up substantially |
| Net earnings | $8.3 | $1.2 | Up 589% |
| Diluted EPS | $0.77 | $0.11 | Up $0.66 |
| Operating cash flow | $1.5 | $(14.3) | Improved by $15.9 |
| Capital expenditures | $4.3 | $5.7 | Down $1.4 |
Segment performance: Irrigation revenue was $82.4, down 6%; segment operating income rose 25% to $9.8 and margin improved to 11.8% from 8.9%. Infrastructure revenue increased 11% to $27.0; segment operating income rose 110% to $8.8 and margin increased to 32.4% from 17.1%.
Cash, debt and liquidity: Cash and equivalents were $120.9 at November 30, 2019, versus $127.2 at August 31, 2019 and $137.2 a year earlier. Net working capital was $231.8. Total debt principal was $116.5, including $115.0 of senior notes; there were no revolver borrowings and up to $50.0 was available. The company reported compliance with its loan covenants. It paid $3.4 in dividends, or $0.31 per share. Financing cash outflow was $4.5 and investing cash outflow was $3.2.
Operating cash flow improved year over year primarily with higher earnings and smaller working-capital cash uses. Cash declined $6.3 during the quarter. Management said cash resources, projected operating cash flow and credit capacity should cover expected working capital, planned capital expenditures and dividends.
Material changes and management commentary
- Revenue declines reflected lower Irrigation sales, partly offset by Infrastructure growth. North American Irrigation revenue was affected by a prior-year dealership divestiture ($3.3 of the decrease) and lower replacement-parts sales; higher equipment unit volume partly offset the decline. International Irrigation revenue was down 5%, including a $1.1 currency-translation impact.
- Gross margin improvement reflected a more profitable Infrastructure revenue mix and margin-improvement initiatives. Operating expenses fell partly because $4.0 of prior-year Foundation for Growth costs did not recur. The prior-year quarter also included $2.9 of after-tax costs from that initiative, equal to $0.27 per diluted share; this makes the earnings comparison notably favorable.
- Infrastructure growth reflected higher road-safety product sales and Road Zipper System lease revenue. Backlog was $69.2, up from $49.2 a year earlier; management cautioned that backlog fluctuates and is generally not a reliable indicator of next-quarter revenue.
- Management identified agricultural commodity prices, farm income, weather, government policies, currency movements and international project timing as factors affecting Irrigation demand. Infrastructure demand is linked in part to government road spending; the FAST Act was scheduled to expire in September 2020 unless reauthorized. Management cited international markets as an important longer-term growth opportunity.
- Fiscal 2020 capital expenditures were expected to be $15–$20, with timing adjustable in response to economic conditions. The filing provides no quantified revenue or earnings guidance.
Risks, contingencies and unusual items
- X-Lite matters: Lindsay is defending product-liability lawsuits involving highway-barrier end terminals. The company said loss was not probable, recorded no accrual, and could not estimate a potential loss range. Separately, the DOJ and U.S. Attorney’s Office are investigating potential False Claims Act violations relating to X-Lite. The company could not estimate any loss or the outcome and said the matter could have a material adverse effect.
- Environmental remediation: The company accrued $15.8 for groundwater remediation at its Lindsay, Nebraska facility. The plan remained preliminary and unapproved; actual costs could exceed the accrual. Management did not expect additional costs to materially affect liquidity or financial condition, though revisions could materially affect a period’s results.
- Internal controls: Disclosure controls were deemed ineffective as of November 30, 2019 because of a previously identified material weakness in controls over valuation and recoverability of foreign indirect tax credits. The company began remediation and expected completion during fiscal 2020; remediation was not yet considered complete.
- Accounting change: Adoption of lease accounting in fiscal Q1 resulted in recognition of a $25.8 right-of-use asset and $29.5 lease liability at November 30, 2019. The adoption-date amounts were $26.2 and $29.5, respectively.
Most important facts for investors to verify
- Whether improved margins and Infrastructure profitability persist, particularly as Irrigation revenue declined.
- How much of the sharp year-over-year earnings improvement reflects the nonrecurrence of Foundation for Growth costs rather than ongoing operating performance.
- Developments in the DOJ investigation and X-Lite lawsuits, including any change in the company’s ability to estimate exposure.
- Whether the environmental remediation plan is approved and whether the $15.8 accrual remains adequate.
- Progress and testing results for remediation of the material weakness, and any subsequent change in control effectiveness.
- Cash generation, working-capital needs, planned capital spending and compliance with debt covenants.