Lindsay Corporation — Q2 FY2015 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2015. Financial amounts are in U.S. dollars; tables show millions unless otherwise noted.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Revenue | $141.1 | $152.8 | $275.9 | $300.5 |
| Gross profit / margin | $39.6 / 28.0% | $42.7 / 27.9% | $76.5 / 27.7% | $82.8 / 27.6% |
| Operating income / margin | $14.5 / 10.3% | $20.9 / 13.7% | $26.4 / 9.6% | $36.9 / 12.3% |
| Net earnings | $9.0 | $13.5 | $16.6 | $23.7 |
| Diluted EPS | $0.75 | $1.04 | $1.36 | $1.83 |
- Q2 revenue declined 8%, operating income 30%, and net earnings 33% year over year. Six-month revenue fell 8%, operating income 28%, and net earnings 30%.
- Q2 operating expenses increased $3.3 million to $25.0 million; they represented 17.7% of sales versus 14.2% a year earlier. Acquisition and integration costs, Elecsys operating expenses, higher health-benefit costs, and infrastructure sales commissions contributed to the increase.
- For the six months, cash from operations was $15.6 million versus $32.4 million; investing cash outflow was $73.3 million versus $6.9 million, principally reflecting the Elecsys acquisition. Financing provided $57.3 million, including $115.0 million of debt proceeds and $49.4 million of share repurchases. Capital expenditures were $6.6 million.
- At February 28, cash was $167.2 million and current assets were $380.9 million against current liabilities of $109.3 million. Long-term debt was $117.3 million; reported debt consisted principally of $115.0 million in senior notes and $2.5 million in Elecsys bonds. Cash exceeded reported debt by approximately $49.9 million. The company also had $44.0 million available under its $50 million revolving facility after letters of credit.
- Cash dividends declared were $0.27 per share for Q2, compared with $0.26; six-month declarations were $0.54 versus $0.39. The company repurchased 605,926 shares for $49.4 million during the six months.
Business and material changes
- Irrigation remained the largest business. Q2 segment revenue fell 20% to $108.3 million and segment operating income fell 51% to $11.9 million. Six-month revenue fell 16% to $223.0 million and segment operating income fell 41% to $26.6 million.
- Infrastructure improved: Q2 revenue rose 94% to $32.8 million and segment operating income was $7.3 million, versus $0.006 million. Six-month revenue rose 49% to $52.9 million and segment operating income was $9.5 million, versus $0.5 million. Growth included $12.7 million of Golden Gate Bridge Road Zipper System revenue recognized in FY2015.
- U.S. irrigation demand weakened amid lower crop prices and farm income; U.S. irrigation system volumes declined 32% in Q2 and 30% year to date. International irrigation revenue was down 6% in Q2 but up 2% year to date, with currency translation reducing revenue by $2.5 million and $4.7 million, respectively.
- On January 22, 2015, Lindsay acquired Elecsys, an M2M technology and electronics business, for $67.2 million net of cash acquired. The acquisition added $7.9 million to period-end backlog. Purchase accounting remained preliminary. Lindsay is closing its Digitec Milford, Nebraska facility and consolidating electronics manufacturing with Elecsys; acquisition-related costs were $1.5 million year to date.
- On February 19, 2015, Lindsay issued $115 million of unsecured senior notes bearing 3.82% interest and due in 2030. The company also entered a $50 million revolving credit agreement, due in 2018; no borrowings were outstanding under it at quarter-end. The company reported compliance with financial covenants.
Outlook, risks and contingencies
- Management said the irrigation market remained constrained and expected lower crop prices and farm income to reduce U.S. irrigation equipment demand in FY2015. It cited continuing pricing pressure, currency headwinds, and challenging conditions in Russia and Ukraine.
- Management’s infrastructure outlook was positive, but tempered by uncertainty over long-term U.S. highway funding and the possibility that global economic weakness could affect international projects. Backlog was $74.3 million at quarter-end, down from $89.3 million a year earlier; management cautioned that backlog is not generally a reliable indicator of next-quarter revenue.
- FY2015 capital expenditures were estimated at approximately $20 million, mainly for capacity expansion and productivity. The Turkey factory began manufacturing in March 2015; management noted possible short-term fixed-cost absorption pressure.
- Management stated that cash, projected operating cash flow, and available credit were sufficient for expected working capital, planned capital expenditures, and dividends. No earnings or revenue guidance was provided.
- Environmental remediation liabilities totaled $7.7 million. The EPA requested a feasibility study; the company planned to complete its investigation during calendar 2015 and expected to meet with the EPA in the first half of 2016. Additional costs for contamination beneath a manufacturing building could not be reasonably estimated, and changes to remediation plans or testing could materially affect results in a quarter or year.
- Other notable risks include currency, grain and oil price volatility, interest-rate changes, and related effects on customer purchasing and product competitiveness. Foreign-currency translation reduced Q2 revenue by $3.0 million but had only a nominal impact on net earnings. Six-month other comprehensive income included an $8.3 million loss, largely reflecting foreign-currency translation.
Important facts for investors to verify
- Whether irrigation demand and margins stabilize as crop prices, farm income, and customer investment decisions evolve.
- Elecsys integration progress, realization of expected strategic benefits, and final purchase-price allocation and contingencies.
- Infrastructure growth and profitability after the Golden Gate Bridge project, alongside the timing of future project awards and highway funding.
- Cash conversion and working-capital trends, debt-service capacity, and compliance with credit agreement covenants.
- EPA remediation requirements, the adequacy of the $7.7 million recorded liability, and potential costs associated with the unquantified building-area contamination.
- Foreign-exchange exposure and the effect of currency, commodity, and interest-rate movements on sales, margins, and customer demand.