Lindsay(LNN) - 2019 Q3 - Quarterly Report

Part I – FINANCIAL INFORMATION ITEM 1 – Financial Statements The company's unaudited condensed consolidated financial statements and accompanying notes are presented for the period Condensed Consolidated Statements of Earnings The company reported significant declines in revenues, profits, and net earnings for the three and nine-month periods | Metric | 3 Months Ended May 31, 2019 | 3 Months Ended May 31, 2018 | 9 Months Ended May 31, 2019 | 9 Months Ended May 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Operating revenues | $121,054 | $169,571 | $342,187 | $424,436 | | Gross profit | $29,999 | $51,478 | $83,121 | $119,191 | | Operating income | $4,475 | $18,814 | $2,055 | $32,306 | | Net earnings | $2,897 | $10,379 | $669 | $15,299 | | Diluted EPS | $0.27 | $0.96 | $0.06 | $1.42 | | Cash dividends declared per share | $0.31 | $0.30 | $0.93 | $0.90 | - Operating revenues decreased by 29% for the three months and 19% for the nine months ended May 31, 2019, compared to the prior year periods[8] - Net earnings decreased by 72% for the three months and 96% for the nine months ended May 31, 2019, compared to the prior year periods[8] Condensed Consolidated Statements of Comprehensive Income Total comprehensive income decreased significantly due to lower net earnings and foreign currency translation adjustments | Metric | 3 Months Ended May 31, 2019 | 3 Months Ended May 31, 2018 | 9 Months Ended May 31, 2019 | 9 Months Ended May 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net earnings | $2,897 | $10,379 | $669 | $15,299 | | Foreign currency translation adjustment | $(1,831) | $(3,705) | $125 | $(2,925) | | Total comprehensive income | $1,104 | $6,714 | $898 | $12,483 | - Total comprehensive income decreased by 83.5% for the three months and 92.8% for the nine months ended May 31, 2019, compared to the prior year periods[10] Condensed Consolidated Balance Sheets Total assets changed slightly while cash decreased and receivables and inventories increased from the prior fiscal year-end | Metric (in thousands) | May 31, 2019 | May 31, 2018 | August 31, 2018 | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $110,839 | $111,779 | $160,787 | | Receivables, net | $94,584 | $92,135 | $69,107 | | Inventories, net | $91,091 | $82,635 | $79,233 | | Total current assets | $317,161 | $350,406 | $331,051 | | Total assets | $505,922 | $519,778 | $499,815 | | Total current liabilities | $86,819 | $98,671 | $80,094 | | Long-term debt | $115,885 | $116,172 | $116,129 | | Total liabilities | $235,528 | $242,269 | $222,949 | | Total shareholders' equity | $270,394 | $277,509 | $276,866 | - Cash and cash equivalents decreased by $49.9 million from August 31, 2018, to May 31, 2019[13] - Total assets increased by $6.1 million from August 31, 2018, to May 31, 2019, but decreased by $13.8 million from May 31, 2018, to May 31, 2019[13] Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity decreased due to cash dividends and other losses, partially offset by net earnings and compensation | Metric (in thousands) | August 31, 2018 | May 31, 2019 | | :--- | :--- | :--- | | Total shareholders' equity | $276,866 | $270,394 | | Net earnings | $669 | | | Other comprehensive income | $229 | | | Cash dividends | $(10,032) | | | Share-based compensation expense | $3,077 | | - Total shareholders' equity decreased by $6.5 million from August 31, 2018, to May 31, 2019[14] Condensed Consolidated Statements of Cash Flows The company experienced net cash outflows from all activities, leading to a significant decrease in cash balances | Cash Flow Activity (in thousands) | 9 Months Ended May 31, 2019 | 9 Months Ended May 31, 2018 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(19,628) | $8,175 | | Net cash used in investing activities | $(18,215) | $(9,667) | | Net cash used in financing activities | $(11,247) | $(7,866) | | Net change in cash and cash equivalents | $(49,948) | $(9,841) | | Cash and cash equivalents, end of period | $110,839 | $111,779 | - Operating activities shifted from providing $8.2 million in cash in 2018 to using $19.6 million in 2019[17] - Investing activities used more cash in 2019 ($18.2 million) compared to 2018 ($9.7 million), primarily due to increased capital expenditures[17] Notes to the Condensed Consolidated Financial Statements These notes detail accounting policies, revenue recognition, divestitures, taxes, debt, and segment-specific data Note 1 – Basis of Presentation The financial statements follow U.S. GAAP and reflect the adoption of new accounting guidance for revenue and taxes - The Company adopted ASC Topic 606 (Revenue from Contracts with Customers) effective September 1, 2018, using the modified retrospective approach, resulting in a $0.5 million increase in retained earnings, net of tax[23][24] - ASU No. 2016-02 (Leases) will be adopted on September 1, 2019, and is expected to record material assets and liabilities on the balance sheet[20] - ASU No. 2018-02 (Reclassification of Certain Tax Effects) was adopted in Q1 fiscal 2019, reclassifying $0.5 million to retained earnings for stranded tax effects from U.S. Tax Reform[28] Note 2 – Revenue Recognition The adoption of ASC Topic 606 impacted financial statements, with revenue now disaggregated by segment and timing Impact of ASC Topic 606 on Financial Statements (May 31, 2019): | Metric (in thousands) | As Reported | ASC Topic 606 Adjustments | Balance without adoption | | :--- | :--- | :--- | :--- | | Inventories, net | $91,091 | $3,652 | $94,743 | | Other current assets | $17,903 | $(1,114) | $16,789 | | Other current liabilities | $49,102 | $5,039 | $54,141 | | Retained earnings | $476,580 | $(2,500) | $474,080 | | Operating revenues (3 months) | $121,054 | $43 | $121,097 | | Operating revenues (9 months) | $342,187 | $(6,303) | $335,884 | | Operating income (3 months) | $4,475 | $(38) | $4,437 | | Operating income (9 months) | $2,055 | $(3,429) | $(1,374) | Revenue by Recognition Timing and Segment (9 Months Ended May 31, 2019): | Segment | Point in time (in thousands) | Over time (in thousands) | Total (in thousands) | | :--- | :--- | :--- | :--- | | Irrigation | $256,466 | $25,528 | $281,994 | | Infrastructure | $51,593 | $4,372 | $55,965 | | Total Revenue from Contracts | $308,059 | $29,900 | $337,959 | | Lease revenue | — | $4,228 | $4,228 | | Total Operating Revenues | $308,059 | $34,128 | $342,187 | - Contract assets were $1.4 million at May 31, 2019, and contract liabilities were $13.1 million[44][45] Note 3 – Divestitures and Held-For-Sale The company completed an irrigation dealership divestiture at a loss and holds an infrastructure facility for sale - Divestiture of a company-owned irrigation dealership in Q1 fiscal 2019 resulted in a $0.3 million loss on sale and a $5.6 million note receivable[46] - An infrastructure manufacturing facility closed in Q4 fiscal 2018 is classified as 'Assets held-for-sale,' with a carrying amount of $2.7 million at May 31, 2019[47][48] Note 4 – Net Earnings per Share Basic and diluted EPS are calculated from weighted average shares, excluding certain anti-dilutive securities | Metric | 3 Months Ended May 31, 2019 | 3 Months Ended May 31, 2018 | 9 Months Ended May 31, 2019 | 9 Months Ended May 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net earnings (in thousands) | $2,897 | $10,379 | $669 | $15,299 | | Basic net earnings per share | $0.27 | $0.96 | $0.06 | $1.43 | | Diluted net earnings per share | $0.27 | $0.96 | $0.06 | $1.42 | | Weighted average shares outstanding (basic, in thousands) | 10,786 | 10,757 | 10,779 | 10,735 | | Weighted average shares outstanding (diluted, in thousands) | 10,814 | 10,785 | 10,807 | 10,763 | - Anti-dilutive securities excluded from diluted EPS calculation for the nine months ended May 31, 2019, included 11 thousand restricted stock units, 66 thousand stock options, and 3 thousand performance stock units[51] Note 5 – Income Taxes The company reported an income tax benefit for the nine-month period due to earnings mix and U.S. Tax Reform impacts | Metric | 3 Months Ended May 31, 2019 | 3 Months Ended May 31, 2018 | 9 Months Ended May 31, 2019 | 9 Months Ended May 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Income tax expense (benefit) | $332 | $7,066 | $(827) | $12,614 | | Estimated annual effective income tax rate | N/A | N/A | 42.6% | 28.5% | - The estimated annual effective income tax rate increased to 42.6% for the nine months ended May 31, 2019, from 28.5% in the prior year, mainly due to a shift in earnings mix to higher-tax foreign jurisdictions and a pre-tax loss in domestic operations[53] - The company recorded a discrete income tax benefit of $0.8 million for the nine months ended May 31, 2019, compared to an expense of $4.7 million in the prior year related to U.S. Tax Reform[53] Note 6 – Inventories Inventories increased from the prior fiscal year-end, driven by growth in raw materials and finished goods | Inventory Category (in thousands) | May 31, 2019 | May 31, 2018 | August 31, 2018 | | :--- | :--- | :--- | :--- | | Raw materials and supplies | $44,742 | $39,320 | $36,316 | | Work in process | $6,917 | $7,898 | $9,176 | | Finished goods and purchased parts, net | $47,659 | $41,454 | $40,197 | | Total inventory value before LIFO adjustment | $99,318 | $88,672 | $85,689 | | Less adjustment to LIFO value | $(8,227) | $(6,037) | $(6,456) | | Inventories, net | $91,091 | $82,635 | $79,233 | - Net inventories increased by $11.8 million from August 31, 2018, to May 31, 2019[55] Note 7 – Long-Term Debt The company's long-term debt primarily consists of Senior Notes due in 2030 and industrial revenue bonds | Debt Type (in thousands) | May 31, 2019 | May 31, 2018 | August 31, 2018 | | :--- | :--- | :--- | :--- | | Series A Senior Notes | $115,000 | $115,000 | $115,000 | | Elecsys Series 2006A Bonds | $1,622 | $1,826 | $1,775 | | Total debt | $116,622 | $116,826 | $116,775 | | Total long-term debt | $115,885 | $116,172 | $116,129 | Principal Payments Due: | Due Within | Amount (in thousands) | | :--- | :--- | | 1 year | $208 | | 2 years | $212 | | 3 years | $216 | | 4 years | $220 | | 5 years | $225 | | Thereafter | $115,541 | | Total | $116,622 | Note 8 – Financial Derivatives The company uses foreign currency forward contracts to hedge exchange rate volatility, carried at fair value Fair Values of Derivative Instruments (in thousands): | Derivative Type | May 31, 2019 | May 31, 2018 | August 31, 2018 | | :--- | :--- | :--- | :--- | | Designated as hedging instruments (assets) | $533 | $2,100 | $775 | | Not designated as hedging instruments (net) | $(21) | $81 | $111 | - Accumulated other comprehensive income included after-tax gains of $6.3 million at May 31, 2019, related to derivative contracts designated as hedging instruments[58] - The company had outstanding foreign currency forward contracts to sell a notional amount of 32.7 million Euro and 43.0 million South African Rand at May 31, 2019, qualifying as net investment hedges[60] Note 9 – Fair Value Measurements Financial assets and liabilities measured at fair value are classified within Level 1 and Level 2 of the hierarchy Financial Assets and Liabilities Measured at Fair Value (May 31, 2019, in thousands): | Category | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $110,839 | — | — | $110,839 | | Derivative assets | — | $534 | — | $534 | | Derivative liabilities | — | $(22) | — | $(22) | Note 10 – Commitments and Contingencies The company faces product liability lawsuits, a DOJ investigation, and an ongoing environmental remediation obligation - The company is defending product liability lawsuits concerning its X-Lite® end terminal, but does not believe a loss is probable and maintains insurance coverage[66] - A Department of Justice investigation into potential False Claims Act violations related to the X-Lite end terminal could have a material adverse effect, though the company cannot estimate a potential loss[67] - The estimated aggregate accrued cost for environmental remediation at the Lindsay, Nebraska facility is $16.1 million as of May 31, 2019, with $1.2 million classified as current and $14.9 million as noncurrent liabilities[72][74] Note 11 – Warranties The product warranty accrual increased during the period due to new accruals and changes in estimates Product Warranty Accrual (in thousands): | Metric | 9 Months Ended May 31, 2019 | | :--- | :--- | | Beginning balance | $7,109 | | Liabilities accrued during the period | $5,472 | | Warranty claims paid during the period | $(4,260) | | Changes in estimates | $382 | | End balance | $8,703 | - The product warranty accrual increased by $1.6 million during the nine months ended May 31, 2019[75] Note 12 – Share-Based Compensation Share-based compensation expense increased from the prior year, reflecting various equity awards | Metric | 3 Months Ended May 31, 2019 | 3 Months Ended May 31, 2018 | 9 Months Ended May 31, 2019 | 9 Months Ended May 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Share-based compensation expense | $0.8 million | $1.0 million | $3.2 million | $2.9 million | - Share-based compensation expense increased by $0.3 million for the nine months ended May 31, 2019, compared to the same period in 2018[76] Note 13 – Other Current Liabilities Other current liabilities were primarily composed of compensation, contract liabilities, and warranties Other Current Liabilities (in thousands): | Category | May 31, 2019 | May 31, 2018 | August 31, 2018 | | :--- | :--- | :--- | :--- | | Compensation and benefits | $13,490 | $17,258 | $17,850 | | Contract liabilities | $11,683 | $10,591 | $8,184 | | Warranties | $8,703 | $7,135 | $7,109 | | Dealer related liabilities | $3,679 | $2,698 | $2,431 | | Tax related liabilities | $2,087 | $5,174 | $1,293 | | Accrued insurance | $1,594 | $2,188 | $2,256 | | Accrued environmental liabilities | $1,243 | $1,281 | $1,264 | | Refund liability | $214 | $274 | $491 | | Other | $6,409 | $7,312 | $6,057 | | Total other current liabilities | $49,102 | $53,911 | $46,935 | - Total other current liabilities increased by $2.2 million from August 31, 2018, to May 31, 2019[77] Note 14 – Share Repurchases No shares were repurchased during the period, with significant capacity remaining under the authorized program - No shares were repurchased during the three and nine months ended May 31, 2019[78] - The remaining amount available under the share repurchase program was $63.7 million as of May 31, 2019[78] Note 15 – Industry Segment Information Both Irrigation and Infrastructure segments experienced declines in revenues and operating income compared to the prior year Segment Operating Revenues (in thousands): | Segment | 3 Months Ended May 31, 2019 | 3 Months Ended May 31, 2018 | 9 Months Ended May 31, 2019 | 9 Months Ended May 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Irrigation | $98,618 | $128,421 | $281,994 | $343,639 | | Infrastructure | $22,436 | $41,150 | $60,193 | $80,797 | | Total | $121,054 | $169,571 | $342,187 | $424,436 | Segment Operating Income (in thousands): | Segment | 3 Months Ended May 31, 2019 | 3 Months Ended May 31, 2018 | 9 Months Ended May 31, 2019 | 9 Months Ended May 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Irrigation | $11,037 | $11,718 | $26,341 | $31,502 | | Infrastructure | $3,537 | $14,248 | $7,259 | $20,058 | | Corporate | $(10,099) | $(7,152) | $(31,545) | $(19,254) | | Total | $4,475 | $18,814 | $2,055 | $32,306 | - Infrastructure segment operating income decreased by 75% for the three months and 64% for the nine months ended May 31, 2019, compared to the prior year periods[82] ITEM 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations Management provides its perspective on financial performance, liquidity, capital resources, and future outlook Concerning Forward-Looking Statements This section contains forward-looking statements involving risks and uncertainties and is protected by safe harbor provisions - Forward-looking statements are identified by words like 'expect,' 'anticipate,' 'estimate,' 'believe,' 'intend,' 'will,' 'plan,' 'predict,' 'project,' 'outlook,' 'could,' 'may,' 'should' or similar expressions[83] - The company claims the protection of the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995[83] Accounting Policies No changes were made to critical accounting policies, with recent accounting guidance detailed in Note 1 - No changes were made to the company's critical accounting policies during the nine months ended May 31, 2019[86] - Recent accounting guidance, both adopted and not yet adopted, is discussed in Note 1 to the condensed consolidated financial statements[87] Executive Overview and Outlook Revenues and earnings declined, impacted by divestitures and initiative costs, with market conditions affecting both segments Financial Performance (3 Months Ended May 31, 2019): | Metric | Value (in millions) | | :--- | :--- | | Operating revenues | $121.1 | | Net earnings | $2.9 | | Diluted EPS | $0.27 | - Net earnings for the three months ended May 31, 2019, were reduced by $2.6 million (after-tax) due to 'Foundation for Growth' initiative costs, primarily professional consulting fees and severance[89] - Business divestitures reduced irrigation revenues by $27.2 million during the third quarter of fiscal 2019[90] - Key drivers for irrigation revenues include agricultural commodity prices, U.S. net farm income (estimated $69.4 billion for 2019), weather conditions, and governmental policies[91] - The backlog of unshipped orders at May 31, 2019, was $42.5 million, down from $55.8 million in the prior year, with $12.4 million of the reduction due to divestitures[95] Results of Operations Consolidated revenues, gross profit, and operating income decreased significantly due to segment declines and lower margins Consolidated Financial Highlights (3 Months Ended May 31): | Metric | 2019 (in thousands) | 2018 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Operating revenues | $121,054 | $169,571 | -29% | | Gross profit | $29,999 | $51,478 | -42% | | Gross margin | 24.8% | 30.4% | | | Operating income | $4,475 | $18,814 | -76% | | Operating margin | 3.7% | 11.1% | | | Net earnings | $2,897 | $10,379 | -72% | Consolidated Financial Highlights (9 Months Ended May 31): | Metric | 2019 (in thousands) | 2018 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Operating revenues | $342,187 | $424,436 | -19% | | Gross profit | $83,121 | $119,191 | -30% | | Gross margin | 24.3% | 28.1% | | | Operating income | $2,055 | $32,306 | -94% | | Operating margin | 0.6% | 7.6% | | | Net earnings | $669 | $15,299 | -96% | - North America irrigation revenues decreased by 28% for the three months and 24% for the nine months, with divestitures accounting for $27.2 million and $60.8 million of the respective declines[100][109] - Infrastructure segment revenues decreased by 46% for the three months and 26% for the nine months, primarily due to lower Road Zipper System® sales[102][111] - Operating expenses for the nine months ended May 31, 2019, included $13.2 million related to the 'Foundation for Growth' initiative, offset by the elimination of expenses from divested businesses[113] Liquidity and Capital Resources Cash decreased significantly due to outflows from operating, investing, and financing activities Cash and Cash Equivalents (in millions): | Date | Amount | | :--- | :--- | | May 31, 2019 | $110.8 | | May 31, 2018 | $111.8 | | August 31, 2018 | $160.8 | Net Working Capital (in millions): | Date | Amount | | :--- | :--- | | May 31, 2019 | $230.3 | | May 31, 2018 | $251.7 | | August 31, 2018 | $251.0 | - Net cash used in operating activities was $19.6 million for the nine months ended May 31, 2019, a shift from $8.2 million provided in the prior year, mainly due to lower net earnings and increased working capital[117] - Cash used in investing activities increased to $18.2 million, primarily due to higher capital expenditures[118] - Approximately $34.2 million of cash and cash equivalents were held by foreign subsidiaries as of May 31, 2019, considered indefinitely reinvested[116] Capital Allocation Plan The capital plan prioritizes growth investments, shareholder dividends, and opportunistic share repurchases - Capital expenditures for fiscal 2019 are projected between $20.0 million and $25.0 million[120] - A quarterly cash dividend of $0.31 per common share was paid in Q3 fiscal 2019[121] - The company has a $250.0 million share repurchase program, with $63.7 million remaining available as of May 31, 2019[122] Long-Term Borrowing Facilities The company maintains Senior Notes and a Revolving Credit Facility and was in compliance with all covenants - Outstanding Senior Notes total $115.0 million, due February 19, 2030, with an annual interest rate of 3.82%, subject to increase if the funded debt to EBITDA leverage ratio exceeds certain thresholds[123] - A $50.0 million unsecured Revolving Credit Facility with Wells Fargo expires May 31, 2022, with no outstanding borrowings as of May 31, 2019, and $50.0 million available[124] - The company was in compliance with all financial loan covenants as of May 31, 2019[126] Contractual Obligations and Commercial Commitments No material changes to contractual obligations have occurred since the most recent Annual Report on Form 10-K - No material changes in contractual obligations and commercial commitments from the Annual Report on Form 10-K for the fiscal year ended August 31, 2018[128] ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk No material changes to market risk disclosures have occurred since the most recent Annual Report on Form 10-K - No material changes from previous disclosures about market risk in the Annual Report on Form 10-K for the fiscal year ended August 31, 2018[129] ITEM 4 – Controls and Procedures Disclosure controls were deemed effective, and changes were made to internal controls due to new revenue standards - Disclosure controls and procedures were effective as of May 31, 2019[130] - Changes to internal control over financial reporting were implemented due to the adoption of ASC Topic 606, including new policies, training, and contract review requirements[132] - No significant change to internal control over financial reporting that materially affected or is reasonably likely to materially affect controls during the last fiscal quarter[131] Part II – OTHER INFORMATION ITEM 1 – Legal Proceedings Disclosures regarding legal proceedings are provided in Note 10 of the accompanying financial statements - Legal proceedings information is incorporated by reference from Note 10 – Commitments and Contingencies[134] ITEM 1A – Risk Factors No material changes to risk factors have occurred since the most recent Annual Report on Form 10-K - No material changes from risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended August 31, 2018[135] ITEM 2 – Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds during the reporting period - None to report[136] ITEM 3 – Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - None to report[137] ITEM 4 – Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[137] ITEM 5 – Other Information There is no other information to report for the period - None to report[138] ITEM 6 – Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and debt agreement amendments Key Exhibits Filed: | Exhibit No. | Description | | :--- | :--- | | 3.1 | Restated Certificate of Incorporation | | 3.2 | Amended and Restated By-Laws | | 10.1 | First Amendment to Note Purchase Agreement, dated May 31, 2019 | | 10.2 | Second Amendment to Amended and Restated Revolving Credit Agreement, dated May 31, 2019 | | 31.1* | Certification of Chief Executive Officer pursuant to Section 302 | | 31.2* | Certification of Chief Financial Officer pursuant to Section 302 | | 32.1* | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 | | 101* | Interactive Data Files | SIGNATURES