Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑Q
(MARK ONE)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13419
Lindsay Corporation
(Exact name of registrant as specified in its charter)
Delaware
47-0554096
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
18135 Burke Street, Suite 100, Omaha, Nebraska
68022
(Address of principal executive offices)
(Zip Code)
402‑829-6800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.00 par value
LNN
New York Stock Exchange, Inc.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non‑accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of January 7, 2020, 10,813,363 shares of the registrant’s common stock were outstanding.
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INDEX FORM 10-Q
Page
Part I – FINANCIAL INFORMATION
ITEM 1 – Financial Statements
Condensed Consolidated Statements of Earnings for the three months ended November 30, 2019 and November 30, 2018
3
Condensed Consolidated Statements of Comprehensive Income for the three months ended November 30, 2019 and November 30, 2018
4
Condensed Consolidated Balance Sheets as of November 30, 2019, November 30, 2018, and August 31, 2019
5
Condensed Consolidated Statements of Shareholders’ Equity for the three months ended November 30, 2019 and November 30, 2018
6
Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 2019 and November 30, 2018
7
Notes to the Condensed Consolidated Financial Statements
8
ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk
23
ITEM 4 – Controls and Procedures
Part II – OTHER INFORMATION
ITEM 1 – Legal Proceedings
24
ITEM 1A – Risk Factors
ITEM 2 – Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 3 – Defaults Upon Senior Securities
ITEM 4 – Mine Safety Disclosures
ITEM 5 – Other Information
ITEM 6 – Exhibits
25
SIGNATURES
26
- 2 -
ITEM 1 - Financial Statements
LINDSAY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three months ended
($ and shares in thousands, except per share amounts)
November 30,
2019
2018
Operating revenues
$
109,393
111,951
Cost of operating revenues
75,319
83,303
Gross profit
34,074
28,648
Operating expenses:
Selling expense
6,492
7,982
General and administrative expense
11,804
15,058
Engineering and research expense
3,502
3,568
Total operating expenses
21,798
26,608
Operating income
12,276
2,040
Other income (expense):
Interest expense
(1,186
)
(1,205
Interest income
615
654
Other (expense) income, net
(450
192
Earnings before income taxes
11,255
1,681
Income tax expense
2,910
469
Net earnings
8,345
1,212
Earnings per share:
Basic
0.77
0.11
Diluted
Shares used in computing earnings per share:
10,795
10,766
10,828
10,806
Cash dividends declared per share
0.31
See accompanying notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
Other comprehensive (loss) income:
Defined benefit pension plan adjustment, net of tax
43
29
Foreign currency translation adjustment, net of hedging activities and tax
(293
1,106
Total other comprehensive (loss) income, net of tax
expense of $76 and $226, respectively
(250
1,135
Total comprehensive income
8,095
2,347
- 4 -
CONDENSED CONSOLIDATED BALANCE SHEETS
($ and shares in thousands, except par values)
August 31,
ASSETS
Current assets:
Cash and cash equivalents
120,910
137,217
127,204
Receivables, net of allowance of $2,785, $3,324, and $2,635,
respectively
79,317
84,864
75,551
Inventories, net
97,284
88,912
92,287
Assets held-for-sale
2,744
Other current assets, net
16,376
11,585
15,704
Total current assets
316,631
325,322
313,490
Property, plant, and equipment:
Cost
193,000
176,669
188,695
Less accumulated depreciation
(122,695
(116,187
(119,727
Property, plant, and equipment, net
70,305
60,482
68,968
Intangibles, net
23,739
26,576
24,382
Goodwill
64,358
64,557
64,387
Operating lease right-of-use assets
25,764
—
Deferred income tax assets
9,902
5,639
11,758
Other noncurrent assets
16,112
19,511
17,329
Total assets
526,811
502,087
500,314
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
30,097
41,338
29,434
Current portion of long-term debt
210
206
209
Other current liabilities
54,494
41,480
52,488
Total current liabilities
84,801
83,024
82,131
Pension benefits liabilities
5,948
5,803
6,029
Long-term debt
115,805
116,086
115,846
Operating lease liabilities
25,323
Deferred income tax liabilities
845
1,048
872
Other noncurrent liabilities
21,089
19,451
27,227
Total liabilities
253,811
225,412
232,105
Shareholders' equity:
Preferred stock of $1 par value - authorized 2,000 shares; no shares issued and outstanding
Common stock of $1 par value - authorized 25,000 shares;
18,897, 18,870, and 18,870 shares issued, respectively
18,897
18,870
Capital in excess of stated value
71,706
68,710
71,684
Retained earnings
479,732
483,811
474,740
Less treasury stock - at cost, 8,083 shares
(277,238
Accumulated other comprehensive loss, net
(20,097
(17,478
(19,847
Total shareholders' equity
273,000
276,675
268,209
Total liabilities and shareholders' equity
- 5 -
Lindsay Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Shares of
common
stock
treasury
Common
Capital in
excess of
stated
value
Retained
earnings
Treasury
Accumulated
other
comprehensive
(loss) income,
net
Total
shareholders’
equity
Balance at August 31, 2018
18,841
8,083
68,465
484,886
(18,088
276,866
Comprehensive income:
Other comprehensive income
Cash dividends ($0.31) per share
(3,344
Issuance of common shares under share compensation plans, net
(972
(943
Share-based compensation
expense
1,217
Cumulative impact of ASC 606
adoption
532
Cumulative impact of ASU
2018-02 adoption
525
(525
Balance at November 30, 2018
Balance at August 31, 2019
Other comprehensive loss
Total comprehensive loss
(3,353
27
(1,138
(1,111
1,160
Balance at November 30, 2019
- 6 -
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization
4,748
3,424
Loss on sale of business
67
Provision for uncollectible accounts receivable
248
(159
Deferred income taxes
1,987
742
Share-based compensation expense
1,303
Other, net
374
(1,053
Changes in assets and liabilities:
Receivables
(4,122
(14,782
Inventories
(4,931
(11,387
Other current assets
(2,466
298
725
13,917
(1,901
(7,106
Other noncurrent assets and liabilities
(2,626
(792
Net cash provided by (used in) operating activities
1,541
(14,316
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment
(4,322
(5,701
Proceeds from settlement of net investment hedges
1,092
962
Other investing activities, net
Net cash used in investing activities
(3,206
(4,731
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options
177
Common stock withheld for payroll tax obligations
(1,120
Principal payments on long-term debt
(52
(51
Dividends paid
(3,352
Net cash used in financing activities
(4,515
(4,338
Effect of exchange rate changes on cash and cash equivalents
(114
(185
Net change in cash and cash equivalents
(6,294
(23,570
Cash and cash equivalents, beginning of period
160,787
Cash and cash equivalents, end of period
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid, net of refunds
(56
553
Interest paid
83
NONCASH INVESTING ACTIVITIES:
Note receivable from sale of business
$ ─
5,823
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation
The condensed consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and do not include all of the disclosures normally required by U.S. generally accepted accounting principles (“U.S. GAAP”) as contained in Lindsay Corporation’s (the “Company”) Annual Report on Form 10-K. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended August 31, 2019.
In the opinion of management, the condensed consolidated financial statements of the Company reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position and the results of operations and cash flows for the periods presented. The results for interim periods are not necessarily indicative of trends or results expected by the Company for a full year. The condensed consolidated financial statements were prepared using U.S. GAAP. These principles require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from these estimates.
Recent Accounting Guidance Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses on instruments within its scope, including trade receivables. This update is intended to provide financial statement users with more decision-useful information about the expected credit losses. The effective date of ASU No. 2016-13 will be the first quarter of the Company’s fiscal 2021 with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU No. 2016-13 on its consolidated financial statements.
Recent Accounting Guidance Adopted
In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize a right-of-use asset and a lease liability for most leases and disclose key information about leasing arrangements. The new guidance became effective for the Company in the first quarter of fiscal 2020. The Company implemented Accounting Standards Codification (“ASC”) 842 and recorded a right of use asset and lease liability of $26.2 million and $29.5 million, respectively, upon adoption of the standard on the first day of fiscal 2020.
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, which modifies the financial reporting of hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. ASU No. 2017-12 became effective in the first quarter of the Company’s fiscal 2020. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
Note 2 – Revenue Recognition
Disaggregation of Revenue
A breakout by segment of revenue recognized over time versus point in time for the three months ended November 30, 2019 and 2018 is as follows:
November 30, 2019
November 30, 2018
Irrigation
Infrastructure
Point in time
73,375
21,605
94,980
81,086
21,247
102,333
Over time
8,977
2,657
11,634
6,524
1,490
8,014
Revenue from the contracts with customers
82,352
24,262
106,614
87,610
22,737
110,347
Lease revenue
2,779
1,604
Total operating revenues
27,041
24,341
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Further disaggregation of revenue is disclosed in the Note 16 – Industry Segment Information.
For contracts with a length longer than twelve months, the unsatisfied performance obligations were $6.1 million at November 30, 2019.
Contract Balances
Contract assets arise when recorded revenue for a contract exceeds the amounts billed under the terms of such contract. Contract liabilities arise when billed amounts exceed revenue recorded. Amounts are billable to customers upon various measures of performance, including achievement of certain milestones and completion of specified units of completion of the contract. At November 30, 2019 and August 31, 2019, contract assets amounted to $1.2 million and $1.3 million respectively. These amounts are included within other current assets on the condensed consolidated balance sheet.
Contract liabilities include advance payments from customers and billings in excess of delivery of performance obligations. At November 30, 2019 and August 31, 2019, contract liabilities amounted to $14.7 million and $18.4 million, respectively. Contract liabilities are included within other current liabilities on the condensed consolidated balance sheets. During the Company’s three months ended November 30, 2019 and November 30, 2018, the Company recognized $6.4 million and $4.6 million of revenue that were included in the liabilities as of August 31, 2019 and August 31, 2018, respectively. The revenue recognized was due to applying advance payments received for the performance obligations completed during the quarter.
Note 3 – Divestitures and Held-For-Sale
The Company completed the divestiture of its Company-owned irrigation dealership during the first quarter of fiscal 2019 and recorded a loss on sale of $0.1 million included in general and administrative expense on the condensed consolidated statement of earnings for the three months ended November 30, 2018. The Company received a note of $5.8 million as proceeds for this sale. This is included as a noncash investing activity on the condensed consolidated statement of cash flows for the three months ended November 30, 2018.
Additionally, during the fourth quarter of fiscal 2018, the Company closed one of its infrastructure manufacturing facilities in North America and consolidated its operations with an irrigation manufacturing facility. The building related to the closure is currently listed for sale and is included within the caption “Assets held-for-sale” for $2.7 million in the condensed consolidated balance sheet as of November 30, 2019, November 30, 2018 and August 31, 2019.
Note 4 – Net Earnings per Share
Basic earnings per share is calculated on the basis of weighted average outstanding common shares. Diluted earnings per share is calculated on the basis of basic weighted average outstanding common shares adjusted for the dilutive effect of stock options, restricted stock unit awards and other dilutive securities. When a period results in a net loss, the impact of outstanding stock awards is excluded from the diluted loss per share calculation as the inclusion would have an anti-dilutive effect.
The following table shows the computation of basic and diluted net earnings per share for the three months ended November 30, 2019 and 2018:
Numerator:
Denominator:
Weighted average shares outstanding
Diluted effect of stock awards
33
40
Weighted average shares outstanding assuming
dilution
Basic net earnings per share
Diluted net earnings per share
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Certain stock options and restricted stock units were excluded from the computation of diluted net earnings per share because their effect would have been anti-dilutive. Performance stock units are excluded from the calculation of dilutive potential common shares until the threshold performance conditions have been satisfied. In addition, the following table shows the securities excluded from the computation of earnings per share because their effect would have been anti-dilutive:
(Units and options in thousands)
Restricted stock units
19
Stock options
35
Performance stock units
20
Note 5 – Income Taxes
The Company recorded income tax expense of $2.9 million and $0.5 million for the three months ended November 30, 2019 and 2018, respectively.
It is the Company’s policy to report income tax expense for interim periods using an estimated annual effective income tax rate. The estimated annual effective income tax rate was 25.8 percent and 27.9 percent for the three months ended November 30, 2019 and 2018, respectively. The decrease in the estimated annual effective income tax rate from November 2018 to November 2019 relates primarily to the change in earnings mix among foreign operations. The tax effects of significant or unusual items are not considered in the estimated annual effective income tax rate. The tax effects of such discrete events are recognized in the interim period in which the events occur, but the Company did not record any such effects within income tax expense for the three months ended November 30, 2019 or 2018.
The United States enacted significant tax reform into law on December 22, 2017. U.S. Tax Reform made complex and broad changes to the U.S. tax laws. U.S. Tax Reform established new income tax provisions that will affect the Company’s fiscal year 2020, including, but not limited to, establishing a new minimum tax on global intangible low-taxed income (“GILTI”). The Company has elected to account for GILTI as a period cost, the effect of which is reflected in the estimated annual effective tax rate of 25.8 percent for the three months ended November 30, 2019.
Note 6 – Inventories
Inventories consisted of the following as of November 30, 2019, November 30, 2018, and August 31, 2019:
Raw materials and supplies
47,266
40,781
49,047
Work in process
6,235
9,601
4,514
Finished goods and purchased parts, net
51,908
46,925
46,812
Total inventory value before LIFO adjustment
105,409
97,307
100,373
Less adjustment to LIFO value
(8,125
(8,395
(8,086
- 10 -
Note 7 – Long-Term Debt
The following table sets forth the outstanding principal balances of the Company’s long-term debt as of the dates shown:
August 31, 2019
Series A Senior Notes
115,000
Revolving Credit Facility
Elecsys Series 2006A Bonds
1,519
1,724
1,571
Total debt
116,519
116,724
116,571
Less current portion
(210
(206
(209
Less unamortized debt issuance costs
(504
(432
(516
Total long-term debt
Principal payments on the debt are due as follows:
Due within
$ in thousands
1 year
2 years
214
3 years
218
4 years
222
5 years
227
Thereafter
115,428
Note 8 – Financial Derivatives
The Company uses certain financial derivatives to mitigate its exposure to volatility in foreign currency exchange rates. The Company uses these derivative instruments to hedge exposures in the ordinary course of business and does not invest in derivative instruments for speculative purposes. The Company manages market and credit risks associated with its derivative instruments by establishing and monitoring limits as to the types and degree of risk that may be undertaken, and by entering into transactions with counterparties that have investment grade credit ratings. Fair values of derivative instruments are as follows:
Balance sheet
location
Derivatives designated as hedging
instruments:
Foreign currency forward contracts
873
1,073
(115
(248
Total derivatives designated as hedging
instruments
625
Derivatives not designated as hedging
13
51
39
(45
Total derivatives not designated as
hedging instruments
Accumulated other comprehensive income included realized and unrealized after-tax gains of $6.9 million, $5.7 million, and $7.0 million at November 30, 2019, November 30, 2018, and August 31, 2019, respectively, related to derivative contracts designated as hedging instruments.
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Net Investment Hedging Relationships
The amount of gain (loss) recognized in other comprehensive income is as follows:
Foreign currency forward contracts, net of tax
(benefit) expense of $25 and ($161) respectively
(76
651
For the three months ended November 30, 2019 and 2018, the Company settled foreign currency forward contracts resulting in an after-tax net gain of $0.8 million and $0.7 million, respectively, which were included in other comprehensive income as part of a currency translation adjustment. There were no amounts recorded in the condensed consolidated statements of earnings related to ineffectiveness of foreign currency forward contracts related to net investment hedges for the three months ended November 30, 2019 and 2018.
At November 30, 2019, November 30, 2018, and August 31, 2019, the Company had outstanding foreign currency forward contracts to sell a notional amount of 32.7 million Euro, 32.5 million Euro, and 32.7 million Euro, respectively, at fixed prices to settle during the next fiscal quarter. The Company’s foreign currency forward contracts qualify as hedges of a net investment in foreign operations.
Derivatives Not Designated as Hedging Instruments
The Company generally does not elect hedge accounting treatment for derivative contracts related to future settlements of foreign denominated intercompany receivables and payables. If the Company does not elect hedge accounting treatment for a derivative, the Company carries the derivative at its fair value in the condensed consolidated balance sheets and recognizes any subsequent changes in its fair value during a period through earnings in the condensed consolidated statements of earnings. At November 30, 2019, November 30, 2018, and August 31, 2019, the Company had notional value of $0.5 million, $1.9 million, and $1.8 million, respectively, of U.S. dollar equivalent of foreign currency forward contracts outstanding that are not designated as hedging instruments.
Note 9 – Leases
The Company, as lessee, has operating leases primarily for office space, manufacturing facilities, equipment, and vehicles. The Company determines if a contract is or contains a lease at the inception of the contract based on whether the contract conveys the right to control the use of an identified asset over a period of time in exchange for consideration.
The Company elected, for all classes of underlying assets, to not separate lease and non-lease components and instead will treat the lease agreement as a single lease component for all asset classes. The Company additionally elected practical expedients to not reassess whether existing contracts are or contain leases, the classification of any existing leases, accounting for initial direct costs for any existing leases, and hindsight in determining the lease term and in assessing impairment of the right-of-use (“ROU”) asset.
Short-term operating leases, which have an initial expected term of twelve months or less, are not recorded on the condensed consolidated balance sheet. Such fixed lease payments are recognized within the condensed consolidated statement of earnings on a straight-line basis over the lease term. Any variable payments associated with short-term operating leases are recognized within the condensed consolidated statement of earnings as they are incurred. The Company did not recognize any expense for such leases during the three months ended November 30, 2019.
Many of the Company’s leases contain renewal or extension options. The Company includes all renewal or extension periods that it is reasonably certain to exercise at lease commencement within the measurement of the ROU asset and lease liability.
The Company’s lease portfolio consists of operating leases which are included in operating lease ROU assets and operating lease liabilities in the condensed consolidated balance sheet. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. To calculate the present value of future lease payments, the Company uses an incremental borrowing rate that estimates a collateralized rate based on the expected term of the lease.
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Lease cost and other information related to the Company’s operating leases are as follows:
Operating lease cost (cost resulting from lease payments)
1,418
Variable lease cost (cost excluded from lease payments)
100
Total lease cost
1,518
Operating cash outflows from operating leases
1,086
Weighted average lease term - operating leases
10.0 years
Weighted average discount rate - operating leases
3.3
%
Supplemental balance sheet information related to operating leases for the first quarter of 2020 is as follows:
Classification
Operating lease ROU assets
Operating lease short-term liabilities
4,200
Operating lease long-term liabilities
Total lease liabilities
29,523
The minimum lease payments under operating leases expiring subsequent to November 30, 2019 are as follows:
Fiscal year ending
2020
4,334
2021
5,233
2022
4,909
2023
3,504
2024
3,110
20,516
Total lease payments
41,606
Less: interest
12,083
Present value of lease liabilities
As previously disclosed in our Annual Report on Form 10-K for the year ended August 31, 2019 and under the previous lease accounting standard, future minimum lease payments under operating leases with an initial or remaining term in excess of one year at August 31, 2019 would have been as follows:
6,065
5,266
4,771
3,414
3,107
20,119
42,742
Note 10 – Fair Value Measurements
The following table presents the Company’s financial assets and liabilities measured at fair value, based upon the level within the fair value hierarchy in which the fair value measurements fall, as of November 30, 2019, November 30, 2018, and August 31, 2019, respectively. There were no transfers between any levels for the periods presented.
- 13 -
Level 1
Level 2
Level 3
Derivative assets
Derivative liabilities
924
1,112
There were no required fair value adjustments for assets and liabilities measured at fair value on a non-recurring basis for the three months ended November 30, 2019 or 2018.
Note 11 – Commitments and Contingencies
In the ordinary course of its business operations, the Company enters into arrangements that obligate it to make future payments under contracts such as lease agreements. Additionally, the Company is involved, from time to time, in commercial litigation, employment disputes, administrative proceedings, business disputes and other legal proceedings. The Company has established accruals for certain proceedings where those proceedings present loss contingencies that are both probable and reasonably estimable at the time of determination. The Company believes that any such currently-pending proceedings are either covered by insurance or would not have a material effect on the business or its consolidated financial statements if decided in a manner that is unfavorable to the Company. Such proceedings are exclusive of environmental remediation matters which are discussed separately below.
Infrastructure Products
The Company is currently defending a number of product liability lawsuits arising out of vehicle collisions with highway barriers incorporating the Company’s X-Lite® end terminal. Despite the September 2017 reversal of a sizable judgment against a competitor, the Company expects that the significant attention brought to the infrastructure products industry by the original judgment may lead to additional lawsuits being filed against the Company and others in the industry. The Company believes it has meritorious factual and legal defenses to each of these lawsuits and is prepared to vigorously defend its interests. Based on the information currently available to the Company, the Company does not believe that a loss is probable in any of these lawsuits; therefore, no accrual has been included in the Company’s condensed consolidated financial statements. While it is possible that a loss may be incurred, the Company is unable to estimate a range of potential loss due to the complexity and current status of these lawsuits. However, the Company maintains insurance coverage to mitigate the impact of adverse exposures in these lawsuits and does not expect that these lawsuits will have a material adverse effect on its business or its consolidated financial statements.
In June 2019, the Company was informed by letter that the Department of Justice, Civil Division and U.S. Attorney’s Office for the Northern District of New York, with the assistance of the Department of Transportation, Office of Inspector General, are conducting an investigation of the Company relating to the Company’s X-Lite end terminal and potential violations of the federal civil False Claims Act. Depending on the outcome of this matter, there could be a material adverse effect on the Company’s business or its consolidated financial statements. Given the current posture of the matter, the Company is unable to estimate a range of potential loss, if any, or to express an opinion regarding the ultimate outcome.
Environmental Remediation
The Company has committed to a preliminary plan to remediate environmental contamination of the groundwater at and adjacent to its Lindsay, Nebraska facility (the “site”) as a result of discussions with the U.S. Environmental Protection Agency (the “EPA”) and the Nebraska Department of Environmental Quality (the “NDEQ”) during the third quarter of fiscal 2016. The proposed remediation plan is preliminary and has not been approved by the EPA or the NDEQ. Based on guidance from third-party environmental experts and the preliminary discussions with the EPA, the Company anticipates that a definitive plan will not be agreed upon until the second half of fiscal 2020 or later.
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The current estimated aggregate accrued cost of this remediation plan of $15.8 million is based on consideration of several remediation options that would use different technologies, each of which the Company believes could be successful in meeting the long-term regulatory requirements of the site. The Company accrues the anticipated cost of investigation and remediation when the obligation is probable and can be reasonably estimated. While the Company believes the current accrual is a good faith estimate of the long-term cost of remediation at this site based on the preliminary analysis available at the time of this filing, the estimate of costs and their timing could change as a result of a number of factors, including (1) EPA and NDEQ input on the proposed remediation plan and any changes which they may subsequently require, (2) refinement of cost estimates and length of time required to complete remediation and post-remediation operations and maintenance, (3) effectiveness of the technology chosen in remediation of the site as well as changes in technology that may be available in the future, and (4) unforeseen circumstances existing at the site. As a result of these factors, the actual amount of costs incurred by the Company in connection with the remediation of contamination of its Lindsay, Nebraska site could exceed the amounts accrued for this expense at this time. While any revisions could be material to the operating results of any fiscal quarter or fiscal year, the Company does not expect such additional expenses would have a material adverse effect on its liquidity or financial condition. The following table summarizes the undiscounted environmental remediation liability classifications included in the condensed consolidated balance sheets as of November 30, 2019, November 30, 2018, and August 31, 2019:
1,243
14,548
15,142
14,674
Total environmental remediation liabilities
15,791
16,385
15,917
Note 12 – Warranties
The following table provides the changes in the Company’s product warranties:
Product warranty accrual balance, beginning of period
8,960
7,109
Liabilities accrued for warranties during the period
1,480
1,178
Warranty claims paid during the period
(1,652
(1,047
Product warranty accrual balance, end of period
8,788
7,240
Note 13 – Share-Based Compensation
The Company’s current share-based compensation plans, approved by the stockholders of the Company, provides for awards of stock options, restricted shares, restricted stock units (“RSUs”), stock appreciation rights, performance shares, and performance stock units (“PSUs”) to employees and non-employee directors of the Company. The Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. Share-based compensation expense was $1.2 million and $1.3 million for the three months ended November 30, 2019 and 2018, respectively.
The following table illustrates the type and fair value of share-based compensation awards granted during the three months ended November 30, 2019 and 2018:
Number of
units
granted
Weighted average
grant-date fair value
per award
44,347
24.18
38,337
24.71
RSUs
30,235
90.73
29,013
88.27
PSUs
22,715
102.28
20,631
107.80
The RSUs granted during the three months ended November 30, 2019 and 2018 consisted of 2,730 and 3,071, respectively, of awards that will be settled in cash. The weighted average stock price on the date of grant was $94.36 and $91.87 for the
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three months ended November 30, 2019 and 2018, respectively. Share issuances are presented net of share repurchases to cover payroll taxes of $1.1 million for the three months ended November 30, 2019 and 2018.
The following table provides the assumptions used in determining the fair value of the stock options awarded during the three months ended November 30, 2019 and 2018:
Grant Year
Weighted-average dividend yield
1.3
1.4
Weighted-average volatility
28.4
26.3
Risk-free interest rate
1.6
3.1
Weighted-average expected life
6 years
The PSUs granted during fiscal 2020 include performance goals based on a return on net assets and total shareholder return (TSR) relative to the Company’s peers during the performance period. The awards actually earned will range from zero to two hundred percent of the targeted number of PSUs and will be paid in shares of common stock. Shares earned will be distributed upon vesting on the first day of November following the end of the three-year performance period. For the return on net assets portion of the award, the Company is accruing compensation expense based on the estimated number of shares expected to be issued utilizing the most current information available to the Company at the date of the financial statements. For the TSR portion of the award, compensation expense is recorded ratably over the three-year term of the award based on the estimated grant date fair value.
The fair value of the TSR portion of the awards granted during the three months ended November 30, 2019 and 2018 was estimated at the grant date using a Monte Carlo simulation model which included the following assumptions:
Expected term (years)
1.5
2.9
Volatility
29.5
27.3
Dividend yield
Note 14 – Other Current Liabilities
Other current liabilities:
Compensation and benefits
11,400
12,034
13,960
Contract liabilities
13,280
7,022
14,763
Warranties
Dealer related liabilities
3,536
2,849
3,246
Deferred revenue - lease
2,431
657
2,985
Tax related liabilities
2,400
1,400
1,469
Accrued insurance
1,555
2,139
1,482
Accrued environmental liabilities
Other
5,661
6,896
4,380
Total other current liabilities
Note 15 – Share Repurchases
There were no shares repurchased during the three months ended November 30, 2019 and November 30, 2018 under the Company’s share repurchase program. The remaining amount available under the repurchase program was $63.7 million as of November 30, 2019.
Note 16 – Industry Segment Information
The Company manages its business activities in two reportable segments: irrigation and infrastructure. The Company evaluates the performance of its reportable segments based on segment sales, gross profit and operating income, with
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operating income for segment purposes excluding unallocated corporate general and administrative expenses, interest income, interest expense, other income and expenses and income taxes. Operating income for segment purposes includes general and administrative expenses, selling expenses, engineering and research expenses and other overhead charges directly attributable to the segment. There are no inter-segment sales included in the amounts disclosed. The Company had no single customer who represented 10 percent or more of its total revenues during the three months ended November 30, 2019 and 2018.
Irrigation - This reporting segment includes the manufacture and marketing of center pivot, lateral move, and hose reel irrigation systems, as well as various innovative technology solutions such as GPS positioning and guidance, variable rate irrigation, remote irrigation management and scheduling technology, irrigation consulting and design and industrial “internet of things”, or IoT, solutions. The irrigation reporting segment consists of one operating segment.
Infrastructure – This reporting segment includes the manufacture and marketing of moveable barriers, specialty barriers, crash cushions and end terminals, and road marking and road safety equipment; the manufacturing and selling of large diameter steel tubing and railroad signals and structures; and providing outsourced manufacturing and production services. The infrastructure reporting segment consists of one operating segment.
Operating revenues:
Irrigation:
North America
52,613
56,464
International
29,739
31,146
Irrigation total
Operating income:
9,757
7,783
8,768
4,168
Corporate
(6,249
(9,911
Total operating income
Interest and other expense, net
(1,021
(359
Capital expenditures:
3,042
2,137
190
168
3,374
4,322
5,701
Depreciation and amortization:
3,104
2,332
919
965
127
Total assets:
305,928
289,773
292,202
84,813
74,671
85,848
136,070
137,643
122,264
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ITEM 2 ‑ Management's Discussion and Analysis of Financial Condition and Results of Operations
Concerning Forward‑Looking Statements
This Quarterly Report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are not historical are forward-looking and reflect information concerning possible or assumed future results of operations and planned financing of the Company. In addition, forward-looking statements may be made orally or in press releases, conferences, reports, on the Company's web site, or otherwise, in the future by or on behalf of the Company. When used by or on behalf of the Company, the words “expect,” “anticipate,” “estimate,” “believe,” “intend,” “will,” “plan,” “predict,” “project,” “outlook,” “could,” “may,” “should” or similar expressions generally identify forward-looking statements. The entire section entitled “Executive Overview and Outlook” should be considered forward-looking statements. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve a number of risks and uncertainties, including but not limited to those discussed in the “Risk Factors” section in the Company’s Annual Report on Form 10-K for the year ended August 31, 2019. Readers should not place undue reliance on any forward-looking statement and should recognize that the statements are predictions of future results or conditions, which may not occur as anticipated. Actual results or conditions could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described herein and in the Company’s other public filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended August 31, 2019, as well as other risks and uncertainties not now anticipated. The risks and uncertainties described herein and in the Company’s other public filings are not exclusive and further information concerning the Company and its businesses, including factors that potentially could materially affect the Company's financial results, may emerge from time to time. Except as required by law, the Company assumes no obligation to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.
Accounting Policies
In preparing the Company’s condensed consolidated financial statements in conformity with U.S. GAAP, management must make a variety of decisions which impact the reported amounts and the related disclosures. These decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In making these decisions, management applies its judgment based on its understanding and analysis of the relevant circumstances and the Company’s historical experience.
The Company’s accounting policies that are most important to the presentation of its results of operations and financial condition, and which require the greatest use of judgments and estimates by management, are designated as its critical accounting policies. See discussion of the Company’s critical accounting policies under Item 7 in the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended August 31, 2019. Management periodically re-evaluates and adjusts its critical accounting policies as circumstances change. There were no changes in the Company’s critical accounting policies during the three months ended November 30, 2019.
Recent Accounting Guidance
See Note 1 – Basis of Presentation and the disclosure therein of recent accounting guidance (adopted and not yet adopted) to the condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Executive Overview and Outlook
Operating revenues for the three months ended November 30, 2019 were $109.4 million, a decrease of 2 percent compared to $112.0 million for the three months ended November 30, 2018. Irrigation segment revenues decreased 6 percent to $82.4 million and infrastructure segment revenues increased 11 percent to $27.0 million. Net earnings for the three months ended November 30, 2019 were $8.3 million, or $0.77 per diluted share, compared to net earnings of $1.2 million, or $0.11 per diluted share, for the three months ended November 30, 2018.
Net earnings for the three months ended November 30, 2018 were reduced by after-tax costs of $2.9 million, or $0.27 per diluted share, related to the Company’s “Foundation for Growth” initiative. These costs primarily consisted of professional consulting fees and severance costs and were not incurred during the fiscal quarter ended November 30, 2019.
The Company’s irrigation revenues are highly dependent upon the need for irrigated agricultural crop production, which, in turn, depends upon many factors, including the following primary drivers:
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•
Agricultural commodity prices – As of November 2019, corn prices have increased 3 percent and soybean prices have increased approximately 1 percent from November 2018. While commodity prices have improved slightly from the prior year, they remain substantially lower than the peak levels in 2013.
Net farm income – As of November 30, 2019, the U.S. Department of Agriculture (the “USDA”) estimated U.S. 2019 net farm income to be $92.5 billion, an increase of 10.2 percent from the USDA’s final U.S. 2018 net farm income of $84.0 billion. The projected increase is largely the result of an increase in direct government payments from the Market Facilitation Program in response to the U.S. trade dispute with China.
Weather conditions – Demand for irrigation equipment is often positively affected by storm damage and prolonged periods of drought conditions as producers look for ways to reduce the risk of low crop production and crop failures. Conversely, demand for irrigation equipment can be negatively affected during periods of more predictable or excessive natural precipitation.
Governmental policies – A number of governmental laws and regulations can affect the Company’s business, including:
The Agriculture Improvement Act of 2018 (the “Farm Bill”) was signed into law in December 2018. The 2018 Farm Bill continues many of the programs that were in the Agricultural Act of 2014, which expired in September 2018. Such programs are designed to provide a degree of certainty to growers, including funding for the Environmental Quality Incentives Program, which provides financial assistance to farmers to implement conservation practices, and is frequently used to assist in the purchase of center pivot irrigation systems.
The U.S. Tax Cuts and Jobs Act (“U.S. Tax Reform”) enacted in December 2017 increased the benefit of certain tax incentives, such as the Section 179 income tax deduction and Section 168 bonus depreciation, which are intended to encourage equipment purchases by allowing the entire cost of equipment to be treated as an expense in the year of purchase rather than amortized over its useful life.
Biofuel production continues to be a major demand driver for irrigated corn, sugar cane and soybeans as these crops are used in high volumes to produce ethanol and biodiesel. On December 19, 2019, the U.S. Environmental Protection Agency finalized Renewable Fuels Standard (RFS) volume requirements for 2020 that slightly increased volumes of conventional biofuels as well as volumes for advanced and cellulosic biofuels.
Many international markets are affected by government policies such as subsidies and other agriculturally related incentives. While these policies can have a significant effect on individual markets, they typically do not have a material effect on the consolidated results of the Company.
Currency – The value of the U.S. dollar fluctuates in relation to the value of currencies in a number of countries to which the Company exports products and in which the Company maintains local operations. The strengthening of the dollar increases the cost in the local currency of the products exported from the U.S. into these countries and, therefore, could negatively affect the Company’s international sales and margins. In addition, the U.S. dollar value of sales made in any affected foreign currencies will decline as the value of the dollar rises in relation to these other currencies.
International irrigation markets remain active with opportunities for further development and expansion, however regional political and economic factors, currency conditions and other factors can create a challenging environment. Additionally, international results are heavily dependent upon project sales which tend to fluctuate and can be difficult to forecast accurately.
The infrastructure business is dependent to some extent on government spending for road construction. In December 2015, the U.S. government enacted a five-year, $305 billion highway-funding bill (the “FAST Act”) to fund highway and bridge projects. The FAST Act is scheduled to expire in September 2020 unless it is reauthorized by Congress. In addition, the Federal Highway Administration has changed highway safety product certification requirements. The change has required additional research and development spending and could have an impact on the competitive positioning of the Company’s highway safety products. In spite of government spending uncertainty, opportunities exist for market expansion in each of the infrastructure product lines. Demand for the Company’s transportation safety products continues to be driven by population growth and the need for improved road safety.
The backlog of unshipped orders at November 30, 2019 was $69.2 million compared with $49.2 million at November 30, 2018. Included in these backlogs are amounts of $5.2 million and $0.5 million, respectively, for orders that are not
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expected to be fulfilled within the subsequent twelve months. The Company’s backlog can fluctuate from period to period due to the seasonality, cyclicality, timing and execution of contracts. Backlog typically represents long-term projects as well as short lead-time orders, and therefore is generally not a good indication of the next fiscal quarter’s revenues.
The global drivers for the Company’s markets of population growth, expanded food production, efficient water use and infrastructure expansion support the Company’s long-term growth goals. The most significant opportunities for growth over the next several years are in international markets, where irrigation use is less developed and demand is driven primarily by food security, water scarcity and population growth.
Results of Operations
For the Three Months ended November 30, 2019 compared to the Three Months ended November 30, 2018
The following section presents an analysis of the Company’s operating results displayed in the condensed consolidated statements of earnings for the three months ended November 30, 2019 and 2018. It should be read together with the industry segment information in Note 16 to the condensed consolidated financial statements:
Percent
Increase
(Decrease)
Consolidated
-2%
19%
Gross margin
31.1
25.6
Operating expenses (1)
-18%
502%
Operating margin
11.2
1.8
Other expense, net
184%
520%
Overall income tax rate
25.9
27.9
589%
Irrigation Segment
Segment operating revenues
-6%
Segment operating income
25%
Segment operating margin
11.8
8.9
Infrastructure Segment
11%
110%
32.4
17.1
(1)
Includes $6.2 million and $9.9 million of corporate operating expenses for the three months ended November 30, 2019 and 2018, respectively.
Revenues
Operating revenues for the three months ended November 30, 2019 decreased 2 percent to $109.4 million from $112.0 million for the three months ended November 30, 2018, as irrigation revenues decreased $5.3 million and infrastructure revenues increased $2.7 million. The irrigation segment provided 75 percent of the Company’s revenue during the three months ended November 30, 2019 as compared to 78 percent for the three months ended November 30, 2018.
North America irrigation revenues for the three months ended November 30, 2019 of $52.6 million decreased $3.9 million, or 7 percent, from $56.5 million for the three months ended November 30, 2018. Approximately $3.3 million of the decrease in North America irrigation revenues during the quarter compared to the same prior year period is attributable to a business divestiture completed in the first quarter of fiscal 2019. In addition, the impact of higher irrigation equipment unit volume was partially offset by lower sales of replacement parts.
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International irrigation revenues for the three months ended November 30, 2019 of $29.7 million decreased by $1.4 million, or 5 percent, from $31.1 million for the three months ended November 30, 2018. Revenues decreased $1.1 million, or 3 percent, due to differences in foreign currency translation rates compared to the same prior year period. Excluding the impact of foreign currency translation, overall international irrigation revenues were comparable to the same prior year period. Increased sales in Brazil, Europe and Australia were offset by declines in other markets.
Infrastructure segment revenues for the three months ended November 30, 2019 of $27.0 million increased $2.7 million, or 11 percent, from $24.3 million for the three months ended November 30, 2018. The increase resulted from higher sales of road safety products as well as from an increase in Road Zipper System® lease revenues.
Gross Profit
Gross profit for the three months ended November 30, 2019 of $34.1 million increased 19 percent from $28.6 million for the three months ended November 30, 2018. Gross profit increased on slightly lower revenues as a result of an increase in gross margin to 31.1 percent of sales for the three months ended November 30, 2019 compared with 25.6 percent of sales for the three months ended November 30, 2018. Gross margin improvement resulted from a more profitable mix of infrastructure revenues as well as from the results of margin improvement initiatives.
Operating Expenses
Operating expenses of $21.8 million for the three months ended November 30, 2019 decreased $4.8 million, or 18 percent, compared with $26.6 million for the three months ended November 30, 2018. Costs of $4.0 million incurred in connection with the Company’s Foundation for Growth initiative during the three months ended November 30, 2018 did not repeat during the current year period. In addition, a reduction in selling expense was partially offset by an increase in general and administrative expense.
Income Taxes
The Company recorded income tax expense of $2.9 million and $0.5 million for the three months ended November 30, 2019 and November 30, 2018, respectively. The effective income tax rate was 25.9 percent and 27.9 percent for the three months ended November 30, 2019 and 2018, respectively. The decrease in the effective tax rate from November 2018 to November 2019 relates primarily to the change in earnings mix among foreign operations.
Liquidity and Capital Resources
The Company's cash and cash equivalents totaled $120.9 million at November 30, 2019 compared with $137.2 million at November 30, 2018 and $127.2 million at August 31, 2019. The Company requires cash for financing its receivables and inventories, paying operating expenses and capital expenditures, and for dividends and share repurchases. The Company meets its liquidity needs and finances its capital expenditures from its available cash and funds provided by operations along with borrowings under its credit arrangements described below. The Company believes its current cash resources, projected operating cash flow, and remaining capacity under its continuing bank lines of credit are sufficient to cover all of its expected working capital needs, planned capital expenditures and dividends. The Company may require additional borrowings to fund potential acquisitions in the future.
The Company’s total cash and cash equivalents held by foreign subsidiaries were approximately $43.5 million, $30.2 million, and $48.1 million as of November 30, 2019, November 30, 2018, and August 31, 2019, respectively. The Company considers earnings in foreign subsidiaries to be indefinitely reinvested and would need to accrue and pay incremental state, local, and foreign taxes if such earnings were repatriated to the United States. The Company does not intend to repatriate the funds and does not expect these funds to have a significant impact on the Company’s overall liquidity.
Net working capital was $231.8 million at November 30, 2019, as compared with $242.3 million at November 30, 2018 and $231.4 million at August 31, 2019. Cash provided by operating activities totaled $1.5 million during the three months ended November 30, 2019, compared to cash used in operating activities of $14.3 million during the three months ended November 30, 2018. This change was primarily due to higher net earnings and lower increases in receivables, inventories, and accounts payable compared to the same prior year period.
Cash flows used in investing activities totaled $3.2 million during the three months ended November 30, 2019 compared to $4.7 million during the three months ended November 30, 2018. The decrease is primarily attributable to a decrease in capital expenditures compared to the same prior year period.
Cash flows used in financing activities totaled $4.5 million during the three months ended November 30, 2019 compared to cash flows used in financing activities of $4.3 million during the three months ended November 30, 2018. Amounts related to dividend payments and employee restricted stock activity were similar between the periods.
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Capital Allocation Plan
The Company’s capital allocation plan is to continue investing in revenue and earnings growth, combined with a defined process for enhancing returns to stockholders. Under the Company’s capital allocation plan, the priorities for uses of cash include:
Investment in organic growth including capital expenditures and expansion of international markets,
Dividends to stockholders, along with expectations to increase dividends over time,
Synergistic acquisitions that provide attractive returns to stockholders, and
Opportunistic share repurchases taking into account cyclical and seasonal fluctuations.
Capital Expenditures
Capital expenditures for fiscal 2020 are expected to be between $15.0 million and $20.0 million, including equipment replacement, productivity improvements and new product development. The Company’s management does maintain flexibility to modify the amount and timing of some of the planned expenditures in response to economic conditions.
Dividends
In the first quarter of fiscal 2020, the Company paid a quarterly cash dividend of $0.31 per common share, or $3.4 million, to stockholders as compared to $0.31 per common share, or $3.3 million, in the first quarter of fiscal 2019.
Share Repurchases
The Company’s Board of Directors authorized a share repurchase program of up to $250.0 million of common stock with no expiration date. Under the program, shares may be repurchased in privately negotiated and/or open market transactions as well as under formalized trading plans in accordance with the guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. There were no shares repurchased during the three months ended November 30, 2019 and 2018, respectively. The remaining amount available under the repurchase program was $63.7 million as of November 30, 2019.
Long-Term Borrowing Facilities
Senior Notes. The Company has outstanding $115.0 million in aggregate principal amount of Senior Notes, Series A (the “Senior Notes”). The entire principal of the Senior Notes is due and payable on February 19, 2030. Interest on the Senior Notes is payable semi-annually at a fixed annual rate of 3.82 percent. On May 31, 2019, the Company and holders of the Senior Notes agreed, among other things, to temporarily increase the Company’s maximum permitted funded debt to EBITDA leverage ratio from 3.0 to 3.5 through the fiscal quarter ending May 31, 2020, provided that, if such ratio exceeds the original maximum permitted ratio during such period, the interest rate on the Senior Notes shall be increased by up to 0.50% depending on the degree to which the Company exceeds such ratio. During fiscal 2019 the Company did not exceed the original permitted ratio. Borrowings under the Senior Notes are unsecured. The Company used the proceeds of the sale of the Senior Notes for general corporate purposes, including acquisitions and dividends.
Revolving Credit Facility. The Company has outstanding a $50.0 million unsecured Amended and Restated Revolving Credit Facility (the “Revolving Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”) expiring May 31, 2022. The Company intends to use borrowings under the Revolving Credit Facility for working capital purposes and to fund acquisitions. At November 30, 2019 and November 30, 2018, the Company had no outstanding borrowings under the Revolving Credit Facility. The amount of borrowings available at any time under the Revolving Credit Facility is reduced by the amount of standby letters of credit issued by Wells Fargo then outstanding. At November 30, 2019, the Company had the ability to borrow up to $50.0 million under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility bear interest at a variable rate equal to LIBOR plus 90 basis points (2.85 percent at November 30, 2019), subject to adjustment as set forth in the loan documents for the Revolving Credit Facility. Interest is paid on a monthly to quarterly basis depending on loan type. The Company currently pays an annual commitment fee of 0.25 percent on the unused portion of the Revolving Credit Facility.
Borrowings under the Revolving Credit Facility have equal priority with borrowings under the Company’s Senior Notes. Each of the credit arrangements described above include certain covenants relating primarily to the Company’s financial condition. These financial covenants include a funded debt to EBITDA leverage ratio and an interest coverage ratio. In the event that the loan documents for the Revolving Credit Facility were to require the Company to comply with any financial
- 22 -
covenant that is not already included or is more restrictive than what is already included in the arrangement governing the Senior Notes, then such covenant shall be deemed incorporated by reference for the benefit of holders of the Senior Notes. Upon the occurrence of any event of default of these covenants, including a change in control of the Company, all amounts outstanding thereunder may be declared to be immediately due and payable. At November 30, 2019 and November 30, 2018, the Company was in compliance with all financial loan covenants contained in its credit arrangements in place as of each of those dates.
Series 2006A Bonds. Elecsys International Corporation, a wholly owned subsidiary of the Company, has outstanding $1.6 million in principal amount of industrial revenue bonds that were issued in 2006 (the “Series 2006A Bonds”). Principal and interest on the Series 2006A Bonds are payable monthly through maturity on September 1, 2026. The interest rate is adjustable every five years based on the yield of the 5-year United States Treasury Notes, plus 0.45 percent (1.92 percent as of November 30, 2019). This rate was adjusted on September 1, 2016 in accordance with the terms of the bonds, and the adjusted rate will be in force until September 1, 2021. The obligations under the Series 2006A Bonds are secured by a first priority security interest in certain real estate.
Contractual Obligations and Commercial Commitments
There have been no material changes in the Company’s contractual obligations and commercial commitments as described in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2019.
ITEM 3 – Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes from the Company’s quantitative and qualitative disclosures about market risk previously disclosed in the Company’s most recent Annual Report on Form 10-K. See discussion of the Company’s quantitative and qualitative disclosures about market risk under Part II, Item 7A in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2019.
Disclosure Controls and Procedures
The Company carried out an evaluation under the supervision and the participation of the Company’s management, including the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were ineffective as of November 30, 2019 due to the material weakness previously disclosed in Part II, Item 9A of the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2019.
As previously disclosed, in connection with management’s assessment of internal control over financial reporting as of August 31, 2019, the Company identified a material weakness related to ineffective internal control over indirect tax credits in a foreign jurisdiction. The Company’s control was not designed effectively to include evaluation of the recoverability of the credits due to ineffective risk assessment that did not identify the risk related to valuation of the tax credits. This deficiency resulted in a material misstatement that was corrected before the Company issued the consolidated financial statements included in the Annual Report on Form 10‑K for the fiscal year ended August 31, 2019.
During the first quarter of fiscal 2020, the Company began executing its remediation plan to address the material weakness identified above, which includes the implementation of new controls focused on the valuation of the tax credits. The weakness will not be considered remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. The Company expects to complete the remediation of this material weakness during fiscal 2020.
Changes in Internal Control over Financial Reporting
Additionally, other than with respect to the remediation efforts described above and implementation of ASC 842 described below, the CEO and CFO determined that there has not been any significant change to the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Effective September 1, 2019, the Company implemented ASC 842, Leases. Management did implement changes to its processes related to leases and the control activities within them. These included the development of new policies, new training, identification and review of lease contracts, and gathering of information provided for disclosures.
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See the disclosure in Note 10 – Commitments and Contingencies to the condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q, which disclosure is hereby incorporated herein by reference.
There have been no material changes from risk factors previously disclosed in the Company’s most recent Annual Report on Form 10-K. See the discussion of the Company’s risk factors under Part I, Item 1A in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2019.
None.
Not applicable.
- 24 -
Exhibit
No.
Description
Restated Certificate of Incorporation of the Company, incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on December 14, 2006.
3.2
Amended and Restated By‑Laws of the Company, effective October 17, 2018, incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on October 19, 2018.
4.1
Specimen Form of Common Stock Certificate, incorporated by reference to Exhibit 4(a) of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2006.
10.1*
Lindsay Corporation Management Incentive Plan (MIP) 2020 Plan Year. † **
31.1*
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 18 U.S.C. Section 1350.
31.2*
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 18 U.S.C. Section 1350.
32.1*
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 18 U.S.C. Section 1350.
101*
Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language ("Inline XBRL").
104*
Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101).
† Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto pursuant to Item 6 of Part II of Form 10-Q.
* Filed herein.
** Certain confidential portions of this Exhibit were omitted by means of marking such portions with brackets and asterisks because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 9th day of January 2020.
LINDSAY CORPORATION
By:
/s/ BRIAN L. KETCHAM
Name:
Brian L. Ketcham
Title:
Senior Vice President and Chief Financial Officer
(on behalf of the registrant and as principal financial officer)
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