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 May 31, 2020
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 June 26, 2020, 10,834,763 shares of the registrant’s common stock were outstanding.
INDEX FORM 10-Q
Page
Part I – FINANCIAL INFORMATION
3
ITEM 1 – Financial Statements
Condensed Consolidated Statements of Operations for the three and nine months ended May 31, 2020 and May 31, 2019
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended May 31, 2020 and May 31, 2019
4
Condensed Consolidated Balance Sheets as of May 31, 2020, May 31, 2019, and August 31, 2019
5
Condensed Consolidated Statements of Shareholders’ Equity for the three and nine months ended May 31, 2020 and May 31, 2019
6
Condensed Consolidated Statements of Cash Flows for the nine months ended May 31, 2020 and May 31, 2019
8
Notes to the Condensed Consolidated Financial Statements
9
ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
ITEM 3 – Quantitative and Qualitative Disclosures about Market Risk
28
ITEM 4 – Controls and Procedures
Part II – OTHER INFORMATION
29
ITEM 1 – Legal Proceedings
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
30
SIGNATURES
31
- 2 -
ITEM 1 - Financial Statements
LINDSAY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
Nine months ended
($ and shares in thousands, except per share amounts)
May 31,
2020
2019
Operating revenues
$
123,106
121,054
346,287
342,187
Cost of operating revenues
83,410
91,055
239,111
259,066
Gross profit
39,696
29,999
107,176
83,121
Operating expenses:
Selling expense
7,417
7,515
22,101
23,934
General and administrative expense
13,055
14,695
38,026
46,585
Engineering and research expense
3,396
3,314
10,303
10,547
Total operating expenses
23,868
25,524
70,430
81,066
Operating income
15,828
4,475
36,746
2,055
Other income (expense):
Interest expense
(1,197
)
(1,169
(3,574
(3,552
Interest income
408
525
1,412
1,930
Other expense, net
(2,774
(602
(4,197
(591
Earnings (loss) before income taxes
12,265
3,229
30,387
(158
Income tax expense (benefit)
2,171
332
6,432
(827
Net earnings
10,094
2,897
23,955
669
Earnings per share:
Basic
0.93
0.27
2.21
0.06
Diluted
Shares used in computing earnings per share:
10,835
10,786
10,818
10,779
10,877
10,814
10,854
10,807
Cash dividends declared per share
0.32
0.31
0.94
See accompanying notes to condensed consolidated financial statements.
- 3 -
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
Other comprehensive (loss) income:
Defined benefit pension plan adjustment, net of tax
43
38
129
104
Foreign currency translation adjustment, net of hedging activities and tax
(2,642
(1,831
(3,831
125
Unrealized gains on marketable securities, net of tax
59
—
121
Total other comprehensive (loss) income, net of tax expense of $297, $120, $670 and $421, respectively
(2,540
(1,793
(3,581
229
Total comprehensive income
7,554
1,104
20,374
898
- 4 -
CONDENSED CONSOLIDATED BALANCE SHEETS
($ and shares in thousands, except par values)
August 31,
ASSETS
Current assets:
Cash and cash equivalents
102,474
110,839
127,204
Marketable securities
19,012
Receivables, net of allowance of $2,607, $2,498, and $2,635,
respectively
84,931
94,584
75,551
Inventories, net
113,301
91,091
92,287
Assets held-for-sale
2,744
Other current assets, net
19,469
17,903
15,704
Total current assets
339,187
317,161
313,490
Property, plant, and equipment:
Cost
198,180
188,215
188,695
Less accumulated depreciation
(125,353
(117,848
(119,727
Property, plant, and equipment, net
72,827
70,367
68,968
Intangibles, net
24,053
25,103
24,382
Goodwill
67,635
64,454
64,387
Operating lease right-of-use assets
27,663
Deferred income tax assets
11,118
8,783
11,758
Other noncurrent assets
15,003
20,054
17,329
Total assets
557,486
505,922
500,314
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
35,310
37,509
29,434
Current portion of long-term debt
195
208
209
Other current liabilities
71,712
49,102
52,488
Total current liabilities
107,217
86,819
82,131
Pension benefits liabilities
5,787
5,661
6,029
Long-term debt
115,723
115,885
115,846
Operating lease liabilities
26,333
Deferred income tax liabilities
835
918
872
Other noncurrent liabilities
18,633
26,245
27,227
Total liabilities
274,528
235,528
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;
18,918, 18,870, and 18,870 shares issued, respectively
18,918
18,870
Capital in excess of stated value
76,188
70,566
71,684
Retained earnings
488,518
476,580
474,740
Less treasury stock - at cost, 8,083 shares
(277,238
Accumulated other comprehensive loss, net
(23,428
(18,384
(19,847
Total shareholders' equity
282,958
270,394
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,
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 ($0.93) per share
(10,032
Issuance of common shares under share compensation plans, net
(976
(947
Share-based compensation expense
3,077
Cumulative impact of ASC 606 adoption
532
Cumulative impact of ASU 2018-02 adoption
(525
Balance at May 31, 2019
Balance at August 31, 2019
Other comprehensive loss
Cash dividends ($0.94) per share
(10,177
48
386
434
4,118
Balance at May 31, 2020
- 6 -
Balance at February 28, 2019
69,772
477,027
(16,591
271,840
Cash dividends ($0.31) per share
(3,344
794
Balance at February 29, 2020
74,645
481,890
(20,888
277,327
Cash dividends ($0.32) per share
(3,466
1,543
- 7 -
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
May 31, 2020
May 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization
14,146
10,452
Gain on sale of assets held-for-sale
(1,191
Loss on sale of business
301
Provision for uncollectible accounts receivable
466
(726
Deferred income taxes
27
(2,556
3,226
Foreign currency transaction loss
3,632
99
Other, net
1,575
(113
Changes in assets and liabilities:
Receivables
(11,379
(26,371
Inventories
(23,765
(14,467
Other current assets
(6,681
546
5,385
9,072
14,485
(4,078
Other noncurrent assets and liabilities
(8,810
4,318
Net cash provided by (used in) operating activities
15,963
(19,628
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment
(12,268
(20,210
Proceeds from sale of assets held-for-sale
3,955
Purchases of marketable securities available-for-sale
(23,389
Proceeds from maturities of marketable securities available-for-sale
4,320
Proceeds from settlement of net investment hedges
1,503
2,262
Payments for settlement of net investment hedges
(327
Acquisition of business, net of cash acquired
(3,034
Other investing activities, net
60
Net cash used in investing activities
(28,913
(18,215
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options
1,545
177
Common stock withheld for payroll tax obligations
(1,111
(1,124
Principal payments on long-term debt
(174
(153
Payment of debt issuance costs
(115
Dividends paid
Net cash used in financing activities
(9,917
(11,247
Effect of exchange rate changes on cash and cash equivalents
(1,863
(858
Net change in cash and cash equivalents
(24,730
(49,948
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
2,910
6,278
Interest paid
2,409
2,379
NONCASH INVESTING ACTIVITIES:
Earn-out liability related to business acquisition
1,195
$ ─
Holdback related to business acquisition
300
Note receivable from sale of business
$ 5,589
- 8 -
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 does not expect the adoption of this ASU to have a material impact on its consolidated financial statements and related disclosures.
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.
- 9 -
Note 2 – Revenue Recognition
Disaggregation of Revenue
A breakout by segment of revenue recognized over time versus at a point in time for the three and nine months ended May 31, 2020 and May 31, 2019 is as follows:
Irrigation
Infrastructure
Point in time
83,128
24,499
107,627
89,442
19,429
108,871
Over time
10,395
2,621
13,016
9,176
1,589
10,765
Revenue from the contracts with customers
93,523
27,120
120,643
98,618
21,018
119,636
Lease revenue
2,463
1,418
Total operating revenues
29,583
22,436
229,529
64,257
293,786
256,466
51,593
308,059
38,419
7,306
45,725
25,528
4,372
29,900
267,948
71,563
339,511
281,994
55,965
337,959
6,776
4,228
78,339
60,193
Further disaggregation of revenue is disclosed in the Note 16 – Industry Segment Information.
For contracts with an initial length longer than twelve months, the unsatisfied performance obligations were $6.1 million at May 31, 2020.
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 May 31, 2020, May 31, 2019, and August 31, 2019, contract assets amounted to $0.8 million, $1.4 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 May 31, 2020, May 31, 2019, and August 31, 2019, contract liabilities amounted to $16.9 million, $13.1 million, and $18.4 million, respectively. Contract liabilities are included within other current liabilities on the condensed consolidated balance sheets. During the Company’s nine months ended May 31, 2020 and 2019, the Company recognized $13.5 million and $0.8 million of revenue that were included in the liabilities as of August 31, 2019 and 2018, respectively. The revenue recognized was due to applying advance payments received for the performance obligations completed during the quarter.
Note 3 – Acquisitions and Divestitures
Net Irrigate, LLC
On April 8, 2020, the Company completed the acquisition of the membership interests of Net Irrigate, LLC (“Net Irrigate”). Net Irrigate is an agriculture technology company based in Indiana that provides remote monitoring services for irrigation customers. The purchase price of $4.5 million consisted of (i) $3.0 million, net of cash acquired, paid in cash at closing and financed from the Company’s cash on hand, (ii) $0.3 million of cash to be paid within ninety days of closing, and (iii) an earn-out payment, initially valued at $1.2 million, based on active customers one year subsequent to the closing date. The fair value of the earn-out payment was calculated using the weighted average probability for each potential outcome and has a maximum potential payout of $1.5 million.
- 10 -
The Company’s allocation of purchase price consists of goodwill of $3.2 million and various other assets and liabilities amounting to $1.3 million. The allocation of purchase price is considered preliminary, largely with the respect to the valuation of certain acquired intangible assets.
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 $0.3 million included in general and administrative expense on the condensed consolidated statement of operations for the nine months ended May 31, 2019. The Company received a note of $5.6 million as proceeds for this sale. This is included as a noncash investing activity on the condensed consolidated statement of cash flows for the nine months ended May 31, 2019.
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. In the second quarter of fiscal 2020, the company sold the building for net proceeds of $3.9 million, resulting in a gain of $1.2 million. The gain on sale is included in cost of goods sold on the condensed consolidated statement of earnings for the nine months ended May 31, 2020. The building was included within the caption “Assets held-for-sale” for $2.7 million in the condensed consolidated balance sheet as of May 31, 2019 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 and nine months ended May 31, 2020 and May 31, 2019:
Numerator:
Denominator:
Weighted average shares outstanding
Diluted effect of stock awards
42
36
Weighted average shares outstanding assuming
dilution
Basic net earnings per share
Diluted net earnings per share
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
11
Stock options
115
88
66
Performance stock units
7
- 11 -
Note 5 – Income Taxes
The Company recorded income tax expense of $2.2 million and $0.3 million for the three months ended May 31, 2020 and 2019, respectively, and recorded income tax expense of $6.4 million and income tax benefit of $0.8 million for the nine months ended May 31, 2020 and 2019, 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 23.6 percent and 42.6 percent for the nine months ended May 31, 2020 and 2019, respectively. The decrease in the estimated annual effective income tax rate from May 2019 to May 2020 relates primarily to the change in earnings mix between U.S. and foreign operations. A larger percentage of earnings for the nine months ended May 31, 2019 was generated in foreign jurisdictions taxed at a higher statutory rate than the 21 percent U.S. federal tax rate. 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. The impact of such events within income tax expense amounted to a net benefit of $0.3 million and $0.8 million for the nine months ended May 31, 2020 and 2019, respectively.
The United States enacted significant tax reform into law on December 22, 2017 by enacting the U.S. Tax Cuts and Jobs Act (“U.S. Tax Reform”). 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 23.6 percent for the nine months ended May 31, 2020.
Note 6 – Inventories
Inventories consisted of the following as of May 31, 2020, May 31, 2019, and August 31, 2019:
Raw materials and supplies
50,820
44,742
49,047
Work in process
7,819
6,917
4,514
Finished goods and purchased parts, net
59,496
47,659
46,812
Total inventory value before LIFO adjustment
118,135
99,318
100,373
Less adjustment to LIFO value
(4,834
(8,227
(8,086
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:
Series A Senior Notes
115,000
Revolving Credit Facility
Elecsys Series 2006A Bonds
1,397
1,622
1,571
Total debt
116,397
116,622
116,571
Less current portion
(195
(208
(209
Less unamortized debt issuance costs
(479
(529
(516
Total long-term debt
Principal payments on the debt are due as follows:
Due within
$ in thousands
1 year
2 years
216
3 years
220
4 years
225
5 years
Thereafter
115,312
- 12 -
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
533
1,073
Total derivatives designated as hedging
instruments
Derivatives not designated as hedging
Foreign currency option contracts
909
1
39
(528
(22
Total derivatives not designated as
hedging instruments
381
(21
Accumulated other comprehensive income included realized and unrealized after-tax gains of $7.3 million, $6.3 million, and $7.0 million at May 31, 2020, May 31, 2019, and August 31, 2019, respectively, related to derivative contracts designated as hedging instruments.
Net Investment Hedging Relationships
The amount of gain recognized in other comprehensive income is as follows:
Foreign currency forward contracts, net of tax
expense of $63, $182, $123 and $368, respectively
101
682
304
1,324
For the three months ended May 31, 2020 and 2019, the Company settled foreign currency forward contracts resulting in an after-tax net gain of $0.3 million and $0.6 million, respectively, which was included in other comprehensive income as part of a currency translation adjustment. For the nine months ended May 31, 2020 and May 31, 2019, the Company settled foreign currency forward contracts resulting in an after-tax net gain of $1.1 million and $1.5 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 operations related to ineffectiveness of foreign currency forward contracts related to net investment hedges for the three and nine months ended May 31, 2020 and May 31, 2019.
At May 31, 2020, the Company had no foreign currency forward contracts qualifying as a hedge of a net investment in foreign operations. However, at May 31, 2019, and August 31, 2019, the Company had outstanding foreign currency forward contracts to sell a notional amount of 32.7 million Euro, on each date, at fixed prices to settle during the next fiscal quarter. Additionally, at May 31, 2019, the Company had an outstanding foreign currency forward contract to sell a notional amount of 43.0 million South African Rand at a fixed price settled during the next fiscal quarter. These foreign currency forward contracts qualify as hedges of a net investment in foreign operations.
- 13 -
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 operations. At May 31, 2020, May 31, 2019 and August 31, 2019, the Company had notional value of $8.5 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.
Additionally, during the third quarter of fiscal 2020, the Company entered into a foreign exchange option contract with a notional amount of 15 million British Pounds to mitigate the risk related to a revenue contract and related costs denominated in British Pounds over an approximate six-month period. The contract is not speculative and was not designated as a hedging instrument. Gains and losses on this contract are recorded within cost of goods sold in the condensed consolidated statement of operations.
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 and nine months ended May 31, 2020.
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.
Lease cost and other information related to the Company’s operating leases are as follows:
Three months ended May 31, 2020
Nine months ended May 31, 2020
Operating lease cost (cost resulting from lease payments)
1,502
4,412
Variable lease cost (cost excluded from lease payments)
112
312
Total lease cost
1,614
4,724
Operating cash outflows from operating leases
1,178
3,997
Weighted average lease term - operating leases
9.2 years
Weighted average discount rate - operating leases
3.2
%
- 14 -
Supplemental balance sheet information related to operating leases as of the third quarter of 2020 is as follows:
Classification
Operating lease ROU assets
Operating lease short-term liabilities
5,046
Operating lease long-term liabilities
Total lease liabilities
31,379
The minimum lease payments under operating leases expiring subsequent to May 31, 2020 are as follows:
Fiscal year ending
1,748
2021
5,798
2022
5,465
2023
3,771
2024
3,397
16,784
Total lease payments
36,963
Less: interest
5,584
Present value of lease liabilities
As previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal 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 May 31, 2020, May 31, 2019, and August 31, 2019. There were no transfers between any levels for the periods presented.
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Level 1
Level 2
Level 3
Marketable securities:
Corporate bonds
14,554
U.S. treasury securities
4,458
Derivative assets
Derivative liabilities
Earn-out liability
534
August 31, 2019
1,112
The Company’s investment in marketable securities consists of United States treasury bonds and investment grade corporate bonds. The marketable securities are classified as available-for-sale and are carried at fair value with the change in unrealized gains and losses reported as a separate component on the condensed consolidated statements of comprehensive income (loss) until realized. The Company determines fair value using data points that are observable, such as quoted prices and interest rates. The amortized cost of the investments approximates fair value. Investment income is recorded within other (expense) income on the condensed consolidated statements of operations. As of May 31, 2020, approximately 67% of the Company’s marketable securities investments mature within one year and 33% mature within one to three years.
There were no required fair value adjustments for assets and liabilities measured at fair value on a non-recurring basis for the nine months ended May 31, 2020 or May 31, 2019.
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, certain of its subsidiaries, and certain third parties which originally designed the X-Lite end terminal have also been named in a lawsuit filed on June 9, 2020 in the Circuit Court of Cole County, Missouri by Missouri Highways and Transportation Commission (“MHTC”). MHTC alleges, among other things, that the X-Lite end terminal was defectively designed and failed to perform as designed, intended, and advertised, leading to MHTC’s removal and replacement of X-Lite end terminals from Missouri’s roadways. MHTC alleges strict liability (defective design and failure to warn), negligence, breach of express warranties, breach of implied warranties (merchantability and fitness for a particular purpose), fraud, and public nuisance. MHTC seeks compensatory damages, interest, attorneys’ fees, and punitive damages.
The Company believes it has meritorious factual and legal defenses to each of the lawsuits discussed above and is prepared to vigorously defend its interests. Based on the information currently available to the Company, the Company does not
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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 final quarter of fiscal 2020 or the first quarter of fiscal 2021.
The current estimated aggregate accrued cost of this remediation plan of $15.4 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 May 31, 2020, May 31, 2019, and August 31, 2019:
1,182
1,243
14,257
14,871
14,674
Total environmental remediation liabilities
15,439
16,114
15,917
Note 12 – Warranties
The following table provides the changes in the Company’s product warranties:
Product warranty accrual balance, beginning of period
8,990
7,971
8,960
7,109
Liabilities accrued for warranties during the period
2,642
6,360
5,472
Warranty claims paid during the period
(2,031
(1,954
(5,617
(4,260
Changes in estimates
110
44
382
Product warranty accrual balance, end of period
9,813
8,703
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,
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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 $1.5 million and $0.8 million for the three months ended May 31, 2020 and 2019, respectively. Share-based compensation expense was $4.1 million and $3.2 million for the nine months ended May 31, 2020 and 2019, respectively.
Note 14 – Other Current Liabilities
Other current liabilities:
Compensation and benefits
17,072
13,490
13,960
Contract liabilities
16,029
11,683
14,763
Warranties
Tax related liabilities
6,733
2,087
1,469
Deferred revenue - lease
3,526
214
2,985
Dealer related liabilities
3,505
3,679
3,246
Accrued insurance
1,462
1,594
1,482
Accrued environmental liabilities
Other
7,344
6,409
4,380
Total other current liabilities
Note 15 – Share Repurchases
There were no shares repurchased during the three and nine months ended May 31, 2020 and May 31, 2019 under the Company’s share repurchase program. The remaining amount available under the repurchase program was $63.7 million as of May 31, 2020.
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 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 or nine months ended May 31, 2020 and 2019.
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.
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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
60,917
62,974
179,197
177,118
International
32,606
35,644
88,751
104,876
Irrigation total
Operating income:
15,014
11,037
34,385
26,341
8,560
3,537
23,686
7,259
Corporate
(7,746
(10,099
(21,325
(31,545
Total operating income
Interest and other expense, net
(3,563
(1,246
(6,359
(2,213
Total assets:
313,216
306,714
292,202
105,832
80,971
85,848
138,438
118,237
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 fiscal year ended August 31, 2019 and the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 2020. 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 and the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 2020, 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.
COVID-19 Impact
In March 2020, the World Health Organization declared coronavirus (COVID-19) a global pandemic. This outbreak, which has continued to spread worldwide, has adversely affected workforces, customers, economies, and financial markets globally, leading to economic uncertainty. Shelter-in-place or stay-at-home orders have been implemented from time to time in many of the jurisdictions in which the Company operates. However, because the Company supports critical industries, the Company’s facilities worldwide have generally been considered “business essential” and have remained open throughout the outbreak with limited exceptions. Accordingly, COVID-19 has had a limited impact on the Company’s manufacturing operations to date. For the three months ended May 31, 2020, the Company experienced shipment and project delays related to COVID-19 that impacted revenue by approximately $14.0 million. While the Company has implemented new procedures to protect the health and well-being of employees, these costs have not been material.
The ultimate impact of COVID-19 on the Company’s business, results of operations, or cash flows remains uncertain and depends on numerous evolving factors that the Company may not be able to accurately predict or effectively respond to, including, without limitation: the duration and scope of the outbreak; actions taken by governments, businesses, and individuals in response to the outbreak; the effect on economic activity and actions taken in response; the effect on customers and their demand for the Company’s products and services; and the Company’s ability to manufacture, sell, and service its products, including without limitation as a result of supply chain challenges, facility closures, social distancing, restrictions on travel, fear or anxiety by the populace, and shelter-in-place orders. As such, the financial impact of COVID-19 on the Company’s business, results of operations, or cash flows cannot be reasonably estimated at this time.
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
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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 nine months ended May 31, 2020.
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 May 31, 2020 were $123.1 million, an increase of 2 percent compared to $121.1 million for the three months ended May 31, 2019. Irrigation segment revenues decreased 5 percent to $93.5 million and infrastructure segment revenues increased 32 percent to $29.6 million. Net earnings for the three months ended May 31, 2020 were $10.1 million, or $0.93 per diluted share, compared to net earnings of $2.9 million, or $0.27 per diluted share, for the three months ended May 31, 2019.
Net earnings for the three months ended May 31, 2019 were reduced by after-tax costs of $2.6 million, or $0.23 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 May 31, 2020.
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:
•
Agricultural commodity prices – As of May 2020, corn prices have decreased 19 percent and soybean prices have increased approximately 3 percent from May 2019 and remain substantially lower than the peak levels in 2013. During the three months ended May 31, 2020, agricultural commodity prices declined significantly because of impacts caused by the global coronavirus pandemic. The pandemic has resulted in the shutdown of economies globally, a significant increase in unemployment, the disruption of food supply systems and consumption patterns, and the reduction in gasoline consumption and demand for ethanol. Under the U.S.-China Phase 1 trade deal signed January 15, 2020, China has pledged to increase purchases of U.S. agricultural products by $32 billion over two years, to an average annual total of $40 billion compared to the 2017 baseline of $24 billion. An increase in purchases by China should be supportive of higher agricultural commodity prices, however it is uncertain that China will actually increase purchases to this level.
Net farm income – As of February 2020, the U.S. Department of Agriculture (the “USDA”) estimated U.S. 2020 net farm income to be $96.7 billion, an increase of 3 percent from the USDA’s estimated U.S. 2019 net farm income of $93.6 billion. The modest increase is a result of projected increases in cash receipts for both crops and livestock, which are partially offset by a projected decrease in payments from the Market Facilitation Program that had to be implemented in response to the U.S. trade dispute with China. In April 2020 the USDA announced the Coronavirus Food Assistance Program (“CFAP”), which includes $16 billion in assistance for several agricultural sectors and is designed to address price declines caused by the demand disruption in the food service industry. The impact on net farm income from lower commodity prices caused by the coronavirus pandemic and from government assistance provided under CFAP have not yet been factored into the USDA’s 2020 estimate.
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,
- 21 -
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. Demand for biofuels has been negatively impacted in 2020 by reduced driving and fuel consumption caused by the coronavirus pandemic.
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 May 31, 2020 was $78.6 million compared with $52.5 million at May 31, 2019. Included in these backlogs are amounts of $4.5 million and $10.0 million, respectively, for orders that are not 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.
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Results of Operations
For the Three Months ended May 31, 2020 compared to the Three Months ended May 31, 2019
The following section presents an analysis of the Company’s operating results displayed in the condensed consolidated statements of operations for the three months ended May 31, 2020 and 2019. It should be read together with the industry segment information in Note 16 to the condensed consolidated financial statements:
Percent
Increase
(Decrease)
Consolidated
2%
32%
Gross margin
32.2
24.8
Operating expenses (1)
-6%
254%
Operating margin
12.9
3.7
186%
Income tax expense
554%
Overall income tax rate
17.7
10.3
248%
Irrigation Segment
Segment operating revenues
-5%
Segment operating income
36%
Segment operating margin
16.1
11.2
Infrastructure Segment
142%
28.9
15.8
(1)
Includes $7.7 million and $10.1 million of corporate operating expenses for the three months ended May 31, 2020 and 2019, respectively.
Revenues
Operating revenues for the three months ended May 31, 2020 increased 2 percent to $123.1 million from $121.1 million for the three months ended May 31, 2019, as irrigation revenues decreased $5.1 million and infrastructure revenues increased $7.1 million. The irrigation segment provided 76 percent of the Company’s revenue during the three months ended May 31, 2020 as compared to 81 percent for the three months ended May 31, 2019.
North America irrigation revenues for the three months ended May 31, 2020 of $60.9 million decreased $2.1 million, or 3 percent, from $63.0 million for the three months ended May 31, 2019. The decrease resulted primarily from lower irrigation equipment unit volume which was partially offset by the impact of higher average selling prices.
International irrigation revenues for the three months ended May 31, 2020 of $32.6 million decreased $3.0 million, or 9 percent, from $35.6 million for the three months ended May 31, 2019. Higher sales volumes in certain regions were more than offset by unfavorable effects of foreign currency translation of approximately $3.5 million compared to the prior year and COVID-19 related shipment delays of approximately $2.0 million.
Infrastructure segment revenues for the three months ended May 31, 2020 of $29.6 million increased $7.1 million, or 32 percent, from $22.4 million for the three months ended May 31, 2019. The increase resulted from higher Road Zipper System® sales and lease revenues which were partially offset by lower sales of road safety products compared to the prior year. In addition, revenues of approximately $12.0 million were impacted by COVID-19 related project delays.
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Gross Profit
Gross profit for the three months ended May 31, 2020 of $39.7 million increased 32 percent from $30.0 million for the three months ended May 31, 2019. The increase in gross profit resulted from higher revenues and an increase in gross margin to 32.2 percent of sales for the three months ended May 31, 2020 compared with 24.8 percent of sales for the three months ended May 31, 2019. Gross margin improvement resulted primarily from a more profitable margin mix from higher infrastructure revenues as well as from the results of margin improvement initiatives in both segments.
Operating Expenses
Operating expenses of $23.9 million for the three months ended May 31, 2020 decreased $1.7 million, or 6 percent, compared with $25.5 million for the three months ended May 31, 2019. Costs of $3.9 million incurred in connection with the Company’s Foundation for Growth initiative during the three months ended May 31, 2019 did not repeat during the current year period. Excluding the impact of the non-repeating costs, operating expenses increased 10 percent compared to the prior year due primarily to an increase in incentive compensation included in administrative expenses.
Other Expense, net
Other expense for the three months ended May 31, 2020 increased $2.2 million compared to the three months ended May 31, 2019. The increase resulted from higher foreign currency transaction losses, primarily related to intercompany transactions with foreign subsidiaries.
Income Taxes
The Company recorded income tax expense of $2.2 million and $0.3 million for the three months ended May 31, 2020 and May 31, 2019, respectively. The effective income tax rate was 17.7 percent and 10.3 percent for the three months ended May 31, 2020 and 2019, respectively. The increase in the effective tax rate from May 2019 to May 2020 relates to the change in earnings mix between U.S. and foreign operations and differences in the impact of discrete items.
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For the Nine Months ended May 31, 2020 compared to the Nine Months ended May 31, 2019
The following section presents an analysis of the Company’s operating results displayed in the condensed consolidated statements of operations for the nine months ended May 31, 2020 and May 31, 2019. It should be read together with the industry segment information in Note 16 to the condensed consolidated financial statements:
1%
29%
31.0
24.3
-13%
1688%
10.6
0.6
187%
-878%
21.2
523.4
3481%
31%
12.8
9.3
30%
226%
30.2
12.1
Includes $21.3 million and $31.5 million of corporate operating expenses for the nine months ended May 31, 2020 and 2019, respectively.
Operating revenues for the nine months ended May 31, 2020 increased 1 percent to $346.3 million from $342.2 million for the nine months ended May 31, 2019, as infrastructure revenues increased $18.1 million while irrigation revenues decreased $14.0 million. The irrigation segment provided 77 percent of the Company’s revenue during the nine months ended May 31, 2020 as compared to 82 percent for the nine months ended May 31, 2019.
North America irrigation revenues for the nine months ended May 31, 2020 of $179.2 million decreased $2.1 million, or 1 percent, from $177.1 million for the nine months ended May 31, 2019. The impact of higher revenue from engineering project services was partially offset by a decrease of approximately $3.3 million attributable to a business divestiture completed in the first quarter of fiscal 2019. Irrigation system unit volume and average selling prices were comparable for the nine months ended May 31, 2020 and 2019.
International irrigation revenues for the nine months ended May 31, 2020 of $88.8 million decreased $16.1 million, or 15 percent, from $104.9 million for the nine months ended May 31, 2019. The decrease resulted primarily from a lower level of project activity in developing markets compared to the prior fiscal year. Additionally, international irrigation revenues decreased $5.6 million, or 5 percent, due to differences in foreign currency translation rates compared to the same prior year period.
Infrastructure segment revenues for the nine months ended May 31, 2020 of $78.3 million increased $18.1 million, or 30 percent, from $60.2 million for the nine months ended May 31, 2019. The increase resulted from higher Road Zipper System® sales and lease revenues and an increase in sales of road safety products compared to the prior year.
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Gross profit for the nine months ended May 31, 2020 of $107.2 million increased 29 percent from $83.1 million for the nine months ended May 31, 2019. The increase in gross profit resulted primarily from an increase in gross margin to 31.0 percent of sales for the nine months ended May 31, 2020 compared with 24.3 percent of sales for the nine months ended May 31, 2019. Gross margin improvement resulted primarily from a more profitable margin mix from higher infrastructure revenues as well as from the results of margin improvement initiatives in both segments. In addition, gross profit for the nine months ended May 31, 2020 included a gain of $1.2 million on the sale of a building that had been held for sale.
Operating expenses of $70.4 million for the nine months ended May 31, 2020 decreased $10.6 million, or 13 percent, compared with $81.1 million for the nine months ended May 31, 2019. Costs of $13.2 million incurred in connection with the Company’s Foundation for Growth initiative during the nine months ended May 31, 2019 did not repeat during the current year period. Excluding the impact of the non-repeating costs, operating expenses increased 4 percent compared to the prior year due to an increase in incentive compensation that was partially offset by reductions in other areas.
Other expense for the nine months ended May 31, 2020 increased $4.1 million compared to the nine months ended May 31, 2019. The increase resulted from higher foreign currency transaction losses, primarily related to intercompany transactions with foreign subsidiaries.
The Company recorded income tax expense of $6.4 million and income tax benefit of $0.8 million for the nine months ended May 31, 2020 and May 31, 2019, respectively. The effective income tax rate was 21.2 percent and 523.5 percent for the nine months ended May 31, 2020 and 2019, respectively. The decrease in the effective tax rate from May 2019 to May 2020 relates primarily to the change in earnings mix among U.S. and foreign operations and differences in the impact of discrete items.
Liquidity and Capital Resources
The Company's cash, cash equivalents, and marketable securities totaled $121.5 million at May 31, 2020 compared with $110.8 million at May 31, 2019 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’s investments in marketable securities are primarily comprised of United States government securities and investment grade corporate bonds. The Company believes its current cash resources, investments in marketable securities, 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 $35.4 million, $34.2 million, and $48.1 million as of May 31, 2020, May 31, 2019, 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 $232.0 million at May 31, 2020, as compared with $230.3 million at May 31, 2019 and $231.4 million at August 31, 2019. Cash provided by operating activities totaled $16.0 million during the nine months ended May 31, 2020, compared to cash used in operating activities of $19.6 million during the nine months ended May 31, 2019. This change was primarily due to higher net earnings and non-cash adjustments compared to the same prior year period.
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Cash flows used in investing activities totaled $28.9 million during the nine months ended May 31, 2020 compared to $18.2 million during the nine months ended May 31, 2019. The increase resulted from purchases of marketable securities which were partially offset by proceeds from the sale of assets held-for-sale and a decrease in capital expenditures compared to the same prior year period.
Cash flows used in financing activities totaled $9.9 million during the nine months ended May 31, 2020 compared to cash flows used in financing activities of $11.2 million during the nine months ended May 31, 2019. The decrease was primarily the result of higher proceeds from the exercise of stock options compared to the same prior year period.
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 third quarter of fiscal 2020, the Company paid a quarterly cash dividend to stockholders of $0.32 per common share, or $10.2 million, compared to a quarterly cash dividend of $0.31 per common share, or $10.0 million, in the third 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 nine months ended May 31, 2020 or 2019. The remaining amount available under the repurchase program was $63.7 million as of May 31, 2020.
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 the nine months ended May 31, 2020, 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 May 31, 2020 and May 31, 2019, 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 May 31, 2020, 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 (2.28 percent at May 31, 2020), 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
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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 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 May 31, 2020 and May 31, 2019, 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 LLC, 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 (1.34 percent as of May 31, 2020). 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 May 31, 2020 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 third quarter of fiscal 2020, the Company continued 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
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.
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See the disclosure in Note 11 – 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, as supplemented by the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 2020. See the discussions of the Company’s risk factors under (i) Part I, Item 1A in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2019 and (i) Part II, Item 1A in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 2020.
None.
Not applicable.
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Exhibit
No.
Description
3.1
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.
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.
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).
* Filed herein.
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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 2nd day of July 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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