Lindsay Corp: Form 10-Q for the period ended Nov 30, 2023

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, 2023. 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, 2023, 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, 2023. Management periodically re-evaluates and adjusts its critical accounting policies as circumstances change. There were no significant changes in the Company’s critical accounting policies during the three months ended November 30, 2023.

Recent Accounting Guidance

See Note 1 – Basis of Presentation and the disclosure therein of recently adopted accounting guidance 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, 2023 were $161.4 million, a decrease of 8 percent compared to $176.2 million for the three months ended November 30, 2022. Irrigation segment revenues decreased 8 percent to $140.2 million and infrastructure segment revenues decreased 12 percent to $21.2 million. Net earnings for the three months ended November 30, 2023 were $15.0 million, or $1.36 per diluted share, compared to net earnings of $18.2 million, or $1.65 per diluted share, for the three months ended November 30, 2022.

The primary drivers for the Company’s irrigation segment are the need for irrigated agricultural crop production, which is tied to population growth and the attendant need for expanded food production, and the need to use water resources efficiently. These drivers are affected by a number of factors, including the following:

• Agricultural commodity prices – As of November 2023, U.S. corn prices have decreased approximately 32 percent and U.S. soybean prices have decreased approximately 8 percent from November 2022. Agriculture commodity prices continue to fluctuate based on supply factors, such as global production and inventory levels and the ongoing conflict between Ukraine and Russia, and demand factors such as food and feed consumption, biofuel production and the level of China's demand for agricultural imports.
• Net farm income – As of December 2023, the U.S. Department of Agriculture (the “USDA”) estimated 2023 U.S. net farm income to be $151.1 billion, a decrease of 17 percent from 2022 U.S. net farm income of $182.8 billion, which was an all-time record level. The majority of this projected decrease is expected to come from a reduction in government support payments while cash receipts for crops is projected to decrease by 4 percent and cash expenses are projected to increase by 4 percent.
• 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 abundant 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 and provides 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. In November 2023, Congress voted to extend the Farm Bill, which is now set to expire at the end of September 2024.
• Changes to U.S. income tax laws 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 100 percent of the cost of equipment to be treated as an expense in the year of purchase rather than amortized over its useful life. This benefit is being phased out by 20 percent per year over a five-year period, beginning in 2023. For calendar 2023, the allowable deduction is 80 percent of the cost of equipment and in calendar 2024 the allowable deduction drops to 60 percent.
• 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 June 21, 2023, the U.S. Environmental Protection Agency (“EPA”) announced a final rule setting biofuel volume requirements for the Renewable Fuels Standard (RFS) program for 2023, 2024, and 2025. The final volume requirements reflect an increase in total gallons of renewable fuel of approximately 3 to 4 percent in each successive year.
• 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.

Demand for irrigation equipment in the U.S. has increased over the same prior year period as 2023 net farm income levels, although lower than historically high 2022 levels, still support farmer profitability and demand for investment. The Company has been able to maintain its pricing while supply chain constraints, such as steel and other raw material costs as well as freight and logistics costs, have eased somewhat compared to the same prior year period.

The most significant opportunities for growth in irrigation sales over the next several years continue to be in international markets where irrigation use is less developed and demand is driven not only by commodity prices and net farm income, but also by food security, water scarcity and population growth. While international irrigation markets remain active with opportunities for further development and expansion, regional political and economic factors, including armed conflict, currency conditions and other factors can create a challenging environment. The Company continues to monitor the Ukraine and Russia conflict for both short and long-term implications and has suspended new business activity in Russia and Belarus since February 2022. Sales with Russian, Ukrainian and Belarusian customers historically have represented less than 5 percent of consolidated revenues. Additionally, international results are heavily dependent upon project sales which tend to fluctuate and can be difficult to forecast accurately.

The infrastructure business continues to be driven by the Company's transportation safety products, the demand for which largely depends on government spending for road construction and improvements. The enactment of the Infrastructure Investment and Jobs Act in November 2021 marked the largest infusion of federal investment into infrastructure projects in more than a decade. This legislation introduced $110 billion in incremental federal funding, planned for roads, bridges, and other transportation projects. The Company expects this additional funding to support higher demand in the U.S. for its transportation safety products.

The backlog of unshipped orders at November 30, 2023 was $86.8 million compared with $129.6 million at November 30, 2022. The irrigation backlog was lower compared to the prior year while the infrastructure backlog was comparable to the prior year. 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.

Results of Operations

For the Three Months ended November 30, 2023 compared to the Three Months ended November 30, 2022

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, 2023 and 2022. It should be read together with the industry segment information in Note 14 to the condensed consolidated financial statements:

($ in thousands)

(1) Includes $7.9 million and $7.4 million of corporate operating expenses for the three months ended November 30, 2023 and 2022, respectively.

Revenues

Operating revenues for the three months ended November 30, 2023 decreased 8 percent to $161.4 million from $176.2 million for the three months ended November 30, 2022, as irrigation revenues decreased $11.9 million and infrastructure revenues decreased $2.9 million. The irrigation segment provided 87 percent of the Company’s revenue during the three months ended November 30, 2023 as compared to 86 percent for the three months ended November 30, 2022.

North America irrigation revenues for the three months ended November 30, 2023 of $89.4 million increased $5.4 million, or 7 percent, from $83.9 million for the three months ended November 30, 2022. The increase resulted primarily from the impact of higher unit sales volume that was partially offset by the impact of a less favorable mix of shorter machines compared to the prior year first quarter. Average selling prices remained stable and were comparable to the same prior year period.

International irrigation revenues for the three months ended November 30, 2023 of $50.8 million decreased $17.3 million, or 25 percent, from $68.1 million for the three months ended November 30, 2022. The decrease resulted primarily from lower sales in Brazil and Argentina compared to record sales in those markets during the same prior year period. Changes in the timing of funding under the financing program in Brazil contributed to lower sales volumes in the quarter. Revenue in the current year also benefited from the favorable effects of foreign currency translation of approximately $1.8 million compared to the same prior year period.

Infrastructure segment revenues for the three months ended November 30, 2023 of $21.2 million decreased $2.9 million, or 12 percent, from $24.1 million for the three months ended November 30, 2022. The decrease resulted from lower Road Zipper System sales compared to the same prior year period due to a project in the same prior year period that did not repeat. This decrease was largely offset by higher Road Zipper System lease revenue and higher sales of road safety products.

Gross Profit

Gross profit for the three months ended November 30, 2023 of $49.9 million decreased 6 percent from $53.0 million for the three months ended November 30, 2022. The decrease in gross profit resulted primarily from lower revenues in both segments, the impact of which was partially offset by improved gross margin. Gross margin was 30.9 percent of sales for the three months ended November 30, 2023 compared with 30.1 percent of sales for the three months ended November 30, 2022. Increased gross margin in infrastructure resulted primarily from a more favorable margin mix of revenues with higher Road Zipper System lease revenues while irrigation gross margins were similar to the same prior year period.

Operating Expenses

Operating expenses of $28.8 million for the three months ended November 30, 2023 increased $0.4 million, or 1 percent, compared with $28.4 million for the three months ended November 30, 2022.

Other Expense, net

The Company recorded other expense of $0.1 million for the three months ended November 30, 2023 compared to $0.6 million for the three months ended November 30, 2022. The change resulted primarily from higher interest income compared to the same prior year period.

Income Taxes

The Company recorded income tax expense of $6.0 million and $5.8 million for the three months ended November 30, 2023 and 2022, respectively. The effective income tax rate was 28.5 percent and 24.1 percent for the three months ended November 30, 2023 and 2022, respectively. The higher effective tax rate reflects an increased proportion of earnings in higher rate foreign jurisdictions in the current year period. In addition, the same prior year period benefited from the impact of larger discrete items.

Liquidity and Capital Resources

The Company's cash, cash equivalents, and marketable securities totaled $175.7 million at November 30, 2023 compared with $110.6 million at November 30, 2022 and $166.3 million at August 31, 2023. 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 securities. 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 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 $70.8 million, $51.3 million, and $64.6 million as of November 30, 2023, November 30, 2022, and August 31, 2023, 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 $359.3 million at November 30, 2023, as compared with $332.8 million at November 30, 2022 and $351.4 million at August 31, 2023. Cash provided by operating activities totaled $21.9 million during the three months ended November 30, 2023, compared to cash provided by operating activities of $4.7 million during the three months ended November 30, 2022. This change was primarily due to a reduction in receivables in the current year as compared to the same prior year period.

Cash flows used in investing activities totaled $18.2 million during the three months ended November 30, 2023 compared to $4.2 million during the three months ended November 30, 2022. The increase resulted primarily from purchases of marketable securities. Purchases of property, plant, and equipment were $6.9 million, compared to $3.8 million in the same prior year period.

Cash flows used in financing activities totaled $5.4 million during the three months ended November 30, 2023 compared to cash flows used in financing activities of $6.2 million during the three months ended November 30, 2022. The value of common stock withheld to cover payroll obligations in the current year amounted to $1.6 million compared to $2.5 million in 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 2024 are expected to be between $35.0 million and $40.0 million, including equipment replacement, productivity improvements, new product development and commercial growth investments. The increase over recent levels of capital expenditures is primarily related to modernization and productivity improvements planned at certain manufacturing facilities. 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 2024, the Company paid a quarterly cash dividend to stockholders of $0.35 per common share, or $3.9 million, compared to a quarterly cash dividend of $0.34 per common share, or $3.7 million, in the first quarter of fiscal 2024.

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, 2023 or 2022. The remaining amount available under the repurchase program was $63.7 million as of November 30, 2023.

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. 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 August 26, 2026. The Company intends to use borrowings under the Revolving Credit Facility for working capital purposes and to fund acquisitions. At November 30, 2023 and 2022, 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, 2023, the Company had the ability to borrow up to $50.0 million under the Revolving Credit Facility. The Revolving Credit Facility may be increased by up to an additional $50.0 million at any time, subject to additional commitment approval. Borrowings under the Revolving Credit Facility bear interest at a variable rate equal to the Secured Overnight Financing Rate (“SOFR”) plus a margin of between 100 and 210 basis points depending on the Company’s leverage ratio then in effect (which resulted in a variable rate of 6.68 percent at November 30, 2023), 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 on the unused portion of the Revolving Credit Facility. The fee is between 0.125 percent and 0.2 percent on the unused balance depending on the Company’s leverage ratio then in effect (which resulted in a fee of 0.125 percent at November 30, 2023).

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 November 30, 2023 and 2022, the Company was in compliance with all financial loan covenants contained in its credit arrangements in place as of each of those dates.

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, 2023.

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, 2023.

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 effective as of November 30, 2023.

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.

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 discussions 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, 2023.