Lindsay Corp. Shares Drop on Dismal Earnings

Lower crop prices, coupled with the elimination of enhanced Section 179 tax depreciation benefit, led to a 36% fall to $1.28 per share in third-quarter fiscal 2014 (ended May 31, 2014) earnings of Lindsay Corporation (LNN). Reported earnings also lagged the Zacks Consensus Estimate of $1.39 per share.

Shares of Lindsay Corp. fell nearly 5% and closed at $83.81 after posting disappointing third-quarter results.

Operational Update

The manufacturer of irrigation equipment reported a 22.6% year-over-year decline in revenues to $169.9 million, missing the Zacks Consensus Estimate of $184 million. The fall was led by a 26% drop in total irrigation equipment revenues, while infrastructure revenues increased 13%. Corn prices have declined roughly 30% as compared with a year ago. Domestic irrigation revenues and international irrigation revenues both registered a decline of 26%.

Cost of operating revenues decreased 22% year over year to $122 million. Gross profit declined 23.5% to $48 million with gross margin contracting 30 basis points (bps) to 28.4%. Irrigation margin dropped less than 1 percentage point due to fixed cost deleverage on lower sales. Infrastructure margin increased around 3 percentage points due to favorable sales mix and leverage on higher sales.

Operating expenses went down 2% year over year to $23 million in the quarter due to reduction in incentive compensation and bad debt expenses. Operating income in the quarter declined 36% year over year to $25 million. Operating margin in the quarter contracted 320 bps to 14.8% from 18% in the prior-year quarter.

Lindsay Corp.’s backlog at the quarter-end was $73.6 million, compared with $80 million at the end of the year-ago quarter. Decrease in backlog in the international irrigation market was offset by the rise in U.S. irrigation and infrastructure backlog. The higher U.S. irrigation backlog reflects replacement of machine orders received at the end of the quarter, driven by the spring storms.

The infrastructure backlog includes a $12.8 million Road Zipper System order from the Golden Gate Bridge which is expected to be recognized in revenues in fiscal 2015.

Financial Position

Cash and cash equivalents were $182 million at the end of the third quarter of fiscal 2014 versus $170 million at the end of the third quarter of fiscal 2013. The company generated $65.9 million in cash from operating activities for the period of nine months ended May 31, 2014 compared with $40.9 million for the period of nine months ended May 31, 2013. Lindsay Corp. has no debt at present.

During the quarter the company repurchased 129,104 shares for $11.2 million.

Guidance

Lindsay Corp. expects capital expenditures for 2014 to be in the range of $10 to $15 million, which is down significantly from the investments made at the beginning of the year due to project timing. The projects which have been delayed are generally capacity expansion projects in developing markets, deferred due to government approval processes or regional conflicts.

The company will also continue to execute the capital allocation plan announced in Jan 2014. However, it anticipates a continuation of lower agricultural equipment demand in the near term.

Our Take

Lindsay Corp. will benefit from the expansion of its global irrigation equipment manufacturing capacity. Sustained growth in the infrastructure business and development of new Road Zipper system will also drive growth. In addition, rise in population, increased food production and efficient water use bodes well for the company’s growth in the long run.

The company will continue to invest in growth and productivity, both organically and through acquisition based on a strong balance sheet position. Lindsay Corp. remains optimistic about growth in global applications of technologies and a multi-year highway bill with similar or improved funding levels which would likely benefit the company’s performance.

However, lower crop prices are likely to pressure irrigation demand during the rest of the year. Moreover, political instability in Iraq has made it more difficult for Lindsay Corp. to complete its contract, on which it had a total exposure of $4.4 million, in the country. The company has not provided a reserve however, it will continue to assess the situation as developments in the country evolve.

The current forecast for 2014 U.S. net farm income is down 27% from 2013. The prices of metals can also have a significant impact on profit. Moreover, lower commodity prices and lack of visibility into the primary selling season for irrigation equipment remain concerns.

Omaha, NE-based Lindsay Corp. is a leading designer and manufacturer of self-propelled center pivot and lateral move irrigation systems, which are primarily used for agriculture purposes to increase or stabilize crop production while saving water, energy and labor at the same time.

Lindsay Corp. carries a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the sector include Kubota Corporation (KUBTY), Komatsu Ltd. (KMTUY) and Caterpillar Inc. (CAT). While Kubota Corporation and Komatsu carry a Zacks Rank #1 (Strong Buy), Caterpillar holds a Zacks Rank #2 (Buy).

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