Lindsay Corp (LNN) SEC Quarterly Report (10-Q) for Q2 2018

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

(MARK ONE)

For the quarterly period ended May 31, 2018

OR

Commission File Number 1-13419

Lindsay Corporation

(Exact name of registrant as specified in its charter)

402‑829-6800

(Registrant's telephone number, including area code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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:  

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 22, 2018, 10,757,318 shares of the registrant's common stock were outstanding.

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Lindsay Corporation

INDEX FORM 10-Q

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Part I – FINANC IAL INFORMATION

ITEM 1 - Financial Statements

LINDSAY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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LINDSAY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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LINDSAY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes to condensed consolidated financial statements .

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LINDSAY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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LINDSAY CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Condensed Consolidated Financial Statements

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, 2017.

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.  Certain reclassifications have been made to prior financial statements and notes to conform to the current year presentation.

Note 2 – New Accounting Pronouncements

Recent Accounting Guidance Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date. The standard provides a single model for revenue arising from contracts with customers and supersedes current revenue recognition guidance. The ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of goods or services. The ASU will replace existing revenue recognition guidance in U.S. GAAP and becomes effective in the first quarter of the Company's fiscal 2019. Early adoption is permitted only in fiscal 2018. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment.  

The Company is continuing to evaluate the impact of the ASU on the Company's operations, accounting policies, internal control over financial reporting, consolidated financial statements, and disclosures. The Company has identified that the key changes in the ASU that could potentially impact the Company's revenue recognition relates to the allocation of contract revenues between various products and services, the timing of when those revenues are recognized, and the deferral of incremental costs to obtain a contract. Based on the current status of the evaluation, the adoption of the standard is not expected to have a material effect on the amounts or timing of revenue recognition.  The Company expects to adopt the new standard using the modified retrospective approach effective September 1, 2018.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard requires a lessee to recognize assets and liabilities arising from an operating lease on the balance sheet. Additionally, companies are permitted to make an accounting policy election to not recognize lease assets and liabilities for leases with a term of 12 months or less.  The effective date of ASU No. 2016-02 will be the first quarter of the Company's fiscal 2020 with early adoption permitted. The Company is currently in the assessment phase and is evaluating the effect that adopting this standard will have on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, Presentation of Net Periodic Benefit Cost Related to Defined Benefit Plans , which amends the income statement presentation requirements for the components of net periodic benefit cost for an entity's defined benefit pension and post-retirement plans. ASU 2017-07 is effective in the first quarter of the Company's fiscal 2019 with early adoption permitted. The Company does not believe this ASU will have a material impact on the consolidated financial statements.

In August 2017, the FASB issued ASU 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 2017-12 is effective in the first quarter of the Company's fiscal 2020 with early adoption permitted. The Company does not believe the adoption of this ASU will have a material impact on the consolidated financial statements.

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In February 2018, the FASB issued ASU 2018- 02, Income S tatement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from A ccumulated Other Comprehensive I ncome , which provides entities with the option to eliminate the stranded tax effects as sociated with the change in tax rate s under the U.S. Tax Cuts and Jobs Act of 2017 ("U.S. Tax Reform") through a reclassification of the stranded tax effects from accumulated other comprehensive income ("AOCI") to retained earnings . The amount of the reclassification would be calculated on the basis of the difference between the historical and newly enacted tax rates for deferred tax liabilities and assets related to items within AOCI. ASU 2018-02 is effective in the first quarter of the Company's fiscal 2020 with early adoption permitted . C ompanies should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate from U.S. Tax Reform is recognized. The Company d oes not believe the adoption of this ASU will have a material impact on the consolidated financial statements.

Recent Accounting Guidance Adopted

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), Income Tax Accounting Implications of the Tax Cuts and Jobs Act , which provides guidance on accounting for the impacts of U.S. Tax Reform.  SAB 118 directs companies to consider the impact of U.S. Tax Reform as provisional when it does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting under Accounting Standards Codification ("ASC") Topic 740, Income Taxes .  The Company has not yet completed its accounting for the tax effects of the U.S. Tax Reform; however it has made a reasonable, but provisional, estimate of the effects as more fully explained in Note 6 to the condensed consolidated financial statements.  

Note 3 – 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.  

The following table shows the computation of basic and diluted net earnings per share for the three and nine months ended May 31, 2018 and May 31, 2017:

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:

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Note 4 – Inventories

Inventories consisted of the following as of May 31, 2018, May 31, 2017, and August 31, 2017:

Note 5 – Assets and Liabilities Held-For-Sale

During the third quarter of fiscal 2018, the Company completed a portfolio review of business investments and has committed to a plan of divestiture of its filtration and pump systems businesses as well as a Company-owned irrigation dealership, all of which are reported in the Irrigation segment.  The Company has determined that the divestiture of these businesses does not meet the criteria for discontinued operations presentation as the commitment to divest these businesses does not represent a strategic shift that will have a major effect on its operations and financial results.  As a result of this classification, the assets and liabilities of these businesses are separately presented within the captions "Assets held-for-sale" and "Liabilities held-for-sale" in the condensed consolidated balance sheet as of May 31, 2018.  Assets and liabilities held-for-sale are recorded at their estimated selling price less costs to sell.  The Company has estimated that value for certain of these businesses to be less than their existing carrying value and has recorded an expense of $6.0 million included in general and administrative expense on the condensed consolidated statement of earnings in the fiscal quarter ended May 31, 2018.  Subsequent to the end of the fiscal quarter, the Company entered into a definitive agreement to sell its filtration and pump systems businesses with an anticipated closing date in the fourth fiscal quarter.  The Company expects the sale of the Company-owned irrigation dealership to close before the end of the current calendar year.

The carrying amounts of the major classes of assets and liabilities that were classified as held-for-sale at May 31, 2018, are as follows:

Note 6 – Income Taxes

The Company recorded income tax expense of $7.1 million and $5.2 million for the three months ended May 31, 2018 and May 31, 2017, respectively.  The Company recorded income tax expense of $12.6 million and $8.3 million for the nine months ended May 31, 2018 and May 31, 2017, respectively.  The effective income tax rate was 28.5 percent and 33.1 percent for the fiscal year-to-date periods ended May 31, 2018 and May 31, 2017, respectively.  The Company also recorded $4.7 million of discrete income tax expense for the fiscal year-to-date period ended May 31, 2018 as discussed further below.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation through U.S. Tax Reform which significantly revised the U.S. corporate income tax structure by, among other things, lowering the U.S. corporate income

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tax rate, repealing certain deductions, and changing the way foreign earnings are taxed. U.S. GAAP requires that the impact of tax legislation be recogni zed in the period in which the law is enacted. As such, the Company's estimated annual effective income tax rate for the current fiscal year includes the impact of the reduction of the U.S. corporate income tax rate from 35% to 21% beginning January 1, 201 8. As an August fiscal year end filer, the lower corporate income tax rate will be phased in resulting in a blended U.S. corporate income tax rate of 25.7% for the fiscal year ending August 31, 2018 (effectively the four months of September through Decembe r 2017 at 35% and the eight months of January through August 2018 at 21%).

Income tax expense for the three and nine months ended May 31, 2018 includes discrete items related to the impact of U.S. Tax Reform as required by ASC Topic 740. These include a one-time mandatory deemed repatriation transition tax on previously untaxed accumulated and current earnings and profits of the Company's foreign subsidiaries. The Company made a reasonable estimate and recorded a provisional deemed repatriation transition tax obligation of $1.8 million. The Company continues to gather information to more precisely compute the amount of the deemed repatriation transition tax.

The Company also remeasured or revalued its deferred income tax assets and liabilities during its fiscal 2018 second quarter, resulting in a provisional deferred income tax expense of $0.8 million, and an additional $0.4 million in its fiscal 2018 third quarter. This provisional amount incorporates assumptions and estimates made based upon the Company's current interpretations of U.S. Tax Reform and may change as the Company receives additional implementation guidance, and as data becomes available allowing for a more accurate scheduling of the deferred income tax assets and liabilities.  

The Company's collective provisional estimates of $3.0 million of incremental income tax expense recorded during the second and third quarters of fiscal 2018 represents all known and estimable impacts of U.S. Tax Reform, and may change as the Company receives additional clarification and implementation guidance, and as data becomes available. The accounting is expected to be finalized by the end of fiscal 2018.

Certain other provisions included in U.S. Tax Reform have later effective dates for fiscal year filers and may have an impact on the Company's future estimated annual effective income tax rate. Other future adjustments to income tax expense may include the impact of actions the Company may take as a result of U.S. Tax Reform.

The tax effects of discrete items related to U.S. Tax Reform as described above, in addition to tax impacts of $1.7 million related to a non-deductible carrying value adjustment on businesses held-for-sale, were recognized in the interim periods in which the events occurred for the three and nine months ended May 31, 2018.  The Company recorded no material discrete items for the three and nine months ended May 31, 2017.

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:

Principal payments on the debt are due as follows:

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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:

Accumulated other comprehensive income included realized and unrealized after-tax gains of $4.4 million, $5.1 million, and $3.9 million at May 31, 2018, May 31, 2017, and August 31, 2017, respectively, related to derivative contracts designated as hedging instruments.

Net Investment Hedging Relationships

The amount of gain (loss) recognized in other comprehensive income is as follows:

For the three months ended May 31, 2018 and May 31, 2017, the Company settled foreign currency forward contracts resulting in an after-tax net loss of $0.8 million and $0.3 million, respectively, which were included in other comprehensive income as part of a currency translation adjustment.  For the nine months ended May 31, 2018 and May 31, 2017, the Company settled foreign currency forward contracts resulting in an after-tax net loss of $2.1 million and an after-tax net gain of $0.6 million, respectively, which were included in other comprehensive income as part of a currency translation adjustment. There were no amounts recorded in the condensed consolidated statements of earnings related to ineffectiveness of foreign currency forward contracts related to net investment hedges for the three and nine months ended May 31, 2018 and May 31, 2017.

At May 31, 2018, May 31, 2017, and August 31, 2017, the Company had outstanding foreign currency forward contracts to sell a notional amount of 32.8 million Euro, 32.9 million Euro, and 32.8 million Euro, respectively, at fixed prices to settle during the next fiscal quarter. At May 31, 2018, May 31, 2017, and August 31, 2017, the Company had an outstanding foreign currency forward contract to sell a notional amount of 43.0 million South African Rand at fixed prices to settle during the next fiscal quarter.  The Company's foreign currency forward contracts qualify as hedges of a net investment in foreign operations.

Derivatives Not Designated as Hedging Instruments

The Company generally does not elect hedge accounting treatment for derivative contracts related to future settlements of foreign denominated intercompany receivables and payables.  If the Company does not elect hedge accounting treatment for a derivative, the Company carries the derivative at its fair value in the condensed consolidated balance sheets and recognizes any subsequent changes in its fair value during a period through earnings in the condensed consolidated

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statements of earnings.  At May 31 , 20 18 , May 31 , 2017 , and August 31, 2017, the Company had notional value of $ 5.9  million, $ 3.1  million, and $5.0 million, respectively, of U.S. dollar equivalent of foreign currency forward contracts outstanding that are not designated as hedging instruments.

Note 9 – 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, 2018, May 31, 2017, and August 31, 2017, respectively. There were no transfers between any levels for the periods presented.

There were no required fair value adjustments for assets and liabilities measured at fair value on a non-recurring basis for the three and nine months ended May 31, 2018 or May 31, 2017.

Note 10 – 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 Litigation

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 intends to vigorously defend each of these allegations.  The Company maintains insurance to mitigate the impact of adverse judgment exposures in the current product liability cases.  Based on the information currently available to the Company, the Company does not believe that a loss is probable in any of these lawsuits; therefore, no accrual has been included in the Company's condensed consolidated financial statements.  While it is possible that a loss may be incurred, the Company is unable to estimate a range of potential loss due to the complexity and current status of these lawsuits.

Environmental Remediation

In 1992, the Company entered into a consent decree with the U.S. Environmental Protection Agency (the "EPA") in which the Company committed to remediate environmental contamination of the groundwater that was discovered from 1982 through 1990 at and adjacent to its Lindsay, Nebraska facility (the "site").  The site was added to the EPA's list of priority superfund sites in 1989.  Between 1993 and 1995, remediation plans for the site were approved by the EPA and fully implemented by the Company.  Since 1998, the primary remaining contamination at the site has been the presence of

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volatile organic compounds in the soil and groundwater.  To date, the remediation process has consisted primarily of drilling wells into the aquifer an d pumping water to the surface to allow these contaminants to be removed by aeration.

In fiscal 2012, the Company undertook an investigation to assess further potential site remediation and containment actions.  In connection with the receipt of preliminary results of this investigation and other evaluations, the Company estimated that it would incur $7.2 million in remediation of source area contamination and operating costs and accrued that undiscounted amount.  In addition to this source area, the Company determined that volatile organic compounds also existed under one of the manufacturing buildings on the site.  Due to the location, the Company had not yet determined the extent of these compounds or the extent to which they were contributing to groundwater contamination.  Based on the uncertainty of the remediation actions that might be required with respect to this affected area, the Company believed that meaningful estimates of costs or range of costs could not be made and accordingly were not accrued at that time.

In December 2014, the EPA requested that the Company prepare a feasibility study related to the site, including the area covered by the building, which resulted in a revision to the Company's remediation timeline.  In the first quarter of fiscal 2015, the Company accrued $1.5 million of incremental operating costs to reflect its updated timeline.  

The Company began soil and groundwater testing in preparation for developing this feasibility study during the first quarter of fiscal 2016. During the second quarter of fiscal 2016, the Company completed its testing which clarified the extent of contamination, including the identification of a source of contamination near the manufacturing building that was not part of the area for which reserves were previously established.  The Company, with the assistance of third-party environmental experts, developed and evaluated remediation alternatives, a proposed remediation plan, and estimated costs.  Based on these estimates of future remediation and operating costs, the Company accrued an additional $13.0 million in the second quarter of fiscal 2016 and included the related expenses in general and administrative expenses in the condensed consolidated statements of earnings.  

The current estimated aggregate accrued cost of $16.8 million is based on consideration of several remediation options that would use different technologies, each of which the Company believes could be successful in meeting the long-term regulatory requirements of the site. The Company participated in a meeting with the EPA and the Nebraska Department of Environmental Quality (the "NDEQ") during the third quarter of fiscal 2016 to review remediation alternatives and proposed plans for the site and submitted its remedial alternatives evaluation report to the EPA in August 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 further discussions with the EPA and the NDEQ, the Company anticipates that a definitive plan will not be agreed upon until later in fiscal 2018 or beyond.

The Company accrues the anticipated cost of investigation and remediation when the obligation is probable and can be reasonably estimated. Costs are charged against the accrual in the period in which they are paid. 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 currently available, 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 become 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 vary from the amounts currently accrued for this expense.  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 balance sheet as of May 31, 2018, May 31, 2017, and August 31, 2017:

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Note 1 1 – Warranties

The following table provides the changes in the Company's product warranties:

Note 12 – 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, stock appreciation rights, performance shares, and performance stock units 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 $1.0 million and $1.0 million for the three months ended May 31, 2018 and May 31, 2017, respectively.  Share-based compensation expense was $2.9 million and $2.8 million for the nine months ended May 31, 2018 and May 31, 2017, respectively.  

Note 13 – Other Current Liabilities

Note 14 – Share Repurchases

There were no shares repurchased during the three and nine months ended May 31, 2018 and May 31, 2017 under the Company's share repurchase program. The remaining amount available under the repurchase program was $63.7 million as of May 31, 2018.

Note 15 – 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 and nine months ended May 31, 2018 and May 31, 2017.

Irrigation - This reporting segment includes the manufacture and marketing of center pivot, lateral move, and hose reel irrigation systems as well as various water pumping stations, controls, filtration solutions and machine-to-machine technology.  The irrigation reporting segment consists of three operating segments that have similar economic

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characteristics and meet the aggregation criteria, including similar products, production processes, type or class of customer and methods for distribution.

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 manufacture and sale of large diameter steel tubing and railroad signals and structures; and the provision of outsourced manufacturing and production services.  The infrastructure reporting segment consists of one operating segment.

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ITEM 2 ‑ Management's Discussion and Analysis o f Financial Condition and Results of Operations