Lindsay Corp. (LNN), a supplier of irrigation and infrastructure equipment to farmers, is trading lower today after reporting a sizeable earnings miss for Q2 (Feb). The company was profitable in the quarter on an adjusted EPS basis, but at just $0.02, that was much lower than market expectations. Operating revenue fell 16.2% year/year to $109.2 mln, which also was below expectations.
So what happened? North America irrigation sales volumes were significantly lower than anticipated as the unresolved US-China trade dispute contributed to a further decline in farmer sentiment. Along with that, Road Zipper System (LNN's moveable barrier system) sales were also weak. All of this contributed to a disappointing quarter. A silver lining was that LNN saw a yr/yr increase in its international irrigation sales.
Both segments saw a decline in sales. Irrigation segment revenue fell 14% yr/yr to $95.8 mln. Lower irrigation equipment sales volume was partially offset by higher average selling prices and higher revenue from engineering project services. International irrigation revenue rose 15% yr/yr to $38.1 mln, so that was good to see. It would have been +22% excluding FX headwinds. Irrigation segment operating margin declined to 7.9% from 10.2% last year due to negative margin mix from lower equipment sales volumes in North America, higher warranty costs and operational inefficiencies.
Infrastructure segment revenue fell 27% yr/yr to $13.4 mln. The decrease resulted primarily from lower Road Zipper System sales along with slightly lower sales of road safety products. The infrastructure segment reported a slight loss on an operating basis.
Taking all of this into account, LNN does not expect to see meaningful improvement in farmer sentiment while the US-China trade uncertainty persists. On the positive side, market conditions in Brazil continue improving and international project markets remain active. Also, there are early signs of success in its Road Zipper System strategy to be more involved in the planning stage of major highway construction projects.
In sum, this was a rough quarter for Lindsay. There is definitely a cloud over the farming sector these days. Most farmers are concerned about the US trade war with China, which is a big consumer of US production. For example, China imports a lot of soybeans from the US to feed Chinese hogs. If a trade deal is not reached, this would have a big negative impact on the export business for US farmers. The US government has provided a $12 bln bailout package to farmers, but that is not a long term solution and it still means farmers are not buying irrigation equipment from companies like Lindsay.
Trade wars are not the only concern as the impact of the recent widespread flooding in the Midwest is still unknown at this time. This is also contributing to farmers being hesitant to buy new equipment. Lindsay is known for being pretty volatile around earnings as the company does not provide specific revenue/EPS guidance. And it was a big miss this time. If a trade deal can be worked out, that would be a nice positive for Lindsay, but until the issue gets resolved, expect farmers to be hesitant about making investments in equipment.