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| LNN > SEC Filings for LNN > Form 10-Q on 14-Jan-2004 | All Recent SEC Filings |
14-Jan-2004
Quarterly Report
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 and Section 21E of the Securities Exchange Act of 1934. Statements that are not historical are forward-looking and reflect expectations for future Company conditions or performance. In addition, forward-looking statements may be made orally or in press releases, conferences, reports, on the Company's worldwide 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", and similar expressions generally identify forward-looking statements. The entire section entitled "Fiscal 2004 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 year ended August 31, 2003. 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, as well as others not now anticipated. The risks and uncertainties described herein 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 financial statements in conformity with accounting principles generally accepted in the United States of America, 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. These critical accounting policies are described in Note A to the Consolidated Financial Statements in the Company's Form 10-K for fiscal 2003. Management periodically re-evaluates and adjusts its critical accounting policies as circumstances change. However, there were no significant changes in the Company's critical accounting policies during the three-months ended November 30, 2003.
RESULTS OF OPERATIONS
The following section presents an analysis of the Company's consolidated operating results displayed in the consolidated statements of operations for the three-months ended November 30, 2003 compared to three-months ended November 30, 2002. It should be read together with the industry segment information in Note 8 to the financial statements:
FOR THE THREE MONTHS ENDED
--------------------------
PERCENT
NOVEMBER NOVEMBER INCREASE
($ IN THOUSANDS) 2003 2002 (DECREASE)
---------------- ---- ---- ----------
Consolidated
Operating revenues ....... $36,513 $33,426 9.1%
Cost of operating revenues $29,159 $26,451 10.2
Gross profit ............ $ 7,354 $ 7,011 4.9
Gross margin ............. 20.1% 21.0%
Operating Expenses ....... $ 6,620 $ 5,816 13.8
Operating income ......... $ 734 $ 1,195 (38.6)
Operating margin ......... 2.0% 3.6%
Interest income, net ..... $ 424 $ 423 (0.2)
Other income, net ....... $ 449 $ 96 367.7
Income tax provision ..... $ 514 $ 521 (1.3)
Effective income tax
rate...................... 32.0% 30.4%
Net earnings ............. $ 1,093 $ 1,193 (8.4)
Irrigation Equipment Segment
Operating revenues ....... $33,970 $30,631 10.9
Operating income ......... $ 4,240 $ 4,080 3.9
Operating margin ......... 12.5% 13.3%
Diversified Products Segment
Operating revenues ...... $ 2,543 $ 2,831 (10.2)
Operating income ......... $ 247 $ 291 (15.1)
Operating margin ......... 9.7% 10.3%
REVENUES
Operating revenues for the three-months ended November 30, 2003 increased by $3.1 million or 9% over the same prior year period. This increase was primarily attributable to improved domestic irrigation equipment revenues, which increased by $3.0 million or 14% over the same prior year period. Revenues remained strong in most of the Midwest market and improved in the Northwest market, after a downturn last year. Our domestic irrigation revenues are influenced by current and anticipated levels of net cash farm income. Conditions have been generally favorable in many of the Company's domestic markets due to stable or increasing prices for many farm commodities (including corn, wheat, soybeans and cotton) and anticipated strength in these commodities based on projected ending stock levels. Other factors, such as continued low interest rates, additional first-year depreciation for capital investments, and stable land values also contributed to increased revenues from domestic irrigation sales.
International irrigation equipment revenues for the three-months ended November 30, 2003 increased by $296,000 or 3% compared to the same prior year period. These revenues include both the export sales of equipment manufactured in the United States and the sales of the Company's manufacturing operations in France, Brazil and South Africa. Revenues from these foreign operations increased $1.5 million or 41% over the same prior year period. Approximately 50% of the increase in revenues from foreign operations reflects the strengthening of the Euro, Brazilian Real, and the South African Rand against the U.S. dollar. The increase in revenues from the Company's foreign operations was partially offset by a $1.0 million decrease in revenues from export sales. This decrease was largely due to lower sales in the Middle East region because of the war in Iraq and general political unrest in the region. In total, international irrigation revenues for the three-months ended November 30, 2003, equaled 26.4% of total revenues, compared to 27.9% of revenues in the same prior year period.
Diversified manufacturing revenues for the three-months ended November 30, 2003 decreased $288,000 or 10% compared to the same prior year period. Revenues in this segment depend to a large degree on orders from a relatively small number of customers. During the quarter, one particular customer delayed shipments that had been originally scheduled for delivery during the three-months ended November 30, 2003, accounting for most of the decrease in revenues in this segment compared to the same prior year period.
GROSS MARGIN
The Company's gross margin decreased to 20.1% in the three-months ended November 30, 2003 from 21.0% for the same prior year period. Margins were lower due to the mix of center pivot sales in the United States and due to higher steel costs. Gross margin was also reduced by a shift in the revenue mix between domestic sales and international sales. Revenues from the Company's foreign operations, which currently have lower gross margins than its U.S. operations, increased to 14% of total sales for the quarter compared with 11% of sales in the same prior year period. The Company's gross margins for the quarter ended November 30 are typically lower than the full year gross margins due to seasonal promotional and pricing programs.
OPERATING MARGIN
The Company's operating margin decreased to 2.0%, during the three-months ended November 30, 2003, from 3.6% for the same prior year period. This decrease is a direct result of an $804,000 (14%) increase in the Company's operating expenses during three months ended November 30, 2003. This increase reflects a $415,000 (16%) increase in general and administrative expenses and a $227,000 (9%) increase in selling expenses compared to the prior period. Higher health insurance costs and the operation of the Company's South African facility for a full quarter in 2003 were major contributors to these cost increases. In addition, engineering and research expense increased by $162,000 (27%) reflecting higher investments by the Company in new product development. The Company expects its operating margins to improve for the remainder of fiscal 2004 as it leverages operating expenses over higher sales volumes.
INTEREST INCOME, OTHER INCOME AND TAXES
Interest income during the three-months ended November 30, 2003 of $424,000 was comparable to the same prior year period.
Other income during the three-months ended November 30, 2003 increased by $353,000 over the same prior year period, primarily reflecting higher foreign currency transaction gains associated with the strengthening of the EURO and South African Rand against the U.S. dollar.
The effective tax rate during the three-months ended November 30, 2003 was 32.0% compared to 30.4% for the same prior year period. The increased effective tax rate reflects a combination of higher statutory tax rates applicable to the Company and the lower mix of tax-exempt interest income to total earnings before income taxes. The Company benefits from an effective tax rate which is lower than the combined federal and state statutory rates primarily due to the federal tax-exempt status of interest income from its municipal bond investments.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires cash for financing its receivables and inventories, paying operating costs and capital expenditures, and for dividends. Historically, the Company has met its liquidity needs and financed all capital expenditures exclusively from its available cash and funds provided by operations. Cash flows used in operations totaled $5.7 million in three-months ended November 30, 2003 compared to $3.5 million during the same prior year period.
Cash flows used in investing activities of $2.9 million for the three-months ended November 30, 2003 compared to $4.7 million for the same prior year period. The cash flows used in investing activities were primarily attributable to purchases of marketable securities and capital expenditures, partially offset by proceeds from the maturity of marketable securities. Capital expenditures were $743,000 during the three-months ended November 30, 2003 compared to $784,000 during the same prior year period. Capital expenditures were used primarily for updating manufacturing plant and equipment and further automating the Company's facilities. Capital expenditures for fiscal 2004 are expected to be approximately $3.0 to $4.0 million and will be used to improve the Company's facilities, expand its manufacturing capabilities, and increase productivity. The Company may also use cash to finance business acquisitions and stock repurchases from time to time.
The Company has an unsecured revolving line of credit with a commercial bank under which it can borrow up to $10 million through January 31, 2004. Proceeds from this line of credit, if any, may be used for working capital and general corporate purposes, including stock repurchases. There have been no borrowings made under the revolving line of credit. Borrowings, if any, bear interest at a rate equal to one percent per annum under the rate in effect from time to time and designated by the commercial bank as its National Base Rate (4.00% at November 30, 2003). The Base Rate will not be less than 4.00%. The Company expects to renew this line of credit on substantially similar terms at the expiration of its term.
The Company's cash and marketable securities totaled $56.0 million at November 30, 2003, $62.8 million at August 31, 2003 and $46.5 million at November 30, 2002. The Company's marketable securities consist primarily of tax-exempt high-grade municipal debt.
The Company believes its current cash resources (including cash and marketable securities balances), projected operating cash flow, and bank line of credit are sufficient to cover all of its expected working capital needs, planned capital expenditures, dividends, and other cash needs.
FISCAL 2004 OUTLOOK
In total, for fiscal 2004, management continues to anticipate low double-digit growth in net earnings on revenue growth of approximately 8 to 10 percent, excluding acquisitions. Management anticipates strong sales in U.S. markets. The Company's sales order backlog is excellent and market conditions remain relatively solid. Management expects to continue to grow sales through its new foreign operations and to improve export sales. Management views the international markets as its most significant opportunity to improve sales margins for the current and future fiscal years.
Management believes it has actions in place to improve margins, reduce inventories and control expenses in fiscal 2004. While price increases in steel and natural gas will continue to present challenges during fiscal 2004, management expects to be able to pass much of these cost increases through to its customers.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that does not have equity investors with voting rights, or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. In December 2003, the FASB issued Interpretation No. 46R, a revision of Interpretation No. 46. The Company will adopt FIN 46 and FIN 46R during fiscal 2004 and is currently evaluating the potential impact of adopting this standard on the Company's financial statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). For public entities, this Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. In November 2003, the implementation of certain components of SFAS No. 150 was deferred. The adoption of this standard did not have an effect on the Company's financial position or net income.
In March 2003, the Emerging Issues Task Force ("EITF") reached consensus on EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables". This guidance addresses the determination of whether an arrangement involving multiple deliverables contains more than one unit of accounting. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The implementation of EITF 00-21 did not have a material impact on the Company's financial statements.
In November 2003, the Emerging Issues Task Force ("EITF") reached consensus on EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments". EITF 03-1 provides guidance on the new requirements for other-than-temporary impairment and its application to debt and marketable equity investments that are accounted for under SFAS No. 115. The new requirements are effective for fiscal years ending after December 15, 2003. The implementation of EITF 03-1 is not anticipated to have a material impact on the Company's financial statements.
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