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LNN > SEC Filings for LNN > Form 10-Q on 28-Mar-2014All Recent SEC Filings

Show all filings for LINDSAY CORP

Form 10-Q for LINDSAY CORP


Quarterly Report

ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

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," "will," "plan," "project," and similar expressions generally identify forward-looking statements. The entire section entitled "Market Conditions 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 year ended August 31, 2013. 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, 2013, 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, 2013. Management periodically re-evaluates and adjusts its critical accounting policies as circumstances change. There were no changes in the Company's critical accounting policies during the three and six months ended February 28, 2014.

New Accounting Pronouncements

See Note 2 - New Accounting Pronouncements to the condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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Executive Overview

Net earnings for the three months ended February 28, 2014 were $13.5 million or $1.04 per diluted share compared with $19.4 million or $1.50 per diluted share in the prior year. The decrease in earnings was primarily attributable to a 13 percent decline in operating revenues to $152.8 million from $175.5 million in the prior year period. Gross margin declined to 27.9 percent of sales from 28.7 percent in the prior year due to a shift in sales mix and deleverage of fixed costs on lower sales. In addition, operating expenses increased by $0.8 million, including an incremental $2.2 million of expenses associated with the newly acquired LAKOS® business. Excluding the LAKOS® acquisition, operating expenses declined $1.4 million.

The primary driver to consolidated results in the quarter was the irrigation segment, where sales decreased by 16 percent to $135.9 million from $162.7 million in the prior year and operating margins declined to 18.1 percent of sales from 21.7 percent last year. The lower sales were primarily attributable to a $23.4 million sales decline in U.S. irrigation markets as a result of lower crop prices and a decreasing impact of drought conditions in the U.S. Corn Belt, while the lower operating margins are due to the deleveraging of fixed expenses on lower revenue.

Infrastructure segment results improved in the quarter as revenues increased 32 percent to $16.9 million and operating profit improved to break-even as compared to an operating loss of $2.1 million in the prior year. Sales and profit improvements are due to a more aggressive approach to sales growth in the infrastructure product lines while improving gross margins and reducing SG&A expenses.

During the second quarter, the Company began to execute the capital allocation plan that it had announced in January 2014, doubling its quarterly cash dividend to $0.26 per common share and repurchasing 78,520 shares of common stock for $6.6 million.

Market Conditions and Outlook

The Company's irrigation revenues are highly dependent upon the need for irrigated agricultural crop production, which, in turn, depends upon many factors, including the primary drivers of agricultural commodity prices, net farm income, weather conditions and governmental policies regarding the agricultural sector. The degree to which each of these factors impact the irrigation equipment purchase decisions of the Company's customers is difficult to predict.

Farm commodity prices have declined during the past year on indications of strong yields and a decreasing impact of drought conditions in the U.S. Corn Belt. As of February 2014, corn prices have decreased 35 percent and soybeans have decreased 3 percent compared to the same time last year. As of February 2014, the U.S. Department of Agriculture (USDA) estimated U.S. 2014 net farm income to be $95.8 billion, down 27 percent from USDA's estimate of U.S. 2013 net farm income of $130.5 billion. The U.S. 2014 net farm income forecast would be the lowest since 2010, but would remain 9% above the 10-year average.

A number of recent and potential regulatory actions could further impact the Company's business.

• The Agricultural Act of 2014 was signed into law and extends for five years. This law continues many of its existing programs, including funding for the Environmental Quality Incentives Program (EQIP), which provides financial assistance to farmers to implement conservation practices and is frequently used to assist in the purchase of center pivot irrigation systems.

• Certain tax incentives (such as the Section 179 income tax deduction and bonus depreciation) that encourage equipment purchases were significantly reduced for 2014.

• The ethanol mandate that increases corn demand was reduced.

• The U.S. government has imposed trade sanctions that could impact irrigation equipment purchases in Russia and Ukraine.

At this point, the Company anticipates lower irrigation segment revenues for the remainder of fiscal 2014 primarily due to the significant decrease in agricultural commodity prices. The U.S. irrigation market has slowed significantly as compared to the past several years of record crop prices and the significant drought. The potential for an increase in international irrigation revenues will be challenging for the remainder of fiscal 2014 since prior year irrigation revenues included $33.4 million from the equipment purchases in Iraq. The current political environment regarding Russia and Ukraine may further limit international irrigation equipment growth.

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While the Company anticipates a decline from peak irrigation revenues during the near-term, drivers for the Company's markets of population growth, expanded food production and efficient water use, support the Company's expectation for long-term growth. The Company believes the most significant opportunities for growth over the next several years are in international markets, where irrigation use is significantly less developed and demand is driven primarily by food security, water scarcity and population growth. The Company's capital expenditure plan includes investments in a manufacturing operation in Turkey, which is planned to be operational early in fiscal 2015 and should accommodate long-term growth plans for several international markets.

Infrastructure demand has increased in recent quarters as the Company has aggressively pursued market expansion. However, the infrastructure business remains dependent on government spending on highway and other infrastructure projects. In addition, the current U.S. highway bill is scheduled to expire in the fall of 2014. While the infrastructure segment continues to experience revenue and profit volatility due to the project nature of the Road Zipper SystemsTM and the fixed nature of some operating expenses, the Company believes it has sizeable market penetration opportunities for road safety products and Road Zipper SystemsTM worldwide. Demand for the Company's transportation safety products continues to be driven by population growth and the need for improved road safety.

As of February 28, 2014, the Company had an order backlog of $89.3 million compared with $159.3 million at February 28, 2013 and $66.5 million at August 31, 2013. Order backlog at February 28, 2014 declined from the same time in 2013 in U.S. and international irrigation markets, and infrastructure segment backlog increased over the same time last year. The current year infrastructure backlog includes a $12.8 million Road Zipper SystemTM order for the Golden Gate Bridge which will be recognized in revenue in fiscal 2015. The prior year irrigation backlog included a $39.1 million equipment and installation contract in Iraq, of which $3.0 million remained in backlog at February 28, 2014. The Company's backlog can fluctuate from period to period due to the seasonality, cyclicality, timing and execution of contracts. Typically, the Company's backlog at any point in time represents only a portion of the revenue it expects to realize during the following three-month period. However, the timing related to certain project oriented contracts may extend longer than three months.

For the business overall, the global, long-term drivers of water conservation, population growth, increasing importance of biofuels, and the need for safer, more efficient transportation solutions remain positive. The Company is committed to increasing shareholder value through investments in organic growth, dividend increases, synergistic water related acquisitions, and share repurchases, as outlined in the Company's capital allocation plan announced in January 2014.

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Results of Operations

For the Three Months ended February 28, 2014 compared to the Three Months ended February 28, 2013

The following section presents an analysis of the Company's operating results displayed in the condensed consolidated statements of operations for the three months ended February 28, 2014 and 2013. It should be read together with the industry segment information in Note 12 to the condensed consolidated financial statements:

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