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LNN > SEC Filings for LNN > Form 10-Q on 27-Jun-2014All Recent SEC Filings

Show all filings for LINDSAY CORP

Form 10-Q for LINDSAY CORP


27-Jun-2014

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 "Executive Overview 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 nine months ended May 31, 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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Table of Contents

Executive Overview and Outlook

Net earnings for the three months ended May 31, 2014 were $16.5 million or $1.28 per diluted share compared with $26.1 million or $2.01 per diluted share in the prior year. The decrease in earnings was primarily attributable to revenues, which declined 23 percent to $169.9 million from $219.5 million. The primary driver of lower revenue was the irrigation segment, where sales decreased 26 percent to $149.0 million. Infrastructure revenues increased 13 percent to $20.9 million, partially offsetting these declines. Gross margins declined by 0.3 percentage points and operating expenses were lower by $0.5 million. Operating margin for the three months ended May 31, 2014 declined to 14.8 percent as compared to 18.0 percent for the three months ended May 31, 2013 primarily as a result of deleverage on lower sales.

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 following primary drivers:

Agricultural commodity prices-As of May 2014, corn prices have decreased 26 percent and soybean prices were relatively flat compared to the same time last year.

Net farm income-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.

Weather conditions-As the third fiscal quarter ended, Spring storms across the Midwest created additional demand for replacement units. Drought conditions drove higher equipment purchases in prior years.

Governmental policies-A number of government laws and regulations can impact the Company's business, including:

The Agricultural Act of 2014 provides certainty to growers by adopting a five-year farm bill. 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 in 2014.

The U.S. government has imposed trade sanctions that could impact irrigation equipment sales to Russia and the Ukraine.

The ethanol mandate that increases corn demand was reduced.

Recent legislative discussions involve possible elimination of the U.S. Ex-Im Bank. Elimination of this government entity could impact the Company's ability to cost effectively assume credit risk in certain international markets.

At this point, the U.S. irrigation market has slowed significantly in recent quarters as compared to the same time last year. U.S. irrigation revenues have contracted due to the significant reduction in commodity prices, the reduction in the Central Plains drought conditions, and the reduction in accelerated tax depreciation benefits, partially offset by demand caused by Spring storm damage. International markets remain active, but with some projects delayed due to lower commodity prices or by regional conflict. The current political environment regarding Russia, the Ukraine and Iraq may have a negative effect on international irrigation equipment growth. As a result of the above factors and that prior year fourth quarter revenues included $17.4 million associated with the Iraq contract, the Company anticipates lower irrigation segment revenues for the fourth quarter of fiscal 2014.

The infrastructure business has improved its profit profile and generated growth in an environment of constrained government spending. While the status of the U.S. highway bill, which is scheduled to expire in the fall of 2014, creates uncertainty for the near term, opportunities exist for market share gains in each of the infrastructure product lines. Demand for the Company's transportation safety products continues to be driven by population growth and the need for improved road safety.

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Table of Contents

As of May 31, 2014, the Company had an order backlog of $73.6 million compared with $80.0 million at May 31, 2013 and $66.5 million at August 31, 2013. Order backlog at May 31, 2014 declined from the same time in 2013 primarily due to a decline in orders from international markets as the prior year irrigation backlog included a $23.0 million equipment and installation contract in Iraq, of which only $2.6 million remained in backlog at May 31, 2014. U.S. irrigation market 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 that is expected to be recognized in revenue during fiscal 2015. The Company's backlog can fluctuate from period to period due to the seasonality, cyclicality, timing and execution of contracts. Backlog typically represents long term projects as well as short lead-time orders and therefore, is generally not a good indication of the next quarter's revenues.

The June 2014 escalation of political hostility has made it more difficult to complete the Company's contract in Iraq. At May 31, 2014, the Company had a total exposure of $4.4 million on this contract, including $2.5 million of accounts receivable, which is not currently due, and a $1.9 million performance bond securing completion of the contract. The Company has not provided a reserve for these amounts, but will continue to assess the situation as developments in the country evolve. The Company has suspended installation services indefinitely until the political environment improves in Iraq. If the Company is unable to complete its work under this agreement, it does not expect to be able to realize the remaining $2.6 million due under the contract.

The global drivers for the Company's markets of population growth, expanded food production and efficient water use and infrastructure expansion support the Company's long-term growth goals. 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.

Results of Operations

For the Three Months ended May 31, 2014 compared to the Three Months ended May 31, 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 May 31, 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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