Lindsay Corp (LNN) 2011 Q1 法說會逐字稿

Good morning. My name is Tina, and I will be your conference operator today. At this time I would like to welcome everyone to the Lindsay Corporation first quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

During this call, management may make forward-looking statements that are subject to risks and uncertainties, and which reflect Management's current beliefs and estimates of future economic circumstances, industry conditions, Company performance and financial results. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company, and those statements preceded by, followed by, or including the words expectation, outlook, could, may, should, or similar expressions. For these statements we claim the protection of the Safe Harbor or forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

I would now like to turn the call over to Mr. Rick Parod, President and Chief Executive Officer. Please go ahead, sir.

Good morning, and thank you for joining us today. Revenues for the first quarter of fiscal 2011 were $89.2 million, increasing 4% over the same quarter last year. Net earnings were $4.3 million or $0.34 per diluted share, compared with $6.7 million or $0.53 per diluted share in the prior year's first quarter.

In the US irrigation market, revenues were $36.6 million for the first quarter, increasing 14% over the same quarter last year. Agricultural commodity prices remained strong with corn increasing 60%, soybeans up 25%, and wheat increasing over 35% from the same time last year. The most recent USDA projections for 2010 net farm income show a 31% increase over 2009, and projected to be the third highest on record. That, coupled with the rising commodity prices has created positive economic conditions for US farmers, enhancing their investment perspective.

Irrigation equipment order flow is strong as we head into the peak selling season. International irrigation revenues were $23.4 million for the first quarter, increasing 11% from the same period last year. Revenues increased significantly in exports to the Latin American and Australia and New Zealand markets, and we realized notable revenue increases in our irrigation business units in China and Brazil. The long-term market drivers are improving diets in a growing worldwide population, combined with water use efficiencies available for mechanized irrigation systems, continue to be positive drivers for global irrigation equipment demand.

Infrastructure business segment revenues were $29.2 million, decreasing 11% from the same quarter last year. The first quarter of the prior year included approximately $16 million of the $20 million Mexico City barrier project, which was completed in the second quarter of that year. During the first fiscal quarter of 2011, we completed and shipped approximately $8 million of a major QuickChange Movable Barrier project on the East Coast of the US, worth approximately $15 million in total, and we expect to ship the remainder of that project in the second fiscal quarter of 2011.

The lower revenues in the quarter on a year to year comparative basis also adversely impacted operating margin for the infrastructure segment as the QMB product line earns the highest margin in that business segment. We continue to see strong interest in our Movable Barrier products and maintain a healthy ongoing potential project list. However, the overall outlook for highway infrastructure spending remains uncertain, with a multi-year US highway bill not expected until sometime in 2011, and given global governmental budget constraints.

Gross profit was $24.2 million for the first quarter, versus $25.8 million in the same quarter last year. Gross margins were 27.2%, compared to 30% for the first quarter of last year. Infrastructure gross margins were lower in the quarter resulting from the lower QuickChange Movable Barrier project revenues. Irrigation gross margins were approximately the same as the first quarter of the previous year.

Operating expenses for the first quarter were $17.6 million, versus $14.6 million for the first quarter of fiscal 2010. The quarter included $700,000 of incremental expense for environmental monitoring and remediation, which is part of an ongoing EPA work plan at our Lindsay, Nebraska facility. In addition, the quarter included higher product development costs, higher personnel-related costs, sales commissions for the QMB project, and incremental expenses from Digitec, the small technology acquisition made at the end of fiscal 2010. Many of the increased operating expenses in the quarter reflect investments related to growth initiatives for both business segments.

Our order backlog was $59.7 million on November 30, 2010, as compared to $36.1 million November 30, 2009. While the first fiscal quarter is typically not indicative of the irrigation equipment demand for the forthcoming selling season, the November 2010 backlog represents a record first quarter backlog, in total and for irrigation. The infrastructure backlog is also higher versus the same time last year.

Cash and cash equivalents of $80.5 million were $11.2 million lower compared with last year, while debt decreased $12.3 million. Accounts receivable were $8.4 million higher year-over-year, due to higher sales in the first quarter of fiscal 2011, and due to lower prepayments. Inventories increased 8.8% over the comparable quarter last year, while inventory turns have improved. Inventories were increased in view of the improved economic conditions for farmers, and higher incoming order rate, as well as for the ongoing QuickChange Movable Barrier project.

In summary, solid irrigation performance and strong results from our infrastructure segment were realized in the quarter. In the irrigation segment, improved farmer sentiment has resulted from increased commodity prices and projected higher farm income. We're optimistic that the improved farmer sentiment, along with the currently strong order flow will result in improved year-over-year irrigation equipment revenues. In the infrastructure segment, we continue to see strong interest in our QuickChange Movable Barrier systems and road safety products.

Also, we continue to have a disciplined process to find accretive acquisitions that add new businesses and/or product lines, and to invest in organic growth opportunities. We are confident that increasing agricultural yield to boost food supply, improving water use efficiency, expanding biofuel production and improving transportation infrastructure will remain global priorities, and will continue to be strong drivers for our markets, long-term. I would now like to open it up for your questions.

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. Our first question will come from the line of Ned Borland with Hudson Securities.

Good morning.

Good morning, Ned.

Just sticking with irrigation here, nice increase to the backlog in total. I'm just wondering what sort of lead times are you looking at in irrigation versus prior periods?

Our lead times are relatively unchanged. We're still sitting at a pretty good situation from a capacity standpoint with probably operating at around the 65% of capacity level. So our lead times generally will be in the few weeks for delivery.

Okay. So they're not really stretching out at this time?

No, not at this point.

Okay. On the growth initiative spending, how many of those items that you called out there, how many of those sort of flow into 2Q and 3Q?

Well, I think there's a couple different factors in this. There are some one-time type expenses or nonrecurring type expenses in the quarter, which I can let Dave comment on in a minute. But I'd comment more in terms of the growth initiatives and the things that we're investing in and the types of things that were an expense in growth initiatives were in things like development of new products, which has been an ongoing initiative for the last couple of quarters in terms of stepping up that development.

During the recession, as many companies did, we had pulled back on some of those activities. But we see the opportunity and the need for some of the markets we're serving to step up our pace on product development. Another one is in market coverage for developing markets. As we're seeing markets strengthen, we found that there are opportunities and needs to have a couple of people in those markets to take advantage of those opportunities.

And the third one would be promotional materials for developing markets. And we've had a process of developing whether it was brochures or video or advertising type materials, but those are more for the developing markets. These are relatively ongoing in the sense of we could see a few quarters of these expenses as we have with product development, but they're not long-term ongoing. Theses are things where we needed to step up expense to address current market needs. Dave, if you wanted to comment on some of the nonrecurring type expense.

Sure. Good morning, Ned. We had approximately $1.5 million of the $3 million increase that was really on timing, $700,000 of that was the environmental expense, which is difficult to forecast. And then we had another $800,000 in some nonrecurring selling and R&D initiatives. We also had $400,000 of commissions on the QMB job in the period and that compares with no commissions in the prior year period on QMB jobs.

The remaining increases would include the OpEx for Digitec, the business that we acquired that Rick mentioned earlier, and some additional salaries and performance-based compensation. We did see some spending that we will address in the period and we had held back during the downturn and as Rick commented, we're pushing ahead with some of those initiatives.

Okay. That's really helpful. Just last question on international irrigation markets, I think Rick, in previous calls you commented that pricing had been somewhat of an issue. Just wondering what you're seeing there.

The international markets haven't really changed much. I think that we will continue to see pricing as an issue in some cases because some of those markets are developing-type markets where they're more project-oriented and what we'll see I think in the next year with those markets is they'll respond as well to the high commodity prices that we've seen in the US market. However, there also will be some capital availability or capital cost limitations that could affect those markets like Russia, Ukraine, China, north and central Africa. And we will see competitive pressures in those markets because they will be probably larger projects, more project-oriented.

Okay. Thank you.

Our next question will come from the line of Brian Drab with William Blair.

Good morning, Rick and Dave.

Good morning, Brian.

First question on the backlog, your backlog as you talked about is up nicely sequentially. Is that much more than the typical seasonal uptick that you would see during the period and do you think indicative of the strong start to the selling season in irrigation?

It's certainly more than what we would typically see in a first quarter. As I said, it was a record first quarter backlog. It's much more than what we would normally see. It's also higher than the 2008 first quarter backlog that we saw. So I think it is indicative of a strong season, which makes sense given commodity prices plus the economic conditions of farmers coming off of this past crop year. So I think those factors all bode well in terms of ongoing equipment demand. Now, there was a second part to your question.

I don't know that I've asked it yet. I'll give you a second part here, though. Actually, one follow-up to your comment there. You mentioned that the backlog first quarter this year is better than it was in 2008 and is one of the differences here that we've seen a strong run-up ag commodities earlier than we did going into that 2008 period?

Yes, I think it's -- it is definitely due to the strong run-up and I think it's coming off of a strong financial situation for the farmers in the past. I think the second part that I was trying to think of related to your question was another factor that does play into this towards the end of the calendar year is the -- I think it was -- was it Section 179 tax benefit or depreciation, incremental depreciation tax deferral that's available to farmers on equipment. Now, it's hard to determine how much of incremental revenue in the last month or so of the quarter could have been tied to that, but I do think it had some impact.

Got it. Okay. Thanks. And then also related to the backlog, is there, specific to QMB, is there more than just the $7 million or so in this announced project in the backlog, or is it just $7 million of QMB in that backlog number?

There's always more in the backlog. And I'm not going to break out the specific amount, but I would say that there are always some road safety products in the backlog as well that are kind of ongoing, more transactional part of the business.

Okay. But QMB specifically, can you comment on whether it's more or less than the balance of this announced $15 million project?

Well, I'd answer it in terms of saying there isn't really any other significant QMB project to talk about that was received in the quarter, so it would be fair to say that is the primary QMB piece in backlog.

Got it. Okay. And then turning to gross margin for a second, the sequential down tick in the gross margin was actually a little surprising to me, maybe it shouldn't be, but tell me what I'm missing but the QMB revenue from fourth quarter 2010 to first quarter 2011 was about the same, right, it was about $9 million in the fourth quarter and about $8 million the first quarter. But your gross margin stepped down from about 29.5% to 27.2%, and is there any -- it just leads me to believe that maybe there's something else going on in terms of margins in the infrastructure business, or is that off?

I can't comment on the fourth to first margin specifically, in terms of that analysis. I would say I did very specifically look at first to first, first quarter to first quarter, and I could say that the primary issue is the difference in the QMB revenue and that was from the Mexico City project to the recent project that is currently in process. There are some additional factors that always come into play in the infrastructure segment which I would characterize as more the mix issues in terms of the -- how much of that revenue would be tied to the contract manufacturing or tubing versus some of the road safety products. And as you know, we're in the process of really addressing improving the profitability and operating margin of our infrastructure business and that includes rationalization of products and potentially restructuring the business to improve that overall position.

Okay. Thanks. And if I could just -- one last question. You mentioned that you don't expect a major highway bill to pass until sometime in 2011. That is I think -- seems to me the optimistic scenario at this point. Seems like there is a group of people that believe that it might not come maybe even until after the next Presidential election. But are you getting some increased visibility to that highway bill passing in 2011?

I think I'd say, Brian, that my visibility on it is about as you just described.

Okay.

We've heard some speculation and I think some that feel very strongly that it will be in 2011 and I also believe that there's some that will say that -- that have told us it won't happen until after the election.

Thanks.

Thank you.

Our next question will come from the line of Ryan Connors with Janney Montgomery.

Good morning. I wanted to have a quick follow-up here on the issue of pricing and really in both segments, but first off in irrigation. Rick, can you talk just qualitatively about the pricing environment domestically, and then as you do that, you know, kind of layer in any thoughts you have on raw material pricing and how that's impacting that. Obviously steel prices have come up very recently and I don't imagine that had an impact in the quarter but going forward what the outlook is there?

Yes. First, Ryan, in terms of pricing, I would say that nothing has really changed in the US or even global pricing environment from what we've seen in previous quarters recently. It is competitive. However, in general we haven't seen any real significant price changing or increased competitive intensity that is driving pricing down. I will say that as we typically see in the lower quarters, which would be first quarter and fourth quarter, we will have a slightly more intense competitive environment because it's lower quarters and we'll have more projects in both the US and the international markets.

Regarding steel, as you mentioned, steel pricing has changed and is ticking up. Steel in fact now is probably about 20%, roughly 20% higher than it was the same time last year. And as you know, steel's about a third of our cost of goods sold. In times of rising steel prices, such as we see right now, our practice is to cover 70% or more of our next three months' steel needs with either inventory on hand or a purchase commitment to get the best possible price and at minimum to at least align our pricing with material costs, and we've continued to do that, and even though steel prices have moved up, we've been able to pass that through in terms of pricing.

Okay. And then following up on the discussion of infrastructure, if you could kind of talk ex-QMB, just sort of the base non-QMB infrastructure highway business, given your discussion and the prior questioner there about whether the highway bill even happens in '11, what is kind of the pricing situation among the non-QMB product lines in that business?

I think the pricing in terms of the non-QMB is competitive. However, I don't really see potential issues in that. What we have seen is in some of the product groups, such as our contract manufacturing and our tubing business, profitability has improved and margins have improved in those businesses. In terms of some of the work that we've done in reducing cost and in just plain changing our pricing strategy.

As you know, our overall infrastructure business is a little complex in the sense that it consists of Barrier Systems, which produces and sells the QuickChange Movable Barrier and road safety equipment, but also the railroad products, the diversified manufacturing and the tubing business, and there have been quarters when those other businesses outside of the QuickChange Movable Barrier and road safety products, were dragging down the margins of the rest of the infrastructure business.

And that is our focus and has been for the last few quarters, to improve those pieces of business. I don't really believe that pricing is a factor in the sense of adversely impacting those businesses. I believe that some of it for us is product rationalization and having the right structure to really -- to approach those markets and to sell effectively in those markets.

Okay. And then kind of a bigger picture question, Rick. I think obviously the stock's done very, very well and I think the big debate taking place is, what will this next upcycle or the 2011 selling season, anyhow, look like relative to the big year in 2008, and people are having a tough time trying to quantify that. So, without necessarily obviously giving guidance and so forth, how are you thinking about next year relative to prior cycles in 2008 in particular? Is it going to be a blow-out year? Is it going to be moderate growth over 2009? Just qualitatively, what are your views of what we're heading into here in 2011.

I think the way I would describe that or answer that, Ryan, is to really look at it in terms of what we've done with inventory as one indicator. As I mentioned, our inventory is up and a big part of the reason for the inventory increase is laying in more inventory in terms of material and parts in anticipation of a positive pleasant surprise in terms of demand.

I say a positive pleasant surprise in that it's a very, very difficult one to predict as you saw in 2008, as it really took off. We're seeing those kind of strong factors in terms of commodity prices and economic conditions for farmers today. But there are some differences. 2007, we saw a few more drought conditions in the US that also drove some demand in 2008. Now, we're seeing some things in terms of the demand that's coming from the Section 179, the additional tax benefit. So there are a number of factors that apply here.

International markets, we saw those really start to turn on in some of the developing markets in 2008 but shut off in 2009 due to capital limitations. Some of those capital issues are now starting to be addressed or disappear. So it's a very difficult one to predict and the way we're handling it is to have upside and down side type forecast and to put in additional inventory in anticipation.

Okay. And then finally, just one housekeeping item, Dave. You mentioned in your discussion of nonrecurring items, you mentioned the OpEx for Digitec. So are we to understand that some of that OpEx will go away and if so, can you quantify that for us?

No, I think the Digitec OpEx will remain because it's an acquisition that we did right at the end of last fiscal year, Ryan. I think that Q2 would have some reduced dollars but pretty significant leverage in terms of what we expect going forward.

Okay. Great. Thanks for your time.

Thank you.

Our next question will come from the line of Schon Williams with BB&T Capital Markets.

Hi, good morning.

Good morning.

I just wanted to specifically talk about international irrigation. I know you highlighted Australia in the slide deck and I know recently we've seen very heavy rain in that geography. Is there any concern that we may see some disruption to sell to the next quarter or two because of heavy rains?

Yes, I think that there is some concern that we could see some disruption in the market due to rains. However, I'd say that our international markets are pretty diverse in the sense that there's numerous markets and they're spread all over the world and from time to time some will be affected by weather conditions or very specific economic conditions or government funding and I don't really see that having a significant impact on any period for us because there are so many different international markets that make up our total international revenues.

Okay. And then just can we give an outlook on what you're seeing in terms of the acquisition pipeline, what you're -- you did Digitec here last quarter, what you're looking at over the next several quarters and what the opportunities might be?

Well, we continue to look for acquisitions that are tied to water use efficiency or transportation safety and security, which are really our two core business segments. And what we're finding is numerous product -- or numerous types of businesses in those categories. However, we're very selective in terms of what we go after. We have a very active list. We track probably 400 to 500 companies in terms of our data base that we'll look at. And companies that we will make contact with from time to time. But we're selective in terms of the acquisitions that fit those criteria.

I'd say that the environment is still pretty good. We are seeing more private equity involvement in potentially bidding up pricing on some deals. However, we generally do not participate in competitive auctions of businesses. We generally pull out of those. So we're more selective and targeted in terms of our acquisitions. I'm still optimistic about the acquisition alternatives. What we've seen in the past couple quarters has been really acquisitions of more technology-type businesses which are good fits, but it really is -- we're looking for more businesses in probably the $50 million revenue range.

Okay. And then finally, in the past, you have talked about opportunities for QMB being somewhere around $100 million to $150 million worth of projects that you're tracking. Does that number still sound right? Would you upgrade that? Downgrade that? What's your feeling there?

I wouldn't change that list. I will say that the list has typically consisted of projects that will total between that $100 million and $150 million range. During the course of the year, projects will be dropped off the list as they've initiated and turned into orders, as we've seen in the past couple of quarters. Others get added and some will come off the list due to changes in plans or funding limitations. And many will remain on the list with somewhat uncertain or indeterminable dates.

But that list is active and we continue to monitor that. But in addition to that, we have another list of potential projects where there are discussions, are very early or introductory stages that represent good QMB projects. However we don't know if they will ever turn into a project and they have gestation periods that could be three years or more.

Has that list been growing over the last several quarters?

I honestly couldn't say. I don't monitor that list as closely as I do the first list. It remains very solid and our goal is to grow that list with projects that we identify as potential projects.

Okay. Thanks for your comments.

Thank you.

Our next question will come from the line of Jon Braatz with Kansas City Capital.

Good morning. I'm sorry. All my questions were answered. Thank you.

Thank you, sir. Our next question will come from the line of David Rose with Wedbush Securities.

I had a couple questions, if we can kind of work through, the first of which is the backlog and get a little bit more color on your expectations about the anticipated work through the backlog on a quarterly basis, how much would you expect in the second and third and fourth quarters?

Our backlog typically is less than a -- certainly a quarter, and certainly less than a month's worth of backlog, so I don't anticipate any carry-over into the next quarter of a backlog. Our backlog at the end of the next quarter will be based on the order flow during the second quarter.

So no international component to that, mostly it's domestic?

I'm referring primarily to the irrigation backlog. And I would say whether it's international or domestic, it will flow through the quarter.

Okay. Great. Thank you. The second question, and I actually have two more is on the environmental expense, as I recall that, those incremental expenses began in the second quarter of last year. You should roll over that incremental expense in this coming second quarter. Is that fair? Or should we expect --

I missed that last part of what you said.

The environmental expenses.

Yes.

That you incurred in this period, you incurred similar expenses starting in the second quarter of last year. So are we rolling over that expense or -- in this coming second quarter will we see an additional incremental above that $700,000?

It's a timing difference, David, and your initial comment is correct. So we did book about that same number in the second quarter of last year. We've booked that number in the first quarter. I don't anticipate that booking in the second quarter again this year.

Okay. So we'll get a benefit from that.

The one point I would add as clarification to that, David is this is not something that just came up in the second quarter of last year. These have been ongoing type expenses, often less than this amount, but it is part of an ongoing process in working through this with the EPA. So we really don't know what that amount will be or when we will have those expenses. So this has been ongoing for many years, it's just there are some quarters where it's more material and we will end up disclosing ate and discussing it.

This is sort of pay as you go, by the way or are some of these accruals?

These are accruals, David, that we accrue when we know what our next phase of work will be and we can estimate it.

So you have some visibility, at least a quarter ahead of time?

Generally.

Okay. Can we expect an expense -- well, you would have booked it if we had. We shouldn't expect a second quarter expense like this unless you go through with the EPA.

Correct.

The headwind that we are facing this year versus last year in the second quarter, the approximately $600,000 in expenses related to the work incentive program, the benefit that you had last year, you don't expect to have that benefit this year or at least the same amount. What do you expect to do to compensate for that? I don't know if you can give us any color, some of the initiatives and if you will be able to compensate for that difference.

Well, first, on the -- that was Nebraska advantage credits. Those were state credits for employment and growth initiatives. I don't expect to see a significant amount or a material amount this year. We did not book any in the first quarter and as you correctly pointed out, we did have a credit that we booked in the prior year.

So is there anything that you're doing, in terms of your lean initiatives, anything that you're looking at that can compensate for the $600,000 difference?

Yes. We continue to push lean in all of our factories. We do have some growth initiatives in our SG&A that Rick commented on specifically. But there are initiatives both in terms of cost reduction and in lean initiatives at all of our factories.

And the last question is Rick had mentioned some of the projects you had in terms of product rationalization particularly in the infrastructure business. Are there any other KPIs outlined by Steve in the QMB business and can you give us some color on the progress?

There's nothing that I would lay out at this point. I think it's a little early. I would say that we are in the process now, as you know, Steve joined and he has been really developing an in-depth understanding of each of the businesses and the customers and we're in the first phase of reorganizing and restructuring that piece of business. So it's a little early, but I would expect that we'll continue to make progress on this objective throughout fiscal 2011, and in future periods be able to report more in terms of some of those KPIs.

Okay. Sorry. Last question is I noticed that you did have an additional expense on a cash flow statement in terms of acquisition. $1.3 million that I see, is that related to Digitec?

No, it's not. During the first quarter of fiscal 2011, we acquired a small technology Company based outside of the US that produces and sells specialized irrigation systems for precision irrigation. And their technology will be integrated into our controls offering and then marketed through qualified Lindsay dealers worldwide.

Thank you.

Our next question will come from the line of Michael Coleman with Sterne Agee.

The question I had for you, you mentioned the capacity was running 65%. Is that correct?

Correct.

Okay. So what I was looking at was given the acceleration in the business, is that a measurement for average in the quarter, November exiting the quarter or is that something that you're running at today?

This is kind of an average, Michael, of our estimated capacity at this time in terms of total irrigation production capacity. Now, I would also add that our irrigation capacity is somewhat variable in the sense that we can add additional capacity fairly easy to many of the operations, not all of them, things like tube mills are a little more difficult, but in terms of assembly and other types of things we can add capacity pretty easily. This is looking at it on a global capacity basis for the irrigation product line.

Okay. Any -- in terms of your plant in Nebraska, whether that would be running above or below that average capacity, 65%?

I would probably put it into that range, somewhere between the 65%, 70% of capacity level. But again, I would caution, this is not hard capacity. This would be kind of a practical capacity level that can be adjusted fairly easily in many of the operations.

Okay. In terms of the last time you kind of passed through this threshold of 65% utilization or so, was that an 2007 event, or did that happen in 2008?

I'd say certainly in 2008. I'd say I think we were lower in capacity utilization in 2007. I don't remember the specifics. But I think the other factor that this is tied to is that you're certainly looking at is incremental leverage that comes from this additional production level I assume and I would also point out that our overhead on a percentage of cost of goods sold is relatively low so there's not a significant fixed overhead amount in a percentage of cost of goods sold. So there's not significant upside leverage that comes from the incremental volume. What we saw in 2008, we ramped up -- was that we had ramped up so fast that we actually achieved a level of inefficiency because we had to do it in such a short period of time. We're trying to anticipates things of that nature today, and be able to respond better to rapidly changing markets.

Okay. And you made some comment earlier regarding inventory in anticipation. How do you feel about your supply chain today in terms of its ability to respond to robust demand? I think that was also an issue in 2008 on some components.

It was. And I would come back to the comments on capacity. Our primary problem, difficulties in 2008 were not directly related to our capacity to build and ship product. It was more related to our -- the supply chain's capacity to get components to us in -- and for us to get those processed through and out to customers. And I would say that I think we are in a decent position with the supply chain. However, we did take some action to anticipate more and add in some more inventory. But I do think that if there was a very significant ramp-up in the market that affected not only us but other equipment manufacturers consuming the inventories in the supply chain, we'll end up with a difficult time. So I don't think that is -- that we're out of the woods or that is an issue that we wouldn't face this time, with a similar type or very rapid ramp-up. I don't know if it's at the same level but I do think that it would be possible again.

Okay. Thank you.

(Operator Instructions). Our next question will come from Shawn Boyd with Westcliff Capital Management.

Hi, thanks for taking the question. Congrats on the real nice start to the year here in terms of the backlog. If I could, the first question, I just want to clarify comments that Dave made earlier regarding the year-over-year increase in the operating expenses. If I heard correctly, he called out $1.5 million of nonrecurring expenses which tells me that we had a core recurring operating expense level of about $16 million this quarter. Is that correct?

Well, just to comment on that specifically, of that $1.5 million, $700,000 was in the EPA and as Rick commented, that's a little tough to predict and in terms of the timing of when those expenses will occur. But yes, I did say there's was $1.5 million of timing issues in the quarter.

Okay. And from other answers on that EPA, that number is ongoing but fluctuates quarter to quarter?

That's correct. And just to give you a sense of that, we did about $700,000 last year and the year before about $1.1 million.

For the year?

For the fiscal year, yes.

Got it.

2009 and 2010.

Got it. Okay. Great. And moving over to the infrastructure segment for a second, if we look at the seasonality of the business and really we have to pull out the QMB revenues, given how much they can swing quarter to quarter, if you say just the non-QMB revenues, is there a -- it looks like last year we had a seasonal drop from November into February. Is that due to winter perhaps? Is there a seasonality that I should think about having again here this year?

Yes, there is some seasonal aspect to it. If you think about the other road safety products which would be crash cushions and some of the other safety products like that, those will be tied to either road repairs or highway build. So it's not unusual to see those drop off during the winter periods because you're just not seeing the road construction happening then.

Okay. Would you expect about a similar change in terms of the percentage drop that you had last year? We're starting off a much higher number this year, that $21 million level.

I really can't comment on the percentage because I just don't have that in front of me to look at the detail level to know if it would be a similar percent. And as I mentioned, the business is a little complex in that we have the road safety products. We also have railroad products and diversified manufacturing and tubing, which will be less impacted by the seasonal change. But the road safety products would be. So I really can't comment on the percentage of decline that would be expected or change.

Got it. That's still helpful. One last question for you on the non-QMB infrastructure revenues here. Given that we're not expecting the new highway spending bill any time soon, what -- can you give us a -- do you expect to be able to keep this business flat? Would you target a 20% growth rate? Can you give us what you think those markets are growing at without QMB, and without big influx from the spending bill?

I think the way I would answer that is to say our expectation is to continue to grow this business with or without that highway bill and I think there's a number of other pieces to this. Certainly there's the QMB piece. As I mentioned, the railroad piece, contract manufacturing and the tubing and we are seeing growth in other sectors of this business other than just QMB. My expectation, and I know Steve, our President of that business, expectation is continued growth in that, with or without the highway bill in place.

Very helpful. Last question from me is going back to the Section 179 tax incentive. And Rick, I think you mentioned this earlier as one of the things that's probably helping that backlog just a bit right now. If I understand it correctly, those have been extended into 2011. So number one, is that correct, and number two, what would be the change? Isn't this going to be something that continues to help you in the coming tax year?

Yes, it is correct that they were extended, and yes, I believe it will continue to help us in the coming tax year. My reference was to the timing of the revenues, and that there is an expectation that the equipment be as I understand it installed prior to year-end in order to get the tax benefit at the end of the year. So we know that there were customers who were rushing to get those machines in. To what extent our revenues were tied to that, I really couldn't comment.

I would say that if the revenue was in November, it's a little tough to think that they're going to be all installed and up and running, say, in December. But there will be a typical push at the end of the calendar year to get machines out. When that benefit exists as it does this year and will next year.

Got it. Very helpful. Thank you.

Thank you.

And we have no further questions at this time. Do you have any closing remarks?

Yes. For our business overall, the global long-term drivers of water conservation, population growth, increased importance of biofuels and improvements in infrastructure remain very positive. Lindsay is committed to achieving earnings growth through global market expansion, improvement in margins, and strategic acquisitions. We thank you for your questions and participation in this call today and wish you all a safe and happy holiday season. Thank you.

And this does conclude today's teleconference. You may all disconnect.