Lindsay Corp (LNN) 2013 Q4 法說會逐字稿

Good morning. My name is Victoria and I will be your conference operator today. At this time I would like to welcome everyone to the Lindsay Corporation fourth-quarter 2013 earnings call.

(Operator Instructions)

During this call, management may make forward-looking statements that are subject to risks and uncertainties 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 for 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.

Good morning and thank you for joining us today. Joining me on today's call is Jim Raabe, Lindsay Corporation's Chief Financial Officer, and Lori Zarkowski, our Chief Accounting Officer.

Total revenues for the fourth quarter of fiscal 2013 were a record $148.4 million, increasing 16% from $127.8 million in the same period last year, driven by higher demand for irrigation systems in our international markets and slightly higher sales of our infrastructure products. Our acquisition of the Claude Laval Corporation, the manufacturer and marketer of the highly regarded Lakos brand of filters and separators, closed two weeks before the end of the quarter, thus had little impact on our 2013 results. We're very pleased to have added this excellent Company and line of filtration products, which fits well with our efficient irrigation product solutions and adds an additional growth path in industrial filtration applications. We continue to expect the acquisition to be accretive in 2014.

Lindsay Corporation's operating margins increased to 10.6% in the quarter compared to 9.9% in the same quarter last year on higher sales and improved gross margins. Net earnings were $10.4 million or $0.81 per diluted share compared with $8.8 million or $0.68 per diluted share in the prior year. Total revenues for fiscal 2013 were a record $690.8 million, increasing 25% from the same period last year. Net earnings were a record $70.6 million or $5.47 per diluted share, as compared to $43.3 million or $3.38 per diluted share in the prior year. As a reminder, the prior year results included a $7.2 million accrual for environmental remediation at our Lindsay, Nebraska facility which lowered earnings by $0.37 per diluted share.

For the irrigation segment, sales totaled $128.2 million in the quarter, 19% higher than the same quarter last year. Irrigation operating margins declined to 14.5% of sales from 15% of sales last year due to a larger mix of international sales. In the US irrigation market, revenues were $53.9 million for the fourth quarter, decreasing 4% over the same period last year. Farm commodity prices declined during the quarter, on indications of strong yields in the current growing season and a decreasing impact of the drought conditions in the Corn Belt. Despite these influences, order volumes remained robust by historical fourth-quarter standards, although less than the same time last year.

In the fourth quarter of fiscal 2013, USDA forecasted 2013 net farm income to be approximately $120.6 billion. This would be the highest on record and 63% above the 10-year average. At this point, we believe farmer sentiment regarding capital goods purchases are becoming more conservative due to lower commodity prices and the anticipated expiration of the Section 179 deduction, offset by their strong balance sheets and high farm income.

In the international irrigation markets, revenues for the fourth quarter of fiscal 2013 were $74.3 million, increasing 44% over the same quarter last year. Revenues increased most notably in the Middle East and South America. The increase in the Middle East reflected $17.4 million in revenue from the Iraq contract we received in the second quarter of fiscal 2013. The increase in South America primarily reflects a continuation of the very strong market we've experienced in Brazil throughout the year. We continue to see strong order activity in our international irrigation markets, and believe these markets will continue to generate long-term growth.

For the full year of fiscal 2013, total irrigation segment revenues increased 32% to $626 million. In the US irrigation market, revenues were $385.7 million, increasing 26% over the previous year, with the majority of the growth in the drought-stricken Corn Belt during the first half of the year. In the international irrigation market, revenues were $240.3 million, increasing 41% over previous year, with the most significant increases in the Middle East and South America. Even without the $33 million of project sales in the Middle East, the international revenues grew a robust 22% in fiscal 2013.

Infrastructure segment revenues were $20.2 million in the quarter, increasing 2% from the same quarter of last year. The infrastructure segment generated operating income of $2.4 million, compared to operating income of $0.7 million in the fourth quarter of last year, due to higher Road Zipper System sales. Infrastructure demand, including the Road Zipper System projects, has continued to be challenging this year due to constricted government funding and project delays. However, in September the Golden Gate Bridge Highway and Transportation District announced that it had approved $14.1 million movable barrier procurement from Lindsay for the bridge as part of a $26.5 million bridge project. The contract has not yet been signed and we do not now anticipate recognizing revenues until 2015. For the full year of fiscal 2013, infrastructure revenues decreased 15% to $64.8 million with a total segment operating loss of $800,000 compared to breakeven for fiscal 2012.

Last week we made a leadership change in our infrastructure business. Over the past couple years cost improvements and targeted marketing initiatives have been implemented against the headwind of a difficult market. The infrastructure business has continued to struggle to regain its sustainable profitability. With the changes made, I'm confident in the progression of our strategic position and in the business returning to profitable growth. Gross profit in the fourth quarter was $38.6 million or 26% of sales versus $32.7 million or 25.6% of sales in the same quarter last year. Gross margins in irrigation declined by approximately 1 percentage point due to a change in sales mix. Infrastructure gross margins improved by approximately 8 percentage points primarily due to increased Road Zipper System sales.

Operating expenses in the fourth quarter increased by $2.7 million. Current quarter expenses included higher personnel and incentive compensation expense, acquisition related expenses, and selling expenses associated with higher volumes. Operating expenses decreased to 15.3% of sales for the quarter compared to 15.7% of sales for the same period last year. The order backlog on August 31, 2013 was $66.5 million, compared to $57.1 million on August 31, 2012, and $80 million on May 31, 2013. Backlog at the end of fiscal 2013 included $5 million remaining from the $39 million Iraq order received in the second quarter.

Year over year backlog for international irrigation and infrastructure increased while US irrigation backlog decreased. US irrigation backlog is typically less than a quarter's revenue, and at this time of year typically less than a month's revenue, therefore the end-of-year backlog is not a good indication of future revenue. Cash and cash equivalents of $152 million were $8 million higher than the same time last year, while debt decreased $4.3 million. Accounts receivable were $37.7 million higher year over year due to higher sales, and our DSO increased 15 days due to the terms of the Iraq contract and slow payment on projects in China. Inventories increased $15.7 million due to the Lakos acquisition and in support of higher sales volume, while inventory turns improved.

Our primary uses of cash remain investing in organic growth opportunities, while continuing to seek accretive acquisitions that add new businesses and/or product lines. In addition, we have an outstanding share repurchase authorization for approximately 881,000 shares, which positions us for opportunistically repurchasing Company stock. In fiscal 2014, we expect capital expenditures of approximately $20 million to $25 million, largely focused on manufacturing capacity expansion and productivity improvements. In summary, the record sales in our domestic and international markets have led to an outstanding year in fiscal 2013, driven by positive farmer sentiment toward capital investments, increased farm income, and concern over the past and future impact of dry weather conditions. The fourth quarter results reflect strong growth in sales and profit, although we have now seen a slowing of orders in the US irrigation market from earlier in the year.

During the quarter, we closed the acquisition of the Claude Laval Corporation. The addition of this business and its filtration technologies offers Lindsay new growth paths and strengthens our differentiated competitive position. While we don't anticipate significant incremental revenue from the synergies in the 2014, we expect the business to be accretive. As we look forward for the irrigation business, we anticipate the currently projected robust harvest will potentially result in further reducing corn and soybean prices, dampening farmer sentiment, negatively affecting US demand for fiscal 2014. Yet, we are very optimistic for the future of mechanized irrigation globally. International irrigation markets appear to remain very strong, driven by continuing concern regarding food security globally, although large international projects remain difficult to project.

For the infrastructure business, government spending on highway and other infrastructure projects remains an impediment to achieving real market growth. We do not anticipate a strong turnaround in government infrastructure spending in 2014, however we believe we have sizable market penetration opportunities for road safety products and Road Zipper System sales worldwide. And we've seen some positive signs of increased infrastructure activity. With the cost, expense and organizational changes made, we believe we are positioned for revenue and profit growth. In addition to our organic growth opportunities in irrigation and infrastructure, we continue to pursue strategic synergistic acquisitions that further differentiate our market position and add new growth opportunities.

While we have continued to aggressively pursue acquisitions, finding willing sellers during the recession and early part of the recovery proved difficult. At this time, we're considering business additions ranging from approximately $30 million to $250 million of revenue, and smaller product line or technology additions. In recent months, we've seen an improved environment for acquisitions. I would now like to open it up for your questions.

(Operator Instructions)

Your first question comes from Schon Williams with BB&T Capital Markets.

Hi, good morning.

Good morning.

Rick, you mentioned that you've seen a slowing on the domestic side of the irrigation business. Can you talk about trends in the quarter and what you've seen so far in fiscal Q1? Should we be expecting that kind of down mid-single digits? Does that become down high single-digits, down double-digits? What are you seeing so far on the irrigation side domestically?

I can't really give you much guidance in terms of the order flow, Schon, other than to say that what we saw last year at this time was certainly some impact from the drought that was taking place across the Corn Belt. And what we've seen happen this year is certainly in the fourth quarter orders remained pretty strong early on. We did see it slow down to what we would consider to be a typical type slowdown at the end of the growing season, or towards the end of the growing season. So it wasn't much of a surprise.

But we did see that the same drought concerns that we saw last year are not there at this point, as we've seen the drought really lessen through most of the Corn Belt region. And I think the backlog that we've talked about basically reflects that. And as I have said, I think the other caution to this is that at this time of year it's very difficult to project what the next year will be, because the backlog and the order flow does not really reflect that. I think we did see a very different situation last year driven by the drought.

Okay. And then I wanted to focus in on infrastructure a little bit. You've changed leadership there, as you mentioned. Can you help me understand what was -- is it more about product mix? Is it more about growth trajectory? Is it more about margins? What was the overarching concern there?

And then why do you feel optimistic about that division? If I look at history, it took quite a while to fill that position last time. I'm just wondering what makes you so optimistic about the near term for that division?

Well, the first part of that is that this time it is being filled internally with someone that I have a great deal of confidence in, in terms of being able to lead that business on a growth path. So we won't go through the long process of trying to find somebody outside. The other is I think that the position has made some very significant improvements under the previous leadership in terms of cost reductions, expense reductions and other things that were necessary.

But the next stage to this as we see the market turn around, is really developing a good growth strategy for this business going forward, and looking for what we do to increase market penetration and really get back into a pretty aggressive forward movement posture. And that's the strategy for the business and I believe that's what we'll see going forward. It won't happen instantaneously because obviously the market is -- there's a bit of momentum there. But I'd say that we haven't seen the turnaround that we would like in that business and I think this is -- with new leadership, we'll see a new approach.

All right. Thanks for the color, guys. Appreciate it.

Thank you.

Your next question comes from Nathan Jones with Stifel.

Good morning, Rick. Good morning, Jim.

Good morning.

If I could start on domestic irrigation, you obviously said you expect 2014 to be lower than 2013. It doesn't sound like you're prepared to give any more color on your expectations for the decline there. Have you got plans in place to cut costs, to remove heads under the potential for a significant cyclical decline in this business? Or did you outsource enough of the manufacturing process during this big upcycle that bringing it back in-house is how you would manage that?

Well, I think first in terms of the expectations, there's not much more color I could add to that other than to say that in looking at the information we're seeing in terms of harvest data, it looks like the harvest is going to be pretty robust. And in talking with dealers, I would say that they're seeing really good harvest numbers so far. It remains to be seen how this turns out in total.

I think certainly the projected harvest numbers and yields look like they have certainly driven commodity prices down, corn prices down, and may drive it a little bit further. We believe that will have an impact on the US market. However, we're not there yet. In other words, it's really too soon to call.

On the other side of it in terms of cuts, we've developed our plan with expectations and always will adjust as necessary as we get more information, as we move through the year. So for example, as this harvest data comes in and we get a better projection in terms of what we think will happen in the few quarters of, let's say all quarters, actually, of the fiscal year, we'll be able to make some appropriate adjustments.

Would it be fair to assume that by the time you report the next quarter, you will be able to give us significantly more color on your outlook for the fiscal year in terms of the domestic irrigation spend?

I think we can probably give more color. I'm not sure we'll be able to answer the question in terms of what we think the next fiscal year will look like. I definitely think we'll be in a slightly better position to give you more information. But that will still be a fairly difficult time because we won't really have the best look at farmer sentiment at that point in terms of what they're going to do for this next season terms of planting.

There's some discussion right now, for example, that it's a little -- things that I've been reading that based on the corn harvest and what's projected in terms of yield, we may see more of a switch to soybean planting this next year, which would have impact in terms of soybean prices as well as corn prices going forward. So I think there's a number of things that we will know at that next call. But as I said, I think it will still be unknown in terms of what will happen in the next season.

Okay. On the international front, you did about $240 million in revenue in 2013, about $35 million of that from that discrete Iraq project. When we think about 2014 international revenues, should we be thinking of growth off that excluding the Iraq base, the Iraq project? Are there other large project opportunities out there that could fall into 2014 to replace that? Or how should we think about international revenues in 2014?

As I mentioned in my comments, the growth without that project was still pretty significant. It was about 22% for the year. There are more projects like that out there but to say that you should factor one in or not is difficult. These large international projects, as I said, are difficult to project.

The only thing I can say is that I think there is still a very significant growth opportunities in the international markets, where it may not be the Middle East, the next one may be Russia and Ukraine, or could be in Africa or anywhere in the world. So we still see those significant projects out there to quote and we're working on many. But in terms of making a projection on that, I am not prepared to do that.

So it would be more fair to think of it as off a $205 million base with the same kind of growth rate in 2014 as you saw 2013, if we just exclude that Iraq project. And then anything else you get on that very large project side would be a bonus?

Well, again, I'm not going to make a projection in that, or to give guidance in that sense. I would say that all of the markets have projects pending and all of the markets have some project opportunities. I just can't really give you that guidance.

Okay. Fair enough. Thanks, Rick. Thanks, Jim.

Thank you.

Your next question comes from Brian Drab with William Blair.

Good morning.

Good morning.

First question for Jim, just housekeeping question. Can you tell us roughly what the acquisition expense was in the fourth quarter?

Well, the combination of acquisition expenses and the additional incremental SG&A for the period that we had LAKOS in the numbers is probably around $0.5 million.

Okay. And so the one-time acquisition related expense was --

is less than that.

Relatively small. Okay. On the Road Zipper side of the business, in the quarter were there any installations or was this primarily leasing business?

No, we had one project that was a Northeast US bridge project. I'm not going to discuss the specific magnitude of it but there was one sale project in the quarter.

So you won't give us an idea what the level of revenue was for Road Zipper, though, in the fourth quarter?

It was relatively -- it was a modest size contract. It was certainly meaningful to the quarter from a mix and gross margin standpoint. But it was not a large contract.

Okay. Got it. And then can you give us any -- at this point do you have any better feel for the level of accretion from LAKOS in fiscal 2014? Can you give us some sense for what the accretion would be?

Not really, no. There's nothing that we are specifically breaking out on that at this point.

Okay. And then, Rick, you mentioned acquisitions could range from $30 million to $250 million in revenue. Would these more likely be on the irrigation side or the infrastructure side?

The acquisition types that we're looking at today are really more towards, let's say, the water use efficiency side, more towards the water side. But I wouldn't rule anything out specifically. But that has been our primary emphasis has been more on that water side than on the infrastructure side. I think I've commented in the past that we really don't want a lot more in terms of government spending related or driven by government spending specifically. But our primary emphasis has been more, let's say, industrial applications or on the water side.

And on the water side, would it necessarily have to integrate with irrigation business or more broadly in water efficiency?

I wouldn't say it would have to integrate into irrigation but we would expect some synergies. Again, I wouldn't rule out something that didn't have a synergy if it made a great third leg, let's say, that was really a great basis for building in the future. But the primary emphasis has continued to be looking for those that are synergistic to our business in some way.

Okay. So something similar to LAKOS, in that there's certainly a separation component of that in the irrigation market. But they have some, as I understand it, general industrial exposure and other exposure as well. You wouldn't be averse to something like that obviously.

Absolutely. In fact, I would say that LAKOS as we looked at it, only about 30% to 35% of their revenues were really tried to the ground water and irrigation markets, with the majority of their business being in more industrial applications including the heat transfer type applications. We considered that a real plus because we believe that there's an opportunity to build on that technology and capability organically and through acquisitions. That was one of the many things that excited us about that business, while it had a nice synergistic fit, it also presented a good growth path for the future.

So building on that, if you look ahead three to five years, could you envision a Lindsay that has some meaningful component of revenue that is not irrigation and is not highway infrastructure?

Yes.

Okay. And the last question, we talk all the time about the opportunities in the international markets, the Ukraine, former Soviet states, et cetera. Is there anything specifically in the Ukraine and the former Soviet states that's changed since the last time we spoke that's made you more or less optimistic about that? Sounds like an enormous opportunity that could eventually be unlocked there.

I think the only thing that I would characterize as changing is I believe that the opportunities in terms of the opportunities that we're seeing today are increasing. And there isn't really a specific driver, for example in terms of government subsidy or whatever behind that, but we're definitely seeing more opportunities in that region than we did even a year ago. I'm more optimistic about it today than I have been in the past.

Okay. Thanks, guys.

Thank you.

Your next question comes from Ryan Connors with Janney Montgomery.

Great. Thank you. Good morning. Last quarter, Rick, you mentioned this issue of planned maintenance shutdowns or projects in the fourth quarter, and that you thought that would have a negative impact on margins. I may have missed it and I apologize if I did, but I didn't hear you mention that in your prepared remarks. Was that a headwind to margin in the quarter? And if so, can you quantify that?

This is Jim. And I would say that there were some things in the quarter but I would say the margins ended up better in the quarter than we anticipated. We did a good job managing those projects and we continue to see through the quarter good pricing and other factors. So it did have an impact. I wouldn't say it was as significant as we thought it was. And I think the margins as a whole certainly held up very well.

Okay, so pretty clean for that issue. We shouldn't look at that margin as somehow being depressed due to any of the project activity like that?

Yes, not to any significant degree with regard to one-time items.

Okay. Great. Thanks, Jim. And then another thing you talked about last quarter, Rick, was pricing. You had mentioned that you thought if in fact demand and orders come under some pressure, that pricing would get more competitive. It seems like the pressure on the orders is there. Any updates you can give us on the pricing environment and what you're seeing develop there in US irrigation?

Right. I haven't really seen or heard of a significant change in terms of competitive environment and pricing at this point. I think that we really haven't seen that yet. Again, I think this is the end of the season. It's a little soon to really call that and I think the reference was going forward, if we were to see orders fall off, we could expect pricing to get more competitive. But I think this is something we probably wouldn't see until we get into the fiscal year a little further and see what happens in terms of this next selling season.

Okay. You mentioned the Golden Gate project and you said that you thought you'd recognize revenue in 2015. Some of the local press there is saying that -- is actually quoting a shipment date of October, November of 2014, which would be your fiscal 2015. So when you say 2015, do you mean calendar 2015 or fiscal 2015 for you?

Fiscal 2015 for us.

Okay. So it could actually be calendar 2014. Okay.

Yes.

One other, kind of a one-off question, something that caught our eye was this product introduction you made at the Husker Harvest, the airless wheel assembly which I think was kind of interesting. Just wanted to get your perspective on that and whether you think that actually could be a material driver in terms of aftermarket sales on replacements of existing tires.

I think it's a great product and we've had a lot of interest and excitement around that, primarily because it does eliminate flats, of course. But also it minimizes the wheel tracks in the field and those become smaller, especially in some difficult conditions. So it's been a great driver of interest. We've got a number of dealers that are already placing their orders. I think it's too soon to say it's going to be a big driver in terms of aftermarket sales at this stage. But I'm pretty enthusiastic about it in terms of the demand that we're seeing today.

Great. Well, we'll watch with interest. Thanks for your time, guys.

Thank you.

Your next question comes from Andrew O'Conor with BMO Asset Management.

Good morning, guys.

Good morning.

Good morning.

Rick, Jim. It's frequently chronicled in the media that certain Midwest aquifers are being drained dry by irrigation. You read about this related to the High Plains Aquifer with some regularity. I just wanted to know if you had any comments or observations about the extent of this.

I don't have a specific comment regarding that. We obviously see the same things that you're referring to in terms of the press. And we see from time to time water restrictions and regulations that will be put into place to control irrigating. That's not a huge surprise. I think the way we also look at the market, however, is that there's a significant amount of waste that still takes place in terms of irrigation with the flood and gravity irrigation that's out there, while mechanized irrigation is very efficient in terms of the water use. And it does disturb me a bit when I see some of the water restrictions that will go in that will be well moratoriums, for example, to stop adding wells completely, while there's still a very significant amount of flood irrigated acres out there. I think that the mechanized irrigation has proven itself as being a very efficient way to improve agricultural output with efficient use of water.

I'm certain that we will continue to see regulations and restrictions from time to time as the aquifers maybe are depleted to some extent and at times recharged, we'll see some of those restrictions lifted. But that's about all that I could comment on at this point, because I see the same things that you do in terms of the press. It is unfortunate they often do not pick up the fact that this is a very efficient irrigation method that really uses less water and grows more food.

Got you. Thanks for that. Secondly, I may have missed it. Are there any specific operating synergies or marketing wins that have come about immediately from the purchase of Claude Laval? Or are about to come about near term?

Well, nothing specific. But I would say it was very interesting, right after the acquisition was announced we had some of our dealers who we really weren't aware they had specific applications for it, contacting Claude Laval Corporation right away, looking to buy some product. And we've had some of those wins that did take place. Nothing I'd call of significant scale yet, but did instantly take place. I'm just really pleased with that.

And at this point we're having dealer seminars across the United States with our people, conducting the normal sales seminars that we have every year. The LAKOS people are participating in those seminars. There's a great deal of interest from our dealer network in applications of their products. So pretty optimistic about this. I think it's been a really good start and I think we'll find a fair amount of synergy.

All right, sir. Thanks very much.

Thank you.

Your next question comes from Joe Mondillo with Sidoti & Company.

Good morning, guys.

Good morning.

So the backlog, if you exclude the Iraq, that small $4.5 million of the Iraq contract, is still up marginally and I would imagine domestic is down. So what I was wondering, is international offsetting that? Or is it more so on the infrastructure side of the business?

This is Jim. I would say that certainly the international business has continued to see good order volume. There's a good amount of year-over-year improvement in the backlog in international. As we mentioned, the infrastructure is up but to a smaller degree. So it's more on the international side.

Okay. And then so staying on international, I saw you're still seeing rising crop stocks elsewhere in the world like we're seeing here domestically. Prices are being weighed upon as a result of that. I know the backlog is very near term. So has anything changed within the last, say, three months within that international market, having seen the rising crop stocks and such and prices, to your outlook over the next year or so?

No, we haven't seen any change of significance in any of the international markets. I believe that there's generally more of a lag effect from what we've seen in the past when there is a change where it would take place in most of the international markets a little later. But I also think there's some additional drivers in the international markets for mechanized irrigation. For example, the global food security issue where we've seen expansion of agricultural land in Africa, Russia and Ukraine, different parts of the world, for that global food security need to meet the population growth. So I think those will continue to be good, strong drivers.

There certainly could be some shorter-term impacts due to commodity price changes and stocks building, but we haven't really seen that of significance yet. The other factor that does come into play at times, for example in Brazil, is financing cost and financing for purchasing of equipment has been very favorable, in the 3% to 3.5% range with some government subsidy behind it. So that's been beneficial to the market down there as well.

Okay. And then just sticking with the international, it seems to be that you saw in the quarter domestic sales down. And the mix was much more heavily associated with international which usually carries lower margin. However, the margin on the irrigation side was actually quite similar to a year ago. So I'm wondering, is these larger projects comparable to the Iraq contract? Do they carry higher margins compared to the rest of the normal international business that you do?

No, typically the larger projects often become more competitive bid. That's not always the case, but we do often see that. So it's not unusual for them to see those with margins in the typical international range or sometimes even a little less, depending on the size of the project. I think that in this case it was definitely a mix issue. We had some pretty good margins in the US market. Some of the offset, of course, was the Iraq contract in the international market for the quarter.

Okay. And then last question, if you will. The orders seem to look pretty reasonable for the quarter. However, that was through the end of August and pricing really didn't fall off in terms of corn until September.

So we're halfway through this quarter. I'm wondering what you're hearing in terms of the near term perspective on the domestic markets. With such a drastic fall-off in prices, are we expecting the next quarter, this quarter and the next quarter, to be pretty tough?

Well, I would still characterize this as difficult to project right now in terms of what the impact will be in terms of the harvest that's taking place. The type of comments I'm getting from the dealers and from customers today would be that the harvest looks pretty robust. So we've seen commodity prices pull back. And at this point it's difficult to project what that impact will be. We are in the low part of the season where no one is of significance really putting in a lot of pivots right now today. Their concentration is on harvest. I don't think the order rate or the backlog is a real good indication of what's to come. I don't think we have enough visibility to that right now to really make that projection.

Okay. All right. Thanks a lot, guys. Thanks for taking my questions.

Thank you.

Your next question comes from David Rose with Wedbush Securities.

Good morning. I have a couple questions that we haven't quite gotten through just yet. The first is on capacity expansion. Help me understand. You indicated that you'll invest a little bit of the CapEx in capacity expansion but how do you reconcile that if you think business is going to be soft or softer in North America? Is it all international that's going to carry you? Or is this something that's a multi-year investment?

The capacity expansion plans are in the international market. And our overall strategy and practice at this point has been adding capacity in those international markets to support international growth. There is also international shipments that take place out of the US factory that at some point will be off-loaded to one of the international facilities. So our expansion will be primarily in those international markets.

Okay. So if that's the case, then we can assume that your capacity utilization will be down in North America. It's a higher margin business for you. What steps will you take to offset the margin compression or the decrementals that we should expect in that business for next year? And how much can you offset?

First, I would not assume that the capacity expansion's going to reduce the capacity utilization in the US. I think that's a managed process from the standpoint of as we add capacity in some of the international markets, we can make the determination of whether or not it makes sense to shift where some of the product is shipped from. So I think that's definitely a managed process. The other side of that is if the market decreases in the US market, what impact would that have in terms of capacity and capacity utilization? I think that's also part of your question, correct?

Correct.

Jim, do you want --?

I think what I would add is we have always been pretty flexible in our management of the production within our US operations. And we'll continue to do that as well as we also continue to invest in productivity enhancements as well. So I think there's a number of steps that we have taken and will continue to take with regard to offsetting those kinds of declines. But there will always be some margin pressure if we're in a down cycle. There are some things we can do to offset it, but there will be some margin pressure as well.

Can you --

I would add that --

Sorry, go ahead.

No, no, go ahead.

I was just wondering if you could give a magnitude, maybe if you're down 10% or so, what decrementals you would expect?

I think we've said in the past that about 15% of our costs are fixed in labor and overhead. So that gives you some idea you how you can work through it.

Okay. And then the lean initiatives offset some of that?

Yes.

Correct.

Got it. Okay. I'm sorry, Rick, you were about to say?

My comment was going to be, while we won't make a specific projection or guidance in terms of what that impact would be, I would say that we have been very aggressive over the last four or five years in terms of lean implementation. It's been very beneficial on the upside as we've grown to be able to get more out through the facility. It's also very beneficial as we've had to contract at different times in terms of being able to take cost out. I'm pretty optimistic about our ability to respond to whatever takes place in the market, but there is always some impact in terms of capacity utilization, if sales were to drop off in some form.

Okay. That's helpful. And then lastly on the infrastructure side, are there any other opportunities to book $1 million, $2 million Road Zipper project over the next six months? Or should we assume that we're all waiting for the Golden Gate project until fiscal 2015?

No, I would not assume that everything is waiting for the Golden Gate Bridge project. I would say there are many active projects that people are working in, and to some extent chasing, that could occur at any time. We've talked about the Golden Gate Bridge more specifically because it's been a publicly published project, where they've actually given numbers and things for it. But outside of that, we're working on many international projects, including in Brazil and Russia and many other places in the world, as well as many US projects. So I wouldn't be banking everything on the Golden Gate Bridge project.

And those projects you think can book in fiscal 2014 or is that 2015 or beyond?

Now we're getting into trying to nail down when I think projects will be booked. I'd just say that there's projects that we always think will be booked in the fiscal year. The difficulty is that as we've seen in the past year or so, year to 18 months, some of the government funding has affected projects in terms of the delay and those types of things. So I can't really predict when it will happen. But I would say there's definitely ones on the list that we would expect this fiscal year.

Okay. That's helpful. Thank you very much.

Thank you.

Your next question comes from Brett Wong with Piper Jaffray.

Hi, thanks, guys. Was just wondering if you're seeing any major changes in equipment funding as a result of the budget debate and the government shutdown?

We haven't as of yet seen -- I haven't heard anything major in terms of equipment. I think it's probably too soon in terms of what the government shutdown impact would be. I don't really expect that that's going to do anything because those funds are allocated out. It could delay some things in terms of, where that would normally be applicable would be in the conversion projects, but I haven't heard or seen anything yet.

Okay. And are you seeing anything on financing rates in Brazil next year?

I'm not aware of anything changing there yet either. I haven't heard anything different than what we've seen to date.

Okay. Just a couple follow-ups on some previous questions. On the well drilling, are you seeing an increased number of moratoriums on well drillings compared to previous years? And if so --

No.

Okay. Go ahead.

Not at this time, no.

Okay. And then on the Ukraine market, there's recent news that the Ag Minister unveiled that they're going to get some funding from China. Any idea on how that might play into demand for you guys? Is that a $3 billion program?

We don't. I've seen articles discussing China leasing a significant amount of land in Ukraine. There's been some very big agricultural projects and initiatives discussed in Ukraine that would include expanding irrigation. All of that has been going on for about the last year without a significant change taking place. It's very hard to predict. Some of it is definitely going to be hard for Ukraine to do, because they haven't had the money and funding to be able to support some of the projects they've talked about. So I really don't know what will happen with those. We're watching those projects closely. We obviously believe that Ukraine has some very significant growth opportunities from a mechanized irrigation standpoint. We'll be on top of it.

Okay. Great. And a question on margins. You talked to a change in the discrepancy of the international versus domestic irrigation margin. Has that discrepancy gotten at all any closer?

I wouldn't characterize much having changed in the differences between the domestic and international margins. What will make that change, to some extent, will be what we do from a manufacturing standpoint in terms of additional vertical integration in our manufacturing processes to reduce cost. So I wouldn't characterize anything really having changed there in the international markets to date.

All right, thanks. And then one last one. For the LAKOS acquisition, how are you planning to report that?

LAKOS will be reported within our irrigation business segment.

Okay. Great.

Thank you.

All right. Thanks a lot, guys.

Your next question is from Chris Shaw with Monness Crespi

I wanted to ask more on infrastructure, how you're trying to characterize this quarter. For 2014, could we expect the $2 million level of profit for each quarter as a run rate? Or is that only going to happen if, say, you get a new Zipper project each quarter? I'm just trying to parse out what's the benefit from that and what's the actual real -- where the cost savings come in.

This is Jim again. I guess just a couple of items that I would point out. First of all, there is a seasonality to the infrastructure business. Basically through the summer, so the third and fourth quarters tend to be stronger, lower seasonal periods just because of the road construction not being as significant in the first and second quarter. So there is a seasonality to it as well.

And then I would also say certainly QMB projects have an impact on when they occur and there isn't a seasonality as much to a QMB project. So I wouldn't expect a straight line of profitability and QMB will impact the quarterly results.

Okay. And then on share repurchase, I know you have the authorization out there. Doesn't look like you did any last year. I'm curious as to how you guys are thinking about that right now.

Well, as I've stated, we view that as it's a great authorization to have for opportunistically repurchasing stock, and we will continue to view that.

Is it an either/or with acquisitions? Or is it just, are you waiting to see what actually you might want to purchase? Or is it just you'll use it as a tool if needed?

I think the first use of cash is growth. So whether that's organic or acquisitions is always our -- is always the priority. And then we do have a dividend as well, but then the repurchase would be more opportunistic.

Okay. Thank you.

You have a follow-up question from the line of Schon Williams with BB&T Capital Markets.

Hi. Quick follow-up for Jim. Can you give me the allowance for -- on the receivables, the bad debt expense there?

The allowance at the end of the year is about $2.8 million.

Okay. Looks pretty similar to Q3 levels, so you're still having a little bit of trouble with some of the Chinese customers, but didn't look like there was a material change from Q3, though?

Yes, I would -- I think that's a good characterization. There continues to be challenges in the Chinese market with regard to that collectability, but I wouldn't say any new issues. So we're making progress there, but it continues to be a challenge.

Okay. What's the risk that, I don't know, you end up having to write off a lot of those receivables? I don't know, does that risk increase as time goes on? Or that risk decreases as you work with those customers?

Well, I guess I think the first thing I would say is, is payments are slow. That does not mean that we're -- so there are risks associated with it, but it's not that we're not being paid. It's being -- taking longer than we would like to see it happen.

Okay. And then Rick, a question for you. I wonder if you could update me on your thoughts about drip irrigation assets. In the past, I know in our discussions you've talked about drip irrigation having some downside or some disadvantages versus mechanized irrigation. Has that thought process changed at all? If you had the opportunity to get drip irrigation assets, is that something you'd be interested in?

Well, first, I think that drip is a very good product from the standpoint of -- in certain applications, certainly in vineyards and orchards and smaller fields, I think it's very applicable and works in efficiently irrigating certain types of crops in small fields. Generally when it gets to larger scale, the economy of scale doesn't really work in terms of drip irrigation. That said, I still like the product and what it does.

The difficulty is that I think that the actual drip products, the hose and tape are basically of a commodity nature. Much different than the kind of business that we're in with very difficult competition than the kind of markets that we participate in today. Now, I think there's some opportunities for Lindsay in the drip markets in some sense. But I'm a little cautious when it comes to thinking about getting into the plastic stuff, where I really believe it's much more of a commodity.

But if there was something that was a more differentiated product, you'd be interested in it though?

Certainly if it was differentiated and I felt that there were opportunities for differentiation that created margin opportunities, I would definitely be interested. That's how I would characterize it.

Okay. That's helpful. I appreciate it. Thanks again, guys.

You do have a follow-up question from the line of Nathan Jones with Stifel.

Hey, guys. Just following up on the margin and infrastructure, which was obviously very good this quarter. I think previously we've talked about an $18 million level as being the breakeven level for revenue in the infrastructure segment. Has your cost take-out actions reduced that number structurally so we should now be thinking of a lower level of revenue as the breakeven level?

Nathan, I wouldn't say that it's had a significant impact on the breakeven. I think the additional factor to that breakeven is it is affected by mix, obviously. And so with a QMB project in the current quarter, it looks a little bit different. The breakeven does change with mix. So that 18 is more of an average number.

Okay. So this double-digit margin level at $20 million of revenue is not something we should be forecasting going forward?

Well, I think we certainly think there's opportunities to improve the margin within the infrastructure business. We've done a pretty good job of improving our gross margins in all of our product lines in 2013 and think we can continue to advance that. But that will take some time. I wouldn't expect that kind of margin in the near term without some contribution from QMB.

Fair enough. And with the DSO stretching out 15 days, you said at least partially that was due to contract terms for the project in Iraq. When do you expect to get paid for that?

I would say over the course of the first half of the year.

Okay. Thank you.

Thank you.

Mr. Parod, there are no further questions.

For our 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 very positive. In addition to the overall business enhancements that have taken place we're focused on seeking accretive, synergistic acquisitions. Lindsay is committed to creating shareholder value for shareholders through organic earnings growth, dividends, strategic acquisitions and share repurchases. We'd like to thank all of you for your questions and participation in the call.

Thank you for your participation in today's conference. This concludes today's call. You may now disconnect.