Lindsay Corp (LNN) 2015 Q4 法說會逐字稿

Good morning. My name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation fourth-quarter and FY15 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. With 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 FY15 were $123.5 million, 16% less than the same quarter last year. US and international irrigation equipment revenues decreased in the quarter, and were partially offset by increases in infrastructure sales. The Company reported a net loss in the quarter of $3.2 million, or $0.28 per diluted share, compared with net earnings of $11.3 million, or $0.89 per diluted share, in the prior-year quarter. During the quarter, the Company recorded a $5-million bad debt reserve on accounts receivable, and a reserve against deferred income tax assets of $2.9 million, all related to our business unit in China. In addition, the effects of foreign exchange rates lowered our operating income by $800,000, and increased non-operating expenses by $1.2 million. These items reduced diluted earnings per share by $0.70 in the quarter.

Total revenues for FY15 were $560.2 million, decreasing 9% from the same period last year. Net earnings were $26.3 million, or $2.20 per diluted share (sic -- see press release, "$2.22 per diluted share"), compared to $51.5 million, or $4 per diluted share in the prior year. The full-year effect of the items noted above, plus acquisition and integration expenses, and additional environmental accruals recorded earlier in the year, reduced diluted earnings by $0.96 per share.

For the irrigation segment in total, sales were $96.9 million, 23% lower than the same quarter last year. Irrigation operating margins decreased to 4.4% of sales from 14.9% of sales, due to the additional expense recorded for accounts receivable reserve and cost deleverage on lower sales. In the US irrigation market, revenues were $54.6 million in the fourth quarter, decreasing 23% from the same period last year, and declining 35% excluding the revenue from the newly acquired Elecsys Corporation.

I'd like to remind you that our fiscal fourth quarter is typically a low sales quarter for irrigation equipment in North America. The quarter covering June to August is post-selling season for equipment in North America, and is generally after crops have been planted. From time to time, sales in the quarter will benefit from the need to replace equipment damaged by storms during the spring and early summer, as we experienced in FY14, or by severe droughts where farmers need to install the equipment, and are, in a sense, willing to start over, as we experienced in FY12.

For the fourth quarter of FY15, the lower US irrigation equipment revenue is a result of approximately $20 million less of storm-damage-related sales this year as compared to the same time last year. In addition, overall lower commodity prices and reduced farm income have affected farmer sentiment regarding capital goods purchases. The USDA is now projecting 2015 net farm income to be $58.3 billion, dropping 36% from the prior year, and declining nearly 53% from the record high set in 2013. 2015 net farm income is projected to be the lowest since 2006.

In the international irrigation markets, revenues for the fourth quarter were $42.3 million, decreasing 23% over the same quarter last year. The revenue declined 13% due to foreign currency exchange rate changes, with the remainder of the decrease primarily attributable to lower project revenues in the Middle East. While the stronger US dollar is affecting our international revenue, and global commodity prices have declined, we continue to see international agricultural development continuing during this cyclical trough. As we see today, and as we've seen in previous trough periods, there is a global recognition of the importance of irrigation, and awareness of the benefits irrigation brings in stabilizing yields and agricultural production, and in enhancing farmland values. During trough periods, as overall equipment revenues contract, international and domestic project revenues become a larger percentage of sales, further exacerbating the lumpiness of revenues. However, these projects lead to further development as the market recovers.

For the full year of FY15, total irrigation segment revenues decreased 16% to $451.2 million. In the US, irrigation revenues were $273.7 million, 17% lower than the prior year. In the international markets, irrigation revenues were $177.5 million, 15% lower than the prior year, with slightly more than half of the decline attributable to foreign currency exchange rate changes. The greatest foreign exchange impact was realized on revenue from our business unit in Brazil. Operating margins for the total irrigation segment were 11.3%, compared to 17% last year, primarily due to the incremental bad debt expense and cost deleverage on lower sales.

Infrastructure segment revenues were $26.7 million in the quarter, increasing 23% from the same quarter last year. The increase was driven by continued growth in Road Safety product revenue, sales of barrier transfer machines, and increases in Road Zipper System lease revenue. The infrastructure segment generated operating income of $4 million in the quarter, or a 15% operating margin. For the full year of FY15, infrastructure revenues increased 40% to $109 million, with significant increases due to the Golden Gate Bridge project and 36% growth in Road Safety products.

The infrastructure business achieved previously set record revenue levels, and set a new operating income record, with operating margins increasing to 18% of revenue. We believe FY16 can be another strong year for the infrastructure business; however, we do not currently have a barrier project of the size of the Golden Gate Bridge project in backlog. In addition, we expect increased investment in testing and product development related to new mandated standards in road safety products, and funding for a multi-year highway bill remains elusive and uncertain.

For the total Company, gross profit in the fourth quarter was $33.5 million, with a gross margin of 27.1% of sales, equal to the same time last year. Gross margins in irrigation decreased less than 1 percentage point versus the same quarter of last year, with cost deleverage on lower sales partially offset by lower input costs, primarily steel and zinc. While overall irrigation equipment demand has declined from the peak of the cycle, competitive pricing remains rational in most regions. In the infrastructure segment, gross margins increased by approximately 2 percentage points, primarily due to sales mix changes, including increased sales of road safety products, and Road Zipper products and leases.

Operating expenses in the fourth quarter increased to $30.7 million from $23.7 million in the prior-year period. Operating expenses increased $2.9 million due to the inclusion of the recently acquired Elecsys business, and $3.9 million due to incremental bad debt expense as compared to the prior-year fourth quarter. SG&A expenses increased a total of $16 million in the fiscal year, due to the addition of Elecsys and startup of Turkey operations, the incremental accounts receivable reserve in China, acquisition and integration expenses, and an incremental EPA expense accrual. These increases were partially offset by reductions in discretionary expenses throughout the year, resulting in a net increase in full-year SG&A expenses of $13 million.

The order backlog at August 31, 2015, was $48 million, compared to $79.6 million August 31, 2014. The August 31, 2015, backlog includes $9.5 million of backlog for Elecsys Corporation, while the prior-year backlog included $12.7 million related to the Golden Gate Bridge project. Year-over-year irrigation backlog levels, excluding Elecsys, have decreased, reflecting the change in agricultural market conditions and completion of some larger projects. Infrastructure backlog has also decreased, due to the completion of the Golden Gate Bridge project and others. Our backlog typically represents some long-term irrigation and infrastructure projects, as well as short lead time orders, and therefore, as I've indicated in the past, backlog is generally not a good indication of future quarter revenues.

Cash and cash equivalents were $139 million at the end of the quarter, and were approximately $33 million lower than the same time last year. We have continued the execution of our capital allocation plan, including $138 million in cumulative stock repurchases from January 2014 to August 2015. With the addition of $100 million of repurchase authorization in July, we now have $112 million of share repurchase authorization outstanding. The strength of our balance sheet continues to position us for additional growth through acquisitions and other initiatives to drive improved returns for shareholders.

We have now completed the second full year of the cyclical downturn, and most forecasts call for a continuation of soft agricultural equipment markets for the near term. Equipment pricing remains competitive, but rational, in both domestic and international markets. Lower steel prices and effective cost management by our plants have helped to sustain selling margins in the face of difficult market conditions.

It's been an especially challenging couple of years for our operations in China, as the market has contracted. Competitive pressures increased from what are allegedly Chinese government-sponsored competitors, and we've experienced significant difficulty in collecting on sales to a specific customer. These challenges have led us to record specific reserves and adjustments. In addition, foreign currency rate changes have reduced overall international revenues by approximately $9 million and 14% versus the same quarter last year, and $21 million and 9% for the year.

The domestic irrigation equipment market decline has had a large impact on our Lindsay Nebraska factory, requiring across-the-board spending reductions and process improvements. Our manufacturing team has done a very good job reducing headcount, and adjusting discretionary and fixed spending to mitigate the deleverage effects of lower volume. Because of their efforts, along with the efforts of our sales management team, irrigation equipment gross margins have compressed by only 2 percentage points since the peak of the cycle two years ago. Given the price competition and cost deleverage from lower sales, they've done a superb job in helping to maintain our gross margins. With the addition of Elecsys this year, we've improved our electronics manufacturing cost effectiveness, quality, and have added to our M2M capabilities, which will enhance our solutions offering.

In infrastructure, we've significantly improved profitability, lowering our manufacturing costs, while managing SG&A expenses and increasing the number of states where our road safety products are approved. The road safety market is subject to government funding, as well as potential changes in product standards. However, it's a business that can continue to contribute to overall growth and profitability.

Finally, we have persistently executed against our capital allocation plan, increasing dividends, repurchasing shares, moving to a more optimal capital structure for improved returns for shareholders, and making strategic acquisitions. We remain committed to continuing execution against this plan.

Now, as FY15 is concluded, I'd like to thank all of our employees for their hard work and dedication as we've navigated through a challenging cyclical downturn. Expenses have been reduced, positions eliminated, certain projects deferred. Yet we've continued to build on our strategic advantages, important initiatives, and further honing our focus and strengthening our competitive resolve.

As we look forward to 2016, we still have work to do in leveraging some of our newer business units and increased profitability. In addition, we will continue to monitor market conditions, and identify areas to reduce costs and improve productivity, while continuing to invest in developing solutions for our customers in the markets we serve, and a geographic expansion in markets having the greatest potential for growth.

I would now like to open it up for your questions.

We will now begin the question-and-answer session.

(Operator Instructions)

Your first question comes from the line of Brian Drab with William Blair.

Hi, good morning.

Good morning.

First, on the irrigation segment, well, total backlog for the Company is down about 40% year over year, adjusting for Elecsys and Golden Gate Bridge. But with the farm net income down 36% this year, is it reasonable, Rick, at this point, to assume that irrigation revenue will likely be down in FY16 versus 2015?

I'm not going to comment in terms of giving any guidance really in terms of 2016; however, I don't really see a significant difference in our current outlook for 2016 than what we have seen for 2015. It's been difficult to predict where 2015 was going to end up as we were coming into the fourth quarter, really not knowing what this end of the selling season would look like. I would say it's also going to be difficult to see what the spring period will look like until we get a little closer to it. So at this point, I really couldn't make a prediction. I will say based on forecasts I've seen from other companies and overall our perspective on it is really not much different than what we saw in 2015.

Okay. Thank you. And shifting to infrastructure, given the momentum that you're seeing in the highway business and what's happening with the competitive landscape there, is it reasonable to assume that the infrastructure segment could report revenue growth in 2016, even given the absence of the $13 million associated with Golden Gate Bridge?

The Golden Gate Bridge and any significant project like that certainly has a big impact in infrastructure revenues in total. I would say that I would expect it would be a tough year for them to achieve the same kind of revenue in total without a major project falling in. And at this point, we don't have a project in backlog of similar size.

So it could make it a pretty tough challenge to get to those kinds of revenues for 2016. It's not out of the question; it's just it would be pretty difficult right now at this stage.

Okay. Well, when you look back at FY14 and the second half of the year, you were doing $20 million in revenue, $22 million in revenue per quarter. Now we've seen a couple quarters where we've had $29 million in the third quarter of 2015, $27 million in fourth-quarter 2015.

Is this back half of 2015, in your mind, probably pretty representative of the average run rate that we see going forward, of course taking seasonality into account? But I would expect some growth next year off of these back half of 2015 levels.

I think there's definitely seasonality in the numbers that you're looking at in terms of the back half, Brian. But the other aspect to take into consideration is we've made some pretty significant progress, our team has, in getting the products approved in the states with higher volumes. Now, there's still a few states to get, but we've made some very good progress there and you've seen that in the numbers.

So I'd say that represents a fair amount of the growth that we've seen in those numbers. So there's probably not as much to get as what we've seen in terms of the progress over the last past year.

Okay. And then can you talk, Rick, a little bit about why you're seeing such a significant step-up this year though in the highway business, and specifically, I'm thinking about share gains that you've seen from Trinity?

Some of it is definitely share gains from what our competitors have gone through. Some of it is also a definite increased focus on concentrating on the states with the biggest opportunity and ones where we could get our products approved. Those have been definitely the focus and direction from the infrastructure business and the road safety products team in total. So we've made some superb progress there.

Are you still gaining share or is that -- should I think about that as a step function up this year that doesn't have as -- doesn't really have impact next year? Is this still accelerating the business, the share gains?

I think I'd describe it as our strategy and overall intent is to continue to gain share. It is not done.

Okay. And then just last, China, can you just talk a little bit more about what's going on there? And can you remind me what percent of total revenue China accounts for? And then can you comment on how much revenue is down in China in 2015 and just talk about the competitive landscape and just how is it different now versus a couple years ago?

Well, I'd probably describe it as we had a very high percentage of market share four or five years ago, as we were starting up and really ramping up in China. And during that time period, we've seen a significant number of competitors appear, probably 10 or 11, that were in that market, most -- primarily local Chinese competitors that have emerged. So that's changed the competitive environment quite a bit in the last three years. We've seen that change take place.

Also during that time period, as I've indicated, we had difficulty in collecting on an accounts receivable with a specific customer, which we have taken reserves in the past and taken additional now to restructure that. But the Chinese environment is extremely competitive from a price standpoint and is still more government tenders than it is commercial market in terms of commercial -- other types of commercial customers. But it is a changing market. It's not one that we would say that we are certainly ready to exit in any way, but it has certainly changed quite a bit in the last four years.

Percentage of total revenue that you do in China?

We don't split out the total for competitive purposes. There's nothing I can really say in terms of -- I would say that it's a relatively small percent of our total overall international sales.

Okay. All right. Thank you very much.

Your next question is from the line of Nathan Jones with Stifel.

Good morning, Rick, Jim.

Good morning.

I wonder if we could just talk a little bit about SG&A here. I was looking back through the model, and 2015 revenue is about the same as what it was in 2012. And if you take out some of the one-time charges like the bad debt expense that's in there in 2015, it looks like SG&A's gone from somewhere around $75 million to $100 million, maybe core SG&A is a bit less with Elecsys integration and things like that, but it's still significantly higher.

We've heard lots of good things about the improvements you've made in the manufacturing process and taking some headcount out there. Why aren't we more you aggressively going after some of the SG&A there? Maybe you could give us some color there or why it is you need that additional SG&A on the same kind of revenue base?

Well, I would say, Nathan, that there's been a little bit of a mix in the business, change in the business. We have -- certainly a big part of that increase is the addition of Elecsys and the addition of Lakos a few years ago, and just generally, the businesses that we have added in that time have higher G&A rates relative to what our core business is.

So if you're comparing those two years, a couple of things that come out. When you look at the total revenue, we have -- the revenue declines have been in our lower SG&A businesses, essentially our domestic irrigation -- pivot irrigation business where the increases in revenue have come in higher than the higher SG&A businesses, and that -- a part of it is mix.

We have taken costs out and we have taken costs out in SG&A in a number of places. But we've also invested in some things as well. We've obviously added the Turkey plant, and we've added some sales resources in some of the international markets where we really see opportunities for growth. And we've added costs in some of the product development areas in the water space, as well as in things like field net and continued to move those things forward.

So there's a little bit of a tradeoff in the mix. There's also a little bit of a tradeoff in some cost reductions in some places, with some additions in SG&A costs where we think there's longer-term growth opportunities. So I think that's mainly what you're seeing.

That's helpful. So if we go back to 2012, you were running 12.5% of sales in SG&A. In 2015, you're 18% of sales in SG&A without some of those 1X expenses. What do you think, longer term, is the right level of SG&A as a percentage of sales for the Company?

I think there's always going to be some variability because of the cyclicality in the business, and I think what you're seeing a little bit right now is that we're in the lower -- we are in the -- we're obviously at the low end of the cycle, which is going to run the SG&A higher. And in those times, we're going to continue to invest in where we think the growth could be, as I've mentioned earlier.

Certainly SG&A this year has run higher than it has historically. Next year, we're probably looking at an SG&A rate on a full-year basis in the -- maybe a 17% to 18% range. But I think longer term, it certainly will be lower than that, but it will depend on where we are in the cycle in different times.

That's fair enough on the position in the cycle. I understand, Rick, your hesitancy to -- and Jim, to forecast revenue for 2016. As somebody who tries to forecast that, I know how difficult it is. SG&A, the SG&A line is something that is much more in your control, so I'm wondering if you could provide some kind of forecast, some kind of range for us to work off for SG&A dollars in 2016.

I think Jim's commented on what the expected SG&A rate potentially could be for this next year. That's probably about as close as we're going to get to a forecast for you on SG&A at this time. I will say that, as I commented earlier, we're going to continue to watch the market and we believe that where we are is near or at the bottom. So we don't expect any significant changes in terms of the revenue projections, as I said.

However, we're going to keep watching it, and we'll see what happens in the spring as we get back into really the selling season. And if we need to make more SG&A changes, we will. As Jim mentioned, some of this is structural, with some of the new businesses we added. And I also commented we have some work to do with some of or newer businesses, and I think in terms of being able to leverage the profitability and the capabilities from those businesses.

All right, guys, that's helpful. Thank you very much.

Thank you.

Your next question is from the line of Schon Williams with BB&T Capital Markets.

Hi, good morning, gentlemen.

Good morning.

Rick, I was wondering, just we're already essentially halfway through the next quarter. I was wondering if you'd be able -- if you'd be willing to give any comments around the trends you've seen so far in September, October, any material improvement or decline?

No, I couldn't really comment really on any specific trend, other than to say there's nothing that's caused me great deal of caution or concern. I've had some opportunities recently to speak to dealers in a couple of markets, and growers as well, end users, and I'd say the attitude is really not that pessimistic. They're looking at it as, okay, this is the cycle; we've been through these cycles before and we know where we're at.

And farmers do still really understand the significant benefit from irrigation. I was talking with somebody just a couple days ago who was commenting that in his acreage, a significant portion of it was irrigated and he had very consistent high yields in corn versus his non-irrigated acres, even with heavy rains in the spring and really significant rainfall even during the summer and really good weather, just to really demonstrate the difference in irrigating.

So I think it's well-known, attitude is pretty positive, in general. I can't say that I have anything that would be factual to -- that I can point to to say what will happen in this next season. But I can say I'm not hearing anybody talking about this is doom and gloom or anything of that nature.

Okay. That's helpful. And then when we last met, you had had some -- a little bit of concern about farm input prices, costs to the farmer as we moved into next year. Have you seen any recent indications if some of those input prices, have farmers seen any relief there or has that been fairly consistent?

I haven't really heard much about changes in those input costs for farmers as of yet. I will say that even things I've been reading in the last couple days are indicating that there will be increased pressure for those input costs -- on those input costs for farmers come spring, as farmers are deciding what they're going to plant and as they're starting their planting process. I think that pressure on the input cost will be there, but I don't think we've seen much change at this point. But again, this is really focused now on harvest.

That's helpful. One more if I might. Just you said that industry is still fairly rational on the pricing perspective around irrigation. Do you still feel comfortable that that can hold, or is there anything that's changed there?

I do feel pretty comfortable it will hold. I think it's been -- we have seen pockets where there's been more intense competitive pressure, probably more demonstrated by what a specific dealer or dealers will do in some regions. But, in general, I would say it's been pretty rational, and I have no reason to believe it won't continue that way, unless there were some major significant change in the market, which I don't anticipate.

All right. Thanks a lot, guys.

Thank you.

Your next question is from the line of Tyler Etten with Piper Jaffray.

Good morning, guys.

Good morning.

Good morning.

I was just wondering if you could talk about the mix in backlog, if this is -- this lower backlog is due to mix in lower margin equipment or is -- just if you could expand on it a little bit?

We don't specifically break out information on our backlog, obviously, for some competitive reasons. I would also say that as I commented on regarding the fourth quarter in general, the backlog is not very indicative of anything, especially at this time of year, considering that on the irrigation side that this is more harvest season. So what we're going to get in terms of orders are usually more generated by what happens with storms and things of that nature.

The previous year, our backlog, which had more storm damage in, particularly in the third quarter and probably a little bit in the fourth, not much, would have been storm damage generated at probably slightly better margin than what you would typically have on a normal irrigation sale, but not much difference at all. And I think that I would say that we just haven't seen those storms in the spring or summer this year across most of farm country.

Got it. Thank you. My second question would be [pretty] infrastructure business. When you're targeting new product -- or excuse me, projects, are you looking for bigger projects, maybe not the scale of the San Francisco project, or are you looking for multiple smaller projects to target?

All of the above. It's -- we're looking at the -- certainly we have had interest from customers in very large projects and we have interest in small projects. We're targeting all of those. We may be doing projects that could be submillion dollars in some Road Zipper System-type projects, which are not very typical. Most of them are bigger than that. Or we'll have significant multi-million dollar projects in Road Zipper System projects.

We also have Road Zipper System leases where we will lease equipment for construction projects, and they may be anywhere from a one year or that specific project one season to three- to five-year-type leases. So we are really targeting all of those.

Because they see the unique nature of what that provides as a solution, in terms of mitigating traffic and road safety, and what a great solution it is, particularly for areas like bridges and some areas where there's limited space. So we are -- there isn't any specific target. We're looking at all those areas.

Got it. Thank you very much.

Your next question is from the line of Joe Mondillo with Sidoti & Company.

Hi guys, good morning.

Good morning.

Just wanted to clarify one question regarding the SG&A questions earlier. If you see similar revenues this -- in FY16 to FY15, should we see a similar SG&A as a percent of sales?

Well, Joe, like I said, what we're -- what I would say is the 17% to 18% SG&A rate is how I would think about it for this year. We have some pluses and minuses to the numbers from last year. Obviously, there are some items that we would not expect to recur coming in, but we also have some annualization of some things like Elecsys and those types of things that will also add to the numbers. So I would just -- I think I would just say that 17% to 18% is the way I would think about it.

Okay. In regard to the international markets, first off, how much of the 23% decline, how much was that of FX?

The 23 -- there was a 13% decline in FX in the international irrigation business.

Okay. So in the back half of the year -- so you saw about a 10% decline in volume?

In the fourth quarter, that is correct. And as Rick noted, that was primarily some project revenue in the Middle East that we had last year.

Okay. So regarding the international markets overall, 10% decline in volume, not -- I guess it could have been worse, especially given what's going on in those markets in terms of just slowing down. In your prepared commentary, you were actually relatively positive I thought. You were saying that projects are still moving forward.

What are your expectations going into this year? Are we seeing another down year of this year? Could we potentially start to see more demand picking up throughout the year? What are your -- what's your outlook given the international markets?

The way I'd describe, first, the comments regarding the sales and the international markets in general is that there definitely is more of a project nature to it, particularly when we see the markets contract a little bit as we've seen. We'll see more projects; it creates a little bit more volatility.

I don't view what we saw in the fourth quarter as really an indication of anything specific, other than obviously, the FX impact definitely is an indication of what's taking place in some of what we will potentially be seeing, which could also mean a little more competitive situation in some of the larger projects. And as we talked about I think in the previous quarter, we have seen a little bit of that. But the projects are still taking place, and we're still talking with many customers in terms of development of agricultural development projects in many parts of the world.

So I'm upbeat and optimistic about the potential of those projects. I'm probably cautious in terms of FX impact and also in terms of what that may do, given the strength of the dollar on some of those projects and if we may see more of our competitors emerge into stronger positions in a couple cases.

The other side of that, however, is that we're in a great position because of the turnkey solution capability that we offer as a Company. We are seeing that the -- in the international markets in general that overall agricultural production, excluding the projects, is continuing pretty well. And I'd say that the international farmers are in pretty good shape in terms of their input cost relative to the dollar right now. So that's not a bad position to be in either.

I don't really see any significant issue in the international markets, other than the concerns I would have would be China, where we know we have some real challenges there from a competitive standpoint. And Russia and Ukraine, which are in a not close to us, but I would say definitely vulnerable in terms of being very difficult for us to do business in, in the near term.

Okay. And is there any difference in your outlook headed into FY16 versus headed into FY15?

Not a great deal of difference. I'd say that the one difference is that coming into 2015, it was really uncertain what things were going to look like, where this was going to go. And we've certainly gotten a much better look as we moved through the year in terms of farmer sentiment and some other factors. And obviously, what happened in Russia and Ukraine had an impact on the year.

I would say that we've got more visibility coming into 2016 in terms of what the conditions look like, given what we don't know, what may happen in the next few months. I always feel better when we get to spring and we start to see what farmer sentiment is like at that point in North America and what their planting plans are. And then we've got the most visibility at that time.

It's probably February, March, before we really get good visibility in North America, but I'd say the visibility, what we're seeing in the international markets as far as projects is still very good.

Okay. Just lastly, I was wondering if you have any opinion on corn yields. The last couple years, they've been extremely high, yet stock to consumption ratios still relative low on a historical basis. How much of those yields, based on weather, and if weather teeters just a little bit, how sensitive is the market to turning on a pricing standpoint, just overall?

That's a very difficult question to answer in any kind of a specific term, other than to say weather has a big impact. And we've seen weather conditions the past year were pretty favorable to growing conditions. It also varies by region in terms of -- we'll just talk about North America, even in terms of the crops that they're growing.

There's definitely volatility based on weather and climate conditions, which is where irrigation really fits in as a strength. So I couldn't predict what this next year will look like or what this current harvest is going to look like based on what's happened with weather conditions to date.

Do you have any idea on how good the weather was compared to the last 10 years or 20 years? Was this just an extremely ideal two-year period or were there other elements involved as well that propped up those yields?

Anecdotally, and going out and talking to farmers, they would describe it as very good weather years these past couple of years for crops, which is why they've had the yields that they've had. But there's a lot of other factors that have come into play. For example, Texas, which had a drought a couple of years ago, a large part of Texas now is getting sufficient water and able to irrigate again where they were not able to irrigate for a while.

So there's a lot of factors that come into play. But in general, farmers would say these were really good years, from a growing standpoint, that were probably much better than they'd seen in the previous four or five. I couldn't tell you if that's factually correct. I'm primarily talking about corn belt region.

Okay. All right. Thank you.

Your next question is from the line of Ryan Connors with Boenning Scattergood.

Great. Thank you. A couple questions today. One just had to do, Rick, with wondered if you could talk to us about how customers are financing their purchases of your products and whether you've seen any shift there? I know that some of the machinery companies are talking about a lot more leasing and so forth, and banks are reporting higher operating loans -- volumes on the farm side. And just wondering whether you're seeing any shift in your business there, and if so, how that might impact the outlook?

We haven't really seen a shift, Ryan, in terms of the financing in general. In North America, our estimates in the past have been roughly about one-third of the machines sold would be financed and done through one of the financing companies that kind of specializes in that area. And we would see UCC-1 filings on that equipment that's being sold, which also you allows us to look at, of course, competitive position. So we typically see about one-third financed that way.

What we saw during the peak of the cycle, we saw that drop down some. It would say that farmers were probably buying more machines through cash, and we've seen it probably closer now to one-third again, but somewhere in that range on a general basis. It does vary by region, but it's somewhere in that range.

Got it. So not a big rise. Okay.

No.

And then I was interested, earlier you were talking about the markets internationally that concern you. And I thought an interesting exclusion was you did not mention Brazil, which obviously, there's been a lot of macro concerning headlines there, not necessarily related to agriculture, but certainly one would think that would impact your business somehow. So can you talk to us about that market?

Our volume and business in Brazil has still been holding up fairly well. I would say the biggest challenge we've had in Brazil and when we look at our revenue from quarter to quarter has been in the change in currency valuation with the real. That's been the biggest impact.

But in general, even if you take out the currency effect, Brazil would have been up a bit in the fourth quarter versus the same time last year. So in general, I'm still pretty optimistic about Brazil, definitely long term. Short term, we're going to see some volatility as we have in the past with Brazil where every few years we'll see it going through some economic issues and we'll see some turmoil. But in general, I would say our business is still very solid there.

Okay. Great. And then I also had a question on Middle East. Obviously, you had a big project there last year. A lot of these, as you mentioned, are big project-oriented international sales. In the Middle East, does the decline in the energy complex impact the funding environment for any of that, or is that completely unrelated to the government finances?

I wouldn't call it unrelated. I would say it's a little unknown what impact that will have. I say that where it potentially stretch beyond the Middle East. For example, we've seen projects in Africa that may be funded out of the Middle East that could be delayed due to what's happened with energy prices; however, that's really not known yet.

We haven't really seen a real direct impact of any type. We see the same discussions taking place, the same level of interest. However, I'll feel better as we see those projects actually coming to the point of closing and we can see the funding behind them.

But in general, I would say I'm not specifically concerned about the Middle East in any way. There still is a significant amount of money and a great deal of interest in projects.

Got it. And then just one last one if I might. You've talked about the 4X headwind on a translation basis, and I know you've opened plants internationally, you mentioned Turkey. Is there any true -- or what's the magnitude of the true economic exposure that you still have in terms of having to export in US dollars or is that pretty de minimis now?

Well, it's not de minimis. It's -- I would say that in looking at our total international revenues we probably export out of the United States, it's still close to half of what we do in term of international sales.

Okay.

In total, to various regions; however, that is shifting and it will definitely shift with a greater ramp-up of our factory in Turkey.

Got it. Okay. Well, that's all very helpful. Thanks for your time.

Thank you.

Your next question is from the line of Kevin Bennett with Sterne Agee.

Hey, good morning, everybody.

Good morning.

Rick, following up on Ryan's last question on currency, I'm wondering if you could help us out in the next couple of quarters in terms of the translation impact going forward. Do you think it will be similar to the fourth quarter we just had or how do you see that playing out?

So as we mentioned, the translation effect in the fourth quarter and across the total business, including infrastructure, was about 14%. When we look at the first half of FY16, just based on what we know today, I would expect it will be similar to that but probably a little bit lower.

And then as you look at the back half of the year here again just based on what we see now and what we expect, it will be probably more nominal. So the next six months or so I think you're going to see something similar, but hopefully that diminishes in the second half of the year.

Got it, thank you, Jim, for that. Rick, if we go back to the margins in irrigation business and thinking about the gross margin level in terms of pricing, seems to have stabilized a little bit and you're getting a benefit from lower input costs. Do you feel confident that gross margin irrigation are troughing here? How do you feel about that going forward?

I feel that gross margins in irrigation have stabilized to the conditions that we're seeing today. And as I've commented, based on our indications or our projections of what we think will happen in 2016, we don't see it significantly different. I have no reason to believe that there should be a deterioration of gross margins in irrigation from what we've seen in this past quarter.

So I think they're holding up pretty well. Unless something were to change, where our competitors became extremely aggressive in an area, of course we'll defend our market share in where we need to. But generally speaking, I don't see a change.

Okay. So you don't think they could actually potentially improve, just given what's happened with steel and zinc and whatnot?

Yes, I think both are possible. I think it's possible we could see some additional improvement with steel and zinc, depending on commodity price changes and our purchasing in those -- with those major commodities. And I also think it's possible it could change the other way, based on competitive issues.

Got you. Okay. Perfect. And then in the infrastructure business, you said something about you guys in 2016 are going to increase investment in testing. I was wondering if you could potentially quantify that and maybe give a little bit more color about what's going on there.

There are some new standards that are going into effect, referred to as mash standard, that will require some of the road safety products to meet a different standard level. I won't call it better; I would just say different. That will require, in many cases, for our products to at least be retested to see if they meet those mash standards. In some cases, it may require some product redesign or modifications.

That's the process that will be taking place. And as what we're finding is some of the states will implement those standards faster than is required, but they are selecting to potentially implement those standards.

So in terms of the cost to you guys, is it significant or is it something we should be thinking about or we won't even see it show up?

It may show up as we proceed with this, but I think it's something we can talk about in future quarters as we get into really understanding what testing needs to be required and what, if any, product modifications need to take place. There isn't much I could tell you about that estimated cost at this point until we get further along in the process.

Okay. Perfect. Two more quick ones. Number one, you usually give the revenue breakdown in terms of dry land versus replacement. I was wondering if you could provide that for the fourth quarter.

Yes, I can. I can say that the replacement piece of business was the largest in terms of our whole goods shipped out the door; 47% would have gone through replacement, 25% into dry land applications, and 27% in conversion from flood or gravity. And this is for the domestic US market that we're talking about.

I can also summarize this for you a bit and say that for the total year, 39% of the machines were replacement, 31% dry land and 29% conversion. So it's much closer to that one-third in each category than what we saw during the drought period, but that's roughly the numbers.

Okay. That's perfect. And then last question for me. I see you made a small acquisition, SPF Water Engineering. Was wondering if you could provide some information about that and the thinking behind it?

Yes, it's a great little engineering company up in Boise that has specialized in water engineering, as the name implies. And that includes everything from water rights to design of irrigation systems to the waste water-type systems and many different types of applications. But they've expanded our capability from an engineering standpoint in terms of large projects, but also with much bigger, larger strength in water in general. So we see them as a great addition to our engineering resource team that can be beneficial in many of the large projects that we work.

Perfect. Thank you so much.

Thank you.

Your next question is from the line of David Rose with Wedbush Securities.

Good morning, thank you for taking my call. Rick, maybe you can talk a little bit more about just your thinking again in terms of next year. If I go through your commentaries, it suggests that you've got a translational headwind for the first half on international irrigation. You don't see any fundamental drivers to improve the business, and I think we've all pointed out that's there's arguably some drivers on the down side.

So doesn't it seem logical that at least on the international side that you've got a tough start, at least for the first half of the year and you're likely to be down. And then with North American irrigation maybe flat, there's a downward bias to the revenue number for next year. Wouldn't that be the logical way to think about this?

I think that's definitely a perspective on the story. I think the other part of it is the things that we're doing to expand our business and increase share in many different ways, including our project revenue that we're working on with a key projects team that is going after large projects. We have new product development taking place in each of our business units with new products planned for additional growth.

We've got market share gaining activities in each of our business and strategies that are being implemented. So there's many other factors to this, other than just the marketing itself, as you've described it. And I suppose if we just rode the market in that sense, that could be an outcome. But that is not an outcome I would predict.

That's actually really helpful. I appreciate it. On the infrastructure margin side, I thought I had heard a number of 200 basis points in investment on the infrastructure margin side. You don't have these Road Zipper, any large projects. So I'm really trying to think of -- I think we're all trying to figure out what the midpoint of that infrastructure operating margin business is. Are we thinking about mid-teens, or is that even on the high end, given how you started off very low in the first quarter. And based on your commentary, the 15% in the fourth quarter seems to be a high water mark right now. So how should we think about next year operating margins? Is that mid-teen, 15% kind of a reasonable level from which to start?

I'm not going to provide a specific kind of number, but I think that certainly the 18% was a very, very good year in the infrastructure business. And as you mentioned, we potentially have some incremental investments on the product development side. And absent a -- or I should say the QMB Road Zipper projects are certainly a key contributor to the margin in that business.

But we are continuing to work to look for projects, and we are continuing to work on other areas of the business to kind of make up that margin. But I think it's certainly fair to say that 18% was a very favorable year, and so there could be some pullback in the margin this year if we don't get another QMB project.

This is Rick. One other point that I would add to that is that prior to this year, where we were running with the infrastructure business, which consists of a number of pieces including the road safety products and rail and all the others. But generally, most of the pieces were running in a 10% operating margin or better level.

The Road Zipper piece of it was the more volatile part because we were carrying expenses that were not offset, of course, if you didn't have the projects. We've reduced the breakeven level for the Road Zipper piece of business. We've built up more in terms of lease revenue with the Road Zipper piece of it. And at the same time, on the road safety products business, the margins have improved through expansion of the business through additional revenue, but also through process improvements that have taken place in our production processes, and generally, just efficiencies in our factory.

So I think there's a number of enhancements that have taken place to both of those. And again, it is going to be a little volatile based on what happens with the Road Zipper projects potentially, but the rest of the businesses have all improved.

Okay, that's helpful. Lastly, Elecsys if you could provide us with some performance metrics, sales growth or decline, operating income growth or decline year over year in the fourth quarter. How did it stack out versus your expectations?

I'll let Jim give you some of the more specifics, but I'd say anecdotally that acquisition has -- is performing as expected, if not better. We have now integrated in our Digitec Electronics operation into Elecsys, and they did a superb job of taking care of customers and getting that done efficiently. That team is a great team down there that has very good growth potential in terms of their business.

I'll let Jim talk about some of the more specifics on Elecsys, but I'd say that it has met our expectations.

Okay.

I think I'll start out by saying this is probably the last quarter I'll talk about specifics on Elecsys, because we're now getting into it being part of the core business. But in the prior quarters, I talked about it basically being a breakeven business with the purchase accounting but some of the purchase accounting amortization items are winding off. But as Rick said, from an operating standpoint with excluding those purchase adjustments, the operating margins have been very good.

Just with regard to the fourth quarter, the operating margins, even with purchase accounting adjustments, are now approaching the 10%, as some of those purchase accounting amortization items wind off and the operating margins before purchase adjustments have been very strong. So we've continued to see it progress as we expected, and as some of those short-term amortization items wind off it's definitely starting to contribute positively to the GAAP earnings as well.

Sales year over year were up?

Sales year -- I don't recall exactly where they were in the quarter, but it was a very good sales quarter for them.

Okay. Thank you, Jim.

Your next question is from the line of Chris Shaw with Monness, Crespi.

Good morning, everyone. If I could just go back to the irrigation pricing question. Just more curiously, what's different? I know in the past when you had lower steel and obviously a weaker demand environment, pricing usually -- I guess there was more competition. Have the players changed since last time it happened, or is this everyone being much more rational, is it that simple?

I missed part of your comment, but I think the answer to your question is the players have not changed. It's basically the same players. Prior periods in trough situations, I would say that players were not quite as rational as what we've seen this time. So it's definitely been more rational in terms of overall pricing than what we'd seen in previous trough conditions. But the players are the same.

Are the players in better financial -- are some of the private guys in more better financial shape? Is that maybe why?

I don't think that's a factor in this. I think it's more management. Sometimes it becomes very difficult in a condition like this when the dealers are certainly trying to find any bit of revenue that they can in their regions, and they're pushing to the manufacturers like us to make concessions and do things to try and generate revenue.

However, there's not really a major share shift that's taken place and stayed shifted based on price. It really is through differ differentiation that that share shift really is sustainable when it does take place. I think that what we've seen over time is the pressure could take place from dealers to do something, and there had been some reactions. And we're seeing less of that now and probably more of a realization of those are just short-term initiatives.

That makes sense. And then just switching over to infrastructure. The zipper systems, I was reading an article, and it was suggesting that there was some [perception] that it was going to be obsolete, not obsolete but they weren't going to use it anymore. Is there like a used market for zipper systems or do you take them back? I was just curious how that might work.

There's really not a used market for the systems. There are some cases where if they're coming off of an application, which is really very, very rare, in fact, I honestly can't think of one. I know of one or two that have been talked about at times in terms of taking it off. There have been cases where we have bought back a machine that's been out in a number of years and sold it into another application or leased it into another application, if, in fact somebody wasn't going to use it. That's a very rare situation. But there's really not a used market for the machines or the barrier, that I'm aware of.

Okay. That's it. Thanks a lot.

We have now reached our allotted time for questions. Mr. Parod, I'll turn the call back to you for closing remarks.

Well, the global long-term drivers of water conservation, population growth, importance of biofuels and the need for safer, more efficient transportation solutions remain very positive. We're uniquely positioned for developing and delivering turnkey solutions.

Our offerings include a broad line of market-leading irrigation solutions for agriculture; providing the best irrigation management and control technology; engineered, integrated pumping and filtration solutions; as well as providing energy absorbing road safety solutions and solutions for expanding the capacity of existing roads and bridges.

We're committed to creating shareholder value through investments in organic growth, dividend increases, strategic water-related acquisitions and share repurchases, congruent with our capital allocation plan. I'd like to thank all of you for your questions and participation in this call.

This will conclude today's conference. You may now disconnect.