Lindsay Corp (LNN) 2016 Q1 法說會逐字稿

Good morning. My name is Combia and I will be your conference operator today. At this time I would like to welcome everyone to the Lindsay Corporation first-quarter 2016 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 proceeded by, followed by, or including the words expectations, 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 first quarter of FY16 were $121.6 million, 10% less than the same quarter last year. US and international irrigation equipment revenues decreased in the quarter, with infrastructure sales essentially flat to a year ago. Operating income of $11.7 million was essentially in line with the operating income of $11.9 million in the first quarter of last year. While interest expense of $1.2 million on the Company's new $115 million long-term debt at 3.82% resulted in lower pretax profits. The Company reported net earnings in the quarter of $6.9 million, or $0.62 per diluted share, compared with $7.6 million, or $0.62 per diluted share in the prior year quarter. Foreign exchange translation continued to be a headwind in the quarter, reducing sales by $7.6 million, or 6%, and lowering operating income by approximately $650,000.

For the Irrigation segment in total, sales were $101.3 million, 12% lower than the same quarter last year. Irrigation operating margins decreased to 12.5% of sales from 12.8% last year. In the US Irrigation market, revenues were $59.2 million in the first quarter, decreasing 6% from the same period last year and declining 17%, excluding the revenue from the newly acquired Elecsys Corporation. Overall, lower commodity prices and reduced farm income continued to affect farmer sentiment regarding capital goods purchases.

The USDA is now projecting 2015 net farm income to be $55.9 billion, dropping 38% from the prior year and declining nearly 55% from the record high set in 2013. Net farm income for 2015 is projected to be the lowest since 2002. On a more positive note, grain prices have been more stable over the last 12 months and we've seen signs that input costs such as fertilizers and chemicals have begun to decline. While we've not seen a positive upturn in overall market conditions for agricultural equipment sales, we believe these factors are indications that we are near or at the bottom of the agricultural commodity cycle in the US.

In the international Irrigation markets revenues for the first quarter were $42.1 million, decreasing 19% over the same quarter of last year. 12 percentage points of the decline was due to foreign currency exchange rate changes, with the remainder of the decrease primarily attributable to a significant slowdown in sales in Brazil as well as more modest declines in a few export markets. We continue to see significant project quoting activity in the international markets, although the headwinds of currency rates and lower grain prices may lead to delays in projects. And while the international markets tend to be more resilient during downturns, the varying percentage of our international revenue is project-based and potentially less consistent from quarter to quarter.

On most projects we're in a position to provide the irrigation engineering, mechanized irrigation equipment, pump systems, filtration and our cloud-based irrigation management system; delivering a turnkey solutions to our customers. We see this as a growing opportunity for our business as farmland consolidates and as new farmland is developed throughout the world. In addition, the geographic dispersion of our revenues in having irrigation manufacturing and distribution platforms in the US, Brazil, South Africa, France, China and Turkey provides options for mitigating currency fluctuations in foreign markets.

Infrastructure segment revenues were $20.3 million in the quarter, increasing 1% from the same quarter last year. Excluding the effects of currency translation, Infrastructure sales increased 9%. The increase was driven by continued growth in road safety product revenue and increases in small Road Zipper system sales and leases. Contract manufacturing and rail structure revenues declined in the quarter. The Infrastructure segment generated operating income of $3.1 million in the quarter, or 15.2% operating margin.

The Infrastructure business continues to perform well in the first quarter of 2016. Interest in the Road Zipper system as a solution for traffic mitigation remains very robust, although we don't anticipate a project in 2016 comparable to the Golden Gate Bridge project which contributed revenue of $13 million in FY15. The recent passage of the five-year Highway Bill is a significant step forward and improves the outlook for sales growth for road safety products and Road Zipper systems into 2017 and beyond, as it provides more funding, visibility and certainty to states for planned projects.

For the total Company, gross margin was 28.3% of sales, approximately 1 percentage point higher than the same period last year. Gross margins in Irrigation and Infrastructure both increased approximately 1 percentage point. Some competitive pricing in the Irrigation market persists, but has primarily consisted of passing through the steel price declines realized. In addition, Irrigation margins have increased slightly from the inclusion of the revenue from the acquisition of Elecsys Corporation completed in January 2015. The improvement in infrastructure gross margins were due primarily to sales mix changes consisting of increased sales of road safety products and Road Zipper system sales and leases.

Operating expenses in the first quarter decreased to $22.7 million from $25 million in the prior-year period. The current year includes $2.4 million in operating expenses for Elecsys while the prior year included $2.1 million in additional environmental and acquisition-related expenses. Personnel expenses were $1.5 million lower than the same quarter of last year. And bad debt expense declined by $1.2 million, as we were able to recover a portion of the China receivables that had been reserved in prior periods.

The order backlog at November 30, 2016 was $61.9 million compared to $68.3 million at November 30, 2014. The November 30, 2015 includes $8.1 million of backlog for Elecsys Corporation, while the prior year included $12.7 million related to the Golden Gate Bridge project. Excluding these items the total backlog reduction is $1.8 million from the same time last year. 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 quarters' revenues.

Cash and cash equivalents were $129 million at the end of the quarter, decreasing approximately $10 million during the first quarter. Cash generated from operations were offset by capital expenditures and dividends. And the Company repurchased stock for $9.2 million. As of the end of the quarter we have $102.8 million of share repurchase authorization outstanding.

In summary, we're now entering the third year of the cyclical downturn. We're pleased with the first quarter performance of earnings per share equal to a year ago, as we maintained gross margins and managed our expenses in response to the compressed market conditions. While it's too early to tell and to know what the market will bring in FY16, we continue to see factors creating a headwind against potential revenue increases over the prior year.

Commodity prices appear to have leveled off. However, farm income for 2015 is projected to be the lowest since 2002 without a visible catalyst for improvement at this time. Brazil and Russia, which are a couple of our more promising growth markets, face specific near-term challenges. These challenges certainly do not change our outlook for those markets but do affect the timing of expected growth. In the US we believe we are at or near the bottom of the agricultural commodity price cycle. However, visibility will remain unclear as we will begin the selling season right in the second fiscal quarter.

Through this cyclical trough, our Irrigation dealers have remained healthy and optimistic. They understand Lindsay's competitive strength in the market and are enthusiastic about our initiatives to continue to build our technological advantage together. In FY16 the international market performance may consist of more project sales than in FY15, which could make revenues lumpier from quarter to quarter. In addition the stronger US dollar will continue to create some challenges in export markets; however our global footprint places us in a strong competitive position.

In Infrastructure we plan to build on the success of 2015. While we don't currently have a project to replace the Golden Gate Bridge revenue realized in 2015, the Road Zipper system project pipeline remains robust. For the Infrastructure business in general, the long anticipated passage of the multi-year Highway Bill should improve the outlook for the business as we move through the year.

We will continue to aggressively protect and expand our market share in both Irrigation and Infrastructure while continuing to expand our competitive advantages through our differentiated offering of products and services. At the same time we will continue to invest in productivity enhancements and implement improvements in our cost structure, control SG&A expenses, and continue to demonstrate working capital discipline.

Finally, we continue to execute against our stated capital allocation plan. During the quarter we repurchased 136,263 shares for $9.2 million. In addition, we continue to invest in organic growth initiatives, pay dividends, and pursue synergistic water-related acquisitions that offer attractive returns to shareholders.

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

(Operator Instructions)

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

Hi. Good morning, Rick.

Good morning.

I'm just looking at the historical model and wanted to start with this questioning. If you look at the period from 2007 to 2011, your Irrigation business was generating average first-quarter sales of about $60 million. For the most recent quarter if you take out Elecsys and LAKOS revenue, you'd have generated maybe about $85 million in Irrigation sales. So even given that we're in the third year of the cyclical downturn as we pointed out, we're still more than 30% above where we were during that 2007 to 2011 period. So I guess my question is, do you feel that Irrigation sales could trend lower potentially toward that 2007 to 2011 average run rate, or to your comments around the ag commodities likely bottoming here reflect your view of Irrigation sales as well? Do you feel those are bottoming?

Well, the signs that we've seen, Brian, would indicate that we are at or near the bottom of the cycle, as I indicated. In talking to dealers I would say they're optimistic about the future. I would say that most would comment that they don't believe that we've turned the corner certainly yet, and we anticipate that this next selling season will be important in terms of understanding where we are in the cycle. However, through the first quarter it was relatively strong. We did, in talking with our dealers, have a good program out there in generating some additional sales in the first quarter and it wasn't a case of really discounting as much as trying to take some of the demand that was there. But the demand is there and we've been pretty, I guess, pleased with how the first quarter turned out. But still a little skeptical in terms of what's around the corner when we get into the selling season. We just don't know yet.

Okay. And what do you think, Rick, is the biggest driver of this more than 30% step-up in the run rate? Despite the difficult operating environment, we're still doing $80-plus million in the first quarter this year excluding the acquisitions in Irrigation compared with that $60 million run rate on average for those five years from 2007 to 2011.

I think there's a number of potential factors. One of them is I think during that time from, say, 2007 and forward, we've definitely strengthened our global market position in all of the markets we're in. So I think our overall strength and overall penetration in the market is stronger. So we're seeing revenues that are really still pretty strong in the international markets, even though we have some headwinds with foreign currency. But in general I would say we're in a pretty strong position in all of the markets around the world.

Okay, great. And then just a couple questions to help with our modeling. The G&A was down big sequentially and year over year. Can you talk a little bit about why that is? And I think you made some high level comments, but a little more specifics around why that is and what should we expect going forward in G&A?

Brian, this is Jim. The G&A is down a little bit, certainly in the first quarter versus a year ago. Obviously, there's a number of things that are kind of more specific to the quarter. Last year's environmental and acquisition costs, and then this year obviously we had some favorability in the bad debt expense. So if you pull that bad debt expense out of Q1, the run rate is similar to a little bit lower than what we saw post-addition of the Elecsys. So we've certainly taken some SG&A costs out. But I think that run rate in the $10 million -- or excuse me, the -- if you add back the $1.2 million, I think you get to a run rate that's fairly close to what you see going forward. Having said that, we are a little bit in the lower part of the season. So there will be a little bit higher than, as we've said before, we do have some R&D projects that as we go into the year may add to the R&D line a little bit.

Okay, great. And on that note, just one last -- the engineering and research was 3% of sales in the quarter. It's been a little bit lower than that, 1.5% to 2% historically. I know some of this is related to Elecsys, but is the roughly 3% the right level to expect for engineering and research going forward?

Well, I would say obviously there's some seasonality to that number. As you said, Elecsys has added to it a little bit. And as we've said in the past, we do have some -- we are focusing on product development a little bit more. So I think taking in -- I would take the seasonality of the revenue into that percentage number when you think about it.

Okay, great. Thank you and have a good holiday.

Thank you.

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

Hi, good morning.

Good morning. I wondered if we could just talk big picture around the impact from some of the recent legislation. I guess I'm just trying to get a sense of, on the Highway Bill, is that -- we think that -- is that going to more impact your Zipper systems or is that more the road markings? And then maybe if you just talk a little bit about Section 179 and the impact there, do you think that could be a significant catalyst heading into next year? Yes, Schon. I think first on the Highway Bill, I think getting a multi-year Highway Bill in place is very beneficial to primarily the road safety products part of the business. So this would be things like the crash cushions and devices that are installed in the roads as they're being either built or repaired, more so than Road Zipper system, although there will be some benefits to that as well. And that's primarily on leased projects during road construction. So we could see a definite upside there.

But the biggest benefit I think is from the standpoint of getting a multi-year Bill in place is giving the visibility to the State and certainty in terms of that future funding to go ahead with their longer-term projects. And this has been a long time coming. So I think it will take a little while to see the ramifications of that and the positive impact, but it will ramp up over time. So that I think is very beneficial. But primarily Road Zipper will get it on the lease side. And the other side, the road safety products in terms of crash cushions, will get it on the construction side.

On Section 179, I think having it put in place and basically not have to be a question at the end of every year will be beneficial. Personally, based on what I've seen and heard, I don't anticipate it driving any significant demand. We don't believe that generally has [rated] when it's done right at the end of the year. It certainly is more beneficial when it's passed a little earlier and people plan for it. But having it passed is not a huge surprise I think to most people. And the demand is probably there anyway. But I don't think it's going to be a big catalyst for driving significant demand at the end of the year.

All right, that's helpful. And then on the, maybe just a question for Jim. On the bad debt expense it looked like you had a reversal this quarter, I think $1.2 million obviously helping the margins. I'm just wondering. I mean, you took a $5 million reserve last quarter. Do you still see, I don't know, I know it's very hard to detail. But do you see maybe that full $5 million kind of reversing itself, or where do we stand with collections? Maybe just some color there would be helpful.

Well I would start with the China receivable, and it is the same balance that we had the collections in this quarter. But the China receivable had aged to almost three years, which was why we took the reserve last quarter and we were not seeing any significant collections. We continue to work towards trying to collect that. But as you might imagine, there's very little visibility into the China government and the particular entities that we're dealing with. So I think that we continue to work towards it, but we don't have visibility into it that would have us changing our reserve at this point.

Okay. And then one more, if I might. The share repurchase slowed a bit in the quarter despite pretty low share prices, nothing dramatic. But I'm just wondering, is that kind of natural cash flow timing or is there any kind of change in the capital allocation policy?

There is no change in the capital allocation policy. I'd describe it as we had a 10b5-1 plan in place that finished right towards the end of the year and there was a little bit of a timeout at the end of our fiscal year. And we have -- we are in the market buying now. So it has been restarted.

Okay, perfect. Thanks guys, and Happy Holidays.

Thank you. Same to you.

Your next question comes from the line of Nathan Jones of Stifel Nicolaus.

Good morning, Rick. Good morning, Jim.

Good morning.

Just like to follow up on Brian's line of questioning a little earlier. If you take out Elecsys, year-over-year domestic Irrigation comps were about minus 17%. I know your supplies, or industry supplies not just yours, have been told to look forward to flattish demand next year. Rick, you've been talking about at or near the bottom. When we entered this down cycle we kind of did so at the start of your fiscal year and comps remain negative going into this quarter. I'm wondering where the confidence comes from that we are at or near the bottom of the cycle and we're not facing what is starting to look like significant negative comps on the top line on domestic Irrigation going into the next selling season?

I think my confidence that we're at or near is coming from a combination of things that I'm seeing in generally commodity traders, in terms of the information that I see in commodity prices, anecdotal from talking to dealers and from growers, and it's from other ag equipment companies in terms of that belief. Now, I think the key, Nathan, is really how long does this run at this kind of a level. And this is where I think that obviously if it ran a number of years longer or so, it definitely has an impact in terms of demand. But I think farmers are optimistic that there is a term point coming. And that there are some indications in terms of things we're hearing in terms of fertilizer and seed prices coming down and other input costs coming down, which are beneficial to farmers' profitability.

But there isn't a specific fact that I can point to that would say this definitely tells us we're at the bottom and it could turn in the next six months. I think it's not quite that clear. And it will require some catalysts for that turn and that change, and we don't know when that will occur.

Okay. And then on pricing, obviously it held again in the current quarter. We have been hearing from some players in the industry that one of your competitors has begun to cut price a little bit more aggressively, specifically the one that's starts with R. Can you just talk about what you're seeing out there in terms of pricing and what your expectations going into the selling season on net pricing? So I know you're offsetting at the moment price less steel input cost is offsetting. If you net that out, what your expectations are for net price going forward?

Well, what we've seen in the market, particularly in this last quarter, is we have seen a little bit of some price change with a competitor, we'll leave it a that. And a little bit more competitiveness, and some of it has been primarily passing through what we believe is steel price costs decreases, and nothing that is really extraordinary.

At the same time we're willing to continue to be aggressive in the market and maintain our share and protect our market position. We don't anticipate any significant change in margins going forward at this stage. And I can't tell you what competition will do. I'm just saying that based on everything we have seen and know today, we don't anticipate significant change because most of it's been pretty rational. It's difficult when we see a steel price fall like this and we pretty quickly see the benefits flowing back into price. However, that's the way it is and we will protect our share.

Okay. Thanks very much for your help.

Thank you.

Your next question comes from the line of Ryan Connors of Boenning and Scattergood.

Great, thanks. Happy Holidays, and congrats on a great result in a tough environment.

Thank you, Ryan.

I wanted to actually expand on the Brazil situation a little bit, Rick. I know you talked a little bit about it there, but if you could expand on the situation, the outlook there. I know there's a school of thought that says demand will be okay since a lot of that is exported in US dollars in terms of the commodities. But obviously there appear to be some big risks there as well. So can you just talk about how important that market's become for you, and maybe drill down for us a little bit on what you're hearing from your people on the ground in that market?

Well certainly it's an important market, not just in terms of the revenue it generates for us. I mean, it is one of our bigger international markets but it's also an important potential growth market for Irrigation. What we've seen recently is certainly some changes of inflation in Brazil, difficulty in terms of getting the financing approved on equipment. So we've seen delays in terms of financing approval. And I'd have to say up through the end of the fiscal year and even a little bit into this first quarter, most of the change that we saw in Brazil in terms of revenue reduction would have really been FX impact rather than actual demand change. But I think right now we're seeing more demand impact with the holdback or slowdown in terms of the financing approvals.

Now, there's pluses and minuses there, as you said. They're selling their commodities potentially in higher value US-dollar type currency. So there's some benefits. We're also seeing some issues in terms of the crops themselves recently with some dry weather drought conditions appearing in Mato Grosso and Goias. So I think there's some commodity prices that are starting to move up which creates a more beneficial position for the farmers. But the big issue really is the funding for agricultural equipment, which is slowing down a little bit. And it's really too bad because it could really be beneficial to their market in total.

Okay. So if I hear that, if I can paraphrase that. You see there's risk factors to some funding but you don't see it as a major leg down or [huge] drop in terms of the market? You're not looking at it as a potential real headache for you in the next 12 months? Is that a --

No. I think that's a fair statement, Ryan. The key is there's so much political stuff going on in Brazil right now in so many different fronts that it's hard to know what impact that's going to have in terms of the funding itself. The funding and the availability of that funding, release of the funding and the flow-through of it in terms of the projects as they're coming along, is key. And I don't view that as long term or a major obstacle going forward. But I do think temporarily it is an issue.

Okay. And then my other question is actually bigger picture, Rick. I know this isn't necessarily new information, but slide 9 in your quarterly slides jumped out at me on the farm and ranch irrigation survey results there. And what struck me was from 1998 to 2008, pivots and laterals went from 35% of acreage to 46%. So more than 1% per year in share gain for pivots. But then from 2008 to 2013 we only went from 46% to 48%, so less than 0.5 a percentage point of gain per year since then. So that was interesting to me and kind of counterintuitive, given how dramatic the sales cycles have been since then. Can you talk about that and what -- why that is, why that appears to have actually decelerated in terms of adoption?

Yes it's interesting because when you really look into the detail of it, that kind of puzzled us too. We dug into find out what was really going on with those numbers. But in that 2013 farm and ranch irrigation survey, the question that is asked is, did you irrigate, and not, do you have irrigation on your farm, or are you irrigating periodically, did you irrigate? And that was during the drought. And we saw an actual decrease in [pivot] irrigation in some markets. While they had equipment in the field, they were not irrigating during that drought time period.

So we saw the biggest change occurred in about three states. And Nebraska was certainly one of them, Colorado, and I don't remember, I think Texas was the third. And it had to do with the water availability. And when you take those out and normalize it, you were seeing the ongoing continued expansion of pivot irrigation as we normally did. And it was that kind of anomaly of that drought that created that situation, and the numbers that you saw in 2013.

Got it, okay.

However, you isolate it in the data to those three states, Ryan.

Got it. I'd suggest making a note of that on the slide because it certainly -- I think the story is a lot more bullish than that points out. Anyway, thanks for your time. Take care.

Yes. Thank you.

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

Hi, guys. Good morning.

Good morning.

So I was wondering if you could comment. On the international business, you've made some comments on Brazil. But just overall, looks like volume, or I guess growth excluding currency, was down just 7%. Just wondering if you could comment on that. It seems like the last couple of quarters were only down at most around 10% or high single digits. Just given the environment, it seems like you would have guessed, or I would have guessed, that demand would be a lot worse than that. What's your outlook on that? And you're saying that the US seems to potentially be bottoming outside of Brazil, which seems like we're going to see more pain. But outside of Brazil, how are you thinking about international markets overall as we proceed throughout the year?

Well, as I mentioned in the opening comments, what we often see in the international markets is more projects as well as the normal flow-through our dealer network in ongoing pivot and mechanized irrigation sales. And we are seeing some delays in some of the larger projects that are being -- have been discussed or in processes in some of the international markets. So that will make things a little lumpier from quarter to quarter. In general the international markets have been a little more resilient and have held up pretty well.

What we typically see in a trough cycle like this is the international markets tend to lag that trough period a bit, and we've seen some of that. And they also tend to lag coming out of it at times, and we haven't really seen any kind of a significant impact in most of the markets other than the FX impact. So I'd say in general most of the markets are holding up pretty good, with the exception of, as I said, the foreign currency impact that we've noted and talked about. And we do see some delays in projects. But in general the demand is still there, and there is the recognition of the very important need to have mechanized irrigation to get the crop yields that are required.

And with the Turkey facility now underway for several quarters now, how is that going in regard to utilization? And how has that been -- I would think it would be a positive regarding currencies alone. How has that gone throughout the last few quarters?

Well, the start-up of the facility has gone very well. The last phase of it is just getting completed, which is our galvanized operation, and that will be opened and commissioned very soon. And that's the last phase of the manufacturing part of it. I'd say that we're not at the capacity levels in terms of running the production levels that we've anticipated yet. But nothing major other than we're starting this up in a kind of a trough of a cycle in general.

The other kind of near-term obstacle we ran into is we were also exporting from that facility to Russia. And as you can imagine, the relationship between Russia and Turkey is a little strained at the moment, which has created some issues there. But it's not, I would consider, to be material or significant to the long-term viability of the Turkey facility. But it certainly made it a little interesting there in the near term in terms of shipment to Russia.

I mean, prior to this facility though, you were exporting from the US, correct?

For most of the markets that we're talking about, the exports would have been from the US. But there is some -- yes, I think that's a true statement. Yes.

Okay. So I guess what I was thinking was, you're benefiting that you're not exporting from the US now, that you're running it out of that facility. And then also I would think even though, or in a very weak environment, that more product is being run through that facility so the leverage of the costs on that higher volume is actually helping. So if you look at the financials of that facility, and I don't even know if this is significant to your financials overall, if it moves the needle or not. But maybe you can address that. And then if you have seen an improvement on the bottom line coming out of that facility over the last couple of quarters because of the currency exporting, utilization, et cetera?

Yes, I would say that we're still ramping up a little bit so we haven't seen the full benefit of what we expect to see. We're certainly have seen improvements in the profit versus where we were a year ago when we're really just in the start-up phases. But to your point, I think we definitely benefit from the fact that we're manufacturing in the region, which takes the US currency disadvantage that we have in that area kind of out of the equation. And we certainly expect to see over time as we ramp up that facility that we'll get it. I would say the impacts today are relatively neutral to a year ago, just because of where we are in the ramp-up. But longer term we would expect as we get more volume through it, we would expect to see more favorability.

Okay. And then just lastly, the operating margin at the Irrigation segment, what would that look have looked like excluding Elecsys? Just trying to get an apples-to-apples comparison.

You're asking the operating margin piece, is that your question?

Yes.

Yes. We don't really speak to the individual pieces, but what I would say is, is consistent with what we said in prior quarters is the Elecsys addition has been positive to earnings overall and the margins are getting better as we've kind of gotten through some of the purchase accounting amortization type of thing. So it is accretive from an earnings standpoint. And it's helped our margins as well. As well as strategically it's been a big plus to what we're doing on the M-to-M side and the technology side.

Okay. And it seems like even if you do exclude that, and I don't know the exact financial there, but it seems like you've done a really good job considering that the, I guess, the organic growth out of that segment was down I think 19% or 18%. What has allowed you to hold the margins up as high as you have been considering that volume decline?

Well, there's a number of factors. And one of the -- I'd say that all of the businesses are managing their expenses, their costs, SG&A expenses very closely in view of the markets that we've seen and see ahead of us. They have cut expenses where possible. We've trimmed back the SG&A. And I'd say they are still holding back on SG&A expenses in many cases with the uncertainty of what the future market looks like as we get into the selling season.

Okay, great. Thanks a lot.

Thank you.

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

Good morning, gentlemen.

Good morning.

Rick, first a quick question on the weather. I'm wondering if this warm winter that we've had nationwide so far has a big impact on you guys? Have you seen maybe more strength than usual in the second quarter, or do you think we'll see an impact, or just any comments around that would be great?

Well, I don't have a lot of comments on the weather impact other than in talking with our salespeople and some others this past week, they were commenting that it's been very difficult in parts of Nebraska, particularly the western part for example, to get sales just from the standpoint they can't get machines into the field because of water. And it's just been a lot of rain. So things have been pretty wet and made it difficult to get into some markets. So it's a bit mixed. Some areas I'd say we're fighting the water issues in terms of the fields are too wet to get machines in. There's some areas that are dry and they're doing well. So I don't know of anything other than that that I would specifically call out in terms of weather impact.

Okay, great. Moving onto the Infrastructure business, are you still seeing any market share growth from the issues that Trinity had with their end terminals, or is that whole situation normalized over the last couple of months?

I would describe it as more normalized. I would say that we're in a pretty strong position in terms of getting our products certified in each of the states. There's still a few more that are targets that are being worked. But outside of that, I'd say that the market share is in pretty good position and stabilized. Some areas still growing, but nothing real significant.

Okay, cool. And then last question for me. On the M&A front, I know Rick we've talked in the past about potentially trying to find something that I guess is countercyclical to your core business. And was just wondering if you've made any progress on that front, or if everything is still just too expensive out there?

Well, I wouldn't describe it as too expensive. We are seeing businesses and products that we look at that are water-related type businesses, and that's really our focus, still staying in the water-related synergistic-type businesses that tie into what we do. And what we're seeing is some of the businesses that have come up for sale may be a little pricey and have some issues. But we're continually searching and talking with many companies and see a lot of opportunities out there. The real issue is more getting to the willing sellers more than it is the price. But we're finding that's coming up for sale is not necessarily the businesses that fit us and where we would be willing to step up to the kind of price that they want. But we still see a very good potential pipeline of acquisitions that we're pursuing that are ones that really getting into that combination of a willing seller and getting to an agreement on price.

Got you, okay. That makes sense. Well, Merry Christmas to you guys.

Merry Christmas. Thank you.

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

Good morning, Rick and Jim. Thank you for taking my call.

Good morning.

Just a follow-up on clarification on the bad debt reserve reversal. It did not have anything to do with China, is that correct? Or did it have to do with China?

It did have to do with China, yes.

So then if my understanding from your comments were that there were really weren't any changes in how you were -- I guess the relationship with the customer. So what made you reverse the bad debt reserve?

Well, the changes that we did actually have collections on receivables that we had previously reserved. So the $1.2 million relates to money that we have collected on those accounts that had previously been reserved. I think what I would say that hasn't changed is just the visibility into what we should expect going forward. We still have the receivable that is still left on our books that has been reserved is very old and we don't have any concrete indication that we will get future collections, although we continue to try to collect on that receivable. But it's just very difficult dealing with the particular entities that we are within China with respect to this particular account.

Okay, that helps. I appreciate it. And then a couple quick ones. What's driving the mix of greater lease of Road Zipper products? Is there some sort of dynamic?

No, I wouldn't describe it as anything specific in terms of the dynamic. I would say that our people have been very aggressive and assertive in terms of going out and finding those projects for leasing the barrier. And our lease rate right now in terms of the utilization of our lease fleet of barrier and trucks is very high. And they've done a great job in terms of finding those opportunities and getting in to get the equipment leased on the construction projects. And as I said earlier, I think as we get more construction projects going as a result of the Highway Bill, that may increase even more.

So if you think about the guidance, which you don't provide but if you can help provide a little bit of color around our thoughts on the Infrastructure margins for Q2 relative to Q1. You don't have the Golden Gate project in Q2 but you have a higher mix of lease products than you did last year at this time. So would the margin profile be relatively similar, or we have to account for seasonality? How should we think about the relative margins from Q1 and Q2?

I think that I would say relative -- Q2 relative to Q1, Q2 is really the low point from an infrastructure standpoint, from a volume, and that includes things like lease revenue. I think we've done a good job in continuing to get leases but if you just think about the timing. In Q1 we still have still construction going on in leases that are running off. You get into November, or you get into December/January, there isn't a lot of construction activity. And so it really is the low point. So I would expect it's a little bit more challenging in Q2 versus Q1, and then Q3 it starts to build back up again.

Okay, that's helpful. And then the last question, if I can combine the two. Can you provide us an update on LAKOS and Elecsys year-over-year growth? I mean, Elecsys on a pro forma basis?

Elecsys is, they continued to perform well. The Elecsys performance, excluding purchase adjustments, is still running in that low double digit operating margin range. So we've seen really good performance on that business and we continue to make progress there.

And the top line, did it grow year over year or no?

Well so the top line is a little bit more difficult because I -- obviously the top line last year wasn't in our numbers. So I don't recall exactly what their actual internal numbers are. And because the quarters don't line up I don't have a good comparison. So I can't really comment on that.

And then LAKOS?

LAKOS has been relatively flat. I think we've been working through that business, but the performance has been relatively flat to a year ago.

Okay, great. Thank you very much. Happy Holidays.

Thank you.

Your next question comes from the line of Craig [Did] of CKS Securities.

Hi, guys. I have two -- I guess I thought of the selling season as starting when the harvest is over. So how do you guys look at that? Is it more January/February?

We can't hear you. Could you repeat the question, and maybe get a little closer to the phone? We're having trouble hearing.

Okay. The selling season starts when?

The selling season will generally start in that February to March. That's going to be the beginning of the peak of that selling season, February to March time period in North America.

And then the irrigation program we are running right now is not priced? Could you describe it?

Well, there's not really a program running now. We have had a program that was a combination of some, I think, some aspects of price but primarily providing some incentive for the sales guys to go out and talk to customers which included a small give-away item to get out in front of customers, and even competitive customers, ones that have competitors' machines. So a number of different factors that could come into it, including dating of receivables, but I'm not specifically aware of the terms of that program. But as I said, that program is basically complete.

Okay. And then with one competitor now using price, how effective is price at moving share in the US irrigation market?

Generally it's not very effective on moving it and holding share because it creates a competitive response that would cause others to change the price. There's generally, with the one competitor, a price difference that could be 5% to 10% in terms of price difference. That is a fairly standard -- we would typically see that as a standard in the market. And there's also a difference in the product, and customers would be aware of that. Now, we see occasionally is that price gap will expand, and that becomes a little bit more of an issue sometimes, and we usually will see that in trough periods like this when somebody believes that they can pick up some market share. But it isn't very long lasting typically to do that because there is considered to be a value difference and product difference between the products.

Okay. And then your irrigation revenues during the quarter, was it down a consistent 17%, 18% through the quarter, or was it getting worse or better?

I don't really have that information. I couldn't tell you. I'd say what we have is basically this picture as we've described for the quarter.

And then would your November/December results give you comfort that things might start to flatten in Q2, or you're not seeing that yet?

I think we are at the time in the year when we're at the seasonal low point and so the lead times and the visibility we have is very, very limited. So we really don't have a visibility into what Q2 would look like.

All right. Thanks a lot.

Thank you.

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

Hey, guys. Thanks for taking my call. I appreciate it.

Hi.

Just one more question on pricing. Since we're not into the deep selling season yet and we're just starting to see some price discounting, what's your confidence level that competitors won't discount pricing more as we get into the heavier selling season?

I can't describe a specific confidence level. I'd say that typically what we have seen in the past, and this will exclude the couple years of significant drought which drove some demand and some pull-forward to some degree. Typically what we've seen is at the end of the harvest season, we would see some program similar to what we've seen this past year out on the street with manufactures and dealers attempting take some of the demand off the street at that point prior to coming into the spring selling season prior to winter, and this is nothing unusual in terms of what we've seen in this past quarter. That doesn't really give us a good indication of what's going to happen in the primary selling season when things start up again. And what will really be determined will be -- what will determine that, rather, is what farmers plan in terms of planting and their plans in terms of capital goods purchases. So it's just too soon to really read anymore into that and consider it as any indication of what the selling season will be.

Okay, great. That helps a lot. So looking at the Infrastructure segment, obviously this Highway Bill is a big driver for you guys. Do you have any idea when will this start to impact this segment? And what sort of impact we would have on that? Obviously it's incremental, but is this a huge win for you guys and can we expect stuff to flow through as soon as the second quarter?

So I would say that it's very positive long term. The states have a very difficult time planning long term for projects if they don't know exactly what the funding is going to look like. So in the long term it is a plus. Absolute dollar terms, the program starts out very similar from a federal funding level to where it is and it grows over the five-year period. So it does helps the growth going long term. From the standpoint of impact on the current fiscal year, it takes a little bit of time to get traction on these. With the new build there will also be new rules around how the funding gets applied. It also takes -- the states are now able to plan. So I wouldn't expect an immediate Q2 type of an impact, but I would see it build throughout the year, more into the season and more later in the year.

Okay, great. Thanks. And now if we look at the international Irrigation segment, you mentioned that Russia has some issues there, but in terms of the other Eastern European segments, are you seeing improvement in demand there or is it more status quo?

Mostly I'd describe it today as more status quo. There are pockets where we are seeing interest in projects, but it is mostly status quo. Nothing really significant in terms of any major change. There's a lot of potential markets that haven't really turned on yet in terms of opportunities that we see longer term for growth in mechanized irrigation that will be driven by the need to reduce the amount of water used and to expand yields, and Eastern European countries are definitely in that category. There's a number of areas in Africa where we will see that happen as well. So there's a lot of market potential out there that hasn't really turned on quite yet.

Okay, thanks. And then just one more from me. I was wondering if you could provide even a rough breakdown of how the backlog looks between Irrigation and Infrastructure?

That is not a breakdown that we typically provide. And as Rick said, I think the overall backlog is down nominally on a year-over-year basis in total.

Okay, that's fine. Thanks guys, and Happy Holidays.

Thank you. You too.

Your next question comes from the line of Chris Shaw of Monness Crespi.

Yes. Good morning, everyone. How you doing?

Good morning.

I was trying to figure out -- I can't remember how your Irrigation customers, I guess particularly in the United States, finance their purchases. But I was just trying to get at, if we're in a raising interest rates environment, is that going to be something that would be obviously (inaudible) for them? Is that much of your sales in the US finance-based, whether it's financed through dealers or whether the farmer them self is financing it?

So historically about one-third of our -- of the Irrigation business gets financed through outside financing sources, and what I mean by that is, is the more specific to the project type of financing. The other two-thirds is either cash on the balance sheet or maybe a loan that the farmer might have with his local bank, and that we don't have visibility to. That number really -- those numbers really don't change a lot. I think what we see is, is that the farmers' balance sheets continue to be in pretty good shape. And I think that bodes well. Rising interest rates is always going to be a little bit of a headwind. I certainly think that where interest rates are now and the increases that we've seen to date, they're still very, very low by historical standards. So I wouldn't expect a lot of near-term impact based on the interest rate environment.

Okay. That's what I was looking for. Thanks a lot.

At this time there appears to be no further questions. Mr. Parod, I'll turn the call back over to you for closing remarks.

Thank you. The global long-term drivers of water conservation, population growth, importance of biofuels and the need for safer, more efficient transportation solutions remain positive. We are 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 our 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 plans. We would like to thank all of you for your questions and participation on this call today. And would like to wish all of you a safe and happy holiday and Merry Christmas. Thank you.

Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.