Lindsay Corp (LNN) 2017 Q1 法說會逐字稿

Good morning. My name is Kayla and I'll be your conference operator today. At this time I would like to welcome everyone to the Lindsay Corporation first-quarter 2017 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'd 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 Brian Ketcham, Lindsay Corporation's Chief Financial Officer; Lori Zarkowski, our Chief Accounting Officer.

Total revenues for the first quarter of FY17 were $110.4 million, a decrease of 9% over the same quarter last year. Both US and international irrigation equipment revenues decreased during quarter, while infrastructure revenues were slightly higher than a year ago. Net earnings for the quarter were $900,000, or $0.08 per diluted share, compared to $6.9 million or $0.62 per diluted share in the prior year.

The irrigation equipment revenue in North America was lower than we expected. That, which lead to under-absorbed factory overhead coupled with higher operating expenses, all contributed to the lower net earnings.

The impact of foreign currency translation was slightly positive for the quarter in comparison to prior year, affecting revenue by $1.3 million, or 1% with minimal impact on operating income. Sales for the irrigation segment in the first quarter were $89.9 million, an 11% decrease over the same quarter last year.

In the US irrigation market revenues were weaker than expected, decreasing 15% from the same period last year. The lower irrigation revenue in the quarter reflected lower unit volume, partially offset by higher average selling prices from the pass-through of increased steel costs.

Our first quarter falls between selling season during harvest in North America, and this period's revenue is usually not indicative of the next full selling season which begins in our second quarter and continues through the third quarter. During the first quarter farmers are generally assessing harvest results and developing planting plans for the next year. We believe that farmers are taking a wait-and-see approach and deferring equipment purchases in the current environment.

Revenues from other irrigation components including pump stations, filtration and technology products were also lower compared to the prior year, reflecting overall post-harvest malaise in North America. Total irrigation segment operating margins decreased to 5.7% of sales from 12.5% of sales in the same quarter last year on the lower revenue, under-absorbed factory overhead and higher operating expenses versus the prior year.

Record production of both corn and soybeans from the fall harvest in the US is added to ending stocks and continues to keep downward pressure on commodity prices. The most recent USDA projection for net farm income of $66.9 billion, and represents a 17.2% decline from 2015, following a 12.7% decline from 2014 to 2015. The prolonged agricultural recession is increasingly weighing on farmer sentiment toward capital good's purchases.

In the international irrigation market, revenues in the first quarter were $39.5 million, down 6% over the same quarter last year, after a slight benefit from changes in foreign currency translation rates. The increased sales in Brazil, Africa and the Middle East were offset by declines in some other markets.

While lower commodity prices impact many international markets, factors such as food security, government subsidies, water availability and currency rates are additional influencers for investments in international irrigation projects. Quoting activity for projects in the international markets remain strong, and we expect to see agricultural development continuing through this cyclical trough.

Infrastructure segment revenues were $20.5 million in the quarter, increasing slightly from the same quarter last year. The increase resulted from increased sales volume and road safety products, offset in part by lower Road Zipper System sales and leasing.

The infrastructure segment generated operating income of $3 million, operating margin of 14.5% in the quarter compared to operating income of $3.1 million and operating margin of 15.2% in the same quarter last year. The infrastructure business continues to perform well in the first quarter of FY17, even without a significant amount of Road Zipper revenue.

The pipeline of Road Zipper projects remains solid with production activity higher than last year in support of future sales, leading to incremental factory overhead absorption. In addition we continue to see improved activity and demand for our road safety products, and are pleased with the performance of that portion of the business overall.

As we stated previously, we're currently running a higher level of engineering R&D expense in the infrastructure segment for product development and testing to the new MASH testing standards for road safety products. We're making good progress in the area, but expect the increased product development and testing activity to continue throughout the current fiscal year.

For the total Company gross margin for the first quarter of FY17 was 25.7% of sales compared to 28.3% of sales for the same period last year. Infrastructure segment gross margin improved, but this was more than offset by lower gross margin in irrigation. The lower irrigation gross margin resulted primarily from reduced overhead absorption on the lower demand, increased product warranty costs on a specific component field fix, and changes in the international regional mix of sales.

Overall, selling margins in the US remain stable. Improved infrastructure gross margin resulted primarily from increased cost absorption from Road Zipper System production and volume leverage from higher road safety product sales.

Operating expenses for the first quarter of FY17 were $25.6 million, an increase of $3 million from the same quarter last year. Operating expenses in the prior year's first quarter were unusually low due to a $1.2 million reversal of a bad debt reserve in the quarter related to collection on a previously reserved account in China.

Operating expenses increased in the quarter in product development and testing costs and some specific project related legal and outside consulting fees. Some personnel-related expenses such as severance and medical were also higher in the quarter than the same time last year.

The order backlog at November 30, 2016 was $55.9 million compared to $61.9 million November 30, 2015. Order backlog in international irrigation and infrastructure both increased, and the US irrigation backlog decreased in comparison to the same time last year.

As we've stated, our backlog typically represents some longer term irrigation and infrastructure projects as well as short lead time orders, and therefore is generally not a good indication of the future quarters' revenues. US irrigation backlog is even less indicative at the end of our first quarter because we're in between the traditional sales and installation seasons which occur during our fiscal second and third quarters.

Cash and cash equivalents were $103.1 million at the end of the quarter, increasing approximately $2 million during the first quarter. Cash generated from operations declined $400,000, or just 5%, compared to the prior year's first quarter. This is a testament to the resiliency of our business during trough periods in the cycle.

Although no share repurchases were made during the quarter, a total of 63.7 million remains available under our share repurchase authorization at the end of the quarter after repurchasing a total of 186 million in shares over the past three years. The strength of our balance sheet continues to position us for additional growth through acquisitions and other initiatives to drive improved returns for shareholders, including share repurchases.

We are now entering the fourth year of the cyclical downturn in our irrigation business without a near-term catalyst for change in sight. Up to this point irrigation equipment pricing has remained competitive but rational in both domestic and international markets.

Steel costs have recently started to rise again, and we expect to be successful in passing through cost increases to our customer, as we have in the past. Unfortunately during the quarter we incurred abnormally high expenses related to specific projects, where those projects are even more onerous in a low revenue period such as we experienced in the first quarter.

Some of the additional expenses related to outside consulting resources engaged in assisting us with identifying and implementing cost reductions in our cost of goods sold. While we are incurring additional expenses for these services in the short term, we expect to realize cost savings this fiscal year to be a multiple of the expenses recorded. Given the less-than-expected demand realized in the quarter, we are continuing to assess and take action on appropriate expense reductions.

In spite of the current market conditions, we continue to recognize benefits from our many water-related acquisitions. From a financial standpoint these acquisitions have helped us to improve gross margins that provided incremental revenues in markets outside of architecture.

From a strategic standpoint, these acquisitions in water engineering services, integrated pumping systems, filtration, irrigation control systems, and machine-to-machine controls have positioned us as the recognized leader in irrigation solutions, providing a value-add proposition to our customers beyond our market-leading center-pivot product line. The turnkey nature of our value-added proposition is particularly important in international markets.

In the infrastructure segment, sales and profits have been stabilized and improved. We continue to see strong interest domestically and internationally in Road Zipper System projects.

In addition we now have a long-term Federal Highway Bill in place, the FAST act, which is potentially beneficial for the infrastructure segment. While we've experienced continued strong demand for our road safety products, we don't believe the new Highway Bill has resulted in significant incremental demand or stimulation of surface transportation projects yet, but anticipate continued development of the project pipeline.

While the agricultural markets are cyclical, the underlying drivers for our business remain intact. Throughout the peaks and valleys of the cycles, farmers remain acutely aware of the benefits of efficient irrigation in increasing crop yields and quality.

During this contracted market period we will continue strengthening our market position, expanding in our solutions offering, improving our cost structure and implementing operational efficiencies. All of these will benefit the Company now and long term.

As we continue to respond to developing market conditions, I'd like to thank our amazing employees. Our LEAN Team of dedicated knowledgeable, passionate people continue to demonstrate dedication and loyalty to the organization, our customers and our mission.

They also demonstrate flexibility, ensuring the workload with the willingness to help each other outside of assigned job duties or job descriptions. This provides us the capability to continue to fine tune the organization in these challenging conditions.

That capability is essential, and cannot be taken for granted. I would now like to open it up for your questions.

(Operator Instructions)

Our first question comes from the line of Nathan Jones from Stifel.

Good morning, Rick, Brian, Lori.

Good morning.

Just start in irrigation. You talked about farmers deferring purchases. We've heard obviously crop prices being a big issue and farmers being worried about some of Trump's policies, particularly on trade. Do you get the feeling that this is deferring out of the first quarter into the second or third quarter, or is it deferring out of your 2017 into later years?

I'm not sure that I picked up all of that, Nathan, because it broke up a little bit. But I think what you're asking is, are these factors deferring volume into other quarters or deferring it into another year. Is that correct?

Yes, sir.

I don't think we know what's really happening yet. As I said early on and would continue to say, the first quarter for us is a very difficult one because it really isn't indicative of what we see in the selling season. This one has been particularly challenging from the standpoint of it was less than what we expected in the North America market, so it was quieter than we expected.

But it's too soon to really understand what that means. I haven't seen anything that would indicate that we would expect volume this year to be down significantly or down as much as we saw necessarily in the first quarter. I think there's definitely a malaise out there.

There's a wait and see attitude from farmers regarding a number of factors, including the new administration. But if I were just betting, I'd say the single biggest factor right now is they're making their planting decisions to determine what they should do to improve their profitability this next year, and they haven't decided yet. And we're not going to know until we get into the selling season, or at least another month or two out.

If we could just look at the margins overall in irrigation, you guys have had fairly significantly higher margins in irrigation in lower revenue quarters, which would lead me to believe that there's some of these one-time charges or non-recurring charges were fairly significant. Can you give us more details on kind of what the core margins were and what the impact of those one-time warranty costs and other things were?

Let me just give an overview and I'll turn it over to Brian for some more detail. I think the key things to think about in the irrigation margins are one, pricing from the selling margin standpoint was stable. We did not see a deterioration in selling margins in irrigation.

So the factors were more internal. Part of the absorption issue from our standpoint was, we expected volume in North America to be bigger and we had forecasts internally that were higher than what it turned out to be. And we attempted to ramp down as that happened.

But what that caused was unabsorbed overhead, of which more action has been taken since the quarter closed, to deal with that. So that's definitely a factor. There's a few others as well.

The international sales mix was a little bit different than what we expected. We also had at least one fairly sizeable project in there that was a fairly low margin turnkey type international project.

I'm not going to get into a lot of specifics on it, but it was one where we knew that it was a little lower margin and it presented some other great opportunities for us. So that one also impacted the quarter in this. And as I said, I'll let Brian add any more details to that.

Just to break it down a little bit further, I think the margin decline overall in irrigation, there's just in the US it was probably a little over two points of margin decline. And again, most of that was the under-absorption as well as the warranty cost in the quarter. On the international side it was a little over one point decline. And again, that's primarily the regional -- the difference in regional mix year over year.

Okay. Thanks very much.

Our next question comes from the line of Mike Shilsky from Seaport Global.

Good morning, guys.

Good morning.

Wanted to touch on what might happen to the mix of crops next year and what that might mean for your business. Looking at the crop price today, it may look a little bit better for soybeans next year than for corn.

So just give us kind of thoughts, if we do see more soybean acres planted this coming season and less corn planted this coming season, will that affect the usage or parts on your equipment that's installed today in a different way than if we had the other way around? Or any kind of impact that might happen if we were to see a big shift towards soybeans in 2017?

Well, I can't say it would have a significant impact on the expected volume from a standpoint of whether it's soybeans or corn. Obviously some are in rotation and there's a number of different factors there.

But there's definitely projections that would show corn acreage reducing during this next year and shifting to soybeans. I think the one thing that I would -- that I think is an important factor in this is we found that corn prices tend to be a very significant driver of farmer sentiment in general.

That may shift a little bit with more soybean acres planted. However, it has historically been for a long time that corn is a big impact on that farmer sentiment. And I think if corn prices rise more, whether it's due to planning more acres than soybeans and less in corn, I think it will still be beneficial from a overall commodity standpoint, and beneficial to drive more demand for our product. It won't necessarily be which of the commodities they are growing, it may be just what happens with commodity prices as a result.

Is there a certain date in which you'd like to see the corn prices rise by? I mean, to have it done by, let' say, April 1 or a different timing there?

Not necessarily. I'd say that when we start to see the market really open up is in that January/February time frame. And probably early February is when farmers have generally made these planting decisions, and they're beginning to make some decisions regarding purchasing.

As we see prices -- if prices rise in that February to, say, April time period, it will be beneficial to our business because that's getting into the primary selling season and it'll will create a more positive farmer sentiment. And we're likely to see that have a decent impact for us.

Okay. Also (inaudible) on your balance sheet here separately, I do see the inventories on your balance sheet are actually up from the prior year from a dollar standpoint and your sales are down. The outlook doesn't necessarily look like it's going to be a huge growth year.

So kind of wondering, are there any excess inventories that you have on your balance sheet today? Anything that you had as far as big projects that could have caused it to be up this much, or are you going to have possibly work down some inventories over the next couple of quarters here?

Yes Mike, this is Brian. When you look at year over year, the entire increase is coming from the international irrigation business. I think domestically it's comparable, but given the soft demand we saw in the first quarter we've got opportunities to manage our inventory to a lower level. But I think just the year-over-year comparison, the increase is coming from all from the international irrigation business.

If I could squeeze in one last one here about your expense reduction you might be taking in irrigation, could you just clarify, Rick, if you have costs that were in the first quarter or in the very near term to help figure out what cost to reduce, did you say you're going to have a payback multiple times that cost? Will that come within the same year, or will it be over a period of a different time frame?

And I guess secondly, do you feel you're going to have to just do kind of a restructuring plan that's something broader or larger to help address where the market is today and in the near term?

There's a number of factors to cover in the question you're asking. I'd say first that the -- from an overall standpoint as we saw the impact of the first quarter, actions were taken in our primary irrigation factory to address some of the unabsorbed overhead and expenses related.

There was also additional actions that are being addressed and developed now regarding incremental SG&A expenses or other areas where we can make some reductions, and maybe people, things could be -- projects to defer, but things of that nature.

But I'd say from an overall irrigation standpoint, we have a pretty lean organization today because we have downsized as we saw the market decline through the cycle. However, there's always more opportunities to look for efficiencies or improvements that we can make. So that's one part of it. So action has been taken, action is continuing to be investigated in terms of things we can do.

It may come to postponement and deferral of some projects. I don't see significant major headcount reductions, that kind of thing, because we are pretty lean as it is today.

The other aspect we're looking at is our manufacturing footprint to see if there's some things we can do in terms of consolidating manufacturing operations from one area to another, and those are not decisions that are made but they are important ones. But a little bit of it depends on what we see as we come into this season now, within the next month or two. So these will be decisions that we'll be evaluating over the next couple of months and taking action as appropriate.

Now, as we come back to another one that I mentioned is we do have a cost reduction, fairly major cost reduction initiative in our cost of goods sold using some consultants as primarily looking at things like our procurement costs and expenses of materials. And in that area, that's the one where I commented that I would expect the benefits this year to be a multiple of the expenses that we're incurring this year for that. So there's an amount that's a fixed expense, but we expect to realize multiple of those benefits in our cost of goods sold throughout the year.

Perfect. Thanks guys, appreciate it. Happy Holidays.

Thank you. You too.

Our next question comes from the line of Tyler Etten from Piper Jaffrey.

Good morning Rick and team. I was just wondering if we could continue the talk of corn prices and potential impact in their [extreme].

Right now South America is shaping up to have a potential large corn crop. How does that affect your guys' assumptions, and how do you think this will play out as they're harvesting in the early spring?

Well I've heard there's potentially a large corn crop. I don't think this is going to have a significant impact at this point.

I think that has been expected and is not a surprise, and possibly in commodity prices as we see them today. I think the bigger factors will be now what happens going forward in terms of the plantings and what takes place in terms of acreage planted, not just US but even potentially globally, but also demand.

And I think that what we see is that there's obviously significant pressure over the next number of years in terms of increasing demand with population changes and more moving into the middle class. So demand will continue to strengthen and improve.

But in the near term I don't really see a major change from, let's say, the South America crop having a big impact. I think much of that has been anticipated, from what I've seen.

Okay. So you are thinking that the planting intentions for next year will have more of an impact. Right now the early USG estimate is 90 million acres of corn in the US. Is that where you guys are at, or do you have a different assumption as of right now?

No, we're kind of in that same area from an assumption standpoint. Anybody that I've been watching from the overall ag marketing perspective is in that kind of range.

And I think that also is basically priced in. However, if there's a major shift that takes place from farmers in their planting plans this year from that, that obviously could have some kind of an impact. But I think that's what's expected at this stage.

And if that were the case, if it does come in in that range in terms of the corn acreage, I would expect to see a fair amount of stability in corn prices. But again there's some unknowns here until we get into the start of the season.

Okay, that's helpful, thank you. And maybe shifting gears a little bit to infrastructure. We had talked a little bit about the Trump effect on irrigation, but just any updated thoughts on infrastructure spending with a new administration? And more importantly, any sort of timing that any impact would have in 2017? Thanks.

Well, there's certainly been a lot of positive comments regarding infrastructure spending. And I believe that there's real intention to expand infrastructure spending, which would be beneficial to us because I do think a fair amount of it would be in roads and bridges, which definitely needs the spending and repair and expansion.

So from our standpoint that would all be very favorable. I would say that the current FAST Act which is in place, is not a significant, or really a major step-up in investment from what we've seen in the past in highway builds.

And what we are seeing is while there is some stability, it's not a significant impact in the market at this point. But I do think that the kind of infrastructure spending that's been talked about by the administration could be very beneficial to our infrastructure business overall. However, I think there's a lot that remains to be seen in terms of where is the money coming from and how that will be done.

One of the things I'd add, though, that is really important is our Road Zipper System product is such a great product for getting more out of existing infrastructure. And I think it would be one that should really be considered in a lot of applications to get more on bridges and highways with minimal investment, without having to completely build another bridge or add significant lanes to existing highways.

Thanks. And sorry if I missed it. On timing, do you think this would be more if there was to be an impact, maybe the second half of 2017, or do you think that there would be any sort of anything sooner than that?

No, I apologize. I did not comment on the timing. I honestly don't know.

I would hate to speculate on it because I do think that there's so much that has to be decided with this new administration coming in. I really couldn't speculate on it.

I'd say I couldn't see really much of anything happening in the first half of 2017. I guess that probably best case, maybe second half.

Got it. Thanks. I'll pass it along.

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

Hi guys. Good morning.

Good morning.

I just wanted to touch on the irrigation margin again. Just in terms of the decremental margins were a lot larger than we've seen in the past. We've seen 15% decline or so in the US operations here in this down cycle, but we haven't seen decremental margins of over 60% like we saw in this quarter.

So just wondering, in the past couple years or several years, were you recognizing a lot more cost restructuring as opposed to now, sort of thinking that maybe this cycle was sort of turning and not anticipating a quarter with such a big decline like we saw here, and that's why we haven't seen decremental margins like this, or is it something else? I know you mentioned that there was the warranty factor as well as the international, but just wondering what you could say on that.

Well I think the first part of that, Joe, would be that the there was a surprise in terms of how low the revenue was in the first quarter in the North America market, which caught our factory by surprise as well. As I mentioned, normally we're probably a little closer to our forecast and this was off a bit. So they were not able to respond as quickly as they probably -- as they historically do in terms of taking cost out.

So that caused a little bit of it. It was a tough guess to try and figure out where this quarter was going to come in, being the end of the season and -- or end of the cycle, or season rather, and between the two seasons. They missed that, and that caused a significant part of it.

In terms of that, do you think there's -- what kind of pricing are you seeing in the industry? And do you think the higher prices that you initiated to push through the higher material costs caused anything regarding the lower volume?

The indications we have is that the pricing changes we've made did not cause the later -- lower volume. Now, I can't say is that for a fact. I'd say the indications that we've received from our people and the dealer network have been that was not the factor.

It is just a quiet period out there in terms of growers making decisions on buying equipment. It does vary some by region. So we could see if one region were a little higher, and we did see this was primarily a corn belt phenomenon because most of the corn belt was down to that extent. We saw a couple pockets up a little higher, but in general it was not based on price as much as it was just plain wait and see approach to find out what's going to happen next.

Can you tell us at what point in time, what part of the month or what month would you expect to start to see if this was just deferred volume?

Well, I would expect that mid-January will start to get an indication of what the farmers are thinking, and hopefully we'll start to see the beginning of the season in terms of placing orders. There are some factors, however, that are not known.

And I do think that the -- whatever's going to happen with the new administration and whatever concern they may have about that could delay that decision-making. I don't know that it's going to have a big impact because I can't think of anything real specific that would cause them to delay, but I do know that farmers, as many of us, are not certain what will be the actions from the administration.

It may take a wait and see approach before making capital goods purchases. But outside of that, I would say mid-January to the end of January, first few weeks of February is where we start to see it really turn on.

Last one for me. The QMB business, just wondering if you could update us on that? Do you see any maybe big projects on the horizon? I know it's very lumpy and you haven't seen much aside from the Golden Gate project, but just wondering if there's anything going on there?

Well, there's a lot going on in terms of quoting activity and interest in two MB Road Zipper projects. As we commented earlier, I commented earlier, we also had increased production levels in the Road Zipper product line during the quarter, which was beneficial to absorption in the infrastructure business.

And that was for projects that are in the pipeline in anticipation of -- some of it is due to orders in backlog, some of it is projects in pipeline that we have a high level of confidence in. So there's definitely confidence of new projects coming in, and we continue to see a very strong interest in the product line.

That's not related to anything the size of the Golden Gate project on the horizon? Is that just smaller type leasing, related to leasing, or smaller type projects?

What currently is in backlog would be smaller type projects, some sale, some leasing. And what we see in potential projects in the pipeline are some as big as Golden Gate. There's a couple in there, but determining the timing on those is very difficult.

I can't say those are the high probability ones. But I'd say that there's some very good projects in the pipeline. And even I'd go so far as to say probably more than we've seen in a number of years in terms of some good size projects in that pipeline that give me a lot of confidence in it.

Okay, great. Thanks a lot. Happy Holidays.

Thank you. You too.

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

Hey, good morning everyone. How are you doing?

Good morning.

A little more question on the pricing in irrigation. Are you able to pass through the higher steel cost, and is it happening in both the US and the international markets, and is one easier to do than the other?

Yes Chris, this is Brian. What we've seen domestically, well primarily domestically, over the past year a little bit of a roller-coaster on the steel costs. It bottomed out probably about this time last year, and then starting in March went on a pretty good run and peaked in the June time period, kind of came back down through October and then recently has gone on another run.

Because of the inventory that we carry, we have avoided the peaks in the market prices of steel. But we've been successful in passing those along.

And as Rick indicated earlier, I don't think that it's had any impact on overall demand. I think that its probably been less volatile in the international markets, and -- but we have adjusted pricing in international markets as well.

And then just thinking about it, I guess you have -- steel's a decent cost input into the infrastructure side, too. Does your contracts on that side allow for price escalators for raw materials?

There's not a lot of long-term contracts on the infrastructure side. It's mostly with orders that are placed so that we're able to pass along those increases fairly quickly there.

Okay. Then a question on Road Zipper potential for new bids. I always forget, what kind of competition do you come up against when you quote a (inaudible) medium barrier project? Is there only just the one competitor, or how many are out there, do you know?

Generally speaking we don't really have any competition on Road Zipper projects. What we do find is sometimes in a, let's say if it's some type of a maintenance project we might be up against standard concrete barrier that they may not move and be looking at different concepts in that process. But generally when it comes to, if they are looking at a moveable barrier, we are it.

Okay, great. Thanks a lot.

Thank you.

Our next question comes from the line of Brian Drab from William Blair.

Hey, good morning guys.

Good morning.

We're kind of deep into the call here, and it might just be me but I still really feel like I don't have any idea how to forecast OpEx for Q2. Clearly, we in the analyst community, we're pretty good at forecasting the revenue for the first quarter, but off by $0.50 or so in EPS.

So I'm wondering if you could step through what, in more detail, these one-time items, warranty, increased product development, consulting, legal, severance and medical, and maybe put some rough dollar figures around those? And then also comment on which ones carry over into the future periods and to what extent.

Okay Brian. This is just first of all on the SG&A expenses, the increase that you saw in the engineering and R&D, we would expect to remain at that level or slightly higher for the balance of the year, due to the additional product development and testing costs. On the other increases that you mentioned, we're primarily at the corporate -- unallocated corporate expense level, and we should see those fall off for the balance of the year.

I think in the past I've indicated roughly around $20 million in corporate expense for the year, and we would expect to be around that, if not slightly less as we go through the year, which means we'll fall from where we were in the first quarter. Overall, just as a little guidance on the SG&A I think we're, if you put it in perspective to where we were last year, backing out the environmental charge, we were probably about 19.5%, 19.6% on SG&A. And this year we're planning at around a 19% level overall for the year.

And that's where we planned the year and we're continuing to manage to that level. Our first quarter was obviously above that. So we've got some work to do to get back to that for the balance of the year.

Okay, that's helpful. So the engineering and research expense, the $4.3 million, that's -- what you're saying is that's a pretty good run rate to estimate for the future quarters here for the rest of the year?

Yes, I think it can vary a little bit quarter to quarter. But I think on average it will continue at that level if -- it could be slightly higher in particular quarters, depending on the activity levels. But that's included in my overall SG&A number that I gave you.

And then can you give us any sense for that consulting/legal line item for the quarter? How that ended? Did that show up at all in the fourth-quarter number, or that's all incremental and new in the first quarter?

No, we had some of that starting in the fourth quarter as well. And I would expect that will, on the consulting side, will tail off as we go through the year as well.

Okay, thanks. And then I don't know if you mentioned yet, but could you give us some detail around what the component was that needed to be fixed in the field?

Without getting into the specific component, we'll just say it was a field fix on a part. And it was interesting one where this was something that really came up probably about 1.5 years to 2 years ago and we thought was done.

And we had a couple dealers that submitted some claims recently for some -- I think some product in inventory to be repaired. So that's really where this came from. And it was a little bit of a surprise.

But we've also found in the past, too, that when we see low markets in quiet periods, our dealers do spend a little more time working through their inventory and outstanding items. So sometimes we get these bigger hits of warranty items that are really carryovers from when they are really busy and don't have time to deal with it. And I think there's a little bit of that took place here.

Got it, okay. And then one last quick one. In the international markets it sounded like the mix weighed on margins to some extent there. Can you comment on what was that change in mix in terms of the geographies?

Brian, one of the things, if we look at the break down of international, Canada is included in our international business. And that market was down probably more than any of the other ones, which it kind of behaves more like the US market. And then there is, I think as Rick mentioned, international project in the quarter that was at probably lower than average margins. So it's really the year-over-year change in mix.

Okay, thank you very much.

At this time there appear to be no more questions. Mr. Parod, I'll turn the call back over 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 positive. We are uniquely positioned for developing and delivering turnkey solutions.

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

We are 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.

We would like to thank you for your questions and participation in this call today. I would like to wish you all a very safe and joyous holiday season. Thank you.

This is the end of today's call. You may now disconnect.