Lindsay Corporation (LNN) Q4 2015 Earnings Report, Transcript and Summary

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 Fiscal Year 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] During this call, management may make forward-looking statements that are subject to risks and uncertainties, 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 fiscal 2015 were $123.5 million, 16% less than the same quarter last year. U.S. 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 earning 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 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 fiscal 2015 were $560.2 million, decreasing 9% from the same period last year. Net earnings were $26.3 million or $2.20 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 expenses recorded for accounts receivable reserve and cost deleverage on lower sales. In the U.S. 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 American. The quarter covering June to August is post-selling season for equipment in North America and is general 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 fiscal 2014 or by severe droughts where farmers need to install the equipment and are in a sense willing to start over as we experienced in fiscal 2012. For the fourth quarter of fiscal 2015, the lower U.S. irrigation equipment revenue was 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 reduced farm income have affected farmer sentiment regarding capital good 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 U.S. 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 have seen in previous trough periods, there is a global recognition of the importance of irrigation and awareness of the benefit irrigation brings in stabilizing yields and agricultural production, and in enhancing farm land 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 fiscal 2015, total irrigation segment revenues decreased 16% to $451.2 million. In the U.S. 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 15% operating margin. For the full year of fiscal 2015, infrastructure revenues increased 40% to, excuse me, $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 fiscal 2016 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 multiyear highway bill remain 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 last year, with cost deleverage on lower sales partially offset by lower input cost primarily steel and zinc. While overall irrigation equipment demand has declined from the peak of the cycle, competitive pricing remains rational in most region. In the infrastructure segment gross margins increased by approximately 2 percentage points, primarily due to sales mix changes, including increase 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 $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 integrated expense -- 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 have 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’ve continued the execution of our capital allocation plan, including $138 million in cumulative stock repurchases from January 2014 through 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 those forecast call for continuation of soft agricultural equipment markets for the near term. The equivalent pricing remains competitive, but rational in both domestic and international market. Lowest yield prices and effective cost management by our plants have helped to sustain selling margins in the face of difficult market conditions. It’s been especially challenging couple of years for our operations in China as the market has contracted and competitive pressures increased from what are allegedly Chinese government sponsored competitors. And we have experienced significant difficulty in collecting on sales to a specific customer. These challenges have led us to record specific reserves and adjustments. And 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 headcounts 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 margin 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, it’s done a superb job in helping to maintain our gross margin. 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 cost while managing SG&A expenses and increasing 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 dividend, repurchasing shares, moving to a more optimal capital structure for improved return for shareholders and making strategic acquisition. We remain committed to continued execution against this plan. Now, as fiscal 2015 has 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 other -- and further honing our focus and strengthening our competitive result. 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 have -- we will continue to monitor market conditions and identify areas to reduce cost and improve productivity. We’ll continue to invest in developing solutions for our customers in the markets we serve and a geographic expansion in market having the greatest potentials for growth. I would now like to open it up for your questions.

[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, I guess, well, total backlog for the company is down about 40% year-over-year, I mean, 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 fiscal ‘16 versus ‘15?

I'm not going to comment in terms of giving any guidance really in terms of ‘16. However, I don't really see a significant difference in our current outlook for ‘16 than what we have seen for ‘15. It's been difficult to predict where ‘15 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 ‘15.

Okay. Thanks. And just shifting to infrastructure, given the momentum that you are 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 since ‘16 even given the absence of the $13 million associated with the Golden Gate Bridge?

Well, 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 to 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 ‘16. It’s not out of the question. It’s just it would be pretty difficult right now at this stage.

Okay. When you look back at fiscal ‘14 in the second half of the year, you’re doing $20 million in revenue, $22 million in revenue per quarter. Now, we’ve seen a couple of quarters where you have $29 million in the third quarter ‘15, $27 million in the fourth quarter ‘15. Is this back half of ‘15 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 -- I guess, I would expect some growth next year off of these back half of ‘15 levels?

What I think there is definitely seasonality in the numbers that you are 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 volume. Now there is still few states to get but we’ve made some very good progress there. And you’ve seen that in the numbers. So that represents a fair amount of the growth that we’ve seen in those numbers. So there is 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 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. So 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 it still accelerating the business for share gains?

Well, I think I have described it as our strategy and overall intent to continue to gain share.

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 you 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 significant number of competitors appear, probably 10 or 11 that were in that market, 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 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.

Wonder if I 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 is gone from somewhere around $75 million to a $100 million, maybe core SG&A is a bit less with Elecsys integration and things like that but it is still significantly higher. We’ve heard lots of good things about the improvements you have made to manufacturing process and taking some headcount out there. Why aren’t we more aggressively going after some of the SG&A there? Maybe if 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 has been a little bit of a mix in the business, change in the business than what 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 are 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 for the increases in revenue have come in higher than the higher SG&A businesses and that. So part of it is mix. We have taken costs out and we’ve taken a cost 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 have 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 FieldNET and continued to move those things forward. So there is a little bit of a trade-off in the mix. There is also a little bit of a trade-off in some cost reductions, in some places with some additions in SG&A costs where we think there is longer term growth opportunities. So, I think that’s mainly what you are seeing.

Okay. That’s helpful. So if we go back to 2012, you were running 12.5% of it of sales in SG&A. In 2015, you are 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?

Well, I think there was always going to be some variability because of the cyclicality in the business. So, I think what you are seeing a little bit right now is that we are in the lower, where we are in the -- growers be at the low end of the cycle, which is going to run the SG&A higher. And in those times, we are going to continue to invest in where we think the growth can be as I have mentioned earlier. Certainly, SG&A this year has run higher than it has historically. Next year, we are 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.

Yeah. That’s fair enough on the positioning of the cycle. I understand, Rick, you are hesitant to achieve the forecast revenue for 2016 as somebody who tries to forecast that and 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 a 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 closest we are going to get to a forecast for you on SG&A at this time. I will say that as I commented earlier, we’ve exceedingly 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 projection as I said. However, we are going to keep marching it and we will see what happens in the spring as we get back into close the selling season. And if we need to make more SG&A changes we will. As Jim mentioned, some of this structural with some of the new businesses we had and I also commented, we have some work to do with some of our 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. Thanks 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.

Good morning.

Rick, I was wondering, just we already essentially kind of halfway through the year, the next quarter. I was wondering if you are willing to give any comments around kind of the trends you’ve seen so far in kind of September, October of things, any material improvement or declines?

No, I couldn’t really comment really on any specific trend other than to say there is nothing that’s caused me a great deal of caution or concern. I have had some opportunities recently to speak to dealers in couple of markets and growers as well end users. And I would say that the attitude is really not that pessimistic. They are looking at it is, okay, this is the cycle. We’ve been through these cycles before and we know where we are at. And farmers do still really understand the significant benefit from irrigation. I was talking to somebody just couple days ago who was commenting that in his acreage, 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 a 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 a factual to that I can point to and say will happen in this next season. But I can say I’m not seeing anybody talking about this is boom or gloom or anything of that nature.

Okay. That’s helpful. And then when we last met, you had add some I guess a little bit concerned about farm input prices cost to the farmer as we move into next year. Are we seeing any -- a recent indication, if some of those input prices that farmers seeing it release there or is 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 that have been really in the last couple of days are indicating that there will be increased pressure for those input costs, on those input costs for farmers come this morning as farmers are deciding what they are going to plant and as they are starting to plan any process. So, I think that pressure on the input costs 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.

Okay. That’s helpful. And then one more if I might. You said that, I guess industry is still fairly rational on the pricing perspective around irrigation. Do you feel still comfortable that can hold or is there anything that’s changed there?

I do feel pretty comfortable it will hold but I think it’s been -- we've seen pockets where there has 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 will continue that way unless there was 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 and backlog. If this lower backlog is due to mixing lower margin equipment or is just if you can expand on it little bit?

Well, 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 are going to get in terms of orders are usually more generated by what happens with the storms and things of that nature. The previous year, our backlog which had more storm damage, particularly in the third quarter and probably a little bit in the fourth, not much would have been storm damage generated and probably slightly better margin than what you would typically on a normal irrigation sales but not much difference at all. And I think I would say that we just haven’t seen those farms in the spring or summer this year across most of farm country.

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

All of the above. We are looking at the -- certainly, we have had interest from customers in very large projects and we have interest in small projects. We are targeting all of those. So, we may be doing projects that could be sub million dollars in some Road Zipper System type projects, which are not very typical. Most of them were bigger than that or we will have significant multimillion dollar projects in Road Zipper System projects. We also have Road Zipper System leases where we will lease equipment for construction projects and it may be anywhere from a one year or that specific project one season to three to five-year type leases. So we’re 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 is particularly for us like bridges in some areas where there is limited space. So we are -- there isn’t any specific target we are looking at all of those areas.

Got it. Thank you very much.

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

Hi, guys. Good morning.

Good morning.

Just want to clarify one question regarding the SG&A questions earlier. If you see similar revenues this in fiscal '16 to fiscal '15, could we see a similar SG&A as a percent of sales?

Well, Joe, like I said, what we’re -- what I would say is that the 17% to 18% rate is I would think about for this year and then we have some -- we have some pluses and minuses to the numbers from last year. Obviously, there are some items that we would now 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 market, 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 I guess in the back half of the year, so you feel about a 10% decline in volumes?

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

Okay. So regarding the international markets overall 10% decline in volume, 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’re actually relatively positive I thought, you’re saying that projects are still moving forward, what are your sort of expectations going into this year? Are we seeing another down year this year? Could we potentially start to see more demand picking up throughout year, or what are your -- what’s your sort of outlook given the international markets?

So the way I would describe first the comments regarding the sales in 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 and we’ve seen, so we’ve seen more projects creates a little bit more volatility. I don’t view what we saw in the fourth quarter is really an indication of anything specific other than obviously the FX impact. It 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 had seen a little bit of that, but the projects are still taking place and we are still talking with the many customers in terms of development of -- agricultural development projects in many parts of the world. So I am upbeat and optimistic about the potential of those projects. I am probably cautious in terms of FX impacts 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 emerging into stronger positions in a couple of 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 in the international markets in general that overall agricultural production, excluding the projects, is continuing pretty well. And I would say that the international farmers are in a 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. So I don’t really see any significant issue in the international market other than the concerns I would have with the China where we know we have some real challenges there from competitive standpoint. And Russia and Ukraine which are not close to us but I would say definitely vulnerable in terms of being very difficult for to do business in the near term.

Okay. And is there any sort of difference in your sort of outlook headed into fiscal '16 versus headed into fiscal '15?

It’s not a great deal of difference. I would say that the one difference is that coming into '15 it’s really uncertain what things are going to look like and where this was going to go. And we’ve certainly got a much better look as we move through the year in terms of farmer’s sentiment and some other factors and obviously what happened in Russia, in Ukraine had an impact on the year.

I would say that we’ve got more visibility coming into '16 in terms of what transitions look like given what we don’t know, I mean what may happen in the next few months. I always feel better when we get to spring we start to see what farmer’s 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. So probably February, March performance really gets good visibility in North America, but I would 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 sort of corn yields. Last couple of years they have been extremely high, yet stock to consumption ratios still relatively low on a historically basis. How much of those yields based on weather, and if weather teeters just a little bit, how I guess sensitive into the market to sort of turning on a pricing standpoint just overall?

This is a very difficult question to answer in any kind of the specific term other than to say whether it 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 -- and we’ll also talk about North America, even in terms of the crops that they are growing. So there is 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 today.

I guess do you have any idea how good the weather was compared to last 10 years, I mean or 20 years, I mean was this just extremely ideal two year period, or was 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 this past couple of years for crops which is why they have the yields that they had, but there is lot of other factors that have come into play. So for example, Texas which had a drought a couple of years ago, large part of Texas now is getting sufficient water and able to irrigate again where there were not able to irrigate for a while. So there is 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 have seen in the previous four or five. And I couldn’t tell you if that’s actually correct, I am primarily talking about corn belts region.

All right. Thank you.

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

Great. Thank you. A couple of questions today. One just had to do Rick with, wondered if you could talk to us about how customers are financing their purchases of new products and whether you’re seeing any shifts there? I know some of the machinery companies are talking about 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 area, and if so, how that might impact the outlook?

We haven’t really seen any shifts Ryan in terms of the financing in general. And in North America, our estimates in the past had been roughly about one-third of the machines sold would be financed and so done through one of the financing companies that kind of specializes in that area and we would see UCC-1 filings on those -- that equipments that’s been sold which also allows us to look at of course competitive position. So we typically see about a third finance that way. What we saw during the peak of the cycle that we saw that drop down some, I would say the farmers were probably buying more machines through cash and we’ve seen it probably closer now to the third again with some more 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 ride, okay.

Okay.

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

Our volume in business in Brazil has still been holding up fairly well. I would say the biggest challenge we 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 am still pretty optimistic about Brazil definitely long term, short term we are going to see some volatility as we have in the past with the Brazil where every few years we will see it going through some economic issues and we will 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? I mean, in the Middle East does the decline in sort of energy complex impact kind of the funding environment for any of that or is that completely unrelated to kind of the government finances?

Well, 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. So, for example, we’ve seen projects in Africa that maybe funded out of the Middle East that could be delayed due to what’s happen with energy prices, however, that’s really not known yet. But 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 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 anyway. There is still the significant amount of money and a great deal of interest in projects.

Got it. Got it. And then just one last one if I might, you’ve talked about the ForEx headwind on a translation basis and I know you’ve opened plants internationally, you mentioned Turkey. Is there any true or what the magnitude of the true economic exposure that you still have in terms of having export in U.S. dollars or is that pretty deminimis now?

Well, it’s not deminimis. 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 terms of international sales.

Okay.

In total to various region. However, that is shifting and it will definitely shift with greater ramp up of our factory in Turkey.

Got it. Okay. 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? 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 fiscal ’16, 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. And then, Rick, if we go back to the margins in your irrigation business and kind of 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 cost? Do you feel confident that gross margin irrigation are troughing here or I mean, how do you feel about that going forward?

What build 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 ’16, we don’t see it significantly different. I have no reason to believe that there should be deterioration in gross margins in irrigation from what we’ve seen in this past quarter. So I think they’re holding up pretty well. Unless something would have 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 can actually, potentially improve, just given what’s happened with steel and zinc and what not?

Yeah. I think both are possible. I think it’s possible, we could see some additional improvement with steel and zinc depending on our commodity price changes. And our purchasing in those -- with those major commodities and I also think it 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?

Well, there are some new standards that are going into effect. We refer to as MASH standard that will require some of the road safety products to meet a different standard level and we’ll call it better, I would just say different. And that will require in many cases for our products to at least be retested to see if they need those MASH standards. In some cases, it may require some product redesign or modifications. So that’s the process that we’ll be taking placed. And what we’re finding that some of the states will implement those standards faster than as required but they are selecting to potentially implement those standards.

So in terms of the costs that you guys -- I mean, is it significant or is it something we should be thinking about or we won’t even see it show up?

Well, it may show up as we proceed with it. 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 can tell you about that estimated costs at this point until we get further along in the process.

Okay. Perfect. And then 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 good shipped out the door, 47% would have gone to replacement, 25% into dry land applications and 27% in conversion from flood or gravity. And this is for the domestic U.S. market that we’re talking about. I can also summarize this for you a bit and say that for the total year, 39% of machines where 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 kind of the thinking behind it?

Yeah. 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 designer irrigation systems to the waste water type systems and many different types of applications. But they have expanded our capability from an engineering standpoint in terms of large projects, but also with a much bigger larger strength in water in general. So, we see them as a great addition to our engineering resource team. It can be beneficial in many other 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. Thanks for taking my call. Rick, maybe you can talk a little bit more about just if you are thinking again in terms of next year. If I go through your commentary, it suggest that you got a translation 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 there arguably some drivers on the downside. So doesn’t it seem logical that at least on the international sides that you’ve got a tough start at least for the first half of the year and you are likely going to be down. And then with North American irrigation maybe flat, there is kind of a downward bias in revenue number for next year. Wouldn’t that be kind of the logic way to you think about this?

So, I think that’s a -- there is definitely a prospective on the story. I think the other part of it is the things that we are doing to expand our business and increase share in many different ways including our project revenue that we’re working on with our key projects team that is going after large projects. We have new product development taking place in each of our business units with new product plan for additional growth. We’ve got market share gaining activities. In each of our businesses and strategies that are being implemented, there is many other factors to this other than just the market in itself as you’ve described it. And I suppose if we just rode the market in that front that could be an outcome but that is not an outcome I would predict.

Okay. That’s actually really helpful. I appreciate it. And then on the infrastructure margin side, I had heard the number of a couple hundred basis points in investment. On the infrastructure margin side, you don’t have these Road Zipper, any large projects. And so I’m really kind of trying to think of any gross or anything were out with the midpoint of that infrastructure operating margin business is. I mean, are we thinking about mid-teens or is that even on the high end, given how you start off very low in the first quarter. And based on your commentary the 15% for the fourth quarter seems to be kind of the high water mark right now. So how should we think about next year operating margins, is that mid-teen 15% kind of a regional level from which to start?

No I’m not going to provide a specific high note number but I think that certainly the 18% was a very, very good year in the infrastructure business. And as you mentioned we potentially add some incremental investments on the product development side and absent -- 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 further could be some pullback in the margin this year, if we don’t have other few QMB project.

So, one other point I would add to that is that prior to this year, where we were running with the infrastructure business which consist the number of pieces including the road safety project product and rail and all the others. But generally most of the pieces were running in a 10% operating margin or better kind of level. The Road Zipper piece of it was more volatile part, because we are carrying expenses that do not offset, of course, if you didn’t have the projects. Now we’ve reduce the breakeven level for the Road Zipper piece of business. We 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 the efficiencies in our factory. So I think there is a number of enhancements that have taken place to both of those. And again it has been a little bit volatile based on what happens with the Road Zipper projects potentially but the rest of the business have all improved.

Okay. That’s helpful. And then lastly, Elecsys, if you could provide us some performance metrics, sales growth or decline operating income growth or decline year-over-year in the fourth quarter, and how did it stack out versus your expectations?

Well, I’ll let Jim give you some of the more specific. But anecdotally that acquisition has -- it is performing as expected, if not better. We have now integrated in our Digitec electronic operations into Elecsys and it did a superb job of taking care of the customers and getting that done efficiently. That team is a great team down there. That has a very good growth potential in terms of their business. Now, I’ll let Jim talk about some of the more specifics on Elecsys, but I’ll say that it has met our expectations.

Okay. Rick, I’ll start out by saying this is probably the last quarter I’ll talk about specifics on Elecsys because we are now kind of getting into it being part of the core business. But in the prior quarters, they have talked about it basically being a kind of breakeven business with the purchase accounting with some of the purchase accounting amortization items are widening off. But as Rick said from an operating standpoint with excluding those purchase adjustments, the operating margins have been very good. Just with the regard to the fourth quarter, the operating margin even with purchase accounting adjustments are now approaching the 10% as some of those purchases accounting amortization items kind of wind off and the operating margin before purchase adjustments have been very strong. So we’ve continued to see it progress as we expected and as some of the short-term amortization items wind off, it’s definitely starting to contribute positively to the GAAP earnings as well.

And sales year-over-year up?

Sales, 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.

Yeah. Good morning, everyone. If I can just go back to the irrigation pricing question, I think, just more curious, what’s different, I know in the past when you had lower steel and obviously a weaker demand environment, pricing usually -- I guess there is more competition. I mean, have there been the players changed since last time it happened or is it everyone being much more rational, is that simple?

I missed the 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 quiet as rational as what we’ve seen at this time. So it’s definitely been more rational in terms of overall pricing than what we’ve seen in the previous crop conditions, but the players are the same.

Are the players in better financial compared to the private guys in better financial shape, is that inline?

I don’t think that’s factored 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. They are pushing to the manufactures like us to make concessions and do things to try and generate revenue. However, there is not really a major share shift that’s taken place and stayed shifted based on price. It really is through differentiation that that share shift really is sustainable when it does take place. So I think that what we’ve seen over time is that the pressure could take place from dealers to do something and there had been some reactions and we’re seeing less of that now, probably more of a realization of those are just short-term initiatives.

Terrific. And then just switching over to infrastructure, the Zipper systems, I was reading an article that was suggesting that there was some Zipper system numbers could be absolutely constantly that they are going to use it anymore. Is there a huge market for Zipper systems or do you take them back? I was just curious how that might work.

There is really not a huge market for the systems. There are some cases where if they are coming off of an application which is really very, very rare. In fact, I honestly can’t think of one, I know of one that one or two that have been talked about a time in terms of about taking it off. There have been cases where we have brought back in 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 that, that’s a very rare situation. But there is really not a huge market for the machines over the period 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.

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. We would like to thank all of you for your questions and participation in this call.

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