Lindsay Corporation (LNN) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Claudia, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation First Quarter 2016 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, expectations, outlook, could, may, should or similar expressions. For these statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. I would now like to turn the call over to Mr. Rick Parod, President and Chief Executive Officer.

Good morning and thank you for joining us today. With me on today's call is Jim Raabe, Lindsay Corporation's Chief Financial Officer; and Lori Zarkowski, our Chief Accounting Officer. Total revenues for the first quarter of fiscal 2016 were $121.6 million, 10% less than the same quarter last year. U.S. and international irrigation equipment revenues decreased in the quarter with infrastructure sales essentially flat to a year ago. Operating income of $11.7 million was essentially in line with the operating income of $11.9 million in the first quarter of last year. While interest expense of $1.2 million on the Company's new $115 million long-term debt at 3.82% resulted in lower pre-tax profit. The Company reported net earnings in the quarter of $6.9 million or $0.62 per diluted share compared with $7.6 million or $0.62 per diluted share in the prior year quarter. Foreign exchange translation continued to be a headwind in the quarter, reducing sales by $7.6 million or 6%, and lowering operating income by approximately $650,000. For the irrigation segment, in total, sales were $101.3 million, 12% lower than the same quarter last year. Irrigation operating margins decreased to 12.5% of sales from 12.8% last year. In the U.S. irrigation market, revenues were $59.2 million in the first quarter, decreasing 6% from the same period of last year and declining 17% excluding the revenue from the newly acquired Elecsys Corporation. Overall, lower commodity prices and reduced farm income, continues to affect farmer sentiment regarding capital goods purchases. The USDA is now projecting 2015 net farm income to be $55.9 billion, dropping 38% from the prior year and declining nearly 55% from the record high set in 2013. Net farm income for 2015 is projected to be the lowest since 2002. On a more positive note, grain prices have been more stable over the last 12 months and we’ve seen signs that input costs, such as fertilizers and chemicals, have begun to decline. While we’ve not seen a positive upturn in overall market conditions for agriculture equipment sales, we believe these factors are indications that we are near or at the bottom of the agriculture commodity cycle in U.S. In the international irrigation markets, revenues for the first quarter were $42.1 million, decreasing 19% over the same quarter last year. 12 percentage points of the decline was due to foreign currency exchange rate changes with the remainder of the decrease primarily attributable to the significant slowdown in sales in Brazil, as well as more modest declines in a few export markets. We continue to see significant project quoting activity in the international markets although the headwinds of currency rates and lower grain prices may lead to delays in projects. While the international markets tend to be more resilient during downturns, a varying percentage of our international revenue is project based, and potentially less consistent from quarter-to-quarter. On those projects, we’re in position to provide the irrigation engineering, mechanized irrigation equipment, pump systems, filtration, and our cloud based irrigation management systems, delivering a turnkey solution to our customers. We see this as a growing opportunity for our business as farm land consolidates and as new farm land is developed throughout the world. In addition, the geographic dispersion of our revenues and having irrigation, manufacturing and distribution platforms in the U.S., Brazil, South Africa, France, China and Turkey, provides options for mitigating currency fluctuations in foreign markets. Infrastructure segment revenues were $20.3 million in the quarter, increasing 1% from the same quarter last year. Excluding the effects of currency translations, infrastructure sales increased 9%. The increase was driven by continued growth in road safety product revenue and increases in small Road Zipper System sales and leases. Contract manufacturing and rail structure revenues declined in the quarter. The infrastructure segment generated operating income of $3.1 million in the quarter or 15.2% operating margin. The infrastructure business continues to perform well in the first quarter of 2016. Interest in the Road Zipper System as a solution for traffic mitigation remains very robust although we don’t anticipate a project in 2016 comparable to the Golden Gate Bridge project which contributed revenue of $13 million in fiscal 2015. The recent passage of the five year highway bill is a significant step forward and improves the outlook for sales growth for road safety products and Road Zipper Systems into 2017 and beyond, as it provides more funding visibility and certainty to states for planned projects. For the total Company, gross margin was 28.3% of sales, approximately 1 percentage point higher than the same period last year. Gross margins in irrigation and infrastructure both increased approximately 1 percentage point. Some competitive pricing in irrigation market persist that has primarily consisted of passing through the steel price declines realized. In addition, irrigation margins have increased slightly from the inclusion of the revenue from the acquisition of Elecsys Corporation completed in January of 2015. The improvement in infrastructure gross margins were due primarily to sales mix changes, consisting of increased sales of road safety products and both Zipper System sales and leases. Operating expenses for the first quarter decreased to $22.7 million from $25 million in the prior year period. The current year includes $2.4 million in operating expenses for Elecsys, while the prior year included $2.1 million in additional environmental and acquisition related expenses. Personnel expenses were $1.5 million lower than the same quarter last year. And bad debt expense declined by $1.2 million as we were able to recover a portion of the China receivables that had been reserved in prior periods. The order backlog at November 30, 2015 was $61.9 million compared to $68.3 million at November 30, 2014. The November 30, 2015 backlog includes $8.1 million of backlog for Elecsys Corporation while the prior year included $12.7 million related to the Golden Gate Bridge project. Excluding these items, the total backlog reduction is $1.8 million from the same time last year. Our backlog typically represents some long-term irrigation and infrastructure projects, as well as short lead-time orders. And therefore, as I have indicated in the past, backlog is generally not a good indication of future quarter’s revenues. Cash and cash equivalents were $129 million at the end of the quarter, decreasing approximately $10 million during the first quarter. Cash generated from operations were offset by capital expenditures and dividend. And the Company repurchased stock for $9.2 million. As of the end of the quarter, we have a $102.8 million of share repurchase authorization outstanding. In summary, we're now entering the third year of the cyclical downturn. We're pleased with the first quarter performance of earnings per share equal to a year ago as we maintained gross margins and managed our expenses in response to the compressed market conditions. While it's too early to tell and to know what the market will bring in fiscal 2016, we continue to see factors creating a headwind against potential revenue increases over the prior year. Commodity prices appear to have levelled off. However, farm income for 2015 is projected to be the lowest since 2002 without a visible catalyst for improvement at this time. Brazil and Russia which are a couple of our more promising growth markets faced specific near-term challenges. These challenges certainly did not change our outlook for those markets but do affect the timing of expected growth. In the U.S., we believe we're at or near the bottom of the agriculture commodity price cycle. However, visibility will remain unclear until we begin the selling season right in the second fiscal quarter. Through this cyclical trough, our irrigation dealers have remained healthy and optimistic. They understand Lindsay’s competitive strength in the market and they're enthusiastic about our initiatives to continue to build our technological advantage together. In fiscal 2016, the international market performance may consist of more project sales than in fiscal 2015, which could make revenues lumpier from quarter-to-quarter. In addition, the stronger U.S. dollar will continue to create some challenges in export markets. However, our global footprint places us in a strong competitive position. In infrastructure, we plan to build on the success of 2015. While we don't currently have a project to replace the Golden Gate Bridge revenue realized in 2015, the Road Zipper System project pipeline remains robust. For the infrastructure business in general, the long anticipated passage of the multiyear highway bill should improve the outlook for the business as we move through the year. We will continue to aggressively protect and expand our market share in both irrigation and infrastructure, while continuing to expand our competitive advantages through our differentiated offering of products and services. At the same time, we will continue to invest in productivity enhancements and implement improvements in our cost structure, control SG&A expenses and continue to demonstrate working capital discipline. Finally, we continue to execute against our stated capital allocation plan. During the quarter, we repurchased 136,263 shares for $9.2 million. In addition, we continue to invest through organic growth initiatives, pay dividend, and pursue synergistic water related acquisitions that offer attractive returns to shareholders. I would now like to open it up for your questions.

We will now begin the question-and-answer session [Operator Instructions]. Your first question comes from the line of Brian Drab of William Blair.

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

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

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

I think there’s a number of potential factors. One of them is I think, during that time from say 2011, 2007 and forward, we've definitely strengthened our global market position in all the markets we're in. So I think our overall strength and overall penetration in the market is stronger. So, we're seeing revenues that are really still pretty strong in the international markets, even though we have some headwinds with foreign currency. But in general, I would say, we're in a pretty strong position in all of the markets around the world.

And then just a couple of questions to help with our modelling; G&A was down big sequentially and year-over-year. Can you talk a little bit about why that is? And I think you've made some high level comments. But a little more specifics around why that is and what should we expect going forward in G&A?

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

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

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

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

I wondered if we could just talk big picture around the impact from some of the recent legislation. I guess, I'm just trying to get a sense of on the highway bill, is that -- we think that - is that going to more impact your Zipper Systems or is that more the road markings? And then maybe if you could just talk a little bit Section 179 and the impact there. Do you think that could be a significant catalyst heading into next year?

Yes, Schon, I think first on the highway bill. I think getting a multiyear highway bill in place is very beneficial to primarily the road safety products part of the business. So this would be things like the crash cushions and devices that are installed in the roads as they're being either built or repaired, more so than Road Zipper System, although there will be some benefits to that as well, and that's primarily on leased projects during road construction. So we could see a definite upside there. But the biggest benefit I think is from the standpoint of getting a multi-year bill in place, is giving the visibility to the State and certainty in terms of that future funding to go ahead with their longer-term projects. And this has been a long-time coming, so I think it will take a little while to see the ramifications of that and the positive impacts. But it will ramp up over time. So that I think is very beneficial. But primarily, Road Zipper, we'll get it on the lease side and the other side, the road safety product, such as the crash cushions, we'll get it on the construction side. On Section 179, I think having it put in place and basically not have to be a question at the end of every year will be beneficial. Personally, based on what I've seen and heard, I don't anticipate it driving any significant demand. We don't believe it generally has when it's done right at the end of the year. It certainly is more beneficial when it's passed a little earlier and people plan for it. But having it passed is not a huge surprise, I think to most people, and the demand is probably there anyway. But I don't think it's going to be a big catalyst for driving significant demand at the end of the year.

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

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

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

There is no change in the capital allocation policy. I'd describe it as we had a 10b 5-1 plan in place that finished right towards the end of the year, and there was a little bit of a time out at the end of our fiscal year and we have -- we are in the market buying now. So that has been restarted.

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

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

Well, I think my confidence that we're at or near is coming from a combination of things that I am seeing in generally commodity traders in terms of the information that I see in commodity prices anecdotal from talking to dealers and from growers and some other ag equipment companies in terms of that belief. Now, I think the key, Nathan is really how long does this run at this kind of a level, and this is where I think that obviously if it ran a number of years longer or so, it definitely has an impact in terms of demand. But I think farmers are optimistic that there is a term-point coming and that there are some indications in terms of things working in terms of fertilizer and feed prices coming down and other input costs coming down, which are beneficial to fund this profitability. But there isn't a specific fact that I can point to that would say this definitely tells us we're at the bottom and it could turn in the next six months. I think it's not quite that clear. And it will require some catalysts for that turn in that change, and we don't know when that will occur.

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

Well, what we've seen in the market, particularly in this last quarter, is we have seen a little bit of some price change with a competitor, and we’ll leave it at that. And little bit more competitiveness, and some of it has been primarily passing through what we believe is steel price costs have decreased, and nothing is really extraordinary. At the same time, we’re going to continue to be aggressive in the market and maintain our share and protect our market position. We don't anticipate any significant change in margins going forward at this stage. And I can't tell you, what competition will do, I'm just saying that based on everything we have seen and know today, we don't anticipate significant change, because most of that’s been pretty rational. It's difficult when we see a field price fall like this and we pretty quickly see the benefits flowing back into price; however, that's the way it is and we will protect our share.

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

Great, thanks, happy holidays and congrats on a great result in a tough environment.

Thank you, Ryan.

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

Well, certainly, it's an important market, not just in terms of the revenue it generates for us. I mean, it is one of our bigger international markets, but it’s also important potential growth market for irrigation. What we've seen recently is certainly some changes of inflation in Brazil, difficulty in terms of getting the financing approved on equipment. So we’ve seen delays in terms of financing approval. And I'd have to say up through the end of the fiscal year and even a little bit into this first quarter, most of the change that we saw in Brazil, in terms of revenue reduction, would have really been FX impacts rather than actually demand change. But it right now we're seeing more demand impact with the whole back or slowdown in terms of the financing approval; there's pluses and minuses there, as you said. They're selling their commodities potentially in higher value U.S. dollar type currency, so there’re some benefits. We're also seeing some issues in terms of the crops themselves recently with some dry weather drought conditions appearing in the Mato Grosso and Goiás. So I think there's some commodity prices that are starting to move up, which creates more beneficial position for the farmers, but the big issue really is the funding for agricultural equipment, which is slowing down a little bit. And it's really too bad, because it could really be beneficial to their market in total.

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

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

And then my other question's actually bigger picture, Rick, I know this isn’t as fairly new information. But slide nine in your quarterly slides jumped out at me, the ranch Farm and Ranch Irrigation Survey results there. And what struck me was from '98 to 2008, pivots and laterals went from 35% of acreage to 46%, so more than 1% per year in share gain for pivots. But then from '08 to '13, we only went from 46% to 48%, so less than half a percentage point of gain per year since then. So, that was interesting to me, and counterintuitive, given how dramatic the sales cycles have been since then. Can you talk about that? And then why that is? Why that appears to have actually decelerated in terms of adoption?

It's interesting, because when you really look into the detail of it that kind of puzzled us too. We dug into find out what was really going on with those numbers. But in that 2013 Farm and Ranch Irrigation Survey, the question that is asked is, did you irrigate, and not do you have irrigation on your farm or are you irrigating, theoretically did you irrigate, and that was during the drought. And we saw an actual decrease in center pivot irrigation in some markets, while they had equipment in the field they were not irrigating during that drought time period. So we saw the biggest change occurred in about three states; and Nebraska was certainly one of them, Colorado and I don't remember I think Texas was the third. And it had to do with the water availability. And when you take those out and normalize it, you’re seeing the ongoing continued expansion of pivot irrigation as we normally did. And with that anomaly of that drought that created that situation in the numbers that you saw in 2013.

Got it, okay…

But it can be helpful later in the data through those three states, Ryan.

Yes, I want to just to make a note of that on the Slide, because it certainly -- I think the story is lot more bullish in that point. Anyway thanks for good time, take care.

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

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

Well, as I mentioned in the opening comments, what we often see in the international markets is more projects, as well as the normal flow through our dealer network in ongoing pivot and mechanized irrigation sales. And we are seeing some delays in some of the larger projects that have been discussed or in process in some of the international markets. So, that will make things a little lumpier from quarter-to-quarter. In general, the international markets have been little more resilient and it held up a pretty well. What we could be pleased to see in a trough cycle like this is the international markets tend to lag that trough period a bit. And we’ve seen some of that. They also tend to lag coming out of it at times and we haven't really seen any significant impact in most of the markets other than the FX impacts. So let's say, in general, most of the markets are holding up pretty good with the exception of, as I said, the foreign currency impact that we’ve noted and talked about. And we do see some delays in projects. But in general, the demand is still there and there is the recognition of the very important need to have mechanized irrigations, get the crop yields that are required.

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

Well, the start-up of the facility has gone very well. The last phase of it is just getting completed, which is galvanized operation and that would be opened and commissioned very soon, and that’s last phase of the manufacturing part of it. I’d say that we’re not at the capacity levels in terms of running the production levels that we’d anticipated yet. But nothing major other than we’re starting this up in a trough of a cycle in general. The other near-term obstacle that we ran into is we were also exporting from that facility to Russia. And as you can imagine the relationship between Russia and Turkey is a little strained at the moment, which has created some issues there. But it's not I would consider it to be, material or significant to the long-term viability of the Turkey facility. But it certainly made it a little interesting there in the near-term in terms of shipments from Russia.

Prior to this facility though, you were exporting from the U.S., correct?

For most of the markets that we’re -- we’re talking about the exports would have been from the U.S., but there is some -- yes, I think that’s a true statement, yes.

So I guess what I was thinking was you are benefitting that you are not exporting from the U.S. now that you’re running it out of that facility. And then also I would think even though for sort of in a very weak environment that more products has been run through that facility. So, the leverage of the cost on that higher volume is actually helping. So, if you look at the financials of that facility, and I don't even know if this is significant to your financials overall, if it move the needle or not but maybe you can address that. And then if you have seen an improvement on the bottom line coming out of that facility over the last couple of quarters because of the currency exporting utilization, et cetera.

Yes, I would say that we're still ramping up a little bit; so year ago, when we were really just in the start up phases. But to your point, I think we definitely benefit from the fact that we're manufacturing in the region, which takes the U.S. currency disadvantage that we had in that area out of the equation. And we certainly expect to see, overtime as we ramp up that facility, that we'll get. And I would say the impacts today are relatively neutral to a year ago, just because of where we are in the ramp up. But longer term, we would expect, as we get more volume through, we would expect to see more favourability.

And then just lastly, the operating margin at the irrigation segments. What would that look like excluding Elecsys? Just trying to get an apples-to-apples comparison.

You're asking the operating margin fees. Is that your question?

Yes.

Yes, we don’t really speak to the individual pieces. But what I would say it it's consistent with what we said in prior quarters is the Elecsys addition has been positive to earnings overall. And the margins are getting better as we gotten through some of the purchase accounting amortization type of thing. So, it is accretive from an earnings standpoint, and it's helped our margins as well. As well as, just strategically, it's been a big plus to what we're doing on the M2M side and the technology side.

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

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

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

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

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

And then moving on to the infrastructure business, are you still seeing a market share growth from the issues that Trinity had with their end terminals? Or is that whole situation I guess normalized over the last couple of months?

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

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

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

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

Just a follow-up on clarification on the bad debt reserve reversal, it did not have anything to do with China. Is that correct, or we’ll just have to….

No, it has to do with China, yes.

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

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

And then couple of quick ones. What's driving the mix of greater lease and reserve products, and is there some dynamic?

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

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

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

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

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

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

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

Okay, and then LAKOS?

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

Your next question comes from the line of Craig Bibb of CJS Securities.

[Question Inaudible].

Could you repeat the question and maybe get a little closer to the phone, we’re having the trouble hearing.

The selling season starts when?

Selling season will generally start in that February to March, that’s going to be the beginning of the peak of that selling season; February to March time period in North America.

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

Well, there’s not really a program running now. We have had a program that was a combination of some aspects of price, but primarily providing some incentive for the sales guys to go out and talk to customers, which included a small giveaway item to get out in front of customers and even competitive customers, once they buy and they have competitor's machines. There are number of different factors that could come in through, including dating and receivables. But I am not specifically aware of the terms of that program. But as I said, that program is basically complete.

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

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

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

I don’t really have that information, I couldn’t tell you. Let's say, what we have is basically the picture as we have described for the quarter.

And then would your November or December results give you comfort that things might start to flatten in Q2? Or you’re not seeing that, do you have a count?

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

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

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

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

So, looking at the Infrastructure segment obviously to pilot those a big driver for you guys, do you have any idea when will this start to impact the segment and what sort of impact would it have on that obviously it's incremental but is it a huge win for you guys and can we expect stuff to flow through as -- through to the second quarter?

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

And now if you look at the International Irrigation segment, you mentioned that Russia has some issues there, but in terms of the other Eastern European segments, are you seeing any improvement in demand there or is this more status quo there, to be status quo?

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

And then just one more from me and I was just wondering if you could provide even just a rough breakdown of how the backlog looks between irrigation and infrastructure?

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

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

I can’t remember how your irrigation customers I guess particularly in United States, finance their purchases. But I was just trying to get out at it, if we're in a raising interest rate environment that could be something that obviously tighter for them? And is that much of your sales in the U.S. finance based, or whether it's financed through dealers or whether the farmer themselves is financing it?

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

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

Thank you. The global long-term drivers of water conservation, population growth, importance of bio-fuels and the need for safer, more efficient transportation solutions remain 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 our existing roads and bridges. We're committed to creating shareholder value through investments in organic growth, dividend increases, strategic water-related acquisitions and share repurchases congruent with our capital allocation plans. We’d like to thank all of you for your questions and participation on this call today and would like to wish all of you a safe and happy holiday and Merry Christmas. Thank you.

Thank you. Ladies and gentlemen, that does conclude today’s conference call. You may now disconnect.