Lindsay Corporation (LNN) Q2 2016 Earnings Report, Transcript and Summary

Good morning. My name is Kalia [ph], and I'll be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation Fiscal 2016 Second Quarter Conference 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 will now turn the call over to Mr. Rick Parod, President and Chief Executive Officer. Please go ahead.

Good morning and thank you for joining us. 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 second quarter of fiscal 2016 were 120.6 million, 15% less than the same quarter last year. The irrigation equipment revenues decreased modestly in the quarter, while infrastructure sales declined primarily due to the completion of the Golden Gate Bridge project in the prior year. Including a $13 million increase in environmental expenses, the company reported a net loss in the quarter of 4.1 million or $0.37 per diluted share, compared with net income of 9 million or $0.75 per diluted share in the prior year quarter. The environmental charge on an after-tax basis reduced net income of 8.7 million or $0.79 per diluted share. Our manufacturing facility in Lindsay, Nebraska has been around since the 1960's. As many of you know from reading the 10-Ks over the years, we've had an ongoing process to remediate legacy environmental matters at the facility, first detected in 1982 and resulting from manufacturing processes going back even further. Since detected, the company has been committed to remediation of those issues, working with the relevant regulatory agencies. This process takes time, because it involves working with our internal and external experts, and regulators in developing testing and remediation plans. In recent years we've used [GRS] [ph], the nationally-known environmental engineering company to assist with environmental testing and evaluation of remediation alternatives. Progress of the remediation efforts implemented is continually monitored, and plans periodically modified. The prior reserves plus the current expense recorded are big numbers, but none of these are going to be material to the liquidity or financial results of the company. We at Lindsay are committed to this remediation effort, and at being good stewards of the environment. Despite the difficult financial comparisons for the quarter, the results for the quarter reflect a continued progress in our business. Excluding the impacts of these two large events, the Golden Gate Bridge project and the environmental accrual, our net operating profit was flat on a year-over-year basis, on modestly lower sales. The effects of foreign exchange translation also moderated somewhat in the quarter compared to the same quarter last year, reducing sales by 4.1 million or 3%, and lowering operating income by approximately 150,000. For the irrigation segment in total, sales were 103.1 million, 5% lower than the same quarter last year. Irrigation operating margins were 10.7% of sales, compared to 11% of sales last year. In the U.S., the irrigation market revenues were 72.3 million in the second quarter, increasing 6% from the same period last year, and declining 1% excluding revenue from businesses acquired last year. Overall, lower commodity prices and reduced farm income had dampened farmers' sentiments regarding capital goods purchases. The USDA is now projecting 2016 net farm income to be 54.8 billion, dropping 3% from the prior year, and declining nearly 56% from the record high set in 2013. 2016 net farm income is projected to be the lowest since 2002. While domestic irrigation demand and the macro factors that drive farmers' sentiment appear to have reached equilibrium, we have not seen an upturn in the overall market or sensed a significant positive change in farmers' sentiments. There has been continued downward pressure on all farm input costs, including land prices and rents, which should result in improved profitability per bushel, and will likely translate into greater support for adding or upgrading irrigation as a primary method of yield enhancement. In the international irrigation markets, revenues for the second quarter were 30.8 million, decreasing 24% over the same quarter last year. The revenue declined 9% due to foreign currency exchange rate changes, with the remainder of the decrease primarily attributable to reduced demand in Brazil and some export markets. The impact of lower global [paying] [ph] prices on irrigation equipment demand often lags that of the domestic market that we believe we're seeing. We remain encouraged by the project quoting activity in several international markets, but recognize that quoting activity does not always translate to near-term revenues. For the first six months of fiscal 2016, total irrigation segment revenues decreased 8%, to 204 million. In the U.S. irrigation market, revenues were 131.5 million, 1% higher than the prior year. In the international markets, irrigation revenues were 72.8 million, 21% lower than the prior year, and $0.11 lower after consideration of the foreign exchange impact. The segment generated 23.8 million of operating income in the first six months of the year, or 11.6% of sales as compared to 12.5% in the first half of last year. Infrastructure segment revenues were $17.5 million in the quarter, decreasing 47% from the same quarter last year. Excluding the effects of currency translation and the Golden Gate Bridge project completed in the prior year, infrastructure sales decreased 6%. The decrease was driven by lower contract manufacturing and tubing sales. Infrastructure segment generated operating income of 1.5 million in the quarter, or 8.8% operating margin. Infrastructure business continues to perform well in 2016, despite this being the second lowest seasonal quarter and without the benefit of the large Road Zipper project. We have not yet seen the benefit of the new five-year highway bill, but expect to see improved infrastructure activities in fiscal 2017. For the first half of fiscal 2016, infrastructure segment revenues were 37.8 million, decreasing 29% in the first half of last year. Excluding the effects of currency translation and the Golden Gate Bridge project completed in the prior year, infrastructure sales [decreased] [ph] 1% in the first half of the fiscal year. The infrastructure segment generated operating income of 4.6 million year-to-date, or 12.2% of sales as compared to 18.4% last year. For the total company, gross profit in the second quarter was 32.4 million with a gross margin of 26.9% of sales, approximately one percentage point lower than the same period last year. Gross margins in irrigation increased approximately one percentage point, while gross margin in infrastructure declined approximately eight percentage points due to the completion of the Golden Gate Bridge project. Improved margins in our value-added product lines of pump station, filtration, and end-to-end controllers were contributing factors to solid irrigation gross margins, while any pricing pressures were largely offset by lower input costs. Operating expenses in the second quarter increased to 37.1 million from 25 million in the prior year period. The 12 million increase in operating expenses includes the $13 million accrued environmental expenses and 1.7 million of incremental operating expenses of the businesses acquired last year. Other operating expenses decreased 2.1 million with the largest reduction in personnel related expenses. The order backlog at February 29, 2016 was 52.6 million compared to 74.3 million, February 28, 2015, and 61.9 million November 30, 2015. Both irrigation and infrastructure backlogs are lower than the same time last year. The largest dollar and percentage decrease in irrigation backlog is in Brazil, where revenues are significantly impacted by both CapEx and demand. The infrastructure decrease in backlog was in Road Zipper system orders, while road safety products backlogs are higher than a year ago. Our backlog typically represents some long-term irrigation and infrastructure projects, as well as short lead time orders, and therefore as I pointed out in the past, backlog is generally is not a good indication of future quarters revenue. Cash and cash equivalents were 89.5 million at the end of the quarter and were approximately $15 million lower than our fiscal year end, August 31, 2015. The decrease year-to-date is primarily related to our share repurchase of 32.2 million. In the second quarter, we repurchased 333,000 shares for $23 million, and as of the end of the quarter we have 79.8 million of shares repurchased authorization outstanding. With the strength of our balance sheet, we remain well-positioned for additional growth through acquisitions and investments and other initiatives that drive improved returns for shareholders. Overall, operating income excluding the Golden Gate Bridge project last year and the environmental charge this year was flat to the year-ago quarter. This reflects some good news in U.S. irrigation market as year-over-year sales were roughly flat in the quarter after year-over-year quarterly declines for the past few years. In addition, we have been able to maintain irrigation gross margin offsetting some competitive pricing changes with input costs reduction. In addition, we are seeing significant benefits from the water-related acquisitions we've completed over the last few years. From a financial standpoint, those acquisitions have helped us to improve gross margins, and have provided revenue synergies, and their revenue base is not tied to the agricultural commodity cycle. From a strategic standpoint, these acquisitions have uniquely positioned us in the market, providing an added value turnkey solution proposition for our customers beyond our market-leading center pivot [ph] product line. In the infrastructure segment, costs have been controlled. Sales and profits have been stabilized to provide more consistent results. The recent passage of the highway bill provides an opportunity for future revenue growth. However, it will take a bit of time to translate into stronger infrastructure project revenues. While we do not have a large Road Zipper project in our current backlog, the Road Zipper lease business continues to grow as we aggressively pursue leasing projects, which generate high returns on the fleet assets. We are also encouraged by the development of our project pipeline for Road Zipper system sales. Many of the international irrigation markets currently face the headwinds of lower crop prices and regional economic and political issues. However, the foreign currency exchange rates, they're destabilizing, and quoting of international projects is showing signs of improvement. As I've stated in the past, we will aggressively perfect and expand our market share in both irrigation and infrastructure, while continuing to broaden our competitive advantages with our differentiated operating products and services. I'm excited about the new products and technologies in development throughout the company, which are just part of our global growth plan. We are investing in productivity enhancements, and new product development, as we position for the growth of the agricultural market, and expansion in other markets we serve. Lastly, we are executing on our stated capital allocation plan, including capital expenditures, share repurchases, paying dividends, and pursuing synergistic water-related acquisitions that offer attractive returns to our shareholders. Our M&A activity is strong today, but as always, it's difficult to predict the timing on completing deals. 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 Nathan Jones of Stifel.

Good morning, Rick. Good morning, Jim.

Good morning.

I wonder if we could just start with the margins. You're getting margins down now in the irrigation business specifically, down around levels that are lower than they were in 2009-2010. You've got SG&A as a percentage of sales is fairly significantly higher than it was at the last few troughs. Are there further levers that you can pull on the SG&A front to help protect margins at the bottom of this cycle?

Well, I think -- Nathan, this is Jim. We're always obviously looking for opportunities for productivity and cost reduction. I think what's a little bit different about today versus where we were in 2009-2010 is we've added a number of businesses that are more value-added products, some engineering, and as a result they have a little bit higher SG&A run rate. Now, they also bring with them some opportunities, both for margin improvement as well as some ability to be more comprehensive, more solution-based in our approach. So we think overall it's a positive, but it's a little bit difficult to compare those periods just because of the nature or the makeup of the business, but we will continue to look at where we can reduce costs and improve the margins.

I mean, outside of the comparisons, are there things that are currently being contemplated on the SG&A front in order to protect margins at this point in the cycle?

I don't think there's anything I would point out in particular. We've obviously taken a number of costs out, and you can see that in the numbers, what's happened with some of our personnel-related costs on a year-over-year basis, but I would also say that we're very focused on making sure that we're continuing to invest in the business from the standpoint of product development. And so, you see the R&D costs being maintained. And we've also looking at geographic expansions, and getting synergy –- the revenue synergies. So I think our focus is really driving the business long-term, while finding opportunities where we can on the cost reductions.

Okay. And then if we could just talk a little bit more in detail about Brazil. I mean, I understand you've got a couple of things at play here. In local currency the corn is quite valuable to the Brazilian farmer, but on the other hand you've got a disastrous economic situation that's probably making it difficult to obtain financing. Can you talk about what you're seeing in the Brazilian market, how it's changed over the last year or two, and what your expectations are for that going forward?

Yes, Nathan, this is Rick. I do think that Brazil still represents a fantastic opportunity going forward. I think that as we've seen in the past periods, Brazil goes through these cycles up and down, and it probably will continue to do that for a bit of time. They're definitely going through some political [indiscernible] as you know, most of the units that we're selling are going through some form of Brazilian government financing through BNDES, and we're seeing slowdown in terms of approvals and payments on funding. Part of it is lack of funds, and part of it is lack of, I think, probably a -- maybe a lack of ability on people part and government to feel that they can take action and do something. So I don't think this will -- certainly I don't think this will last, but it's part of a cycle. And we've seen these ups and downs before in Brazil, but the opportunity is still excellent. And we're in a good position in Brazil. So we'll ride through this. This has definitely been a tough impact with between the FX and seeing sales declining, but we still get feedback of strong demand in Brazil.

Okay, thank you.

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

Good morning.

Schon, if you are on speakerphone, please pick up your handset, if you're on mute, un-mute your line.

Hi, good morning.

Good morning.

If we could talk a little bit about cash flow, Jim, the operating cash flow in the quarter was a drag on the overall cash flows for the quarter, and have a little bit unusual, maybe from a seasonal standpoint. I mean, could you maybe just clarify exactly how much of the $13 million expense, was that all cash? Is that the primary drag there or are there some other pieces that maybe hit the operating cash flow this quarter?

So, the 13 million is non-cash, so that was not a driver of the cash. I would say that it really is more working capital related. And some of this goes into things like expansion of some of the business, like the ramp-up of the Turkey facility. It's not a big number, but there are some contributors to inventory on that side. I would also say we've had a little bit more in extended terms on the receivable side in some of the markets' international project type of things as well. So I would just say it's a few of –- I mean we always get a little bit of this working capital swing when we go from -- as we head into the primary selling seasons, but there's been a few other variables that have maybe made it a little bit more than normal.

All right, that's helpful. And then I'm interested, I mean in the commentaries intro you talked about kind of being on plan with the capital expenditures relative to the capital allocation plans, but I mean -- so the guidance is 20 million to 22 million, you know, you were a good bit below that in the last fiscal quarter or last fiscal year, you're on pace to be below it this year. I'm just wondering, has anything changed relative to when you put the capital plan out there? I mean, has the market outlook affected the spending on that side? I'm just trying to reconcile the commentary.

Yes, this is Rick. I wouldn't characterize it as really having changed the outlook in terms of what we would spend capital on, with the exception of -- we probably had intended. And in fact, I know for a fact, we intended, when we developed that plan that we would probably have some additional investment in one other regional market from a manufacturing up in some form, which is delayed, and that was Russia. So that, it definitely is not on the table right now, but it's not a significant amount of money, but it was anticipated that we would have some additional expansion there at that point.

And that would be primarily for irrigation revenue?

Yes.

Okay, that's helpful. And then one more, if I may, you mentioned some weakness on the contracts and tubing side within infrastructure. Is that actually -- most of that would go into agricultural markets? I mean, is that things like, I don't know, grain towers or…

That's correct.

Okay.

Yes, most of our contract manufacturing is still for agricultural equipment providers, and the commercial tubing that is still in that product line is generally one of our biggest groups of customers would be in the grain handling.

All right, that's helpful guys. I'll get back in the queue.

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

Good morning, guys.

Good morning.

In terms of the domestic irrigation business, just wondering, relative to your expectations was that a surprise on the upside? Seeing that sort of flat year-over-year? Just given with the environment, I would've thought, especially in the whole agriculture equipment space that seems not too bad considering the environments…

I agree it's not bad. In fact, we're happy with the fact that it was flat. The way I looked at it is, in last quarter, when we talked about this we were really uncertain in terms of what we were going to find out coming into the North America selling season. But we're pleased that it was flat. It looks like we have leveled off in terms of debt demand. There was nothing really specific in terms of any big opportunities or large significant purchases that skewed it that I'm aware of in any of this. But I think it reflected market demand. So from that standpoint, I think it's good and healthy that we've seen that level-off the way it did. Adding to that, I think what we've seen in the couple of the international markets, and primarily ones like Australia, New Zealand, and Mexico or Canada, which are very similar to the U.S., we've seen the global commodity price affect in lower commodity prices impacts those markets similar to it has in North America. But as we've often seen, there's a bit of a lag sometimes in those markets. But those were more affected by the lower commodity prices now, in the last couple of quarters. So, those two are ones that we'll respond if commodity prices pick back up again. So I think to come back to your point, we were pleased to see a pretty level situation in North America. Not totally surprised with some of the international markets. I think one part on the international front that probably skews this a little is we've seen some slowdown in just the generation of projects, or at least completion of the quoting activity on projects turn into sales dollars, and tends to maybe rely more on the developed markets, and see this as kind of an impact of the lower commodity prices.

So, just given the lower farm income, farmers are doing everything they can to try to cut their costs. Why do you think your revenue was flat year-over-year, considering those headwinds? And now that we're through the month of March, how do you see the spring, and the rest of this year sort of playing out in your eyes?

Well, I'm not going to make any comments regarding the projection for the rest of the spring. I'd say that, what we saw in the units that we sold in the quarter, from the activity, was nothing much of a surprise in terms of, let's say, the distribution of the use of those machines. So for example, we've talked in the past about the split between the units going into conversion, or dry land to replacement. And I think the only part that was maybe a little bit of a surprise to me is the dry land is holding up pretty well. And that was about a third of the machine. So roughly 33% of the machines worked in dry land, 42% to replacement, and 25% to conversion. And I think if we look back, we'd find that that was very similar to, almost right on the previous –- the same quarter last year. So a very similar comparison, but that split is holding up pretty well, and indicating feel-good interest in conversion, and in putting irrigation on for the first time. So I think the recognition of the yield enhancement is still the draw for the customer. And obviously, the replacement market is holding up well too in terms of replacing older units. And that older unit volume or capacity out there continues to increase every year. So there's a good potential long-term for that.

Okay. And then I just wanted to clarify one of your prepared commentary remarks regarding international irrigation. Were you implying that the bidding activity is actually stronger than the actual results that you saw in this quarter?

Well, I wouldn't characterize it as stronger than the results. I'd say that the bidding activity has continued to be pretty strong. We've seen ups and downs, ebbs and flows in bidding activity on projects, but there's still some good bidding activity taking place. See, the problem is they're not getting closed as fast as we had seen back a couple of years ago in more peace periods, and it's taking longer to see those come to fruition. So it's a little tougher process. And we've also seen some projects that were on the table that have been delayed now for months. We still believe those projects will take place, but they're currently delayed for one reason or another. So I wouldn't characterize it as stronger than the markets or the sales reflects –- I'd say that it's still pretty strong. That keeps us encouraged about opportunities in the international markets.

Okay. And then just lastly, if you will, in terms of your CapEx your planning in the next couple of years 20 million-25 million annually. You're only at about 7.5 million year-to-date. Just wondering if you could update us on that? And update us on sort of the projects that you have going on in your CapEx budget?

Well, the first comment I would make is that we are encouraging our operations to identify those opportunities to use that CapEx in opportunities for improvements in our operations. These are, it could be efficiency improvements or it could be new projects or new products, so we are encouraged to do that where possible. I think we're on track to about where we were at the same time last year, or let's say for the total we received -- got to the last year of about 15 [ph] million. I suspect that's probably closer to where we will end up this year, but there's a lot of activity on projects, there's certainly opportunities for improvement that have been identified that our factories are working on. But it's not going necessarily as fast as we expected, not for any specific reason. Also, even the completion of the Turkey facility is taking a little longer than expected. And there's capital that's still going into there to get our galvanizing operation up and running. So it isn't anything specific. I would say that everyone is encouraged to find those opportunities, and they're pursuing them at a pretty rapid rate.

Okay, thank you.

Thank you.

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

Great, thank you. Rick, I wanted to touch on the international supply and demand situation. I know we've had a substantial reduction in demand. And domestically, you've always talked about pretty rational market that can scale down effective capacity, and then help to maintain pricing that way, but as we go through this big reduction in demand internationally, in theory some of that effective capacity reduction might be less orderly. I wonder if you can just talk to us about the supply and demand situation globally, especially some of your emerging market competitors, and how that's impacting the pricing environment on these international bids that you've talked about here.

Well, as we've talked about in the past, Ryan, we've seen some increase in competitiveness on projects from some of the international competitors, but I wouldn't say that there was anything really notable in this particular quarter anything that's really changed much. And I don't consider that to be a major factor. And right now if I were to characterize, let's say, the slowdown or the impact on our operations from the market demand reductions that we're seeing, the largest impact from a international manufacturing operations has been Brazil. And that one has had some definite impacts from the standpoint of lower demand, partly due to some of the whole economic and government stuff that's going on. So there's an impact there. Other markets that are impacted are more of our export markets currently that are coming out of our Lindsay, Nebraska factory, which has done a really good job in terms of adjusting scale to be able to adjust for that. Our other factories, in general, are doing a great job in terms of managing capacity levels and meeting demands. And as I said, many of the international markets are still holding up pretty good. Brazil was the one single biggest impact in terms of a factory, and they are having to adjust their factors to the new levels of demand that we're seeing.

Got it, that's helpful. And then you mentioned commodity prices a few times here on the call. And I wonder if you can, just a big picture question about kind of rules of thumb. I mean, you hear a lot in the oil market about, if oil gets back to X, that's going to trigger a round of CapEx activity and what not. I mean when you talk to your distribution channel and what not, the rule of thumb that people have in mind, that if on the benchmark like corn or soybeans for example, we need to get above X and then, that will really start to prove sentiment and demand activity, is there any kind of rule of thumb out there, I know you did mentioned costs coming down, with the moving target but any color you might be, of interest?

Well, as we talked to people recently and this is from a U.S. domestic perspective, we've heard comments of corn at $4.20 bushel or corn at 4.50 seeing trigger points to see increased activity, in terms of capital goods purchases, I have seen a number of articles that would indicate a couple of different levels in that range as well. However, I look at it as kind of a rising tide in the sense as the price goes up, we do see increased activity and particularly irrigation going into dry lands for the first time. So I don't know if there is a specific trigger point, especially as you commented, when you are seeing inputs costs adjusted and decreasing at this stage that trigger point may change. Right now, farmers are having to adjust those perspective that they had in the past have seen $7 corn prices and obviously high input costs, input costs now falling at commodity prices are falling. So those adjustments in the -- there is a sense that might taking place all the time. So I think that -- certainly that $4 range is a trigger point that's probably pretty important and I don't know if its $4 or 4.20 or what number is, but it certainly costing that $4 target is a factor I think that most farmers mind today.

Got it, and then one quick on the infrastructure, obviously you got the Golden Gate project rolling off you mentioned it in the press release but it seems like, if I look at the run rate of infrastructure on a top line, it seems like maybe that positive impact of the rail competitive legal problem last year may that benefit maybe dissipating as well. Can you comment on that at all for us?

Well, I would describe more as - if you were to look at it on a year-to-date basis, there really isn't much change that's taking place in that road safety product piece of it, from year to year in another words the benefit that we received this past year, we have held on to, I think the opportunities for continual growth and advancement still exist there, I think the growth rate has slowed down but not the opportunity and in front of us and we haven't gone backwards in terms of road safety product piece of it, what's put down the infrastructure part this quarter has really been truly the Golden Gate Bridge project which is obvious but also the reduction in the tubing and contract manufacturing, which are significant high to agricultural demand.

Got it. Well, thanks for your time.

Thank you.

Your next question comes from the line of Tim Mulrooney of William and Blair.

Good morning. I would like to start my irrigation business, to start you said it's competitive pricing as a headwind in the quarter, has pricing pressure stepped up the selling season or is it just more of the same, which you have been seeing lately and is this broad based across the industry are you seeing pricing pressure from one or two specific competitors or one or two specific regions.

During the quarter, we did see pricing pressure in the domestic market, while pricing change take place, I am not going to single out competition on this, I would say that I do believe, some of that pricing pressure and change we saw was giving back some of the steel decreases that we also experienced and of course fuel is roughly a third of our costs of goods sold, those are significant factor in this. The good news is that it wasn't getting back all of the reduction in steel that we have been able to experience. So it's been beneficial from that standpoint. I think it's been pretty rational, nothing really major -- pocket as we always have been the difficult region, where it's a little more competitive than others but again I as you said, often do dealers not through the manufacturing that there is definitely been some movements down in pricing, but as I said it is offset with input costs.

Okay, thank you. And then just one more also on irrigation, can you talk just a little bit more about the value added products, your pumps control, your filtration product that lead to gross margins by a point in the quarter. How big is this piece of business today? How fast is it growing and where do you think it can be in a couple of years, Thank you.

Jim, do you want to take that?

Yes, from a overall when -- kind of the filtration, the pump and the Elecsys business, it always ranges because they have international project, it is somewhat project driven and they have some other product lines that they have but roughly it can be 15 to 25% of our business within the irrigation business in a particular time and obviously I think and probably more importantly is really how are the fact our ability to get into projects and really keep it more comprehensive pollution. So we expect it to help us grow the pivot, the historical pivot business but also to contribute more to the growth in those individual product lines as well going forward.

Just to add to Jim's comment. In addition to the, what it does for us, the irrigation market in terms of adding through our complete solution, they also have strong position in other markets, in industrial filtration or industrial water application, pump station that will go on to golf courses, landscape application, other areas that are not necessarily tied to the Ag cycle, but very closely tied to what we do. So they brought in a synergistic piece of revenue for us an opportunity to improve the mix in margin, but at the same time, expanded the market that we serve.

Okay. Thank you.

Thank you.

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

Hey guys, thanks for taking my question, I appreciate it. With margins extending to the point…

Tyler we can barely hear you, so if you could get closer to the phone or speak up please.

Can you hear me now?

Yes, that's better. Thank you.

Okay. With margins coming to the point of -- '09, 2010 levels, how should we look at margin pre-Elecsys what were the margins before pre Elecsys acquisition?

That's not a break out that we do. So I can't clearly provide that information.

Okay, no problem. How about on the infrastructure side, with the highway bill not providing any impact yet, do you have any visibility from your customers on when you could see some sort of impact from that bill?

We don't have specific visibility on that, I describe it more as what our sales people are running into with our distribution channel and others that we are working with, is increased activity in the planning stage that's taking place, that will turn into project down the stream. So what we are seeing is that the highway bill is providing more funding and confidence to develop the project that will turn into project for us in the future. However those have not come to fruition yet, at this stage. So the general talk is that we should see more of these starting to really hit, we didn't a few quarters and I don't really know, if it's within the next two or three or four but we will start to see those projects come together, that are out there in the planning stages right now.

Okay, that's helpful. I guess just last one for me, with pricing getting more competitive in the market is it possible to match pricing much further or will there have to be additional restructuring for that kind of -- wait to happen.

I think your question is it possible to match pricing without having us to have an impact on margins?

Right, if there were to be another like down in pricing from competitors.

Well, obviously, pricing impacts do pull down margin and as I said, we have been fortunate in terms of offsetting the input costs, we would hope that, we are not going to see more of that really taking place. However, we will go where, where we need to go, in terms of competitive positions in the market and there is always things that we are going to be doing in our organization which could be looking for reductions in input costs or manufacturing improvement in efficiency and other things that we will do to match that, we will go where we need to go, this is a primary focus of our business and we will support our position in the market.

All right, great. Thank you.

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

Hey guys, good morning.

Good morning, Kevin.

Jim, first a quick question for you on the environmental reserve, I know there is 13 million as your best guess as of now, but I am wondering if, do you think, this is the final charge or are there other parts of that side, that I guess you are still test -- you are still testing and are unsure of it at this point or is it kind of it?

Well, I would never say that there couldn't be further adjustments. There is obviously uncertainties and those type of things, but I think to your point, I think certainly what has, what's changed with this accrual is that, previously we had accrued for areas that we knew, there were issues, but there were also areas on the side that it was difficult for us to asses, the level of contamination and what it would -- what options will be available for us to clean it up. So what we did last fall, was we expanded our testing to get these difficult areas, in particular there was one associated around the building and under the building that we were had been difficult for us to test, we basically expanded our testing into that area and that really the findings out of that is really what resulted in this adjustment to the accrual. So in the past, where I think we had more uncertainties, the testing that we have done now is - has been comprehensive and so it's always difficult to say, that the testing is always sampling, so you never know for sure, but I think the testing that we have done at this point is very comprehensive and I think we feel good about our level of understanding of the contamination on the site.

Okay, great. And then I certainly understand that this is non-cash right now, but I guess over the next several years, it takes you to remediate, should I assume that, this is going to be 13 million of cash outlays at some point in the future for you guys?

It will at some point be cash outlay, I will say that, I mean -- as I said, there is still uncertainties including the fact that, we have -- we need to have the discussions with the EPA and get approval from the EPA on what our plans are but this is a 10 year plus type of number that we are talking about. So it is an extended period of time and then there maybe periods, where the cash outflows are larger but for most part it is a long-term type project.

Okay, great. And then, Rick, going back to kind of margins and pricing within your domestic irrigation business, I guess the way I read your release, in terms of margins on specifically the center pivot, it seems like they were probably down a little bit if you say, competitive pricing were largely offset by lower interest costs, is that a fair way to read it, I guess gross margin on just center pivots were actually down in the quarter.

I would read it as pricing on center pivots was down in the quarter and it was offset by input costs.

Okay. Okay, great. And then, I guess based on your experience you have been in this industry for a long time and I am just curious, if we saw some kind of correction in field prices, do you think that would lead your competitors to, I guess, stop cutting price and going after volume and kind of stabilize there or is there something else to play here.

Well, I can't make decisions for competitors obviously, I would say based on historically what happened is that we think field prices move up, where usually the first or one of the first to move our pricing up and we have seen competitors follow. So I think that the industry has been pretty rational in terms of responding to what happens to the field market, in terms of pricing and frankly there are not additional units that you are really going to get by having significantly lower price or holding back on those increases and in the farm economy generally know and understand farmers to what's happening with fields. Yes, I think we can pass through price increases in field when it's necessary.

Okay, great. And then last question for me, again sticking with the U.S., but more on the volume side, I was wondering if you could comment on any promotional activity that you guys may have ran, I know we did some in the first quarter, I am wondering if you did any in the second quarter, I guess any discounting that you guys might have done to the dealers.

There were some promotions that were, that did go on in the second quarter, I think I think they were similar to what some competitors had as well, in terms of some rebate on per tower, but also there was a element of it, where we were offering FieldNET, pivot control for example as an option in some cases, to expand our market position with our FieldNET product line, so there were some things, I am not familiar with all the specific details of it, but I know that there were some programs in the second quarter.

Okay, great. Thank you.

Thank you.

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

Good morning. This is actually James calling in for David. So my first question actually is on your outlook on infrastructure, I know you talked about your expectation for 2017 to again seeing benefits from the highway bill before Road Zipper projects. In the past, you talked about maintaining sustainable pipeline perhaps 100 million to 200 million and identify projects with some projects bigger than the Golden Gate project is that still the case and overall I know Q2 was weaker than expected for the reasons you already discussed but can you also provide any color on what you may expect in the second half, whether it may ramp back up to your last year levels?

Yes, we didn't really provide much in terms of the second half, I would say that the answer to your pipeline question is yes, we are seeing similar levels in terms of pipeline today, one of the good things we have seen is a little bigger pipeline in terms of the lease opportunities for QMB systems, the removable barriers systems. So that's been favorable and also fantastic profit as we get those lease project in on our low cost based lease asset today. Yes, the pipeline is still looking very good, there are still projects in there that are equal to or bigger than Golden Gate Bridge project but as we from quarter-to-quarter, the projects that we often expect to happen in a specific quarter or any point in the year were roughly delayed, timing will change on those. There is nothing other than that, I can really comment on and say that the pipeline still looks very good.

Okay. My follow-up question is on irrigation margins, obviously you talked about competitive pricing, offset by lower input costs and product mix of more value added products, for center pivot are you still seeing that mix moving more towards less expensive lighter machines or do you seeing kind of return through some of the larger more sizable projects and I am assuming, you are also benefiting from heavier mix of domestic sales versus lower margin international sales in the quarter, are there -- so would that -- are there other maybe factors, your gross margin profile for irrigation, are they up or down from where you are today? Thank you.

There was nothing significant that I am aware of in the quarter that would affect the gross margins in terms of the mixed impact on the irrigation equipment. As we commented even in the last quarter, we did see some shorter machines that were sold that had some pricing effect in terms of price impact in the quarter, I can't specifically say in this quarter, I suspect that mix is similar, one of the things you see as the market becomes more robust, is we will see expansion into people putting machine on to the large parts of land and it doesn't -- again I can't say specifically in this quarter, but we do see that typically as the market becomes more robust and picks up again. Other than that, there is nothing really significant in product mix that would have made margins even better or worse for the quarter that I am aware of. Jim, do you have any comments…

Nothing other that you added.

What's the domestic mix; domestic and international mix of that impact going forward?

The domestic was a little bit higher than it was a year ago, but I would say that, I don't think that had a very significant impact on the overall margin, I think the factors that we outlined really being some of the value added product lines that have continued to see good contribution to our overall gross margin rate.

Okay, thank you.

Your next question comes from the line of Jose Garza of Gabelli & Company.

Good morning, guys.

Good morning.

Hey, Rick, I was wondering if you could comment just touch on - maybe give us some data points on kind of FieldNET and what the uptake is from customers especially as you talked about on, and maybe some new customers [indiscernible].

Well, I can't -- I'm not going to be able to split out specific data in terms of the FieldNET other than to say, we are pleased with the growth that we are continuing to see with FieldNET in the market. The past year, we launched the new product called pivot control, that will put FieldNET capability on to any other pivot that's out there in the market and that's been very successful, we use that as part of our commotion program in the second quarter and we had a very good uptick in terms of people taking the pivot the control product line, pivot control product, I think that is probably the single biggest demand from that program, with on the pivot control. But in general, I would say that the success of FieldNET is excellent and we continuing to look at building out, new features and add other things, that we can add to it, so we are very pleased with the growth path and where it's going and also the very significant installed base of number of machines that are out there in the domestic and international market that allow our future growth of that product line. We are a market leader from a international standpoint, FieldNET is in the international markets in most, all of the that we are doing business with today, with great success, but we continuously get opportunities to expand that and also help us significantly with projects.

Okay, thanks. And if you could just give a kind of a quick update on, where do you stand on the Turkey facility and the galvanizing that you want to install there?

The facility in Turkey is operational and up and running, we had galvanizing plants, I don't believe it's quite turned on yet, I know that the equipment was being installed in the last few weeks it is -- I don't think it's completed yet. So we will be testing probably within the next couple of weeks, in terms of galvanizing operation. So it's in pretty good shape and we are happy with that facility, it's obviously is not at the time, where we had peak revenues, so it would be great to be able to absorb that overhead in a more effective way, but it's still, we will be very good facility for us and able to absorb, the manufacturing capacity for that region.

Okay. Thank you very much guys.

Thank you.

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

Hey, good morning. How are you doing?

Good morning.

Do you have any sense, I would like to -- in North America the land is changing, you can farm a little bit more than frequently this year than in the past, I guess more so on [indiscernible] land and I guess I don't have data on sales, but maybe [indiscernible] as well, but do you have any sense, if change in ownership or at least farmer ship of the acreage increases, does that good or bad for your relation, what kind of investment or taking over farm or do you have any sense of that at all?

I don't have any specific data to support that, but anecdotally we find that as people are coming in picking up land and they are looking at ways to improve the efficiency of that land. We work for a lot of larger companies and individuals, who are acquiring land and REITs that are acquiring land and generally there philosophy is they are looking for the efficient land to pick up and in many cases, we will improve the efficiency of that land by adding irrigation that's also based on the value of the land. So from that standpoint we generally feel its good, I don't have any specific data to percentage of things that's taking place from new land owners, I think there is definitely more changing hands at this point and I think we will see more as we have seen some land prices decrease in a few areas now and what we are hearing is more activity, in terms of land sales. So it could be beneficial to new farmers coming in and setting up irrigation for the first time.

You guys mentioned, you guys work with the farmer and partners FDI…

I don't want to specifically talk about any one customer, I don't think, we work with REIT and we believer we are seeing more activity with both companies picking farm land and many of them are very, very good, good business people and good business partners and we would like to work with them all.

And then on Elecsys, can you give us an indication on sort of what the -- what do you expect organic growth to be for that business, I assume it's positive, but is it growing significantly or is it just sort of -- I don't know single digit, double digit, is it 50%...

For Elecsys, we see great opportunities for significant organic growth in their adjusted markets. Now in the near term, there has been some change taking place with Elecsys. For example, they picked up the volume that we had with another manufacturing facility that we owned, it was consolidated into them. That increased their capacity, and increased their utilization and manufacturing that they were doing. So instantly they picked up more internal volume from our operations, and that was a plus. At the same time, there are some other changes there are taking place with their contract manufacturing part of the business, where one customer is phasing out some of their business of Elecsys. They're also -- a portion of their business is with oil and gas, and with the rail industries. But we're seeing some decreases in those markets. At the same time, given Elecsys' great capabilities in the M2M technology, they have many other new markets that they're starting to get involved in, and work with. So I can't give you a specific in terms of an organic growth rate for the company. I would just say that we're very optimistic about it, and pleased that they have excellent capability, that not only serves us from Lindsay's standpoint in all of our businesses, but also will be beneficial in terms of growth into other markets with their capabilities.

How about just for '16, do you expect it to grow organically or –- I couldn't figure that out from all the puts and takes there, whether it's [indiscernible]?

Well, I think, and if I understand your question, you're asking are we expecting significant growth or anything from them for fiscal '16, is that correct?

How significant, but is it going to be positive organic growth for Elecsys this year?

We don't -- we try not to get into the discussion on the individual business units, and where they are, but I think to Rick's point, certainly how things go within the irrigation business, as well as in oil and gas, and rail, is going to have an impact on the near-term revenue numbers for Elecsys.

Okay, thank helps. Thanks so much again.

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

Hi. Thanks for sweeping me back in. I just –- Rick, I wondered if you've seen anything out there, either from a positive or negative standpoint on the regulatory issues or water access? There's just there's been a lot of chatter recently around nutrient loss in Illinois farmland run off into the Gulf. I think Iowa's got a large water quality lawsuit going on right now because of nitrates. I'm just wondering if there's anything that you're watching with particular interest that could be a kind of positive or negative catalyst out there.

Generally speaking, we're watching all of that, because they can have negative impacts. And in some cases that it's just that it could be positive as well. But we're not really seeing anything that we believe is eminent that a trigger that's going to have any significant impact in any way. We're watching everything, from the waters of the U.S. legislation, to the specifics that you're talking about that are much more regional. But generally, they can have limitations or have some impact that, if, for example, they decided that you either cant irrigate or you can't apply fertilizer or chemicals through your irrigation practice, sorts of things. But we're not really seeing anything moving in that direction. So generally speaking, most of the legislation, and there's been regulation that we see, is water-efficiency-oriented. And as you said, there are some others that are more nutrient and solution-oriented. But the water efficiency-oriented would be beneficial to us. But there's nothing specific or eminent that I see as a big impact.

Okay. And then maybe specifically on –- have you seen any change in purchasing patterns that you look at the California market. I mean, obviously that's not a big center pivot market, but I'm just -- I'm kind of surprised that you've got an ongoing drought there. It hasn't maybe driven more of a -- more conversion opportunities. I mean, could you just talk about, I don't know, tell me what you're specifically seeing out of the West?

Well, I don't have the facts specifically on what's happened to-date in California. I'd say that what we have seen year-over-year for a few years is better growth in California. So we had definitely seen that there had been more pivots going in than there used to be, but I can't point to the specifics on where we're at right now. I think that the drip irrigation market was extremely robust in the last couple of years in California. And farmers, which primarily vineyards, and orchards, and specialty vegetable crops were put in a drip irrigation for water efficiency. And we benefited from that, by the way, through our LAKOS business, which sells filtration into the drip irrigation industry. So from that standpoint, that's been beneficial to us. We see good opportunities in California for pivots and for drip irrigation expansion, including pump stations and filtration for drip. So, either way I think it's -- as long as there is movement towards improved efficiency in California and water use, we can benefit from that.

We have reached the end of our allotted call time. I will now turn the call back over to Rick Parod for closing remarks.

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 in this call.

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