SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 31, 2005 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-13419
Lindsay Manufacturing Co.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0554096
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2707 NORTH 108TH STREET, SUITE 102, OMAHA, NEBRASKA 68164
(Address of principal executive offices) (Zip Code)
402-428-2131
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
-------------- -----------------------------------------
Common Stock, $1.00 par value New York Stock Exchange, Inc. (Symbol LNN)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of Common Stock of the registrant, all of which is
voting, held by non-affiliates based on the closing sales price on the New York
Stock Exchange, Inc. on February 28, 2005 was $270,948,258.
As of October 19, 2005, 11,520,136 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement pertaining to the February 6, 2006, annual
shareholders' meeting are incorporated herein by reference into Part III.
Exhibit index is located on page 47-48.
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TABLE OF CONTENTS
Page(s)
-------
Part I
Item 1. Business 3-8
Item 2. Properties 8
Item 3. Legal Proceedings 8-9
Item 4. Submission of Matters to a Vote of Security
Holders 9
Part II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation 12-19
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 19
Item 8. Financial Statements and Supplementary Data 20-41
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 42
Item 9A. Controls and Procedures 42-43
Item 9B. Other Information 43
Part III
Item 10. Directors and Executive Officers of the
Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management 44
Item 13. Certain Relationships and Related Transactions 45
Item 14. Principal Accounting Fees and Services 45
Part IV
Item 15. Exhibits, Financial Statement Schedules 46-48
SIGNATURES 49
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PART I
ITEM 1 - BUSINESS
INTRODUCTION
Lindsay Manufacturing Co. ("Lindsay" or the "Company") is a leading designer and
manufacturer of self-propelled center pivot and lateral move irrigation systems
which are used principally in the agricultural industry to increase or stabilize
crop production while conserving water, energy, and labor. The Company has been
in continuous operation since 1955, making it one of the pioneers in the
automated irrigation industry. The Company markets its standard size center
pivot and lateral move irrigation systems domestically and internationally under
its Zimmatic brand. The Company also manufactures and markets separate lines of
center pivot and lateral move irrigation equipment for use on smaller fields
under its Greenfield and Stettyn brands, and hose reel travelers under the
Perrot brand (Greenfield in the United States). The Company also produces
irrigation controls, chemical injection systems and remote monitoring and
control systems which it sells under its GrowSmart brand. In addition to whole
systems, the Company manufactures and markets repair and replacement parts for
its irrigation systems and controls. Lindsay also produces and sells large
diameter steel tubing products and manufactures and assembles diversified
agricultural and construction products on a contract manufacturing basis for
certain large industrial companies. Industry segment information about Lindsay
is included in Note Q to the consolidated financial statements.
Lindsay, a Delaware corporation, maintains its corporate offices in Omaha,
Nebraska, USA. The Company's principal manufacturing facilities are located in
Lindsay, Nebraska, USA. The Company also has foreign sales and production
facilities in France, Brazil, and South Africa which provide it with important
bases of operations in key international markets. Lindsay Europe SAS, located in
France, was acquired in March 2001 and manufactures and markets irrigation
equipment for the European market. Lindsay America do Sul Ltda., located in
Brazil, was acquired in April 2002 and manufactures and markets irrigation
equipment for the South American market. Lindsay Manufacturing Africa, (PTY)
Ltd, located in South Africa, was organized in September 2002 and manufactures
and markets irrigation equipment in markets in southern Africa.
Lindsay has two additional operating subsidiaries including Irrigation
Specialists, Inc., which is a retail irrigation dealership based in Washington
State that operates at four locations ("Irrigation Specialists"). Irrigation
Specialists was acquired by the Company in March 2002 and provides a strategic
distribution channel in a key regional irrigation market. The other operating
subsidiary is Lindsay Transportation, Inc. See "Subsidiaries" below.
PRODUCTS BY MARKET
IRRIGATION PRODUCTS
The Company's irrigation systems are primarily of the standard sized center
pivot type, with a small portion of its products consisting of the lateral move
type. Both are automatic, continuous move systems consisting of sprinklers
mounted on a water carrying pipeline which is supported approximately 11 feet
off the ground by a truss system suspended between moving towers.
A typical standard center pivot for the U.S. market is approximately 1,250
feet long and is designed to circle within a quarter-section of land, which
comprises 160 acres, wherein it irrigates approximately 130 to 135 acres. A
typical standard center pivot for the international market is somewhat shorter
than that in the U.S. market. Standard center pivot or lateral move systems can
also be custom designed and can irrigate from 25 to 500 acres. A mini-pivot is a
small version of the standard pivot and is used for smaller fields and/or
shorter crops, than that for which standard pivots are used.
A center pivot system represents a significant investment to a farmer. A
typical standard center pivot system, fully installed, requires an investment of
up to approximately $65,000 to $75,000. Approximately one-half of such
expenditure is for the pivot itself and the remainder is attributable to
installation of additional equipment such as wells, pumps, underground water
pipe, electrical supply and a concrete pad upon which the pivot is anchored.
The Company also manufactures and distributes mini-pivots and hose reel
travelers. These systems are considered to be relatively easy to operate and
have good mobility. They are typically deployed in smaller or irregular growing
fields. Mini-pivots and hose reel travelers require, on average, a lower
investment than a typical standard center pivot.
The Company also markets pivot monitoring and control systems, which
includes remote telemetry and a web or personal computer hosted data acquisition
and monitoring applications. These systems will allow the grower to monitor and
control their pivot system, accumulate data on the operation of the system and
control the pivot from a remote location by logging onto an internet web site.
The pivot monitoring and control system are marketed under the GrowSmart brand
with product names of FieldSENTRY and FieldLink.
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Other Types of Irrigation. Center pivot and lateral move irrigation systems
compete with three other types of irrigation: flood, drip, and other mechanical
devices such as hose reel travelers. The bulk of the worldwide irrigation is
accomplished by the traditional method of flood irrigation. Flood irrigation is
accomplished by either flooding an entire field, or by providing a water source
(ditches or a pipe) along the side of a field, which is planed and slopes
slightly away from the water source. The water is released to the crop rows
through gates in the ditch or pipe, or through siphon tubes arching over the
ditch wall into some of the crop rows. It runs down through the crop row until
it reaches the far end of the row, at which time the water source is moved and
another set of rows are flooded. Note that a significant disadvantage or
limitation of flood irrigation is that it cannot be used to irrigate uneven,
hilly, or rolling terrain or fields. In "drip" or "low flow" irrigation,
perforated plastic pipe or tape is installed on the ground or buried underground
at the root level. Several other types of mechanical devices, such as hose reel
travelers, irrigate the remaining irrigated acres.
Center pivot, lateral move, and hose reel traveler irrigation offers
significant advantages when compared with other types of irrigation. It requires
less labor and monitoring; can be used on sandy ground which, due to poor water
retention ability, must have water applied frequently; can be used on uneven
ground, thereby allowing previously unsuitable land to be brought into
production; can also be used for the application of fertilizers, insecticides,
herbicides, or other chemicals (termed "chemigation"); and conserves water and
chemicals through precise control of the amount and timing of the application.
Markets - General. Water is an essential and critical requirement for crop
production, and the extent, regularity, and frequency of water application can
be a critical factor in crop quality and yield.
The fundamental factors which govern the demand for center pivot and
lateral move systems are essentially the same in both the domestic and
international markets. Demand for center pivot and lateral move systems is
determined by whether the value of the increased crop production attributable to
center pivot or lateral move irrigation exceeds any increased costs associated
with purchasing, installing, and operating the equipment. Thus, the decision to
purchase a center pivot or lateral move system, in part, reflects the
profitability of agricultural production, which is determined primarily by the
prices of agricultural commodities and the costs of other farming inputs.
The current demand for center pivot systems has three sources: conversion
to center pivot systems from less water efficient, more labor intensive types of
irrigation; replacement of older center pivot systems, which are beyond their
useful lives or technologically outmoded; and conversion of dry land farming to
irrigated farming. In addition, demand for center pivots and lateral move
irrigation equipment depends upon the need for the particular operational
characteristics and advantages of such systems in relation to alternative types
of irrigation, primarily flood. More efficient use of the basic natural
resources of land, water, and energy helps drive demand for center pivot and
lateral move irrigation equipment. Increasing global population not only
increases demand for agricultural output, but also places additional and
competing demands on land, water, and energy. The Company expects demand for
center pivots and lateral moves to continue to increase relative to other
irrigation methods because center pivot and lateral move systems are required
where the soil is sandy, the terrain is not flat, there is a shortage of
reliable labor, water supply is restricted and conservation is critical, and/or
chemigation will be utilized.
The following table describes the Company's total irrigation and diversified
products revenues for the past three years. United States export revenue is
included in the region of destination.
FOR THE YEARS ENDED AUGUST 31,
-----------------------------------------------------------------
2005 2004 2003
2005 % of Total 2004 % of Total 2003 % of Total
($ IN MILLIONS) Revenues Revenues Revenues Revenues Revenues Revenues
-------- ---------- -------- ---------- -------- -----------
United States ........................ $126.5 71 $145.7 74 $125.0 76
Europe, Africa, Australia, & Middle
East .............................. 30.1 17 30.3 15 23.3 14
Mexico & Latin America ............... 16.1 9 16.5 9 10.7 7
Other International ................. 4.6 3 4.2 2 4.4 3
------ --- ------ --- ------ ---
Total Revenues ....................... $177.3 100 $196.7 100 $163.4 100
United States Market. In the United States, the Company sells its branded
irrigation systems, including Zimmatic, to approximately 200 independent dealer
locations, who resell to their customer, the farmer. Dealers assess their
customer's requirements, assemble and erect the system in the field from the
parts delivered from the Company, and provide additional system components,
primarily relating to water supply (wells, pumps, pipes) and electrical supply
(on-site generation or hook-up to power lines). Lindsay dealers generally are
established local agri-businesses, many of which also deal in related products,
such as well drilling and water pump equipment, farm implements, grain handling
and storage systems, or farm
4
structures. The Company also has a small number of direct sales agents that sell
the Greenfield and GrowSmart branded products directly to the end-users.
International Market. Over the years, the Company has sold center pivot and
lateral move irrigation systems throughout the world. The Company has production
and sales operations in France, Brazil, and South Africa serving the key
European, South American, and Southern African markets, respectively. The
Company exports its equipment from the U.S. to other international markets. The
majority of the Company's U.S. export sales is denominated in U.S. dollars and
is shipped against prepayments or U.S. bank confirmed irrevocable letters of
credit or other secured means.
The Company's international markets differ significantly with respect to
the need for irrigation, the ability to pay, demand, customer type, government
support of agriculture, marketing and sales methods, equipment requirements, and
the difficulty of on-site erection. The Company's industry position is such that
it believes that it will likely be approached as a potential supplier for most
major international agricultural development projects utilizing center pivot or
lateral move irrigation systems.
Competition. The U.S. center pivot irrigation systems industry has seen
significant consolidation of manufacturers over the years; four primary
manufacturers remain today. The international market includes participation and
competition by the leading U.S. manufacturers as well as certain regional
manufacturers. The Company competes in certain product lines with several
manufacturers, some of whom may have greater financial resources than the
Company. The Company competes by continuously improving its products through
ongoing research and development activities. The Company's engineering and
research expenses totaled $2.7 million, $2.9 million, and $2.6 million for
fiscal years 2005, 2004, and 2003, respectively. There is a high level of price
competition and utilization of seasonal promotional programs. Competition also
occurs in areas of product quality and durability, product characteristics,
retention and reputation of local dealers, customer service, and, at certain
times of the year, the availability of systems and their delivery time. The
Company believes it generally competes favorably with respect to these factors.
DIVERSIFIED PRODUCTS
Seeking to expand the throughput of its manufacturing facility and operation,
the Company began in 1987 to more fully utilize its capacity by providing
outsource manufacturing services and selling large-diameter steel tubing. In
addition, the Company has expanded its diversified products into contract
manufacturing. The Company continues to develop new relationships for
diversified manufacturing in industries outside of agriculture and irrigation.
The Company's customer base includes certain large industrial companies. Each
benefits from the Company's design and engineering capabilities as well as the
Company's ability to provide a wide spectrum of manufacturing services,
including welding, machining, painting, punching, forming, galvanizing and
hydraulic, electrical, and mechanical assembly.
SEASONALITY
Irrigation equipment sales are seasonal by nature. Farmers generally order
systems to be delivered and installed before the growing season. Shipments to U.
S. customers usually peak during the Company's second and third quarters for the
spring planting period.
CUSTOMERS
Management believes that overall, the Company is not dependent on a single
customer. The diversified products segment, however, is largely dependent on a
few customers. While the loss of any substantial customer could have a
short-term impact on the Company's business, the Company believes that its
diverse distribution channels and customer base reduces the long-term impact of
any such loss.
ORDER BACKLOG
As of August 31, 2005, the Company had an order backlog of $14.2 million, a
decrease of 14% from $16.5 million at August 31, 2004. The $2.3 million decrease
in order backlog was primarily attributable to decreased demand for irrigation
systems, which was partially offset by a higher backlog on diversified products.
At fiscal year end 2005, the Company had a $9.0 million order backlog for
irrigation equipment, compared to $12.3 million at fiscal year end 2004. At
fiscal year end 2005, order backlog for diversified products totaled $5.2
million, compared to $4.2 million at fiscal year end 2004. The Company expects
that the existing backlog of orders will be filled in fiscal 2006.
Generally, the Company manufactures or purchases the components for its
irrigation equipment from a sales forecast and prepares the equipment for
shipment upon the receipt of a U.S. or international dealer's firm order. Orders
from U.S. dealers are accompanied with a $1,000 down payment unless they are
purchasing through a Company financing program and the down payment is 10% of
purchase price. Orders being delivered to international markets from the U.S.
are generally shipped against prepayments or receipt of an irrevocable letter of
credit confirmed by a U.S. bank or other secured
5
means, which call for delivery within time periods negotiated with the customer.
Orders delivered from the Company's international manufacturing operations are
generally shipped according to payment and/or credit terms customary to that
country or region.
RAW MATERIALS AND COMPONENTS
Raw materials used by the Company include coil steel, angle steel, plate steel,
zinc, tires, gearboxes, fasteners, and electrical components (motors, switches,
cable, and stators). The Company has, on occasion, faced shortages of certain
such materials. The Company believes it currently has ready access to adequate
supplies of raw materials and components.
CAPITAL EXPENDITURES
Capital expenditures for fiscal 2005, 2004, and 2003 were $4.1 million, $5.0
million and $1.9 million, respectively. Fiscal 2005 capital expenditures were
used primarily for updating manufacturing plant and equipment, expanded
manufacturing capacity, and to further automate the Company's facilities.
Capital expenditures for fiscal 2006 are expected to be approximately $4.0 to
$4.5 million and will be used to improve the Company's existing facilities,
expand its manufacturing capabilities, and increase productivity.
PATENTS, TRADEMARKS, LICENSES
Lindsay's Zimmatic, Greenfield, GrowSmart, and other trademarks are registered
or applied for in the major markets in which the Company sells its products.
Lindsay follows a policy of applying for patents on all significant patentable
inventions. Although the Company believes it is important to follow a patent
protection policy, Lindsay's business is not dependent, to any material extent,
on any single patent or group of patents.
EMPLOYEES
The number of persons employed by the Company and its wholly owned subsidiaries
at fiscal year end 2005, 2004, and 2003 were 645, 639, and 620, respectively.
None of the Company's U.S. employees are represented by a union. Certain of the
Company's foreign employees are unionized due to local governmental regulations.
ENVIRONMENTAL AND HEALTH AND SAFETY MATTERS
Like other manufacturing concerns, the Company is subject to numerous laws and
regulations that govern environmental and occupational health and safety
matters. The Company believes that its operations are substantially in
compliance with all such applicable laws and regulations. The Company, in 1992,
entered into a consent decree with the Environmental Protection Agency of the
U.S. federal government concerning its Lindsay, Nebraska facility which is
included in the agency's superfund sites as discussed in Note M to the
consolidated financial statements. Permits are or may be required for some of
the operations at its facilities. Although management believes that all
currently required permits have been obtained by the Company, as with all such
permits, they are subject to revocation, modification, and renewal. Even where
regulations or standards have been adopted, they are subject to varying and
conflicting interpretations and implementation. In some cases, compliance with
applicable environmental regulations or standards may require additional capital
and operational expenditures. Management does not believe that these matters,
individually or in the aggregate, are likely to have a material adverse effect
on the Company's consolidated financial condition, results of operations, or
cash flows.
SUBSIDIARIES
The Company has five wholly owned operating subsidiaries: Lindsay
Transportation, Inc., Lindsay Europe SAS, Irrigation Specialists, Inc., Lindsay
America do Sul Ltda., and Lindsay Manufacturing Africa (PTY) Ltd.
Lindsay Transportation, Inc. was formed in 1975. It owns approximately 110
trailers and, through lease of tractors and arrangements with independent
drivers, supplies the ground transportation in the United States and Canada for
the Company's products and the bulk of incoming raw materials, and hauls other
products on backhauls.
Lindsay Europe SAS, located in France, was acquired in March 2001, and is a
manufacturer and marketer of irrigation equipment for the European market.
Irrigation Specialists, Inc., an irrigation dealership in Washington State,
was acquired in March 2002.
Lindsay America do Sul Ltda., located in Brazil, was acquired in April 2002
and is a manufacturer and marketer of irrigation equipment for the South
American market.
Lindsay Manufacturing Africa (PTY) Ltd, located in South Africa, was
organized in September 2002 and is a manufacturer and marketer of irrigation
equipment for the southern African market.
The Company also has three non-operational subsidiaries.
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FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
The Company's primary production facility is located in the United States, but
it also has smaller production facilities in France, Brazil, and South Africa.
Most financial transactions are in U.S. dollars, although sales from the
Company's foreign subsidiaries, which were less than 15% of total consolidated
Company sales in fiscal 2005, are conducted in local currencies.
A portion of the Company's cash flow is derived from sales and purchases
denominated in foreign currencies. To reduce the uncertainty of foreign currency
exchange rate movements on these sales and purchase commitments, the Company
monitors its risk of foreign currency fluctuations. To date, the Company has not
entered into any foreign currency exchange contracts to hedge any risk to
foreign currency. For information on international revenues, see Note Q to the
Consolidated Financial Statements entitled "Industry Segment Information"
included in Item 8 of Part II of this report.
INFORMATION AVAILABLE ON LINDSAY WEBSITE
We make available free of charge on our website, through a link to the
Securities Exchange Commission (SEC) website, our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities and Exchange Act of 1934, as amended, as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the SEC. The Company's internet address is http://www.lindsaymanufacturing.com,
however, information posted on our website is not part of the Form 10-K. The
following documents are also posted on the Company's website:
Audit Committee Charter
Compensation Committee Charter
Corporate Governance and Nominating Committee Charter
Corporate Governance Principles
Code of Ethical Conduct
Code of Business Conduct and Ethics
Employee Complaint Procedures for Accounting and Auditing Matters
Special Toll-Free Hotline Number, E-mail Address, and Mail Address for Making
Confidential or Anonymous Complaints
These documents are also available in print to any shareholders who requests, by
sending a letter addressed to the Secretary of the Company.
NEW YORK STOCK EXCHANGE CERTIFICATION
On March 11, 2005, the Company's Chief Executive Officer certified to the New
York Stock Exchange that he was not aware of any violation by the Company of the
New York Stock Exchange corporate governance listing standards as of that date.
RISK FACTORS
THE COMPANY'S DOMESTIC AND INTERNATIONAL IRRIGATION EQUIPMENT SALES ARE HIGHLY
DEPENDENT ON THE AGRICULTURAL INDUSTRY. The Company's domestic and international
irrigation equipment sales are highly dependent upon the need for irrigated
agricultural crop production which, in turn, depends upon many factors,
including total worldwide crop production, the profitability of agricultural
crop production, agricultural commodity prices, aggregate net cash farm income,
governmental policies regarding the agricultural sector, water and energy
conservation policies, the regularity of rainfall, and foreign currency exchange
rates. As farm income decreases, farmers may postpone capital expenditures or
seek cheaper alternatives in the used irrigation equipment market.
THE COMPANY'S PROFITABILITY MAY BE NEGATIVELY AFFECTED BY INCREASES IN THE COST
OF RAW MATERIALS, LABOR, AND ENERGY. There is a high level of price competition
in the market for irrigation equipment. Therefore, the Company may not be able
to recover all operating cost increases through price increases, which would
result in reduced profitability. Whether increased operating costs can be passed
through to the customer depends on a number of factors, including farm income,
the regularity of rainfall, and the price of competing products. The cost of raw
materials can be volatile and is dependent on a number of factors, including
availability, demand, and freight costs.
THE COMPANY'S INTERNATIONAL IRRIGATION EQUIPMENT SALES ARE HIGHLY DEPENDENT ON
FOREIGN MARKET CONDITIONS. Approximately 29% of the Company's revenues are
generated from international sales. Specifically, international
7
revenues are generated in Australia, Canada, Central and Western Europe, Mexico,
the Middle East, South Africa, and Central and South America. In addition to
general economic and political stability, the Company's international sales are
affected by international trade barriers, including governmental policies on
tariffs, taxes, and foreign currency exchange rates. International sales are
also more susceptible to disruption from political instability, armed
hostilities, and similar incidents.
THE COMPANY'S DIVERSIFIED PRODUCT REVENUES ARE DEPENDENT ON SALES TO A FEW LARGE
CUSTOMERS, THE LOSS OF WHICH COULD HAVE AN ADVERSE EFFECT ON THE COMPANY'S
PROFITABILITY. Approximately 12% of the Company's revenues are generated from
sales of its diversified products (outsource manufacturing services and the sale
of large diameter steel tubing). While we anticipate that these customers will
each continue to be significant outsource manufacturing customers, the loss of
one or more of these customers could have an adverse effect on the revenues the
Company earns from outsource manufacturing and its overall profitability.
COMPLIANCE WITH APPLICABLE ENVIRONMENTAL REGULATIONS OR STANDARDS MAY REQUIRE
ADDITIONAL CAPITAL AND OPERATIONAL EXPENDITURES. Like other manufacturing
concerns, the Company is subject to numerous laws and regulations which govern
environmental and occupational health and safety matters. The Company believes
that its operations are substantially in compliance with all such applicable
laws and regulations. Permits are or may be required for some of the operations
at its facilities. Although management believes that all currently required
permits have been obtained by the Company, as with all such permits, they are
subject to revocation, modification, and renewal. Even where regulations or
standards have been adopted, they are subject to varying and conflicting
interpretations and implementation. The Company, in 1992, entered into a consent
decree with the Environmental Protection Agency of the U.S. federal government
concerning its Lindsay, Nebraska facility, which is included in the agency's
superfund sites as discussed in Note M to the consolidated financial statements.
Compliance with applicable environmental regulations or standards may require
additional capital and operational expenditures. Management does not believe any
future material capital and operational expenditures for such issues are
required
ITEM 2 - PROPERTIES
The Company owns and occupies 43 acres in Lindsay, Nebraska on which its
principal U.S. manufacturing facilities are located. The Lindsay, Nebraska
facility has eight separate buildings. In addition, the Company owns 79 acres
adjacent to its primary property. This land is used for research, development,
and testing purposes.
The French facility was acquired to provide a European location for the
manufacture of its irrigation products. The French facility consists of three
separate buildings situated on approximately 3.5 acres.
The Irrigation Specialists Inc. dealership occupies several leased
buildings at three separate retail locations based in the eastern Washington
state region and one retail location in north eastern Oregon. These leases
expire over a remaining term of nine years.
The Company's Brazilian facility is operated under a lease cancelable by
the Company, which expires in 2008. The Brazilian facility consists of two main
buildings.
The Company's South African subsidiary has two separate facilities. One
facility is operated under a lease cancelable by the Company, which expires in
2007. This facility consists of a single main building. The other South African
facility is operated under a lease with a six month cancellation option.
The Company leases office space in Omaha, Nebraska where it maintains its
executive and its domestic and international sales and marketing offices. The
Omaha executive, domestic and international sales and marketing office space
lease expires in 2008.
The Company leases office space in Omaha, Nebraska where it maintains
certain engineering laboratory space. The Omaha engineering laboratory space
lease expires 2006.
The Company believes its current facilities are adequate to support normal
and planned operations.
ITEM 3 - LEGAL PROCEEDINGS
In the ordinary course of its business operations, the Company is involved, from
time to time, in commercial litigation, employment disputes, administrative
proceedings and other legal proceedings. The Company, in 1992, entered into a
consent decree with the Environmental Protection Agency of the U.S. federal
government concerning its Lindsay, Nebraska facility which is included in the
agency's superfund sites as discussed in Note M to the consolidated financial
statements. While the ultimate results of any known legal matter are unknown at
this time, management does not believe that these
8
matters, individually or in the aggregate, are likely to have a material adverse
effect on the Company's consolidated financial condition, results of operations,
or cash flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the vote of security holders during the fourth
quarter of fiscal 2005.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages, positions and past five years
experience are set forth below. Mr. Parod is the only executive officer of the
Company with an employment agreement. This agreement extends through April 2007.
All other executive officers of the Company are appointed by the Board of
Directors annually. There are no family relationships between any director,
executive officer, or person nominated to become a director or executive
officer. There are no arrangements or understandings between any executive
officer and any other person to which he was selected as an officer.
AGE POSITION
--- --------
Richard W. Parod 52 President and Chief Executive Officer
Matthew T. Cahill 43 Vice President - Manufacturing
David B. Downing 50 Vice President, Chief Financial Officer, Treasurer and
Secretary
Gary E. Kaplan 44 Vice President - Market Services
Dirk A. Lenie 51 Vice President - Marketing
Charles H. Meis 59 Vice President - Engineering
Tim J. Paymal 31 Corporate Controller
Robert S. Snoozy 59 Vice President - Domestic Sales
Mr. Richard W. Parod is President and Chief Executive Officer of the
Company, and has held such positions since April 2000. Prior to that time and
since 1997, Mr. Parod was Vice President and General Manager of the Irrigation
Division of The Toro Company. Mr. Parod was employed by James Hardie Irrigation
from 1993 through 1997, becoming President in 1994. Mr. Parod has been a
Director since April 2000, when he began his employment with the Company.
Mr. Matthew T. Cahill is Vice President - Manufacturing of the Company, and
has held such position since October 2000, when he joined the Company. Prior to
that time and since 1997, Mr. Cahill held several positions with Ingersoll-Rand;
most recently as the Fabrication and Machining Operations Manager - Road
Machinery Division. From 1997 through early 2000 Mr. Cahill was a Process
Engineering Consultant - Corporate Technology Staff.
Mr. David B. Downing is Vice President, Chief Financial Officer, Treasurer
and Secretary, and has held the CFO position since August 2004 when he joined
the Company and was appointed Treasurer and Secretary in September 2005. Prior
to August 2004, Mr. Downing was President of FPM L.L.C., a heat-treating company
in Elk Grove Village, Illinois, after joining the company in January 2001 as
Vice President and Chief Financial Officer. From July 1998 to December 2000, Mr.
Downing was Vice President and Controller for Thermo-King, a unit of
Ingersoll-Rand Company Limited, which manufactures transport refrigeration
equipment.
Mr. Gary E. Kaplan is Vice President - Market Services of the Company, and
has held such position since September 2004. Prior to that time and since 1997,
Mr. Kaplan was Director of Customer Care at The Toro Company, a manufacturer of
various irrigation systems in Riverside, California.
Mr. Dirk A. Lenie is Vice President - Marketing of the Company, and has
held such position since November 2000, when he joined the Company. Prior to
that time, and since 1997, Mr. Lenie was Director of Sales and Marketing of
Residential/Commercial Irrigation Division of The Toro Company.
Mr. Charles H. Meis is Vice President - Engineering of the Company, and has
held such position since 1975. Mr. Meis began his employment with the Company in
1971.
Mr. Tim J. Paymal is Corporate Controller of the Company, and has held such
position since January 2005, when he joined the Company. Prior to that time and
since 1996, Mr. Paymal was most recently an audit assurance senior manager with
Deloitte & Touche LLP.
Mr. Robert S. Snoozy is Vice President - Domestic Sales of the Company, and
has held such position since 1997. From 1986 through 1997 Mr. Snoozy was Vice
President of Sales and Marketing. Mr. Snoozy began his employment with the
Company in 1973.
10
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Lindsay Common Stock trades on the New York Stock Exchange, Inc. (NYSE) under
the ticker symbol "LNN". As of September 30, 2005 there were approximately 141
shareholders of record and an estimated 2,500 "street-name" beneficial holders
whose shares are held in names other than their own.
The following table sets forth for the periods indicated the range of the high
and low sales price and dividends paid:
Fiscal 2005 Stock Price Fiscal 2004 Stock Price
--------------------------- ---------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
------ ------ --------- ------ ------ ---------
First Quarter $28.55 $22.45 $0.055 $24.53 $20.05 $0.050
Second Quarter 29.51 21.51 0.055 26.87 23.90 0.050
Third Quarter 24.60 17.50 0.055 26.15 22.90 0.050
Fourth Quarter 26.06 19.95 0.060 24.96 22.70 0.055
Year $29.51 $17.50 $0.225 $26.87 $20.05 $0.205
Purchases of equity securities by the issuer and affiliated purchases-The
Company made no repurchases of its common stock under the Company's stock
repurchase plan during the fourth quarter ended August 31, 2005; therefore,
tabular disclosure is not presented. During the second and third quarters of
fiscal 2005, the Company repurchased a total of 324,379 shares. From time to
time, the Company's Board of Directors has authorized management to repurchase
shares of the Company's common stock. Under this share repurchase plan,
management has existing authorization to purchase, without further announcement,
up to 881,139 shares of the Company's common stock in the open market or
otherwise.
ITEM 6 - SELECTED FINANCIAL DATA
FOR THE YEARS ENDED AUGUST 31,
-------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Operating revenues $ 177.3 $ 196.7 $ 163.4 $ 145.9 $ 126.7 $ 129.8 $ 116.7 $ 155.7 $ 158.3 $ 136.2
Gross profit 33.6 39.5 39.7 32.9 27.9 31.6 30.6 42.8 40.9 32.7
Selling, general and
administrative, and
engineering and research
expenses 28.1 27.5 23.4 19.8 17.2 15.0 15.4 15.5 14.2 13.2
Restructuring charges -- -- -- -- 0.9 -- -- -- -- --
Operating income 5.5 12.0 16.4 13.1 9.8 16.6 15.2 27.3 26.7 19.5
Net earnings (2) 4.8 9.3 12.9 10.7 8.2 13.4 12.9 23.7 20.3 16.7
Net earnings per share (1)(2) 0.41 0.78 1.08 0.90 0.69 1.07 0.97 1.63 1.36 1.10
Cash dividends per share 0.225 0.205 0.155 0.14 0.14 0.14 0.14 0.125 0.091 0.067
Property, plant and
equipment, net 17.3 16.4 13.9 14.5 14.9 15.9 15.4 14.1 11.1 9.7
Total assets 134.8 139.0 131.2 114.7 101.9 97.2 101.6 109.9 108.7 97.3
Long-term obligation -- -- -- -- -- -- -- 0.1 0.3 --
Return on sales 2.7% 4.7% 7.9% 7.4% 6.5% 10.3% 11.1% 15.2% 12.8% 12.3%
Return on beginning assets (3) 3.5% 7.1% 11.2% 10.7% 8.4% 13.2% 11.7% 21.8% 20.9% 19.3%
Diluted weighted average
shares 11.801 11.947 11.896 11.858 11.900 12.503 13.285 14.556 14.980 15.226
(1) Per share amounts are calculated using diluted average shares outstanding.
(2) Fiscal 1998 includes non-operating income of $4.0 million ($2.7 after
taxes) or $0.18 per share from the settlement of litigation.
(3) Defined as net earnings divided by beginning of period total assets.
11
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
CONCERNING FORWARD-LOOKING STATEMENTS - This Annual Report on Form 10-K contains
not only historical information, but also forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements that are not historical are
forward-looking and reflect expectations for future company performance. In
addition, forward-looking statements may be made orally or in press releases,
conferences, reports, on the Company's worldwide web site, or otherwise, in the
future by or on behalf of the Company. When used by or on behalf of the company,
the words "expect", "anticipate", "estimate", "believe", "intend", and similar
expressions generally identify forward-looking statements. The entire section
entitled Market Conditions and Fiscal 2006 Outlook should be considered
forward-looking statements. For these statements, the Company claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve a number of risks and uncertainties,
including but not limited to those discussed in the "Risk Factors" section
contained in Item 1. Readers should not place undue reliance on any
forward-looking statement and should recognize that the statements are
predictions of future results which may not occur as anticipated. Actual results
could differ materially from those anticipated in the forward-looking statements
and from historical results, due to the risks and uncertainties described
herein, as well as others not now anticipated. The risks and uncertainties
described herein are not exclusive and further information concerning the
Company and its businesses, including factors that potentially could materially
affect the Company's financial results, may emerge from time to time. Except as
required by law, the Company assumes no obligation to update forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting such forward-looking statements.
OVERVIEW- The Company manufactures and markets Zimmatic, Greenfield, Stettyn,
and Perrot center pivot, lateral move, and hose reel irrigation systems. The
Company also produces irrigation controls, chemical injection systems and remote
monitoring and control systems which it sells under its GrowSmart brand. These
products are used by farmers to increase or stabilize crop production while
conserving water, energy, and labor. In addition to irrigation equipment, the
Company also produces and sells large diameter steel tubing products and
manufactures and assembles diversified agricultural and construction products on
a contract basis for certain industrial companies. The Company sells its
products primarily to an independent dealer network, world-wide, who resell to
their customer, the farmer. The Company also has a small number of direct sales
agents that sell the Greenfield and GrowSmart branded products directly to the
farmer. The Company's principal manufacturing facilities are located in Lindsay,
Nebraska, USA. The Company also has production facilities in France, South
Africa, and Brazil.
Key factors which impact demand for the Company's products include agricultural
commodity prices, crop yields, weather, environmental regulations, and interest
rates. Demand for the Company's products declined during fiscal 2005. Lower
commodity prices, high farm input costs and a reduction in the drought
conditions in the West and Plains regions in the United States decreased demand
for irrigation systems. International sales were primarily impacted by the same
factors affecting the domestic market.
Compliance with Sarbanes Oxley requirements negatively impacted general and
administrative expenses during fiscal 2005. The Company expects that Sarbanes
related costs will decrease in fiscal 2006, but will continue to be a recurring
expense.
The Company will continue to focus on opportunities for growth both organically
and through accretive acquisitions. Over the past four years, the Company has
added the operations in Europe, South America, and South Africa. The addition of
those operations has allowed the Company to strengthen its market position in
those regions, yet they remain relatively small in scale. None of the
international operations has achieved the operating leverage of the United
States based operations.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP"),
management must make a variety of decisions which impact the reported amounts
and the related disclosures. Such decisions include the selection of the
appropriate accounting principles to be applied
12
and the assumptions on which to base accounting estimates. In reaching such
decisions, management applies judgment based on its understanding and analysis
of the relevant circumstances.
Certain of the Company's accounting policies are critical, as these
policies are most important to the presentation of the Company's consolidated
results of operations and financial condition. They require the greatest use of
judgments and estimates by management based on the Company's historical
experience and management's knowledge and understanding of current facts and
circumstances. Management periodically re-evaluates and adjusts the estimates
that are used as circumstances change. There were no significant changes in
critical accounting policies during fiscal 2005.
Following are the accounting policies management considers critical to the
Company's consolidated results of operations and financial condition:
REVENUE RECOGNITION
Revenues from the sale of the Company's irrigation products to its independent
dealers are recognized upon delivery of the product to the dealer. The Company
has no post delivery obligations to its independent dealers other than standard
warranties. Revenues for sales of irrigation products by Irrigation Specialists
are recognized when the product or service is delivered to the end-user
customers. Revenues from the sale of the Company's diversified products are
recognized when the product is delivered to the customer. Revenues and gross
profits on intercompany sales are eliminated in consolidation.
The costs related to revenues are recognized in the same period in which
the specific revenues are recorded. Shipping and handling revenue is reported as
a component of operating revenues. Shipping and handling costs are reported as a
component of cost of operating revenues. Shipping and handling revenues and
costs are not significant to total operating revenues or cost of operating
revenues. Customer rebates, cash discounts, and other sales incentives are
recorded as a reduction of revenues at the time of the original sale. Other
sales incentives such as guarantees issued by the Company to support end-user
customer financing are recognized as cost of sales. Estimates used in the
recognition of operating revenues and cost of operating revenues include, but
are not limited to, estimates for rebates payable and cash discounts expected.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method for the Lindsay, Nebraska operation's
inventories. Cost is determined by the weighted average method for inventories
at the Company's other operating locations. At all locations, the Company
reserves for obsolete, slow moving, and excess inventory by estimating the net
realizable value based on the potential future use of such inventory.
Note A to the consolidated financial statements provides a summary of the
significant accounting policies followed in the preparation of the consolidated
financial statements. Other footnotes describe various elements of the financial
statements and the assumptions on which specific amounts were determined. While
actual results could differ from those estimated at the time of preparation of
the consolidated financial statements, management is committed to preparing
financial statements which incorporate accounting policies, assumptions, and
estimates that promote the representational faithfulness, verifiability,
neutrality, and transparency of the accounting information included in the
consolidated financial statements.
RESULTS OF OPERATIONS
The following "Fiscal 2005 Compared to 2004" and the "Fiscal 2004 Compared to
2003" sections present an analysis of the Company's consolidated operating
results displayed in the Consolidated Statements of Earnings and should be read
together with the industry segment information in Note Q to the financial
statements.
13
FISCAL 2005 COMPARED TO 2004
The following table provides highlights for fiscal 2005 compared with fiscal
2004:
FOR THE YEARS ENDED
AUGUST 31,
------------------- % INCREASE
($ IN THOUSANDS) 2005 2004 (DECREASE)
-------- -------- ----------
Consolidated
Operating revenues ..................... $177,271 $196,696 (9.9%)
Cost of operating revenues ............. $143,700 $157,179 (8.6)
Gross profit ........................ $ 33,571 $ 39,517 (15.0)
Gross margin .............................. 18.9% 20.1%
Selling, engineering and research, and
general and administrative expenses .. $ 28,073 $ 27,477 2.2
Operating income .......................... $ 5,498 $ 12,040 (54.3)
Operating margin .......................... 3.1% 6.1%
Interest income, net ...................... $ 1,179 $ 1,456 (19.0)
Other income, net ......................... $ 273 $ 270 1.1
Income tax provision ...................... $ 2,112 $ 4,480 (52.9)
Effective income tax rate ................. 30.4% 32.5%
Net earnings .............................. $ 4,838 $ 9,286 (47.9)
Irrigation Equipment Segment (See Note Q)
Operating revenues ........................ $156,313 $183,844 (15.0)
Operating income (1) ...................... $ 19,945 $ 27,226 (26.7)
Operating margin .......................... 12.8% 14.8%
Diversified Products Segment (See Note Q)
Operating revenues ........................ $ 20,958 $ 12,852 63.1
Operating income (1) ...................... $ 2,595 $ 1,143 127.0
Operating margin .......................... 12.4% 8.9%
(1) Excludes unallocated general & administrative and engineering & research
expenses
REVENUES
Operating revenues for fiscal 2005 declined by $19.4 million or 10% from fiscal
2004. The decline was attributable to decreased irrigation equipment revenues,
partially offset by an increase in diversified manufacturing revenues.
Domestic irrigation revenues declined by $27.4 million or 21% from fiscal
2004. The decline in domestic irrigation revenue was due to a decline in unit
volume of approximately 35% as compared to prior year, which was partially
offset by an increase in the selling price of irrigation equipment of
approximately 10%. Management believes that a combination of factors contributed
to the lower demand for irrigation equipment during the year. These factors
include generally lower agricultural commodity prices, higher farm input costs,
and a reduction in drought conditions. The price of corn declined approximately
10%, cotton declined approximately 8% and soybeans remained flat, from the same
time last year. In addition, strong U.S. harvests are expected for this fall
season. While ethanol demand continues to drive corn usage higher, ending
inventories for corn are expected to remain high. The overall growing conditions
for farmers throughout most of the United States remained favorable. The drought
conditions experienced in much of the West and Plains regions were greatly
alleviated. The combination of these factors and higher costs for energy,
fertilizer and other farm inputs contributed to reduced demand for products such
as irrigation equipment, which represent substantial capital expenditures.
International irrigation revenues remained flat in fiscal 2005 at $50.8
million compared to $50.9 million in fiscal 2004. The acquisition of Stettyn,
the irrigation company in South Africa, in the fourth quarter of fiscal 2004
contributed additional revenues during the year. This increase in revenue was
partially offset by many of the same factors affecting domestic sales of
irrigation equipment, including the negative effects of depressed agricultural
commodity prices. In addition, the lower value of the United States dollar
relative to local currencies continues to negatively impact farmers'
profitability due to the fact that world commodity prices are denominated in US
dollars and a depressed U.S. dollar yields less local currency revenue for
farmers. In total international revenues were 29% of total revenues for fiscal
2005 as compared to 26% for fiscal 2004.
Diversified manufacturing revenues increased $8.1 million or 63% compared
to fiscal 2004. Revenues grew in both contract manufacturing and commercial
tubing. The Company continues to develop new relationships for diversified
manufacturing in industries outside of agriculture and irrigation. Additionally,
the Company is pursuing incremental growth
14
paths for its commercial tubing business. The diversified segment continues to
achieve success in developing new business opportunities and expects to see
continued growth supported by appropriate investment.
GROSS MARGIN
Gross margin was 18.9% for fiscal 2005 compared to 20.1% for fiscal 2004. The
decrease in gross margin is primarily attributable to the significant reduction
in unit volume offset by product price increases implemented in 2004 that were
designed to pass-through the steel cost increases that occurred in the prior
year. Towards the end of the 2005 fiscal year, the Company experienced a slight
reduction in steel costs from the high level of fiscal 2004. In addition, gross
margins for fiscal 2005 were negatively affected by the field repair campaign
announced during the fourth quarter, which decreased pre-tax earnings by $1.5
million. Company-wide cost reduction actions have partially offset lower
domestic unit volumes and contributed to improved international and diversified
manufacturing margins.
OPERATING EXPENSES
The Company's operating expenses for fiscal 2005 increased $596,000 or 2% over
fiscal 2004. Operating expenses were positively affected by cost reduction
efforts during the year, but these savings were largely offset by incremental
operating expenses of $217,000 incurred at our Stettyn operation which was
acquired in the fourth quarter of fiscal 2004. In addition, we incurred
additional costs related to Sarbanes-Oxley compliance of approximately $800,000
higher than 2004. Finally, 2004 operating expenses included a non recurring bad
debt charge related to the insolvency of a Kansas dealership of $724,000.
INTEREST INCOME, OTHER INCOME, AND TAXES
Fiscal 2005 interest income of $1.2 million was a decrease of $277,000 as
compared to 2004. This decrease primarily reflects a reduction of interest
income from securities due to smaller balances held in marketable securities and
higher balances in interest bearing accounts earning a lower interest rate. The
Company's interest income is primarily generated from its investments in
short-term (0 to 12 months) and intermediate-term (12 to 42 months) investment
grade municipal bonds, on which interest earnings are exempt from federal income
taxes, and short-term investment grade commercial paper.
Fiscal 2005 other income of $273,000 was comparable to fiscal 2004. Other
income was primarily the result of higher net earnings from minority equity
investments.
The effective tax rate during fiscal 2005 was 30.4% compared to 32.5% for
fiscal 2004. The decreased effective tax rate reflects a higher percentage of
tax deductions compared to net income before taxes for fiscal year 2005 compared
to the same period in 2004. Overall, the Company benefits from a U.S. effective
tax rate which is lower than the combined federal and state statutory rates
primarily due to the federal tax-exempt interest income from its municipal bond
investments.
NET EARNINGS
Net earnings were $4.8 million, or $.41 per diluted share, for fiscal 2005,
compared with $9.3 million, or $.78 per diluted share, for fiscal 2004.
15
FISCAL 2004 COMPARED TO 2003
The following table provides highlights for fiscal 2004 compared with fiscal
2003:
FOR THE YEARS ENDED
AUGUST 31,
------------------- % INCREASE
($ IN THOUSANDS) 2004 2003 (DECREASE)
- ---------------- -------- -------- ----------
Consolidated
Operating revenues ................... $196,696 $163,374 20.4%
Cost of operating revenues ........... $157,179 $123,628 27.1
Gross profit ...................... $ 39,517 $ 39,746 (0.6)
Gross margin ............................ 20.1% 24.3%
Selling, engineering and research, and
general and administrative expenses .. $ 27,477 $ 23,380 17.5
Operating income ........................ $ 12,040 $ 16,366 (26.4)
Operating margin ........................ 6.1% 10.0%
Interest income, net .................... $ 1,456 $ 1,577 (7.7)
Other income, net ....................... $ 270 $ 844 (68.0)
Income tax provision .................... $ 4,480 $ 5,900 (24.1)
Effective income tax rate ............... 32.5% 31.4%
Net earnings ............................ $ 9,286 $ 12,887 (27.9)
Irrigation Equipment Segment (See Note Q)
Operating revenues ...................... $183,844 $151,320 21.5
Operating income (1) .................... $ 27,226 $ 27,992 (2.7)
Operating margin ........................ 14.8% 18.5%
Diversified Products Segment (See Note Q)
Operating revenues ...................... $ 12,852 $ 12,054 6.6
Operating income (1) .................... $ 1,143 $ 1,237 (7.6)
Operating margin ........................ 8.9% 10.3%
(2) Excludes unallocated general & administrative and engineering & research
expenses
REVENUES
Operating revenues for fiscal 2004 increased by $33.3 million or 20% over fiscal
2003. This increase was attributable to improved irrigation equipment revenues.
Due to a favorable domestic market, domestic irrigation equipment revenues
increased by $20.0 million or 18% over fiscal 2003. In the domestic market,
revenue expansion was split approximately equally between sales volume gains and
customer price increases. Conditions were generally favorable in the Company's
domestic markets due to higher prices for many farm commodities earlier in
fiscal 2004 (including corn, soybeans, wheat, and cotton). Other factors, such
as low interest rates, additional first-year depreciation for capital
investments, and higher land values also contributed to increased revenues from
domestic irrigation sales.
International irrigation equipment revenues increased by $12.5 million or
33% compared to fiscal 2003 due primarily to an increase in revenues from the
Company's foreign operations, which increased $10.5 million over fiscal 2003.
Revenues were stronger in the European and South American markets as the
Company's operations in France and Brazil continued to develop. The European
market reflected higher demand after the drought that was experienced there in
fiscal 2003. The South American market reflected the impact in Brazil of strong
demand due to the continued expansion of agricultural production in Brazil.
Additionally, revenues from export sales to the Australian and Mexican regions
were higher due to favorable market conditions. In total, for fiscal 2004,
international revenues were 26% of total revenues, up from 24% of revenues in
the previous year.
Diversified revenues increased $798,000 or 7% compared to fiscal 2003.
Revenues in this segment depend to a large degree on orders from a relatively
small number of customers. The diversified products segment uses the same
Lindsay, Nebraska physical plant resources as those used for irrigation
equipment.
GROSS MARGIN
Gross margin was 20.1% for fiscal 2004 compared to 24.3% for fiscal 2003. Fiscal
2004 gross margins reflected significant increases in steel costs, which
essentially doubled during fiscal 2004. Although the Company was able to
increase sales prices during the year, its ability to fully pass on steel cost
increases to its customers was limited because
16
firm sales prices committed to at the time of order acceptance generally did not
fully reflect steel price increases effective at the time of production and due
to competitive factors.
OPERATING EXPENSES
The Company's operating expenses increased $4.1 million or 17.5% over fiscal
2003. This increase in operating expenses reflects a $3.1 million (30%) increase
in general and administrative expenses compared to fiscal 2003, reflecting
higher general insurance costs of approximately $800,000, the $724,000 bad debt
charge related to the insolvency of a Kansas dealership, in which the Company
held a minority equity position, higher legal and other professional services
costs associated with the Sarbanes-Oxley Act compliance of approximately
$700,000, and approximately $700,000 associated with increased administrative
personnel costs. Selling expenses increased by $631,000 (6%) compared to fiscal
2003 of which approximately $200,000 is related to new business additions. In
addition, engineering and research expense increased by $332,000 (13%)
reflecting marginally higher investments by the Company in new product
development.
INTEREST INCOME, OTHER INCOME, AND TAXES
Fiscal 2004 interest income of $1.5 million was comparable to fiscal 2003. The
Company's interest income is primarily generated from its investments in
short-term (0 to 12 months) and intermediate-term (12 to 42 months) investment
grade municipal bonds, on which interest earnings are exempt from federal income
taxes, and short-term investment grade commercial paper.
Fiscal 2004 other income decreased by $574,000 compared to fiscal 2003,
primarily from a charge of $250,000 on its guarantee of certain bank loans
relating to the Kansas irrigation dealership insolvency and equity loss of
equity-method investments.
The effective tax rate during fiscal 2004 was 32.5% compared to 31.4% for
fiscal 2003. The increased effective tax rate reflects primarily a higher mix of
foreign based income and related foreign statutory rates compared to U.S. based
income and related U.S. effective rate. Overall, the Company benefits from a
U.S. effective tax rate which is lower than the combined federal and state
statutory rates primarily due to the federal tax-exempt interest income from its
municipal bond investments.
NET EARNINGS
Net earnings were $9.3 million, or $0.78 per diluted share, for fiscal 2004,
compared with $12.9 million, or $1.08 per diluted share, for fiscal 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires cash for financing its receivables and inventories, paying
operating costs and capital expenditures, and for dividends. Historically, the
Company has met its liquidity needs and financed all capital expenditures
exclusively from its available cash and funds provided by operations.
The Company's cash and marketable securities totaled $54.8 million at
August 31, 2005 compared with $56.3 million at August 31, 2004. The Company's
marketable securities consist primarily of tax exempt investment grade municipal
bonds.
Cash flows provided by operations totaled $11.8 million during fiscal 2005
compared to $1.2 million during fiscal 2004. For fiscal 2005, cash flows
provided by operations include a decrease of $6.2 million for accounts
receivable compared with a increase of $11.5 million in fiscal 2004, and net
earnings of $4.8 million. The accounts receivable decrease was primarily due to
lower revenues and lower sales to the dealer stock inventory program at year end
as compared to fiscal 2004. Other increases include accounts payable of $2.4
million and other current liabilities of $3.0 million. For fiscal 2004, cash
flows provided by operations include decreases in inventory of $920,000,
increases of $11.5 million for accounts receivable and net earnings of $9.3
million.
Cash flows provided by investing activities totaled $13.2 million during
fiscal 2005 compared to $5.7 million used in investing activities during fiscal
2004. Capital expenditures were $4.1 million during fiscal 2005 compared to $5.0
million during fiscal 2004. Capital expenditures were used primarily for
updating manufacturing plant and equipment, expanding manufacturing capacity,
and further automating the Company's facilities. Capital expenditures for fiscal
2006 are expected to be approximately $4.0 to $4.5 million and will be used to
improve the Company's facilities and expand its manufacturing capacity. Net
proceeds from maturities or sales of marketable securities were $19.1 million
during fiscal 2005 compared to $8.5 million during fiscal 2004, while purchases
of marketable securities in 2005 totaled $1.8 million compared with $14.8
million in fiscal 2004.
Cash flows used in financing activities totaled $8.6 million during fiscal
2005 compared to $1.9 million in 2004. The increase in cash used for fiscal 2005
is primarily the result of repurchases of common shares of $6.6 million.
17
The Company repurchased 324,379 shares of common stock on the open market under
the Company's stock repurchase plan during fiscal 2005. As of August 31, 2005,
the Company had existing authorization, without further action by our Board of
Directors, to repurchase up to approximately 881,000 shares of the Company's
common stock in the open market or otherwise.
The Company has an unsecured revolving line of credit, which expires
December 28, 2005, with a commercial bank under which it could borrow up to $10
million for working capital and general corporate purposes, including stock
repurchases. There were no borrowings made under the revolving line of credit
during fiscal 2005. Under the terms of the line of credit, borrowings, if any,
bear interest at a rate equal to one percent per annum under the rate in effect
from time to time and designated by the commercial bank as its National Base
Rate (6.44% at August 31, 2005). The Company expects to renew this line of
credit on substantially similar terms.
The Company's European subsidiary, Lindsay Europe, has an unsecured
revolving line of credit with a commercial bank under which it could borrow up
to 2.3 million Euros, which equates to USD$2.8 million, for working capital
purposes. As of August 31, 2005, there was no outstanding balance on this line.
Under the terms of the line of credit, borrowings, if any, bear interest at a
floating rate in effect from time to time designated by the commercial bank as
LIBOR+200 basis points. (6.17% at August 31, 2005).
The Company believes its current cash resources (including cash and
marketable securities balances), projected operating cash flow, and bank lines
of credit are sufficient to cover all of its expected working capital needs,
planned capital expenditures, dividends, and other cash requirements, excluding
potential acquisitions.
INFLATION
The Company is subject to the effects of changing prices. During fiscal 2005,
the Company realized stabilized pricing for purchases of certain commodities, in
particular steel products, used in the production of its products. While the
cost outlook for commodities used in the Company's production of its products is
not certain, management believes it can manage these inflationary pressures by
introducing appropriate sale price adjustments and by actively pursuing internal
cost reduction efforts.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has certain off balance sheet arrangements as described in Note P to
the consolidated financial statements. The Company does not believe these
arrangements are reasonably likely to have a material effect on the Company's
financial condition.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
In the normal course of business, the Company enters into contracts and
commitments which obligate the Company to make payments in the future. The table
below sets forth the Company's significant future obligations by time period.
Where applicable, information included in the Company's consolidated financial
statements and notes is cross-referenced in this table.
($in thousands)
More
Note Less than 2-3 4-5 than 5
Contractual Obligations Reference Total 1 year years years years
- ----------------------- --------- ------ --------- ------ ------ ------
Leases ................. M $3,485 $ 937 $1,390 $ 638 $ 520
Supplemental Retirement
Plan ................ N 3,956 313 679 847 2,117
------ ------ ------ ------ ------
Total .................. $7,441 $1,250 $2,069 $1,485 $2,637
====== ====== ====== ====== ======
MARKET CONDITIONS AND FISCAL 2006 OUTLOOK
For fiscal 2006, the Company remains uncertain as to the demand for irrigation
equipment. Lower agricultural commodity prices, higher farm input costs, and a
reduction in drought conditions in the United States continues to reduce the
demand for irrigation systems. Even though commodity prices have dropped off
from last year's levels due to expectations for high harvests and yields, and
high farm input costs, demand drivers remain in place. The Company expects
diversified manufacturing to remain strong for fiscal 2006 due to the continued
expansion and investment in this
18
business segment. Management believes it has taken appropriate actions to
tightly control operating expenses for fiscal 2006.
The Company will continue to create shareholder value by pursuing a balance
of accretive acquisitions, organic growth opportunities, share repurchases and
dividend payments.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market value of the Company's investment securities fluctuates inversely
with movements in interest rates because all of these investment securities bear
interest at fixed rates. Accordingly, during periods of rising interest rates,
the market value of these securities will decline. However, the Company does not
consider itself to be subject to material market risks with respect to its
portfolio of investment securities because the maturity of these securities is
relatively short, making their value less susceptible to interest rate
fluctuations.
The Company has manufacturing operations in the United States, France,
Brazil, and South Africa. The Company has sold products throughout the world and
purchases certain of its components from third-party foreign suppliers. Export
sales made from the United States are principally U.S. dollar denominated.
Accordingly, these sales are not subject to significant currency translation
risk. However, a majority of the Company's revenue generated from operations
outside the United States is denominated in local currency. The Company's most
significant transactional foreign currency exposures are the Euro, Brazilian
real, and the South African rand in relation to the U.S. dollar. Fluctuations in
the value of foreign currencies create exposures which can adversely affect the
Company's results of operations. The Company attempts to manage its
transactional foreign exchange exposure by monitoring foreign currency cash flow
forecasts and commitments arising from the settlement of receivables and
payables, and from future purchases and sales.
The Company's translation exposure resulting from translating the financial
statements of foreign subsidiaries into U.S. dollars is not hedged. The most
significant translation exposures are the Euro, Brazilian real, and the South
African rand in relation to the U.S. dollar.
19
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Lindsay Manufacturing Co.:
We have audited the accompanying consolidated balance sheets of Lindsay
Manufacturing Co. and subsidiaries (the Company) as of August 31, 2005 and 2004,
and the related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended August 31, 2005. In connection with our audits of the consolidated
financial statements, we have also audited the financial statement schedule
listed in Item 15(a)(2) of this Form 10-K. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion. In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Lindsay Manufacturing Co.
and subsidiaries as of August 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended August 31, 2005 in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of August 31, 2005, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated November 3, 2005 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
Omaha, Nebraska
November 4, 2005
20
LINDSAY MANUFACTURING CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED AUGUST 31,
------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 2004 2003
-------- -------- --------
Operating revenues ............................. $177,271 $196,696 $163,374
Cost of operating revenues ..................... 143,700 157,179 123,628
-------- -------- --------
Gross profit ................................... 33,571 39,517 39,746
-------- -------- --------
Operating expenses:
Selling expense ............................. 11,031 11,148 10,517
General and administrative expense .......... 14,377 13,419 10,285
Engineering and research expense ............ 2,665 2,910 2,578
-------- -------- --------
Total operating expenses ....................... 28,073 27,477 23,380
-------- -------- --------
Operating income ............................... 5,498 12,040 16,366
Interest income, net ........................... 1,179 1,456 1,577
Other income, net .............................. 273 270 844
-------- -------- --------
Earnings before income taxes ................... 6,950 13,766 18,787
Income tax provision ........................... 2,112 4,480 5,900
-------- -------- --------
Net earnings ................................... $ 4,838 $ 9,286 $ 12,887
======== ======== ========
Basic net earnings per share ................... $ 0.42 $ 0.79 $ 1.10
======== ======== ========
Diluted net earnings per share ................. $ 0.41 $ 0.78 $ 1.08
======== ======== ========
Weighted average shares outstanding - basic .... 11,649 11,756 11,729
======== ======== ========
Weighted average shares outstanding - diluted .. 11,801 11,947 11,896
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
SHARES OF CAPITAL IN ACCUMULATED
--------------------- EXCESS OTHER TOTAL
(IN THOUSANDS, EXCEPT PER SHARE COMMON TREASURY COMMON OF STATED RETAINED TREASURY COMPREHENSIVE SHAREHOLDERS'
AMOUNTS) STOCK STOCK STOCK VALUE EARNINGS STOCK INCOME (LOSS) EQUITY
---------- --------- ------- ---------- --------- -------- ------------- -------------
Balance at August 31, 2002 .......... 17,430,348 5,724,069 17,430 2,472 163,265 (89,898) (914) 92,355
Comprehensive income:
Net earnings ..................... -- -- -- -- 12,887 -- -- 12,887
Other comprehensive income:
Unrealized net loss on
available for sale
securities ................. -- -- -- -- -- -- (87) (87)
Currency translation .......... -- -- -- -- -- -- 1,357 1,357
Minimum pension liability,
net of tax ................. -- -- -- -- -- -- (444) (444)
--------
Total comprehensive income .......... 13,713
Cash dividends ($0.155 per share) ... -- -- -- -- (1,819) -- -- (1,819)
Net issued under stock option plan .. 29,213 -- 27 (56) -- -- -- (29)
Proceeds from stock option
exercise ......................... -- -- 3 36 -- -- -- 39
Stock option tax benefits ........... -- -- -- 32 -- -- -- 32
---------- --------- ------- ------ -------- -------- ------- --------
Balance at August 31, 2003 .......... 17,459,561 5,724,069 17,460 2,484 174,333 (89,898) (88) 104,291
---------- --------- ------- ------ -------- -------- ------- --------
Comprehensive income:
Net earnings ..................... -- -- -- -- 9,286 -- -- 9,286
Other comprehensive income:
Unrealized net gain on
available for sale
securities, net of tax ..... -- -- -- -- -- -- 272 272
Currency translation .......... -- -- -- -- -- -- 201 201
Minimum pension liability,
net of tax ................. -- -- -- -- -- -- 28 28
--------
Total comprehensive income .......... 9,787
Cash dividends ($0.205 per share) ... -- -- -- -- (2,410) -- -- (2,410)
Net issued under stock option plan .. 34,280 -- (6) (127) -- -- -- (133)
Proceeds from stock option
exercise ......................... -- -- 40 452 -- -- -- 492
Stock option tax benefits ........... -- -- -- 157 -- -- -- 157
---------- --------- ------- ------ -------- -------- ------- --------
Balance at August 31, 2004 .......... 17,493,841 5,724,069 17,494 2,966 181,209 (89,898) $ 413 112,184
========== ========= ======= ====== ======== ======== ======= ========
Comprehensive income:
Net earnings ..................... -- -- -- -- 4,838 -- -- 4,838
Other comprehensive income:
Unrealized net loss on
available for sale
securities, net of tax ..... -- -- -- -- -- -- (321) (321)
Currency translation .......... -- -- -- -- -- -- 1,382 1,382
Minimum pension liability,
net of tax ................. -- -- -- -- -- -- (299) (299)
--------
Total comprehensive income .......... 5,600
Cash dividends ($0.225 per share) ... -- -- -- -- (2,603) -- -- (2,603)
Purchases of 324,379 shares of
common stock ..................... 324,379 -- -- -- (6,649) -- (6,649)
Net issued under stock option plan .. 74,243 -- 16 25 -- -- -- 41
Proceeds from stock option
exercise ......................... -- -- 58 563 -- -- -- 621
Stock option tax benefits ........... -- -- -- 136 -- -- -- 136
---------- --------- ------- ------ -------- -------- ------- --------
Balance at August 31, 2005 .......... 17,568,084 6,048,448 $17,568 $3,690 $183,444 $(96,547) $ 1,175 $109,330
========== ========= ======= ====== ======== ======== ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
22
LINDSAY MANUFACTURING CO.
CONSOLIDATED BALANCE SHEETS
AT AUGUST 31,
-------------------
($ IN THOUSANDS, EXCEPT PAR VALUES) 2005 2004
-------- --------
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 25,564 $ 8,973
Marketable securities ........................................................ 14,101 14,802
Receivables, net ............................................................. 28,919 34,369
Inventories, net ............................................................. 19,311 19,780
Deferred income taxes ........................................................ 3,276 1,026
Other current assets ......................................................... 3,042 2,422
-------- --------
Total current assets ............................................................ 94,213 81,372
Long-term marketable securities ................................................. 15,157 32,527
Property, plant and equipment, net .............................................. 17,268 16,355
Other noncurrent assets ......................................................... 8,201 8,747
-------- --------
Total assets .................................................................... $134,839 $139,001
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 6,704 $ 9,117
Other current liabilities .................................................... 13,434 15,359
-------- --------
Total current liabilities ....................................................... 20,138 24,476
Pension benefits liabilities .................................................... 5,142 2,169
Other noncurrent liabilities .................................................... 229 172
-------- --------
Total liabilities ............................................................... 25,509 26,817
-------- --------
Shareholders' equity:
Preferred stock, ($1 par value, 2,000,000 shares
authorized, no shares issued and outstanding) ............................. -- --
Common stock, ($1 par value, 25,000,000 shares authorized,
17,568,084 and 17,493,841 shares issued in 2005 and 2004, respectively) ... 17,568 17,494
Capital in excess of stated value ............................................ 3,690 2,966
Retained earnings ............................................................ 183,444 181,209
Less treasury stock (at cost, 6,048,448 and 5,724,069 shares, respectively) .. (96,547) (89,898)
Accumulated other comprehensive income, net .................................. 1,175 413
-------- --------
Total shareholders' equity ...................................................... 109,330 112,184
-------- --------
Total liabilities and shareholders' equity ...................................... $134,839 $139,001
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
23
LINDSAY MANUFACTURING CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31,
------------------------------
($ IN THOUSANDS) 2005 2004 2003
------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ................................................................... $ 4,838 $ 9,286 $ 12,887
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ............................................... 3,481 2,969 3,525
Amortization of marketable securities premiums (discounts), net ............. 248 149 (145)
Loss (gain) on sale of property, plant and equipment ........................ 37 (29) (76)
Provision for uncollectible accounts receivable ............................. 88 760 (275)
Deferred income taxes ....................................................... (1,140) 1,034 272
Stock option tax benefits ................................................... 136 157 32
Equity in net (earnings) loss of equity-method investments .................. (257) 73 (125)
Other, net .................................................................. 16 (204) (152)
Changes in assets and liabilities:
Receivables, net ............................................................ 6,203 (11,507) 2,514
Inventories, net ............................................................ 828 920 (2,578)
Other current assets ........................................................ (45) (1,428) (119)
Accounts payable, trade ..................................................... (2,429) 749 (564)
Other current liabilities ................................................... (3,031) 436 189
Current taxes payable ....................................................... 257 (1,443) 1,446
Other noncurrent assets and liabilities ..................................... 2,548 (717) (1,524)
------- -------- --------
Net cash provided by operating activities ................................... 11,778 1,205 15,307
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment ..................................... (4,122) (5,037) (1,918)
Acquisitions of businesses ..................................................... -- (1,025) --
Proceeds from sale of property, plant and equipment ............................ 55 43 63
Purchases of marketable securities held-to-maturity ............................ -- (2,982) (12,465)
Proceeds from maturities of marketable securities held-to-maturity ............. -- 6,676 14,232
Purchases of marketable securities available-for-sale .......................... (1,841) (11,817) (10,445)
Proceeds from maturities or sales of marketable securities available-for-sale .. 19,100 8,456 --
------- -------- --------
Net cash provided by (used in) investing activities ......................... 13,192 (5,686) (10,533)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options under stock option plan ...................... 621 492 39
Repurchases of common shares ................................................... (6,649) -- --
Dividends paid ................................................................. (2,603) (2,410) (1,819)
------- -------- --------
Net cash used in financing activities ....................................... (8,631) (1,918) (1,780)
------- -------- --------
Effect of foreign exchange rate changes on cash ................................ 252 4 (51)
------- -------- --------
Net increase (decrease) in cash and cash equivalents ........................... 16,591 (6,395) 2,943
Cash and cash equivalents, beginning of period ................................. 8,973 15,368 12,425
------- -------- --------
Cash and cash equivalents, end of period ....................................... $25,564 $ 8,973 $ 15,368
======= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid .............................................................. $ 2,185 $ 6,246 $ 5,753
Interest paid .................................................................. $ 145 $ 119 $ 73
The accompanying notes are an integral part of the consolidated financial
statements.
24
LINDSAY MANUFACTURING CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Lindsay Manufacturing Co. (the "Company" or "Lindsay") manufactures automated
agricultural irrigation systems and sells these products in both the U.S. and
international markets. The Company also manufactures large diameter steel tubing
products and manufactures and assembles agricultural and construction equipment
on a contract manufacturing basis for other manufacturers. The Company's
principal manufacturing facilities are located in Lindsay, Nebraska, USA. The
Company's corporate office is located in Omaha, Nebraska, USA. The Company also
has foreign operating subsidiaries which manufacture irrigation equipment in
France, Brazil, and South Africa, and owns a retail irrigation dealership with
three separate retail locations based in the eastern Washington state region and
one retail location in north eastern Oregon ("Irrigation Specialists").
Notes to the consolidated financial statements describe various elements of
the financial statements and the accounting policies, estimates, and assumptions
applied by management. While actual results could differ from those estimated at
the time of preparation of the consolidated financial statements, management
believes that the accounting policies, assumptions, and estimates applied
promote the representational faithfulness, verifiability, neutrality, and
transparency of the accounting information included in the consolidated
financial statements.
The significant accounting policies of the Company are as follows:
(1) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany balances and transactions are
eliminated in consolidation.
(2) STOCK BASED COMPENSATION
The Company maintains a stock option plan and accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Net earnings does not reflect stock-based employee
compensation cost as all options granted under this plan had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation", to stock-based employee
compensation.
FOR THE YEARS
ENDED AUGUST 31,
---------------------------
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2005 2004 2003
------- ------- -------
Net earnings, as reported .................................... $ 4,838 $ 9,286 $12,887
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects ............................. (1,180) (1,244) (1,057)
------- ------- -------
Proforma net earnings ........................................ $ 3,658 $ 8,042 $11,830
======= ======= =======
Earnings per share:
Basic-as reported ......................................... $ 0.42 $ 0.79 $ 1.10
Basic-pro forma ........................................... $ 0.31 $ 0.68 $ 1.01
Diluted-as reported ....................................... $ 0.41 $ 0.78 $ 1.08
Diluted-pro forma ......................................... $ 0.31 $ 0.67 $ 0.99
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for all grants in fiscal 2005, 2004, and 2003: dividend yield
of 0.6% to 1.4%, expected volatility of 34.7% to 36.5%, risk-free interest rates
ranging from 3.4% to 4.8 %, and expected lives of the options
25
of 7 years. The weighted average fair value of options granted during fiscal
2005, 2004, and 2003 was $10.26, $11.27, and $8.36, respectively.
SFAS No. 123R, (revised December 2004), "Share-Based Payment" sets
accounting requirements for "share-based" compensation to employees, including
employee-stock-purchase-plans (ESPPs) and provides guidance on accounting for
awards to non-employees. This Statement will require the Company to recognize in
the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees, but expresses no preference for a
type of valuation model. For public entities, this Statement is effective for
the first interim or annual reporting period beginning after June 15, 2005. The
Company has historically provided proforma disclosures pursuant to SFAS No. 123
and SFAS No. 148 as if the fair value method of accounting for stock options had
been applied, assuming use of the Black-Scholes option-pricing model and that
all option grants were recorded at fair value. Although not currently
anticipated, other assumptions may be utilized when SFAS No. 123R is adopted. In
addition, the Company will also take into consideration the recently issued
Staff Accounting Bulletin No. 107. The Company will adopt SFAS No. 123R "Share
Based-Payment" during the first quarter of fiscal year 2006. The Company expects
that the adoption of SFAS No 123R will have a negative impact on the Company's
reported consolidated results of operations.
(3) REVENUE RECOGNITION
Revenues from the sale of the Company's irrigation products to its independent
dealers are recognized upon delivery of the product to the dealer. The Company
has no post delivery obligations to its independent dealers other than standard
warranties. Revenues for sales of irrigation products by Irrigation Specialists
are recognized when the product or service is delivered to the end-user
customers. Revenues from the sale of the Company's diversified products are
recognized when the product is delivered to the customer. Revenues and gross
profits on intercompany sales are eliminated in consolidation.
The costs related to revenues are recognized in the same period in which
the specific revenues are recorded. Shipping and handling revenue is reported as
a component of operating revenues. Shipping and handling costs are reported as a
component of cost of operating revenues. Shipping and handling revenues and
costs are not significant to total operating revenues or cost of operating
revenues. Customer rebates, cash discounts, and other sales incentives are
recorded as a reduction of revenues at the time of the original sale. Other
sales incentives such as guarantees issued by the Company to support end-user
customer financing are recognized as cost of sales. Estimates used in the
recognition of operating revenues and cost of operating revenues include, but
are not limited to, estimates for rebates payable and cash discounts expected.
(4) WARRANTY COSTS
Provision for the estimated warranty costs is made in the period in which such
costs become probable. This provision is periodically adjusted to reflect actual
experience.
Warranty costs were $2.7 million, $1.5 million, and $1.4 million for the
fiscal years ended August 2005, 2004, and 2003, respectively. Warranty costs
increased $1.2 million in fiscal year 2005 compared to the same period in 2004
primarily due to a voluntary repair campaign relating to the end gun solenoid
valves on Zimmatic irrigation systems.
(5) CASH EQUIVALENTS, MARKETABLE SECURITIES, AND LONG-TERM MARKETABLE SECURITIES
Cash equivalents are included at cost, which approximates market. At August 31,
2005, the Company's cash equivalents were held primarily by one financial
institution. The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents, while those having
original maturities in excess of three months are classified as marketable
securities or as long-term marketable securities when maturities are in excess
of one year. Marketable securities and long-term marketable securities consist
of investment-grade municipal bonds.
During 2004, the Company transferred all of its securities classified as
part of the Company's held-to-maturity portfolio to an available-for-sale
securities portfolio. The net carrying amount (amortized cost) of the securities
at the date transferred was $30.3 million and resulted in the recognition of a
net unrealized gain of $208,000 in accumulated other comprehensive income (net
of related income taxes of $79,000). The transfer of securities resulted from
management's revision of its investment policy in light of the changes in the
Company's overall business strategy, which considered the possibility that the
securities may be liquidated prior to the maturity of the debt securities. As a
result of the transfer of securities from the held-to-maturity portfolio, the
Company will not classify new acquisitions of securities as held-to-maturity for
a period of at least two years.
At the date of acquisition of an investment security, management designates
the security as belonging to a trading portfolio, an available-for-sale
portfolio, or a held-to-maturity portfolio. Currently, the Company holds no
securities
26
designated as held-to-maturity or trading. All investment securities are
classified as available-for-sale and carried at fair value. Unrealized
appreciation or depreciation in the fair value of available-for-sale securities
is reported in accumulated other comprehensive income, net of related income tax
effects. The Company monitors its investment portfolio for any decline in fair
value that is other-than-temporary and records any such impairment as an
impairment loss. No impairment losses for other-than-temporary declines in fair
value have been recorded in fiscal years 2005, 2004, or 2003. In the opinion of
management, the Company is not subject to material market risks with respect to
its portfolio of investment securities because the investment grade quality of
the securities and the maturities of these securities is relatively short,
making their value less susceptible to interest rate fluctuations.
(6) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method for the Company's Lindsay, Nebraska inventory.
Cost is determined by the weighted average method for inventories at the
Company's other operating locations in Washington State, France, Brazil, and
South Africa. At all locations, the Company reserves for obsolete, slow moving,
and excess inventory by estimating the net realizable value based on the
potential future use of such inventory.
(7) PROPERTY, PLANT AND EQUIPMENT
Property, plant, equipment, and capitalized lease assets are stated at cost. The
Company's policy is to capitalize major expenditures and to charge to operating
expenses the cost of current maintenance and repairs. Provisions for
depreciation and amortization have been computed principally on the
straight-line method for buildings and equipment. Rates used for depreciation
are based principally on the following expected lives: buildings -- 20 to 30
years; equipment -- three to 10 years; other -- two to 20 years; and leasehold
improvements -- term of lease. All of the Company's long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of the expected
discounted future cash flows is less than the carrying amount of the asset, a
loss is recognized based upon the difference between the fair value of the asset
and its carrying value. The cost and accumulated depreciation relating to assets
retired or otherwise disposed of are eliminated from the respective accounts at
the time of disposition. The resultant gain or loss is included in operating
income in the consolidated statements of operations.
(8) EQUITY INVESTMENTS
Other assets include a 39% minority investment held by the Company in an
irrigation dealership based outside of the United States. This investment is
accounted for on the equity method. The Company's investment in this company is
reviewed periodically to determine if its fair value has declined below the cost
of the investment on an other-than-temporary basis, in which case an impairment
loss would be recognized. On September 1, 2005 the Company sold its minority
position in the irrigation dealership and no longer has any investment in the
dealership. The sale is expected to close prior to November 30, 2005. The
Company does not expect a significant gain or loss from the sale of the
dealership.
During fiscal 2004, due to the insolvency and liquidation of a Kansas
irrigation dealership in which the Company held a 25% minority interest, the
Company wrote-off the value of the investment which was deemed to be immaterial.
The Company also incurred a bad debt charge during fiscal 2004 of $724,000 and a
$250,000 charge relating to bank guarantees associated with this dealership.
(9) GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair value of net
assets arising from acquisitions. Under SFAS No. 141, "Business Combinations",
the purchase method of accounting is used for all business combinations. SFAS
No. 141 also provides a criteria to determine whether an acquired intangible
asset should be recognized separately from goodwill. SFAS No. 142, "Goodwill and
Other Intangible Assets", requires that goodwill and intangible assets with
indefinite useful lives be tested for impairment at least annually at the
reporting unit level using a two-step impairment test. The Company updated its
evaluation of goodwill recoverability at August 31, 2005. No impairment losses
were indicated as a result of the annual impairment testing under SFAS No. 142.
The estimates of fair value of its reporting units and related goodwill depend
on a number of assumptions, including forecasted sales growth and improved
operating expense ratios. To the extent that the reporting unit is unable to
achieve these assumptions, impairment losses may emerge. Intangible assets which
have identifiable useful lives are amortized over the term of their useful
lives.
27
(10) NET EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the
weighted average number of shares outstanding. Diluted net earnings per share
includes the incremental dilutive effect of stock options.
The following table summarizes options outstanding but excluded from the
computation of diluted net earnings per share because the options' exercise
price was greater than the average market price of the common shares:
AUGUST 31, 2005 AUGUST 31, 2004 AUGUST 31, 2003
- ------------------------------------- ------------------------------------- -----------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Expire Shares Price Expire Shares Price Expire
- ------- -------- ---------------- ------- -------- ---------------- ------- -------- --------------
September November November 2007-
377,184 $25.32 2007-August 2015 305,813 $25.86 2007-August 2014 170,750 $25.98 May 2012
======= ====== ======= ====== ======= ======
(11) RECLASSIFICATIONS
Certain reclassifications have been made to prior financial statements to
conform to the current-year presentation.
(12) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(13) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 123R, (revised December 2004), "Share-Based Payment" sets
accounting requirements for "share-based" compensation to employees, including
employee-stock-purchase-plans (ESPPs) and provides guidance on accounting for
awards to non-employees. This Statement will require the Company to recognize in
the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees, but expresses no preference for a
type of valuation model. For public entities, this Statement is effective for
the first interim or annual reporting period beginning after June 15, 2005. The
Company has historically provided proforma disclosures pursuant to SFAS No. 123
and SFAS No. 148 as if the fair value method of accounting for stock options had
been applied, assuming use of the Black-Scholes option-pricing model and that
all option grants were recorded at fair value. Although not currently
anticipated, other assumptions may be utilized when SFAS No. 123R is adopted. In
addition, the Company will also take into consideration the recently issued
Staff Accounting Bulletin No. 107. The Company adopted SFAS No. 123R "Share
Based Payment" on September 1, 2005. There was no cumulative effect of the
accounting change recognized as a result of the adoption of SFAS No. 123R and
the Company is adopting using the modified prospective method. The Company
expects that the adoption of SFAS 123R will have a negative impact on the
Company's reported consolidated results of operations.
SFAS No. 151, "Inventory Costs" eliminates the "so abnormal" criterion in
ARB 43 Chapter 4 "Inventory Pricing". This Statement no longer permits a company
to capitalize inventory costs on their balances sheets when the production
defect rate varies significantly from the expected rate. The Statement reduces
the differences between U.S. and international accounting standards. This
Statement is effective for inventory cost incurred during annual periods
beginning after June 15, 2005. The Company will adopt this Statement in the
first quarter of fiscal 2006 and is evaluating this pronouncement's effect on
the Company's financial position and net income.
SFAS No. 153, "Exchanges of Nonmonetary Assets" eliminates the exception to
the fair-value principle for exchanges of "similar productive assets," which had
been accounted for based on the book value of the asset surrendered with no gain
recognition. Nonmonetary exchanges have to be accounted for at fair-value,
recognizing any gain or loss, if the transactions meet the commercial-substance
criterion and fair-value determinable. The Statement reduces the differences
between U.S. and international accounting standards. This Statement is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The Company will adopt this Statement in the first quarter of fiscal
2006 and does not expect this pronouncement to have a material impact on the
Company's financial position and net income.
28
In December 2004, the Financial Accounting Standard Board (FASB) issued
FASB Staff Position No. FAS 109-1 ("FSP FAS 109-1"), "Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities provided by the American Jobs Creation Act of
2004." FSP FAS 109-1 clarifies that the deduction will be treated as a "special
deduction" as described in SFAS 109, "Accounting for Income Taxes." As such, the
special deduction has no effect on deferred tax assets and liabilities existing
at the date of enactment. The impact of the deduction will be reported in the
period in which the deduction is claimed. The incentive for U.S. qualified
production activities included in the Act is effective as of December 21, 2004.
See further discussion of the effect on the Company's consolidated financial
statements in Note 14, Income Taxes.
SFAS No. 154, "Accounting Changes and Error Corrections" replaces APB
Opinion No. 20, "Accounting Changes", and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements" and changes the requirements for the
accounting for and reporting of a change in accounting principle. This Statement
applies to all voluntary changes in accounting principle. It also applies to
changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. This Statement
requires retrospective application to prior periods' financial statements of
changes in accounting principle. This Statement shall be effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company does not expect this pronouncement to have
a material impact on the Company's financial position and net income.
FSP FAS 123(R)-2, Practical Accommodation to the Application of Grant Date
as Defined in FASB Statement No. 123(R), is in response to recent inquiries from
constituents to provide guidance on the application of grant date as defined in
SFAS No. 123 (revised 2004), Share-Based Payment. As a practical accommodation,
a mutual understanding of the key terms and conditions of an award to an
individual employee shall be presumed to exist at the date the award is approved
in accordance with the relevant corporate governance requirements if certain
conditions are met. The guidance in this FSP shall be applied upon initial
adoption of SFAS No. 123(R). The Company will adopt this FSP during the first
quarter of fiscal year 2006, and does not expect this FSP to have a material
impact on the Company.
B. ACQUISITIONS
During June 2004, the Company's subsidiary, Lindsay Manufacturing Africa
(PTY) Ltd acquired the assets of Stettyn, a manufacturer of center pivots in
South Africa, for $1.0 million in cash. Stettyn specializes in standard height,
four-inch pivot systems designed for the growing market segment of farmers who
want an economical irrigation system with smaller parcels of land. The Company's
allocation of purchase price for this acquisition consisted of inventory of
$560,000, fixed assets of $265,000, receivables of $465,000, and other current
liabilities of $265,000.
Pro forma data is not presented for the Stettyn acquisition, as the amounts
are considered immaterial.
C. OTHER COMPREHENSIVE INCOME (LOSS), NET
The components of accumulated other comprehensive income consists of the
following:
FOR THE YEARS
ENDED AUGUST 31,
-----------------
$ IN THOUSANDS 2005 2004
------- -------
Accumulated other comprehensive income, net:
Unrealized (loss) gain on available for sale securities, net of tax... $ (136) $ 185
Currency translation.................................................. 2,745 1,363
Minimum pension liability, net of tax................................. (1,434) (1,135)
------- -------
Total accumulated other comprehensive income, net........................ $ 1,175 $ 413
======= =======
29
The deferred tax components of accumulated other comprehensive income consists
of the following:
AUGUST 31,
-----------
$ IN THOUSANDS 2005 2004
---- ----
Unrealized (loss) gain on available for sale securities taxes:
Federal deferred asset ....................................... $ 77 $104
State deferred asset ......................................... $ 6 $ 9
Minimum pension liability taxes:
Federal deferred asset ....................................... $798 $629
State deferred asset ......................................... $ 66 $ 52
D. OTHER INCOME, NET
FOR THE YEARS ENDED
AUGUST 31,
-------------------
$ IN THOUSANDS 2005 2004 2003
---- ----- ----
Other income, net:
Cash surrender value of life insurance ...................... $ 72 $ 90 $122
Foreign currency transaction (loss) gains, net .............. (18) 484 501
Equity in net earnings (loss) of equity-method investments .. 257 (73) 125
Bank guarantee .............................................. -- (250) --
All other, net .............................................. (38) 19 96
---- ----- ----
Total other income, net ........................................ $273 $ 270 $844
==== ===== ====
E. INCOME TAXES
For financial reporting purposes earnings before income taxes include the
following components:
FOR THE YEARS ENDED
AUGUST 31,
--------------------------
$ IN THOUSANDS 2005 2004 2003
------ ------- -------
United States .. $6,588 $12,386 $18,049
Foreign ........ 362 1,380 738
------ ------- -------
$6,950 $13,766 $18,787
====== ======= =======
Significant components of the income tax provision are as follows:
FOR THE YEARS ENDED
AUGUST 31,
------------------------
$ IN THOUSANDS 2005 2004 2003
------ ------ ------
Current:
Federal ........................ $2,223 $2,931 $5,518
State .......................... 336 262 630
Foreign ........................ 314 414 269
------ ------ ------
Total current ............... 2,873 3,607 6,417
------ ------ ------
Deferred:
Federal ........................ (474) 604 (470)
State .......................... (60) 50 (32)
Foreign ........................ (227) 219 (15)
------ ------ ------
Total deferred .............. (761) 873 (517)
------ ------ ------
Total income tax provision .. $2,112 $4,480 $5,900
====== ====== ======
30
Total income tax provision resulted in effective tax rates differing from that
of the statutory United States Federal income tax rates. The reasons for these
differences are:
FOR THE YEARS ENDED AUGUST 31,
---------------------------------------------
2005 2004 2003
------------- ------------- -------------
$ IN THOUSANDS AMOUNT % AMOUNT % AMOUNT %
------ ---- ------ ---- ------ ----
U.S. statutory rate .................... $2,363 34.0 $4,688 34.1 $6,482 34.5
State and local taxes,
net of federal tax benefit .......... 134 1.9 203 1.5 413 2.2
Qualified export activity .............. (98) (1.4) (86) (0.6) (165) (0.9)
Municipal bond interest income ......... (328) (4.7) (443) (3.2) (481) (2.6)
Research and development tax credits ... (56) (0.8) (83) (0.6) (150) (0.8)
Other .................................. 97 1.4 201 1.3 (199) (1.0)
------ ---- ------ ---- ------ ----
Effective rate ......................... $2,112 30.4 $4,480 32.5 $5,900 31.4
====== ==== ====== ==== ====== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
AUGUST 31,
---------------
$ IN THOUSANDS 2005 2004
------ ------
Deferred tax assets:
Minimum pension liability ................................ $ 864 $ 681
Foreign items ............................................ 301 74
Employee benefits liability .............................. 1,088 979
Inventory ................................................ 102 87
Warranty ................................................. 930 495
Accrued liabilities not currently deductible for taxes ... 1,262 1,474
------ ------
Deferred tax assets ................................... $4,547 $3,790
====== ======
Deferred tax liabilities:
Property, plant and equipment ............................ $ (327) $ (606)
Other .................................................... (214) (318)
------ ------
Deferred tax liabilities .............................. $ (541) $ (924)
====== ======
Net deferred tax assets .................................. $4,006 $2,866
====== ======
In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
asset will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Management does not
believe there are significant uncertainties surrounding realization of the
deferred tax assets, and, consequently, has not provided a valuation allowance
for deferred tax assets at August 31, 2005 and 2004.
The Company's foreign subsidiaries had deferred tax assets of $301,000 and
$74,000 at August 31, 2005 and 2004 as shown above. This is comprised
principally of temporary differences for property and equipment, inventory, and
other items.
The American Jobs Creation Act of 2004 (the "Jobs Act").
On October 22, 2004, the Jobs Act was enacted, which directly impacts the
Company in several areas.
The Company currently takes advantage of the extraterritorial income
exclusion ("EIE") in calculation of its federal income tax liability. The Jobs
Act repealed the EIE, the benefits of which will be phased out over the next
three years, with 80% of the prior benefit allowed in 2005, 60% in 2006 and 0%
allowed in any year after 2006. The Company reported an EIE of $287,000 and
$253,000 at fiscal years ended 2005 and 2004, respectively. The Jobs Act
31
replaced the EIE with the new "manufacturing deduction" that allows a deduction
from taxable income of up to 9% of "qualified production activities income" not
to exceed taxable income. The deduction is phased in over a nine-year period,
with the eligible percentage increasing from 3% in 2005 to 9% in 2010.
The Jobs Act includes a foreign earnings repatriation provision that
provides an 85% dividends received deduction for certain dividends received from
controlled foreign corporations. The Company does not intend to repatriate
earnings of its foreign subsidiaries and accordingly, under APB Opinion No. 23,
"Accounting for Income Taxes-Special Areas" has not recorded deferred tax
liabilities for unpatriated foreign earnings. However, the Company will continue
to analyze the potential tax impact should it elect to repatriate foreign
earnings pursuant to the Jobs Act.
F. MARKETABLE SECURITIES
The Company's marketable securities consist of investment-grade municipal bonds.
Marketable securities may mature earlier than their weighted-average contractual
maturities because of principal prepayments.
During 2004, the Company transferred all of its securities classified as part of
the Company's held-to-maturity portfolio to an available-for-sale securities
portfolio. The net carrying amount (amortized cost) of the securities at the
date transferred was $30.3 million and resulted in the recognition of a net
unrealized gain of $208,000 in accumulated other comprehensive income (net of
related income taxes of $79,000). The transfer of securities resulted from
management's revision of its investment policy in light of the changes in the
Company's overall business strategy, which considered the possibility that the
securities may be liquidated prior to the maturity of the debt securities. As a
result of the transfer of securities from the held-to-maturity portfolio, the
Company will not classify new acquisitions of securities as held-to-maturity for
a period of at least two years.
Fair value of investments in marketable securities classified as
available-for-sale according to management's intent are summarized as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
$ IN THOUSANDS, COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
As of August 31, 2005:
Due within one year ..................... $14,163 $ 1 $ (63) $14,101
Due after one year through five years ... 15,315 1 (159) 15,157
------- ---- ----- -------
$29,478 $ 2 $(222) $29,258
======= ==== ===== =======
As of August 31, 2004:
Due within one year ..................... $14,678 $124 $ -- $14,802
Due after one year through five years ... 32,353 214 (40) 32,527
------- ---- ----- -------
$47,031 $338 $ (40) $47,329
======= ==== ===== =======
Proceeds and gains and losses from the maturities or sales of available-for-sale
securities are as follows:
FOR THE YEARS ENDED AUGUST 31,
------------------------------
$ IN THOUSANDS 2005 2004 2003
------- ------ ----
Proceeds from maturities or sales ... $19,100 $8,456 $--
Gross realized gains ................ $ 5 $ 19 $--
Gross realized losses ............... $ (51) $ (1) $--
32
Marketable securities classified as available-for-sale in a continuous loss
position for less than 12 months and greater than 12 months as of August 31,
2005 are as follows:
LESS THAN GREATER THAN
$ IN THOUSANDS 12 MONTHS 12 MONTHS
--------- ------------
Total amount of unrealized losses ........................ $ (173) $ (48)
Total fair value of investments with unrealized losses ... $26,227 $2,609
G. RECEIVABLES
AUGUST 31,
-----------------
$ IN THOUSANDS 2005 2004
------- -------
Receivables:
Trade accounts and notes .......... $29,621 $35,755
Allowance for doubtful accounts ... (702) (1,386)
------- -------
Net receivables ................... $28,919 $34,369
======= =======
H. INVENTORIES
AUGUST 31,
-----------------
$ IN THOUSANDS 2005 2004
------- -------
Inventory:
First-in, first-out (FIFO) inventory ... $15,373 $16,043
LIFO reserves .......................... (4,048) (5,333)
Obsolescence reserve ................... (613) (527)
Weighted average inventory ............. 8,599 9,597
------- -------
Total inventories ...................... $19,311 $19,780
======= =======
The Company's LIFO reserves as of August 31, 2005 reflect adjustments resulting
in approximately $498,000 of income for fiscal 2005. The Company's LIFO reserves
as of August 31, 2004 reflect the liquidation of approximately $930,000 of base
LIFO inventory resulting in approximately $280,000 of income for fiscal 2004.
The estimated percentage distribution between major classes of inventory before
reserves is as follows:
AUGUST 31,
-----------
2005 2004
---- ----
Raw materials ........................ 23% 20%
Work in process ...................... 6% 10%
Finished goods and purchased parts ... 71% 70%
I. PROPERTY, PLANT AND EQUIPMENT
AUGUST 31,
-------------------
$ IN THOUSANDS 2005 2004
-------- --------
Property, plant and equipment:
Land ..................................... $ 336 $ 336
Buildings ................................ 10,625 10,192
Equipment ................................ 38,884 38,886
Other .................................... 6,175 3,954
-------- --------
Total property, plant, and equipment ........ 56,020 53,368
Accumulated depreciation and amortization ... (38,752) (37,013)
-------- --------
Property, plant and equipment, net .......... $ 17,268 $ 16,355
======== ========
Depreciation expense was $3.3 million, $2.9 million and $3.4 million for the
years ended August 31, 2005, 2004, and 2003, respectively.
33
J. OTHER NONCURRENT ASSETS
AUGUST 31,
---------------
$ IN THOUSANDS 2005 2004
------ ------
Other Noncurrent Assets:
Cash surrender value of life insurance policies .... $1,975 $1,903
Deferred income taxes .............................. 730 1,840
Equity method investments .......................... 1,621 1,364
Goodwill ........................................... 1,364 1,254
Split dollar life insurance ........................ 954 916
Intangible pension asset ........................... 304 372
Other intangibles, net ............................. 695 472
Other .............................................. 558 626
------ ------
Total other noncurrent assets ...................... $8,201 $8,747
====== ======
August 31, 2005 goodwill increased when compared to prior fiscal year ended 2004
due to increases in currency translation and an earn-out payment.
The following table summarizes the Company's net carrying value for other
intangible assets as shown above. These other intangible assets are being
amortized over an average term of approximately 5 years. Related amortization
expense was $155,000, $107,000, and $113,000 for 2005, 2004, and 2003,
respectively.
AUGUST 31,
-------------
$ IN THOUSANDS 2005 2004
----- -----
Non-compete agreements ............................. $ 406 $ 385
License ............................................ 364 --
Tradenames ......................................... 146 145
Patent ............................................. 100 100
Plans and specifications ........................... 75 75
Other .............................................. 38 31
Accumulated amortization ........................... (434) (264)
----- -----
Total other intangibles, net ....................... $ 695 $ 472
===== =====
K. OTHER CURRENT LIABILITIES
AUGUST 31,
-----------------
$ IN THOUSANDS 2005 2004
------- -------
Other current liabilities:
Payroll and vacation ............................... $ 3,313 $ 3,280
Retirement plan .................................... 330 2,584
Taxes, other than income ........................... 610 1,005
Workers compensation and product liability ......... 1,243 1,251
Dealer related liabilities ......................... 1,008 1,279
Warranty ........................................... 2,456 1,339
Income tax payable ................................. 265 --
Other .............................................. 4,209 4,621
------- -------
Total other current liabilities .................... $13,434 $15,359
======= =======
L. CREDIT ARRANGEMENTS
The Company has an agreement with a commercial bank for a $10.0 million
unsecured revolving line of credit through December 28, 2005. Proceeds from this
line of credit, if any, are to be used for working capital and general corporate
purposes including stock repurchases. There have been no borrowings made under
such unsecured revolving line of credit. Under the terms of the line of credit,
borrowings, if any, bear interest at a rate equal to one percent per annum under
the rate
34
in effect from time to time and designated by the commercial bank as its
National Base Rate (6.44% at August 31, 2005). The Company expects to renew this
line of credit on substantially similar terms.
The Company's European subsidiary, Lindsay Europe, has an unsecured
revolving line of credit with a commercial bank under which it could borrow up
to 2.3 million Euros, which equates to USD$2.8 million, for working capital
purposes. As of August 31, 2005, there was no outstanding balance on this line.
Under the terms of the line of credit, borrowings, if any, bear interest at a
floating rate in effect from time to time designated by the commercial bank as
LIBOR+200 basis points. (6.17% at August 31, 2005).
M. COMMITMENTS AND CONTINGENCIES
In the ordinary course of its business operations, the Company is involved, from
time to time, in commercial litigation, employment disputes, administrative
proceedings, and other legal proceedings. These include a consent decree that
the Company entered in 1992 with the U.S. Environmental Protection Agency
concerning groundwater contamination at its Lindsay, Nebraska facility, which is
included as an EPA superfund site. Management does not believe that these
matters, individually or in the aggregate, are likely to have a material adverse
effect on the Company's consolidated financial condition, results of operations,
or cash flows.
The Company held a minority position in an irrigation dealership based
outside of the United States. On September 1, 2005 the Company sold its minority
position in the irrigation dealership and no longer has any investment in the
dealership. The sale is expected to close prior to November 30, 2005. The
Company does not expect a significant gain or loss from the sale of the
dealership.
The Company leases land, buildings, machinery, equipment, and furniture under
various noncancelable operating lease agreements. At August 31, 2005, future
minimum lease payments under noncancelable operating leases were as follows:
$ IN THOUSANDS
FISCAL YEARS
2006 ............................................... $ 937
2007 ............................................... 768
2008 ............................................... 622
2009 ............................................... 333
2010 ............................................... 305
Thereafter ......................................... 520
------
Total future minimum lease payments ................ $3,485
======
Lease expense was $1,039,000, $795,000, and $379,000 for the years ended August
31, 2005, 2004, and 2003, respectively.
N. RETIREMENT PLANS
The Company has a defined contribution profit-sharing plan covering
substantially all of its full-time U.S. employees. Participants may voluntarily
contribute a percentage of compensation, but not in excess of the maximum
allowed under the Internal Revenue Code. The plan provides for a required
matching contribution by the Company. The Company's total contributions charged
to expense under this plan were $430,000, $497,000 and $449,000 for the years
ended August 31, 2005, 2004, and 2003, respectively.
A supplementary non-qualified, non-funded retirement plan for six
current and former executives is also maintained. Plan benefits are based on the
executive's average total compensation during the three highest compensation
years of employment. This unfunded supplemental retirement plan is not subject
to the minimum funding requirements of ERISA. The Company has purchased life
insurance policies on certain executives named in this supplemental retirement
plan to provide funding for this liability.
35
Cost and the assumptions for the Company's supplemental retirement plan include
the following components:
FOR THE YEARS ENDED AUGUST 31,
------------------------------
$ IN THOUSANDS 2005 2004 2003
------- ------- -------
Change in benefit obligation:
Benefit obligation at beginning of year ............ $ 4,839 $ 4,747 $ 3,944
Service cost ....................................... 34 40 42
Interest cost ...................................... 269 290 267
Actuarial loss ..................................... 654 44 773
Benefits paid ...................................... (318) (282) (279)
------- ------- -------
Benefit obligation at end of year .................. $ 5,478 $ 4,839 $ 4,747
======= ======= =======
Funded status ...................................... $(5,478) $(4,839) $(4,747)
Unrecognized net actuarial loss .................... 2,606 2,255 2,507
------- ------- -------
Net liability recognized ........................... $(2,872) $(2,584) $(2,240)
======= ======= =======
The Company's accumulated benefit obligation was $5.5 million, $4.8 million, and
$4.7 million for the years ended August 31, 2005, 2004, and 2003, respectively.
AUGUST 31,
-----------------
$ IN THOUSANDS 2005 2004
------- -------
Amounts recognized in the statement of financial
position consist of:
Accrued benefit cost ............................... $ 2,872 $ 2,584
Intangible pension asset ........................... (304) (372)
Additional minimum pension liability ............... 2,583 2,169
Other comprehensive loss ........................... (2,279) (1,797)
------- -------
Net amount recognized .............................. $ 2,872 $ 2,584
======= =======
Weighted-average assumptions for the liability
as of year ends:
Discount rate ...................................... 5.00% 5.75%
Assumed rates of compensation increases ............ 3.50% 3.50%
Rate of return on underlying 401(k) investments .... 7.50% 7.50%
FOR THE YEARS ENDED AUGUST 31,
------------------------------
$ IN THOUSANDS 2005 2004 2003
----- ----- -----
Components of net periodic benefit cost:
Service cost ....................................... $ 34 $ 40 $ 42
Interest cost ...................................... 269 290 267
Net amortization and deferral ...................... 302 296 181
----- ----- -----
Total .............................................. $ 605 $ 626 $ 490
===== ===== =====
Weighted-average assumptions for expense for the
years ended:
Discount rate ...................................... 5.00% 5.75% 7.00%
Assumed rates of compensation increases ............ 3.50% 3.50% 3.50%
The Company uses an August 31 measurement date for its supplemental retirement
plan.
36
The following net benefits payments, which reflect future service, as
appropriate, are expected to be paid:
$ IN THOUSANDS
FISCAL YEARS
2006 ................................................ $ 313
2007 ................................................ 313
2008 ................................................ 367
2009 ................................................ 423
2010 ................................................ 423
2011-2015 ........................................... 2,117
------
Future expected benefit payments through 2015 ....... $3,956
======
O. STOCK OPTIONS
On January 30, 2001, the shareholders approved the Lindsay Manufacturing Co.
2001 Long-Term Incentive Plan (the "2001 Plan"). The 2001 Plan supercedes the
1988 Plan and 1991 Plan and no further options or other awards will be granted
under the 1988 Plan and 1991 Plan (the "Prior Plans"). The Company has
outstanding stock options under its 1991 Plan and 2001 Plan. No options are
outstanding under the 1988 Plan. The 2001 Plan is similar in most material
respects to the 1991 Plan and provides for awards of stock options, restricted
stock, restricted stock units or stock appreciation rights ("SARs") to employees
of the Company and for annual awards of stock options to non-employee directors.
A total of 900,000 shares of the Company's common stock may be issued under the
2001 Plan, subject to adjustments to reflect stock splits and similar events. If
options, restricted stock units or restricted stock awarded under the 2001 Plan
(or options issued under the Prior Plans or outside of the Prior Plans)
terminate without being fully vested or exercised, those shares will be
available again for grant under the 2001 Plan. No more than 180,000 shares of
common stock may be issued to employees other than through options having an
exercise price of not less than the fair market value of the underlying shares.
The 2001 Plan also limits the total awards that may be made to any individual.
The 1991 and 2001 Plans permit participants to surrender mature common shares,
in lieu of cash, for the value of the exercise price. Mature shares are defined
as shares held more than six months.
A summary of the status of the Company's stock plans is presented below:
AVERAGE
OPTION SHARES NUMBER OF SHARES EXERCISE PRICE
- ------------- ---------------- --------------
Officers, Directors and Key Employees:
Outstanding at August 31, 2002 ............. 1,003,543 $17.00
Granted ................................. 197,060 21.48
Exercised ............................... (52,530) 10.39
Cancelled ............................... (35,500) 24.77
---------
Outstanding at August 31, 2003 ............. 1,112,573 17.02
=========
Exercisable at August 31, 2003 ............. 514,020 16.71
=========
Outstanding at August 31, 2003 ............. 1,112,573 17.02
Granted ................................. 202,872 25.05
Exercised ............................... (47,312) 14.19
Cancelled ............................... (39,000) 22.84
---------
Outstanding at August 31, 2004 ............. 1,229,133 19.06
=========
Exercisable at August 31, 2004 ............. 664,594 17.22
=========
Outstanding at August 31, 2004 ............. 1,229,133 19.06
Granted ................................. 128,872 24.45
Exercised ............................... (81,712) 12.22
Cancelled ............................... (89,562) 23.39
---------
Outstanding at August 31, 2005 ............. 1,186,731 19.84
=========
Exercisable at August 31, 2005 ............. 693,938 $17.98
=========
The numbers of stock awards available for grant under the stock option plans are
263,672, 302,996, and 466,968 shares as of August 31, 2005, 2004, and 2003,
respectively.
37
The following table summarizes information about stock options outstanding at
August 31, 2005:
OPTIONS OUTSTANDING
----------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------
RANGE OF NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
EXERCISE OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
PRICES AT 8/31/05 LIFE PRICE AT 8/31/05 PRICE
- -------------- ----------- ----------- -------- ----------- --------
$10.00 - 15.00 350,000 4.5 years $14.00 300,000 $14.00
15.01 - 22.00 408,930 5.9 years 19.38 266,004 18.72
$22.01 - 30.00 427,801 7.8 years $25.05 127,934 $25.75
--------- -------
1,186,731 693,938
========= =======
P. GUARANTEES
The Company is currently party to guarantee arrangements relating to
dealer/customer financing arrangements, the debt for a business in which the
Company holds a minority equity investment, and warranties of the Company's
products.
The following table provides the estimated maximum amount of potential future
payments for each major group of guarantees:
AUGUST 31,
---------------
$ IN THOUSANDS 2005 2004
------ ------
Guarantees on third party debt of equity investment .......... $ -- 700
Customer equipment financing recourse ........................ 2,256 3,700
Product warranties ........................................... N/A N/A
------ ------
Total guarantees ............................................. $2,256 $4,400
====== ======
CUSTOMER EQUIPMENT FINANCING
In the normal course of business, the Company has arranged for unaffiliated
financial institutions to make favorable financing terms available to end-user
purchasers of the Company's irrigation equipment. In order to facilitate these
arrangements, the Company provided the financial institutions with limited
recourse guarantees or full guarantees as more fully described below. The
Company recorded, at estimated fair value, deferred revenue of $69,000 at August
31, 2005 compared to $83,000 at August 31, 2004, classified with other current
liabilities, for guarantees. The estimated fair values of these guarantees are
based, in large part, on the Company's experience with this agreement and
related transactions. The Company recognizes the revenue for the value of the
guarantees ratably over the term of the guarantee. Separately, related to these
exposures, the Company has accrued a liability of $190,000 and $290,000 at
August 31, 2005 and 2004, respectively, also classified with other current
liabilities, for estimated losses on such guarantees.
The Company maintains an agreement with a single financial institution that
guarantees the financial institution's pool of financing agreements with end
users. This guarantee was approximately $1.3 million at August 31, 2005 and $1.5
million at August 31, 2004. Generally, the Company's exposure is limited to
unpaid interest and principal where the first and/or second annual customer
payments have not yet been made as scheduled. The maximum exposure of these
limited recourse guarantees is equal to 2.75% of the aggregate amounts
originally financed.
Separately, the Company maintains limited, specific customer financing
recourse arrangements with two financial institutions including the institution
referred to above. The original amount of existing specific guarantees is
approximately $956,000 at August 31, 2005 compared to $2.2 million at August 31,
2004. Generally, the Company's exposure is limited to unpaid interest and
principal where customer payments have not yet been made as scheduled. In some
cases, the guarantee may cover all scheduled payments of a loan.
38
All of the Company's customer-equipment recourse guarantees are
collateralized by the value of the equipment being financed.
GUARANTEES ON THIRD PARTY DEBT RELATED TO EQUITY INVESTMENT
The Company had guaranteed three bank loans and a standby letter of credit on
behalf of the irrigation dealership based in Kansas in which the Company
previously held a minority equity investment position. By the end of the second
quarter fiscal 2005, all underlying bank loans guaranteed had been paid in full
for approximately $250,000 and the guarantees released .
PRODUCT WARRANTIES
The Company generally warrants its products against certain manufacturing and
other defects. These product warranties are provided for specific periods and/or
usage of the product. The accrued product warranty costs are for a combination
of specifically identified items and other unidentified items based primarily on
historical experience of actual warranty claims.
The following table provides the changes in the Company's product warranties:
FOR THE YEARS ENDED AUGUST 31,
------------------------------
$ IN THOUSANDS 2005 2004 2003
------- ------- -------
Product warranty accrual balance, beginning of fiscal year .. $ 1,339 $ 1,152 $ 1,266
Liabilities accrued for warranties during the period ........ 2,675 1,492 1,370
Warranty claims paid during the period ...................... (1,558) (1,305) (1,484)
------- ------- -------
Product warranty accrual balance, end of fiscal year ........ $ 2,456 $ 1,339 $ 1,152
======= ======= =======
Q. INDUSTRY SEGMENT INFORMATION
The Company manages its business activities in two reportable segments:
Irrigation: This segment includes the manufacture and marketing of center
pivot, lateral move, and hose reel irrigation systems. The irrigation segment
consists of six operating segments that have similar economic characteristics
and meet the aggregation criteria of SFAS No. 131.
Diversified Products: This segment includes providing outsource
manufacturing services and the manufacturing and selling of large diameter steel
tubing.
The accounting policies of the two reportable segments are the same as
those described in the "Accounting Policies" in Note A. The Company evaluates
the performance of its operating segments based on segment sales, gross profit,
and operating income, with operating income for segment purposes excluding
general and administrative expenses (which include corporate expenses),
engineering and research expenses, interest income net, other income and
expenses, and net income taxes, and assets. Operating income for segment
purposes does include selling expenses and other overhead charges directly
attributable to the segment. There are no inter-segment sales. Because the
Company utilizes common operating assets for its irrigation and diversified
segments, it is not practical to separately identify assets by reportable
segment. Similarly, other segment reporting proscribed by FAS 131 is not shown
as this information can not be reasonably disaggregated by segment and is not
utilized by the Company's management.
The Company has no single major customer representing 10% or more of its
total revenues during fiscal 2005, 2004, or 2003.
39
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
FOR THE YEARS ENDED AUGUST 31,
------------------------------
($ IN MILLIONS) 2005 2004 2003
------ ------ ------
Operating revenues:
Irrigation ............................. $156.3 $183.8 $151.3
Diversified products ................... 21.0 12.9 12.1
------ ------ ------
Total operating revenues .................. $177.3 $196.7 $163.4
====== ====== ======
Operating income:
Irrigation ............................. $ 19.9 $ 27.2 $ 28.0
Diversified products ................... 2.6 1.1 1.2
------ ------ ------
Segment operating income .................. 22.5 28.3 29.2
Unallocated general & administrative and
engineering & research expenses ........ (17.0) (16.2) (12.8)
Interest and other income, net ............ 1.5 1.7 2.4
------ ------ ------
Earnings before income taxes .............. $ 7.0 $ 13.8 $ 18.8
====== ====== ======
FOR THE YEARS ENDED AUGUST 31,
------------------------------
$ IN MILLIONS 2005 2004 2003
------ ------ ------
Geographic area revenues:
United States ............................ $126.5 $145.7 $125.0
Europe, Africa, Australia, & Middle East.. 30.1 30.3 23.3
Mexico & Latin America ................... 16.1 16.5 10.7
Other International ...................... 4.6 4.2 4.4
------ ------ ------
Total revenues ........................... $177.3 $196.7 $163.4
====== ====== ======
R. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The follow is a tabulation of the unaudited quarterly results of operations for
the years ended August 31, 2005 and 2004:
FOR THE THREE MONTHS ENDED THE LAST DAY OF
------------------------------------------
$ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS NOVEMBER FEBRUARY MAY AUGUST
-------- -------- ------- -------
Fiscal 2005
Operating revenues .................. $39,767 $41,487 $55,985 $40,032
Cost of operating revenues .......... 33,194 33,721 43,792 32,993
Earnings before income taxes ........ 178 1,073 5,493 206
Net earnings ........................ 175 600 3,770 293
Diluted net earnings per share ...... $ 0.01 $ 0.05 $ 0.32 $ 0.03
Market price (NYSE)
High ............................. $ 28.55 $ 29.51 $ 24.60 $ 26.06
Low .............................. $ 22.45 $ 21.51 $ 17.50 $ 19.95
40
Fiscal 2004
Operating revenues .................. $36,513 $51,475 $62,286 $46,422
Cost of operating revenues .......... 29,159 39,865 49,299 38,856
Earnings before income taxes ........ 1,607 5,166 6,428 565
Net earnings ........................ 1,093 3,503 4,345 345
Diluted net earnings per share ...... $ 0.09 $ 0.29 $ 0.36 $ 0.04
Market price (NYSE)
High ............................. $ 24.53 $ 26.87 $ 26.15 $ 24.96
Low .............................. $ 20.05 $ 23.90 $ 22.90 $ 22.70
2005: Significant fourth-quarter adjustments aggregated an increase to pre-tax
earnings of $1.0 million. The significant adjustments increasing pre-tax
earnings include LIFO inventory adjustments and physical inventory adjustments.
2004: Significant fourth-quarter adjustments aggregated a decrease to pre-tax
earnings of $2.6 million. The adjustments decreasing pre-tax earnings included
the Kansas irrigation dealership bank guarantee and bad debt adjustments of
$850,000 and LIFO/ Inventory revaluation adjustments and physical inventory
adjustments of $1.7 million.
41
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 9A - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as defined in Exchange Act Rules 13a-15 (e),
15d-15(e) and internal control over financial reporting, as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in enabling the Company to
record, process, summarize and report information required to be included in the
Company's periodic SEC filings within the required time period.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. The Company's
internal control system was designed to provide reasonable assurance to the
Company's management and board of directors regarding the preparation and fair
presentation of published financial statements.
Management has assessed the effectiveness of the Company's internal control
over financial reporting as of August 31, 2005, based on the criteria for
effective internal control described in Internal Control - Intergrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on its assessment, management concluded that the Company's internal
control over financial reporting was effective as of August 31, 2005.
The Audit Committee has engaged KPMG LLP, the independent registered public
accounting firm that audited the consolidated financial statements included in
this Annual Report on Form 10-K, to attest to and report on management's
evaluation of the Company's internal control over financial reporting. Its
report is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Lindsay Manufacturing Co.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting appearing under
item 9A, that Lindsay Manufacturing Co. and subsidiaries (the Company)
maintained effective internal control over financial reporting as of August 31,
2005, based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
42
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of August 31, 2005, is fairly
stated, in all material respects, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of August 31, 2005, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company and subsidiaries as of August 31, 2005 and 2004, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
August 31, 2005, and our report dated November 3, 2005 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
Omaha, Nebraska
November 4, 2005
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in the Company's internal controls over financial
reporting that occurred during the quarter ended August 31, 2005 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B - OTHER INFORMATION
NONE
43
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company will file with the Securities and Exchange Commission a definitive
Proxy Statement not later than 120 days after the close of its fiscal year ended
August 31, 2005. Information about the Directors required by Item 401 of
Regulation S-K is incorporated by reference to the Proxy Statement. Information
about Executive Officers is shown on page 6 and 7 of this filing.
Section 16(a) Beneficial Ownership Reporting Compliance - Item 405 of
Regulation S-K calls for disclosure of any known late filing or failure by an
insider to file a report required by Section 16 of the Securities Exchange Act.
The information required by Item 405 incorporated by reference to the Proxy
Statement.
Code of Ethics- Item 406 of Regulation S-K calls for disclosure of whether
the Company has adopted a code of ethics applicable to the principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. The Company has adopted a
code of ethics applicable to the Company's principal executive officer and
senior financial officers known as the Code of Ethical Conduct (Principal
Executive Officer and Senior Financial Officers). The Code of Ethical Conduct
(Principal Executive Officer and Senior Financial Officers) is available on the
Company's website. In the event that the Company amends or waives any of the
provisions of the Code of Ethical Conduct applicable to the principal executive
officer and senior financial officers, the Company intends to disclose the same
on the Company's website at www.lindsaymanufacturing.com.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the Proxy
Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the Proxy
Statement.
Equity Compensation Plan Information- The following equity compensation plan
information summarizes plans and securities approved and not approved by
security holders as of August 31, 2005:
(A) (B) (C)
NUMBER OF SECURITIES WEIGHTED-AVERAGE NUMBER OF SECURITIES REMAINING
TO BE ISSUED UPON EXERCISE PRICE OF AVAILABLE FOR FUTURE ISSUANCE
EXERCISE OF OUTSTANDING UNDER EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OPTIONS, WARRANTS, (EXCLUDING SECURITIES REFLECTED IN
PLAN CATEGORY WARRANTS, AND RIGHTS AND RIGHTS COLUMN (A)) (1)
------------- -------------------- ------------------ ----------------------------------
Equity compensation plans
approved by security holders (2) .. 836,731 $22.76 263,672
Equity compensation plans not
approved by security holders (3) .. 350,000 $14.00 --
--------- ------ -------
Total ................................ 1,186,731 $20.94 263,672
========= ====== =======
(1) The Company's 2001 Amended and Restated Long-Term Incentive Plan (the "2001
Plan") allows for the issuance of up to 180,000 shares of restricted common
stock (not subject to the exercise of an option, warrant or right). As of
November 1, 2005, 180,000 shares of restricted common stock were available
for issuance under the 2001 Plan.
(2) Plans approved by shareholders include the Company's Amended and Restated
1991 Long-Term Incentive Plan and the 2001 Plan.
(3) Consists of options issued to Richard W. Parod pursuant to his employment
agreement, which was not approved by stockholders.
44
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the Proxy
Statement.
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to the Proxy
Statement.
45
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following financial statements of Lindsay Manufacturing Co. are
included in Part II Item 8.
PAGE
-----
Report of Independent Registered Public Accounting Firm.................... 20
Consolidated Statements of Operations for the years
ended August 31, 2005, 2004, and 2003................................... 21
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended August 31, 2005, 2004, and 2003..................... 22
Consolidated Balance Sheets at
August 31, 2005 and 2004................................................ 23
Consolidated Statements of Cash Flows for the years
ended August 31, 2005, 2004, and 2003................................... 24
Notes to Consolidated Financial Statements................................. 25-41
Valuation and Qualifying Accounts -
Years ended August 31, 2005, 2004, and 2003............................. 50
Financial statements and schedules other than those listed are omitted for
the reason that they are not required, are not applicable or that equivalent
information has been included in the financial statements or notes thereto.
46
A(3) EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3(a) Restated Certificate of Incorporation of the Company, incorporated by
reference to Exhibit 3(a) to the Company's Report on Form 10-Q for the
fiscal quarter ended February 28, 1997.
3(b) By-Laws of the Company amended and restated by the Board of Directors
on December 16, 2004, incorporated by reference to Exhibit 3(b) to the
Company's Current Report on Form 8-K filed on December 22, 2004.
3(c) Certificate of Amendment of the Restated Certificate of Incorporation
of Lindsay Manufacturing Co. dated February 7, 1997, incorporated by
reference to Exhibit 3(b) to the Company's Report on Form 10-Q for the
fiscal quarter ended February 28, 1997.
4(a) Specimen Form of Common Stock Certificate incorporated by reference to
Exhibit 4 to the Company's report on Form 10-Q for the fiscal quarter
ended November 30, 1997.
10(a) Lindsay Manufacturing Co. Executive Compensation Plan incorporated by
reference to Exhibit 10(a) to the Company's report on Form 10-Q for
the fiscal quarter ended February 28, 1998.
10(b) Agreement between the Company and Gary D. Parker, effective December
1, 1999 incorporated by reference to Exhibit 10(a) to the Company's
Report on Form 10-Q for the fiscal quarter ended November 30, 1999.
10(c) Indemnification Agreement between the Company and its directors and
officers, dated October 24, 2003 incorporated by reference to Exhibit
10 to the Company's Annual Report on Form 10-K for the fiscal year
ended August 31, 2003.
10(d) Lindsay Manufacturing Co. Profit Sharing Plan, incorporated by
reference to Exhibit 10(i) of the Company's Registration Statement on
Form S-1 (Registration No. 33-23084), filed July 15, 1988.
10(e) Lindsay Manufacturing Co. Amended and Restated 1991 Long-Term
Incentive Plan, incorporated by reference to Exhibit 10(f) to the
Company's Annual Report on Form 10-K for the fiscal year ended August
31, 2000.
10(f) Employment Agreement between the Company and Richard W. Parod
effective March 8, 2000, incorporated by reference to Exhibit 10(a) to
the Company's Report on Form 10-Q for the fiscal quarter ended May 31,
2000.
47
A(3) EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10(g) First Amendment to Employment Agreement, dated May 2, 2003, between
the Company and Richard W. Parod, incorporated by reference to Exhibit
10 (a) of Amendment No. 1 to the Company's Report on Form 10-Q for the
fiscal quarter ended May 31, 2003.
10(l) Second Amendment to Employment Agreement, dated December 22, 2004,
between the Company and Richard W. Parod, incorporated by reference to
10(h) Exhibit 10(a) to the Company's Current Report on Form 8-K filed on
December 27, 2004. Lindsay Manufacturing Co. Supplemental Retirement
Plan, incorporated by reference to Exhibit 10(j) to the Company's
Annual Report on Form 10-K for the fiscal year ended August 31, 1994.
10(i) Lindsay Manufacturing Co. 2001 Amended and Restated Long-Term
Incentive Plan, incorporated by reference to Exhibit 10(i) of the
Company's Annual Report on Form 10-K for the fiscal year ended August
31, 2001.
10(k)* Amendment to Lindsay Manufacturing Co. 2001 Amended and Restated
Long-Term Incentive Plan, dated July 11, 2005.
10(j)* Lindsay Manufacturing Co. Management Incentive Plan (MIP), 2006 Plan
Year
14 Code of Ethical Conduct for Principal Executive Officer and Senior
Financial Officers incorporated by reference to Exhibit 14 of the
Company's Annual Report on Form 10-K for the fiscal year ended August
31, 2003.
21* Subsidiaries of the Company
23* Consent of KPMG LLP
24(a)* The Power of Attorney authorizing Richard W. Parod to sign the Annual
Report on Form 10-K for fiscal 2005 on behalf of certain directors.
31(a)* Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 18 U.S.C. Section 1350.
31(b)* Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 18 U.S.C. Section 1350.
32(a)* Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 18 U.S.C.
Section 1350.
* - filed herein
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 14th day of
November, 2005.
LINDSAY MANUFACTURING CO.
By: /s/ DAVID B. DOWNING
------------------------------------
Name: David B. Downing
Title: Vice President, Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 15th day of November, 2005.
/s/ RICHARD W. PAROD Director, President and Chief Executive
- ------------------------------------- Officer
Richard W. Parod
/s/ DAVID B. DOWNING Vice President, Chief Financial Officer
- -------------------------------------
David B. Downing
/s/ TIMOTHY J. PAYMAL Corporate Controller
- -------------------------------------
Timothy J. Paymal
/s/ MICHAEL N. CHRISTODOLOU (1) Chairman of the Board of Directors
- -------------------------------------
Michael N. Christodolou
/s/ HOWARD G. BUFFETT (1) Director
- -------------------------------------
Howard G. Buffett
/s/ LARRY H. CUNNINGHAM (1) Director
- -------------------------------------
Larry H. Cunningham
/s/ J.DAVID MCINTOSH (1) Director
- -------------------------------------
J. David McIntosh
/s/ MICHAEL C. NAHL (1) Director
- -------------------------------------
Michael C. Nahl
/s/ WILLIAM F. WELSH II (1) Director
- -------------------------------------
William F. Welsh II
(1) By: /s/ RICHARD W. PAROD
-----------------------------
Richard W. Parod,
Attorney-In-Fact
49
LINDSAY MANUFACTURING CO.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED AUGUST 31, 2005, 2004 AND 2003
(DOLLARS IN THOUSANDS)
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- ---------- ---------- ---------- ---------- ----------
Year ended August 31, 2005:
Deducted in the balance sheet from the
assets to which they apply:
- Reserve for guarantee losses(c) ....... $ 540 $(38) $-- $312 $ 190
====== ==== === ==== ======
- Allowance for doubtful accounts ....... $1,386 $108 $-- $792(a) $ 702
====== ==== === ==== ======
- Allowance for inventory obsolescence .. $ 527 $228 $-- $142(b) $ 613
====== ==== === ==== ======
Year ended August 31, 2004:
Deducted in the balance sheet from the
assets to which they apply:
- Reserve for guarantee losses(c) ....... $ 354 $325 $-- $139 $ 540
====== ==== === ==== ======
- Allowance for doubtful accounts ....... $ 667 $760 $-- $ 41(a) $1,386
====== ==== === ==== ======
- Allowance for inventory obsolescence .. $ 566 $136 $-- $175(b) $ 527
====== ==== === ==== ======
Year ended August 31, 2003:
Deducted in the balance sheet from
the assets to which they apply:
- Reserve for guarantee losses(c) ....... $ 344 $105 $-- $ 95 $ 354
====== ==== === ==== ======
- Allowance for doubtful accounts ....... $ 492 $275 $-- $100(a) $ 667
====== ==== === ==== ======
- Allowance for inventory obsolescence .. $ 359 $256 $ 8 $ 57(b) $ 566
====== ==== === ==== ======
Notes:
(a) Deductions consist of uncollectible items written off, less recoveries of
items previously written off.
(b) Deductions consist of obsolete items sold or scrapped.
(c) Represents estimated losses on financing guarantees.
50