SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 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
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 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]
As of January 03, 2006, 11,520,483 shares of the registrant's common stock were
outstanding.
1
LINDSAY MANUFACTURING CO. AND SUBSIDIARIES
INDEX FORM 10-Q
Page No.
--------
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets, November 30, 2005 and 2004
and August 31, 2005 3
Consolidated Statements of Operations for the three-months
ended November 30, 2005 and 2004 4
Consolidated Statements of Cash Flows for the three-months
ended November 30, 2005 and 2004 5
Notes to Consolidated Financial Statements 6-16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION 17-21
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 21-22
ITEM 4 - CONTROLS AND PROCEDURES 22
PART II - OTHER INFORMATION
ITEM 1- LEGAL PROCEEDINGS 22
ITEM 1A- RISK FACTORS 22
ITEM 2- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 22
ITEM 3- DEFAULTS UPON SENIOR SECURITIES 22
ITEM 4- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
ITEM 5- OTHER INFORMATION 23
ITEM 6- EXHIBITS 23
SIGNATURE 24
2
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
LINDSAY MANUFACTURING CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2005 AND 2004 AND AUGUST 31, 2005
(UNAUDITED) (UNAUDITED)
NOVEMBER NOVEMBER AUGUST
($ IN THOUSANDS, EXCEPT PAR VALUES) 2005 2004 2005
- ----------------------------------- ---- ---- ----
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 21,991 $ 4,354 $ 25,564
Marketable securities .......................................... 12,570 11,277 14,101
Receivables, net ............................................... 33,949 39,314 28,919
Inventories, net ............................................... 22,707 26,250 19,311
Deferred income taxes .......................................... 3,617 1,176 3,276
Other current assets ........................................... 3,454 3,987 3,042
--------- --------- ---------
Total current assets ........................................... 98,288 86,358 94,213
Long-term marketable securities .................................. 14,772 27,971 15,157
Property, plant and equipment, net ............................... 17,274 17,127 17,268
Other noncurrent assets .......................................... 7,527 8,876 8,201
--------- --------- ---------
Total assets ..................................................... $ 137,861 $ 140,332 $ 134,839
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................... $ 8,554 $ 9,500 $ 6,704
Other current liabilities ...................................... 14,130 15,311 13,434
--------- --------- ---------
Total current liabilities ...................................... 22,684 24,811 20,138
Pension benefits liabilities ..................................... 5,183 2,247 5,142
Other noncurrent liabilities ..................................... 162 57 229
--------- --------- ---------
Total liabilities ................................................ 28,029 27,115 25,509
--------- --------- ---------
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,
17,568,931, 17,497,785 and 17,568,084 shares issued in
November 2005 and 2004 and August 2005, respectively) ........ 17,569 17,498 17,568
Capital in excess of stated value .............................. 4,037 2,978 3,690
Retained earnings .............................................. 183,264 180,748 183,444
Less treasury stock (at cost, 6,048,448, 5,724,069 and 6,048,448
shares, respectively) ........................................ (96,547) (89,898) (96,547)
Accumulated other comprehensive income, net .................... 1,509 1,891 1,175
--------- --------- ---------
Total shareholders' equity ....................................... 109,832 113,217 109,330
--------- --------- ---------
Total liabilities and shareholders' equity ....................... $ 137,861 $ 140,332 $ 134,839
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
3
LINDSAY MANUFACTURING CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTHS ENDED NOVEMBER 30, 2005 AND 2004
(UNAUDITED)
THREE MONTHS ENDED
------------------------
NOVEMBER NOVEMBER
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 2004
- ---------------------------------------- ---- ----
Operating revenues ............................... $ 39,504 $ 39,767
Cost of operating revenues ....................... 32,077 33,194
-------- --------
Gross profit ..................................... 7,427 6,573
-------- --------
Operating expenses:
Selling expense ................................ 2,848 2,747
General and administrative expense ............. 3,569 3,597
Engineering and research expense ............... 647 696
-------- --------
Total operating expenses ......................... 7,064 7,040
-------- --------
Operating income ................................. 363 (467)
Interest income, net ............................. 427 261
Other income, net ................................ 2 384
-------- --------
Earnings before income taxes ..................... 792 178
Income tax provision ............................. 281 3
-------- --------
Net earnings ..................................... $ 511 $ 175
======== ========
Basic net earnings per share ..................... $ 0.04 $ 0.01
======== ========
Diluted net earnings per share ................... $ 0.04 $ 0.01
======== ========
Average shares outstanding ....................... 11,523 11,772
Diluted effect of stock options .................. 143 213
-------- --------
Average shares outstanding assuming dilution ..... 11,666 11,985
======== ========
Cash dividends per share ......................... $ 0.060 $ 0.055
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
4
LINDSAY MANUFACTURING CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTHS ENDED NOVEMBER 30, 2005 AND 2004
(UNAUDITED)
NOVEMBER NOVEMBER
($ IN THOUSANDS) 2005 2004
- ---------------- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ..................................................................... $ 511 $ 175
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization ................................................. 831 906
Amortization of marketable securities, net .................................... 63 49
Loss on sale of property, plant and equipment ................................. 57 -
Provision for uncollectible accounts receivable ............................... 23 31
Equity in net earnings of equity method investments ........................... (4) (233)
Deferred income taxes ......................................................... (444) (28)
Stock option tax benefits ..................................................... (18) -
Stock-based compensation expense .............................................. 356 -
Other, net .................................................................... (20) 13
Changes in assets and liabilities:
Receivables, net .............................................................. (4,182) (4,127)
Inventories, net .............................................................. (3,428) (5,471)
Other current assets .......................................................... (427) (1,279)
Accounts payable, trade ....................................................... 1,896 (6)
Other current liabilities ..................................................... (389) (378)
Current taxes payable ......................................................... 833 (139)
Other noncurrent assets and liabilities ....................................... 314 29
-------- --------
Net cash used in operating activities ............................................ (4,028) (10,458)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ....................................... (819) (1,343)
Acquisition of business .......................................................... - 3
Proceeds from sale of property, plant and equipment .............................. 5 -
Proceeds from maturities or sales of marketable securities available-for-sale .... 1,805 7,740
-------- --------
Net cash provided by investing activities ........................................ 991 6,400
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under stock option plan ................... 9 29
Dividends paid ................................................................... (691) (636)
-------- --------
Net cash used in financing activities ............................................ (682) (607)
-------- --------
-------- --------
Effect of exchange rate changes on cash .......................................... 146 46
-------- --------
Net decrease in cash and cash equivalents ........................................ (3,573) (4,619)
Cash and cash equivalents, beginning of period ................................... 25,564 8,973
-------- --------
Cash and cash equivalents, end of period ......................................... $ 21,991 $ 4,354
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
5
LINDSAY MANUFACTURING CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements are presented in accordance with the
requirements of Form 10-Q and do not include all of the disclosures normally
required by accounting principles generally accepted in the United States of
America for financial statements contained in Lindsay Manufacturing Co.'s (the
"Company") annual Form 10-K filing. Accordingly, these condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's most recent
Form 10-K for the fiscal year ended August 31, 2005.
In the opinion of management, the consolidated financial statements of
the Company reflect all adjustments of a normal recurring nature necessary to
present a fair statement of the financial position and the results of operations
and cash flows for the respective interim periods. The results for interim
periods are not necessarily indicative of trends or results expected by the
Company for a full year.
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 by management in the 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.
(2) SHARE BASED COMPENSATION
On September 1, 2005, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123(R)") which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors based on estimated
fair values. SFAS 123(R) supersedes the Company's previous accounting under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") for periods beginning in fiscal 2006. In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
("SAB 107") relating to SFAS 123(R). The Company has applied the provisions of
SAB 107 in its adoption of SFAS 123(R).
The Company adopted SFAS 123(R) using the modified prospective
transition method, which requires the application of the accounting standard as
of September 1, 2005, the first day of the Company's fiscal year 2006. The
Company's Consolidated Financial Statements as of and for the three months ended
November 30, 2005 reflect the impact of SFAS 123(R). In accordance with the
modified prospective transition method, the Company's Consolidated Financial
Statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS 123(R). Share-based compensation expense recognized
under SFAS 123(R) for the three months ended November 30, 2005 was $244,000, net
of tax.
SFAS 123(R) requires companies to estimate the fair value of
share-based payment awards on the date of grant using an option-pricing model.
The value of the portion of the award that is ultimately expected to vest is
recognized as expense over the requisite service periods in the Company's
Consolidated Statement of Operations. Prior to the adoption of SFAS 123(R), the
Company accounted for share-based awards to employees and directors using the
intrinsic value method in accordance with APB 25. Under the intrinsic value
method, no stock-based compensation expense had been recognized in the Company's
Consolidated Statement of Operations, because the exercise price of the
Company's stock options granted to employees and directors equaled the fair
market value of the underlying stock at the date of grant.
Share-based compensation expense recognized during the period is based
on the value of the portion of share-based payment awards that is ultimately
expected to vest during the period. Share-based compensation expense recognized
in the Company's Consolidated Statement of Operations for the first quarter of
fiscal 2006 included compensation expense for share-based payment awards granted
prior to, but not yet vested as of August 31, 2005 based on the grant date fair
value estimated in accordance with the pro forma provisions of SFAS 123 and
compensation expense for the share-based payment awards granted subsequent to
August 31, 2005 based on the grant date fair value estimated in accordance with
the provisions of SFAS 123(R). Because share-based compensation expense
recognized in the Consolidated Statement of Operations for the first quarter of
fiscal 2006 is based on awards ultimately expected to vest, it has been reduced
for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from
6
those estimates. In the Company's pro forma information required under SFAS 123
for the periods prior to fiscal 2006, the Company accounted for forfeitures as
they occurred.
The Company uses the Black-Scholes option-pricing model ("Black-Scholes
model") as its valuation method for share-based payment awards. Under the
Black-Scholes model, the fair value of share-based payment awards on the date of
grant using an option-pricing model is affected by the Company's stock price as
well as assumptions regarding a number of highly complex and subjective
variables. These variables include, but are not limited to the Company's
expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors.
Computation of Net Income per Share
Basic net income per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted net income per share is
computed using the weighted-average number of common shares and dilutive
potential common shares outstanding during the period. Dilutive potential common
shares consist of stock options and restricted stock units.
Statement of Financial Accounting Standards No. 128, "Earnings per
Share," requires that employee equity share options, nonvested shares and
similar equity instruments granted by the Company be treated as potential common
shares outstanding in computing diluted earnings per share. Diluted shares
outstanding include the dilutive effect of in-the-money options, which is
calculated, based on the average share price for each fiscal period using the
treasury stock method. Under the treasury stock method, the amount the employee
must pay for exercising stock options, the amount of compensation cost for
future service that the Company has not yet recognized, and the amount of
benefits that would be recorded in additional paid-in capital when the award
becomes deductible are assumed to be used to repurchase shares.
Share Based Compensation Program Descriptions
As of November 30, 2005, the Company's share-based compensation plan was the
2001 Long-Term Incentive Plan (the "2001 Plan"). Share based compensation is
designed to reward employees for their long-term contributions to the Company
and provide incentives for them to remain with the Company. The number and
frequency of share grants are based on competitive practices, operating results
of the Company, and individual performance.
The 2001 Plan provides for awards of stock options, restricted stock,
restricted stock units or stock appreciation rights to employees and
non-employee directors of the Company. 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 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 2001 Plan permits 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. Options granted
under the 2001 Plan have an exercise price equal to the fair market value of the
underlying stock on the grant date and expire no later than ten years from the
grant date. The options vest over a five year period at 20% per year. The
restricted stock units granted under the 2001 Plan have a grant date fair value
equal to the fair market value of the underlying stock on the grant date less
present value of expected dividends. The restricted stock units vest over a
three year period at approximately 33% per year.
The Board of Directors adopted the Lindsay Manufacturing Co. 2006 Long-Term
Incentive Plan (the "2006 Plan") on December 12, 2005, subject to approval by
the shareholders at the Company's 2006 Annual Meeting of Shareholders. The 2006
Plan is intended to replace the Company's 2001 Plan. If shareholders approve the
2006 Plan, the 2006 Plan will become effective on February 6, 2006 and no
further grants will be made under the 2001 Plan.
7
General Share Based Compensation Information
Average
Remaining Aggregate
Number of Average Contractual Term Intrinsic Value
Shares Exercise Price (years) (`000s)
Outstanding at August 31, 2004 ....... 1,229,133 $ 19.05
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 6.2
==========
Granted
Stock options ............... 45,000 19.33
Restricted stock units ...... 37,266 0.00
Exercised ....................... (6,500) 18.50 $ 13
Forfeitures ..................... (3,600) 23.77
----------
Outstanding at November 30, 2005 ..... 1,258,897 19.23 6.2 24,901
==========
==========
Exercisable at August 31, 2005 ....... 693,938 17.98 5.0 12,447
==========
Exercisable at November 30, 2005 ..... 729,185 $ 18.17 4.9 $ 13,220
==========
The following table summarizes information about stock options outstanding at
November 30, 2005.
Options Outstanding Options Exercisable
---------------------------------------- -----------------------------------
Weighted average
Number remaining Number Weighted
Range of outstanding at contractual life Weighted exercisable at average
exercise prices 11/30/2005 (years) average price 11/30/2005 price
- --------------------- ---------------- --------------------- --------------- ------------------ -------------
$10.00-15.00 350,000 4.27 $14.00 300,000 $14.00
15.01-22.00 446,275 6.14 19.39 283,807 18.80
$22.01-30.00 425,356 7.54 25.05 145,378 25.53
---------------- ------------------
1,221,631 6.09 $19.82 729,185 $18.17
================ ==================
The above table excludes outstanding restricted stock units granted in November
2005 covering 37,266 shares. For the three-months ended November 30, 2005,
35,242 outstanding stock options vested.
A summary of the status of the Company's nonvested restricted stock units as of
November 30, 2005, and changes during the quarter ended November 30, 2005:
Weighted-
Average
Grant-Date
Nonvested Shares Shares Fair Value
- ---------------------------------------------------------------------- ------------------ ---------------
Nonvested at September 1, 2005........................................ - $ 0.00
Granted............................................................... 37,266 18.78
Vested................................................................ - 0.00
Forfeited............................................................. - 0.00
------------------ ---------------
Nonvested at November 30, 2005...................................... 37,266 $18.78
================== ===============
As of November 30, 2005, there was $4.2 million pre-tax of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
which is expected to be recognized over a weighted-average period of 3.5 years.
8
Valuation and Expense Information under SFAS 123(R)
On September 1, 2005, the Company adopted SFAS 123(R), which requires
the measurement and recognition of compensation expense for all share-based
payment awards made to the Company's employees and directors. The following
table summarizes share-based compensation expense under SFAS 123(R) for the
three months ended November 30, 2005:
$ IN THOUSANDS
- --------------
THREE MONTHS
ENDED
NOVEMBER 30,
2005
------------------
Share-based compensation expense included in cost of operating
revenues ............................................................... $ 25
Research and development ............................................... 21
Sales and marketing .................................................... 71
General and administrative ............................................. 239
-----
Share-based compensation expense included in operating expenses ..... 331
-----
Total Share-based compensation expense ................................. 356
-----
Tax benefit ......................................................... (112)
-----
Share-based compensation expense, net of tax ........................... $ 244
=====
The table below reflects the pro forma information for the three months ended
November 30, 2004 as follows:
FOR THE THREE-
MONTHS ENDED
NOVEMBER
$ IN THOUSANDS 2004
- -------------- ----
Net earnings, as reported (1) ......................................... $ 175
Share-based compensation expense ...................................... 555
Tax benefit ........................................................... (194)
------
Share-based compensation expense, net tax (2) ......................... 361
------
Net income, including the effect of share-based compensation
expense (3) ........................................................... $ (186)
======
Earnings per share:
Basic net earnings per share-as reported (1) .................... $ 0.01
Basic net earnings per share, including the effect of share-based
compensation expense (3) ........................................ $(0.02)
Diluted- as reported for the prior period (1) ................... $ 0.01
Diluted net income per share, including the effect of share-based
compensation expense (3) ........................................ $(0.02)
(1) Net income and net income per share prior to fiscal 2006 did not
include share-based compensation expense under SFAS 123 because the
Company did not adopt the recognition provisions of SFAS 123.
(2) Share-based compensation expense prior to fiscal 2006 was calculated
based on the pro forma application of SFAS 123.
(3) Net income and net income per share prior to fiscal 2006 represents
pro forma information based on SFAS 123.
Net income before taxes was reduced by $356,000 for share based compensation,
while the net of tax effect on earnings was $244,000. There was minimal impact
on the Consolidated Statement of Cash Flows from the adoption of SFAS 123(R).
Basic and diluted earnings per share were negatively effected by $0.02 per
share.
9
The value of each employee stock option was estimated on the date of
grant using the Black-Scholes model for the purpose of the pro forma financial
information in accordance with SFAS 123(R).
The fair value of each option award is estimated on the date of grant
using a Black-Scholes option valuation model that uses the assumptions noted in
the following table. The Company uses a seven year period to calculate the
historical volatility of its stock price for use in the valuation model. The
Company uses historical data to estimate option exercise and employee
termination within the valuation model; separate groups of employees that have
similar historical exercise behavior are considered separately for valuation
purposes. The expected term of options granted is derived from historical
experience and represents the period of time that options granted are expected
to be outstanding. The risk-free rate for options is based on a U.S. Treasury
rate commensurate with the expected terms.
The use of the Black-Scholes model requires the use of a number of
assumptions including volatility, risk-free interest rate, and expected
dividends. The weighted-average estimated value of employee stock options
granted during the three months ended November 30, 2005 and 2004 was $8.13 and
$10.63, per share, respectively, with the following weighted-average
assumptions:
THREE MONTHS THREE MONTHS
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
------------ ------------
2005 2004
---- ----
Expected volatility.................... 35.13% 35.01%
Expected dividends..................... .76% .68%
Expected term (in years)............... 7.00 7.00
Risk-free interest rate................ 4.52% 4.30%
(3) CASH EQUIVALENTS, MARKETABLE SECURITIES, AND LONG-TERM MARKETABLE
SECURITIES
Cash equivalents are included at cost, which approximates market. At November
30, 2005, a single financial institution held substantially all the Company's
cash equivalents. 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.
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. In fiscal year
2004 management transferred all debt securities from the held-to-maturity
portfolio to the available-for-sale portfolio. Currently, the Company holds no
securities 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 the three-months ended November 30, 2005 and 2004.
In the opinion of management, the Company is not subject to material market
risks with respect to its portfolio of investment securities because the
relatively short maturities of these securities make their value less
susceptible to interest rate fluctuations.
Gross realized gains and losses from sale of available-for-sale securities are
as follows:
$ IN THOUSANDS
- --------------
THREE-MONTHS ENDED
------------------
NOVEMBER 30,
------------
2005 2004
---- ----
Gross realized gains................... $ - $ 5
Gross realized losses.................. $ - $(51)
10
Amortized cost and fair value of investments in marketable securities classified
as available-for-sale according to management's intent are summarized as
follows:
$ IN THOUSANDS
- --------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---- ----- ------ ----------
As of November 30, 2005:
Due within one year ......................... $ 12,629 $ 13 $ (72) $ 12,570
Due after one year through five years ....... 14,981 1 (210) 14,772
-------- -------- -------- --------
$ 27,610 $ 14 $ (282) $ 27,342
======== ======== ======== ========
As of November 30, 2004:
Due within one year ......................... $ 11,232 $ 46 $ (1) $ 11,277
Due after one year through five years ....... 27,964 90 (83) 27,971
-------- -------- -------- --------
$ 39,196 $ 136 $ (84) $ 39,248
======== ======== ======== ========
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
======== ======== ======== ========
(4) INVENTORIES
Inventories are stated at the lower of cost or market value. 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 establishes reserves for obsolete,
slow moving, and excess inventory by estimating the net realizable value based
on the potential future use of such inventory.
NOVEMBER NOVEMBER AUGUST
$ IN THOUSANDS 2005 2004 2005
- -------------- ---- ---- ----
Inventory:
First-in, first-out (FIFO) inventory ...... $ 18,104 $ 20,810 $ 15,373
LIFO reserves ............................. (3,904) (5,333) (4,048)
-------- -------- --------
LIFO inventory .............................. 14,202 15,477 11,325
Weighted average inventory ................ 9,087 11,229 8,599
Obsolescence reserve ...................... (580) (456) (613)
-------- -------- --------
Total inventories ........................... $ 22,707 $ 26,250 $ 19,311
======== ======== ========
The estimated percentage distribution between major classes of inventory before
reserves is as follows:
NOVEMBER NOVEMBER AUGUST
2005 2004 2005
---- ---- ----
Raw materials................................ 26% 30% 23%
Work in process.............................. 9% 5% 6%
Finished goods and purchased parts........... 65% 65% 71%
11
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation, as follows:
NOVEMBER NOVEMBER AUGUST
$ IN THOUSANDS 2005 2004 2005
- -------------- ---- ---- ----
Property, plant and equipment:
Land ......................................... $ 336 $ 336 $ 336
Buildings .................................... 10,651 10,263 10,625
Equipment .................................... 41,169 39,778 38,884
Other ....................................... 4,604 4,616 6,175
-------- -------- --------
Total property, plant and equipment .............. 56,760 54,993 56,020
Accumulated depreciation and amortization ........ (39,486) (37,866) (38,752)
-------- -------- --------
Property, plant and equipment, net ............... $ 17,274 $ 17,127 $ 17,268
======== ======== ========
Depreciation expense was $782,000 and $867,000 for the three-months ended
November 30, 2005 and 2004, respectively.
(6) CREDIT ARRANGEMENTS
The Company had an unsecured revolving line of credit which expired on 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.
The Company has not borrowed under the revolving line of credit. Under the terms
of the line of credit, borrowings, if any, would have borne 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 (.6.0% at November
30, 2005). The Company may arrange credit facilities when needed.
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$2.7 million, for working capital
purposes. As of November 30, 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 (3.6% at November 30, 2005).
(7) NET EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the
weighted average number of shares outstanding during the period. Diluted net
earnings per share includes the incremental dilutive effect of stock options and
restricted stock units, which under the treasury stock method described in Note
2 are determined to be dilutive.
The Company had additional stock options outstanding during the period,
but these options were excluded from the calculation of diluted earnings per
share because they were not dilutive, as set forth in the following table:
NOVEMBER 30, 2005 NOVEMBER 30, 2004
---------------------------------------------------- -------------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES PRICE EXPIRE SHARES PRICE EXPIRE
------ ----- ------ ------ ----- ------
September, 2007- November, 2007 -
546,506 $24.27 November, 2015 204,750 $26.49 April, 2014
======= ====== ======= ======
(8) 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
12
aggregation criteria of Statement of Financial Accounting Standards (SFAS) No.
131 "Disclosures about Segments of an Enterprise and Related Information."
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 to the consolidated
financial statements contained in the Company's 10-K for the fiscal year ended
August 31, 2005. 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 required by SFAS No. 131
is not shown as this information cannot be reasonably disaggregated by segment
and is not utilized by the Company's management.
The Company had no single customer representing 10% or more of its
total revenues during the three-months ended November 30, 2005 or 2004,
respectively.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
FOR THE THREE-MONTHS ENDED
--------------------------
NOVEMBER NOVEMBER
$ IN THOUSANDS 2005 2004
- -------------- ---- ----
Operating revenues:
Irrigation ............................................................ $34,142 $35,402
Diversified products .................................................. 5,362 4,365
------- -------
Total operating revenues ................................................... $39,504 $39,767
======= =======
Operating income:
Irrigation ............................................................ $ 3,780 $ 3,511
Diversified products .................................................. 799 315
------- -------
Segment operating income ................................................... 4,579 3,826
Unallocated general & administrative and engineering & research expenses ... 4,216 4,293
Interest and other income, net ............................................. 429 645
------- -------
Earnings before income taxes ............................................... $ 792 $ 178
======= =======
(9) OTHER NONCURRENT ASSETS
NOVEMBER NOVEMBER AUGUST
$ IN THOUSANDS 2005 2004 2005
- -------------- ---- ---- ----
Cash surrender value of life insurance policies ................ $1,996 $1,924 $1,975
Deferred income taxes .......................................... 824 1,718 730
Equity method investments ...................................... - 1,597 1,621
Goodwill ....................................................... 1,372 1,320 1,364
Split dollar life insurance .................................... 954 916 954
Intangible pension assets ...................................... 303 373 304
Other intangibles, net ......................................... 644 717 695
Notes receivable ............................................... 1,371 - -
Other .......................................................... 63 311 558
------ ------ ------
Total noncurrent assets ........................................ $7,527 $8,876 $8,201
====== ====== ======
13
Goodwill represents the excess of the allocable purchase price for assets
acquired in certain business acquisitions over the fair value of these assets at
the time of the acquisitions. Other intangible assets include non-compete
agreements, trade names, patents, and plans and specifications. Goodwill and
intangible assets with indefinite useful lives are not amortized, but instead
are tested for impairment of their values at least annually in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets." The estimated fair value
of these assets depends on a number of assumptions including forecasted sales
growth and operating expenses of the reporting segment in which the assets are
used. To the extent that the relevant reporting unit is unable to achieve these
assumptions, impairment losses may be recognized. The Company completed its
annual impairment evaluation of these non-amortizing assets at August 31, 2005
and determined that no impairment losses were indicated. Other intangible assets
that have finite lives are amortized over their realizable lives. Amortization
expense for these other intangible assets was $49,000 and $39,000 for the
three-months ended November 30, 2005 and 2004, respectively. These other
intangible assets include software rights acquired in fiscal year 2005. The
Company held a 39% minority investment in an irrigation dealership based outside
of the United States. This investment was accounted for on the equity method. On
September 1, 2005 the Company sold its minority position in the irrigation
dealership for cash held in escrow of approximately $790,000 and notes
receivable with a carrying value of $1.2 million. These notes are due in annual
installments through 2010 and bear interest at 6%. These notes are guaranteed by
the acquirer. The sale closed on November 30, 2005. The Company realized a small
gain from the sale of the dealership.
The following table summarizes the Company's other intangible assets:
NOVEMBER NOVEMBER AUGUST
$ IN THOUSANDS 2005 2004 2005
- -------------- ---- ---- ----
Other intangible assets:
Non-compete agreements ........................... $ 406 $ 392 $ 406
License .......................................... 364 279 364
Tradenames ....................................... 146 145 146
Patent ........................................... 100 100 100
Plans and specifications ......................... 75 75 75
Other ............................................ 37 34 38
Accumulated amortization ............................ (484) (308) (434)
----- ----- -----
Total other intangibles assets, net ................... $ 644 $ 717 $ 695
===== ===== =====
(10) COMPREHENSIVE INCOME
The accumulated other comprehensive income or loss shown in the Company's
consolidated balance sheets includes the unrealized gains on securities and
accumulated foreign currency translation adjustment. The following table shows
the difference between the Company's reported net earnings and its comprehensive
income:
FOR THE THREE-MONTHS ENDED
--------------------------
NOVEMBER NOVEMBER
$ IN THOUSANDS 2005 2004
- -------------- ---- ----
Comprehensive income:
Net earnings ..................................... $ 511 $ 175
Other comprehensive (loss) income:
Unrealized losses on securities, net of taxes .... (31) (153)
Foreign currency translation ..................... 365 1,631
------- -------
Total comprehensive income ............................ $ 845 $ 1,653
======= =======
(11) GUARANTEES
The Company is currently party to guarantee arrangements relating to customer
financing arrangements with dealers, and warranties of the Company's products.
14
The following table provides the amount of estimated maximum potential future
payments for each major group of the Company's guarantees:
NOVEMBER NOVEMBER AUGUST
$ IN THOUSANDS 2005 2004 2005
- -------------- ---- ---- ----
Guarantees:
Customer equipment financing recourse ................. $2,256 $3,900 $2,256
Guarantees on third party debt of equity investment ... - 250 -
------ ------ ------
Total guarantees ........................................... $2,256 $4,150 $2,256
====== ====== ======
Customer Equipment Financing
In the normal course of its 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 described below. The Company recorded,
at estimated fair value, deferred revenue of $62,000 at November 30, 2005,
compared to $70,000 at November 30, 2004 and $69,000 at August 31, 2005,
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 estimated fair value of the guarantees ratably over the term of the
guarantee. Separately, related to these exposures, the Company has accrued a
liability of $118,000, $339,000, and $190,000 at November 30, 2005 and 2004, and
August 31, 2005, 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 is approximately $1.3 million at November 30, 2005,
$1.7 million at November 30, 2004, and $1.3 million at August 31, 2005.
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 these specific guarantees is
approximately $956,000 at November 30, 2005, approximately $2.2 million at
November 30, 2004, and approximately $956,000 at August 31, 2005. 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.
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 incurred, but not identified, items
based primarily on historical experience of actual warranty claims. This reserve
is classified with other current liabilities.
The following table provides the changes in the Company's product warranties:
FOR THE THREE-MONTHS ENDED
NOVEMBER NOVEMBER
$ IN THOUSANDS 2005 2004
- -------------- ---- ----
Warranties:
Product warranty accrual balance, September 1 .......... $ 2,456 $ 1,339
Liabilities accrued for warranties during the period ... 277 190
Warranty claims paid during the period ................. (337) (406)
------- -------
Product warranty accrual balance, end of period ............ $ 2,396 $ 1,123
======= =======
15
The warranty accrual increased approximately $1.5 million in the fourth quarter
of fiscal year 2005 due to a voluntary repair campaign relating to the end gun
solenoid valves on Zimmatic irrigation systems.
(12) RETIREMENT PLAN
The Company has a supplemental non-qualified, un-funded retirement plan for six
current and former executives. Plan benefits are based on the participant'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 four of the participants named in this supplemental retirement plan
to provide partial funding for this liability. Components of net periodic
benefit cost for the Company's supplemental retirement plan include:
FOR THE THREE-MONTHS ENDED
NOVEMBER NOVEMBER
$ IN THOUSANDS 2005 2004
- -------------- ---- ----
Net periodic benefit cost:
Service cost .................................. $ 5 $ 9
Interest cost ................................. 67 67
Net amortization and deferral ................. 39 76
---- ----
Total net periodic benefit cost ................... $111 $152
==== ====
(13) 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. 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.
(14) INCOME TAXES
It is the Company's policy to report income tax expense for interim periods
using an estimated annual effective income tax rate. However, the tax effects of
significant or unusual items are not considered in the estimated annual
effective tax rate. The tax effect of such events is recognized in the interim
period in which the event occurs.
The annual expected effective tax rate for the income tax provision for
the year ended August 31, 2006 is expected to be between 31% and 32%. The
effective tax rate for the income tax provision for the three month period ended
November 30, 2005 was 35.5%. The first quarter fiscal 2006 tax rate was higher
than the annual expected tax rate due to a state tax penalty paid during the
period. The first quarter fiscal 2005 effective tax rate was 1.7%, which was
lower than the expected annual tax rate due to higher deductions experienced
during the first quarter of fiscal 2005. 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 on its
investment portfolio.
16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CONCERNING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q 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 conditions or 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 in
the Company's annual report on Form 10-K for the year ended August 31, 2005.
Readers should not place undue reliance on any forward-looking statement and
should recognize that the statements are predictions of future results or
conditions, which may not occur as anticipated. Actual results or conditions
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.
ACCOUNTING POLICIES
In preparing the Company's consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
management must make a variety of decisions, which impact the reported amounts
and the related disclosures. These decisions include the selection of the
appropriate accounting principles to be applied and the assumptions on which to
base accounting estimates. In making these decisions, management applies its
judgment based on its understanding and analysis of the relevant circumstances
and the Company's historical experience.
The Company's accounting policies that are most important to the
presentation of its results of operations and financial condition, and which
require the greatest use of judgments and estimates by management, are
designated as its critical accounting policies. Disclosure on these critical
accounting policies is incorporated by reference under Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's Annual Report on Form 10-K for the Company's year ended August 31,
2005. Management periodically re-evaluates and adjusts its critical accounting
policies as circumstances change. During the first quarter of fiscal 2006 the
Company adopted SFAS 123(R). Management does not consider this a critical
accounting policy and there were no significant changes in the Company's
critical accounting policies during the three-months ended November 30, 2005.
OVERVIEW
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 and chemical injection systems and remote monitoring 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 8 to the consolidated financial statements.
17
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, manufactures and markets irrigation equipment for the
European market. Lindsay America do Sul Ltda., located in Brazil, manufactures
and markets irrigation equipment for the South American market. Lindsay
Manufacturing Africa, (PTY) Ltd, located in South Africa, 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 three locations and provides a strategic distribution
channel in a key regional irrigation market and Lindsay Transportation, Inc.
which supplies ground transportation in the United States and Canada for the
Company's products and the bulk of incoming raw materials.
RESULTS OF OPERATIONS
The following section presents an analysis of the Company's consolidated
operating results displayed in the consolidated statements of operations for the
three-months ended November 30, 2005 and 2004. It should be read together with
the industry segment information in Note 8 to the consolidated financial
statements:
FOR THE THREE-MONTHS ENDED
---------------------------------------------
PERCENT
NOVEMBER NOVEMBER INCREASE
($ IN THOUSANDS) 2005 2004 (DECREASE)
- ---------------- ---- ---- ----------
Consolidated
Operating revenues ................ $ 39,504 $ 39,767 (0.7)%
Cost of operating revenues ........ $ 32,077 $ 33,194 (3.4)
Gross profit ...................... $ 7,427 $ 6,573 13.0
Gross margin ...................... 18.8% 16.5%
Operating expenses ................ $ 7,064 $ 7,040 0.3
Operating income (loss) ........... $ 363 $ (467) 177.7
Operating margin .................. 0.9% (1.2)%
Interest income, net .............. $ 427 $ 261 63.6
Other income, net ................. $ 2 $ 384 (99.5)
Income tax provision .............. $ 281 $ 3 9,266.7
Effective income tax rate ......... 35.5% 1.7%
Net earnings ...................... $ 511 $ 175 192.0
Irrigation Equipment Segment (1)
Operating revenues ................ $ 34,142 $ 35,402 (3.6)
Operating income .................. $ 3,780 $ 3,511 7.7
Operating margin .................. 11.1% 9.9%
Diversified Products Segment (1)
Operating revenues ................ $ 5,362 $ 4,365 22.8
Operating income .................. $ 799 $ 315 153.7
Operating margin .................. 14.9% 7.2%
(1) Excludes unallocated general & administrative and engineering &
research expenses
FOR THE THREE-MONTHS ENDED NOVEMBER 30, 2005
REVENUES
Operating revenues for the three-months ended November 30, 2005 were $39.5
million as compared to $39.8 million for the year-ago period. Revenues for the
first quarter of fiscal 2006 were near the prior year levels; however, they were
negatively impacted by decreases in both domestic and international irrigation
revenues partially offset by an increase in diversified manufacturing revenues.
18
Domestic irrigation revenues of $23.2 million declined $0.8 million or
3 percent from the same prior year period. Commodity prices for the primary
agricultural commodities on which our equipment is used, continued to be mixed,
relative to the same quarter last year. At the end of the quarter, corn prices
were down 3-4 percent while soybean and cotton prices were up approximately 8
percent and 15 percent, respectively. Ending stocks for corn and soybeans, after
the 2005 harvest, were recently projected higher by the USDA due to lower than
expected export demand. According to USDA estimates, with low crop prices,
agricultural subsidies will likely comprise more than 27 percent of Net Cash
Farm Income as compared to roughly 16 percent of Net Cash Farm Income the year
before. In addition, high costs for fuel and fertilizer have pushed input costs
higher for farmers. For many growers, the higher percentage of income from
subsidies versus crop receipts and the higher input costs in general lead them
to a conservative stance regarding capital equipment purchases at this time.
International irrigation equipment revenues for the three-months ended
November 30, 2005 of $11.0 million decreased $0.5 million or 4 percent as
compared to the same prior year period. The international markets are impacted
by many of the same conditions as the domestic market. Farmers in most of the
major international agricultural markets were impacted by the low commodity
prices and higher energy related input costs.
Diversified manufacturing revenues for the three-months ended November
30, 2005 of $5.4 million increased $1.0 million or 23 percent from the same
prior year period. The Company continues to realize strong revenues in our
contract manufacturing business, and has also achieved improved margins. In
addition, commercial tubing sales increased for the quarter, driven by overall
strength in the industrial sector. The Company continues the initiative of
developing new customer relationships for our diversified manufacturing business
in industries outside of agriculture and irrigation.
GROSS MARGIN
Gross margin of $7.4 million increased to 18.8 percent from 16.5 percent a year
ago. Improved factory performance along with lower material costs were primary
contributors to the higher margins.
OPERATING EXPENSES
Operating expenses of $7.1 million were flat as compared to the same prior year
period. Higher audit and Sarbanes-Oxley Act compliance related expenses were
offset by overall expense reductions made in response to the decrease in product
demand. Additionally, the Company adopted SFAS 123(R) in the quarter, which
requires expensing stock-based compensation. The adoption of SFAS 123(R)
increased operating expenses by $331,000 pre-tax.
NET EARNINGS
Net earnings were $511,000 or $.04 per diluted share, for the three-months ended
November 30, 2005, compared with $175,000, or $.01 per diluted share, for the
same prior year period. The adoption of SFAS 123(R) had a negative net of tax
effect on earnings of $244,000 or $0.02 per diluted share.
INTEREST INCOME, OTHER INCOME, AND TAXES
Net interest income during the three-months ended November 30, 2005 of $427,000
increased 62 percent from the $341,000 earned during the same period of fiscal
2004. The increase is primarily the result of increased interest income from
higher interest rates when compared to the average interest rate earned in the
prior year period.
Other income, net during the three-months ended November 30, 2005 of
$2,000 decreased $382,000 when compared to the same period in fiscal 2005. This
decrease primarily resulted from the loss of other income from a 39% minority
ownership in the Canadian dealership due to the sale of this interest on
September 1, 2005. In addition, the Company incurred a foreign currency
translation loss of $71,000 as compared to a $182,000 gain in the prior year
period.
The income tax provision for the three-months ended November 30, 2005
increased $278,000 when compared to the same period in 2004. The annual expected
effective tax rate for the income tax provision for the year ended August 31,
2006 is expected to be between 31% and 32%. The effective tax rate for the
income tax provision for the three month period ended November 30, 2005 was
35.5%. The first quarter fiscal 2006 tax rate was higher than the annual
expected tax rate due to a state tax penalty paid during the period. The, first
quarter fiscal 2005 effective tax rate was 1.7%, which was lower than the
expected annual tax rate due to higher deductions experienced during the first
quarter of fiscal 2005. 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 on its investment
portfolio.
19
SHARE-BASED COMPENSATION EXPENSE
On September 1, 2005, the Company adopted SFAS 123(R), which requires
the measurement and recognition of compensation expense for all share-based
payment awards made to the Company's employees and directors. The following
table summarizes share-based compensation expense under SFAS 123(R) for the
three months ended November 30, 2005:
$ IN THOUSANDS
- --------------
THREE MONTHS
ENDED
NOVEMBER 30,
2005
------------
Share-based compensation expense included in cost of operating revenues ........ $ 25
Research and development ....................................................... 21
Sales and marketing ............................................................ 71
General and administrative ..................................................... 239
-----
Share-based compensation expense included in operating expenses ............. 331
-----
Total Share-based compensation expense ......................................... 356
-----
Tax benefit ................................................................. (112)
-----
Share-based compensation expense, net of tax ................................... $ 244
=====
The share-based compensation expense is allocated based on the relative
compensation split of individuals receiving share-based compensation. Total
expected share-based compensation for fiscal 2006 is approximately $1.5 million
pre-tax (approximately $0.10 per diluted share after tax) for grants made as of
January 6, 2006.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires cash for financing its receivables and inventories, paying
operating costs and capital expenditures, and for dividends. The Company may
also use cash to finance business acquisitions and additional stock repurchases
from time to time. 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 $49.3 million at
November 30, 2005, $43.6 million at November 30, 2004, and $54.8 million at
August 31, 2005. The Company's marketable securities consist primarily of
investment-grade municipal bonds.
Cash flows used by operations totaled $4.0 million during the
three-months ended November 30, 2005, compared to $10.5 million used in
operations during the same prior year period. The $6.4 million decrease in cash
flows used by operations was primarily due to a $2.0 million decrease in cash
used by inventory, $1.0 million increase in cash provided by current taxes
payable, and $1.9 million increase in cash provided by accounts payable. The
improvements in cash flows used by operations were a result of improved working
capital.
Cash flows provided by investing activities totaled $991,000 during the
three-months ended November 30, 2005 compared to cash flows provided by
investing activities of $6.4 million during the same prior year period. Cash
flows provided by investing activities decreased by $5.4 million compared to the
same prior year period primarily due to lower proceeds from maturities and sales
of marketable securities and lower purchases of property, plant and equipment.
Capital expenditures were $819,000 during the three-months ended
November 30, 2005 compared to $1.3 million during the same prior year period.
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.
20
Cash flows used in financing activities totaled $682,000 during the
three-months ended November 30, 2005 compared to $607,000 during the same prior
year period. The increase in cash used for the three-months ended November 30,
2005 as compared to the same prior year period, is primarily the result of an
increase in dividends paid.
The Company had an unsecured revolving line of credit which expired on
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. The Company has not borrowed under the revolving line of credit.
Under the terms of the line of credit, borrowings, if any, would have borne
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
(6.0% at November 30, 2005). The Company may arrange credit facilities when
needed.
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$2.7 million, for working capital
purposes. As of November 30, 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 (3.6% at November 30, 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.
OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes in our off balance sheet arrangements as
described on page 18 in our Form 10-K for the fiscal year ended August 31, 2005.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
There have been no material changes in our contractual obligations and financial
commitments as described on page 18 in our Form 10-K for the fiscal year ended
August 31, 2005.
MARKET CONDITIONS AND FISCAL 2006 OUTLOOK
In spite of low agricultural commodity prices, higher farm input costs and a
reduction in drought conditions in the United States, industry market demand for
irrigation equipment is expected to be slightly higher than fiscal 2005. The
Company expects diversified manufacturing to remain strong for fiscal 2006 due
to the continued expansion and investment in this business segment. Management
believes it has taken appropriate actions to control operating expenses for
fiscal 2006.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments, addresses the determination as to when
an investment is considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. This FSP also includes
accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognize as other-than-temporary
impairments. The Company will adopt this FSP in the second quarter of fiscal
2006 and is evaluating the impact this FSP will have on the Company's financial
position and net income.
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, and the Company will adopt this pronouncement in the
first quarter of fiscal 2007. The Company does not expect this pronouncement to
have a material impact on the Company's financial position and net income.
ITEM 3 - 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
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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.
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an
evaluation under the supervision and the participation of the Company's
management, including the Company's Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rules
13a-15(e) and 15d-15(e). Based upon that evaluation, the CEO and CFO concluded
that the Company's disclosure controls and procedures were effective as of
November 30, 2005.
Additionally, the CEO and CFO determined that there have been no
significant changes to the Company's internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1 - 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. 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.
ITEM 1A - RISK FACTORS
There have been no material changes in our risk factors as described on pages 7
& 8 in our Form 10-K for the fiscal year ended August 31, 2005.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company made no repurchases of its common stock under the Company's stock
repurchase plan during the three months ended November 30, 2005; therefore,
tabular disclosure is not presented. From time to time, the Company's Board of
Directors has authorized management to repurchase shares of the Company's common
stock. Most recently, during August 2000, the Company announced a 1.0 million
share increase in the number of shares authorized for repurchase. 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 3 - DEFAULTS UPON SENIOR SECURITIES
None
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS
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) of the Company's 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.
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.
23
SIGNATURE
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 9th day of
January 2006.
LINDSAY MANUFACTURING CO.
By: /s/ DAVID B. DOWNING
-----------------------------------
Name: David B. Downing
Title: Vice President, Chief Financial Officer
(Principal Financial Officer)
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