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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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[ ]
As of January 9, 2004, 11,756,188 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, 2003 and 2002,
and August 31, 2003 3
Consolidated Statements of Operations for the three-months
ended November 30, 2003 and 2002 4
Consolidated Statements of Cash Flows for the three-months
ended November 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6-12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION 13-16
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 17
ITEM 4 -- CONTROLS AND PROCEDURES 17
PART II -- OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 18
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURE 19
2
PART I -- FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
LINDSAY MANUFACTURING CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2003 AND 2002 AND AUGUST 31, 2003
(UNAUDITED) (UNAUDITED)
NOVEMBER NOVEMBER AUGUST
($ IN THOUSANDS, EXCEPT PAR VALUES) 2003 2002 2003
- ----------------------------------- ---- ---- ----
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 6,263 $ 3,906 $ 15,368
Marketable securities................................................... 5,730 15,279 8,770
Receivables............................................................. 29,691 28,589 22,970
Inventories............................................................. 21,728 18,736 20,019
Deferred income taxes................................................... 2,398 1,686 2,301
Other current assets.................................................... 1,538 1,175 1,010
------------ ------------ ------------
Total current assets.................................................... 67,348 69,371 70,438
Long-term marketable securities........................................... 43,971 27,333 38,674
Property, plant and equipment, net........................................ 14,157 14,453 13,889
Other noncurrent assets................................................... 8,259 7,905 8,219
------------ ------------ ------------
Total assets.............................................................. $ 133,735 $ 119,062 $ 131,220
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 10,172 $ 9,822 $ 8,228
Other current liabilities............................................... 15,020 13,917 16,053
------------ ------------ ------------
Total current liabilities............................................... 25,192 23,739 24,281
Pension benefits liability................................................ 2,315 1,688 2,315
Other noncurrent liabilities.............................................. 632 420 333
------------ ------------ ------------
Total liabilities......................................................... 28,139 25,847 26,929
------------ ------------ ------------
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, 17,475,748, 17,452,621 and 17,459,561 shares
issued in November 2003 and 2002, and August 2003, respectively)...... 17,476 17,453 17,460
Capital in excess of stated value....................................... 2,574 2,454 2,484
Retained earnings....................................................... 174,840 164,047 174,333
Less treasury stock, (at cost, 5,724,069 shares)........................ (89,898) (89,898) (89,898)
Accumulated other comprehensive gain (loss)............................. 604 (841) (88)
------------ ------------ ------------
Total shareholders' equity................................................ 105,596 93,215 104,291
------------ ------------ ------------
Total liabilities and shareholders' equity................................ $ 133,735 $ 119,062 $ 131,220
============ ============ ============
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, 2003 AND 2002
(UNAUDITED)
THREE MONTHS ENDED
----------------------------
NOVEMBER NOVEMBER
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002
- ---------------------------------------- ---- ----
Operating revenues......................................... $ 36,513 $ 33,462
Cost of operating revenues................................. 29,159 26,451
------------ ------------
Gross profit............................................... 7,354 7,011
------------ ------------
Operating expenses:
Selling expense.......................................... 2,867 2,640
General and administrative expense....................... 2,993 2,578
Engineering and research expense......................... 760 598
------------ ------------
Total operating expenses................................... 6,620 5,816
------------ ------------
Operating income........................................... 734 1,195
Interest income, net....................................... 424 423
Other income, net.......................................... 449 96
------------ ------------
Earnings before income taxes............................... 1,607 1,714
Income tax provision....................................... 514 521
------------ ------------
Net earnings............................................... $ 1,093 $ 1,193
============ ============
Basic net earnings per share............................... $ 0.09 $ 0.10
============ ============
Diluted net earnings per share............................. $ 0.09 $ 0.10
============ ============
Average shares outstanding................................. 11,741 11,713
Diluted effect of stock options............................ 224 217
------------ ------------
Average shares outstanding assuming dilution............... 11,965 11,930
============ ============
Cash dividends per share................................... $ 0.050 $ 0.035
============ ============
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, 2003 AND 2002
(UNAUDITED)
NOVEMBER NOVEMBER
($ IN THOUSANDS) 2003 2002
- ---------------- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................................... $ 1,093 $ 1,193
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization........................................... 774 871
Amortization of marketable securities premiums (discounts), net......... 40 (43)
Loss on sale of property, plant and equipment........................... 8 -
Provision for uncollectible accounts receivable......................... (60) (60)
Equity in net (earnings) loss of equity method investments.............. 7 (178)
Deferred income taxes................................................... (135) (225)
Other, net.............................................................. (27) 264
Changes in assets and liabilities:
Receivables............................................................. (6,214) (5,264)
Inventories............................................................. (1,186) (3,153)
Other current assets.................................................... (564) (393)
Accounts payable........................................................ 1,080 3,754
Other current liabilities............................................... (935) (867)
Current taxes payable................................................... (201) 1,144
Other noncurrent assets and liabilities................................. 559 (509)
------------ ------------
Net cash used in operating activities...................................... (5,761) (3,466)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................................. (721) (784)
Proceeds from sale of property, plant and equipment........................ 11 -
Purchases of marketable securities held to maturity........................ (2,982) (4,324)
Proceeds from maturities of marketable securities held to maturity......... 2,785 460
Purchases of marketable securities available for sale...................... (3,288) -
Proceeds from maturities of marketable securities available for sale....... 1,315 -
------------ ------------
Net cash used in investing activities...................................... (2,880) (4,648)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under stock option plan............. 110 5
Dividends paid............................................................. (586) (410)
------------ ------------
Net cash used in financing activities...................................... (476) (405)
------------ ------------
Effect of exchange rate changes on cash.................................... 12 -
Net decrease in cash and cash equivalents.................................. (9,105) (8,519)
Cash and cash equivalents, beginning of period............................. 15,368 12,425
------------ ------------
Cash and cash equivalents, end of period................................... $ 6,263 $ 3,906
============ ============
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, 2003.
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. Certain reclassifications have been made to prior
financial statements and notes to conform to the current presentation.
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) 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 income 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 THREE MONTHS ENDED
--------------------------
NOVEMBER NOVEMBER
$ IN THOUSANDS 2003 2002
- --------------
Net earnings, as reported.......................................... $ 1,093 $ 1,193
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects...................................... 323 263
---------- ----------
Proforma net earnings.............................................. $ 770 $ 930
========== ==========
Earnings per share:
Basic-as reported............................................... $ 0.09 $ 0.10
Basic-pro forma................................................. $ 0.07 $ 0.08
Diluted-as reported............................................. $ 0.09 $ 0.10
Diluted-pro forma............................................... $ 0.06 $ 0.08
6
(3) CASH EQUIVALENTS, MARKETABLE SECURITIES AND LONG-TERM MARKETABLE SECURITIES
The Company considers all investment securities with original maturities of
three-months or less to be cash equivalents. Marketable securities having
original maturities of one year or less, but more than three months, are
classified as current assets. Investment securities with maturities of more than
one year are classified as long-term marketable securities. At November 30,
2003, most of the Company's cash equivalents were money market accounts with a
single financial institution. Marketable securities and long-term marketable
securities consisted of investment-grade municipal bonds. Investment securities
are further classified as either held-to-maturity or available-for-sale.
Investment securities are classified as held-to-maturity when the Company has
both the ability and intent to hold such securities to their scheduled maturity
dates. All other investment securities are classified as available-for-sale. The
Company has not designated any of its investment securities as trading
securities.
Held-to-maturity securities (including all cash equivalents) are
carried at amortized cost. Available-for-sale securities are carried at fair
value and any unrealized appreciation or depreciation in the fair value of
available-for-sale securities is reported in accumulated other comprehensive
income. 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. The Company recorded no impairment losses for
other-than-temporary declines in the fair value of investment securities for the
three months ended November 30, 2003 or 2002. The amortized cost and fair value
of the Company's investment securities classified as held-to-maturity or
available-for-sale are summarized as follows:
$ IN THOUSANDS
- --------------
HELD-TO-MATURITY SECURITIES
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---- ----- ------ ----------
As of November 30, 2003:
Due within one year................................. $ 5,730 $ 61 $ (1) $ 5,790
Due after one year through five years............... 31,578 479 (34) 32,023
---------- ---------- ---------- ----------
$ 37,308 $ 540 $ (35) $ 37,813
========== ========== ========== ==========
As of November 30, 2002:
Due within one year................................. $ 15,279 $ 129 $ - $ 15,408
Due after one year through five years............... 27,333 283 (72) 27,544
---------- ---------- ---------- ----------
$ 42,612 $ 412 $ (72) $ 42,952
========== ========== ========== ==========
As of August 31, 2003:
Due within one year................................. $ 7,453 $ 54 $ (2) $ 7,505
Due after one year through five years............... 29,661 422 (95) 29,988
---------- ---------- ---------- ----------
$ 37,114 $ 476 $ (97) $ 37,493
========== ========== ========== ==========
AVAILABLE-FOR SALE SECURITIES
As of November 30, 2003:
Due within one year................................. $ - $ - $ - $ -
Due after one year through five years............... 12,354 74 (35) 12,393
---------- ---------- ---------- ----------
$ 12,354 $ 74 $ (35) $ 12,393
========== ========== ========== ==========
As of November 30, 2002:
Due within one year................................. $ - $ - $ - $ -
Due after one year through five years............... - - - -
---------- ---------- ---------- ----------
$ - $ - $ - $ -
========== ========== ========== ==========
As of August 31, 2003:
Due within one year................................. $ 1,325 $ - $ (8) $ 1,317
Due after one year through five years............... 9,092 - (79) 9,013
---------- ---------- ---------- ----------
$ 10,417 $ - $ (87) $ 10,330
========== ========== ========== ==========
7
(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 2003 2002 2003
- --------------- ---- ---- ----
First-in, first-out (FIFO) inventory.. $ 16,423 $ 17,497 $ 15,821
LIFO reserves......................... (2,494) (3,153) (2,494)
---------- ---------- ----------
LIFO inventory........................ 13,929 14,344 13,327
Weighted average inventory............ 8,315 4,801 7,258
Obsolescence reserve.................. (516) (409) (566)
---------- ---------- ----------
Total inventories..................... $ 21,728 $ 18,736 $ 20,019
========== ========== ==========
The estimated percentage distribution between major classes of inventory before
reserves is as follows:
NOVEMBER NOVEMBER AUGUST
2003 2002 2003
---- ---- ----
Raw materials......................... 20% 10% 18%
Work in process....................... 10% 4% 5%
Finished goods and purchased parts.... 70% 86% 77%
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation, as follows:
NOVEMBER NOVEMBER AUGUST
$ IN THOUSANDS 2003 2002 2003
- -------------- ---- ---- ----
Property, plant and equipment:
Land.................................... $ 336 $ 336 $ 336
Buildings............................... 9,393 9,074 9,319
Equipment............................... 37,548 35,775 36,957
Other................................... 3,076 2,988 2,654
---------- ---------- ----------
Total property, plant and equipment.......... 50,353 48,173 49,266
Accumulated depreciation and amortization.... (36,196) (33,720) (35,377)
---------- ---------- ----------
Property, plant and equipment, net........... $ 14,157 $ 14,453 $ 13,889
========== ========== ==========
(6) CREDIT ARRANGEMENTS
The Company has an unsecured revolving line of credit with a commercial bank
under which it can borrow up to $10 million through January 31, 2004. Proceeds
from this line of credit, if any, may be used for working capital and general
corporate purposes, including stock repurchases. There have been no borrowings
made under the revolving 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 (4.00% at
November 30, 2003). The Base Rate will not be less than 4.00%. The Company
expects to renew this line of credit on substantially similar terms at the
expiration of its term.
8
(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
which have an exercise price below the market price of the Company's common
shares during the period.
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 had an exercise price exceeding than the average market price
of the Company's common shares during the period, as set forth in the following
table:
11/30/03 11/30/02
------------------------------------------------- -------------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES PRICE EXPIRE SHARES PRICE EXPIRE
------ ----- ------ ------ ----- ------
148,250 $25.84 November, 2007- 203,562 $25.97 September, 2007-
======= ====== May, 2012 ======= ====== May, 2012
(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, hose reel irrigation systems, and related
control and ancillary equipment.
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 financial
statements included in the Form 10-K for the fiscal year ended August 31, 2003.
The Company evaluates the performance of its operating segments based on segment
sales, gross profit, and operating income. Operating income for segment
reporting purposes includes selling expenses and other overhead charges directly
attributable to the segment but does not include unallocated general and
administrative expenses (which include corporate expenses), engineering and
research expenses, interest income net, other income and expenses and net income
taxes. There are no inter-segment sales. Because the Company utilizes common
operating assets for its irrigation and diversified segments, it is not
practical to identify assets by reportable segment. Similarly, other segment
reporting proscribed by SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", is not shown as this information cannot 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 for any period reported.
9
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
FOR THE THREE MONTHS ENDED
--------------------------
NOVEMBER NOVEMBER
$ IN THOUSANDS 2003 2002
- -------------- ------- -------
Operating revenues:
Irrigation.................................. $33,970 $30,631
Diversified products........................ 2,543 2,831
------- -------
Total operating revenues 36,513 33,462
======= =======
Operating income:
Irrigation.................................. 4,240 4,080
Diversified products........................ 247 291
------- -------
Segment operating income 4,487 4,371
Unallocated general & administrative and
engineering & research expenses............. 3,753 3,176
Interest and other income, net................. 873 519
------- -------
Earnings before income taxes................... $ 1,607 $ 1,714
======= =======
(9) OTHER NONCURRENT ASSETS
NOVEMBER NOVEMBER AUGUST
$ IN THOUSANDS 2003 2002 2003
- --------------- ---- ---- ----
Cash surrender value of life insurance policies .. $1,836 $1,723 $1,813
Deferred income taxes ............................ 1,637 1,112 1,599
Equity method investments ........................ 1,430 1,489 1,437
Goodwill, net .................................... 1,194 1,130 1,174
Split dollar life insurance ...................... 914 894 913
Intangible pension assets ........................ 442 511 442
Other intangibles, net ........................... 532 686 574
Other ............................................ 274 360 267
------ ------ ------
Total noncurrent assets .......................... $8,259 $7,905 $8,219
====== ====== ======
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, tradenames, 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 assets at August 31, 2003 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 assets was $42,000 and $17,000 for the three-months ended November 30,
2003 and 2002, respectively. The following table summarizes the Company's other
intangible assets:
NOVEMBER NOVEMBER AUGUST
$ IN THOUSANDS 2003 2002 2003
- --------------- ---- ---- ----
Non-compete agreements ...... $ 358 $ 358 $ 358
Tradenames .................. 147 163 147
Patent ...................... 100 100 100
Plans and specifications .... 77 77 77
Other ....................... 30 30 30
Accumulated amortization .... (180) (42) (138)
----- ----- -----
Total other intangible, net.. $ 532 $ 686 $ 574
===== ===== =====
10
(10) COMPREHENSIVE INCOME
The accumulated other comprehensive gain 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
--------------------------
$ IN THOUSANDS NOVEMBER NOVEMBER
- -------------- 2003 2002
---- ----
Comprehensive Income:
Net earnings .................... $1,093 $1,193
Other comprehensive income:
Unrealized gains on securities .. 126 -
Foreign currency translation .... 566 73
------ ------
Total comprehensive income ......... $1,785 $1,266
====== ======
(11) 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 amount of estimated maximum potential
future payments for each major group of the Company's guarantees:
NOVEMBER
$ IN THOUSANDS 2003
- -------------- ----
Guarantees for customer equipment financing ......... $3,900
Guarantees on third party debt of equity investment.. 700
Product warranties .................................. N/A
------
Total guarantees .................................... $4,600
======
Effective January 1, 2003, the Company adopted FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Other (the "Interpretation"). The
Interpretation requires the guarantor to recognize a liability for the estimated
value of such guarantee.
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 $78,000 for the three-months ended
November 30, 2003 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 $302,000, 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 $1.7 million as of November 30, 2003.
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 original loan amount financed or the total equipment cost related
to a lease.
Separately, the Company maintains limited, specific customer financing
recourse arrangements with three financial institutions including the
institution referred to above. The original amount of existing specific
guarantees is approximately $2.2 million at November 30, 2003. 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. In
some cases, the guarantee may cover all scheduled payments of a loan.
11
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 has guaranteed three bank loans and a standby letter of credit of an
irrigation business in which the Company holds a minority equity investment. The
bank loan guarantees continue until the loan principal, including accrued
interest and fees have been paid in full. The bank loans mature in July 2004,
December 2006, and February 2007. The standby letter of credit expires in
December 2003. As of November 30, 2003, the maximum amount associated with the
guarantees and letter of credit was approximately $700,000. The majority owner
of the business provides a separate personal guarantee of the bank loans.
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 2003 2002
- -------------- ---- ----
Product warranty accrual balance, September 1 ...... $ 1,152 $ 1,266
Liabilities accrued for warranties
during the period .................................. 425 393
Warranty claims paid during the period ............. (434) (385)
------- -------
Product warranty accrual balance, November 30 ...... $ 1,143 $ 1,274
======= =======
12
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 "Fiscal 2004
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, 2003.
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 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. These critical accounting
policies are described in Note A to the Consolidated Financial Statements in the
Company's Form 10-K for fiscal 2003. Management periodically re-evaluates and
adjusts its critical accounting policies as circumstances change. However, there
were no significant changes in the Company's critical accounting policies during
the three-months ended November 30, 2003.
13
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, 2003 compared to three-months ended November 30,
2002. It should be read together with the industry segment information in Note 8
to the financial statements:
FOR THE THREE MONTHS ENDED
--------------------------
PERCENT
NOVEMBER NOVEMBER INCREASE
($ IN THOUSANDS) 2003 2002 (DECREASE)
- ---------------- ---- ---- ----------
Consolidated
Operating revenues ....... $36,513 $33,426 9.1%
Cost of operating revenues $29,159 $26,451 10.2
Gross profit ............ $ 7,354 $ 7,011 4.9
Gross margin ............. 20.1% 21.0%
Operating Expenses ....... $ 6,620 $ 5,816 13.8
Operating income ......... $ 734 $ 1,195 (38.6)
Operating margin ......... 2.0% 3.6%
Interest income, net ..... $ 424 $ 423 (0.2)
Other income, net ....... $ 449 $ 96 367.7
Income tax provision ..... $ 514 $ 521 (1.3)
Effective income tax
rate...................... 32.0% 30.4%
Net earnings ............. $ 1,093 $ 1,193 (8.4)
Irrigation Equipment Segment
Operating revenues ....... $33,970 $30,631 10.9
Operating income ......... $ 4,240 $ 4,080 3.9
Operating margin ......... 12.5% 13.3%
Diversified Products Segment
Operating revenues ...... $ 2,543 $ 2,831 (10.2)
Operating income ......... $ 247 $ 291 (15.1)
Operating margin ......... 9.7% 10.3%
REVENUES
Operating revenues for the three-months ended November 30, 2003 increased by
$3.1 million or 9% over the same prior year period. This increase was primarily
attributable to improved domestic irrigation equipment revenues, which increased
by $3.0 million or 14% over the same prior year period. Revenues remained strong
in most of the Midwest market and improved in the Northwest market, after a
downturn last year. Our domestic irrigation revenues are influenced by current
and anticipated levels of net cash farm income. Conditions have been generally
favorable in many of the Company's domestic markets due to stable or increasing
prices for many farm commodities (including corn, wheat, soybeans and cotton)
and anticipated strength in these commodities based on projected ending stock
levels. Other factors, such as continued low interest rates, additional
first-year depreciation for capital investments, and stable land values also
contributed to increased revenues from domestic irrigation sales.
International irrigation equipment revenues for the three-months ended
November 30, 2003 increased by $296,000 or 3% compared to the same prior year
period. These revenues include both the export sales of equipment manufactured
in the United States and the sales of the Company's manufacturing operations in
France, Brazil and South Africa. Revenues from these foreign operations
increased $1.5 million or 41% over the same prior year period. Approximately 50%
of the increase in revenues from foreign operations reflects the strengthening
of the Euro, Brazilian Real, and the South African Rand against the U.S. dollar.
The increase in revenues from the Company's foreign operations was partially
offset by a $1.0 million decrease in revenues from export sales. This decrease
was largely due to lower sales in the Middle East region because of the war in
Iraq and general political unrest in the region. In total, international
irrigation revenues for the three-months ended November 30, 2003, equaled 26.4%
of total revenues, compared to 27.9% of revenues in the same prior year period.
14
Diversified manufacturing revenues for the three-months ended November
30, 2003 decreased $288,000 or 10% compared to the same prior year period.
Revenues in this segment depend to a large degree on orders from a relatively
small number of customers. During the quarter, one particular customer delayed
shipments that had been originally scheduled for delivery during the
three-months ended November 30, 2003, accounting for most of the decrease in
revenues in this segment compared to the same prior year period.
GROSS MARGIN
The Company's gross margin decreased to 20.1% in the three-months ended November
30, 2003 from 21.0% for the same prior year period. Margins were lower due to
the mix of center pivot sales in the United States and due to higher steel
costs. Gross margin was also reduced by a shift in the revenue mix between
domestic sales and international sales. Revenues from the Company's foreign
operations, which currently have lower gross margins than its U.S. operations,
increased to 14% of total sales for the quarter compared with 11% of sales in
the same prior year period. The Company's gross margins for the quarter ended
November 30 are typically lower than the full year gross margins due to seasonal
promotional and pricing programs.
OPERATING MARGIN
The Company's operating margin decreased to 2.0%, during the three-months ended
November 30, 2003, from 3.6% for the same prior year period. This decrease is a
direct result of an $804,000 (14%) increase in the Company's operating expenses
during three months ended November 30, 2003. This increase reflects a $415,000
(16%) increase in general and administrative expenses and a $227,000 (9%)
increase in selling expenses compared to the prior period. Higher health
insurance costs and the operation of the Company's South African facility for a
full quarter in 2003 were major contributors to these cost increases. In
addition, engineering and research expense increased by $162,000 (27%)
reflecting higher investments by the Company in new product development. The
Company expects its operating margins to improve for the remainder of fiscal
2004 as it leverages operating expenses over higher sales volumes.
INTEREST INCOME, OTHER INCOME AND TAXES
Interest income during the three-months ended November 30, 2003 of $424,000 was
comparable to the same prior year period.
Other income during the three-months ended November 30, 2003 increased
by $353,000 over the same prior year period, primarily reflecting higher foreign
currency transaction gains associated with the strengthening of the EURO and
South African Rand against the U.S. dollar.
The effective tax rate during the three-months ended November 30, 2003
was 32.0% compared to 30.4% for the same prior year period. The increased
effective tax rate reflects a combination of higher statutory tax rates
applicable to the Company and the lower mix of tax-exempt interest income to
total earnings before income taxes. The Company benefits from an effective tax
rate which is lower than the combined federal and state statutory rates
primarily due to the federal tax-exempt status of interest income from its
municipal bond investments.
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. Cash flows
used in operations totaled $5.7 million in three-months ended November 30, 2003
compared to $3.5 million during the same prior year period.
Cash flows used in investing activities of $2.9 million for the
three-months ended November 30, 2003 compared to $4.7 million for the same prior
year period. The cash flows used in investing activities were primarily
attributable to purchases of marketable securities and capital expenditures,
partially offset by proceeds from the maturity of marketable securities. Capital
expenditures were $743,000 during the three-months ended November 30, 2003
compared to $784,000 during the same prior year period. Capital expenditures
were used primarily for updating manufacturing plant and equipment and further
automating the Company's facilities. Capital expenditures for fiscal 2004 are
expected to be approximately $3.0 to $4.0 million and will be used to improve
the Company's facilities, expand its manufacturing capabilities, and increase
productivity. The Company may also use cash to finance business acquisitions and
stock repurchases from time to time.
15
The Company has an unsecured revolving line of credit with a commercial
bank under which it can borrow up to $10 million through January 31, 2004.
Proceeds from this line of credit, if any, may be used for working capital and
general corporate purposes, including stock repurchases. There have been no
borrowings made under the revolving 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
(4.00% at November 30, 2003). The Base Rate will not be less than 4.00%. The
Company expects to renew this line of credit on substantially similar terms at
the expiration of its term.
The Company's cash and marketable securities totaled $56.0 million at
November 30, 2003, $62.8 million at August 31, 2003 and $46.5 million at
November 30, 2002. The Company's marketable securities consist primarily of
tax-exempt high-grade municipal debt.
The Company believes its current cash resources (including cash and
marketable securities balances), projected operating cash flow, and bank line of
credit are sufficient to cover all of its expected working capital needs,
planned capital expenditures, dividends, and other cash needs.
FISCAL 2004 OUTLOOK
In total, for fiscal 2004, management continues to anticipate low double-digit
growth in net earnings on revenue growth of approximately 8 to 10 percent,
excluding acquisitions. Management anticipates strong sales in U.S. markets. The
Company's sales order backlog is excellent and market conditions remain
relatively solid. Management expects to continue to grow sales through its new
foreign operations and to improve export sales. Management views the
international markets as its most significant opportunity to improve sales
margins for the current and future fiscal years.
Management believes it has actions in place to improve margins, reduce
inventories and control expenses in fiscal 2004. While price increases in steel
and natural gas will continue to present challenges during fiscal 2004,
management expects to be able to pass much of these cost increases through to
its customers.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). A
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that does not have equity investors
with voting rights, or has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns,
or both. In December 2003, the FASB issued Interpretation No. 46R, a revision of
Interpretation No. 46. The Company will adopt FIN 46 and FIN 46R during fiscal
2004 and is currently evaluating the potential impact of adopting this standard
on the Company's financial statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). For public entities, this Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. In November 2003, the implementation of certain components
of SFAS No. 150 was deferred. The adoption of this standard did not have an
effect on the Company's financial position or net income.
In March 2003, the Emerging Issues Task Force ("EITF") reached
consensus on EITF 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables". This guidance addresses the determination of whether an
arrangement involving multiple deliverables contains more than one unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The implementation of EITF 00-21
did not have a material impact on the Company's financial statements.
In November 2003, the Emerging Issues Task Force ("EITF") reached
consensus on EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments". EITF 03-1 provides guidance on the new
requirements for other-than-temporary impairment and its application to debt and
marketable equity investments that are accounted for under SFAS No. 115. The new
requirements are effective for fiscal years ending after December 15, 2003. The
implementation of EITF 03-1 is not anticipated to have a material impact on the
Company's financial statements.
16
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
portfolio of investment securities for two reasons. First, the average maturity
of these securities is relatively short and this makes the value of these
securities less susceptible to interest rate fluctuations. Second, most of the
securities held by the Company are classified as "held to maturity" marketable
securities because the Company intends, and has the ability, to hold these
securities until they are paid off at face value at maturity. Since the Company
does not anticipate selling these securities, the fluctuations in the market
value of these securities does not affect the Company's earnings or assets.
The Company has manufacturing operations in the United States, France,
Brazil, and South Africa. The Company has sold products in over 90 countries
throughout the world and purchases a portion 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 the
currency of the customer location. 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.
ITEM 4 -- CONTROLS AND PROCEDURES
Based upon their evaluation of the effectiveness of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e), management, including the Chief Executive Officer and Chief
Financial Officer, concluded that the Company's disclosure controls and
procedures were effective as of November 30, 2003.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
November 30, 2003 through the date of this Quarterly Report on Form 10-Q,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
17
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. 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.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 April 28, 2000, incorporated by reference to
Exhibit 3(b) of the Company's Annual Report on Form 10-K for
the fiscal year ended August 31, 2000.
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.
(b) Reports on Form 8-K
On October 17, 2003, the Company furnished a report on Form 8-K
reporting its results of operations for the year ended August 31, 2003 under
Item 12, Results of Operations and Financial Condition.
18
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 14th day of
January 2004.
LINDSAY MANUFACTURING CO.
By: /s/ BRUCE C. KARSK
-----------------------------------
Name: Bruce C. Karsk
Title: Executive Vice President,
Chief Financial Officer, Treasurer
and Secretary (Principal Financial
Officer)
19