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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 February 28, 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 [ ]
As of April 5, 2005, 11,598,603 shares of the registrant's common stock were
outstanding.
LINDSAY MANUFACTURING CO. AND SUBSIDIARIES
INDEX FORM 10-Q
Page No.
--------
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets, February 28, 2005, February 29, 2004
and August 31, 2004 3
Consolidated Statements of Operations for the three-months and six-months ended
February 28, 2005 and February 29, 2004 4
Consolidated Statements of Cash Flows for the six-months
ended February 28, 2005 and February 29, 2004 5
Notes to Consolidated Financial Statements 6-14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION 15-21
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 21
ITEM 4 - CONTROLS AND PROCEDURES 21
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 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 22
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
FEBRUARY 28, 2005, FEBRUARY 29, 2004 AND AUGUST 31, 2004
(UNAUDITED) (UNAUDITED)
FEBRUARY FEBRUARY AUGUST
($ IN THOUSANDS, EXCEPT PAR VALUES) 2005 2004 2004
----------------------------------- ----------- ----------- ------
ASSETS
Current assets:
Cash and cash equivalents ................................................................. $ 7,571 $ 1,724 $ 8,973
Marketable securities ..................................................................... 11,720 11,733 14,802
Receivables ............................................................................... 35,680 39,761 34,369
Inventories ............................................................................... 29,858 24,829 19,780
Deferred income taxes ..................................................................... 1,288 2,496 1,026
Other current assets ...................................................................... 3,343 1,932 2,422
--------- --------- ---------
Total current assets ...................................................................... 89,460 82,475 81,372
Long-term marketable securities ............................................................. 24,517 36,813 32,527
Property, plant and equipment, net .......................................................... 16,724 14,348 16,355
Other noncurrent assets ..................................................................... 9,158 8,296 8,747
--------- --------- ---------
Total assets ................................................................................ $ 139,859 $ 141,932 $ 139,001
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................................... $ 11,010 $ 12,863 $ 9,117
Other current liabilities ................................................................. 13,849 18,251 15,359
--------- --------- ---------
Total current liabilities ................................................................. 24,859 31,114 24,476
Pension benefits liability .................................................................. 4,664 2,315 2,169
Other noncurrent liabilities ................................................................ 161 163 172
--------- --------- ---------
Total liabilities ........................................................................... 29,684 33,592 26,817
--------- --------- ---------
Shareholders' equity:
Preferred stock, ($1 par value, 2,000,000 shares authorized, no shares issued
and outstanding) ........................................................................ - - -
Common stock, ($1 par value, 25,000,000 shares authorized, 17,521,272, 17,481,879 and
17,493,841 shares issued in February 2005 and 2004 and August 2004, respectively) ....... 17,521 17,482 17,494
Capital in excess of stated value ......................................................... 3,092 2,620 2,966
Retained earnings ......................................................................... 180,700 177,754 181,209
Less treasury stock (at cost, 5,862,569, 5,724,069 and 5,724,069 shares, respectively) .... (93,073) (89,898) (89,898)
Accumulated other comprehensive income .................................................... 1,935 382 413
--------- --------- ---------
Total shareholders' equity .................................................................. 110,175 108,340 112,184
--------- --------- ---------
Total liabilities and shareholders' equity .................................................. $ 139,859 $ 141,932 $ 139,001
========= ========= =========
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 AND SIX-MONTHS ENDED FEBRUARY 28, 2005 AND FEBRUARY
29, 2004
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 2004 2005 2004
---------------------------------------- ---- ---- ---- ----
Operating revenues ...................................... $41,487 $51,475 $81,254 $87,988
Cost of operating revenues .............................. 33,721 39,865 66,915 69,024
------- ------- ------- -------
Gross profit ............................................ 7,766 11,610 14,339 18,964
------- ------- ------- -------
Operating expenses:
Selling expense ....................................... 2,999 2,891 5,746 5,758
General and administrative expense .................... 3,397 3,279 6,994 6,272
Engineering and research expense ...................... 660 676 1,356 1,436
------- ------- ------- -------
Total operating expenses ................................ 7,056 6,846 14,096 13,466
------- ------- ------- -------
Operating income ........................................ 710 4,764 243 5,498
Interest income, net .................................... 295 361 556 785
Other income, net ....................................... 68 41 452 490
------- ------- ------- -------
Earnings before income taxes ............................ 1,073 5,166 1,251 6,773
Income tax provision .................................... 473 1,663 476 2,177
------- ------- ------- -------
Net earnings ............................................ $ 600 $ 3,503 $ 775 $ 4,596
======= ======= ======= =======
Basic net earnings per share ............................ $ 0.05 $ 0.30 $ 0.07 $ 0.39
======= ======= ======= =======
Diluted net earnings per share .......................... $ 0.05 $ 0.29 $ 0.06 $ 0.38
======= ======= ======= =======
Average shares outstanding .............................. 11,710 11,756 11,741 11,749
Diluted effect of stock options ......................... 168 210 188 217
------- ------- ------- -------
Average shares outstanding assuming dilution ............ 11,878 11,966 11,929 11,966
======= ======= ======= =======
Cash dividends per share ................................ $ 0.055 $ 0.050 $ 0.110 $ 0.100
======= ======= ======= =======
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 SIX-MONTHS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004
(UNAUDITED)
FEBRUARY FEBRUARY
($ IN THOUSANDS) 2005 2004
---------------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................................................. $ 775 $ 4,596
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization ......................................... 1,783 1,506
Amortization of marketable securities premiums, net ................... 110 81
Loss on sale of property, plant and equipment ......................... - 6
Provision for uncollectible accounts receivable ....................... 53 129
Equity in net (earnings) losses of equity method investments .......... (230) 196
Deferred income taxes ................................................. (332) (150)
Other, net ............................................................ (50) (52)
Changes in assets and liabilities:
Receivables ........................................................... (427) (16,715)
Inventories ........................................................... (8,914) (4,869)
Other current assets .................................................. (521) (969)
Accounts payable ...................................................... 1,425 4,603
Other current liabilities ............................................. (2,616) 685
Current taxes payable ................................................. 351 1,287
Other noncurrent assets and liabilities ............................... 2,528 40
-------- --------
Net cash used in operating activities .................................... (6,065) (9,626)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ............................... (1,769) (2,047)
Proceeds from sale of property, plant and equipment ...................... 7 11
Purchases of marketable securities held-to-maturity ...................... - (2,982)
Proceeds from maturities or sales of marketable securities
held-to-maturity ......................................................... - 4,496
Purchases of marketable securities available-for-sale .................... (1,841) (3,790)
Proceeds from maturities or sales of marketable securities
available-for-sale ....................................................... 12,360 1,315
-------- --------
Net cash provided by (used in) investing activities ...................... 8,757 (2,997)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock under stock option plan ........... 208 164
Repurchases of common shares ............................................. (3,175) -
Dividends paid ........................................................... (1,284) (1,175)
-------- --------
Net cash used in financing activities .................................... (4,251) (1,011)
-------- --------
Effect of exchange rate changes on cash .................................. 157 (10)
-------- --------
Net decrease in cash and cash equivalents ................................ (1,402) (13,644)
Cash and cash equivalents, beginning of period ........................... 8,973 15,368
-------- --------
Cash and cash equivalents, end of period ................................. $ 7,571 $ 1,724
======== ========
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, 2004.
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) STOCK BASED COMPENSATION
The Company maintains a stock option plan and accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Net earnings does not reflect stock-based employee
compensation cost as all options granted under this plan had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation", to stock-based employee
compensation.
FOR THE THREE-MONTHS ENDED FOR THE SIX-MONTHS ENDED
FEBRUARY FEBRUARY FEBRUARY FEBRUARY
$ IN THOUSANDS 2005 2004 2005 2004
- ---------------------------------------------------------------- -------- -------- -------- --------
Net earnings, as reported....................................... $ 600 $ 3,503 $ 775 $ 4,596
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects................................... 361 305 722 628
-------- -------- -------- --------
Proforma net earnings........................................... $ 239 $ 3,198 $ 53 $ 3,968
======== ======== ======== ========
Earnings per share:
Basic-as reported......................................... $ 0.05 $ 0.30 $ 0.07 $ 0.39
Basic-pro forma........................................... $ 0.02 $ 0.27 $ 0.00 $ 0.34
Diluted-as reported....................................... $ 0.05 $ 0.29 $ 0.06 $ 0.38
Diluted-pro forma......................................... $ 0.02 $ 0.27 $ 0.00 $ 0.33
SFAS No. 123R, (revised December 2004), "Share-Based Payment" sets
accounting requirements for "share-based" compensation to employees, including
employee-stock-purchase-plans (ESPPs) and provides guidance on accounting for
awards to non-employees. This Statement will require the Company to recognize in
the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees, but expresses no preference for a
type of valuation model. For public entities, this Statement is effective for
the first interim or annual reporting period beginning after June 15, 2005. The
Company has historically provided proforma disclosures pursuant to SFAS No. 123
and SFAS No. 148 as if the fair value method of accounting for stock options had
been applied, assuming use of the Black-Scholes option-pricing model and that
all option
6
grants were recorded at fair value. Although not currently anticipated, other
assumptions may be utilized when SFAS No. 123R is adopted. In addition, the
Company will also take into consideration the recently issued Staff Accounting
Bulletin No. 107. The Company will adopt SFAS No. 123R "Share Based-Payment"
during the first quarter of fiscal year 2006. The Company expects that the
adoption of SFAS No 123R will have a negative impact on the Company's
consolidated results of operations.
(3) CASH EQUIVALENTS, MARKETABLE SECURITIES, AND LONG-TERM MARKETABLE SECURITIES
Cash equivalents are included at cost, which approximates market. At February
28, 2005, primarily one financial institution held 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. Following
management's fiscal year 2004 decision to transfer debt securities from the
held-to-maturity portfolio to the available-for-sale portfolio, the Company will
not designate purchases to the held-to-maturity portfolio for a period of at
least two years. 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 six-months ended February 28, 2005 and February 29, 2004. In the
opinion of management, the Company is not subject to material market risks with
respect to its portfolio of investment securities because of the investment
grade quality of the securities and the relatively short maturities of these
securities are making their value less susceptible to interest rate
fluctuations.
Gross realized gains and losses from sale of available-for-sale securities
were $0 for the three-months ended February 28, 2005 and February 29, 2004.
Gross realized gains and losses from sale of available-for-sale securities were
a $5,000 gain and $51,000 loss, respectively, for the six-months ended February
28, 2005 and $0 for the six-months ended February 29, 2004.
Amortized cost and fair value of investments in marketable securities classified
as held-to-maturity or available-for-sale according to management's intent are
summarized as follows:
$ IN THOUSANDS
HELD-TO-MATURITY SECURITIES
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ----------- ----------
As of February 28, 2005:
Due within one year....................................... $ - $ - $ - $ -
Due after one year through five years..................... - - - -
--------- ---------- ----------- ----------
$ - $ - $ - $ -
========= ========== =========== ==========
As of February 29, 2004:
Due within one year....................................... $ 11,733 $ 161 $ - $ 11,894
Due after one year through five years..................... 23,850 373 (7) 24,216
--------- ---------- ----------- ----------
$ 35,583 $ 534 $ (7) $ 36,110
========= ========== =========== ==========
As of August 31, 2004:
Due within one year....................................... $ - $ - $ - $ -
Due after one year through five years..................... - - - -
--------- ---------- ----------- ----------
$ - $ - $ - $ -
========= ========== =========== ==========
7
AVAILABLE-FOR-SALE SECURITIES
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ----------- ----------
As of February 28, 2005:
Due within one year....................................... $ 11,705 $ 26 $ (11) $ 11,720
Due after one year through five years..................... 24,650 21 (154) 24,517
--------- ---------- ---------- ----------
$ 36,355 $ 47 $ (165) $ 36,237
========= ========== ========== ==========
As of February 29, 2004:
Due within one year....................................... $ - $ - $ - $ -
Due after one year through five years..................... 12,828 144 (9) 12,963
--------- ---------- ---------- ----------
$ 12,828 $ 144 $ (9) $ 12,963
========= ========== ========== ==========
As of August 31, 2004:
Due within one year....................................... $ 14,678 $ 124 $ - $ 14,802
Due after one year through five years..................... 32,353 214 (40) 32,527
--------- ---------- ---------- ----------
$ 47,031 $ 338 $ (40) $ 47,329
========= ========== ========== ==========
(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.
FEBRUARY FEBRUARY AUGUST
$ IN THOUSANDS 2005 2004 2004
- ---------------------------------------------------------- -------- -------- --------
Inventory:
First-in, first-out (FIFO) inventory.................... $ 22,610 $ 18,151 $ 16,043
LIFO reserves........................................... (5,333) (2,644) (5,333)
-------- -------- --------
LIFO inventory............................................ 17,277 15,507 10,710
Weighted average inventory.............................. 13,221 9,929 9,597
Obsolescence reserve.................................... (640) (607) (527)
-------- -------- --------
Total inventories......................................... $ 29,858 $ 24,829 $ 19,780
======== ======== ========
The estimated percentage distribution between major classes of inventory before
reserves is as follows:
FEBRUARY FEBRUARY AUGUST
2005 2004 2004
-------- -------- --------
Raw materials............................................. 30% 20% 20%
Work in process........................................... 5% 10% 10%
Finished goods and purchased parts........................ 65% 70% 70%
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation, as follows:
8
FEBRUARY FEBRUARY AUGUST
$ IN THOUSANDS 2005 2004 2004
- ---------------------------------------------------------- -------- -------- --------
Property, plant and equipment:
Land.................................................. $ 336 $ 336 $ 336
Buildings ............................................ 10,460 9,626 10,192
Equipment............................................. 39,866 36,769 38,886
Other............................................... 4,661 3,471 3,954
-------- -------- --------
Total property, plant and equipment....................... 55,323 50,202 53,368
Accumulated depreciation and amortization................. (38,599) (35,854) (37,013)
-------- -------- --------
Property, plant and equipment, net ...................... $ 16,724 $ 14,348 $ 16,355
======== ======== ========
Depreciation expense was $863,000 and $713,000 for the three-months ended
February 28, 2005 and February 29, 2004, respectively, and $1.7 million and $1.5
million for the six-months ended February 28, 2005 and February 29, 2004,
respectively.
(6) CREDIT ARRANGEMENTS
The Company has an agreement with a commercial bank for a $10.0 million
unsecured revolving line of credit through December 28, 2005. Proceeds from this
line of credit, if any, are to be used for working capital and general corporate
purposes including stock repurchases. There have been no borrowings made under
such unsecured revolving line of credit. Under the terms of the line of credit,
borrowings, if any, bear interest at a rate equal to one percent per annum under
the rate in effect from time to time and designated by the commercial bank as
its National Base Rate (5.5% at February 28, 2005). The Company expects to renew
this line of credit on substantially similar terms.
The Company's European subsidiary, Lindsay Europe, has an unsecured
revolving line of credit with a commercial bank under which it could borrow up
to the Euro equivalent of $2.7 million for working capital purposes. As of
February 28, 2005, there was a $2.3 million 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 (4.1% at February 28, 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,
which have an exercise price below the average 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 the average market price of
the Company's common shares during the period, as set forth in the following
table:
FEBRUARY 28, 2005 FEBRUARY 29, 2004
- ------------------------------------------- ----------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES PRICE EXPIRE SHARES PRICE EXPIRE
- ------- ---------------- ---------------- ------ ---------------- --------------
November, 2007-
289,250 $ 25.81 August, 2014 54,000 $ 28.17 November, 2007
======= ======= ====== =======
(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 aggregation criteria of Statement of Financial Accounting Standards
(SFAS) No. 131 "Disclosures about segments of an Enterprise and Related
Information."
9
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, 2004. The Company evaluates the performance of its operating segments
based on segment sales, gross profit, and operating income, with operating
income for segment purposes excluding general and administrative expenses (which
include corporate expenses), engineering and research expenses, interest income
net, other income and expenses, and net income taxes, and assets. Operating
income for segment purposes does include selling expenses and other overhead
charges directly attributable to the segment. There are no inter-segment sales.
Because the Company utilizes common operating assets for its irrigation and
diversified segments, it is not practical to separately identify assets by
reportable segment. Similarly, other segment reporting proscribed by 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 has no single customer representing 10% or more of its total
revenues during the three-months or six-months ended February 28, 2005 or
February 29, 2004, respectively.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
FOR THE THREE-MONTHS FOR THE SIX-MONTHS
ENDED ENDED
----------------------- -----------------------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY
$ IN THOUSANDS 2005 2004 2005 2004
- -------------------------------------------------------------- ---------- ---------- ---------- ----------
Operating revenues:
Irrigation............................................... $ 36,161 $ 48,733 $ 71,563 $ 82,703
Diversified products..................................... 5,326 2,742 9,691 5,285
---------- ---------- ---------- ----------
Total operating revenues...................................... $ 41,487 $ 51,475 $ 81,254 $ 87,988
========== ========== ========== ==========
Operating income:
Irrigation............................................... $ 4,149 $ 8,452 $ 7,660 $ 12,692
Diversified products..................................... 618 267 933 514
---------- ---------- ---------- ----------
Segment operating income...................................... 4,767 8,719 8,593 13,206
Unallocated general & administrative and engineering &
research expenses........................................ 4,057 3,955 8,350 7,708
Interest and other income, net................................ 363 402 1,008 1,275
---------- ---------- ---------- ----------
Earnings before income taxes.................................. $ 1,073 $ 5,166 $ 1,251 $ 6,773
========== ========== ========== ==========
(9) OTHER NONCURRENT ASSETS
FEBRUARY FEBRUARY AUGUST
$ IN THOUSANDS 2005 2004 2004
- -------------------------------------------------------------- -------- -------- --------
Cash surrender value of life insurance policies............... $ 1,945 $ 1,858 $ 1,903
Deferred income taxes ........................................ 1,910 1,554 1,840
Equity method investments .................................... 1,594 1,241 1,364
Goodwill ..................................................... 1,351 1,242 1,254
Split dollar life insurance................................... 916 913 916
Intangible pension assets..................................... 373 442 373
Other intangibles, net........................................ 740 507 472
Other......................................................... 329 539 625
-------- -------- --------
Total noncurrent assets....................................... $ 9,158 $ 8,296 $ 8,747
======== ======== ========
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
10
to achieve these assumptions, impairment losses may be recognized. The Company
completed its annual impairment evaluation of these assets at August 31, 2004
and determined that no impairment losses were indicated. Other intangible assets
that have finite lives are amortized over their realizable lives. During the
first and second quarter of fiscal year 2005, the Company capitalized costs of
$314,000 for software rights purchased from a development company, which will be
marketed to customers. The amortization method for this software is a 3-year
straight-line method. Amortization expense for other intangible assets was
$14,000 and $19,000 for the three-months ended February 28, 2005 and February
29, 2004, respectively, and $53,000 and $50,000 for the six-months ended
February 28, 2005 and February 29, 2004, respectively. The following table
summarizes the Company's other intangible assets:
FEBRUARY FEBRUARY AUGUST
$ IN THOUSANDS 2005 2004 2004
-------------- ---- ---- ----
Other intangible assets:
Non-compete agreements............... $ 396 $ 343 $ 385
Tradenames........................... 145 145 145
Patent............................... 100 100 100
Plans and specifications............. 75 75 75
Software............................. 314 - -
Other ............................... 34 15 31
Accumulated amortization ............... (324) (171) (264)
-------- -------- ------
Total other intangibles assets, net....... $ 740 $ 507 $ 472
======== ======== ======
(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 FOR THE SIX-MONTHS ENDED
-------------------------- ------------------------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY
$ IN THOUSANDS 2005 2004 2005 2004
-------------- -------- --------- -------- --------
Comprehensive income:
Net earnings.............................................. $ 600 $ 3,503 $ 775 $ 4,596
Other comprehensive (loss) income:
Unrealized gains (losses) on securities, net of taxes..... (105) 95 (258) 222
Foreign currency translation.............................. 149 (317) 1,780 248
----- --------- -------- --------
Total comprehensive income..................................... $ 644 $ 3,281 $ 2,297 $ 5,066
===== ========= ======== ========
(11) GUARANTEES
The Company is currently party to guarantee arrangements relating to
dealer/customer financing arrangements, 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:
FEBRUARY FEBRUARY AUGUST
$ IN THOUSANDS 2005 2004 2004
-------------- ---------- -------- ------
Guarantees:
Guarantees for customer equipment financing................. $ 3,100 $ 3,800 $3,700
Guarantees on third party debt of equity investment......... - 700 700
Product warranties.......................................... N/A N/A N/A
--------- -------- ------
Total guarantees................................................. $ 3,100 $ 4,500 $4,400
========= ======== ======
11
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 $64,000 at February 28, 2005,
compared to $69,000 at February 29, 2004 and $83,000 at August 31, 2004,
classified with other current liabilities, for guarantees. The estimated fair
values of these guarantees are based, in large part, on the Company's experience
with this agreement and related transactions. The Company recognizes the revenue
for the 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 $367,000, $319,000, and $290,000 at February 28, 2005, February 29,
2004, and August 31, 2004, respectively, also classified with other current
liabilities, for estimated losses on such guarantees.
The Company maintains an agreement with a single financial institution
that guarantees the financial institution's pool of financing agreements with
end users. This guarantee is approximately $1.5 million at February 28, 2005,
$1.7 million at February 29, 2004, and $1.5 million at August 31, 2004.
Generally, the Company's exposure is limited to unpaid interest and principal
where the first and/or second annual customer payments have not yet been made as
scheduled. The maximum exposure of these limited recourse guarantees is equal to
2.75% of the aggregate amounts originally financed.
Separately, the Company maintains limited, specific customer financing
recourse arrangements with three financial institutions including the
institution referred to above. The original amount of these specific guarantees
is approximately $1.6 million at February 28, 2005, approximately $2.1
million at February 29, 2004 and approximately $2.2 million at August 31, 2004.
Generally, the Company's exposure is limited to unpaid interest and
principal where customer payments have not yet been made as scheduled. In some
cases, the guarantee may cover all scheduled payments of a loan.
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. As of February 28, 2005,
the underlying bank loans being guaranteed had been paid in full 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
FEBRUARY FEBRUARY
$ IN THOUSANDS 2005 2004
-------------- -------- ---------
Warranties:
Product warranty accrual balance, December 1................... $ 1,123 $ 1,143
Liabilities accrued for warranties during the period........... 239 245
Warranty claims paid during the period......................... (198) (231)
-------- ---------
Product warranty accrual balance, end of period.................... $ 1,164 $ 1,157
======== =========
FOR THE SIX-MONTHS ENDED
FEBRUARY FEBRUARY
$ IN THOUSANDS 2005 2004
-------------- -------- --------
Warranties:
Product warranty accrual balance, September 1.................. $ 1,339 $ 1,152
Liabilities accrued for warranties during the period........... 429 670
Warranty claims paid during the period......................... (604) (665)
-------- --------
Product warranty accrual balance, end of period.................... $ 1,164 $ 1,157
======== ========
12
(12) RETIREMENT PLAN
The Company has a supplementary non-qualified, non-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 FOR THE SIX-MONTHS ENDED
FEBRUARY FEBRUARY FEBRUARY FEBRUARY
$ IN THOUSANDS 2005 2004 2005 2004
-------------- -------- -------- -------- --------
Net periodic benefit cost:
Service cost...................... $ 9 $ 10 $ 18 $ 20
Interest cost..................... 67 72 134 145
Net amortization and deferral..... 76 74 152 148
-------- -------- -------- --------
Total net periodic benefit cost....... $ 152 $ 156 $ 304 $ 313
======== ======== ======== ========
(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. These include a consent decree that
the Company entered in 1992 with the U.S. Environmental Protection Agency
concerning groundwater contamination at its Lindsay, Nebraska facility, which is
included as an EPA superfund site. Management does not believe that these
matters, individually or in the aggregate, are likely to have a material adverse
effect on the Company's consolidated financial condition, results of operations,
or cash flows.
The Company holds a minority position in an irrigation dealership based
outside of the United States. The Company has an obligation to purchase the
remaining shares of this company for an amount of approximately $1.5 million by
August 31, 2005.
(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 effective tax rate for the income tax provision for the three-month
and six-month periods ended February 28, 2005 increased due to a change in
estimate in the income tax provisions recorded previously for previous year's
Federal and state income tax liabilities. The effective tax rate for the
three-months ended February 28, 2005 was 44.1% compared with 32.2% for the same
period in fiscal 2004.
Overall, the Company benefits from a U.S. effective tax rate which is
lower than the combined federal and state statutory rates primarily due to the
federal tax-exempt interest income on its investment portfolio.
The American Jobs Creation Act of 2004 (the "Jobs Act").
On October 22, 2004, the Jobs Act was enacted, which directly impacts the
Company in several areas.
The Company currently takes advantage of the extraterritorial income
exclusion ("EIE") in calculation of its federal income tax liability. The Jobs
Act repealed the EIE, the benefits of which will be phased out over the next
three years, with 80% of the prior benefit allowed in 2005, 60% in 2006 and 0%
allowed in any year after 2006. The Company reported at year
13
ended August 31, 2004 an EIE of $253,000. The Jobs Act replaced the EIE with the
new "manufacturing deduction" that allows a deduction from taxable income of up
to 9% of "qualified production activities income" not to exceed taxable income.
The deduction is phased in over a six-year period, with the eligible percentage
increasing from 3% in 2005 to 9% in 2010.
The Jobs Act includes a foreign earnings repatriation provision that
provides an 85% dividends received deduction for certain dividends received from
controlled foreign corporations. The Company does not intend to repatriate
earnings of its foreign subsidiaries and accordingly, under APB Opinion No. 23,
"Accounting for Income Taxes-Special Areas" has not recorded deferred tax
liabilities for unpatriated foreign earnings. However, the Company will continue
to analyze the potential tax impact should it elect to repatriate foreign
earnings pursuant to the Jobs Act.
14
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 2005 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, 2004.
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,
2004. 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 six-months ended February
28, 2005.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company to include in
the annual report on Form 10-K a report on management's assessment of the
effectiveness of the Company's internal controls over financial reporting and a
statement that the Company's independent auditor has issued an attestation
report on management's assessment of the Company's internal controls over
financial reporting. The Company believes it is progressing on the project plan
generally as expected to meet this requirement, however, during the second
quarter of fiscal year 2005, the Company did identify a material weakness in
internal controls over financial reporting (see further discussion in Item 4).
The Company has remediated the material weakness as of February 28, 2005. There
are no assurances however, that the Company will not discover additional
material weaknesses in its internal controls as it implements new documentation
and testing procedures to comply with the new Section 404 reporting requirement.
If the Company discovers material weaknesses or is unable to complete the work
necessary to properly evaluate its internal controls over financial reporting,
there is a risk that management and or the Company's independent auditor may not
be able to conclude that the Company's internal controls over financial
reporting are effective.
15
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 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.
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, was acquired in April 2002 and
manufactures and markets irrigation equipment for the South American market.
Lindsay Manufacturing Africa, (PTY) Ltd, located in South Africa, was organized
in September 2002 and manufactures and markets irrigation equipment in markets
in southern Africa.
Lindsay has two additional operating subsidiaries including Irrigation
Specialists, Inc., which is a retail irrigation dealership based in Washington
State that operates at four locations ("Irrigation Specialists"). Irrigation
Specialists was acquired by the Company in March 2002 and provides a strategic
distribution channel in a key regional irrigation market. The other operating
subsidiary is Lindsay Transportation, Inc.
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 and six-months ended February 28, 2005 and February 29, 2004. It
should be read together with the industry segment information in Note 8 to the
consolidated financial statements:
FOR THE THREE-MONTHS ENDED FOR THE SIX-MONTHS ENDED
-------------------------------- -------------------------------
PERCENT PERCENT
FEBRUARY FEBRUARY INCREASE FEBRUARY FEBRUARY INCREASE
($ IN THOUSANDS) 2005 2004 (DECREASE) 2005 2004 (DECREASE)
---------------- ---- ---- ---------- ---- ---- ---------
Consolidated
Operating revenues...................... $ 41,487 $ 51,475 (19.4)% $ 81,254 $ 87,988 (7.7)%
Cost of operating revenues.............. $ 33,721 $ 39,865 (15.4) $ 66,915 $ 69,024 (3.1)
Gross profit............................ $ 7,766 $ 11,610 (33.1) $ 14,339 $ 18,964 (24.4)
Gross margin............................ 18.7% 22.6% 17.6% 21.6%
Operating expenses...................... $ 7,056 $ 6,846 3.1 $ 14,096 $ 13,466 4.7
Operating income........................ $ 710 $ 4,764 (85.1) $ 243 $ 5,498 (95.6)
Operating margin........................ 1.7% 9.3% .3% 6.2%
Interest income, net.................... $ 295 $ 361 (18.3) $ 556 $ 785 (29.2)
Other income, net....................... $ 68 $ 41 65.9 $ 452 $ 490 (7.8)
Income tax provision.................... $ 473 $ 1,663 (71.6) $ 476 $ 2,177 (78.1)
Effective income tax rate............... 44.1% 32.2% 38.0% 32.1%
Net earnings............................ $ 600 $ 3,503 (82.9) $ 775 $ 4,596 (83.1)
Irrigation Equipment Segment (1)
Operating revenues...................... $ 36,161 $ 48,733 (25.8) $ 71,563 $ 82,703 (13.5)
Operating income........................ $ 4,149 $ 8,452 (50.9) $ 7,660 $ 12,692 (39.6)
Operating margin........................ 11.5% 17.3% 10.7% 15.3%
16
Diversified Products Segment (1)
Operating revenues...................... $ 5,326 $ 2,742 94.2 $ 9,691 $ 5,285 83.4
Operating income........................ $ 618 $ 267 131.5 $ 933 $514 81.6
Operating margin........................ 11.6% 9.7% 9.6% 9.7%
(1) Excludes unallocated general & administrative and engineering & research
expenses
FOR THE THREE-MONTHS ENDED FEBRUARY 28, 2005
REVENUES
Operating revenues for the three-months ended February 28, 2005 declined 19% to
$41.5 million compared with $51.5 million for the three-months ended February
29, 2004. This decrease was attributable to a 26% decline in irrigation
equipment revenues partially offset by a 94% increase in revenues from our
diversified manufacturing segment.
Domestic irrigation equipment revenues for the three-months ended February
28, 2005 declined $11.3 million or 31%, compared to the same period last year.
The decline in irrigation revenue was due to approximately a 40% decline in unit
volume compared to the second quarter of fiscal 2004, which was offset by
increases of approximately 17% in the average selling price of irrigation
equipment. Management believes that a combination of factors have contributed to
the lower demand for irrigation equipment during the quarter. These factors
include the substantial increase in the prices for our irrigation equipment that
occurred during the past twelve months due mostly to higher steel costs. At the
same time the prices of our equipment were increasing, the prices of many
agricultural commodities were declining significantly from the levels of mid
2004, including prices for major crops such as corn and soybeans that are major
markets for mechanical irrigation. These lower commodity prices, combined with
higher costs for energy and fertilizer, and other farm inputs contributed to
reduced demand for products such as irrigation equipment, which represent
substantial capital expenditures. In addition, there has been a reduction in the
drought conditions from the same time last year.
International irrigation equipment revenues have also been affected by
many of the same factors affecting domestic sales of irrigation equipment. As a
result, international irrigation equipment revenues decreased $1.2 million or
11% for the three-months ended February 28, 2005 when compared to the same
period in fiscal 2004. While the acquisition of the Stettyn irrigation company
in South Africa in the fourth quarter of fiscal 2004 contributed additional
revenues during the quarter, this increase was more than offset by declines in
revenues for the remaining international products. These decreased revenues were
attributable to lower unit sales volumes in each of these markets.
Notwithstanding the positive effect of a lower U.S. dollar value on export
sales, the negative effects of higher equipment prices and depressed
agricultural commodity prices reduced demand for irrigation systems.
Diversified manufacturing revenues for the three-months ended February 28,
2005 increased 94% to $5.3 million, from $2.7 million during the second quarter
of fiscal 2004. The increase was primarily due to expanded revenues generated
from outsourced manufacturing work performed for GE Transportation Systems,
Global Signaling during the period. The diversified segment continues to achieve
success in developing new business opportunities and expects to see continued
growth supported by appropriate investment.
GROSS MARGIN
Gross margin for the quarter declined to 18.7% from the 22.6% gross margin
achieved during the second quarter of fiscal 2004. The decline in gross margin
is largely attributable to the production of fewer irrigation systems during the
quarter compared to the second quarter of fiscal 2004. This resulted in a
reduced number of units to which overhead and other fixed production costs were
allocated. In addition, higher energy cost has affected cost of production and
in-bound and out-bound transportation. Gross margin was also negatively affected
by the increase in the percentage of total sales represented by our
international operations since margins achieved by these operations are
typically lower than those achieved by our domestic operations. Finally, the
larger percentage of revenues from diversified manufacturing lowered margins
during the quarter since the Company realizes lower margins on these products
than it currently does on irrigation equipment products. As the Company gains
experience with its expanded diversified manufacturing base, it expects to
realize margin improvements, bringing margins closer to those earned on
irrigation equipment revenues.
17
OPERATING EXPENSES
Operating expenses for the quarter were $0.2 million or 3.1% higher than during
the same period of fiscal 2004. The increase was primarily due to higher
insurance costs, expenses relating to compliance with management's assessment
over internal controls, and incremental operating expenses of the Stettyn
irrigation company which was acquired in the fourth quarter of fiscal 2004.
INTEREST INCOME, OTHER INCOME, AND TAXES
Net interest income during the three-months ended February 28, 2005 of $295,000
declined 18% from the $361,000 earned during the same period of fiscal 2004.
This decrease primarily reflects a reduction of interest income from securities
and interest bearing bank accounts due to a smaller balance held in these
securities and accounts.
Other income, net of $68,000 during the three-months ended February 28,
2005 reflects an increase of $27,000 compared to other income, net of $41,000
for the same prior year period. This increase primarily resulted from a $185,000
increase in net earnings from minority equity investments partially offset by
lower net foreign currency gains of $155,000 compared to the same prior year
period.
The effective tax rate for the income tax provision for the three-months
ended February 28, 2005 increased due to a change in estimate in the income tax
provision recorded previously for the 2004 state income tax liability. The
effective tax rate for the three-months ended February 28, 2005 was 44.1%
compared with 32.2% for the same period in fiscal 2004. Overall, the Company
benefits from a U.S. effective tax rate which is lower than the combined federal
and state statutory rates primarily due to the federal tax-exempt interest
income on its investment portfolio.
The American Jobs Creation Act of 2004 (the "Job's Act") which was signed
into law on October 22, 2004 includes provisions which phase out the
extraterritorial income deduction over a two year period beginning January 1,
2005. The first year phase out of 20% will impact the Company's tax rates for
the eight months of fiscal 2005 occurring after that date. Accordingly, the
effect of this phase out has been included in the calculation of the Company's
effective tax rate beginning in the quarter ended February 28, 2005. The Job's
Act also includes a one-time deduction for qualifying repatriations of foreign
earnings during fiscal 2005. However, the Company does not intend to repatriate
earnings of its foreign subsidiaries during fiscal 2005. The incentive for U.S.
production activities included in the Job's Act, effective for fiscal years
beginning after December 31, 2004, will not impact the Company's tax rate in
fiscal 2005.
FOR THE SIX-MONTHS ENDED FEBRUARY 28, 2005
REVENUES
Operating revenues for the six months ended February 28, 2005 declined 8% to
$81.3 million compared with $88.0 million for the six months ended February 29,
2004. This decrease was attributable to a 14% decline in irrigation equipment
revenues partially offset by an 83% increase in revenues from our diversified
manufacturing segment.
Domestic irrigation equipment revenues for the six-months ended February
28, 2005 declined $11.7 million or 19%, compared to the same period last year.
The decline in irrigation revenue was due to a 34% decline in unit volume
compared to the first half of fiscal 2004, which was partially offset by
increases in the selling price of irrigation equipment. Management believes that
the combination of factors described above in the discussion of the three-months
ended February 28, 2005 also contributed to the decline in domestic irrigation
revenues for the first six months of fiscal 2005.
International irrigation equipment revenues for the six-months ended
February 28, 2005 increased $0.5 million or 3% over the first six months of
fiscal 2004. The acquisition of the Stettyn irrigation company in South Africa
in the fourth quarter of fiscal 2004 contributed additional revenues during the
first half of fiscal 2005. This increase was largely offset by a decline in unit
volume in other international markets. The decline in unit volume compared to
the first half of fiscal 2004 was partially offset by increases in the average
selling price of irrigation equipment. Management believes that the combination
of factors described above in the discussion of the three-months ended February
28, 2005 also contributed to the decline in unit volume in international
irrigation markets for the first six months of fiscal 2005.
Diversified manufacturing revenues of $9.7 million for the six-months
ended February 28, 2005 represented an increase of $4.4 million or 83% from the
same prior year period. The increase was primarily due to expanded revenues
generated from outsourced manufacturing work performed for GE Transportation
Systems, Global Signaling during the period.
18
GROSS MARGINS
The Company's gross margin decreased to 17.6% in the six-months ended February
28, 2005, from 21.6% for the same prior year period. Management believes that
the factors described in the discussion of the three-months ended February 28,
2005 also contributed to the decline in gross margins for the first six months
of fiscal 2005.
OPERATING EXPENSES
Operating expenses during the first half of fiscal 2005 rose by $0.6 million or
4.7% from the same prior year period. The increase was primarily due to higher
insurance costs, expenses relating to compliance with management's assessment
over internal controls, and incremental operating expenses of the Stettyn
irrigation company which was acquired in the fourth quarter of fiscal 2004.
INTEREST INCOME, OTHER INCOME, AND TAXES
Net interest income during the six-months ended February 28, 2005 of $556,000
declined 26% from the $785,000 earned during the same period of fiscal 2004.
This decrease primarily reflects a reduction of interest income from securities
and interest bearing bank accounts due to a smaller balance held in these
securities and accounts.
Other income, net of $452,000 during the six-months ended February 28,
2005 reflects a decrease of $38,000 compared to other income, net of $490,000
for the same prior year period. This decrease resulted from lower foreign
currency net gains of $420,000 and an increase in other miscellaneous expenses
of $44,000 partially offset by higher net earnings from minority equity
investments of $426,000.
The effective rate for the income tax provision for the six-months ended
February 28, 2005 increased due to a change in estimate in the income tax
provisions recorded previously for previous year's Federal and state income tax
liabilities. The effective tax rate for the six-months ended February 28, 2005
was 38.0% compared with 32.1% for the same period in fiscal 2004. Overall, the
Company benefits from a U.S. effective tax rate which is lower than the combined
federal and state statutory rates primarily due to the federal tax-exempt
interest income on its investment portfolio.
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 $43.8 million at
February 28, 2005, $50.3 million at February 29, 2004, and $56.3 million at
August 31, 2004. The Company's marketable securities consist primarily of
tax-exempt high-grade municipal debt.
Cash flows used in operations totaled $6.1 million during the six-months
ended February 28, 2005, compared to $9.6 million used in operations during the
same prior year period. The $3.5 million decrease in cash flows used in
operations was primarily due to a $16.3 million decrease from the prior year
period in accounts receivables offset by higher inventory builds of $4.0
million, a $4.1 million decrease in accounts payable and current taxes payable,
and a $3.8 million decrease in net earnings. The inventory change was primarily
due to lower unit sales volumes, and higher steel inventory and the accounts
receivable change was primarily due to collection of dealer programs.
Cash flows provided by investing activities totaled $8.8 million during
the six-months ended February 28, 2005 compared to cash flows used in investing
activities of $3.0 million during the same prior year period. Cash flows
provided by investing activities increased by $11.8 million compared to the same
prior year period primarily due to proceeds from maturities and sales of
marketable securities partially offset by purchases of marketable securities and
property, plant and equipment.
Capital expenditures were $1.8 million during the six-months ended
February 28, 2005 compared to $2.0 million during the same prior year period.
Capital expenditures were used primarily for updating manufacturing plant and
equipment, expanding
19
manufacturing capacity, and further automating the Company's facilities. Capital
expenditures for fiscal 2005 are expected to be approximately $4.5 to $5 million
and will be used to improve the Company's facilities and expand its
manufacturing capacity.
Cash flows used in financing activities totaled $4.3 million during the
six-months ended February 28, 2005 compared to $1.0 million during the same
prior year period. The increase in cash used for the six-months ended February
28, 2005 as compared to the same prior year period, is primarily the result of
repurchases of common shares of $3.2 million.
The Company repurchased 138,500 shares of common stock on the open market
under the Company's stock repurchase plan during the three-months ended February
28, 2005. As of February 28, 2005, the Company has existing authorization,
without further action by our Board of Directors, to repurchase up to
approximately 1.1 million shares of the Company's common stock in the open
market or otherwise.
The Company has an agreement with a commercial bank for a $10.0 million
unsecured revolving line of credit through December 28, 2005. Proceeds from this
line of credit, if any, are to be used for working capital and general corporate
purposes including stock repurchases. There have been no borrowings made under
such unsecured revolving line of credit. Under the terms of the line of credit,
borrowings, if any, bear interest at a rate equal to one percent per annum under
the rate in effect from time to time and designated by the commercial bank as
its National Base Rate (5.5% at February 28, 2005). The Company expects to renew
this line of credit on substantially similar terms.
The Company's European subsidiary, Lindsay Europe, has an unsecured
revolving line of credit with a commercial bank under which it could borrow up
to the Euro equivalent of $2.7 million for working capital purposes. As of
February 28, 2005, there was a $2.2 million outstanding balance on this line,
which is a $1.4 million increase during the quarter. 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 (4.1%
at February 28, 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 needs.
OFF-BALANCE SHEET ARRANGEMENTS
During the three-months ended February 28, 2005, the Company reduced its off -
balance sheet exposure to guarantees as described in Note 11, Guarantees, to the
consolidated financial statements.
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, 2004.
MARKET CONDITIONS AND FISCAL 2005 OUTLOOK
For the remainder of fiscal 2005, the Company expects lower irrigation system
unit volumes in the domestic and international markets. The Company remains
uncertain as to the long-term effect of higher irrigation system prices and
pricing policy changes on the demand for its products. The Company expects
diversified manufacturing to remain strong for fiscal 2005 due to the continued
expansion and investment in this business segment. Management believes it has
taken appropriate actions to tightly control operating expenses for fiscal 2005.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 123R, (revised December 2004), "Share-Based Payment" sets accounting
requirements for "share-based" compensation to employees, including
employee-stock-purchase-plans (ESPPs) and provides guidance on accounting for
awards to non-employees. This Statement will require the Company to recognize in
the income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees, but expresses no preference for a
type of valuation model. For public entities, this Statement is effective for
the first interim or annual reporting period beginning after June 15, 2005. The
Company has historically provided proforma disclosures pursuant to SFAS No. 123
and SFAS No. 148 as if the fair value method of accounting for stock options had
been applied, assuming use of the Black-Scholes option-pricing model and that
all option grants were recorded at fair value. Although not currently
anticipated, other assumptions may be utilized when SFAS No. 123R is adopted. In
addition, the Company will also take into consideration the recently issued
Staff Accounting Bulletin No. 107. The Company will adopt SFAS No. 123R "Share
Based Payment" during the first quarter of fiscal year 2006. The Company expects
that the adoption of SFAS 123R will have a negative impact on the Company's
consolidated results of operations.
SFAS No. 151, "Inventory Costs" eliminates the "so abnormal" criterion in
ARB 43 Chapter 4 "Inventory Pricing". This Statement no longer permits a company
to capitalize inventory costs on their balances sheets when the production
defect rate varies
20
significantly from the expected rate. The Statement reduces the differences
between U.S. and international accounting standards. This Statement is effective
for inventory cost incurred during annual periods beginning after June 15, 2005.
The Company will adopt this Statement in the first quarter of fiscal 2006 and is
evaluating this pronouncement's effect on the Company's financial position and
net income.
SFAS No. 153, "Exchanges of Nonmonetary Assets" eliminates the exception
to the fair-value principle for exchanges of "similar productive assets," which
had been accounted for based on the book value of the asset surrendered with no
gain recognition. Nonmonetary exchanges have to be accounted for at fair-value,
recognizing any gain or loss, if the transactions meet the commercial-substance
criterion and fair-value determinable. The Statement reduces the differences
between U.S. and international accounting standards. This Statement is effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after June
15, 2005. The Company will adopt this Statement in the first quarter of fiscal
2006 and does not expect this pronouncement to have a material impact on the
Company's financial position and net income.
In December 2004, the Financial Accounting Standard Board (FASB) issued
FASB Staff Position No. FAS 109-1 ("FSP FAS 109-1"), "Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities provided by the American Jobs Creation Act of
2004." FSP FAS 109-1 clarifies that the deduction will be treated as a "special
deduction" as described in SFAS 109, "Accounting for Income Taxes." As such, the
special deduction has no effect on deferred tax assets and liabilities existing
at the date of enactment. The impact of the deduction will be reported in the
period in which the deduction is claimed. The incentive for U.S. qualified
production activities included in the Act is effective as of December 21, 2004.
See further discussion of the effect on the Company's consolidated financial
statements in Note 14, Income Taxes.
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 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
The Company's Chief Executive Officer and Chief Financial Officer (the
"Officers") performed an evaluation of the Company's disclosure controls and
procedures as of the end of the period covered by this report. The Officers
concluded that the disclosure controls and procedures were ineffective for
gathering, analyzing and disclosing the information the Company is required to
disclose in the Company's reports under the Securities Exchange Act of 1934 due
to a material weakness in internal controls over financial reporting. The
identified material weakness related to review of manual journal entries
according to the Company's policy due to vacancies in two key financial
management positions at November 30, 2004. Both of the open positions have been
filled by qualified individuals.
Other than filling the two vacant positions in its financial management staff,
there were no significant changes in the Company's internal controls over
financial reporting or in other factors that could significantly affect those
controls made during the period covered by this report that have, or are
reasonably likely to materially affect the Company's internal control over
financial reporting.
21
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 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
(c) Total Number of
(a) Total Shares Purchased as (d) Maximum Number of
Number of (b) Average Part of Publicly Shares that May Yet
Shares Price Paid per Announced Plans or Be Purchased Under
Period Purchased Share Programs (2) the Plans and Programs
- ------ --------- -------------- ------------------- ----------------------
December 1, 2004 to
December 31, 2004............ - - - 1,205,518
January 1, 2005 to
January 31, 2005............. 138,500(1) $ 22.93 138,500 1,067,018
February 1, 2005 to
February 28, 2005............ - - - 1,067,018
------- ------- ------- ---------
Total.................... 138,500 $ 22.93 138,500 1,067,018
======= ======= ======= =========
(1) All shares were purchased in open market transactions.
(2) The Company originally announced a plan to repurchase 250,000 shares on
July 26, 1989. Increases in the number of shares that the Company is
authorized to repurchase under the plan were announced from time to time
since that date, including increases due to three stock splits declared by
the Company. As a result, the total number of shares the Company was
authorized to purchase under this plan was 1,898,437 on a split-adjusted
basis.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual shareholders' meeting was held on February 9, 2005. The
shareholders voted to elect two directors and to ratify the appointment of KPMG
LLP as independent accountants for the fiscal year ending August 31, 2005. In
addition to the election of Mr. Christodolou and Mr. McIntosh as directors, the
following were directors at the time of the annual meeting and will continue in
office: Mr. Buffett, Mr. Nahl, Mr. Welsh, Mr. Cunningham, and Mr. Parod. There
were 11,778,185 shares of common stock entitled to vote at the meeting and
10,941,429 shares (92.9%) were represented at the meeting. The voting results
were as follows:
1. Election of Directors: Michael N. Christodolou For - 10,907,888 Withheld - 33,541
J. David McIntosh For - 10,905,154 Withheld - 36,275
2. Auditors: Ratification of the appointment of
KPMG LLP as independent auditors for the
fiscal year ended August 31, 2005.
For - 10,747,556 Against - 185,990 Abstain - 7,884
22
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 11th day of
April 2005.
LINDSAY MANUFACTURING CO.
By: /s/ DAVID B. DOWNING
------------------------------------------
Name: David B. Downing
Title: Vice President, Chief Financial Officer
(Principal Financial Officer)
24