Lindsay Corporation F1Q09 (Qtr End 11/30/08) Earnings Call Transcript

Dec.17.08 | About: Lindsay Corporation (LNN)

Lindsay Corporation (NYSE:LNN)

F1Q09 Earnings Call

December 17, 2008 11:00 am ET

Executives

Rick Parod - President, Chief Executive Officer

Tim Paymal - Vice President, Chief Accounting Officer

Analysts

Michael Cox - Piper Jaffray

Joe Giamichael - Rodman & Renshaw

Ryan Connors - Boenning & Scattergood

Arnie Ursaner - CJS Securities

Michael Coleman - Sterne Agee

Steven Gambuzza - Longbow Capital

Jeff Moore - Hunter

Operator

Good morning ladies and gentlemen. My name is Tina and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation first quarter 2009 conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session (Operator Instructions).

During this call, management may make forward-looking statements that are subject to risk and uncertainties and which reflect management’s current beliefs and estimates of future economic circumstances, industry conditions, company performance and financial results.

Forward-looking statements include the information concerning possible or assumed future results of operations of the company and those statements preceded by, followed by or including the words, expectation, outlook, could, may, should or similar expressions. For these statements, we claim the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

I would now like to turn the call over to Mr. Rick Parod, President and Chief Executive Officer. Please go ahead sir.

Rick Parod

Good morning and thank you for joining us today. Revenues for the first quarter of fiscal 2009 rose 49% to $113.1 million as compared to $75.9 for the same prior year quarter. Net earnings were $6.3 million or $0.51 per diluted share compared with $4.4 million or $0.36 per diluted share in the prior year’s first quarter.

In the domestic irrigation market, revenues were $53.6 million for the first quarter, increasing 55% over the same quarter last year. Revenues on the quarter benefited from the sizable backlog accumulated during the fourth quarter of fiscal 2008, prior to the change in economic conditions.

Economic conditions for U.S. farmers changed unfavorably within the quarter driven by the worldwide economic crisis. The current USDA projections are for net farm income to be essentially flat for the ‘08 crop year, yet still near record levels. Since June, we’ve experienced a dramatic change in conditions for U.S. farmers. Commodity prices for corn and soybeans have dropped about 50% and wheat is down about 40%, while input costs have not fallen has rapidly.

It’s estimated that the most current corn price is below the breakeven level for U.S. farmers. Demand for U.S. corn remains solid and ending stocks for the ‘08,‘09 year are estimated to be 9% to 15% below the previous year, so supply and demand relationships would indicate corn prices rising. Farmers’ balance sheet remains strong; however it slightly though continues to remain cautious until there are clear indications of improving farm economics.

International irrigation revenues were $32.3 million for the first quarter, up 47% over the same period last year. Exports were up in all regions, driven by continued agricultural development and yield improvement initiatives and the high year end backlog. Revenue from our international irrigation business units in Brazil, South Africa and France were also significantly higher in the first quarter of fiscal 2007. Our irrigation operations outside the U.S. continue to maintain high order activity during the quarter.

The pressure on increasing food production, demand for biofuels has increased investment in agricultural development, including expanding efficient irrigation globally. Our infrastructure segment revenues rose to $27.2 million, up 40% from the first quarter of last year, with revenues rising in each of our infrastructure businesses. The largest revenue increases in this segment were from Snoline’s lower margin products and from our diversified manufacturing, both of which earned lower gross margin than barrier systems proprietary moveable barrier products, resulting in a less favorable product mix.

Overall, gross profit rose $28.6 million for the first quarter versus $19.3 in the same quarter last year on the higher volume. Gross margins declined slightly to 25.3% compared to 25.4% for the first quarter last year. Gross margin on irrigation products increased during the quarter over the same time last year, offset by a decrease in infrastructure margins due to the unfavorable shift in product mix and factory efficiency variances.

Total operating expenses for the quarter were $16.9 million versus $12.8 million in the same quarter last year, primarily due to the inclusion of Watertronics acquired in January of last year, $700,000 of incremental expenses for additional monitoring remediation of an EPA work plan and higher personnel-related expenses. For the quarter, operating expenses were 14.9% of sales, compared to 16.8% in the prior year’s first quarter.

Our order backlog decreased to $40.1 million on November 30, 2008 as compared to $51.2 million on November 30, 2007. The irrigation equipment backlog decreased $6.1 million and infrastructure backlog decreased $5 million.

Recently, Barrier Systems was awarded a $19.6 million contract for moveable barrier and barrier transfer machines to be installed in Mexico City. This project, which was not in our backlog at quarter end, will assist Mexico City in their efforts to mitigate traffic congestion, while providing positive barrier protection from oncoming traffic during peak traffic periods. Work on this project is currently under way and is scheduled to be completed in January 2010, with the largest percentage of the revenue expected to be recognized in the second half of fiscal 2009.

Accounts receivable increased $23.7 million from the same time last year due to the higher revenues and inclusion of Watertronics. Inventories increased $17.5 million over the same time last year. Our consolidated inventory churns were approximately 5.7 times improving over the same time last year. Current initiatives are focused on working capital efficiency improvement. Our balance sheet remains strong, with $28.3 million of cash and $30.2 million of debt. In addition, we have a $30 million revolver currently unused.

In summary, the first quarter of fiscal 2009 was relatively strong, working off a good backlog of orders. The overall global economic conditions did impact our orders received during the quarter; however the long-term drivers for our irrigation business remained positive in spite of the current downturn.

In our infrastructure segment, we’re pleased with the strength of demand and interest in our unique moveable barrier product line and we continue to see many domestic and international opportunities for growth in our infrastructure business and we expect that if there’s an increase in government investment infrastructure, our business is likely to benefit.

Globally, we’re dealing with a challenging economic environment that’s changing rapidly, making it very difficult to predict future demand. During this time, we remain positioned with a strong balance sheet, a strong global market position and we will continue to make appropriate modifications within our business in response to market conditions.

Despite of the near-term challenges, we’re confident that increasing agricultural yields to boost food supply, improving water use efficiency, biofuel demand and transportation safety, will remain global priorities and will be long-term drivers for our markets.

I’d now like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Cox - Piper Jaffray.

Michael Cox - Piper Jaffray

My first question is on the timing from a seasonal perspective. On a normalized year, when do you expect farmers to sort of revisit a capital decision?

Rick Parod

Mike we expect to generally see demand start to pick up and orders start to pick up in the January time period; usually its January, February time period, depending on what else is happening in the market.

Just to explain our typical revenue split for irrigation, this is from a more historical perspective, typically we would see a revenues split for the irrigation business of about 20% of revenues in the first quarter, 25% in the second, 35% in the third and 20% in the fourth quarter and that’s kind of a traditional split.

Now, we do however see many times when that will change due to things like whatever is happening in the economic environment that may affect farmers, commodity pricing for example or a drought impact in terms of timing, so there’s a number of things that can impact that flow, but that’s the typical timing of our revenue recognition in irrigation.

Michael Cox - Piper Jaffray

Can you comment on the pricing dynamic in the irrigation segment now that steel prices have fallen significantly?

Rick Parod

Yes. During the first quarter and through all of last year, we saw pretty good pricing discipline in the sense that as steel prices were rising, we were generally or often leading in terms of passing through price increases and saw competition following a good pricing discipline in terms of maintaining pricing in the market and we saw most of that through this first quarter.

However, since then we have seen some movement down by one of our major competitors; not a huge amount, but probably in the range of about 3% and what I’ve said to our dealers and would say is that we will be competitive in this business in irrigation and we will do what’s necessary to remain competitive in it, but we will not lead with pricing reductions.

Michael Cox - Piper Jaffray

Okay that’s very helpful and then just one last. Again a big picture questions in revolving credit conditions; there’s been a lot of discussion around this. I’m hoping you could maybe address this, both on a domestic as well as in your key international markets?

Rick Parod

Well, what we’ve heard is that the farmer is still relatively healthy. Their balance sheets are in a good position and that’s domestic and for the most part foreign as well, with our international markets.

In the international markets, we’re seeing more of the large farmers will typically have some bank financing that maybe tied into their farming practices, but that could be more impacted by some of the economic conditions, but we’ve really not seen a lot of that yet. Anecdotally, we’re hearing that there’s some, but generally and I’d say on a broad global general basis, we’re hearing that farmers are still in a strong position.

I do believe that the farmers facing some difficult questions or challenges in terms of planting decisions this next year, given things like corn prices near breakeven levels, around that breakeven level. So, the farmer’s going to have to make some tough choices in terms of what he will do for this next season.

Operator

Your next question comes from Joe Giamichael - Rodman & Renshaw.

Joe Giamichael - Rodman & Renshaw

I just want to start up by talking about the infrastructure business. I mean do you have a sense for the addressable opportunity in the infrastructure spending plans as it relates to your business and I guess with that, can you just sort of walk us through the potential timing and competitive environment as you buy for those dollars?

Rick Parod

Well, I will give you my view on it, which is the best I can do and that view would be it’s difficult to know right now what changes or demand improvements we could see from what’s been discussed in terms of economic stimulus and infrastructure by the new administration coming in and the reason I’d say that is because if the investment were in things like just typical road repayment that would have one implication.

If it’s building new roads and new bridges, that has other implications, but we believe that in general, investments in any roadwork infrastructure will be beneficial to our business, particularly in things like crash cushions and our TMAs, truck and trailer mounted to team leaders.

When it comes to investments in traffic mitigation, we also believe that we will benefit and that is globally in projects that would involve our quick move barrier system, the moveable barrier like we’ve seen in the Mexico project. So, we think any of these investments that will be tied to trying to stimulate or create jobs and stimulate some demand in that infrastructure segment will potentially be beneficial to us.

The second part of the question that you asked is really regarding the timing and I believe that for an administration coming in and making changes in terms of infrastructure spending, it’s likely to be a period or could be six months before we see real change coming from that, but in the meantime we still have good projects and demand for our infrastructure business with projects like Mexico and other road works projects involving crash cushions and TMAs.

Joe Giamichael - Rodman & Renshaw

I guess to follow on that, I know that the Mexico opportunity had been kind of publicly discussed by officials much sooner than they’d actually approached you. Do you sort of have a sense that there was a demand for that project out there? On an international standpoint, do you see other opportunities like Mexico there sort of, I would say, sort of percolating now, where they could turn into orders in the near-term?

Rick Parod

We do. There are many opportunities like that and they do take time to process through and I think Mexico was a good example of that. I was thinking back this morning and I think I saw news paper article from Mexico City; probably the first time might have been a year to year and a half ago, when they discussed doing this quick move barrier project or traffic mitigation project on the front page of the newspaper. So, they do take time to go through this frustration period and come out.

We anticipated the Mexico project really much earlier than what it came in. In fact, to the point where we’ve even built or pre-built some inventory anticipating that when the project did land we would have a pretty short fuse or delivery time in terms of production.

So, the fact that it’s in is excellent; it also will help us in terms of some of our inventory reduction because we know we have pre-built some of the components for that barrier, but we do see many projects like that, that are at various stages of either discussion or completion or analysis.

Joe Giamichael - Rodman & Renshaw

Just a few more quick questions and I’ll get out of the way. On the irrigation side, what sort of order of magnitude have you seen in regards to a decline in your input costs? I guess largely just steel and zinc? My thought being, trying to gauge your ability will be to maintain your gross profit dollars, even if you decide to decrease prices to some extent.

Rick Parod

Well, there’s really two parts to that equation and I think one that I’d comment on is that at any point in time in any quarter, we typically will look at pre-buying or having a buy that will cover somewhere in the range of 70%, 75% of our steel needs and requirements and that would be a typical process for us.

The fourth quarter of ‘08 was a little bit different because we could see some declines in steel prices. So, we did purchase a little bit more on the spot market rather than pre-buying; however, we did have a pre-buy in place. Now that said and also we had a pre-buy or let’s say a forward buy that we had in place during the first quarter and that said, it usually takes a couple of months to burn through whatever is on hand at any point in time.

So, the current price of steel is probably about roughly 30% below, where we were buying steel say two or three months ago and that’s the kind of reduction that we’ve seen, which has been a pretty rapid reduction in the steel market in the last few months.

Joe Giamichael - Rodman & Renshaw

And just remind us, steel as a percentage of your cost of goods on the irrigation side?

Rick Parod

Steel has been roughly a third of cost of goods sold, so 30% to 33%.

Joe Giamichael - Rodman & Renshaw

And just one last question; I just want to focus on the balance sheet and cash flows for a second. You’ve tied up a lot of the cash in inventory in the quarter; could you just walk us through the composition and the rational there? I know you talked about having build inventory in anticipation of the Mexico project.

Rick Parod

Yes, there would have been some that would have been built in anticipation of the Mexico project. There also is a fair amount of irrigation related inventory or irrigation inventory in that number. In fact, the majority of it would be irrigation inventory in terms of the increase, probably year-over-year.

One of the reasons for it is certainly looking back to where we were sitting in the July, August time period and building our plans for this next year and this will also be a fairly typical process. We’ll look at the coming year and make decisions in terms of production levels and whether we will have some dealer stock inventory that we will encourage dealers to take and how much we will build or pre-build in anticipation of the season. So, we did pre-build and do have some inventory on hand in anticipation of the season.

Joe Giamichael - Rodman & Renshaw

Got it and this is just one sort of means that you can avoid some sort of a capacity utilization issues around a Q3 bubble in demand, right?

Rick Parod

Yes, that’s right. As we experienced last year at the peak of the season, during that say May through June time period, it became very difficult for us to respond quickly to orders received and we decided it was more beneficial to one, have dealers have some stock, which was minimal and also for us to have more stock to be able to respond to that demand quickly.

Operator

Your next question comes from Ryan Connors - Boenning & Scattergood.

Ryan Connors - Boenning & Scattergood

A couple questions on irrigation, then a couple on infrastructure. Last year, there was some real discrepancies between the growth at domestic irrigation business and the international. They were both growing very nicely, but international growing exceptionally well.

Now it seems like the market is decelerating to some extent. I’ll be interested to get your thoughts on how you think that those two markets will fair relative to one another in terms of their growth rate or maybe lack thereof in the near-term? I mean, will the international side still sort of outperform, so to speak or do you think that could change in the near-term?

Rick Parod

It’s difficult to predict which will have what growth rate or decelerate as you said at what rate at this point Ryan. The way I would look at this, if you look at our fourth quarter backlog and performance in the first quarter, I think it was showing that both were performing very well at that time and what we’ve seen and what I said a couple minutes ago is that we’ve seen still strong order rates in our international markets.

I think it would also be fair to say that the economic crisis or downturn that has been experienced in the U.S. is probably a little delayed in terms of its impact in more of the international markets that we participate in. So, I think that there is a delay factor in terms of what that impact would be, but there is also different market dynamics in each of those international markets versus the United States.

By different dynamics, I’m referring to things like in Brazil; most of the purchases are financed under the government’s Tsunami program which is currently funded for this next season. Also, input costs and commodity prices are different for those farmers, where many commodities are really denominated or based on dollars in terms of the sale and input costs are in local currency. So, the dynamics are different in each of the markets, whether we’re looking at Brazil or Africa or Asia or anywhere around the world.

So it’s difficult to characterize that as any one growth rate or deceleration rate, whichever you really want to look at and I would say that what we will see is during this next few months and probably the next three to four months, what all of these variables or how all of these variables impact those specific markets.

Ryan Connors - Boenning & Scattergood

And then you mentioned and you made reference in your press release to the staffing reductions with regard to getting ready for an environment that will still be good, but maybe not as good as 2008. I’d be interested to get any input you could give us on how those discussions played out in terms of what were the big factors you looked at in order to determine that those steps had to be taken and then at what magnitude they had to be taken and whether it was the number of reductions or the shifts or what have you?

Rick Parod

Fairly, let me start out by saying that due to the seasonality of the irrigation business we typically have workforce reductions in the June or July time period in the Lindsay, Nebraska factory in our domestic operation. This year, we retained that workforce as we worked through the big backlog we had at the end of the fourth quarter.

Today, our hourly workforce in Lindsay is down approximately 14% from say, the low period of fiscal ‘08. So we are down from that time period and the reductions were based on what we saw in terms of current orders on hand and also what we felt was going to be the most efficient operation as we worked through that backlog.

So that’s where we sit today, which is not an unusual period in the sense that we typically have made these reductions much sooner than we did this year, but it’s the low part of our year, low part of the season, so reductions normally would have taken place by now.

Ryan Connors - Boenning & Scattergood

Okay and then shifting over on the infrastructure side, I just had two questions to follow-up on the things you’ve already discussed with the previous callers here. First off, I wonder just from a capacity utilization perspective, where does the company stand in order to be able to capitalize on the opportunities? In other words, is there enough capacity there to sort of capitalize on that without having to say, build new plant and equipment and that sort of thing?

Then the second question being is there any reason to believe that the influx of federal dollars would impact profitability for you and for the industry as a whole? In other words, sort of the single payer problem that you hear about in healthcare that’s been as a major buyer and the government sort of drives the hard bargain in margins, may become depressed on some projects. Is that a valid way to think about that or what are your thoughts on that?

Rick Parod

Let me take that second question first, Ryan. I’d say that I wouldn’t see that having an impact on our business and that the primary reasons for that would be we’re dealing with some highly proprietary type products that are fairly unique without many suppliers of those kinds of products and I say many in some cases we’re the only one.

For example, the quick move barrier type system, but even when it comes to things like crash cushions and TMAs, I think we’re in a strong market position and there are not a lot of suppliers to this. I really don’t see that being a specific issue in terms of government leverage by increasing spending in their infrastructure area.

Coming back to the first question, which was regarding the capacity, I would say that we have the capacity in a fairly variable capacity plan that would allow us to be able to take advantage of those opportunities as they come along. I would add however, if we do see that the federal spending is significant in the kinds of products that we build and supply, in our proprietary products, we would consider expanding capacity, which may be more in the form of manufacturing equipment than say, brick and mortar.

So I would look at capacity expansion, if the opportunity was significant, but we have quite a bit of variable capacity that we can apply to this infrastructure business.

Ryan Connors - Boenning & Scattergood

Okay, great and then just one final housekeeping item either for you or Mark if he’s there. The other income line on the income statement showed a fairly sizable negative number. Can you just give us some color around what exactly what are the components of that?

Tim Paymal

Ryan, I can certainly cover that, but this is Tim Paymal. Ryan, in the quarter, we experienced significant devaluation in the euro and riyal of approximately 15% on the euro and 39% on the riyal. That created FX losses in the quarter. Approximately 40% of those were realized. We’ve now subsequently seen the euro strengthening again and that would help the unrealized side of that. So, that explains the significant number that you’re seeing there.

Operator

Your next question comes from Torin Eastburn - CJS Securities.

Arnie Ursaner - CJS Securities

Hi Rick. It’s actually Arnie Ursaner from CJS Securities. I’ve three questions I’d like to try to ask you. The American Association of State Highway and Transportation Officials just put out a survey talking about 5,000 projects ready to go, meaning they could be on the contract within 180 days totaling $64 billion. Give any sense of how many of these your products are designed into?

Rick Parod

I don’t, Arnie I have not seen that survey or I’m not aware of the details of that, so I really can’t say how much of that would involve our product, but I will definitely look into it.

Arnie Ursaner - CJS Securities

Okay. My second question is a follow-up regarding your steel inventory costs. You mentioned that the current cash prices are roughly 30% below where they were a while back. Should we assume your steel inventory costs are materially above market and how would that likely impact your margin over the next month or two or three months as you manufacture equipment?

Rick Parod

I think you could assume that our steel inventory is somewhat above market. I would not call it drastically above or use any extreme term in terms of defining that. I would say it’s somewhat above market and as I said, it’s typical for us to have a month or two to burn through the inventory that would be on hand to whatever current market changes have taken place and this has been a pretty rapid changing environment in terms of the steel pricing, rather.

Your second part of your question is how does that affect our margins going forward and I think the answer is that in a fairly stable pricing environment, there really is not an impact. In fact, there could be some potential benefit, because our overall steel on hand would be lower priced than what we would have seen say, four months ago.

So, there could be some potential benefit in a stable environment of pricing in a competitive environment where we’ve seen some price reduction. We will be reducing some pricing. I don’t expect that to have a significant impact on selling margins. I think the thing that could be more impactful of margins is really what happens to volume at the peak of the season in the next couple months.

Arnie Ursaner - CJS Securities

That leads right into my third and final question. A farmer Iowa Governor, Tom Vilsack, is expected to be announced the next secretary of agriculture. He’s been a very strong supporter of renewable energy, has pushed for ethanol in Iowa. How do you view him? If he is in fact put in place, how do you envision that perhaps impacting the commodity side of the equation for you?

Rick Parod

Yes, I saw that also and I thought that’s pretty favorable for farmers and farm economy and agro business in general. As you said, he is the biofuels pro ethanol and I think that’s very beneficial and obviously it’s very important for Iowa, but it’s also important for all of agro business and farm economies and the ethanol has played a pretty big role in the rural communities and rural agricultural communities. So I consider that favorable. I consider that positive in terms of hopefully maintaining demand for ethanol, which will be positive for corn pricing, positive for farmer economics.

Operator

(Operator Instructions) Your next question comes from Michael Coleman - Sterne Aggie.

Michael Coleman - Sterne Agee

I wanted to go back to the seasonality of the backlog and whether the potential of the pre-buy this season, disproportionately affected the decline in the backlog from the August to the November quarter.

Rick Parod

If I understand your question, I believe it’s tied to the fact that we did have some dealer stock inventory or cases where dealers would have taken on some inventory and that would show up, by the way, in our accounts receivable and this was anticipation of a strong peak period for our irrigation business where we wanted our dealers to have some stock on hand and your question is really did that in someway distort that, either the backlog in the first quarter, is that correct?

Michael Coleman - Sterne Agee

That’s correct.

Rick Parod

Yes, I would say that the type of dealer stock inventory program we had was fairly typical to ones we’ve had in previous years and I believe not much different than the one from the year before. I don’t recall the specific details of that Michael, but I think it’s very similar. So, I would say it would not have distorted it.

I think there is one other factor that probably came into play towards the tail end of fiscal ‘08 and that would have been the economic stimulus package that had tax incentives, well basically, tax incentives for farmers. I think that did play into some demand towards the end of the year and into that backlog, but it’s very difficult to know to what extent.

Michael Coleman - Sterne Agee

Okay and do you think those dealer inventories have been worked through or do you think they still may have some inventory on hand?

Rick Parod

Well dealers probably have been moving, I don’t know the exact amount, but they have been moving that inventory; I do know that they are moving it. The inventory that a dealer would take on would be typically one to two units. So it’s fairly small communities for any specific dealer, but I believe that they are moving those units and I couldn’t tell you offhand how many are there today.

Michael Coleman - Sterne Agee

Okay. In your prepared remarks, you referenced that the current corn prices are below breakeven and just for a point of reference, are you referring to current cash prices or are you referring to the 2009 new crop futures?

Rick Parod

Current cash prices.

Michael Coleman - Sterne Agee

Okay. The award with Mexico City, maybe you’ve disclosed this, but the number of miles or kilometers that covers?

Rick Parod

No, we haven’t disclosed that and for competitive reasons we’re really not disclosing much more about that project, but we have not disclosed that.

Michael Coleman - Sterne Agee

Does that represent, I mean is there potential follow-on orders that could come with this. I mean it seems relative to the size of Mexico City that would represent a relatively small contract. Am I thinking about that right or is that potentially maxed out in that marketplace?

Rick Parod

You’re absolutely thinking about that right. I would think of it in terms of, as we are doing this project in Mexico, there could be additional projects of this size, bigger or smaller that will follow-on. I think that they see the benefits from a traffic mitigation standpoint. It’s very likely, we will see additional projects and we found that in other markets as well.

Michael Coleman - Sterne Agee

You referenced last couple of quarters the lower margin Sinoline products versus the Quick Move Barrier; what approximately is the spread, I mean how large is that spread on a margin basis?

Rick Parod

Well, I don’t want to specifically define a margin amount. I would just say that there is one element in the Snoline’s product line. One product line in their business which is the road marking tape business that is lower margin than, what we’d like to see in general in our infrastructure business; it’s a lower margin product line and that one is the one that tends to drag down Snoline’s margins from an overall product mix standpoint.

Michael Coleman - Sterne Agee

One follow-up; on the steel, your image steel inventory costs are on a LIFO basis?

Rick Parod

Yes.

Michael Coleman - Sterne Agee

So, did you see a charge in the past year on LIFO and could you see a credit in the next quarter or so?

Rick Parod

At year end, we did not have a charge on LIFO and we evaluate that on a quarterly basis and we continue due to the seasonality of that business and inventories picking up in the middle of the year. We tracked it on a quarterly basis, but we have full intentions of getting the inventory levels back to prior year levels and minimizing that potential charge.

Operator

Your next question comes from Steven Gambuzza - Longbow Capital.

Steven Gambuzza - Longbow Capital

I just wanted to clarify, a follow-up on one of the earlier questions asked regarding the impact of lower steel prices on margins and I think you said earlier that steel is approximately 30% of cost of goods sold; is that correct?

Rick Parod

30% to 33%, that’s third of cost of goods sold, yes.

Steven Gambuzza - Longbow Capital

In general, should we assume all things being equal that any decline in steel prices is generally passed on roughly dollar-for-dollar to your customers?

Rick Parod

As steel was going up, we were passing on increases. Yes, that’s correct and I would say that what we’ve seen in the market today is not dollar-for-dollar passing decreases and I also would caution of going too far with that because we also hear indications from steel mills that steel maybe rising. So I anticipate that we could see steel prices coming back up some. So, I’m certainly cautious about taking actions that are going to reduce pricing significantly and the only reason that we would do that at this point is to meet competitive conditions.

Steven Gambuzza - Longbow Capital

Sure. So it sounds like things on the way down so far, pricing has been stickier on the way down in terms of the average selling prices versus spot steel prices?

Rick Parod

Through the first quarter, that is correct. We have seen some movement in the last few weeks with one competitor; however, it has been fairly sticky in general as steel moved down.

Steven Gambuzza - Longbow Capital

And in your experience running this business in prior cycles, I mean obviously we haven’t had maybe as much volatility in steel prices, but has that dynamic kind of generally played out throughout the cycle?

Rick Parod

I honestly could not define that Stephen, because we have not seen a dynamic like this. What we have seen is very stable steel prices up till about 2004, when steel doubled and then doubled again in about 2008 time period. So, we really haven’t seen a period of steel dropping like it has recently, at least not in my tenure with the company.

Steven Gambuzza - Longbow Capital

Just so I can get a better feel for the competitive dynamic and the irrigation side, is it pretty much kind of an oligopoly in terms of it’s only kind of four or five major competitors you’re going against on any large order?

Rick Parod

For the most part, yes; if you look at the domestic market, there’s really three or four players. In the international markets, it does change a bit and some markets will have six to eight and other markets it may be three. So, it will vary in the international markets, but in general, yes.

Operator

Your next question comes from Jeff Moore - Hunter.

Jeff Moore - Hunter

Actually, I have two questions. The first is, at year-end 2008, you had $13 million of your backlog that represented dealer inventory. I’m wondering, how much of the current backlog is dealer inventory?

Rick Parod

First of all, I don’t know if that number is correct for 2008 representing dealer inventory. I couldn’t say that is correct. That sounds high. Well first of all, we don’t have dealer inventory in our backlog unless lets just say dealer stock order, hard order that they are going to place to put into stock and in our current backlog, we have many dealer orders, but they are primarily for specific customers.

Jeff Moore - Hunter

Okay. I’m just reading off Page 22 in your 10-K and maybe I’m misreading it, where it says that approximately $13 million of the order backlog represents orders from dealers for inventory.

Rick Parod

No, that’s very possible. I don’t have that in front of me but that would mean that was the dealer stock orders at that point in time where dealers had placed orders to take in the stock in anticipation of the season. Now, that would have been pre-season kind of build. Now we really wouldn’t have, much if any dealer stock orders in our backlog at this time that I’m aware of.

Jeff Moore - Hunter

Okay, thank you and my second question is kind of follow-on. I’m just trying to understand your accounts receivable in their cycle. Going back to that statement, it said that payment is collected by the earlier of 30 days after the units are sold to growers or February 28, 2009. I guess I’m wondering when I look at your accounts receivable and it looks like they are up about 80% from the fourth quarter of ‘07, I’m just wondering if you could talk through kind of how those receivables work and why they have gotten so large on a relative basis.

Rick Parod

Yes. Well first I’ll let Tim describe our general payables terms, but I would add that references that you are referring back to or that comment is in regard to the dealer stock inventory piece only, which means when dealers take or place orders for dealer stock, the terms are it’s an actual sale.

We don’t own the inventory, but we do give them extended terms or dating on the receivable and that would amount to them paying for the dealer stock 30 days after they sell it or at the latest, the end of February and that’s on dealer stock units only. Now, the typical order that we receive, which is for a general customer and specified to a customer, those terms would not apply.

Tim Paymal

Those terms are 30 day terms and then that’s when you would see the quicker cycle of generating cash.

Rick Parod

So, there is a portion of that receivable that would stay on our books until, say that February time period if it is a dealer stock unit that has not been sold yet.

Jeff Moore - Hunter

Okay, so the $84 million that you have in receivables at the moment; could you just speak more generally about that. How much of that goes to irrigation versus infrastructure and is all of that 30 day payable and then what are the terms on that?

Rick Parod

Well Tim is looking for some detail on this to be able to split that out, I don’t have that offhand. That may be a question we could help you with in follow-up, but…

Jeff Moore - Hunter

Yes, that would be great.

Rick Parod

Tim, do you have a split-out on the receivables between, say just for irrigation; how much of that is irrigation in total?

Just roughly, we don’t need to get defined. This is not a part of what we split in the segment reporting, but just kind of an approximate basis, is it 80/20?

Tim Paymal

Approximately $50 million.

Rick Parod

Of the $84 million.

Tim Paymal

Yes.

Rick Parod

So approximately $50 million of the $84 million is irrigation and I couldn’t tell you how much of that is specifically related to say the dealer stock that’s going to be paid at the end of February. I don’t know that offhand.

Operator

We have no further questions at this time. You may continue with your presentation or any closing remarks.

Rick Parod

For our business overall, the global long-term drivers of water conservation, population growth, increasing importance of biofuels and improvements in infrastructure remain positive. In addition to the overall business enhancements that have taken place, we continue to have an ongoing structured acquisition process that will generate additional growth opportunities throughout the world in water and infrastructure.

I’d like to thank you for your questions and participation in this call today. We wish you all an enjoyable Holiday Season and Happy New Year. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s Lindsay first quarter 2009 conference call. You may all disconnect.

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