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Lindsay (NYSE:LNN)

Q1 2014 Earnings Call

January 03, 2014 11:00 am ET

Executives

Richard W. Parod - Chief Executive Officer, President and Director

James C. Raabe - Chief Financial Officer and Vice President

Mark A. Roth - Vice President of Corporate Development and Treasurer

Analysts

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Brett Wong - Piper Jaffray Companies, Research Division

Christopher Schon Williams - BB&T Capital Markets, Research Division

Tim Mulrooney

Ryan M. Connors - Janney Montgomery Scott LLC, Research Division

Andrew O'Conor

Joseph Mondillo - Sidoti & Company, LLC

David L. Rose - Wedbush Securities Inc., Research Division

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

Kevin C. Bennett - Sterne Agee & Leach Inc., Research Division

Peter Van Roden

Brian Gustavson

Operator

Good morning. My name is Justin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation First Quarter 2014 Earnings Call. [Operator Instructions]

During this call, management may make forward-looking statements that are subject to risks and uncertainties, which reflect the 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 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.

Richard W. Parod

Good morning. Happy New Year and thank you for joining us today. Joining me on today's call is Jim Raabe, our CFO; Lori Zarkowski, our Chief Accounting Officer; and Mark Roth, VP of Corporate Development and Treasurer.

Total revenues for the first quarter of fiscal 2014 were $147.7 million, approximately equal to the same period last year. Irrigation segment revenues decreased 4% from the same quarter last year, driven by lower mechanized irrigation revenue in the U.S. And infrastructure segment revenues increase 41%, driven by higher road safety product sales and Road Zipper System revenues.

Lindsay Corporation's operating margins decreased to 10.8% in the quarter compared to 15.1% in the same quarter of last year. Net earnings were $10.2 million or $0.79 per diluted share, compared with $14.7 million or $1.15 per diluted share in the prior year.

For the irrigation segment, sales totaled $129.2 million in the quarter, 4% lower than the same quarter of last year, due to significantly lower U.S. revenue, partially offset by increased demand in the international markets and the acquisition of Claude Laval Corporation.

Irrigation operating margins declined to 15.7% of sales from 20.5% last year, in large part due to a $2.3 million charge related to a product warranty matter, along with fixed cost deleverage of manufacturing and SG&A expenses.

In the U.S. irrigation market, revenues were $79.3 million in the quarter, decreasing 18% off of drought-driven sales last year, 23% lower than last year when excluding the revenue from Claude Laval Corporation acquired late last fiscal year.

While U.S. sales are well below the year-ago level, demand remained higher than is typical in the first quarter, which we attribute to historically high farm income and strong farmer balance sheets.

The expiration of the Section 179 tax depreciation benefit may have driven some sales in the quarter. However, we have only minimal anecdotal evidence of that. The outlook for the primary selling season remains difficult to predict and we don't really expect to have more visibility into the primary selling season of fiscal 2014 until later in the second quarter.

Despite lower crop prices, irrigation revenues -- irrigation remains one of the most significant means of which growers can improve yield through capital expenditures.

In the international irrigation market, revenues for the first quarter were $49.9 million, increasing 32% over the same quarter of last year.

Revenues increased most notably in South America and Australia. The increase in South America primarily reflects the continuation of the very strong market we experienced in Brazil throughout fiscal 2013, due to attractive interest rates, high commodity prices and state government support for irrigation. In general, international irrigation equipment revenues are more volatile quarter-to-quarter than in the U.S. market due to the project nature of some of the individual markets.

We expect the lower commodity prices will impact irrigation equipment demand in many of the international markets. However, the timing is less clear due to the continued drive for food security, including government support for efficient irrigation. During the first quarter, we continued to see solid ordering and quoting activity in most all international markets.

Infrastructure segment revenues were $18.5 million in the quarter, increasing 41% from the same quarter of last year, while sales increases from Road Zipper Systems, road safety products and rail products. The infrastructure segment generated operating income of $0.5 million in the quarter compared to an operating loss of $1.3 million in the first quarter of last year, primarily due to increased revenue and a larger mix of Road Zipper System sales.

In addition, we received a $12.7 million order from the Golden Gate Bridge Highway and Transportation District during the quarter that will likely be installed in the first quarter of fiscal 2015.

While we're making progress in returning the segment to profitable growth, we expect infrastructure demand will remain challenging and sales will remain lumpy as government spending for infrastructure projects improve and as new Road Zipper applications are developed worldwide. We are pleased with the progress being made.

Gross profit in the first quarter was $40.2 million or 27.2% of sales, versus $42.9 million or 29.1% of sales in the same quarter last year. Gross margins in irrigation declined by approximately 2 percentage points due to a $2.3 million charge related to a product warranty issue. Excluding this charge, U.S. irrigation gross margins improved, but were offset by lower margin international sales.

Infrastructure gross margins improved by approximately 5 percentage points due to a mix shift to higher margin infrastructure products, including an increase in Road Zipper System sales.

Operating expenses in the first quarter increased $3.6 million. The increase in the quarter expenses included $2.1 million of operating expenses associated with the newly acquired Claude Laval Corporation and $1.2 million of higher personnel expenses. Operating expenses were 16.4% of sales for the quarter compared to 14% of sales for the same quarter last year.

Including the acquisition, we expect SG&A as a percentage of revenue to return to historical levels of approximately 15% of revenue for the full year. The order backlog of November 30, 2013, was $86.6 million, compared to $85.1 million on November 30, 2012 and $66.5 million on August 31, 2013.

Year-over-year, backlog for international irrigation and infrastructure increased, while U.S. irrigation backlog declined. The infrastructure segment backlog includes the $12.7 million order for the Golden Gate Bridge project.

U.S. irrigation backlog at this time of year typically represents less than a month's revenue. Backlog for international irrigation and infrastructure typically contains some longer-term projects, such as the Iraq contract and the Golden Gate Bridge project. As a result, current backlog is not a good indication of quarterly revenues.

Cash and cash equivalents of $151.8 million were $400,000 lower than the same time last year, while debt decreased $3.2 million.

Accounts receivable were $33.2 million higher year-over-year, primarily due to the Iraq contract and inclusion of Claude Laval Corporation.

Inventories increased $8.4 million, due primarily to the acquisition and inventory turns improved.

Included in our earnings release and under a separate release, the company has also clarified its plans for capital allocation and announced specific actions to enhance shareholder value. Our first priority for uses of cash remain investing in organic growth. We expect $20 million to $25 million of annual capital expenditures in the next 3 years, focused primarily on productivity and capacity enhancement, as well as continuing to invest in our substantial growth opportunities in international markets.

Second, we are committed to annual increases in cash dividends and our doubling of our quarterly dividend to $0.26 per share, providing a meaningful yield increase to shareholders that more appropriately reflects our recent and expected cash generation. This increase in the dividend will not limit our ability to invest in organic growth initiatives or to make synergistic value-creating acquisitions.

Our acquisition focus is directed on water-related acquisitions that enhance our competitive position and offer attractive returns to shareholders. We expect acquisitions to total $100 million to $150 million over the next 3 years.

In addition, we plan to opportunistically repurchase between $100 million and $150 million of company stock over the next 24 months, taking into account the cyclicality and seasonality of the business. Our Board of Directors has now approved a total repurchase authorization up to $150 million.

It's important to note that this capital allocation plan was developed taking into consideration what we believe are significant revenue and earnings growth initiatives and by talking with and listening to our shareholders. We would like to thank the many institutional shareholders that took the time to provide their thoughts on the various value-creation priorities our management team and board considered.

In summary, sales continued at record levels in the first quarter. However, the mix has changed notably from the same time last year. U.S. irrigation equipment demand declined from the same time last year, while we achieved growth in international irrigation and infrastructure markets.

Sales for the remainder of the fiscal year remain uncertain due to our lack of visibility into the primary selling season for irrigation equipment. Due to the significant decrease in relevant agricultural commodity prices, we continue to anticipate lower U.S. irrigation revenues for fiscal 2014 versus the record level of 2013.

Regardless of where we are in the Ag cycle, we are very optimistic about the future of mechanized irrigation globally. Food security needs, along with limited land and water, will drive the need for efficient food production.

For the infrastructure business, government spending on highway and other infrastructure projects remains an impediment to achieving consistent market growth, although we believe we have sizable market penetration opportunities for road safety products, Road Zipper Systems worldwide. And we have recently seen positive signs of increased infrastructure activity.

Finally, in addition to our organic growth opportunities in irrigation and infrastructure, we continue to pursue strategic, synergistic acquisitions that further differentiate our product position and add new growth opportunities.

I would now like to open it up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Nathan Jones.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

I understand that visibility is limited into what demand is going to look like for the rest of the year, but I wonder if you could kind of help us think about the possible scenarios given your long experience in the business. If we end up with revenue down 10% for the year, where -- what kind of margin compression would you think about there, and if it's 15%, if it's 20%? If you could just give us any more color on kind of the decremental margins or the deleverage on that volume we might look to expect?

Richard W. Parod

Well, I don't really want to get into guidance in this or really, specifically, the deleveraged amount, other than to say that our big challenge as we see market shift is to really take out cost as rapidly as we can or appropriately to whatever's happening with the market. And I think we've demonstrated in the past that we're very responsive to market conditions and can take out cost pretty rapidly to prevent that erosion. I think the other factor that come into play often is the competitive situation. So as the market contracts, we've seen cases where the competitive pricing will change and become more aggressive. And that tends to put a little pressure on gross margins. We've seen factors of that type that have played into it. So it's a difficult one to predict. And every situation is a little bit different. But I would say, we probably are very effective in terms of responding internally with appropriate reductions. However, we're not in control of what happens from a competitive position.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Well, given what you just said there, can you outline what plans you've implemented and what plans there are to implement in terms of taking cost out in the face of this, what looks like a cyclical downturn in demand?

Richard W. Parod

Well, I would characterize that, Nate, as starting -- when we started the fiscal year, we began with not only our business plan, but also contingency plans in terms of looking at best-case and worst-case scenarios as we often do. And we have continued to monitor the market conditions from the standpoint of being prepared to take action as necessary. Now let's say that one of the more immediate actions we've taken is holding back on some of the planned spending that would have taken place given potential growth opportunities that we would see. But outside of that, nothing really specific in terms of significant reductions. I would say that we have a cautious view right now looking into this next season to see what's going to happen. And we're prepared to take action as necessary.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

So at the moment, there's no headcount reduction plans in place?

Richard W. Parod

Nothing specific that I'm really prepared to talk about at this point.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Can you talk -- I think you said that outside of that, the warranty charge, gross margins for U.S. irrigation were actually up year-over-year. Is that correct?

James C. Raabe

Yes, Nathan. This is Jim. That's correct.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

That's, I think, a pretty good result considering that core revenue was probably down about 25% x the acquisition. Can you talk about the dynamics there, or what you've done to allow you to kind of hold those margins, despite the pretty significant year-over-year drop in revenue?

James C. Raabe

Sure. Yes, first of all, I think our team in our manufacturing plants have done a very good job in kind of managing the dynamic of the volume shifts that we see. I mean, we've always had a fairly good LEAN approach to things. And we're always working towards adding efficiencies into our plants and our manufacturing processes. And so that's always a part of it. Just on a more macro level, pricing -- the pricing side of things in the U.S. market has been -- has remained to be pretty strong. We've picked up a little bit of margin on the pricing side. We did deleverage a little bit on the cost. As you mentioned, the -- on the fixed cost side, as you mentioned. The volume is down, so that did offset some of it. But I think the combination of productivity within our plants, as well as some of the strength of the pricing, has contributed to where we are in the margins. Now as Rick mentioned, it's difficult to predict how that pricing is going to hold through the selling season because it really is the primary selling season when we're more likely to see pressure if we're going to get pressure. So I don't know that it's necessarily a good indicator of what we expect into the selling season, but it certainly held pretty well through the current period.

Operator

And your next question comes from the line of Brett Wong.

Brett Wong - Piper Jaffray Companies, Research Division

I just wanted to see if you could provide some more color on where the growth in the infrastructure segment came from. And if you see that kind of being improvement here going forward.

Richard W. Parod

Well, I would characterize it in a couple of different ways. One, there was an additional Road Zipper System project, which was a project in Hawaii that's in process. And that was part of it. The other was, as I mentioned early on in the comments, the -- was growth in our road safety products and in our rail products. And both of those I would attribute to aggressive selling processes and everybody really stepping up and some benefits that we've seen in terms of additional spending in the market. But I think more of it is the opportunities that we've seen, where there are opportunities for us to take additional market share.

Brett Wong - Piper Jaffray Companies, Research Division

And so do you see that spending improving here going forward?

Richard W. Parod

Well, we've seen some slight improvement in overall infrastructure spending that's been beneficial, without a doubt, in road safety products. There's definitely more projects taking place. I think the other part where I'm probably even more encouraged right now is the activity that we've seen in the Road Zipper System or QMB-type sales opportunities that are taking place around the world. So our people have been working on projects all around the world and one of them that we were working on may be something that could fall into this year. We've got projects that we're working on today and meeting with people in the last month or so that could be 2 years out. But there -- the pipeline is really pretty active. So from that standpoint, I'm very encouraged.

Brett Wong - Piper Jaffray Companies, Research Division

Okay. And on the acquisition front, are there targets that you have in the pipeline? And can you provide any color into what those are and timing?

Richard W. Parod

Well, I would characterize it as, there's always targets in the pipeline. Last quarter, I was probably very optimistic on a couple of specific targets that we were working on. Some of those have shifted a little bit or a couple of them, where, one, it's probably not as likely as I thought it was at that time due to some issues, but we're continuing to have discussions. And another one that's probably moved out some. So these are -- it's constantly changing. But I would say, right now, our pipeline in terms of acquisition candidates are more active and more full than it's been for a while. I would let Mark Roth see if there's anything he would want to contribute to that. But we do have a pretty active pipeline, nothing that I would describe as eminent today.

Mark A. Roth

Yes, this is Mark Roth. I would say our process is active. And with regards to our strategy, we remain focused on synergistic water-related acquisitions, of which some specific areas like pump systems and filtration, of which we really do like the Claude Laval acquisition because it gives us the synergy in irrigation, but yet provides us some exposure to some industrial markets. So we'll remain active and very proactive in the acquisition side.

Brett Wong - Piper Jaffray Companies, Research Division

Okay. And just on the Claude Laval acquisition. Is that odd million dollar first quarter run new figure a good run rate going forward?

James C. Raabe

Excuse me, what was -- what number were you quoting?

Brett Wong - Piper Jaffray Companies, Research Division

I -- just kind of backing into it, given the commentary around domestic irrigation being down 23% excluding the Claude Laval acquisition.

James C. Raabe

Right, yes. Well, the number we quoted was related to the domestic business -- or the decrease was related to the U.S. business and what Claude Laval Corporation contributed to that piece. There is also an international piece. I think just the one point that I would make is, we don't typically talk about individual business unit sales, but we had indicated that the annual sales for that business was around $25 million to $30 million. This is a little bit of a seasonal slower period for them, but that business is tracking to what we expected when we acquired it.

Brett Wong - Piper Jaffray Companies, Research Division

Okay. And what portion of that's domestic versus international, if you could break that out?

James C. Raabe

This is Jim again. And the -- it can fluctuate from time to time. But I would say that, generally, it's 2/3 domestic and 1/3 international.

Brett Wong - Piper Jaffray Companies, Research Division

Great. And then just one last one for me. I'm just wondering if you could provide a more color on the warranty charge. What that was and if there's expectations of any charges in the future?

Richard W. Parod

Well, the specific warranty charge was related to a new product that we launched that was, essentially, a very good product. And it's our NFTrax product out in the market. And it's a interesting little challenge because we really didn't have customer reported issues with it. But we saw some cracking in the tracks that our customers believe is really not much of an issue and probably something that would -- is more of an expectation change than anything else. But we're not happy with this in terms of we really want to get to the bottom of why the cracking is taking place and what we can do to prevent that earlier. The cracking is -- we're seeing it earlier than what would be expected. And we think that from a brand standpoint and our product expectation standpoint, we need to take a look at what we can do to change and improve this. So that's what the warranty charge was for. I wouldn't anticipate any more related to that. I think we've taken a pretty conservative approach on this, much more conservative than even our customers would prefer.

Operator

And your next question comes from the line of Schon Williams of BB&T Capital Markets.

Christopher Schon Williams - BB&T Capital Markets, Research Division

I wanted to talk a little bit back on the acquisition strategy. I mean, $100 million to $150 million seems a bit more aggressive than what you've been able to realize in the past several years. And I just want to -- I want to try and understand, what do you think has changed that would allow you to do that pace of acquisition kind of versus what recent history has been?

Richard W. Parod

Yes. It's a difficult one to answer from the standpoint of saying that it certainly is not a sure thing. I would say that there's not a lot that has changed. What we have seen is that our acquisition process in terms of identifying candidates around the water-related core that we're talking about is better than it has been in the past in terms of identification of those, as Mark mentioned, whether they're pump station-type acquisitions or filtration and things of that nature. And we've also seen in some cases more willing sellers than what we've seen in the past few years, which does help the situation. Now it's still difficult to predict. And we've estimated $100 million to $150 million. However, it's a very difficult one due to the fact that you need willing sellers. And that's why I think the -- when we look at our capital allocation plan in total, it's important to look at the fact that we're also looking at any excess cash or capital that we have sitting. We really need to be aggressively looking at investing that from creating shareholder returns. And that's beneficial to all of us as a management team in terms of our incentives and beneficial to our shareholders. So from a capital allocation standpoint, we will aggressively be looking at share buybacks and other things in terms of enhancing returns, while we're continuing to look at those acquisitions.

Christopher Schon Williams - BB&T Capital Markets, Research Division

Just so I understand, I mean, should I look at the acquisitions and maybe the share buyback as kind of mutually exclusive? If there's no activity on the acquisition side of the ledger that you'd be using cash flows to go back and buy, and that's why we kind of see that $100 million to $150 million kind of -- those are the kind of numbers we're talking about across both categories?

Richard W. Parod

I wouldn't look at them as mutually exclusive. I would look at, we would intend to do both. We would be considering debt for acquisitions if we find the appropriate acquisitions that really do create the value that we believe can be done. And at the same time, we'll be investing cash in share buyback.

Mark A. Roth

This is Mark Roth, too. I think when you look at the capital allocation plan put in place and the commitment that we've made to the 24 months time period for the $100 million to $150 million of share repurchase, I think it is important to note that the simultaneous view of acquisition in conjunction with share repurchase, we're going to be active on both fronts simultaneously, like Rick stated. So that's important to know.

Christopher Schon Williams - BB&T Capital Markets, Research Division

And is there any reason why we would expect the pace of the buyback, I mean, to not be equally distributed over that period? Obviously, as acquisitions come in that, that would be in play. But is there -- I don't know, should we expect you to be more, I don't know, front-end loaded, back-end loaded? Is there anything that would kind of -- are there any other variables that I should be thinking about in terms of the pace of the buyback?

Mark A. Roth

I would say given, again, the caveat of looking at our business as cyclical and seasonal and given the fact that we've put this into a timeframe, we're going to be opportunistically looking for repurchase periods over the course of the next 2 years. However, we will be in the market quite often given the amount that we've put in the repurchase plan. So you'll see -- you'll probably see activity in most quarters. However, we're going to remain opportunistic in our repurchase methodology.

Christopher Schon Williams - BB&T Capital Markets, Research Division

So to ask this another way, I mean, seasonally, we should be expecting maybe more aggressive activity in the back half of the year, just given the cash flows are generally better during that period?

Mark A. Roth

I don't necessarily think that we could put a timing to that. And I wouldn't say that on the back half of the year. I think we've gone into this repurchase plan with a cash position that we're comfortable with, executing on both the repurchase and the acquisition side, in conjunction with the fact that we're debt-free at this point and we have debt capacity.

Richard W. Parod

The stock repurchase will not affect our ability to make the acquisitions.

Christopher Schon Williams - BB&T Capital Markets, Research Division

Okay, that's helpful. Then one last one for me. Just any update on where we are in terms of new leadership for the infrastructure division?

Richard W. Parod

I'm not exactly sure of the question, but the new leadership was appointed to the infrastructure division very quickly. And I think I made the comment last quarter, I'm very confident with the new leadership that has been appointed, somebody from internal, and it's working very well.

Christopher Schon Williams - BB&T Capital Markets, Research Division

I mean, any comments on, I don't know, new -- I'm just trying to think, is there any low-hanging fruit that we should expect kind of out of the gate, anything? Has the strategy changed there at all for the near term?

Richard W. Parod

No, I wouldn't characterize it as any kind of a strategy change. I would just say that there is definitely a sense of urgency. There's definitely a sense of aggressiveness in the business. And there's definitely a different execution approach.

Operator

And your next question comes from the line of Tim Mulrooney with William Blair.

Richard W. Parod

I'm sorry. I didn't hear from the operator. Who is this?

Tim Mulrooney

This is Tim Mulrooney with -- for Brian Drab at William Blair. I have just a couple irrigation questions. First off, could you provide us with some more insight into the pipeline in your international irrigation business? Do you think it's possible that given the first quarter result that the international irrigation could be up this fiscal year despite the large project in Iraq last year?

Richard W. Parod

Yes, I think it's possible. I really am not going to give guidance or make an estimate on that. I would say that a lot of the international markets are somewhat project impacted or affected. So as we see large projects come in, whether it's the Middle East or it's Russia or Ukraine or wherever it is anywhere in the world, they can have a sizable impact on international irrigation at any point in time. And we also have a very active project list in irrigation at this stage, primarily international projects, that are very sizable projects. However, the timing of those are also difficult to predict. So it is a possibility. I'm not projecting anything at this point. I also think it's important to note that the international markets are impacted by global commodity price changes as well and it does at times affect the institutional investors or the investors that are getting into agricultural projects and their timing of getting into those projects. So we could also see delays in some of the projects that we would anticipate falling into this year. So I think it could go either way. But it definitely could be more and it could be less. And I'm really not making a prediction at this time.

Tim Mulrooney

Okay, great. Just one more on the domestic side. Are your dealers seeing an impact from the expiration of Section 179? Did they see -- or did you see any pull-forward in December? And do you think that this will materially impact pivot sales in 2014?

Richard W. Parod

We had minimal anecdotal comments or evidence of any kind of a pull-forward on Section 179. And I would say the majority of the people that I've heard from talked to -- or that our people have talked to, are really not indicating any pull-forward on the Section 179 of any significance. I think more interestingly, the order rate had held up quite well, given the farm -- farmers balance sheets, plus farm income in the past. So they've been in a pretty strong position. Even though commodity prices have decreased, farmers have remained pretty optimistic and pretty bullish. I really don't know how that -- if that sustains into this next selling season. That's why we've been cautious in our projection. But we don't believe that Section 179 has played a big role in that at this point.

Operator

And your next question comes from the line of Ryan Connors of Janney Montgomery Scott.

Ryan M. Connors - Janney Montgomery Scott LLC, Research Division

A question on U.S. irrigation side, Rick, just regards to geographies within the U.S. I know that when the drought came along, there was a lot of disproportionate growth in the eastern part of the Corn Belt, dry land conversion and so forth. So can you give us an idea, as you're starting to see that moderation from the peak level, what the contribution is to that from kind of the plain states and the eastern part of the Corn Belt? And I guess, also the analysis you typically go through on dry land versus conversion versus replacement and so forth. If you can kind of give us an update there, that'd be helpful.

Richard W. Parod

Well, I think the comment on -- to comment on where the geographical region of the changing has taken place, I would say that it's been primarily in the same regions that we've seen where the increases took place. So it's been relatively consistent in terms of that pullback. It's been primarily the Corn Belt, in the same regions where we saw the increase. And I'd say, probably even more so on the eastern region from the standpoint of the areas where they were more drought affected. And we saw significant increases in those areas where we weren't seeing the irrigation revenue growth in the past. Now that's pulled back and dropped back to more normalized levels. In relation to the other question, what we saw this past quarter is roughly 40% of the systems sold went into dry land, 26% into conversion and 34% into replacement.

Ryan M. Connors - Janney Montgomery Scott LLC, Research Division

Okay. So does that kind of imply, Rick, that if you -- some of the other manufacturers of agricultural equipment actually saw sales hold up pretty well in the fourth quarter in the most recent quarter. Does that kind of imply that the weakness you've seen from the peak so far is more a function of the drought conditions having abated than really the commodity prices per se? Or is that -- would you not agree with that characterization?

Richard W. Parod

I think it's really hard to parse that into pieces in the sense of they're very closely related. The drought areas certainly were significantly impacted in the past in terms of -- from a positive standpoint in terms of buying equipment. And we have seen that pullback. But also the commodity price has played a large role in it as well. So I think it's really a combination of the 2. And they are very closely related.

Ryan M. Connors - Janney Montgomery Scott LLC, Research Division

Okay. And then just as a separate, kind of one-off question. There was an interesting acquisition by another company that -- in the space called Trimble, of a company called IQ Irrigation back in the third quarter. And I'm curious, my understanding of it is that it's technology that's not all that dissimilar from FieldNET. And so I'm curious how -- whether you're aware of that deal and, if so, how that impacts your FieldNET outlook and whether that impacts your competitive position at all there.

Richard W. Parod

I recall the acquisition. I remember looking at the specifics of that one. I believe it's not really a FieldNET-type product, but they do -- Trimble does have a product that they're making a number of acquisitions to tie into their product. And it was an interesting acquisition. One that is a company that we had looked at, at one time or another. And I wouldn't call it a FieldNET-type company. So we do see that there is some competition moving in the direction that we do in terms of more of the, let's say, smart farm and the intelligent irrigation in the field. So we see a little bit of that taking place, but it's not -- that was not a significant factor from our standpoint, from a competitive standpoint.

Ryan M. Connors - Janney Montgomery Scott LLC, Research Division

Okay. And so I take from that, that there's no view that, somehow, the technology migrates towards some of the technology players like Trimble at the expense of your ability to upsell on things like FieldNET and so forth?

Richard W. Parod

Well, I think there's always going to be a push for some of the other equipment manufacturers to pull in some of that technology and get into some of that space that, let's say, we're providing solutions for from our intelligent irrigation systems. And we expect we will have more competitors and some of the larger companies getting into that space. However, I don't believe that changes our competitive position in any way. And we will continue to build out our strength and capabilities in that area.

Operator

And your next question comes from the line of Andrew O'Conor with BMO Asset Management.

Andrew O'Conor

How would you guys see a generally strengthening U.S. dollar impacting Lindsay's international irrigation sales over the next quarter or 2? Any comments you have, appreciate it.

James C. Raabe

This is Jim. And I don't really anticipate that having a significant impact. I mean, we do also have international manufacturing locations that help us to offset that and continue to expand those capabilities that we continue to build out. But we haven't seen much of an impact to date. And I wouldn't anticipate a large impact at this point.

Andrew O'Conor

Okay. And then secondly, do you guys see any surge in demand for Lindsay's irrigation systems in California to help alleviate the ongoing drought there?

Richard W. Parod

I would describe it as, we've seen some consistent improvement in demand in California over the last few years. However, I wouldn't describe it as any kind of a surge in demand. I think there's definitely increased interest. We've seen also a reduction in some farmland in California that has been traditionally, let's say, water gravity irrigated moving out. But we think that there is still a good opportunity in California, but it's not a fast process.

Operator

And your next question comes from the line of Joe Mondillo with Sidoti & Company.

Joseph Mondillo - Sidoti & Company, LLC

Just a couple of questions. One, I was wondering if you can talk about the spread between input prices and output prices. It seems like you probably got a pretty good benefit from that spread widening over the last several quarters. And with steel prices starting to rise, just wondering if you have any thoughts on that.

James C. Raabe

Yes, this is Jim. And I would say, we really haven't seen much of a change in steel prices overall, although there has been talk of increases. It's a question of whether those prices would hold. I would say, there have been other of our component prices that have had some increases to them, though. But I think your general comment is correct. We have seen some improvement in our gross margins because we've had a fairly strong pricing environment and a relatively modest input cost environment. But it is kind of a question of how that holds because of the pricing comments we've made earlier, as well as that there is some talk of some pressure on steel, although we haven't seen any hold -- anything hold yet.

Richard W. Parod

This is Rick. I'd just add to that point that while we have seen that pricing pressure, we typically will have 2/3 of a quarter or more covered in a forward buy or a hedge of some type on steel. And at this point, I believe we're covered through all of the second quarter in terms of the projected usage.

Joseph Mondillo - Sidoti & Company, LLC

Okay, great. And then moving on to the infrastructure segment. And just wanted to clarify, I guess, the Golden Gate Bridge and then I just want to go into something else. But in terms of the Golden Gate Bridge project, correct me if I'm wrong, you said that, that $12.7 million backlog that you recorded this quarter will hit in the first quarter of '15?

James C. Raabe

I think the installation of the project is scheduled for -- at the end of the calendar year, which would be roughly our first quarter. We will be manufacturing and delivering in advance of that. But likely, a good majority, if not all of the revenue, will be in 2015.

Joseph Mondillo - Sidoti & Company, LLC

Okay. And then that project is roughly a $25 million project. Is that right? Are you going to record any additional business related to that? Or is that $12.7 million backlog sort of the extent of what you guys are going to realize from that project?

James C. Raabe

That $12.7 million is the extent of what we would realize. There -- it is a larger project. There is other work that's being done on the bridge, but it's unrelated to the Road Zipper System that we're putting in.

Joseph Mondillo - Sidoti & Company, LLC

Okay. And then just additionally in terms of the segment overall, backlog, excluding the Golden Gate project, could you talk about that? And just how has that been -- excluding the Golden Gate, how has that been trending lately? And what your expectations are there going forward?

James C. Raabe

Was that question specific to infrastructure?

Joseph Mondillo - Sidoti & Company, LLC

Yes, infrastructure. Specific to infrastructure.

James C. Raabe

I think generally speaking, I think our infrastructure business has seen good volume. And excluding the Golden Gate Bridge project, we've seen good order taking across the infrastructure business.

Joseph Mondillo - Sidoti & Company, LLC

Okay. So you have a pretty good feeling that things will continue to improve in that segment?

James C. Raabe

Yes. It's always a little bit difficult to predict because that business can be -- it is project-related. It can be lumpy. But as Rick alluded to earlier, we've had a change in management of a little bit more aggressive approach. And I think we're seeing good progress on that side.

Joseph Mondillo - Sidoti & Company, LLC

Okay. And then just my last question, related to the international business. It sounds like you're maybe a little more cautious on international, just given, I guess, where crop prices have gone. I just had a specific question in terms of your business in China. I was wondering if you have any color on that. And if we see a slowdown in China, any insight on how that may affect the overall international business?

Richard W. Parod

Our business in China is, in a large part, government-subsidized. So if there is a slowdown in China that affects government subsidies and projects, then we would definitely expect to see some slowdown there. However, I'd say that we've seen this periodically in the last couple of years, where government tenders will occur in 1 year and may drag out or not occur in the next year. So it's still been very lumpy there as well, somewhat tied to government funding, somewhat tied to their economic changes and things that are happening. So we do expect that there could be an impact in China if there's a real slowdown. I think the other part, you made the comment of being more cautious about the international markets, I'd say that I'm extremely bullish on the international markets in total in the sense of the growth potential of Brazil and Russia and Ukraine and Eastern Europe, Africa, China, all of these markets in terms of their overall growth potential. I do believe that they are, in many cases, project-oriented. So we will see some lumpiness in those. And commodity price changes can affect the timing of those projects and timing of people investing in them. But from a long-term standpoint, the projects will take place and the growth will occur.

Operator

And your next question comes from the line of David Rose of Wedbush Securities.

David L. Rose - Wedbush Securities Inc., Research Division

A couple of follow-up questions. You mentioned the commentary from the dealers is generally fairly positive, though you see the corn prices -- or grain prices down. Your comparisons also become easier. I mean, you were up 59% in domestic irrigation last year. So the comparison is easier and with your dealer commentary perhaps not as negative. What level of corn prices do you start to feel more comfortable that the market improves? Is there a level? And speaking to corn, maybe there's -- you might want to talk about wheat and some of the other grains.

Richard W. Parod

You're asking if there's a level of corn prices...

David L. Rose - Wedbush Securities Inc., Research Division

Yes, I mean, you're talking about -- yes, I mean, given the dramatic decline and yet there's a payback that you've articulated many times of roughly $4 a bushel. And I guess, where we're trading at today that it's still fairly attractive. At what level do you feel more comfortable with the outlook? That's one.

Richard W. Parod

Well, there's no specific dollar amount that I would pick in terms of corn price, where I would say, I'm much more optimistic or even be able to really define what that means at this stage. I guess, I look at it in terms of the -- what's really going to be important coming into this next crop season is both input and output -- basically, prices and input cost for farmers as they're planting this next season and what their attitude is looking forward. So from the standpoint of the spring planting season, we really don't know what to expect yet. And we need a little more visibility to get to that point. In addition, I think that there's other variables other than just the corn price. But looking at the corn usage and the stock-to-use ratios right now, they're very high in terms of stock-to-use ratios, more than double where at the same time last year. So there's a lot of inventory to work down in terms of corn before we can see significant change in corn prices, unless something were to happen, say, another drought or something of that nature. So they're not really a specific number that I would zero in on or target as the key.

David L. Rose - Wedbush Securities Inc., Research Division

Okay. No, I appreciate it. You called out, I mean, obviously, the decline in corn prices is -- or grains has been kind of an overhang. And so I wasn't sure if there was a point that you'd start to feel more comfortable. And maybe on the operating expense line, if you could follow-up on that. There were a couple of items that, I think, that were attributable to higher operating expense, part of which was Claude Laval. What others areas that you might see that might be nonrecurring and maybe you can walk us through. I think you made some comments on personnel expenses in the press release. Are there some other key issues that might go away in the coming periods?

James C. Raabe

I think the SG&A cost were a little bit higher than a normal run rate in the quarter because of a few things around equity, stock compensation with a little bit of a benefit spike, which we tend to see at the end of the year sometimes just because of the way the programs work. So we did have a few items, but the good part of the increase from a personnel standpoint is related to focusing on kind of our growth opportunities, including some investments in people in some of our developing markets and also just some overall project-related things related to some smaller systems projects and those kinds of things. So I think there were a few things that made the cost a little bit higher than normal, but I wouldn't say those were real significant.

David L. Rose - Wedbush Securities Inc., Research Division

Okay. So we should expect maybe something slightly lower in the coming quarters, but not meaningfully lower?

James C. Raabe

Correct.

Operator

And your next question comes from the line of Chris Shaw from Monness, Crespi.

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

I guess I have a broader question on irrigation business. Last year, in the first quarter, you spoke to maybe some pull-forward based on the drought, based on farmers trying to get their orders in. Earlier, fearing that there might be so much rush for orders they might not get it. Now did this quarter, you think, return back to sort of more normal seasonality? And is there anyway that you can quantify maybe what that shift was at all?

Richard W. Parod

I think that the comment that you're referring to from the last year in the first quarter was a true statement in the sense of, there was some pull-forward we expected because of the drought. And we certainly didn't see that impact in this quarter. So from a more normalized standpoint, I would say yes, that's true. This first quarter was more normalized. On the other hand, I also believe that farmers are in a great position from a cash and balance sheet standpoint and have continued to make investment. But I do think that this was much more reflective of a normalized seasonal flow than what we saw in the previous year.

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

Is that reflected in the balance between the dry land, the conversion and the replacement? Was that sort of more normal for a first quarter?

Richard W. Parod

I think it does, yes.

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

Okay. And then if I could switch next just on international. Were there any besides the Iraq contract finishing up in this quarter? Was there any other large international contract that sort of finished up this quarter? Or was that really the only one?

James C. Raabe

There wasn't really any large international contract that finished up. And even the Iraq contract does still have some backlog that will finish in more kind of the second and the third quarter. So but directly to your question, there wasn't any large contracts similar to that.

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

Also when you guys -- I think at the end of the year -- had said that there was $5 million left in the backlog on Iraq. That whole $5 million did not occur in first quarter?

James C. Raabe

That is correct. It did not all occur in the first quarter.

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

Okay, I didn't realize that. And then on infrastructure, you mentioned a Hawaii Zipper project. And I'm just curious, is that something that's going to continue to contribute revenues into the second quarter? Or was that a sort of won and done in the first quarter?

Richard W. Parod

That was one specific project that was really in the first quarter. That project, I referred to it as "in process", meaning it's still in process in Hawaii but that was -- the revenue occurred in the first quarter.

Christopher L. Shaw - Monness, Crespi, Hardt & Co., Inc., Research Division

Okay. And then a more of maybe somewhat off-topic question, but actually someone sort of referred to it earlier when they were talking about the FieldNET business or product. Do you guys -- you sort of spoke to people, competitors trying to get -- maybe larger competitors trying to get into that sort of tech or water management tech kind of space at some point. But are you guys talking to any of those big guys also on collaborations? I just know, people like Monsanto, DuPont and Deere doing all those sort of precision planting work, where they're really bringing a lot of data and tech. And I would be interested if they're interested at all in bringing in sort of a water management piece to that as well. Or do you think they're trying to do it by themselves?

Richard W. Parod

Yes, we are talking with different ones. And yes, I won't get specific in terms of the specific companies, but we are talking with them. And we think, in many cases, that the better approach for them is to look at tieing into what we're doing with FieldNET than other approaches. But that is definitely a possibility.

Operator

And your next question comes from the line of Kevin Bennett with Sterne Agee.

Kevin C. Bennett - Sterne Agee & Leach Inc., Research Division

My first question is on the international irrigation business. I was wondering, you called out Brazil and Australia as being strong in the quarter. I was wondering if you could go through the rest of your major markets in terms of what you saw in the quarter and then what you see moving forward.

Richard W. Parod

Well, I think the comment that I would make -- and I did make this, I think, in the opening -- is that most all of the international markets, all of the regions we're selling into, most all were up. The most notable ones were Australia and Brazil. But we've seen most of the markets holding up quite well. And I won't get real specific in terms of breaking out any of the other specific markets.

Kevin C. Bennett - Sterne Agee & Leach Inc., Research Division

Okay, that's fine. And then on the margins internationally, can you remind us kind of what the difference was between international margins in irrigation and the U.S.? And then how do you see that gap closing, I guess, over the next couple of years with your CapEx plans?

James C. Raabe

Yes. I mean, the margin generally is in that 5 to 7 points difference higher in the U.S. markets than the international markets. And that has to do with the fact that we are more vertically integrated in the U.S. market. That's the biggest factor. One of the things that we've talked about is adding capacity and productivity into some of those markets as they grow in size and gain scale. So we would expect that, that gap will shift. But I would say that's a longer, over time type of closing of the gap as opposed to anything dramatic. Because for one thing, we have a number of locations. And as we make enhancements, it affects a portion of our international markets, not the entire thing. But we do see that gap closing, but it will be more incremental than anything.

Operator

And your next question comes from the line of Peter van Roden from Spitfire Capital.

Peter Van Roden

Just a quick question on irrigation operating income margins. You mentioned it for the infrastructure business, but what was operating margins for the irrigation business?

James C. Raabe

I think the operating margin was about 15.7%.

Peter Van Roden

Okay. And then secondly, your DSOs have been creeping up over the last couple of quarters. They've kind of averaged 50 over the last, call it, 6. And then for the last 2, they've been over 70. What's driving that difference?

James C. Raabe

Yes. The primary reason for the increase in the DSO is the Iraq contract because it is a longer -- and it did have longer terms. We do -- we have collected about $10 million on that contract in the quarter. And the remainder of it should get collected end of the second quarter, sometime in the third quarter, most likely. But that's really what's driving it. I think the other thing that I would just point out is that the international markets do tend to have a little longer terms and so as we see -- longer payment terms. So as we see growth in the international markets, you could see that DSO increase over time a little bit as well.

Peter Van Roden

Okay. And has there been any change in the U.S. dealer payment terms as these guys sort of increase inventory?

Richard W. Parod

There really isn't much in terms of dealer inventory that's out there. We don't stock dealers from that standpoint. Usually, in the spring season, we might see some dealers carrying a little bit of inventory. And Dealer DSO has been basically the same, really unchanged.

Operator

And your next question comes from the line of Brian Gustavson from 1060 Capital.

Brian Gustavson

How big was the Iraq contract? How much revenue did you recognize last year?

James C. Raabe

The total contract was about $38 million. $33 million of that we recognized last year, primarily in the third and fourth quarters.

Operator

And you have a follow-up question from Nathan Jones of Stifel.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

By my calculations, even if you spend at the upper end on the repurchase and on M&A, you're still going to have negligible net debt on the balance sheet a couple of years from now. What would you consider to be the optimal level of net debt to run the company at?

Mark A. Roth

This is Mark Roth. I think -- what we've talked about in the past and where we're comfortable from an optimal capital structure is 30% debt-to-capital. And when we look at current market and debt-to-EBITDA levels, anything less than 2x debt-to-EBITDA, we'd be comfortable with leverage, with the ability that our company has the cash flow generate and pay down debt fairly efficiently. So...

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

So with the capital allocation plan you've targeted, that's going to probably have you significantly below that optimal leverage. Why aren't we being maybe a bit more aggressive on buybacks or increasing the dividend or some other form? Is that just dry powder that you can use over the next 2 years and a conservative kind of approach?

Richard W. Parod

No, I would describe it as, this capital allocation plan is a very big step in terms of a very first step in the sense of clarifying our capital use plan. We need a little more visibility in terms of what the next season looks like and what the next couple of seasons look like, given the kinds of stock-to-use ratios and what we're seeing with agricultural commodity prices. However, that could certainly be modified. While we have $150 million repurchase authorization, that could easily change.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Just on the tax rate, you -- it, obviously, was a fair bit lower this quarter than it has been. I assume that is a shift to more profits internationally than domestically than you have seen. Are you anticipating the tax rate to stay at around the 31% level it is now or to change significantly from there?

James C. Raabe

Well, the tax rate in the quarter actually was about 35%, a little bit higher than where it has been. And that interestingly does have to do with mix shift. And that while we have more business internationally this quarter, it is still business that's in fairly high tax rate jurisdictions like in South America. So the rate that we have in the quarter is about what we're projecting for the year. So you should expect about a 35% tax rate for the full year.

Nathan Jones - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And on the dividend, I know we doubled that, but it's still a relatively low dividend yield and payout ratio. Do you have a target you're aiming at over a longer period of time for a dividend payout ratio?

Mark A. Roth

This is Mark. I think with coming out with the capital plan and the doubling of the dividend, we've also stated that we'll continue to look at increasing the dividend. We don't have a specific target at this time, but we'll continue to look at increases in the dividend.

Operator

And there are no further questions. Rick, you may begin with closing remarks.

Richard W. Parod

While we anticipate a decline from peak irrigation revenues for the near term, drivers for the company's markets, population growth, expanded food production and efficient water use support our expectation for long-term growth. Our overall capital allocation plan articulates our plan to continue to invest and attaining revenue and earnings growth, combined with a defined process for enhancing returns to shareholders. I would like to thank you for your questions and participation in the call this morning. Thank you.

Operator

And this concludes today's conference call. You may now disconnect.

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