The fourth-quarter 2010 net earnings of Valmont Industries Inc. (VMI), a leading producer of engineered products, increased 15.8% to $1.32 per share from last years’ $1.14, surpassing the Zacks Consensus Estimate by 19 cents.
The increase was driven by the contribution to sales and earnings from Delta and a significant improvement in Irrigation and Coatings Segment.
In fiscal 2010, net earnings were $94.4 million, or $3.57 per diluted share, including the expenses and financing associated with the purchase of Delta plc on May 12, 2010, compared with fiscal year 2009 earnings of $150.6 million, or $5.73 per diluted share.
Cost of sales climbed 60% to $4415 million in the quarter. Operating margins came in at 9.6% versus 8.4% in the year-ago period.
Quarterly revenues, however, jumped 50% year over year to $598.7 million, with the start of generating revenues from its Delta segment. This was modestly up from the Zacks Consensus Estimate of $530 million. In fiscal 2010, revenues were $1.976 billion versus $1.787 billion in fiscal 2009.
In fiscal 2010, operating income as a percent of sales declined to 9.0% from 13.3% in fiscal 2009. Return on invested capital fell to 8.1% from 15.2% due to the increase in total assets and the decline in operating income.
Segment Review
Utility Support Structures Segment: The segment, which manufactures steel and concrete structures for the global electric utility industry, reported sales of $128.5 million, slightly lower than the prior-year quarter, driven by a weak pricing environment in North America, despite higher volumes, and reduced export activity in international markets.
In fiscal 2010, sales were lower. North American utility customers have announced plans for increased investments in transmission structures for 2011. Future growth potential is expected in India, where during the fourth quarter, Valmont broke ground on a new manufacturing facility.
Operating income fell 46% to $15.8 million and was 12.3% of sales. The decline in operating income was mostly due to sharply lower pricing in North America despite higher volumes, a reduction in international volumes, and an unfavorable product sales mix.
Engineered Infrastructure Products Segment: Valmont manufactures structures for lighting and traffic, wireless communication and other specialty structures within this segment. This segment also includes Delta’s lighting, communication, access systems and roadway safety products.
In the fourth-quarter 2010, segment sales were $210.8 million, up 35% year over year, largely attributable to the Delta businesses now reported in this segment, whose sales were $55.2 million. In North America, commercial lighting sales improved while transportation lighting and traffic product sales declined. Budget deficits have further reduced states’ ability to match federal funds on highway projects, creating additional market pressures.
Global sales of wireless communication products were lower due to weakness in North American markets and reduced investment by China’s wireless carriers. Operating income increased 29% to $17.9 million or 8.5% of segment sales. The operating income attributable to the Delta businesses was $5.8 million.
Though the segment produced 27% of total sales in the reported quarter, revenues declined 10% to $145 million due to weak wireless communication markets. Lighting and traffic business sales were hurt by weak transportation markets.
Sales in the segment were driven by the inclusion of the Delta businesses. The North American transportation market was weaker and a decline in project orders led to lower sales in international markets.
Irrigation Segment: The segment manufactures mechanized irrigation equipment for the global agricultural market. Sales surged 62% year over year to $134.3 million.
In global farm markets, confidence in investing in mechanized irrigation equipment was buoyed by rising crop prices and the outlook for a meaningful increase in net farm income. In addition, an earlier fall harvest in North America, when compared with last year widened the window of opportunity for fourth quarter sales.
Operating income grew 2½ times to $19.4 million and was 14.4% of segment sales. The improvement in operating income was the result of improved productivity and volume leverage.
Coatings Segment: The segment produces hot-dip galvanizing, anodizing and powder coatings to protect steel against rust. The segment also includes Delta’s galvanizing operations. Sales of $76.5 million were nearly 3 times last year’s $27.2 million.
The increase in sales included $42.0 million from the Delta galvanizers plus volume gains. Improved demand from industrial manufacturers in Midwestern regions of the U.S. further drove volume gains.
Operating income increased 204% to $14.3 million, or 19% of segment sales. The increase in operating income included $6.0 million from the Delta businesses. Delta’s forged steel grinding media and electrolytic manganese dioxide operations are included in “Other.”
Financial Position
At the end of December 25, 2010, cash and cash equivalents were $346.9 million versus $180.8 million at the end of December 26, 2009. Long-term debt was $468.6 million versus $160.3 million in the prior year.
Outlook
Valmont believes the operating environment during the first quarter 2011 will be a particular challenge due to severe weather and the pressures of rising steel costs.
For fiscal 2011, Valmont expects favorable comparisons in the Irrigation Segment as tighter crop supplies and rising farm income should drive sales. In the Coatings Segment, it expects the addition of the Delta locations to lead to positive sales comparisons.
In the Engineered Infrastructure Products Segment, the customer base is operating in an environment of no long-term highway bill, budgetary pressures and struggling European markets. Rising steel prices and a weak competitive pricing environment create additional challenges for this segment.
In the Utility Support Structures Segment, the company looks for volume gains, and until industry capacity is more fully utilized and a competitive pricing environment is achieved.
For fiscal 2011, Valmont expects earnings per share to increase between 35-45%.
We maintain a Neutral recommendation on the stock. Currently, it holds a Zacks #2 Rank (Buy) on the stock.
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