Another Weak Quarter for Valmont - Analyst Blog

The third quarter 2010 net earnings of Valmont Industries Inc.(VMI), a leading producer of engineered products, plunged 36% to 98 cents per share from last years' $1.53, and missed the Zacks Consensus Estimate by 11 cents.

The lower-than-expected earnings were a result of higher costs. Cost of sales climbed 33% to $395 million in the quarter leading to a 25% decline in operating income. Operating margins came in at 9% versus 14.5% in the year-ago period.

Quarterly revenues, however, jumped 22% year over year to $527.8 million, with the start of generating revenues from its Delta segment. This was modestly up from the Zacks Consensus Estimate of $525 million.

Valmont reported weak performance in the Utility Support Structures and Engineered Support Structures segments on reduced demand for wireless communication structures as well as poor federal spending on infrastructure. However, Irrigation, Delta and Coatings segments results were encouraging.

Segment Review

Utility Support Structures Segment: The segment, which manufactures steel and concrete structures for the global electric utility industry, constituted 23% of sales in the reported quarter, and recorded a 27% decline in top line to $120.4 million, driven by weak volumes resulting from lower spending on transmission lines.

The decline was primarily attributable to the deferral of large transmission projects in North America due to uncertainties associated with the economic recovery. Operating income fell 80% to $9.2 million and was 7.7% of sales hurt by higher costs.

Engineered Support Structures Segment: Valmont manufactures structures for lighting and traffic, wireless communication and other specialty structures within this segment. Though the segment produced 27% of the 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 international markets were also weak in light of lower government investment in infrastructure. In China, sales were lower mainly due to a decline in wireless communication structures demand. Operating income decreased 18% to $11.7 million or 8% of segment sales.

Delta Segment:The segment yielded 25% of consolidated sales and deals with engineered steel products, steel galvanizing and production of manganese dioxide. The segment was formed with the acquisition of Delta plc on May 12, 2010. Sales for the segment within the period of May 12, 2010 to September 25, 2010 were $120.4 million.

Operating income was 6% of sales or $8.1 million. Stronger galvanizing and Engineered Steel Products businesses helped revenues and earnings in the segment.

Irrigation Segment: The segment manufactures mechanized irrigation equipment for the global agricultural market. Driven by higher exports, sales in the segment improved 17% to $88 million, forming 17% of total sales.The growth in foreign sales reflects improved global crop commodity prices and optimism for higher farm income in 2010.

Stronger revenues and lower costs translated into operating income of $11 million, considerably higher than last years' $7.6 million. Operating margin was 12%.

Coatings Segment: The Coatings segment contributed 7% to consolidated revenues in the quarter. The segment produces hot-dip galvanizing, anodizing and powder coatings to protect steel against rust. Sales of $35 million were 19% above last year's $29.6 million, reflecting improving demand, especially for custom coatings and galvanizing. Operating income improved 14% to $8.6 million while operating margin was 24%.

Outlook

Valmont expects a 35% (excluding the impact of Delta Acquisition) year-over-year decline in earnings for the full year. The company anticipates positive earnings comparisons in the fourth quarter, which is likely to improve further in 2011. Valmont's Engineered Support Structures Segment is highly dependent on government funding. Government spending is expected to continue to remain under pressure and a new multi-year highway bill is not expected in the near future.

The longer-term outlook for the Utility business is strong. Valmont is also optimistic on the Irrigation and Coatings segment's performance. Results from the Irrigation Segment for the year should provide modest improvement in sales and a fair amount of uptake in the operating income.