The second-quarter 2011 net earnings of Valmont Industries, Inc. (VMI), a leading producer of engineered products, increased 48% to $1.58 per share from last years’ $1.10, surpassing the Zacks Consensus Estimate of $1.45. Earnings after accounting for non-recurring items of $0.14 per share amounted to $1.72 per share in the quarter versus $0.65 per share in the prior year quarter.
Quarterly revenues, however, jumped 38.8% year over year to $688.6 million. The second quarter results were driven by a significant growth in Irrigation Segment sales and the contribution of the Delta businesses.
Segment Review
Irrigation Segment: The segment manufactures mechanized irrigation equipment for the global agricultural market. Sales surged 64% year over year to $183.7 million, generating 28% of total sales.
There has been an alarming increase in population leading to increased demand for food. The need to conserve water encourages the growers to install center pivot technology to enhance productivity, which is supportive of a positive long-term outlook for mechanized irrigation equipment sales.
Operating income was driven by improved productivity and volume leverage and totaled $33 million, almost double from the year-ago quarter.
Utility Support Structures Segment: The segment, which manufactures steel and concrete structures for the global electric utility industry, reported sales of $136.6 million, compared with $114.8 million in the prior-year quarter, driven by sales in North America. However, international sales declined in the quarter.
New projects in the quarter along with the restart of certain transmission projects deferred by utility companies in 2010 led to increased order intake in North America.
Operating income increased 4% to $13.0 million and was 9.5% of segment sales. The decline in operating income as a percentage of sales was mostly due to lower international sales, and also because the orders were taken when pricing was not favorable.
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 second quarter of 2011, segment sales were $206.4 million, up 25% year over year, largely attributable to the Delta businesses now reported in this segment, whose sales were $28.3 million.
The lighting and traffic product sales in North America in the second quarter were lower than the comparative year ago quarter as the market continued to struggle with the lack of a U.S. highway bill and budgetary constraints at the state and local levels weak Canadian markets. However, wireless communication product sales increased due to improved demand in North America.
International lighting sales were higher and business conditions in Australia and Southeast Asia were slightly weaker than last year.
The segment’s operating income decreased 5% to $11.5 million. A decline in operating income as a percentage of sales reflects higher input costs coupled with a weaker pricing environment, particularly in the North American and European lighting markets, which pressured gross margins.
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 $84.2 million jumped 55% from last year’s sales. Coatings Segment sales increased due to the additional Delta locations plus volume gains in North America.
The increase in sales included $24.7 million from the Delta sales, broad-based industrial demand, and greater internal utility and irrigation volumes. Positive economical conditions supported sales in the segment. In Australia and Southeast Asia, galvanizing volumes also increased.
Operating income increased 53% to $15.1 million, or 17.9% of segment sales. The increase in operating income included $4.4 million from the Delta businesses. Delta's forged steel grinding media and electrolytic manganese dioxide operations are included in "Other".
Financial Position
As of June 25, 2011, cash and cash equivalents were $326.8 million versus $314.4 million at the end of June 26, 2010.
In late June 2011, Valmont increased its investment in the Australian grinding media business Donhad from 60% to 100%.
Outlook
Based on the present scenario where the company is seeing significant strength in the irrigation market and an improving demand for utility transmission structure and expectations of better operational performance in the Engineered Infrastructure Products segment, it expects reported earnings in the range of $5.70 to $5.90 per share.
The increasing population is leading to rising demand for food and Valmont believes that its is well equipped and its geographic mix and product diversification position it well to benefit from future global economic growth, positive trends in agriculture, and investments in infrastructure.
Zacks Recommendation
Currently, Valmont has a short-term (1 to 3 months) Zacks #3 Hold rating and a long-term (6 months) Underperform recommendation.
Competitors
The company faces stiff competition from Lindsay Corporation (LNN) and Thomas and Betts Corp. (TNB).
LINDSAY CORP (LNN): Free Stock Analysis Report
THOMAS & BETTS (TNB): Free Stock Analysis Report
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