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The third-quarter 2011 net earnings of Valmont Industries Inc. (VMI - Analyst Report), a leading producer of engineered products, increased 62% to $1.59 per share from last years’ $0.98.
Quarterly revenues, however, jumped 27.4% year over year to $672.2 million. The third- quarter results were driven by a significant growth in Irrigation Segment sales, increased revenue in every segment and strong market fundamentals.
Irrigation Segment: The segment manufactures mechanized irrigation equipment for the global agricultural market. Sales surged 71% year over year to $150.6 million, generating 22% of total sales.
In international markets, sales increase was broad-based and supported by firm global crop prices. North American demand was significantly higher, even during the seasonally slow summer months. An increase in aftermarket parts sales resulting from longer operation of irrigation equipment in hot weather, further supported North American sales increase.
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 for boosting 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 $23.8 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 $159.8 million, up 31% year over year, driven by sales in North America. However, international sales declined in the quarter.
Order activity in North America increased during the third quarter resulting in a growing backlog. Electric utility companies have increased capital spending on projects to add physical capacity and increase the reliability of the transmission grid. Moreover, growing pipeline of large projects is expected to stimulate demand for structures for a number of years.
Operating income increased 51% to $14.7 million and was 9.2% of segment sales. The decline in operating income as a percentage of sales was mostly due to lower international sales, and also due to the orders, which 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 third quarter of 2011, segment sales were $222.2 million, up 12% year over year, largely attributable to improved revenues in international markets. Government budgetary constraints, the lack of a long-term highway bill and a slow recovery in non-residential construction have led to weak market conditions and a competitive pricing environment in the North American commercial, and lighting and traffic markets.
In Europe, lighting and traffic sales improved modestly due to regional strength in some markets. In most European markets, pricing was competitive due to sluggish demand resulting from economic uncertainty and fiscal restraint.
Wireless communication product sales were lower in North American markets due to uncertainty about carrier consolidations. In China, sales improved.
Sales of engineered infrastructure products in the Asia-Pacific region were somewhat higher mainly as a result of growing infrastructure investment in Southeast Asia.
The segment’s operating income was flat despite higher sales. Operating income as a percent of sales was 7.7% compared with 8.7% in 2010. The pressure on operating income as a percent of sales reflects pricing competitiveness in all markets and generally higher material costs than last year.
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 $80.8 million were up 7% from last year’s sales. Coatings Segment sales increased due to higher internal demand from Valmont’s utility and irrigation divisions in North America. Revenues also rose in the Asia-Pacific region.
Operating income increased 5% to $14.2 million, or 17.6% of segment sales. The improvement in results in these businesses reflects higher sales and improved operations. Delta's forged steel grinding media and electrolytic manganese dioxide operations are included in "Other".
As of September 24, 2011, cash and cash equivalents were $336.9 million versus $323.2 million at the end of September 25, 2010.
Management reaffirmed its earnings guidance to be in the range of $5.70 to $5.90 per share. However, due to the deteriorating economic outlook in general over the past few months, particularly in Europe, management now expects results to be in the mid-to-lower end of that range.
Going forward, the outlook remains positive. Demand for Utility Support Structures is rising. Recent order activity and growing backlog support its expectations for a strong fourth quarter and 2012.
In the irrigation business, a growing global demand for feed-grains to sustain dietary improvement and historically high farm income levels support a positive outlook.
Outlook for the Engineered Infrastructure Products Segment is mixed. In North America and Europe, Valmont reduced government spending and uncertain economic conditions. However, in the Asia-Pacific region, management expects its operations to benefit from economic growth and new infrastructure investment, albeit at slower growth rates than in recent history.
Coatings segment results will be mostly driven by economic conditions in North America and industrial demand in the Asia-Pacific region.
Currently, Valmont has a short-term (1 to 3 months) Zacks #1 Strong Buy rating and a long-term (6 months) Outperform recommendation.
The company faces stiff competition from Lindsay Corporation (LNN - Analyst Report) and Thomas and Betts Corp. .