Recently, Valspar Corporation (VAL) reported its results for the fourth quarter and fiscal year ended Oct 30, 2009. Net income per share improved to 49 cents in the quarter from 35 cents in the year ago quarter, helped by lower cost of sales and research and development expenses.

Excluding a restructuring charge, adjusted profit totaled 53 cents per share in the latest period. The world’s sixth largest paint and coatings manufacturer topped the Zacks Consensus Estimate of 48 cents per share. Valspar believes its restructuring actions, which improved the efficiency of operations, were the driving factors behind the earnings growth. Cost of sales tumbled to $498.4 million from $675.2 million, while research and development expenses dipped to $22.9 million from $24.1 million.

However, sales during the quarter, which contained one less week than a year ago, scaled down 16% year over year to $776.6 million. When adjusted for the week difference, the company’s revenue fell just 11.8%. Valspar seems to be continuously affected by the slowdown in the industrial and architectural coatings markets, which is a result of the housing slump.

Sales in the Coatings segment were down 20% to $435.1 million year over year, while that in the Paints segment dropped 5.6% to $283.9 million. The decrease in volume reflects lower demand for wood coatings from the furniture manufacturers as well as contracting demand for coil coatings and general industrial coatings. In the Other Business segment, which includes resins, colorants, gel coats, composite materials for shower and tub manufacturing, furniture protection plans and corporate expenses, the company reported a sales decline of 25% to $57.6 million due to the impact of a weak housing market in the U.S. For the full year 2009, sales totaled $2,879.0 million, a decline of 16.2% year over year. Earnings per share increased to $1.49 in 2009 from $1.38 in 2008.

For fiscal 2010, Valspar assumes modest revenue growth and ongoing pressure on raw material costs. Currently, earnings in 2010 are expected to be in the range of $1.85 to $2.05 per share. Valspar anticipates the difficult sales environment to continue through 2010, particularly in the coil, general industrial and wood product lines, which account for about 40% of its revenues. In the remaining 60% of its revenues, the company expects a slight improvement as customers complete their inventory adjustments, resulting in new business flow.

Customer concentration is another concern for Valspar. The company’s top 10 customers account for nearly 35% of sales. The five largest customers in the Paints segment account for nearly 66% of sales. Valspar is moving aggressively to increase prices in all its business segments. The company’s prices are increasing at an annual rate of 3–4%. However, we fear these price increases are weighing on demand.

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