Raven (RAVN) Q3 Earnings Lag on Soft Agriculture Market

Raven Industries Inc.’s (RAVN) shares fell over 7% and closed at $22.89 on Nov 20, after the company reported a 47% slump in earnings to 18 cents per share from 34 cents in the year-ago quarter. Despite strong performance of the Engineered Films division, persisting weakness in agriculture equipment impacted results. Earnings also fell short of the Zacks Consensus Estimate of 27 cents.

Operational Update

Sales declined 13% year over year to $91.3 million. Revenues also missed the Zacks Consensus Estimate of $98 million. Revenues contracted in the Applied Technology and Aerostar segments, partly offset by improved revenues in the Engineered Films segment.

Cost of sales reduced 8.3% year over year to $67 million. Gross profit decreased 24% to $24.3 million from $31.9 million in the year-ago quarter. Gross margin contracted 370 basis points to 27% from the year-ago quarter.

Selling, general and administrative expenses remained flat at $9.86 million in the quarter compared with $9.85 million in the year-ago quarter. Operating income plunged 44% year over year to $10.2 million with operating margin declining 620 basis points (bps) to 11.1%.

Raven Industries, Inc - Earnings Surprise | FindTheBest

Segment Performance

Applied Technology: Sales for the segment declined 24% year over year to $33.2 million due to subdued demand for precision agriculture equipment. Furthermore, revenue decline of non-strategic legacy customers more than offset sales growth from the recent acquisition of SBG Innovatie BV. Included in the sales decrease was $1.2 million in runoff related to the company exiting its low-growth contract manufacturing business. Operating income also slumped 57% to $86.4 million from $31 million in the prior-year quarter.

Engineered Films: The segment reported sales of $41.2 million, improving 3% year over year. Increased sales of construction, industrial and geomembrane films were offset by moderated deliveries of energy films and barrier films for specific high-value agriculture applications. Operating income increased 5% year over year to $5.5 million. Pricing changes, operating improvements and leveraging the company's reclaim production line led to the improvement.

Aerostar: Sales decreased 21% year over year to $19.3 million affected by planned decline in contract manufacturing, partially offset by increase in Vista revenues. The segment reported 12% year-over-year surge in its operating income to $3 million.

Vista Research reported 20% year-on-year sales growth in the quarter, fueled by Vista's Smart Sensing Radar Systems. Vista continues to develop and grow relationships with major U.S. Prime contractors like Raytheon and deliver highly innovative new products for long-term customers such as the U.S. Navy.

Financial Update

Raven Industries ended the third quarter of fiscal 2015 with cash and cash equivalents of $66.6 million compared with $48.6 million at the end of third-quarter of fiscal 2014. Cash flow from operating activities for the period of nine months ended Oct 31, 2014 was $45.7 million against $37.2 million in the comparable year-ago period.

Raven invested $9.8 million in research and development and capital expenditures during the third quarter. These investments included Vista Research R&D, Google Project Loon R&D and ongoing new product developments for application and planter controls in Applied Technology.

Outlook

Raven will benefit by following its fiscal 2015 objectives including, considerable growth in revenues from situational awareness and lighter-than-air product lines; bringing high-value plastic film applications and selectively pursuing targeted Applied Technology opportunities through new products and broadening OEM relationships. Moreover, the company is focused on rebalancing the organization, reducing costs and actively managing the business for long-term growth.

While the agriculture markets will remain challenging for Applied Technology going forward, implementation of cost control measures to manage spending levels closely for this division will aid growth. Raven has initiated the exit of its non-strategic St. Louis, MO, contract manufacturing facility. The process is expected to take six-months. The company has also reduced its international sales infrastructure and scaled back marketing initiatives along with the lessening of general manufacturing overhead. These targeted actions are expected to drive $7 million in annual savings. However, Raven remains optimistic about long-term growth in the North American agricultural market led by growing global population and stronger demand for food.

In executing its rebalancing strategy, Raven announced the acquisition of Integra Plastics in Nov 2014. The move will help in the expansion of Raven's engineered film production capacity, broadening of its product offerings and enhancement of current converting capabilities. For the fiscal 2015 fourth quarter, Raven expects the Integra Plastics acquisition to be accretive to earnings per share and anticipates higher profit contributions from Engineered Films compared with the fourth quarter of last year.

The rebalancing plan will help shift Applied Technologies percent of Raven’s operating profit from 65% where it has been to approximately 50% over the next two years.

Raven also expects solid growth in Engineered Films revenues from multiple end markets. The company continues work on developing and growing sales of higher-margin barrier films, as well as other lower-cost product formulations that meet customer needs across the product spectrum.

Further, the company remains focused on growth of the Aerostar division through the expansion of its proprietary technology opportunities, including advanced radar systems, high-altitude balloons and aerostats to international markets.

On the Google Project Loon front, Raven’s product continues to perform well, with consistent balloon endurance in the 75-day range. The company expects the project to continue to build in the coming quarters. Overall lighter-than-air business grew 12% in the reported quarter compared with the year-ago quarter.

Going forward, the company will invest more aggressively in Aerostar and EFD to drive rebalancing of its profit mix. Moreover, Raven continues to focus on research and development, implementation of cost control measures, international market expansion and new products innovation in order to drive growth.

South Dakota-based Raven is an industrial manufacturer offering a variety of products for agricultural, industrial, construction and aerospace markets. The company operates through three business segments, namely, Engineered Films, Electronic Systems, Applied Technology and Aerostar.

Raven currently carries a Zacks Rank #3 (Hold). Some better-ranked diversified-operations stocks worth considering are Carlisle Companies Incorporated (CSL), Federal Signal Corp. (FSS) and Noble Group Limited (NOBGY). All these stocks carry a Zacks Rank #1 (Strong Buy).

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