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RAVN > SEC Filings for RAVN > Form 10-Q on 31-May-2013All Recent SEC Filings

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Form 10-Q for RAVEN INDUSTRIES INC


31-May-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following commentary on the operating results, liquidity, capital resources and financial condition of Raven Industries, Inc. (the Company or Raven) should be read in conjunction with the unaudited Consolidated Financial Statements in Item 1 of Part 1 of this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended January 31, 2013. There have been no material changes to the Company's critical accounting policies discussed therein.

EXECUTIVE SUMMARY
Raven is a diversified technology company providing a variety of products to customers within the industrial, agricultural, energy, construction and military/aerospace markets. The Company is comprised of unique operating units, classified into three reportable segments: Applied Technology Division, Engineered Films Division and Aerostar Division. While each segment has distinct characteristics, the products and technologies are largely extensions of durable competitive advantages rooted in the original research balloon business. Effective June 1, 2012, the Company realigned the assets and team members of its Electronic Systems Division and deployed them into the Company's Aerostar and Applied Technology Divisions. The realigned divisions will better align the Company's corporate structure with its mission and long-term growth strategies. Electronic Systems net sales of electronic manufacturing assemblies were realigned to Aerostar and the remaining proprietary products, after adjustments to intersegment eliminations, to Applied Technology. The Company retrospectively adjusted its segment information for all periods presented to reflect this change in segment reporting. These adjustments are reflected in the following discussion of segment results for comparison to prior year results. Management uses a number of metrics to assess the Company's performance:
Consolidated net sales, gross margins, operating income, operating margins, net income and earnings per share

Cash flow from operations and shareholder returns

Return on sales, assets and equity

Segment net sales, gross profit, gross margins, operating income and operating margins

Vision and Strategy
At Raven, there is a singular purpose behind everything we do. It is: to solve great challenges. Great challenges require great solutions. Solutions driven by quality, service, innovation and peak performance set Raven apart in the development of technology that helps the world grow more food, produce more energy, protect the environment and live safely.
The Raven business model is our platform for success. Our business model is defensible, sustainable and gives us a consistent approach in the pursuit of quality financial results. This overall approach to creating value, which is employed across the three unique business segments is summarized as follows:
Serve a set of diversified market segments with attractive near- and long-term growth prospects;

Consistently manage a pipeline of growth initiatives within our market segments;

Aggressively compete on quality, service, innovation and peak performance;

Hold ourselves accountable for continuous improvement;

Value our balance sheet as a source of strength and stability; and

Make corporate responsibility a top priority.

The diversified business model enables us to weather near-term challenges, while continuing to grow and build for our future. It is our culture and it is woven into how we do business.

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Results of Operations
Consolidated financial highlights for the three months ended April 30 of fiscal
2014 and fiscal 2013 include the following:
                                                              Three Months Ended
                                                     April 30,     April 30,
(dollars in thousands, except per-share data)          2013          2012        % Change
Net sales                                           $ 103,680     $ 117,915       (12 )%
Gross profit                                           34,916        41,135       (15 )%
Gross margins(a)                                         33.7 %        34.9 %
Operating income                                    $  20,934     $  28,432       (26 )%
Operating margins                                        20.2 %        24.1 %
Net income attributable to Raven Industries, Inc.   $  14,003     $  19,043       (26 )%
Diluted earnings per share                          $    0.38     $    0.52

Operating cash flow                                 $  14,899     $  28,212
Capital expenditures                                $  (8,149 )   $  (4,900 )
Cash dividends                                      $  (4,361 )   $  (3,806 )

The Company's gross and operating margins may not be comparable to industry
(a) peers due to the diversity of its operations and variability in the classification of expenses across industries in which the Company operates.

Net sales for the three months ended April 30, 2013 were down 12% to $103.7 million from $117.9 million in the prior-year comparative period. Each of the Company's three divisions reported sales declines compared with a year ago, reflecting the current sluggish growth environment and the tough year-over-year comparisons to last year's record first quarter.
First quarter net income attributable to Raven declined 26% to $14.0 million, or $0.38 per diluted share, compared to fiscal 2013 first quarter net income of $19.0 million, or $0.52 per diluted share. Declining sales volume and lower Engineered Film's gross margins were the main drivers for the decrease. Applied Technology
First quarter fiscal 2014 net sales were $51.2 million, down $2.6 million (5%) year-over-year and operating income decreased by $2.9 million, or 13%, to $19.2 million. The decrease in sales is the result of modest softness of demand in the North American aftermarket. The decrease in operating income primarily reflects the decrease in sales as well as continued investment in research and product development initiatives.

Engineered Films
For the first quarter of fiscal 2014, net sales were $34.5 million, down $6.6 million (16%) as compared to the first quarter of last year. First quarter operating income decreased 48% to $4.8 million year-over-year. Lower sales volume, and to a lesser extent, lower selling prices impacted overall net sales compared to a record quarter in the previous fiscal year. Sales declines in the energy, geomembrane and construction markets were partially offset by an increase in industrial film deliveries. The decline of gross margins reflects the lower selling prices and the impact of fixed costs and lower sales.

Aerostar
Fiscal 2014 first quarter net sales were $21.7 million compared to $25.6 million in the previous year's first quarter, a $3.9 million decrease (15%). Operating income increased by $0.4 million, or 25%, to $1.8 million from the previous year's first quarter results.
The net sales decrease was expected and due primarily to reduced demand from Aerostar's U.S. government customers and planned declines with avionics customers. Higher research balloon sales and Vista radar system sales partially offset these expected decreases. This change in product mix was the main driver of the operating income improvement for the quarter ended April 30, 2013 over the prior year's first quarter.

RESULTS OF OPERATIONS - SEGMENT ANALYSIS

Applied Technology
Applied Technology designs, manufactures, sells and services innovative
precision agriculture products and information management tools that help
growers reduce costs, precisely control inputs and improve farm yields around
the world.

                                      #14
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                                                   Three Months Ended
                                    April 30,     April 30,
(dollars in thousands)                2013          2012        $ Change     % Change
Net sales                          $  51,181     $  53,741     $ (2,560 )      (5 )%
Gross profit                          24,783        27,323       (2,540 )      (9 )%
Gross margins                           48.4 %        50.8 %
Operating expenses                 $   5,626     $   5,273     $    353         7  %
Operating expenses as % of sales        11.0 %         9.8 %
Operating income                   $  19,157     $  22,050     $ (2,893 )     (13 )%
Operating margins                       37.4 %        41.0 %

The following factors were the primary drivers of the three-month year-over-year changes:

Market conditions. Global market fundamentals remained healthy as population and income growth in emerging economies have increased demand for food. Emerging agriculture markets abroad are at varying life cycle stages providing opportunities for Raven's precision agriculture products to meet market needs. Uncertainty in the domestic marketplace, a result of last year's drought as well as the cool spring delaying growers getting into the field, has delayed purchases and lowered demand in the U.S. and Canadian aftermarket. The Company continues to cultivate and deepen relationships with key original equipment manufacturing (OEM) partners, by customizing product solutions, tailoring the services it provides and entering long-term agreements that offer stability and competitiveness for both Raven and these partners.

Sales volume. Net sales decreased $2.6 million, or 5%, to $51.2 million compared to $53.7 million in the prior year period. Sales of field computers and application controls were down due to timing of demand year-over-year. These decreases were partially offset by strong OEM demand for injection products.

International sales decreased. For the three-month period, international sales totaled $13.7 million, a decrease of $0.6 million, or 4%, compared to $14.3 million in the prior year three-month period. International sales represent 27% of segment revenue, which is consistent with the prior year results. Products delivered to South America increased year-over-year; however, lower demand in Canada, South Africa and Eastern Europe offset this increase.

Gross margins. Gross margins for the three months ended April 30, 2013 were down approximately two percentage points from the three months ended April 30, 2012. The decrease reflects the lower sales volume during the current year period. Gross margins for the prior year period were also favorably impacted by one percentage point due to the early buyout of an acquisition-related contingent liability in the first quarter of fiscal 2013.

Operating expenses. First quarter operating expense as a percentage of net sales was 11.0%, up from 9.8% in the prior year first quarter. The increase is attributable to higher spending in research and development (R&D) for new product development.

Engineered Films
Engineered Films manufactures high performance plastic films and sheeting for
industrial, energy, construction, geomembrane and agricultural applications.


                                                   Three Months Ended
                                    April 30,     April 30,
(dollars in thousands)                2013          2012        $ Change     % Change
Net sales                          $  34,493     $  41,094     $ (6,601 )     (16 )%
Gross profit                           6,383        10,529       (4,146 )     (39 )%
Gross margins                           18.5 %        25.6 %
Operating expenses                 $   1,629     $   1,350     $    279        21  %
Operating expenses as % of sales         4.7 %         3.3 %
Operating income                   $   4,754     $   9,179     $ (4,425 )     (48 )%
Operating margins                       13.8 %        22.3 %

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The following factors were the primary drivers of the three-month year-over-year changes:

Market conditions. Declining demand for pit liners in our energy market beginning in the second half of fiscal 2013 has persisted well below the levels experienced in the three months ended April 30, 2012. Environmental and water conservation projects have increased demand for the division's containment liners in the geomembrane market.

Sales volume and selling prices. The decrease in first quarter fiscal 2014 net sales compared to the prior year period was predominately driven by the decline in the energy market as sales were down $5.7 million, or 30%, compared to the prior year first quarter. Geomembrane market sales decreased slightly, year-over-year as the prior year first quarter included sales on a significant geomembrane reservoir project in Ohio. Sales volume, measured by pounds of film shipped, for the three month period was down 12% compared to the prior year and accounted for majority of the year-over-year sales decline as selling prices were roughly 5-6% lower than the prior year period.

Gross margin decrease. For the three-month period, margins decreased seven percentage points as the result of the decline in sales volume impacting fixed cost absorption and the decline in selling prices reducing the spread over material cost.

Operating expenses. First quarter operating expense as a percentage of net sales was 4.7% compared to 3.3% in the prior year quarter. Higher R&D spending for new product development drove the increase in the first quarter operating expenses.

Aerostar
Aerostar designs and manufactures surveillance technology and specialty-sewn and sealed products including tethered aerostats, high-altitude scientific balloons and airships, protective wear, parachutes, military decoys and marine navigation equipment. Aerostar also provides electronics manufacturing services (EMS) for commercial customers with a focus on high-mix, low-volume production. Assemblies manufactured by the Aerostar segment include avionics, communication, environmental controls and other products where high quality is critical.

Aerostar acquired Vista Research, Inc. (Vista) at the end of fiscal 2012. Vista's smart-sensing radar systems (SSRS) use sophisticated signal processing algorithms and are employed in a host of detection and tracking applications, including wide-area surveillance for border patrol and the military.

                                                   Three Months Ended
                                    April 30,     April 30,
(dollars in thousands)                2013          2012        $ Change     % Change
Net sales                          $  21,715     $  25,635     $ (3,920 )     (15 )%
Gross profit                           3,771         3,362          409        12  %
Gross margins                           17.4 %        13.1 %
Operating expenses                 $   1,965     $   1,920     $     45         2  %
Operating expenses as % of sales         9.0 %         7.5 %
Operating income                   $   1,806     $   1,442     $    364        25  %
Operating margins                        8.3 %         5.6 %

The following factors were the primary drivers of the year-over-year changes for the three-month period:

Market conditions. Certain of Aerostar's markets are subject to significant variability due to U.S. federal spending. Uncertainty and sluggish demand in these markets continued throughout fiscal 2013 and into fiscal 2014.

Sales volumes. Net sales for the current quarter were unable to reach last year's first quarter levels, declining 15% from $25.6 million to $21.7 million. An increase in high altitude research balloon sales and an increase in Vista net sales driven by support activities under existing contracts for Vista's SSRS were offset by planned declines in avionics sales and the effect of reduced demand by U.S. government customers.

Gross margin change. For the three-month period ended April 30, 2013, margins increased approximately four percentage points compared to the three-month period ended April 30, 2012 due to improved product mix and increased sales at Vista.

Operating expenses. First quarter operating expense spending remained flat as compared to the first quarter of fiscal 2013. As a result of declining sales, this spending level was 9.0% of net sales for the first quarter of fiscal 2014, an increase from 7.5% of net sales for the first quarter of fiscal 2013.

#16


Corporate Expenses (administrative expenses; other (expense), net; and income

taxes)
                                              Three Months Ended
                                           April 30,      April 30,
(dollars in thousands)                        2013           2012
Administrative expenses                   $   4,762      $    4,160
Administrative expenses as a % of sales         4.6 %           3.5 %
Other (expense), net                      $    (198 )    $      (52 )
Effective tax rate                             32.5 %          33.0 %

Administrative expenses increased $0.6 million, or 14%, for the quarter ended April 30, 2013 to $4.8 million as compared to the prior year first quarter due to the Company's investments in additional finance, legal, human resources and information technology personnel to support current and future growth strategies through a strengthened corporate infrastructure. This growth has been tempered over the last two quarters and the number of employees in these roles has remained relatively consistent.
Other (expense), net consists mainly of activity related to the company's equity investment, interest income and foreign currency transaction gain or losses.

OUTLOOK

At Raven, we solve great challenges. It's this purpose that keeps us grounded in markets and opportunities that have meaning, align with our values and provide profitable growth. As anticipated, we faced challenging year-over year comparisons and met economic headwinds in the first quarter of fiscal 2014. Based on these results and the factors described below, delivering year-over year sales and earnings growth in the second quarter of fiscal 2014 will be challenging.

Applied Technology saw lower demand in the U.S. aftermarket, influenced by growers mindful of last year's drought as well as being slow getting into the field this spring. Although we expect this market to slowly recover, we anticipate that sales growth internationally will outpace growth in the U.S. The second quarter of fiscal 2014 is expected to be challenging year-over-year. New product introductions, continued growth in automated steering systems and recovery in the U.S. market are expected in the second half of the year. Engineered Films experienced energy market softness and an extremely tough year-over-year comparison for the first quarter. For the second quarter, management expects to leverage the introduction of agricultural barrier films, both from a new product and expanded distribution perspective, move aggressively with our energy market distribution partner and deliver on orders for our new multi-layer geomembrane products that help reduce the environmental effects of landfills. Over the full year, growth will require strong year-over-year performance for the next three quarters, with geomembrane film sales being a rising part of the product mix as well as growth in agricultural films for high-value crops.
Aerostar continued to be impacted by reduced demand from U.S. agency customers and planned declines with avionics customers. While Aerostar faces continued government uncertainty and sluggish demand, management is working to offset government uncertainty by expanding proprietary technology revenues including advanced radar systems, high altitude research balloons and aerostats outside of U.S. government channels. Management's focus through this fiscal year will be on executing a strong pipeline of high-quality business development pursuits and broadening Aerostar's customer base.

One of the hallmarks of Raven's business model is the ongoing investment in its business development pipeline. While we cannot control the macro environment, the strength and quality of this pipeline remains robust and encouraging; its impact on the current year results is contingent on our ability to execute. We believe that reaching last year's earnings level will also be challenging, but it is still possible. We will execute the Raven business model, exercise fiscal prudence and stay true to our purpose of solving great challenges. In doing so, we'll optimize fiscal 2014 performance while ensuring the soundness of our business and preparing for future growth.

LIQUIDITY AND CAPITAL RESOURCES

The Company's balance sheet continues to reflect significant liquidity and a strong capital base. Management focuses on the current cash balance and operating cash flows in considering liquidity, as operating cash flows have historically been Raven's primary source of liquidity. Management expects that current cash, combined with the generation of positive operating cash flows, will be sufficient to fund the Company's normal operating, investing and financing activities. Sufficient borrowing capacity also exists if necessary for a large acquisition or major business expansion.

#17


Raven's cash needs are seasonal, with working capital demands strongest in the first quarter. As a result, the discussion of trends in operating cash flows focuses on the primary drivers of year-over-year variability in working capital.

Cash and cash equivalents totaled $51.1 million at April 30, 2013, an increase of $1.7 million from $49.4 million at January 31, 2013. The comparable balance one year earlier was $43.5 million. Increases in capital expenditures were offset by cash flows from operations.

Raven has an uncollateralized credit agreement that provides a $10.5 million line of credit and expires November 30, 2013. There is no outstanding balance under the line of credit at April 30, 2013. The line of credit is reduced by outstanding letters of credit totaling $0.9 million as of April 30, 2013.

Operating Activities
Operating cash flows result primarily from cash received from customers, which is offset by cash payments for inventories, services, employee compensation and income taxes. Management evaluates working capital levels through the computation of average days sales outstanding and inventory turnover. Average days sales outstanding is a measure of the Company's efficiency in enforcing its credit policy. The inventory turnover ratio is a metric used to evaluate the effectiveness of inventory management, with further consideration given to balancing the disadvantages of excess inventory with the risk of delayed customer deliveries.

Cash provided by operating activities was $14.9 million for the first three months of fiscal 2014 compared with $28.2 million in the first three months of fiscal 2013. The decrease in operating cash flows is the result of lower company earnings, cash consumed by accounts receivable and inventory account balances, and less cash generated by the change in income taxes payable.

Changes in inventory and accounts receivable consumed $5.8 million of cash in the first three months of fiscal 2014 compared to generating $2.2 million one year ago. The Company's inventory turnover rate increased slightly from the prior year despite the decrease in inventory levels (trailing 12-month inventory turn of 5.3X in fiscal 2014 versus 5.2X in fiscal 2013). Cash collections continue to be efficient despite the increase in trailing 12 months days sales outstanding of 50 days at April 30, 2013 compared to 47 days at April 30, 2012.

Investing Activities
Cash used in investing activities totaled $8.4 million in the first three months of fiscal 2014 compared to $5.0 million in the first three months of fiscal 2013. Year-to-date capital spending consisted primarily of expenditures to expand Engineered Films' manufacturing capacity and ongoing renovation of the Company's headquarters.

Management anticipates fiscal 2014 capital spending in the $25 - $30 million range. In addition, management will evaluate strategic acquisitions that result in expanded capabilities and solidify competitive advantages.

Financing Activities
Cash used in financing activities was $4.7 million for the three months ended April 30, 2013 compared to $5.6 million one year ago. Dividends of $4.4 million, or 12.0 cents per share, were paid during the current year compared to $3.8 million, or 10.5 cents per share, in the prior year. During the three months ended April 30, 2013 and April 30, 2012, the Company made payments of $0.4 million and $1.9 million, respectively, on acquisition-related contingent liabilities.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

There have been no material changes since the fiscal year ended January 31, 2013.

ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted
During the three months ended April 30, 2013 the following accounting pronouncements were adopted or effective that are of significance, or potential significance, to the Company.

In February 2013 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (AOCI)" (ASU No. 2013-03). ASU No. 2013-03 requires that an entity present, either on the face of the statement where net income is reported or in the notes, the effect of significant reclassifications out of AOCI to net income when GAAP requires that the amount be reclassified in its entirety to net income. For amounts not required to be entirely reclassified to net income, ASU No. 2013-03 requires the cross-referencing of these amounts to other disclosures that provide detail about these amounts. This guidance, required to be applied prospectively,

#18


was effective for the Company on February 1, 2013. The adoption of this guidance had no effect on the Company's consolidated financial position, results of operations or cash flows as it is disclosure-only in nature.

Pending Accounting Standards
At April 30, 2013 there are no accounting pronouncements pending that are of significance, or potential significance, to the Company.

FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report on Form 10-Q are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. Without limiting the foregoing, the words "anticipates," "believes," "expects," "intends," "may," "plans" and similar expressions are intended to identify forward-looking statements. The Company intends that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act. Although management believes that the expectations reflected in forward-looking statements are based on reasonable assumptions, there is no assurance that these assumptions are correct or that these expectations will be achieved. Assumptions involve important risks and uncertainties that could significantly affect results in the future. These risks and uncertainties include, but are not limited to, those relating to weather conditions and commodity prices, which could affect sales and profitability in some of the Company's primary markets, such as agriculture, construction, and oil and gas well drilling; or changes in competition, raw . . .

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