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RAVN > SEC Filings for RAVN > Form 10-Q on 3-Dec-2013All Recent SEC Filings

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Quarterly Report


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.

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. 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.


Results of Operations
Consolidated financial highlights for the fiscal third quarter and nine months
ended October 31, 2013 and 2012 include the following:
                                              Three Months Ended                             Nine Months Ended
(dollars in thousands, except     October 31,      October 31,                   October 31,      October 31,
per-share data)                       2013             2012         % Change         2013             2012         % Change
Net sales                        $    104,938     $     97,011          8 %     $    302,039     $    316,600        (5 )%
Gross profit                           31,940           29,575          8 %           93,591          100,774        (7 )%
Gross margins(a)                         30.4 %           30.5 %                        31.0 %           31.8 %
Operating income                 $     18,132     $     16,372         11 %     $     51,634     $     62,211       (17 )%
Operating margins                        17.3 %           16.9 %                        17.1 %           19.6 %
Net income attributable to Raven
Industries, Inc.                 $     12,289     $     10,859         13 %     $     34,625     $     41,448       (16 )%
Diluted earnings per share       $       0.34     $       0.30                  $       0.95     $       1.13

Operating cash flow                                                             $     37,203     $     58,046
Capital expenditures                                                            $    (23,906 )   $    (22,840 )
Cash dividends                                                                  $    (13,094 )   $    (11,430 )

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 income attributable to Raven for the three months ended October 31, 2013 was $12.3 million, or $0.34 per diluted share, compared to $10.9 million, or $0.30 per diluted share, in the prior year comparative period. For the third quarter, net sales were $104.9 million, up $7.9 million from $97.0 million in the prior-year third quarter. Net sales in the Engineered Films and Applied Technology divisions were strong, growing 21% and 11%, respectively. Aerostar sales declined 8% reflecting the transition away from contract manufacturing and the current constraints on federal spending.

For the nine-month period, net sales decreased 5% to $302.0 million from $316.6 million one year earlier. For the same period, net income attributable to Raven was $34.6 million, or $0.95 per diluted share, down 16% from $41.4 million, or $1.13 per diluted share, in fiscal 2013. Engineered Films and Applied Technology division net sales were up slightly for the nine-month period while Aerostar division continued to be down compared to last year's results for the nine-month period. The primary drivers of the decrease in net income was the profit impact of reduced sales along with lower gross margins in Engineered Films combined with higher research and development and operating expenses.

Applied Technology
Third quarter fiscal 2014 net sales were $43.8 million, up $4.3 million, or 11%, as compared to the prior year period and operating income increased $2.9 million, or 23%, to $15.1 million for the same comparative period. For the nine-month period, net sales were up 1% to $134.1 million as compared to $133.3 million in the prior year period and operating income decreased $1.1 million, or 2%, to $46.2 million. The slight increase in year-to-date sales levels over the prior year reflects third quarter demand from OEM customers, rising international performance in Brazil and strong contributions from new product introductions. These strengths offset the softness of demand during the first quarter of fiscal 2014 compared to fiscal 2013. Lower operating income is primarily the result of the flat sales as well as continued investment in research, marketing and product development to secure future growth.

Engineered Films
For the fiscal 2014 third quarter, net sales grew $6.9 million, or 21%, to $40.2 million as compared with $33.3 million the third quarter of last year. Third quarter operating income of $5.2 million improved 11% year-over-year. Fiscal 2014 year-to-date net sales increased $0.8 million, or 1%, to $112.0 million and operating income of $14.8 million was down 29% from the prior year period. For the fiscal third quarter, higher volumes contributed to the overall net sales. Year-to-date, higher sales in the agriculture markets substantially offset lower energy market sales. Operating income for the three- and nine-month periods was constrained by significantly higher resin costs than the comparative periods.


Fiscal 2014 third quarter net sales were $24.3 million compared to $26.4 million in the previous year's third quarter, a $2.1 million decrease. Operating income decreased by $1.1 million, or 29%, to $2.7 million from the previous year third quarter results. Fiscal 2014 year-to-date net sales of $66.7 million were down $12.2 million from $78.9 million and operating income of $5.5 million was $2.1 million, or 28%, lower than fiscal 2013 year-to-date comparative results. The net sales decrease was due primarily to a shift away from Aerostar's contract manufacturing business. Increased sales of lighter-than-air products and Vista radar system sales partially offset these expected decreases. The lower volume of contract manufacturing services was the main driver of the operating income decline for the three- and nine-month periods ended October 31, 2013 as compared to the prior year periods.


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.
                                            Three Months Ended                                           Nine Months Ended
                          October 31,      October 31,                                October 31,      October 31,
(dollars in thousands)        2013             2012         $ Change     % Change         2013             2012         $ Change     % Change
Net sales                $     43,797     $     39,534     $  4,263        11  %     $    134,069     $    133,346     $    723         1  %
Gross profit                   20,880           18,069        2,811        16  %           63,323           63,318            5         -  %
Gross margins                    47.7 %           45.7 %                                     47.2 %           47.5 %
Operating expenses       $      5,731     $      5,780     $    (49 )      (1 )%     $     17,147     $     16,070     $  1,077         7  %
Operating expenses as %
of sales                         13.1 %           14.6 %                                     12.8 %           12.1 %
Operating income         $     15,149     $     12,289     $  2,860        23  %     $     46,176     $     47,248     $ (1,072 )      (2 )%
Operating margins                34.6 %           31.1 %                                     34.4 %           35.4 %

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

Market conditions. Global market fundamentals remained healthy. With the world's population growing toward 9 billion and income growth in emerging economies, demand for food continues to increase. Apprehension given the drought conditions last year and falling commodity prices put pressure on domestic demand through the second quarter of fiscal 2014, but after-market demand rose in the third quarter. Original equipment manufacturing (OEM) demand also stayed robust for certain products. Emerging agriculture markets abroad are at varying life cycle stages providing opportunities for Raven's precision agriculture products to meet market needs. Growth in these international markets has moderated in some areas of the world while there is strength in others. The Company continues to invest in growth internationally for the long term.

Sales volume. Third quarter fiscal 2014 net sales increased $4.3 million, or 11%, to $43.8 million compared to $39.5 million in the prior year third quarter. Demand from OEM customers along with rising after-market demand drove sales of products such as guidance and steering systems, field computers, boom controls and application controls higher, making up the majority of the sales increase. Year-to-date sales of $134.1 million were slightly above the prior year comparative results by $0.7 million or 1%. Strong international OEM demand for guidance and steering products and boom controls contributed to the higher sales year-to-date, but these increases were partially offset due to weaker demand in the U.S. aftermarket and timing of demand experienced in the fiscal 2014 first quarter.

International sales. For the three-month period, international sales totaled $9.8 million, increasing 15% from a year ago and representing 22% of segment revenue compared to 21% in the prior year three-month period. International sales of $34.7 million accounted for 26% of segment revenue for the nine-month period ending October 31, 2013. This percentage of revenue remained consistent with the prior year nine-month period but represented a slight sales decline of $0.2 million year-over-year. Product deliveries to Brazil increased year-over-year; however, lower demand in Canada, South Africa and Eastern Europe offset this increase for both the three- and nine-month periods.

Gross margins. Gross margins increased to 47.7% for the three months ended October 31, 2013 from 45.7% for the three months ended October 31, 2012 primarily due to higher sales volume. Current year-to-date gross margins were comparable to the prior year.

Operating expenses. Third quarter operating expense as a percentage of net sales was 13.1%, down from 14.6% in the prior year third quarter. The current quarter percentage was impacted by higher sales volumes quarter-over-quarter. The prior year third quarter percentage also includes the effect of bad debt expense associated with an international customer. Year-to-date operating expenses as a percentage of net sales was 12.8% compared to 12.1% for fiscal 2013. The increase is attributable to higher spending in research and development (R&D) on virtually flat sales volumes.


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

                                             Three Months Ended                                           Nine Months Ended
                           October 31,      October 31,                                October 31,      October 31,
(dollars in thousands)         2013             2012         $ Change     % Change         2013             2012         $ Change     % Change
Net sales                 $     40,241     $     33,316     $  6,925        21  %     $    111,998     $    111,195     $    803         1  %
Gross profit                     6,354            6,348            6         -  %           18,990           25,119       (6,129 )     (24 )%
Gross margins                     15.8 %           19.1 %                                     17.0 %           22.6 %
Operating expenses        $      1,113     $      1,619     $   (506 )     (31 )%     $      4,225     $      4,392     $   (167 )      (4 )%
Operating expenses as %
of sales                           2.8 %            4.9 %                                      3.8 %            3.9 %
Operating income          $      5,241     $      4,729     $    512        11  %     $     14,765     $     20,727     $ (5,962 )     (29 )%
Operating margins                 13.0 %           14.2 %                                     13.2 %           18.6 %

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

Market conditions. Beginning in the second quarter of fiscal 2014, demand has strengthened for agriculture barrier films used in high value crop production. The addition of new extrusion capacity earlier in fiscal 2014 was a key factor in meeting demand for these high-tech films. Demand for pit liners in our energy market, declining since the beginning of the second half of fiscal 2013, has rebounded during the third quarter of fiscal 2014. Environmental and water conservation projects increase demand for the division's containment liners in the geomembrane market and provide sales growth opportunities for these products.

Sales volume and selling prices. Fiscal 2014 third quarter net sales were up 21% to $40.2 million compared to the prior year third quarter net sales of $33.3 million. Sales volume (as measured by pounds shipped), fueled by sales of fumigation and silage films in the agriculture market, was up about 19% as compared to the prior year quarter. Year-to-date fiscal 2014 net sales were 1%, or $0.8 million, ahead of last year's sales. Agriculture market sales were up $6.7 million, or 48%, year-to-date, substantially offsetting the energy market declines, primarily during the first quarter of fiscal 2014 and lower geomembrane sales which included sales for a significant geomembrane reservoir project in Ohio in the prior year. Current year-to-date net sales also reflect a modest increase in sales volume partially offset by a decrease in selling price.

Gross margins. For the three- and nine-month periods, margins decreased 3.3 and 5.6 percentage points, respectively. The current year periods were impacted by substantially higher resin costs combined with market conditions that did not allow pass-through costs.

Operating expenses. Fiscal 2014 third quarter operating expense as a percentage of net sales was 2.8% compared to 4.9% in the prior year three-month period. In addition to the sales increase, project timing also reduced R&D spending resulting in the improved percentages. Year-to-date operating expenses of $4.2 million were down $0.2 million, or 4%, compared to the prior year.

Aerostar designs and manufactures surveillance technology and specialty-sewn and sealed products including tethered aerostats, high-altitude scientific balloons, protective wear, parachutes, military decoys and marine navigation equipment. Aerostar also provides electronics manufacturing services (EMS) 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                                           Nine Months Ended
                            October 31,      October 31,                                October 31,      October 31,
(dollars in thousands)          2013             2012         $ Change     % Change         2013             2012         $ Change      % Change
Net sales                  $     24,269     $     26,385     $ (2,116 )      (8 )%     $     66,706     $     78,865     $ (12,159 )     (15 )%
Gross profit                      4,729            5,183         (454 )      (9 )%           11,339           12,424        (1,085 )      (9 )%
Gross margins                      19.5 %           19.6 %                                     17.0 %           15.8 %
Operating expenses         $      2,015     $      1,353     $    662        49  %     $      5,855     $      4,843     $   1,012        21  %
Operating expenses as % of
sales                               8.3 %            5.1 %                                      8.8 %            6.1 %
Operating income           $      2,714     $      3,830     $ (1,116 )     (29 )%     $      5,484     $      7,581     $  (2,097 )     (28 )%
Operating margins                  11.2 %           14.5 %                                      8.2 %            9.6 %

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

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. In collaboration with Google on a pilot program to provide high-speed wireless Internet accessibility to rural, remote and underserved areas of the world, Aerostar is pioneering leading-edge applications of its high-altitude balloons. While in its early stages, this program positions Aerostar for significant growth potential, albeit with a higher risk of uncertainty.

Sales volumes. Current fiscal quarter net sales did not reach last year's fiscal third quarter levels, declining 8% from $26.4 million to $24.3 million. Year-to-date sales of $66.7 million were down $12.2 million, a year-over-year decrease of 15%. The primary drivers of the quarter and year-to-date sales declines were reduced demand from U.S. government agency customers, including the impact of completion of the Company's contract with the U.S. Army for the manufacture of T-11 parachutes, as well as planned declines in avionics sales. These decreases were partially offset by additional revenues for sales and services of high-altitude balloons from the initiative with Google, higher Vista net sales of support activities and SSRS products under existing contracts and increased intercompany sourcing to Applied Technology.

Gross margins For the nine-month period ended October 31, 2013, margins increased just over one percentage point compared to the nine-month period ended October 31, 2012 due to increased sales of higher-margin product lines and increased Vista sales.

Operating expenses. Third quarter operating expense was $2.0 million, or 8.3% of net sales as compared to 5.1% of net sales in the third quarter of fiscal 2013. Year-to-date operating expense as a percentage of net sales was 8.8%, up from 6.1% in the prior year period. Increased R&D spending on product development over lower sales volumes drove the percentage higher in the current year.

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

                                                  Three Months Ended                 Nine Months Ended
                                              October 31,      October 31,     October 31,      October 31,
(dollars in thousands)                           2013             2012             2013             2012
Administrative expenses                     $      4,949      $     4,451     $     14,730     $     13,258
Administrative expenses as a % of sales              4.7 %            4.6 %            4.9 %            4.2 %
Other (expense), net                        $        (43 )    $       (56 )   $       (460 )   $       (204 )
Effective tax rate                                  32.0 %           33.4 %           32.3 %           33.1 %

Administrative expenses for the three- and nine-month periods ended October 31, 2013 increased $0.5 million and $1.5 million, respectively, compared to the three- and nine-month periods ended October 31, 2012. This 11% increase over both periods is 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 three 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 gains or losses.

The effective tax rate of 32.3% for the nine-months ended October 31, 2013 was lower than the prior year comparative period effective tax rate of 33.1% due to additional R&D credits available and a higher deduction for manufacturing income in the U.S.



Raven continues to become a more technology-focused Company - centered on solving the specific great challenges of hunger, security, energy independence and natural resource preservation and serving our core markets. Raven is transitioning from a company with a strong contract manufacturing orientation to one that is driven by proprietary products and services. During this evolution, management anticipates some volatility in our results. The Company anticipates near-term fluctuations across its divisions, however, management believes that Raven is very well positioned for the long term.

Aerostar, in particular, continues to be impacted by reduced demand from U.S. agency customers and its planned transition away from electronic manufacturing services for avionics customers. Aerostar has opportunities to offset reduced demand from U.S. agency customers and continues to reassign resources to support this transition and allocate capital to breakout growth drivers. Theses growth opportunities include high-altitude balloons (including Google's Project Loon), aerostat sales to customers in international markets and revenues from advanced radar systems. As a diversified company, management considers this Aerostar role a benefit, believing that Applied Technology and Engineered Films are well positioned to deliver more incremental growth, and Aerostar provides the potential for strong upside, albeit with a higher risk of uncertainty.

Management believes it will be difficult to match the growth seen in the fiscal third quarter, but opportunities exist in the fiscal fourth quarter that could fuel some year-over-year earnings growth for the quarter. Applied Technology will be driven by sales of new products and improving international market performance. Engineered Films will continue to leverage opportunity in agricultural barrier films and move forward with new film capabilities serving the Company's construction, geomembrane and industrial segments. Aerostar will continue to experience reduced demand from Raven's U.S. government customers, but the Company has opportunities to substantially offset this by increasing Vista and other proprietary product sales.

The Company's strong balance sheet and technological positions along with future prospects in its chosen markets, give management confidence for the long term, despite potentially volatile results. While overall conditions are improving and the third quarter was strong, management does not believe the Company will report profit growth for the full fiscal year 2014. Management expects to achieve attractive returns on equity and will continue to deliver strong returns to shareholders through dividends and long-term growth. The Company also expects to return to its long-term earnings growth goals of 10 to 12% in fiscal 2015 as it executes on a current mix of promising growth drivers and mixed macro-economic conditions.


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.

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 $48.6 million at October 31, 2013, a decrease of $0.8 million from $49.4 million at January 31, 2013. The comparable balance one year earlier was $48.1 million.

Raven has an uncollateralized credit agreement that provides a $10.5 million line of credit and expires November 30, 2014. There is no outstanding balance under the line of credit at October 31, 2013. The line of credit is reduced by outstanding letters of credit totaling $0.9 million as of October 31, 2013.

Operating Activities
Operating cash flows result primarily from cash received from customers, which . . .

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