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RAVN > SEC Filings for RAVN > Form 10-Q on 29-May-2014All Recent SEC Filings

Show all filings for RAVEN INDUSTRIES INC



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, 2014. 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 situational awareness markets. The Company is comprised of three unique operating units, classified into 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. As strategic actions have changed the Company's business over the last several years, Raven has remained committed to providing high-quality, high-value products. The Company's performance reflects our ongoing adjustment to conditions and opportunities.

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. Raven's three unique divisions share resources, ideas and a passion to create 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 business segments, is summarized as follows:
Intentionally 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.

This 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 three months ended April 30 of fiscal
2015 and fiscal 2014 include the following:
                                                              Three Months Ended
                                                     April 30,     April 30,
(dollars in thousands, except per-share data)          2014          2013        % Change
Net sales                                           $ 102,510     $ 103,680        (1 )%
Gross profit                                           31,766        34,916        (9 )%
Gross margins(a)                                         31.0 %        33.7 %
Operating income                                    $  16,532     $  20,934       (21 )%
Operating margins                                        16.1 %        20.2 %
Net income attributable to Raven Industries, Inc.   $  11,038     $  14,003       (21 )%
Diluted earnings per share                          $    0.30     $    0.38

Operating cash flow                                 $  18,178     $  14,899
Capital expenditures                                $  (2,900 )   $  (8,149 )
Cash dividends                                      $  (4,371 )   $  (4,361 )

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, 2014 were down 1% to $102.5 million from $103.7 million in the prior-year comparative period. Engineered Films posted strong double-digit sales increases compared with a year ago while Applied Technology and Aerostar experienced double-digit sales declines. First quarter net income attributable to Raven declined 21% to $11.0 million, or $0.30 per diluted share, compared to fiscal 2014 first quarter net income of $14.0 million, or $0.38 per diluted share. Higher profits in Engineered Films were offset by lower profits in Applied Technology and Aerostar. Applied Technology
First quarter fiscal 2015 net sales were $46.3 million, down $4.9 million, or 10%, as compared to the prior-year period and operating income decreased $3.3 million, or 17%, to $15.9 million for the same comparative period. The sales decline reflects the weakness in the North American precision agriculture market. Lower operating income is primarily the result of the sales decline.

Engineered Films
For the fiscal 2015 first quarter, net sales grew $7.7 million, or 22%, to $42.2 million as compared to $34.5 million in the first quarter of last year. First quarter operating income improved 23% year-over-year to $5.9 million. For the fiscal 2015 first quarter, higher volumes contributed to the overall net sales. Higher sales of barrier films for specific agriculture applications, and energy, construction and industrial film sales drove first-quarter results. Operating income rose during the quarter, despite higher resin costs compared to a year ago.

Fiscal 2015 first quarter net sales were $17.7 million compared to $21.7 million in the previous year's first quarter, a $4.1 million decrease. Operating income declined $1.8 million to break-even results in the first quarter of fiscal 2015. 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 revenues and spending for growth projects like Project Loon and international aerostat opportunities were the main drivers of the operating income declines.


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
                                    April 30,     April 30,
(dollars in thousands)                2014          2013        $ Change     % Change
Net sales                          $  46,288     $  51,181     $ (4,893 )     (10 )%
Gross profit                          21,588        24,783       (3,195 )     (13 )%
Gross margins                           46.6 %        48.4 %
Operating expenses                 $   5,732     $   5,626     $    106         2  %
Operating expenses as % of sales        12.4 %        11.0 %
Operating income                   $  15,856     $  19,157     $ (3,301 )     (17 )%
Operating margins                       34.3 %        37.4 %

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

Market conditions. With the world's population growing toward nine billion and income growth in emerging economies, demand for food continues to increase and global market fundamentals remain healthy. Continued softness in the North American agriculture market put pressure on Applied Technology through the fiscal first quarter although original equipment manufacturer (OEM) demand continued to rise for certain key products, including advanced field computers, planter and seeder controls and harvest controls. Growth in 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. Emerging agriculture markets abroad are at varying life cycle stages providing opportunities for Raven's precision agriculture products to meet market needs.

Sales volume. First quarter fiscal 2015 net sales decreased $4.9 million, or 10%, to $46.3 million compared to $51.2 million in the prior year first quarter. The sales decline reflects lower international sales, weakness in the North American precision agriculture equipment market and the anticipated $1.9 million decline of non-strategic legacy customers from the Company's former Electronic Services Division.

International sales. For the three-month period, international sales totaled $9.5 million, a decrease of $4.2 million, or 31%, compared to $13.7 million in the prior year three-month period. International sales represented 20% of segment revenue for the quarter compared to 27% in the prior year comparative period. Timing of international OEM deliveries in South America and lower demand in Canada were the primary drivers of the decline.

Gross margins. Gross margins decreased to 46.6% for the three months ended April 30, 2014 from 48.4% for the three months ended April 30, 2013, primarily due to lower sales volume and related unfavorable overhead absorption.

Operating expenses. First quarter operating expense as a percentage of net sales was 12.4%, up from 11.0% in the prior year first quarter. While spending was virtually flat, the current quarter percentage was impacted by lower sales volumes period-over-period.

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)                2014          2013        $ Change     % Change
Net sales                          $  42,207     $  34,493     $  7,714        22  %
Gross profit                           7,201         6,383          818        13  %
Gross margins                           17.1 %        18.5 %
Operating expenses                 $   1,338     $   1,629     $   (291 )     (18 )%
Operating expenses as % of sales         3.2 %         4.7 %
Operating income                   $   5,863     $   4,754     $  1,109        23  %
Operating margins                       13.9 %        13.8 %


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

Market conditions. Despite the overall slowness in the broader agriculture market, demand has continued to strengthen for agriculture barrier films used in high-value crop production. The addition of new extrusion capacity in fiscal 2014 was a key factor in meeting demand for these high-tech films. Improving demand for pit liners in our energy market beginning in the second half of fiscal 2014 has continued into fiscal 2015. Environmental and water conservation projects impact demand for the division's containment liners in the geomembrane market.

Sales volume and selling prices. Fiscal 2015 first quarter net sales were up 22% to $42.2 million compared to prior year first quarter net sales of $34.5 million. Sales volume (as measured by pounds shipped), fueled by sales of fumigation and silage films in the agriculture market, was up about 14% as compared to the prior year quarter. While agriculture and construction market sales were the main drivers of the increase, energy market sales continued the upward trend that began in the second half of fiscal 2014. For the three-month period, selling prices were up approximately 6% compared to the prior year period.

Gross margins. For the three-month period, margins decreased 1.4 percentage points from the prior year first quarter as a result of higher resin costs and pricing pressure. Despite this decrease, current quarter gross margins are higher than any of the three previous quarters as a result of overall selling prices rising and higher sales into the more profitable agriculture markets.

Operating expenses. Fiscal 2015 first quarter operating expense as a percentage of net sales was 3.2% compared to 4.7% in the prior year three-month period. In addition to the sales increase, reduced spending improved the percentages.

Aerostar designs and manufactures proprietary products including high-altitude balloons, tethered aerostats and radar processing systems. These products can be integrated with additional third-party sensors to provide research, communications and situational awareness to government and commercial customers. Aerostar has historically produced products such as military parachutes, uniforms and protective wear as a contract manufacturing services provider as well as being a total solutions provider of electronics manufacturing services. These contract businesses have been declining as Aerostar emphasizes proprietary products.
Through Vista Research, Inc. (Vista) and a separate business venture that is majority-owned by the Company, Aerostar pursues potential product and support services contracts for agencies and instrumentalities of the U.S. government. Vista positions the Company to meet growing global demand for lower-cost detection and tracking systems used by government and law enforcement agencies. As a leading provider of surveillance systems that enhance the effectiveness of radar using sophisticated algorithms, Vista products and services enhance Aerostar's security solutions.

                                                   Three Months Ended
                                    April 30,     April 30,
(dollars in thousands)                2014          2013        $ Change     % Change
Net sales                          $  17,665     $  21,715     $ (4,050 )     (19 )%
Gross profit                           2,915         3,771         (856 )     (23 )%
Gross margins                           16.5 %        17.4 %
Operating expenses                 $   2,904     $   1,965     $    939        48  %
Operating expenses as % of sales        16.4 %         9.0 %
Operating income                   $      11     $   1,806     $ (1,795 )     (99 )%
Operating margins                        0.1 %         8.3 %


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 into fiscal 2015. As such, Aerostar's planned growth strategy emphasizes proprietary products over contract manufacturing and continued planned declines in contract manufacturing will occur in these markets in fiscal 2015 as Aerostar focuses on proprietary technology opportunities, including advanced radar systems, high-altitude balloons and aerostats to international markets. Aerostar is pioneering leading-edge applications of its high-altitude balloons in collaboration with Google on Project Loon, a pilot program to provide high-speed wireless Internet accessibility to rural, remote and underserved areas of the world. While still 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 declined 19% to $17.7 million from $21.7 million in the prior year. The drivers of this decline were lower sales of parachutes and the planned reduction of contract manufacturing business. These decreases were partially offset by revenues for Project Loon and higher Vista product revenues.

Operating expenses. First quarter fiscal 2015 operating expense was $2.9 million, or 16.4% of net sales as compared to 9.0% of net sales in the first quarter of fiscal 2014. Increased R&D spending associated with Project Loon and Vista radar solutions as well as business development costs associated with international aerostat opportunities over lower sales volumes drove the percentage higher in the current year.

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

                                            Three Months Ended
                                         April 30,      April 30,
(dollars in thousands)                      2014           2013
Administrative expenses                 $   5,260      $    4,762
Administrative expenses as a % of sales       5.1 %           4.6 %
Other (expense), net                    $     (79 )    $     (198 )
Effective tax rate                           32.9 %          32.5 %

Administrative expenses for the three-month period ended April 30, 2014 increased $0.5 million compared to the three-month period ended April 30, 2013. This 10% increase reflects higher depreciation charges associated with the substantially complete renovation of the Company's headquarters and expenses related to the acquisition of SBG Innovatie BV and Navtronics BVBA as described in Note 5. Acquisitions of Investments in Business and Technology of the Notes to Consolidated Financial Statements in Item 1. of this Quarterly Report on Form 10-Q.

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 32.9% for the three months ended April 30, 2014 was higher than the prior year comparative period effective tax rate as the prior year was favorably impacted by tax benefits associated with the U.S. research and development tax credit. These credits expired on January 1, 2014.


At Raven our enduring success is built on our ability to balance the Company's purpose and core values with necessary shifts in business strategy demanded by an ever-changing world. 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 being a company with a strong contract manufacturing orientation to being one that is driven by proprietary products and services. This vision brings meaning to the work of the organization and ensures our focus on profitable opportunities with strong fundamentals.

In fiscal 2015 Raven will leverage its strengths to drive growth from the core businesses in all three operating divisions and aggressively pursue closely adjacent opportunities. Despite marketplace headwinds through the fiscal first quarter, the Company's focus continues to be on:

Measurably growing revenues from Aerostar's growth drivers, including advanced radar systems, high-altitude balloons and aerostats to international markets;

Driving Applied Technology growth through international market expansion, new products and broadening OEM relationships; and


Bringing high value plastic films applications to each of Engineered Films' markets.

The Company expects year-over-year profit growth in the second fiscal quarter. Raven anticipates continued softness in the North American agriculture market but is confident in the long-term health of the market and that the Company is positioned to leverage its technology, expertise and product portfolio once conditions improve. Raven intends to drive growth through international market expansion, new products and broadening OEM relationships.

Raven expects to see solid second quarter growth in Engineered Films revenues from high-value agriculture products, with incremental improvements in the energy, construction and industrial film markets as well.
For Aerostar, fiscal 2015 focus is on expanding proprietary technology opportunities, including advanced radar systems, high-altitude balloons and aerostats to international markets. Based on these opportunities, the Company anticipates improvement in Aerostar partially offset by ongoing declines in lower-margin contract manufacturing customers.
For the 2015 fiscal year, management anticipates difficulty increasing operating income in Applied Technology. Engineered Films should continue to grow and Aerostar will show mixed results.


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 $63.4 million at April 30, 2014, an increase of $10.4 million from $53.0 million at January 31, 2014. The comparable balance one year earlier was $51.1 million. The increase was driven by positive cash flows from operating activities, partially offset by cash outflow for dividends paid to shareholders and capital expenditures.

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 April 30, 2014. The line of credit is reduced by outstanding letters of credit totaling $0.9 million as of April 30, 2014. The credit line is expected to be renewed during fiscal 2015.

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 $18.2 million for the first three months of fiscal 2015 compared with $14.9 million in the first three months of fiscal 2014. The increase in operating cash flows is the result of less cash consumed by the change in accounts receivable and inventory. These increases were partially offset by lower company earnings. While the Company's earnings were lower, these earnings reflected the impact of higher depreciation and amortization expense.

Changes in inventory and accounts receivable consumed $0.8 million of cash in the first three months of fiscal 2015 compared to consuming $5.8 million one year ago. The Company's inventory turnover rate decreased from the prior year due the higher inventory levels at Engineered Films (trailing 12-month inventory turn of 5.1X in fiscal 2015 versus 5.3X in fiscal 2014). Cash collections continue to be efficient as the trailing 12 months days sales outstanding was 50 days at April 30, 2014 and April 30, 2013.

Investing Activities
Cash used in investing activities totaled $3.0 million in the first three months of fiscal 2015 compared to $8.4 million in the first three months of fiscal 2014. The change from the prior year is due to higher spending in fiscal 2014 for expansion of Engineered Films' capacity and lower spending for the renovation of the Company's headquarters.


Management anticipates fiscal 2015 capital spending of approximately $25-30 million. Expansion of Engineered Films' capacity, Aerostar's build-out for Project Loon production levels and Applied Technology's capital spending to advance product development and customer support are expected to continue. In addition, management will evaluate strategic acquisitions that result in expanded capabilities and solidify competitive advantages.

Financing Activities
Cash used in financing activities was $4.8 million for the three months ended April 30, 2014 compared to $4.7 million one year ago. Dividends of $4.4 million, or 12.0 cents per share, were paid during the current year and prior year first quarter, respectively. During the three months ended April 30, 2014 and April 30, 2013, the Company made payments of $0.5 million and $0.4 million, respectively, on acquisition-related contingent liabilities.


There have been no material changes since the fiscal year ended January 31, 2014.


Accounting Standards Adopted
During the three months ended April 30, 2014 there were no accounting pronouncements adopted or effective that are of significance, or potential significance, to the Company.

Pending Accounting Standards
In April 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" (ASU No. 2014-08) changes the criteria for determining which disposals should be presented as discontinued operations and modifies the related disclosure requirements. Additionally, the new guidance requires that a business that qualifies as held for sale upon acquisition should be reported as held for sale upon acquisition should be reported as discontinued operations. The new guidance is effective for the Company on February 1, 2015 and applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The Company does not expect adoption of this guidance to have a material impact on its consolidated financial statements.

In January 2014 the FASB issued ASU No. 2014-05, "Service Concession Arrangements" (ASU No. 2014-05). ASU No. 2014-05 specifies that an operating entity entering into a service concession arrangement with a public-sector entity grantor within the scope of this guidance should not account for such arrangement as a lease in accordance with FASB Accounting Standards Codification Topic 840, "Leases." This guidance is effective for annual periods beginning after December 15, 2014. Early adoption is permitted. The Company does not expect adoption of this guidance to have a material impact on its consolidated financial position, results of operations or cash flows.

Certain statements contained in this Quarterly Report on Form 10-Q are . . .

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