Raven Falls as Q2 Earnings Lag on Weak Agriculture Market

Zacks

Raven Industries Inc.’s (RAVN) shares fell around 3.7% on reporting an 8.7% year-over-year decline in its second-quarter fiscal 2015 (ended Jul 31, 2014) earnings to 21 cents per share. The year-over-year decline was due to persistent weakness in the agriculture equipment market. Earnings also fell short of the Zacks Consensus Estimate of 27 cents.

Operational Update

Sales increased 1% year over year to $94.5 million. However, revenues missed the Zacks Consensus Estimate of $99 million. Improved revenues in the Engineered Films segment were offset by a decline in revenues in the Applied Technology and Aerostar segments.

Cost of sales rose 3% year over year to $68.8 million. Gross profit declined 4% to $25.7 million from $26.7 million in the year-ago quarter. Gross margin contracted 160 basis points to 27% from the year-ago quarter.

Selling, general and administrative expenses increased 3.9% year over year to $10.6 million. Operating income plunged 15% year over year to $10.7 million with operating margin declining 220 basis points (bps) to 11.3%.

Segment Performance

Applied Technology: Sales for the segment declined 7% year over year to $36 million due to sluggish agriculture equipment market. Furthermore, approximately 50% of the decline was due to the anticipated decline in non-strategic revenues, partly offset by sales growth from SBG acquisition. Operating income also slumped 26% to $8.8 million from $11.9 million in the prior-year quarter.

Engineered Films: The segment reported sales of $42.3 million, improving 14% year over year. Increased sales of barrier films for specific agriculture applications facilitated the improvement despite the overall slowness in the agriculture equipment market. Construction and industrial film sales also increased year over year. Operating income increased 22% year over year to $5.8 million.

Aerostar: Sales decreased 7% year over year to $19 million affected by planned decline in contract manufacturing. Segment revenues were partly offset by 175% quarterly growth in balloon-related revenue from Google’s Project Loon. The segment however reported 69% year-over-year surge in its operating income to $1.6 million.

However, within Aerostar, Vista Research reported a sales growth in the quarter. Vista's Smart Sensing Radar Systems delivered an 8% quarterly revenue increase. Vista Research has been selected by Raytheon Co. (RTN) as a preferred radar solution for future U.S. and export opportunities. Additionally, Vista's systems have been awarded an $8.4 million operations and maintenance contract by the U.S. Army.

Cash Position

Raven Industries ended the second quarter of fiscal 2015 with cash and cash equivalents of $62.4 million compared with $55.7 million at the end of the second quarter of fiscal 2014. Cash flow from operating activities for the period of six months ended Jul 31, 2014 was $31 million against $29.7 million in the comparable year-ago period.

Outlook

Raven remains optimistic about long-term growth led by growing global population and stronger demand for food. For third-quarter fiscal 2015, Raven expects solid growth in Engineered Films revenues from multiple end markets. However, the company expects double-digit declines in third-quarter net income versus last year. Difficult market conditions in Applied Technology, transitional impact of higher-scale production of Project Loon balloons and planned runoff in contract manufacturing will make third-quarter revenue growth challenging.

Raven anticipates that profit growth will resume in the fourth quarter of fiscal 2015, but not at a rate to produce higher earnings for the full fiscal year.

As per the company Engineered Films will continue to witness solid growth in revenues in the second half of fiscal 2015 derived from high-value agriculture and operating income gains.

During the second quarter, the company announced its collaboration with Kinze Manufacturing to develop a standalone planter control solution leveraging the new Viper4(TM) field computer and multi-hybrid capabilities. Raven also recently unveiled its Hawkeye(TM) nozzle control system, bringing a new level of precision application to agricultural sprayers. These will aid growth in Applied Technology. In addition, broadening its original equipment manufacturer (:OEM) relationships bodes well for the segment. However, North American agricultural equipment environment is expected to remain soft for the next four quarters and in turn hurt the segment’s performance.

For the second half of fiscal 2015, Raven remains positive about the Aerostar segment led by the expansion of proprietary technology opportunities, including advanced radar systems, high-altitude balloons and aerostats to international markets. However, there remain uncertainties regarding additional aerostat contracts in the second half. Additionally transition to higher levels of balloon production in the third quarter may result in certain disruptions that can temporarily reduce the growth rate.

Moreover, continued focus in research and development, implementation of cost control measures, international market expansion and new products innovation will drive growth for Raven.

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 stock worth considering include Federal Signal Corp. (FSS) and ITT Corporation (ITT), both carrying a Zacks Rank #2 (Buy).

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