Raven Industries Inc.’s RAVN adjusted earnings slumped 52% to 11 cents per share in the fourth quarter of fiscal 2015 (ended Jan 31, 2015) from 23 cents in the year-ago quarter. Lower segment operating income and higher corporate expenses led to the year-over-year decline. Earnings also fell short of the Zacks Consensus Estimate of 21 cents.
Including favorable discrete tax settlement and the extension of the federal research and development tax credit, earnings were 16 cents per share in the reported quarter. Earnings in the year-ago quarter did not have any adjustments.
Operational Update
Sales declined 3% year over year to $90 million in the fourth quarter. Excluding sales from contract manufacturing, net sales were $81.6 million, down 1.1% from the fourth quarter of 2014. Revenues also missed the Zacks Consensus Estimate of $97 million. Despite a solid performance in Engineered Films and gains in Aerostar, declines in Applied Technology led to revenue contraction.
Cost of sales reduced 2.3% year over year to $68.4 million. Gross profit decreased 16.6% to $21.5 million from $25.8 million in the year-ago quarter. Gross margin contracted 390 basis points to 23.9% from the year-ago quarter.
Selling, general and administrative expenses declined 25.5% to $11.3 million in the quarter compared with $9 million in the year-ago quarter. Operating income plunged 48% year over year to $6.4 million with operating margin declining 620 basis points (bps) to 7.1%.
Segment Performance
Applied Technology: Sales for the segment declined 27% year over year to $26.5 million driven by significant contraction in demand across the division's agricultural end-markets. Operating income also slumped 68.4% to $3.4 million from $7.4 million in the prior-year quarter. The decline in operating income was principally due to lower sales volume year over year. Although the division initiated a $7 million annualized cost reduction program during the fourth quarter, the benefits of those actions were mostly delayed due to timing and offsetting severance payments.
Engineered Films: The segment reported sales of $40.9 million, improving 14.8% year over year. The acquisition of Integra Plastics added around $5.6 million to sales in the fourth quarter. Excluding the impact of the acquisition, net sales for the division were down slightly year over year. Operating income increased 36.8% year over year to $4.6 million. Absence of warranty related costs, which were there in the fourth quarter of last year and improvement in the legacy business led to the improvement.
Aerostar: Sales for the segment were $24.6 million, up 2.9% year over year. Excluding sales from contract manufacturing, fourth quarter net sales were $15.8 million, a gain of 20.9% versus the fourth quarter of 2014. The division's focus on proprietary products led to significant new business, particularly within Vista Research, which experienced substantial year-over-year growth in the fourth quarter.
The segment reported 85% year-over-year surge in its operating income to $4.3 million. The increase was aided by strength within both situational awareness and aerospace.
Financial Update
Raven had cash and cash equivalents of $52 million at the end of fiscal 2015 compared with $53 million as of fiscal 2014-end. The company generated cash flow from operations of $60 million in fiscal 2015, as against $52.8 million in fiscal 2014.
Restructuring
Owing to the significant decline in the Applied Technology business and the expectation of continued end-market weakness for this division, Raven implemented an additional $13 million restructuring plan, on top of $7 million restructuring employed in the fourth quarter, to further lower its cost structure. Before this, the company executed a $2.5 million restructuring program for the Engineered Films division in the fourth quarter which addressed the expected decline in demand in the energy sector.
All restructurings initiated in the fourth quarter of 2015 and the first quarter of 2016 total approximately $23 million on an annualized basis. The savings in fiscal 2016 are expected to be approximately $20 million from these actions.
Fiscal 2015 Performance
Raven posted adjusted earnings of 81 cents per share for fiscal 2015, which decreased 30.8% year over year. Earnings trailed the Zacks Consensus Estimate of 91 cents.
Including favorable discrete tax benefits, Raven reported earnings of 86 cents per share for the year versus $1.17 in fiscal 2014. Prior-year earnings did not have any adjustments.
Revenues for fiscal 2015 were down 4.2% to $378 million from $394.7 million in fiscal 2014. Excluding sales from contract manufacturing, fiscal 2015 net sales were $351.2 million, up 1.8 percent from the prior fiscal year. Revenues missed the Zacks Consensus Estimate of $392 million.
Outlook
Raven maintains its long-term growth target for operating income of 10% to 12%. The company’s effort to transform its business by investing in essential strategic initiatives along with reduction of operating expenses will optimize its performance. The company will optimize internal investments in each of the three operating divisions and invest in those projects which have the greatest long-term growth potential.
Raven’s continued strategic partnership with AGCO Corporation AGCO as well as relatively new partnership with Kinsey will drive customer relationship. In addition, its new product pipeline is balanced with both near-term contributors and multiple intermediate and long-term offerings that will show positive results later this year and beyond.
The company remains optimistic about the long-term view of the North American agricultural market. Raven's technology, expertise and product portfolio stands to benefit from the rising world population and increasing global demand for food.
The Integra Plastics acquisition was a key strategic move and has greatly improved Raven’s competitive positioning. By leveraging Integra's significant capabilities the company will be able to deliver improved returns over the long-term.
Further, demand for Applied Technology in end-markets has declined considerably more than earlier expectations and is getting worse in the first quarter of fiscal 2016. Several OEMs are reducing production levels again and lowering their outlooks for the year. With high corn inventories, continued high input costs, and waning grower sentiment, Raven remains concerned about the recovery in demand until late fiscal 2016.
Although, the company’s restructuring actions will address the weak end-market conditions, the recent decline in oil prices will remain a headwind. The drop in oil prices will challenge the sales development in the energy end-market for Engineered Films.
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 #4 (Sell). However, some diversified-operations stocks that warrant a look include Compass Diversified Holdings CODI and Danaher Corp. DHR, both carrying carry a Zacks Rank #2 (Buy).
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