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Raven Industries Inc. (RAVN - Analyst Report) reported second quarter fiscal 2014 earnings of 23 cents per share, which dropped 28% year over year and also missed the Zacks Consensus Estimate of 27 cents per share.

Operational Update

Sales decreased 8% year over year to $93.4 million, but were in line with the Zacks Consensus Estimate. Decline in sales in the Applied Technology and Aerostar division, reflecting the current constraints on federal spending, offset the slight increase in Engineered Films.

Cost of sales decreased 7% year over year to $66.7 million. Selling, general and administrative expenses increased 12% year over year to $10.2 million. Operating income plunged 28% year over year to $12.6 million in the quarter.

Segment Performance

Applied Technology: Sales for the segment dipped 2% year over year to $39 million. Operating income decreased 8% to $11.9 million from $12.9 million in the prior-year quarter, owing to lower sales and expenses for continued investments in research, marketing and product development to drive future growth.

Engineered Films: The segment reported sales of $37.3 million, up 1% year over year. Agricultural barrier films grew in double-digits triggered by sales of fumigation and silage films, but were offset by lower deliveries of geomembrane films. However, operating income plunged 30% to $4.8 million due to higher resin costs as well as lower manufacturing efficiencies thanks to new line start-up costs.

Aerostar: Sales declined 23% year over year to $20.7 million due to reduced demand from U.S. agency customers. Segment operating income plunged 58% to $0.9 million.  

Financial Position

Raven Industries ended the second quarter of fiscal 2014 with cash and cash equivalents of $55.7 million compared with $44.1 million as at the end of the second quarter of fiscal 2013. Cash flow from operating activities during the first half of fiscal 2014 was $29.7 million compared with $44.5 million in the prior-year comparable period.

Our Take

Going forward, Raven will benefit from its acquisition of Vista Research. Raven expects to return to historic earnings growth levels in fiscal 2014, driven by benefits from investments made over the last few years, new product developments and expansion. The Engineered Films segment will benefit from opportunities with agricultural barrier films and growing sales for new multi-layer geomembrane products.

Raven will benefit from Google’s new project for balloon-powered Internet access, Project Loon. The project will use Raven’s Aerostar-designed and developed high-tech balloons. While the program is still in its early stages, a successful trial took place in June involving 30 balloons providing Internet connectivity to an area covering nearly 10,000 square kilometers. Raven expects modest revenues from the project in the remainder of fiscal 2014, with further expectations of significant revenue growth in the first half of fiscal 2015.

The Aerostar segment will continue to face continued government uncertainty and sluggish demand. Raven is working to offset government uncertainty by expanding proprietary technology revenues including advanced radar systems, high-altitude research balloons and aerostats to international markets. However, margins will also be under pressure due to Raven’s increased investments in new initiatives and product development.

South Dakota-based Raven Industries is an industrial manufacturer providing a variety of products for the agricultural, industrial, construction and military/aerospace markets. Raven operates through four business segments: Engineered Films, Electronic Systems, Applied Technology and Aerostar.

Raven currently carries a Zacks Rank #4 (Sell). Among other stocks in the same industry, Hutchison Whampoa Ltd. (HUWHY) with a Zacks Rank #1 (Strong Buy) and Federal Signal Corp. (FSS - Snapshot Report) and ITT Corporation (ITT - Analyst Report) with a Zacks Rank #2 (Buy).
 

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