Raven Misses on Both Lines

Raven Industries Inc. (RAVN - Analyst Report) reported second quarter 2012 earnings of 32 cents per share, down 3% from 34 cents in the year-ago quarter. Results were affected by continued volatility in the Aerostar segment. Earnings per share also fell short of the Zacks Consensus Estimate of 38 cents per share.

Operational Update

Sales increased 13% year over year to $101.7 million, but marginally missed the Zacks Consensus Estimate of $102 million. The year-over-year growth in sales was attributable to the double-digit growth across all segments.

Cost of sales increased 15% year over year to $71.6 million. Selling, general and administrative expenses increased 28% year over year to $9.1 million. Operating income decreased 7% year over year to $17.4 million in the quarter.

Segment Performance

Applied Technology: Sales for the segment surged 13% year over year to $40 million, due to the strength in international sales, particularly in Brazil and Canada. Domestic sales also remained strong but were somewhat mitigated by drought conditions. Operating income, however, declined 2% to $12.9 million from $13.2 million due to higher sales of lower-margin products and higher investment in research, marketing and product development.

Engineered Films : The segment reported sales of $36.8 million, up 13% year over year. Operating income saw a 29% increase on a year-over-year basis to a record $6.8 million. The solid performance was driven by strength in the energy and agricultural markets, and deliveries of geomembrane films for environmental protection. Margins benefited from improved operating efficiencies and a more aggressive pricing strategy.

Aerostar : Sales increased 15% year over year to $26.8 million, primarily driven by the addition of Vista Research revenues (which was acquired in January 2012) and higher Electronic Systems' sales. Raven realigned its Electronic Systems Division in the quarter. Approximately 75% of Electronic Systems' sales have been recorded in the Aerostar segment and the balance to Applied Technology.

The segment reported an operating profit of $2.3 million, down 32% from $3.4 million in the prior-year quarter due to decline in Aerostat sales. A difficult federal spending environment led to continued volatility in the segment, as lack of aerostat orders are taking a toll on potential top-line gains.

Financial Position

Raven Industries ended the quarter with cash and cash equivalents, including short-term investments, of $44.1 million, up from the $43.5 million as of April 31, 2012. Cash flow from operating activities during the first half of fiscal 2012 improved to $44.4 million from $26.2 million in the prior year comparable period.

Our Take

Raven will benefit from the current strength in the agriculture market. However, variability for aerostat orders will remain, leading to significant fluctuations in the Aerostar Division. The company continues with its strategy of investing significantly in research and development, thereby, helping to maintain strong financial results. In addition, Raven has ample scope to fund future growth and increase dividends with the support from debt-free balance sheet and solid cash flow. The company currently retains a Zacks #2 Rank (short-term Buy recommendation).

South Dakota-based Raven Industries Inc. is an industrial manufacturer providing a variety of products for the agricultural, industrial, construction and military/aerospace markets. The company operates through four business segments: Engineered Films, Electronic Systems, Applied Technology and Aerostar. Graco Inc. (GGG - Snapshot Report) and Spartech Corp. (SEH) are peers of Raven.