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Raven Industries Inc. (RAVN - Analyst Report) reported first quarter 2014 earnings of 38 cents per share, a 27% drop year over year, which fell short of the Zacks Consensus Estimate of 44 cents per share. Sales declined across the board reflecting the current sluggish growth environment and tough year-over-year comparisons.

Operational Update

Sales decreased 12% year over year to $103.7 million, falling short of the Zacks Consensus Estimate of $113 million. Weakness in the Applied Technology Division, declining demand from U.S. agency customers in Aerostar and a moderated energy market in Engineered Films led to the overall decline.

Cost of sales decreased 10% year over year to $68.8 million. Selling, general and administrative expenses increased 5% year over year to $9.7 million. Operating income decreased 26% year over year to $20.9 million in the quarter.

Segment Performance

Applied Technology: Sales for the segment dipped 5% year over year to $51.2 million reflecting lower demand in the U.S. aftermarkets. Operating income decreased 13% to $19 million from $22 million in the prior-year quarter, driven by lower sales but impacted by expenses for continued investments in research, marketing and product development to drive future growth.

Engineered Films: The segment reported sales of $34.5 million, down 16% year over year. Operating income plunged 48% to $4.7 million due to weak energy markets and  tough year-over-year comparisons.

Aerostar: Sales declined 15% year over year to $21.7 million due to reduced demand from U.S. agency customers and planned declines with avionics customers. However, Aerostar was the lone segment which reported a rise in operating profit to $1.8 million, up 25% from the prior-year quarter helped by gross margin improvements and the integration of Vista Research. .

Financial Position

Raven Industries ended the first quarter of fiscal 2014 with cash and cash equivalents of $51.1 million compared with $49.3 million as of the end of fiscal 2013. Cash flow from operating activities during the reported quarter was $14.9 million compared with $28.2 million in the prior year quarter.

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.  Raven has several new precision agricultural products that will be launched in the second half of fiscal 2014 and are expected to help drive growth in Applied Technology.

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 stepped up investments in new initiatives and product development.

South Dakota-based Raven Industries Inc. 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 holds a short-term Zacks Rank #3 (Hold). Among the other stocks in the same industry, CLARCOR Inc. (CLC - Snapshot Report), Compass Diversified Holdings (CODI - Snapshot Report) and Honeywell International Inc. (HON - Analyst Report) hold a Zacks Rank #2 (Buy) and are favorable options for investors.

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