Raven Industries Inc. today reported financial results for the first quarter that ended April 30, 2015.
- Announced leadership change of Applied Technology Division to enhance execution capabilities and drive increased accountability;
- Applied Technology Division operating profit margin increased from 12.9 percent in the fourth quarter to 27.0 percent this quarter primarily as a result of the restructuring actions taken;
- $13 million annualized restructuring plan on target to deliver full cost reduction realization in the second quarter;
- Completed the planned run-off of the contract manufacturing business in both Applied Technology and Aerostar;
- Initiated activity on the repurchase plan during the quarter, repurchased approximately 150 thousand shares, equivalent to about $3.0 million in stock.
First Quarter Results
Net sales for the first quarter of 2016 were $70.3 million, down 31.4 percent versus the first quarter of 2015. Excluding sales from contract manufacturing, first quarter net sales were $68.2 million, down 29.1 percent versus the first quarter of 20151.
Operating income for the first quarter of 2016 was $7.2 million, down $9.3 million or 56.4 percent versus the first quarter of 2015. The decline was principally due to weakness in Applied Technology and Engineered Films. Both divisions experienced deteriorating end-market demand, leading to significant declines in division operating profit year-over-year.
Net income for the first quarter of 2016 was $4.9 million, or $0.13 per diluted share, versus net income of $11.0 million, or $0.30 per diluted share, in last year's first quarter.
Balance Sheet and Cash Flow
At the end of the first quarter of 2016, cash and cash equivalents totaled $47.7 million, down $4.5 million versus the previous quarter. Net working capital as a percentage of annualized sales increased from 24.2 percent to 33.8 percent year-over-year principally due to higher inventory levels2. Cash flow from operations was $9.3 million in the first quarter versus $18.2 million in the previous year's first quarter. The decline in cash flow from operations was primarily due to the decline in net income year-over-year. Capital expenditures were $5.0 million in this year's first quarter, up $2.1 million versus the first quarter of 2015. The increase in capital expenditures was primarily due to the timing of projects, particularly within Engineered Films. The Company continues to expect capital expenditures for the year to be between $13 and $15 million.
Engineered Films Division First Quarter Results
Net sales for Engineered Films were $31.3 million, down 25.8 percent year-over-year. The decline in sales was driven primarily by a sharp decline in Energy market sales, which declined approximately 75 percent year-over-year. The remaining markets, in aggregate, were up slightly in the first quarter on a reported basis.
Operating income was $4.5 million, down $1.4 million or 23.7 percent versus the first quarter of 2015. The decline in operating income was driven primarily by the significant decline in Energy market volume, which constituted approximately 35 percent of the division's sales in last year's first quarter. Despite declining volume, value engineering, pricing discipline, and favorable raw material cost comparisons led to operating margin increasing 40 basis points year-over-year and 300 basis points sequentially.
"The decline in oil prices has resulted in a reduction in land-based rig counts of approximately 50 percent year-over-year in the first quarter," said Dan Rykhus, president and CEO. "Unfortunately, oil well completion rates have fallen even more, putting significant pressure on the division and delaying the accretion realization of the Integra acquisition. With the actions we are taking to adjust the cost structure of Engineered Films, the division will be in a strong position to capitalize on the rebound in drilling activity when that occurs. In the meantime, we are aggressively pursuing volume opportunities in other markets and managing costs to help offset the Energy market decline in 2016."
Applied Technology Division First Quarter Results
Net sales for Applied Technology in the first quarter of 2016 were $32.4 million, down 30.0 percent versus the first quarter of 2015. The decline in sales was driven by the significant contraction in demand in both the OEM and aftermarket segments which declined approximately 40 percent and 30 percent, respectively, excluding the impact from acquisitions.
Operating income was $8.7 million, down $7.1 million or 44.9 percent versus the first quarter of 2015. Although division operating income was down meaningfully year-over-year due to reduced volume, the restructuring actions taken brought the cost structure of the division more in-line with the current level of demand. As a result, division profit margin increased significantly versus the fourth quarter, increasing from 12.9 percent to 27.0 percent.
According to Rykhus, "The challenging end-market conditions have continued to worsen for Applied Technology. The division has taken actions to adjust its cost structure and took a big step in restoring the operating margin of the business this quarter. We expect further improvement in the second quarter as we realize the full benefit of the restructuring actions implemented."
"Given the significant challenges facing the division and the need for enhanced execution and accountability, we announced a leadership change for the division earlier this month. Brian Meyer, who had most recently served as our CIO, has taken over leadership responsibilities for the Applied Technology Division. Brian will bring a fresh perspective and accelerate the execution of our strategy while at the same time preserving the investment and resources dedicated to innovation. Brian has extensive experience across disciplines and is particularly talented at building and leading high-performing teams. We're confident that in his new role the Division will benefit greatly from his leadership," continued Rykhus.
Aerostar Division First Quarter Results
Net sales for Aerostar for the first quarter of 2016 were $6.6 million, down 62.9 percent versus the first quarter of 2015. Excluding sales from contract manufacturing, first quarter net sales were $5.0 million, down 47.1 percent versus the first quarter of 20151.
Operating income was a loss of $0.9 million versus break-even in the first quarter of 2015. The decline was primarily the result of the planned reduction in contract manufacturing sales and lower sales of proprietary products. Sales of proprietary products were impacted partially by the timing of orders and contract wins relative to the prior year within the Vista radar business and lower volumes of stratospheric balloons.
Said Rykhus, "As we expected, the first quarter was a challenging start to the year for Aerostar, with proprietary product sales declining. The second half of the year is our seasonally-stronger half for proprietary products and we expect momentum to build throughout the year. The Division continues to develop new opportunities and make progress on key strategic programs relating to both radar and stratospheric balloon opportunities."
Fiscal 2016 Outlook
"For Applied Technology we have seen end-market demand deteriorate since the beginning of the year and we believe conditions will remain challenging throughout this fiscal year, and may persist well into next fiscal year. Corn prices have continued to slide since the beginning of the year and are now at 8-year lows. Farmer sentiment is weak and productivity investments are being delayed. Based on what we see now and the feedback we are getting from our strategic OEM partners, we believe the market will bottom-out sometime during the remainder of this year," said Rykhus.
"At the same time, we have seen the Energy market served by our Engineered Films division take a substantial hit. Although oil prices have rebounded somewhat lately, rig counts and oil well completion rates continue to decline. As a result, we are not anticipating a quick recovery, rather a slower and more measured return in demand for films," continued Rykhus.
"Despite these challenges, we are a financially strong Company with a resilient organization. We have adjusted our cost structure for the current level of demand and we continue to look for opportunities to reduce expenses and further optimize our structure as necessary. While current end-market conditions are not conducive to growth, we believe in the long-term fundamentals of the markets we serve. We are committed and confident that we will return to the growth rates consistent with our strategic objectives when commodity market conditions cycle in our favor," concluded Rykhus.
The information presented in this earnings release regarding net sales excluding contract manufacturing sales and earnings before interest, taxes, depreciation, and amortization (EBITDA) do not conform to generally accepted accounting principles (GAAP) and should not be construed as an alternative to the reported results determined in accordance with GAAP. Management has included this non-GAAP information to assist in understanding the operating performance of the Company and its operating segments as well as the comparability of results. The non-GAAP information provided may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results in the tables below.
1 Net sales excluding contract manufacturing sales is a non-GAAP financial measure and excludes sales generated from contract manufacturing activities. Net sales excluding contract manufacturing sales is reconciled in the accompanying Regulation G tables.
2 Net working capital is a ratio defined as accounts receivable (net) plus inventories less accounts payable. Net working capital percentage is defined as net working capital divided by four times quarterly sales.
3 EBITDA is a non-GAAP financial measure defined on a consolidated basis as net income attributable to Raven Industries, Inc., plus income taxes, plus depreciation expense, plus amortization expense, plus interest expense (net). On a segment basis it is defined as operating income, plus depreciation expense, plus amortization expense. EBITDA margin is defined as EBITDA divided by net sales. EBITDA is reconciled in the accompanying Regulation G tables.