SIOUX FALLS, S.D. — Raven Industries Inc. today reported financial results for the first quarter that ended April 30, 2016.
• Applied Technology's sales declined 2.9% year-over-year, however, Aftermarket sales grew 5.7% year-over-year and the sales development of the OEM channel continued to improve sequentially;
• Division operating profit margin for Applied Technology expanded 60 basis points year-over-year to 27.6%, driven principally by lower manufacturing and selling expenses;
• Land-based rig counts in the U.S. declined approximately 55% year-over-year in the first quarter, driving Energy related sales for Engineered Films down $2.5 million, or approximately 60%;
• Net working capital, as a percentage of annualized net sales, declined 510 basis points year-over-year;
• Expense controls and prior year restructuring benefits drove consolidated SG&A expenses down $1.9M year-over-year;
• The Company repurchased approximately 380 thousand shares at an average price of $14.93 for a total of $5.7 million.
First Quarter Results
Net sales for the first quarter of fiscal 2017 were $68.4 million, down 2.7% vs. the first quarter of fiscal 2016. Applied Technology and Engineered Films both declined year-over-year, but exhibited improved sales trends despite continued end-market demand challenges, while Aerostar achieved revenue growth during the quarter.
Operating income for the first quarter of fiscal 2017 was $7.6 million vs. $7.2 million in the first quarter of fiscal 2016. Operating margin increased 80 basis points year-over-year from 10.3% of net sales to 11.1% of net sales. The increase in operating margin was principally driven by lower operating expenses year-over-year as a result of continued expense controls and prior year restructuring benefits.
Net income for the first quarter of fiscal 2017 was $5.5 million, or $0.15 per diluted share, vs. net income of $4.9 million, or $0.13 per diluted share, in last fiscal year's first quarter. The increase in earnings per share was driven primarily by favorable tax developments and lower shares outstanding as a result of the repurchase actions taken over the previous year.
Balance Sheet and Cash Flow
At the end of the first quarter of 2017, cash and cash equivalents totaled $32.8 million, down $1.0 million vs. the prior quarter. The share repurchase actions during the quarter reduced cash balances by $5.7 million, but this impact was largely offset by free cash flow generation driven by lower net working capital requirements and reductions in capital spending.
Net working capital as a percentage of annualized net sales decreased 510 basis points year-over-year, from 33.8% in the first quarter of last year to 28.7% in this year's first quarter1. The decrease in net working capital was primarily the result of lower inventory levels, particularly in Applied Technology and Engineered Films.
Cash flow from operations was $11.1 million in the first quarter of fiscal year 2017 vs. $9.0 million in the previous year's first quarter. Higher net income and favorable working capital developments principally drove the improvement year-over-year.
Capital expenditures were $0.8 million in this year's first quarter, down $4.2 million vs. the first quarter of fiscal 2016. The Company continues to expect capital expenditures for the year to be approximately $9 million. There are no significant capacity expansions planned for the year for Engineered Films and the other divisions are expected to maintain a disciplined approach to capital spending.
During the first quarter of fiscal 2017, the Company repurchased approximately 380 thousand shares at an average price of $14.93 per share for a total of $5.7 million. Over the previous five quarters, the Company repurchased approximately 2.0 million shares at an average price of $17.66 per share for a total of $35.0 million. During the first quarter, the Company's Board of Directors authorized an incremental $10.0 million for share repurchases, increasing the total amount authorized to $50.0 million. The Company's remaining authorization at the end of the first quarter of fiscal 2017 was $15.0 million.
Applied Technology Division
Net sales for Applied Technology in the first quarter of fiscal 2017 were $31.5 million, down 2.9% vs. the first quarter of fiscal 2016. However, the sequential improvement in the year-over-year sales development of the division continued. Sales to the Aftermarket channel increased 5.7% in the first quarter vs. the prior year, compared to a decline of approximately 20% in the previous quarter. Sales through the OEM channel decreased 11.9% year-over-year in the first quarter, compared to a 33% decline experienced in the fourth quarter. Geographically, domestic sales were down 13.8% year-over-year and international sales were up 26.3% year-over-year.
Operating income was $8.7 million, essentially flat with the first quarter of fiscal 2016. The impact of lower sales volume vs. the previous year was offset by the benefits of ongoing expense controls and the prior year restructuring. Operating margin for the division increased by 60 basis points vs. the prior year, from 27.0% to 27.6%, driven principally by lower manufacturing and selling expenses.
"We are very pleased by Applied Technology's relatively strong start to fiscal year 2017. While there is still a long road ahead and market uncertainties persist, we are encouraged with the continued sequential improvement the division is achieving. Although the underlying strength of the precision ag market remains subdued, conditions appear to be stabilizing for now," according to Dan Rykhus, president and CEO. "Steady market conditions, combined with our early success in growing our market share position, give us reason to remain optimistic for the balance of the year. New product introductions are gaining traction. Our new nozzle control system, Hawkeye, continues to ramp up in sales and is on track to deliver significant growth this year. With the enhanced quality of our new product portfolio, we expect continued OEM sales improvement throughout the rest of the year, both domestically and internationally."
Engineered Films Division
Net sales for Engineered Films were $29.1 million, down 7.1% year-over-year. The decline in sales was principally driven by lower sales into the Energy and Geomembrane markets. Sales into these markets declined $2.9 million vs. the first quarter of last year. The remaining markets, in aggregate, were up $0.8 million year-over-year, driven by strength in both the Construction and Industrial markets.
Operating income in the first quarter of fiscal 2017 was $3.9 million, down $0.6 million or 13.3% vs. the first quarter of fiscal 2016. The year-over-year decline in operating income was driven principally by lower production volumes, offset somewhat by lower operating expenses. Division operating margin declined 100 basis points year-over-year in the first quarter, but rebounded sequentially from 7.5% in the fourth quarter to 13.3% on seasonally improved production volumes.
"Energy market conditions for Engineered Films deteriorated further in the first quarter as active land-based U.S. rig counts continued to decline, dropping 55% year-over-year," said Rykhus. "While oil prices have improved over the last three months, producers are skeptical that these gains will last. As a result, we continue to experience reduced drilling activity and persistent headwinds in the Energy market. While this is creating a drag on the overall growth profile of the division, it's a lot less severe than it has been in the recent past.
"Although the division was unable to achieve growth in the first quarter, the sales trends did improve sequentially. We are pleased with the strong growth achieved in both the Construction and Industrial markets during the quarter and the relative stability of the Agriculture market.
With our efforts to sell the capacity of our new production line into the Industrial and Geomembrane markets, and our steady progress in Construction and Agriculture, we are optimistic that we will make meaningful progress during the year toward returning the division to growth," concluded Rykhus.
Net sales for Aerostar for the first quarter of fiscal 2017 were $7.9 million, up $1.3 million vs. the first quarter of fiscal 2016. The sales increases year-over-year were driven primarily by growth in stratospheric balloon business, led by Project Loon. In addition, the division generated stratospheric sales from two new U.S. government customers during the first quarter. Building upon its 60-year legacy, and its ongoing collaboration with Google, the division validated that its advancements in stratospheric balloon technology have alternative uses in the market.
Operating loss in the first quarter of fiscal 2017 was $0.6 million vs. an operating loss of $0.9 million in the first quarter of last year. Benefits from the restructuring actions taken in the fourth quarter of last year, together with improved sales volumes, principally led to the reduction in operating loss year-over-year.
"This is a very important year for Aerostar," said Rykhus. "We are intently focused on turning around the performance of the division and returning it to profitability. The first quarter was a slight improvement vs. the prior year, but we need momentum to build quickly as we progress through the year and we need to deliver a step change in performance. Key to achieving this will be winning meaningful new business in the second half of the year. Our pipeline of new business opportunities has improved significantly and this gives us some tempered optimism and near-term patience, but we must be successful in turning these opportunities into revenue for the division."
Fiscal 2017 Outlook
"We are pleased with our overall performance in the first quarter, and in particular the improved performance of Applied Technology. Despite continued end-market challenges, the decisions we made last year, to restructure the cost profile of the company and to continue R&D investment amidst declining revenues, are positively impacting our results. We are off to a relatively good start and this gives us optimism for the balance of the year. With that said, our optimism is tempered. We still have a lot to accomplish to improve the growth and profitability of the business in order to meet our expectations for the year, and we believe we will," stated Rykhus.
"For Applied Technology, we will continue to expand our OEM relationships and grow our share in a down market. We are executing our plan and driving for growth by leveraging our new product portfolio and investing more intently to drive international sales. For Engineered Films, we need to increase sales volume despite continued Energy and Geomembrane market weakness. We will continue our first quarter progress in ramping up sales in the Industrial market, leveraging our new production line, while driving strong performance in Agriculture and Construction. For Aerostar, we need to continue the progress toward improved financial performance. Key to sustaining this progress will be establishing a regular cadence of new business wins across product platforms. Resources are aligned to continue the progress we've made to improve Aerostar, but uncertainties do remain.
"In addition to each division's sales initiatives, the Company will remain vigilant on costs, drive down inventory levels, and generate value engineering benefits. Successfully driving growth when end-market conditions are weak is not without its challenges, but doing so while maintaining operational discipline has been and will continue to be our focus for the rest of the year. Given our performance in the first quarter, we believe we are on track to deliver revenues and operating profit consistent with prior year revenue and adjusted operating profit, with potential opportunity to achieve modest growth in both in fiscal 2017," concluded Rykhus.