RAVN Raven Industries Inc

Raven Industries, Inc. (NASDAQ:RAVN) today reported financial results for the third quarter that ended October 31, 2017.

Noteworthy Items:

• Consolidated net sales and earnings per share increased approximately 40 percent and 106 percent year-over-year, respectively;
• Closed on the acquisition of Colorado Lining International, Inc. (CLI), further strengthening Engineered Film’s presence in the geomembrane market;
• Engineered Films modified its production schedules to assist in hurricane recovery efforts, generating $8.4 million in recovery film sales during the third quarter;
• Applied Technology was issued a patent by the U.S. Patent Office for its Hawkeye® Nozzle Control System;
• Aerostar was awarded a $6.8 million aerostat contract through the Department of Defense;
• Aerostar’s stratospheric balloons achieved a new duration record of 197 days;
• Launched Project Atlas, a strategic investment to replace the Company’s existing enterprise resource planning platforms to enhance the Company’s execution of its long-term growth strategy;
• The Company repurchased approximately 350 thousand shares at an average price of $28.71 for a total of $10.0 million.

Third Quarter Results:     Net sales for the third quarter of fiscal 2018 were $101.3 million, up 39.7 percent versus the third quarter of fiscal 2017. Engineered Films and Aerostar both achieved significant growth year-over-year in the third quarter, increasing sales 68.9 percent and 23.3 percent, respectively. Applied Technology sales were up slightly versus the prior year. In this year’s third quarter, sales related to the acquisition of CLI were $5.2 million. CLI was acquired on September 1, 2017. As a result, CLI was only part of the Company for two months of the third quarter. In addition, sales of hurricane recovery film during the third quarter of this year were $8.4 million. It has been several years since the Company received a substantial increase in demand for hurricane recovery film. Sales of such film are generally less than $2.0 million on an annual basis.

Operating income for the third quarter of fiscal 2018 was $17.8 million versus operating income of $7.4 million in the third quarter of fiscal 2017, increasing 141.3 percent year-over-year. Operating margin increased 740 basis points year-over-year, from 10.2 percent of net sales to 17.6 percent of net sales. The significant improvement in profitability was principally driven by strong operating leverage on higher sales volume within Engineered Films and improved financial performance of Aerostar.

Net income for the third quarter of fiscal 2018 was $12.0 million, or $0.33 per diluted share, versus net income of $5.7 million, or $0.16 per diluted share, in last year's third quarter. The increase in earnings per share was driven primarily by the improved operating performance in both Engineered Films and Aerostar. The impact of the CLI acquisition was neutral to earnings per share in this year’s third quarter.

Project Atlas Launched:During the third quarter, the Company launched a company-wide initiative called Project Atlas. This is a strategic long-term investment to replace the Company’s existing enterprise resource planning platforms. Project Atlas is expected to take approximately three years to complete and cost between $8 and $10 million. This investment will drive efficiencies across the enterprise, enable faster integration of future acquisitions, automate a significant portion of internal controls, and enhance the enterprise’s execution of its long-term growth strategy. All of the costs associated with this project will be reported within corporate expenses. During the third quarter of this year, Project Atlas costs were approximately $300 thousand. Project Atlas costs are expected to be approximately $1 million per quarter in fiscal year 2019.

Balance Sheet and Cash Flow:At the end of the third quarter of fiscal 2018, cash and cash equivalents totaled $36.9 million, down $18.3 million versus the prior quarter. The decrease was primarily driven by the acquisition of CLI and share repurchase activity, partially offset by strong operating cash flows.

Net working capital as a percentage of annualized net sales1 improved 60 basis points year-over-year, from 25.2 percent in the third quarter of last year to 24.6 percent in this year’s third quarter. The decrease in net working capital percentage1 was the result of higher payables, as well as managing inventory and receivables efficiently with the substantial increase in sales versus the prior year.

During the third quarter of fiscal 2018, the Company repurchased approximately 350 thousand shares at an average price of $28.71 per share for a total of $10.0 million.

Applied Technology Division:Net sales for Applied Technology in the third quarter of fiscal 2018 were $25.3 million, up slightly versus the third quarter of fiscal 2017. Weaker end market conditions, coupled with challenging year-over-year comparisons for new products, led to the expected slowdown in growth for the division during the third quarter. Although Agriculture market conditions deteriorated in the third quarter of this year for Applied Technology, the Company believes that overall the division is holding market share across product lines.

Division operating income was $5.4 million, down 16.5 percent versus the third quarter of fiscal 2017. The decline in profitability was driven primarily by additional investments to enhance our customer experience as well as higher legal expenses. Combined, these items reduced division operating income by approximately $1.0 million during the third quarter of this year. The incremental investments, concentrated in research and development and selling and marketing, are strategic investments which are expected to generate new sales and market share gains in future quarters.

Engineered Films Division:Net sales for Engineered Films were $65.1 million, up 68.9 percent year-over-year. Volume, measured in pounds sold, increased 53 percent versus the prior year. All markets contributed to the division’s higher sales versus the prior year. Sales of recovery film to support hurricane relief efforts and the recent acquisition of CLI contributed $8.4 million and $5.2 million, respectively. Excluding CLI and hurricane recovery film, net sales for Engineered Films were $51.5 million, up 33.6 percent year-over-year.

Operating income in the third quarter of fiscal 2018 was $17.1 million, up $10.0 million or 140.1 percent versus the third quarter of fiscal 2017. The year-over-year increase in operating income was principally driven by strong operating leverage on higher sales volume. Division operating margin increased 780 basis points year-over-year, from 18.5 percent to 26.3 percent, driven by improved capacity utilization, ongoing pricing discipline and favorable product mix.

Aerostar Division:Net sales for Aerostar during the third quarter of fiscal 2018 were $11.1 million, up $2.1 million or 23.3 percent versus the third quarter of fiscal 2017. The year-over-year increase in sales was primarily driven by growth in the stratospheric balloon platform.

Operating income in the third quarter of fiscal 2018 was $1.4 million, versus an operating loss of $1.4 million in the previous year’s third quarter. Last year's third quarter results include a pre-tax inventory write-down adjustment of $2.3 million related to certain radar inventory. This year’s third quarter results include pre-tax charges of approximately $0.9 million related primarily to a strategic decision to narrow aerostat offerings and thereby further enhance the division’s focus on its stratospheric balloon platform.

Fiscal 2018 Outlook:“We are very pleased with the performance achieved by all three operating divisions throughout the first nine months of the year,” said Dan Rykhus, President and CEO. “Each division has worked to optimize performance given their specific end market conditions and each has achieved success.

“Applied Technology has faced a more challenging agriculture market than we expected at the beginning of the year, and we don't foresee anything changing in the next twelve months to improve market conditions. At the same time, we have made the strategic decision to fund several long-term investments for growth, knowing this dampens short-term profits. We believe strongly in the long-term margin potential for ATD and we expect improved margins over time with these investments, even if end-market conditions remain challenging.

“Engineered Films’ integration of CLI is going very well. Similar cultures and strong leadership are greatly benefiting the integration efforts. We expect performance for CLI to be slightly accretive to earnings this fiscal year and contribute approximately 5 cents per share in fiscal 2019. The sale of recovery film to support hurricane relief efforts was unexpected and favorably impacted the division’s operating leverage in the third quarter. We expect sales of such films to be approximately $8 to $9 million in the fourth quarter. 

“Aerostar is achieving both improved financial performance and consistency in results on a sequential basis. During the third quarter, the division continued to improve the performance of its stratospheric balloon technology, achieving a record duration of 197 days aloft. Its partnership with Google on Project Loon remains very strong, and the division continues to advance its technology offering with new customers. Furthermore, during the third quarter, Aerostar was awarded a $6.8 million aerostat contract with the U.S. Department of Defense. We expect the majority of the revenue from this contract to be realized in fiscal year 2019.

“Overall, we are very pleased with our third quarter and year-to-date financial performance, and we are very proud of our team members’ resolve and determination to drive improved results.”

Regulation G:The information presented in this earnings release regarding 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.

Conference Call Information:The Company will host an investor conference call to discuss third quarter fiscal 2018 results tomorrow, Tuesday, November 21, 2017, at 9:00 a.m. Central Time (10:00 a.m. Eastern Time). The conference call audio will be available to all interested parties via a simultaneous webcast that can be accessed through the Investor Relations section of the Company’s website at http://investors.ravenind.com. Analysts and investors are invited to join the conference call by dialing: +1 (866) 393-0676. The event is scheduled to last one hour. For those unable to listen live, an audio replay of the event will be archived on the Company's website.

About Raven Industries, Inc.:Raven Industries (NASDAQ:RAVN) is dedicated to providing innovative, high-value products and solutions that solve great challenges throughout the world. Raven is a leader in precision agriculture, high-performance specialty films, and lighter-than-air technologies. Since 1956, Raven has designed, produced, and delivered exceptional solutions, earning the company a reputation for innovation, product quality, high performance, and unmatched service. For more information, visit http://ravenind.com.

Forward-Looking Statements:This news release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. The Company intends that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act.

Generally, forward-looking statements can be identified by words such as "may," "will," "plan," "believe," "expect," "intend," "anticipate," "potential," “should,” “estimate,” “predict,” “project,” “would,” and similar expressions, which are generally not historical in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future - including statements relating to our future operating or financial performance or events, our strategy, goals, plans and projections regarding our financial position, our liquidity and capital resources, and our product development - are forward-looking statements.

Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements, because such statements speak only as of the date when made. Our Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain known risks, as described in the Company’s 10K under Item 1A, and unknown risks and uncertainties that may cause actual results to differ materially from our Company’s historical experience and our present expectations or projections.

Contact Information:        Bo Larsen              Investor Relations Director               Raven Industries, Inc.         +1(605)-336-2750        

RAVEN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands, except earnings per share) (Unaudited)
	Three Months Ended October 31,											Nine Months Ended October 31,
	2017				2016				Fav (Un) Change			2017				2016				Fav (Un) Change
Net sales	$	101,349			$	72,522			39.7	%		$	281,494			$	208,480			35.0	%
Cost of goods sold	68,016				52,683							189,692				149,609
Gross profit	33,333				19,839				68.0	%		91,802				58,871				55.9	%
Gross profit percentage	32.9		%		27.4		%					32.6		%		28.2		%
Research and development expenses	4,083				4,151							12,319				12,475
Selling, general and administrative expenses	11,421				8,212							31,476				24,174
Long-lived asset impairment loss	—				87							259				87
Operating income	17,829				7,389				141.3	%		47,748				22,135				115.7	%
Operating income percentage	17.6		%		10.2		%					17.0		%		10.6		%
Other income (expense), net	(34		)		(273		)					(327		)		(579		)
Income before income taxes	17,795				7,116				150.1	%		47,421				21,556				120.0	%
Income tax expense	5,798				1,375							14,842				5,802
Net income	11,997				5,741				109.0	%		32,579				15,754				106.8	%
Net income attributable to noncontrolling interest	(1		)		—							(2		)		1
Net income attributable to Raven Industries	$	11,998			$	5,741			109.0	%		$	32,581			$	15,753			106.8	%
Net income per common share:
- basic	$	0.33			$	0.16			106.3	%		$	0.90			$	0.43			109.3	%
- diluted	$	0.33			$	0.16			106.3	%		$	0.89			$	0.43			107.0	%
Weighted average common shares:
- basic	35,939				36,174							36,108				36,265
- diluted	36,320				36,296							36,477				36,335

RAVEN INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) (Unaudited)
	October 31				January 31				October 31
	2017				2017				2016
ASSETS
Cash and cash equivalents	$	36,873			$	50,648			$	46,313
Accounts receivable, net	59,573				43,143				39,554
Inventories	53,481				42,336				42,813
Other current assets	3,910				2,689				2,747
Total current assets	153,837				138,816				131,427
Property, plant and equipment, net	105,651				106,324				108,948
Goodwill and amortizable intangibles, net	58,127				52,697				53,214
Other assets, net	2,926				3,672				3,746
Total Assets	$	320,541			$	301,509			$	297,335
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable	$	13,383			$	8,467			$	9,377
Accrued and other liabilities	22,553				19,915				15,862
Total current liabilities	35,936				28,382				25,239
Other liabilities	13,456				13,696				12,134
Shareholders' equity	271,149				259,431				259,962
Total Liabilities and Shareholders' Equity	$	320,541			$	301,509			$	297,335

Net Working Capital and Net Working Capital Percentage1
Accounts receivable, net	$	59,573			$	43,143			$	39,554
Plus:  Inventories	53,481				42,336				42,813
Less: Accounts payable	13,383				8,467				9,377
Net working capital1	$	99,671			$	77,012			$	72,990
Net working capital percentage1	24.6		%		27.9		%		25.2		%

RAVEN INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
	Nine Months Ended October 31,
	2017				2016
Cash flows from operating activities:
Net income	$	32,579			$	15,754
Adjustments to reconcile net income to net cash provided by operating  activities:
Depreciation and amortization	10,985				11,526
Long-lived asset impairment loss	259				87
Other operating activities, net	(12,989		)		11,318
Net cash provided by operating activities	30,834				38,685
Cash flows from investing activities:
Capital expenditures	(7,003		)		(3,901		)
Payments related to business acquisitions	(12,700		)		—
Proceeds from sale or maturity of investments	250				250
Purchases of investments	(255		)		(750		)
(Disbursements) proceeds from settlement of liabilities, sale of assets	(333		)		1,145
Other investing activities, net	(36		)		(498		)
Net cash used in investing activities	(20,077		)		(3,754		)
Cash flows from financing activities:
Dividends paid	(14,032		)		(14,148		)
Payments for common shares repurchased	(10,000		)		(7,702		)
Payment of acquisition-related contingent liabilities	(364		)		(318		)
Other financing activities, net	(308		)		(256		)
Net cash used in financing activities	(24,704		)		(22,424		)
Effect of exchange rate changes on cash	172				24
Net increase (decrease) in cash and cash equivalents	(13,775		)		12,531
Cash and cash equivalents at beginning of period	50,648				33,782
Cash and cash equivalents at end of period	$	36,873			$	46,313

RAVEN INDUSTRIES, INC.
SALES AND OPERATING INCOME BY SEGMENT
(Dollars in thousands) (Unaudited)
		Three Months Ended October 31,											Nine Months Ended October 31,
		2017				2016				Fav (Un) Change			2017				2016				Fav (Un) Change
Net sales
Applied Technology		$	25,319			$	25,203			0.5	%		$	94,233			$	79,327			18.8	%
Engineered Films		65,108				38,551				68.9	%		157,691				104,307				51.2	%
Aerostar		11,103				9,003				23.3	%		30,078				25,313				18.8	%
Intersegment eliminations		(181		)		(235		)					(508		)		(467		)
Total Company		$	101,349			$	72,522			39.7	%		$	281,494			$	208,480			35.0	%
Operating income (loss)
Applied Technology		$	5,357			$	6,415			(16.5	)%		$	25,447			$	20,280			25.5	%
Engineered Films		17,115				7,129				140.1	%		35,386				17,666				100.3	%
Aerostar		1,359				(1,375		)		198.8	%		4,165				(1,804		)		330.9	%
Intersegment eliminations		(12		)		(16		)					(3		)		(21		)
Total segment income		$	23,819			$	12,153			96.0	%		$	64,995			$	36,121			79.9	%
Corporate expenses		(5,990		)		(4,764		)		(25.7	)%		(17,247		)		(13,986		)		(23.3	)%
Total Company		$	17,829			$	7,389			141.3	%		$	47,748			$	22,135			115.7	%
Operating income (loss) percentages
Applied Technology		21.2		%		25.5		%		(430)bps			27.0		%		25.6		%		140bps
Engineered Films		26.3		%		18.5		%		780bps			22.4		%		16.9		%		550bps
Aerostar		12.2		%		(15.3		)%		2,750bps			13.8		%		(7.1		)%		2,090bps
Total Company		17.6		%		10.2		%		740bps			17.0		%		10.6		%		640bps

RAVEN INDUSTRIES, INC.
EBITDA REGULATION G RECONCILIATION2
(Dollars in thousands) (Unaudited)
	Three Months Ended October 31,											Nine Months Ended October 31,
									Fav (Un)											Fav (Un)
Segments	2017				2016				Change			2017				2016				Change
Applied Technology
Reported operating income	$	5,357			$	6,415			(16.5	)%		$	25,447			$	20,280			25.5	%
Plus: Depreciation and amortization	872				949				(8.1	)%		2,524				2,857				(11.7	)%
ATD EBITDA	$	6,229			$	7,364			(15.4	)%		$	27,971			$	23,137			20.9	%
ATD EBITDA % of Net Sales	24.6		%		29.2		%					29.7		%		29.2		%
Engineered Films
Reported operating income	$	17,115			$	7,129			140.1	%		$	35,386			$	17,666			100.3	%
Plus: Depreciation and amortization	2,259				2,201				2.6	%		6,424				6,431				(0.1	)%
EFD EBITDA	$	19,374			$	9,330			107.7	%		$	41,810			$	24,097			73.5	%
EFD EBITDA % of Net Sales	29.8		%		24.2		%					26.5		%		23.1		%
Aerostar
Reported operating income (loss)	$	1,359			$	(1,375	)		198.8	%		$	4,165			$	(1,804	)		330.9	%
Plus: Depreciation and amortization	351				421				(16.6	)%		1,112				1,258				(11.6	)%
Aerostar EBITDA	$	1,710			$	(954	)		279.2	%		$	5,277			$	(546	)		1,066.5	%
Aerostar EBITDA % of Net Sales	15.4		%		(10.6		)%					17.5		%		(2.2		)%
Consolidated Raven
Net Income	$	11,998			$	5,741			109.0	%		$	32,581			$	15,753			106.8	%
Interest expense (income), net	24				77							139				225
Income tax expense	5,798				1,375							14,842				5,802
Depreciation and amortization	3,801				3,893							10,985				11,526
EBITDA	$	21,621			$	11,086			95.0	%		$	58,547			$	33,306			75.8	%
EBITDA % of Net Sales	21.3		%		15.3		%					20.8		%		16.0		%

____________________________

1 Net working capital is a 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 for each respective period.2  EBITDA is a non-GAAP financial measure defined on a consolidated basis as net income/(loss) attributable to Raven Industries, Inc., plus income taxes, plus depreciation and amortization expense, plus interest expense (net). On a segment basis, it is defined as operating income plus depreciation expense and amortization expense. EBITDA margin is defined as EBITDA divided by net sales.