SIOUX FALLS, S.D. — Raven Industries, Inc. (NASDAQ:RAVN) today reported financial results for the fourth quarter and fiscal year that ended Jan. 31, 2016.
- Restructuring savings and continued cost controls drove corporate SG&A expense down $2.2 million year-over-year in the fourth quarter and $4.6 million for the fiscal year;
- Inventory reduction efforts led to a decline in inventory of $2.7 million versus the third quarter;
- Engineered Films' sales into the Energy market deteriorated further, declining nearly 90% year-over-year as further declines in oil prices led to additional reductions in drilling activity;
- For the second consecutive quarter, Applied Technology's sequential year-over-year sales declines eased;
- Reductions in capital spending continued, with CAPEX down $4.0 million in fiscal year 2016 vs. last year;
- Subsequent to quarter end, executed an exclusive distribution agreement with AgEagle Aerial Systems, a leader in UAS technology for agriculture providing aerial data acquisition capabilities to Ag service providers.
Fourth Quarter Results:
Net sales for the fourth quarter of 2016 were $52.8 million, down 41.2% vs. the fourth quarter of 2015. Excluding sales from contract manufacturing, fourth quarter net sales were $51.8 million, down 36.4% vs. the fourth quarter of 2015. Excluding the impact of contract manufacturing, all three operating divisions experienced significant sales declines in the fourth quarter. All divisions continue to experience reduced end-market demand in their primary markets of focus. Adverse commodity market conditions are driving reduced demand for both Applied Technology and Engineered Films, while reductions and delays in governmental defense spending are reducing demand for Aerostar, and Vista Research in particular.
Operating income for the fourth quarter of 2016 was $0.2 million vs. $6.4 million in the fourth quarter of 2015. Operating margin declined 680 basis points from 7.1 percent of net sales to 0.3% of net sales. The decline in operating income was principally driven by significantly lower sales volumes across all divisions and the corresponding impact this had on gross profit margins from lower fixed cost absorption. Restructuring and cost reduction efforts reduced the expense profile of the Company, but this was not enough to offset the impact to operating income from significantly lower sales volumes.
Net income for the fourth quarter of 2016 was $1.0 million, or $0.03 per diluted share, vs. net income of $6.2 million, or $0.16 per diluted share, in last year's fourth quarter. The fourth quarter of both this year and last year benefited by approximately $0.9 million from the timing of U.S. legislation related to the research and development tax credit.
Fiscal Year 2016 Results:
Net sales for fiscal year 2016 were $258.2 million, down 31.7% vs. fiscal year 2015. Excluding sales from contract manufacturing, fiscal year 2016 net sales were $253.0 million, down 28.0% vs. fiscal year 2015. All divisions experienced significant declines in sales during the year. With the planned run-off of contract manufacturing business now complete, the Company will no longer report net sales excluding contract manufacturing in future quarters.
Operating income for fiscal year 2016 was $11.1 million vs. $43.8 million last fiscal year. Operating income for fiscal year 2016, adjusted for the third quarter Vista Research goodwill impairment and associated financial impacts, was $20.0 million vs. $43.8 million in fiscal year 2015, down 54.4% year-over-year.
Net income for fiscal year 2016 was $8.5 million, or $0.23 per diluted share, vs. net income of $31.7 million, or $0.86 per diluted share, in fiscal year 2015. Net income for fiscal year 2016, adjusted for the Vista Research goodwill impairment and associated financial impacts, was $14.9 million, or $0.40 per diluted share, down 53.5% vs. fiscal year 2015.
The effective tax rate for fiscal year 2016 was 20.6% and was significantly impacted by both the goodwill impairment loss recorded in the third quarter of this year and the research and development tax credit legislation passed by Congress. For fiscal year 2017 the Company expects an effective tax rate of approximately 30%.
Balance Sheet and Cashflow:
At the end of the fourth quarter of 2016, cash and cash equivalents totaled $33.8 million, up slightly versus the previous quarter. Net working capital as a percentage of annualized sales increased from 29.9% in the third quarter to 36.9% in the fourth quarter4. The increase in net working capital percentage was primarily the result of inventory levels declining less than the sequential decline in sales. While both Applied Technology and Engineered Films have reduced inventory levels and continue to pursue additional reductions, Aerostar has been significantly challenged in reducing inventory levels due to the lack of contract wins during the fiscal year.
Cashflow from operations was $8.8 million in the fourth quarter vs. $14.4 million in the previous year's fourth quarter. The decrease in cashflow from operations was principally driven by lower net income year-over-year. Capital expenditures were $2.3 million in this year's fourth quarter, down $2.0 million vs. the fourth quarter of 2015. For fiscal year 2017, the Company expects capital expenditures to be approximately $9 million, down $4 million vs. fiscal year 2016.
Engineered Films Division Fourth Quarter Results:
Net sales for Engineered Films were $25.4 million, down 37.8% year-over-year. The decline in sales was principally driven by lower sales into the Energy and Geomembrane markets. Energy-related sales declined $15.5 million vs. the fourth quarter of last year, or nearly 90%, while sales into the Geomembrane market were down nearly 20% year-over-year. Both the Energy and Geomembrane markets are heavily influenced by commodity oil prices and were negatively impacted by lower end-market demand in the fourth quarter. Sales into the Agriculture, Construction, and Industrial markets, in aggregate, were up 3.9% year-over-year and only partially offset the declines in the Energy and Geomembrane markets.
Operating income was $1.9 million, down $2.7 million or 58.8% vs. the fourth quarter of 2015. The decrease in operating income was driven principally by significantly lower volumes and the resultant decline in capacity utilization. Raw material cost developments, reformulation efforts, cost controls, and pricing discipline continue to benefit margin developments, but were not enough to offset the impact from lower volumes.
"Engineered Films had a very challenging fourth quarter. Sales developments in the Energy and Geomembrane markets deteriorated even further as oil prices dropped to the thirty-dollar range," said Rykhus. "Cost reduction efforts are ongoing, but they were not enough to make up for the declines in volume. Although the energy market will be even more challenging this next fiscal year, we are intently focused on driving growth in our other markets by capitalizing on our new production capabilities. We expect these efforts will lead to market share gains and also drive profit margin expansion as volumes grow."
Applied Technology Division Fourth Quarter Results:
Net sales for Applied Technology in the fourth quarter of 2016 were $18.4 million, down 30.3% vs. the fourth quarter of 2015. Excluding sales from contract manufacturing, fourth quarter net sales were down 26.1 percent versus the fourth quarter of 20152. In the fourth quarter, sales to OEM's and the Aftermarket declined by approximately 33% and 21%, respectively. International sales were up approximately 46%, while domestic sales were down approximately 36%. International sales growth was driven by strong organic sales in Europe and stabilized performance in Latin America.
Operating income was $2.2 million, down $1.2 million or 34.7% vs. the fourth quarter of 2015. Lower volumes combined with sustained R&D spending to preserve and enhance technological capabilities resulted in lower operating income year-over-year. Restructuring savings and ongoing cost controls, outside of research and development, have reduced spending levels in the division, but were not enough to offset the impacts of lower volumes.
According to Rykhus, "Momentum is building within Applied Technology and we are encouraged by our pipeline of new business. The sequential year-over-year quarterly sales development continued to improve for the division in the fourth quarter. The largest decline in division sales during fiscal year 2016 occurred in the second quarter when sales, excluding contract manufacturing, declined approximately 42 percent year-over-year. Third quarter and fourth quarter were down approximately 33% and 26%, respectively," said Rykhus. "We are still facing very challenging end market conditions, but we are encouraged by the progress we are beginning to make. We have a lot of opportunities for growth and market share expansion. OEM interest in our new product portfolio is strong and we are seeing promising developments in the international markets we serve, particularly in Europe and Latin America."
Aerostar Division Fourth Quarter Results:
Net sales for Aerostar for the fourth quarter of 2016 were $9.0 million, down 63.3% vs. the fourth quarter of 2015. Excluding sales from contract manufacturing, fourth quarter net sales were $8.0 million, down $7.8 million or 49.1% vs. the fourth quarter of 20152. The sales declines year-over-year were driven primarily by lower Vista Research sales, which declined $6.4 million, or 71.9%, vs. the fourth quarter of 2015. Sales of stratospheric balloons were essentially flat year-over-year, while sales of aerostats were down due to the timing of orders.
Operating loss in the fourth quarter was $0.2 million vs. operating income of $4.3 million in the fourth quarter of last year. The decline in operating income was primarily driven by the significant decline in Vista Research sales. In the fourth quarter of last year, Vista Research sold radar systems to several different customers. This year the business was unable to sustain these sales levels due to delays in the timing of new business and the decline in governmental defense spending.
"This was a very disappointing year for Aerostar, particularly due to the significant shortfall in Vista Research," said Rykhus. "Leadership changes were made swiftly to address the lack of execution and we are very pleased with the progress of the new leadership team. Although the sales cycles in this division tend to be relatively long, the team is expanding their efforts and responding by building a more robust new-business pipeline and vigorously pursuing new opportunities. While the ramp in production for Project Loon has taken longer than we had planned, we are encouraged with the continued progress of the program and our continued advancement in stratospheric technology."
Fiscal 2017 Outlook:
"As we begin fiscal year 2017, the markets served by our core businesses remain very challenging," said Rykhus. "The precision agriculture market is expected to decline for the third straight year, oil and gas prices are suppressing drilling activity, and defense spending continues to be curtailed. This is not the ideal backdrop for a business with our end market exposures. With that said, we are much better positioned to deal with these challenges as a result of the actions we took in fiscal year 2016 to preserve our core business, which included:
- Executing a restructuring plan to reduce expenses on an annualized basis by more than $13 million;
- Heightening the divisional focus on net working capital management and aggressively reducing inventory levels;
- Prudently reducing our capital expenditure profile to better reflect the market conditions we face;
- Executing leadership changes within both Applied Technology and Aerostar to drive enhanced accountability;
- Launching Hawkeye, our next generation application control system and the most precise system in the marketplace today;
- Addressing the quality challenges we faced in Latin America and re-engaging customers to begin rebuilding our market share in this key region; and
- Continuing to fund and preserve our research and development capabilities to continue our track record of introducing new and innovative solutions to the market to drive future growth."
"We believe we have a number of strong opportunities in front of us to drive market share gains in fiscal year 2017. Momentum is building within Applied Technology, new production capabilities are on-line in Engineered Films, and we have new invigorated leadership in Aerostar focusing on turning around Vista Research and advancing Project Loon. We are cautiously optimistic that the sequential year-over-year sales comparisons will continue to improve as we progress through the year. We expect to maintain flat sales and adjusted operating income in fiscal year 2017, with potential to achieve very modest growth in each," concluded Rykhus.