Raven Industries Inc. today announced third quarter results for the three months ended October 31, 2011. Higher sales were led by strong demand for the company's precision agriculture solutions. Third quarter net income declined from prior year levels. Based upon net income gains of 19% for the first nine months, along with anticipated growth from all divisions in the fourth quarter, Raven is on pace for another record year in sales and net income.
For the third quarter, sales increased 9% to $93.3 million, from a record $85.8 million in the same period a year ago. The largest sales increase was reported by the Applied Technology Division, with continued sales growth in Engineered Films. Third quarter net income decreased 4% to $11.4 million, or $0.63 per diluted share, compared with $11.8 million, or $0.65 per share, during the same period a year ago.
For the nine months, sales reached $285.2 million, a 17% increase from last year's $244.0 million. Net income for the nine months of $39.6 million, or $2.17 per share, was 19% above the prior year's nine-month results of $33.1 million, or $1.83 per share.
"Our Applied Technology Division, which currently represents about one-third of our total revenues, turned in another outstanding quarter," said Daniel A. Rykhus, president and chief executive officer."Although our Engineered Films Division achieved double-digit sales growth, we faced another quarter of very tough year-over-year comparisons in operating income. As expected, the decline in avionics is being felt in our Electronic Systems Division. Regarding our Aerostar Division, last year's third quarter was a record, driven by a very high number of aerostat shipments.
"Despite a very challenging economic environment, our diversified base of business is on track to produce another record year. Our two largest divisions are experiencing strong sales momentum, both of which have been the beneficiary of aggressive investment programs related to new products and capacity expansion. True to the Raven model, our strong cash flows allow us to fund future growth and still maintain a debt-free balance sheet. Capital spending and investment in corporate capabilities to support growth continue at a steady pace, and yet we have been able to achieve strong top-line growth and remain consistently profitable."
Strong Demand and Solid Execution Drive Record Applied Technology Results
For the third quarter, sales in the Applied Technology Division increased 36% to $32.5 million versus $23.9 million last year. Operating income increased 45%, to $10.7 million from $7.3 million. The division set third quarter records for sales and earnings.
"Sales of our precision ag solutions have been strong all year," Rykhus said. "We're seeing demand across our core product line, including field computers, guidance systems and steering controls, with success in both our OEM and aftermarket channels. Meanwhile, our international sales remain on a good pace, led by the former Soviet Republics, Brazil, Australia and South Africa. We made a significant investment over the past few years in building out our international sales and support network. Today, our international sales represent about 27% of division revenues, compared to 21% for the first nine months of last year. Despite the fact that we continue to invest in new products and new markets, our profit growth has outpaced our sales growth this year."
Sales Growth Continues for Engineered Films
The Engineered Films Division posted record quarterly sales of $34.9 million, which was up 17% from $29.8 million in the third quarter of the prior year. Operating income decreased 19% to $5.6 million versus $6.9 million last year. Last year's operating income included a $451,000 gain on the sale of a warehouse.
Rykhus stated, "Our custom applications continue to perform well, particularly in our energy and agriculture end markets. While our geomembrane liners and covers are performing well, we see increased opportunity stemming from new capabilities to provide environmental protection in the areas of liquid containment and gas barriers. Regarding profitability, we faced delays in ramping up our new capacity, which is only now being completed. This impacted our productivity and efficiency during the quarter. We expect both of our new extruders will be on line by the end of the calendar year. This, along with an improving profit spread, is expected to result in operating profit growth in the fourth quarter."
Lower Sales and Profits at Aerostar
Aerostar sales in the third quarter declined 34% to $10.5 million from $15.9 million in the previous year's third quarter. Operating income of $1.8 million was 50% below year ago results of $3.6 million.
"On the plus side we have military parachutes which continue to perform consistently," noted Rykhus. "We have stated before that aerostat system deliveries can vary from quarter to quarter. As such, we had strong sales in the third quarter last year and a lull in this year's third quarter. We received a $6 million contract in September 2011 for aerostats, spare parts and support, and we anticipate increased aerostat deliveries in the fourth quarter. Along with lower sales in the third quarter compared to a year ago, profit margins were further pressured by our R&D investments as we build the business foundation that will better enable us to compete in the world markets for surveillance and communications. A cornerstone of this effort will be the new test and demonstration facility for large aerostat systems, located in the expanded Raven Innovation campus."
Electronic Systems Shows Stable Results
Electronic Systems sales in the third quarter were $17.3 million versus $17.8 million a year ago, down 3%. Operating income of $2.3 million was relatively flat.
Rykhus noted, "We continue to see a decline in our avionics-related business. In addition, operating profits and margins in this division can vary between quarters depending on product mix. Electronic Systems continues to assume responsibility for producing additional high-quality components for our Applied Technology Division. As we look to secure new low-volume high-mix projects, we can also count on this division to be a consistent generator of strong cash flows."
Cash Builds Despite Increased Capital Investment
Raven is on pace this fiscal year to invest approximately $33 million for expanded manufacturing capacity and major facility enhancements. At October 31, 2011, cash and investment balances were $44.2 million, up from $30.0 million a year ago. Nine month operating cash flows increased to $37.7 million versus $26.3 million last year due primarily to higher net income. Working capital levels reflected a higher level of sales activity. Accounts receivable increased to $50.7 million compared with $48.7 last year. Inventories at the end of the quarter were $49.9 million, up from $37.1 million one year earlier.
Heading for Another Record Year of Performance
"With significant growth over the first nine months, we're looking to finish the fiscal year on a strong note," said Rykhus. "Applied Technology should continue to show gains in sales and profit, although at a lower rate of growth than recent quarters. We are in the process of moving this division's manufacturing facilities to a new location in Sioux Falls, but any related disruptions should be short-lived. We also look for Engineered Films to maintain their momentum, with improved efficiencies leading to better profit margins. Regarding Aerostar, we expect new aerostat orders to ship in the fourth quarter and we should see higher divisional income versus a year ago."
He continued, "In addition to producing strong growth in this uncertain economic environment, Raven has carried out several key initiatives over the past year that together will significantly expand our manufacturing capacity and greatly improve our new product R&D capabilities. Our financial strength supports both an increased capital budget this year, as well as continued growth in our dividend. "
For the sixth year in a row, Raven was recently named to the Forbes America's Best Small Companies list based on earnings growth, sales growth and return on equity over the past 12 months and the past five years. Rykhus noted, "We strive to be one of the best companies in America, and I believe our culture of service, innovation, quality, and peak performance is what sets Raven apart."