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Raven Industries, Inc. Flies Higher on Broad-Based Growth

By Steve Symington - Nov 21, 2017 at 8:01PM

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Between the hurricane-driven outperformance of engineered films, the closing of a strategic acquisition, and a new long-term resource planning initiative, Raven gave investors plenty of reasons to celebrate this quarter.

Raven Industries (RAVN) released impressive fiscal third-quarter 2018 results on Nov. 21 after the market closed. The mini-industrial conglomerate enjoyed sustained momentum across its businesses, including a particularly strong quarter from the engineered films segment following the severe hurricane season, as well as the launch of a new companywide initiative to revamp its approach to enterprise resource planning.

Let's take a closer look at how Raven Industries kicked off the second half, as well as what investors can expect from the company in the coming quarters.

Raven Industries Engineered Films product lining a golf course water hole

Image source: Raven Industries.

Raven Industries results: The raw numbers

Metric

Fiscal Q3 2018*

Fiscal Q3 2017

Year-Over-Year Growth

Revenue

$101.3 million

$72.5 million

39.7%

Net income

$12.0 million

$5.7 million

110.6%

Earnings per diluted share

$0.33

$0.16

106.3%

Data source: Raven Industries. *For the quarter ended Oc. 31, 2017. 

What happened with Raven Industries this quarter?

  • The company closed on the previously announced acquisition of polymer film and sheeting manufacturer Colorado Lining International (CLI) for $14 million, plus the potential for $2 million in earn-out payments over the next three years.
  • Engineered films revenue grew 68.9% to $65.1 million, driven by higher sales in all markets. Engineered films operating income climbed 140.1% to $17.1 million.
    • Excluding $8.4 million in revenue from hurricane recovery film to support relief efforts -- sales of which are typically less than $2 million per year -- as well as $5.2 million in revenue from CLI, engineered films revenue would have still grown 33.6% to $51.5 million.
  • Applied technology revenue rose slightly on a year-over-year basis to $25.3 million, because of an expected slowdown in growth given weaker agriculture market conditions and challenging comparisons for new products. Applied technology operating income fell 16.5% to $5.4 million, primarily because of investments aimed at enhancing the customer experience and driving longer-term growth.
  • Aerostar sales climbed 23.3% to $11.1 million, driven by higher stratospheric balloon platform sales. Segment operating income swung to $1.4 million, compared with a $1.4 million operating loss in last year's third quarter.
    • Aerostar's partnership with Alphabet's Google on Project Loon "remains very strong," and its stratospheric balloons set a new duration record of 197 days during the quarter.
    • Aerostar was also awarded a $6.8 million aerostat contract through the U.S. Department of Defense.
  • Raven also launched "Project Atlas," a new companywide initiative and strategic long-term investment, to replace its current enterprise resource planning platforms. Project Atlas will take roughly three years to complete and cost between $8 million and $10 million, including roughly $1 million per quarter in fiscal 2019. But it should also make the company more efficient, allow for faster integration of acquisitions, automate many internal controls, and enable the more effective execution of Raven's long-term growth plans.

What management had to say

"We are very pleased with the performance achieved by all three operating divisions throughout the first nine months of the year," stated Raven Industries CEO Dan Rykhus. "Each division has worked to optimize performance given their specific end market conditions, and each has achieved success." 

Looking forward

As a reminder, Raven Industries doesn't provide specific quarterly financial guidance. But Rykhus did offer some forward-looking perspective on each segment.

For starters, the company doesn't see current market headwinds abating for the applied technology segment over the next year. But in the meantime, as mentioned, the company has opted to make strategic investments to drive market share and foster the segment's longer-term growth.

"We believe strongly in the long-term margin potential" for the applied technology division, Rykhus explained, "and we expect improved margins over time with these investments, even if end-market conditions remain challenging."

Next, he noted that the early integration of CLI into engineered films is "going very well" and predicted that the acquisition should be accretive to this year's earnings to the tune of $0.05 per share. Further, Raven expects hurricane-related catalysts to continue in the near term, with hurricane recovery film sales of $8 million to $9 million in the fourth quarter.

Finally, Aerostar is rightly celebrating its 197-day stratospheric balloon duration record, its continued positive relationship with Project Loon, and the ongoing diversification of its business with the new Department of Defense contract. Most of the latter contract will be recognized in fiscal 2019.

In the end, there was little not to like about the broad strength Raven demonstrated this quarter.

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