President & Chief Executive Officer
DANIEL A. RYKHUS
RAVEN AT A GLANCE
APPLIED TECHNOLOGY
ENGINEERED FILMS
AEROSTAR
Precision agriculture technology
designed to improve the position
of growers around the world by
reducing operating costs and
improving yields.
High-quality flexible films and
sheeting designed to protect
Earth’s resources and preserve
asset value.
Shaping the stratospheric
market with the world’s
most advanced and reliable
lighter-than-air technologies.
FY 2017 RESULTS
FY 2017 RESULTS
FY 2017 RESULTS
NET SALES
(Dollars in millions)
142.2
142.2
105.2
105.2
92.6
92.6
OPERATING
INCOME
(Dollars in millions)
34.6
34.6
26.6
26.6
18.3
18.3
NET SALES
(Dollars in millions)
166.6
166.6
138.9
138.9
129.5
129.5
OPERATING
INCOME
(Dollars in millions)
21.8
21.8
23.0
23.0
17.9
17.9
NET SALES
(Dollars in millions)
OPERATING
INCOME
(Dollars in millions)
9.0
9.0
80.8
80.8
36.4
36.4
34.1
34.1
(1.6)
(1.6)
(14.8)
(14.8)
‘15 ‘16 ‘17
‘15 ‘16 ‘17
‘15 ‘16 ‘17
‘15 ‘16 ‘17
‘15 ‘16 ‘17
‘15 ‘16 ‘17
‘15 ‘16 ‘17
‘15 ‘16 ‘17
‘15 ‘16 ‘17
‘15 ‘16 ‘17
‘15 ‘16 ‘17
‘15 ‘16 ‘17
FY 2018 PRIORITIES
FY 2018 PRIORITIES
FY 2018 PRIORITIES
▪ Advance our market position
and further strengthen our
relationships with OEM
and end customers
▪ Grow sales and profitability
through high value
film solutions and
operational excellence
▪ Continue to invest in R&D
▪ Meet customer
▪ Evaluate acquisition
opportunities with strong
strategic alignment
▪ Expand international sales
▪ Deliver exceptional service
and product quality
to our customers
demand by providing
outstanding service,
quality and innovation
▪ Evaluate acquisition
opportunities that
complement the strengths
of the division
▪
Increase share in Industrial
and Geomembrane markets
▪ Grow stratospheric
balloon revenues
through commercial
and U.S. government
customer opportunities
▪ Expand our product quality
and performance advantage
on balloon systems
through focused R&D
▪
Improve the financial
performance of the
business by executing
our focused strategy
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2017
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-07982
RAVEN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
South Dakota
(State or other jurisdiction of incorporation or organization)
205 E. 6th Street, P.O. Box 5107, Sioux Falls, SD
(Address of principal executive offices)
46-0246171
(IRS Employer Identification No.)
57117- 5107
(Zip Code)
Registrant's telephone number including area code (605) 336-2750
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, $1 par value
Name of each exchange on which registered
The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes
Yes
No
No
Yes
No
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
The aggregate market value of the registrant's common stock held by non-affiliates at July 31, 2016 was approximately $742,719,932. The aggregate
market value was computed by reference to the closing price as reported on the NASDAQ Global Select Market, $20.76, on July 29, 2016, which was
as of the last business day of the registrant's most recently completed second fiscal quarter. The number of shares outstanding on March 22, 2017 was
36,076,259.
The definitive proxy statement relating to the registrant's Annual Meeting of Shareholders, to be held May 25, 2017, is incorporated by reference into
Part III to the extent described therein.
DOCUMENTS INCORPORATED BY REFERENCE
PART I
Item 1.
BUSINESS
Item 1A. RISK FACTORS
Item 1B. UNRESOLVED STAFF COMMENTS
Item 2.
Item 3.
PROPERTIES
LEGAL PROCEEDINGS
Item 4. MINE SAFETY DISCLOSURES
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Quarterly Information
Stock Performance
Item 6.
SELECTED FINANCIAL DATA
Five-year Financial Summary
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Executive Summary
Results of Operations - Segment Analysis
Liquidity and Capital Resources
Off-Balance Sheet Arrangements and Contractual Obligations
Critical Accounting Policies and Estimates
Accounting Pronouncements
Forward-Looking Statements
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Item 9A. CONTROLS AND PROCEDURES
Item 9B. OTHER INFORMATION
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 11. EXECUTIVE COMPENSATION
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
Item 16.
10-K SUMMARY
INDEX TO EXHIBITS
SIGNATURES
SCHEDULE II
3
7
12
12
12
13
13
13
14
15
15
16
16
22
27
30
31
37
37
37
38
39
41
42
43
44
45
46
76
76
78
79
79
79
79
79
79
79
80
82
83
PART I
ITEM 1.
BUSINESS
Raven Industries, Inc. (the Company or Raven) was incorporated in February 1956 under the laws of the State of South Dakota
and began operations later that same year. The Company is a diversified technology company providing a variety of products to
customers within the industrial, agricultural, geomembrane (which includes energy), construction, and aerospace/defense markets.
The Company markets its products around the world and has its principal operations in the United States of America. Raven began
operations as a manufacturer of high-altitude research balloons before diversifying into product lines that extended from
technologies and production methods of this original balloon business. The Company employs 941 people and is headquartered
at 205 E. Sixth Street, Sioux Falls, SD 57104 - telephone (605) 336-2750. The Company's Internet address is http://
www.ravenind.com and its common stock trades on the NASDAQ Global Select Market under the ticker symbol RAVN. The
Company has adopted a Code of Conduct applicable to all officers, directors and employees, which is available on the website.
Information on the Company's website is not part of this filing.
All reports (including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and current reports on Form 8-K) and
proxy and information statements filed with the Securities and Exchange Commission (SEC) are available through a link from
the Company's website to the SEC website. All such information is available as soon as reasonably practicable after it has been
electronically filed. Filings can also be obtained free of charge by contacting the Company or the SEC. The SEC can be contacted
through its website at http://www.sec.gov or through the SEC's Office of FOIA/PA Operations at 100 F Street N.E., Washington,
DC 20549-2736, or by calling the SEC at 1-800-732-0330.
This Annual Report on Form 10-K (Form 10-K) contains forward-looking statements that are subject to risks and uncertainties.
All statements other than statements of historical fact included in this Form 10-K are forward-looking statements. Forward-looking
statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives,
future performance, and business. All forward-looking statements are subject to risks and uncertainties that may cause actual
results to differ materially from those that we expected. Important factors that could cause actual results to differ materially from
our expectations and other important information about forward-looking statements are disclosed under Item 1A, “Risk Factors”
and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Forward-Looking
Statements” in this Form 10-K.
BUSINESS SEGMENTS
The Company has three unique operating units, or divisions, that are also its reportable segments: Applied Technology Division
(Applied Technology), Engineered Films Division (Engineered Films), and Aerostar Division (Aerostar). Product lines have been
generally grouped in these segments based on technology, manufacturing processes, and end-use application; however, a business
segment may serve more than one of the product markets identified above. The Company measures the profitability performance
of its segments primarily based on their operating income excluding administrative and general expenses. Other expense and
income taxes are not allocated to individual operating segments, and assets not identifiable to an individual segment are included
as corporate assets. Segment information is reported consistent with the Company's management reporting structure.
Business segment financial information is found on the following pages of this Form 10-K:
22
Results of Operations – Segment Analysis
Note 15 Business Segments and Major Customer Information
73
Applied Technology
Applied Technology designs, manufactures, sells, and services innovative precision agriculture products and information
management tools that help growers reduce costs, more precisely control inputs, and improve farm yields. The Applied Technology
product families include field computers, application controls, GPS-guidance and assisted-steering systems, automatic boom
controls, injection systems, yield monitoring controls, and planter and seeder controls. Applied Technology's services include
high-speed in-field Internet connectivity and cloud-based data management. The Company's investment in Site-Specific
Technology Development Group, Inc. (SST), a software company, and the continued build-out of the Slingshot™ platform have
also positioned Applied Technology as an information platform that improves grower decision-making and achieves business
efficiencies for its agriculture retail partners.
Applied Technology sells its precision agriculture control products to both original equipment manufacturers (OEMs) and through
aftermarket distribution partners in the United States and in most major agricultural areas around the world. The Company's
3
competitive advantage in this segment is designing and selling easy to use, reliable, and innovative value-added products that are
supported by an industry-leading service and support team.
Engineered Films
Engineered Films produces high-performance plastic films and sheeting for geomembrane (which includes energy), agricultural,
construction, and industrial applications.
Engineered Films sells plastic sheeting both direct to end-customers and through independent third-party distributors. The majority
of product sold into the construction and agriculture markets is through distributors, while sales into the geomembrane and industrial
markets are more direct in nature. The Company extrudes a significant portion of the film converted for its commercial products
and believes it is one of the largest sheeting converters in the United States in the markets it serves. Engineered Films' ability to
both extrude and convert films allows it to provide a more customized solution to customers. A number of film manufacturers
compete with the Company on both price and product availability. Engineered Films is the Company's most capital-intensive
business segment, and historically has made sizable investments in new extrusion capacity and conversion equipment. This
segment's capital expenditures were $2.8 million in fiscal 2017, $10.8 million in fiscal 2016, and $8.2 million in fiscal 2015.
Aerostar
Aerostar serves the aerospace/defense and situational awareness markets. Aerostar's primary products include high-altitude
balloons, tethered aerostats, and radar processing systems. These products can be integrated with additional third-party sensors
to provide research, communications, and situational awareness capabilities to governmental and commercial customers. Aerostar’s
growth strategy emphasizes the design and manufacture of proprietary products in these markets. In previous years, Aerostar also
provided contract manufacturing services. The Company largely exited this business and the planned reduction of contract
manufacturing activities was completed in fiscal 2016.
Through Vista Research, Inc. (Vista) and a separate business venture that is majority-owned by the Company, Aerostar pursues
product and support services contracts for agencies and instrumentalities of the U.S. government as well as sales of advanced
radar systems and aerostats in international markets. In limited cases, such sales may be Direct Commercial Sales to foreign
governments rather than Foreign Military Sales through the U.S. government.
Aerostar sells to government agencies as both a prime contractor and subcontractor, and to commercial users primarily as a sub-
contractor. Certain projects Aerostar bids on can be larger-scale, with opportunities for $10 million projects. Further, Direct
Commercial Sales to foreign governments often involve large contracts subject to frequent delays because of budget uncertainties,
regional military conflicts, and protracted negotiation processes. The timing and size of contract wins create volatility in Aerostar’s
results.
OUTLOOK
As we begin fiscal year 2018, the Company continues to face uncertainties in end-market demand, but we have created opportunities
for growth with the investments we have made over the last few years. Momentum continued to build throughout fiscal year 2017
and continues today. Despite the macro challenges faced in certain end markets, management is relatively optimistic for the year
ahead.
For Applied Technology, end-market demand continues to be subdued and management does not expect an improvement in such
demand to occur during fiscal year 2018. With that said, the research and development efforts that were maintained during the
market downturn have led to new product introductions which are seeing success. As a result, the division has been able to increase
its market share position and overcome the down market to achieve growth both domestically and internationally. Management
expects this to continue in fiscal year 2018.
For Engineered Films, after nearly two years of declining demand in the geomembrane market which culminated in a revenue
decline of approximately 66% in fiscal year 2016, the division began to see conditions improve in the second half of fiscal year
2017. Although there remains uncertainty with respect to geomembrane end-market demand in the future, management expects
growth in this market in fiscal year 2018. In addition, management expects sales into the industrial market to improve in fiscal
2018 as the result of success in selling the capacity of its new industrial production line that was put in service in first quarter
fiscal 2017. Overall, sales growth in the division is expected in fiscal year 2018.
For Aerostar, the outlook is mixed, but financial performance is expected to improve. For stratospheric balloon related sales, the
outlook is relatively strong. The division has been awarded a new stratospheric balloon contract with a new customer and sales
to Google for Project Loon are expected to increase again in fiscal year 2018. At the same time, the division is susceptible to
delays in deliveries of radar systems and aerostats. The timing of contract wins has a significant impact on the growth and
4
profitability of the division. Overall, management's outlook for the division remains cautious, but we do expect financial
performance to improve in fiscal 2018.
The Company remains committed to executing its strategic plan and expects to make continued progress towards its long-term
goal to generate 10% annualized earnings growth while also generating strong relative returns on equity and assets.
MAJOR CUSTOMER INFORMATION
No customers accounted for 10% or more of consolidated sales in fiscal years 2017 and 2016. Sales to Brawler Industrial Fabrics,
a customer in the Engineered Films Division, accounted for 14% of consolidated sales in fiscal 2015.
SEASONAL WORKING CAPITAL REQUIREMENTS
Some seasonal demand exists in both the Applied Technology and Engineered Films divisions, primarily due to their respective
exposure to the agricultural market. Although net working capital (accounts receivable, net plus inventories less accounts payable)
requirements tend to be the highest in the fiscal first quarter, given the overall diversification of the Company, the seasonal
fluctuations in net working capital are not significant.
FINANCIAL INSTRUMENTS
The principal financial instruments that the Company maintains are cash, cash equivalents, short-term investments, accounts
receivable, accounts payable, accrued liabilities, and acquisition-related contingent payments. The Company manages the interest
rate, credit, and market risks associated with these accounts through periodic reviews of the carrying value of assets and liabilities
and establishment of appropriate allowances in accordance with Company policies. The Company does not use off-balance sheet
financing, except to enter into operating leases.
The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company
uses derivative financial instruments to manage foreign currency balance sheet risk. The use of these financial instruments has
had no material effect on consolidated results of operations, financial condition, or cash flows.
RAW MATERIALS
The Company obtains a wide variety of materials from numerous vendors. Principal materials include electronic components for
Applied Technology and Aerostar, various polymeric resins for Engineered Films, and fabrics and film for Aerostar. Engineered
Films has experienced volatile resin prices over the past three years. Price increases could not always be passed on to customers
due to weak demand and/or a competitive pricing environment. Predicting future material volatility and the related potential
impact on the Company is not easily estimated and the Company is unable to do so to the degree required to build reliance on
such forecasts.
PATENTS
The Company owns a number of patents. The Company does not believe that its business, as a whole, is materially dependent on
any one patent or related group of patents. The Company focuses significant research and development effort to develop technology-
based offerings. As such, the protection of the Company’s intellectual property is an important strategic objective. Along with
an aggressive posture toward patenting new technology and protecting trade secrets, the Company has restrictions on the disclosure
of our technology to industry and business partners to ensure that our intellectual property is maintained and protected.
RESEARCH AND DEVELOPMENT
The three business segments conduct ongoing research and development (R&D) efforts to improve their product offerings and
develop new products. Most of the Company's R&D expenditures are directed toward new product development. R&D investment
is particularly strong within the Applied Technology Division. Development of new technology and product enhancements within
Applied Technology is a competitive differentiator and central to its long-term strategy. Engineered Films also utilizes R&D
spending to develop new products and to value engineer and reformulate its products. These R&D investments deliver high-value
film solutions to the markets it serves and also result in lower raw material costs and improved quality for existing product lines.
Aerostar's investment in the development of new technology has a particular emphasis on its core stratospheric balloon product
platform. The Company's total R&D costs are presented in the Consolidated Statements of Income and Comprehensive Income.
5
ENVIRONMENTAL MATTERS
The Company believes that, in all material respects, it is in compliance with applicable federal, state and local environmental laws
and regulations. Expenditures incurred in the past relating to compliance for operating facilities have not significantly affected
the Company's capital expenditures, earnings, or competitive position.
In connection with the sale of substantially all of the assets of the Company's Glasstite, Inc. subsidiary in fiscal 2000, the Company
agreed to assume responsibility for the investigation and remediation of any pre-October 29, 1999, environmental contamination
at the Company's former Glasstite pickup-truck topper facility in Dunnell, Minnesota, as required by the Minnesota Pollution
Control Agency (MPCA) or the United States Environmental Protection Agency.
The Company and the purchasers of the Company's Glasstite subsidiary conducted environmental assessments of the properties.
The MPCA had evaluated these assessments until fiscal 2017 when this matter was closed. As a result of the conclusion of this
matter, the Company reversed the $37 thousand liability that had been accrued as the Company's best estimate of probable costs
related to this environmental matter. The Company is unaware of any potential liabilities as of January 31, 2017 for any
environmental matters that would have a material effect on the Company's results of operations, financial position, or cash flows.
BACKLOG
As of February 1, 2017, the Company's order backlog totaled approximately $25.7 million. Backlog amounts as of February 1,
2016 and 2015 were $18.6 million and $26.7 million, respectively. Because the length of time between order and shipment varies
considerably by business segment and customers can change delivery schedules or potentially cancel orders, the Company does
not believe that backlog, as of any particular date, is necessarily indicative of actual net sales for any future period.
EMPLOYEES
As of January 31, 2017, the Company had 941employees (including temporary workers). Following is a summary of active
employees by segment: Applied Technology - 382; Engineered Films - 315; Aerostar - 163; and Corporate Services - 81.
Management believes its relationship with its employees is good.
6
EXECUTIVE OFFICERS
Name, Age, and Position
Daniel A. Rykhus, 52
President and Chief Executive Officer
Steven E. Brazones, 43
Vice President and Chief Financial Officer
Stephanie Herseth Sandlin, 46
General Counsel and Vice President of
Corporate Development
Janet L. Matthiesen, 59
Vice President of Human Resources
Brian E. Meyer, 54
Division Vice President and General Manager -
Applied Technology Division
Biographical Data
Mr. Rykhus became the Company's President and Chief Executive Officer
in 2010. He joined the Company in 1990 as Director of World Class
Manufacturing, was General Manager of the Applied Technology Division
from1998 through 2009, and served as Executive Vice President from 2004
through 2010.
Mr. Brazones joined the Company in December 2014 as its Vice President,
Chief Financial Officer, and Treasurer. From 2002 to 2014, Mr. Brazones
held a variety of positions with H.B. Fuller Company. Most recently, he
served as H.B. Fuller's Americas Region Finance Director. Previously, he
served as the Assistant Treasurer and the Director of Investor Relations.
Prior to his tenure with H.B. Fuller, Mr. Brazones held various roles at
Northwestern Growth.
Ms. Herseth Sandlin joined the Company in August 2012 as General Counsel
and Vice President of Corporate Development and also became the
Company's Secretary in March 2013. Prior to joining the Company, Ms.
Herseth Sandlin was a partner at OFW Law in Washington, D.C. from 2011
to 2012 and served as South Dakota's lone member of the United States
House of Representatives from 2004 through 2011.
Ms. Matthiesen joined the Company in 2010 as Director of Administration
and has been the Company's Vice President of Human Resources since 2012.
Prior to joining Raven, Ms. Matthiesen was a Human Resource Manager at
Science Applications International Corporation from 2002 to 2010.
Mr. Meyer was named Division Vice President and General Manager of the
Applied Technology Division in May 2015. He joined the Company in 2010
as Chief Information Officer. Prior to joining the Company, Mr. Meyer was
an information and technology executive in the health insurance industry
and vice president of systems development in the property and casualty
insurance industry.
Anthony D. Schmidt, 45
Division Vice President and General Manager -
Engineered Films Division
Mr. Schmidt was named Division Vice President and General Manager of
the Engineered Films Division in 2012. He joined the Company in 1995 in
the Applied Technology Division performing various leadership roles within
manufacturing and engineering. He transitioned to Engineered Films
Division in 2011 as Manufacturing Manager.
ITEM 1A. RISK FACTORS
RISKS RELATING TO THE COMPANY
The Company's business is subject to many risks. Set forth below are the most important risks we face. In evaluating our business
and your investment in the Company, you should also consider the other information presented in or incorporated by reference
into this Annual Report on Form 10-K.
We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, result
in material misstatements in our consolidated financial statements. We may be unable to develop, implement, and maintain
appropriate controls in future periods which could adversely affect our ability to report our financial condition and results of
operations in a timely and accurate manner, which may adversely affect investor confidence in our company and, as a result,
the value of our common stock.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended (the Exchange Act). In Item 9A, "Controls and
Procedures” of the Company’s Annual Report on Form 10-K/A for the fiscal year ended January 31, 2016 filed with the SEC on
February 2, 2017, management reported the existence of material weaknesses in our internal control over financial reporting. The
material weaknesses resulted in errors in our previously filed annual audited and interim unaudited consolidated financial
statements.
7
A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be
prevented or detected on a timely basis.
As a result of the material weaknesses, management concluded that our internal control over financial reporting was not effective
as of January 31, 2016 and remains ineffective as of the date of this filing. The assessment was based on criteria described by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Also
as a result of the material weaknesses, we concluded that our disclosure controls and procedures (as defined by Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) were not effective as of January 31, 2016 and remain ineffective as of the date of this
filing. We are actively engaged in remediation activities designed to address the material weaknesses, but our remediation efforts
are not complete and are ongoing. The progress made in remediating these material weaknesses is further described in Item 9A,
"Controls and Procedures” of this Annual Report on Form 10-K. If our remediation measures are insufficient to address the
material weaknesses, or if additional material weaknesses in our internal control are discovered or occur in the future, material
misstatements in our consolidated financial statements could occur which could result in a further restatement of our consolidated
financial statements and may materially adversely affect our ability to report our financial condition and results of operations in
a timely and accurate manner. Although we continually review and evaluate our internal controls, we cannot assure you that we
will not discover additional material weaknesses in our internal control over financial reporting. The next time we evaluate our
internal control over financial reporting, if we identify one or more new material weaknesses or are unable to timely remediate
our existing material weaknesses, we may be unable to assert that our internal controls are effective. If we are unable to assert
that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to
express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the
accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock.
We could also become subject to private litigation or investigations, or one or more government enforcement actions, arising out
of the errors in our previously issued financial statements. Our management may be required to devote significant time and
attention to these matters, and these and any additional matters that arise could have a material adverse impact on our results of
operations, financial condition, liquidity, and cash flows.
The remediation measures in progress to address the material weaknesses have been time-consuming and expensive and could
expose us to additional risks that could materially adversely affect our financial position, results of operations, and cash flows.
We have incurred expenses, including audit, legal, consulting, and other professional fees in connection with the ongoing
remediation of material weaknesses in our internal control over financial reporting. We have taken a number of steps, including
adding significant internal resources and have implemented a number of additional procedures in order to strengthen our internal
control and risk assessment functions. To the extent these steps are not successful, we could be forced to incur additional time
and expense. Our management’s attention has also been diverted from the operation of our business in connection with the ongoing
remediation of material weaknesses in our internal controls.
Weather conditions or natural disasters could affect certain of the Company's markets, such as agriculture and construction,
or the Company's primary manufacturing facilities.
The Company's Applied Technology Division is largely dependent on the ability of farmers, agricultural service providers, and
custom operators to purchase agricultural equipment, including its products. If such farmers experience weather conditions
resulting in unfavorable crop prices or farm incomes, sales in the Applied Technology Division may be adversely affected.
Weather conditions can also adversely affect sales in the Company's Engineered Films Division. To the extent weather conditions
curtail construction or agricultural activity, such as a late spring or drought, sales of the segment's plastic sheeting would likely
decrease.
Seasonal, weather-related and market demand variation could also affect quarterly results. If expected sales are deferred in a fiscal
quarter while inventory has been built and operating expenses incurred, financial results could be negatively impacted.
The Company’s primary manufacturing facilities for each of its operating divisions are located on contiguous properties in Sioux
Falls, South Dakota. If weather-related natural disasters such as tornadoes or flooding were to occur in the area, such conditions
could impede the manufacturing and shipping of products and potentially adversely affect the Company’s sales, transactions
processing, and financial reporting. The Company has disaster recovery plans in place to mitigate the Company’s risks to these
vulnerabilities but these measures may not be adequate, implemented properly, or executed timely to ensure that the Company’s
operations are not disrupted. Such consequences could adversely affect our results of operations, financial condition, liquidity,
and cash flows.
8
Price fluctuations in and shortages of raw materials could have a significant impact on the Company's ability to sustain and
grow earnings.
The Company's Engineered Films Division utilizes significant amounts of polymeric resin, the cost of which depends upon market
prices for natural gas and oil and other market forces. These prices are subject to worldwide supply and demand as well as other
factors beyond the control of the Company. Although the Engineered Films Division is sometimes able to pass on such price
increases to its customers, significant variations in the cost of polymeric resins can affect the Company's operating results from
period to period. Unusual supply disruptions, such as one caused by a natural disaster, could cause suppliers to invoke "force
majeure" clauses in their supply agreements, causing shortages of material. Success in offsetting higher raw material costs with
price increases is largely influenced by competitive and economic conditions and could vary significantly depending on the market
served. If the Company is not able to fully offset the effects of adverse materials availability and correspondingly higher costs,
financial results could be adversely affected which in turn could adversely affect our results of operations, financial condition,
liquidity, and cash flows.
Electronic components used by both the Applied Technology Division and Aerostar Division, are sometimes in short supply, and
may impact our ability to meet customer demand.
If a supplier of raw materials or electronic components were unable to deliver due to shortage or financial difficulty, any of the
Company's segments could be adversely affected.
Fluctuations in commodity prices can increase our costs and decrease our sales.
Agricultural income levels are affected by agricultural commodity prices and input costs. As a result, changes in commodity prices
that reduce agricultural income levels could have a negative effect on the ability of growers and their service providers to purchase
the Company's precision agriculture products manufactured by its Applied Technology Division.
Exploration for oil and natural gas fluctuates with their price and energy market conditions are subject to volatility. Certain plastic
sheeting manufactured and sold by our Engineered Films Division is sold as pit and pond liners to contain water used in the drilling
processes for these energy commodities. Lower prices for oil and natural gas could reduce exploration activities and demand for
our products.
Film manufacturing uses polymeric resins, which can be subject to changes in price as the cost of oil or natural gas changes.
Accordingly, volatility in oil and natural gas prices may negatively affect our raw material costs and cost of goods sold and
potentially cause us to increase prices, which could adversely affect our sales and/or profitability.
Failure to develop and market new technologies and products could impact the Company's competitive position and have an
adverse effect on the Company's financial results.
The Company's operating results in Applied Technology, Engineered Films, and Aerostar depend upon the ability to renew the
pipeline of new products and services and to bring these to market. This ability could be adversely affected by difficulties or
delays in product development such as the inability to identify viable new products, successfully complete research and development
projects, obtain relevant regulatory approvals, obtain intellectual property protection, or gain market acceptance of new products
and services. Because of the lengthy development process, technological challenges, and competition, there can be no assurance
that any of the products the Company is currently developing, or could begin to develop in the future, will achieve commercial
success. Technical advancements in products may also increase the risk of product failure, increasing product returns or warranty
claims and settlements. In addition, sales of the Company's new products could replace sales of some of its current products,
offsetting the benefit of even a successful new product introduction.
The Company's sales of products which are specialized and highly technical in nature are subject to uncertainties, start-up
costs and inefficiencies, as well as market, competitive, and compliance risks.
The Company’s growth strategy relies on the design and manufacture of proprietary products. Highly technical, specialized product
inventories may be more susceptible to fluctuations in market demand. If demand is unexpectedly low, write-downs or impairments
of such inventory may become necessary. Either of these outcomes could adversely affect our results of operations. Start-up costs
and inefficiencies can adversely affect operating results and such costs may not be recoverable in a proprietary product environment
because the Company may not receive reimbursement from its customers for such costs.
Competition in agriculture markets could come from our current customers if original equipment manufacturers develop and
integrate precision agriculture technology products themselves rather than purchasing from third parties, thereby reducing demand
for Applied Technology’s products.
9
Regulatory restrictions could be placed on hydraulic fracturing activities because of environmental and health concerns, reducing
demand for Engineered Film’s products. For Engineered Films, the development of alternative technologies, such as closed loop
drilling processes that reduce the need for pit liners in energy exploration, could also reduce demand for the Company’s products.
Aerostar’s future growth relies on sales of high-altitude balloons as well as advanced radar systems and aerostats to international
markets. In limited cases, such sales may be Direct Commercial Sales to foreign governments rather than Foreign Military Sales
through the U.S. government. Direct Commercial Sales to foreign governments often involve large contracts subject to frequent
delays because of budget uncertainties, regional military conflicts, political instability, and protracted negotiation processes. Such
delays could adversely affect our results of operations. The nature of these markets for Aerostar's radar systems and aerostats
makes these products particularly susceptible to fluctuations in market demand. Demand fluctuations and the likelihood of delays
in sales involving large contracts for such products also increase the risk of these products becoming obsolete, increasing the risk
associated with expected sales of such products. The value of radar system and aerostat inventory are each approximately $4
million at January 31, 2017. This valuation is based on an estimate that the market demand for these products will be sufficient
in future periods such that these inventories will be sold at a price greater than carrying value. Write-downs or impairment of the
value of such products carried in inventory could adversely affect our results of operations. To the extent products become obsolete
or anticipated sales are not realized, our expected future cash flows could be adversely impacted. This could lead to an impairment
which could adversely impact the Company's results of operations and financial condition.
Sales of certain of Aerostar’s products into international markets increase the compliance risk associated with regulations such as
The International Traffic in Arms Regulations (ITAR), as well as others, exposing the Company to fines and its employees to fines,
imprisonment, or civil penalties. Potential consequences of a material violation of such regulations include damage to our
reputation, litigation, and increased costs.
The Company's Aerostar segment depends on the U.S. government for a significant portion of its sales, creating uncertainty
in the timing of and funding for projected contracts.
A significant portion of Aerostar's sales are to the U.S. government or U.S. government agencies as a prime or sub-contractor.
Government spending has historically been cyclical. A decrease in U.S. government defense or near-space research spending or
changes in spending allocations could result in one or more of the Company's programs being reduced, delayed, or terminated.
Reductions in the Company's existing programs, unless offset by other programs and opportunities, could adversely affect its
ability to sustain and grow its future sales and earnings. The Company's U.S. government sales are funded by the federal budget,
which operates on an October-to-September fiscal year. Changes in congressional schedules, negotiations for program funding
levels, reduced program funding due to U.S government debt limitations, automatic budget cuts ("sequestration"), or unforeseen
world events can interrupt the funding for a program or contract. Funds for multi-year contracts can be changed in subsequent
years in the appropriations process.
In addition, many U.S. government contracts are subject to a competitive bidding and funding process even after the award of the
basic contract, adding an additional element of uncertainty to future funding levels. Delays in the funding process or changes in
funding are common and can impact the timing of available funds or can lead to changes in program content or termination at the
government's convenience. The loss of anticipated funding or the termination of multiple or large programs could have an adverse
effect on the Company's future sales and earnings.
The Company derives a portion of its revenues from foreign markets, which subjects the Company to business risks, including
risk of changes in government policies and laws or worldwide economic conditions.
The Company's sales outside the U.S. were $35.5 million in fiscal 2017, representing approximately 13% of consolidated net
sales. The Company's financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations,
or other activities of U.S. and non-U.S. governments, agencies and similar organizations, along with changes in worldwide economic
conditions. These conditions include, but are not limited to, changes in a country's or region's economic or political condition;
trade regulations affecting production, pricing, and marketing of products; local labor conditions and regulations; reduced protection
of intellectual property rights in some countries; changes in the regulatory or legal environment; restrictions on currency exchange
activities; the impact of fluctuations in foreign currency exchange rates, which may affect product demand and may adversely
affect the profitability of our products in U.S. dollars in foreign markets where payments are made in the local currency; burdensome
taxes and tariffs; and other trade barriers. International risks and uncertainties also include changing social and economic conditions,
terrorism, political hostilities and war, difficulty in enforcing agreements or collecting receivables, and increased transportation
or other shipping costs. Any of these such risks could lead to reduced sales and reduced profitability associated with such sales.
10
Adverse economic conditions in the major industries the Company serves may materially affect segment performance and
consolidated results of operations.
The Company's results of operations are impacted by the market fundamentals of the primary industries served. Significant
declines of economic activity in the agricultural, oil and gas exploration, construction, industrial, aerospace/defense, and other
major markets served may adversely affect segment performance and consolidated results of operations.
The Company may pursue or complete acquisitions which represent additional risk and could impact future financial results.
The Company's business strategy includes pursuing future acquisitions. Acquisitions involve a number of risks including integration
of the acquired company with the Company's operations and unanticipated liabilities or contingencies related to the acquired
company. Further, business strategies supported by the acquisition may be in perceived, or actual, opposition to strategies of
certain of our customers and our business could be materially adversely affected if those relationships are terminated and the
expected strategic benefits are delayed or are not achieved. The Company cannot ensure that the expected benefits of any acquisition
will be realized. Costs could be incurred on pursuits or proposed acquisitions that have not yet or may not close which could
significantly impact the operating results, financial condition, or cash flows. Additionally, after the acquisition, unforeseen issues
could arise which adversely affect the anticipated returns or which are otherwise not recoverable as an adjustment to the purchase
price. Other acquisition risks include delays in realizing benefits from the acquired companies or products; difficulties due to lack
of or limited prior experience in any new product or geographic markets we enter; unforeseen adjustments, charges or write-offs;
unforeseen losses of customers of, or suppliers to, acquired businesses; difficulties in retaining key employees of the acquired
businesses; or challenges arising from increased geographic diversity and complexity of our operations and our information
technology systems.
Total goodwill and intangible assets account for $52.7 million, or approximately 17%, of the Company's total assets as of January 31,
2017. The Company evaluates goodwill and intangible assets for impairment annually, or when evidence of potential impairment
exists. The annual impairment test is based on several factors requiring judgment. Principally, a significant decrease in expected
cash flows or changes in market conditions may indicate potential impairment of recorded goodwill or intangible assets. Our
expected future cash flows are dependent on several factors including revenue growth in certain of our product lines and an
expectation that the pricing in commodities markets will recover in future periods. Our expected future cash flows could be
adversely impacted if our anticipated revenue growth is not realized or if pricing in commodities markets does not recover in
future periods. Reductions in cash flows could result in an impairment of goodwill and/or intangible assets which could adversely
impact the Company's results of operations and financial condition.
The Company may fail to continue to attract, develop, and retain key management and other key employees, which could
negatively impact our operating results.
We depend on the performance of our senior management team and other key employees, including experienced and skilled
technical personnel. The loss of certain members of our senior management, including our Chief Executive Officer, could
negatively impact our operating results and ability to execute our business strategy. Our future success will also depend in part
upon our ability to attract, train, motivate, and retain qualified personnel.
The Company may fail to protect its intellectual property effectively, or may infringe upon the intellectual property of others.
The Company has developed significant proprietary technology and other rights that are used in its businesses. The Company
relies on trade secret, copyright, trademark, and patent laws and contractual provisions to protect the Company's intellectual
property. While the Company takes enforcement of these rights seriously, other companies such as competitors or persons in
related markets may attempt to copy or use the Company's intellectual property for their own benefit.
In addition, intellectual property of others also has an impact on the Company's ability to offer some of its products and services
for specific uses or at competitive prices. Competitors' patents or other intellectual property may limit the Company's ability to
offer products and services to its customers. Any infringement or claimed infringement by the Company of the intellectual property
rights of others could result in litigation and adversely affect the Company's ability to continue to provide, or could increase the
cost of providing, products and services and negatively impact sales and profitability. Any infringement by the Company could
also result in judgments against the Company which could adversely affect our results of operations, financial condition, liquidity,
and cash flows.
Among the Company’s legal proceedings is a patent infringement lawsuit filed in federal district court in Kansas by Capstan Ag
Systems, Inc. In this lawsuit, Capstan Ag Systems Inc. has made certain infringement claims against the Company and one of its
customers, CNH Industrial America LLC, related to the Applied Technology Division’s Hawkeye™ nozzle control system. This
litigation is in the early stages and the potential costs and liability of this pending claim, if any, cannot be determined at this time.
Intellectual property litigation is very costly and could result in substantial expense and diversions of the Company's resources,
both of which could adversely affect its businesses, financial condition, results of operations, and cash flows. In addition, there
11
may be no effective legal recourse against infringement of the Company's intellectual property by third parties, whether due to
limitations on enforcement of rights in foreign jurisdictions or as a result of other factors.
Technology failures or cyber-attacks on the Company's systems could disrupt the Company's operations or the functionality
of its products and negatively impact the Company's business.
The Company increasingly relies on information technology systems to process, transmit, and store electronic information. In
addition, a significant portion of internal communications, as well as communication with customers and suppliers depends on
information technology. Further, the products in our Applied Technology and Aerostar segments depend upon GPS and other
systems through which our products interact with government computer systems and other centralized information sources. We
are exposed to the risk of cyber incidents in the normal course of business. Cyber incidents may be deliberate attacks for the theft
of intellectual property or other sensitive information or may be the result of unintentional events. Like most companies, the
Company's information technology systems may be vulnerable to interruption due to a variety of events beyond the Company's
control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers,
foreign governments, and other security issues. Further, attacks on centralized information sources could affect the operation of
our products or cause them to malfunction. The Company has technology security initiatives and disaster recovery plans in place
to mitigate the Company's risk to these vulnerabilities, but these measures may not be adequate, or implemented properly, or
executed timely to ensure that the Company's operations are not disrupted. Potential consequences of a material cyber incident
include damage to our reputation, litigation, and increased cyber security protection and remediation costs. Such consequences
could adversely affect our results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Raven's corporate office is located in Sioux Falls, South Dakota. Along with the corporate headquarters building, the Company
also owns separate manufacturing facilities for each of our business segments as well as various warehouses, training, and product
development facilities in the immediate Sioux Falls area.
In addition to its Sioux Falls facilities, Applied Technology owns a product development facility in Austin, Texas. Applied
Technology also leases manufacturing, warehouse, research, and office facilities in Middenmeer, Netherlands and Geel, Belgium
as well as in Winnipeg, Manitoba and Stockholm, Saskatchewan in Canada. Furthermore, Applied Technology leases smaller
research and office facilities in South Dakota.
Engineered Films also has additional owned production and conversion facilities located in Madison and Brandon, South Dakota
and Midland, Texas.
Aerostar also owns manufacturing, sewing, and research facilities located in Madison, South Dakota and Sulphur Springs, Texas.
Aerostar's subsidiary Vista also leases facilities in Arlington, Virginia and in Monterey, Chatsworth, and Sunnyvale, California.
Most of the Company's manufacturing plants also serve as distribution centers and contain offices for sales, engineering, and
manufacturing support staff. The Company believes that its properties are suitable and adequate to meet existing production
needs. Although there is idle capacity available in the Engineered Films Division, the productive capacity in the Company's
facilities is substantially being used. The Company also owns approximately 28 acres of undeveloped land adjacent to the other
owned property, which is available for expansion.
The following is the approximate square footage of the Company's owned or leased facilities by segment: Applied Technology -
154,000; Engineered Films - 610,000; Aerostar - 316,000; and Corporate - 150,000.
ITEM 3.
LEGAL PROCEEDINGS
The Company is involved as a party in lawsuits, claims, regulatory inquiries, or disputes arising in the normal course of its business,
the potential costs and liability of which cannot be determined at this time. Among these matters is a patent infringement lawsuit
in the early stages of litigation. In a lawsuit filed in federal district court in Kansas, Capstan Ag Systems, Inc. has made certain
infringement claims against the Company and one of its customers, CNH Industrial America LLC, related to the Applied Technology
12
Division’s HawkeyeTM nozzle control system. Management does not believe the ultimate outcomes of its legal proceedings are
likely to be significant to its results of operations, financial position, or cash flows, except that, because of its preliminary stage,
management cannot determine the potential impact, if any, of the patent infringement lawsuit described above.
The Company has insurance policies that provide coverage to various degrees for potential liabilities arising from legal proceedings.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is traded on the NASDAQ Global Select Market under the ticker symbol RAVN. The following
table shows quarterly unaudited financial results, quarterly high and low trade prices per share of the Company's common stock,
as reported by the NASDAQ Global Select Market, and dividends declared for the periods indicated:
QUARTERLY INFORMATION (UNAUDITED)
(Dollars in thousands, except per-share amounts)
Gross
Profit
Operating
Income
(Loss)
Pre-tax
Income
(Loss)
Net Sales
Net Income
(Loss)
Attributable
to Raven
Net Income
(Loss) Per
Share(a)
Basic Diluted
Common Stock
Market Price
Low
High
Cash
Dividends
Per Share
FISCAL 2017
First Quarter
Second Quarter
Third Quarter(b)
Fourth Quarter
$ 68,360 $ 20,117 $
67,598
72,522
68,915
18,915
19,839
19,319
8,050 $ 7,953 $
6,696
7,389
6,278
6,487
7,116
6,297
5,517 $ 0.15 $ 0.15
0.12
0.12
4,495
0.16
0.16
5,741
0.12
0.12
4,438
$ 16.86 $ 12.88 $
21.58
25.47
26.90
15.01
20.21
20.80
Total Year
$ 277,395 $ 78,190 $ 28,413 $ 27,853 $
20,191 $ 0.56 $ 0.56
$ 26.90 $ 12.88 $
FISCAL 2016
First Quarter
Second Quarter
Third Quarter(c)
Fourth Quarter
$ 70,273 $ 20,359 $
67,518
67,611
52,827
17,858
16,972
11,785
7,214 $ 7,170 $
6,429
(9,823)
571
6,163
(9,946)
694
4,855 $ 0.13 $ 0.13
0.11
0.11
4,191
(0.17)
(0.17)
(6,188)
0.05
0.05
1,918
$ 22.85 $ 16.91 $
22.36
19.53
19.61
18.52
15.77
13.87
Total Year
$ 258,229 $ 66,974 $
4,391 $ 4,081 $
4,776 $ 0.13 $ 0.13
$ 22.85 $ 13.87 $
FISCAL 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 102,510 $ 31,766 $ 16,532 $ 16,453 $
94,485
91,292
89,866
25,658
24,339
21,483
10,696
10,159
6,414
10,637
10,087
6,324
11,038 $ 0.30 $ 0.30
0.21
0.21
0.18
0.19
0.16
0.16
7,719
6,783
6,193
$ 40.06 $ 30.29 $
34.56
30.74
26.56
27.75
22.13
20.75
0.13
0.13
0.13
0.13
0.52
0.13
0.13
0.13
0.13
0.52
0.12
0.12
0.13
0.13
Total Year
(a) Net income per share is computed discretely by quarter and may not add to the full year.
(b) The fiscal year 2017 third quarter includes inventory write-downs of $2,278 for Vista as a result of discontinuing sales activities for a specific radar product
$ 378,153 $ 103,246 $ 43,801 $ 43,501 $
31,733 $ 0.86 $ 0.86
$ 40.06 $ 20.75 $
0.50
line within its business.
(c) The fiscal year 2016 third quarter includes pre-contract cost write-offs of $2,933 (which is comprised of $2,075 of costs capitalized as of July 31, 2015 and
additional costs of $858 capitalized during August and September 2015), a goodwill impairment loss of $11,497, a long-lived asset impairment loss of $3,813,
and a reduction of $2,273 acquisition-related contingent liability for Vista. For further information regarding these impairments and other charges refer to
the applicable notes to the consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Form 10-
K.
As of January 31, 2017, the Company had approximately 11,700 beneficial holders, which includes a substantial amount of the
Company's common stock held of record by banks, brokers, and other financial institutions.
13
On November 3, 2014, the Company announced that its Board of Directors (Board) had authorized a $40.0 million stock buyback
program. Effective March 21, 2016 the Board authorized an extension and increase of this stock buyback program. An additional
$10.0 million was authorized for share repurchases once the $40.0 million authorization limit is reached.
During fiscal 2017, the Company made purchases of 484,252 common shares under this plan at an average price of $15.91 equating
to a total cost of $7.7 million. None of these common shares were repurchased during the fourth quarter of fiscal 2017. During
fiscal 2016, the Company made purchases of 1,602,545 common shares under this plan at an average price of $18.31 per share
for a total cost of $29.3 million. None of these common shares were repurchased during the fourth quarter of fiscal 2016. There
is approximately $12.9 million still available for share repurchases under this Board-authorized program which remains in place
until such time as the authorized spending limit is reached or is otherwise revoked by the Board.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG RAVEN INDUSTRIES, INC.,
S&P 1500 INDUSTRIAL MACHINERY INDEX AND RUSSELL 2000 INDEX
The above graph compares the cumulative total shareholders return on the Company's stock with the cumulative return of the S&P
1500 Industrial Machinery Index and the Russell 2000 index. Investors who bought $100 of the Company's stock on January 31,
2012, held this for five years and reinvested the dividends would have seen its value decrease to $85.51. Stock performance on
the graph is not necessarily indicative of future price performance.
Company / Index
2012
2013
2014
2015
2016
2017
Raven Industries, Inc.
S&P 1500 Industrial Machinery Index
Russell 2000 Index
$ 100.00
100.00
100.00
$ 84.21
120.45
115.47
$ 118.83
151.75
146.69
$ 69.30
157.33
153.15
$ 49.92
143.50
137.96
$ 85.51
205.32
184.21
Years Ended January 31,
5-Year
CAGR(a)
(3.1)%
15.5 %
13.0 %
(a) compound annual growth rate (CAGR)
14
ITEM 6.
SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY
(In thousands, except employee counts and per-share amounts)
2017
2016
2015
2014
2013
For the years ended January 31,
OPERATIONS
Net sales
Gross profit(a)
Operating income(a)(b)
Income before income taxes(a)(b)
Net income attributable to Raven Industries, Inc.
Net income % of sales
Net income % of average equity(c)
FINANCIAL POSITION
Cash and cash equivalents
Property, plant and equipment
Total assets
Total debt
Raven Industries, Inc. shareholders' equity
Net working capital(d)
Net working capital percentage(e)
CASH FLOWS PROVIDED BY (USED IN)
Operating activities
Investing activities
Financing activities
Change in cash and cash equivalents
COMMON STOCK DATA
EPS — basic
EPS — diluted
Cash dividends per share
Book value per share(f)
Stock price range during the year
High
Low
Close
Shares and stock units outstanding, year-end
OTHER DATA
Price / earnings ratio(g)
Average number of employees
Sales per employee
$ 277,395
78,190
28,413
27,853
20,191
$ 258,229
66,974
4,391
4,081
4,776
$ 378,153
103,246
43,801
43,501
31,733
$ 394,677
119,354
63,994
63,623
42,903
$ 406,175
127,673
77,692
77,646
52,545
7.3%
7.7%
1.8%
1.7%
8.4%
11.4%
10.9%
18.2%
12.9%
26.2%
$ 50,648
106,324
301,509
—
259,426
77,012
$
33,782
115,704
298,688
—
264,155
77,870
$
51,949
117,513
362,873
—
305,153
100,183
$
52,987
98,076
301,819
—
251,362
97,184
$
49,353
81,238
273,210
—
221,346
88,054
27.9%
36.9%
27.9%
26.2%
24.6%
$ 48,636
(4,642)
(27,151)
16,866
$
$
$
0.56
0.56
0.52
7.17
26.90
12.88
25.05
36,175
44.7
907
306
$
$
$
$
44,008
(11,074)
(50,684)
(18,167)
0.13
0.13
0.52
7.22
22.85
13.87
15.01
36,600
115.5
936
276
$
$
$
$
60,083
(29,986)
(30,665)
(1,038)
0.86
0.86
0.50
8.01
40.06
20.75
21.44
38,119
24.9
1,251
302
$
$
$
$
52,836
(31,615)
(17,354)
3,634
1.18
1.17
0.48
6.89
42.99
25.46
37.45
36,492
32.0
1,264
312
$
$
$
$
76,456
(29,930)
(23,007)
23,511
1.45
1.44
0.42
6.09
37.73
23.01
26.93
36,326
18.7
1,350
301
(a) The fiscal year ended January 31, 2017 includes inventory write-downs of $2,278 for Vista as a result of discontinuing sales activities for a specific radar
product line within its business.
(b) The fiscal year ended January 31, 2016 includes pre-contract cost write-offs of $2,933, a goodwill impairment loss of $11,497, and a long-lived asset impairment
loss of $3,826, partially offset by a reduction of $2,273 of an acquisition-related contingent liability for Vista.
(c) Net income attributable to Raven Industries, Inc. divided by average equity. Average equity is the sum of Raven Industries, Inc. shareholders' equity for
the beginning of the fiscal year plus Raven Industries, Inc. shareholders' equity for the end of the fiscal year divided by two.
(d) Net working capital is defined as accounts receivable (net) plus inventories less accounts payable.
(e) Net working capital percentage is defined as net working capital divided by fourth quarter net sales times four for each of the fiscal years, respectively.
(f) Raven Industries, Inc. shareholders' equity divided by common shares and stock units outstanding.
(g) Closing stock price on last business day of fiscal year divided by EPS — diluted.
15
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to enhance
overall financial disclosure with commentary on the operating results, liquidity, capital resources, and financial condition of Raven
Industries, Inc. (the Company or Raven). This commentary provides management's analysis of the primary drivers of year-over-
year changes in key financial statement elements, business segment results, and the impact of accounting principles on the
Company's financial statements. The most significant risks and uncertainties impacting the operating performance and financial
condition of the Company are discussed in Item 1A., Risk Factors, of this Annual Report on Form 10-K (Form 10-K).
This discussion should be read in conjunction with Raven's Consolidated Financial Statements and notes thereto in Item 8 of this
Form 10-K.
The MD&A is organized as follows:
• Executive Summary
• Results of Operations - Segment Analysis
• Liquidity and Capital Resources
• Off-Balance Sheet Arrangements and Contractual Obligations
• Critical Accounting Policies and Estimates
• Accounting Pronouncements
EXECUTIVE SUMMARY
Raven is a diversified technology company providing a variety of products to customers within the industrial, agricultural,
geomembrane (which includes energy), construction, aerospace/defense, and situational awareness markets. The Company is
comprised of three unique operating units, classified into reportable segments: Applied Technology Division (Applied Technology),
Engineered Films Division (Engineered Films), and Aerostar Division (Aerostar). Segment information is reported consistent
with the Company's management reporting structure.
Management uses a number of measures to assess the Company's performance:
• Consolidated net sales, gross margin, operating income, operating margin, net income, and diluted earnings per share
• Cash flow from operations and shareholder returns
• Return on sales, average assets, and average equity
•
Segment net sales, gross profit, gross margin, operating margin, and operating income. At the segment level, operating
income does not include an allocation of general and administrative expenses.
Raven's growth strategy focuses on its proprietary product lines and the Company made the decision in fiscal year 2015 to largely
reduce its non-strategic contract manufacturing business. To assess the effectiveness of this strategy during the transition period,
management has used two additional measures:
• Consolidated net sales excluding contract manufacturing sales (adjusted sales)
Segment net sales excluding contract manufacturing sales (adjusted sales)
•
Information reported as net sales excluding contract manufacturing sales on both a consolidated and segment basis exclude sales
generated from contract manufacturing activities and do not conform to generally accepted accounting principles (GAAP). As
such, these are non-GAAP measures. As the reduction of contract manufacturing was largely completed in fiscal 2016, these
additional measures are not utilized for comparisons to periods after fiscal 2016 and are excluded from the tables in this MD&A
for fiscal 2017.
As described in the Notes to the Financial Statements of this Form 10-K, four significant unusual charges were recorded in Vista
Research, Inc. (Vista) within the Aerostar Division in the fiscal 2016 third quarter. To allow evaluation of operating income and
net income for the Company’s core business, the Company used three additional measures. The additional measurements are:
Segment operating income excluding Vista charges (adjusted operating income)
•
• Consolidated operating income excluding Vista charges (consolidated adjusted operating income)
• Net income excluding Vista charges (adjusted net income)
16
Information reported as adjusted operating income and adjusted net income excluding the Vista charges, on both a consolidated
and segment basis, do not conform to GAAP and are non-GAAP measures.
Non-GAAP measures should not be construed as an alternative to the reported results determined in accordance with GAAP. Non-
GAAP measures exclude the impact of certain items (as further described below) and provide supplemental information regarding
the operating performance of the Company and its operating segments. By disclosing these non-GAAP financial measures,
management intends to provide a supplemental comparison of our operating results and trends for the periods presented. The
Company believes these measures are also useful as they allow investors to evaluate our performance using the same metrics that
management uses to evaluate past performance and prospects for future performance.
With regards to adjusted operating income and net income measures, management believes these measures assist in understanding
the operating performance of the Company and its operating segments by excluding the impact of unusual charges which are non-
recurring in nature and which, from management's perspective, significantly impact the comparison of year-over-year changes in
underlying financial performance.
This non-GAAP information may not be consistent with the methodologies used by other companies. All non-GAAP measures
are reconciled with reported GAAP results in the tables that follow.
Vision and Strategy
At Raven, our purpose is to solve great challenges. Great challenges require great solutions. Raven’s three unique divisions share
resources, ideas, and a passion to create technology that helps the world grow more food, produce more energy, protect the
environment, and live safely.
The Raven business model is our platform for success. Our business model is defensible, sustainable, and gives us a consistent
approach in the pursuit of quality financial results. This overall approach to creating value, which is employed across the three
business segments, is summarized as follows:
Intentionally serve a set of diversified market segments with attractive near- and long-term growth prospects;
•
• Consistently manage a pipeline of growth initiatives within our market segments;
• Aggressively compete on quality, service, innovation, and peak performance;
• Hold ourselves accountable for continuous improvement;
• Value our balance sheet as a source of strength and stability with which to pursue strategic acquisitions; and
• Make corporate responsibility a top priority.
17
The following discussion highlights the consolidated operating results for the years ended January 31, 2017, 2016, and 2015.
Segment operating results are more fully explained in the Results of Operations - Segment Analysis section.
(dollars in thousands, except per-share data)
Results of Operations
Net sales
Gross margin(a)
Operating income
Operating margin(a)
Net income attributable to Raven Industries, Inc.
Diluted income per share
Adjusted net income attributable to Raven Industries,
Inc.(b)
Cash Flow and Shareholder Returns
Cash flow from operating activities
Cash outflow for capital expenditures
Cash dividends
Common share repurchases
Performance Measures
Return on net sales(c)
Return on average assets(d)
Return on average equity(e)
For the years ended January 31,
%
%
change
change
2016
2015
2017
$ 277,395
7.4% $ 258,229
(31.7)% $ 378,153
$
$
$
$
$
$
$
$
28.2%
25.9%
27.3%
28,413
547.1% $
4,391
(90.0)% $
43,801
10.2%
20,191
0.56
322.8% $
330.8% $
1.7%
4,776
0.13
11.6%
(84.9)% $
(84.9)% $
31,733
0.86
20,191
34.1% $
15,053
(52.6)% $
31,733
48,636
4,642
18,839
7,702
7.3%
6.7%
7.7%
$
$
$
$
44,008
13,046
19,426
29,338
1.8%
1.4%
1.7%
$
$
$
$
60,083
17,041
18,519
—
8.4%
9.5%
11.4%
(a) The Company's gross and operating margins may not be comparable to industry peers due to variability in the classification of expenses across industries
in which the Company operates.
(b) Non-GAAP measure reconciled to GAAP in the applicable table below.
(c) Net income divided by net sales.
(d) Net income attributable to Raven Industries, Inc. divided by average assets. Average assets is the sum of Total Assets for the beginning of the fiscal year
plus Total Assets for the end of the fiscal year divided by two.
(e) Net income attributable to Raven Industries, Inc. divided by average equity. Average equity is the sum of Total Raven Industries, Inc. shareholders' equity
for the beginning of the fiscal year plus Total Raven Industries, Inc. shareholders' equity for the end of the fiscal year divided by two.
18
The following table reconciles the reported net sales to adjusted sales, a non-GAAP financial measure. Adjusted sales excludes
contract manufacturing and represents the Company's sales from proprietary products. As the reduction of contract manufacturing
was largely completed in fiscal 2016, adjusted sales excluding manufacturing is not a meaningful measure in subsequent fiscal
periods. As such fiscal 2017 has been excluded from this table.
(dollars in thousands)
Applied Technology
Reported net sales
Less: Contract manufacturing sales
Applied Technology net sales, excluding
contract manufacturing sales
Aerostar
Reported net sales
Less: Contract manufacturing sales
Aerostar net sales, excluding contract
manufacturing sales
Consolidated Raven
Reported net sales
Less: Contract manufacturing sales
Plus: Aerostar sales to Applied Technology
Consolidated net sales, excluding contract
manufacturing sales
For the years ended January 31,
%
change
2016
2015
$
$
$
$
$
92,599
546
(34.9)% $
(90.6)%
142,154
5,832
92,053
(32.5)% $
136,322
36,368
4,701
(55.0)% $
(85.2)%
80,772
31,669
31,667
(35.5)% $
49,103
258,229
5,247
(31.7)% $
(86.0)%
— (100.0)%
378,153
37,501
10,553
$
252,982
(28.0)% $
351,205
The following table reconciles the reported operating (loss) income to adjusted operating income, a non-GAAP financial measure.
On both a segment and consolidated basis, adjusted operating income excludes the goodwill impairment loss, long-lived asset
impairment loss, pre-contract cost write-offs, and an acquisition-related contingent consideration benefit all of which relate to the
Vista business within the Aerostar Division and all of which occurred in the fiscal 2016 third quarter. These are described in more
detail in Note 6 Goodwill, Long-lived Assets, and Other Charges and Note 5 Acquisition of and Investments in Businesses and
Technologies of the Notes to the Consolidated Financial Statements.
(dollars in thousands)
Aerostar
Reported operating (loss) income
Plus:
Goodwill impairment loss
Long-lived asset impairment loss
Pre-contract costs written off
Less:
Consolidated Raven
Reported operating income
Plus:
Goodwill impairment loss
Long-lived asset impairment loss
Pre-contract costs written off
Less:
Acquisition-related contingent liability benefit
For the years ended January 31,
%
change
2016
%
change
2015
2017
$ (1,560)
(89.5)% $ (14,801)
(264.8)% $
8,983
—
—
—
—
—
—
11,497
3,813
2,933
—
—
—
—
(87.0)% $
—
—
—
—
8,983
11.1%
$ 28,413
547.1 % $
4,391
(90.0)% $ 43,801
—
—
—
—
—
—
11,497
3,813
2,933
—
—
—
—
—
—
Acquisition-related contingent liability benefit
Aerostar adjusted operating (loss) income(a)
Aerostar adjusted operating (loss) income % of net sales
—
$ (1,560)
—
(233.4)% $
2,273
1,169
(4.6)%
3.2%
Consolidated adjusted operating income
Consolidated adjusted operating income % of net sales
7.9%
(a) At the segment level, adjusted operating (loss) income does not include an allocation of general and administrative expenses.
10.2 %
—
$ 28,413
—
2,273
39.5 % $ 20,361
—
—
(53.5)% $ 43,801
11.6%
19
The following table reconciles the reported net income to adjusted net income, a non-GAAP financial measure. Adjusted net
income excludes the goodwill impairment loss, long-lived asset impairment loss, pre-contract cost write-off, an acquisition-related
contingent consideration benefit, and the income tax effect of these items, all of which relate to Vista.
(dollars in thousands)
Consolidated Raven
Reported net income attributable to Raven Industries, Inc.
Plus:
Goodwill impairment loss
Long-lived asset impairment loss
Pre-contract costs written off
Less:
Acquisition-related contingent liability benefit
Net tax benefit on adjustments
Adjusted net income attributable to Raven
Industries, Inc.
Adjusted net income per common share:
- Basic
- Diluted
For the years ended January 31,
%
change
2016
%
change
2015
2017
$
20,191
322.8% $
4,776
(84.9)% $
31,733
—
—
—
—
—
11,497
3,813
2,933
2,273
5,693
—
—
—
—
—
$
$
$
20,191
34.1% $
15,053
(52.6)% $
31,733
0.56
0.56
40.0% $
40.0% $
0.40
0.40
(53.5)% $
(53.5)% $
0.86
0.86
Results of Operations - Fiscal 2017 compared to Fiscal 2016
The Company's net sales in fiscal 2017 were $277.4 million, an increase of $19.2 million, or 7.4%, from last year's net sales of
$258.2 million. Despite the continued challenges within the end-markets in their primary markets of focus, the Applied Technology
and Engineered Films divisions saw sales increases year-over-year. With respect to Aerostar, delays and uncertainties regarding
certain opportunities important to the division's growth strategy resulted in lower net sales for this division.
Operating income for fiscal year 2017 was $28.4 million compared to $4.4 million in fiscal year 2016. The fiscal 2016 results
were impacted by the Vista goodwill and long-lived impairment losses and associated financial impacts. Excluding these specific
Vista related items, adjusted operating income for fiscal 2016 was $20.4 million. Adjusted operating income increased $8.0 million,
or 39.5%, year-over-year. The adjusted operating income increase year-over-year was principally driven by higher sales volumes
and lower manufacturing expenses in Applied Technology and Engineered Films.
Net income for fiscal year 2017 was $20.2 million, or $0.56 per diluted share, compared to net income of $4.8 million, or $0.13
per diluted share, in fiscal year 2016. The fiscal 2016 results were impacted by the Vista goodwill and long-lived asset impairments
and associated financial impacts. Excluding these specific Vista related items, adjusted net income for fiscal 2016 was $15.1
million, or $0.40 per diluted share. On an adjusted basis, net income was up $5.1 million year-over-year, or $0.16 per diluted
share, in fiscal 2017.
Applied Technology Division
Fiscal 2017 net sales increased $12.6 million, or 13.6%, to $105.2 million from $92.6 million in fiscal 2016. This increase in sales
was driven by new product introductions and market share gains. Sales in the original equipment manufacturer (OEM) channel
were up 25.1% while sales in the aftermarket channel increased 6.1%. The Company does not specifically model comparative
market share position for any of its operating divisions, but based on the sales developments in fiscal 2017 the Company believes
that Applied Technology's global market share position improved during the year as a result of new product sales and expanded
OEM relationships.
Applied Technology's operating income increased by 45.4% to $26.6 million from $18.3 million in the prior year due primarily
to higher sales volume and lower manufacturing expenses. End-market demand conditions remain subdued, but new product
introductions have driven sales increases in fiscal 2017.
Engineered Films Division
Fiscal 2017 net sales were $138.9 million, an increase of $9.4 million, or 7.3%, compared to fiscal 2016. The increase in sales was
driven by increases in the industrial, geomembrane (which includes energy), and construction markets, partially offset by a decrease
in the agricultural market. Although the Company does not specifically model comparative market share position for any of its
20
operating divisions, based on the sales developments in fiscal year 2017 the Company believes that Engineered Films’ market
share position improved during the year in all of the end markets served, with the exception of the agriculture market.
Engineered Film's operating income increased by 28.4% to $23.0 million from $17.9 million in the prior year due primarily to
higher sales volume and lower manufacturing expenses. Higher production and sales volume helped improve capacity utilization
and resulted in fixed cost leverage.
Aerostar Division
Fiscal 2017 net sales were $34.1 million compared to $36.4 million in fiscal 2016, down $2.3 million. The decline in sales for
the division was principally driven by lower aerostat sales, partially offset by higher sales of stratospheric balloons. While it is
particularly challenging to measure market share information for the Aerostar division and the Company does not specifically
model comparative market share position for any of its operating divisions, the Company believes that Aerostar’s market share
position was largely unchanged during the year for all of the markets served, with the exception of radar products and services
which the Company believes experienced an erosion of market share.
Aerostar reported an operating loss of $1.6 million in fiscal 2017 compared to an operating loss of $14.8 million in fiscal 2016.
The fiscal 2016 results were impacted by the Vista goodwill and long-lived assets impairments and associated financial impacts.
Excluding these specific Vista related items, adjusted operating income in fiscal 2016 was $1.2 million, compared to an operating
loss of $1.6 million for fiscal 2017, a decline of $2.8 million on an adjusted basis. This decline in operating income was primarily
driven by lower sales volume and $2.3 million of inventory write-downs related to certain radar systems, discussed in more detail
in Note 6 Goodwill, Long-lived Assets, and Other Charges of the Notes to the Consolidated Financial Statements, and lower sales
volume.
Results of Operations - Fiscal 2016 compared to Fiscal 2015
The Company's net sales in fiscal 2016 were $258.2 million, a decrease of $120.0 million, or 31.7%, from the prior year's net sales
of $378.2 million. Excluding sales from contract manufacturing, fiscal year 2016 net sales were $253.0 million, down 28.0% from
$351.2 million in fiscal year 2015. All divisions saw significant sales declines and continued to experience reduced end-market
demand in their primary markets of focus. Adverse commodity market conditions drove reduced demand for both Applied
Technology and Engineered Films, while reductions and delays in governmental defense spending reduced demand for Aerostar,
and Vista in particular.
Operating income for fiscal year 2016 was $4.4 million compared to $43.8 million in fiscal year 2015. Operating income for fiscal
year 2016, adjusted for the third quarter Vista goodwill and long-lived asset impairments and associated financial impacts, was
$20.4 million compared to $43.8 million in fiscal year 2015, down 53.5% year-over-year. The adjusted operating income decline
year-over-year was primarily due to the overall sales decline and lower operating margins in Applied Technology and lower Aerostar
profitability driven by Vista. The Company initiated cost reduction measures across all divisions in fiscal 2016 to reduce overall
spending. These cost control measures contributed to decreases of $2.8 million in research and development (R&D) expense and
$9.4 million in selling, general and administrative expenses in fiscal year 2016 compared to fiscal 2015.
Net income for fiscal year 2016 was $4.8 million, or $0.13 per diluted share, compared to 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 goodwill and long-lived asset
impairments and associated financial impacts, was $15.1 million, down 52.6% compared to fiscal year 2015.
Applied Technology Division
Fiscal 2016 net sales decreased $49.6 million, or 34.9%, to $92.6 million from $142.2 million in fiscal 2015. This decline in sales
was driven by a significant contraction in end-market demand. The Company believes that its market share in the United States
was largely sustained, but that international market share declined, particularly in Latin America. Year-over-year sales to OEM
and aftermarket customers declined by 42.1% and 23.8%, respectively.
Applied Technology's operating income decreased by 47.0% due primarily to lower sales volume. The price of corn declined to
8-year lows which led to significant declines in farmer incomes. Such macro-level market conditions impacted both grower
sentiment and the manufacturing decisions of our strategic OEM partners.
Engineered Films Division
Engineered Films’ fiscal 2016 net sales were $129.5 million, a decrease of $37.2 million, or 22.3%, compared to fiscal 2015. The
decline in sales was primarily driven by the continuation of the substantial decline in demand in the geomembrane market (which
includes energy) as a result of lower oil prices year-over-year partially offset by the benefit to sales due to the acquisition of Integra
Plastics, Inc. (Integra) in November 2014. The Company does not specifically model comparative market share position for any
21
of its operating divisions, but based on customer feedback and evaluation of publicly-available financial information on competitors,
these revenue trends are not believed to have been the result of a material loss of market share.
The acquisition of Integra improved the Company’s ability to meet customer’s complex conversion needs and leverage a more
direct sales channel into the geomembrane (which includes energy) market. However, significant and sustained declines in energy
sub-market demand resulted in declining sales to this market. With oil prices at multi-decade lows, sales into the geomembrane
market were down approximately 66% year-over-year. Rig counts and well-completion rates continued to fall, driving down
demand for Engineered Films’ geomembrane market products. Data available from Baker Hughes, a worldwide oil field service
company, showed that land-based rig counts for the Permian Basin, the division’s primary market for its geomembrane products,
were down approximately 60% year-over-year as of January 31, 2016 and well-completion rates were also down. The operations
of Integra were fully integrated into Engineered Films’ operations in early fiscal 2016 and, as a result, separate quantification of
its impact to net sales was not determinable.
Aerostar Division
Fiscal 2016 net sales were $36.4 million compared to $80.8 million in fiscal 2015, down $44.4 million. Excluding contract
manufacturing sales, Aerostar's net sales decreased 35.5%, or $17.4 million, to $31.7 million for fiscal 2016. The decline in sales
for the division was principally driven by Vista, but lower sales of stratospheric balloons also contributed to the
Aerostar reported an operating loss of $14.8 million in fiscal 2016 compared to operating income of $9.0 million in fiscal 2015.
The operating loss included the Vista goodwill and long-lived asset impairments and associated financial impacts. Excluding these
items, adjusted Aerostar operating income was $1.2 million, or 87.0% below fiscal 2015 operating income of $9.0 million. This
was primarily due to the lower sales volume of proprietary products, particularly within the Vista business.
From time to time, the Company incurs costs before a contract is finalized and such pre-contract costs are deferred to the balance
sheet to the extent they relate to a specific project and the Company has concluded that is probable that the contract will be awarded
for more than the amount deferred. Pre-contract cost deferrals are common with Vista's business pursuits. As described in Note
1 Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements, pre-contract costs are
evaluated for recoverability periodically. The Company was in negotiations throughout most of fiscal 2016 on a large international
contract and also had a preauthorization letter from the prime contractor, but the contract did not materialize in the fiscal 2016
third quarter as expected. As a result, expectations were lowered as the timing and likelihood of completing certain international
pursuits became less certain. Corresponding to these lower expectations, the pre-contract costs associated with these pursuits were
written off and Vista recorded a charge of $2.9 million reported in “Cost of sales” in the Consolidated Statements of Income and
Comprehensive Income. These charges were partially offset by a benefit of $2.3 million as the result of a reduction of an acquisition-
related contingent liability (earn-out liability) due to the lowered forecast for the Aerostar Division.
RESULTS OF OPERATIONS - SEGMENT ANALYSIS
Applied Technology
Applied Technology designs, manufactures, sells, and services innovative precision agriculture products and information
management tools that help growers reduce costs, more precisely control inputs, and improve yields for the global agriculture
market. Applied Technology's operations include operations of SBG Innovatie BV and its affiliate, Navtronics BVBA (collectively,
SBG), based in the Netherlands.
Financial highlights for the fiscal years ended January 31,
(dollars in thousands)
2017
% change
2016
% change
2015
$
41.3%
92,599
33,969
$ 105,217
43,476
13.6% $
28.0%
Net sales
Gross profit
Gross margin
Operating expense
Operating expense as % of sales
Operating income(a)
Operating margin
Applied Technology net sales,
excluding contract manufacturing
sales(b)
92,053
(a) At the segment level, operating income does not include an allocation of general and administrative expenses.
(b) Reduction of contract manufacturing was largely completed in fiscal 2016; measure is not meaningful (NMF) for comparisons in subsequent fiscal
(34.9)% $
(41.8)%
(34.2)% $
(47.0)% $
(32.5)% $
45.4% $
7.6% $
15,650
18,319
16.0%
16,833
25.3%
26,643
16.9%
36.7%
19.8%
NMF
NMF
$
$
142,154
58,325
41.0%
23,768
16.7%
34,557
24.3%
136,322
periods.
22
For fiscal 2017, net sales increased $12.6 million, or 13.6%, to $105.2 million as compared to $92.6 million in fiscal 2016.
Operating income increased $8.3 million, or 45.4%, to $26.6 million as compared to fiscal 2016.
Fiscal 2017 fourth quarter net sales increased $7.5 million, or 40.4%, to $25.9 million and operating income increased $4.1 million,
or 184.3%, to $6.4 million compared to fourth quarter fiscal 2016.
Fiscal 2017 comparative results were primarily driven by the following factors:
•
• Market conditions. Conditions in the agriculture market remain subdued; however, Applied Technology's marketplace
strategy has capitalized on new product introductions in fiscal 2017. While OEM and aftermarket sales channel demand
remains challenging, Applied Technology achieved fourth quarter and year-to-date sales growth compared to the prior
year primarily due to market share gains driven by new product introductions and expanded relationships with OEM
partners. These were the primary growth drivers both domestically and internationally.
Sales volume. Fiscal 2017 sales increased 13.6% to $105.2 million as compared to $92.6 million in the prior fiscal year.
Sales in the OEM and aftermarket channels were up 25.1% and 6.1%, respectively, in fiscal 2017. Fiscal 2017 domestic
sales were up 9.9% while international sales were up 24.8%.
International sales. Net sales outside the U.S. accounted for 27.6% of segment sales in fiscal 2017 compared to 25.1%
in fiscal 2016. International sales increased $5.8 million, or 24.8%, to $29.0 million in fiscal 2017 compared to fiscal
2016. Higher sales in Canada and Europe were the primary drivers of the increase. European revenue growth included
strong growth at SBG in fiscal 2017. For the fourth quarter, international sales totaled $5.9 million, an increase of 29.8%
from the prior year comparative quarter.
•
• Gross margin. Gross margin increased from 36.7% in fiscal 2016 to 41.3% in fiscal 2017. Higher sales volume and
lower manufacturing costs including increased leverage of fixed manufacturing costs contributed to the higher margin.
Due to the existing available capacity of the facilities, the increase in sales volume did not require a commensurate
increase in costs in fiscal 2017.
• Restructuring expenses. Fiscal 2016 results included severance and other related exit activity totaling $0.6 million.
These costs were offset by completion of the St. Louis contract manufacturing exit activities which resulted in gains of
$0.6 million recorded in the fiscal 2016 results. There were no impairments recorded as a result of the exit of this business.
No restructuring or exit costs were incurred in the three-month period ended January 31, 2016. No restructuring or exit
costs were incurred in the three-month or year-to-date period ended January 31, 2017.
• Operating expenses. Fiscal 2017 operating expenses were 16.0% of net sales compared to 16.9% for the prior year.
Operating expenses increased less than revenues due primarily to continued cost control measures and resulted in a lower
percentage of sales year-over-year.
For fiscal 2016, net sales decreased $49.6 million, or 34.9%, to $92.6 million as compared to $142.2 million in fiscal 2015.
Operating income decreased $16.2 million, or 47.0%, to $18.3 million as compared to fiscal 2015.
Fiscal 2016 fourth quarter net sales declined $8.0 million, or 30.3%, to $18.4 million and operating income decreased $1.2 million,
or 34.7%, to $2.2 million compared to fourth quarter fiscal 2015.
Fiscal 2016 comparative results were primarily driven by the following factors:
•
• Market conditions. Deteriorating conditions in the agriculture market put pressure on Applied Technology during fiscal
2016. End-market demand had deteriorated from the beginning of the year. Corn prices had stabilized since the beginning
of the year but were still at multi-year lows. Farm incomes and farmer sentiment were weak, resulting in productivity
investments in precision agriculture equipment being delayed.
Sales volume. Fiscal 2016 sales declined 34.9% to $92.6 million as compared to $142.2 million in the prior fiscal year.
These sales declines were driven by continued lower demand, OEM shutdowns, and customers managing down inventory
levels. Sales in the OEM and aftermarket channels were down 42.1% and 23.8%, respectively, for fiscal 2016. Fiscal
2016 domestic sales were down 37.6% while international sales were down 25.2%.
Strategic sales. Applied Technology’s net sales, excluding contract manufacturing sales, for fiscal 2016 were $92.1
million, a decrease of 32.5%, compared to $136.3 million in fiscal 2015.
International sales. Net sales outside the U.S. accounted for 25.1% of segment sales in fiscal 2016 compared to 21.9%
in fiscal 2015. International sales decreased $7.9 million, or 25.2%, to $23.3 million in fiscal 2016 compared to fiscal
2015. Lower sales in Latin America, Canada, and South Africa were the primary drivers of the decline. These declines
were partially offset by higher European revenues. European revenues were favorably impacted by the acquisition of
SBG in fiscal 2015 second quarter. For the fourth quarter, international sales totaled $4.6 million, an increase of 45.6%
from the prior year comparative quarter. The fiscal fourth quarter 2015 sales were reduced by credits issued related to
•
•
23
quality issues on products sold in Latin America and without these credits, the year-over-year fourth quarter increase
would have been approximately 19%.
• Gross margin. Gross margin declined from 41.0% in fiscal 2015 to 36.7% in fiscal 2016. Lower sales volume and a
reduced leverage of fixed manufacturing costs contributed to the lower margin.
• Restructuring expenses. Fiscal 2016 results included severance and other related exit activity totaling $0.6 million.
These costs were offset by completion of the St. Louis contract manufacturing exit activities which resulted in gains of
$0.6 million recorded in the fiscal 2016 results. There were no impairments recorded as a result of the exit of this business.
No restructuring or exit costs were incurred in the three-month period ended January 31, 2016. Restructuring costs of
$0.3 million were incurred for the three-month period ended January 31, 2015.
• Operating expenses. Fiscal 2016 operating expenses were 16.9% of net sales compared to 16.7% for the prior year.
Restructuring efforts and cost containment actions reduced both selling expense and R&D expense as planned, but were
not enough to offset the impact to division profit from lower sales volume.
Engineered Films
Engineered Films manufactures high performance plastic films and sheeting for geomembrane (which includes energy),
agricultural, construction, and industrial applications. Engineered Films’ ability to develop value-added innovative products is
expanded by its fabrication and conversion capabilities.
Financial highlights for the fiscal years ended January 31,
% change
2017
$ 138,855
29,407
(dollars in thousands)
Net sales
Gross profit
Gross margin
Operating expenses
Operating expenses as % of sales
Operating income(a)
Operating margin
(a) At the segment level, operating income does not include an allocation of general and administrative expenses.
7.3 % $ 129,465
25,076
17.3 %
(10.3)% $
28.4 % $
17,892
22,966
21.2%
16.5%
7,184
6,441
4.6%
2016
$
$
5.5%
13.8%
19.4%
% change
2015
(22.3)% $ 166,634
28,104
(10.8)%
16.9%
14.0 % $
6,302
3.8%
(17.9)% $
21,802
13.1%
For fiscal 2017, net sales increased $9.4 million, or 7.3%, to $138.9 million as compared to fiscal 2016. Operating income was
$23.0 million, up 28.4% for fiscal 2017 as compared to $17.9 million for fiscal 2016.
For fiscal 2017 fourth quarter net sales increased $9.1 million, or 35.8%, to $34.5 million as compared to $25.4 million in the
fiscal 2016 fourth quarter. Operating income was up $3.4 million, or 177.3%, to $5.3 million as compared to $1.9 million in the
prior year fourth quarter.
Fiscal 2017 comparative results were primarily driven by the following factors:
•
• Market conditions. End-market conditions have improved in the geomembrane (which includes energy) market in the
second half of fiscal 2017 for Engineered Films. U.S. land-based rig counts have increased approximately 17% from
January 2016 to January 2017. For fiscal 2017, sales into the geomembrane market increased 16.9% year-over-year.
Sales volume and selling prices. Fiscal 2017 net sales were up 7.3% to $138.9 million compared to fiscal 2016 net sales
of $129.5 million. Sales volume, measured in pounds, for fiscal 2017 was up 11.4%. Primary drivers of the increase in
sales volume included the improved market conditions within the geomembrane market and new sales into the industrial
and geomembrane markets as a result of successfully selling capacity of the division's new production line that was
commissioned in the fiscal 2017 first quarter. Average selling prices for the same period were down approximately 3.7%
compared to the prior fiscal year primarily due to product mix and the competitive landscape in the geomembrane market.
Fourth quarter fiscal 2017 sales volume was up 34.0% compared to fourth quarter fiscal 2016. Fourth quarter average
selling prices increased 1.3% year-over-year.
• Gross margin. Fiscal 2017 gross margin was 21.2%, 1.8 percentage points higher than the prior fiscal year. During fiscal
2017 fourth quarter, the gross margin was 20.5% compared to 15.0% in the prior year fourth quarter. The increase for
both periods was primarily the result of higher sales volume. Due to the existing available capacity of the facilities, the
increase in sales volume did not require a commensurate increase in costs in fiscal 2017. In addition, benefits from value
engineering, reformulation efforts, pricing discipline, and favorable raw material cost developments also benefited gross
margin.
• Operating expenses. Fiscal 2017 operating expenses, as a percentage of net sales, decreased to 4.6%, from 5.5% in the
prior year. Sales volume increased while selling expense decreased compared to fiscal year 2016 as a result of cost
control measures and lower bad debt expense.
24
For fiscal 2016, net sales decreased $37.2 million, or 22.3%, to $129.5 million as compared to fiscal 2015. Operating income was
$17.9 million for fiscal 2016, down 17.9%, as compared to $21.8 million for fiscal 2015.
For fiscal 2016, fourth quarter net sales decreased $15.4 million, or 37.8%, to $25.5 million as compared to $40.9 million in the
fiscal 2015 fourth quarter. Operating income was down $2.7 million, or 58.8%, to $1.9 million as compared to $4.6 million in
the prior year fourth quarter.
Fiscal 2016 comparative results were primarily driven by the following factors:
• Market conditions. Challenging end-market conditions persisted in the geomembrane (which includes energy) market
for Engineered Films. The decline in oil prices resulted in land-based rig counts decreasing more than 60% year-over-
year along with declining well-completion rates. While the decline in oil prices reduced demand for sales of film into
the geomembrane market, it also led to favorable raw material cost comparisons versus the prior year. While the
geomembrane market experienced challenging end-market conditions, demand continued to strengthen for both
Engineered Films' agricultural barrier films used in high-value crop production and grain and silage covers used to protect
grain and feed.
Sales volume and selling prices. Fiscal 2016 net sales were down 22.3% to $129.5 million compared to fiscal 2015 net
sales of $166.6 million. The decline in sales was driven primarily by a 66% decline in geomembrane market sales. These
declines were partially offset by the acquisition of Integra. Sales volume for fiscal 2016 was down 27.5%. Average
selling prices for the same period were up approximately 7% compared to the prior fiscal year primarily due to product
mix. Fourth quarter fiscal 2016 sales volume was down approximately 38% compared to fourth quarter fiscal 2015.
Fourth quarter average selling prices remained flat year-over-year.
•
• Gross margin. Fiscal 2016 gross margin was 19.4%, 2.5 percentage points higher than the prior fiscal year. This increase
was the result of gross margin expansion from value engineering, reformulation efforts, pricing discipline, and favorable
raw material cost comparisons. During fiscal 2016 fourth quarter, the gross margin was 15.0% compared to 16.2% in
the prior year fourth quarter. The decline was due to significantly lower volume and the resulting decline in fixed cost
absorption.
• Operating expenses. Fiscal 2016 operating expenses, as a percentage of net sales, increased to 5.5%, from 3.8% in the
prior year. Higher selling expenses resulting from the Integra acquisition, additional R&D costs for new product
development activities and higher bad debt expense over lower sales volume increased operating expense as a percentage
of sales.
Aerostar
Aerostar serves the aerospace/defense and situational awareness markets. Aerostar had also provided significant contract
manufacturing services in the past, but largely exited this business in fiscal 2016. Aerostar designs and manufactures proprietary
products including stratospheric balloons, tethered aerostats, and radar processing systems for aerospace and situational awareness
markets. These products can be integrated with additional third-party sensors to provide research, communications, and situational
awareness capabilities to governmental and commercial customers. Aerostar pursues product and support services contracts for
agencies and instrumentalities of the U.S. and foreign governments.
Financial highlights for the fiscal years ended January 31,
(dollars in thousands)
Net sales
Gross profit
Gross margin
Operating expenses
Operating expenses as % of sales
Goodwill and long-lived asset impairment
loss
2017
$ 34,113
5,319
$
15.6 %
6,792
19.9 %
% change
2016
% change
(6.2)% $ 36,368
7,838
(32.1)%
(55.0)% $
(52.9)%
21.6 %
2015
80,772
16,654
20.6%
(7.2%)
$
7,316
(4.6)% $
7,671
20.1 %
9.5%
87
$
$ (1,560)
15,323
(14,801)
Operating (loss) income(a)
Operating margin
Aerostar net sales, excluding
contract manufacturing sales(b)
(a) At the segment level, operating (loss) income does not include an allocation of general and administrative expenses.
(b) Reduction of contract manufacturing was largely completed in fiscal 2016; measure is not meaningful (NMF) for comparisons in subsequent fiscal
(35.5)% $
$ 31,667
(264.8)%
(89.5)%
(40.7)%
(4.6)%
NMF
NMF
8,983
11.1%
49,103
periods.
25
Net sales declined 6.2% to $34.1 million from last year’s net sales of $36.4 million. Operating loss was $1.6 million, down $13.2
million, compared to fiscal 2016 operating loss of $14.8 million. The fiscal 2016 results were impacted by the Vista goodwill and
long-lived asset impairments and associated financial impacts. Excluding these Vista related items, adjusted operating income in
fiscal 2016 was $1.2 million, compared to an operating loss of $1.6 million for fiscal 2017, a decline of $2.8 million on an adjusted
basis.
Fiscal 2017 fourth quarter net sales declined $0.2 million, or 2.5%, to $8.8 million. Aerostar reported fiscal 2017 fourth quarter
operating income of $0.2 million, flat compared with the prior year fourth quarter.
Fiscal 2017 comparative results were primarily driven by the following factors:
• Market conditions. Aerostar is experiencing delays and uncertainties regarding certain opportunities important to the
division's growth strategy, and some of Aerostar's markets are subject to significant variability due to government spending
and the timing of contract awards. Aerostar is pioneering new markets with leading-edge applications of its high-altitude
balloons and remains in active collaboration with Google on Project Loon. Project Loon is a program to provide high-
speed wireless Internet accessibility and telecommunications to rural, remote, and under-served areas of the world.
Sales volume. Fiscal 2017 net sales decreased $2.3 million from the prior year, a year-over-year decrease of 6.2%. The
decline was principally driven by lower aerostat sales due to the timing of deliveries. This was partially offset by higher
sales of stratospheric balloons for Project Loon and other customers newly established in fiscal 2017.
•
• Gross margin. For fiscal 2017, gross margin decreased 6.0 percentage points compared to the prior fiscal year. Fiscal
2017 gross margin decline was primarily driven by lower sales volume and $2.3 million of inventory write-downs related
to certain radar systems discussed in more detail in Note 6 Goodwill, Long-lived Assets, and Other Charges of the Notes
to the Consolidated Financial Statements, offset somewhat by a $1.3 million reduction in depreciation and amortization
expense due to the long-lived asset impairment charges recorded in fiscal 2016.
• Goodwill and long-lived asset impairment loss. In fiscal 2016, Aerostar recorded a goodwill impairment loss of $11.5
million and a long-lived asset impairment loss of $3.8 million. These impairment charges were recorded in the Vista
reporting unit and are described more fully in Note 6 Goodwill, Long-lived Assets, and Other Charges of the Notes to
the Consolidated Financial Statements. As also described in Note 6 Goodwill, Long-lived Assets, and Other Charges, a
$0.1 million long-lived asset impairment loss was recorded in fiscal 2017 on the Radar asset group. Expense control
measures executed throughout fiscal year 2017 reduced operating expenses year-over-year.
• Operating expenses. Operating expenses as a percentage of net sales was essentially flat year-over- year. Fiscal 2017
operating expenses of $6.8 million were 19.9% of net sales compared to operating expenses of $7.3 million, equivalent
to 20.1% of net sales in fiscal 2016.
• Aerostar adjusted operating income. Aerostar reported an operating loss of $1.6 million in fiscal 2017 compared to an
operating loss of $14.8 million in fiscal 2016. The fiscal 2016 results were impacted by the Vista goodwill and long-
lived asset impairments and associated financial impacts. Excluding these Vista related items, adjusted operating income
in fiscal 2016 was $1.2 million, compared to an operating loss of $1.6 million for fiscal 2017, a decline of $2.8 million
on an adjusted basis. This decline in operating income was primarily driven by lower sales volume and $2.3 million of
inventory write-downs related to certain radar systems, offset somewhat by a $1.3 million reduction in depreciation and
amortization expense due to the long-lived asset impairment charges recorded in fiscal 2016.
Fiscal 2016 net sales declined 55.0% to $36.4 million from fiscal 2016 net sales of $80.8 million. Fiscal 2016 operating loss was
$14.8 million, down $23.8 million, compared to fiscal 2015 operating income of $9.0 million. Fiscal 2016 operating loss included
a goodwill impairment loss of $11.5 million, a long-lived asset impairment loss of $3.8 million, and associated financial impacts
(a $2.9 million pre-contract cost write-off and a $2.3 million acquisition-related contingent consideration benefit) all of which
relate to Vista.
Fiscal 2016 fourth quarter net sales declined $15.6 million, or 63.3%, to $9.0 million compared to fiscal 2015 fourth quarter results.
Aerostar reported a fiscal 2016 fourth quarter operating income of $0.2 million compared to an operating income of $4.3 million
in the prior year fourth quarter.
Fiscal 2016 comparative results were primarily driven by the following factors:
• Market conditions. Aerostar’s growth strategy emphasizes proprietary products and its focus was on proprietary
technology including stratospheric balloons, advanced radar systems, and sales of aerostats in international markets.
Certain of Aerostar's markets are subject to significant variability due to government spending. Uncertain demand in
these markets continued in fiscal 2016 as defense spending was down. Aerostar continued to pursue substantial targeted
international opportunities but the conflicts plaguing the Middle East North Africa region made these opportunities and
their timing less certain.
26
•
Sales volume. Fiscal 2016 net sales decreased $44.4 million from the prior year, a year-over-year decrease of 55.0%.
The decline was the result of both lower sales of proprietary products, particularly Vista radar sales, and the planned
reduction in contract manufacturing sales.
• Proprietary net sales. For fiscal 2016, net sales for proprietary products were $31.7 million, down $17.4 million, or
35.5%, from the prior fiscal year. Sales of proprietary products were down primarily due to Vista’s lack of success in
winning certain international contracts and declines in domestic government defense spending that reduced revenues for
Vista.
• Gross margin. For fiscal 2016, gross margin increased 1.0 percentage point compared to the prior fiscal year. Fiscal 2016
gross margin reflected net charges of $0.6 million which are discussed further below. Vista had been pursuing international
opportunities and throughout the first half of fiscal 2016 was in the process of negotiating a large international contract
for which it also had a pre-authorization letter from the prime contractor. When the contract did not materialize in the
fiscal 2016 third quarter as expected, expectations were lowered as the timing and likelihood of completing certain
international pursuits became less certain. Corresponding to these lower expectations, the pre-contract costs associated
with these pursuits were written off during the fiscal 2016 third quarter. Vista recorded a charge of $2.9 million for the
write-off of these pre-contract costs. Partially offsetting this impairment charge, Vista recorded a benefit of $2.3 million
to reflect a reduction in acquisition-related contingent liabilities due to lower expected payouts.
• Goodwill and long-lived asset impairment loss. Aerostar recorded a goodwill impairment loss of $11.5 million and a
long-lived asset impairment loss of $3.8 million for fiscal 2016. The goodwill and long-lived impairment charges were
recorded on the Vista reporting unit. These impairment losses are described more fully in Note 6 Goodwill, Long-lived
Assets, and Other Charges of the Notes to the Consolidated Financial Statements. No impairment losses were recorded
in fiscal 2015.
• Operating expenses. Fiscal 2016 operating expenses of $7.3 million were 20.1% of net sales compared to $7.7 million,
or 9.5% of net sales in fiscal 2015. The increase in operating expenses, as a percentage of net sales, was due to continued
strategic R&D spending on radar and stratospheric technologies over lower sales.
• Aerostar adjusted operating income. Excluding the Vista goodwill and long-lived asset impairment losses and associated
financial impacts, the fiscal 2016 operating income was $1.2 million, down from $9.0 million in the prior year. These
operating income declines were driven primarily by the significant declines in sales volume for the year for both contract
manufacturing and proprietary products, in particular Vista.
Corporate Expenses (administrative expenses; other (expense), net; and income taxes)
dollars in thousands
Administrative expenses
Administrative expenses as a % of sales
Other (expense), net
Effective tax rate
For the years ended January 31,
$
$
2017
19,624
7.1%
(560)
27.5%
2016
$ 17,110
6.6 %
$
(310)
(18.8)%
$
$
2015
21,704
5.7%
(300)
26.9%
Administrative expenses increased $2.5 million in fiscal 2017 compared with fiscal 2016. The increase is primarily due to higher
accruals for management incentives and equity compensation relative to the prior year based upon fiscal 2017 results in comparison
to fiscal 2016, costs incurred to amend filings, and expenses related to remediation efforts for identified material weaknesses
discussed in more detail in "Management's Report On Internal Control Over Financial Reporting" in Item 8 of this Form 10-K.
Other (expense), net consists primarily of activity related to the Company's equity investments, interest income, foreign currency
transaction gains or losses, amortization of debt issuance costs, and other fees related to the Company's credit facility further
described in Note 10 Financing Arrangements of the Notes to the Consolidated Financial Statements.
The Company's fiscal 2017 effective tax rate was 27.5% compared to (18.8)% in the prior year. The difference in the effective
tax rate is primarily due to the significantly lower pre-tax income in fiscal 2016 driven by the goodwill and long-lived asset
impairment losses. The impacts of these losses on the Company's effective tax rate and other items causing the effective tax rate
to differ from the statutory tax rate are more fully described in Note 9 Income Taxes of the Notes to the Consolidated Financial
Statements. For fiscal year 2018, the Company expects a consolidated effective tax rate of approximately 29%, excluding discrete
items.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect significant liquidity and a strong capital base. Management focuses on the
current cash balance and operating cash flows in considering liquidity, as operating cash flows have historically been the Company's
27
primary source of liquidity. Management expects that current cash, combined with the generation of positive operating cash flows,
will be sufficient to fund the Company's normal operating, investing and financing activities beyond the next twelve months.
The Company’s cash balances and cash flows were as follows:
(dollars in thousands)
Cash and cash equivalents
Short-term investments
(dollars in thousands)
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
January 31,
2017
January 31,
2016
January 31,
2015
$
$
$
50,648
—
$
33,782
—
$
51,949
250
For the years ended January 31,
2017
2016
2015
48,636
(4,642)
(27,151)
23
16,866
$
$
44,008
(11,074)
(50,684)
(417)
(18,167)
$
$
60,083
(29,986)
(30,665)
(470)
(1,038)
Cash and cash equivalents totaled $50.6 million at January 31, 2017 compared to $33.8 million on the same date in 2016, an
increase of $16.8 million. The increase from fiscal 2016 year-end was primarily driven by higher earnings, lower net working
capital, and reductions in both capital spending and share repurchases.
At January 31, 2017 the Company held cash and cash equivalents of $2.3 million in accounts outside the United States. These
balances included undistributed earnings of foreign subsidiaries we consider to be indefinitely reinvested. If repatriated,
undistributed earnings of $2.5 million would be subject to United States federal taxation. This estimated tax liability is
approximately $0.3 million net of foreign tax credits. Our liquidity is not materially impacted by the amount held in accounts
outside of the United States.
Operating Activities
Operating cash flows result primarily from cash received from customers, which is offset by cash payments for inventories, services,
employee compensation, and income taxes. Cash provided by operating activities was $48.6 million in fiscal 2017 compared with
$44.0 million in fiscal 2016. The $4.6 million increase in operating cash flows is primarily the result of higher earnings and lower
net working capital requirements. While fiscal 2016 net income was $15.4 million lower than fiscal 2017, it included $10.3 million
of non-cash losses associated with the Vista business within the Aerostar Division. These losses were due to goodwill and long-
lived asset impairments and associated financial impacts net of related tax benefits.
The Company's cash needs have minimal seasonal trends. Net working capital demands tend to be highest in the first quarter. As
a result, the discussion of trends in operating cash flows focuses on the primary drivers of year-over-year variability in net working
capital. The Company's net working capital for the comparative periods was as follows:
(dollars in thousands)
Accounts receivable, net
Plus: Inventories
Less: Accounts payable
Net working capital(a)
$
January 31,
2017
43,143
42,336
8,467
77,012
$
$
January 31,
2016
38,069
45,839
6,038
77,870
$
$
January 31,
2015
56,576
55,152
11,545
$ 100,183
Net working capital percentage(b)
(b) Net working capital is defined as accounts receivable (net) plus inventories less accounts payable.
(b) Net working capital percentage is defined as net working capital divided by fourth quarter net sales times four for each of the fiscal years, respectively.
27.9%
36.9%
27.9%
The net working capital percentage decreased from 36.9% at January 31, 2016 to 27.9% at January 31, 2017 primarily as the result
of both lower inventory levels and an increase in accounts payable balances due to improvement in the timing of payments to
suppliers. These changes in net working capital are the result of management's focus on managing these resources more proactively.
To manage levels of inventory during periods of significant change in sales volume, the Company assembled teams within each
operating division to manage inventory lower. Similar emphasis was placed on managing accounts payable and to a lesser extent,
accounts receivable.
28
Inventory levels decreased from $55.2 million at January 31, 2015 to $45.8 million at January 31, 2016 driven by focused inventory
reduction actions in the Applied Technology and Engineered Films divisions. Inventory levels decreased from $45.8 million at
January 31, 2016 to $42.3 million at January 31, 2017 reflecting the ongoing focus on reducing inventory levels as well as the
inventory write-downs for certain radar inventory in the third quarter of fiscal 2017.
Accounts receivable levels increased from $38.1 million at January 31, 2016 to $43.1 million at January 31, 2017 due primarily
to increased sales volume. Conversely, accounts receivable levels decreased from $56.6 million at January 31, 2015 to $38.1
million at January 31, 2016 in conjunction with the steep decline in sales.
Improvement in the timing of payments to suppliers increased accounts payable $2.5 million year-over-year to $8.5 million at
January 31, 2017 from $6.0 million at January 31, 2016. Accounts payable had decreased from $11.5 million at January 31, 2015
to $6.0 million at January 31, 2016 as a result of significantly lower purchasing levels to support the lower sales volume.
Investing Activities
Cash used in investing activities totaled $4.6 million in fiscal 2017, $11.1 million in fiscal 2016, and $30.0 million in fiscal 2015.
Capital expenditures totaled $4.8 million in fiscal 2017 compared to $13.0 million in fiscal 2016 and $17.0 million in fiscal 2015.
Fiscal 2017 spending primarily relates to maintenance activities. Due to the existing available capacity of the facilities as the
result of meaningful capacity additions in prior years and the acquisition of Integra in fiscal 2015, the increase in sales volume
did not require capital expenditures for new capacity in fiscal 2017.
Fiscal 2017 benefited from $1.2 million in cash provided by the disposal of assets, most of which related to selling the Company's
idle St. Louis, Missouri facility. There was $2.1 million of cash flows from the disposal of assets in fiscal 2016. There were no
material cash flows from the disposal of assets in fiscal 2015.
Cash inflow related to business acquisitions in fiscal 2016 relate to the Company receiving a $0.4 million settlement of the working
capital adjustment to the Integra purchase price. Cash outflows totaling $12.5 million in fiscal 2015 related to the Integra and
SBG business acquisitions. There were no material cash flows from business acquisition activity in fiscal 2017.
Management anticipates capital spending of $10 to $12 million in fiscal 2018. Maintaining Engineered Films' capacity and Applied
Technology's capital spending to advance product development are expected to continue. In addition, management will evaluate
strategic acquisitions that result in expanded capabilities and improved competitive advantages.
Financing Activities
Financing activities consumed cash of $27.2 million in fiscal 2017 compared with $50.7 million in fiscal 2016 and $30.7 million
in fiscal 2015.
Quarterly dividends paid in fiscal 2017 were $18.8 million, or $0.52 per share, compared to $19.4 million, or $0.52 share, in fiscal
2016 and $18.5 million, or $0.50 share, in fiscal 2015.
In fiscal 2016, the Company began to repurchase common shares as part of the $40.0 million share repurchase plan authorized by
the Company’s Board of Directors. In fiscal 2017 first quarter, the Board of Directors authorized a $10.0 million increase, bringing
the total authorized under the plan to $50.0 million. The Company paid $7.7 million and $29.3 million for share repurchases in
fiscal 2017 and fiscal 2016, respectively. No shares were repurchased during fiscal 2015.
The Company made $0.4 million, $0.8 million, and $0.5 million of acquisition-related contingent liability payments related to the
Vista and SBG acquisitions in fiscal 2017, fiscal 2016, and fiscal 2015, respectively.
During fiscal 2016, the Company paid $0.5 million of debt issuance costs associated with the Credit Agreement discussed further
in Note 10 Financing Arrangements of the Notes to the Consolidated Financial Statements and below. No debt issuance costs
were paid during fiscal 2017 or fiscal 2015. No borrowings or repayment have occurred on the Credit Agreement during fiscal
2017 or fiscal 2016. In fiscal 2015, the Company made net debt repayments totaling $12.0 million for debt assumed as part of
the Integra and SBG acquisitions.
Financing cash outflows in fiscal 2017 included $0.3 million of employee taxes in relation to the net settlement of restricted stock
units (RSUs) that vested during the year. Financing cash outflows in fiscal 2016 included $0.5 million of employee taxes in relation
to the net settlement of RSUs that vested during the year. No RSUs vested during fiscal 2015.
29
Other Liquidity and Capital Resources
The Company entered into a credit facility on April 15, 2015 (Credit Agreement) which provides for a syndicated senior revolving
credit facility up to $125.0 million with a maturity date of April 15, 2020. This Credit Agreement, more fully described in Note
10 Financing Arrangements of the Notes to the Consolidated Financial Statements, replaced an uncollateralized line of credit of
$10.5 million with Wells Fargo Bank, N.A. maturing November 30, 2016.
The Credit Agreement contains customary affirmative and negative covenants, including those relating to financial reporting and
notification, limits on levels of indebtedness and liens, investments, mergers and acquisitions, affiliate transactions, sales of assets,
restrictive agreements, and change in control as defined in the Credit Agreement. The Company requested and received the
necessary covenant waivers relating to its late filing of financial information in fiscal 2017. Financial covenants include an interest
coverage ratio and funded indebtedness to earnings before interest, taxes, depreciation, and amortization as defined in the Credit
Agreement. The Company is in compliance with all financial covenants set forth in the Credit Agreement.
Letters of credit (LOC) totaling $0.7 million issued under the previous line of credit with Wells Fargo were outstanding at January
31, 2016. These LOC primarily support self-insured workers' compensation bonding. All but one LOC has been transferred and
issued under the Credit Agreement as of January 31, 2017. At January 31, 2017, $0.5 million LOCs were outstanding under the
Credit Agreement and one $50 thousand LOC issued by Wells Fargo were outstanding.
$124.5 million was available under the Credit Agreement for borrowings as of January 31, 2017. Loan proceeds may be utilized
by Raven for strategic business purposes and for net working capital needs. There were no borrowings outstanding for any of the
fiscal periods covered by this Form 10-K. There have been no borrowings under credit agreements in the last three fiscal years.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
As of January 31, 2017, the Company is obligated to make cash payments in connection with its non-cancelable operating leases
for facilities and equipment and unconditional purchase obligations, primarily for raw materials, in the amounts listed below. The
Company's known off-balance sheet debt and other unrecorded obligations are noted in the table below.
A summary of the obligations and commitments at January 31, 2017 is shown below.
$
$
Total
Less than
1 year
1-3
years
3-5
years
More than
5 years
(dollars in thousands)
Operating leases
Unconditional purchase obligations
Postretirement benefits(a)
Acquisition-related contingent payments(b)
Uncertain tax positions(c)
Credit facility(d)
5,319
31,976
18,698
2,657
—
699
$ 59,349
(a) Postretirement benefit amounts represent expected payments on the accumulated postretirement benefit obligation before it is discounted.
(b) Amounts reflect the expected future earn-out payments with respect to business acquisitions. Actual payments on these obligations may vary from the
expected amounts since the total payment amount due depends upon certain future conditions. See below for further detail on the specific obligations.
See below for further details on specific obligations.
Amounts reflect administrative and unborrowed capacity fees under the credit facility described below.
—
—
16,842
14
—
—
16,856
1,647
31,976
362
457
—
212
34,654
2,484
—
737
1,596
—
424
5,241
1,188
—
757
590
—
63
2,598
$
$
$
$
$
$
$
(d)
(c)
Acquisition-related obligations
The Company has future obligations for earn-out payments associated with the acquisition of Vista completed in fiscal 2012 and
of SBG completed in fiscal 2015. The total liability recorded on the Consolidated Balance Sheet as of January 31, 2017 related
to these future obligations was $1.7 million, of which $0.3 million was classified as "Accrued liabilities" and $1.4 million as "Other
liabilities." These liabilities represent the present value of earn-out payments classified as consideration at the acquisition date.
Specific to the SBG acquisition, the Company may pay up to $2.5 million in additional earn-out payments calculated and paid
quarterly over 10 years contingent upon SBG achieving certain revenues. Specific to the Vista acquisition, the Company agreed
to pay additional contingent consideration not to exceed $15.0 million, based upon earn-out percentages on specific revenue streams
until January 31, 2019. In a transaction separate from the Vista acquisition but related to Vista, the Company agreed to a revenue-
based bonus pool, also not to exceed $15.0 million, which will be accrued when the specific revenue stream is recorded using
those same earn-out percentages over the same time period.
30
Uncertain tax positions
Raven reported a total liability for uncertain tax positions of $2.6 million at January 31, 2017. The Company is not able to reasonably
estimate the timing of future payments relating to these non-current tax benefits. This obligation is retired when the uncertain tax
position is settled or applicable tax year is no longer subject to examination by the tax authorities.
Credit facility
On April 15, 2015 the Company's uncollateralized credit agreement with Wells Fargo providing a line of credit of $10.5 million
and maturing on November 30, 2016 was terminated upon the Company's entering into a new credit facility.
This new credit facility, the Credit Agreement dated as of April 15, 2015 among Raven Industries, Inc., JPMorgan Chase Bank,
N.A., Toronto Branch as Canadian Administrative Agent, JPMorgan Chase Bank, National Association, as administrative agent,
and each lender from time to time party thereto (the Credit Agreement), provides for a syndicated senior revolving credit facility
up to $125.0 million with a maturity date of April 15, 2020.
Loans or borrowings defined under the Credit Agreement bear interest and fees at varying rates and terms defined in the Credit
Agreement based on the type of borrowing as defined. The Credit Agreement includes annual administrative and unborrowed
capacity fees of $0.2 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are those that require the application of judgment when valuing assets and liabilities on the Company's
balance sheet. These policies are discussed below because a fluctuation in actual results versus expected results could materially
affect operating results and because the policies require significant judgments and estimates to be made. Accounting related to
these policies is initially based on best estimates at the time of original entry in the accounting records. Adjustments are periodically
recorded when the Company's actual experience differs from the expected experience underlying the estimates. These adjustments
could be material if experience were to change significantly in a short period of time. The Company does not enter into derivatives
or other financial instruments for trading or speculative purposes. However, Raven has used derivative financial instruments to
manage the economic impact of fluctuations in currency exchange rates on transactions that are denominated in currency other
than its functional currency, which is the U.S. dollar. The use of these financial instruments had no material effect on the Company's
financial condition, results of operations, or cash flows in fiscal year 2017, 2016, or 2015.
Inventories
The Company estimates inventory valuation each quarter. Typically, when a product reaches the end of its lifecycle, inventory is
utilized more slowly or the product has alternative uses. Management uses its manufacturing resources planning data to help
determine if inventory is slow-moving or has become obsolete due to an engineering change. The Company closely reviews items
that have balances in excess of the forecasted requirements, or that have been dropped from production requirements. Despite
these reviews, technological or strategic decisions made by management or the Company's customers may result in unexpected
excess material. Further, a decline in the market demand for the Company's products may also result in write-down of inventory
balances. The Company assesses current and expected selling prices in determining if inventory balances should be written down
to net realizable value. In every Raven operating unit, management must manage obsolete inventory risk. The accounting judgment
ultimately made is an evaluation of the success that management will have in controlling inventory risk and mitigating the impact
of obsolescence when it does occur.
Due to the Company's decision to no longer actively pursue certain radar opportunities, during the fiscal 2017 third quarter, the
Company wrote-down radar inventory, purchased primarily during fiscal 2016. The decision to write-down this inventory is
consistent with the triggering event identified during the fiscal 2017 third quarter relating to the Aerostar reporting unit and the
radar product and radar services (Radar) asset group as discussed in Note 6 Goodwill, Long-lived Assets, and Other Charges and
below in the critical accounting estimates for long-lived and intangible assets and goodwill. This radar-specific inventory write-
down increased "Cost of sales" by $2.3 million in fiscal 2017.
Pre-Contract Costs
From time to time, the Company incurs costs to begin fulfilling the statement of work under a specific anticipated contract still
being negotiated with the customer. If the Company determines that it is probable it will be awarded the specific anticipated
contract, the pre-contract costs incurred, excluding start-up costs which are expensed as incurred, are deferred to the balance sheet
and included in “Inventories.” Deferred pre-contract costs are periodically reviewed and assessed for recoverability under the
contract based on the Company’s assessment of the nature of the costs, the probability and timing of the award, and other relevant
facts and circumstances. Write-offs of pre-contract costs are charged to cost of sales when it becomes probable such costs will
not be recoverable. As described in Note 6 Goodwill, Long-lived Assets, and Other Charges of the Notes to the Consolidated
31
Financial Statements, pre-contract costs of $2.9 million were written off in fiscal 2016. No pre-contract costs were included in
"Inventories" at January 31, 2017, 2016, or 2015.
Warranties
Estimated warranty liability costs are based on historical warranty costs and average time elapsed between purchases and returns
for each business segment. Warranty issues that are unusual in nature are accrued for individually.
Allowance for Doubtful Accounts
Determining the level of the allowance for doubtful accounts requires management's best estimate of the amount of probable credit
losses based on historical write-off experience by segment and an estimate of the ability to collect any past due accounts. Factors
that are considered beyond historical experience include the length of time the receivables are outstanding, the current business
climate, and the customer's current financial condition. Accounts receivable and any related allowance are written off after all
collection efforts have been exhausted.
Revenue Recognition
Estimated returns or sales allowances are recognized upon shipment of a product. The Company sells directly to customers or
distributors that incur the expense and commitment for any post-sale obligations beyond stated warranty terms.
For certain service-related contracts, the Company recognizes revenue under the percentage-of-completion method of accounting,
whereby contract revenues are recognized on a pro-rata basis based upon the ratio of costs incurred compared to total estimated
contract costs. Contract costs include labor, material, subcontracting costs, as well as allocation of indirect costs. Revenues,
including estimated profits, are recorded as costs are incurred. Losses estimated to be incurred upon completion of contracts are
charged to operations when they become known.
Certain contracts contain provisions for incentive payments that the Company may receive based on performance criteria related
to product design, development and production standards. Revenue related to the incentive payments is recognized when ultimate
realization by the Company is assured, which generally occurs when the provisions and performance criteria required by the
contract are met.
Long-lived and Intangible Assets and Goodwill
For long-lived assets, including definite-lived intangibles, equity investments, and property plant and equipment, management
tests for recoverability whenever events or changes in circumstances indicate that the asset's carrying amount may not be recoverable.
Management periodically assesses for triggering events and discusses any significant changes in the utilization of long-lived assets,
which may result from, but are not limited to, an adverse change in the asset's physical condition or a significant adverse change
in the business climate. For purposes of recognition and measurement of an impairment loss, a long-lived asset is grouped with
other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other
assets and liabilities. An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted
cash flows used in determining its fair value. The cash flows used for this analysis are similar to those used in the goodwill
impairment assessment discussed further below. Such valuations are derived from valuation techniques in which one or more
significant inputs are not observable (Level 3 fair value measures).
The Company recognizes goodwill as the excess cost of an acquired business over the net amount assigned to assets acquired and
liabilities assumed. Management assesses goodwill for impairment annually during the fourth quarter and between annual tests
whenever a triggering event indicates there may be an impairment. When performing goodwill impairment testing, the fair values
of reporting units are determined based on valuation techniques using the best available information, primarily discounted cash
flow projections. Such valuations are derived from valuation techniques in which one or more significant inputs are not observable
(Level 3 fair value measures).
The Company performs impairment reviews of goodwill by reporting unit. Through fiscal 2016, the Company determined it had
four reporting units: Engineered Films Division; Applied Technology Division; and two separate reporting units in the Aerostar
Division, one of which was Vista and one of which was all other Aerostar operations.
During the first quarter of fiscal 2017, management implemented managerial and financial reporting changes within Vista and
Aerostar to further integrate Vista into the Aerostar Division. Integration actions included leadership re-alignment, including
selling and business development functions, re-deployment of employees across the division, and consolidation of administrative
functions, among other actions. Based on the changes made, the Company consolidated the two separate reporting units within
the Aerostar Division into one reporting unit for the purposes of goodwill impairment review. As such as of April 30, 2016, the
Company has three reporting units: Engineered Films Division, Applied Technology Division, and Aerostar Division. The Company
determined there was not a change in the long-lived asset groups as a result of the reporting unit changes.
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Goodwill
In step one of the goodwill impairment analysis (Step 1), the fair value of each reporting unit is determined using a discounted
cash flow analysis. Projecting discounted future cash flows requires the Company to make significant estimates and assumptions
regarding future revenues and expenses, projected capital expenditures, changes in net working capital, and the appropriate discount
rate.
In developing the discounted cash flow analysis, assumptions about the revenue growth rate, operating profit margin percentage,
capital expenditures, and changes in net working capital reference our annual operating plan and long-term strategic plan for each
of the Company’s reporting units, but also reflect the best available information at that time and as appropriate, reflect market
participant assumptions if such amounts might differ from the Company-specific assumptions for each of the Company’s reporting
units.
Discount rate assumptions for each reporting unit are the value-weighted average of the Company’s estimated cost of capital
derived using both known and estimated customary market metrics and take into consideration management’s assessment of risks
inherent in the future cash flows of the respective reporting unit. One of the metrics considered by the Company in its selection
of a discount rate is the relevant small company size premium appropriate to the reporting unit for which the valuation is being
assessed. Generally, the lower the revenues associated with a reporting unit, the higher the small company premium and the higher
the discount rate for that reporting unit. With other factors such as the optimal capital structure assumed for the reporting unit,
this may result in a different discount rate assumption for each reporting unit being evaluated and may result in the discount rate
for a reporting unit varying from year to year.
The estimated fair value of the reporting unit is then compared with the book value of its net assets. If the estimated fair value of
the reporting unit is less than the book value of the net assets of the reporting unit, an impairment loss is possible and a more
refined measurement of the impairment loss takes place. This is the second step of the goodwill impairment testing (Step 2), in
which management may use market comparisons and recent transactions to assign the fair value of the reporting unit to all of the
assets and liabilities of that unit. The valuation methodologies in both steps of goodwill impairment testing use significant estimates
and assumptions. Management evaluates the merits of each significant assumption and the overall basket of assumptions used to
determine the fair value of the reporting unit.
During fiscal 2017, there were no triggering events with respect to the Applied Technology or Engineered Films reporting units.
Based on the Company’s annual impairment assessment (Step 0) for the Applied Technology reporting unit, no Step 1 or Step 2
analyses were determined to be necessary. As discussed below, the Company determined that there was a triggering event with
respect to the Aerostar reporting unit in the third quarter, which resulted in a goodwill impairment test. The Company also completed
a Step 1 analysis during the annual goodwill impairment process on the Engineered Films and Aerostar reporting units.
In fiscal 2016, the Company determined that there were triggering events with respect to the Engineered Films reporting unit in
the second quarter and the Vista reporting unit in the third quarter, each of which resulted in goodwill impairment tests. The
Engineered Films estimated fair value exceeded the carrying value of the reporting unit's net assets. However, the results of the
Vista reporting unit Step 1 goodwill impairment testing as of October 31, 2015 indicated that the fair value of the Vista reporting
unit was below its carrying value. Accordingly, the Company performed the Step 2 test and concluded the goodwill of the Vista
reporting unit was impaired. As a result, the Company recorded a non-cash goodwill impairment charge of $11.5 million in the
third quarter of fiscal 2016 as "Goodwill impairment loss" in the Consolidated Statements of Income and Comprehensive Income.
Long-lived and Intangible Assets
In Step 1 of the long-lived and intangible asset impairment analysis, the book value of the asset is compared to the undiscounted
cash flows supporting the value of the asset. Projecting undiscounted future cash flows requires the Company to make significant
estimates and assumptions regarding future revenues and expenses, projected capital expenditures, changes in net working capital,
and allocations of certain costs.
In developing the undiscounted cash flow analysis, assumptions about the revenue growth rate, operating profit margin percentage,
capital expenditures, and changes in net working capital reference our annual operating plan and long-term strategic plan, but also
reflect the best available information at that time, and as appropriate, reflect market participant assumptions if such amounts might
differ from the Company-specific assumptions for each of the Company’s asset groups. In addition, certain reporting unit costs
which are not specific to an asset group are allocated between asset groups to estimate undiscounted cash flows at the asset group
level.
If the estimated undiscounted cash flows for the asset group exceed the book value of the asset, there is no impairment. If the
estimated undiscounted cash flows for the asset group are below the book value of the asset, an impairment loss is possible and a
more refined measurement of the impairment loss would take place. This is the Step 2 of the long-lived and intangible asset
impairment analysis in which management compares the discounted value of the cash flows of the asset group to the book value
33
of the asset. The difference between the book value of the asset and the present value of the discounted cash flows supporting the
asset group determines the amount of the asset impairment. The discount rate for the Step 2 analysis is derived in a similar manner
as the discount rate used for goodwill impairment testing. The valuation methodologies in both steps of long-lived and intangible
asset impairment testing use significant estimates and assumptions. Management evaluates the merits of each significant assumption
and the overall basket of assumptions used to determine the fair value of the asset.
In fiscal 2017, as discussed below, the Company determined that there were triggering events with respect to the assets associated
with the Lighter than Air (aerostat and stratospheric balloon programs) and Radar asset groups in the Aerostar reporting unit in
the third quarter, which resulted in an asset impairment test. The asset impairment test with respect to the Radar asset group resulted
in a long-lived asset impairment in the third quarter of fiscal 2017 in addition to the impairments recorded in fiscal 2016 for the
Radar asset group.
During fiscal 2016, the Company determined that there were triggering events with respect to the Engineered Films asset group
in the second quarter and the client private business (CP) and Radar asset groups in the Vista reporting unit in the third quarter,
each of which resulted in an asset impairment test. The undiscounted cash flows for the Engineered Films asset group exceeded
the carrying value of the long-lived assets by more than $100 million, or approximately 800%, and no Step 2 was deemed to be
necessary based on the recoverability of the long-lived assets.
For the two asset groups associated with the Vista reporting unit (CP and Radar), using the sum of the undiscounted cash flows
associated with each of the asset groups, a Step 1 test was performed for each asset group. The undiscounted cash flows for the
CP asset group exceeded the carrying value of the long-lived assets and no Step 2 test was deemed to be necessary based on the
recoverability of the long-lived assets. For the Radar asset group, however, the undiscounted cash flows did not exceed the carrying
value of the long-lived assets and the Company performed a Step 2 impairment analysis for the long-lived assets. In the Step 2
impairment analysis, the fair value determined was allocated to the assets and liabilities of the Radar asset group. The resulting
implied fair value of the Radar asset group long-lived assets was $0.1 million compared to the carrying value of $3.9 million for
the asset group. The shortfall of $3.8 million was recorded in the fiscal 2016 third quarter as an impairment charge to operating
income reported as "Long-lived asset impairment loss" in the Consolidated Statements of Income and Comprehensive Income.
Of the total long-lived asset impairment of $3.8 million, $3.2 million was related to amortizable intangible assets related to radar
technology and radar customers, $0.5 million was related to property, plant, and equipment, and $0.1 million was related to patents.
Aerostar
Triggering Event
In the fiscal 2017 third quarter the Company determined that a triggering event occurred for its Aerostar reporting unit. The
triggering event was caused by lowering the financial expectations for net sales and operating income of the reporting unit and
asset groups due to delays and uncertainties regarding the reporting unit’s pursuit of certain opportunities, including aerostat orders,
certain stratospheric balloon pursuits, and radar pursuits. Aerostar is still actively pursuing these opportunities and some are in
active negotiations, but the likelihood of radar sales was lowered and the timing of certain aerostat and classified stratospheric
balloon opportunities was delayed more than previously expected.
In the assessment, management evaluated the asset groups for completion of Step 1 of the long-lived asset impairment analysis.
Using the sum of the undiscounted cash flows associated with each of the two asset groups, a Step 1 test was performed for each
asset group. The undiscounted cash flows for the Lighter than Air asset group exceeded the carrying value of the long-lived assets
by approximately $110 million, or 800%, and no Step 2 test was deemed to be necessary based on the recoverability of the long-
lived assets. For the Radar asset group, however, the undiscounted cash flows did not exceed the carrying value of the long-lived
assets and the Company performed a Step 2 impairment analysis for the long-lived assets.
In the Step 2 impairment analysis, the fair value determined was allocated to the assets and liabilities of the Radar asset group.
The resulting estimated fair value of the Radar asset group long-lived assets was $0.1 million compared to the carrying value of
$0.2 million for the asset group. The shortfall of $0.1 million was recorded in the third quarter as an impairment charge to operating
income reported as "Long-lived asset impairment loss" in the Consolidated Statements of Income and Comprehensive Income.
The total impairment loss related to property, plant, and equipment, and patents.
The most significant assumptions used to determine the undiscounted cash flows of the Aerostar asset groups include: revenue
growth rate (particularly revenue related to the continued development of a classified stratospheric balloon pursuit and likelihood
of success in being awarded the contract, and the timing thereof), and operating profit margin percentage. These assumptions are
consistent with the assumptions used in determining the fair value of the Aerostar reporting unit, which is described below.
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Subsequent to the impairment determination for long-lived assets, the Company compared the carrying value of the reporting unit,
including goodwill, to its estimated fair value. In calculating the estimated fair value, the Company used the income approach.
The income approach is a valuation technique under which the Company estimated future cash flows using the reporting unit's
financial forecast from the perspective of an unrelated market participant. Using historical trending and internal forecasting
techniques, the Company projected revenues and applied projected gross margins and operating expense ratios to the projected
revenue to arrive at the future cash flows. A terminal value was then applied to the projected cash flow stream. Future estimated
cash flows were discounted to their present value to calculate the estimated fair value. The discount rate used was the Company’s
estimated weighted average cost of capital derived using both known and estimated customary market metrics consistent with the
Company's previously outlined approach. The estimated fair value was also compared to comparable market information for
reasonableness.
The reporting unit's fair value was estimated based on discounted cash flows and that fair value amount was compared to the
carrying value of the reporting unit. This analysis indicated that the third quarter estimated fair value of the Aerostar reporting
unit exceeded the net book value by approximately $9 million, or approximately 30%. Therefore, no Step 2 analysis was required.
The most significant assumptions used to determine the fair value of the Aerostar reporting unit include: revenue growth rate
(particularly revenue related to the continued development of Project Loon and likelihood of contract-based revenues, and the
timing thereof), operating profit margin percentage, and the discount rate.
For the third quarter testing, ten-year revenue expectations were built using a bottom-up approach for each of Aerostar's markets
that are contract-based businesses to determine the project and timing of award status. Another key revenue growth driver for
Aerostar relates to the growth of stratospheric balloons and new classified business related to stratospheric balloon projects. The
resulting compound annual growth rate (CAGR) for net sales for the first 5 years (fiscal 2018-2022) of the forecast was
approximately (10%) while the CAGR for net sales for years 6 through 10 (fiscal 2023-2027) of the forecast was approximately
4%. The historical CAGR was approximately 1% from fiscal 2011 through fiscal 2016 (excluding the impact of contract
manufacturing). The forecasted growth is heavily influenced by the timing of aerostat contracts and new classified stratospheric
balloon opportunities. In addition, sales to Google for Project Loon are expected to increase over the first 5 years of the forecast
period. Growth in radar based revenues are constant at 3% over the forecast period. The perpetual growth factor selected was
3%, in line with long-term average GDP and market growth rates. Using the revenue growth rate to illustrate the sensitivity on
this estimated fair value, a one-half percentage decrease in the average revenue growth rate over the 10-year forecast period (and
the terminal growth rate in perpetuity) would have reduced the third quarter estimated fair value of the Aerostar reporting unit by
approximately $3 million.
Operating profit margin assumptions for the forecast period for fiscal years 2018 - 2027 averaged approximately 10% of sales.
This compares to an average operating margin of approximately 4% of sales during fiscal years 2013-2017. The forecasted
operating profit margin is higher than the historical average referenced primarily due to the impairment of long-lived assets in the
third quarter of fiscal year 2016. This impairment of amortizable intangibles and property, plant, and equipment significantly
reduced depreciation and amortization expense in the forecast period. In addition, cost reductions executed during fiscal year
2017 are expected to benefit future periods and benefit operating margins in the forecast years. Using the operating profit margin
to illustrate the sensitivity on this estimated fair value, a one-half percentage decrease in average operating profit margin over the
forecast period would have reduced the third quarter estimated fair value of the Aerostar reporting unit by approximately $2 million.
The discount rate used in the determination of the fair value was 14.0%. Using the discount rate to illustrate the sensitivity on this
estimated fair value, a one-half percentage point increase in the discount rate would have reduced the third quarter estimated fair
value of the Aerostar reporting unit by approximately $1.5 million.
Annual Impairment Test
The Company completed its regular annual goodwill impairment testing in the fourth quarter for the Aerostar reporting unit based
on November 30, 2016 information.
There were no significant changes in market conditions, revenue growth projections (particularly revenue related to the continued
development of Project Loon and other contract-based revenues), expected operating profit margin percentage, or capital
expenditure assumptions for the Aerostar reporting unit compared to the third quarter analysis. The discount rate used in the
determination of the fair value was 14.0%, consistent with the third quarter analysis. As such, the Step 1 analysis completed as
of November 30, 2016 indicated that the estimated fair value of the Aerostar reporting unit exceeded the net book value by the
same amount as the third quarter testing, approximately $9 million, or 30%.
Aerostar's results for the last two months of fiscal 2017 subsequent to November 30, the date of the annual impairment analysis,
were substantially consistent with the forecast and no new impairment indicators or triggering events were noted in the fiscal 2017
fourth quarter.
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Engineered Films
Annual Impairment Test
The Company completed its annual Step 1 analysis for the Engineered Films reporting unit based on November 30, 2016 information.
This analysis indicated that the estimated fair value of the Engineered Films reporting unit exceeded the net book value by
approximately $105 million, or 90%. Therefore, no Step 2 analysis was done.
The most significant assumptions used to determine the fair value of the Engineered Films reporting unit include: revenue growth
rate (including assumptions regarding economic conditions, particularly those related to the geomembrane and industrial markets
served by the division), operating profit margin percentage, capital expenditures (particularly those impacting changes in capacity),
and the discount rate.
For the Step 1 goodwill analysis performed, ten-year revenue expectations were built using a bottom-up approach for each market
served focusing primarily on current product pipelines and new product developments, customer changes, market conditions and
drivers, and production capacity. Regarding the revenue growth assumptions, geomembrane market revenues were of particular
focus due to previous year weak end-market demand and improvement in fiscal 2017. The Company estimated the geomembrane
market would achieve a modest rebound in demand relative to historical highs during the middle of the 10-year forecast. The
resulting CAGR for net sales for the first 5 years (fiscal 2018-2022) of the forecast was approximately 5% while the CAGR for
net sales for years 6 through 10 (fiscal 2023-2027) of the forecast was approximately 3%. The 4-year historical CAGR was
approximately 6% from fiscal 2013 through fiscal 2017. The perpetual growth factor selected was 3.0%, in line with average
long-term GDP and market growth rates. Using the revenue growth rate to illustrate the sensitivity on this estimated fair value, a
one-half percentage decrease in the average revenue growth rate over the 10-year forecast period (and the terminal growth rate in
perpetuity) would have reduced the estimated fair value of the Engineered Films reporting unit by approximately $5 million.
The operating profit margin percentage assumption for the forecast period averaged approximately 13% of sales. This compares
to an average operating profit margin percentage of approximately 10% of sales during fiscal years 2014-2017. The expansion in
operating profit margin during the forecast period is based on the Company’s expectation of the product sales mix and overall
higher capacity utilization and is also in-line with the profitability achieved in fiscal year 2017. Higher-value products, higher
margins on such products, and leverage of fixed costs at higher production levels are expected to sustain operating margins at
levels commensurate with fiscal year 2017. Using the operating profit margin percentage to illustrate the sensitivity on this
estimated fair value, a one-half percentage decrease in average operating profit margin percentage over the forecast period would
have reduced the second quarter estimated fair value of the Engineered Films reporting unit by approximately $8 million.
Capital expenditures are a significant input to the valuation of the Engineered Films reporting unit because of a recurring pattern
of maintenance spending and spending for capacity increases. Typically, new capacity expansion occurs every three to four years.
As a result of the Integra acquisition in fiscal 2015 and the completion of a production line in fiscal 2016 at a cost of approximately
$12 million, Engineered Films currently has excess capacity and will continue to have excess capacity for some time. Engineered
Films' average annual capital expenditures were approximately $7 million for fiscal years 2014 through fiscal 2017. The average
annual capital expenditure amount used in the fair value model for the Engineered Films reporting unit was $6 million for the next
ten years. Using capital expenditures to illustrate the sensitivity on this estimated fair value, each additional $1.0 million in average
capital expenditures over the forecast period would have reduced the estimated fair value of the Engineered Films reporting unit
by approximately $3 million.
The discount rate used in the determination of the fair value was 11.0%. Using the discount rate to illustrate the sensitivity on this
estimated fair value, a one-half percentage point increase in the discount rate would have reduced the estimated fair value of the
Engineered Films reporting unit by approximately $13 million.
Engineered Film's results for the last two months of fiscal 2017 subsequent to November 30, the date of the annual impairment
analysis, were substantially consistent with the forecast and no impairment indicators were noted in the fiscal fourth quarter.
Acquisition-Related Contingent Consideration
Acquisition-related contingent consideration represents an obligation of the Company to transfer additional assets or equity interests
if specified future events occur or conditions are met. This contingency is accounted for at fair value either as a liability or equity
depending on the terms of the acquisition agreement. The Company determines the estimated fair value of contingent consideration
as of the acquisition date, and subsequently at the end of each reporting period. In doing so, the Company makes significant
estimates and assumptions regarding future events or conditions being achieved under the subject contingent agreement as well
as the appropriate discount rate to apply. Such valuation techniques include one or more significant inputs that are not observable.
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Uncertain Tax Positions
Accounting for tax positions requires judgments, including estimating reserves for uncertainties associated with the interpretation
of income tax laws and regulations and the resolution of tax positions with tax authorities after discussions and negotiations. The
ultimate outcome of these matters could result in material favorable or unfavorable adjustments to the consolidated financial
statements.
ACCOUNTING PRONOUNCEMENTS
See Note 1 Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Item
8 of this Form 10-K for a summary of recent accounting pronouncements.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are “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, not past or historical events. Without limiting the foregoing,
the words "anticipates," "believes," "expects," "intends," "may," "plans," "should," "estimate," "would," "will," "potential," and
similar expressions are intended to identify forward-looking statements. However, the absence of these words or similar expressions
does not mean that a statement is not forward-looking. The Company intends that all forward-looking statements be subject to
the safe harbor provisions of the Private Securities Litigation Reform Act.
Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable
assumptions when made, there is no assurance that such assumptions are correct or that these expectations will be achieved.
Assumptions involve important risks and uncertainties that could significantly affect results in the future. These risks and
uncertainties include, but are not limited to, those relating to weather conditions and commodity prices, which could affect sales
and profitability in some of the Company's primary markets, such as agriculture and construction and oil and gas drilling; or
changes in competition, raw material availability, technology or relationships with the Company's largest customers, risks and
uncertainties relating to development of new technologies to satisfy customer requirements, possible development of competitive
technologies, risks of litigation, ability to scale production of new products without negatively impacting quality and cost, risks
of operating in foreign markets, risks relating to acquisitions, including risks of integration or unanticipated liabilities or
contingencies, and ability to finance investment and net working capital needs for new development projects, any of which could
adversely impact any of the Company's product lines, as well as other risks described in Item 1A., Risk Factors, of this Annual
Report on Form 10-K. The foregoing list is not exhaustive and the Company disclaims any obligation to subsequently revise any
forward-looking statements to reflect events or circumstances after the date of such statements. Past financial performance may
not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future
periods.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The exposure to market risks pertains mainly to changes in interest rates on cash and cash equivalents and short-term investments.
The Company has no debt outstanding as of January 31, 2017. The Company does not expect operating results or cash flows to
be significantly affected by changes in interest rates.
The Company's subsidiaries that operate outside the United States use their local currency as the functional currency. The functional
currency is translated into U.S. dollars for balance sheet accounts using the period-end exchange rates, and average exchange rates
for the statement of income. Cash and cash equivalents held in foreign currency (primarily Euros and Canadian dollars) totaled
$2.3 million, $1.6 million, and $2.0 million at January 31, 2017, 2016, and 2015, respectively. Adjustments resulting from financial
statement translations are included as cumulative translation adjustments in "Accumulated other comprehensive income (loss)"
within shareholders' equity. Foreign currency transaction gains or losses are recognized in the period incurred and are included
in "Other (expense), net" in the Consolidated Statements of Income and Comprehensive Income. Foreign currency fluctuations
had no material effect on the Company's financial condition, results of operations, or cash flows.
The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. However, the
Company does utilize derivative financial instruments to manage the economic impact of fluctuation in foreign currency exchange
rates on those transactions that are denominated in currency other than its functional currency, which is the U.S. dollar. Such
transactions are principally Canadian dollar-denominated transactions. The use of these financial instruments had no material
effect on the Company's financial condition, results of operations, or cash flows.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Management's Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Quarterly Information (Unaudited) - included in Item 5
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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of
our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed effectiveness of the Company's internal control over financial reporting as of January 31, 2017 using
the criteria described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
As a result of this assessment, management identified the following control deficiencies:
• The Company’s controls relating to the response to the risks of material misstatement were not effectively designed and
constituted a material weakness that contributed to the following additional material weaknesses.
• The Company’s controls over the accounting for goodwill and long-lived assets, including finite-lived intangible assets,
were not effectively designed and maintained, specifically, the controls related to the identification of the proper unit of
account as well as the development and review of assumptions used in interim and annual impairment tests. This control
deficiency resulted in the restatement of the Company’s financial statements for the three- and nine-month periods ended
October 31, 2015, the fiscal year ended January 31, 2016, and the three-month period ended April 30, 2016.
• The Company’s controls related to the accounting for income taxes were not effectively designed and maintained,
specifically the controls to assess that the income tax provision and related tax assets and liabilities are complete and
accurate. This control deficiency resulted in adjustments to the income tax provision and related tax asset and liability
accounts and related disclosures for the three- and nine-month periods ended October 31, 2015, the fiscal year ended
January 31, 2016, and the three-month period ended April 30, 2016.
• The Company’s controls over the existence of inventories were not effectively designed and maintained. Specifically,
the controls to monitor that inventory subject to the cycle count program was counted at the frequency levels and accuracy
rates required under the Company’s policy, and the controls to verify the existence of inventory held at third-party locations
were not effectively designed and maintained. These control deficiencies resulted in adjustments to inventory and cost
of sales accounts and disclosures for the three and nine months ended October 31, 2015, the fiscal year ended January
31, 2016, and the three months ended April 30, 2016.
• The Company’s controls over the completeness and accuracy of spreadsheets and system-generated reports used in
internal control over financial reporting were not effectively designed and maintained.
Additionally, these control deficiencies could result in additional misstatements of account balances or disclosures that would
result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Accordingly, our management has determined that these control deficiencies constitute material weaknesses.
A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not
be prevented or detected on a timely basis. Because of these material weaknesses, our management concluded that the Company
did not maintain effective internal control over financial reporting as of January 31, 2017.
39
The effectiveness of our internal control over financial reporting as of January 31, 2017 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report, which appears on the next page.
/s/ DANIEL A. RYKHUS
Daniel A. Rykhus
/s/ STEVEN E. BRAZONES
Steven E. Brazones
President and Chief Executive Officer
Vice President and Chief Financial Officer
March 31, 2017
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Raven Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive
income, of shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of Raven Industries,
Inc. and its subsidiaries as of January 31, 2017, 2016, and 2015 and the results of their operations and their cash flows for each
of the three years in the period ended January 31, 2017 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 presents
fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial
reporting as of January 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) because material weaknesses in internal control
over financial reporting existed as of that date related to (i) the response to the risks of material misstatement, (ii) the accounting
for goodwill and long-lived assets, including finite-lived intangible assets, (iii) the accounting for income taxes, (iv) the controls
over the existence of inventories subject to the cycle count program and held at third party locations, and (v) the completeness
and accuracy of spreadsheets and system-generated reports used in internal control over financial reporting. A material weakness
is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The
material weaknesses referred to above are described in Management's Report on Internal Control Over Financial Reporting
appearing under Item 8. We considered these material weaknesses in determining the nature, timing, and extent of audit tests
applied in our audit of the 2017 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s
internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company's
management is responsible for these financial statements and financial statement schedule, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
management’s report referred to above. Our responsibility is to express opinions on these financial statements, on the financial
statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for the
presentation and classification of deferred taxes in 2017.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 31, 2017
41
RAVEN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except per-share amounts)
ASSETS
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Deferred income taxes
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Amortizable intangible assets, net
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable
Accrued liabilities
Customer advances
Total current liabilities
Other liabilities
Commitments and contingencies
Shareholders' equity
$
$
$
Common stock, $1 par value, authorized shares 100,000; issued
67,060; 67,006; and 66,947, respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Less treasury stock at cost, 30,984; 30,500; and 28,897 shares,
respectively
Total Raven Industries, Inc. shareholders' equity
Noncontrolling interest
Total shareholders' equity
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $
The accompanying notes are an integral part of the consolidated financial statements.
42
As of January 31,
2017
2016
2015
50,648
—
43,143
42,336
—
2,689
$
33,782
—
38,069
45,839
3,110
4,429
$
51,949
250
56,576
55,152
3,958
3,094
138,816
125,229
170,979
106,324
40,649
12,048
3,672
301,509
8,467
18,055
1,860
28,382
13,696
67,060
55,795
230,649
(3,676)
(90,402)
259,426
5
259,431
301,509
115,704
40,672
12,956
4,127
298,688
6,038
12,042
739
18,819
15,640
67,006
53,907
229,443
(3,501)
(82,700)
264,155
74
264,229
298,688
$
$
$
117,513
52,148
18,490
3,743
362,873
11,545
19,187
1,111
31,843
25,793
66,947
53,237
244,180
(5,849)
(53,362)
305,153
84
305,237
362,873
$
$
$
RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands, except per-share amounts)
Net sales
Cost of sales
Gross profit
Research and development expenses
Selling, general and administrative expenses
Goodwill impairment loss
Long-lived asset impairment loss
Operating income
Other (expense), net
Income before income taxes
Income tax expense (benefit)
Net income
Net income attributable to the noncontrolling interest
Net income attributable to Raven Industries, Inc.
Net income per common share:
- Basic
- Diluted
Comprehensive income:
Net income
Other comprehensive income (loss), net of tax:
Foreign currency translation
Postretirement benefits, net of income tax benefit (expense) of $129,
($1,620), and $1,187, respectively
Other comprehensive (loss) income, net of tax
Comprehensive income
Comprehensive income attributable to noncontrolling interest
For the years ended January 31,
$
2017
277,395
199,205
78,190
$
2016
258,229
191,255
66,974
$
2015
378,153
274,907
103,246
16,312
33,378
—
87
28,413
(560)
27,853
7,661
20,192
1
20,191
0.56
0.56
20,192
50
(225)
(175)
20,017
1
$
$
$
$
14,686
32,574
11,497
3,826
4,391
(310)
4,081
(767)
4,848
72
4,776
0.13
0.13
4,848
(729)
3,077
2,348
7,196
72
$
$
$
$
17,440
42,005
—
—
43,801
(300)
43,501
11,705
31,796
63
31,733
0.86
0.86
31,796
(1,466)
(2,204)
(3,670)
28,126
63
$
$
$
$
Comprehensive income attributable to Raven Industries, Inc.
$
20,016
$
7,124
$
28,063
The accompanying notes are an integral part of the consolidated financial statements.
43
RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars and shares in thousands, except per-share amounts)
Balance January 31, 2014
Net income
Other comprehensive income (loss), net of income
tax
Cash dividends ($0.50 per share)
Dividends of less than wholly-owned subsidiary
paid to noncontrolling interest
Shares issued in connection with business
combination (net of issuance costs of $38)
Director shares issued
Shares issued on stock options exercised, net of
shares withheld for employee taxes
Share-based compensation
Tax benefit from exercise of stock options
Balance January 31, 2015
Net income
Other comprehensive income (loss), net of income
tax
Cash dividends ($0.52 per share)
Dividends of less than wholly-owned subsidiary
paid to noncontrolling interest
Share issuance costs related to fiscal 2015 business
combination
Shares issued on stock options exercised, net of
shares withheld for employee taxes
Shares issued on vesting of stock units, net of
shares withheld for employee taxes
Shares repurchased
Share-based compensation
Income tax impact related to share-based
compensation
Balance January 31, 2016
Net income
Other comprehensive income, net of income tax
Cash dividends ($0.52 per share)
Dividends of less than wholly-owned subsidiary
paid to noncontrolling interest
Director shares issued
Shares issued on vesting of stock units, net of
shares withheld for employee taxes
Shares repurchased
Share-based compensation
Income tax impact related to share-based
compensation
$1 Par
Common
Stock
Paid-in
Capital
Treasury Stock
Shares
Cost
Retained
Earnings
Accumulated
Other
Comprehen-
sive Income
(Loss)
Raven
Industries, Inc.
Equity
Non-
controlling
Interest
Total
Equity
$ 65,318 $ 10,556
28,897
$ (53,362) $ 231,029 $
(2,179) $ 251,362 $
100
251,462
31,733
—
31,733
63
31,796
66,947
53,237
28,897
(53,362)
244,180
(5,849)
305,153
—
—
4,776
—
—
2,348
4,776
2,348
— (19,513)
—
—
—
(3,670)
— (18,582)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
142
—
1,542
37,672
18
69
(18)
572
— 4,213
—
100
—
—
—
—
—
—
—
—
—
—
—
169
—
(15)
(54)
(510)
—
—
—
—
—
—
—
—
—
—
—
—
7
52
—
—
—
—
—
—
—
—
—
—
—
—
— 1,603
(29,338)
— 2,311
— (1,231)
—
—
—
—
—
—
—
—
19
35
—
—
—
216
—
(19)
(291)
—
— 3,071
— (1,089)
—
—
—
—
—
—
484
—
—
—
—
20,191
—
— (18,985)
—
—
—
(7,702)
—
—
—
—
—
—
—
—
(3,670)
(18,440)
— (3,670)
— (18,440)
—
(79)
(79)
39,214
—
641
4,213
100
— 39,214
—
—
—
—
84
72
—
—
641
4,213
100
305,237
4,848
2,348
—
—
—
—
—
—
—
—
(19,344)
— (19,344)
—
(15)
(47)
(458)
(82)
—
—
—
(82)
(15)
(47)
(458)
(29,338)
— (29,338)
2,311
—
2,311
(1,231)
— (1,231)
—
(175)
20,191
(175)
74
1
—
264,229
20,192
(175)
—
—
—
—
—
—
—
(18,769)
— (18,769)
—
—
(256)
(7,702)
3,071
(70)
—
—
(70)
—
(256)
— (7,702)
—
3,071
(1,089)
— (1,089)
67,006
53,907
30,500
(82,700)
229,443
(3,501)
264,155
Balance January 31, 2017
$ 67,060 $ 55,795
30,984
$ (90,402) $ 230,649 $
(3,676) $ 259,426 $
5 $259,431
The accompanying notes are an integral part of the consolidated financial statements.
44
RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation
Amortization of intangible assets
Goodwill impairment loss
Long-lived asset impairment loss
Change in fair value of acquisition-related contingent consideration
Loss (income) from equity investments
Deferred income taxes
Share-based compensation expense
Other operating activities, net
Change in operating assets and liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES:
Capital expenditures
Proceeds (payments) related to business acquisitions
Maturities of investments
Purchases of investments
Proceeds from sale of assets
Other investing activities, net
Net cash used in investing activities
FINANCING ACTIVITIES:
Dividends paid
Payments for common shares repurchased
Proceeds from revolving line of credit
Payment of revolving line of credit and acquisition-related debt
Payment of acquisition-related contingent liabilities
Debt issuance costs paid
Restricted stock units vested and issued
Employee stock option exercises net of tax benefit
Other financing activities, net
Net cash used in financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
The accompanying notes are an integral part of the consolidated financial statements.
45
$
For the years ended January 31,
2017
2016
2015
$
20,192
$
4,848
$
31,796
13,169
2,267
—
87
36
72
307
3,071
2,390
7,045
48,636
(4,796)
—
250
(750)
1,188
(534)
(4,642)
(18,839)
(7,702)
—
—
(354)
—
(256)
—
—
(27,151)
23
16,866
33,782
50,648
13,856
3,280
11,497
3,826
(1,488)
(83)
(6,039)
2,311
2,112
9,888
44,008
(13,046)
351
250
(250)
2,124
(503)
(11,074)
(19,426)
(29,338)
—
—
(814)
(548)
(458)
(85)
(15)
(50,684)
(417)
(18,167)
51,949
33,782
14,761
2,608
—
—
714
(28)
(958)
4,213
(996)
7,973
60,083
(17,041)
(12,472)
500
(750)
—
(223)
(29,986)
(18,519)
—
2,127
(14,116)
(533)
—
—
702
(326)
(30,665)
(470)
(1,038)
52,987
51,949
$
$
RAVEN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per-share amounts)
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
Raven Industries, Inc. (the Company or Raven) is a diversified technology company providing a variety of products to customers
within the industrial, agricultural, geomembrane (which includes energy), construction, and aerospace/defense markets. The
Company conducts this business through the following direct and indirect subsidiaries: Aerostar International, Inc. (Aerostar);
Vista Research, Inc. (Vista); Raven International Holding Company BV (Raven Holdings); Raven Industries Canada, Inc. (Raven
Canada); SBG Innovatie BV; Navtronics BVBA; Raven Industries GmbH (Raven GmbH); Raven Industries Australia Pty Ltd
(Raven Australia) and Raven Do Brazil Participacoes E Servicos Technicos LTDA (Raven Brazil). The Company and these
subsidiaries comprise three unique operating units, or divisions, classified into reportable segments (Applied Technology,
Engineered Films, and Aerostar).
The consolidated financial statements for the periods included herein have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). The accompanying consolidated financial statements include
the accounts of the Company and its wholly-owned or controlled subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
Noncontrolling Interest
Noncontrolling interests represent capital contributions, income and loss attributable to the owners of less than wholly-owned and
consolidated entities. The Company owns 75% of a business venture to pursue potential product and support services contracts
for agencies and instrumentalities of the United States government. The business venture, Aerostar Integrated Systems (AIS), is
included in the Aerostar business segment. No capital contributions have been made by the noncontrolling interest since the
initial capitalization in fiscal year 2014. Given the Company's majority ownership interest, the accounts of the business venture
have been consolidated with the accounts of the Company, and a noncontrolling interest has been recorded for the noncontrolling
investor's interests in the net assets and operations of the business venture.
Equity Investments
In February 2016, the Applied Technology Division acquired an interest of approximately 5% in Ag-Eagle Aerial Systems, Inc.
(AgEagle).
AgEagle is considered a variable interest entity (VIE) and the Company’s equity ownership interest in AgEagle is considered a
variable interest. The Company accounts for its investment in AgEagle under the equity method of accounting as the Company
has the ability to exercise significant influence over the operating policies of AgEagle through the Company's representation on
AgEagle's Board of Directors and the exclusive distribution agreement between the companies discussed in Note 5 Acquisitions
of and Investments in Businesses and Technologies. However, the Company is not the primary beneficiary as the Company does
not have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to
absorb the majority of the losses or the right to receive the majority of the benefits of the VIE.
The Company also owns an interest of approximately 22% in Site-Specific Technology Development Group, Inc. (SST). The
Company has significant influence, but neither a controlling interest nor a majority interest in the risks or rewards of SST and as
such, this affiliate investment is accounted for using the equity method.
The investment balances for both AgEagle and SST are included in “Other assets” while the Company's share of the results of
AgEagle and SST operations is included in “Other (expense), net.”
The Company considers whether the value of any of its equity method investments has been impaired whenever adverse events
or changes in circumstances indicate that recorded values may not be recoverable. If the Company considered any such decline
to be other than temporary (based on various factors, including historical financial results, product development activities, and
the overall health of the affiliate's industry), an impairment loss would be recorded.
46
(Dollars in thousands, except per-share amounts)
Use of Estimates
Preparing the financial statements in conformity with accounting principles generally accepted in the United States of America
(GAAP) requires management to make certain estimates and assumptions. These affect the reported amounts of assets and liabilities
as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The
Company's forecasts, based principally on estimates, are critical inputs to asset valuations such as those for inventory or goodwill.
These assumptions and estimates require significant judgment and actual results could differ from assumed and estimated amounts.
Foreign Currency
The Company's subsidiaries that operate outside the United States use the local currency as their functional currency. The functional
currency is translated into U.S. dollars for balance sheet accounts using the period-end exchange rates and average exchange rates
for the statement of income and comprehensive income. Adjustments resulting from financial statement translations are included
as foreign currency translation adjustments in “Accumulated other comprehensive income (loss)” within shareholders' equity.
Foreign currency transaction gains or losses are recognized in the period incurred and are included in “Other (expense), net” in
the Consolidated Statements of Income and Comprehensive Income. Foreign currency transaction gains or losses on intercompany
notes receivable and notes payable denominated in foreign currencies for which settlement is not planned in the foreseeable future
are considered part the net investment and are reported in the same manner as foreign currency translation adjustments.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with original maturities of three or fewer months to be cash equivalents.
Cash and cash equivalent balances are principally concentrated in checking, money market, and savings accounts. Certificates
of deposit that mature in over 90 days but less than one year are considered short-term investments. Certificates of deposit that
mature in one year or more are considered to be other long-term assets and are carried at cost.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount, do not bear interest, and are considered past due based on invoice
terms. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses. This is based
on historical write-off experience by segment and an estimate of the collectability of past due accounts. Unbilled receivables arise
when revenues have been earned, but not billed, and are related to differences in timing. Unbilled receivables were not material
as of January 31, 2017, 2016, or 2015.
Inventory Valuation
Inventories are carried at the lower of cost or market, with cost determined on the first-in, first-out basis. Market value encompasses
consideration of all business factors including expected future sales, price, contract terms, and usefulness.
Pre-Contract Costs
From time to time, the Company incurs costs to begin fulfilling the statement of work under a specific anticipated contract still
being negotiated with the customer. If the Company determines that it is probable it will be awarded the specific anticipated
contract, the pre-contract costs incurred, excluding start-up costs which are expensed as incurred, are deferred to the balance sheet
and included in "Inventories." Deferred pre-contract costs are periodically reviewed and assessed for recoverability under the
contract based on the Company’s assessment of the nature of the costs, the probability and timing of the award, and other relevant
facts and circumstances. Write-offs of pre-contract costs are charged to cost of sales when it becomes probable that such costs
will not be recoverable. No pre-contract costs were included in "Inventories" at January 31, 2017, 2016, or 2015.
Property, Plant and Equipment
Property, plant and equipment held for use is carried at the asset's cost and depreciated over the estimated useful life of the asset.
With the prospective adoption of the straight-line method of depreciation for manufacturing equipment, office equipment, and
furniture and fixtures placed in service on or after February 1, 2015, the Company no longer primarily uses accelerated methods
of computing depreciation. This change was made as a straight-line method of depreciation more accurately reflects the economic
consumption of these assets than did the accelerated method previously used. This prospective change in the depreciation method
did not have a material effect on the Company’s financial position or results of operations for the fiscal years ended January 31,
2017 or 2016.
47
(Dollars in thousands, except per-share amounts)
The estimated useful lives used for computing depreciation are as follows:
Building and improvements
Manufacturing equipment by segment
Applied Technology
Engineered Films
Aerostar
Furniture, fixtures, office equipment, and other
15 - 39 years
3 - 5 years
5 - 12 years
3 - 5 years
3 - 7 years
The cost of maintenance and repairs is charged to expense in the period incurred, and renewals and betterments are capitalized.
The cost and related accumulated depreciation of assets sold or disposed are removed from the accounts and the resulting gain or
loss is reflected in operations.
The Company capitalizes certain internal costs incurred in connection with developing or obtaining internal-use software in
accordance with the accounting guidance for such costs. There were no internal capitalized software costs during fiscal year 2017,
2016, or 2015. The costs are included in “Property, plant and equipment, net” on the Consolidated Balance Sheets. Software
costs that do not meet capitalization criteria are expensed as incurred. Amortization expense related to capitalized software is
computed on the straight-line basis over the estimated lives ranging from 3 to 5 years and is included in depreciation expense.
Fair Value Measurements
Fair value is defined as an exit price representing the amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or liability. The Company uses the established fair
value hierarchy, which classifies or prioritizes the inputs used in measuring fair value. These classifications include:
Level 1 - Observable inputs such as quoted prices in active markets;
Level 2 - Inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3 - Unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.
The Company's financial assets required to be measured at fair value on a recurring basis include cash and cash equivalents and
short-term investments. The Company determines fair value of its cash equivalents and short-term investments through quoted
market prices. The fair values of accounts receivable and accounts payable approximate carrying values because of the short-
term nature of these instruments.
The Company's goodwill and long-lived assets, including intangible assets subject to amortization, are measured at fair value on
a non-recurring basis. These valuations are derived from valuation techniques in which one or more significant inputs are not
observable.
For all acquisitions, the Company is required to measure the fair value of the net identifiable tangible and intangible assets acquired.
In addition, the Company determines the estimated fair value of contingent consideration as of the acquisition date, and subsequently
at the end of each reporting period. These valuations are derived from valuation techniques in which one or more significant
inputs are not observable. Fair value measurements associated with acquisitions, including acquisition-related contingent liabilities,
are described in Note 5 Acquisition of and Investments in Businesses and Technologies.
Intangible Assets
Intangible assets, primarily comprised of technologies acquired through acquisition, are recorded at cost and are presented net of
accumulated amortization. Amortization is computed using the method that best approximates the pattern of economic benefits
which the asset provides. The Company has used both the straight-line method and the undiscounted cash flows method to
appropriately allocate the cost of intangible assets to earnings in each reporting period.
The straight-line method allocates the cost of such intangible assets ratably over the asset’s life. Under the undiscounted cash
flow method, the estimated cash flow attributable to each year of an intangible asset’s life is calculated as a percentage of the total
of the cash flows over the asset’s life and that percentage is applied to the initial value of the asset to determine the annual
amortization to be recorded.
Intangible assets also include patents, trademarks, and other product rights attained to protect the Company’s intellectual property.
48
(Dollars in thousands, except per-share amounts)
The estimated useful lives of the Company’s intangible assets range from 3 to 20 years.
Goodwill
The Company recognizes goodwill as the excess cost of an acquired business over the net amount assigned to assets acquired and
liabilities assumed. Acquisition earn-out payments are accrued at fair value as of the purchase date and payments reduce the
accrual without affecting goodwill. Any change in the fair value of the contingent consideration after the acquisition date is
recognized in "Cost of sales" in the Consolidated Statements of Income and Comprehensive Income.
Goodwill is tested for impairment on an annual basis during the fourth quarter and between annual tests whenever a triggering
event indicates there may be an impairment. Impairment tests of goodwill are performed at the reporting unit level. A qualitative
impairment assessment over relevant events and circumstances may be assessed to determine whether it is more likely than not
that the fair value of a reporting unit is less than its carrying amount. If events and circumstances indicate the fair value of a
reporting unit may be less than its carrying value, then the fair values are estimated based on discounted cash flows and are
compared with the corresponding carrying value of the reporting unit. If the fair value of the reporting unit is less than the carrying
amount, the amount of the impairment loss must be measured and then recognized to the extent the carrying value of the goodwill
exceeds the implied fair value. When performing goodwill impairment testing, the fair values of reporting units are determined
based on valuation techniques using the best available information, primarily discounted cash flow projections. Such valuations
are derived from valuation techniques in which one or more significant inputs are not observable (Level 3 fair value measures).
Long-Lived Assets
The Company periodically assesses the recoverability of long-lived and intangible assets. An impairment loss is recognized when
the carrying amount of an asset group exceeds the estimated undiscounted cash flows used in determining the fair value of the
asset group. The amount of the impairment loss to be recorded is the excess of the carrying value of the assets within the group
over their fair value. When performing long-lived assets impairment testing, the fair values of assets are determined based on
valuation techniques using the best available information. Such valuations are derived from valuation techniques in which one
or more significant inputs are not observable (Level 3 fair value measures).
Long-lived assets determined to be held for sale and classified as such in accordance with the applicable guidance are reported as
long-term assets at the lower of the asset's carrying amount or fair value less the estimated cost to sell. Depreciation is not recorded
once a long-lived asset has been classified as held for sale.
Acquisition-Related Contingent Consideration
Acquisition-related contingent consideration represents an obligation of the Company to transfer additional assets or equity interests
if specified future events occur or conditions are met. This contingency is accounted for at fair value either as a liability or equity
depending on the terms of the acquisition agreement. The Company determines the estimated fair value of contingent consideration
as of the acquisition date, and subsequently at the end of each reporting period. In doing so, the Company makes significant
estimates and assumptions regarding future events or conditions being achieved under the subject contingent agreement as well
as the appropriate discount rate to apply. Such valuations are derived from valuation techniques in which one or more significant
inputs are not observable (Level 3 fair value measures).
Insurance Obligations
The Company utilizes insurance policies to cover workers' compensation and general liability costs. Liabilities are accrued related
to claims filed and estimates for claims incurred but not reported. To the extent these obligations are expected to be reimbursed
by insurance, the probable insurance policy benefit is included as a component of "Other current assets."
Contingencies
The Company is involved as a defendant in lawsuits, claims, regulatory inquiries, or disputes arising in the normal course of
business. While the ultimate settlement of these claims cannot be easily estimated, management believes that any liability resulting
from these claims will, in many cases, be substantially covered by insurance. Management does not believe that the ultimate
outcome of any pending matters will be material to its results of operations, financial position, or cash flows.
The Company also has contingencies related to potential asset impairments or contingent liabilities. An estimate of the loss on
these matters is charged to operations when it is probable that an asset has been impaired or a liability has been incurred, and the
amount of the loss can be reasonably estimated. Management does not believe any potential contingent asset impairment or
liability will be material to its results of operations, financial position, or cash flows.
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and has been earned. Revenue is recognized when there is
persuasive evidence of an arrangement, the sales price is determinable, collectability is reasonably assured, and shipment or
49
(Dollars in thousands, except per-share amounts)
delivery has occurred (depending on the terms of the sale). The Company sells directly to customers or distributors who incur
the expense and commitment for any post-sale obligations beyond stated warranty terms. Estimated returns, sales allowances, or
warranty charges are recognized upon shipment of a product.
For certain service-related contracts, the Company recognizes revenue under the percentage-of-completion method of accounting,
whereby contract revenues are recognized on a pro-rata basis based upon the ratio of costs incurred compared to total estimated
contract costs. Contract costs include labor, material, subcontracting costs, as well as an allocation of indirect costs. Revenues
including estimated profits are recorded as costs are incurred. Losses estimated to be incurred upon completion of contracts are
charged to operations when they become known. Revenues recognized under the percentage-of-completion method of accounting
were not material in any of the fiscal years reported in the Consolidated Statements of Income and Comprehensive Income presented
in this Annual Report on Form 10-K.
Certain contracts contain provisions for incentive payments that the Company may receive based on performance criteria related
to product design, development and production standards. Revenue related to the incentive payments is recognized when ultimate
realization by the Company is assured, which generally occurs when the provisions and performance criteria required by the
contract are met.
Operating Expenses
The primary types of operating expenses are classified in the income statement as follows:
Cost of sales
Direct material costs
Material acquisition and handling costs
Direct labor
Factory overhead including depreciation
and amortization
Inventory obsolescence
Product warranties
Shipping and handling cost
Research and development
(R&D) expenses
Personnel costs
Professional service fees
Material and supplies
Facility allocation
Selling, general, and administrative (SG&A)
expenses
Personnel costs
Professional service fees
Advertising
Promotions
Information technology equipment depreciation
Office supplies
Facility allocation
Bad debt expense
The Company's R&D expenditures consist primarily of internal direct and indirect costs associated with development of
technologies to support its proprietary product lines in each of its divisions. These R&D costs are expensed as incurred.
General and administrative expenses included in SG&A are not allocated at the segment level. The Company's gross margin and
segment operating income may not be comparable to industry peers due to variability in the classification of these expenses across
the industries in which the Company operates.
Warranties
Accruals necessary for product warranties are estimated based on historical warranty costs and average time elapsed between
purchases and returns for each division. Additional accruals are made for any significant, discrete warranty issues.
Share-Based Compensation
The Company records compensation expense related to its share-based compensation plans using the fair value method. Under
this method, the fair value of share-based compensation is determined as of the grant date and the related expense is recorded over
the period in which the share-based compensation vests.
Income Taxes
Deferred income taxes reflect future tax effects of temporary differences between the tax and financial reporting basis of the
Company's assets and liabilities measured using enacted tax laws and statutory tax rates applicable to the periods when the temporary
differences will affect taxable income. When necessary, deferred tax assets are reduced by a valuation allowance to reflect realizable
value. Accruals are maintained for uncertain tax positions.
Accounting Pronouncements
Accounting Standards Adopted
In January 2017 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-01
"Business Combinations (Topic 805) - Clarifying the Definition of a Business" (ASU 2017-01). This update clarifies the definition
of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for
as acquisitions (or disposals) of assets or businesses. The amendments provide a screen to determine when a set of assets and
activities is not a business. If the screen is not met, the amendments require further consideration of inputs, substantive processes
and outputs to determine whether the transaction is an acquisition of a business. The new update is effective for annual periods
50
(Dollars in thousands, except per-share amounts)
beginning after December 15, 2017 with early adoption permitted. The Company early adopted ASU 2017-01 in the fiscal 2017
fourth quarter on a prospective basis with no impact on its consolidated financial statements and associated disclosures.
In November 2015 the FASB issued ASU No. 2015-17, "Income Taxes (Topic 740) Balance Sheet Classification of Deferred
Taxes" (ASU 2015-17). Currently GAAP requires the deferred taxes for each jurisdiction (or tax-paying component of a jurisdiction)
to be presented as a net current asset or liability and net noncurrent asset or liability. This requires a jurisdiction-by-jurisdiction
analysis based on the classification of the assets and liabilities to which the underlying temporary differences relate, or, in the case
of loss or credit carryforwards, based on the period in which the attribute is expected to be realized. To simplify presentation, ASU
2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent
on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The
guidance does not change the existing requirement that only permits offsetting within a jurisdiction - that is, companies are still
prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The new
update is effective for annual periods beginning after December 15, 2016 with early adoption permitted. The Company early
adopted ASU 2015-17 in the fiscal 2017 first quarter using the prospective method. No current deferred tax assets or liabilities
are recorded on the balance sheet. Since the Company adopted the guidance prospectively, the prior periods were not retrospectively
adjusted.
In September 2015 the FASB issued ASU No. 2015-16, "Business Combinations (Topic 805) Simplifying the Accounting for
Measurement-Period Adjustments" (ASU 2015-16). The amendments in ASU 2015-16 apply to all entities that have reported
provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period
in which the combination occurs and, during the measurement period, have an adjustment to provisional amounts recognized.
ASU 2015-16 requires that an acquirer in a business combination recognize adjustments to provisional amounts that are identified
during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 requires
that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization,
or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been
completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income
statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have
been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition
date. The Company adopted ASU 2015-16 when it became effective in the fiscal 2017 first quarter with no impact on its consolidated
financial statements, results of operations, or associated disclosures.
In April 2015 the FASB issued ASU No. 2015-05, "Intangibles - Goodwill and Other-Internal-Use Software (Subtopic 350-40)
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (CCA)" (ASU 2015-05). The amendments in ASU
2015-05 clarify existing GAAP guidance about a customer’s accounting for fees paid in a CCA with or without a software license.
Examples of cloud computing arrangements include software as a service, platform as a service, infrastructure as a service, and
other similar hosting arrangements. Under ASU 2015-05, fees paid by a customer in a CCA for a software license are within the
scope of the internal-use software guidance if certain criteria are met. If the criteria are not met the fees paid are accounted for
as a prepaid service contract and expensed. The Company has historically accounted for all fees in a CCA as a prepaid service
contract. The Company adopted ASU 2015-05 in first quarter fiscal 2017 when it became effective using the prospective method.
The Company did not pay any fees in a CCA in the current period that met the criteria to be in scope of the internal-use software
guidance and it had no impact on the consolidated financial statements, results of operations, or associated disclosures.
In February 2015 the FASB issued ASU No. 2015-02, “Consolidation (Topic 810) Amendments to the Consolidation
Analysis" (ASU 2015-02). The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they
should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model.
Specifically, the amendments: 1. Modify the evaluation of whether limited partnerships and similar legal entities are VIEs or voting
interest entities; 2. Eliminate the presumption that a general partner should consolidate a limited partnership; 3. Affect the
consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related
party relationships; and 4. Provide a scope exception from consolidation guidance for reporting entities with interests in legal
entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the
Investment Company Act of 1940. In October 2016 the FASB issued ASU 2016-17 "Consolidation (Topic 810) - Interests Held
through Related Parties that are under Common Control" (ASU 2016-17) which amended ASU 2015-02. Under ASU 2016-17,
the Company only needs to consider its proportionate indirect interest in the VIE held through a common control party when
evaluating whether the Company is the primary beneficiary. ASU 2015-02 required that the common control party's interest be
treated as if it was the Company's interest when evaluating whether the Company is the primary beneficiary. The Company adopted
ASU 2015-02 in first quarter fiscal 2017 when it became effective. ASU 2016-17 is effective for annual periods beginning after
December 15, 2016 with early adoption permitted. The Company early adopted ASU 2016-17 in third quarter fiscal 2017 using
the retrospective method. The Company reevaluated all of it legal entities and one investment accounted for using the equity
method during the first quarter. The Company did not have an indirect interest in any of the entities through an unconsolidated
51
(Dollars in thousands, except per-share amounts)
related party. Under ASU 2015-02 and the amended guidance in ASU 2016-17 neither of these equity method investments qualified
for consolidation. The adoption of this guidance had no impact on the legal entities consolidated or the Company's consolidated
financial statements and associated disclosures. No prior period retrospective adjustments were required.
In January 2015 the FASB issued ASU No. 2015-01, "Income Statement - Extraordinary and Unusual Items (Subtopic 225-20)
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items" (ASU 2015-01). The amendments
in ASU 2015-01 eliminate the GAAP concept of extraordinary items and no longer requires that transactions that met the criteria
for classification as extraordinary items be separately classified and reported in the financial statements. ASU 2015-01 retains
the presentation and disclosure guidance for items that are unusual in nature or occur infrequently and expands them to include
items that are both unusual in nature and infrequently occurring. The Company adopted ASU 2015-01 in fiscal 2017 first quarter
when it became effective using the prospective method. The adoption of this guidance did not have any impact on the Company's
consolidated financial statements and associated disclosures.
In August 2014 the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40)
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern" (ASU 2014-15). The amendments in ASU
2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon
certain principles that are currently in U.S. auditing standards. ASU 2014-15 requires certain financial statement disclosures when
there is "substantial doubt about the entity's ability to continue as a going concern" within one year after the date that the financial
statements are issued (or available to be issued). ASU 2014-15 is effective for annual periods ending after December 15, 2016
with early adoption permitted. The Company early adopted ASU 2014-15 in the fiscal 2017 first quarter. The adoption of this
guidance did not have any impact on the Company's consolidated financial statements and associated disclosures.
New Accounting Standards Not Yet Adopted
In February 2017, the FASB issued ASU No. 2017-05, "Other Income - Gains and Losses from the Derecognition of Nonfinancial
Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial
Assets" (ASU 2017-05). Subtopic 610-20 was issued as part of the new revenue standard. It provides guidance for recognizing
gains and losses from the transfer of nonfinancial assets in contracts with non-customers. The new guidance defines “in substance
nonfinancial assets,” unifies guidance related to partial sales of nonfinancial assets, eliminates rules specifically addressing sales
of real estate, removes exceptions to the financial asset derecognition model, and clarifies the accounting for contributions of
nonfinancial assets to joint ventures. The amendments are effective for annual periods beginning after December 15, 2017 with
early adoption permitted. Transition can use either the full retrospective approach or the modified retrospective approach. The
Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements, results of
operations, and associated disclosures.
In January 2017 the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment" (ASU 2017-04). This ASU removes Step 2 of the goodwill impairment test, which requires a hypothetical
purchase price allocation. Under the new guidance, a goodwill impairment will be measured as the amount by which a reporting
unit’s carrying value exceeds its fair value. The amount of any impairment may not exceed the carrying amount of goodwill. The
amendments should be applied on a prospective basis. The guidance is effective for annual or any interim goodwill impairment
tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Company is evaluating the impact the adoption of this guidance will
have on its consolidated financial statements, results of operations, and associated disclosures.
In November 2016 the FASB issued ASU 2016-16, "Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than
Inventory" (ASU 2016-16). Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset
transfer until the asset has been sold to an outside party. In addition, interpretations of this guidance have developed in practice
over the years for transfers of certain intangible and tangible assets. This prohibition on recognition is an exception to the principle
of comprehensive recognition of current and deferred income taxes in GAAP. The new guidance eliminates the exception for an
intra-entity transfer of an asset other than inventory. The amendments in ASU 2016-16 are effective for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. The Company can early adopt ASU 2016-16, but earlier
adoption must be in the first quarter of the fiscal year. The amendments in ASU 2016-16 will be applied on a modified retrospective
basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The
Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements, results of
operations, and associated disclosures.
In August 2016 the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts
and Cash Payments" (ASU 2016-15). The new guidance clarifies eight cash flow classification issues where current GAAP was
either unclear or had no specific guidance. The new standard is effective for annual reporting periods beginning after December
15, 2017 and interim periods within those fiscal years. All entities may elect to early adopt ASU 2016-15 in any interim period.
52
(Dollars in thousands, except per-share amounts)
If an entity early adopts it must adopt all eight of the amendments in the same period and if early adopted in an interim period any
adjustments should be reflected as of the beginning of the year. The amendments in ASU 2016-15 will be applied using the
modified retrospective transition method for each period presented. The Company is evaluating the impact the adoption of this
guidance will have on the classification of certain items on its Consolidated Statements of Cash Flows.
In June 2016 the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses
on Financial Instruments" (ASU 2016-13). Current GAAP generally delays recognition of the full amount of credit losses until
the loss is probable of occurring. The amendments in this guidance eliminate the probable initial recognition threshold and, instead,
reflect an entity’s current estimate of all expected credit losses. Previously, when credit losses were measured under GAAP, an
entity generally only considered past events and current conditions in measuring the incurred loss. Under ASU 2016-13 the
Company will need to create an economic forecast over the entire contractual life of long-dated financial assets. The new standard
is effective for annual reporting periods beginning after December 15, 2019. All entities may elect to early adopt ASU 2016-13
for annual reporting periods beginning after December 15, 2018. The amendments in ASU 2016-13 will be applied using the
modified retrospective approach by recording a cumulative-effect adjustment to retained earnings in the first reporting period.
The Company's trade accounts receivable are in-scope under ASU 2016-13. The Company is evaluating the impact the adoption
of this guidance will have on its consolidated financial statements, results of operations, and associated disclosures.
In March 2016 the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting" (ASU 2016-09). ASU 2016-09 amends the accounting for employee share-based payment
transactions to require recognition of the tax effects resulting from the settlement of stock-based awards as discrete income tax
expense or benefit in the income statement in the reporting period in which they occur. In addition, this guidance requires that all
tax-related cash flows resulting from share-based payments, including the excess tax benefits related to the settlement of stock-
based awards, be classified as cash flows from operating activities in the statement of cash flows. The guidance also requires that
cash paid to taxing authorities on employees' behalf for withheld shares should be classified as a financing activity in the statement
of cash flows. In addition, the guidance also allows companies to make an accounting policy election to either estimate the number
of awards that are expected to vest, consistent with current GAAP, or account for forfeitures when they occur. The new standard
is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. ASU 2016-09 requires
that the various amendments be adopted using different methods. The Company is evaluating the impact the adoption of this
guidance will have on its consolidated financial statements, results of operations, and associated disclosures.
In February 2016 the FASB issued ASU No. 2016-02, "Leases (Topic 842)" (ASU 2016-02). The primary difference between
previous GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as
operating leases under previous GAAP. The guidance requires a lessee to recognize in the statement of financial position a liability
to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease
term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in
optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to
terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease
assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. For leases with a term of 12
months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease
assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-
line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. Lessees and lessors
are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective
approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply.
An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the
effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-
of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum
rental payments that were tracked and disclosed under previous GAAP. The Company is evaluating the impact the adoption of
this guidance will have on its consolidated financial statements and associated disclosures.
In May 2014 the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09). ASU
2014-09 provides a comprehensive new recognition model that requires recognition of revenue when a company transfers promised
goods or services to customers in an amount that reflects the consideration to which the company expects to receive in exchange
for those goods or services. This guidance supersedes the revenue recognition requirements in FASB ASC Topic 605, "Revenue
Recognition," and most industry-specific guidance. ASU 2014-09 defines a five-step process to achieve this core principle and,
in doing so, companies will need to use more judgment and make more estimates than under the current guidance. It also requires
additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts.
In August 2015, the FASB approved a one-year deferral of the effective date (ASU 2015-14) and the standard is now effective for
the Company for fiscal 2019 and interim periods therein. ASU 2014-09 may be adopted as of the original effective date, which
for the Company is fiscal 2018. The guidance may be applied using either of the following transition methods: (i) a full retrospective
53
(Dollars in thousands, except per-share amounts)
approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients
or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption
(which includes additional footnote disclosures). In addition, FASB has amended Topic 606 prior to it becoming effective. The
effective date and transition requirements for these amendments to Topic 606 are the same as ASU 2014-09. Management has
designated a team to assess the Company's revenue streams to determine what, if any, impact the new standard will have on revenue
recognition. The Company's evaluation of ASU 2014-09, and all subsequent amendments to Topic 606, is ongoing and no
conclusions have been reached on the method and date of adoption or the impact the adoption will have on the Company’s
consolidated financial position, results of operations, and associated disclosures.
54
(Dollars in thousands, except per-share amounts)
NOTE 2
SELECTED BALANCE SHEET INFORMATION
Following are the components of selected balance sheet items:
Accounts receivable, net:
Trade accounts
Allowance for doubtful accounts
Inventories:
Finished goods
In process
Materials
Other current assets:
Insurance policy benefit
Federal income tax receivable
Prepaid expenses and other
Property, plant and equipment, net:
Held for use:
Land
Buildings and improvements
Machinery and equipment
Accumulated depreciation
Held for sale:
Land
Buildings and improvements
Machinery and equipment
Accumulated depreciation
Other assets:
Equity investments
Deferred income taxes
Other
Accrued liabilities:
Salaries and related
Benefits
Insurance obligations
Warranties
Income taxes
Other taxes
Acquisition-related contingent consideration
Other
Other liabilities:
Postretirement benefits
Acquisition-related contingent consideration
Deferred income taxes
Uncertain tax positions
Other
2017
As of January 31,
2016
2015
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
43,834
(691)
43,143
5,438
2,288
34,610
42,336
802
604
1,283
2,689
3,054
77,817
142,471
(117,018)
106,324
—
—
—
—
—
106,324
2,371
18
1,283
3,672
6,286
3,960
2,400
1,547
498
1,540
445
1,379
18,055
8,054
1,397
1,421
2,610
214
13,696
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
39,103
(1,034)
38,069
4,896
1,845
39,098
45,839
716
1,721
1,992
4,429
3,054
77,797
140,472
(106,419)
114,904
244
1,595
329
(1,368)
800
115,704
2,805
—
1,322
4,127
1,883
3,864
1,730
1,835
475
1,117
407
731
12,042
7,662
1,732
3,247
2,999
—
15,640
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
56,895
(319)
56,576
8,127
1,317
45,708
55,152
733
713
1,648
3,094
3,246
78,140
131,766
(96,545)
116,607
11
1,522
—
(627)
906
117,513
3,217
—
526
3,743
4,063
5,001
1,590
3,120
536
1,240
1,375
2,262
19,187
11,812
3,631
7,091
3,259
—
25,793
55
(Dollars in thousands, except per-share amounts)
NOTE 3
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income refers to revenue, expenses, gains, and losses that under GAAP are recorded as an element of
shareholders' equity but are excluded from net income. The changes in the components of accumulated other comprehensive
income (loss) (AOCI) are shown below:
Cumulative
foreign currency
translation
adjustment
Postretirement
benefits
Total
Balance at January 31, 2014
$
(282)
$
(1,897)
$
Other comprehensive (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
(loss) after tax benefit of $1,187
Balance at January 31, 2015
Other comprehensive (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
(loss) after tax expense of ($1,620)
Balance at January 31, 2016
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive
(loss) after tax benefit of $129
(1,466)
—
(1,748)
(729)
—
(2,477)
50
—
—
(2,204)
(4,101)
—
3,077
(1,024)
—
(225)
(2,179)
(1,466)
(2,204)
(5,849)
(729)
3,077
(3,501)
50
(225)
Balance at January 31, 2017
$
(2,427)
$
(1,249)
$
(3,676)
Postretirement benefit cost components are reclassified in their entirety from AOCI to net periodic benefit cost. Net periodic
benefit costs are reported in net income as “Cost of sales” or “Selling, general and administrative expenses” in a manner consistent
with the classification of direct labor and personnel costs of the eligible employees.
NOTE 4
SUPPLEMENTAL CASH FLOW INFORMATION
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued and other liabilities
Customer advances
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes
Interest paid
Significant non-cash transactions:
Issuance of common stock for business acquisition
Capital expenditures included in accounts payable
Capital expenditures converted from inventory
56
For the years ended January 31,
2017
2016
2015
$
$
$
$
$
$
$
(5,361)
1,215
228
2,558
7,279
1,126
7,045
6,618
190
—
84
—
$
$
$
$
$
$
$
16,847
7,564
(111)
(5,059)
(8,985)
(368)
9,888
6,558
129
—
161
1,036
$
$
$
$
$
$
$
4,699
6,753
195
(3,578)
48
(144)
7,973
14,011
160
39,252
564
491
(Dollars in thousands, except per-share amounts)
NOTE 5
ACQUISITIONS OF AND INVESTMENTS IN BUSINESSES AND TECHNOLOGIES
Integra
On November 3, 2014 the Company acquired all of the issued and outstanding shares of Integra Plastics, Inc. (Integra). Integra,
which was a privately-held company headquartered in Madison, South Dakota, specialized in the manufacture and conversion of
high-quality plastic film and sheeting. This acquisition expanded Raven's Engineered Films Division's production capacity with
additional extrusion and lamination operations in Brandon, South Dakota and fabrication locations in Madison, South Dakota and
Midland, Texas, as well as broadened Engineered Films' product offerings and enhanced its converting capabilities. Integra's
results of operations subsequent to acquisition are included in the Engineered Films segment.
At the acquisition date, the total purchase price was valued at approximately $48,200 net of an estimated working capital adjustment
included in the terms of the merger and acquisition agreement. These terms provided for payment through the issuance of 1,541,696
shares of the Company's common stock valued at $39,252, based on the closing stock price on the date of acquisition and cash
payments of $9,361. The Company received $351 in settlement of the working capital adjustment to the purchase price and
finalized deferred tax calculations in fiscal 2016 first quarter. These transactions resulted in an adjustment of about $20 to the
purchase price allocation.
The fair value of the business acquired was allocated to the assets acquired and liabilities assumed based on their estimated fair
values. The excess of the fair value acquired over the identifiable assets acquired and liabilities assumed is reflected as goodwill.
The fair value of the goodwill recorded as part of the purchase price allocation was $27,422. None of this goodwill is tax deductible.
Goodwill resulting from this business combination is largely attributable to the experienced workforce of the acquired business
and synergies expected to arise after integration of Integra products and operations into Engineered Films. Identifiable intangible
assets acquired as part of the acquisition included definite-lived intangibles for customer relationships and other intangibles valued
at $10,000 and $200, respectively. These intangible assets are being amortized using the straight-line method over their estimated
useful life as follows: customer relationships - twelve years and other intangibles - two years. Liabilities assumed from Integra
included a revolving line of credit and long-term notes with Wells Fargo Bank N.A. (Wells Fargo). The Company had a related
party relationship with Wells Fargo described in Note 10 Financing Arrangements. This debt was repaid by the Company in fiscal
2015 and there was no debt outstanding at January 31, 2015.
The purchase price was finalized in the fiscal 2016 first quarter after the working capital adjustment was settled. The total purchase
price allocated to the estimated fair values of assets acquired and liabilities assumed was as follows:
Cash
Accounts receivable
Inventory
Deferred income taxes
Other current assets
Property, plant and equipment, net
Goodwill
Customer relationships and other definite-lived intangibles
Short-term and long-term debt
Current liabilities
Other liabilities
$
1,600
4,808
7,575
543
24
17,088
27,422
10,200
(11,341)
(4,084)
(5,573)
Total purchase price
$
48,262
Integra net sales and net loss recognized in fiscal 2015 from the acquisition date to January 31, 2015 were $5,627 and $(874),
respectively. The operations of Integra were fully integrated into Engineered Films’ existing operations at the beginning of fiscal
year 2016. The Company does not manage such operations or report these results separate and apart from the Engineered Films
segment.
57
(Dollars in thousands, except per-share amounts)
SBG
On May 1, 2014 the Company completed the purchase of all issued and outstanding shares of SBG Innovatie BV and its affiliate,
Navtronics BVBA (collectively, SBG). SBG has operations in the Netherlands just outside of Amsterdam and at Navtronics in
Geel, Belgium. The acquisition broadened Applied Technology Division’s guided steering system product line by adding high-
accuracy implement steering applications. Additionally, SBG’s headquarters have become the home office for Raven in Europe,
expanding the Company’s global presence and reach into key European markets.
In connection with the purchase, the Company paid $5,000 and agreed to pay up to $2,500 in additional earn-out payments
calculated using the undiscounted cash flows and paid quarterly over the next 10 years contingent upon achieving certain revenues.
Projecting discounted future cash flows requires the Company to make significant estimates and assumptions regarding future
revenues under the subject contingent agreement and the appropriate discount rate. Such valuations techniques include one or
more significant inputs that are not observable (Level 3 fair value measures).
At January 31, 2017, the fair value of this contingent consideration was $1,409 of which $247 was classified as "Accrued liabilities"
and $1,162 was classified as "Other liabilities." At January 31, 2016, the fair value of this contingent consideration was $1,499
of which $249 was classified as "Accrued liabilities" and $1,250 was classified as "Other liabilities." The fair value of this
contingent consideration at January 31, 2015 was $1,432, of which $236 was classified as "Accrued liabilities" and $1,196 was
classified as "Other liabilities." The Company has paid a total of $583 of this potential earn-out liability including $275, $229
and $79 in earn-out payments during fiscal 2017, 2016, and 2015 respectively.
The fair value of the business acquired was allocated to the assets acquired and liabilities assumed based on their estimated fair
values. The excess of the fair value acquired over the identifiable assets acquired and liabilities assumed is reflected as goodwill.
Goodwill recorded as part of the purchase price allocation was $3,250, none of which is tax deductible. Identifiable intangible
assets acquired as part of the acquisition were $2,104, and included definite-lived intangibles, such as customer relationships and
proprietary technology. Amortization is being computed over the estimated useful life using the undiscounted cash flows method
as follows: twelve years for customer relationships and five years for proprietary technology. Liabilities acquired included debts
to the former owners, a long-term note with a third-party bank, and deferred income taxes. As further described in Note 10
Financing Arrangements, this debt was repaid by the Company and there was no debt outstanding at January 31, 2015.
SBG net sales and net income recognized in fiscal 2015 from the acquisition date to January 31, 2015 were $3,245 and $152,
respectively. The operations of SBG were integrated into the existing operations of the Applied Technology Division at the
beginning of fiscal year 2016.
The following pro forma consolidated condensed financial results of operations are presented as if the fiscal year 2015 acquisitions
described above had been completed at the beginning of the period presented (unaudited):
Net sales
Net income attributable to Raven Industries, Inc.
Earnings per common share:
Basic
Diluted
(Unaudited)
For the year
ended January 31,
2015
$
$
$
408,906
34,424
0.90
0.90
These unaudited pro forma consolidated financial results have been prepared for comparative purposes only and include certain
adjustments such as amortization and acquisition cost. The pro forma information does not purport to be indicative of the results
of operations that actually would have resulted had these business combinations occurred at the beginning of the period presented,
or of future results of the consolidated entities.
Acquisition-related contingent consideration
In addition to the contingent consideration related to the acquisition of SBG, the Company has contingent liabilities related to
prior year acquisitions. Related to the acquisition of Vista in 2012, the Company is committed to make annual payments based
upon earn-out percentages on specific revenue streams for seven years after the purchase date, not to exceed $15,000. Projecting
discounted future cash flows requires the Company to make significant estimates and assumptions regarding future revenues under
58
(Dollars in thousands, except per-share amounts)
the subject contingent agreement and the appropriate discount rate. Such valuations techniques include one or more significant
inputs that are not observable (Level 3 fair value measures).
As a result of the triggering event that occurred in the third quarter of fiscal 2016, the Company performed an impairment analysis
for the Vista reporting unit in fiscal 2016. The triggering event and the result of this analysis is more fully described in Note 6
Goodwill, Long-lived Assets, and Other Charges. Related to this analysis, the Company evaluated the fair value of the remaining
assets and liabilities including acquisition-related contingent consideration. The analysis resulted in a reduction of $2,273 in the
fair value of this contingent consideration for which the benefits were recognized in "Cost of sales" in the Consolidated Statements
of Income and Comprehensive Income for the three-month and nine-month periods ended October 31, 2015 and the twelve-month
period ended January 31, 2016. The fair value of the contingent consideration for the Vista acquisition at January 31, 2017 was
$332 of which $98 was classified in "Accrued liabilities" and $234 as "Other liabilities" in the Consolidated Balance Sheet. At
January 31, 2016, the fair value of the contingent consideration for the Vista acquisition was $560, of which $78 was classified
in "Accrued liabilities" and $482 as "Other liabilities" in the Consolidated Balance Sheet. At January 31, 2015, the fair value of
the contingent consideration for the Vista acquisition was $2,989 of which $554 was classified in "Accrued liabilities" and $2,435
as "Other liabilities" in the Consolidated Balance Sheet. These fair values were estimated using forecasted discounted cash flows.
The Company has paid a total of $1,471 of this potential earn-out liability including $79, $585, and $454 in earn-out payments in
fiscal year 2017, 2016, and 2015, respectively.
Equity Method Investments
The Company has owned interests in two affiliates accounted for as equity method investments: AgEagle and SST.
AgEagle
In February 2016, the Applied Technology Division acquired an interest of approximately 5% in AgEagle. AgEagle is a privately
held company that is a leading provider of unmanned aerial systems (UAS) used for agricultural applications. Contemporaneously
with the execution of the stock purchase agreement, AgEagle and the Company entered into a distribution agreement whereby the
Company was appointed as the sole and exclusive distributor worldwide of the existing AgEagle system as it pertains to the
agriculture market. This investment and distribution agreement will allow the Company to expand into the UAS market for
agriculture, enhancing its existing product offerings to provide actionable data that customers can use to make important input
decisions.
The Company’s owned interest in AgEagle is accounted for using the equity method. The Company determined that the exclusivity
of the distribution agreement resulted in an intangible asset. The purchase price was allocated between the equity ownership
interest, classified as "Other assets" in the Consolidated Balance Sheet, and this intangible asset, classified as "Amortizable
intangible assets, net" in the Consolidated Balance Sheet, which will be amortized on a straight-line basis over the four-year life
of the distribution agreement.
SST
The Company’s owned interest of approximately 22% in SST is accounted for using the equity method. SST is a privately-held
agricultural software development and information services provider. Raven and SST are strategically aligned to provide customers
with simple, more efficient ways to move and manage data in the precision agriculture market.
Changes in the net carrying value of the Company's equity investments was as follows:
Balance at beginning of year
Purchase price of equity investment
(Loss) income from equity investment
Amortization of intangible assets
Balance at end of year
2017
As of January 31,
2016
2015
$
$
2,805
135
(72)
(497)
2,371
$
$
3,217
—
83
(495)
2,805
$
$
3,684
—
28
(495)
3,217
59
(Dollars in thousands, except per-share amounts)
NOTE 6
GOODWILL, LONG-LIVED ASSETS, AND OTHER CHARGES
Goodwill
For goodwill, the Company performs impairment reviews by reporting unit. At the end of fiscal 2016, the Company determined
the reporting units to be Engineered Films Division, Applied Technology Division, and two separate reporting units in the Aerostar
Division, one of which is Vista and one of which is all other Aerostar operations (Aerostar excluding Vista).
During the first quarter of fiscal 2017, management implemented managerial and financial reporting changes within Vista and
Aerostar to further integrate Vista into the Aerostar Division. Integration actions included leadership re-alignment, including
selling and business development leadership functions, re-deployment of employees across the division, and consolidation of
administrative functions, among other actions. Based on the changes made, the Company consolidated the two separate reporting
units within the Aerostar Division into one reporting unit for the purposes of goodwill impairment review. As such, as of April
30, 2016, the Company has three reporting units: Engineered Films Division, Applied Technology Division, and Aerostar Division.
The Company reviewed the quantitative and qualitative factors associated with the change in reporting unit and determined there
were no indicators of impairment at the time of the reporting unit change.
The changes in the carrying amount of goodwill by reporting unit are shown below:
Balance at January 31, 2014
Acquired goodwill
Foreign currency translation adjustment
Balance at January 31, 2015
Purchase price adjustment to acquired goodwill(a)
Goodwill disposed from sale of business
Goodwill impairment loss
Foreign currency translation adjustment
Balance at January 31, 2016
Applied
Technology
9,892
$
3,250
(592)
12,550
—
(69)
—
(116)
12,365
(23)
—
Engineered
Films
Aerostar(b)
Vista
Total
$
96
$
789
$
11,497
$
22,274
27,216
—
27,312
206
—
—
—
—
—
789
—
—
—
—
27,518
—
789
—
—
—
30,466
(592)
11,497
—
—
(11,497)
—
—
—
52,148
206
(69)
(11,497)
(116)
40,672
(23)
—
40,649
Foreign currency translation adjustment
Reporting unit transfer balance(b)
Balance at January 31, 2017
(a) Working capital adjustment and final deferred tax adjustment for Integra acquisition (see Note 5 Acquisitions of and Investments in Businesses and
— $
12,342
27,518
789
—
—
—
$
$
$
$
Technologies).
(b) The Company combined the Aerostar and Vista reporting units in fiscal 2017. No goodwill amount was transferred between reporting units due to the
goodwill impairment loss recorded at the Vista reporting unit during fiscal 2016.
Goodwill is tested for impairment on an annual basis and between annual tests whenever a triggering event indicates there may
be an impairment. The annual impairment tests were completed for each reporting unit in the fourth quarter based on a November
30th valuation date. No triggering events were deemed to have occurred in the fourth quarter and no impairments were recorded
as a result of the annual impairment testing. The Aerostar reporting unit was also tested earlier in fiscal 2017 as a result of a
triggering event that had occurred.
Fiscal 2017 Goodwill Impairment Testing
In the fiscal 2017 third quarter, the Company determined that a triggering event occurred for its Aerostar reporting unit. The
triggering event was caused by lower financial expectations for net sales and operating income of the reporting unit and certain
asset groups due to delays and uncertainties regarding the reporting unit’s pursuit of certain opportunities, including aerostat orders,
certain classified stratospheric balloon pursuits, and radar pursuits. Aerostar is still actively pursuing these opportunities and some
are in active negotiations, but the timing of certain aerostat and classified stratospheric balloon opportunities are being delayed
more than previously expected and the likelihood of radar sales is lower due to the Company's decision to no longer actively
pursue certain radar product opportunities. The Step 1 impairment analysis was completed using fair value techniques as of
October 31, 2016. In determining the estimated fair value of the Aerostar reporting unit, the Company was required to estimate
a number of factors, including projected revenue growth rates, projected operating results, terminal growth rates, economic
conditions, anticipated future cash flows, and the discount rate. On the basis of these estimates, the October 31, 2016 analysis
indicated that the estimated fair value of the Aerostar reporting unit exceeded the reporting unit carrying value by approximately
$9,000, or approximately 30%.
60
(Dollars in thousands, except per-share amounts)
Fiscal 2016 Goodwill Impairment Testing
In the fiscal 2016 third quarter, the Company determined that a triggering event occurred for its Vista reporting unit. The triggering
event was caused by the lowering of financial expectations for sales and operating income of the reporting unit due to delays and
uncertainties regarding the reporting unit’s pursuit of large international opportunities. Despite the Company having a pre-
authorization letter from the prime contractor and being in negotiations on a large international contract through the fiscal 2016
second quarter, the contract did not materialize in the fiscal 2016 third quarter as expected. Expectations were lowered as the
timing and likelihood of completing certain international pursuits became less certain. In addition, the Company made a change
in the executive leadership of the reporting unit during the third quarter. The Step 1 impairment analysis was completed using fair
value techniques as of October 31, 2015. In determining the estimated fair value of the Vista reporting unit, the Company was
required to make assumptions and estimate a number of factors, including projected revenue growth rates (particularly those related
to being successful in being awarded large, international contracts and the timing thereof), operating profit margin percentage,
and the discount rate. On the basis of these estimates, the October 31, 2015 analysis indicated that the estimated fair value of the
Vista reporting unit was less than the carrying value. The carrying value exceeded the estimated fair value by approximately
$14,000, or 64%.
Pursuant to the applicable accounting guidance, the Company performed a Step 2 impairment analysis. In the Step 2 impairment
analysis, the fair value determined was allocated to the assets and liabilities of the reporting unit. Based on this Step 2 impairment
analysis the resulting implied fair value of the Vista goodwill was determined to have no value compared to the carrying value
recorded for the reporting unit, $11,497. In the fiscal 2016 third quarter an impairment charge to operating income of $11,497
was reported as "Goodwill impairment loss" in the Consolidated Statements of Income and Comprehensive Income.
Goodwill gross of accumulated impairment losses at January 31, 2017, 2016, and 2015 was $52,146, $52,169, and $52,148,
respectively. Goodwill net of accumulated impairment losses at January 31, 2017, 2016 and 2015 was $40,649, $40,672, and
$52,148, respectively.
Intangible Assets
The following table provides the gross carrying amount and related accumulated amortization of definite-lived intangible assets:
For the years ended January 31,
2017
Accumulated
Amount amortization
2016
Accumulated
amortization
2015
Accumulated
amortization
Net
Net
Amount
Net
Amount
Existing technology
$ 7,136 $
(6,553) $
583
$ 7,144 $
(6,265) $
879
$ 8,870 $
(5,239) $ 3,631
Customer relationships
Patents and other intangibles
12,987
4,378
(3,680)
9,307
12,628
(2,641)
9,987
14,128
(1,271) 12,857
(2,220)
2,158
3,967
(1,877)
2,090
3,657
(1,655)
2,002
Total
$ 24,501 $
(12,453) $12,048
$ 23,739 $
(10,783) $12,956
$ 26,655 $
(8,165) $18,490
The estimated future amortization expense for these definite-lived intangible assets, as well as definite-lived intangible assets
held by SST, during the next five years is as follows:
Estimated amortization expense
$
1,936
$
1,822
$
1,576
$
1,096
$
1,067
2018
2019
2020
2021
2022
Long-lived assets, including definite-lived intangibles, are tested for recoverability whenever events or changes in circumstances
indicate that the asset's carrying amount may not be recoverable. Management periodically assesses for triggering events and
discusses any significant changes in the utilization of long-lived assets. For purposes of recognition and measurement of an
impairment loss, a long-lived asset is grouped with other assets and liabilities at the lowest level for which identifiable cash flows
are largely independent of the cash flows of other assets and liabilities.
Fiscal 2017 Long-lived Intangibles Impairment Assessment
The Company evaluated the triggering events described in the goodwill impairment analysis and determined there were also
triggering events with respect to the assets associated with the aerostat and stratospheric programs (Lighter than Air) and the radar
product and radar services (Radar) asset groups in the Aerostar reporting unit in the third quarter of fiscal 2017, which resulted in
an asset impairment test.
Using the sum of the undiscounted cash flows associated with each of the two asset groups, a Step 1 test was performed for each
asset group. The undiscounted cash flows for the Lighter than Air asset group exceeded the carrying value of the long-lived assets
by approximately $110,000, or 800%, and no Step 2 test was deemed to be necessary based on the recoverability of the long-lived
61
(Dollars in thousands, except per-share amounts)
assets. For the Radar asset group, however, the undiscounted cash flows did not exceed the carrying value of the long-lived assets
and the Company performed a Step 2 impairment analysis for the long-lived assets.
In the Step 2 impairment analysis, the fair value determined was allocated to the assets and liabilities of the Radar asset group.
The resulting estimated fair value of the Radar asset group long-lived assets was $175 compared to the carrying value of $262 for
the asset group. The shortfall of $87 was recorded in the fiscal 2017 third quarter as an impairment charge to operating income
reported as "Long-lived asset impairment loss" in the Consolidated Statements of Income and Comprehensive Income. The total
impairment loss related to property, plant, and equipment and patents was $62 and $25, respectively.
Fiscal 2016 Long-lived Intangibles Impairment Assessment
As described in our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2016, the Company determined that the
relevant cash flows for long-lived asset testing (the lowest level of cash flows that are largely independent of other assets) are one
level below the Vista reporting unit. For Vista, these levels were determined to be asset groups identified for the client private
business (CP) and Radar. Based on the assessment of the forecasts of cash flows and these asset groups, the Company concluded
that certain long-lived assets of the Vista reporting unit, including finite-lived intangible assets, were impaired as of October 31,
2015.
Using the sum of the undiscounted cash flows associated with each of the two asset groups, a Step 1 test was performed for each
asset group. The undiscounted cash flows for the CP asset group exceeded the carrying value of the long-lived assets and no Step
2 test was deemed to be necessary based on the recoverability of the long-lived assets. For the Radar asset group, however, the
undiscounted cash flows did not exceed the carrying value of the long-lived assets and the Company performed a Step 2 impairment
analysis for the long-lived assets.
In the Step 2 impairment analysis, the fair value determined was allocated to the assets and liabilities of the Radar asset group.
The resulting implied fair value of the Radar asset group long-lived assets was $103 compared to the carrying value of $3,916 for
the asset group. The shortfall of $3,813 was recorded in the third quarter of fiscal 2016 as an impairment charge to operating
income reported as "Long-lived asset impairment loss" in the Consolidated Statements of Income and Comprehensive Income.
Of the total long-lived asset impairment of $3,813, $3,154 was related to amortizable intangible assets related to radar technology
and radar customers, $554 was related to property, plant, and equipment, and $105 was related to patents. In addition, expenditures
of $13 for additional patents related to the Radar asset group in the fiscal 2016 fourth quarter were also considered to have been
impaired. The carrying value was fully impaired in the third quarter of fiscal 2016.
Fiscal 2015 Long-lived Intangibles Impairment Assessment
There were no long-lived asset impairment losses reported in fiscal year 2015.
Other Charges
Inventory Write-downs
Due to the Company's decision to no longer actively pursue certain radar opportunities, during the fiscal 2017 third quarter the
Company wrote-down radar inventory, purchased primarily during fiscal 2016. The decision to write-down this inventory is
consistent with the triggering event identified during the fiscal 2017 third quarter relating to the Aerostar reporting unit and the
Radar asset group. This radar-specific inventory write-down increased "Cost of sales" by $2,278 in fiscal 2017. At January 31,
2017 the carrying value of Aerostar's radar systems inventory was $4,260. There were no specific radar inventory write-downs
in fiscal 2016 or 2015.
Pre-contract Deferred Cost Write-offs
From time to time, the Company incurs costs before a contract is finalized and such pre-contract costs are deferred to the balance
sheet to the extent they relate to a specific project and the Company has concluded that is probable that the contract will be awarded
for more than the amount deferred. Pre-contract cost deferrals are common with Vista's business pursuits. As described above,
Vista was pursuing international opportunities and was in the process of negotiating a large international contract that did not
materialize in the fiscal 2016 third quarter as expected. Expectations were lowered as the timing and likelihood of completing
certain international pursuits became less certain. Corresponding to these lower expectations, the pre-contract costs associated
with these pursuits were written off during the fiscal 2016 third quarter. Vista recorded a charge of $2,933, (which is comprised
of $2,075 of costs capitalized as of July 31, 2015 and additional costs of $858 capitalized during August and September 2015) for
the write-off of these pre-contract costs. This charge is recorded in “Cost of sales” in the Consolidated Statements of Income and
Comprehensive Income. There were no pre-contract costs written-off in 2017 or 2015.
62
(Dollars in thousands, except per-share amounts)
NOTE 7
EMPLOYEE POSTRETIREMENT BENEFITS
As of January 1, 2017, the Company has one 401(k) plan covering substantially all employees. This plan, which covers the majority
of employees, matches employee contributions up to 4%. Under this plan all account balances and future contributions and related
earnings can be invested in several investment alternatives as well as the Company's common stock in accordance with each
participant's elections. Participants may choose to make separate investment choices for current account balances and for future
contributions. As a result of changes to the plan’s permissible investment options effective January 1, 2017, participants'
contributions to the 401(k) and the employer matching contributions are limited to 10% investment in the Company's common
stock. This limit was previously 20%. The plan does not allow a participant to exchange more than 10% of their existing account
balance into the Company’s common stock nor permit exchanges that would cause the participant’s investment in the Company’s
common stock to exceed 10%. Officers of the Company may not include Raven's common stock in their 401(k) plan elections.
Prior to January 1, 2017, the Company had a second 401(k) plan that was assumed as part of the Vista acquisition. This plan was
terminated December 31, 2016 and all participant contributions were merged into the plan previously described. Employee
contributions under this plan were matched up to 4% under an amendment in fiscal 2015 to eliminate a 3% annual contribution
and to eliminate a provision allowing an additional annual discretionary contribution. The Company also assumed an additional
401(k) profit sharing plan as part of the Integra acquisition. This plan was merged into Raven's 401(k) plan on December 31,
2014. The Company also contributes to post-retirement and pensions as are required or customary for employees in foreign
locations. Total contribution expense to all such plans was $2,030, $1,952, and $2,416 for fiscal 2017, 2016, and 2015, respectively.
In addition, the Company provides postretirement medical and other benefits to senior executive officers and senior managers.
These plan obligations are unfunded. On August 25, 2015 the Company eliminated postretirement medical benefits to five of its
senior executive officers and their spouses. In consideration of the elimination of this retiree benefit, each senior executive officer
received a lump sum payment in an amount ranging from $8 to $15 based on the officer’s years of service to the Company. At
the time of this amendment, the Company’s senior executive officers that either already qualified for retirement or had twenty or
more years of service to the Company remained eligible for benefits under their employment agreements. The elimination of
coverage for these executives reduced the benefit obligation due to prior service by approximately $1,000 as of August 31, 2015.
The amount was recognized as a negative plan amendment and is being amortized over the average remaining years of service to
full eligibility for active participants not yet fully eligible for benefits as of August 31, 2015. The accumulated benefit obligation,
including the impact of the plan amendment and remeasurement during fiscal 2016, for these benefits is as follows:
Benefit obligation at beginning of year
Service cost
Interest cost
Amendments
Actuarial loss (gain) and assumption changes
Retiree benefits paid
For the years ended January 31,
2016
2017
2015
$
$
7,991
80
333
—
341
(329)
$
12,125
285
386
(958)
(3,544)
(303)
8,254
195
366
—
3,543
(233)
Benefit obligation at end of year
$
8,416
$
7,991
$
12,125
63
(Dollars in thousands, except per-share amounts)
The following tables set forth the plan's pre-tax adjustment to accumulated other comprehensive income/loss:
For the years ended January 31,
2016
2017
2015
Amounts not yet recognized in net periodic benefit cost:
Net actuarial loss
Prior service cost
Total pre-tax accumulated other comprehensive loss
Pre-tax accumulated other comprehensive loss - beginning of year related to
benefit obligation
Reclassification adjustments recognized in benefit cost:
Recognized net (loss)
Amortization of prior service cost
Amounts recognized in AOCI during the year:
Prior service cost from amendments
Net actuarial loss (gain)
$
$
$
$
$
$
2,699
(732)
1,967
1,612
(146)
160
—
341
$
$
$
2,504
(892)
1,612
6,309
(261)
66
(958)
(3,544)
6,309
—
6,309
2,918
(152)
—
—
3,543
Pre-tax accumulated other comprehensive loss - end of year related to benefit
obligation
$
1,967
$
1,612
$
6,309
The net actuarial loss for fiscal year 2017 was the result of a decrease in the discount rate, a decrease in the average life expectancy
by approximately half a year based on the application of an updated mortality projection scale, and census changes. The net
actuarial gain for fiscal year 2016 was the result of the negative plan amendment, an increase in the discount rate, lower than
expected claims, updated trend rates, and application of updated mortality assumptions in which the average life expectancy
increased. The net actuarial loss for fiscal year 2015 was result of a decrease in the discount rate and application of updated
mortality assumptions in which the average life expectancy increased.
The liability and net periodic benefit cost reflected in the Consolidated Balance Sheets and Consolidated Statements of Income
and Comprehensive Income were as follows:
Beginning liability balance
Net periodic benefit cost
Other comprehensive loss (income)
Total recognized in net periodic benefit cost and other
comprehensive income
Retiree benefits paid
Ending liability balance
Current portion in accrued liabilities
Long-term portion in other liabilities
Assumptions used to calculate benefit obligation:
Discount rate
Rate of compensation increase
Health care cost trend rates:
Health care cost trend rate assumed for next year
Ultimate health care cost trend rate
Year that the rate reaches the ultimate trend rate
Assumptions used to calculated the net periodic benefit cost:
Discount rate
Rate of compensation increase
For the years ended January 31,
2016
2015
2017
$
$
$
$
7,991
399
355
754
(329)
8,416
362
8,054
$
$
$
$
12,125
866
(4,697)
(3,831)
(303)
7,991
329
7,662
$
$
$
$
4.00%
4.00%
4.25%
4.00%
6.67% 6.83%(a) | 7.00%(b)
4.50% 4.50%(a) | 5.00%(b)
2030
2030(a) | 2025(b)
4.25% 4.25%(a) | 3.50%(b)
4.00%
4.00%
8,254
713
3,391
4,104
(233)
12,125
313
11,812
3.50%
4.00%
7.20%
5.00%
2025
4.50%
4.00%
(a) Assumptions used for the five months of fiscal 2016 following the August 31, 2015 remeasurement.
(b) Assumptions used for the seven months of fiscal 2016 prior to the plan amendment triggering the August 31, 2015 remeasurement.
64
(Dollars in thousands, except per-share amounts)
The discount rate is based on matching rates of return on high-quality fixed-income investments with the timing and amount of
expected benefit payments. No material fluctuations in retiree benefit payments are expected in future years. The total estimated
cost to be recognized from AOCI into net periodic benefit cost over the next fiscal year is $(40); $120 of recognized net loss and
$(160) of amortized prior service cost.
The assumed health care cost trend rate has a significant effect on the amounts reported. The impact of a one-percentage point
change in assumed health care rates would have the following effects:
Effect on total of service and interest cost components
Effect on accumulated postretirement benefit obligation
January 31, 2017
One-percentage-
point increase
One-percentage-
point decrease
$
$
91
1,486
$
$
(69)
(1,159)
The Company expects to make $362 in postretirement medical and other benefit payments in fiscal 2018. The following
postretirement other than pension benefit payments, which reflect expected future service as appropriate, are expected to be paid:
Expected postretirement medical and other benefit
payments
$
362
$
371
$
366
$
379
$
2,372
2018
2019
2020
2021
2022 - 2027
NOTE 8 WARRANTIES
Changes in the warranty accrual were as follows:
Beginning balance
Acquired
Accrual for warranties
Settlements made
Ending balance
NOTE 9
INCOME TAXES
For the years ended January 31,
2017
2016
2015
$
$
1,835
—
1,597
(1,885)
1,547
$
$
3,120
—
1,945
(3,230)
1,835
$
$
2,525
50
3,467
(2,922)
3,120
The reconciliation of income tax computed at the federal statutory rate to the Company's effective income tax rate was as
follows:
Tax at U.S. federal statutory rate
State and local income taxes, net of U.S. federal tax benefit
Tax credit for research activities
Tax benefit on qualified production activities
Tax benefit on insurance premiums
Change in uncertain tax positions
Foreign tax rate difference
Other, net
For the years ended January 31,
2016
2015
2017
35.0%
0.7
(3.7)
(2.8)
(1.5)
(0.3)
(0.3)
0.4
27.5%
35.0 %
(2.8)
(24.2)
(13.7)
(10.3)
1.8
(2.9)
(1.7)
(18.8)%
35.0%
(0.3)
(3.9)
(3.6)
(1.0)
—
0.4
0.3
26.9%
The Company's fiscal 2017 effective rate is lower than the statutory rate primarily due to a $779 tax benefit for qualified production
activities and a $1,044 tax benefit from the R&D tax credit.
The negative fiscal 2016 effective rate is lower than the statutory rate primarily due to the combination of a significantly lower
book income year-over-year, a $560 tax benefit for qualified production activities, and a $989 tax benefit from the R&D tax credit
65
(Dollars in thousands, except per-share amounts)
extension passed by Congress in fiscal 2016. The qualified production deduction is based on estimated taxable income. Taxable
income is higher in comparison to pre-tax income for fiscal 2016 primarily due to $14,756 of goodwill and long-lived asset
impairment losses recorded in net income which are not currently deductible but are amortizable for income tax purposes.
The effective tax rate for fiscal 2015 was lower than the statutory rate primarily due to the recognition of a $776 R&D tax credit
based upon a tax study undertaken for fiscal years 2011 through 2014. The Company also recorded a $963 discrete tax benefit in
fiscal 2015 after reaching a favorable tax settlement with a state tax authority on a previously recorded uncertain tax position.
Significant components of the Company's income tax provision were as follows:
Income taxes:
Currently payable
Deferred expense (benefit)
For the years ended January 31,
2016
2017
2015
$
$
7,354
307
7,661
$
$
5,272
(6,039)
(767)
$
$
12,663
(958)
11,705
Deferred Tax Assets (Liabilities)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred
tax assets and liabilities were as follows:
Deferred tax assets:
Accounts receivable(a)
Inventories(a)
Accrued vacation(a)
Insurance obligations(a)
Accrued benefit liabilities(a)
Warranty obligations(a)
Postretirement benefits
Uncertain tax positions
Share-based compensation
Other accrued liabilities(a)
Deferred tax (liabilities):
2017
As of January 31,
2016
2015
$
212
978
887
383
41
565
3,072
803
3,201
68
10,210
$
355
602
836
350
99
670
2,797
896
3,613
198
10,416
$
194
873
940
271
261
1,225
4,243
1,002
4,410
194
13,613
Depreciation and amortization
Other
(16,099)
(647)
(16,746)
(3,133)
Net deferred tax (liability)
(a) As discussed below, under the prior accounting guidance these deferred tax assets were classified as current deferred tax assets. All other deferred tax assets
(9,886)
(667)
(10,553)
(137)
(10,565)
(1,048)
(11,613)
(1,403)
$
$
$
and liabilities were classified as non-current.
As discussed in Note 1 Summary of Significant Accounting Policies, effective April 30, 2016, the Company early adopted Accounting
Standards Update No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” on a prospective
basis. This update eliminates the requirement to classify deferred tax assets and liabilities as current and noncurrent, and instead
requires all deferred tax assets and liabilities to be classified as noncurrent. Since the guidance was adopted prospectively, the
prior period Consolidated Balance Sheets were not updated; however, the prior years in the table above were updated to disclose
deferred tax assets separately from deferred tax liabilities and no longer classifies the deferred tax assets/(liabilities) as current
and noncurrent.
66
(Dollars in thousands, except per-share amounts)
Uncertain Tax Positions
A summary of the activity related to the gross unrecognized tax benefits (excluding interest and penalties) is as follows:
Gross unrecognized tax benefits at beginning of year
Increases in tax positions related to the current year
Decreases in tax positions related to prior years
Decreases as a result of lapses in applicable statutes of limitation
Tax settlement with tax authorities
Gross unrecognized tax benefits at end of year
For the years ended January 31,
2016
2017
2015
$
$
2,327
279
(193)
(303)
—
2,110
$
$
2,307
395
—
(375)
—
2,327
$
$
4,660
909
—
(393)
(2,869)
2,307
Fiscal year 2017 changes to uncertain tax positions related to prior years resulted from lapses of applicable statutes of limitation
and a decrease to prior period tax positions primarily related to a favorable determination by a state tax authority impacting the
Company’s estimated liability. The fiscal year 2015 included a favorable settlement reached with a state tax authority.
The total unrecognized tax benefits (including interest and penalty) that, if recognized, would affect the Company's effective tax
rate were $1,806, $2,140, and $2,256 as of January 31, 2017, 2016, and 2015, respectively. The Company recognizes interest and
penalties accrued related to unrecognized tax benefits in income tax expense. At January 31, 2017, 2016, and 2015, accrued interest
and penalties were $500, $672, and $952, respectively. The Company does not expect any significant change in the amount of
unrecognized tax benefits in the next fiscal year.
Additional Tax Information
The Company files tax returns, including returns for its subsidiaries, with various federal, state, and local jurisdictions. Uncertain
tax positions are related to tax years that remain subject to examination. As of January 31, 2017, federal tax returns filed in the
U.S. for fiscal years ended January 31, 2014 through January 31, 2016 remain subject to examination by federal tax authorities.
In state and local jurisdictions, tax returns for fiscal years ended January 31, 2011 through January 31, 2016 remain subject to
examination by state and local tax authorities. International jurisdictions have open tax years varying by location beginning in
fiscal 2012.
Pre-tax book income for the U.S. companies and the foreign subsidiaries was $27,015 and $838, respectively. As of January 31,
2017, undistributed earnings of $2,510 of the Canadian and European subsidiaries and were considered to have been reinvested
indefinitely and, accordingly, the Company has not provided United States income taxes on such earnings. This estimated tax
liability upon repatriation would be approximately $293 net of foreign tax credits.
NOTE 10 FINANCING ARRANGEMENTS
The Company entered into a credit facility on April 15, 2015 with JPMorgan Chase Bank, N.A., Toronto Branch as Canadian
Administrative Agent, JPMorgan Chase Bank, National Association, as administrative agent, and each lender from time to time
party thereto (the Credit Agreement). The Credit Agreement, which replaced an uncollateralized line of credit of $10,500 with
Wells Fargo maturing November 30, 2016, provides for a syndicated senior revolving credit facility up to $125,000 with a maturity
date of April 15, 2020. Wells Fargo, a participating lender under the Credit Agreement holds the majority of the Company's cash
and cash equivalents. One member of the Company's Board of Directors, who served through May 2016, is also on the Board of
Directors of Wells Fargo & Company, the parent company of Wells Fargo.
Simultaneous with execution of the Credit Agreement, Raven, Aerostar, Vista, and Integra entered into a guaranty agreement in
favor of JPMorgan Chase Bank National Association in its capacity as administrator under the Credit Agreement for the benefit
of JPMorgan Chase Bank N.A., Toronto Branch and the lenders and their affiliates under the Credit Agreement.
Unamortized debt issuance costs associated with this Credit Agreement were $352 and $461 at January 31, 2017 and January 31,
2016, respectively, and are included in "Other assets" in the Consolidated Balance Sheets. Loans or borrowings defined under
the Credit Agreement bear interest and fees at varying rates and terms defined in the Credit Agreement based on the type of
borrowing as defined. The Credit Agreement includes annual administrative and unborrowed capacity fees. Such fees were $215
and $213 for the years ended January 31, 2017 and January 31, 2016, respectively.
67
(Dollars in thousands, except per-share amounts)
The Credit Agreement also contains customary affirmative and negative covenants, including those relating to financial reporting
and notification, limits on levels of indebtedness and liens, investments, mergers and acquisitions, affiliate transactions, sales of
assets, restrictive agreements, and change in control as defined in the Credit Agreement. The Company requested and received
the necessary covenant waivers relating to its late filing of financial information in fiscal 2017. Financial covenants include an
interest coverage ratio and funded indebtedness to earnings before interest, taxes, depreciation, and amortization as defined in the
Credit Agreement. The Company is in compliance with all financial covenants set forth in the Credit Agreement.
Letters of credit (LOC) totaling $664 issued under the previous line of credit with Wells Fargo were outstanding at January 31,
2016. These LOC primarily support self-insured workers' compensation bonding. All but one $50 LOC has been transferred and
issued under the Credit Agreement as of January 31, 2017. At January 31, 2017, $464 of LOCs were outstanding under the Credit
Agreement and $50 issued by Wells Fargo was outstanding. Any draws required under the Wells Fargo LOC would be settled
with available cash or borrowings under the Credit Agreement. $124,536 was available under the Credit Agreement for borrowings
as of January 31, 2017. Loan proceeds may be utilized by Raven for strategic business purposes and for net working capital needs.
There were no borrowings outstanding for any of the fiscal periods covered by this Annual Report on Form 10-K. There have
been no borrowings under credit agreements in the last three fiscal years.
Pursuant to the acquisition of SBG and Integra in fiscal year 2015 as described in Note 5 Acquisitions of and Investments in
Businesses and Technologies, the Company assumed liabilities including debts to former owners, a line of credit and long-term
notes. Although there was a short-term net working capital borrowing under Integra's line of credit, such borrowing and assumed
debt was subsequently paid in full and the line of credit was closed. There was no assumed debt outstanding at January 31, 2017,
2016, and 2015. The changes in the outstanding debt are shown below:
Balance at January 31, 2014
Acquired in business combination
Additional borrowings
Debt repayment
Balance at January 31, 2015
Balance at January 31, 2016
Balance at January 31, 2017
Line of credit
Long-term
notes
Notes with
former owners
and others
Debt
Outstanding
$
$
$
$
— $
— $
— $
1,465
2,127
(3,592)
— $
— $
— $
9,876
—
(9,876)
— $
— $
— $
648
—
(648)
— $
— $
— $
—
11,989
2,127
(14,116)
—
—
—
(a) The line of credit and long-term notes were assumed in the Integra business combination. The notes with former owners and others were
assumed in the SBG business combination.
The Company leases certain vehicles, equipment, and facilities under operating leases. Total rent and lease expense was $2,028,
$2,095, and $1,977 in fiscal 2017, 2016, and 2015, respectively.
Future minimum lease payments under non-cancelable operating leases are as follows:
Minimum lease payments
2018
$ 1,647
2019
$ 1,276
2020
$ 1,208
2021
$ 1,188
NOTE 11 COMMITMENTS AND CONTINGENCIES
2022
$ — $
Thereafter
—
The Company is involved as a party in lawsuits, claims, regulatory inquiries, or disputes arising in the normal course of its business,
the potential costs and liability of which cannot be determined at this time. Among these matters is a patent infringement lawsuit
in the early stages of litigation. In a lawsuit filed in federal district court in Kansas, Capstan Ag Systems, Inc. has made certain
infringement claims against the Company and one of its customers, CNH Industrial America LLC, related to the Applied Technology
Division’s HawkeyeTM nozzle control system. Management does not believe the ultimate outcomes of its legal proceedings are
likely to be significant to its results of operations, financial position, or cash flows, except that, because of its preliminary stage,
management cannot determine the potential impact, if any, of the patent infringement lawsuit described above.
The Company has insurance policies that provide coverage to various degrees for potential liabilities arising from legal proceedings.
68
(Dollars in thousands, except per-share amounts)
In addition to commitments disclosed elsewhere in the Notes to the Consolidated Financial Statements, the Company has the
following obligations and commitments at January 31, 2017:
Total
2018
$
$
2019 - 2020
$
— $
Unconditional purchase obligations
Postretirement benefits(a)
Credit facility(b)
757
63
820
(a) Postretirement benefit amounts represent expected payments on the accumulated postretirement benefit obligation before it is discounted.
(b) Amounts reflect administrative and unborrowed capacity fees under the credit facility described below.
737
424
1,161
$
$
$
$
31,976
362
212
32,550
31,976
18,698
699
51,373
— $
$
—
16,842
—
16,842
2021 - 2022
2023 and
After
Purchase obligations consist of those for inventory and other obligations that arise in the normal course of business operations.
The majority of these obligations are related to the Applied Technology and Engineered Films divisions and arise from the purchase
of raw materials inventory.
NOTE 12 RESTRUCTURING COSTS
The Company has no ongoing restructuring plans or unpaid restructuring costs at January 31, 2017. No restructuring costs were
incurred in fiscal 2017.
In the fiscal 2015 fourth quarter, the Company announced and implemented a restructuring plan to lower Applied Technology’s
cost structure in response to weak commodity prices, eroding grower sentiment, reduced demand for precision agricultural
equipment, and the anticipated revenue decline of non-strategic legacy customers. In the same period, Engineered Films
implemented a preemptive restructuring plan to address the decline in demand in the energy sector as the result of falling oil prices.
In addition to reducing its international sales infrastructure, scaling back marketing initiatives, lowering general manufacturing
overhead, and focusing R&D spending on core product lines, the Company initiated the exit of Applied Technology’s non-strategic
St. Louis, Missouri contract manufacturing facility.
As a result of these actions, the Company incurred restructuring costs of approximately $399 for the fiscal year ended January 31,
2015. Such costs were principally severance benefits which were $308 for Applied Technology and $91 for Engineered Films.
The Company reported $250 of this expense in "Cost of sales" and $149 in "Selling, general, and administrative expenses" in the
Consolidated Statements of Income and Comprehensive Income. Approximately $344 of these restructuring costs were paid in
fiscal 2015 and $55 were paid in fiscal 2016.
Subsequent to the end of fiscal 2015, the Company announced that Applied Technology's remaining contract manufacturing
operations in the St. Louis, Missouri area had been successfully sold and transferred. The exit activities related to this sale and
transfer were substantially completed during the fiscal 2016 first quarter. Proceeds from the sale of these assets were $1,288 and
gains of $611 were recorded in fiscal 2016 as a result of the exit activity. Receivables for inventory and estimated future royalties
pursuant to the sale agreements were $28 and are reflected in "Other current assets" in the Consolidated Balance Sheet at January 31,
2017.
The exit of Applied Technology’s St. Louis operations was completed in fiscal 2017 with the sale of the idle manufacturing facility.
Proceeds from the sale of this asset were $960 and gains of $160 were recognized in "Selling, general, and administrative expenses
in the Consolidated Statements of Income and Comprehensive Income for fiscal 2017.
With continued weak end-market demand in the Engineered Films and Applied Technology divisions, on March 10, 2015 the
Company announced and implemented an additional restructuring plan to further lower its cost structure. The cost reductions
covered all divisions and included the corporate offices, but were weighted to Applied Technology as a result of the decline in this
business and the expectation of continued end-market weakness for this division.
As a result of this action, the Company incurred restructuring costs for severance benefits of $588 for the year ended January 31,
2016. The Company reported $407 of restructuring expense in "Cost of sales" and $181 in "Selling, general, and administrative
expenses" in the Consolidated Statements of Income and Comprehensive Income for fiscal 2016. Substantially all of these
restructuring costs related to Applied Technology. This restructuring plan was completed during the fiscal 2016 second quarter.
69
(Dollars in thousands, except per-share amounts)
In October 2015, the Company's Aerostar Division implemented a restructuring plan at Vista to lower its cost structure due to
reduced demand expectations primarily related to delays and uncertainty surrounding international pursuits.
Restructuring costs for severance benefits were $73 for the year ended January 31, 2016. The Company reported $58 of this
expense in "Cost of sales" and $15 in "Research and development expenses" in the Consolidated Statements of Income and
Comprehensive Income. This restructuring plan was completed during fiscal 2016 fourth quarter and there were no unpaid costs
at January 31, 2016.
NOTE 13 SHARE-BASED COMPENSATION
At January 31, 2017, the Company had two shareholder approved share-based compensation plans, which are described below.
The compensation cost and related income tax benefit for these plans were as follows:
Share-based compensation cost
Tax benefit
For the years ended January 31,
2016
2017
2015
$
3,071
1,103
$
2,311
819
$
4,213
1,504
Share-based compensation cost capitalized as part of inventory is not significant.
Equity Compensation Plans
The Company reserved shares of its common stock for issuance to directors, officers, employees, and certain advisors of the
Company through incentive stock options and non-statutory stock options, stock appreciation rights, stock awards, restricted stock,
restricted stock units (RSUs), and performance awards to be granted under the Amended and Restated 2010 Stock Incentive Plan
(the Plan) which was approved by shareholders on May 22, 2012. The aggregate number of shares initially available for grant
under the Plan was 2,000,000. As of January 31, 2017, the number of shares available for grant under the Plan was 1,080,240.
Option exercises under the Plan are settled in newly issued common shares.
The Plan is administered by the Personnel and Compensation Committee of the Board of Directors (the Committee), consisting
of two or more independent directors of the Company. Subject to the provisions set forth in the Plan, all of the members of the
Committee shall be non-employee members of the Board of Directors. The Committee determines the option exercise prices and
the term of each grant. The Committee may accelerate the exercisability of awards under the Plan or extend the term of such
awards to the extent allowed by the Plan to a maximum term of ten years. Two types of awards were granted under the Plan in
fiscal 2017, stock options and restricted stock units.
Stock Option Awards
The Company granted 274,200 non-qualified stock options during fiscal 2017. Options are granted with exercise prices not less
than the market value of the Company's common stock at the date of grant. The stock options vest over a four-year period and
expire after five years. Options contain retirement and change-in-control provisions that may accelerate the vesting period. The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The Company uses
historical data to estimate option exercises, employee terminations, and volatility within this valuation model.
The weighted average assumptions used for the Black-Scholes option pricing model by grant year are as follows:
Risk-free interest rate
Expected dividend yield
Expected volatility factor
Expected option term (in years)
For the years ended January 31,
2016
2017
2015
1.05%
3.33%
32.61%
4.00
1.33%
2.59%
36.81%
3.75
1.32%
1.53%
38.65%
4.00
Weighted average grant date fair value
$
3.05
$
4.77
$
9.18
70
(Dollars in thousands, except per-share amounts)
Outstanding stock options as of January 31, 2017 and activity for the year then ended are presented below:
Outstanding, January 31, 2016
Granted
Exercised
Forfeited
Expired
Outstanding, January 31, 2017
Outstanding exercisable, January 31, 2017
Number
of options
925,950
274,200
—
(4,125)
(205,125)
990,900
422,158
Options vested, or expected to vest, January 31, 2017
990,900
Weighted
average
exercise
price
Aggregate
intrinsic
value
Weighted
average
remaining
contractual
term
(years)
$
$
$
$
28.44
15.61
—
25.41
30.03
24.58
30.24
24.58
$
$
$
3,867
361
3,867
2.55
1.41
2.55
The intrinsic value of a stock award is the amount by which the fair value of the underlying stock exceeds the exercise price of
the award. The total intrinsic value of options exercised was $0, $172, and $1,467 during the years ended January 31, 2017, 2016,
and 2015, respectively. The total fair value of options vested was $1,323, $1,755, and $2,144 during the years ended January 31,
2017, 2016, and 2015. As of January 31, 2017, the total unrecognized compensation cost for non-vested awards was $1,612, net
of the effect of estimated forfeitures. This amount is expected to be recognized over a weighted average period of 1.91 years.
Restricted Stock Unit Awards
The Company granted 70,947 time-vested RSUs to employees during the year ended January 31, 2017. The fair value of a time-
vested RSU is measured based upon the closing market price of the Company's common stock on the day prior to the date of grant.
Time-vested RSUs will vest if, at the end of the three-year period, the employee remains employed by the Company. RSUs contain
retirement and change-in-control provisions that may accelerate the vesting period. Dividends are cumulatively earned on the
time-vested RSUs over the vesting period and are forfeited if such RSUs do not vest.
Activity for time-vested RSUs under the Plan in fiscal 2017 was as follows:
Outstanding, January 31, 2016
Granted
Vested
Forfeited
Outstanding, January 31, 2017
Cumulative dividends, January 31, 2017
Number
of restricted
stock units
Weighted
average
grant date
fair value
25.53
15.94
32.85
23.14
19.19
$
$
81,926
70,947
(19,208)
(6,936)
126,729
5,003
The Company also granted performance-based RSUs during the year ended January 31, 2017. The exact number of performance
shares to be issued will vary from 0% to 150% of the target award, depending on the Company's actual performance over the
three-year period in comparison to the target award. The target awards for the fiscal 2015, 2016 and 2017 grants are based on
return on equity (ROE), which is defined as net income divided by the average of beginning and ending shareholders' equity for
the fiscal year. The performance-based RSUs will vest if, at the end of the three-year performance period, the Company has
achieved certain performance goals and the employee remains employed by the Company. Performance-based RSUs contain
retirement and change-in-control provisions that may accelerate the vesting period. Dividends are cumulatively earned on
performance-based RSUs over the vesting period and are forfeited if such RSUs do not vest.
The fair value of the performance-based restricted stock units is based upon the closing market price of the Company's common
stock on the day prior to the grant date. The number of restricted stock units granted is based on 100% of the target award. The
71
(Dollars in thousands, except per-share amounts)
number of RSUs that will vest is determined by the estimated ROE target over the three-year performance period. The estimated
performance factor used to estimate the number of restricted stock units expected to vest is evaluated quarterly. The number of
restricted stock units issued at the vesting date will be based on actual results.
Activity for performance-based RSUs under the Plan in fiscal 2017 was as follows:
Outstanding, January 31, 2016
Granted
Vested
Forfeited
Performance-based adjustment
Outstanding, January 31, 2017
Cumulative dividends, January 31, 2017
Number
of restricted
stock units
expected to
vest
Weighted
average
grant date
fair value
$
$
66,068
72,950
(29,162)
(1,178)
37,841
146,519
5,103
25.65
15.61
32.85
17.66
15.94
16.78
The weighted average grant date fair values of the time-based and performance-based RSUs by grant year are as follows:
For the years ended January 31,
2016
2017
2015
Weighted average grant date fair value: time-based RSUs
Weighted average grant date fair value: performance-based RSUs
$
$
15.94
15.61
$
$
19.25
20.09
$
$
29.69
32.75
The total intrinsic value of RSUs vested (or converted to shares) was $754, $1,437, and $0 during the years ended January 31,
2017, 2016, and 2015, respectively. The total fair value of RSUs vested (or converted to shares) was $761, $1,411, and $0, during
the years ended January 31, 2017, 2016, and 2015, respectively. 273,248 outstanding RSUs with a weighted average term of 1.95
years and an aggregate intrinsic value of $6,845 at January 31, 2017 are expected to vest. None of the outstanding RSUs are
vested as of January 31, 2017. The total unrecognized compensation cost for nonvested RSU awards at January 31, 2017 was
$2,713 net of the effect for estimated forfeitures. This amount is expected to be recognized over a weighted average period of
1.95 years.
Deferred Stock Compensation Plan for Directors
The Company reserved 100,000 shares of its common stock for issuance to certain members of its Board of Directors under the
Deferred Stock Compensation Plan for Directors of Raven Industries, Inc. (the Director Plan). The Director Plan is administered
by the Personnel and Compensation Committee of the Board of Directors. Under the Director Plan, any non-employee director
receives a grant of a number of stock units as deferred compensation to be converted into common stock after retirement from the
Board of Directors and may elect to have a specified percentage of their annual retainer converted to stock units. Under the
Director Plan, a stock unit is the right to receive one share of the Company's common stock as deferred compensation, to be
distributed from an account established by the Company in the name of the non-employee director. Stock units have the same
value as a share of common stock but cannot be sold. Stock units are a component of the Company's equity.
Stock units granted under the Director Plan vest immediately and are expensed at the date of grant. When dividends are paid on
the Company's common shares, stock units are added to the directors' balances and a corresponding amount is removed from
retained earnings. The intrinsic value of a stock unit is the fair value of the underlying shares.
72
(Dollars in thousands, except per-share amounts)
Outstanding stock units as of January 31, 2017 and changes during the year then ended are presented below:
Outstanding, January 31, 2016
Granted
Deferred retainers
Dividends
Converted into common shares
Outstanding, January 31, 2017
NOTE 14 NET INCOME PER SHARE
Number
of stock units
93,734
18,750
3,125
2,681
(19,641)
98,649
Weighted
average price
20.82
$
19.20
19.20
19.68
18.88
20.82
$
Basic net income per share is computed by dividing net income by the weighted average common shares and stock units outstanding.
Diluted net income per share is computed by dividing net income by the weighted average common and common equivalent shares
outstanding which includes the shares issuable upon exercise of employee stock options (net of shares assumed purchased with
the option proceeds), stock units, and restricted stock units outstanding. Performance share awards are included in the diluted
calculation based upon what would be issued if the end of the most recent reporting period was the end of the term of the award.
Certain outstanding options and restricted stock units were excluded from the diluted net income per-share calculations because
their effect would have been anti-dilutive under the treasury stock method. The options and restricted stock units excluded from
the diluted net income per share calculation were as follows:
Anti-dilutive options and restricted stock units
The computation of earnings per share is presented below:
Numerator:
Net income attributable to Raven Industries, Inc.
Denominator:
Weighted average common shares outstanding
Weighted average stock units outstanding
Denominator for basic calculation
Weighted average common shares outstanding
Weighted average stock units outstanding
Dilutive impact of stock options and RSUs
Denominator for diluted calculation
For the years ended January 31,
2016
1,107,733
2017
884,099
2015
781,988
For the years ended January 31,
2017
2016
2015
$
20,191
$
4,776
$
31,733
36,142,416
100,019
36,242,435
36,142,416
100,019
129,480
36,371,915
37,237,717
86,745
37,324,462
37,237,717
86,745
75,481
37,399,943
36,859,026
69,484
36,928,510
36,859,026
69,484
174,784
37,103,294
Net income per share - basic
Net income per share - diluted
$
$
0.56
0.56
$
$
0.13
0.13
$
$
0.86
0.86
NOTE 15 BUSINESS SEGMENTS AND MAJOR CUSTOMER INFORMATION
The Company's operating segments, which are also its reportable segments, are defined by their product lines which have been
generally grouped based on technology, manufacturing processes, and end-use application. The Company's reportable segments
are Applied Technology Division, Engineered Films Division, and Aerostar Division. Raven Canada, SBG, Raven GmbH, Raven
Australia, and Raven Brazil are included in the Applied Technology Division. Vista and AIS are included in the Aerostar Division.
Separate financial information is available and regularly evaluated by the Company's chief operating decision-maker, the President
73
(Dollars in thousands, except per-share amounts)
and Chief Executive Officer, in making resource allocation decisions for the Company's reportable segments. Segment information
is reported consistent with the Company's management reporting structure.
Applied Technology designs, manufactures, sells, and services innovative precision agriculture products and information
management tools that help growers reduce costs, save time, and improve farm yields around the world. Their product families
include field computers, application controls, GPS-guidance and assisted-steering systems, automatic boom controls, injection
systems, yield monitoring controls, planter and seeder controls, and an integrated real-time kinematic (RTK) and information
platform called Slingshot™. Applied Technology services include high-speed, in-field internet connectivity and cloud-based data
management.
The Company's Engineered Films Division manufactures high-performance plastic films and sheeting for major markets throughout
the United States and abroad. An important part of this business is highly technical, engineered geomembrane films that protect
environmental resources through containment linings and coverings for energy, agriculture, construction, and industrial markets.
Aerostar designs and manufactures proprietary products including high-altitude balloons, tethered aerostats, and radar processing
systems. These products can be integrated with additional third-party sensors to provide research, communications, and situational
awareness to government and commercial customers. Aerostar's product lines such as manufacturing military parachutes and
electronics manufacturing services were phased out during fiscal 2016 as the Company focused its growth strategy on its proprietary
products and largely completed its exit of contract manufacturing operations.
Through Vista and AIS, Aerostar pursues potential product and support services contracts for agencies and instrumentalities of the
U.S. government and to foreign governments as Direct Commercial Sales and Foreign Military Sales through the U.S. Government.
Vista positions the Company to meet the global demand for lower-cost detection and tracking systems used by government agencies.
The Company measures the performance of its segments based on their operating income excluding administrative and general
expenses. The accounting policies of the operating segments are the same as those described in Note 1 Summary of Significant
Accounting Policies. Other income, interest expense, and income taxes are not allocated to individual operating segments, and
assets not identifiable to an individual segment are included as corporate assets.
74
(Dollars in thousands, except per-share amounts)
Business segment information is as follows:
APPLIED TECHNOLOGY DIVISION
Sales
Operating income(a)(e)
Assets(b)
Capital expenditures
Depreciation and amortization
ENGINEERED FILMS DIVISION
Sales
Operating income(e)
Assets(b)
Capital expenditures
Depreciation and amortization
AEROSTAR DIVISION
Sales
Operating income(c)(e)
Assets(b)
Capital expenditures
Depreciation and amortization
INTERSEGMENT ELIMINATIONS
Sales
$
$
$
For the years ended January 31,
2016
2017
2015
$
$
$
105,217
26,643
67,911
1,017
3,828
138,855
22,966
133,309
2,768
8,580
34,113
(1,560)
23,515
547
1,720
$
$
$
92,599
18,319
65,490
664
4,428
129,465
17,892
134,942
10,780
7,735
36,368
(14,801)
32,689
941
3,297
142,154
34,557
88,764
3,478
5,569
166,634
21,802
140,023
8,241
6,096
80,772
8,983
59,274
2,799
3,474
$
$
$
$
$
$
(1)
(789)
—
(12)
(69)
(8)
(195)
—
91
(57)
277,395
48,037
224,666
4,332
14,128
(231)
(652)
(10,524)
163
(148)
Applied Technology Division
Engineered Films Division
Aerostar Division
Operating income(e)
Assets
REPORTABLE SEGMENTS TOTAL
Sales
Operating income(e)
Assets
Capital expenditures
Depreciation and amortization
CORPORATE & OTHER
Operating (loss) from administrative expenses(f)
Assets(b)(d)
Capital expenditures
Depreciation and amortization
TOTAL COMPANY
Sales
Operating income
Assets
Capital expenditures
Depreciation and amortization
(a) The fiscal year ended January 31, 2016 includes gains of $611 on disposal of assets related to the exit of contract manufacturing operations.
(b) Certain facilities owned by the Company are shared by more than one reporting segment. Beginning with fiscal year 2016 all facilities are reported as an asset
based on the segment that acquired the asset as we believe this better reflects total assets of the business segment. In prior fiscal years (which have not been
recast in this table), the book value of certain shared facilities was allocated across reporting segments based on usage. Expenses and costs related to these
facilities including depreciation expense, are allocated and reported in each reporting segment's operating income for each fiscal year presented.
258,229
21,501
233,064
12,385
15,460
378,153
65,505
287,913
14,518
15,139
277,395
28,413
301,509
4,796
15,436
258,229
4,391
298,688
13,046
17,136
378,153
43,801
362,873
17,041
17,369
74,960
2,523
2,230
65,624
661
1,676
76,843
464
1,308
(17,110)
(21,704)
(19,624)
$
$
$
$
$
$
(c) The fiscal year 2017 includes inventory write-downs of $2,278 for Vista as a result of discontinuing sales activities for a specific radar product line within its
business. The fiscal year ended January 31, 2016 includes pre-contract cost write-offs of $2,933, a goodwill impairment loss of $11,497, a long-lived asset
impairment loss of $3,826, and a $2,273 reduction of an acquisition-related contingent liability for Vista as a result of lower financial expectations for net sales
and operating income.
(d) Assets are principally cash, investments, deferred taxes, and other receivables.
(e) At the segment level, operating income does not include an allocation of general and administrative expenses.
(f) At the segment level, operating income does not include an allocation of general and administrative expenses and, as a result, general and administrative
expenses are reported as "Operating (loss) from administrative expenses" in Corporate & Other.
75
(Dollars in thousands, except per-share amounts)
No customers accounted for 10% or more of consolidated sales in fiscal 2017 or 2016. Sales to a customer of the Engineered
Films segment accounted for 14% of consolidated sales in fiscal 2015 and accounted for 5% of consolidated accounts receivable
at January 31, 2015.
Substantially all of the Company's long-lived assets are located in the United States. Foreign sales are attributed to countries based
on location of the customer. Net sales to customers outside the United States were as follows:
Canada
Europe
Latin America
Other foreign sales
Total foreign sales
United States
For the years ended January 31,
2016
2017
2015
$
$
13,969
13,924
3,402
4,233
35,528
241,867
277,395
$
$
11,789
10,526
2,676
2,858
27,849
230,380
258,229
$
$
14,432
8,243
9,921
4,239
36,835
341,318
378,153
NOTE 16 SUBSEQUENT EVENTS
The Company has evaluated events up to the filing date of this Annual Report on Form 10-K and concluded that no subsequent
events have occurred that would require recognition or disclosure in the Notes to the Consolidated Financial Statements.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the
effectiveness of the design and operation of our disclosure controls and procedures as of January 31, 2017. Disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)), are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including
our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of January
31, 2017 due to the material weaknesses in our internal control over financial reporting described in "Management’s Report on
Internal Control Over Financial Reporting" appearing in Part II. Item 8 of this Annual Report on Form 10-K (Form 10-K)
(Management's Report on Internal Control Over Financial Reporting).
Notwithstanding the existence of the material weaknesses described in Management's Report on Internal Control Over Financial
Reporting, management has concluded that the consolidated financial statements included in this Form 10-K present fairly, in all
material respects, our consolidated financial position, results of operations and cash flows for the periods presented herein in
conformity with accounting principles generally accepted in the United States of America.
Management’s Report on Internal Control Over Financial Reporting
Management's report and the report of the Company's independent registered public accounting firm are included in Part II, Item
8. of this Form 10-K captioned "Management's Report on Internal Control Over Financial Reporting" and "Report of Independent
Registered Public Accounting Firm", respectively, and are incorporated herein by reference.
76
Management’s Remediation Initiatives
The Company is actively engaged in the planning for, and implementation of, remediation efforts to address the underlying causes
of the control deficiencies that gave rise to the material weaknesses. These remediation efforts, summarized below, which are in
the process of being implemented, are intended to address the identified material weaknesses and to enhance our overall financial
reporting control environment.
With the oversight of the Company’s Audit Committee, management is taking steps intended to address the underlying causes of
the material weaknesses identified in Management's Report on Internal Control Over Financial Reporting primarily through the
following remediation activities:
• Controls relating to the risk assessment in response to the risks of material misstatement
During the fourth quarter of fiscal 2017, we engaged a third-party independent registered public accounting firm
to help remediate the identified material weaknesses and complete an assessment of our internal controls
framework.
We are adding or redesigning specific controls and procedures to proactively address opportunities to augment
and enhance controls identified through this assessment.
We are establishing an independent internal audit function and hiring additional accounting and internal audit
staff to improve the management of risks to the enterprise.
• Controls over accounting for goodwill and long-lived assets, including finite-lived intangible assets
We are redesigning our specific procedures and controls associated with the identification of the proper unit of
account.
We are developing an enhanced risk assessment evaluation for the reporting unit for which a goodwill impairment
analysis is being conducted.
We are redesigning our controls associated with the development of a more precise revenue forecast for use in
interim and annual impairment tests. For Aerostar, this specifically includes more precise contract-based revenue
assumptions.
We are redesigning our controls associated with all significant assumptions, model and data used in management's
estimates relevant to assessing the valuation of goodwill and long-lived assets, including finite-lived intangible
assets.
We have engaged third-party valuation experts to evaluate and enhance the processes and procedures we are
establishing or enhancing.
• Completeness and accuracy of accounting for income taxes
We are redesigning specific processes and controls to augment the review of significant or unusual transactions
by finance leadership to ensure that the relevant tax accounting implications are identified and considered.
We have engaged third-party tax accounting resources to assist in review and analysis of tax matters associated
with significant or unusual transactions.
Our new Director of Taxation has begun re-evaluating our tax models and designing and implementing multiple
reconciliations to ensure the Company’s tax provision is properly reconciled and rolled-forward.
• Controls over the existence of inventories, specifically controls to monitor that inventory subject to the cycle count
program was counted at the frequency levels and accuracy rates required under the Company’s policy, and the controls
to verify existence of inventory held at third-party locations
We have begun redesigning and enhancing our cycle count procedure to monitor the completeness and accuracy
of cycle count results and establish specific accountability for investigation and analysis of variances.
We have begun redesigning and enhancing controls, including those over the completeness and accuracy of
underlying information, to monitor count dates for each item by location. This will be reviewed annually to
ensure that each item was counted the appropriate number of times in accordance with the cycle count policy.
We are redesigning and implementing enhanced controls including those over the completeness and accuracy
of underlying information to calculate and monitor the historical 12-month rolling accuracy of cycle counts.
During the fourth quarter of fiscal 2017, we completed a full physical inventory count for locations subject to
the cycle count program and will continue to do so annually until the completeness and accuracy of the cycle
count program has been validated. Also during the fourth quarter of fiscal 2017, we completed a full physical
inventory count of third-party locations and will conduct a full physical count at such locations each quarter
until we have completed the transfer of the vast majority of inventory held at third-party locations to Company-
owned facilities.
77
• Controls over the completeness and accuracy of spreadsheets and system-generated reports used in internal control over
financial reporting
We have begun designing new controls for the identification and assessment of the completeness and accuracy
of spreadsheets and system-generated reports used within the Company’s internal control over financial reporting.
We have begun adding or redesigning controls to require both an evaluation and evidence of that evaluation of
the completeness and accuracy of all spreadsheets and system-generated reports used in internal control over
financial reporting and the preparation of the financial statements and related footnote disclosures.
We will maintain evidence of a baseline evaluation of completeness and accuracy for every system-generated
report determined to be a key report for which it is possible to maintain a baseline test.
We will periodically re-baseline system-generated reports whether they are changed or not in accordance with
our redesigned procedures and controls over financial reporting.
We will establish a process for evaluating and documenting the completeness and accuracy of all other
spreadsheets and system-generated reports that cannot be baselined, including spreadsheets prepared or reviewed
by management.
Although we have implemented several remediation actions, we are still in the process of implementing certain actions and
validating the impact of such actions. These remediation actions are subject to ongoing review by management, as well as oversight
by the Audit Committee of our Board of Directors. Although we plan to complete this remediation process as diligently as possible,
we cannot, at this time, estimate when such remediation may occur, and our initiatives may not prove successful in remediating
the material weaknesses. Management may determine to enhance other existing controls and/or implement additional controls as
the implementation progresses. It will take time to determine whether the additional controls we are implementing will be sufficient
and functioning as designed to accomplish their intended purpose; accordingly, these material weaknesses may continue for a
period of time. While the Audit Committee of our Board of Directors and Executive management are closely monitoring this
implementation, until the remediation efforts discussed herein, including any additional remediation efforts that management
identifies as necessary, are complete, tested, and determined to be effective, we will not conclude that the material weaknesses
have been remediated. In addition, we may need to incur incremental costs associated with this remediation, primarily due to the
engagement of external accounting and tax experts to validate and support remediation activities and the implementation and
validation of improved accounting and financial reporting procedures.
We are committed to improving our internal control over financial reporting and processes and intend to proactively review and
improve our financial reporting controls and procedures incorporating best practices and leveraging external resources to facilitate
periodic evaluations of our internal control over financial reporting. As we continue to evaluate and work to improve our internal
control over financial reporting, we may take additional measures to address control deficiencies or modify certain of the
remediation measures described above.
Changes in Internal Control over Financial Reporting
As described above under "Management's Remediation Initiatives," there were changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended January
31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Limitations on Effectiveness of Controls and Procedures
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will
prevent or detect all errors or potential fraud. Any control system, no matter how well designed and operated, is based upon certain
assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of
controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances
of fraud, if any, within our Company have been detected.
ITEM 9B. OTHER INFORMATION
Not applicable.
78
PART III
ITEMS 10,
11, 12, 13
and 14.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE; EXECUTIVE
COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS; CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE; AND PRINCIPAL
ACCOUNTING FEES AND SERVICES
The Company will file a definitive proxy statement with the Securities and Exchange Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934 (the Proxy Statement) relating to the Company's 2017 Annual Meeting of Shareholders.
Information required by Items 10 through 14 will appear in the Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULE
LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
Financial Statements
See PART II, Item 8.
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts for the years ended January 31, 2017, 2016, and 2015; included on page 83.
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are inapplicable and therefore have been omitted.
Exhibits
See index to Exhibits on the following page.
ITEM 16.
FORM 10-K SUMMARY
None.
79
Exhibit
Number
Description
2(a) Agreement and Plan of Merger and Reorganization, dated as of November 3, 2014, by and among Raven Industries, Inc.,
Infinity Acquisition, Inc., Integra Plastics, Inc. and Nikole Mulder, as the Shareholder Representative (incorporated herein by
reference to Exhibit 2.1 of the Company's Form 8-K filed November 7, 2014).
3(a) Articles of Incorporation of Raven Industries, Inc. and all amendments thereto (incorporated herein by reference to the
corresponding exhibit of the Company's 10-K for the year ended January 31, 1989).
3(b) Amended and Restated Bylaws of Raven Industries (incorporated herein by reference to Exhibit B of the Company's definitive
Proxy Statement filed April 12, 2012).
4(a) Raven Industries, Inc. Amended and Restated 2010 Stock Incentive Plan filed on June 8, 2015 as Exhibit 4.1 of Raven Industries,
Inc. Registration Statement on Form S-8, and incorporated herein by reference.
10.1 Amended and Restated Employment Agreement between Raven Industries, Inc. and Daniel A. Rykhus dated as of March 29,
2017 and filed herewith as Exhibit 10.1. †
10.2 Amended and Restated Employment Agreement between Raven Industries, Inc. and Steven E. Brazones dated as of March
29, 2017 and filed herewith as Exhibit 10.2. †
10.3 Form of Schedule A to Employment Agreement, revised effective January 1, 2016, between Raven Industries, Inc. and the
following executive officers: Stephanie Herseth Sandlin, Janet L. Matthiesen, Brian E. Meyer, and Anthony D. Schmidt filed
herewith as Exhibit 10.3. †
10(a) Amended and Restated Change in Control Agreements between Raven Industries, Inc. and the following senior executive
officers: Stephanie Herseth Sandlin, Anthony D. Schmidt, Brian E. Meyer, and Janet L. Matthiesen dated as of March 28, 2016
(incorporated herein by reference to Exhibit 10.1 of the Company's 10-K filed March 29, 2016). †
10(b) Amended and Restated Change in Control Agreements between Raven Industries, Inc. and the following senior executives:
Lon E. Stroschein and Scott W. Wickersham dated as of March 28, 2016 (incorporated herein by reference to Exhibit 10.2 of
the Company's 10-K filed March 29, 2016). †
10(c) Employment Agreement between Raven Industries, Inc. and Anthony D. Schmidt dated as of February 1, 2012 (incorporated
herein by reference to Exhibit 10.1 of the Company's 8-K filed February 1, 2012). †
10(d) Raven Industries, Inc. 2000 Stock Option and Compensation Plan adopted May 24, 2000 (incorporated herein by reference to
Exhibit A of the Company's definitive Proxy Statement filed April 19, 2000). †
10(e) Raven Industries, Inc. Deferred Compensation Plan for Directors adopted May 23, 2007 (incorporated herein by reference to
Exhibit 10.1 of the Company's 8-K filed May 24, 2007). †
10(f) Change in Control Agreement between Raven Industries, Inc. and Anthony D. Schmidt dated February 1, 2012 (incorporated
herein by reference to Exhibit 10.3 of the Company's 8-K filed February 1, 2012). †
10(g) Change in Control Agreement between Raven Industries, Inc. and Janet L. Matthiesen (incorporated herein by reference to
Exhibit 10.3 of the Company's 8-K filed April 20, 2012). †
10(h) Credit Agreement dated April 15, 2015, by and between Raven Industries, Inc. and JPMorgan Chase Bank, N.A., Toronto
Branch, as Canadian Administrative Agent, JPMorgan Chase Bank National Association, as Administrative Agent, and JP
Morgan Securities LLC and Wells Fargo Securities, LLC as Joint Bookrunners and Joint Lead Arrangers (incorporated herein
by reference to Exhibit 10.1 of the Company's Form 8-K filed April 16, 2015).
10(i) Guaranty dated April 15, 2015, made by each of the Guarantors (Raven Industries, Inc., Aerostar International, Inc., Vista
Research, Inc., and Integra Plastics, Inc.) in favor of JPMorgan Chase Bank, N.A. as Administrative Agent on behalf of the
guaranteed parties (incorporated herein by reference to Exhibit 10.2 of the Company's Form 8-K filed April 16, 2015).
10(j) Amended Employment Agreements between Raven Industries, Inc. and the following senior executive officers: Brian E.
Meyer, Janet L. Matthiesen, and Stephanie Herseth Sandlin dated August 25, 2015 (incorporated herein by reference to Exhibit
10.1 of the Company's 8-K filed August 31, 2015). †
10(k) Form of Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 10(r) of the Company's Form
10-Q filed June 4, 2012). †
10(l) Form of Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10(s) of the Company's Form 10-Q
filed June 4, 2012). †
21 Subsidiaries of the Registrant.
23 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
80
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
† Management contract or compensatory plan or arrangement.
81
SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RAVEN INDUSTRIES, INC.
(Registrant)
By: /s/ DANIEL A. RYKHUS
Daniel A. Rykhus
President and Chief Executive Officer
Date: March 31, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ DANIEL A. RYKHUS
Daniel A. Rykhus
President and Chief Executive Officer
(principal executive officer) and Director
/s/ STEVEN E. BRAZONES
Steven E. Brazones
Vice President and Chief Financial Officer
(principal financial and accounting officer)
/s/ THOMAS S. EVERIST
Thomas S. Everist
Chairman of the Board
/s/ KEVIN T. KIRBY
Kevin T. Kirby
Director
/s/ MARC E. LEBARON
Marc E. LeBaron
Director
/s/ JASON M. ANDRINGA
/s/ HEATHER A. WILSON
Jason M. Andringa
Director
/s/ MARK E. GRIFFIN
Mark E. Griffin
Director
Heather A. Wilson
Director
Date: March 31, 2017
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended January 31, 2017, 2016 and 2015
(in thousands)
Column A
Column B
Column C
Additions
Column D
Column E
Description
Deducted in the balance sheet from the asset to which it
applies:
Allowance for doubtful accounts:
Year ended January 31, 2017
Year ended January 31, 2016
Year ended January 31, 2015
Note:
Balance at
Beginning
of Year
Charged to
Costs and
Expenses
Charged to
Other
Accounts
Deductions
From
Reserves (1)
Balance at
End of Year
$
1,034 $
319
319
380 $
1,066
211
— $
—
19
723 $
351
230
691
1,034
319
(1) Represents uncollectable accounts receivable written off during the year, net of recoveries.
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INVESTOR INFORMATION