President & Chief Executive Officer
DANIEL A. RYKHUS
124.7
105.2
92.6
31.3
26.6
18.3
‘16 ‘17 ‘18
‘16 ‘17 ‘18
213.3
129.5
138.9
47.3
23.0
17.9
‘16 ‘17 ‘18
‘16 ‘17 ‘18
39.9
36.4
34.1
4.1
(1.6)
‘16 ‘17 ‘18
(14.8)
‘16 ‘17 ‘18
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, 2018
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
Emerging growth 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, 2017 was approximately $1,231,707,927. The aggregate
market value was computed by reference to the closing price as reported on the NASDAQ Global Select Market, $34.40, on July 31, 2017, 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 16, 2018 was
35,796,857.
The definitive proxy statement relating to the registrant's Annual Meeting of Shareholders, to be held May 22, 2018, 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 - Deloitte & Touche LLP
Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP
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
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7
12
12
13
13
14
14
15
16
16
17
17
23
28
31
32
35
35
36
37
38
39
40
41
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45
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79
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, 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 1,157 people and is headquartered at 205 E. 6th
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 its website. Information on the Company's
website is not part of this filing.
We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to
those reports available, free of charge, in the “Investor Relations” section of our Internet website as soon as reasonably practicable
after we electronically file these materials with, or furnish these materials to, the Securities and Exchange Commission (SEC).
Information on or connected to our website is neither part of, nor incorporated by reference into, this Form 10-K or any other
report filed with or furnished to the SEC.
You may also read or copy any materials that we file with the SEC at its Public Reference Room at 100 F Street, N.E., Washington,
DC 20549. You may obtain additional information about the Public Reference Room by calling the SEC at 1-800-
SEC-0330. Additionally, you will find these materials on the SEC Internet site at www.sec.gov. This site contains reports, proxy
statements and other information regarding issuers that file electronically with the SEC.
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 general and administrative 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:
23
72
Results of Operations – Segment Analysis
Note 16 Business Segments and Major Customer Information
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 steering systems, automatic boom controls, injection
systems, 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 the continued build-out of the Slingshot™ platform has also
3
positioned Applied Technology as an information platform that improves 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
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, agricultural, construction, and industrial
applications. Engineered Films acquired the assets of Colorado Lining International, Inc. (CLI) in September 2017. This acquisition
enhanced the division's geomembrane market position through extended service and product offerings with the addition of new
design-build and installation service components. The acquisition of CLI advanced Engineered Films’ business model into a
vertically-integrated, full-service solutions provider for the geomembrane market.
Engineered Films sells 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 extrude
and convert films, along with offering installation services for its geomembrane products, 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 $8.1 million in fiscal 2018, $2.8 million
in fiscal 2017, and $10.8 million in fiscal 2016.
Aerostar
Aerostar serves the aerospace/defense, radar and lighter-than-air markets. Aerostar's primary products include high-altitude
(stratospheric or lighter-than-air) balloons, tethered aerostats, and radar 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. Aerostar
also pursues product and support services contracts with agencies and instrumentalities of the U.S. government as well as sales
of advanced radar systems and aerostats in international 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.
Aerostar sells to government agencies as both a prime contractor and subcontractor, and to commercial users primarily as a sub-
contractor. Further, sales to government agencies often involve large contracts subject to frequent delays because of budget
uncertainties, and protracted negotiation processes. The timing and size of contract wins can create volatility in Aerostar’s results.
OUTLOOK
The Company is very pleased with the performance achieved by all three operating divisions throughout fiscal 2018. All three
divisions achieved double-digit sales growth and the Company believes it is well positioned for the year ahead.
In fiscal 2018 Applied Technology achieved strong results in the face of challenging agricultural market conditions. The Company
expects to continue to drive growth and will continue to strategically fund several long-term investments. Subsequent to the end
of the fourth quarter, the division launched a strategic initiative to grow its local presence in Brazil and drive organic growth in
Latin America, in order to better capitalize on one of the largest agricultural markets in the world.
Engineered Films demonstrated impressive operational discipline and sustained high plant utilization throughout fiscal 2018. The
division grew sales by approximately $75 million year-over-year, and prior investments in acquisitions and manufacturing capacity
drove strong growth in every market served. The division continues to see opportunities for growth and is investing in additional
capacity in fiscal 2019. As for hurricane recovery efforts, the delivery of hurricane recovery film will result in sales of approximately
$9 million in the first quarter and then return to significantly reduced levels consistent with prior years.
During the year, Aerostar improved its financial performance and achieved more consistency and stability in its results. The division
continues to sharpen its focus on the stratospheric balloon platform, and has divested of a few non-strategic portions of its business
during and subsequent to the end of fiscal 2018. Strong performance on existing programs is driving confidence for continued
growth with Aerostar’s stratospheric balloon platform.
4
Overall, the Company is well positioned as it enters fiscal 2019 because of the actions taken and investments made to preserve
and strengthen our core business. Furthermore, the Company is evaluating strategic acquisitions and will continue to invest in
additional manufacturing capacity and technology development to enhance its core product lines. The Company's goal remains
to generate 10 percent annualized earnings growth over the long-term, excluding unusual and generally non-recurring items.
MAJOR CUSTOMER INFORMATION
No customers accounted for 10% or more of consolidated sales in fiscal years 2018, 2017, or 2016.
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. However, given the overall diversification of the Company, the seasonal fluctuations in net
working capital (accounts receivable, net plus inventories less accounts payable) are not usually 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 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. The Company is unaware of any potential liabilities as of
January 31, 2018 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, 2018, the Company's order backlog totaled approximately $40.3 million. Backlog amounts as of February 1,
2017 and 2016 were $25.7 million and $18.6 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, 2018, the Company had 1,157 employees (including temporary workers). Following is a summary of active
employees by segment: Applied Technology - 394; Engineered Films - 471; Aerostar - 195; and Corporate Services - 97.
Management believes its relationship with its employees is good.
6
EXECUTIVE OFFICERS
Name, Age, and Position
Daniel A. Rykhus, 53
President and Chief Executive Officer
Steven E. Brazones, 44
Vice President and Chief Financial Officer
Lee A. Magnuson, 62
General Counsel and Vice President
Janet L. Matthiesen, 60
Vice President of Human Resources
Brian E. Meyer, 55
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.
Mr. Magnuson joined the Company in June 2017, as Vice President and
General Counsel and also became the Company's Secretary in August 2017.
Prior to joining the Company, Mr. Magnuson was managing partner of
Lindquist and Vennum Law Firm's Sioux Falls, SD office for 5 years,
practicing in the areas of commercial transactions, mergers and acquisitions,
corporate matters, real estate and regulatory matters.
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, 46
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.
Scott W. Wickersham, 44
Division Vice President and General Manager -
Aerostar Division
Mr. Wickersham was named Division Vice President and General Manager
of the Aerostar Division in January 2018. He joined the Company in 2010
as the Director of Product Development and Engineering Manager and has
been the General Manager for the Aerostar Division since November 2015.
Prior to joining the Company, Mr. Wickersham held a range of engineering
and operational roles with various technology companies.
ITEM 1A. RISK FACTORS
RISKS RELATING TO THE COMPANY
The Company's business is subject to many risks, which by their nature are unpredictable or unquantifiable and may be unknown.
In an attempt to provide you with information on potential risks the Company may encounter, we have provided below, what we
believe are the most significant risks the Company could potentially face, based on our knowledge, experience, information and
assumptions. The risks provided below should be assessed contemporaneously with other information contained in this Form 10-
K, including Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the risks and
uncertainties addressed under "Forward-Looking Statements" on page 35, the Notes to the Consolidated Financial Statements on
page 45, and other information presented in or incorporated by reference into this Annual Report on Form 10-K. The risks contained
herein, as well as other statements in this 10-K are forward-looking statements and, as such, are uncertain. Such statements are
7
not guarantees of future performance and undue reliance should not be placed on them. The indeterminate nature of risk factors
makes them subject to change, and certain risks and uncertainties could potentially cause material changes to actual results. Some
of these risks may affect the entire Company, where others may only affect particular segments of our business, or may have no
material affect at all.
The Company, except as required by law, disclaims any obligation to update or revise the risk factors contained herein, regardless
of changes, whether as a result of new information, developments or otherwise. The risks provided in this form 10-K and in other
documents filed with the SEC are not exclusive in nature and, as such, there are other potential risks and uncertainties that the
Company is not aware of, or does not presently consider material in nature that could feasibly cause actual results to vary materially
from expectations.
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 applicators to purchase agricultural equipment, including its products. If such farmers, agricultural service providers, or
custom applicators experience weather conditions or natural disasters resulting in unfavorable crop prices or farm incomes, sales
in the Applied Technology Division may be adversely affected.
Weather conditions and natural disasters can also adversely affect sales in the Company's Engineered Films Division. To the extent
weather conditions or natural disasters curtail construction or agricultural activity, sales of the division's plastic sheeting would
likely decrease.
Seasonal and weather-related 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 manage 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.
The loss, disruption, or material change in our business relationship with single source suppliers for particular materials,
components or services, could cause a disruption in supply, or substantial increase in cost of any such products or services,
and therefore could result in harm to our sales, profitability, cash flows and financial condition.
The Company obtains certain materials, components, or services from suppliers that serve as the only source of supply, or that
supply the majority of the Company’s requirements of the particular material, component, or service. While these materials,
components, services, or suitable replacements, could potentially be sourced from other suppliers, in the event of a disruption or
loss of supply of relevant materials, components, or services for any reason, the Company may not be able to immediately find
alternative sources of supply, or if found, may not be found on similar terms. If the Company’s relationship with any of these
single source suppliers became challenged, or is terminated, we could have difficulty replacing these sources without causing
disruption to the business.
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 our control. Although the Engineered Films Division is sometimes able to pass on price increases to its customers,
significant variations in the cost of polymeric resins can affect the Company's operating results from period to period. 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. 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 in supply of material. If the
Company is not able to fully offset the effects of adverse materials availability or 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, which
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.
8
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
or input costs 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 technologies and products 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 a successful new product introduction.
Failure to develop and maintain partnerships, alliances, and other distribution or supplier relationships could adversely impact
the Company's financial results.
In certain areas of the Company’s business, continued success depends on developing and maintaining relationships with other
industry participants, such as original equipment manufacturers, dealers and distributors. If the Company fails to develop and
maintain such relationships, or if there is disruption of current business relationships, due to actions of the Company, its partners
or competitors, our ability to effectively market and sell certain products could be harmed. The Company’s relationships with
other industry participants are complex and multifaceted, and evolve over time. Often, these relationships contribute to substantial
ongoing business and operations in particular markets; therefore, changes in these relationships could have an adverse impact on
our sales and revenue.
Additionally, the Company uses dealer/distributor networks, some of which are affiliated with strategic and industry partners.
Enlisting and retaining qualified dealers and distributors and training them in the use and selling of product offerings necessitates
substantial time and resources. If we were to lose a significant dealer or distributor relationship, and were forced to identify new
channels, the time and expense of training new dealers or distributors may make new-product introduction difficult and also may
hinder end-user sales and adoption, which could result in decreased revenues. Additionally, the interruption of dealer coverage
within specific regions or markets could cause difficulties in marketing, selling or servicing our products and could harm the
Company’s business, operating results or financial condition.
The Company's sales of products that 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.
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.
9
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 certain of Aerostar's advanced 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 certain advanced radar systems and aerostat
inventory at January 31, 2018 was $1.6 million and $3.4 million, respectively. 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 and related selling costs. 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 also 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
International Traffic in Arms Regulations and Foreign Corrupt Practices Act, 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 changes in worldwide economic conditions.
The Company's consolidated net sales to locations outside of the U.S. were $41.6 million in fiscal 2018, representing approximately
11% 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.
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.
10
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 accounted for $57.3 million, or approximately 18%, of the Company's total assets as of
January 31, 2018. 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.
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 board of directors, senior management team and other key employees, including experienced
and skilled technical personnel. The loss of certain members of our board of directors, senior management, including our Chief
Executive Officer, or other key employees, 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 board members,
senior management and other key 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 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 on 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.
The Company could be impacted by unfavorable results or material settlement of legal proceedings.
The Company is sometimes a party to various legal proceedings and claims that arise in the ordinary course of business. Regardless
of the merit of any such claims, litigation is often very costly, time-consuming, and disruptive to the operations and business of
the Company, and a distraction to management and other personnel. While these matters generally are not material in nature, it
is possible a matter may arise that is material to the Company’s business.
Although the Company believes the probability of a materially adverse outcome is remote, if one or more claims were resolved
against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated
financial statements may be materially adversely affected. Further, such an outcome could result in significant compensatory,
punitive or trebled monetary damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief against
the Company that could have a material adverse affect on its businesses, financial condition, results of operation, and cash flows.
11
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 other 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 manage 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 significantly 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.
The implementation of a new enterprise resource planning (ERP) system may result in short term disruption to the Company’s
operations and business, which could adversely impact the Company and damage customer relationships and brand reputation.
The Company depends heavily on its management information systems for several aspects of our business. The Company launched
a company-wide initiative during the fiscal 2018 third quarter called "Project Atlas." This is a strategic long-term investment to
replace the Company’s existing ERP. Project Atlas is being implemented in a phased approach and is expected to take approximately
three years. If the new ERP system or legacy system are disrupted, in any material way, during implementation, the Company
may occur additional expense and loss of data. Additionally, if improvements or upgrades are required to meet the evolving needs
of our business, we may be required to incur significant capital expenditures or expenses in the pursuit of improvements or upgrades
to the new system. These efforts could potentially increase the amount of time for implementation of the new ERP system, require
expenditures above the anticipated amounts, demand the use of additional resources, distract key personnel and potentially cause
short-term disruptions to our existing systems and our business. Any of these outcomes could impair the Company’s ability to
achieve critical strategic initiatives and could adversely impact our sales, profitability, cash flows and financial condition.
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 and in Brazil. 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 in Midland and Pleasanton, Texas. In addition, Engineered Films leases a production and conversion facility in Parker, Colorado
and Colton, California.
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 and Chatsworth, 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.
The Company also owns approximately 70 acres of undeveloped land adjacent to the other owned property, which is available for
expansion.
12
The following is the approximate square footage of the Company's owned or leased facilities by segment: Applied Technology -
154,000; Engineered Films - 761,000; Aerostar - 285,000; 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. Management does not believe the ultimate outcomes
of its legal proceedings are likely to be material to its results of operations, financial position, or cash flows. The previously
disclosed patent infringement lawsuit in which Capstan Ag Systems, Inc. made certain infringement claims against the Company
has been settled on a confidential basis.
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.
13
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)
Common
Stock Market
Price
Basic Diluted High
Low
Cash
Dividends
Per Share
FISCAL 2018
First Quarter
Second Quarter
Third Quarter(b)
Fourth Quarter(b)(c)
$ 93,535 $ 31,956 $ 18,219 $17,989 $
86,610
101,349
95,823
26,513
33,333
29,763
11,700
17,829
11,422
11,637
17,795
11,565
12,348 $ 0.34 $ 0.34
0.23
0.23
8,235
0.33
0.33
11,998
0.23
0.24
8,441
$31.60 $23.75
29.80
37.40
26.70
35.80
32.06
40.85
$
0.13
0.13
0.13
0.13
Total Year
$ 377,317 $121,565 $ 59,170 $58,986 $
41,022 $ 1.14 $ 1.13
$40.85 $23.75
$
0.52
FISCAL 2017
First Quarter
Second Quarter
Third Quarter(d)
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
15.01
21.58
20.21
25.47
20.80
26.90
$
0.13
0.13
0.13
0.13
Total Year
$ 277,395 $ 78,190 $ 28,413 $27,853 $
20,191 $ 0.56 $ 0.56
$26.90 $12.88
$
0.52
FISCAL 2016
First Quarter
Second Quarter
Third Quarter(e)
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
18.52
22.36
15.77
19.53
13.87
19.61
$
0.13
0.13
0.13
0.13
$ 258,229 $ 66,974 $
Total Year
(a) Net income per share is computed discretely by quarter and may not add to the full year.
(b) Fiscal year 2018 third and fourth quarters include net sales of $5.2 million and $7.9 million, respectively, related the acquisition of Colorado Lining International,
Inc., as further described in Note 6 "Acquisitions of and Investments in Businesses and Technologies" of the Notes to the Consolidated Financial Statements.
(c) The Tax Cuts and Jobs Act, effective January 1, 2018, lowered the Company's federal statutory rate by 1.2 percentage points and benefited net income
4,776 $ 0.13 $ 0.13
4,391 $ 4,081 $
$22.85 $13.87
0.52
$
approximately $0.7 million for the fiscal year, as further described in Note 10 "Income Taxes" of the Notes to the Consolidated Financial Statements.
(d) 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
line within its business, as further described in Note 7 "Goodwill, Long-Lived Assets, and Other Charges " of the Notes to the Consolidated Financial
Statements.
(e) 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
Note 7 "Goodwill, Long-Lived Assets, and Other Charges" of the Notes to the Consolidated Financial Statements.
As of January 31, 2018, the Company had approximately 12,400 beneficial holders, which includes a substantial amount of the
Company's common stock held of record by banks, brokers, and other financial institutions.
On November 3, 2014, the Company announced that its Board of Directors (Board) had authorized a $40.0 million stock buyback
program. Since that time, the Board has provided additional authorizations to increase the total amount authorized under the
program to $75.0 million.
During fiscal 2018, the Company made purchases of 348,286 common shares under this plan at an average price of $28.71 equating
to a total cost of $10.0 million. None of these common shares were repurchased during the fourth quarter of fiscal 2018. During
14
fiscal 2017, the Company made purchases of 484,252 common shares under this plan at an average price of $15.91 per share for
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 $28.0
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, RUSSELL 2000 INDEX, AND THE S&P SMALL CAP 600
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, Russell 2000 Index, and S&P Small Cap 600 Index. The S&P 1500 Industrial Machinery Index
is being replaced by the S&P Small Cap 600 Index as the Company determined that the S&P Small Cap 600 Index more closely
represents similar companies. The S&P 1500 Industrial Machinery Index remains on this chart in the year of transition for
comparative purposes. Investors who bought $100 of the Company's stock on January 31, 2013, held this for five years and
reinvested the dividends would have seen its value increase to $158.77. Stock performance on the graph is not necessarily indicative
of future price performance.
Years Ended January 31,
Company / Index
2013
2014
2015
2016
2017
2018
Raven Industries, Inc.
S&P 1500 Industrial Machinery Index
Russell 2000 Index
$ 100.00
100.00
100.00
$ 141.12
125.99
127.03
$ 82.29
130.62
132.63
$ 59.29
119.14
119.47
$ 101.55
170.46
159.53
$ 158.77
223.32
186.94
S&P Small Cap 600 Index
100.00
128.44
136.34
129.95
174.58
203.49
5-Year
CAGR(a)
9.7%
17.4%
13.3%
15.3%
(a) compound annual growth rate (CAGR)
15
ITEM 6.
SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY
(In thousands, except employee counts and per-share amounts)
OPERATIONS
Net sales(a)
Gross profit(b)
Operating income(b)(c)
Income before income taxes(b)(c)
Net income attributable to Raven Industries, Inc.(d)
Net income % of sales
Net income % of average equity(e)
FINANCIAL POSITION
Cash and cash equivalents
Property, plant and equipment
Total assets
Total debt (including capital lease obligations)
Raven Industries, Inc. shareholders' equity
Net working capital(f)
Net working capital percentage(g)
Long-term debt / total capitalization
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
Stock price range during the year
High
Low
Close
OTHER DATA
Price / earnings ratio(h)
Average number of employees
Sales per employee
For the years ended January 31,
2018
2017
2016
2015
2014
$377,317
121,565
59,170
58,986
41,022
$ 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
10.9%
15.3%
7.3%
7.7%
1.8%
1.7%
8.4%
11.4%
10.9%
18.2%
$ 40,535
106,280
326,803
448
276,064
100,777
$ 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
26.3%
0.2%
27.9%
—%
36.9%
—%
27.9%
—%
26.2%
—%
$ 44,961
(25,675)
(29,721)
(10,113)
$ 48,636
(4,642)
(27,151)
16,866
$ 44,008
(11,074)
(50,684)
(18,167)
$ 60,083
(29,986)
(30,665)
(1,038)
$ 52,836
(31,615)
(17,354)
3,634
$
$
$
1.14
1.13
0.52
40.85
23.75
38.55
34.1
1,054
358
$
$
$
0.56
0.56
0.52
26.90
12.88
25.05
44.7
907
306
$
$
$
0.13
0.13
0.52
22.85
13.87
15.01
115.5
936
276
$
$
$
0.86
0.86
0.50
40.06
20.75
21.44
24.9
1,251
302
$
$
$
1.18
1.17
0.48
42.99
25.46
37.45
32.0
1,264
312
(a) Fiscal year 2018 includes $13.1 million in net sales related to the acquisition of Colorado Lining International, Inc., further described in Note 6 "Acquisitions
of and Investments in Businesses and Technologies" of the Notes to the Consolidated Financial Statements.
(b) 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, as further described in Note 7 "Goodwill, Long-Lived Assets, and Other Charges " of the Notes to the Consolidated Financial
Statements.
(c) 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. For further information regarding these
impairments and other charges refer to Note 7 "Goodwill, Long-Lived Assets, and Other Charges" of the Notes to the Consolidated Financial Statements.
(d) The Tax Cuts and Jobs Act, effective January 1, 2018, lowered the Company's federal statutory rate by 1.2 percentage points and benefited net income
approximately $0.7 million for the fiscal year, as further described in Note 10 "Income Taxes" of the Notes to the Consolidated Financial Statements.
(e) 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.
(f) Net working capital is defined as accounts receivable (net) plus inventories less accounts payable.
(g) 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.
(h) Closing stock price on last business day of fiscal year divided by EPS — diluted.
16
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, construction, aerospace/defense, radar and lighter-than-air 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 2018 and 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)
17
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.
18
The following discussion highlights the consolidated operating results for the years ended January 31, 2018, 2017, and 2016.
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(a)
Gross margin(b)
Operating income
Operating margin(b)
Net income attributable to Raven Industries, Inc.(c)
Diluted income per share
Adjusted net income attributable to Raven
Industries, Inc.(d)
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(e)
Return on average assets(f)
Return on average equity(g)
2018
For the years ended January 31,
2017
% change
% change
2016
$ 377,317
36.0% $ 277,395
7.4% $ 258,229
$
$
$
$
$
$
$
$
32.2%
28.2%
25.9%
59,170
108.2% $
28,413
547.1% $
4,391
15.7%
41,022
1.13
10.2%
103.2% $
101.8% $
20,191
0.56
322.8% $
330.8% $
1.7%
4,776
0.13
41,022
103.2% $
20,191
34.1% $
15,053
44,961
12,011
18,685
10,000
10.9%
13.1%
15.3%
$
$
$
$
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%
(a) Fiscal year 2018 includes $13.1 million in net sales related to the acquisition of Colorado Lining International, Inc. further described in Note 6 "Acquisitions
of and Investments in Businesses and Technologies" of the Notes to the Consolidated Financial Statements.
(b) 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.
(c) The Tax Cuts and Jobs Act, effective January 1, 2018, lowered the Company's federal statutory rate by 1.2% and benefited net income approximately $0.7
million for the fiscal year, as further described in Note 10 "Income taxes" of the Notes to the Consolidated Financial Statements.
(d) Non-GAAP measure reconciled to GAAP in the applicable table below.
(e) Net income divided by net sales.
(f) 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.
(g) 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.
19
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 2018 and 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
Consolidated net sales, excluding contract
manufacturing sales
For the year
ended January 31,
2016
$
$
$
$
$
$
92,599
546
92,053
36,368
4,701
31,667
258,229
5,247
252,982
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 7 Goodwill, Long-lived Assets, and Other Charges and Note 6 Acquisition of and Investments in Businesses and
Technologies of the Notes to the Consolidated Financial Statements.
(dollars in thousands)
Aerostar
Reported operating income (loss)
Plus:
Goodwill impairment loss
Long-lived asset impairment loss
Pre-contract costs written off
Less:
Acquisition-related contingent liability benefit
Aerostar adjusted operating income (loss) (a)
Aerostar adjusted operating income (loss) % of
net sales
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
2018
For the years ended January 31,
2017
% change
% change
2016
$
4,122
(364.2)% $ (1,560)
(89.5)% $ (14,801)
—
—
—
—
—
—
—
4,122
$
—
(364.2)% $ (1,560)
(233.4)% $
11,497
3,813
2,933
2,273
1,169
10.3%
(4.6)%
3.2%
$ 59,170
108.2 % $ 28,413
547.1 % $
4,391
—
—
—
—
—
—
11,497
3,813
2,933
—
$ 59,170
—
108.2 % $ 28,413
2,273
39.5 % $ 20,361
Consolidated adjusted operating income
Consolidated adjusted operating income % of
net sales
10.2 %
(a) At the segment level, adjusted operating income (loss) does not include an allocation of general and administrative expenses.
15.7%
7.9%
20
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 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 7 Goodwill,
Long-lived Assets, and Other Charges and Note 6 Acquisition of and Investments in Businesses and Technologies of the Notes to
the Consolidated Financial Statements.
(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
2018
For the years ended January 31,
2017
% change
% change
2016
$
41,022
103.2% $
20,191
322.8% $
4,776
—
—
—
—
—
—
—
—
—
—
11,497
3,813
2,933
2,273
5,693
$
$
$
41,022
103.2% $
20,191
34.1% $
15,053
1.14
1.13
103.6% $
101.8% $
0.56
0.56
40.0% $
40.0% $
0.40
0.40
Results of Operations - Fiscal 2018 compared to Fiscal 2017
The Company's net sales in fiscal 2018 were $377.3 million, an increase of $99.9 million, or 36.0%, from last year's net sales of
$277.4 million. All three divisions achieved double-digit growth, with Engineered Films achieving growth of 53.6 percent year-
over-year. Delivery of hurricane recovery film to support relief efforts and the recent acquisition of CLI contributed sales of $24.2
million and $13.1 million, respectively.
Operating income for fiscal year 2018 was $59.2 million compared to $28.4 million in fiscal year 2017. The operating income
increase year-over-year was principally driven by operating leverage on higher sales volumes in Engineered Films and Applied
Technology, as well as improved profitability within Aerostar. Project Atlas began in the third quarter of fiscal 2018, and the related
costs incurred were $0.9 million in fiscal year 2018.
Net income for fiscal year 2018 was $41.0 million, or $1.13 per diluted share, compared to net income of $20.2 million, or $0.56
per diluted share, in fiscal year 2017. Net income was up $20.8 million year-over-year, or $0.57 per diluted share, in fiscal 2018.
The U.S. Tax Cuts and Jobs Act (TCJA) was enacted on December 22, 2017 and reduced the U.S. federal statutory tax rate to 21
percent effective January 1, 2018. This change caused the Company’s fiscal 2018 U.S. federal statutory tax rate to be reduced by
1.2 percentage points, benefiting fiscal year 2018 net income by approximately $0.7 million.
Applied Technology Division
Fiscal 2018 net sales increased $19.5 million, or 18.5%, to $124.7 million from $105.2 million in fiscal 2017. This increase in
sales was driven by new product introductions and market share gains. Sales in the original equipment manufacturer (OEM) channel
were up 32.4% while sales in the aftermarket channel increased 6.3%. The Company does not specifically model comparative
market share position for any of its operating divisions, but based on the sales developments in fiscal 2018 the Company believes
that Applied Technology's global market share position improved during the year as a result of new product sales and building on
key OEM relationships.
Applied Technology's operating income increased by 17.3% to $31.3 million from $26.6 million in the prior year due primarily
to higher sales volume and lower manufacturing expenses. Throughout fiscal 2018, the division continued to invest in research
and development activities to position itself for incremental new product sales and market share gains in future years.
21
Engineered Films Division
Fiscal 2018 net sales were $213.3 million, an increase of $74.4 million, or 53.6%, compared to fiscal 2017. The geomembrane
and construction markets had the largest increases in net sales, but all markets were up year-over-year. Although the Company
does not specifically model comparative market share position for any of its operating divisions, based on the sales developments
in fiscal year 2018 the Company believes that Engineered Films achieved sales growth due to improved end-market demand and
increased market share. Delivery of hurricane recovery film to support relief efforts and the recent acquisition of CLI contributed
net sales of $24.2 million and $13.1 million, respectively.
Engineered Film's operating income increased by 106.1% to $47.3 million from $23.0 million in the prior year due primarily to
strong operating leverage on higher sales volume. Operational efficiency gains developed throughout the year and higher sales
volume improved capacity utilization and resulted in fixed cost leverage.
Aerostar Division
Fiscal 2018 net sales were $39.9 million compared to $34.1 million in fiscal 2017, up $5.8 million. The increase in sales for the
division was principally driven by higher sales of stratospheric balloons and radar systems. 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 sales growth was primarily the result of
continuing to develop capabilities for and interest in the emerging stratospheric balloon market rather than capturing existing
market share from others.
Aerostar reported operating income of $4.1 million in fiscal 2018 compared to an operating loss of $1.6 million in fiscal 2017.
The improved profitability was driven by higher sales volume, and the absence of inventory write-downs, which lowered prior
year results by $2.3 million as discussed in more detail in Note 7 Goodwill, Long-Lived Assets, and Other Charges of the Notes
to the Consolidated Financial Statements.
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 volume
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, 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 operating divisions,
22
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 7 Goodwill, Long-lived Assets, and Other Charges of the Notes to the Consolidated Financial Statements, and lower sales
volume.
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.
(dollars in thousands)
2018
For the years ended January 31,
2017
% change
% change
2016
$
23,166
43.9%
105,217
43,476
$ 124,688
54,682
13.6% $
28.0%
18.5% $
25.8%
Net sales
Gross profit
Gross margin
Operating expense
Operating expense as % of sales
Long-lived asset impairment loss
Operating income(a)
Operating margin
Applied Technology net sales,
excluding contract manufacturing
sales(b)
NMF
(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
18.6%
259
31,257
16.0%
—
26,643
37.6% $
7.6% $
25.1%
16,833
25.3%
41.3%
17.3%
45.4%
NMF
NMF
NMF
$
$
$
$
92,599
33,969
36.7%
15,650
16.9%
—
18,319
19.8%
92,053
periods.
For fiscal 2018, net sales increased $19.5 million, or 18.5%, to $124.7 million as compared to $105.2 million in fiscal 2017.
Operating income increased $4.6 million, or 17.3%, to $31.3 million as compared to $26.6 million in fiscal 2017.
Fiscal 2018 fourth quarter net sales increased $4.6 million, or 17.6%, to $30.5 million and operating income decreased $0.6 million,
or 8.7%, to $5.8 million compared to the fourth quarter of fiscal 2017.
Fiscal 2018 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 2018. While OEM and aftermarket sales channel demand
23
•
•
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 building on key OEM relationships.
These were the primary growth drivers both domestically and internationally.
Sales volume and selling prices. Sales in the OEM and aftermarket channels were up 32.4% and 6.3%, respectively, in
fiscal 2018. Fiscal 2018 domestic sales were up 25.0% while international sales were up 1.5%. Higher sales volume,
rather than an increase in selling price, was the main driver for these increases.
International sales. Net sales outside the U.S. accounted for 23.6% of segment sales in fiscal 2018 compared to 27.6%
in fiscal 2017. International sales increased $0.4 million, or 1.5%, to $29.4 million in fiscal 2018 compared to fiscal
2017. Higher sales in Latin America and Europe, partially offset by a decrease in Canada, were the primary drivers of
the increase. European revenue growth included strong growth at SBG in fiscal 2018. For the fourth quarter, international
sales totaled $6.3 million, an increase of 6.2% from the prior year comparative quarter.
• Gross margin. Gross margin increased from 41.3% in fiscal 2017 to 43.9% in fiscal 2018. Higher sales volume and lower
manufacturing costs increased operating leverage and drove the increase in gross margin. Due to the existing available
capacity of the manufacturing facilities, the increase in sales volume did not require a commensurate increase in costs
in fiscal 2018.
• Operating expenses. Fiscal 2018 operating expenses were 18.6% of net sales compared to 16.0% for the prior year.
Throughout fiscal 2018, the division continued to invest in research and development activities to position itself for
incremental new product sales and market share gains in future years.
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 and selling prices. 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%. Higher sales volume, rather than an
increase in selling price, was the main driver for these increases.
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.
24
Engineered Films
Engineered Films manufactures high performance plastic films and sheeting for geomembrane, agricultural, construction, and
industrial applications. Engineered Films’ ability to develop value-added innovative products is expanded by its fabrication,
conversion, design-build and installation capabilities.
For the years ended January 31,
2017
% change
% change
2018
$ 213,298
56,255
(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.
53.6% $ 138,855
29,407
91.3%
106.1% $
38.7% $
47,324
26.4%
22.2%
22,966
8,931
4.2%
$
$
21.2%
6,441
4.6%
16.5%
2016
7.3 % $ 129,465
25,076
17.3 %
19.4%
(10.3)% $
7,184
5.5%
28.4 % $
17,892
13.8%
For fiscal 2018, net sales increased $74.4 million, or 53.6%, to $213.3 million as compared to fiscal 2017. Operating income was
$47.3 million, up 106.1% for fiscal 2018 as compared to $23.0 million for fiscal 2017.
For fiscal 2018, fourth quarter net sales increased $21.1 million, or 61.0%, to $55.6 million as compared to $34.5 million in the
fiscal 2017 fourth quarter. Operating income was up $6.6 million, or 125.2%, to $11.9 million as compared to $5.3 million in the
prior year fourth quarter.
Fiscal 2018 comparative results were primarily driven by the following factors:
• Market conditions. Engineered Films produces high-performance plastic films and sheeting for geomembrane,
agricultural, construction, and industrial applications. Each of these markets had significant growth in fiscal 2018, with
the geomembrane and construction markets growing most significantly. Geomembrane end-market conditions for
Engineered Films exhibited significant year-over-year improvement throughout fiscal 2018. U.S. land-based rig counts
have increased 34.6% from January 2017 to January 2018. Additionally, as discussed in more detail in Note 6 Acquisitions
and Investments in Business and Technologies of the Notes to the Consolidated Financial Statements, Engineered Films
acquired the assets of CLI in September 2017. This acquisition enhanced the division's geomembrane market position
through extended service and product offerings with the addition of new design-build and installation service components.
The acquisition of CLI advanced Engineered Films’ business model into a vertically-integrated, full-service solutions
provider for the geomembrane market. CLI contributed $13.1 million in net sales in fiscal 2018. For fiscal 2018, sales
into the geomembrane market increased 103.3% year-over-year. The growth in the construction market was driven by
delivery of hurricane recovery film. Due to the unusually devastating hurricane season, delivery of hurricane recovery
film during fiscal 2018 resulted in sales of $24.2 million. It has been several years since the Company received a substantial
increase in demand for hurricane recovery film, and sales of such film are generally less than $2.0 million on an annual
basis. For fiscal 2018, sales into the construction market increased 46.8% year-over-year.
Sales volume and selling prices. Primary drivers of the increase in net sales were the improved conditions within the
geomembrane and industrial markets, the acquisition of CLI, and the delivery of hurricane recovery film, which added
$2.3 million, $7.9 million and $15.8 million, in the fourth quarter of fiscal 2018, and $34.9 million, $13.1 million and
$24.2 million, in the 2018 full fiscal year, respectively.
•
• Gross margin. Fiscal 2018 gross margin was 26.4%, 5.2 percentage points higher than the prior fiscal year. During fiscal
2018 fourth quarter, the gross margin was 26.3% compared to 20.5% in the prior year fourth quarter. The increase for
both periods was primarily the result of operational efficiency gains developed throughout the year and higher sales
volume that improved capacity utilization and resulted in fixed cost leverage. Due to the existing available capacity of
the facilities, the increase in sales volume did not require a commensurate increase in costs in fiscal 2018.
• Operating expenses. Fiscal 2018 operating expenses, as a percentage of net sales, decreased to 4.2%, from 4.6% in 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 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 for fiscal 2017, up 28.4%, as compared to $17.9 million for fiscal 2016.
25
For fiscal 2017, fourth quarter net sales increase $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 market in the second half of fiscal 2017
for Engineered Films. U.S. land-based rig counts have increased approximately 17.0% 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.
Aerostar
Aerostar serves the aerospace/defense, radar and lighter-than-air 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 high-altitude (stratospheric) balloon systems, tethered aerostats, and radar 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 pursues product and support services contracts for agencies and
instrumentalities of the U.S. and foreign governments.
(dollars in thousands)
Net sales
Gross profit
Gross margin
Operating expenses
Operating expenses as % of sales
Goodwill and long-lived asset impairment
loss
For the years ended January 31,
2017
% change
% change
2016
17.0 % $ 34,113
5,319
99.4 %
15.6 %
(6.2)% $ 36,368
7,838
(32.1)%
21.6 %
6,792
19.9 %
(7.2)% $
7,316
20.1 %
(4.5%)
$
$
87
(1,560)
2018
$ 39,915
10,608
$
$
26.6%
6,486
16.2%
—
4,122
10.3%
$ 15,323
(14,801)
(40.7)%
$ 31,667
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
(364.2)%
(89.5)%
(4.6)%
NMF
NMF
NMF
NMF
periods.
Net sales increased 17.0% to $39.9 million from last year’s net sales of $34.1 million. Operating income was $4.1 million, up $5.7
million, compared to the fiscal 2017 operating loss of $1.6 million. Higher sales volume and the absence of inventory write-downs,
which lowered prior year results by $2.3 million, drove the improved profitability.
Fiscal 2018 fourth quarter net sales increased $1.0 million, or 11.8%, to $9.8 million. Aerostar's operating income for the fiscal
2018 fourth quarter was essentially break-even. This is down $0.2 million compared with the prior year fourth quarter.
26
Fiscal 2018 comparative results were primarily driven by the following factors:
• Market conditions. Aerostar's markets are subject to significant variability due to government spending and the timing
of contract awards. Aerostar is also pioneering new markets with leading-edge applications of its stratospheric 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. During fiscal 2018
Aerostar had several new contract wins further expanding the market for its stratospheric balloons.
Sales volume. The increase was principally driven by higher sales of stratospheric balloons and radar systems.
•
• Gross margin. For fiscal 2018, gross margin increased 11.0 percentage points compared to the prior fiscal year. The
improved profitability was driven by higher sales volume, and the absence of inventory write-downs, which lowered
prior year results by $2.3 million.
• Operating expenses. Operating expenses as a percentage of net sales decreased 3.7 percentage points compared to prior
fiscal year. Fiscal 2018 operating expenses were $6.5 million, or 16.2% of net sales, compared to operating expenses of
$6.8 million, or 19.9% of net sales in fiscal 2017.
Fiscal 2017 net sales declined 6.2% to $34.1 million from fiscal 2016 net sales of $36.4 million. Fiscal 2017 operating loss was
$1.6 million, up $13.2 million, compared to fiscal 2016 operating loss of $14.8 million. 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 an adjusted basis.
Fiscal 2017 fourth quarter net sales declined $0.2 million, or 2.5%, to $8.8 million compared to fiscal 2016 fourth quarter results.
Aerostar reported a 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 7 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 7 Goodwill, Long-lived Assets, and Other Charges of the Notes to
the Consolidated Financial Statements. As also described in Note 7 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.
27
Corporate Expenses (administrative expenses; other (expense), net; and effective tax rate)
(dollars in thousands)
Administrative expenses
Administrative expenses as a % of sales
Other (expense), net
Effective tax rate
For the years ended January 31,
2017
2016
2018
$
$
23,553
6.2%
(184)
30.5%
$
$
19,624
$
17,110
7.1%
(560)
27.5%
6.6 %
$
(310)
(18.8)%
Administrative expenses increased $3.9 million in fiscal 2018 compared with fiscal 2017. The increase is primarily due to higher
head count and incentive compensation, due diligence related expenses for CLI and the evaluation of other acquisition targets,
and costs incurred for Project Atlas. Project Atlas is a strategic long-term investment to replace the Company’s existing enterprise
resource planning platform. Costs incurred related to Project Atlas were $0.6 million and $0.9 million for the three- and twelve-
month periods ended January 31, 2018.
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 11 Financing Arrangements of the Notes to the Consolidated Financial Statements. It declined $0.4 million in
fiscal 2018 due to a combination of higher interest income and lower amortization expense related to an equity method investment.
The Company's fiscal 2018 effective tax rate was 30.5% compared to 27.5% in the prior year. The difference in the effective tax
rate is primarily due to higher pre-tax income in the current year and the recognition of discrete tax expense related to the Company's
adoption of ASU 2016-09 in fiscal 2018 as further discussed in Note 1 Summary of Significant Accounting Policies of the Notes
to the Consolidated Financial Statements. This ASU requires that the tax effects resulting from the settlement of stock-based
awards be recognized as a discrete income tax expense or benefit in the income statement in the reporting period in which they
occur. Additionally, the TCJA, effective January 1, 2018, lowered the Company's U.S. federal statutory tax rate by 1.2 percentage
points for the fiscal year. The TCJA reduces the U.S. federal statutory tax rate to 21% for fiscal 2019.
The effective tax rate and other items causing the effective tax rate to differ from the statutory tax rate are more fully described
in Note 10 Income Taxes of the Notes to the Consolidated Financial Statements. For fiscal year 2019, the Company expects a
consolidated effective tax rate of approximately 21%, 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
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.
Additionally, the Company has a credit facility of up to $125.0 million with a maturity date of April 15, 2020.
The Company’s cash balances and cash flows were as follows:
(dollars in thousands)
Cash and cash equivalents
(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
28
As of January 31,
2017
2018
2016
$
40,535
$
50,648
$
33,782
For the years ended January 31,
2017
2016
2018
$
$
44,961
(25,675)
(29,721)
322
(10,113)
$
$
48,636
(4,642)
(27,151)
23
$
16,866
$
44,008
(11,074)
(50,684)
(417)
(18,167)
Cash and cash equivalents totaled $40.5 million at January 31, 2018 compared to $50.6 million at January 31, 2017, a decrease
of $10.1 million. The decrease from fiscal 2017 year-end was primarily driven by cash outlays for the acquisition of CLI and share
repurchases, partially offset by strong operating cash flows.
At January 31, 2018 the Company held cash and cash equivalents of $4.1 million in accounts outside the United States. These
balances included undistributed earnings of foreign subsidiaries. As of January 31, 2018, the Company has recorded United States
income taxes of $0.3 million on $3.2 million of undistributed earnings from its Canadian and European subsidiaries. As a result
of the TCJA, we can repatriate our cumulative undistributed earnings back to the U.S. when needed with minimal U.S. income
tax consequences other than the transition tax. We plan to reinvest our foreign earnings internationally, but will continue to assess
if there is a need in the future to bring back a portion of foreign cash which was subject to the transition tax. Our liquidity is not
materially impacted by the amount held in accounts outside of the United States as the Company's operating cash flows are primarily
driven by U.S. sources.
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 $45.0 million in fiscal 2018 compared with
$48.6 million in fiscal 2017. The $3.6 million decrease in operating cash flows year-over-year is primarily due to the increase in
net working capital demands.
The Company's cash needs have minimal seasonal trends. 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. Net working capital and net working capital percentage
are metrics used by management as a guide in measuring the efficient use of cash resources to support business activities and
growth. 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)
As of January 31,
$
2018
58,532
55,351
13,106
$ 100,777
2017
43,143
42,336
8,467
77,012
$
$
2016
38,069
45,839
6,038
77,870
$
$
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.
26.3%
27.9%
36.9%
The net working capital percentage decreased from 27.9% at January 31, 2017 to 26.3% at January 31, 2018. The decrease was
driven by an increase in accounts payable balances as well as managing inventory levels and receivables terms proactively with
the substantial increase in sales versus the prior year. The Company has placed emphasis on managing efficient levels of inventory.
Similar emphasis was placed on managing accounts payable terms and to a lesser extent, accounts receivable terms and collections.
Inventory levels decreased from $45.8 million at January 31, 2016 to $42.3 million at January 31, 2017 driven by focused inventory
reduction actions in the Applied Technology and Engineered Films divisions as well as the inventory write-downs for certain radar
inventory in the third quarter of fiscal 2017. Conversely, inventory levels increased $13.0 million, or 30.7% from $42.3 million
at January 31, 2017 to $55.4 million at January 31, 2018. In comparison net sales increased $26.9 million or 39.0% year-over year
in the fourth quarter. The increase in inventory was primarily driven by growth in net sales and backlog in the Engineered Films
Division, offset somewhat by actions to reduce inventory levels in all three divisions.
Accounts receivable levels increased $5.1 million, or 13.3%, from $38.1 million at January 31, 2016 to $43.1 million at January
31, 2017 due primarily to increased sales volume. Accounts receivable levels increased $15.4 million, or 35.7% from $43.1 million
at January 31, 2017 to $58.5 million at January 31, 2018. In comparison net sales increased $26.9 million or 39.0% year-over year
in the fourth quarter.
Accounts Payable increased $2.4 million, or 40.2%, year-over-year from $6.0 million at January 31, 2016 to $8.5 million at January
31, 2017, primarily due to improvement in the timing of payments to suppliers. Accounts payable increased $4.6 million, or 54.8%
to $13.1 million at January 31, 2018 from $8.5 million at January 31, 2017. This increase was due to improved timing of payments
to suppliers, as well as additional purchases of raw materials to support the increase in sales year-over-year.
29
Investing Activities
Cash used in investing activities totaled $25.7 million in fiscal 2018, $4.6 million in fiscal 2017, and $11.1 million in fiscal 2016.
Capital expenditures totaled $12.0 million in fiscal 2018 compared to $4.8 million in fiscal 2017 and $13.0 million in fiscal 2016.
The primary drivers of the increase in fiscal 2018 cash outflows were payments related to the acquisition of CLI, as further described
in Note 6 Acquisitions of and Investments in Businesses and Technologies of the Notes to the Consolidated Financial Statements
included in Item 8 of this Form 10-K, and increased capital expenditures. Net capital outlay related to the CLI business acquisition
was $13.3 million. There were no businesses acquired in fiscal year 2017 or 2016. Capital expenditures in fiscal year 2018 included
$1.7 million for the Pleasanton, Texas facility purchased by Engineered Films in the first quarter. In addition, $3.3 million of costs
were capitalized in the fourth quarter for a new extrusion line to expand capacity within the Engineered Films division. The
installation of this line will continue throughout most of fiscal 2019.
Fiscal 2017 spending primarily related to maintenance activities. Due to the existing available capacity of the facilities as the result
of meaningful capacity additions in prior years, the increase in sales volume in fiscal 2017 did not require capital expenditures
for new capacity. Fiscal 2017 also 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.
Management anticipates capital spending of approximately $22 million in fiscal 2019. The increase over fiscal 2018 will primarily
be driven by installation of a new production line for Engineered Films.
Financing Activities
Financing activities consumed cash of $29.7 million in fiscal 2018 compared with $27.2 million in fiscal 2017 and $50.7 million
in fiscal 2016.
Quarterly dividends paid in fiscal 2018 were $18.7 million, or $0.52 per share, compared to $18.8 million, or $0.52 share, in fiscal
2017 and $19.4 million, or $0.52 share, in fiscal 2016.
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. Since that time, the Board has provided additional authorizations bringing the total amount
authorized under the plan to $75.0 million at January 31, 2018. The Company paid $10.0 million, $7.7 million and $29.3 million
for share repurchases in fiscal 2018, 2017 and 2016, respectively. Approximately $28.0 million of the total authorization is remains
available for share repurchases under this plan as of January 31, 2018.
The Company made $0.4 million, $0.4 million, and $0.8 million of acquisition-related contingent liability payments related to the
Vista and SBG acquisitions in fiscal 2018, 2017, and 2016, respectively.
During fiscal 2016, the Company paid $0.5 million of debt issuance costs associated with the Credit Agreement discussed further
in Note 11 Financing Arrangements of the Notes to the Consolidated Financial Statements and below. No debt issuance costs were
paid during fiscal 2018 or fiscal 2017. No borrowings or repayment have occurred on the Credit Agreement during any of fiscal
periods reported.
Financing cash outflows included $0.2 million, $0.3 million and $0.5 million, of employee taxes in relation to the net settlement
of restricted stock units (RSUs) that vested during fiscal years 2018, 2017 and 2016, respectively.
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 is more fully described in Note
11 Financing Arrangements of the Notes to the Consolidated Financial Statements. There were no borrowings outstanding for
any of the fiscal periods covered by this Form 10-K. Availability under the Credit Agreement for borrowings as of January 31,
2018 was $124.0 million.
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.
30
Letters of credit (LOC) totaling $1.1 million and $0.5 million were outstanding at January 31, 2018 and 2017. Any draws required
under the LOCs would be settled with available cash or borrowings under the Credit Agreement.
The Company launched a company-wide initiative during the third quarter of fiscal 2018 called Project Atlas. This is a strategic
long-term investment to replace the Company’s existing enterprise resource planning platform. This investment will drive
efficiencies across the enterprise, enable faster integration of future acquisitions, automate a significant portion of internal controls,
and enhance the enterprise’s execution of its long-term growth strategy. Project Atlas is expected to take approximately three years
to complete and cost between $8 and $10 million. The company recognized $0.6 million and $0.9 million of expenses for Project
Atlas in the three- and twelve-month periods ended January 31, 2018. Project Atlas spending is expected to be approximately $1
million per quarter in fiscal year 2019.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
As of January 31, 2018, the Company is obligated to make cash payments in connection with its non-cancelable operating leases
for facilities and equipment, capital lease obligations and unconditional purchase obligations, primarily for raw materials.
Additionally, the Company's known off-balance sheet debt and other unrecorded obligations at January 31, 2018 are listed in the
table below.
(dollars in thousands)
Credit facility(a)
Capital lease obligations
Operating leases
Unconditional purchase obligations
Postretirement benefits(b)
Acquisition-related contingent payments(c)
Uncertain tax positions(d)
Total
Less than
1 year
1-3
years
3-5
years
More than
5 years
$
$
$
485
528
6,655
33,874
18,066
3,835
2,634
$ 66,077
211
237
2,012
33,874
313
1,278
—
37,925
274
259
3,705
—
655
2,518
—
7,411
$
$
— $
32
938
—
688
39
—
1,697
$
—
—
—
—
16,410
—
—
16,410
$
(a) Amounts reflect administrative and unborrowed capacity fees under the credit facility described below.
(b)
$
Postretirement benefit amounts represent expected payments on the accumulated postretirement benefit obligation before it is discounted.
Amounts reflect the expected future earn-out payments related to the acquisitions of CLI, SBG, and Vista. These amounts also reflect the Vista employee
bonus pool payments which are separate from the acquisition earn-out payments. 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.
(c)
(d)
See below for further details on specific obligations.
Credit facility
The Company's 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. The loan proceeds may be utilized by Raven for strategic
business purposes such as acquisitions and for working capital needs.
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.
Capital lease obligations
Related to the fiscal year 2018 asset acquisition of CLI further described in Note 6 Acquisition of and Investments in Businesses
and Technologies of the Notes to the Consolidated Financial Statements, the Company has future obligations for a fleet of vehicles
held under capital leases to support Engineered Film's new design-build and installation service capabilities.
Operating Leases
The Company leases certain vehicles, equipment, and facilities under operating leases. These future obligations primarily support
Applied Technology's precision agriculture products and international sales efforts and Aerostar's defense, radar and lighter-than-
air markets.
31
Unconditional purchase obligations
Unconditional 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.
Postretirement Benefit Obligation,
In fiscal 2016, the Company eliminated this benefit and obligation for all of its senior executive officers and their spouses except
two officers with over 20 years of service. At January 31, 2018 two active participants and 15 retiree participants and their spouses
remain eligible to receive postretirement medical and other benefits for their lifetimes. This benefit obligation is unfunded and is
further described in Note 8 Employee Postretirement Benefits of the Notes to the Consolidated Financial Statements.
Acquisition-related obligations
The Company has future obligations for earn-out payments associated with the acquisition of Vista completed in fiscal 2012, SBG
completed in fiscal 2015 and CLI completed in fiscal 2018. The total liability recorded on the Consolidated Balance Sheet as of
January 31, 2018 related to these future obligations was $3.0 million, of which $1.0 million was classified as "Accrued liabilities"
and $2.0 million as "Other liabilities." These liabilities represent the present value of earn-out payments classified as consideration
at the acquisition date. In the recent CLI acquisition, the Company entered into a contingent earn-out agreement, not to exceed
$2.0 million. The earn-out is paid annually for 3 years after the purchase date, contingent upon achieving certain revenues and
operational synergies. 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 is accrued as the specific revenue stream
is recorded using those same earn-out percentages over the same time period.
Uncertain tax positions
Raven reported a total liability for uncertain tax positions of $2.6 million at January 31, 2018. 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are those that require the application of especially challenging, subjective, or complex judgment when
valuing assets and liabilities on the Company's balance sheet. These policies and estimates 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.
Inventory Reserves
The Company estimates inventory valuation each quarter. Typically, when a product reaches the end of its lifecycle, inventory is
utilized more slowly or alternative uses for the product are explored. 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.
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 delivery
has occurred (depending on the terms of the sale) or services have been rendered. 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.
32
Long-lived Assets Impairment
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).
In the quantitative analysis of the long-lived and intangible asset, 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
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.
During the first quarter of fiscal 2018, the Company determined that the customer relationship intangible asset related to the
Company's equity method investment in Ag Eagle, further described in Note 7 Goodwill, Long-lived assets and Other Charges of
the Notes to the Consolidated Financial Statements included in Item 8 of this form 10-K, was fully impaired. The total impairment
loss related to this intangible asset was $0.3 million and is reported in "Long-lived asset impairment loss" in the Consolidated
Statements of Income and Comprehensive Income for the twelve-month period ended January 31, 2018.
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 quantitative 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
33
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.
Goodwill Impairment
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.
In step one of the goodwill impairment analysis (quantitative analysis), 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.
For goodwill impairment tests prior to fiscal 2018, the estimated fair value of the reporting unit was then compared with the book
value of its net assets. If the estimated fair value of the reporting unit was less than the book value of the net assets of the reporting
unit, an impairment loss was 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.
In the fiscal 2018 first quarter, the Company early adopted Accounting Standards Update (ASU) No. 2017-04 (issued by the
Financial Accounting Standards Board (FASB) in January 2017), "Intangibles - Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment" (ASU 2017-04) on a prospective basis. This ASU removed Step 2 of the goodwill impairment test,
which requires a hypothetical purchase price allocation. Under the new guidance, a goodwill impairment is measured as the amount
by which a reporting unit’s carrying value exceeds its fair value. The amendment is applied on a prospective basis, and as such
Step 2 was applied as appropriate in fiscal 2017 and 2016.
34
During fiscal 2018 there were no triggering events with respect to any of the Company's reporting units. Based on the Company’s
annual qualitative assessment for the Applied Technology and the Engineered Films reporting unit, the Company determined a
quantitative analysis was not necessary for fiscal 2018. For the Aerostar reporting unit, the Company determined the excess of the
fair value of the reporting unit over its carrying value in the previous year's annual impairment assessment was not significant
enough based on the current macroeconomic conditions to perform a qualitative analysis. As such, the Company performed a
quantitative analysis for the annual impairment assessment of the Aerostar reporting unit. 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.
This analysis indicated that the estimated fair value of the Aerostar reporting unit exceeded the net book value by approximately
$12 million, or approximately 41%. No goodwill impairment losses were recorded for fiscal year 2018.
The discount rate and terminal growth rate used in determination of the fair value were 13.0% and 3.0%, respectively. Using the
discount rate and terminal growth rate to illustrate sensitivity on this estimated fair value, a one-half percentage point increase in
the discount rate or a one-half percentage point decrease in the terminal growth rate would have reduced the fair value of the
Aerostar reporting unit by $1.5 million and $0.5 million, respectively.
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 quantitative or
Step 2 analysis were determined to be necessary for fiscal 2017. 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 quantitative analysis during the annual goodwill impairment process on the Engineered Films and Aerostar reporting units. The
annual impairment analysis indicated that the fair value of Engineered Films and Aerostar reporting units exceeded their carrying
value by approximately $105 million and $9 million, or approximately 90% and 30%, respectively. No goodwill impairment losses
were recorded for fiscal year 2017.
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 second
quarter Engineered Films analysis indicated that the estimated fair value of the reporting unit exceeded the net book value by
approximately $51 million, or approximately 37%. However, the results of the Vista reporting unit quantitative 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.
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," "predict," "project,"
"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, 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 raw material
availability, commodity prices, competition, 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, 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, risks of litigation, as well as other risks described in Item 1A., Risk Factors, of this Annual Report
35
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. The Company's only
outstanding debt as of January 31, 2018 is an immaterial amount of capital lease obligations. 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
$4.1 million and $2.3 million at January 31, 2018 and 2017, 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.
36
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 - Deloitte & Touche LLP
Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP
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
Page
38
39
40
41
42
43
44
45
14
37
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, 2018. In
making its assessment of effectiveness of internal control over financial reporting, management used the criteria described by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based
on this assessment using those criteria, we concluded that, as of January 31, 2018, the Company's internal control over financial
reporting was effective at a reasonable assurance level.
The effectiveness of our internal control over financial reporting as of January 31, 2018 has been audited by Deloitte & Touche,
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 23, 2018
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Raven Industries, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of Raven Industries, Inc. and subsidiaries (the "Company") as of
January 31, 2018, the related consolidated statement of income and comprehensive income, consolidated statement of shareholder’s
equity, consolidated statement of cash flows, and the related notes and the schedules listed in the Index at Item 15 for the fiscal
year then ended (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over
financial reporting as of January 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of January 31, 2018, and the results of their operations and their cash flows for the year in the period ended January
31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2018, based on
criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
managements report on internal control over financial reporting. Our responsibility is to express an opinion on these financial
statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting
firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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 (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) 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 (3) 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/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 23, 2018
We have served as the Company's auditor since 2017.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Raven Industries, Inc.
In our opinion, the consolidated balance sheet as of January 31, 2017 and the related consolidated statements of income and
comprehensive income, of shareholders’ equity and of cash flows for each of the two years in the period ended January 31, 2017
present fairly, in all material respects, the financial position of Raven Industries, Inc. and its subsidiaries as of January 31, 2017,
and the results of their operations and their cash flows for each of the two 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 for each of the two years in the period ended January 31, 2017 present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We conducted our audits of these financial statements
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes 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. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 31, 2017
40
RAVEN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except per-share amounts)
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable, net
Inventories
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
Other current liabilities
Total current liabilities
Other liabilities
$
$
$
Commitments and contingencies (see Note 12)
Raven Industries, Inc. shareholders' equity
Common stock, $1 par value, authorized shares 100,000; issued 67,124 and 67,060,
respectively
Paid-in capital
Retained earnings
Accumulated other comprehensive loss
Less treasury stock at cost, 31,332 and 30,984 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.
41
As of January 31,
2018
2017
40,535
58,532
55,351
5,861
$
50,648
43,143
42,336
2,689
160,279
138,816
106,280
46,710
10,584
2,950
326,803
13,106
21,946
1,890
36,942
13,795
67,124
59,143
252,772
(2,573)
(100,402)
276,064
2
276,066
326,803
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
$
$
$
RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands, except per-share amounts)
For the years ended January 31,
$
2018
377,317
255,752
121,565
$
2017
277,395
199,205
78,190
$
2016
258,229
191,255
66,974
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 (loss) 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):
Foreign currency translation
Postretirement benefits, net of income tax (expense) benefit of $44,
$129, and $(1,620), respectively
Other comprehensive income (loss), net of tax
16,936
45,200
—
259
59,170
(184)
58,986
17,967
41,019
(3)
41,022
1.14
1.13
41,019
1,234
(131)
1,103
$
$
$
$
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)
$
$
$
$
$
$
$
$
Comprehensive income
42,122
20,017
Comprehensive (loss) income attributable to noncontrolling interest
(3)
1
Comprehensive income attributable to Raven Industries, Inc.
$
42,125
$
20,016
$
7,124
The accompanying notes are an integral part of the consolidated financial statements.
42
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
RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars and shares in thousands, except per-share amounts)
Balance January 31, 2015
$ 66,947 $ 53,237
28,897
$ (53,362) $ 244,180 $
(5,849) $ 305,153 $
84 $305,237
$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
—
—
4,776
—
—
2,348
4,776
2,348
72
—
4,848
2,348
— (19,513)
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
Balance January 31, 2017
Net income
Other comprehensive income, net of income tax
Cash dividends ($0.52 per share)
Director shares issued
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
—
—
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)
—
—
—
—
—
—
—
—
—
—
—
26
21
17
—
—
—
214
(26)
(311)
(254)
—
— 3,725
—
—
—
—
—
—
348
—
—
—
41,022
—
— (18,899)
—
—
—
—
(10,000)
—
—
—
—
—
—
—
—
—
—
—
—
—
(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)
—
1,103
41,022
1,103
5
259,431
(3)
—
41,019
1,103
—
—
—
—
—
—
(18,685)
— (18,685)
—
(290)
(237)
—
—
—
—
(290)
(237)
(10,000)
— (10,000)
3,725
—
3,725
67,006
53,907
30,500
(82,700)
229,443
(3,501)
264,155
67,060
55,795
30,984
(90,402)
230,649
(3,676)
259,426
Balance January 31, 2018
$ 67,124 $ 59,143
31,332
$(100,402) $ 252,772 $
(2,573) $ 276,064 $
2 $276,066
The accompanying notes are an integral part of the consolidated financial statements.
43
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
(Disbursements) proceeds from settlement of liabilities, sale of assets
Other investing activities, net
Net cash used in investing activities
FINANCING ACTIVITIES:
Dividends paid
Payments for common shares repurchased
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.
44
For the years ended January 31,
2018
2017
2016
$
41,019
$
20,192
$
4,848
12,743
2,059
—
259
457
114
(787)
3,725
2,053
(16,681)
44,961
(12,011)
(13,267)
250
(273)
(333)
(41)
(25,675)
(18,685)
(10,000)
(408)
—
(237)
(290)
(101)
(29,721)
322
(10,113)
50,648
40,535
$
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
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, 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 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 2012. Given the Company's controlling financial 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 6 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.
45
(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. The Company held cash and cash equivalents
in accounts outside the United States of $4,101 and $2,281 as of January 31, 2018 and 2017, respectively.
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, 2018 or 2017.
Inventory Valuation
Inventories are carried at the lower of cost or net realizable value, with cost determined on the first-in, first-out basis. Net realizable
value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. Prior to adopting ASU 2015-11 "Inventory (Topic 330) Simplifying the Measurement of Inventory" in fiscal
2018, inventories were carried at the lower of cost or market.
Pre-Contract Costs
From time to time, Pre-contract costs incurred, excluding start-up costs which are expensed as incurred, are deferred to the balance
sheet and included in "Inventories." if the Company determines that it is probable it will be awarded the specific anticipated
contract. Deferred pre-contract costs are periodically reviewed and assessed for recoverability under the contract. 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, 2018 or 2017.
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.
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.
46
(Dollars in thousands, except per-share amounts)
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 6 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.
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. Goodwill is allocated to the reporting units that are expected to benefit from the synergies of the business
combination. 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, a goodwill impairment loss is recognized for the amount that the carrying value of the reporting unit, including goodwill,
exceeds its fair value, limited to the total amount of goodwill allocated to the reporting unit. Prior to adopting ASU 2017-04
"Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" in fiscal 2018 first quarter, the
Company recognized a goodwill impairment loss for the amount that the carrying value of the reporting unit exceeded the reporting
unit's implied fair value of the goodwill. The impact of adopting this new guidance is further described below in the Accounting
Pronouncements - Accounting Standards Adopted.
47
(Dollars in thousands, except per-share amounts)
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).
Litigation and Contingencies
We recognize legal costs as an expense in the period incurred. The Company is involved as a defendant in lawsuits, claims,
regulatory inquiries, or disputes arising in the normal course of business, some of which allege substantial monetary damages.
We accrue for any loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of
the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability.
Amounts recovered by insurance are recognized when they are realized.
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
delivery has occurred (depending on the terms of the sale) or services have been rendered. 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.
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.
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.
48
(Dollars in thousands, except per-share amounts)
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. All deferred tax balances are reported as long-term on the Consolidated Balance Sheets. Accruals are maintained for uncertain
tax positions.
Accounting Pronouncements
Accounting Standards Adopted
In the fiscal 2018 first quarter, the Company early adopted Accounting Standards Update (ASU) No. 2017-04 (issued by the
Financial Accounting Standards Board (FASB) in January 2017), "Intangibles - Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment" (ASU 2017-04) on a prospective basis. 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. As discussed in Note 7 Goodwill, Long-
lived Assets, and Other Intangibles, management determined no triggering events had occurred for any of its three reporting units
in fiscal 2018 and the Company's annual fourth quarter impairment testing did not result in a goodwill impairment loss being
recorded; therefore, the early adoption of this guidance did not have any impact on the consolidated financial statements or the
results of operations as of and for the twelve-month period ended January 31, 2018.
In the fiscal 2018 first quarter when it became effective, the Company adopted FASB ASU 2016-09 (issued in March 2016),
"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. This guidance also requires that all tax-related cash flows resulting from share-based
awards be disclosed as operating cash flows in the statement of cash flows and that cash paid to taxing authorities on the behalf
of employees for withheld shares be classified as a financing activity in the statement of cash flows. Finally, this ASU 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 Company accounts for forfeitures as they occur. The Company is
prospectively recognizing excess tax benefits or deficits on vesting or settlement of awards, when they occur, as a discrete income
tax benefit or expense instead of as additional paid-in capital as required under previous guidance. This change to the Company's
accounting policies resulted in recognition of income tax expense of $692, or $0.02 per diluted share, for the twelve-month period
ended January 31, 2018. These tax-related cash flows are now classified within operating activities. The Company classifies tax
payments made to taxing authorities on the employee's behalf for withheld shares as a financing activity on the statement of cash
flows, as such the adoption of this guidance had no impact. Under the new guidance, excess tax benefits are no longer included
in assumed proceeds under the treasury stock method of calculating earnings per share. The increase in incremental shares used
in the weighted average diluted shares calculation was not material to the Company's diluted earnings per share calculation.
In the fiscal 2018 first quarter when it became effective, the Company adopted the FASB ASU No. 2015-11 (issued in July 2015),
"Inventory (Topic 330) Simplifying the Measurement of Inventory" (ASU 2015-11) on a prospective basis. The amendments in
ASU 2015-11 clarify that an entity should measure inventory within the scope of this update at the lower of cost and net realizable
value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of
completion, disposal, and transportation. Substantial and unusual losses that result from subsequent measurement of inventory
should be disclosed in the financial statements. Previously the Company reported its inventory at the lower of cost or market.
Market was defined as replacement cost with a ceiling of net realizable value and a floor of net realizable value less a normal
profit margin. The Company evaluates its inventory in all three reporting segments quarterly to determine if cost exceeds net
49
(Dollars in thousands, except per-share amounts)
realizable value and records a write-down, if necessary. The adoption of this guidance did not have any impact on the consolidated
financial statements or the results of operations as of and for the twelve-month period ended January 31, 2018.
New Accounting Standards Not Yet Adopted
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" (ASU 2018-02). The amendments in
this guidance allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects
resulting from the Tax Cuts and Jobs Act (TCJA). Consequently, the amendments eliminate the stranded tax effects resulting from
the TCJA and will improve the usefulness of information reported. The amendments in this update are effective for all entities for
fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments
in this update is permitted, including adoption in any interim period for which financial statements have not yet been issued. The
amendments in this update may be applied either in the period of adoption or retrospectively to each period (or periods) in which
the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. The Company is evaluating the
impact the adoption of this guidance will have on the stranded tax effects in accumulated other comprehensive income related to
the Company's postretirement benefit plan.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification
Accounting" (ASU 2017-09). The guidance amends the scope of modification accounting for share-based payment arrangements.
The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity
would be required to apply modification accounting under Topic 718. Specifically, an entity would not apply modification
accounting if the fair value, vesting conditions, and classification of the awards as equity instruments or as liability instruments
are the same immediately before and after the modification to the award. The guidance is effective for annual periods, including
interim periods, in fiscal years beginning after December 15, 2017. Early adoption is permitted and the amendments should be
applied prospectively to an award modified on or after the adoption date. The Company currently has no plans to modify any of
its outstanding awards. The Company does not expect the adoption of this guidance will have a significant impact on its consolidated
financial statements, results of operations, and disclosures.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Postretirement Benefit Cost" (ASU 2017-07). The guidance clarifies where the cost components of the net benefit
cost should be reported in the income statement and it allows only the service cost to be capitalized. Currently the Company reports
all of the components of the net benefit cost in "Operating income" in the Consolidated Statement of Income and Comprehensive
Income. The net benefit cost for participants that are active employees is reported in the same manner as each participant's
compensation cost is classified in the Consolidated Statement of Income and Comprehensive Income. The net benefit cost
attributable to retired (inactive) participants is reported in "Selling, general, and administrative expenses" in the Consolidated
Statement of Income and Comprehensive Income. Under the new guidance only the service cost component of the net benefit cost
will be classified the same as the participant's compensation cost. The other components of the net benefit cost are required to be
reported separately as a non-operating income (expense). The guidance is effective for annual periods, including interim periods,
in fiscal years beginning after December 15, 2017. Early adoption is permitted and the amendments should be applied
retrospectively. The Company does not expect this guidance will have a significant impact on its consolidated financial statements,
results of operations and disclosures since it primarily will only change how the net benefit cost is classified in the Company's
Consolidated Statements of Income and Comprehensive Income.
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 does not expect the adoption of this guidance will have a significant impact 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
50
(Dollars in thousands, except per-share amounts)
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 does not expect the adoption of this guidance will have significant impact 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.
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 specific classification issues clarified in the guidance either are not
applicable to the Company or are consistent with how the Company currently classifies them, therefore the Company does not
expect the adoption of this guidance will have a significant impact on the classification of these specific items in its Consolidated
Statements of Cash Flows.
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. In addition, FASB has amended Topic 842 prior to it
becoming effective. The effective date and transition requirements for these amendments to Topic 842 are the same as ASU
2016-02. The Company is in the initial stages of evaluating the impact the adoption of this guidance will have on its consolidated
financial statements, results of operations, and disclosures which will include recognizing a lease liability and a right-of-use asset
representing its right to use the underlying asset for the lease term.
In January of 2016, the FASB issued ASU No. 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities." The updated accounting guidance requires changes to the reporting
model for financial instruments. The amendments in this guidance supersede the guidance to classify equity securities with readily
determinable fair values into different categories (that is, trading or available-for sale) and require equity securities (including
other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies to be measured at
fair value with changes in the fair value recognized through net income. An entity’s equity investments that are accounted for
under the equity method of accounting or result in consolidation of an investee are not included within the scope of this update.
The amendments also require separate presentation of financial assets and financial liabilities by measurement category and form
of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial
statements. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those
fiscal years. Since the securities held at the time of adoption that are in scope under this new guidance will be immaterial in amount,
the Company does not expect the adoption of this guidance and the subsequent changes to Subtopic 825-10 in ASU 2018-03
"Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities," will have a significant impact to the Company's financial statements, results of
operations, and 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
51
(Dollars in thousands, except per-share amounts)
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. The guidance may be applied using either of the following transition
methods: (i) a full retrospective 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. The Company has completed its assessment of the impact that the standard will have on revenue recognition. The
Company has reviewed contracts for all material revenue streams across the Company's three divisions, held discussions with key
stakeholders, and assessed potential impacts on the Company’s consolidated financial statements, results of operations, disclosures,
and internal controls over financial reporting. The Company currently recognizes a significant majority of its revenue across all
three divisions at a point-in-time with some exceptions that are recognized over time. These exceptions primarily relate to certain
revenue streams within the Aerostar Division and installation sales within the Engineered Films Division. Management has
determined that this will remain materially consistent upon adoption of the new standard, but has identified a few exceptions
within the Aerostar Division and the Engineered Films Division for which revenue recognition will change from point-in-time to
over time. As such, in these limited instances revenue may be recognized sooner than it had been in prior years under previously
applicable accounting guidance. While these limited differences have been identified, due to the timing of activities under these
revenue streams no adjustment to beginning retained earnings will be necessary upon adoption. Additionally, the Company will
make additional disclosures related to the revenues arising from contracts with customers as required by the new standard. The
Company will adopt this guidance in the first quarter of fiscal 2019 using the modified retrospective approach.
52
(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:
Assets held for use and assets held for sale(a):
Land
Buildings and improvements
Machinery and equipment
Accumulated depreciation
Property, plant and equipment subject to capital leases:
Machinery and equipment
Accumulated amortization for capitalized leases
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:
As of January 31,
2018(a)
2017(a)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
59,510
(978)
58,532
8,054
961
46,336
55,351
759
1,397
3,705
5,861
3,234
80,299
149,847
(127,523)
105,857
488
(65)
423
106,280
1,955
19
976
2,950
9,409
4,225
1,992
1,163
226
1,880
1,036
2,015
21,946
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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
Postretirement benefits
Acquisition-related contingent consideration
Deferred income taxes
Uncertain tax positions
Other
8,054
1,397
1,421
2,610
214
13,696
(a) The amount of assets and liabilities held for sale as of January 31, 2018 are separately disclosed in Note 3 - Assets Held For Sale in Item 8 of this Form 10-
8,264
2,010
615
2,634
272
13,795
$
$
$
$
K. There were no assets or liabilities held for sale as of January 31, 2017.
53
(Dollars in thousands, except per-share amounts)
NOTE 3
ASSETS HELD FOR SALE
Aerostar
The Company continually analyzes its product and service offerings to ensure we serve market segments with attractive near- and
long-term growth prospects that are consistent with our core capabilities. Through this continued evaluation, the Company's
Aerostar segment finalized a plan ("the Plan") to actively market the sale of its client private and radar product lines, each of which
it has determined constitutes a business. During the second quarter of fiscal 2018 the Company determined that it was probable
that these product lines would be sold within one year.
During the fourth quarter, Aerostar modified the plan and no longer marketed the sale of its radar product line. A buyer was
identified and the sale of the client private business was completed subsequent to the end of fiscal 2018. As such, and as of January
31, 2018, the radar product line is not considered held for sale.
The Company has identified specific assets and liabilities that have been sold, including an allocation of goodwill based on the
relative fair value of the business. The Company has determined that the final selling price will be in excess of the net book value.
As such there is no impact to the Consolidated Statement of Income for the twelve-month period ended January 31, 2018.
Under the Plan, Aerostar will remain focused on serving the aerospace/defense market with its stratospheric balloon and radar
product lines.
The amounts of assets and liabilities classified as held for sale were as follows:
Assets held for sale
Property, plant and equipment, net
Goodwill
Amortizable intangible assets, net
Other assets
Total assets held for sale
Liabilities held for sale
Current liabilities
Total liabilities held for sale
There were no assets held for sale as of January 31, 2017.
As of
January 31
2018
$
$
$
$
63
103
329
17
512
91
91
54
(Dollars in thousands, except per-share amounts)
NOTE 4
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) 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, 2016
$
(2,477)
$
(1,024)
$
(3,501)
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
(loss) after tax benefit of $129
Balance at January 31, 2017
Other comprehensive income before reclassifications
Amounts reclassified from accumulated other comprehensive
(loss) after tax benefit of $44
Balance at January 31, 2018
50
—
(2,427)
1,234
—
—
(225)
(1,249)
—
(131)
50
(225)
(3,676)
1,234
(131)
$
(1,193)
$
(1,380)
$
(2,573)
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 5
SUPPLEMENTAL CASH FLOW INFORMATION
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued and other liabilities
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes
Interest paid
Significant non-cash transactions:
Capital expenditures included in accounts payable
Assets acquired under capital leases
Capital expenditures converted from inventory
For the years ended January 31,
2018
2017
2016
$
$
$
$
$
$
$
(7,014)
(11,062)
(2,445)
1,280
2,560
(16,681)
19,854
186
418
79
—
$
$
$
$
$
$
$
(5,361)
1,215
228
2,558
8,405
7,045
6,618
190
84
—
—
$
$
$
$
$
$
$
16,847
7,564
(111)
(5,059)
(9,353)
9,888
6,558
129
161
—
1,036
NOTE 6
ACQUISITIONS OF AND INVESTMENTS IN BUSINESSES AND TECHNOLOGIES
Colorado Lining International, Inc.
On September 1, 2017, the Company completed the acquisition of substantially all of the assets ("the acquisition") of Colorado
Lining International, Inc., a Colorado corporation, headquartered in Parker, CO (“CLI”). The acquisition was aligned under the
Company’s Engineered Films Division. The acquisition enhanced the Company’s geomembrane market position through extended
55
(Dollars in thousands, except per-share amounts)
service and product offerings with the addition of new design-build and installation service components, and advanced Engineered
Films’ business model into a vertically-integrated, full-service solutions provider for the geomembrane market. The acquisition
constitutes a business and as such was accounted for as a business combination.
The acquisition included a working capital adjustment that was settled in January 2018. The final working capital adjustment was
$566 which brought the purchase price to $14,938. The purchase price includes potential earn-out payments with an estimated
fair value of $1,256 which are contingent upon achieving certain revenues and operational synergies.
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 purchase price over the fair value of the identifiable assets acquired and liabilities assumed is reflected
as goodwill. Goodwill recorded as part of the purchase price allocation was $5,714, all of which is tax deductible. Identifiable
intangible assets acquired as part of the acquisition were $610, including definite-lived intangibles, such as customer relationships
and order backlog.
Acquisition-related contingent consideration
The Company has contingent liabilities related to the current fiscal year acquisition of CLI, as well as the prior acquisitions of
SBG Innovatie BV and its affiliate, Navtronics BVBA (collectively, SBG) in May 2014 and Vista Research, Inc. (Vista) in January
2012. The fair value of such contingent consideration is estimated as of the acquisition date, and subsequently at the end of each
reporting period, using forecasted cash flows. Projecting future cash flows requires the Company to make significant estimates
and assumptions regarding future events, conditions, or revenues being achieved under the subject contingent agreement as well
as the appropriate discount rate. Such valuation techniques include one or more significant inputs that are not observable (Level
3 fair value measures).
Changes in the fair value of the liability for acquisition-related contingent consideration are as follows:
Beginning balance
Fair value of contingent consideration acquired
Change in fair value of the liability
Contingent consideration earn-out paid
Ending balance
Classification of liability in the Consolidated balance sheet
Accrued Liabilities
Other Liabilities, long-term
Balance at January 31, 2018
For the years ended January 31,
2018
2017
$
$
$
$
1,741
1,256
457
(408)
3,046
1,036
2,010
3,046
$
$
$
$
2,059
—
36
(354)
1,741
345
1,396
1,741
As part of the CLI acquisition in the current fiscal year, the Company entered into a contingent earn-out agreement, not to exceed
$2,000. The earn-out is paid annually for three years after the purchase date, contingent upon achieving certain revenues and
operational synergies. To date, the Company has made no payments on this potential earn-out liability.
In connection with the acquisition of SBG, Raven is committed to making additional earn-out payments, not to exceed $2,500
calculated and paid quarterly for ten years after the purchase date contingent upon achieving certain revenues. To date, the Company
has paid a total of $890 of this potential earn-out liability.
Related to the acquisition of Vista in 2012, the Company is committed to making annual payments based upon earn-out percentages
on specific revenue streams for seven years after the purchase date, not to exceed $15,000. To date, the Company has paid a total
of $1,572 of this potential earn-out liability.
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
56
(Dollars in thousands, except per-share amounts)
agriculture market. The Company’s equity ownership interest is considered a variable interest and it accounts for this investment
under the equity method of accounting. 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 losses or the right
to receive benefits of the VIE that could potentially be significant to the entity. The purchase price was allocated between the
equity ownership interest and an intangible asset for the exclusive distribution agreement. In April 2017, the Company determined
that the investment in AgEagle, was fully impaired, further described in Note 7 Goodwill, Long-lived Assets and Other Intangibles,
due to lower than expected cash flows. The Company has no commitments or guarantees related to this equity method investment.
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
Impairment to equity investment
Balance at end of year
As of January 31,
2018
2,371
—
(42)
(320)
(72)
1,937
$
$
2017
$
2,805
135
(72)
(497)
—
$
2,371
NOTE 7
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 was Vista and one of which was 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, and thereafter 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 units
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, 2016
Foreign currency translation adjustment
Reporting unit transfer balance(a)
Balance at January 31, 2017
Additions due to business combinations
Divestiture of business
Applied
Technology
12,365
$
(23)
—
12,342
—
—
Engineered
Films
Aerostar
Total
$
27,518
—
—
27,518
5,714
—
$
$
789
—
—
789
—
(52)
—
40,672
(23)
—
40,649
5,714
(52)
399
46,710
Foreign currency translation adjustment
Balance at January 31, 2018
(a) The Company combined the Aerostar and Vista reporting units in fiscal 2017. No goodwill amount was transferred between reporting units due to the
12,741
33,232
737
399
—
$
$
$
$
goodwill impairment loss recorded at the Vista reporting unit during fiscal 2016.
57
(Dollars in thousands, except per-share amounts)
Goodwill gross and net of accumulated impairment losses were as follows:
Gross goodwill
Accumulated impairment loss
Net goodwill
As of January 31,
2018
58,207
(11,497)
46,710
$
$
2017
52,146
(11,497)
40,649
$
$
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.
Fiscal 2018 Goodwill Impairment Testing
In fiscal 2018 no triggering events were deemed to have occurred in any of the quarterly periods and no impairments were recorded
as a result of the annual impairment testing. In its annual impairment testing, the Company concluded a quantitative analysis was
not required for the Applied Technology and Engineered Films reporting units. This was based on the Company's qualitative
analysis and the fact that the estimated fair value in the Company's most recent impairment test substantially exceeded its carrying
value for each of these reporting units.
For the Aerostar reporting unit, the Company determined the excess of the fair value of the reporting unit over its carry value in
the previous year's annual impairment assessment was not significant enough based on the current macroeconomic conditions to
perform a qualitative analysis. As such, the Company performed a quantitative analysis for the annual impairment assessment of
the Aerostar reporting unit. In determining the estimated fair value of the Aerostar reporting unit, the Company was required to
estimate a number of factors, including future revenues and expenses, projected capital expenditures, changes in net working
capital and the discount rate. On the basis of these estimates, the November 30, 2017 analysis indicated that the estimated fair
value of the Aerostar reporting unit exceeded the reporting unit carrying value by approximately $11,600 or approximately 41%,
as such there were no goodwill impairment losses reported in the year ended January 31, 2018.
Fiscal 2017 Goodwill Impairment Testing
In the fiscal 2017 third quarter, the Company determined that a triggering event occurred for its Aerostar reporting unit, which
had $789 of goodwill as of October 31, 2016. The triggering event was caused by lowering the 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 was still actively pursuing these opportunities and some were in active negotiations, but the timing of certain aerostat
and classified stratospheric balloon opportunities were 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.
A quantitative 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%.
There were no other triggering events during fiscal 2017 for any of the three reporting units, and no impairments were recorded
as a result of the annual impairment testing for fiscal 2017.
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
58
(Dollars in thousands, except per-share amounts)
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.
Intangible Assets
The following table provides the gross carrying amount and related accumulated amortization of definite-lived intangible assets:
Existing technology
Customer relationships
Patents and other intangibles
Total
For the years ended January 31,
2018
Accumulated
amortization
Amount
Net
Amount
2017
Accumulated
amortization
$
7,290 $
(6,996) $
294
$
7,136 $
(6,553) $
13,264
4,241
(4,834)
(2,381)
8,430
1,860
12,987
4,378
(3,680)
(2,220)
Net
583
9,307
2,158
$
24,795 $
(14,211) $
10,584
$
24,501 $
(12,453) $
12,048
The estimated future amortization expense for these definite-lived intangible assets, as well as definite-lived intangible assets
accounted for as part of the equity method investment in SST, during the next five years is as follows:
Estimated amortization expense
$
1,988
$
1,578
$
1,163
$
1,111
$
1,013
2019
2020
2021
2022
2023
Long-lived assets
The Company assesses the recoverability of long-lived assets, including definite-lived intangibles, equity method investments,
and property plant and equipment if events or changes in circumstances indicate that an asset might be impaired. For long-lived
and intangible assets, the Company performs impairment reviews by asset groups. 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.
When performing long-lived asset 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). An impairment loss is recognized when the carrying amount of an asset is above the
estimated undiscounted cash flows used in determining the fair value of the asset.
Fiscal 2018 Long-lived Intangibles and Equity-Method Investment Impairment Assessment
During first quarter of fiscal 2018, the Company determined that the investment in AgEagle, further described in Note 6 Acquisitions
of and Investments in Businesses and Technologies, was impaired due to lower than expected cash flows. This impairment was
determined to be other-than-temporary and an accelerated equity method investment loss of $72 was recorded in the first quarter.
This loss was reported in "Other (expense), net" in the Consolidated Statements of Income and Comprehensive Income for the
twelve-month period ended January 31, 2018. The Company also determined the customer relationship intangible asset related to
the Ag Eagle exclusive distribution agreement was fully impaired. The total impairment loss reported related to this intangible
asset was $259 and was recorded in the first quarter. This loss was reported in "Long-lived asset impairment loss" in the Consolidated
Statements of Income and Comprehensive Income for the twelve-month period ended January 31, 2018.
The Company did not identify any additional triggering events for any of its assets groups or equity method investments the
remainder of fiscal 2018.
Fiscal 2017 Long-lived Intangibles Impairment Assessment
The Company evaluated the triggering events described in the goodwill impairment analysis for fiscal 2017 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.
59
(Dollars in thousands, except per-share amounts)
Using the sum of the undiscounted cash flows associated with each of the two asset groups, a quantitative 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 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) were
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 quantitative 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.
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. There were no
significant inventory write-downs in fiscal 2018 or 2016.
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 fiscal 2018 or 2017.
60
(Dollars in thousands, except per-share amounts)
NOTE 8
EMPLOYEE POSTRETIREMENT BENEFITS
Defined contribution 401(k) plan
As of January 1, 2018, the Company has one 401(k) plan covering substantially all employees. This plan, which covers the majority
of employees, matches employee contributions up to 5%. Prior to January 1, 2018, the plan matched 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. The Company
also contributes to post-retirement and pensions as are required or customary for employees in foreign locations.
Deferred compensation plan
Effective January 1, 2018, the Company established a section 409A non-qualified deferred compensation plan. The purpose of
the deferred compensation plan is to attract and retain key employees by providing them with an opportunity to defer receipt of
a portion of their compensation, and there is no standard Company contribution or match. Participants are approved by the Board
of Director's Personnel and Compensation Committee which is also responsible for the deferred compensation plan's general
administration. A rabbi trust was also established in January 2018 which the Company may elect to make contributions to in order
to provide a source of funds to assist the Company in meeting its obligation. Any assets held by the deferred compensation plan
are still part of the Company's general assets and are subject to creditor's claims. The Company's common stock is not an investment
option.
Total contribution expense to all such plans was $2,263, $2,030, and $1,952 for fiscal 2018, 2017, and 2016, respectively, and all
of these contributions were to the 401(k) plan.
Defined benefit postretirement plan
In addition, the Company provides postretirement medical and other benefits to senior executive officers and senior managers.
The accumulated benefit obligation is as follows:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss (gain) and assumption changes
Retiree benefits paid
Benefit obligation at end of year
For the years ended January
2018
2017
$
$
8,416
74
312
112
(343)
7,991
80
333
341
(329)
$
8,571
$
8,416
61
(Dollars in thousands, except per-share amounts)
The following tables set forth the plan's pre-tax adjustment to accumulated other comprehensive income/loss:
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:
Net actuarial loss (gain)
For the years ended January 31,
2018
2017
$
$
$
$
$
$
2,714
(572)
2,142
1,967
(96)
159
112
2,699
(732)
1,967
1,612
(146)
160
341
Pre-tax accumulated other comprehensive loss - end of year related to benefit obligation
$
2,142
$
1,967
The net actuarial loss for fiscal year 2018 was the result of a decrease in the discount rate and unfavorable demographic experience
partially offset by medical costs trending lower than expected. 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 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
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,
2018
2017
$
$
$
$
8,416
323
175
498
(343)
8,571
307
8,264
$
$
$
$
3.75%
4.00%
6.50%
4.50%
2030
4.00%
4.00%
7,991
399
355
754
(329)
8,416
362
8,054
4.00%
4.00%
6.67%
4.50%
2030
4.25%
4.00%
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 $(31); $129 of recognized net loss and
$(160) of amortized prior service cost.
62
(Dollars in thousands, except per-share amounts)
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, 2018
One-percentage-
point increase
One-percentage-
point decrease
$
$
71
1,180
$
$
(58)
(1,045)
The Company expects to make $313 in postretirement medical and other benefit payments in fiscal 2019. 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
$
313
$
323
$
332
$
341
$
2,192
2019
2020
2021
2022
2023 - 2028
NOTE 9 WARRANTIES
Changes in the warranty accrual were as follows:
Beginning balance
Change in provision
Settlements made
Ending balance
NOTE 10 INCOME TAXES
For the years ended January 31,
2018
2017
2016
$
$
1,547
1,762
(2,146)
1,163
$
$
1,835
1,597
(1,885)
1,547
$
$
3,120
1,945
(3,230)
1,835
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
Impact of the Tax Cuts and Jobs Act
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
Impact of settlement of stock-based awards
Other, net
For the years ended January 31,
2017
2016
2018
33.8%
(0.1)
1.6
(1.8)
(3.0)
(1.3)
0.1
—
1.2
—
30.5%
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)%
The increase in the fiscal 2018 effective tax rate is primarily due to higher pre-tax income in the current year and recognition of
discrete tax expense related to the Company's adoption of ASU 2016-09 in fiscal 2018 as further discussed in Note 1 Summary of
Significant Accounting Policies. This ASU requires that the tax effects resulting from the settlement of stock-based awards be
recognized as a discrete income tax expense or benefit in the income statement in the reporting period in which they occur.
Additionally, the Tax Cuts and Jobs Act (TCJA), effective January 1, 2018, lowered the Company's federal statutory rate by 1.2
percentage points for the fiscal year. The TCJA reduces the federal statutory rate to 21% for fiscal 2019.
63
(Dollars in thousands, except per-share amounts)
The TCJA imposes a one-time mandatory transition tax on accumulated foreign earnings, which resulted in a provisional amount
of $265 for the Company. The Company re-measured its ending deferred tax assets and liabilities to reflect the realization at the
new 21% corporate tax rate. The re-measurement resulted in a provisional $312 reduction to fiscal 2018 tax expense.
In addition, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the TCJA (“SAB
118”), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year from
the enactment date. Since the TCJA was passed late in the fourth quarter of fiscal 2018, ongoing guidance and accounting
interpretation are expected over the next year, and significant data and analysis is required to finalize amounts recorded pursuant
to the TCJA, the Company considers the accounting of the transition tax, deferred tax re-measurements, indefinite reinvestment
assertion, and other items to be incomplete due to the forthcoming guidance and its ongoing analysis of final year-end data and
tax positions. Also, the Company has not yet determined its policy election as to whether it will recognize deferred taxes for basis
differences expected to reverse as Global Intangible Low Taxed Income (“GILTI”) or whether GILTI will be accounted for as a
period cost if and when incurred. The Company expects to complete its analysis within the measurement period in accordance
with SAB 118.
The Company's fiscal 2017 effective rate is lower than the federal 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 federal 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 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.
Significant components of the Company's income tax provision were as follows:
Income tax provision:
Currently payable
Deferred expense (benefit)
Income tax expense (benefit)
For the years ended January 31,
2017
2018
2016
$
$
18,754
(787)
17,967
$
$
7,354
307
7,661
$
$
5,272
(6,039)
(767)
64
(Dollars in thousands, except per-share amounts)
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
Inventories
Accrued vacation
Insurance obligations
Accrued benefit liabilities
Warranty obligations
Postretirement benefits
Uncertain tax positions
Share-based compensation
Other accrued liabilities
Deferred tax (liabilities):
Depreciation and amortization
Other
Net deferred tax (liability)
As of January 31,
2018
2017
184
664
647
137
—
262
1,929
491
1,761
54
6,129
(6,082)
(643)
(6,725)
(596)
$
$
212
978
887
383
41
565
3,072
803
3,201
68
10,210
(10,565)
(1,048)
(11,613)
(1,403)
$
$
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
Gross unrecognized tax benefits at end of year
For the years ended January 31,
2018
2017
$
$
2,110
426
—
(320)
2,216
$
$
2,327
279
(193)
(303)
2,110
Fiscal year 2018 changes to uncertain tax positions related to prior years resulted from lapses of applicable statutes of limitations.
Fiscal year 2017 included 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 total unrecognized tax benefits (including interest and penalty) that, if recognized, would affect the Company's effective tax
rate were $2,143, $1,806, and $2,140 as of January 31, 2018, 2017, and 2016, respectively. The Company recognizes interest and
penalties accrued related to unrecognized tax benefits in income tax expense. At January 31, 2018, 2017, and 2016, accrued interest
and penalties were $418, $500, and $672, 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, 2018, federal tax returns filed in the
U.S. for fiscal years ended January 31, 2015 through January 31, 2017 remain subject to examination by federal tax authorities.
In state and local jurisdictions, tax returns for fiscal years ended January 31, 2012 through January 31, 2017 remain subject to
examination by state and local tax authorities. International jurisdictions have open tax years varying by location beginning in
fiscal 2013.
Pre-tax book income for the U.S. companies and the foreign subsidiaries was $58,757 and $229, respectively. As of January 31,
2018, the Company has recorded United States income taxes of $265 on $3,242 of undistributed earnings from its Canadian and
65
(Dollars in thousands, except per-share amounts)
European subsidiaries. The Company plans to reinvest its foreign earnings internationally and as a result has not recorded additional
income or withholding tax on undistributed foreign earnings. The Company will continue to assess if there is a need in the future
to bring back a portion of the foreign cash which was subject to the transition tax.
NOTE 11 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 provides for a syndicated senior revolving credit facility up to
$125,000 with a maturity date of April 15, 2020. Loan proceeds may be utilized by Raven for strategic business purposes, such
as business acquisitions, and for net working capital needs.
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.
The unamortized debt issuance costs associated with this Credit Agreement were as follows:
Unamortized debt issuance costs(a)
(a) Unamortized debt issuance costs are reported as "Other assets" in the Consolidated Balance Sheets.
As of January 31,
2018
2017
$
242
$
352
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 $211, $215, and $213 for the years ended January 31, 2018, 2017, and 2016, respectively.
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.
Letters of credit (LOC) issued and outstanding were as follows:
Letters of credit outstanding (a)
(a)Any draws required under the LOC' would be settled with available cash or borrowings under the Credit Agreement.
$
As of January 31,
2018
2017
1,097
$
514
There have been no borrowings under any of the credit agreements and there were no borrowings outstanding for any of the fiscal
periods covered by this Annual Report on Form 10-K. Availability under the Credit Agreement for borrowings as of January 31,
2018 was approximately $124,000.
Capital leases
The Company's recent asset acquisition of CLI further described in Note 6 Acquisition of and Investments in Businesses and
Technologies included a fleet of vehicles under capital leases to support Engineered Film's new design-build and installation service
capabilities. The Company had no leased assets under capital leases in fiscal 2017.
66
(Dollars in thousands, except per-share amounts)
Future minimum lease payments under capital leases and the present value of the net minimum lease payments as of January 31,
2018 were as follows:
Minimum lease payments
$
237
$ 169
$
90
$
32
$
— $
528
2019
2020
2021
2022
Thereafter
Total
Less amount representing estimated executory costs such as taxes, license and insurance
including profit thereon.
Net minimum lease payments
Less amounts representing interest
Present value of net minimum lease payments
$
(17)
511
(63)
448
At January 31, 2018, the present value of net minimum lease payments due within one year is $196. Amortization and interest
expense for the year ended January 31, 2018 was $65 and $13, respectively.
Operating leases
The Company leases certain vehicles, equipment, and facilities under operating leases. Total rent and lease expense was $2,104,
$2,028, and $2,095 in fiscal 2018, 2017, and 2016, respectively.
Future minimum lease payments under non-cancelable operating leases are as follows:
Minimum lease payments
$ 2,012
$ 1,925
$ 1,780
$
501
$
437
$
—
2019
2020
2021
2022
2023
Thereafter
NOTE 12 COMMITMENTS AND CONTINGENCIES
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. Management does not believe the ultimate outcomes
of its legal proceedings are likely to be material to its results of operations, financial position, or cash flows. The previously
disclosed patent infringement lawsuit in which Capstan Ag Systems, Inc. made certain infringement claims against the Company
has been settled on a confidential basis.
The Company has insurance policies that provide coverage to various degrees for potential liabilities arising from legal proceedings.
The Company entered into a Gift Agreement (the Agreement) effective in January 2018 with the South Dakota State University
Foundation, Inc. (the Foundation). The Agreement states that the Company will make a $5,000 gift to the Foundation, conditional
on certain other actions that had not occurred as of January 31, 2018. This gift will be used by South Dakota State University
(SDSU), located in Brookings, SD, for the establishment of a precision agriculture facility to support SDSU's Precision Agriculture
degrees and curriculum. This facility will assist the Company in further collaboration with faculty, staff, and students on emerging
technology in support of the growing need for precision agriculture practices and tools. As the Agreement is conditional upon
certain other actions yet to occur, the gift will not be recorded as an expense or liability until those contingencies are satisfied.
The Company expects these contingencies to be satisfied during fiscal 2019.
In addition to commitments disclosed elsewhere in the Notes to the Consolidated Financial Statements, the Company has
unconditional purchase obligations 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 13 RESTRUCTURING COSTS
The Company has no ongoing restructuring plans or unpaid restructuring costs at January 31, 2018. No restructuring costs were
incurred in fiscal 2018 or 2017.
In addition to Applied Technology 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
67
(Dollars in thousands, except per-share amounts)
Technology’s non-strategic St. Louis, Missouri contract manufacturing operations in fiscal 2015. In fiscal 2016 first quarter, the
Company announced that Applied Technology successfully sold and transferred its contract manufacturing operations in the St.
Louis, Missouri area. 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.
This exit strategy of Applied Technology was fully completed in fiscal 2017 with the sale of the idle St. Louis manufacturing
facility. Proceeds from the sale of this facility 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, the Company announced
and implemented a restructuring plan in fiscal 2016 first quarter to 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.
In the fiscal 2016 third quarter, 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 14 SHARE-BASED COMPENSATION
At January 31, 2018, 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,
2017
2018
2016
$
3,725
1,275
$
3,071
1,103
$
2,311
819
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, 2018, the number of shares available for grant under the Plan was 1,163,074.
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. 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 2018, stock options
and restricted stock units.
Stock Option Awards
The Company granted 85,800 non-qualified stock options during fiscal 2018. 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.
68
(Dollars in thousands, except per-share amounts)
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,
2018
1.68%
1.78%
33.87%
4.25
2017
2016
1.05%
3.33%
32.61%
4.00
1.33%
2.59%
36.81%
3.75
Weighted average grant date fair value
$
7.35
$
3.05
$
4.77
Outstanding stock options as of January 31, 2018 and activity for the year then ended are presented below:
Outstanding, January 31, 2017
Granted
Exercised
Forfeited
Expired
Outstanding, January 31, 2018
Outstanding exercisable, January 31, 2018
Number
of options
990,900
85,800
(206,000)
(43,600)
(124,150)
702,950
331,717
Options vested, or expected to vest, January 31, 2018
702,950
Weighted
average
exercise
price
Aggregate
intrinsic
value
Weighted
average
remaining
contractual
term
(years)
$
$
$
$
24.58
29.20
31.01
19.05
31.70
22.34
23.43
22.34
$
$
$
11,396
5,014
11,396
2.49
1.95
2.49
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 $1,036, $0, and $172 during the years ended January 31, 2018, 2017,
and 2016, respectively. The total fair value of options vested was $1,312, $1,323, and $1,755 during the years ended January 31,
2018, 2017, and 2016, respectively. As of January 31, 2018, the total unrecognized compensation cost for non-vested awards was
$838. This amount is expected to be recognized over a weighted average period of 1.93 years.
Restricted Stock Unit Awards
The Company granted 61,270 time-vested RSUs during the year ended January 31, 2018. 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 vesting 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 2018 was as follows:
Outstanding, January 31, 2017
Granted
Vested
Forfeited
Outstanding, January 31, 2018
Cumulative dividends, January 31, 2018
69
Number
of restricted
stock units
Weighted
average grant
date fair value
per share
19.19
29.33
29.62
18.92
21.81
$
$
126,729
61,270
(23,122)
(18,028)
146,849
5,129
(Dollars in thousands, except per-share amounts)
The Company also granted performance-based RSUs during the year ended January 31, 2018. 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
vesting period in comparison to the target award. The target awards for the fiscal 2016, 2017 and 2018 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 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
number of RSUs that will vest is determined by the estimated ROE target over the 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 2018 was as follows:
Outstanding, January 31, 2017
Granted
Vested
Forfeited
Performance-based adjustment
Outstanding, January 31, 2018
Cumulative dividends, January 31, 2018
Number
of restricted
stock units
expected to
vest
Weighted
average grant
date fair value
per share
146,519
$
22,745
—
(16,164)
26,629
179,729
$
7,130
16.78
29.20
—
16.89
23.96
19.40
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,
2017
2018
2016
Weighted average grant date fair value: time-based RSUs
Weighted average grant date fair value: performance-based RSUs
$
$
29.33
29.20
$
$
15.94
15.61
$
$
19.25
20.09
The total intrinsic value of RSUs vested (or converted to shares) was $685, $754, and $1,437 during the years ended January 31,
2018, 2017, and 2016, respectively. The total fair value of RSUs vested (or converted to shares) was $678, $761, and $1,411,
during the years ended January 31, 2018, 2017, and 2016, respectively. 326,578 outstanding RSUs with a weighted average term
of 1.81 years and an aggregate intrinsic value of $12,590 at January 31, 2018 are expected to vest. None of the outstanding RSUs
are vested as of January 31, 2018. The total unrecognized compensation cost for nonvested RSU awards at January 31, 2018 was
$3,054. This amount is expected to be recognized over a weighted average period of 1.81 years.
70
(Dollars in thousands, except per-share amounts)
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.
Outstanding stock units as of January 31, 2018 and changes during the year then ended are presented below:
Outstanding, January 31, 2017
Granted
Deferred retainers
Dividends
Converted into common shares
Outstanding, January 31, 2018
NOTE 15 NET INCOME PER SHARE
Number
of stock units
98,649
12,000
1,143
1,547
(25,725)
87,614
Weighted
average price
20.82
$
35.00
35.00
33.98
33.88
19.35
$
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:
For the years ended January 31,
2017
884,099
2018
344,774
2016
1,107,733
Anti-dilutive options and restricted stock units
71
(Dollars in thousands, except per-share amounts)
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,
2018
2017
2016
$
41,022
$
20,191
$
4,776
35,945,225
104,980
36,050,205
35,945,225
104,980
399,620
36,449,825
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
Net income per share - basic
Net income per share - diluted
$
$
1.14
1.13
$
$
0.56
0.56
$
$
0.13
0.13
NOTE 16 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. Separate financial information is available
for each reportable segment and regularly evaluated by the Company's chief operating decision-maker, the President 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.
Engineered Films expanded its business model in the fiscal 2018 third quarter by adding new design-build and installation service
solutions to its geomembrane market with the asset purchase of Colorado Lining International, Inc.
Aerostar designs and manufactures proprietary products including high-altitude balloons, tethered aerostats, and radar 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.
72
(Dollars in thousands, except per-share amounts)
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.
Business segment financial performance and other information is as follows:
APPLIED TECHNOLOGY DIVISION
Sales
Operating income(a)(f)
Assets(b)
Capital expenditures
Depreciation and amortization
ENGINEERED FILMS DIVISION
Sales(c)
Operating income(f)
Assets(b)
Capital expenditures
Depreciation and amortization
AEROSTAR DIVISION
Sales
Operating income (loss)(d)(f)
Assets(b)
Capital expenditures
Depreciation and amortization
INTERSEGMENT ELIMINATIONS
Sales
$
$
$
For the years ended January 31,
2017
2016
2018
$
$
$
124,688
31,257
66,555
1,489
3,365
213,298
47,324
168,797
8,128
8,761
39,915
4,122
22,127
343
1,386
$
$
$
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
(8)
(195)
—
91
(57)
$
$
$
$
— $
(1)
(789)
—
(12)
(69)
(584)
—
20
(3,380)
Applied Technology Division
Engineered Films Division
Aerostar Division
Operating income(f)
Assets
REPORTABLE SEGMENTS TOTAL
Sales
Operating income(f)
Assets
Capital expenditures
Depreciation and amortization
CORPORATE & OTHER
Operating (loss) from administrative expenses(g)
Assets(b)(e)
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. All facilities are reported as an asset based on the segment that
377,317
82,723
254,099
9,960
13,512
277,395
48,037
224,666
4,332
14,128
277,395
28,413
301,509
4,796
15,436
377,317
59,170
326,803
12,011
14,802
76,843
464
1,308
72,704
2,051
1,290
(19,624)
(23,553)
$
$
$
$
$
$
$
(17,110)
65,624
661
1,676
258,229
4,391
298,688
13,046
17,136
258,229
21,501
233,064
12,385
15,460
acquired the asset as we believe this better reflects total assets of the business segment. 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.
(c) Fiscal year 2018 sales include $13,088 in net sales related to the CLI asset acquisition further described in Note 6 "Acquisitions of and Investments in
Businesses and Technologies", and $24,225 of recovery film sales related to the hurricane recovery effort.
(d) 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
73
(Dollars in thousands, except per-share amounts)
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. These items are further described in Note 7 "Goodwill, Long-Lived Assets, and Other Charges ".
(e) Assets are principally cash, investments, deferred taxes, and other receivables.
(f) At the segment level, operating income does not include an allocation of general and administrative expenses.
(g) 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.
No customers accounted for 10% or more of consolidated sales in fiscal 2018, 2017 or 2016.
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
Asia
Other foreign sales
Total foreign sales
United States
For the years ended January 31,
2017
2018
2016
$
$
12,940
13,864
4,439
4,074
6,239
41,556
335,761
377,317
$
$
13,969
13,924
3,402
1,535
2,698
35,528
241,867
277,395
$
$
11,789
10,526
2,676
482
2,376
27,849
230,380
258,229
NOTE 17 SUBSEQUENT EVENTS
On February 5, 2018, the Company sold its equity ownership interest in SST. The Company held approximately a 22% interest
in SST, and the initial cash received at close was in excess of its carrying value which approximated $1,900. The Company's
analysis and accounting for this transaction will be completed in the first quarter of fiscal 2019.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) are our controls and other procedures
that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 (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 include, without limitation, controls and procedures 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 Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as
appropriate to allow timely decisions regarding required disclosure. As of January 31, 2018, the end of the period covered by this
report, management evaluated the effectiveness of the Company's disclosure controls and procedures as of such date. Based on
their evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures were effective at a
reasonable assurance level as of January 31, 2018.
Management's Report on Internal Control Over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, the Company included management’s assessment of the design and
effectiveness of its internal controls over financial reporting as part of this Annual Report on Form 10-K for the fiscal year ended
January 31, 2018. Management's report and the report of the Company's independent registered public accounting firm are included
in Part II, Item 8. captioned “Management's Report on Internal Control Over Financial Reporting" and "Report of Independent
Registered Public Accounting Firm” and are incorporated herein by reference.
Remediation of Prior Material Weakness
74
We completed our remediation plan designed to address the material weaknesses related to the Company's controls relating to the
response to the risks of material misstatement, controls related to accounting for goodwill and long-lived assets, including finite-
lived intangible assets, and controls related to the completeness and accuracy of spreadsheets and system-generated reports used
in internal control over financial reporting that were identified during our fiscal year 2016. As part of our assessment of internal
control over financial reporting, management tested and evaluated all controls to assess whether they were designed and operating
effectively as of January 31, 2018. Based on this assessment, management concluded that the material weaknesses were remediated.
Changes in Internal Control Over Financial Reporting
As described above under "Remediation of Prior Material Weaknesses" 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, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
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 2018 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, 2018, 2017, and 2016; included on page 79.
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.
75
Exhibit
Number
Description
2(a) Asset Purchase Agreement by and among Colorado Lining International, Inc., John B. Heap, Patrick Elliott, and Raven
Industries, Inc., dated as of August 22, 2017 (incorporated herein by reference to Exhibit 2.1 of the Company's Form 10-Q
filed November 21, 2017.
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 Form 10-K for the year ended January 31, 1989). ‡
3(b) Amended and Restated Bylaws of Raven Industries, Inc. (incorporated herein by reference to Exhibit B of the Company's
definitive Proxy Statement filed April 12, 2012).
10(a) Amended and Restated 2010 Stock Incentive Plan adopted May 25, 2017 (incorporated herein by reference to Exhibit A of
the Company’s definitive Proxy Statement filed April 19, 2017). †
10(b) 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(c)
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). †
10(d) Raven Industries, Inc. Non-Qualified Deferred Compensation Plan, effective as of January 1, 2018 and filed herewith as
Exhibit 10.1. †
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 Form8-K filed May 24, 2006). †
10(f) Credit Agreement, dated April 15, 2015, by and among 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(g) Guaranty, dated as of 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(h) Amended and Restated Employment Agreement between Raven Industries, Inc. and Daniel A. Rykhus dated as of March 29,
2017 (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-K filed March 31, 2017). †
10(i) Amended and Restated Employment Agreement between Raven Industries, Inc. and Steven E. Brazones dated as of March
29, 2017 (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-K filed March 31, 2017). †
10(j) Form of Amended and Restated Change in Control Agreement between Raven Industries, Inc. and the following senior executive
officers: 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 Form 10-K filed March 29, 2016). †
10(k) Form of Amended Employment Agreement between Raven Industries, Inc. and the following senior executive officers: Brian
E. Meyer and Janet L. Matthiesen dated August 25, 2015 (incorporated herein by reference to Exhibit 10.1 of the Company's
Form 8-K filed August 31, 2015). †
10(l) 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 Form 8-K filed February 1, 2012). †
10(m) Form of Schedule A to Employment Agreement, revised effective January 1, 2016, between Raven Industries, Inc. and the
following senior executive officers: Janet L. Matthiesen, Brian E. Meyer, and Anthony D. Schmidt (incorporated herein by
reference to Exhibit 10.3 of the Company's Form 10-K filed March 31, 2017). †
16(a) Letter of PricewaterhouseCoopers LLP to the Securities and Exchange Commission, dated as of April 6, 2017,
(incorporated herein by reference to Exhibit 16.1 of the Company's Form 8-K filed April 6, 2017).
21 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.
23.2 Consent of PricewaterhouseCoopers LLP, 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.
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.
76
101.INS
Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded
within the Inline XBRL 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.
‡
Filed in paper.
77
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 23, 2018
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
/s/ THOMAS S. EVERIST
Steven E. Brazones
Vice President and Chief Financial Officer
(principal financial and accounting officer)
/s/ MARC E. LEBARON
Marc E. LeBaron
Chairman of the Board
Thomas S. Everist
Director
/s/ KEVIN T. KIRBY
Kevin T. Kirby
Director
/s/ JASON M. ANDRINGA
/s/ RICHARD W. PAROD
Jason M. Andringa
Director
/s/ DAVID L. CHICOINE
David L. Chicoine
Director
Richard W. Parod
Director
Date: March 23, 2018
78
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ended January 31, 2018, 2017 and 2016
(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, 2018
Year ended January 31, 2017
Year ended January 31, 2016
Note:
Balance at
Beginning
of Year
Charged to
Costs and
Expenses
Charged to
Other
Accounts
Deductions
From
Reserves (1)
Balance at
End of Year
$
691 $
1,034
319
357 $
380
1,066
— $
—
—
70 $
723
351
978
691
1,034
(1) Represents uncollectable accounts receivable written off during the year, net of recoveries.
79
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