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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) OF THE SECUR - RAVEN INDUSTRIES INCa2016q3exhibit311.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS - RAVEN INDUSTRIES INCa2016q3exhibit322.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) OF THE SECUR - RAVEN INDUSTRIES INCa2016q3exhibit312.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS - RAVEN INDUSTRIES INCa2016q3exhibit321.htm

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2015
OR
o
 
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)
 
46-0246171
(IRS Employer Identification No.)
205 East 6th Street, P.O. Box 5107, Sioux Falls, SD 57117-5107
(Address of principal executive offices)
(605) 336-2750
(Registrant’s telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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.                     þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).         þ Yes o 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o Yes þ No
As of November 27, 2015 there were 36,505,845 shares of common stock, $1 par value, of Raven Industries, Inc. outstanding. There were no other classes of stock outstanding.
 




RAVEN INDUSTRIES, INC.
INDEX
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
Item 4. Mine Safety Disclosures




PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RAVEN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(Dollars and shares in thousands, except per-share data)
October 31,
2015
 
January 31,
2015
 
October 31,
2014
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
32,287

 
$
51,949

 
$
66,358

Short-term investments
250

 
250

 
250

Accounts receivable, net
39,293

 
56,576

 
54,533

Inventories
48,624

 
55,152

 
51,800

Deferred income taxes
3,296

 
3,958

 
3,299

Other current assets
2,915

 
3,094

 
2,881

Total current assets
126,665

 
170,979

 
179,121

 
 
 
 
 
 
Property, plant and equipment, net
117,760

 
117,513

 
100,369

Goodwill
44,796

 
52,148

 
25,234

Amortizable intangible assets, net
16,586

 
18,490

 
9,005

Other assets
3,859

 
3,743

 
3,734

TOTAL ASSETS
$
309,666

 
$
362,873

 
$
317,463

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
$
7,160

 
$
11,545

 
$
11,614

Accrued liabilities
11,906

 
19,187

 
16,922

Customer advances
907

 
1,111

 
1,540

Total current liabilities
19,973

 
31,843

 
30,076

 
 
 
 
 
 
Other liabilities
17,057

 
25,793

 
20,432

 
 
 
 
 
 
Commitments and contingencies

 

 

 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
Common stock, $1 par value, authorized shares 100,000; issued 67,006; 66,947; and 65,400, respectively
67,006

 
66,947

 
65,400

Paid-in capital
54,342

 
53,237

 
14,579

Retained earnings
236,922

 
244,180

 
242,973

Accumulated other comprehensive loss
(3,026
)
 
(5,849
)
 
(2,693
)
Treasury stock at cost, 30,500; 28,897; and 28,897 shares, respectively
(82,700
)
 
(53,362
)
 
(53,362
)
Total Raven Industries, Inc. shareholders' equity
272,544

 
305,153

 
266,897

Noncontrolling interest
92

 
84

 
58

Total shareholders' equity
272,636

 
305,237

 
266,955

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
309,666

 
$
362,873

 
$
317,463


The accompanying notes are an integral part of the unaudited consolidated financial statements.

#3

                           

RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
 
Three Months Ended
 
Nine Months Ended
(Dollars in thousands, except per-share data)
October 31,
2015
 
October 31,
2014
 
October 31,
2015
 
October 31,
2014
Net sales
$
67,611

 
$
91,292

 
$
205,402

 
$
288,287

Cost of sales
51,440

 
66,953

 
151,014

 
206,524

Gross profit
16,171

 
24,339

 
54,388

 
81,763

 
 
 
 
 
 
 
 
Research and development expenses
4,005

 
4,318

 
10,757

 
13,675

Selling, general, and administrative expenses
7,480

 
9,862

 
25,302

 
30,701

Goodwill impairment loss
7,413

 

 
7,413

 

Operating (loss) income
(2,727
)
 
10,159

 
10,916

 
37,387

 
 
 
 
 
 
 
 
Other (expense), net
(123
)
 
(72
)
 
(433
)
 
(210
)
(Loss) income before income taxes
(2,850
)
 
10,087

 
10,483

 
37,177

 
 
 
 
 
 
 
 
Income taxes
(1,291
)
 
3,290

 
2,960

 
11,599

Net (loss) income
(1,559
)
 
6,797

 
7,523

 
25,578

 
 
 
 
 
 
 
 
Net income attributable to the noncontrolling interest
22

 
14

 
58

 
38

 
 
 
 
 
 
 
 
Net (loss) income attributable to Raven Industries, Inc.
$
(1,581
)
 
$
6,783

 
$
7,465

 
$
25,540

 
 
 
 
 
 
 
 
Net (loss) income per common share:
 
 
 
 
 
 
 
      ─ Basic
$
(0.04
)
 
$
0.19

 
$
0.20

 
$
0.70

      ─ Diluted
$
(0.04
)
 
$
0.18

 
$
0.20

 
$
0.70

 
 
 
 
 
 
 
 
Cash dividends paid per common share
$
0.13

 
$
0.13

 
$
0.39

 
$
0.37

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net (loss) income
$
(1,559
)
 
$
6,797

 
$
7,523

 
$
25,578

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation
2

 
(463
)
 
(172
)
 
(588
)
Postretirement benefits, net of income tax benefit of $1,606, $14, $1,572, and $40, respectively
2,794

 
24

 
2,995

 
74

Other comprehensive income (loss), net of tax
2,796

 
(439
)
 
2,823

 
(514
)
 
 
 
 
 
 
 
 
Comprehensive income
1,237

 
6,358

 
10,346

 
25,064

 
 
 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interest
22

 
14

 
58

 
38

 
 
 
 
 
 
 
 
Comprehensive income attributable to Raven Industries, Inc.
$
1,215

 
$
6,344

 
$
10,288

 
$
25,026


The accompanying notes are an integral part of the unaudited consolidated financial statements.

#4

                           

RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
$1 Par Common Stock
Paid-in Capital
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Raven Industries, Inc. Equity
Non- controlling Interest
Total Equity
(Dollars in thousands, except per-share amounts)
Shares
Cost
Balance January 31, 2014
$
65,318

$
10,556

28,897

$
(53,362
)
$
231,029

$
(2,179
)
$
251,362

$
100

$
251,462

Net income




25,540


25,540

38

25,578

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Cumulative foreign currency translation adjustment





(588
)
(588
)

(588
)
Postretirement benefits reclassified from accumulated other comprehensive income (loss) after tax benefit of $40





74

74


74

Cash dividends ($0.37 per share) 

104



(13,596
)

(13,492
)

(13,492
)
Dividends of less than wholly-owned subsidiary attributable to non-controlling interest







(80
)
(80
)
Director shares issued
18

(18
)







Shares issued on stock options exercised, net of shares withheld for employee taxes
64

510





574


574

Share-based compensation

3,336





3,336


3,336

Tax benefit from exercise of stock options

91





91


91

Balance October 31, 2014
$
65,400

$
14,579

28,897

$
(53,362
)
$
242,973

$
(2,693
)
$
266,897

$
58

$
266,955

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance January 31, 2015
$
66,947

$
53,237

28,897

$
(53,362
)
$
244,180

$
(5,849
)
$
305,153

$
84

$
305,237

Net income




7,465


7,465

58

7,523

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Cumulative foreign currency translation adjustment





(172
)
(172
)

(172
)
Change in postretirement benefits due to plan amendments after tax benefit of $1,591





2,770

2,770


2,770

Postretirement benefits reclassified from accumulated other comprehensive income (loss) after tax (expense) of ($19)





225

225


225

Cash dividends ($0.39 per share)

125



(14,723
)

(14,598
)

(14,598
)
Dividends of less than wholly-owned subsidiary paid to noncontrolling interest







(50
)
(50
)
Share issuance costs related to fiscal 2015 business combination

(15
)




(15
)

(15
)
Shares issued on stock options exercised, net of shares withheld for employee taxes
7

(54
)




(47
)

(47
)
Shares issued on vesting of stock units, net of shares withheld for employee taxes
52

(510
)




(458
)

(458
)
Shares repurchased


1,603

(29,338
)


(29,338
)

(29,338
)
Share-based compensation

1,826





1,826


1,826

Income tax impact related to share-based compensation

(267
)




(267
)

(267
)
Balance October 31, 2015
$
67,006

$
54,342

30,500

$
(82,700
)
$
236,922

$
(3,026
)
$
272,544

$
92

$
272,636


The accompanying notes are an integral part of the unaudited consolidated financial statements.


#5

                           

RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Nine Months Ended
(Dollars in thousands)
October 31,
2015
 
October 31,
2014
OPERATING ACTIVITIES:
 
 
 
Net income
$
7,523

 
$
25,578

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
13,201

 
12,538

Change in fair value of acquisition-related contingent consideration
(930
)
 
514

Goodwill impairment loss
7,413

 

Loss from equity investment
126

 
138

Deferred income taxes
(4,765
)
 
(2,420
)
Share-based compensation expense
1,826

 
3,336

Change in operating assets and liabilities:
 
 
 
Accounts receivable
16,144

 
2,108

Inventories
4,832

 
2,768

Other assets
228

 
(555
)
Operating liabilities
(12,012
)
 
1,623

Other operating activities, net
1,595

 
67

Net cash provided by operating activities
35,181

 
45,695

 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(10,771
)
 
(12,797
)
Proceeds (payments) related to business acquisitions
351

 
(4,711
)
Proceeds from sales of short-term investments

 
250

Purchase of short-term investments

 
(250
)
Proceeds from sale of assets
1,960

 

Other investing activities
(506
)
 
(604
)
Net cash used in investing activities
(8,966
)
 
(18,112
)
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
Dividends paid
(14,648
)
 
(13,572
)
Payments for common shares repurchased
(29,338
)
 

Payments of acquisition-related debt

 
(648
)
Payments of acquisition-related contingent liability
(773
)
 
(491
)
Debt issuance costs paid
(548
)
 

Restricted stock units vested and issued
(458
)
 

Employee stock option exercises net of tax benefit
(85
)
 
665

Other financing activities, net
(15
)
 

Net cash used in financing activities
(45,865
)
 
(14,046
)
 
 
 
 
Effect of exchange rate changes on cash
(12
)
 
(166
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(19,662
)
 
13,371

Cash and cash equivalents at beginning of year
51,949

 
52,987

Cash and cash equivalents at end of period
$
32,287

 
$
66,358


The accompanying notes are an integral part of the unaudited consolidated financial statements.

#6


RAVEN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(Dollars in thousands, except per-share amounts)

(1) 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, energy, construction, and military/aerospace markets. The Company is comprised of three unique operating units, or divisions, classified into reportable segments: Applied Technology, Engineered Films, and Aerostar.
The accompanying unaudited consolidated financial information, which includes the accounts of Raven and its wholly-owned or controlled subsidiaries, net of intercompany balances and transactions which have been eliminated, has been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, it does not include all of the information and notes required by GAAP for complete financial statements. This financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2015.
In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of this financial information have been included. Financial results for the interim nine-month period ended October 31, 2015 are not necessarily indicative of the results that may be expected for the year ending January 31, 2016. The January 31, 2015 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. Preparing financial statements in conformity with 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. Actual results could differ from those estimates.
Noncontrolling interests represent capital contributions, income and loss attributable to the owners of less than wholly-owned consolidated entities. The Company owns a 75% interest in an entity consolidated under the Aerostar business segment. Given the Company's majority ownership interest, the accounts of the business venture have been consolidated with the accounts of the Company, and a noncontrolling interest has been recorded for the noncontrolling investor interests in the net assets and operations of the business venture.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company prospectively adopted the straight-line method of depreciation for manufacturing equipment, office equipment, and furniture and fixtures placed in service on or after February 1, 2015. This change was made as a straight-line method of depreciation more accurately reflects the economic consumption of these assets than did the accelerated method previously used. This prospective change in the depreciation method did not have a material effect on the Company’s financial position or results of operations for the three- or nine-month periods ended October 31, 2015.
As described in Note 1 Summary of Significant Accounting Policies of the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2015, 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. Impairment tests of goodwill are done at the reporting unit level. 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).
In the fiscal 2016 second quarter the Company performed a Step 1 impairment analysis using fair value techniques on the Engineered Films reporting unit as a result of changes in market conditions indicating that goodwill might be impaired. The reporting unit's fair value was estimated based on discounted cash flows and that fair value amount was compared to the carrying value of the reporting unit. This analysis indicated that the estimated fair value of the Engineered Films reporting unit exceeded the net book value by approximately $50,700 or 37.2%. No significant changes were noted in the market conditions in fiscal 2016 third quarter and operating income was consistent with expectations at the end of second quarter. Although oil prices continue to be lower and sales are down, the profitability of the division continues to be higher than the trailing months at the time of the impairment analysis given the lower material costs in comparison to the selling price. As such, the Company concluded a triggering event did not occur in the current quarter for Engineered Films.

In the fiscal 2016 third quarter the Company determined that a triggering event occurred for its Vista reporting unit, a subsidiary of the Aerostar Division. In addition to the Company making a change in the executive leadership of the Vista reporting unit

#7

(Dollars in thousands, except per-share amounts)


during the quarter, financial expectations for sales and operating income of the reporting unit were lowered due to delays and uncertainties regarding the reporting unit’s pursuit of large international opportunities, one of which was expected to be awarded during the current quarter. While Vista has been in the process of negotiating a large international contract, the contract did not materialize in the fiscal 2016 third quarter as expected. The likelihood of being awarded this or other such contracts in the next twelve months is now lower than it was in the second quarter. The Company continues to pursue these international opportunities, but the timing of any contract award is less certain. As a result of a delay in being awarded this large international contract, the Company lowered its financial forecast for the business. As a result of these factors, the Company performed a Step 1 impairment analysis using fair value techniques as of October 31, 2015.

The reporting unit's fair value was estimated based on discounted cash flows and that fair value amount was compared to the carrying value of the reporting unit. The analysis indicated that the estimated fair value of the Vista reporting unit was less than the carrying value by $8,357, or 35.0%. Based on these results, a Step 2 impairment analysis was performed. The fair value determined in Step 1 was allocated to the assets and liabilities of the reporting unit. Based on the Step 2 impairment analysis the Company determined that the goodwill balance was impaired as of October 31, 2015 and an impairment loss of $7,413 was recorded. This goodwill impairment loss is described further in Note 6 Goodwill Impairment Loss And Other Charges.
Although the profitability of the Company’s other two reporting units, Aerostar (all operations other than Vista) and Applied Technology, has been down as compared to the prior year, the Company identified no triggering events requiring a Step 1 impairment analysis for either of these reporting units. The Company will conduct its planned annual assessment of goodwill for impairment in the fourth quarter.

There have been no material changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

(3) NET (LOSS) INCOME PER SHARE

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. Weighted average common and common equivalent shares outstanding are excluded from the diluted loss per share calculation as their inclusion would have an antidilutive effect.
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 share calculation were as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 31,
2015
 
October 31,
2014
 
October 31,
2015
 
October 31,
2014
Anti-dilutive options and restricted stock units
1,216,318
 
846,205
 
1,150,227
 
574,631

#8

(Dollars in thousands, except per-share amounts)



The computation of earnings per share is presented below:
 
Three Months Ended
 
Nine Months Ended
 
October 31,
2015
 
October 31,
2014
 
October 31,
2015
 
October 31,
2014
Numerator:
 
 
 
 
 
 
 
Net (loss) income attributable to Raven Industries, Inc.
$
(1,581
)
 
$
6,783

 
$
7,465

 
$
25,540

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
36,785,140

 
36,499,018

 
37,481,675

 
36,462,441

Weighted average stock units outstanding
92,470

 
68,721

 
84,597

 
69,616

Denominator for basic calculation
36,877,610

 
36,567,739

 
37,566,272

 
36,532,057

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
36,785,140

 
36,499,018

 
37,481,675

 
36,462,441

Weighted average stock units outstanding
92,470

 
68,721

 
84,597

 
69,616

Dilutive impact of stock options and restricted stock units

 
165,504

 
47,773

 
188,713

Denominator for diluted calculation
36,877,610

 
36,733,243

 
37,614,045

 
36,720,770

 
 
 
 
 
 
 
 
Net (loss) income per share - basic
$
(0.04
)
 
$
0.19

 
$
0.20

 
$
0.70

Net (loss) income per share - diluted
$
(0.04
)
 
$
0.18

 
$
0.20

 
$
0.70



#9

(Dollars in thousands, except per-share amounts)


(4) SELECTED BALANCE SHEET INFORMATION

Following are the components of selected items from the Consolidated Balance Sheets:
 
 
October 31, 2015
 
January 31, 2015
 
October 31, 2014
Accounts receivable, net:
 
 
 
 
 
 
     Trade accounts
 
$
40,062

 
$
56,895

 
$
54,889

     Allowance for doubtful accounts
 
(769
)
 
(319
)
 
(356
)
 
 
$
39,293

 
$
56,576

 
$
54,533

 
 
 
 
 
 
 
Inventories:
 
 
 
 
 
 
Finished goods
 
$
5,211

 
$
8,127

 
$
7,981

In process
 
2,157

 
1,317

 
2,063

Materials
 
41,256

 
45,708

 
41,756

 

$
48,624


$
55,152


$
51,800

 
 
 
 
 
 
 
Other current assets:
 
 
 
 
 
 
Insurance policy benefit
 
$
728

 
$
733

 
$
517

     Federal tax receivable
 

 
713

 

Receivable from sale of business
 
420

 

 

     Prepaid expenses and other
 
1,767

 
1,648

 
2,364

 
 
$
2,915

 
$
3,094

 
$
2,881

 
 
 
 
 
 
 
Property, plant and equipment, net:
 
 
 
 
 
 
Held for use:
 
 
 
 
 
 
Land
 
$
2,974

 
$
3,246

 
$
2,077

Buildings and improvements
 
76,775

 
78,140

 
69,353

Machinery and equipment
 
138,921

 
131,766

 
124,057

     Accumulated depreciation
 
(102,263
)
 
(96,545
)
 
(95,118
)
 
 
$
116,407

 
$
116,607

 
$
100,369

 
 
 
 
 
 
 
Held for sale:
 
 
 
 
 
 
Land
 
$
324

 
$
11

 
$

Buildings and improvements
 
2,597

 
1,522

 

Machinery and equipment
 
639

 

 

     Accumulated depreciation
 
(2,207
)
 
(627
)
 

 
 
1,353

 
906

 

 
 
$
117,760

 
$
117,513

 
$
100,369

 
 
 
 
 
 
 
Other assets, net:
 
 
 
 
 
 
Investment in affiliate
 
$
2,720

 
$
3,217

 
$
3,175

Other, net
 
1,139

 
526

 
559

 
 
$
3,859

 
$
3,743

 
$
3,734

 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
Salaries and related
 
$
1,177

 
$
4,063

 
$
1,875

Benefits
 
3,925

 
5,001

 
5,778

Insurance obligations
 
1,852

 
1,590

 
1,426

Warranties
 
1,639

 
3,120

 
2,456

Income taxes
 
1,013

 
536

 
1,140

Other taxes
 
977

 
1,240

 
1,052

Acquisition-related contingent consideration
 
492

 
1,375

 
1,191

Other
 
831

 
2,262

 
2,004

 
 
$
11,906

 
$
19,187

 
$
16,922

 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
Postretirement benefits
 
$
7,898

 
$
11,812

 
$
8,264

Acquisition-related contingent consideration
 
2,229

 
3,631

 
3,587

Deferred income taxes
 
3,665

 
7,091

 
1,406

Uncertain tax positions
 
3,265

 
3,259

 
7,175

 
 
$
17,057

 
$
25,793

 
$
20,432



#10

(Dollars in thousands, except per-share amounts)


(5) ACQUISITIONS OF AND INVESTMENTS IN BUSINESSES AND TECHNOLOGIES

Integra
Related to the fourth quarter fiscal 2015 acquisition of Integra Plastics, Inc. (Integra), the Company received $351 in settlement of the working capital adjustment to the purchase price and finalized deferred tax calculations in fiscal 2016 first quarter. These transactions resulted in an adjustment of about $20 to the purchase price allocation. As of as October 31, 2015, the purchase price valuation was $48,262 with fair value of goodwill of $27,422. None of this goodwill is tax deductible.

Acquisition-related Contingent Consideration
The Company has contingent liabilities related to prior year acquisitions of SBG Innovatie BV and its affiliate, Navtronics BVBA (collectively, SBG) in May 2014 and Vista in January 2012 . The fair value of such contingent consideration is estimated using forecasted discounted cash flows. Projecting discounted future cash flows requires the Company to make significant estimates and assumptions regarding future revenues under the subject contingent agreement and the appropriate discount rate. Such valuations techniques include one or more significant inputs that are not observable (Level 3 fair value measures).

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. At October 31, 2015, the fair value of this contingent consideration was $1,338, of which $329 was classified as "Accrued liabilities" and $1,009 was classified as "Other liabilities" in the Consolidated Balance Sheets. At October 31, 2014, the fair value of this contingent consideration was $1,583, of which $298 was classified as "Accrued liabilities" and $1,285 as "Other liabilities." The Company paid $38 and $188 in earn-out payments in the three- and nine-month periods ended October 31, 2015. There were $37 earn-out payments in the three- and nine-month periods ended October 31, 2014.

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.

As a result of the triggering event described in Note 2 Significant Accounting Policies, the Company performed a Step 1 and Step 2 impairment analysis for the Vista reporting unit. The result of the Step 2 analysis is more fully described in Note 6 Goodwill Impairment Loss And Other Charges. Prior to performing the Step 2 analysis, the Company evaluated the fair value of the remaining assets and liabilities including acquisition-related contingent consideration. This analysis included a reduction of $1,483 in the fair value of this contingent consideration. This benefit was recognized in "Cost of sales" in the Consolidated Statements of Income and Comprehensive Income for the three- and nine-month periods ended October 31, 2015. At October 31, 2015 the fair value of this contingent consideration was $1,340, of which $120 was classified in "Accrued liabilities" and $1,220 as "Other liabilities" in the Consolidated Balance Sheets. At October 31, 2014 the fair value of this contingent consideration was $2,841, of which $539 was classified as "Accrued liabilities" and $2,302 as "Other liabilities" in the Consolidated Balance Sheets. The Company paid $585 and $454 in the nine-month periods ended October 31, 2015 and 2014, respectively. The Company made no earn-out payments in the three-month periods ended October 31, 2015 or 2014, respectively.

(6) GOODWILL IMPAIRMENT LOSS AND OTHER CHARGES

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 in Note 2 Summary of Significant Accounting Policies, Vista has been 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. While the Company continues to pursue international opportunities, it is not likely that major contracts will be successfully executed within the next twelve months as previously expected. 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.
Goodwill Impairment Loss
In the fiscal 2016 third quarter the Company determined that a triggering event occurred for its Vista reporting unit, a subsidiary of the Aerostar division. 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, one of which was expected to be awarded during the quarter. In addition, the Company made a change in the executive leadership of

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(Dollars in thousands, except per-share amounts)


the reporting unit during the quarter. As previously discussed, 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 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, 2015 analysis indicated that the estimated fair value of the Vista reporting unit was less than the carrying value. The carrying value exceeded the estimated fair value by $8,357, or 35.0%.
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. The resulting implied fair value of the Vista goodwill was $4,084 compared to the carrying value recorded for the reporting unit, $11,497. This $7,413 shortfall was recorded in the current quarter as an impairment charge to operating income reported as "Goodwill impairment loss" in the Consolidated Statements of Income and Comprehensive Income.
There were no impairment losses reported in the three- or nine-month periods ended October 31, 2014 nor were there any accumulated impairment losses prior to October 31, 2015. Goodwill gross and net of accumulated impairment losses at October 31, 2015 was $52,209 and $44,796, respectively. Goodwill gross and net of accumulated impairment losses at October 31, 2014 was $25,234.
(7) EMPLOYEE POSTRETIREMENT BENEFITS

The Company provides postretirement medical and other benefits to senior executive officers and senior managers. These plan obligations are unfunded. On August 25, 2015 the Company amended the employment agreements with five of its senior executive officers eliminating the postretirement medical benefits to these individuals and their spouses. In consideration of eliminating this retiree benefit, the senior executive officers received lump sum payments in amounts ranging from $8 to $15 based on each officer’s years of service to the Company. The Company’s current senior executive officers that either already qualified for retirement or had twenty or more years of service to the Company are still eligible for benefits under their employment agreements.

The reduction in active plan participants was accounted for as a negative plan amendment and eliminated the accrual for defined benefits for future services from these individuals and resulted in the subsequent remeasurement of the Company's benefit obligation as of August 31, 2015. The effect of the August 31, 2015 remeasurement of the benefit obligation is as follows:
Benefit obligation at January 31, 2015
$
12,125

Service cost
252

Interest cost
244

Prior service (credit) due to plan amendment
(958
)
Actuarial (gain) due to assumption changes
(3,403
)
Retiree benefits paid
(89
)
Benefit obligation at August 31, 2015
$
8,171

Fair value of plan assets

Funded status at August 31, 2015
$
(8,171
)
Net actuarial loss in accumulated other comprehensive income
2,710

Unrecognized prior service (credit)
(958
)
Accrued postretirement benefit cost at August 31, 2015
$
(6,419
)

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(Dollars in thousands, except per-share amounts)



The actuarial gain from assumptions changes is primarily the result of an increase in the discount rate at the measurement date. 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. Medical trend rates were developed using a combination of a trend survey and a trend rate model. For the years 2015 through 2017, the rates are based on survey data and client market expectations. The trend rate model was then used to determine the trend rates between the years 2017 through 2030, based on reasonable macro-economic assumptions for the growth of health care expenditures during this period relative to the general economy. The assumptions used to measure the benefit obligation were as follows:
Assumptions used to calculate benefit obligation:
 
 
 
Measurement date
August 31, 2015

 
January 31, 2015

Discount rate
4.25
%
 
3.50
%
Wage inflation rate
4.00
%
 
4.00
%
Average remaining years of service
15.14

 
16.05

Health care cost trend rates:
 
 
 
Health care cost trend rate assumed for next year
7.00
%
 
7.20
%
Ultimate health care cost trend rate
4.50
%
 
5.00
%
Year that the rate reaches the ultimate trend rate
2030

 
2025


The negative plan amendment and assumption changes will reduce the net periodic benefit cost for fiscal year 2016 by approximately $300 compared to the amount expected prior to the remeasurement. The components of the net periodic benefit cost for postretirement benefits are as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 31,
2015
 
October 31,
2014
 
October 31,
2015
 
October 31,
2014
Service cost
$
49

 
$
49

 
$
265

 
$
147

Interest cost
92

 
91

 
302

 
274

Amortization of actuarial losses
38

 
38

 
206

 
114

Net periodic benefit cost
$
179

 
$
178

 
$
773

 
$
535


Postretirement benefit cost components are reclassified in their entirety from accumulated other comprehensive loss 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.

(8) 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. Changes in the warranty accrual were as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 31,
2015
 
October 31,
2014
 
October 31,
2015
 
October 31,
2014
Beginning balance
$
1,752

 
$
2,617

 
$
3,120

 
$
2,525

Accrual for warranties
571

 
676

 
1,319

 
2,065

Settlements made
(684
)
 
(837
)
 
(2,800
)
 
(2,134
)
Ending balance
$
1,639

 
$
2,456

 
$
1,639

 
$
2,456


(9) FINANCING ARRANGEMENTS

On April 15, 2015 the Company's uncollateralized credit agreement with Wells Fargo Bank, N.A. (Wells Fargo) providing a line of credit of $10,500 and maturing on November 30, 2016 was terminated upon the Company's entering into a new credit facility.

This new credit facility, the Credit Agreement dated as of April 15, 2015 among Raven Industries, Inc., JPMorgan Chase Bank, N.A., Toronto Branch as Canadian Administrative Agent, JPMorgan Chase Bank, National Association, as administrative agent,

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(Dollars in thousands, except per-share amounts)


and each lender from time to time party thereto (the Credit Agreement), provides for a syndicated senior revolving credit facility up to $125,000 with a maturity date of April 15, 2020. Unamortized debt issuance costs associated with this Credit Agreement were $489 at October 31, 2015.

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 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. Financial covenants include an interest coverage ratio and funded indebtedness to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement. $125,000 was available under the Credit Agreement for borrowings as of October 31, 2015. The loan proceeds may be utilized by Raven for strategic business purposes and for 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.

Letters of credit totaling $850, issued under the previous line of credit with Wells Fargo primarily to support self-insured workers' compensation bonding requirements, remain in place. The Company expects to have these outstanding letters of credit issued under the credit facility. Until such time as that is complete, any draws required under these letters of credit would be settled with available cash or borrowings under the Credit Agreement.

There were no borrowings under either credit agreement for any of the fiscal periods covered by this Quarterly Report on Form 10-Q.

(10) CONTINGENCIES

In the normal course of business, the Company is subject to various claims and litigation. The Company has concluded that the ultimate outcome of these matters is not expected to be significant to the Company’s results of operations, financial position, or cash flows.

(11) INCOME TAXES

The Company’s effective tax rate varies from the federal statutory rate primarily due to state and local taxes, tax-exempt captive insurance premiums, and tax benefits on qualified production activities. The Company’s effective tax rates for the nine-month periods ended October 31, 2015 and 2014 were 28.2% and 31.2%, respectively. Although the fiscal 2015 effective tax rates include the impact of recognition of a $709 research and development tax credit in the fiscal second quarter based upon a tax study undertaken for fiscal years 2011 through 2014, the fiscal 2016 rate decreased 3.0 percentage points from the prior year. The decrease in the effective rate is primarily due to an increased tax benefit for qualified production activities. While pre-tax income is lower in the current year, this benefit is based on estimated taxable income. Taxable income is higher in comparison to pre-tax income for the three- and nine-month periods ended October 31, 2015 due to the goodwill impairment loss recorded. This impairment, described further in Note 6 Goodwill Impairment Loss And Other Charges, does not reduce taxable income. Rather, goodwill is amortized over 15 years for tax purposes.

As of October 31, 2015, undistributed earnings of approximately $1,720 of the Canadian subsidiary were considered to have been reinvested indefinitely and, accordingly, the Company has not provided United States income taxes on such earnings. This estimated tax liability would be approximately $270 net of foreign tax credits.

(12) RESTRUCTURING COSTS

On March 10, 2015 the Company announced and implemented a restructuring plan to further lower its cost structure. The cost reductions covered all divisions and included the corporate offices, but were weighted to Applied Technology as a result of the decline in this business and the expectation of continued end-market weakness for this division. This action was taken in addition to a preemptive restructuring of the Engineered Films Division in the fourth quarter of fiscal 2015 to address the expected decline in demand in the energy sector as the result of falling oil prices, as well as the Applied Technology restructuring announced in November 2014.

The Company incurred restructuring costs for severance benefits of $588 in the nine-month period ended October 31, 2015. This restructuring plan was completed during fiscal 2016 second quarter so no costs were incurred related to this restructuring plan in

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(Dollars in thousands, except per-share amounts)


the three-month period ended October 31, 2015 and there were no unpaid costs at October 31, 2015. The Company reported $407 of this expense in "Cost of sales" and the remaining $181 in "Selling, general, and administrative expenses" in the Consolidated Statements of Income and Comprehensive Income. Substantially all of these restructuring costs related to the Applied Technology Division. The Company incurred no restructuring costs in the three- or nine-month periods ended October 31, 2014.

Subsequent to the end of fiscal 2015, the Company announced that Applied Technology's remaining contract manufacturing operations in the St. Louis, Missouri area had been successfully sold and transferred. The exit activities related to this sale and transfer were substantially completed during the first quarter. There were no impairments recorded as a result of the exit activity and gains of $611 were recorded in the nine-month period ended October 31, 2015. There were no gains recorded in the three-month period ended October 31, 2015. Receivables for inventory and estimated future royalties pursuant to the sale agreements were $420 and were reflected in "Other current assets" in the Consolidated Balance Sheet at October 31, 2015.

Aerostar Division (Vista) restructuring plan
In addition to the restructuring plan announced in first quarter, the Company's Aerostar segment implemented a restructuring plan at Vista in October 2015 due to reduced demand expectations primarily related to delays and uncertainty surrounding international pursuits. The lower cost structure will preserve the Company's capabilities to pursue domestic and international opportunities for Vista's radar products and technology.

Vista incurred restructuring costs for severance benefits of $73 in the three- and nine-month periods ended October 31, 2015. The restructuring plan was implemented late in third quarter so virtually all of these costs were unpaid at October 31, 2015. The Company reported $58 of this expense in "Cost of sales" and the remaining $15 in "Research and development expenses" in the Consolidated Statements of Income and Comprehensive Income. In addition to these restructuring costs, Vista incurred a goodwill impairment loss and a write-off of some deferred pre-contract costs. These one-time charges are further described in Note 6 Goodwill Impairment Loss And Other Charges. Vista incurred no restructuring costs in the three- or nine-month periods ended October 31, 2014.

(13) DIVIDENDS AND TREASURY STOCK

Dividends paid to Raven shareholders for the three and nine months ended October 31, 2015 were $4,764 and $14,598, or 13.0 cents and 39.0 cents per share, respectively. Dividends paid to Raven shareholders for the three and nine months ended October 31, 2014 were $4,745 and $13,492, or 13.0 cents and 37.0 cents per share, respectively.

On November 30, 2014 the Company announced that its Board of Directors had authorized a $40,000 stock buyback program. The Company repurchased 1,052,587 and 1,602,545 shares in the three- and nine-month periods ended October 31, 2015, respectively. These purchases totaled $18,513 and $29,338, respectively. The remaining dollar value that may be purchased under the plan at October 31, 2015 is $10,662.

(14) SHARE-BASED COMPENSATION

The Company reserves shares for issuance pursuant to the Amended and Restated 2010 Stock Incentive Plan effective March 23, 2012, administered by the Personnel and Compensation Committee of the Board of Directors. Two types of awards, stock options and restricted stock units, were granted during the nine months ended October 31, 2015 and October 31, 2014.

Stock Option Awards
The Company granted 289,600 and 194,900 non-qualified stock options during the nine-month periods ended October 31, 2015 and 2014, respectively. None of these options were granted during the three-month periods ended October 31, 2015 or October 31, 2014. 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 and employee terminations within this valuation model.


#15

(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:
 
 
Nine Months Ended
 
 
October 31, 2015
 
October 31, 2014
Risk-free interest rate
 
1.33
%
 
1.32
%
Expected dividend yield
 
2.59
%
 
1.53
%
Expected volatility factor
 
36.81
%
 
38.65
%
Expected option term (in years)
 
3.75

 
4.00

 
 
 
 
 
Weighted average grant date fair value
 
$4.77
 
$9.18

Restricted Stock Unit Awards (RSUs)
The Company granted 27,696 and 19,040 time-vested RSUs to employees in the nine-month periods ended October 31, 2015 and 2014, respectively. The Company granted 8,446 awards in the three-month period ended October 31, 2015. There were no awards granted during the three-month period ended October 31, 2014. 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. The weighted average grant date fair value per share of the time-vested RSUs granted in the nine months ended October 31, 2015 was $19.90. The weighted average grant date fair value per share of the time-vested RSUs granted for the nine-month period ended October 31, 2014 was $32.75. Time-vested RSUs will vest if, at the end of the three-year period, the employee remains employed by the Company. RSUs contain retirement and change-in-control provisions that may accelerate the vesting period. Dividends are cumulatively earned on the time-vested RSUs over the vesting period.

The Company also granted performance-based RSUs in the nine-month period ended October 31, 2015. The exact number of performance shares to be issued will vary from 0% to 150% of the target award, depending on the Company's actual performance over the three-year period in comparison to the target award. The target award for the fiscal 2016 and 2015 grants are based on return on equity (ROE), which is defined as net income divided by the average of beginning and ending shareholders' equity. The performance-based RSUs will vest if, at the end of the three-year performance period, the Company has achieved certain performance goals and the employee remains employed by the Company. 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. The number of RSUs that will vest is determined by an estimated ROE target over the three-year performance period. The estimated ROE performance factors used to estimate the number of restricted stock units expected to vest are evaluated at least quarterly. The number of restricted stock units issued at the vesting date will be based on actual results.

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 performance-based RSUs granted is based on 100% of the target award. During the nine-month periods ended October 31, 2015 and 2014, the Company granted 68,570 and 54,490 performance-based RSUs, respectively. None of the performance-based RSUs were granted in the three-month period ended October 31, 2015 or October 31, 2014. The weighted average grant date fair value per share of these performance-based RSUs was $20.10 and $32.75, respectively.

(15) SEGMENT REPORTING

The Company's reportable segments are defined by their product lines which have been grouped in these segments based on common technologies, production methods, and inventories. Raven's reportable segments are Applied Technology Division, Engineered Films Division, and Aerostar Division. The Company measures the performance of its segments based on their operating income excluding administrative and general expenses. Other expense and income taxes are not allocated to individual operating segments, and assets not identifiable to an individual segment are included as corporate assets. Segment information is reported consistent with the Company's management reporting structure.


#16

(Dollars in thousands, except per-share amounts)


Business segment net sales and operating income results are as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 31,
2015
 
October 31,
2014
 
October 31,
2015
 
October 31,
2014
Net sales
 
 
 
 
 
 
 
Applied Technology Division
$
21,344

 
$
33,161

 
$
74,165

 
$
115,696

Engineered Films Division
36,919

 
41,249

 
104,029

 
125,755

Aerostar Division
9,456

 
19,257

 
27,338

 
56,179

Intersegment eliminations (a)
(108
)
 
(2,375
)
 
(130
)
 
(9,343
)
Consolidated net sales
$
67,611

 
$
91,292

 
$
205,402

 
$
288,287

 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
Applied Technology Division (b)
$
3,299

 
$
6,447

 
$
16,081

 
$
31,132

Engineered Films Division
6,145

 
5,486

 
15,981

 
17,165

Aerostar Division (c)
(8,378
)
 
3,027

 
(7,917
)
 
4,666

Intersegment eliminations (a)
9

 
134

 
93

 
114

Total reportable segment income
1,075

 
15,094

 
24,238

 
53,077

Administrative and general expenses
(3,802
)
 
(4,935
)
 
(13,322
)
 
(15,690
)
Consolidated operating (loss) income
$
(2,727
)
 
$
10,159

 
$
10,916

 
$
37,387

(a) Fiscal 2016 intersegment sales were primarily sales from Engineered Films to Aerostar. Fiscal 2015 intersegment sales were comprised primarily of contract manufacturing sales from Aerostar to Applied Technology.
(b) Includes gains of $611 for the nine-month period ended October 31, 2015 on disposal of assets related to the exit of contract manufacturing operations.
(c) The three- and nine-month periods ended October 31, 2015 include 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 $7,413, and a reduction of $1,483 of an acquisition-related contingent liability for Vista as a result of changes in expected sales and cash flows.

(16) NEW ACCOUNTING STANDARDS

Accounting Standards Adopted
In April 2015 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-04, "Compensation—Retirement Benefits (Topic 715) Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets" (ASU 2015-04). The amendments in ASU 2015-04 allow a reporting entity that may incur more costs than other entities when measuring the fair value of plan assets of a defined benefit pension or other postretirement benefit plan at other than a month-end to measure defined benefit plan assets and obligations using the month-end date that is closest to the date of event (such as a plan amendment, settlement, or curtailment that calls for a remeasurement in accordance with existing requirements) that is triggering the remeasurement. In addition, if a contribution or significant event occurs between the month-end date used to measure defined benefit plan assets and obligations and an entity’s fiscal year-end, the entity should adjust the measurement of defined benefit plan assets and obligations to reflect the effects of those contributions or significant events. However, an entity should not adjust the measurement of defined benefit plan assets and obligations for other events that occur between the month-end measurement and the entity’s fiscal year-end that are not caused by the entity (for example, changes in market prices or interest rates). This practical expedient for the measurement date also applies to significant events that trigger a remeasurement in an interim period. An entity electing the practical expedient for the measurement date is required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations in accordance with the amendments in ASU 2015-04. ASU 2015-04 is effective for fiscal years beginning after December 15, 2015. The Company may adopt the standard prospectively. Early adoption is permitted. In the fiscal 2016 first quarter the Company elected to early adopt ASU 2015-04 and apply it on a prospective basis. The Company's plan that provides postretirement medical and other benefits was amended on August 25, 2015. As a result of this plan amendment, the Company elected the practical expedient pursuant to this guidance and a valuation was completed using an August 31, 2015 measurement date.

In April 2015 the FASB issued ASU No. 2015-03, "Interest—Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03). The amendments in ASU 2015-03 simplify the presentation of debt issuance costs and require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. In August 2015 the FASB issued ASU No. 2015-15 "Interest

#17


—Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements" (ASU 2015-15). The guidance in ASU 2015-03 does not address presentation or subsequent measurement of debt issuance costs related to line of credit arrangements. Given the absence of authoritative guidance, in ASU 2015-15, issued in August 2015, FASB adopted SEC staff comments that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. ASU 2015-03 and 2015-15 are both effective for fiscal years beginning after December 15, 2015. The amendments are required to be applied retrospectively to all prior periods presented and early adoption is permitted. The Company elected to early adopt ASU 2015-03 in fiscal 2016 first quarter and ASU 2015-15 in fiscal 2016 third quarter. Adoption of this guidance did not have a significant impact on the Company's consolidated financial statements, or results of operations for the period since there were no prior period costs it applied to. Debt issuance costs associated with the credit facility discussed further in Note 9 Financing Arrangements have been presented as an asset and are being amortized ratably over the term of the line of credit arrangement. The adoption of this guidance did not have an impact on the Company's results of operations for the period.

In April 2014 the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" (ASU No. 2014-08). ASU No. 2014-08 changes the criteria for determining which disposals should be presented as discontinued operations and modifies the related disclosure requirements. Additionally, this guidance requires that a business that qualifies as held for sale upon acquisition should be reported as discontinued operations. This guidance became effective for the Company on February 1, 2015 and applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The adoption of this guidance did not have an impact on the Company's consolidated financial statements, results of operations, or disclosures for the period.

In addition to the accounting pronouncements adopted and described above, the Company adopted various other accounting pronouncements that became effective in first, second and third quarter fiscal 2016. None of this guidance had a significant impact on the Company's consolidated financial statements, results of operations, or disclosures for the period.

New Accounting Standards Not Yet Adopted
In November 2015 the FASB issued Accounting Standards Update (ASU) No. 2015-17, "Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes “ (ASU 2015-17). Current GAAP requires the deferred taxes for each jurisdiction (or tax-paying component of a jurisdiction) to be presented as a net current asset or liability and net noncurrent asset or liability. This requires a jurisdiction-by-jurisdiction analysis based on the classification of the assets and liabilities to which the underlying temporary differences relate, or, in the case of loss or credit carryforwards, based on the period in which the attribute is expected to be realized. Any valuation allowance is then required to be allocated on a pro rata basis, by jurisdiction, between current and noncurrent deferred tax assets. To simplify presentation, ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The guidance does not change the existing requirement that only permits offsetting within a jurisdiction - that is, companies are still prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016. The Company may apply the standard either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Early adoption is permitted. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements and working capital.

In September 2015 the FASB issued ASU No. 2015-16, "Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments“ (ASU 2015-16). The amendments ASU 2015-16 apply to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and, during the measurement period, have an adjustment to provisional amounts recognized. ASU 2015-16 requires that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. ASU 2015-16 is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the update with earlier application permitted for financial statements that have not been issued. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements, results of operations, and disclosures.


#18


In July 2015 the FASB issued ASU No. 2015-11, "Inventory (Topic 330) Simplifying the Measurement of Inventory" (ASU 2015-11). 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 prices 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. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments are to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements, results of operations, and disclosures.

In April 2015 the FASB issued ASU No. 2015-05, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement" (ASU 2015-05). The amendments in ASU 2015-05 clarify existing GAAP guidance about a customer’s accounting for fees paid in a cloud computing arrangement with or without a software license. Examples of cloud computing arrangements include software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements. ASU 2015-05 adds guidance to Subtopic 350-40, Intangibles-Goodwill and Other-Internal-Use Software, which will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance does not change GAAP for a customer’s accounting for service contracts. All software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. ASU 2015-05 is effective for fiscal years beginning after December 15, 2015. The amendments may be applied prospectively to all arrangements entered into or materially altered after the effective date or retrospectively to all prior periods presented. Early adoption is permitted. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial position, results of operations, and cash flows.

In February 2015 the FASB issued ASU No. 2015-02, “Consolidation (Topic 810) Amendments to the Consolidation Analysis" (ASU 2015-02). The amendments in ASU 2015-02 affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: 1. Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; 2. Eliminate the presumption that a general partner should consolidate a limited partnership; 3. Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and 4. Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940. ASU 2015-02 is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted. ASU 2015-02 may be applied retrospectively or using a modified retrospective approach. The Company is evaluating the impact of this guidance on its consolidated legal entities and on its consolidated financial position, results of operations, and cash flows.

In May 2014 the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides a comprehensive new recognition model that requires recognition of revenue when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to receive in exchange for those goods or services. This guidance supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” and most industry-specific guidance. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, companies will need to use more judgment and make more estimates than under the current guidance. It also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB approved a one-year deferral of the effective date (ASU 2015-14) and the standard is now effective for the Company for fiscal 2019 and interim periods therein. ASU 2014-09 may be adopted as of the original effective date, which for the Company is fiscal 2018. The guidance may be applied using either of the following transition methods: (i) a full retrospective 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). The Company is currently evaluating the method and date of adoption and the impact the adoption of ASU 2014-09 will have on the Company’s consolidated financial position, results of operations, and disclosures.

#19




Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following commentary on the operating results, liquidity, capital resources, and financial condition of Raven Industries, Inc. (the Company or Raven) should be read in conjunction with the unaudited Consolidated Financial Statements in Item 1 of Part 1 of this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended January 31, 2015.

EXECUTIVE SUMMARY

Raven is a diversified technology company providing a variety of products to customers within the industrial, agricultural, energy, construction, aerospace, and situational awareness markets. The Company is comprised of three unique operating units, classified into reportable segments: Applied Technology Division, Engineered Films Division, and Aerostar Division. As strategic actions have changed the Company’s business over the last several years, Raven has remained committed to providing high-quality, high-value products. The Company’s performance reflects our ongoing adjustment to conditions and opportunities.

Management uses a number of metrics to assess the Company's performance:

Consolidated net sales, gross margins, operating income, operating margins, net income, and earnings per share
Cash flow from operations and shareholder returns
Return on sales, assets, and equity
Segment net sales, gross profit, gross margins, operating income, and operating margins

Raven's growth strategy focuses on its proprietary product lines and the Company has made an intentional choice to move away from non-strategic product lines such as contract manufacturing. To assess the effectiveness of this strategy during the transition period, management is using 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 described in the Notes to the Financial Statements of this Quarterly Report on Form 10-Q, three significant one-time charges were recorded in 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 two additional measures. The additional measurements are:

Segment operating income excluding Vista charges (adjusted operating income)
Net income excluding Vista charges (adjusted net income)

Information reported as adjusted operating income and adjusted net income excluding 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. Management has included this non-GAAP information to assist in understanding the operating performance of the Company and its operating segments as well as the comparability of results. This non-GAAP information provided may not be consistent with the methodologies used by other companies. All non-GAAP information is 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.

#20


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.

This diversified business model enables us to better weather near-term challenges, while continuing to grow and build for our future. It is our culture and it is woven into how we do business.

The following discussion highlights the consolidated operating results for the three- and nine-month periods ended October 31, 2015 and 2014. Segment operating results are more fully explained in the Results of Operations - Segment Analysis section.
 
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands, except per-share data)
 
October 31,
2015
 
October 31,
2014
 
% Change
 
October 31,
2015
 
October 31,
2014
 
% Change
Net sales
 
$
67,611

 
$
91,292

 
(25.9
)%
 
$
205,402

 
$
288,287

 
(28.8
)%
Gross profit
 
16,171

 
24,339

 
(33.6
)%
 
54,388

 
81,763

 
(33.5
)%
Gross margins(a)
 
23.9
 %
 
26.7
%
 
 
 
26.5
%
 
28.4
%
 
 
Operating (loss) income
 
$
(2,727
)
 
$
10,159

 
(126.8
)%
 
$
10,916

 
$
37,387

 
(70.8
)%
Operating margins
 
(4.0
)%
 
11.1
%
 
 
 
5.3
%
 
13.0
%
 
 
Net (loss) income attributable to Raven Industries, Inc.
 
$
(1,581
)
 
$
6,783

 
(123.3
)%
 
$
7,465

 
$
25,540

 
(70.8
)%
Diluted earnings per share
 
$
(0.04
)
 
$
0.18

 
 
 
$
0.20

 
$
0.70

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated net sales excluding contract manufacturing sales (b)
 
$
66,981

 
$
85,121

 
(21.3
)%
 
$
201,142

 
$
269,653

 
(25.4
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net income attributable to Raven Industries, Inc. (b)
 
$
4,783

 
$
6,783

 
(29.5
)%
 
$
13,829

 
$
25,540

 
(45.9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted operating income (b)
 
$
6,136

 
$
10,159

 
(39.6
)%
 
$
19,779

 
$
37,387

 
(47.1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating cash flow
 
 
 
 
 
 
 
$
35,181

 
$
45,695

 
(23.0
)%
Capital expenditures
 
 
 
 
 
 
 
$
(10,771
)
 
$
(12,797
)
 
(15.8
)%
Cash dividends
 
 
 
 
 
 
 
$
(14,648
)
 
$
(13,572
)
 
7.9
 %
 
(a)The Company's gross and operating margins may not be comparable to industry peers due to the diversity of its operations and variability in the classification of expenses across industries in which the Company operates.
(b)Non-GAAP measure reconciled to GAAP in the following tables.


#21


The following table reconciles the reported net sales to adjusted sales, a non-GAAP financial measure. Adjusted sales exclude contract manufacturing and represent the Company's sales from proprietary products.
 
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
 
October 31,
2015
 
October 31,
2014
 
% Change
 
October 31,
2015
 
October 31,
2014
 
%
Change
Applied Technology
 
 
 
 
 
 
 
 
 
 
 
 
Reported net sales
 
$
21,344

 
$
33,161

 
(35.6
)%
 
$
74,165

 
$
115,696

 
(35.9
)%
Less: Contract manufacturing sales
 

 
1,535

 
(100.0
)%
 
546

 
4,317

 
(87.4
)%
Applied Technology net sales, excluding
    contract manufacturing sales
 
$
21,344

 
$
31,626

 
(32.5
)%
 
$
73,619

 
$
111,379

 
(33.9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Aerostar
 
 
 
 
 
 
 
 
 
 
 
 
Reported net sales
 
$
9,456

 
$
19,257

 
(50.9
)%
 
$
27,338

 
$
56,179

 
(51.3
)%
Less: Contract manufacturing sales
 
630

 
6,841

 
(90.8
)%
 
3,714

 
22,875

 
(83.8
)%
Aerostar net sales, excluding contract
    manufacturing sales
 
$
8,826

 
$
12,416

 
(28.9
)%
 
$
23,624

 
$
33,304

 
(29.1
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Raven
 
 
 
 
 
 
 
 
 
 
 
 
Reported net sales
 
$
67,611

 
$
91,292

 
(25.9
)%
 
$
205,402

 
$
288,287

 
(28.8
)%
Less: Contract manufacturing sales
 
630

 
8,376

 
(92.5
)%
 
4,260

 
27,192

 
(84.3
)%
Plus: Aerostar sales to Applied Technology
 

 
2,205

 
(100.0
)%
 

 
8,558

 
(100.0
)%
Consolidated net sales, excluding contract
    manufacturing sales
 
$
66,981

 
$
85,121

 
(21.3
)%
 
$
201,142

 
$
269,653

 
(25.4
)%

The following table reconciles the reported operating (loss) income to adjusted operating income, a non-GAAP financial measure. On both a consolidated and segment basis, adjusted operating income excludes the goodwill impairment loss, pre-contract cost write-offs, and an acquisition-related contingent consideration benefit, all of which relate to the Vista Research, Inc. business within the Aerostar Division.
 
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
 
October 31,
2015
 
October 31,
2014
 
%
Change
 
October 31,
2015
 
October 31,
2014
 
%
Change
Aerostar
 
 
 
 
 
 
 
 
 
 
 
 
Reported operating (loss) income
 
$
(8,378
)
 
$
3,027

 
(376.8
)%
 
$
(7,917
)
 
$
4,666

 
(269.7
)%
Plus:
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill impairment loss
 
7,413

 

 
 
 
7,413

 

 
 
Pre-contract costs written off (a)
 
2,933

 

 
 
 
2,933

 

 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent liability benefit
 
1,483

 

 
 
 
1,483

 

 
 
Aerostar adjusted operating income
 
$
485

 
$
3,027

 
(84.0
)%
 
$
946

 
$
4,666

 
(79.7
)%
Aerostar adjusted operating income % of net sales
 
5.1
%
 
15.7
%
 

 
3.5
%
 
8.3
%