Document
 
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, 2016
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.                     o Yes þ 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).         o Yes þ 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 February 10, 2017 there were 36,076,259 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,
2016
 
January 31,
2016
 
October 31,
2015
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
46,313

 
$
33,782

 
$
32,287

Short-term investments

 

 
250

Accounts receivable, net
39,554

 
38,069

 
39,293

Inventories
42,813

 
45,839

 
48,636

Deferred income taxes

 
3,110

 
3,296

Other current assets
2,747

 
4,429

 
2,915

Total current assets
131,427

 
125,229

 
126,677

 
 
 
 
 
 
Property, plant and equipment, net
108,948

 
115,704

 
117,206

Goodwill
40,703

 
40,672

 
40,712

Amortizable intangible assets, net
12,511

 
12,956

 
13,327

Other assets
3,746

 
4,127

 
3,859

TOTAL ASSETS
$
297,335

 
$
298,688

 
$
301,781

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
$
9,377

 
$
6,038

 
$
7,160

Accrued liabilities
14,708

 
12,042

 
11,597

Customer advances
1,154

 
739

 
907

Total current liabilities
25,239

 
18,819

 
19,664

 
 
 
 
 
 
Other liabilities
12,134

 
15,640

 
14,511

 
 
 
 
 
 
Commitments and contingencies

 

 

 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
Common stock, $1 par value, authorized shares 100,000; issued 67,060; 67,006; and 67,006, respectively
67,060

 
67,006

 
67,006

Paid-in capital
55,703

 
53,907

 
53,919

Retained earnings
230,957

 
229,443

 
232,315

Accumulated other comprehensive loss
(3,361
)
 
(3,501
)
 
(3,026
)
Treasury stock at cost, 30,984; 30,500; and 29,447 shares, respectively
(90,402
)
 
(82,700
)
 
(82,700
)
Total Raven Industries, Inc. shareholders' equity
259,957

 
264,155

 
267,514

Noncontrolling interest
5

 
74

 
92

Total shareholders' equity
259,962

 
264,229

 
267,606

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
297,335

 
$
298,688

 
$
301,781


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,
2016
 
October 31,
2015
 
October 31,
2016
 
October 31,
2015
Net sales
$
72,522

 
$
67,611

 
$
208,480

 
$
205,402

Cost of sales
52,683

 
50,639

 
149,609

 
150,213

Gross profit
19,839

 
16,972

 
58,871

 
55,189

 
 
 
 
 
 
 
 
Research and development expenses
4,151

 
4,005

 
12,475

 
10,757

Selling, general, and administrative expenses
8,212

 
7,480

 
24,174

 
25,302

Goodwill impairment loss

 
11,497

 

 
11,497

Long-lived asset impairment loss
87

 
3,813

 
87

 
3,813

Operating income (loss)
7,389

 
(9,823
)
 
22,135

 
3,820

 
 
 
 
 
 
 
 
Other (expense), net
(273
)
 
(123
)
 
(579
)
 
(433
)
Income before income taxes
7,116

 
(9,946
)
 
21,556

 
3,387

 
 
 
 
 
 
 
 
Income taxes provision (benefit)
1,375

 
(3,780
)
 
5,802

 
471

Net income (loss)
5,741

 
(6,166
)
 
15,754

 
2,916

 
 
 
 
 
 
 
 
Net income attributable to the noncontrolling interest

 
22

 
1

 
58

 
 
 
 
 
 
 
 
Net income (loss) attributable to Raven Industries, Inc.
$
5,741

 
$
(6,188
)
 
$
15,753

 
$
2,858

 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
 
 
      ─ Basic
$
0.16

 
$
(0.17
)
 
$
0.43

 
$
0.08

      ─ Diluted
$
0.16

 
$
(0.17
)
 
$
0.43

 
$
0.08

 
 
 
 
 
 
 
 
Cash dividends paid per common share
$
0.13

 
$
0.13

 
$
0.39

 
$
0.39

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income (loss)
$
5,741

 
$
(6,166
)
 
$
15,754

 
$
2,916

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation
(201
)
 
2

 
146

 
(172
)
Postretirement benefits, net of income tax benefit (expense) of $2, ($1,606), $4 and ($1,572), respectively
(2
)
 
2,794

 
(6
)
 
2,995

Other comprehensive income (loss), net of tax
(203
)
 
2,796

 
140

 
2,823

 
 
 
 
 
 
 
 
Comprehensive income (loss)
5,538

 
(3,370
)
 
15,894

 
5,739

 
 
 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interest

 
22

 
1

 
58

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to Raven Industries, Inc.
$
5,538

 
$
(3,392
)
 
$
15,893

 
$
5,681


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, 2015
$
66,947

$
53,237

28,897

$
(53,362
)
$
244,180

$
(5,849
)
$
305,153

$
84

$
305,237

Net income




2,858


2,858

58

2,916

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





(172
)
(172
)

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





2,770

2,770


2,770

Postretirement benefits reclassified from accumulated other comprehensive income (loss) after tax benefit 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 attributable to non-controlling 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


(690
)




(690
)

(690
)
Balance October 31, 2015
$
67,006

$
53,919

30,500

$
(82,700
)
$
232,315

$
(3,026
)
$
267,514

$
92

$
267,606

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance January 31, 2016
$
67,006

$
53,907

30,500

$
(82,700
)
$
229,443

$
(3,501
)
$
264,155

$
74

$
264,229

Net income




15,753


15,753

1

15,754

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





146

146


146

Postretirement benefits reclassified from accumulated other comprehensive income (loss) after tax benefit of $4





(6
)
(6
)

(6
)
Cash dividends ($0.39 per share)

161



(14,239
)

(14,078
)

(14,078
)
Dividends of less than wholly-owned subsidiary paid to noncontrolling interest







(70
)
(70
)
Shares issued on vesting of stock units, net of shares withheld for employee taxes
35

(291
)




(256
)

(256
)
Director shares issued
19

(19
)







Shares repurchased


484

(7,702
)


(7,702
)

(7,702
)
Share-based compensation

2,291





2,291


2,291

Income tax impact related to share-based compensation

(346
)




(346
)

(346
)
Balance October 31, 2016
$
67,060

$
55,703

30,984

$
(90,402
)
$
230,957

$
(3,361
)
$
259,957

$
5

$
259,962


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,
2016
 
October 31,
2015
OPERATING ACTIVITIES:
 
 
 
Net income
$
15,754

 
$
2,916

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
11,526

 
13,201

Change in fair value of acquisition-related contingent consideration
(41
)
 
(1,720
)
Goodwill impairment loss

 
11,497

Long-lived asset impairment loss
87

 
3,813

Loss from equity investment
223

 
126

Deferred income taxes
(290
)
 
(6,685
)
Share-based compensation expense
2,291

 
1,826

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(1,620
)
 
16,144

Inventories
3,048

 
4,820

Other assets
(135
)
 
228

Operating liabilities
7,834

 
(12,580
)
Other operating activities, net
8

 
1,595

Net cash provided by operating activities
38,685

 
35,181

 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(3,901
)
 
(10,771
)
Proceeds related to business acquisitions

 
351

Proceeds from sale or maturity of investments
250

 

Purchases of investments
(750
)
 

Proceeds from sale of assets
1,145

 
1,960

Other investing activities
(498
)
 
(506
)
Net cash used in investing activities
(3,754
)
 
(8,966
)
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
Dividends paid
(14,148
)
 
(14,648
)
Payments for common shares repurchased
(7,702
)
 
(29,338
)
Payments of acquisition-related contingent liability
(318
)
 
(773
)
Debt issuance costs paid

 
(548
)
Restricted stock units vested and issued
(256
)
 
(458
)
Employee stock option exercises net of tax benefit

 
(85
)
Other financing activities

 
(15
)
Net cash used in financing activities
(22,424
)
 
(45,865
)
 
 
 
 
Effect of exchange rate changes on cash
24

 
(12
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
12,531

 
(19,662
)
Cash and cash equivalents at beginning of year
33,782

 
51,949

Cash and cash equivalents at end of period
$
46,313

 
$
32,287


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

#6

(Dollars in thousands, except per-share amounts)


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/A for the fiscal year ended January 31, 2016.
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 three- and nine-month periods ended October 31, 2016 are not necessarily indicative of the results that may be expected for the year ending January 31, 2017. The January 31, 2016 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

As described in Note 1 Summary of Significant Accounting Policies of the Company's Annual Report on Form 10-K/A for the fiscal year ended January 31, 2016, the Company assesses the recoverability of long-lived and intangible assets using fair value measurement techniques if events or changes in circumstances indicate that an asset might be impaired. An impairment loss is recognized when the carrying amount of an asset is below the estimated undiscounted cash flows associated with the asset group which contains the long-lived and intangible assets being assessed. The cash flows used for this analysis are similar to those used in the goodwill impairment assessment discussed further below. However, the cash flows are undiscounted and are projected over the life of the "primary asset" within the asset group being assessed.

As also described in Note 1 Summary of Significant Accounting Policies of the Company's Annual Report on Form 10-K/A for the fiscal year ended January 31, 2016, 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).

Based on the Company’s review of its Engineered Films and Applied Technology Division reporting units, the Company identified no indicators of impairment for these reporting units or asset groups, and as such no further impairment analysis was required under the applicable accounting guidance for the three- or nine-month periods ended October 31, 2016.

Aerostar Reporting Unit (related to October 31, 2016)
In the fiscal 2017 third quarter the Company determined that a triggering event occurred for its Aerostar reporting unit and the aerostat and stratospheric programs (Lighter than Air) and radar product and radar services (Radar) asset groups. Financial expectations for net sales and operating income of the reporting unit and affected asset groups were lowered due to delays and

#7

(Dollars in thousands, except per-share amounts)


uncertainties regarding the reporting unit’s pursuits of certain opportunities, in particular aerostat orders, certain classified stratospheric balloon pursuits, and radar pursuits. Aerostar is still actively pursuing these opportunities and some are in active negotiations, but the timing of certain stratospheric balloon and aerostat opportunities are being delayed more than previously expected and the likelihood of radar sales is lower due to the Company's decision to no longer actively pursue certain radar product opportunities. As a result of these factors, the Company lowered its financial forecast for the business and performed a Step 1 impairment analysis using fair value techniques as of October 31, 2016 for both goodwill and long-lived assets.

As described in Note 6 Goodwill, Long-Lived Assets and Other Charges, the Company concluded that the Aerostar reporting unit goodwill balance was not impaired but certain long-lived assets associated with the previously impaired Radar asset group, including property, plant, and equipment and patents, were further impaired as of October 31, 2016.
Vista Reporting Unit (related to October 31, 2015)
As described in our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2016, the Company determined that a triggering event occurred for its Vista reporting unit, a subsidiary of the Aerostar Division, during the fiscal 2016 third quarter. Accordingly, the Company performed a Step 1 impairment analysis using fair value techniques as of October 31, 2015 for both goodwill and long-lived assets.

As described in Note 6 Goodwill, Long-Lived Assets and Other Charges, the Company concluded that the Vista goodwill balance was fully impaired and that certain long-lived assets of the Vista reporting unit, including finite-lived intangible assets, were impaired as of October 31, 2015.
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/A for the fiscal year ended January 31, 2016.

(3) NET INCOME (LOSS) PER SHARE

Basic net income per share is computed by dividing net income by the weighted average common shares and fully vested 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,
2016
 
October 31,
2015
 
October 31,
2016
 
October 31,
2015
Anti-dilutive options and restricted stock units
653,513
 
1,216,318
 
922,041
 
1,150,227

#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,
2016
 
October 31,
2015
 
October 31,
2016
 
October 31,
2015
Numerator:
 
 
 
 
 
 
 
Net income (loss) attributable to Raven Industries, Inc.
$
5,741

 
$
(6,188
)
 
$
15,753

 
$
2,858

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
36,076,259

 
36,785,140

 
36,164,468

 
37,481,675

Weighted average fully vested stock units outstanding
97,716

 
92,470

 
100,595

 
84,597

Denominator for basic calculation
36,173,975

 
36,877,610

 
36,265,063

 
37,566,272

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
36,076,259

 
36,785,140

 
36,164,468

 
37,481,675

Weighted average fully vested stock units outstanding
97,716

 
92,470

 
100,595

 
84,597

Dilutive impact of stock options and restricted stock units
122,270

 

 
70,102

 
47,773

Denominator for diluted calculation
36,296,245

 
36,877,610

 
36,335,165

 
37,614,045

 
 
 
 
 
 
 
 
Net income (loss) per share - basic
$
0.16

 
$
(0.17
)
 
$
0.43

 
$
0.08

Net income (loss) per share - diluted
$
0.16

 
$
(0.17
)
 
$
0.43

 
$
0.08



#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, 2016
 
January 31, 2016
 
October 31, 2015
Accounts receivable, net:
 
 
 
 
 
 
     Trade accounts
 
$
40,257

 
$
39,103

 
$
40,062

     Allowance for doubtful accounts
 
(703
)
 
(1,034
)
 
(769
)
 
 
$
39,554

 
$
38,069

 
$
39,293

Inventories:
 
 
 
 
 
 
Finished goods
 
$
5,686

 
$
4,896

 
$
5,211

In process
 
2,325

 
1,845

 
2,157

Materials
 
34,802

 
39,098

 
41,268

 

$
42,813


$
45,839


$
48,636

Other current assets:
 
 
 
 
 
 
Insurance policy benefit
 
$
776

 
$
716

 
$
728

     Federal tax receivable
 
228

 
1,721

 

Receivable from sale of business
 
71

 
255

 
420

     Prepaid expenses and other
 
1,672

 
1,737

 
1,767

 
 
$
2,747

 
$
4,429

 
$
2,915

Property, plant and equipment, net:
 
 
 
 
 
 
Held for use:
 
 
 
 
 
 
Land
 
$
3,054

 
$
3,054

 
$
2,974

Buildings and improvements
 
78,703

 
77,827

 
76,775

Machinery and equipment
 
143,533

 
140,996

 
138,921

     Accumulated depreciation
 
(115,726
)
 
(106,419
)
 
(102,263
)
Accumulated impairment losses
 
(616
)
 
(554
)
 
(554
)
 
 
$
108,948

 
$
114,904

 
$
115,853

Held for sale:
 
 
 
 
 
 
Land
 
$

 
$
244

 
$
324

Buildings and improvements
 

 
1,595

 
2,597

Machinery and equipment
 

 
329

 
639

     Accumulated depreciation
 

 
(1,368
)
 
(2,207
)
 
 

 
800

 
1,353

 
 
$
108,948

 
$
115,704

 
$
117,206

Other assets:
 
 
 
 
 
 
Equity investments
 
$
2,346

 
$
2,805

 
$
2,720

Deferred income taxes
 
65

 

 

Other
 
1,335

 
1,322

 
1,139

 
 
$
3,746

 
$
4,127

 
$
3,859

Accrued liabilities:
 
 
 
 
 
 
Salaries and related
 
$
3,931

 
$
1,883

 
$
1,177

Benefits
 
3,720

 
3,864

 
3,925

Insurance obligations
 
2,022

 
1,730

 
1,852

Warranties
 
1,852

 
1,835

 
1,639

Income taxes
 
332

 
475

 
748

Other taxes
 
1,230

 
1,117

 
977

Acquisition-related contingent consideration
 
396

 
407

 
448

Other
 
1,225

 
731

 
831

 
 
$
14,708

 
$
12,042

 
$
11,597

Other liabilities:
 
 
 
 
 
 
Postretirement benefits
 
$
7,714

 
$
7,662

 
$
7,898

Acquisition-related contingent consideration
 
1,385

 
1,732

 
1,483

Deferred income taxes
 
257

 
3,247

 
2,205

Uncertain tax positions
 
2,778

 
2,999

 
2,925

 
 
$
12,134

 
$
15,640

 
$
14,511



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(Dollars in thousands, except per-share amounts)


(5) ACQUISITIONS OF AND INVESTMENTS IN BUSINESSES AND TECHNOLOGIES

Ag-Eagle Aerial Systems, Inc.
In February 2016, the Applied Technology Division acquired an interest of approximately 5% in AgEagle Aerial Systems, Inc. (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 this agreement, AgEagle and the Company entered into a distribution agreement whereby the Company was appointed as the sole and exclusive distributor worldwide of the existing AgEagle system as it pertains to the agriculture market. This investment and distribution agreement will allow the Company to expand into the UAS market for agriculture, enhancing its existing product offerings to provide actionable data that customers can use to make important input decisions.

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 distribution agreement. 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 losses or the right to receive benefits of the VIE that could potentially be significant to the entity.

At the acquisition date, the Company determined that the exclusivity of the distribution agreement resulted in an intangible asset. The purchase price was allocated between the equity ownership interest and this intangible asset which will be amortized on a straight-line basis over the four-year life of the distribution agreement.

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 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 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, 2016, the fair value of this contingent consideration was $1,375, of which $219 was classified as "Accrued liabilities" and $1,156 was classified as "Other liabilities" in the Consolidated Balance Sheet. 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 as "Other liabilities." The Company paid $37 and $239 in earn-out payments in the three- and nine-month periods ended October 31, 2016, respectively. The Company paid $38 and $188 in earn-out payments in the three- and nine-month periods ended October 31, 2015, respectively. To date, the Company has paid a total of $548 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.

As described in our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2016, in the fiscal 2016 third quarter the Company (based on a reassessment of its forecasted future revenue projections associated with Vista) determined that the estimated fair value of this contingent consideration should be reduced by $2,273. This adjustment was recognized as a benefit to "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, 2016, the fair value of this contingent consideration was $325, of which $96 was classified in "Accrued liabilities" and $229 as "Other liabilities" in the Consolidated Balance Sheet. At October 31, 2015 the fair value of this contingent consideration was $550, of which $76 was classified as "Accrued liabilities" and $474 as "Other liabilities" in the Consolidated Balance Sheets. The Company paid $79 and $585 in the nine-month periods ended October 31, 2016 and 2015, respectively. The Company made no payments in the three-month periods ended October 31, 2016 or 2015, respectively. To date, the Company has paid a total of $1,471 of this potential earn-out liability.


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(Dollars in thousands, except per-share amounts)


(6) GOODWILL, LONG-LIVED ASSETS 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 within the Aerostar Division, particularly with the aerostat and radar business pursuits. Aerostar had 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 other 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. The Aerostar Division 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. The pre-contract costs deferred to the balance sheet at October 31, 2016 were not material and there have been no write-offs in the three- and nine-month periods ended October 31, 2016, respectively.
Inventory write-downs
During the fiscal 2017 third quarter, the Company wrote-down radar inventory, purchased primarily during fiscal 2016, due to the Company's decision in the fiscal 2017 third quarter to no longer actively pursue certain radar opportunities. The decision to write-down for this inventory is consistent with the triggering event identified during the fiscal 2017 third quarter relating to the Aerostar reporting unit and the radar product and radar services (Radar) asset group. This radar specific inventory write-down increased "Cost of sales" by $2,278 for the three- and nine-month periods ended October 31, 2016. There were no specific radar inventory write-downs for the three- and nine-month periods ended October 31, 2015.

Goodwill and Goodwill Impairment Loss
The Company performs impairment reviews of goodwill by reporting unit. At the end of 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 (Aerostar excluding Vista).

During the first quarter of fiscal 2017, management implemented managerial and financial reporting changes within Vista and Aerostar to further integrate Vista into the Aerostar Division. Integration actions included leadership re-alignment, including selling and business development leadership functions, re-deployment of employees across the division, and consolidation of administrative functions, among other actions. Based on the changes made, the Company consolidated the two separate reporting units within the Aerostar Division into one reporting unit for the purposes of goodwill impairment review. As such, as of April 30, 2016, the Company has three reporting units: Engineered Films Division, Applied Technology Division, and Aerostar Division. The Company reviewed the quantitative and qualitative factors associated with the change in reporting unit and determined there were no indicators of impairment at the time of the reporting unit change.

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 is still actively pursuing these opportunities and some are in active negotiations, but the timing of certain aerostat and classified stratospheric balloon opportunities are being delayed more than previously expected and the likelihood of radar sales is lower due to the Company's decision to no longer actively pursue certain radar product opportunities. The Step 1 impairment analysis was completed using fair value techniques as of October 31, 2016. In determining the estimated fair value of the Aerostar reporting unit, the Company was required to estimate a number of factors, including projected revenue growth rates, projected operating results, terminal growth rates, economic conditions, anticipated future cash flows, and the discount rate. On the basis of these estimates, the October 31, 2016 analysis indicated that the estimated fair value of the Aerostar reporting unit exceeded the reporting unit carrying value by approximately $9,000, or approximately 30.0%.
As described in our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2016, the Company determined that a triggering event occurred for its Vista reporting unit, a subsidiary of the Aerostar Division, during the fiscal 2016 third quarter. A Step 1 impairment analysis was completed using fair value techniques as of October 31, 2015 and it was determined that the estimated fair value of the Vista reporting unit was less than the carrying value.
Pursuant to the applicable accounting guidance, the Company performed a Step 2 impairment analysis. 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 $11,497 carrying value recorded for the reporting unit. This $11,497 shortfall was recorded in the prior fiscal year third quarter as an

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(Dollars in thousands, except per-share amounts)


impairment charge to operating income reported as "Goodwill impairment loss" in the Consolidated Statements of Income and Comprehensive Income.
The Company reported $11,497 in goodwill impairment losses for the three- and nine-month periods ended October 31, 2015. Goodwill gross and net of accumulated impairment losses at October 31, 2015 was $52,209 and $40,712, respectively. The Company's cumulative impairment loss recorded as of October 31, 2015 was $11,497.
The Company reported no impairment losses for the three- and nine-month periods ended October 31, 2016. Goodwill gross and net of accumulated impairment losses at October 31, 2016 was $52,200 and $40,703, respectively. The Company's cumulative impairment loss recorded as of October 31, 2016 was $11,497.
Long-Lived Asset Impairment Loss
Fiscal 2017 third quarter assessment
The Company evaluated the triggering events described in the goodwill impairment analysis and determined there were also triggering events with respect to the assets associated with the aerostat and stratospheric programs (Lighter than Air) and Radar asset groups in the Aerostar reporting unit in the third quarter, which resulted in an asset impairment test.

Using the sum of the undiscounted cash flows associated with each of the two asset groups, a Step 1 test was performed for each asset group. The undiscounted cash flows for the Lighter than Air asset group exceeded the carrying value of the long-lived assets by approximately $110,000, or 800%, and no Step 2 test was deemed to be necessary based on the recoverability of the long-lived 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 third quarter assessment
As described in our Annual Report on Form 10-K/A for the fiscal year ended January 31, 2016, the Company determined that the relevant cash flows for long-lived asset testing (the lowest level of cash flows that are largely independent of other assets) are one level below the Vista reporting unit. For Vista, these levels were determined to be asset groups identified for the client private business (CP) and Radar. Based on the assessment of the forecasts of cash flows and these asset groups, the Company concluded that certain long-lived assets of the Vista reporting unit, including finite-lived intangible assets, were impaired as of October 31, 2015.

Using the sum of the undiscounted cash flows associated with each of the two asset groups, a Step 1 test was performed for each asset group. The undiscounted cash flows for the CP asset group exceeded the carrying value of the long-lived assets and no Step 2 test was deemed to be necessary based on the recoverability of the long-lived assets. For the Radar asset group, however, the undiscounted cash flows did not exceed the carrying value of the long-lived assets, resulting in an estimated fair value of the Radar asset group long-lived assets of $103 compared to the carrying value of $3,916 for the asset group. The shortfall of $3,813 was recorded in fiscal 2016 third quarter as an impairment charge to operating income reported as "Long-lived asset impairment loss" in the Consolidated Statements of Income and Comprehensive Income. Of the total long-lived asset impairment of $3,813, $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.


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(Dollars in thousands, except per-share amounts)


(7) EMPLOYEE POSTRETIREMENT BENEFITS

The Company provides postretirement medical and other benefits to certain senior executive officers and senior managers. These plan obligations are unfunded. The components of the net periodic benefit cost for postretirement benefits are as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 31,
2016
 
October 31,
2015
 
October 31,
2016
 
October 31,
2015
Service cost
$
20

 
$
49

 
$
60

 
$
265

Interest cost
83

 
92

 
249

 
302

Amortization of actuarial losses
36

 
38

 
110

 
206

Amortization of unrecognized prior service cost (gains)
(40
)
 

 
(120
)
 

Net periodic benefit cost
$
99

 
$
179

 
$
299

 
$
773


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,
2016
 
October 31,
2015
 
October 31,
2016
 
October 31,
2015
Beginning balance
$
2,076

 
$
1,752

 
$
1,835

 
$
3,120

Accrual for warranties
202

 
571

 
1,288

 
1,319

Settlements made
(426
)
 
(684
)
 
(1,271
)
 
(2,800
)
Ending balance
$
1,852

 
$
1,639

 
$
1,852

 
$
1,639


(9) 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. Wells Fargo Bank, N.A. (Wells Fargo), a participating lender under the Credit Agreement, holds the majority of the Company's cash and cash equivalents. One member of the Company's Board of Directors, who served through May 2016, is also on the Board of Directors of Wells Fargo & Company, the parent company of Wells Fargo.

Unamortized debt issuance costs associated with this Credit Agreement were $379 and $489 at October 31, 2016 and 2015, respectively and are included in "Other assets" in the Consolidated Balance Sheets. Loans or borrowings defined under the Credit Agreement bear interest and fees at varying rates and terms defined in the Credit Agreement based on the type of borrowing as defined. The Credit Agreement 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. 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 (LOCs) totaling $850 issued under a previous line of credit with Wells Fargo were outstanding at October 31, 2015. These LOC primarily support self-insured workers' compensation bonding. All but one $50 LOC has been transferred and issued under the Credit Agreement as of October 31, 2016. At October 31, 2016, $464 of LOCs were outstanding under the Credit

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(Dollars in thousands, except per-share amounts)


Agreement and $50 issued by Wells Fargo was outstanding. Any draws required under the Wells Fargo LOC would be settled with available cash or borrowings under the Credit Agreement.
 
There were no borrowings under either credit agreement for any of the fiscal periods covered by this Quarterly Report on Form 10-Q. Availability under the Credit Agreement for borrowings as of October 31, 2016 was $124,536.

The Company has requested and received the necessary covenant waivers relating to its late filing of financial statement information.

(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 material 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, research and development tax credit, tax benefits on qualified production activities, and tax-exempt insurance premiums. The Company’s year-to-date effective tax rates for the nine-month periods ended October 31, 2016 and 2015 were 26.9% and 13.9%, respectively. The increase in the effective tax rate is primarily due to the prior year effective tax rate being significantly lower due to the impact of the affects of the impairment and other charges which is partially offset by the inclusion of an R&D tax credit in the current period provision for income taxes. Congress permanently enacted this credit into law in the fourth quarter of fiscal 2016. No estimate of the R&D tax credit was included in the provision for income taxes for the three- or nine-month periods ended October 31, 2015.

As of October 31, 2016, undistributed earnings of approximately $2,365 of the Canadian and European subsidiaries 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

At October 31, 2016, there are no ongoing restructuring plans or unpaid restructuring costs. No restructuring costs were incurred in the three- or nine-month periods ended October 31, 2016.

In the fiscal 2015 fourth quarter, the Company announced and implemented a restructuring plan to lower Applied Technology’s cost structure. In the same period, Engineered Films implemented a preemptive restructuring plan to address the decline in demand in the energy sector as the result of falling oil prices. The Company also initiated the exit of Applied Technology’s non-strategic St. Louis, Missouri contract manufacturing facility.

Exit activities related to this sale and transfer of these contract manufacturing operations were substantially completed during the fiscal 2016 first quarter. Gains of $611 were recorded for the nine-month period ended October 31, 2015 as a result of the exit activity. 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 of $420 were included in "Other current assets" in the Consolidated Balance Sheet at October 31, 2015. At October 31, 2016, such receivables were $71.

In the fiscal 2017 second quarter, the land, building, and remaining equipment in St. Louis that was owned and held for sale was sold. The selling price, net of all selling expenses, exceeded the net book value of the assets held for sale. A gain of $161 was recorded on this sale.

In the fiscal 2016 first quarter, 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.

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 the fiscal 2016 second quarter so no costs were incurred related to this restructuring plan in the three-month period ended October 31, 2015. The Company reported $407 of these restructuring costs in "Cost of sales" and the remaining $181 were reported in "Selling, general, and administrative expenses" in the Consolidated Statements of Income and Comprehensive Income. There were no unpaid costs at October 31, 2015. Substantially all of these restructuring costs related to the Applied Technology Division.


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(Dollars in thousands, except per-share amounts)


(13) DIVIDENDS AND TREASURY STOCK

Dividends paid to Raven shareholders for the three and nine months ended October 31, 2016 were $4,690 and $14,078 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, 2015 were $4,764 and $14,598, or 13.0 cents and 39.0 cents per share, respectively.

Effective March 21, 2016 the Board of Directors (Board) authorized an extension and increase of the authorized $40,000 stock buyback program in place. An additional $10,000 was authorized for share repurchases once the $40,000 authorization limit is reached.

Pursuant to these authorizations, the Company repurchased 484,252 shares , or $7,702, in the nine-month period ended October 31, 2016. None of these shares were repurchased in the three-month period ended October 31, 2016. The Company repurchased 1,052,587 and 1,602,545 shares in the three- and nine-month periods ended October 31, 2015. These purchases totaled $18,513 and $29,338, respectively. All such share repurchases were paid at October 31, 2015. The remaining dollar value authorized for share repurchases at October 31, 2016 is $12,959. This authorization remains in place until such time as the authorized spending limit is reached or such authorization is revoked by the Board.

(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, 2016 and October 31, 2015.

Stock Option Awards
The Company granted 274,200 and 289,600 non-qualified stock options during the nine-month period ended October 31, 2016 and October 31, 2015, respectively. None of these options were granted in the three-month periods ended October 31, 2016 or October 31, 2015. 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.

The weighted average assumptions used for the Black-Scholes option pricing model by grant year are as follows:
 
 
Nine Months Ended
 
 
October 31, 2016
 
October 31, 2015
Risk-free interest rate
 
1.05
%
 
1.33
%
Expected dividend yield
 
3.33
%
 
2.59
%
Expected volatility factor
 
32.61
%
 
36.81
%
Expected option term (in years)
 
4.00

 
3.75

 
 
 
 
 
Weighted average grant date fair value
 
$3.05
 
$4.77

Restricted Stock Unit Awards (RSUs)
The Company granted 70,947 and 27,696 time-vested RSUs to employees in the nine-month periods ended October 31, 2016 and 2015, respectively. The Company granted 4,577 and 8,446 awards in the three-month periods ended October 31, 2016 and 2015. The grant date 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 grant date fair value per share of the time-vested RSUs granted in the three months ended October 31, 2016 and 2015 was $15.94 and $19.90, respectively. 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, 2016. 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 2017 and 2016 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

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(Dollars in thousands, except per-share amounts)


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, 2016 and 2015, the Company granted 72,950 and 68,570 performance-based RSUs, respectively. None of the performance-based RSUs were granted in the three-month periods ended October 31, 2016 and 2015. The weighted average grant date fair value per share of the performance-based RSUs granted in the periods ended October 31, 2016 and 2015, respectively, was $15.61 and $20.10.

(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, Engineered Films, and Aerostar. 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.

Business segment net sales and operating income results are as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 31,
2016
 
October 31,
2015
 
October 31,
2016
 
October 31,
2015
Net sales
 
 
 
 
 
 
 
Applied Technology
$
25,203

 
$
21,344

 
$
79,327

 
$
74,165

Engineered Films
38,551

 
36,919

 
104,307

 
104,029

Aerostar
9,003

 
9,456

 
25,313

 
27,338

Intersegment eliminations (a)
(235
)
 
(108
)
 
(467
)
 
(130
)
Consolidated net sales
$
72,522

 
$
67,611

 
$
208,480

 
$
205,402

 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
Applied Technology (b) (c)
$
6,415

 
$
3,299

 
$
20,280

 
$
16,081

Engineered Films
7,129

 
6,145

 
17,666

 
15,981

Aerostar (d) (e)
(1,375
)
 
(15,474
)
 
(1,804
)
 
(15,013
)
Intersegment eliminations (a)
(16
)
 
9

 
(21
)
 
93

Total reportable segment income (loss)
12,153

 
(6,021
)
 
36,121

 
17,142

Administrative and general expenses
(4,764
)
 
(3,802
)
 
(13,986
)
 
(13,322
)
Consolidated operating income (loss)
$
7,389

 
$
(9,823
)
 
$
22,135

 
$
3,820

(a) Intersegment sales for both fiscal 2017 and 2016 were primarily sales from Engineered Films to Aerostar.
(b) Includes $161 gain for the nine-month period ended October 31, 2016 on the disposal of an idle manufacturing plant held for sale.
(c) 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.
(d) 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 $11,497, a long-lived impairment loss of $3,813 and a reduction of $2,273 of an acquisition-related contingent liability for Vista as a result of changes in expected sales and cash flows.
(e) The three- and nine-month periods ended October 31, 2016 include inventory write-downs of $2,278 as a result of changes in expected sales of a specific product line within radar business.

(16) NEW ACCOUNTING STANDARDS

Accounting Standards Adopted
In November 2015 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-17, "Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes" (ASU 2015-17). Currently GAAP requires the deferred

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taxes for each jurisdiction (or tax-paying component of a jurisdiction) to be presented as a net current asset or liability and net noncurrent asset or liability. This requires a jurisdiction-by-jurisdiction analysis based on the classification of the assets and liabilities to which the underlying temporary differences relate, or, in the case of loss or credit carryforwards, based on the period in which the attribute is expected to be realized. To simplify presentation, ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The guidance does not change the existing requirement that only permits offsetting within a jurisdiction - that is, companies are still prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. The Company early adopted ASU 2015-17 in the fiscal 2017 first quarter using the prospective method. No current deferred tax assets or liabilities are recorded on the balance sheet. Since the Company adopted the guidance prospectively, the prior periods were not retrospectively adjusted.

In September 2015 the FASB issued ASU No. 2015-16, "Business Combinations (Topic 805) Simplifying the Accounting for Measurement-Period Adjustments" (ASU 2015-16). The amendments in ASU 2015-16 apply to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and, during the measurement period, have an adjustment to provisional amounts recognized. ASU 2015-16 requires that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an entity to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The Company adopted ASU 2015-16 when it became effective in the fiscal 2017 first quarter with no impact on its consolidated financial statements or results of operations.

In April 2015 the FASB issued ASU No. 2015-05, "Intangibles - Goodwill and Other-Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (CCA)" (ASU 2015-05). The amendments in ASU 2015-05 clarify existing GAAP guidance about a customer’s accounting for fees paid in a CCA with or without a software license. Examples of cloud computing arrangements include software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements. Under ASU 2015-05, fees paid by a customer in a CCA for a software license are within the scope of the internal-use software guidance if certain criteria are met. If the criteria are not met the fees paid are accounted for as a prepaid service contract and expensed. The Company has historically accounted for all fees in a CCA as a prepaid service contract. The Company adopted ASU 2015-05 in first quarter fiscal 2017 when it became effective using the prospective method. The Company did not pay any fees in a CCA in the current period that met the criteria to be in scope of the internal-use software guidance and it had no impact on the consolidated financial statements, results of operations, or 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. In October 2016, the FASB issued ASU 2016-17 "Consolidation (Topic 810) - Interests Held through Related Parties that are under common Control" (ASU 2016-17) which amended ASU 2015-02. Under ASU 2016-17, the Company only needs to consider its proportionate indirect interest in the VIE held through a common control party when evaluating whether the Company is the primary beneficiary. ASU 2015-02 required that the common control party's interest be treated as if it was the Company's interest when evaluating whether the Company is the primary beneficiary. The Company early adopted ASU 2015-02 in first quarter fiscal 2017 and early adopted ASU 2016-17 in third quarter fiscal 2017. The Company reevaluated all of it legal entities and one investment accounted for using the equity method during the first quarter. In addition, this guidance was applied to the evaluation of the Company's investment in Ag Eagle in first quarter fiscal 2017 further discussed in Note 5 Acquisitions of and Investments in Businesses and Technologies of this Form 10-Q. The Company did not have an indirect interest in any of the entities through an unconsolidated related party. Under ASU 2015-02 and the amended guidance in ASU 2016-17 neither of these equity method investments qualified for consolidation. The adoption of this guidance had no impact on the legal entities consolidated or the Company's consolidated financial position, results of operations, or cash flows. No prior period retrospective adjustments were required.


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In January 2015 the FASB issued ASU No. 2015-01, "Income Statement - Extraordinary and Unusual Items (Subtopic 225-20) Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items" (ASU 2015-01). The amendments in ASU 2015-01 eliminate the GAAP concept of extraordinary items and no longer requires that transactions that met the criteria for classification as extraordinary items be separately classified and reported in the financial statements. ASU 2015-01 retains the presentation and disclosure guidance for items that are unusual in nature or occur infrequently and expands them to include items that are both unusual in nature and infrequently occurring. The Company adopted ASU 2015-01when it became effective in fiscal 2017 first quarter using the prospective method. The adoption of this guidance did not have any impact on the Company's consolidated financial statements or disclosures.

In August 2014 the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern (Subtopic 205-40) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern" (ASU 2014-15). The amendments in ASU 2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. ASU 2014-15 requires certain financial statement disclosures when there is "substantial doubt about the entity's ability to continue as a going concern" within one year after the date that the financial statements are issued (or available to be issued). The Company adopted ASU 2014-15 in the fiscal 2017 first quarter when it became effective. The adoption of this guidance did not have any impact on the Company's consolidated financial statements or disclosures.

New Accounting Standards Not Yet Adopted
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The Update removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new guidance, a goodwill impairment will be measured as the amount by which a reporting unit’s carrying value exceeds its fair value. The amount of any impairment may not exceed the carrying amount of goodwill. The amendments should be applied on a prospective basis. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements, results of operations and disclosures.

In January 2017, the FASB issued ASU No. 2017-01 Business Combinations (Topic 805) - Clarifying the Definition of a Business. This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments provide a screen to determine when a set of assets and activities is not a business. If the screen is not met, the amendments require further consideration of inputs, substantive processes and outputs to determine whether the transaction is an acquisition of a business. The new update is effective for annual periods beginning after December 15, 2017. The amendments in ASU 2017-01 will be implemented on a prospective basis.

In November 2016 the FASB issued ASU 2016-16, "Income Taxes (Topic 740) Intra-Entity Transfers of Assets Other Than Inventory" (ASU 2016-16). Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. In addition, interpretations of this guidance have developed in practice over the years for transfers of certain intangible and tangible assets. This prohibition on recognition is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. The new guidance eliminates the exception for an intra-entity transfer of an asset other than inventory. The amendments in ASU 2016-16 are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company can early adopt ASU 2016-16, but earlier adoption must be in the first quarter of the fiscal year. The amendments in ASU 2016-16 will be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements, results of operations, and 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 has 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 Company is evaluating the impact the adoption of this guidance will have on the classification of certain items on its consolidated statements of cash flows.

In June 2016 the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments" (ASU 2016-13). Current GAAP generally delays recognition of the full amount of credit losses until

#19


the loss is probable of occurring. The amendments in this guidance eliminate the probable initial recognition threshold and, instead, reflect an entity’s current estimate of all expected credit losses. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. Under ASU 2016-13 the Company will need to create an economic forecast over the entire contractual life of long-dated financial assets. The new standard is effective for annual reporting periods beginning after December 15, 2019. All entities may elect to early adopt ASU 2016-13 for annual reporting periods beginning after December 15, 2018. The amendments in ASU 2016-13 will be applied using the modified retrospective approach by recording a cumulative-effect adjustment to retained earnings in the first reporting period. The Company's trade accounts receivable are in-scope under ASU 2016-13. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements, results of operations, and disclosures.

In March 2016 the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" (ASU 2016-09). ASU 2016-09 amends the accounting for employee share-based payment transactions to require recognition of the tax effects resulting from the settlement of stock-based awards as discrete income tax expense or benefit in the income statement in the reporting period in which they occur. In addition, this guidance requires that all tax-related cash flows resulting from share-based payments, including the excess tax benefits related to the settlement of stock-based awards, be classified as cash flows from operating activities in the statement of cash flows. The guidance also requires that cash paid to taxing authorities on employee behalf for withheld shares should be classified as a financing activity in the statement of cash flows. In addition, the guidance also allows companies to make an accounting policy election to either estimate the number of awards that are expected to vest, consistent with current U.S. GAAP, or account for forfeitures when they occur. The new standard is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted. ASU 2016-09 requires that the various amendments be adopted using different methods. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements, results of operations, and disclosures.

In February 2016 the FASB issued ASU No. 2016-02, "Leases (Topic 842)" (ASU 2016-02). The primary difference between previous GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The guidance requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements, 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 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). 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 is currently evaluating the method and date of adoption and the impact the adoption of ASU 2014-09 and all subsequent amendments to Topic 606, will have on the Company’s consolidated financial position, results of operations, and disclosures.

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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 (Form 10-Q) and the Company's Annual Report on Form 10-K/A for the year ended January 31, 2016.

EXECUTIVE SUMMARY

Raven is a diversified technology company providing a variety of products to customers within the industrial, agricultural, energy, construction, defense/aerospace, and situational awareness markets. The Company is comprised of three unique operating divisions, classified into reportable segments: Applied Technology, Engineered Films, and Aerostar.

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

Consolidated net sales, gross margin, operating income, operating margin, 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 margin, operating income, and operating margin

Vision and Strategy
At Raven, our purpose is to solve great challenges. Great challenges require great solutions. Raven’s three unique operating units 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.

As described in the Notes to the Financial Statements, four significant 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.
The following discussion highlights the consolidated operating results for the three- and nine-months ended October 31, 2016 and 2015. Segment operating results are more fully explained in the Results of Operations - Segment Analysis section.

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Three Months Ended
 
Nine Months Ended
(dollars in thousands, except per-share data)
 
October 31,
2016
 
October 31,
2015
 
% Change
 
October 31,
2016
 
October 31,
2015
 
% Change
Net sales
 
$
72,522

 
$
67,611

 
7.3
 %
 
$
208,480

 
$
205,402

 
1.5
 %
Gross profit
 
19,839

 
16,972

 
16.9
 %
 
58,871

 
55,189

 
6.7
 %
Gross margin (a)
 
27.4
%
 
25.1
 %
 
 
 
28.2
%
 
26.9
%
 
 
Operating income (loss)
 
$
7,389

 
$
(9,823
)
 
(175.2
)%
 
$
22,135

 
$
3,820

 
479.5
 %
Operating margin (a)
 
10.2
%
 
(14.5
)%
 
 
 
10.6
%
 
1.9
%
 
 
Net income (loss) attributable to Raven Industries, Inc.
 
$
5,741

 
$
(6,188
)
 
(192.8
)%
 
$
15,753

 
$
2,858

 
451.2
 %
Diluted earnings (loss) per share
 
$
0.16

 
$
(0.17
)
 
 
 
$
0.43

 
$
0.08

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net income attributable to Raven Industries, Inc. (b)
 
$
5,741

 
$
4,089

 
40.4
 %
 
$
15,753

 
$
13,135

 
19.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating cash flow
 
 
 
 
 
 
 
$
38,685

 
$
35,181

 
10.0
 %
Capital expenditures
 
 
 
 
 
 
 
$
(3,901
)
 
$
(10,771
)
 
(63.8
)%
Cash dividends
 
 
 
 
 
 
 
$
(14,148
)
 
$
(14,648
)
 
(3.4
)%
Common share repurchases
 
 
 
 
 
 
 
$
(7,702
)
 
$
(29,338
)
 
(73.7
)%
 
(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.

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The following table reconciles the reported operating income (loss) to adjusted operating income (loss), a non-GAAP financial measure. On both a consolidated and segment 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 Research, Inc. business within the Aerostar Division.
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
October 31, 2016
 
October 31,
2015
 
%
Change
 
October 31, 2016
 
October 31,
2015
 
%
Change
Aerostar
 
 
 
 
 
 
 
 
 
 
 
Reported operating (loss) income
$
(1,375
)
 
$
(15,474
)
 
(91.1
)%
 
$
(1,804
)
 
$
(15,013
)
 
(88.0
)%
Plus:
 
 
 
 
 
 
 
 
 
 
 
Goodwill impairment loss

 
11,497

 
 
 

 
11,497

 
 
Long-lived asset impairment loss

 
3,813

 
 
 
 
 
3,813

 
 
Pre-contract costs written off (a)

 
2,933

 
 
 

 
2,933

 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent liability benefit

 
2,273

 
 
 

 
2,273

 
 
Aerostar adjusted operating (loss) income
$
(1,375
)
 
$
496

 
(377.2
)%
 
$
(1,804
)
 
$
957

 
(288.5
)%
Aerostar adjusted operating income (loss) % of net sales
(15.3
)%
 
5.2
%
 
 
 
(7.1
)%
 
3.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Raven
 
 
 
 
 
 
 
 
 
 
 
Reported operating income (loss)
$
7,389

 
(9,823
)
 
(175.2
)%
 
$
22,135

 
3,820

 
479.5
 %
Plus:
 
 
 
 
 
 
 
 
 
 
 
Goodwill impairment loss

 
11,497

 
 
 

 
11,497

 
 
Long-lived asset impairment loss

 
3,813

 
 
 

 
3,813

 
 
Pre-contract costs written off (a)

 
2,933

 
 
 

 
2,933

 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent liability benefit

 
2,273

 
 
 

 
2,273

 
 
Consolidated adjusted operating income
$
7,389

 
$
6,147

 
20.2
 %
 
$
22,135

 
$
19,790

 
11.8
 %
Consolidated adjusted operating income % of net sales

10.2
 %
 
9.1
%
 
 
 
10.6
 %
 
9.6
%
 
 
 
(a)  The $2,933 pre-contract costs written off is comprised of $2,075 of costs capitalized as of July 31, 2015 and additional costs of $858 capitalized during August and September 2015.

The following table reconciles the reported net income (loss) 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-offs, an acquisition-related contingent consideration benefit, and the income tax effect of these items, all of which relate to the Vista Research, Inc. business within the Aerostar Division.

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Three Months Ended
 
Nine Months Ended
(dollars in thousands)
 
October 31, 2016
 
October 31,
2015
 
%
Change
 
October 31, 2016
 
October 31,
2015
 
%
Change
Consolidated Raven
 
 
 
 
 
 
 
 
 
 
 
 
Reported net income (loss) attributable to Raven
Industries
 
$
5,741

 
$
(6,188
)
 
(192.8
)%
 
$
15,753

 
$
2,858

 
451.2
%
Plus:
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill impairment
 

 
11,497

 
 
 

 
11,497

 
 
Long-lived asset impairment loss
 

 
3,813

 
 
 

 
3,813

 
 
Deferred cost charge
 

 
2,933

 
 
 

 
2,933

 
 
Less:
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition earn-out benefit
 

 
2,273

 
 
 

 
2,273

 
 
Net tax benefit
 

 
5,693

 
 
 

 
5,693

 
 
Adjusted net income attributable to Raven
Industries
 
$
5,741

 
$
4,089

 
40.4
 %
 
$
15,753

 
$
13,135

 
19.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net income per common share:
 
 
 
 
 
 
 
 
 
 
 
 
   -basic
 
$
0.16

 
$
0.11

 
45.5
 %
 
$
0.43

 
$
0.35

 
22.9
%
   -diluted
 
$
0.16

 
$
0.11

 
45.5
 %
 
$
0.43

 
$
0.35

 
22.9
%
 
(a)  The $2,933 pre-contract costs written off 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 fiscal 2017 third quarter, net sales were $72.5 million, up $4.9 million, or 7.3%, from $67.6 million in last year’s third quarter. The Company's operating income for the third quarter of fiscal 2017 was $7.4 million, up $17.2 million, or 175.2% compared to third quarter fiscal 2016's operating loss. Last year’s third quarter results include a goodwill impairment charge of $11.5 million, long-lived asset impairment charge of $3.8 million, deferred pre-contract cost write-offs of $2.9 million (of which $2.1 million was related to amounts deferred in prior periods), and a benefit of $2.3 million as the result of a reduction of an acquisition-related contingent liability (earn-out liability), all of which are related to the Company’s Vista business. Excluding these specific Vista items, adjusted operating income for the third quarter fiscal 2017 was up $1.2 million or 20.2%, compared to $6.1 million adjusted operating income for the third quarter of last year. The increase in adjusted operating income was principally due to higher sales volumes and lower manufacturing expenses in both Applied Technology and Engineered Films, partially offset by an increase in radar inventory write-downs in Aerostar. Net income for the third quarter of 2017 was $5.7 million, or $0.16 per diluted share, compared to a net loss of ($6.2) million, or ($0.17) per diluted share, in last year's third quarter. Excluding the goodwill impairment, long-lived asset impairment, pre-contract cost write-offs, and earn-out reduction benefit related to Vista, adjusted net income attributable to Raven Industries for the third quarter of 2016 was $4.1 million, or $0.11 per diluted share. The increase in earnings per share was driven primarily by higher sales volumes and lower manufacturing expenses.
For the nine-month period, net sales were $208.5 million compared to $205.4 million, up 1.5% from one year earlier. The Company's operating income was $22.1 million, up significantly from the prior year period. Like the third quarter results, the fiscal 2016 year-to-date results were impacted by the Vista goodwill and long-lived asset impairments and write-off of deferred pre-contract costs, partially offset by the reduction of the earn-out liability, all of which are related to the Company’s Vista business. Excluding these specific Vista items, adjusted operating income for the nine-month period was up $2.3 million, or 11.8%, compared to adjusted operating income of $19.8 million in the nine-month period of fiscal 2016. The increase in adjusted operating income was principally driven by lower manufacturing expenses in Applied Technology and Engineered Films, partially offset by an increase in radar inventory write-downs in Aerostar. For the same period, adjusted net income attributable to Raven Industries was $15.8 million, or $0.43 per diluted share, up from $13.1 million, or $0.35 per diluted share, in fiscal 2016.
Net sales for Applied Technology in the third quarter of fiscal 2017 were $25.2 million, up 18.1% compared to the third quarter of fiscal 2016. Sales in the original equipment manufacturer (OEM) channel were up 42.7% while sales in the aftermarket channel were down 0.4% for the fiscal 2017 third quarter. Geographically, domestic sales were up 14.3 percent year-over-year and international sales were up 33.0 percent year-over-year. Operating income was $6.4 million, up 94.5% compared to the third quarter of fiscal 2016. The increase in operating income was primarily driven by higher sales volume and lower manufacturing costs compared to the previous year.

Applied Technology's net sales for the nine-month period ended October 31, 2016 were $79.3 million, up 7.0% compared to the nine-month period of fiscal 2016. For the nine months ended October 31, 2016, sales in the OEM and aftermarket channels were up 11.7% and 4.6% respectively. Geographically, international sales were up 23.8% year-over-year while domestic sales were up