Document
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2017
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
 
46-0246171
 
 
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
 
205 E. 6th Street, P.O. Box 5107, Sioux Falls, SD
 
57117- 5107
 
 
(Address of principal executive offices)
 
(Zip Code)
 
 
Registrant's telephone number including area code (605) 336-2750
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class:
 
Name of each exchange on which registered
 
 
Common Stock, $1 par value
 
The NASDAQ Stock Market
 
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o
Yes
þ
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o
Yes
þ
No
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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ
Yes
o
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter)is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
þ
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
 
Accelerated filer
o
Non-accelerated filer
o
 
 
Smaller reporting company
o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
o
Yes
þ
No
The aggregate market value of the registrant's common stock held by non-affiliates at July 31, 2016 was approximately $742,719,932. The aggregate market value was computed by reference to the closing price as reported on the NASDAQ Global Select Market, $20.76, on July 29, 2016, which was as of the last business day of the registrant's most recently completed second fiscal quarter. The number of shares outstanding on March 22, 2017 was 36,076,259.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrant's Annual Meeting of Shareholders, to be held May 25, 2017, is incorporated by reference into Part III to the extent described therein.
 
 
 
 
 



PART I
 
 
Item 1.
BUSINESS
 
Item 1A.
RISK FACTORS
 
Item 1B.
UNRESOLVED STAFF COMMENTS
 
Item 2.
PROPERTIES
 
Item 3.
LEGAL PROCEEDINGS
 
Item 4.
MINE SAFETY DISCLOSURES
 
 
 
 
 
PART II
 
 
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 
Quarterly Information
 
 
Stock Performance
 
Item 6.
SELECTED FINANCIAL DATA
 
 
Five-year Financial Summary
 
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
Executive Summary
 
 
Results of Operations - Segment Analysis
 
 
Liquidity and Capital Resources
 
 
Off-Balance Sheet Arrangements and Contractual Obligations
 
 
Critical Accounting Policies and Estimates
 
 
Accounting Pronouncements
 
 
Forward-Looking Statements
 
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
Management's Report on Internal Control Over Financial Reporting
 
 
Report of Independent Registered Public Accounting Firm
 
 
Consolidated Balance Sheets
 
 
Consolidated Statements of Income and Comprehensive Income
 
 
Consolidated Statements of Shareholders' Equity
 
 
Consolidated Statements of Cash Flows
 
 
Notes to Consolidated Financial Statements
 
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
Item 9A.
CONTROLS AND PROCEDURES
 
Item 9B.
OTHER INFORMATION
 
 
 
 
 
PART III
 
 
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Item 11.
EXECUTIVE COMPENSATION
 
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
 
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES 
 
 
 
 
 
PART IV
 
 
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULE
 
Item 16.
10-K SUMMARY
 
INDEX TO EXHIBITS
 
SIGNATURES
 
SCHEDULE II
 




                           

PART I
 
 
 
ITEM 1.
BUSINESS
Raven Industries, Inc. (the Company or Raven) was incorporated in February 1956 under the laws of the State of South Dakota and began operations later that same year. The Company is a diversified technology company providing a variety of products to customers within the industrial, agricultural, geomembrane (which includes energy), construction, and aerospace/defense markets. The Company markets its products around the world and has its principal operations in the United States of America. Raven began operations as a manufacturer of high-altitude research balloons before diversifying into product lines that extended from technologies and production methods of this original balloon business. The Company employs 941 people and is headquartered at 205 E. Sixth Street, Sioux Falls, SD 57104 - telephone (605) 336-2750. The Company's Internet address is http://www.ravenind.com and its common stock trades on the NASDAQ Global Select Market under the ticker symbol RAVN. The Company has adopted a Code of Conduct applicable to all officers, directors and employees, which is available on the website. Information on the Company's website is not part of this filing.

All reports (including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and current reports on Form 8-K) and proxy and information statements filed with the Securities and Exchange Commission (SEC) are available through a link from the Company's website to the SEC website. All such information is available as soon as reasonably practicable after it has been electronically filed. Filings can also be obtained free of charge by contacting the Company or the SEC. The SEC can be contacted through its website at http://www.sec.gov or through the SEC's Office of FOIA/PA Operations at 100 F Street N.E., Washington, DC 20549-2736, or by calling the SEC at 1-800-732-0330.

This Annual Report on Form 10-K (Form 10-K) contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Form 10-K are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance, and business.  All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Important factors that could cause actual results to differ materially from our expectations and other important information about forward-looking statements are disclosed under Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Forward-Looking Statements” in this Form 10-K.

BUSINESS SEGMENTS

The Company has three unique operating units, or divisions, that are also its reportable segments: Applied Technology Division (Applied Technology), Engineered Films Division (Engineered Films), and Aerostar Division (Aerostar). Product lines have been generally grouped in these segments based on technology, manufacturing processes, and end-use application; however, a business segment may serve more than one of the product markets identified above. The Company measures the profitability performance of its segments primarily based on their operating income excluding administrative and general expenses. Other expense and income taxes are not allocated to individual operating segments, and assets not identifiable to an individual segment are included as corporate assets. Segment information is reported consistent with the Company's management reporting structure.
Business segment financial information is found on the following pages of this Form 10-K:
Results of Operations – Segment Analysis
Note 15 Business Segments and Major Customer Information

Applied Technology
Applied Technology designs, manufactures, sells, and services innovative precision agriculture products and information management tools that help growers reduce costs, more precisely control inputs, and improve farm yields.  The Applied Technology product families include field computers, application controls, GPS-guidance and assisted-steering systems, automatic boom controls, injection systems, yield monitoring controls, and planter and seeder controls. Applied Technology's services include high-speed in-field Internet connectivity and cloud-based data management. The Company's investment in Site-Specific Technology Development Group, Inc. (SST), a software company, and the continued build-out of the Slingshot™ platform have also positioned Applied Technology as an information platform that improves grower decision-making and achieves business efficiencies for its agriculture retail partners.

Applied Technology sells its precision agriculture control products to both original equipment manufacturers (OEMs) and through aftermarket distribution partners in the United States and in most major agricultural areas around the world. The Company's

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competitive advantage in this segment is designing and selling easy to use, reliable, and innovative value-added products that are supported by an industry-leading service and support team.

Engineered Films
Engineered Films produces high-performance plastic films and sheeting for geomembrane (which includes energy), agricultural, construction, and industrial applications.

Engineered Films sells plastic sheeting both direct to end-customers and through independent third-party distributors. The majority of product sold into the construction and agriculture markets is through distributors, while sales into the geomembrane and industrial markets are more direct in nature. The Company extrudes a significant portion of the film converted for its commercial products and believes it is one of the largest sheeting converters in the United States in the markets it serves. Engineered Films' ability to both extrude and convert films allows it to provide a more customized solution to customers. A number of film manufacturers compete with the Company on both price and product availability. Engineered Films is the Company's most capital-intensive business segment, and historically has made sizable investments in new extrusion capacity and conversion equipment. This segment's capital expenditures were $2.8 million in fiscal 2017, $10.8 million in fiscal 2016, and $8.2 million in fiscal 2015.

Aerostar
Aerostar serves the aerospace/defense and situational awareness markets. Aerostar's primary products include high-altitude balloons, tethered aerostats, and radar processing systems. These products can be integrated with additional third-party sensors to provide research, communications, and situational awareness capabilities to governmental and commercial customers. Aerostar’s growth strategy emphasizes the design and manufacture of proprietary products in these markets. In previous years, Aerostar also provided contract manufacturing services. The Company largely exited this business and the planned reduction of contract manufacturing activities was completed in fiscal 2016.

Through Vista Research, Inc. (Vista) and a separate business venture that is majority-owned by the Company, Aerostar pursues product and support services contracts for agencies and instrumentalities of the U.S. government as well as sales of advanced radar systems and aerostats in international markets. In limited cases, such sales may be Direct Commercial Sales to foreign governments rather than Foreign Military Sales through the U.S. government.

Aerostar sells to government agencies as both a prime contractor and subcontractor, and to commercial users primarily as a sub-contractor. Certain projects Aerostar bids on can be larger-scale, with opportunities for $10 million projects. Further, Direct Commercial Sales to foreign governments often involve large contracts subject to frequent delays because of budget uncertainties, regional military conflicts, and protracted negotiation processes. The timing and size of contract wins create volatility in Aerostar’s results.

OUTLOOK

As we begin fiscal year 2018, the Company continues to face uncertainties in end-market demand, but we have created opportunities for growth with the investments we have made over the last few years. Momentum continued to build throughout fiscal year 2017 and continues today. Despite the macro challenges faced in certain end markets, management is relatively optimistic for the year ahead.

For Applied Technology, end-market demand continues to be subdued and management does not expect an improvement in such demand to occur during fiscal year 2018. With that said, the research and development efforts that were maintained during the market downturn have led to new product introductions which are seeing success. As a result, the division has been able to increase its market share position and overcome the down market to achieve growth both domestically and internationally. Management expects this to continue in fiscal year 2018.

For Engineered Films, after nearly two years of declining demand in the geomembrane market which culminated in a revenue decline of approximately 66% in fiscal year 2016, the division began to see conditions improve in the second half of fiscal year 2017. Although there remains uncertainty with respect to geomembrane end-market demand in the future, management expects growth in this market in fiscal year 2018. In addition, management expects sales into the industrial market to improve in fiscal 2018 as the result of success in selling the capacity of its new industrial production line that was put in service in first quarter fiscal 2017. Overall, sales growth in the division is expected in fiscal year 2018.

For Aerostar, the outlook is mixed, but financial performance is expected to improve. For stratospheric balloon related sales, the outlook is relatively strong. The division has been awarded a new stratospheric balloon contract with a new customer and sales to Google for Project Loon are expected to increase again in fiscal year 2018. At the same time, the division is susceptible to delays in deliveries of radar systems and aerostats. The timing of contract wins has a significant impact on the growth and

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profitability of the division. Overall, management's outlook for the division remains cautious, but we do expect financial performance to improve in fiscal 2018.

The Company remains committed to executing its strategic plan and expects to make continued progress towards its long-term goal to generate 10% annualized earnings growth while also generating strong relative returns on equity and assets.

MAJOR CUSTOMER INFORMATION

No customers accounted for 10% or more of consolidated sales in fiscal years 2017 and 2016. Sales to Brawler Industrial Fabrics, a customer in the Engineered Films Division, accounted for 14% of consolidated sales in fiscal 2015.

SEASONAL WORKING CAPITAL REQUIREMENTS

Some seasonal demand exists in both the Applied Technology and Engineered Films divisions, primarily due to their respective exposure to the agricultural market. Although net working capital (accounts receivable, net plus inventories less accounts payable) requirements tend to be the highest in the fiscal first quarter, given the overall diversification of the Company, the seasonal fluctuations in net working capital are not significant.
 
FINANCIAL INSTRUMENTS

The principal financial instruments that the Company maintains are cash, cash equivalents, short-term investments, accounts receivable, accounts payable, accrued liabilities, and acquisition-related contingent payments. The Company manages the interest rate, credit, and market risks associated with these accounts through periodic reviews of the carrying value of assets and liabilities and establishment of appropriate allowances in accordance with Company policies. The Company does not use off-balance sheet financing, except to enter into operating leases.

The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company uses derivative financial instruments to manage foreign currency balance sheet risk. The use of these financial instruments has had no material effect on consolidated results of operations, financial condition, or cash flows.

RAW MATERIALS

The Company obtains a wide variety of materials from numerous vendors. Principal materials include electronic components for Applied Technology and Aerostar, various polymeric resins for Engineered Films, and fabrics and film for Aerostar. Engineered Films has experienced volatile resin prices over the past three years. Price increases could not always be passed on to customers due to weak demand and/or a competitive pricing environment. Predicting future material volatility and the related potential impact on the Company is not easily estimated and the Company is unable to do so to the degree required to build reliance on such forecasts.

PATENTS

The Company owns a number of patents. The Company does not believe that its business, as a whole, is materially dependent on any one patent or related group of patents. The Company focuses significant research and development effort to develop technology-based offerings. As such, the protection of the Company’s intellectual property is an important strategic objective. Along with an aggressive posture toward patenting new technology and protecting trade secrets, the Company has restrictions on the disclosure of our technology to industry and business partners to ensure that our intellectual property is maintained and protected.

RESEARCH AND DEVELOPMENT

The three business segments conduct ongoing research and development (R&D) efforts to improve their product offerings and develop new products. Most of the Company's R&D expenditures are directed toward new product development. R&D investment is particularly strong within the Applied Technology Division. Development of new technology and product enhancements within Applied Technology is a competitive differentiator and central to its long-term strategy. Engineered Films also utilizes R&D spending to develop new products and to value engineer and reformulate its products. These R&D investments deliver high-value film solutions to the markets it serves and also result in lower raw material costs and improved quality for existing product lines. Aerostar's investment in the development of new technology has a particular emphasis on its core stratospheric balloon product platform. The Company's total R&D costs are presented in the Consolidated Statements of Income and Comprehensive Income.


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ENVIRONMENTAL MATTERS

The Company believes that, in all material respects, it is in compliance with applicable federal, state and local environmental laws and regulations. Expenditures incurred in the past relating to compliance for operating facilities have not significantly affected the Company's capital expenditures, earnings, or competitive position.

In connection with the sale of substantially all of the assets of the Company's Glasstite, Inc. subsidiary in fiscal 2000, the Company agreed to assume responsibility for the investigation and remediation of any pre-October 29, 1999, environmental contamination at the Company's former Glasstite pickup-truck topper facility in Dunnell, Minnesota, as required by the Minnesota Pollution Control Agency (MPCA) or the United States Environmental Protection Agency.

The Company and the purchasers of the Company's Glasstite subsidiary conducted environmental assessments of the properties. The MPCA had evaluated these assessments until fiscal 2017 when this matter was closed. As a result of the conclusion of this matter, the Company reversed the $37 thousand liability that had been accrued as the Company's best estimate of probable costs related to this environmental matter. The Company is unaware of any potential liabilities as of January 31, 2017 for any environmental matters that would have a material effect on the Company's results of operations, financial position, or cash flows.

BACKLOG

As of February 1, 2017, the Company's order backlog totaled approximately $25.7 million. Backlog amounts as of February 1, 2016 and 2015 were $18.6 million and $26.7 million, respectively. Because the length of time between order and shipment varies considerably by business segment and customers can change delivery schedules or potentially cancel orders, the Company does not believe that backlog, as of any particular date, is necessarily indicative of actual net sales for any future period.

EMPLOYEES

As of January 31, 2017, the Company had 941employees (including temporary workers). Following is a summary of active employees by segment: Applied Technology - 382; Engineered Films - 315; Aerostar - 163; and Corporate Services - 81. Management believes its relationship with its employees is good.


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EXECUTIVE OFFICERS
 
 
 
 
 
Name, Age, and Position
 
Biographical Data
Daniel A. Rykhus, 52
 
Mr. Rykhus became the Company's President and Chief Executive Officer in 2010. He joined the Company in 1990 as Director of World Class Manufacturing, was General Manager of the Applied Technology Division from1998 through 2009, and served as Executive Vice President from 2004 through 2010.
President and Chief Executive Officer
 
 
 
 
 
 
Steven E. Brazones, 43
 
Mr. Brazones joined the Company in December 2014 as its Vice President, Chief Financial Officer, and Treasurer. From 2002 to 2014, Mr. Brazones held a variety of positions with H.B. Fuller Company. Most recently, he served as H.B. Fuller's Americas Region Finance Director. Previously, he served as the Assistant Treasurer and the Director of Investor Relations. Prior to his tenure with H.B. Fuller, Mr. Brazones held various roles at Northwestern Growth.
Vice President and Chief Financial Officer
 
 
 
 
 
 
 
 
Stephanie Herseth Sandlin, 46
 
Ms. Herseth Sandlin joined the Company in August 2012 as General Counsel and Vice President of Corporate Development and also became the Company's Secretary in March 2013. Prior to joining the Company, Ms. Herseth Sandlin was a partner at OFW Law in Washington, D.C. from 2011 to 2012 and served as South Dakota's lone member of the United States House of Representatives from 2004 through 2011.  
General Counsel and Vice President of Corporate Development
 
 
 
 
 
 
Janet L. Matthiesen, 59
 
Ms. Matthiesen joined the Company in 2010 as Director of Administration and has been the Company's Vice President of Human Resources since 2012. Prior to joining Raven, Ms. Matthiesen was a Human Resource Manager at Science Applications International Corporation from 2002 to 2010.


Vice President of Human Resources
 
 
 
 
 
 
Brian E. Meyer, 54
 
Mr. Meyer was named Division Vice President and General Manager of the Applied Technology Division in May 2015. He joined the Company in 2010 as Chief Information Officer. Prior to joining the Company, Mr. Meyer was an information and technology executive in the health insurance industry and vice president of systems development in the property and casualty insurance industry.

Division Vice President and General Manager - Applied Technology Division
 
 
 
 
 
 
Anthony D. Schmidt, 45
 
Mr. Schmidt was named Division Vice President and General Manager of the Engineered Films Division in 2012. He joined the Company in 1995 in the Applied Technology Division performing various leadership roles within manufacturing and engineering. He transitioned to Engineered Films Division in 2011 as Manufacturing Manager.
Division Vice President and General Manager - Engineered Films Division
 
 
 

ITEM 1A.
RISK FACTORS

RISKS RELATING TO THE COMPANY

The Company's business is subject to many risks. Set forth below are the most important risks we face. In evaluating our business and your investment in the Company, you should also consider the other information presented in or incorporated by reference into this Annual Report on Form 10-K.

We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, result in material misstatements in our consolidated financial statements. We may be unable to develop, implement, and maintain appropriate controls in future periods which could adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended (the Exchange Act). In Item 9A, "Controls and Procedures” of the Company’s Annual Report on Form 10-K/A for the fiscal year ended January 31, 2016 filed with the SEC on February 2, 2017, management reported the existence of material weaknesses in our internal control over financial reporting. The material weaknesses resulted in errors in our previously filed annual audited and interim unaudited consolidated financial statements.

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A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

As a result of the material weaknesses, management concluded that our internal control over financial reporting was not effective as of January 31, 2016 and remains ineffective as of the date of this filing. The assessment was based on criteria described by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Also as a result of the material weaknesses, we concluded that our disclosure controls and procedures (as defined by Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective as of January 31, 2016 and remain ineffective as of the date of this filing. We are actively engaged in remediation activities designed to address the material weaknesses, but our remediation efforts are not complete and are ongoing. The progress made in remediating these material weaknesses is further described in Item 9A, "Controls and Procedures” of this Annual Report on Form 10-K. If our remediation measures are insufficient to address the material weaknesses, or if additional material weaknesses in our internal control are discovered or occur in the future, material misstatements in our consolidated financial statements could occur which could result in a further restatement of our consolidated financial statements and may materially adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner. Although we continually review and evaluate our internal controls, we cannot assure you that we will not discover additional material weaknesses in our internal control over financial reporting. The next time we evaluate our internal control over financial reporting, if we identify one or more new material weaknesses or are unable to timely remediate our existing material weaknesses, we may be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock.

We could also become subject to private litigation or investigations, or one or more government enforcement actions, arising out of the errors in our previously issued financial statements. Our management may be required to devote significant time and attention to these matters, and these and any additional matters that arise could have a material adverse impact on our results of operations, financial condition, liquidity, and cash flows.

The remediation measures in progress to address the material weaknesses have been time-consuming and expensive and could expose us to additional risks that could materially adversely affect our financial position, results of operations, and cash flows.
We have incurred expenses, including audit, legal, consulting, and other professional fees in connection with the ongoing remediation of material weaknesses in our internal control over financial reporting. We have taken a number of steps, including adding significant internal resources and have implemented a number of additional procedures in order to strengthen our internal control and risk assessment functions. To the extent these steps are not successful, we could be forced to incur additional time and expense. Our management’s attention has also been diverted from the operation of our business in connection with the ongoing remediation of material weaknesses in our internal controls.

Weather conditions or natural disasters could affect certain of the Company's markets, such as agriculture and construction, or the Company's primary manufacturing facilities.
The Company's Applied Technology Division is largely dependent on the ability of farmers, agricultural service providers, and custom operators to purchase agricultural equipment, including its products. If such farmers experience weather conditions resulting in unfavorable crop prices or farm incomes, sales in the Applied Technology Division may be adversely affected.

Weather conditions can also adversely affect sales in the Company's Engineered Films Division. To the extent weather conditions curtail construction or agricultural activity, such as a late spring or drought, sales of the segment's plastic sheeting would likely decrease.

Seasonal, weather-related and market demand variation could also affect quarterly results. If expected sales are deferred in a fiscal quarter while inventory has been built and operating expenses incurred, financial results could be negatively impacted.

The Company’s primary manufacturing facilities for each of its operating divisions are located on contiguous properties in Sioux Falls, South Dakota. If weather-related natural disasters such as tornadoes or flooding were to occur in the area, such conditions could impede the manufacturing and shipping of products and potentially adversely affect the Company’s sales, transactions processing, and financial reporting. The Company has disaster recovery plans in place to mitigate the Company’s risks to these vulnerabilities but these measures may not be adequate, implemented properly, or executed timely to ensure that the Company’s operations are not disrupted. Such consequences could adversely affect our results of operations, financial condition, liquidity, and cash flows.


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Price fluctuations in and shortages of raw materials could have a significant impact on the Company's ability to sustain and grow earnings.
The Company's Engineered Films Division utilizes significant amounts of polymeric resin, the cost of which depends upon market prices for natural gas and oil and other market forces. These prices are subject to worldwide supply and demand as well as other factors beyond the control of the Company. Although the Engineered Films Division is sometimes able to pass on such price increases to its customers, significant variations in the cost of polymeric resins can affect the Company's operating results from period to period. Unusual supply disruptions, such as one caused by a natural disaster, could cause suppliers to invoke "force majeure" clauses in their supply agreements, causing shortages of material. Success in offsetting higher raw material costs with price increases is largely influenced by competitive and economic conditions and could vary significantly depending on the market served. If the Company is not able to fully offset the effects of adverse materials availability and correspondingly higher costs, financial results could be adversely affected which in turn could adversely affect our results of operations, financial condition, liquidity, and cash flows.

Electronic components used by both the Applied Technology Division and Aerostar Division, are sometimes in short supply, and may impact our ability to meet customer demand.

If a supplier of raw materials or electronic components were unable to deliver due to shortage or financial difficulty, any of the Company's segments could be adversely affected.

Fluctuations in commodity prices can increase our costs and decrease our sales.
Agricultural income levels are affected by agricultural commodity prices and input costs. As a result, changes in commodity prices that reduce agricultural income levels could have a negative effect on the ability of growers and their service providers to purchase the Company's precision agriculture products manufactured by its Applied Technology Division.

Exploration for oil and natural gas fluctuates with their price and energy market conditions are subject to volatility. Certain plastic sheeting manufactured and sold by our Engineered Films Division is sold as pit and pond liners to contain water used in the drilling processes for these energy commodities. Lower prices for oil and natural gas could reduce exploration activities and demand for our products.

Film manufacturing uses polymeric resins, which can be subject to changes in price as the cost of oil or natural gas changes. Accordingly, volatility in oil and natural gas prices may negatively affect our raw material costs and cost of goods sold and potentially cause us to increase prices, which could adversely affect our sales and/or profitability.

Failure to develop and market new technologies and products could impact the Company's competitive position and have an adverse effect on the Company's financial results.
The Company's operating results in Applied Technology, Engineered Films, and Aerostar depend upon the ability to renew the pipeline of new products and services and to bring these to market. This ability could be adversely affected by difficulties or delays in product development such as the inability to identify viable new products, successfully complete research and development projects, obtain relevant regulatory approvals, obtain intellectual property protection, or gain market acceptance of new products and services. Because of the lengthy development process, technological challenges, and competition, there can be no assurance that any of the products the Company is currently developing, or could begin to develop in the future, will achieve commercial success. Technical advancements in products may also increase the risk of product failure, increasing product returns or warranty claims and settlements. In addition, sales of the Company's new products could replace sales of some of its current products, offsetting the benefit of even a successful new product introduction.

The Company's sales of products which are specialized and highly technical in nature are subject to uncertainties, start-up costs and inefficiencies, as well as market, competitive, and compliance risks.
The Company’s growth strategy relies on the design and manufacture of proprietary products. Highly technical, specialized product inventories may be more susceptible to fluctuations in market demand. If demand is unexpectedly low, write-downs or impairments of such inventory may become necessary. Either of these outcomes could adversely affect our results of operations. Start-up costs and inefficiencies can adversely affect operating results and such costs may not be recoverable in a proprietary product environment because the Company may not receive reimbursement from its customers for such costs.

Competition in agriculture markets could come from our current customers if original equipment manufacturers develop and integrate precision agriculture technology products themselves rather than purchasing from third parties, thereby reducing demand for Applied Technology’s products.


9



Regulatory restrictions could be placed on hydraulic fracturing activities because of environmental and health concerns, reducing demand for Engineered Film’s products. For Engineered Films, the development of alternative technologies, such as closed loop drilling processes that reduce the need for pit liners in energy exploration, could also reduce demand for the Company’s products.

Aerostar’s future growth relies on sales of high-altitude balloons as well as advanced radar systems and aerostats to international markets. In limited cases, such sales may be Direct Commercial Sales to foreign governments rather than Foreign Military Sales through the U.S. government. Direct Commercial Sales to foreign governments often involve large contracts subject to frequent delays because of budget uncertainties, regional military conflicts, political instability, and protracted negotiation processes. Such delays could adversely affect our results of operations. The nature of these markets for Aerostar's radar systems and aerostats makes these products particularly susceptible to fluctuations in market demand. Demand fluctuations and the likelihood of delays in sales involving large contracts for such products also increase the risk of these products becoming obsolete, increasing the risk associated with expected sales of such products. The value of radar system and aerostat inventory are each approximately $4 million at January 31, 2017. This valuation is based on an estimate that the market demand for these products will be sufficient in future periods such that these inventories will be sold at a price greater than carrying value. Write-downs or impairment of the value of such products carried in inventory could adversely affect our results of operations. To the extent products become obsolete or anticipated sales are not realized, our expected future cash flows could be adversely impacted. This could lead to an impairment which could adversely impact the Company's results of operations and financial condition.
  
Sales of certain of Aerostar’s products into international markets increase the compliance risk associated with regulations such as The International Traffic in Arms Regulations (ITAR), as well as others, exposing the Company to fines and its employees to fines, imprisonment, or civil penalties. Potential consequences of a material violation of such regulations include damage to our reputation, litigation, and increased costs.

The Company's Aerostar segment depends on the U.S. government for a significant portion of its sales, creating uncertainty in the timing of and funding for projected contracts.
A significant portion of Aerostar's sales are to the U.S. government or U.S. government agencies as a prime or sub-contractor. Government spending has historically been cyclical. A decrease in U.S. government defense or near-space research spending or changes in spending allocations could result in one or more of the Company's programs being reduced, delayed, or terminated. Reductions in the Company's existing programs, unless offset by other programs and opportunities, could adversely affect its ability to sustain and grow its future sales and earnings. The Company's U.S. government sales are funded by the federal budget, which operates on an October-to-September fiscal year. Changes in congressional schedules, negotiations for program funding levels, reduced program funding due to U.S government debt limitations, automatic budget cuts ("sequestration"), or unforeseen world events can interrupt the funding for a program or contract. Funds for multi-year contracts can be changed in subsequent years in the appropriations process.

In addition, many U.S. government contracts are subject to a competitive bidding and funding process even after the award of the basic contract, adding an additional element of uncertainty to future funding levels. Delays in the funding process or changes in funding are common and can impact the timing of available funds or can lead to changes in program content or termination at the government's convenience. The loss of anticipated funding or the termination of multiple or large programs could have an adverse effect on the Company's future sales and earnings.

The Company derives a portion of its revenues from foreign markets, which subjects the Company to business risks, including risk of changes in government policies and laws or worldwide economic conditions.
The Company's sales outside the U.S. were $35.5 million in fiscal 2017, representing approximately 13% of consolidated net sales. The Company's financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations, along with changes in worldwide economic conditions. These conditions include, but are not limited to, changes in a country's or region's economic or political condition; trade regulations affecting production, pricing, and marketing of products; local labor conditions and regulations; reduced protection of intellectual property rights in some countries; changes in the regulatory or legal environment; restrictions on currency exchange activities; the impact of fluctuations in foreign currency exchange rates, which may affect product demand and may adversely affect the profitability of our products in U.S. dollars in foreign markets where payments are made in the local currency; burdensome taxes and tariffs; and other trade barriers. International risks and uncertainties also include changing social and economic conditions, terrorism, political hostilities and war, difficulty in enforcing agreements or collecting receivables, and increased transportation or other shipping costs. Any of these such risks could lead to reduced sales and reduced profitability associated with such sales.


10



Adverse economic conditions in the major industries the Company serves may materially affect segment performance and consolidated results of operations.
The Company's results of operations are impacted by the market fundamentals of the primary industries served. Significant declines of economic activity in the agricultural, oil and gas exploration, construction, industrial, aerospace/defense, and other major markets served may adversely affect segment performance and consolidated results of operations.

The Company may pursue or complete acquisitions which represent additional risk and could impact future financial results.
The Company's business strategy includes pursuing future acquisitions. Acquisitions involve a number of risks including integration of the acquired company with the Company's operations and unanticipated liabilities or contingencies related to the acquired company. Further, business strategies supported by the acquisition may be in perceived, or actual, opposition to strategies of certain of our customers and our business could be materially adversely affected if those relationships are terminated and the expected strategic benefits are delayed or are not achieved. The Company cannot ensure that the expected benefits of any acquisition will be realized. Costs could be incurred on pursuits or proposed acquisitions that have not yet or may not close which could significantly impact the operating results, financial condition, or cash flows. Additionally, after the acquisition, unforeseen issues could arise which adversely affect the anticipated returns or which are otherwise not recoverable as an adjustment to the purchase price. Other acquisition risks include delays in realizing benefits from the acquired companies or products; difficulties due to lack of or limited prior experience in any new product or geographic markets we enter; unforeseen adjustments, charges or write-offs; unforeseen losses of customers of, or suppliers to, acquired businesses; difficulties in retaining key employees of the acquired businesses; or challenges arising from increased geographic diversity and complexity of our operations and our information technology systems.

Total goodwill and intangible assets account for $52.7 million, or approximately 17%, of the Company's total assets as of January 31, 2017. The Company evaluates goodwill and intangible assets for impairment annually, or when evidence of potential impairment exists. The annual impairment test is based on several factors requiring judgment. Principally, a significant decrease in expected cash flows or changes in market conditions may indicate potential impairment of recorded goodwill or intangible assets. Our expected future cash flows are dependent on several factors including revenue growth in certain of our product lines and an expectation that the pricing in commodities markets will recover in future periods. Our expected future cash flows could be adversely impacted if our anticipated revenue growth is not realized or if pricing in commodities markets does not recover in future periods. Reductions in cash flows could result in an impairment of goodwill and/or intangible assets which could adversely impact the Company's results of operations and financial condition.

The Company may fail to continue to attract, develop, and retain key management and other key employees, which could negatively impact our operating results.
We depend on the performance of our senior management team and other key employees, including experienced and skilled technical personnel.  The loss of certain members of our senior management, including our Chief Executive Officer, could negatively impact our operating results and ability to execute our business strategy.  Our future success will also depend in part upon our ability to attract, train, motivate, and retain qualified personnel.

The Company may fail to protect its intellectual property effectively, or may infringe upon the intellectual property of others.
The Company has developed significant proprietary technology and other rights that are used in its businesses. The Company relies on trade secret, copyright, trademark, and patent laws and contractual provisions to protect the Company's intellectual property. While the Company takes enforcement of these rights seriously, other companies such as competitors or persons in related markets may attempt to copy or use the Company's intellectual property for their own benefit.

In addition, intellectual property of others also has an impact on the Company's ability to offer some of its products and services for specific uses or at competitive prices. Competitors' patents or other intellectual property may limit the Company's ability to offer products and services to its customers. Any infringement or claimed infringement by the Company of the intellectual property rights of others could result in litigation and adversely affect the Company's ability to continue to provide, or could increase the cost of providing, products and services and negatively impact sales and profitability. Any infringement by the Company could also result in judgments against the Company which could adversely affect our results of operations, financial condition, liquidity, and cash flows.

Among the Company’s legal proceedings is a patent infringement lawsuit filed in federal district court in Kansas by Capstan Ag Systems, Inc. In this lawsuit, Capstan Ag Systems Inc. has made certain infringement claims against the Company and one of its customers, CNH Industrial America LLC, related to the Applied Technology Division’s Hawkeye™ nozzle control system.  This litigation is in the early stages and the potential costs and liability of this pending claim, if any, cannot be determined at this time.

Intellectual property litigation is very costly and could result in substantial expense and diversions of the Company's resources, both of which could adversely affect its businesses, financial condition, results of operations, and cash flows. In addition, there

11



may be no effective legal recourse against infringement of the Company's intellectual property by third parties, whether due to limitations on enforcement of rights in foreign jurisdictions or as a result of other factors.

Technology failures or cyber-attacks on the Company's systems could disrupt the Company's operations or the functionality of its products and negatively impact the Company's business.
The Company increasingly relies on information technology systems to process, transmit, and store electronic information. In addition, a significant portion of internal communications, as well as communication with customers and suppliers depends on information technology. Further, the products in our Applied Technology and Aerostar segments depend upon GPS and other systems through which our products interact with government computer systems and other centralized information sources. We are exposed to the risk of cyber incidents in the normal course of business. Cyber incidents may be deliberate attacks for the theft of intellectual property or other sensitive information or may be the result of unintentional events. Like most companies, the Company's information technology systems may be vulnerable to interruption due to a variety of events beyond the Company's control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers, foreign governments, and other security issues. Further, attacks on centralized information sources could affect the operation of our products or cause them to malfunction. The Company has technology security initiatives and disaster recovery plans in place to mitigate the Company's risk to these vulnerabilities, but these measures may not be adequate, or implemented properly, or executed timely to ensure that the Company's operations are not disrupted. Potential consequences of a material cyber incident include damage to our reputation, litigation, and increased cyber security protection and remediation costs. Such consequences could adversely affect our results of operations.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

ITEM 2.
PROPERTIES

Raven's corporate office is located in Sioux Falls, South Dakota. Along with the corporate headquarters building, the Company also owns separate manufacturing facilities for each of our business segments as well as various warehouses, training, and product development facilities in the immediate Sioux Falls area.

In addition to its Sioux Falls facilities, Applied Technology owns a product development facility in Austin, Texas. Applied Technology also leases manufacturing, warehouse, research, and office facilities in Middenmeer, Netherlands and Geel, Belgium as well as in Winnipeg, Manitoba and Stockholm, Saskatchewan in Canada. Furthermore, Applied Technology leases smaller research and office facilities in South Dakota.
 
Engineered Films also has additional owned production and conversion facilities located in Madison and Brandon, South Dakota and Midland, Texas.

Aerostar also owns manufacturing, sewing, and research facilities located in Madison, South Dakota and Sulphur Springs, Texas. Aerostar's subsidiary Vista also leases facilities in Arlington, Virginia and in Monterey, Chatsworth, and Sunnyvale, California.

Most of the Company's manufacturing plants also serve as distribution centers and contain offices for sales, engineering, and manufacturing support staff. The Company believes that its properties are suitable and adequate to meet existing production needs. Although there is idle capacity available in the Engineered Films Division, the productive capacity in the Company's facilities is substantially being used. The Company also owns approximately 28 acres of undeveloped land adjacent to the other owned property, which is available for expansion.

The following is the approximate square footage of the Company's owned or leased facilities by segment: Applied Technology - 154,000; Engineered Films - 610,000; Aerostar - 316,000; and Corporate - 150,000.

ITEM 3.
LEGAL PROCEEDINGS
The Company is involved as a party in lawsuits, claims, regulatory inquiries, or disputes arising in the normal course of its business, the potential costs and liability of which cannot be determined at this time.  Among these matters is a patent infringement lawsuit in the early stages of litigation.  In a lawsuit filed in federal district court in Kansas, Capstan Ag Systems, Inc. has made certain infringement claims against the Company and one of its customers, CNH Industrial America LLC, related to the Applied Technology

12



Division’s HawkeyeTM nozzle control system. Management does not believe the ultimate outcomes of its legal proceedings are likely to be significant to its results of operations, financial position, or cash flows, except that, because of its preliminary stage, management cannot determine the potential impact, if any, of the patent infringement lawsuit described above.

The Company has insurance policies that provide coverage to various degrees for potential liabilities arising from legal proceedings.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

PART II
 
 
 
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company's common stock is traded on the NASDAQ Global Select Market under the ticker symbol RAVN. The following table shows quarterly unaudited financial results, quarterly high and low trade prices per share of the Company's common stock, as reported by the NASDAQ Global Select Market, and dividends declared for the periods indicated:
QUARTERLY INFORMATION (UNAUDITED)
(Dollars in thousands, except per-share amounts)
 
Net Sales
Gross Profit
Operating Income (Loss)
Pre-tax Income (Loss)
Net Income (Loss) Attributable to Raven
Net Income (Loss) Per Share(a)
 
Common Stock Market Price
Cash Dividends Per Share
 
 
Basic
Diluted
 
High
Low
FISCAL 2017
 
 
 
 
 
 
 
 
 
 
 
First Quarter
$
68,360

$
20,117

$
8,050

$
7,953

$
5,517

$
0.15

$
0.15

 
$
16.86

$
12.88

$
0.13

Second Quarter
67,598

18,915

6,696

6,487

4,495

0.12

0.12

 
21.58

15.01

0.13

Third Quarter(b)
72,522

19,839

7,389

7,116

5,741

0.16

0.16

 
25.47

20.21

0.13

Fourth Quarter
68,915

19,319

6,278

6,297

4,438

0.12

0.12

 
26.90

20.80

0.13

Total Year
$
277,395

$
78,190

$
28,413

$
27,853

$
20,191

$
0.56

$
0.56

 
$
26.90

$
12.88

$
0.52

 
 
 
 
 
 
 
 
 
 
 
 
FISCAL 2016
 
 
 
 
 
 
 
 
 
 
 
First Quarter
$
70,273

$
20,359

$
7,214

$
7,170

$
4,855

$
0.13

$
0.13

 
$
22.85

$
16.91

$
0.13

Second Quarter
67,518

17,858

6,429

6,163

4,191

0.11

0.11

 
22.36

18.52

0.13

Third Quarter(c)
  
67,611

16,972

(9,823
)
(9,946
)
(6,188
)
(0.17
)
(0.17
)
 
19.53

15.77

0.13

Fourth Quarter
52,827

11,785

571

694

1,918

0.05

0.05

 
19.61

13.87

0.13

Total Year
$
258,229

$
66,974

$
4,391

$
4,081

$
4,776

$
0.13

$
0.13

 
$
22.85

$
13.87

$
0.52

 
 
 
 
 
 
 
 
 
 
 
 
FISCAL 2015
 
 
 
 
 
 
 
 
 
 
 
First Quarter
$
102,510

$
31,766

$
16,532

$
16,453

$
11,038

$
0.30

$
0.30

 
$
40.06

$
30.29

$
0.12

Second Quarter
94,485

25,658

10,696

10,637

7,719

0.21

0.21

 
34.56

27.75

0.12

Third Quarter
91,292

24,339

10,159

10,087

6,783

0.19

0.18

 
30.74

22.13

0.13

Fourth Quarter
89,866

21,483

6,414

6,324

6,193

0.16

0.16

 
26.56

20.75

0.13

Total Year
$
378,153

$
103,246

$
43,801

$
43,501

$
31,733

$
0.86

$
0.86

 
$
40.06

$
20.75

$
0.50

(a) Net income per share is computed discretely by quarter and may not add to the full year.
(b) The fiscal year 2017 third quarter includes inventory write-downs of $2,278 for Vista as a result of discontinuing sales activities for a specific radar product line within its business.
(c) The fiscal year 2016 third quarter includes pre-contract cost write-offs of $2,933 (which is comprised of $2,075 of costs capitalized as of July 31, 2015 and additional costs of $858 capitalized during August and September 2015), a goodwill impairment loss of $11,497, a long-lived asset impairment loss of $3,813, and a reduction of $2,273 acquisition-related contingent liability for Vista. For further information regarding these impairments and other charges refer to the applicable notes to the consolidated financial statements included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

As of January 31, 2017, the Company had approximately 11,700 beneficial holders, which includes a substantial amount of the Company's common stock held of record by banks, brokers, and other financial institutions.


# 13


On November 3, 2014, the Company announced that its Board of Directors (Board) had authorized a $40.0 million stock buyback program. Effective March 21, 2016 the Board authorized an extension and increase of this stock buyback program. An additional $10.0 million was authorized for share repurchases once the $40.0 million authorization limit is reached.
 
During fiscal 2017, the Company made purchases of 484,252 common shares under this plan at an average price of $15.91 equating to a total cost of $7.7 million. None of these common shares were repurchased during the fourth quarter of fiscal 2017. During fiscal 2016, the Company made purchases of 1,602,545 common shares under this plan at an average price of $18.31 per share for a total cost of $29.3 million. None of these common shares were repurchased during the fourth quarter of fiscal 2016. There is approximately $12.9 million still available for share repurchases under this Board-authorized program which remains in place until such time as the authorized spending limit is reached or is otherwise revoked by the Board.


COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG RAVEN INDUSTRIES, INC.,
S&P 1500 INDUSTRIAL MACHINERY INDEX AND RUSSELL 2000 INDEX
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11503852&doc=11

The above graph compares the cumulative total shareholders return on the Company's stock with the cumulative return of the S&P 1500 Industrial Machinery Index and the Russell 2000 index. Investors who bought $100 of the Company's stock on January 31, 2012, held this for five years and reinvested the dividends would have seen its value decrease to $85.51. Stock performance on the graph is not necessarily indicative of future price performance.
 
 
Years Ended January 31,
 
5-Year
Company / Index
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
 
CAGR(a)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Raven Industries, Inc.
 
$
100.00

 
$
84.21

 
$
118.83

 
$
69.30

 
$
49.92

 
$
85.51

 
(3.1
)%
S&P 1500 Industrial Machinery Index
 
100.00

 
120.45

 
151.75

 
157.33

 
143.50

 
205.32

 
15.5
 %
Russell 2000 Index
 
100.00

 
115.47

 
146.69

 
153.15

 
137.96

 
184.21

 
13.0
 %
(a)  compound annual growth rate (CAGR)
 
 
 
 
 
 
 
 
 
 
 
 


14

                           

ITEM 6.
SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY
 
 
 
 
 
 
 
 
 
For the years ended January 31,
(In thousands, except employee counts and per-share amounts)

 
2017
 
2016
 
2015
 
2014
 
2013
OPERATIONS
 
 
 
 
 
 
 
 
 
 
 Net sales
 
$
277,395

 
$
258,229

 
$
378,153

 
$
394,677

 
$
406,175

 Gross profit(a)
 
78,190

 
66,974

 
103,246

 
119,354

 
127,673

 Operating income(a)(b)
 
28,413

 
4,391

 
43,801

 
63,994

 
77,692

 Income before income taxes(a)(b)
 
27,853

 
4,081

 
43,501

 
63,623

 
77,646

 Net income attributable to Raven Industries, Inc.
 
20,191

 
4,776

 
31,733

 
42,903

 
52,545

 Net income % of sales
 
7.3
%
 
1.8
%
 
8.4
%
 
10.9
%
 
12.9
%
 Net income % of average equity(c)
 
7.7
%
 
1.7
%
 
11.4
%
 
18.2
%
 
26.2
%
FINANCIAL POSITION
 
 
 
 
 
 
 
 
 
 
 Cash and cash equivalents
 
$
50,648

 
$
33,782

 
$
51,949

 
$
52,987

 
$
49,353

 Property, plant and equipment
 
106,324

 
115,704

 
117,513

 
98,076

 
81,238

 Total assets
 
301,509

 
298,688

 
362,873

 
301,819

 
273,210

 Total debt
 

 

 

 

 

 Raven Industries, Inc. shareholders' equity
 
259,426

 
264,155

 
305,153

 
251,362

 
221,346

 Net working capital(d)
 
77,012

 
77,870

 
100,183

 
97,184

 
88,054

 Net working capital percentage(e)
 
27.9
%
 
36.9
%
 
27.9
%
 
26.2
%
 
24.6
%
CASH FLOWS PROVIDED BY (USED IN)
 
 
 
 
 
 
 
 
 
 
 Operating activities
 
$
48,636

 
$
44,008

 
$
60,083

 
$
52,836

 
$
76,456

 Investing activities
 
(4,642
)
 
(11,074
)
 
(29,986
)
 
(31,615
)
 
(29,930
)
 Financing activities
 
(27,151
)
 
(50,684
)
 
(30,665
)
 
(17,354
)
 
(23,007
)
 Change in cash and cash equivalents
 
16,866

 
(18,167
)
 
(1,038
)
 
3,634

 
23,511

COMMON STOCK DATA
 
 
 
 
 
 
 
 
 
 
 EPS — basic
 
$
0.56

 
$
0.13

 
$
0.86

 
$
1.18

 
$
1.45

 EPS — diluted
 
0.56

 
0.13

 
0.86

 
1.17

 
1.44

 Cash dividends per share
 
0.52

 
0.52

 
0.50

 
0.48

 
0.42

 Book value per share(f)
 
7.17

 
7.22

 
8.01

 
6.89

 
6.09

 Stock price range during the year
 
 
 
 
 
 
 
 
 
 
   High
 
$
26.90

 
$
22.85

 
$
40.06

 
$
42.99

 
$
37.73

   Low
 
12.88

 
13.87

 
20.75

 
25.46

 
23.01

   Close
 
25.05

 
15.01

 
21.44

 
37.45

 
26.93

 Shares and stock units outstanding, year-end
 
36,175

 
36,600

 
38,119

 
36,492

 
36,326

OTHER DATA
 
 
 
 
 
 
 
 
 
 
 Price / earnings ratio(g)
 
44.7

 
115.5

 
24.9

 
32.0

 
18.7

 Average number of employees
 
907

 
936

1,251

1,251

 
1,264

 
1,350

 Sales per employee
 
$
306

 
$
276

 
$
302

 
$
312

 
$
301

 
 
 
 
 
 
 
 
 
 
 
(a) The fiscal year ended January 31, 2017 includes inventory write-downs of $2,278 for Vista as a result of discontinuing sales activities for a specific radar product line within its business.
(b) The fiscal year ended January 31, 2016 includes pre-contract cost write-offs of $2,933, a goodwill impairment loss of $11,497, and a long-lived asset impairment loss of $3,826, partially offset by a reduction of $2,273 of an acquisition-related contingent liability for Vista.
(c) Net income attributable to Raven Industries, Inc. divided by average equity. Average equity is the sum of Raven Industries, Inc. shareholders' equity for the beginning of the fiscal year plus Raven Industries, Inc. shareholders' equity for the end of the fiscal year divided by two.

(d) Net working capital is defined as accounts receivable (net) plus inventories less accounts payable.
(e) Net working capital percentage is defined as net working capital divided by fourth quarter net sales times four for each of the fiscal years, respectively.
(f) Raven Industries, Inc. shareholders' equity divided by common shares and stock units outstanding.
(g) Closing stock price on last business day of fiscal year divided by EPS — diluted.

# 15



ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to enhance overall financial disclosure with commentary on the operating results, liquidity, capital resources, and financial condition of Raven Industries, Inc. (the Company or Raven). This commentary provides management's analysis of the primary drivers of year-over-year changes in key financial statement elements, business segment results, and the impact of accounting principles on the Company's financial statements. The most significant risks and uncertainties impacting the operating performance and financial condition of the Company are discussed in Item 1A., Risk Factors, of this Annual Report on Form 10-K (Form 10-K).

This discussion should be read in conjunction with Raven's Consolidated Financial Statements and notes thereto in Item 8 of this Form 10-K.

The MD&A is organized as follows:

Executive Summary
Results of Operations - Segment Analysis
Liquidity and Capital Resources
Off-Balance Sheet Arrangements and Contractual Obligations
Critical Accounting Policies and Estimates
Accounting Pronouncements

EXECUTIVE SUMMARY
Raven is a diversified technology company providing a variety of products to customers within the industrial, agricultural, geomembrane (which includes energy), construction, aerospace/defense, and situational awareness markets. The Company is comprised of three unique operating units, classified into reportable segments: Applied Technology Division (Applied Technology), Engineered Films Division (Engineered Films), and Aerostar Division (Aerostar). Segment information is reported consistent with the Company's management reporting structure.

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

Consolidated net sales, gross margin, operating income, operating margin, net income, and diluted earnings per share
Cash flow from operations and shareholder returns
Return on sales, average assets, and average equity
Segment net sales, gross profit, gross margin, operating margin, and operating income. At the segment level, operating income does not include an allocation of general and administrative expenses.

Raven's growth strategy focuses on its proprietary product lines and the Company made the decision in fiscal year 2015 to largely reduce its non-strategic contract manufacturing business. To assess the effectiveness of this strategy during the transition period, management has used two additional measures:

Consolidated net sales excluding contract manufacturing sales (adjusted sales)
Segment net sales excluding contract manufacturing sales (adjusted sales)

Information reported as net sales excluding contract manufacturing sales on both a consolidated and segment basis exclude sales generated from contract manufacturing activities and do not conform to generally accepted accounting principles (GAAP). As such, these are non-GAAP measures. As the reduction of contract manufacturing was largely completed in fiscal 2016, these additional measures are not utilized for comparisons to periods after fiscal 2016 and are excluded from the tables in this MD&A for fiscal 2017.

As described in the Notes to the Financial Statements of this Form 10-K, four significant unusual charges were recorded in Vista Research, Inc. (Vista) within the Aerostar Division in the fiscal 2016 third quarter. To allow evaluation of operating income and net income for the Company’s core business, the Company used three additional measures. The additional measurements are:

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


# 16

                           

Information reported as adjusted operating income and adjusted net income excluding the Vista charges, on both a consolidated and segment basis, do not conform to GAAP and are non-GAAP measures.

Non-GAAP measures should not be construed as an alternative to the reported results determined in accordance with GAAP. Non-GAAP measures exclude the impact of certain items (as further described below) and provide supplemental information regarding the operating performance of the Company and its operating segments. By disclosing these non-GAAP financial measures, management intends to provide a supplemental comparison of our operating results and trends for the periods presented. The Company believes these measures are also useful as they allow investors to evaluate our performance using the same metrics that management uses to evaluate past performance and prospects for future performance.

With regards to adjusted operating income and net income measures, management believes these measures assist in understanding the operating performance of the Company and its operating segments by excluding the impact of unusual charges which are non-recurring in nature and which, from management's perspective, significantly impact the comparison of year-over-year changes in underlying financial performance.

This non-GAAP information may not be consistent with the methodologies used by other companies. All non-GAAP measures are reconciled with reported GAAP results in the tables that follow.

Vision and Strategy
At Raven, our purpose is to solve great challenges. Great challenges require great solutions. Raven’s three unique divisions share resources, ideas, and a passion to create technology that helps the world grow more food, produce more energy, protect the environment, and live safely.
The Raven business model is our platform for success. Our business model is defensible, sustainable, and gives us a consistent approach in the pursuit of quality financial results. This overall approach to creating value, which is employed across the three business segments, is summarized as follows:
Intentionally serve a set of diversified market segments with attractive near- and long-term growth prospects;
Consistently manage a pipeline of growth initiatives within our market segments;
Aggressively compete on quality, service, innovation, and peak performance;
Hold ourselves accountable for continuous improvement;
Value our balance sheet as a source of strength and stability with which to pursue strategic acquisitions; and
Make corporate responsibility a top priority.


























# 17

                           

The following discussion highlights the consolidated operating results for the years ended January 31, 2017, 2016, and 2015. Segment operating results are more fully explained in the Results of Operations - Segment Analysis section.
 
 
For the years ended January 31,
(dollars in thousands, except per-share data)
 
2017
 
%
change
 
2016
 
%
change
 
2015
Results of Operations
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
277,395

 
7.4
%
 
$
258,229

 
(31.7
)%
 
$
378,153

Gross margin(a)
 
28.2
%
 
 
 
25.9
%
 
 
 
27.3
%
Operating income
 
$
28,413

 
547.1
%
 
$
4,391

 
(90.0
)%
 
$
43,801

Operating margin(a)
 
10.2
%
 
 
 
1.7
%
 
 
 
11.6
%
Net income attributable to Raven Industries, Inc.
 
$
20,191

 
322.8
%
 
$
4,776

 
(84.9
)%
 
$
31,733

Diluted income per share
 
$
0.56

 
330.8
%
 
$
0.13

 
(84.9
)%
 
$
0.86

Adjusted net income attributable to Raven Industries, Inc.(b)
 
$
20,191

 
34.1
%
 
$
15,053

 
(52.6
)%
 
$
31,733

 
 
 
 
 
 
 
 
 
 
 
Cash Flow and Shareholder Returns
 
 
 
 
 
 
 
 
 
 
Cash flow from operating activities
 
$
48,636

 
 
 
$
44,008

 
 
 
$
60,083

Cash outflow for capital expenditures
 
$
4,642

 
 
 
$
13,046

 
 
 
$
17,041

Cash dividends
 
$
18,839

 
 
 
$
19,426

 
 
 
$
18,519

Common share repurchases
 
$
7,702

 
 
 
$
29,338

 
 
 
$

 
 
 
 
 
 
 
 
 
 
 
Performance Measures
 
 
 
 
 
 
 
 
 
 
Return on net sales(c)
 
7.3
%
 
 
 
1.8
%
 
 
 
8.4
%
Return on average assets(d)
 
6.7
%
 
 
 
1.4
%
 
 
 
9.5
%
Return on average equity(e)
 
7.7
%
 
 
 
1.7
%
 
 
 
11.4
%
 
(a)  The Company's gross and operating margins may not be comparable to industry peers due to variability in the classification of expenses across industries in which the Company operates.
(b)  Non-GAAP measure reconciled to GAAP in the applicable table below.
(c)  Net income divided by net sales.
(d)  Net income attributable to Raven Industries, Inc. divided by average assets. Average assets is the sum of Total Assets for the beginning of the fiscal year plus Total Assets for the end of the fiscal year divided by two.
(e)  Net income attributable to Raven Industries, Inc. divided by average equity. Average equity is the sum of Total Raven Industries, Inc. shareholders' equity for the beginning of the fiscal year plus Total Raven Industries, Inc. shareholders' equity for the end of the fiscal year divided by two.













# 18

                           

The following table reconciles the reported net sales to adjusted sales, a non-GAAP financial measure. Adjusted sales excludes contract manufacturing and represents the Company's sales from proprietary products. As the reduction of contract manufacturing was largely completed in fiscal 2016, adjusted sales excluding manufacturing is not a meaningful measure in subsequent fiscal periods. As such fiscal 2017 has been excluded from this table.
 
 
For the years ended January 31,
 
 
 
 
%
change
 
 
(dollars in thousands)
 
2016
 
 
2015
Applied Technology
 
 
 
 
 
 
Reported net sales
 
$
92,599

 
(34.9
)%
 
$
142,154

Less: Contract manufacturing sales
 
546

 
(90.6
)%
 
5,832

Applied Technology net sales, excluding
    contract manufacturing sales
 
$
92,053

 
(32.5
)%
 
$
136,322

 
 
 
 
 
 
 
Aerostar
 
 
 
 
 
 
Reported net sales
 
$
36,368

 
(55.0
)%
 
$
80,772

Less: Contract manufacturing sales
 
4,701

 
(85.2
)%
 
31,669

Aerostar net sales, excluding contract
    manufacturing sales
 
$
31,667

 
(35.5
)%
 
$
49,103

 
 
 
 
 
 
 
Consolidated Raven
 
 
 
 
 
 
Reported net sales
 
$
258,229

 
(31.7
)%
 
$
378,153

Less: Contract manufacturing sales
 
5,247

 
(86.0
)%
 
37,501

Plus: Aerostar sales to Applied Technology
 

 
(100.0
)%
 
10,553

Consolidated net sales, excluding contract
    manufacturing sales
 
$
252,982

 
(28.0
)%
 
$
351,205

The following table reconciles the reported operating (loss) income to adjusted operating income, a non-GAAP financial measure. On both a segment and consolidated basis, adjusted operating income excludes the goodwill impairment loss, long-lived asset impairment loss, pre-contract cost write-offs, and an acquisition-related contingent consideration benefit all of which relate to the Vista business within the Aerostar Division and all of which occurred in the fiscal 2016 third quarter. These are described in more detail in Note 6 Goodwill, Long-lived Assets, and Other Charges and Note 5 Acquisition of and Investments in Businesses and Technologies of the Notes to the Consolidated Financial Statements.
 
 
For the years ended January 31,
 
 
 
 
%
change
 
 
 
%
change
 
 
(dollars in thousands)
 
2017
 
 
2016
 
 
2015
Aerostar
 
 
 
 
 
 
 
 
 
 
Reported operating (loss) income
 
$
(1,560
)
 
(89.5
)%
 
$
(14,801
)
 
(264.8
)%
 
$
8,983

Plus:
 
 
 
 
 
 
 
 
 
 
Goodwill impairment loss
 

 

 
11,497

 

 

Long-lived asset impairment loss
 

 

 
3,813

 

 

Pre-contract costs written off
 

 

 
2,933

 

 

Less:
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent liability benefit
 

 

 
2,273

 

 

Aerostar adjusted operating (loss) income(a)
 
$
(1,560
)
 
(233.4
)%
 
$
1,169

 
(87.0
)%
 
$
8,983

Aerostar adjusted operating (loss) income % of net sales
 
(4.6
)%
 
 
 
3.2
%
 
 
 
11.1
%
 
 
 
 
 
 
 
 
 
 
 
Consolidated Raven
 
 
 
 
 
 
 
 
 
 
Reported operating income
 
$
28,413

 
547.1
 %
 
$
4,391

 
(90.0
)%
 
$
43,801

Plus:
 
 
 
 
 
 
 
 
 
 
Goodwill impairment loss
 

 

 
11,497

 

 

Long-lived asset impairment loss
 

 

 
3,813

 

 

Pre-contract costs written off
 

 

 
2,933

 

 

Less:
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent liability benefit
 

 

 
2,273

 

 

Consolidated adjusted operating income
 
$
28,413

 
39.5
 %
 
$
20,361

 
(53.5
)%
 
$
43,801

Consolidated adjusted operating income % of net sales

 
10.2
 %
 
 
 
7.9
%
 
 
 
11.6
%
(a) At the segment level, adjusted operating (loss) income does not include an allocation of general and administrative expenses.

# 19

                           


The following table reconciles the reported net income to adjusted net income, a non-GAAP financial measure. Adjusted net income excludes the goodwill impairment loss, long-lived asset impairment loss, pre-contract cost write-off, an acquisition-related contingent consideration benefit, and the income tax effect of these items, all of which relate to Vista.
 
 
For the years ended January 31,
 
 
 
 
%
change
 
 
 
%
change
 
 
(dollars in thousands)
 
2017
 
 
2016
 
 
2015
Consolidated Raven
 
 
 
 
 
 
 
 
 
 
Reported net income attributable to Raven Industries, Inc.
 
$
20,191

 
322.8
%
 
$
4,776

 
(84.9
)%
 
$
31,733

Plus:
 
 
 
 
 
 
 
 
 
 
Goodwill impairment loss
 

 
 
 
11,497

 
 
 

Long-lived asset impairment loss
 

 
 
 
3,813

 
 
 

Pre-contract costs written off
 

 
 
 
2,933

 
 
 

 
 
 
 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent liability benefit
 

 
 
 
2,273

 
 
 

Net tax benefit on adjustments
 

 
 
 
5,693

 
 
 

Adjusted net income attributable to Raven
   Industries, Inc.
 
$
20,191

 
34.1
%
 
$
15,053

 
(52.6
)%
 
$
31,733

 
 
 
 
 
 
 
 
 
 
 
Adjusted net income per common share:
 
 
 
 
 
 
 
 
 
 
      ─ Basic
 
$
0.56

 
40.0
%
 
$
0.40

 
(53.5
)%
 
$
0.86

      ─ Diluted
 
$
0.56

 
40.0
%
 
$
0.40

 
(53.5
)%
 
$
0.86

Results of Operations - Fiscal 2017 compared to Fiscal 2016
The Company's net sales in fiscal 2017 were $277.4 million, an increase of $19.2 million, or 7.4%, from last year's net sales of $258.2 million. Despite the continued challenges within the end-markets in their primary markets of focus, the Applied Technology and Engineered Films divisions saw sales increases year-over-year. With respect to Aerostar, delays and uncertainties regarding certain opportunities important to the division's growth strategy resulted in lower net sales for this division.

Operating income for fiscal year 2017 was $28.4 million compared to $4.4 million in fiscal year 2016. The fiscal 2016 results were impacted by the Vista goodwill and long-lived impairment losses and associated financial impacts. Excluding these specific Vista related items, adjusted operating income for fiscal 2016 was $20.4 million. Adjusted operating income increased $8.0 million, or 39.5%, year-over-year. The adjusted operating income increase year-over-year was principally driven by higher sales volumes and lower manufacturing expenses in Applied Technology and Engineered Films.

Net income for fiscal year 2017 was $20.2 million, or $0.56 per diluted share, compared to net income of $4.8 million, or $0.13 per diluted share, in fiscal year 2016. The fiscal 2016 results were impacted by the Vista goodwill and long-lived asset impairments and associated financial impacts. Excluding these specific Vista related items, adjusted net income for fiscal 2016 was $15.1 million, or $0.40 per diluted share. On an adjusted basis, net income was up $5.1 million year-over-year, or $0.16 per diluted share, in fiscal 2017.

Applied Technology Division
Fiscal 2017 net sales increased $12.6 million, or 13.6%, to $105.2 million from $92.6 million in fiscal 2016. This increase in sales was driven by new product introductions and market share gains. Sales in the original equipment manufacturer (OEM) channel were up 25.1% while sales in the aftermarket channel increased 6.1%. The Company does not specifically model comparative market share position for any of its operating divisions, but based on the sales developments in fiscal 2017 the Company believes that Applied Technology's global market share position improved during the year as a result of new product sales and expanded OEM relationships.

Applied Technology's operating income increased by 45.4% to $26.6 million from $18.3 million in the prior year due primarily to higher sales volume and lower manufacturing expenses. End-market demand conditions remain subdued, but new product introductions have driven sales increases in fiscal 2017.

Engineered Films Division
Fiscal 2017 net sales were $138.9 million, an increase of $9.4 million, or 7.3%, compared to fiscal 2016. The increase in sales was driven by increases in the industrial, geomembrane (which includes energy), and construction markets, partially offset by a decrease

# 20

                           

in the agricultural market. Although the Company does not specifically model comparative market share position for any of its operating divisions, based on the sales developments in fiscal year 2017 the Company believes that Engineered Films’ market share position improved during the year in all of the end markets served, with the exception of the agriculture market.

Engineered Film's operating income increased by 28.4% to $23.0 million from $17.9 million in the prior year due primarily to higher sales volume and lower manufacturing expenses. Higher production and sales volume helped improve capacity utilization and resulted in fixed cost leverage.

Aerostar Division
Fiscal 2017 net sales were $34.1 million compared to $36.4 million in fiscal 2016, down $2.3 million. The decline in sales for the division was principally driven by lower aerostat sales, partially offset by higher sales of stratospheric balloons. While it is particularly challenging to measure market share information for the Aerostar division and the Company does not specifically model comparative market share position for any of its operating divisions, the Company believes that Aerostar’s market share position was largely unchanged during the year for all of the markets served, with the exception of radar products and services which the Company believes experienced an erosion of market share.

Aerostar reported an operating loss of $1.6 million in fiscal 2017 compared to an operating loss of $14.8 million in fiscal 2016. The fiscal 2016 results were impacted by the Vista goodwill and long-lived assets impairments and associated financial impacts. Excluding these specific Vista related items, adjusted operating income in fiscal 2016 was $1.2 million, compared to an operating loss of $1.6 million for fiscal 2017, a decline of $2.8 million on an adjusted basis. This decline in operating income was primarily driven by lower sales volume and $2.3 million of inventory write-downs related to certain radar systems, discussed in more detail in Note 6 Goodwill, Long-lived Assets, and Other Charges of the Notes to the Consolidated Financial Statements, and lower sales volume.

Results of Operations - Fiscal 2016 compared to Fiscal 2015
The Company's net sales in fiscal 2016 were $258.2 million, a decrease of $120.0 million, or 31.7%, from the prior year's net sales of $378.2 million. Excluding sales from contract manufacturing, fiscal year 2016 net sales were $253.0 million, down 28.0% from $351.2 million in fiscal year 2015. All divisions saw significant sales declines and continued to experience reduced end-market demand in their primary markets of focus. Adverse commodity market conditions drove reduced demand for both Applied Technology and Engineered Films, while reductions and delays in governmental defense spending reduced demand for Aerostar, and Vista in particular.

Operating income for fiscal year 2016 was $4.4 million compared to $43.8 million in fiscal year 2015. Operating income for fiscal year 2016, adjusted for the third quarter Vista goodwill and long-lived asset impairments and associated financial impacts, was $20.4 million compared to $43.8 million in fiscal year 2015, down 53.5% year-over-year. The adjusted operating income decline year-over-year was primarily due to the overall sales decline and lower operating margins in Applied Technology and lower Aerostar profitability driven by Vista. The Company initiated cost reduction measures across all divisions in fiscal 2016 to reduce overall spending. These cost control measures contributed to decreases of $2.8 million in research and development (R&D) expense and $9.4 million in selling, general and administrative expenses in fiscal year 2016 compared to fiscal 2015.

Net income for fiscal year 2016 was $4.8 million, or $0.13 per diluted share, compared to net income of $31.7 million, or $0.86 per diluted share, in fiscal year 2015. Net income for fiscal year 2016, adjusted for the Vista goodwill and long-lived asset impairments and associated financial impacts, was $15.1 million, down 52.6% compared to fiscal year 2015.

Applied Technology Division
Fiscal 2016 net sales decreased $49.6 million, or 34.9%, to $92.6 million from $142.2 million in fiscal 2015. This decline in sales was driven by a significant contraction in end-market demand. The Company believes that its market share in the United States was largely sustained, but that international market share declined, particularly in Latin America. Year-over-year sales to OEM and aftermarket customers declined by 42.1% and 23.8%, respectively.


Applied Technology's operating income decreased by 47.0% due primarily to lower sales volume. The price of corn declined to 8-year lows which led to significant declines in farmer incomes. Such macro-level market conditions impacted both grower sentiment and the manufacturing decisions of our strategic OEM partners.

Engineered Films Division
Engineered Films’ fiscal 2016 net sales were $129.5 million, a decrease of $37.2 million, or 22.3%, compared to fiscal 2015. The decline in sales was primarily driven by the continuation of the substantial decline in demand in the geomembrane market (which includes energy) as a result of lower oil prices year-over-year partially offset by the benefit to sales due to the acquisition of Integra Plastics, Inc. (Integra) in November 2014. The Company does not specifically model comparative market share position for any

# 21

                           

of its operating divisions, but based on customer feedback and evaluation of publicly-available financial information on competitors, these revenue trends are not believed to have been the result of a material loss of market share.

The acquisition of Integra improved the Company’s ability to meet customer’s complex conversion needs and leverage a more direct sales channel into the geomembrane (which includes energy) market. However, significant and sustained declines in energy sub-market demand resulted in declining sales to this market. With oil prices at multi-decade lows, sales into the geomembrane market were down approximately 66% year-over-year. Rig counts and well-completion rates continued to fall, driving down demand for Engineered Films’ geomembrane market products. Data available from Baker Hughes, a worldwide oil field service company, showed that land-based rig counts for the Permian Basin, the division’s primary market for its geomembrane products, were down approximately 60% year-over-year as of January 31, 2016 and well-completion rates were also down. The operations of Integra were fully integrated into Engineered Films’ operations in early fiscal 2016 and, as a result, separate quantification of its impact to net sales was not determinable.

Aerostar Division
Fiscal 2016 net sales were $36.4 million compared to $80.8 million in fiscal 2015, down $44.4 million. Excluding contract manufacturing sales, Aerostar's net sales decreased 35.5%, or $17.4 million, to $31.7 million for fiscal 2016. The decline in sales for the division was principally driven by Vista, but lower sales of stratospheric balloons also contributed to the decline.

Aerostar reported an operating loss of $14.8 million in fiscal 2016 compared to operating income of $9.0 million in fiscal 2015. The operating loss included the Vista goodwill and long-lived asset impairments and associated financial impacts. Excluding these items, adjusted Aerostar operating income was $1.2 million, or 87.0% below fiscal 2015 operating income of $9.0 million. This was primarily due to the lower sales volume of proprietary products, particularly within the Vista business.

From time to time, the Company incurs costs before a contract is finalized and such pre-contract costs are deferred to the balance sheet to the extent they relate to a specific project and the Company has concluded that is probable that the contract will be awarded for more than the amount deferred. Pre-contract cost deferrals are common with Vista's business pursuits. As described in Note 1 Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements, pre-contract costs are evaluated for recoverability periodically. The Company was in negotiations throughout most of fiscal 2016 on a large international contract and also had a preauthorization letter from the prime contractor, but the contract did not materialize in the fiscal 2016 third quarter as expected. As a result, expectations were lowered as the timing and likelihood of completing certain international pursuits became less certain. Corresponding to these lower expectations, the pre-contract costs associated with these pursuits were written off and Vista recorded a charge of $2.9 million reported in “Cost of sales” in the Consolidated Statements of Income and Comprehensive Income. These charges were partially offset by a benefit of $2.3 million as the result of a reduction of an acquisition-related contingent liability (earn-out liability) due to the lowered forecast for the Aerostar Division.

RESULTS OF OPERATIONS - SEGMENT ANALYSIS
Applied Technology
Applied Technology designs, manufactures, sells, and services innovative precision agriculture products and information management tools that help growers reduce costs, more precisely control inputs, and improve yields for the global agriculture market. Applied Technology's operations include operations of SBG Innovatie BV and its affiliate, Navtronics BVBA (collectively, SBG), based in the Netherlands.
Financial highlights for the fiscal years ended January 31,
(dollars in thousands)
 
2017
 
% change
 
2016
 
% change
 
2015
Net sales
 
$
105,217

 
13.6
%
 
$
92,599

 
(34.9
)%
 
$
142,154

Gross profit
 
43,476

 
28.0
%
 
33,969

 
(41.8
)%
 
58,325

Gross margin
 
41.3
%
 
 
 
36.7
%
 
 
 
41.0
%
Operating expense
 
$
16,833


7.6
%
 
$
15,650

 
(34.2
)%
 
$
23,768

Operating expense as % of sales
 
16.0
%
 
 
 
16.9
%
 
 
 
16.7
%
Operating income(a)
 
$
26,643

 
45.4
%
 
$
18,319

 
(47.0
)%
 
$
34,557

Operating margin
 
25.3
%
 
 
 
19.8
%
 
 
 
24.3
%
Applied Technology net sales,
    excluding contract manufacturing
    sales(b)
 
NMF
 
NMF
 
$
92,053

 
(32.5
)%
 
$
136,322

(a) At the segment level, operating income does not include an allocation of general and administrative expenses.

(b) Reduction of contract manufacturing was largely completed in fiscal 2016; measure is not meaningful (NMF) for comparisons in subsequent fiscal periods.



# 22

                           


For fiscal 2017, net sales increased $12.6 million, or 13.6%, to $105.2 million as compared to $92.6 million in fiscal 2016. Operating income increased $8.3 million, or 45.4%, to $26.6 million as compared to fiscal 2016.

Fiscal 2017 fourth quarter net sales increased $7.5 million, or 40.4%, to $25.9 million and operating income increased $4.1 million, or 184.3%, to $6.4 million compared to fourth quarter fiscal 2016.

Fiscal 2017 comparative results were primarily driven by the following factors:

Market conditions. Conditions in the agriculture market remain subdued; however, Applied Technology's marketplace strategy has capitalized on new product introductions in fiscal 2017. While OEM and aftermarket sales channel demand remains challenging, Applied Technology achieved fourth quarter and year-to-date sales growth compared to the prior year primarily due to market share gains driven by new product introductions and expanded relationships with OEM partners. These were the primary growth drivers both domestically and internationally.
Sales volume. Fiscal 2017 sales increased 13.6% to $105.2 million as compared to $92.6 million in the prior fiscal year. Sales in the OEM and aftermarket channels were up 25.1% and 6.1%, respectively, in fiscal 2017. Fiscal 2017 domestic sales were up 9.9% while international sales were up 24.8%.
International sales. Net sales outside the U.S. accounted for 27.6% of segment sales in fiscal 2017 compared to 25.1% in fiscal 2016. International sales increased $5.8 million, or 24.8%, to $29.0 million in fiscal 2017 compared to fiscal 2016. Higher sales in Canada and Europe were the primary drivers of the increase. European revenue growth included strong growth at SBG in fiscal 2017. For the fourth quarter, international sales totaled $5.9 million, an increase of 29.8% from the prior year comparative quarter.
Gross margin. Gross margin increased from 36.7% in fiscal 2016 to 41.3% in fiscal 2017. Higher sales volume and lower manufacturing costs including increased leverage of fixed manufacturing costs contributed to the higher margin. Due to the existing available capacity of the facilities, the increase in sales volume did not require a commensurate increase in costs in fiscal 2017.
Restructuring expenses. Fiscal 2016 results included severance and other related exit activity totaling $0.6 million. These costs were offset by completion of the St. Louis contract manufacturing exit activities which resulted in gains of $0.6 million recorded in the fiscal 2016 results. There were no impairments recorded as a result of the exit of this business. No restructuring or exit costs were incurred in the three-month period ended January 31, 2016. No restructuring or exit costs were incurred in the three-month or year-to-date period ended January 31, 2017.
Operating expenses. Fiscal 2017 operating expenses were 16.0% of net sales compared to 16.9% for the prior year. Operating expenses increased less than revenues due primarily to continued cost control measures and resulted in a lower percentage of sales year-over-year.

For fiscal 2016, net sales decreased $49.6 million, or 34.9%, to $92.6 million as compared to $142.2 million in fiscal 2015. Operating income decreased $16.2 million, or 47.0%, to $18.3 million as compared to fiscal 2015.

Fiscal 2016 fourth quarter net sales declined $8.0 million, or 30.3%, to $18.4 million and operating income decreased $1.2 million, or 34.7%, to $2.2 million compared to fourth quarter fiscal 2015.

Fiscal 2016 comparative results were primarily driven by the following factors:

Market conditions. Deteriorating conditions in the agriculture market put pressure on Applied Technology during fiscal 2016. End-market demand had deteriorated from the beginning of the year. Corn prices had stabilized since the beginning of the year but were still at multi-year lows. Farm incomes and farmer sentiment were weak, resulting in productivity investments in precision agriculture equipment being delayed.
Sales volume. Fiscal 2016 sales declined 34.9% to $92.6 million as compared to $142.2 million in the prior fiscal year. These sales declines were driven by continued lower demand, OEM shutdowns, and customers managing down inventory levels. Sales in the OEM and aftermarket channels were down 42.1% and 23.8%, respectively, for fiscal 2016. Fiscal 2016 domestic sales were down 37.6% while international sales were down 25.2%.
Strategic sales. Applied Technology’s net sales, excluding contract manufacturing sales, for fiscal 2016 were $92.1 million, a decrease of 32.5%, compared to $136.3 million in fiscal 2015.
International sales. Net sales outside the U.S. accounted for 25.1% of segment sales in fiscal 2016 compared to 21.9% in fiscal 2015. International sales decreased $7.9 million, or 25.2%, to $23.3 million in fiscal 2016 compared to fiscal 2015. Lower sales in Latin America, Canada, and South Africa were the primary drivers of the decline. These declines were partially offset by higher European revenues. European revenues were favorably impacted by the acquisition of SBG in fiscal 2015 second quarter. For the fourth quarter, international sales totaled $4.6 million, an increase of 45.6% from the prior year comparative quarter. The fiscal fourth quarter 2015 sales were reduced by credits issued related to

# 23

                           

quality issues on products sold in Latin America and without these credits, the year-over-year fourth quarter increase would have been approximately 19%.
Gross margin. Gross margin declined from 41.0% in fiscal 2015 to 36.7% in fiscal 2016. Lower sales volume and a reduced leverage of fixed manufacturing costs contributed to the lower margin.
Restructuring expenses. Fiscal 2016 results included severance and other related exit activity totaling $0.6 million. These costs were offset by completion of the St. Louis contract manufacturing exit activities which resulted in gains of $0.6 million recorded in the fiscal 2016 results. There were no impairments recorded as a result of the exit of this business. No restructuring or exit costs were incurred in the three-month period ended January 31, 2016. Restructuring costs of $0.3 million were incurred for the three-month period ended January 31, 2015.
Operating expenses. Fiscal 2016 operating expenses were 16.9% of net sales compared to 16.7% for the prior year. Restructuring efforts and cost containment actions reduced both selling expense and R&D expense as planned, but were not enough to offset the impact to division profit from lower sales volume.

Engineered Films
Engineered Films manufactures high performance plastic films and sheeting for geomembrane (which includes energy), agricultural, construction, and industrial applications. Engineered Films’ ability to develop value-added innovative products is expanded by its fabrication and conversion capabilities.
Financial highlights for the fiscal years ended January 31,
(dollars in thousands)
 
2017
 
% change
 
2016
 
% change
 
2015
Net sales
 
$
138,855

 
7.3
 %
 
$
129,465

 
(22.3
)%
 
$
166,634

Gross profit
 
29,407

 
17.3
 %
 
25,076

 
(10.8
)%
 
28,104

Gross margin
 
21.2
%
 
 
 
19.4
%
 
 
 
16.9
%
Operating expenses
 
$
6,441

 
(10.3
)%
 
$
7,184

 
14.0
 %
 
$
6,302

Operating expenses as % of sales
 
4.6
%
 
 
 
5.5
%
 
 
 
3.8
%
Operating income(a)
 
$
22,966

 
28.4
 %
 
$
17,892

 
(17.9
)%
 
$
21,802

Operating margin
 
16.5
%
 
 
 
13.8
%
 
 
 
13.1
%
(a) At the segment level, operating income does not include an allocation of general and administrative expenses.


For fiscal 2017, net sales increased $9.4 million, or 7.3%, to $138.9 million as compared to fiscal 2016. Operating income was $23.0 million, up 28.4% for fiscal 2017 as compared to $17.9 million for fiscal 2016.

For fiscal 2017 fourth quarter net sales increased $9.1 million, or 35.8%, to $34.5 million as compared to $25.4 million in the fiscal 2016 fourth quarter. Operating income was up $3.4 million, or 177.3%, to $5.3 million as compared to $1.9 million in the prior year fourth quarter.

Fiscal 2017 comparative results were primarily driven by the following factors:

Market conditions. End-market conditions have improved in the geomembrane (which includes energy) market in the second half of fiscal 2017 for Engineered Films. U.S. land-based rig counts have increased approximately 17% from January 2016 to January 2017. For fiscal 2017, sales into the geomembrane market increased 16.9% year-over-year.
Sales volume and selling prices. Fiscal 2017 net sales were up 7.3% to $138.9 million compared to fiscal 2016 net sales of $129.5 million. Sales volume, measured in pounds, for fiscal 2017 was up 11.4%. Primary drivers of the increase in sales volume included the improved market conditions within the geomembrane market and new sales into the industrial and geomembrane markets as a result of successfully selling capacity of the division's new production line that was commissioned in the fiscal 2017 first quarter. Average selling prices for the same period were down approximately 3.7% compared to the prior fiscal year primarily due to product mix and the competitive landscape in the geomembrane market. Fourth quarter fiscal 2017 sales volume was up 34.0% compared to fourth quarter fiscal 2016. Fourth quarter average selling prices increased 1.3% year-over-year.
Gross margin. Fiscal 2017 gross margin was 21.2%, 1.8 percentage points higher than the prior fiscal year. During fiscal 2017 fourth quarter, the gross margin was 20.5% compared to 15.0% in the prior year fourth quarter. The increase for both periods was primarily the result of higher sales volume. Due to the existing available capacity of the facilities, the increase in sales volume did not require a commensurate increase in costs in fiscal 2017. In addition, benefits from value engineering, reformulation efforts, pricing discipline, and favorable raw material cost developments also benefited gross margin.
Operating expenses. Fiscal 2017 operating expenses, as a percentage of net sales, decreased to 4.6%, from 5.5% in the prior year. Sales volume increased while selling expense decreased compared to fiscal year 2016 as a result of cost control measures and lower bad debt expense.

# 24

                           


For fiscal 2016, net sales decreased $37.2 million, or 22.3%, to $129.5 million as compared to fiscal 2015. Operating income was $17.9 million for fiscal 2016, down 17.9%, as compared to $21.8 million for fiscal 2015.

For fiscal 2016, fourth quarter net sales decreased $15.4 million, or 37.8%, to $25.5 million as compared to $40.9 million in the fiscal 2015 fourth quarter. Operating income was down $2.7 million, or 58.8%, to $1.9 million as compared to $4.6 million in the prior year fourth quarter.

Fiscal 2016 comparative results were primarily driven by the following factors:
  
Market conditions. Challenging end-market conditions persisted in the geomembrane (which includes energy) market for Engineered Films. The decline in oil prices resulted in land-based rig counts decreasing more than 60% year-over-year along with declining well-completion rates. While the decline in oil prices reduced demand for sales of film into the geomembrane market, it also led to favorable raw material cost comparisons versus the prior year. While the geomembrane market experienced challenging end-market conditions, demand continued to strengthen for both Engineered Films' agricultural barrier films used in high-value crop production and grain and silage covers used to protect grain and feed.
Sales volume and selling prices. Fiscal 2016 net sales were down 22.3% to $129.5 million compared to fiscal 2015 net sales of $166.6 million. The decline in sales was driven primarily by a 66% decline in geomembrane market sales. These declines were partially offset by the acquisition of Integra. Sales volume for fiscal 2016 was down 27.5%. Average selling prices for the same period were up approximately 7% compared to the prior fiscal year primarily due to product mix. Fourth quarter fiscal 2016 sales volume was down approximately 38% compared to fourth quarter fiscal 2015. Fourth quarter average selling prices remained flat year-over-year.
Gross margin. Fiscal 2016 gross margin was 19.4%, 2.5 percentage points higher than the prior fiscal year. This increase was the result of gross margin expansion from value engineering, reformulation efforts, pricing discipline, and favorable raw material cost comparisons. During fiscal 2016 fourth quarter, the gross margin was 15.0% compared to 16.2% in the prior year fourth quarter. The decline was due to significantly lower volume and the resulting decline in fixed cost absorption.
Operating expenses. Fiscal 2016 operating expenses, as a percentage of net sales, increased to 5.5%, from 3.8% in the prior year. Higher selling expenses resulting from the Integra acquisition, additional R&D costs for new product development activities and higher bad debt expense over lower sales volume increased operating expense as a percentage of sales.

Aerostar
Aerostar serves the aerospace/defense and situational awareness markets. Aerostar had also provided significant contract manufacturing services in the past, but largely exited this business in fiscal 2016. Aerostar designs and manufactures proprietary products including stratospheric balloons, tethered aerostats, and radar processing systems for aerospace and situational awareness markets. These products can be integrated with additional third-party sensors to provide research, communications, and situational awareness capabilities to governmental and commercial customers. Aerostar pursues product and support services contracts for agencies and instrumentalities of the U.S. and foreign governments.
Financial highlights for the fiscal years ended January 31,
(dollars in thousands)
 
2017
 
% change
 
2016
 
% change
 
2015
Net sales
 
$
34,113

 
(6.2
)%
 
$
36,368

 
(55.0
)%
 
$
80,772

Gross profit
 
5,319

 
(32.1
)%
 
7,838

 
(52.9
)%
 
16,654

Gross margin
 
15.6
 %
 
 
 
21.6
 %
 
 
 
20.6
%
Operating expenses
 
$
6,792

 
(7.2
%)
 
$
7,316

 
(4.6
)%
 
$
7,671

Operating expenses as % of sales
 
19.9
 %
 
 
 
20.1
 %
 
 
 
9.5
%
Goodwill and long-lived asset impairment loss
 
$
87

 
 
 
15,323

 
 
 
 
Operating (loss) income(a)
 
$
(1,560
)
 
(89.5
)%
 
(14,801
)
 
(264.8
)%
 
8,983

Operating margin
 
(4.6
)%
 
 
 
(40.7
)%
 
 
 
11.1
%
Aerostar net sales, excluding
    contract manufacturing sales(b)
 
NMF
 
NMF
 
$
31,667

 
(35.5
)%
 
$
49,103

(a) At the segment level, operating (loss) income does not include an allocation of general and administrative expenses.
(b) Reduction of contract manufacturing was largely completed in fiscal 2016; measure is not meaningful (NMF) for comparisons in subsequent fiscal periods.




# 25

                           

Net sales declined 6.2% to $34.1 million from last year’s net sales of $36.4 million. Operating loss was $1.6 million, down $13.2 million, compared to fiscal 2016 operating loss of $14.8 million. The fiscal 2016 results were impacted by the Vista goodwill and long-lived asset impairments and associated financial impacts. Excluding these Vista related items, adjusted operating income in fiscal 2016 was $1.2 million, compared to an operating loss of $1.6 million for fiscal 2017, a decline of $2.8 million on an adjusted basis.

Fiscal 2017 fourth quarter net sales declined $0.2 million, or 2.5%, to $8.8 million. Aerostar reported fiscal 2017 fourth quarter operating income of $0.2 million, flat compared with the prior year fourth quarter.

Fiscal 2017 comparative results were primarily driven by the following factors:

Market conditions. Aerostar is experiencing delays and uncertainties regarding certain opportunities important to the division's growth strategy, and some of Aerostar's markets are subject to significant variability due to government spending and the timing of contract awards. Aerostar is pioneering new markets with leading-edge applications of its high-altitude balloons and remains in active collaboration with Google on Project Loon. Project Loon is a program to provide high-speed wireless Internet accessibility and telecommunications to rural, remote, and under-served areas of the world.
Sales volume. Fiscal 2017 net sales decreased $2.3 million from the prior year, a year-over-year decrease of 6.2%. The decline was principally driven by lower aerostat sales due to the timing of deliveries. This was partially offset by higher sales of stratospheric balloons for Project Loon and other customers newly established in fiscal 2017.
Gross margin. For fiscal 2017, gross margin decreased 6.0 percentage points compared to the prior fiscal year. Fiscal 2017 gross margin decline was primarily driven by lower sales volume and $2.3 million of inventory write-downs related to certain radar systems discussed in more detail in Note 6 Goodwill, Long-lived Assets, and Other Charges of the Notes to the Consolidated Financial Statements, offset somewhat by a $1.3 million reduction in depreciation and amortization expense due to the long-lived asset impairment charges recorded in fiscal 2016.
Goodwill and long-lived asset impairment loss. In fiscal 2016, Aerostar recorded a goodwill impairment loss of $11.5 million and a long-lived asset impairment loss of $3.8 million. These impairment charges were recorded in the Vista reporting unit and are described more fully in Note 6 Goodwill, Long-lived Assets, and Other Charges of the Notes to the Consolidated Financial Statements. As also described in Note 6 Goodwill, Long-lived Assets, and Other Charges, a $0.1 million long-lived asset impairment loss was recorded in fiscal 2017 on the Radar asset group. Expense control measures executed throughout fiscal year 2017 reduced operating expenses year-over-year.
Operating expenses. Operating expenses as a percentage of net sales was essentially flat year-over- year. Fiscal 2017 operating expenses of $6.8 million were 19.9% of net sales compared to operating expenses of $7.3 million, equivalent to 20.1% of net sales in fiscal 2016.
Aerostar adjusted operating income. Aerostar reported an operating loss of $1.6 million in fiscal 2017 compared to an operating loss of $14.8 million in fiscal 2016. The fiscal 2016 results were impacted by the Vista goodwill and long-lived asset impairments and associated financial impacts. Excluding these Vista related items, adjusted operating income in fiscal 2016 was $1.2 million, compared to an operating loss of $1.6 million for fiscal 2017, a decline of $2.8 million on an adjusted basis. This decline in operating income was primarily driven by lower sales volume and $2.3 million of inventory write-downs related to certain radar systems, offset somewhat by a $1.3 million reduction in depreciation and amortization expense due to the long-lived asset impairment charges recorded in fiscal 2016.

Fiscal 2016 net sales declined 55.0% to $36.4 million from fiscal 2016 net sales of $80.8 million. Fiscal 2016 operating loss was $14.8 million, down $23.8 million, compared to fiscal 2015 operating income of $9.0 million. Fiscal 2016 operating loss included a goodwill impairment loss of $11.5 million, a long-lived asset impairment loss of $3.8 million, and associated financial impacts (a $2.9 million pre-contract cost write-off and a $2.3 million acquisition-related contingent consideration benefit) all of which relate to Vista.

Fiscal 2016 fourth quarter net sales declined $15.6 million, or 63.3%, to $9.0 million compared to fiscal 2015 fourth quarter results. Aerostar reported a fiscal 2016 fourth quarter operating income of $0.2 million compared to an operating income of $4.3 million in the prior year fourth quarter.

Fiscal 2016 comparative results were primarily driven by the following factors:

Market conditions. Aerostar’s growth strategy emphasizes proprietary products and its focus was on proprietary technology including stratospheric balloons, advanced radar systems, and sales of aerostats in international markets. Certain of Aerostar's markets are subject to significant variability due to government spending. Uncertain demand in these markets continued in fiscal 2016 as defense spending was down. Aerostar continued to pursue substantial targeted international opportunities but the conflicts plaguing the Middle East North Africa region made these opportunities and their timing less certain.

# 26

                           

Sales volume. Fiscal 2016 net sales decreased $44.4 million from the prior year, a year-over-year decrease of 55.0%. The decline was the result of both lower sales of proprietary products, particularly Vista radar sales, and the planned reduction in contract manufacturing sales.
Proprietary net sales. For fiscal 2016, net sales for proprietary products were $31.7 million, down $17.4 million, or 35.5%, from the prior fiscal year. Sales of proprietary products were down primarily due to Vista’s lack of success in winning certain international contracts and declines in domestic government defense spending that reduced revenues for Vista.
Gross margin. For fiscal 2016, gross margin increased 1.0 percentage point compared to the prior fiscal year. Fiscal 2016 gross margin reflected net charges of $0.6 million which are discussed further below. Vista had been pursuing international opportunities and throughout the first half of fiscal 2016 was in the process of negotiating a large international contract for which it also had a pre-authorization letter from the prime contractor. When the contract did not materialize in the fiscal 2016 third quarter as expected, expectations were lowered as the timing and likelihood of completing certain international pursuits became less certain. Corresponding to these lower expectations, the pre-contract costs associated with these pursuits were written off during the fiscal 2016 third quarter. Vista recorded a charge of $2.9 million for the write-off of these pre-contract costs. Partially offsetting this impairment charge, Vista recorded a benefit of $2.3 million to reflect a reduction in acquisition-related contingent liabilities due to lower expected payouts.
Goodwill and long-lived asset impairment loss. Aerostar recorded a goodwill impairment loss of $11.5 million and a long-lived asset impairment loss of $3.8 million for fiscal 2016. The goodwill and long-lived impairment charges were recorded on the Vista reporting unit. These impairment losses are described more fully in Note 6 Goodwill, Long-lived Assets, and Other Charges of the Notes to the Consolidated Financial Statements. No impairment losses were recorded in fiscal 2015.
Operating expenses. Fiscal 2016 operating expenses of $7.3 million were 20.1% of net sales compared to $7.7 million, or 9.5% of net sales in fiscal 2015. The increase in operating expenses, as a percentage of net sales, was due to continued strategic R&D spending on radar and stratospheric technologies over lower sales.
Aerostar adjusted operating income. Excluding the Vista goodwill and long-lived asset impairment losses and associated financial impacts, the fiscal 2016 operating income was $1.2 million, down from $9.0 million in the prior year. These operating income declines were driven primarily by the significant declines in sales volume for the year for both contract manufacturing and proprietary products, in particular Vista.

Corporate Expenses (administrative expenses; other (expense), net; and income taxes)
 
 
For the years ended January 31,
dollars in thousands
 
2017
 
2016
 
2015
Administrative expenses
 
$
19,624

 
$
17,110

 
$
21,704

Administrative expenses as a % of sales
 
7.1
%
 
6.6
 %
 
5.7
%
Other (expense), net
 
$
(560
)
 
$
(310
)
 
$
(300
)
Effective tax rate
 
27.5
%
 
(18.8
)%
 
26.9
%

Administrative expenses increased $2.5 million in fiscal 2017 compared with fiscal 2016. The increase is primarily due to higher accruals for management incentives and equity compensation relative to the prior year based upon fiscal 2017 results in comparison to fiscal 2016, costs incurred to amend filings, and expenses related to remediation efforts for identified material weaknesses discussed in more detail in "Management's Report On Internal Control Over Financial Reporting" in Item 8 of this Form 10-K.
   
Other (expense), net consists primarily of activity related to the Company's equity investments, interest income, foreign currency transaction gains or losses, amortization of debt issuance costs, and other fees related to the Company's credit facility further described in Note 10 Financing Arrangements of the Notes to the Consolidated Financial Statements.

The Company's fiscal 2017 effective tax rate was 27.5% compared to (18.8)% in the prior year. The difference in the effective tax rate is primarily due to the significantly lower pre-tax income in fiscal 2016 driven by the goodwill and long-lived asset impairment losses. The impacts of these losses on the Company's effective tax rate and other items causing the effective tax rate to differ from the statutory tax rate are more fully described in Note 9 Income Taxes of the Notes to the Consolidated Financial Statements. For fiscal year 2018, the Company expects a consolidated effective tax rate of approximately 29%, excluding discrete items.

LIQUIDITY AND CAPITAL RESOURCES

The Company's balance sheet continues to reflect significant liquidity and a strong capital base. Management focuses on the current cash balance and operating cash flows in considering liquidity, as operating cash flows have historically been the Company's

# 27


primary source of liquidity. Management expects that current cash, combined with the generation of positive operating cash flows, will be sufficient to fund the Company's normal operating, investing and financing activities beyond the next twelve months.

The Company’s cash balances and cash flows were as follows:
(dollars in thousands)
 
January 31,
2017
 
January 31,
2016
 
January 31,
2015
Cash and cash equivalents
 
$
50,648

 
$
33,782

 
$
51,949

Short-term investments
 

 

 
250

 
 
For the years ended January 31,
(dollars in thousands)
 
2017
 
2016
 
2015
Cash provided by operating activities
 
$
48,636

 
$
44,008

 
$
60,083

Cash used in investing activities
 
(4,642
)
 
(11,074
)
 
(29,986
)
Cash used in financing activities
 
(27,151
)
 
(50,684
)
 
(30,665
)
Effect of exchange rate changes on cash and cash equivalents
 
23

 
(417
)
 
(470
)
Net increase (decrease) in cash and cash equivalents
 
$
16,866

 
$
(18,167
)
 
$
(1,038
)

Cash and cash equivalents totaled $50.6 million at January 31, 2017 compared to $33.8 million on the same date in 2016, an increase of $16.8 million. The increase from fiscal 2016 year-end was primarily driven by higher earnings, lower net working capital, and reductions in both capital spending and share repurchases.

At January 31, 2017 the Company held cash and cash equivalents of $2.3 million in accounts outside the United States. These balances included undistributed earnings of foreign subsidiaries we consider to be indefinitely reinvested. If repatriated, undistributed earnings of $2.5 million would be subject to United States federal taxation. This estimated tax liability is approximately $0.3 million net of foreign tax credits. Our liquidity is not materially impacted by the amount held in accounts outside of the United States.

Operating Activities
Operating cash flows result primarily from cash received from customers, which is offset by cash payments for inventories, services, employee compensation, and income taxes. Cash provided by operating activities was $48.6 million in fiscal 2017 compared with $44.0 million in fiscal 2016. The $4.6 million increase in operating cash flows is primarily the result of higher earnings and lower net working capital requirements. While fiscal 2016 net income was $15.4 million lower than fiscal 2017, it included $10.3 million of non-cash losses associated with the Vista business within the Aerostar Division. These losses were due to goodwill and long-lived asset impairments and associated financial impacts net of related tax benefits.

The Company's cash needs have minimal seasonal trends. Net working capital demands tend to be highest in the first quarter. As a result, the discussion of trends in operating cash flows focuses on the primary drivers of year-over-year variability in net working capital. The Company's net working capital for the comparative periods was as follows:
(dollars in thousands)
 
January 31, 2017
 
January 31, 2016
 
January 31, 2015
Accounts receivable, net
 
$
43,143

 
$
38,069

 
$
56,576

Plus: Inventories
 
42,336

 
45,839

 
55,152

Less: Accounts payable
 
8,467

 
6,038

 
11,545

Net working capital(a)
 
$
77,012

 
$
77,870

 
$
100,183

 
 
 
 
 
 
 
Net working capital percentage(b)
 
27.9
%
 
36.9
%
 
27.9
%
(b) Net working capital is defined as accounts receivable (net) plus inventories less accounts payable.
(b) Net working capital percentage is defined as net working capital divided by fourth quarter net sales times four for each of the fiscal years, respectively.

The net working capital percentage decreased from 36.9% at January 31, 2016 to 27.9% at January 31, 2017 primarily as the result of both lower inventory levels and an increase in accounts payable balances due to improvement in the timing of payments to suppliers. These changes in net working capital are the result of management's focus on managing these resources more proactively. To manage levels of inventory during periods of significant change in sales volume, the Company assembled teams within each operating division to manage inventory lower. Similar emphasis was placed on managing accounts payable and to a lesser extent, accounts receivable.

28



Inventory levels decreased from $55.2 million at January 31, 2015 to $45.8 million at January 31, 2016 driven by focused inventory reduction actions in the Applied Technology and Engineered Films divisions. Inventory levels decreased from $45.8 million at January 31, 2016 to $42.3 million at January 31, 2017 reflecting the ongoing focus on reducing inventory levels as well as the inventory write-downs for certain radar inventory in the third quarter of fiscal 2017.

Accounts receivable levels increased from $38.1 million at January 31, 2016 to $43.1 million at January 31, 2017 due primarily to increased sales volume. Conversely, accounts receivable levels decreased from $56.6 million at January 31, 2015 to $38.1 million at January 31, 2016 in conjunction with the steep decline in sales.

Improvement in the timing of payments to suppliers increased accounts payable $2.5 million year-over-year to $8.5 million at January 31, 2017 from $6.0 million at January 31, 2016. Accounts payable had decreased from $11.5 million at January 31, 2015 to $6.0 million at January 31, 2016 as a result of significantly lower purchasing levels to support the lower sales volume.

Investing Activities
Cash used in investing activities totaled $4.6 million in fiscal 2017, $11.1 million in fiscal 2016, and $30.0 million in fiscal 2015. Capital expenditures totaled $4.8 million in fiscal 2017 compared to $13.0 million in fiscal 2016 and $17.0 million in fiscal 2015. Fiscal 2017 spending primarily relates to maintenance activities. Due to the existing available capacity of the facilities as the result of meaningful capacity additions in prior years and the acquisition of Integra in fiscal 2015, the increase in sales volume did not require capital expenditures for new capacity in fiscal 2017.

Fiscal 2017 benefited from $1.2 million in cash provided by the disposal of assets, most of which related to selling the Company's idle St. Louis, Missouri facility. There was $2.1 million of cash flows from the disposal of assets in fiscal 2016. There were no material cash flows from the disposal of assets in fiscal 2015.

Cash inflow related to business acquisitions in fiscal 2016 relate to the Company receiving a $0.4 million settlement of the working capital adjustment to the Integra purchase price. Cash outflows totaling $12.5 million in fiscal 2015 related to the Integra and SBG business acquisitions. There were no material cash flows from business acquisition activity in fiscal 2017.

Management anticipates capital spending of $10 to $12 million in fiscal 2018. Maintaining Engineered Films' capacity and Applied Technology's capital spending to advance product development are expected to continue. In addition, management will evaluate strategic acquisitions that result in expanded capabilities and improved competitive advantages.

Financing Activities
Financing activities consumed cash of $27.2 million in fiscal 2017 compared with $50.7 million in fiscal 2016 and $30.7 million in fiscal 2015.

Quarterly dividends paid in fiscal 2017 were $18.8 million, or $0.52 per share, compared to $19.4 million, or $0.52 share, in fiscal 2016 and $18.5 million, or $0.50 share, in fiscal 2015.

In fiscal 2016, the Company began to repurchase common shares as part of the $40.0 million share repurchase plan authorized by the Company’s Board of Directors.  In fiscal 2017 first quarter, the Board of Directors authorized a $10.0 million increase, bringing the total authorized under the plan to $50.0 million. The Company paid $7.7 million and $29.3 million for share repurchases in fiscal 2017 and fiscal 2016, respectively. No shares were repurchased during fiscal 2015.

The Company made $0.4 million, $0.8 million, and $0.5 million of acquisition-related contingent liability payments related to the Vista and SBG acquisitions in fiscal 2017, fiscal 2016, and fiscal 2015, respectively.
 
During fiscal 2016, the Company paid $0.5 million of debt issuance costs associated with the Credit Agreement discussed further in Note 10 Financing Arrangements of the Notes to the Consolidated Financial Statements and below. No debt issuance costs were paid during fiscal 2017 or fiscal 2015. No borrowings or repayment have occurred on the Credit Agreement during fiscal 2017 or fiscal 2016. In fiscal 2015, the Company made net debt repayments totaling $12.0 million for debt assumed as part of the Integra and SBG acquisitions.

Financing cash outflows in fiscal 2017 included $0.3 million of employee taxes in relation to the net settlement of restricted stock units (RSUs) that vested during the year. Financing cash outflows in fiscal 2016 included $0.5 million of employee taxes in relation to the net settlement of RSUs that vested during the year. No RSUs vested during fiscal 2015.


29


Other Liquidity and Capital Resources
The Company entered into a credit facility on April 15, 2015 (Credit Agreement) which provides for a syndicated senior revolving credit facility up to $125.0 million with a maturity date of April 15, 2020. This Credit Agreement, more fully described in Note 10 Financing Arrangements of the Notes to the Consolidated Financial Statements, replaced an uncollateralized line of credit of $10.5 million with Wells Fargo Bank, N.A. maturing November 30, 2016.

The Credit Agreement contains customary affirmative and negative covenants, including those relating to financial reporting and notification, limits on levels of indebtedness and liens, investments, mergers and acquisitions, affiliate transactions, sales of assets, restrictive agreements, and change in control as defined in the Credit Agreement. The Company requested and received the necessary covenant waivers relating to its late filing of financial information in fiscal 2017. Financial covenants include an interest coverage ratio and funded indebtedness to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement. The Company is in compliance with all financial covenants set forth in the Credit Agreement.

Letters of credit (LOC) totaling $0.7 million issued under the previous line of credit with Wells Fargo were outstanding at January 31, 2016. These LOC primarily support self-insured workers' compensation bonding. All but one LOC has been transferred and issued under the Credit Agreement as of January 31, 2017. At January 31, 2017, $0.5 million LOCs were outstanding under the Credit Agreement and one $50 thousand LOC issued by Wells Fargo were outstanding.

$124.5 million was available under the Credit Agreement for borrowings as of January 31, 2017. Loan proceeds may be utilized by Raven for strategic business purposes and for net working capital needs. There were no borrowings outstanding for any of the fiscal periods covered by this Form 10-K. There have been no borrowings under credit agreements in the last three fiscal years.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

As of January 31, 2017, the Company is obligated to make cash payments in connection with its non-cancelable operating leases for facilities and equipment and unconditional purchase obligations, primarily for raw materials, in the amounts listed below. The Company's known off-balance sheet debt and other unrecorded obligations are noted in the table below.

A summary of the obligations and commitments at January 31, 2017 is shown below.
(dollars in thousands)
 
Total
 
Less than
1 year
 
1-3