Document
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2017
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to
Commission File Number: 001-07982
RAVEN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
South Dakota
(State or other jurisdiction of incorporation or organization)
 
46-0246171
(I.R.S. Employer Identification No.)
205 East 6th Street, P.O. Box 5107, Sioux Falls, SD 57117-5107
(Address of principal executive offices)
(605) 336-2750
(Registrant’s telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                     þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o Yes þ No
As of August 18, 2017 there were 36,103,017 shares of common stock, $1 par value, of Raven Industries, Inc. outstanding. There were no other classes of stock outstanding.
 




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




PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RAVEN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars and shares in thousands, except per-share data)
July 31,
2017
 
January 31,
2017
 
July 31,
2016
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
55,197

 
$
50,648

 
$
40,123

Accounts receivable, net
46,398

 
43,143

 
38,645

Inventories
50,844

 
42,336

 
45,502

Other current assets
3,670

 
2,689

 
4,958

Total current assets
156,109

 
138,816

 
129,228

 
 
 
 
 
 
Property, plant and equipment, net
105,723

 
106,324

 
110,706

Goodwill
40,841

 
40,649

 
40,752

Amortizable intangible assets, net
11,228

 
12,048

 
12,888

Other assets
3,295

 
3,672

 
3,783

TOTAL ASSETS
$
317,196

 
$
301,509

 
$
297,357

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
$
12,597

 
$
8,467

 
$
10,076

Accrued liabilities
18,724

 
18,055

 
14,085

Customer advances
456

 
1,860

 
913

Total current liabilities
31,777

 
28,382

 
25,074

 
 
 
 
 
 
Other liabilities
12,348

 
13,696

 
13,827

 
 
 
 
 
 
Commitments and contingencies

 

 

 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
Common stock, $1 par value, authorized shares 100,000; issued 67,087; 67,060; and 67,060, respectively
67,087

 
67,060

 
67,060

Paid-in capital
57,510

 
55,795

 
54,962

Retained earnings
241,739

 
230,649

 
229,959

Accumulated other comprehensive income (loss)
(2,867
)
 
(3,676
)
 
(3,158
)
Treasury stock at cost, 30,984; 30,984; and 30,984 shares, respectively
(90,402
)
 
(90,402
)
 
(90,402
)
Total Raven Industries, Inc. shareholders' equity
273,067

 
259,426

 
258,421

Noncontrolling interest
4

 
5

 
35

Total equity
273,071

 
259,431

 
258,456

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
317,196

 
$
301,509

 
$
297,357


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

#3

                           

RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
 
Three Months Ended
 
Six Months Ended
(dollars in thousands, except per-share data)
July 31,
2017
 
July 31,
2016
 
July 31,
2017
 
July 31,
2016
Net sales
$
86,610

 
$
67,598

 
$
180,145

 
$
135,958

Cost of sales
60,097

 
48,683

 
121,676

 
96,926

Gross profit
26,513

 
18,915

 
58,469

 
39,032

 
 
 
 
 
 
 
 
Research and development expenses
4,256

 
3,915

 
8,236

 
8,324

Selling, general, and administrative expenses
10,557

 
8,304

 
20,055

 
15,962

Long-lived asset impairment loss

 

 
259

 

Operating income
11,700

 
6,696

 
29,919

 
14,746

 
 
 
 
 
 
 
 
Other income (expense), net
(63
)
 
(209
)
 
(293
)
 
(306
)
Income before income taxes
11,637

 
6,487

 
29,626

 
14,440

 
 
 
 
 
 
 
 
Income tax expense
3,403

 
1,993

 
9,044

 
4,427

Net income
8,234

 
4,494

 
20,582

 
10,013

 
 
 
 
 
 
 
 
Net income (loss) attributable to the noncontrolling interest
(1
)
 
(1
)
 
(1
)
 
1

 
 
 
 
 
 
 
 
Net income attributable to Raven Industries, Inc.
$
8,235

 
$
4,495

 
$
20,583

 
$
10,012

 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
      ─ Basic
$
0.23

 
$
0.12

 
$
0.57

 
$
0.28

      ─ Diluted
$
0.23

 
$
0.12

 
$
0.56

 
$
0.28

 
 
 
 
 
 
 
 
Cash dividends paid per common share
$
0.13

 
$
0.13

 
$
0.26

 
$
0.26

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income
$
8,234

 
$
4,494

 
$
20,582

 
$
10,013

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation
810

 
(265
)
 
822

 
347

Postretirement benefits, net of income tax benefit (expense) of $3, $1, $7 and $2, respectively
(7
)
 
(2
)
 
(13
)
 
(4
)
Other comprehensive income (loss), net of tax
803

 
(267
)
 
809

 
343

 
 
 
 
 
 
 
 
Comprehensive income
9,037

 
4,227

 
21,391

 
10,356

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to noncontrolling interest
(1
)
 
(1
)
 
(1
)
 
1

 
 
 
 
 
 
 
 
Comprehensive income attributable to Raven Industries, Inc.
$
9,038

 
$
4,228

 
$
21,392

 
$
10,355


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

#4

                           

RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
$1 Par Common Stock
Paid-in Capital
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Raven Industries, Inc. Equity
Non- controlling Interest
Total Equity
(dollars in thousands, except per-share amounts)
Shares
Cost
Balance January 31, 2016
$
67,006

$
53,907

30,500

$
(82,700
)
$
229,443

$
(3,501
)
$
264,155

$
74

$
264,229

Net income




10,012


10,012

1

10,013

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





347

347


347

Postretirement benefits reclassified from accumulated other comprehensive income (loss) after tax benefit of $2





(4
)
(4
)

(4
)
Cash dividends ($0.26 per share) 

108



(9,496
)

(9,388
)

(9,388
)
Dividends of less than wholly-owned subsidiary attributable to non-controlling interest







(40
)
(40
)
Shares issued on vesting of stock units, net of shares withheld for employee taxes
35

(291
)




(256
)

(256
)
Shares repurchased


484

(7,702
)


(7,702
)

(7,702
)
Director shares issued
19

(19
)





 

Share-based compensation

1,574





1,574


1,574

Income tax impact related to share-based compensation


(317
)




(317
)

(317
)
Balance July 31, 2016
$
67,060

$
54,962

30,984

$
(90,402
)
$
229,959

$
(3,158
)
$
258,421

$
35

$
258,456

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance January 31, 2017
$
67,060

$
55,795

30,984

$
(90,402
)
$
230,649

$
(3,676
)
$
259,426

$
5

$
259,431

Net income




20,583


20,583

(1
)
20,582

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





822

822


822

Postretirement benefits reclassified from accumulated other comprehensive income (loss) after tax benefit of $7





(13
)
(13
)

(13
)
Cash dividends ($0.26 per share)

109



(9,493
)

(9,384
)

(9,384
)
Shares issued on stock options exercised, net of shares withheld for employee taxes
12

(160
)




(148
)

(148
)
Shares issued on vesting of stock units, net of shares withheld for employee taxes
11

(162
)




(151
)

(151
)
Director shares issued
4

(4
)







Share-based compensation

1,932





1,932


1,932

Balance July 31, 2017
$
67,087

$
57,510

30,984

$
(90,402
)
$
241,739

$
(2,867
)
$
273,067

$
4

$
273,071


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


#5

                           

RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Six Months Ended
(dollars in thousands)
July 31,
2017
 
July 31,
2016
OPERATING ACTIVITIES:
 
 
 
Net income
$
20,582

 
$
10,013

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
7,184

 
7,633

Change in fair value of acquisition-related contingent consideration
145

 
124

Long-lived asset impairment loss
259

 

Loss from equity investment
154

 
82

Deferred income taxes
(942
)
 
1,057

Share-based compensation expense
1,932

 
1,574

Other operating activities, net
174

 
(184
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable
(3,279
)
 
(505
)
Inventories
(8,466
)
 
391

Other assets
(1,257
)
 
(871
)
Operating liabilities
3,375

 
6,244

Net cash provided by operating activities
19,861

 
25,558

 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(5,223
)
 
(2,168
)
Proceeds from sale or maturity of investments
250

 
250

Purchases of investments
(255
)
 
(500
)
(Disbursements) proceeds from settlement of liabilities, sale of assets
(344
)
 
1,117

Other investing activities
(17
)
 
(339
)
Net cash used in investing activities
(5,589
)
 
(1,640
)
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
Dividends paid
(9,384
)
 
(9,428
)
Payments for common shares repurchased

 
(7,702
)
Payments of acquisition-related contingent liability
(320
)
 
(282
)
Restricted stock units vested and issued
(151
)
 
(256
)
Employee stock option exercises
(148
)
 

Net cash used in financing activities
(10,003
)
 
(17,668
)
 
 
 
 
Effect of exchange rate changes on cash
280

 
91

 
 
 
 
Net increase (decrease) in cash and cash equivalents
4,549

 
6,341

Cash and cash equivalents at beginning of year
50,648

 
33,782

Cash and cash equivalents at end of period
$
55,197

 
$
40,123


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

#6

(dollars in thousands, except per-share amounts)


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

(1) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Raven Industries, Inc. (the Company or Raven) is a diversified technology company providing a variety of products to customers within the industrial, agricultural, geomembrane, construction, and aerospace/defense markets. The Company is comprised of three unique operating units, or divisions, classified into reportable segments: Applied Technology, Engineered Films, and Aerostar.

The accompanying interim unaudited consolidated financial statements, which includes the accounts of Raven and its wholly-owned or controlled subsidiaries, net of intercompany balances and transactions, has been prepared by the Company in accordance with generally accepted accounting principles in the United States (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present this financial information have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2017.

Financial results for the interim three- and six-month periods ended July 31, 2017 are not necessarily indicative of the results that may be expected for the year ending January 31, 2018. The January 31, 2017 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required in an annual report on Form 10-K. Preparing financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Noncontrolling interests represent capital contributions, income and loss attributable to the owners of less than wholly-owned consolidated entities. The Company owns a 75% interest in an entity consolidated under the Aerostar business segment. Given the Company's majority ownership interest, the accounts of the business venture have been consolidated with the accounts of the Company, and a noncontrolling interest has been recorded for the noncontrolling investor interest in the net assets and operations of the business venture.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2017 other than described below in the Accounting Standards Adopted section.

Accounting Pronouncements
Accounting Standards Adopted
In the fiscal 2018 first quarter, the Company early adopted Accounting Standards Update (ASU) No. 2017-04 (issued by the Financial Accounting Standards Board (FASB) in January 2017), "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" (ASU 2017-04) on a prospective basis . This ASU removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new guidance, a goodwill impairment will be measured as the amount by which a reporting unit’s carrying value exceeds its fair value. The amount of any impairment may not exceed the carrying amount of goodwill. The amendments should be applied on a prospective basis. As discussed in Note 6 Goodwill, Long-lived Assets, and Other Intangibles, management performed an assessment in the fiscal 2018 first and second quarters and determined no triggering events had occurred for any of its three reporting units; therefore, the early adoption of this guidance did not have any impact on the consolidated financial statements or the results of operations as of and for the three- or six-month periods ended July 31, 2017.

In the fiscal 2018 first quarter when it became effective, the Company adopted FASB ASU 2016-09 (issued in March 2016), "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" (ASU 2016-09). ASU 2016-09 amends the accounting for employee share-based payment transactions to require recognition of the tax effects resulting from the settlement of stock-based awards as discrete income tax expense or benefit in the income statement in the reporting period in which they occur. This guidance also requires that all tax-related cash flows resulting from share-based awards be disclosed as operating cash flows in the statement of cash flows and that cash paid to taxing authorities on the behalf of employees for withheld shares be classified as a financing activity in the statement of cash flows. Finally, this ASU allows

#7

(dollars in thousands, except per-share amounts)


companies to make an accounting policy election to either estimate the number of awards that are expected to vest, consistent with current GAAP, or account for forfeitures when they occur. The Company accounts for forfeitures as they occur. The Company is prospectively recognizing excess tax benefits or deficits on vesting or settlement of awards, when they occur, as a discrete income tax benefit or expense instead of as additional paid-in capital as required under previous guidance. This change to the Company's accounting policies resulted in recognition of income tax expense of $90 and $569 for the three- and six-month periods ended July 31, 2017. These tax-related cash flows are now classified within operating activities. The Company classifies tax payments made to taxing authorities on the employee's behalf for withheld shares as a financing activity on the statement of cash flows, as such the adoption of this guidance had no impact. Under the new guidance, excess tax benefits are no longer included in assumed proceeds under the treasury stock method of calculating earnings per share. The increase in incremental shares used in the weighted average diluted shares calculation was not material to the Company's diluted earnings per share calculation.

In the fiscal 2018 first quarter when it became effective, the Company adopted the FASB ASU No. 2015-11 (issued in July 2015), "Inventory (Topic 330) Simplifying the Measurement of Inventory" (ASU 2015-11) on a prospective basis. The amendments in ASU 2015-11 clarify that an entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Substantial and unusual losses that result from subsequent measurement of inventory should be disclosed in the financial statements. Previously the Company reported its inventory at the lower of cost or market. Market was defined as replacement cost with a ceiling of net realizable value and a floor of net realizable value less a normal profit margin. The Company evaluates its inventory in all three reporting segments quarterly to determine if cost exceeds net realizable value and records a write-down, if necessary. The adoption of this guidance did not have any impact on the consolidated financial statements or the results of operations as of and for the three- and six-month period ended July 31, 2017.

New Accounting Standards Not Yet Adopted
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting" (ASU 2017-09). The guidance amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Topic 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards as equity instruments or a liability instruments are the same immediately before and after the modification to the award. The guidance is effective for annual periods, including interim periods, in fiscal years beginning after December 15, 2017. Early adoption is permitted and the amendments should be applied prospectively to an award modified on or after the adoption date. The Company currently has no plans to modify any of its outstanding awards. The Company will consider early adopting this guidance if modifications to its share-based compensation arrangements are likely to occur. The Company does not expect the adoption of this guidance will have a significant impact on its consolidated financial statements, results of operations, and disclosures.

In March 2017, the FASB issued ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Postretirement Benefit Cost" (ASU 2017-07). The guidance clarifies where the cost components of the net benefit cost should be reported in the income statement and it allows only the service cost to be capitalized. Currently the Company reports all of the components of the net benefit cost in "Operating income" in the Consolidated Statement of Income and Comprehensive Income. The net benefit cost for participants that are active employees is reported in the same manner as each participant's compensation cost is classified in the Consolidated Statement of Income and Comprehensive Income. The net benefit cost attributable to retired (inactive) participants is reported in "Selling, general, and administrative expenses" in the Consolidated Statement of Income and Comprehensive Income. Under the new guidance only the service cost component of the net benefit cost will be classified the same as the participant's compensation cost. The other components of the net benefit cost are required to be reported separately as a non-operating income (expense). The guidance is effective for annual periods, including interim periods, in fiscal years beginning after December 15, 2017. Early adoption is permitted and the amendments should be applied retrospectively. The Company does not expect this guidance will have a significant impact on its consolidated financial statements, results of operations and disclosures since it primarily will only change how the net benefit cost is classified in the Company's Consolidated Statements of Income and Comprehensive Income.

In February 2016 the FASB issued ASU No. 2016-02, "Leases (Topic 842)" (ASU 2016-02). The primary difference between previous GAAP and ASU 2016-02 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The guidance requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease

#8

(dollars in thousands, except per-share amounts)


assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements, results of operations, and disclosures.

In May 2014 the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" (ASU 2014-09). ASU 2014-09 provides a comprehensive new recognition model that requires recognition of revenue when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to receive in exchange for those goods or services. This guidance supersedes the revenue recognition requirements in FASB ASC Topic 605, "Revenue Recognition," and most industry-specific guidance. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, companies will need to use more judgment and make more estimates than under the current guidance. It also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB approved a one-year deferral of the effective date (ASU 2015-14) and the standard is now effective for the Company for fiscal 2019 and interim periods therein. ASU 2014-09 may be adopted as of the original effective date, which for the Company is fiscal 2018. The guidance may be applied using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). In addition, FASB has amended Topic 606 prior to it becoming effective. The effective date and transition requirements for these amendments to Topic 606 are the same as ASU 2014-09. With the assistance of a third-party consultant, the Company is currently evaluating the impact this standard will have on revenue recognition by reviewing a representative sample of contracts for all material revenue streams across the Company's three divisions, holding discussions with key stakeholders, and assessing potential impacts on the Company’s consolidated financial statements, results of operations, disclosures, and internal controls over financial reporting. The Company will adopt this guidance in the first quarter of fiscal 2019 using the modified retrospective approach.

(3) NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted average common shares and fully vested stock units outstanding. Diluted net income per share is computed by dividing net income by the weighted average common and common equivalent shares outstanding which includes the shares issuable upon exercise of employee stock options (net of shares assumed purchased with the option proceeds), stock units, and restricted stock units outstanding. Performance share awards are included in the diluted calculation based upon what would be issued if the end of the most recent reporting period was the end of the term of the award. Weighted average common and common equivalent shares outstanding are excluded from the diluted loss per share calculation if their inclusion would have an antidilutive effect.
Certain outstanding options and restricted stock units were excluded from the diluted net income per-share calculations because their effect would have been anti-dilutive under the treasury stock method. The options and restricted stock units excluded from the diluted net income per-share share calculation were as follows:
 
Three Months Ended
 
Six Months Ended
 
July 31,
2017
 
July 31,
2016
 
July 31,
2017
 
July 31,
2016
Anti-dilutive options and restricted stock units
209,400
 
924,204
 
409,136
 
1,102,952


#9

(dollars in thousands, except per-share amounts)



The computation of earnings per share is presented below:
 
Three Months Ended
 
Six Months Ended
 
July 31,
2017
 
July 31,
2016
 
July 31,
2017
 
July 31,
2016
Numerator:
 
 
 
 
 
 
 
Net income attributable to Raven Industries, Inc.
$
8,235

 
$
4,495

 
$
20,583

 
$
10,012

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
36,096,048

 
36,097,228

 
36,088,095

 
36,208,573

Weighted average fully vested stock units outstanding
109,146

 
110,083

 
103,966

 
102,035

Denominator for basic calculation
36,205,194

 
36,207,311

 
36,192,061

 
36,310,608

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
36,096,048

 
36,097,228

 
36,088,095

 
36,208,573

Weighted average fully vested stock units outstanding
109,146

 
110,083

 
103,966

 
102,035

Dilutive impact of stock options and restricted stock units
348,795

 
43,001

 
322,661

 
51,547

Denominator for diluted calculation
36,553,989

 
36,250,312

 
36,514,722

 
36,362,155

 
 
 
 
 
 
 
 
Net income per share - basic
$
0.23

 
$
0.12

 
$
0.57

 
$
0.28

Net income per share - diluted
$
0.23

 
$
0.12

 
$
0.56

 
$
0.28




#10

(dollars in thousands, except per-share amounts)



(4) SELECTED BALANCE SHEET INFORMATION

Following are the components of selected items from the Consolidated Balance Sheets:
 
 
July 31, 2017
 
January 31, 2017
 
July 31, 2016
Accounts receivable, net:
 
 
 
 
 
 
     Trade accounts
 
$
47,350

 
$
43,834

 
$
39,203

     Allowance for doubtful accounts
 
(952
)
 
(691
)
 
(558
)
 
 
$
46,398

 
$
43,143

 
$
38,645

Inventories:
 
 
 
 
 
 
Finished goods
 
$
5,878

 
$
5,438

 
$
4,784

In process
 
1,510

 
2,288

 
1,929

Materials
 
43,456

 
34,610

 
38,789

 

$
50,844


$
42,336


$
45,502

Other current assets:
 
 
 
 
 
 
Insurance policy benefit
 
$
734

 
$
802

 
$
762

     Income tax receivable
 
409

 
604

 
1,652

Receivable from sale of business
 
35

 
28

 
103

     Prepaid expenses and other
 
2,492

 
1,255

 
2,441

 
 
$
3,670

 
$
2,689

 
$
4,958

Property, plant and equipment, net:
 
 
 
 
 
 
Land
 
$
3,234

 
$
3,054

 
$
3,054

Buildings and improvements
 
79,648

 
77,817

 
78,310

Machinery and equipment
 
145,516

 
142,471

 
142,185

     Accumulated depreciation
 
(122,675
)
 
(117,018
)
 
(112,843
)
 
 
$
105,723

 
$
106,324

 
$
110,706

Other assets:
 
 
 
 
 
 
Equity method investments
 
$
2,057

 
$
2,371

 
$
2,611

Deferred income taxes
 
16

 
18

 
38

Other
 
1,222

 
1,283

 
1,134

 
 
$
3,295

 
$
3,672

 
$
3,783

Accrued liabilities:
 
 
 
 
 
 
Salaries and related
 
$
5,138

 
$
6,286

 
$
3,628

Benefits
 
3,868

 
3,960

 
3,632

Insurance obligations
 
2,492

 
2,400

 
1,975

Warranties
 
2,265

 
1,547

 
2,076

Income taxes
 
1,287

 
498

 
213

Other taxes
 
1,503

 
1,540

 
1,357

Acquisition-related contingent consideration
 
478

 
445

 
381

Other
 
1,693

 
1,379

 
823

 
 
$
18,724

 
$
18,055

 
$
14,085

Other liabilities:
 
 
 
 
 
 
Postretirement benefits
 
$
8,085

 
$
8,054

 
$
7,706

Acquisition-related contingent consideration
 
1,182

 
1,397

 
1,565

Deferred income taxes
 
488

 
1,421

 
1,557

Uncertain tax positions
 
2,593

 
2,610

 
2,999

Other
 

 
214

 

 
 
$
12,348

 
$
13,696

 
$
13,827



(5) ASSETS HELD FOR SALE

The Company continually analyzes its product and service offerings to ensure we serve market segments with attractive near- and long-term growth prospects that are consistent with our core capabilities. Through this continued evaluation the Company's Aerostar segment finalized a plan ("the Plan") to actively market the sale of its client private and radar product lines, which it has determined constitutes a business. During the second quarter of fiscal 2018 the Company determined that it was probable that these product lines would be sold within one year. The Company has identified specific assets and liabilities likely to be sold, including an allocation of goodwill based on the relative fair value of the business to be sold. Currently, the Company estimates

#11

(dollars in thousands, except per-share amounts)


the fair value of the net assets held for sale is in excess of their net book value. As such there is no impact to the Consolidated Statement of Income for the three- or six-month period ended July 31, 2017.
Under the Plan, Aerostar will remain focused on serving the aerospace/defense market with its stratospheric balloon product and service offerings.
Amounts classified as held for sale were as follows:
 
July 31, 2017
Assets held for sale
 
Inventories
$
3,212

Other current assets
18

Total current assets held for sale
3,230

Property, plant and equipment, net
238

Goodwill
102

Amortizable intangible assets, net
387

Other assets
17

          Total assets held for sale
$
3,974

 
 
Liabilities held for sale
 
Current liabilities
$
292

Other long-term liabilities
125

Total liabilities held for sale
$
417



(6) ACQUISITIONS OF AND INVESTMENTS IN BUSINESSES AND TECHNOLOGIES

Ag-Eagle Aerial Systems, Inc.
In February 2016, the Applied Technology Division acquired an interest of approximately 5% in AgEagle Aerial Systems, Inc. (AgEagle). AgEagle is a privately held company that is a provider of unmanned aerial systems (UAS) used for agricultural applications. Contemporaneously with the execution of this agreement, AgEagle and the Company entered into a distribution agreement whereby the Company was appointed as the exclusive distributor of the existing AgEagle system as it pertains to the agriculture market. The Company’s equity ownership interest is considered a variable interest and it accounts for this investment under the equity method of accounting. The Company is not the primary beneficiary as the Company does not have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the entity. The purchase price was allocated between the equity ownership interest and an intangible asset for the exclusive distribution agreement. In April 2017, the Company determined that the investment in AgEagle, was fully impaired, further described in Note 7 Goodwill, Long-lived Assets and Other Intangibles, due to lower than expected cash flows. The Company has no commitments or guarantees related to this equity method investment.
 
Acquisition-related Contingent Consideration
The Company has contingent liabilities related to prior year acquisitions of SBG Innovatie BV and its affiliate, Navtronics BVBA (collectively, SBG) in May 2014 and Vista Research, Inc. (Vista) in January 2012. The fair value of such contingent consideration is estimated as of the acquisition date, and subsequently at the end of each reporting period, using forecasted cash flows. Projecting future cash flows requires the Company to make significant estimates and assumptions regarding future events, conditions, or revenues being achieved under the subject contingent agreement as well as the appropriate discount rate. Such valuation techniques include one or more significant inputs that are not observable (Level 3 fair value measures).

In connection with the acquisition of SBG, Raven is committed to making additional earn-out payments, not to exceed $2,500 calculated and paid quarterly for ten years after the purchase date contingent upon achieving certain revenues. At July 31, 2017, the fair value of this contingent consideration was $1,285, of which $228 was classified as "Accrued liabilities" and $1,057 was classified as "Other liabilities" in the Consolidated Balance Sheet. At January 31, 2017, the fair value of this contingent consideration was $1,409, of which $247 was classified as "Accrued liabilities" and $1,162 was classified as "Other liabilities". At July 31, 2016, the fair value of this contingent consideration was $1,397, of which $228 was classified as "Accrued liabilities" and $1,169 as "Other liabilities." The Company paid $160 and $220 in earn-out payments in the three- and six-month periods ended July 31,

#12

(dollars in thousands, except per-share amounts)


2017, respectively. The Company paid $143 and $203 in earn-out payments in the three- and six-month periods ended July 31, 2016, respectively. To date, the Company has paid a total of $803 of this potential earn-out liability.

Related to the acquisition of Vista in 2012, the Company is committed to making annual payments based upon earn-out percentages on specific revenue streams for seven years after the purchase date, not to exceed $15,000. At July 31, 2017, the fair value of this contingent consideration was $282, of which $157 was classified in "Accrued liabilities" and $125 as "Other liabilities" in the Consolidated Balance Sheet. At January 31, 2017, the fair value of this contingent consideration was $332, of which $98 was classified in "Accrued liabilities" and $234 as "Other liabilities." At July 31, 2016 the fair value of this contingent consideration was $504, of which $108 was classified as "Accrued liabilities" and $396 as "Other liabilities." The Company paid $100 and $79 in earn-out payments in the six-month periods ended July 31, 2017 and 2016, respectively. The Company made no payments in the three-month periods ended July 31, 2017 or 2016. To date, the Company has paid a total of $1,572 of this potential earn-out liability.

(7) GOODWILL, LONG-LIVED ASSETS, AND OTHER INTANGIBLES

Goodwill
Management assesses goodwill for impairment annually during the fourth quarter and between annual tests whenever a triggering event indicates there may be an impairment. Impairment tests of goodwill are done at the reporting unit level. Management performed an assessment in fiscal 2018 second quarter and determined that no triggering events had occurred for any of the Company's reporting units. There were no goodwill impairment losses reported in the three- and six-month periods ended July 31, 2017.

During the first quarter of fiscal 2017 which ended April 30, 2016, management implemented managerial and financial operations and reporting changes within Vista and Aerostar to further integrate Vista into the Aerostar Division. Integration actions included leadership re-alignment, including selling and business development functions, re-deployment of employees across the division, and consolidation of administrative functions, among other actions. Based on the changes made, the Company consolidated the two separate reporting units within the Aerostar Division that were in existence at that time, into one reporting unit for purposes of goodwill impairment assessment. As such, as of April 30, 2016, the Company had three reporting units: Engineered Films Division, Applied Technology Division, and Aerostar Division. The Company reviewed the quantitative and qualitative factors associated with the change in reporting units and determined there were no indicators of impairment at the time of the reporting unit change. There were no goodwill impairment losses reported in the three- and six-month periods ended July 31, 2016.

The changes in the carrying amount of goodwill by reporting unit were as follows:

 
 
Applied
Technology
 
Engineered
Films
 
Aerostar
 
Total
Balance at January 31, 2017
 
$
12,342

 
$
27,518

 
$
789

 
$
40,649

Divestiture of business
 

 

 
(52
)
 
(52
)
Foreign currency translation adjustment
 
244

 

 

 
244

Balance at July 31, 2017
 
$
12,586

 
$
27,518

 
$
737

 
$
40,841

 
 
 
 
 
 
 
 
 
Balance at January 31, 2016
 
$
12,365

 
$
27,518

 
$
789

 
$
40,672

Foreign currency translation adjustment
 
80

 

 

 
80

Balance at July 31, 2016
 
$
12,445

 
$
27,518

 
$
789

 
$
40,752



Long-lived Assets and Other Intangibles
The Company assesses the recoverability of long-lived assets, including definite-lived intangibles, equity method investments, and property plant and equipment if events or changes in circumstances indicate that an asset might be impaired. For long-lived and intangible assets, the Company performs impairment reviews by asset groups. When performing long-lived asset testing, the fair values of assets are determined based on valuation techniques using the best available information. Such valuations are derived from valuation techniques in which one or more significant inputs are not observable (Level 3 fair value measures). An impairment loss is recognized when the carrying amount of an asset is above the estimated undiscounted cash flows used in determining the fair value of the asset.

During first quarter of fiscal 2018, the Company determined that the investment in AgEagle, further described in Note 6 Acquisitions of and Investments in Businesses and Technologies, was impaired due to lower than expected cash flows. This impairment was determined to be other-than-temporary and an accelerated equity method investment loss of $72 was reported in "Other (expense),

#13

(dollars in thousands, except per-share amounts)


net" in the Consolidated Statements of Income and Comprehensive Income for the six-month period ended July 31, 2017. The Company also determined the customer relationship intangible asset related to the Ag Eagle exclusive distribution agreement was fully impaired. The total impairment loss reported related to this intangible asset was $259 and was reported in "Long-lived asset impairment loss" in the Consolidated Statements of Income and Comprehensive Income for the six-month period ended July 31, 2017. There were no long-lived asset impairments or accelerated equity method investment losses reported in the three-month period ended July 31, 2017 or the three- and six-month periods ended July 31, 2016, respectively.

The following table provides the gross carrying amount and related accumulated amortization of definite-lived intangible assets:
 
 
July 31, 2017
 
January 31, 2017
 
July 31, 2016
 
 
 
Accumulated
 
 
 
Accumulated
 
 
 
Accumulated
 
 
 
Amount
amortization
Net
 
Amount
amortization
Net
 
Amount
amortization
Net
Existing technology
 
$
7,230

$
(6,775
)
$
455

 
$
7,136

$
(6,553
)
$
583

 
$
7,175

$
(6,423
)
$
752

Customer relationships
 
12,787

(4,206
)
8,581

 
12,987

(3,680
)
9,307

 
13,012

(3,160
)
9,852

Patents and other intangibles
 
4,530

(2,338
)
2,192

 
4,378

(2,220
)
2,158

 
4,352

(2,068
)
2,284

Total
 
$
24,547

$
(13,319
)
$
11,228

 
$
24,501

$
(12,453
)
$
12,048

 
$
24,539

$
(11,651
)
$
12,888


(8) EMPLOYEE POSTRETIREMENT BENEFITS

The Company provides postretirement medical and other benefits to certain current and past senior executive officers and senior managers. These plan obligations are unfunded. The components of the net periodic benefit cost for postretirement benefits are as follows:
 
Three Months Ended
 
Six Months Ended
 
July 31,
2017
 
July 31,
2016
 
July 31,
2017
 
July 31,
2016
Service cost
$
21

 
$
20

 
$
43

 
$
40

Interest cost
82

 
83

 
164

 
166

Amortization of actuarial losses
30

 
37

 
60

 
74

Amortization of unrecognized gains in prior service cost
(40
)
 
(40
)
 
(80
)
 
(80
)
Net periodic benefit cost
$
93

 
$
100

 
$
187

 
$
200


Postretirement benefit cost components are reclassified in their entirety from accumulated other comprehensive loss to net periodic benefit cost.  Net periodic benefit costs are reported in net income as “Cost of sales” or “Selling, general, and administrative expenses” in a manner consistent with the classification of direct labor and personnel costs of the eligible employees.

(9) WARRANTIES

Accruals necessary for product warranties are estimated based on historical warranty costs and average time elapsed between purchases and returns for each division. Additional accruals are made for any significant, discrete warranty issues. Changes in the warranty accrual were as follows:
 
Three Months Ended
 
Six Months Ended
 
July 31,
2017
 
July 31,
2016
 
July 31,
2017
 
July 31,
2016
Beginning balance
$
2,405

 
$
2,316

 
$
1,547

 
$
1,835

Accrual for warranties
401

 
262

 
1,778

 
1,086

Settlements made
(541
)
 
(502
)
 
(1,060
)
 
(845
)
Ending balance
$
2,265

 
$
2,076

 
$
2,265

 
$
2,076



(10) FINANCING ARRANGEMENTS

The Company entered into a credit facility on April 15, 2015 with JPMorgan Chase Bank, N.A., Toronto Branch as Canadian Administrative Agent, JPMorgan Chase Bank, National Association, as administrative agent, and each lender from time to time party thereto (the Credit Agreement). The Credit Agreement provides for a syndicated senior revolving credit facility up to $125,000 with a maturity date of April 15, 2020.

#14

(dollars in thousands, except per-share amounts)


Simultaneous with execution of the Credit Agreement, Raven, and its subsidiaries entered into a guaranty agreement in favor of JPMorgan Chase Bank National Association in its capacity as administrator under the Credit Agreement for the benefit of JPMorgan Chase Bank N.A., Toronto Branch and the lenders and their affiliates under the Credit Agreement.

Unamortized debt issuance costs associated with this Credit Agreement were $297, $352 and $407 at July 31, 2017, January 31, 2017, and July 31, 2016, respectively and are included in "Other assets" in the Consolidated Balance Sheets. Loans or borrowings defined under the Credit Agreement bear interest and fees at varying rates and terms defined in the Credit Agreement based on the type of borrowing as defined. The Credit Agreement includes annual administrative and unborrowed capacity fees. The Credit Agreement also contains customary affirmative and negative covenants, including those relating to financial reporting and notification, limits on levels of indebtedness and liens, investments, mergers and acquisitions, affiliate transactions, sales of assets, restrictive agreements, and change in control as defined in the Credit Agreement. The Company requested and received the necessary covenant waivers relating to its late filing of financial information in fiscal 2017. Financial covenants include an interest coverage ratio and funded indebtedness to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement. The loan proceeds may be utilized by Raven for strategic business purposes and for working capital needs.

Letters of credit (LOCs) totaling $514 issued under the Credit Agreement or the Company's previous line of credit with Wells Fargo were outstanding at July 31, 2017, January 31, 2017, and July 31, 2016. These LOCs primarily support self-insured workers' compensation bonding. Any draws required under the LOCs would be settled with available cash or borrowings under the Credit Agreement.

There were no borrowings under the Credit Agreement for any of the fiscal periods covered by this Quarterly Report on Form 10-Q. Availability under the Credit Agreement for borrowings as of July 31, 2017 was $124,536.

(11) COMMITMENTS AND CONTINGENCIES

The Company is involved as a party in lawsuits, claims, regulatory inquiries, or disputes arising in the normal course of its business, the potential costs and liability of which cannot be determined at this time.  Among these matters is a patent infringement lawsuit filed in federal district court in Kansas, in which Capstan Ag Systems, Inc. has made certain infringement claims against the Company and one of its customers, CNH Industrial America LLC, related to the Applied Technology Division’s HawkeyeTM nozzle control system. Management does not believe the ultimate outcomes of its legal proceedings are likely to be significant to its results of operations, financial position, or cash flows. Additionally, because of the present status of the lawsuit, 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.
 
In addition to commitments disclosed elsewhere in the Notes to the unaudited Consolidated Financial Statements, the Company has other unconditional purchase obligations that arise in the normal course of business operations. The majority of these obligations are related to the purchase of raw material inventory for the Applied Technology and Engineered Films divisions.

(12) INCOME TAXES

The Company’s effective tax rate varies from the federal statutory rate primarily due to state and local taxes, research and development tax credit, tax benefits on qualified production activities, and tax-exempt insurance premiums. The Company’s effective tax rates for the three- and six-month periods ended July 31, 2017 were 29.2% and 30.5%, respectively. The decrease in the effective tax rate in the second quarter of fiscal 2018 compared to the year-to-date fiscal 2018 effective tax rate is primarily due to the recognition of discrete tax expense related to the Company's adoption of ASU 2016-09 in the fiscal 2018 first quarter as further discussed in Note 2 Summary of Significant Accounting Policies. This ASU requires that the tax effects resulting from the settlement of stock-based awards be recognized as a discrete income tax expense or benefit in the income statement in the reporting period in which they occur. The Company’s effective tax rates for the three- and six-month periods ended July 31, 2016 were 30.7% and 30.7%, respectively. The decrease in the effective tax rate in the three- and six-month periods ended July 31, 2017 compared to July 31, 2016 is primarily due to a higher estimate of the research and development tax credit in the current year compared to the prior year.

(13) DIVIDENDS AND TREASURY STOCK

Dividends paid to Raven shareholders for the three- and six-month periods ended July 31, 2017 were $4,693 and $9,384, or 13.0 cents and 26.0 cents per share, respectively. Dividends paid to Raven shareholders for the three- and six-month periods ended

#15

(dollars in thousands, except per-share amounts)


July 31, 2016 were $4,687 and $9,388, or 13.0 cents and 26.0 cents per share, respectively. There were no declared and unpaid shareholder dividends at July 31, 2017 or 2016.

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

The Company did not repurchase any shares in the three- and six-month periods ended July 31, 2017. The Company repurchased 102,187 and 484,252 shares in the three- and six-month periods ended July 31, 2016, respectively. These purchases totaled $