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EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS - RAVEN INDUSTRIES INCa2016q2exhibit321.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS - RAVEN INDUSTRIES INCa2016q2exhibit322.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) OF THE SECUR - RAVEN INDUSTRIES INCa2016q2exhibit312.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) OF THE SECUR - RAVEN INDUSTRIES INCa2016q2exhibit311.htm

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2015
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to
Commission File Number: 001-07982
RAVEN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
South Dakota
(State or other jurisdiction of incorporation or organization)
 
46-0246171
(IRS Employer Identification No.)
205 East 6th Street, P.O. Box 5107, Sioux Falls, SD 57117-5107
(Address of principal executive offices)
(605) 336-2750
(Registrant’s telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
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 Exchange Act). o Yes þ No
As of August 25, 2015 there were 37,303,276 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,
2015
 
January 31,
2015
 
July 31,
2014
ASSETS
 
 
 
 
 
Current assets
 
 
 
 
 
Cash and cash equivalents
$
47,302

 
$
51,949

 
$
62,161

Short-term investments
250

 
250

 
250

Accounts receivable, net
39,889

 
56,576

 
52,453

Inventories
54,066

 
55,152

 
51,256

Deferred income taxes
3,539

 
3,958

 
3,406

Other current assets
3,808

 
3,094

 
5,751

Total current assets
148,854

 
170,979

 
175,277

 
 
 
 
 
 
Property, plant and equipment, net
118,291

 
117,513

 
97,806

Goodwill
52,198

 
52,148

 
25,420

Amortizable intangible assets, net
17,148

 
18,490

 
9,514

Other assets, net
4,139

 
3,743

 
3,858

TOTAL ASSETS
$
340,630

 
$
362,873

 
$
311,875

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accounts payable
$
6,958

 
$
11,545

 
$
9,483

Accrued liabilities
14,049

 
19,187

 
15,276

Customer advances
1,043

 
1,111

 
1,697

Total current liabilities
22,050

 
31,843

 
26,456

 
 
 
 
 
 
Other liabilities
24,244

 
25,793

 
21,138

 
 
 
 
 
 
Commitments and contingencies

 

 

 
 
 
 
 
 
Shareholders' equity
 
 
 
 
 
Common stock, $1 par value, authorized shares 100,000; issued 67,006; 66,947; and 65,376, respectively
67,006

 
66,947

 
65,376

Paid-in capital
53,909

 
53,237

 
13,505

Retained earnings
243,310

 
244,180

 
240,971

Accumulated other comprehensive loss
(5,822
)
 
(5,849
)
 
(2,254
)
Treasury stock at cost, 29,447; 28,897; and 28,897 shares, respectively
(64,187
)
 
(53,362
)
 
(53,362
)
Total Raven Industries, Inc. shareholders' equity
294,216

 
305,153

 
264,236

Noncontrolling interest
120

 
84

 
45

Total shareholders' equity
294,336

 
305,237

 
264,281

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
340,630

 
$
362,873

 
$
311,875


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,
2015
 
July 31,
2014
 
July 31,
2015
 
July 31,
2014
Net sales
$
67,518

 
$
94,485

 
$
137,791

 
$
196,995

Cost of sales
49,660

 
68,827

 
99,574

 
139,571

Gross profit
17,858

 
25,658

 
38,217

 
57,424

 
 
 
 
 
 
 
 
Research and development expenses
3,216

 
4,385

 
6,752

 
9,357

Selling, general, and administrative expenses
8,213

 
10,577

 
17,822

 
20,839

Operating income
6,429

 
10,696

 
13,643

 
27,228

 
 
 
 
 
 
 
 
Other (expense), net
(266
)
 
(59
)
 
(310
)
 
(138
)
Income before income taxes
6,163

 
10,637

 
13,333

 
27,090

 
 
 
 
 
 
 
 
Income taxes
1,942

 
2,890

 
4,251

 
8,309

Net income
4,221

 
7,747

 
9,082

 
18,781

 
 
 
 
 
 
 
 
Net income attributable to the noncontrolling interest
30

 
28

 
36

 
24

 
 
 
 
 
 
 
 
Net income attributable to Raven Industries, Inc.
$
4,191

 
$
7,719

 
$
9,046

 
$
18,757

 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
      ─ Basic
$
0.11

 
$
0.21

 
$
0.24

 
$
0.51

      ─ Diluted
$
0.11

 
$
0.21

 
$
0.24

 
$
0.51

 
 
 
 
 
 
 
 
Cash dividends paid per common share
$
0.13

 
$
0.12

 
$
0.26

 
$
0.24

 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
Net income
$
4,221

 
$
7,747

 
$
9,082

 
$
18,781

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation
(105
)
 
(199
)
 
(174
)
 
(125
)
Postretirement benefits, net of income tax (expense) benefit of $(62), $12, $(33), and $26, respectively
146

 
26

 
201

 
50

Other comprehensive income (loss), net of tax
41

 
(173
)
 
27

 
(75
)
 
 
 
 
 
 
 
 
Comprehensive income
4,262

 
7,574

 
9,109

 
18,706

 
 
 
 
 
 
 
 
Comprehensive income attributable to noncontrolling interest
30

 
28

 
36

 
24

 
 
 
 
 
 
 
 
Comprehensive income attributable to Raven Industries, Inc.
$
4,232

 
$
7,546

 
$
9,073

 
$
18,682


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

#4

                           

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

$
10,556

28,897

$
(53,362
)
$
231,029

$
(2,179
)
$
251,362

$
100

$
251,462

Net income




18,757


18,757

24

18,781

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





(125
)
(125
)

(125
)
Postretirement benefits reclassified from accumulated other comprehensive income (loss) after tax benefit of $26





50

50


50

Cash dividends ($0.24 per share) 

68



(8,815
)

(8,747
)

(8,747
)
Dividends of less than wholly-owned subsidiary attributable to non-controlling interest







(79
)
(79
)
Director shares issued
18

(18
)







Shares issued on stock options exercised, net of shares withheld for employee taxes
40

418





458


458

Share-based compensation

2,428





2,428


2,428

Tax benefit from exercise of stock options

53





53


53

Balance July 31, 2014
$
65,376

$
13,505

28,897

$
(53,362
)
$
240,971

$
(2,254
)
$
264,236

$
45

$
264,281

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance January 31, 2015
$
66,947

$
53,237

28,897

$
(53,362
)
$
244,180

$
(5,849
)
$
305,153

$
84

$
305,237

Net income




9,046


9,046

36

9,082

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





(174
)
(174
)

(174
)
Postretirement benefits reclassified from accumulated other comprehensive income (loss) after tax (expense) of ($33)





201

201


201

Cash dividends ($0.26 per share)

82



(9,916
)

(9,834
)

(9,834
)
Share issuance costs related to fiscal 2015 business combination

(15
)




(15
)

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

(54
)




(47
)

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

(510
)




(458
)

(458
)
Shares repurchased


550

(10,825
)


(10,825
)

(10,825
)
Share-based compensation

1,436





1,436


1,436

Income tax impact related to share-based compensation

(267
)




(267
)

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

$
53,909

29,447

$
(64,187
)
$
243,310

$
(5,822
)
$
294,216

$
120

$
294,336


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,
2015
 
July 31,
2014
OPERATING ACTIVITIES:
 
 
 
Net income
$
9,082

 
$
18,781

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
8,782

 
8,373

Change in fair value of acquisition-related contingent consideration
405

 
363

Loss from equity investment
73

 
57

Deferred income taxes
(1,301
)
 
(1,769
)
Share-based compensation expense
1,436

 
2,428

Change in operating assets and liabilities:
 
 
 
Accounts receivable
15,824

 
4,383

Inventories
(559
)
 
3,967

Other assets
(714
)
 
(1,689
)
Operating liabilities
(9,090
)
 
(3,863
)
Other operating activities, net
(237
)
 
7

Net cash provided by operating activities
23,701

 
31,038

 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(7,333
)
 
(7,297
)
Proceeds (payments) related to business acquisitions
351

 
(4,711
)
Proceeds from sale of assets
1,542

 

Other investing activities, net
(391
)
 
(432
)
Net cash used in investing activities
(5,831
)
 
(12,440
)
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
Dividends paid
(9,834
)
 
(8,826
)
Payments for common shares repurchased
(10,825
)
 

Payments of acquisition-related debt

 
(638
)
Payments of acquisition-related contingent liability
(735
)
 
(454
)
Debt issuance costs paid
(548
)
 

Restricted stock units vested and issued
(458
)
 

Employee stock option exercises net of tax benefit
(85
)
 
511

Other financing activities, net
(15
)
 

Net cash used in financing activities
(22,500
)
 
(9,407
)
 
 
 
 
Effect of exchange rate changes on cash
(17
)
 
(17
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(4,647
)
 
9,174

Cash and cash equivalents at beginning of year
51,949

 
52,987

Cash and cash equivalents at end of period
$
47,302

 
$
62,161


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

#6


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

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

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company prospectively adopted the straight-line method of depreciation for manufacturing equipment, office equipment, and furniture and fixtures placed in service on or after February 1, 2015. This change was made as a straight-line method of depreciation more accurately reflects the economic consumption of these assets than did the accelerated method previously used. This prospective change in the depreciation method did not have a material effect on the Company’s financial position or results of operations for the three- or six-month periods ended July 31, 2015.

As described in Note 1 Summary of Significant Accounting Policies of the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2015, the Company recognizes goodwill as the excess cost of an acquired business over the net amount assigned to assets acquired and liabilities assumed. Management assesses goodwill for impairment annually during the fourth quarter and between annual tests whenever a triggering event indicates there may be an impairment. Impairment tests of goodwill are done at the reporting unit level. When performing goodwill impairment testing, the fair values of reporting units are determined based on valuation techniques using the best available information, primarily discounted cash flow projections. Such valuations are derived from valuation techniques in which one or more significant inputs are not observable (Level 3 fair value measures).

As a result of changes in market conditions indicating that goodwill might be impaired, the Company performed a Step 1 impairment analysis using fair value techniques on the Engineered Films reporting unit as of July 31, 2015. The reporting unit's fair value was estimated based on discounted cash flows and that fair value amount was compared to the carrying value of the reporting unit. This analysis indicated that the estimated fair value of the Engineered Films reporting unit exceeded the net book value by approximately $50,700 or 37.2% and that the Step 1 test was passed at July 31, 2015. No impairments were recorded in the three- and six-months periods ended July 31, 2015 or 2014.
 
There have been no material changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2015.


#7

(Dollars in thousands, except per-share amounts)

(3) NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted average common shares and stock units outstanding. Diluted net income per share is computed by dividing net income by the weighted average common and common equivalent shares outstanding which includes the shares issuable upon exercise of employee stock options (net of shares assumed purchased with the option proceeds), stock units, and restricted stock units outstanding. Performance share awards are included in the diluted calculation based upon what would be issued if the end of the most recent reporting period was the end of the term of the award.
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,
2015
 
July 31,
2014
 
July 31,
2015
 
July 31,
2014
Anti-dilutive options and restricted stock units
1,207,761
 
623,658
 
1,156,704
 
502,950
 
 
 
 
 
 
 
 

The computation of earnings per share is presented below:
 
Three Months Ended
 
Six Months Ended
 
July 31,
2015
 
July 31,
2014
 
July 31,
2015
 
July 31,
2014
Numerator:
 
 
 
 
 
 
 
Net income attributable to Raven Industries, Inc.
$
4,191

 
$
7,719

 
$
9,046

 
$
18,757

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
37,659,107

 
36,462,600

 
37,829,941

 
36,444,153

Weighted average stock units outstanding
91,831

 
68,414

 
80,661

 
70,063

Denominator for basic calculation
37,750,938

 
36,531,014

 
37,910,602

 
36,514,216

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
37,659,107

 
36,462,600

 
37,829,941

 
36,444,153

Weighted average stock units outstanding
91,831

 
68,414

 
80,661

 
70,063

Dilutive impact of stock options and restricted stock units
76,662

 
203,703

 
80,688

 
213,502

Denominator for diluted calculation
37,827,600

 
36,734,717

 
37,991,290

 
36,727,718

 
 
 
 
 
 
 
 
Net income per share - basic
$
0.11

 
$
0.21

 
$
0.24

 
$
0.51

Net income per share - diluted
$
0.11

 
$
0.21

 
$
0.24

 
$
0.51



#8

(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, 2015
 
January 31, 2015
 
July 31, 2014
Accounts receivable, net:
 
 
 
 
 
 
     Trade accounts
 
$
40,370

 
$
56,895

 
$
52,797

     Allowance for doubtful accounts
 
(481
)
 
(319
)
 
(344
)
 
 
$
39,889

 
$
56,576

 
$
52,453

 
 
 
 
 
 
 
Inventories:
 
 
 
 
 
 
Finished goods
 
$
6,657

 
$
8,127

 
$
7,098

In process
 
3,957

 
1,317

 
1,694

Materials
 
43,452

 
45,708

 
42,464

 

$
54,066


$
55,152


$
51,256

 
 
 
 
 
 
 
Other current assets:
 
 
 
 
 
 
Insurance policy benefit
 
$
637

 
$
733

 
$
876

     Federal tax receivable
 

 
713

 
1,826

Receivable from sale of business
 
830

 

 

     Prepaid expenses and other
 
2,341

 
1,648

 
3,049

 
 
$
3,808

 
$
3,094

 
$
5,751

 
 
 
 
 
 
 
Property, plant and equipment, net:
 
 
 
 
 
 
Held for use:
 
 
 
 
 
 
Land
 
$
2,921

 
$
3,246

 
$
2,077

Buildings and improvements
 
76,697

 
78,140

 
68,439

Machinery and equipment
 
136,666

 
131,766

 
118,833

     Accumulated depreciation
 
(99,346
)
 
(96,545
)
 
(91,543
)
 
 
$
116,938

 
$
116,607

 
$
97,806

 
 
 
 
 
 
 
Held for sale:
 
 
 
 
 
 
Land
 
$
324

 
$
11

 
$

Buildings and improvements
 
2,597

 
1,522

 

Machinery and equipment
 
639

 

 

     Accumulated depreciation
 
(2,207
)
 
(627
)
 

 
 
1,353

 
906

 

 
 
$
118,291

 
$
117,513

 
$
97,806

 
 
 
 
 
 
 
Other assets, net:
 
 
 
 
 
 
Investment in affiliate
 
$
2,896

 
$
3,217

 
$
3,380

Other, net
 
1,243

 
526

 
478

 
 
$
4,139

 
$
3,743

 
$
3,858

 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
Salaries and related
 
$
2,031

 
$
4,063

 
$
2,115

Benefits
 
4,315

 
5,001

 
5,261

Insurance obligations
 
1,702

 
1,590

 
1,443

Warranties
 
1,752

 
3,120

 
2,617

Income taxes
 
1,108

 
536

 
133

Other taxes
 
1,031

 
1,240

 
983

Acquisition-related contingent consideration
 
1,028

 
1,375

 
919

Other
 
1,082

 
2,262

 
1,805

 
 
$
14,049

 
$
19,187

 
$
15,276

 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
Postretirement benefits
 
$
12,151

 
$
11,812

 
$
8,166

Acquisition-related contingent consideration
 
3,049

 
3,631

 
3,682

Deferred income taxes
 
5,764

 
7,091

 
2,172

Uncertain tax positions
 
3,280

 
3,259

 
7,118

 
 
$
24,244

 
$
25,793

 
$
21,138



#9

(Dollars in thousands, except per-share amounts)

(5) ACQUISITIONS OF AND INVESTMENTS IN BUSINESSES AND TECHNOLOGIES

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

Acquisition-related contingent consideration
The Company has contingent liabilities related to prior year acquisitions of SBG Innovatie BV and its affiliate, Navtronics BVBA (collectively, SBG) in May 2014 and Vista in 2012 . 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, 2015, the fair value of this contingent consideration was $1,325, of which $310 was classified as "Accrued liabilities" and $1,015 was classified as "Other liabilities" in the Consolidated Balance Sheets. At July 31, 2014, the fair value of this contingent consideration was $1,661, of which $152 was classified as "Accrued liabilities" and $1,509 as "Other liabilities." The Company paid $121 and $150 in earn-out payments in the three- and six-month periods ended July 31, 2015. There were no earn-out payments in the three- or six-month periods ended July 31, 2014.

Related to the acquisition of Vista Research, Inc. (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. The fair value of this contingent consideration is estimated using forecasted discounted cash flows. At July 31, 2015 the fair value of this contingent consideration was $2,720, of which $686 was classified in "Accrued liabilities" and $2,034 as "Other liabilities" in the Consolidated Balance Sheets. At July 31, 2014 the fair value of this contingent consideration was $2,745, of which $569 was classified as "Accrued liabilities" and $2,176 as "Other liabilities" in the Consolidated Balance Sheets. The Company paid $585 and $454 in the six-month periods ended July 31, 2015 and 2014, respectively. The Company made no earn-out payments in the three-month periods ended July 31, 2015 or 2014, respectively.

(6) EMPLOYEE POSTRETIREMENT BENEFITS

The Company provides postretirement medical and other benefits to senior executive officers and senior managers. These plan obligations are unfunded. The components of net periodic benefit cost for postretirement benefits are as follows:
 
Three Months Ended
 
Six Months Ended
 
July 31,
2015
 
July 31,
2014
 
July 31,
2015
 
July 31,
2014
Service cost
$
108

 
$
49

 
$
216

 
$
98

Interest cost
105

 
92

 
210

 
183

Amortization of actuarial losses
84

 
38

 
168

 
76

Net periodic benefit cost
$
297

 
$
179

 
$
594

 
$
357


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.

(7) 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,
2015
 
July 31,
2014
 
July 31,
2015
 
July 31,
2014
Beginning balance
$
2,285

 
$
2,654

 
$
3,120

 
$
2,525

Accrual for warranties
389

 
648

 
748

 
1,389

Settlements made
(922
)
 
(685
)
 
(2,116
)
 
(1,297
)
Ending balance
$
1,752

 
$
2,617

 
$
1,752

 
$
2,617



#10

(Dollars in thousands, except per-share amounts)

(8) FINANCING ARRANGEMENTS

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

This new credit facility, the Credit Agreement dated as of April 15, 2015 among Raven Industries, Inc., JPMorgan Chase Bank, N.A., Toronto Branch as Canadian Administrative Agent, JPMorgan Chase Bank, National Association, as administrative agent, and each lender from time to time party thereto (the Credit Agreement), provides for a syndicated senior revolving credit facility up to $125,000 with a maturity date of April 15, 2020. Debt issuance costs associated with this Credit Agreement were $549 as of July 31, 2015.

Loans or borrowings defined under the Credit Agreement bear interest and fees at varying rates and terms defined in the Credit Agreement based on the type of borrowing as defined. The Credit Agreement contains customary affirmative and negative covenants, including those relating to financial reporting and notification, limits on levels of indebtedness and liens, investments, mergers and acquisitions, affiliate transactions, sales of assets, restrictive agreements, and change in control as defined in the Credit Agreement. Financial covenants include an interest coverage ratio and funded indebtedness to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement. $125,000 was available under the Credit Agreement for borrowings as of July 31, 2015. The loan proceeds may be utilized by Raven for strategic business purposes and for working capital needs.

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

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

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

(9) CONTINGENCIES

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

(10) INCOME TAXES

The Company’s effective tax rate varies from the federal statutory rate primarily due to state and local taxes and tax benefits on qualified production activities. The Company’s tax rates for the three-month periods ended July 31, 2015 and 2014 were 31.5% and 27.2%, respectively. The Company’s tax rates for the six-month periods ended July 31, 2015 and 2014 were 31.9% and 30.7%, respectively. The fiscal 2015 rates include the impact of recognition of a $709 research and development tax credit in the fiscal second quarter based upon a tax study undertaken for fiscal years 2011 through 2014.

As of July 31, 2015, undistributed earnings of approximately $2,000 of the Canadian subsidiary were considered to have been reinvested indefinitely and, accordingly, the Company has not provided United States income taxes on such earnings. This estimated tax liability would be approximately $310 net of foreign tax credits.

(11) RESTRUCTURING COSTS

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


#11

(Dollars in thousands, except per-share amounts)

The Company incurred restructuring costs for severance benefits of $111 and $588, respectively, in the three- and six-month periods ended July 31, 2015. There were no unpaid costs at July 31, 2015. The Company reported $407 of this expense in cost of sales and the remaining $181 in selling, general, and administrative expenses in the Consolidated Statements of Income and Comprehensive Income. Substantially all of these restructuring costs related to the Applied Technology Division. The Company incurred no restructuring costs in the three- or six-month periods ended July 31, 2014.

Subsequent to the end of fiscal 2015, the Company announced that Applied Technology's remaining contract manufacturing operations in the St. Louis, Missouri area had been successfully sold and transferred. The exit activities related to this sale and transfer were substantially completed during the first quarter. There were no impairments recorded as a result of the exit activity and gains of $247 and $611 were recorded in the three- and six-month periods ended July 31, 2015. Receivables for inventory and estimated future royalties pursuant to the sale agreements were $827 and were reflected in "Other current assets" in the Consolidated Balance Sheet at July 31, 2015.

(12) DIVIDENDS AND TREASURY STOCK

Dividends paid to Raven shareholders for the three and six months ended July 31, 2015 were $4,894 and $9,834, or 13.0 cents and 26.0 cents per share, respectively. Dividends paid to Raven shareholders for the three and six months ended July 31, 2014 were $4,376 and $8,747, or 12.0 cents and 24.0 cents per share, respectively.

On November 30, 2014 the Company announced that its Board of Directors had authorized a $40,000 stock buyback program. The remaining dollar value that may be purchased under the plan at July 31, 2015 is $29,175.

(13) SHARE-BASED COMPENSATION

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

Stock Option Awards
The Company granted 9,400 and 289,600 non-qualified stock options during the three- and six-month periods ended July 31, 2015, respectively. The Company granted 194,900 non-qualified stock options during the six-month period ended July 31, 2014. None of these options were granted during the three-months ended July 31, 2014. Options are granted with exercise prices not less than the market value of the Company's common stock at the date of grant. The stock options vest over a four-year period and expire after five years. Options contain retirement and change-in-control provisions that may accelerate the vesting period. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The Company uses historical data to estimate option exercises and employee terminations within this valuation model.

The weighted average assumptions used for the Black-Scholes option pricing model by grant year are as follows:
 
 
Six Months Ended
 
 
July 31, 2015
 
July 31, 2014
Risk-free interest rate
 
1.33
%
 
1.32
%
Expected dividend yield
 
2.59
%
 
1.53
%
Expected volatility factor
 
36.81
%
 
38.65
%
Expected option term (in years)
 
3.75

 
4.00

 
 
 
 
 
Weighted average grant date fair value
 
$4.77
 
$9.18

Restricted Stock Unit Awards (RSUs)
The Company granted 19,250 and 19,040 time-vested RSUs to employees in the six-month periods ended July 31, 2015 and 2014, respectively. None of these awards were granted during the three-month periods ended July 31, 2015 or July 31, 2014. The fair value of a time-vested RSU is measured based upon the closing market price of the Company's common stock on the day prior to the date of grant. The grant date fair value per share of the time-vested RSUs granted during the six months ended July 31, 2015 and 2014 was $20.10 and $32.75, respectively. Time-vested RSUs will vest if, at the end of the three-year period, the employee remains employed by the Company. RSUs contain retirement and change-in-control provisions that may accelerate the vesting period. Dividends are cumulatively earned on the time-vested RSUs over the vesting period.


#12

(Dollars in thousands, except per-share amounts)

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

The fair value of the performance-based restricted stock units is based upon the closing market price of the Company's common stock on the day prior to the grant date. The number of performance-based RSUs granted is based on 100% of the target award. During the six-month periods ended July 31, 2015 and 2014, the Company granted 68,570 and 54,490 performance-based RSUs, respectively. 2,240 performance-based RSUs were granted in the three-month period ended July 31, 2015 but none were granted in the three-month period ended July 31, 2014. The weighted average grant date fair value per share of these performance-based RSUs was $20.10 and $32.75, respectively.

(14) SEGMENT REPORTING

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

Business segment net sales and operating income results are as follows:
 
Three Months Ended
 
Six Months Ended
 
July 31,
2015
 
July 31,
2014
 
July 31,
2015
 
July 31,
2014
Net sales
 
 
 
 
 
 
 
Applied Technology Division
$
20,411

 
$
36,247

 
$
52,821

 
$
82,535

Engineered Films Division
35,789

 
42,299

 
67,110

 
84,506

Aerostar Division
11,328

 
19,257

 
17,882

 
36,922

Intersegment eliminations (a)
(10
)
 
(3,318
)
 
(22
)
 
(6,968
)
Consolidated net sales
$
67,518

 
$
94,485

 
$
137,791

 
$
196,995

 
 
 
 
 
 
 
 
Operating income
 
 
 
 
 
 
 
Applied Technology Division (b)
$
4,041

 
$
8,829

 
$
12,782

 
$
24,685

Engineered Films Division
5,365

 
5,816

 
9,836

 
11,679

Aerostar Division (c)
1,314

 
1,628

 
461

 
1,639

Intersegment eliminations (a)
25

 
(82
)
 
84

 
(20
)
Total reportable segment income
10,745

 
16,191

 
23,163

 
37,983

Administrative and general expenses
(4,316
)
 
(5,495
)
 
(9,520
)
 
(10,755
)
Consolidated operating income
$
6,429

 
$
10,696

 
$
13,643

 
$
27,228

(a) Fiscal 2016 intersegment sales were primarily sales from Engineered Films to Aerostar. Fiscal 2015 intersegment sales were comprised primarily of contract manufacturing sales from Aerostar to Applied Technology.
(b) Includes gains of $247 and $611 for the three- and six-month periods ended July 31, 2015, respectively, on disposal of assets related to the exit of contract manufacturing operations.
(c) Includes $(70) loss for both the three- and six-month periods ended July 31, 2015 on disposal of an idle manufacturing plant held for sale.

(15) SUBSEQUENT EVENT

On August 25, 2015 the Personnel and Compensation Committee of the Company’s Board of Directors approved changes to the Company’s postretirement benefit plan that provides medical and certain other benefits. Under the amendment, certain current

#13

(Dollars in thousands, except per-share amounts)

senior executives became ineligible for plan benefits. These changes to the plan constitute a curtailment and will be accounted for as such based on a remeasurement of the expected benefit obligation. The remeasurement will be undertaken in the fiscal 2016 third quarter to determine the impact of the plan changes on the Company’s consolidated financial position and results of operations. Such changes are expected to reduce net periodic benefit costs for the current fiscal year by approximately $165.

(16) NEW ACCOUNTING STANDARDS

Accounting Standards Adopted
In April 2015 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-04, "Compensation—Retirement Benefits (Topic 715) Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets" (ASU 2015-04). The amendments in ASU 2015-04 allow a reporting entity that may incur more costs than other entities when measuring the fair value of plan assets of a defined benefit pension or other postretirement benefit plan at other than a month-end to measure defined benefit plan assets and obligations using the month-end date that is closest to the date of event (such as a plan amendment, settlement, or curtailment that calls for a remeasurement in accordance with existing requirements) that is triggering the remeasurement. In addition, if a contribution or significant event occurs between the month-end date used to measure defined benefit plan assets and obligations and an entity’s fiscal year-end, the entity should adjust the measurement of defined benefit plan assets and obligations to reflect the effects of those contributions or significant events. However, an entity should not adjust the measurement of defined benefit plan assets and obligations for other events that occur between the month-end measurement and the entity’s fiscal year-end that are not caused by the entity (for example, changes in market prices or interest rates). This practical expedient for the measurement date also applies to significant events that trigger a remeasurement in an interim period. An entity electing the practical expedient for the measurement date is required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations in accordance with the amendments in ASU 2015-04. ASU 2015-04 is effective for fiscal years beginning after December 15, 2015. The Company may adopt the standard prospectively. Early adoption is permitted. In the fiscal 2016 first quarter the Company elected to early adopt ASU 2015-04 and apply it on a prospective basis. The Company's Plan that provides postretirement medical and other benefits, further described in Note 6 Employee Postretirement Benefits, did not have an event occur that would trigger a remeasurement in the period of adoption; therefore, the early adoption of this guidance in fiscal 2016 first quarter did not have any impact on the Company's consolidated financial statements or results of operations for the period.

In April 2015 the FASB issued ASU No. 2015-03, "Interest—Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03). The amendments in ASU 2015-03 simplify the presentation of debt issuance costs and require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015. The amendments are required to be applied retrospectively to all prior periods presented and early adoption is permitted. The Company elected to early adopt ASU 2015-03 in fiscal 2016 first quarter. Adoption of this guidance did not have a significant impact on the Company's consolidated financial statements, or results of operations for the period since there were no prior period costs it applied to. Debt issuance costs associated with a credit facility discussed further in Note 8 Financing Arrangements have been presented as prescribed by ASU 2015-03.

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

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


#14

(Dollars in thousands, except per-share amounts)

New Accounting Standards not yet adopted
In July 2015 the FASB issued ASU No. 2015-11, "Inventory (Topic 330) Simplifying the Measurement of Inventory" (ASU 2015-11). The amendments in ASU 2015-11 clarifies an entity should measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Substantial and unusual losses that result from subsequent measurement of inventory should be disclosed in the financial statements. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments are to be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements, results of operations, and disclosures.

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

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

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


#15





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

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

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

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

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

Raven's growth strategy focuses on its proprietary product lines and the Company has made an intentional choice to move away from non-strategic product lines such as contract manufacturing. To assess the effectiveness of this strategy during the transition period, management is using two additional measures:

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

Information reported as net sales excluding contract manufacturing sales on both a consolidated and segment basis, exclude sales generated from contract manufacturing activities and do not conform to generally accepted accounting principles (GAAP). These non-GAAP measures should not be construed as an alternative to the reported results determined in accordance with GAAP. Management has included this non-GAAP information to assist in understanding the operating performance of the Company and its operating segments as well as the comparability of results. This non-GAAP information provided may not be consistent with the methodologies used by other companies. All non-GAAP information is reconciled with reported GAAP results in the tables that follow.
Vision and Strategy
At Raven, our purpose is to solve great challenges. Great challenges require great solutions. Raven’s three unique divisions share resources, ideas, and a passion to create technology that helps the world grow more food, produce more energy, protect the environment, and live safely.
The Raven business model is our platform for success. Our business model is defensible, sustainable, and gives us a consistent approach in the pursuit of quality financial results. This overall approach to creating value, which is employed across the three business segments, is summarized as follows:
Intentionally serve a set of diversified market segments with attractive near- and long-term growth prospects;
Consistently manage a pipeline of growth initiatives within our market segments;
Aggressively compete on quality, service, innovation, and peak performance;
Hold ourselves accountable for continuous improvement;
Value our balance sheet as a source of strength and stability with which to pursue strategic acquisitions; and
Make corporate responsibility a top priority.

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


#16


The following discussion highlights the consolidated operating results for the three and six months ended July 31, 2015 and 2014. Segment operating results are more fully explained in the Results of Operations - Segment Analysis section.
 
 
Three Months Ended
 
Six Months Ended
(dollars in thousands, except per-share data)
 
July 31,
2015
 
July 31,
2014
 
% Change
 
July 31,
2015
 
July 31,
2014
 
% Change
Net sales
 
$
67,518

 
$
94,485

 
(28.5
)%
 
$
137,791

 
$
196,995

 
(30.1
)%
Gross profit
 
17,858

 
25,658

 
(30.4
)%
 
38,217

 
57,424

 
(33.4
)%
Gross margins(a)
 
26.4
%
 
27.2
%
 
 
 
27.7
%
 
29.1
%
 
 
Operating income
 
$
6,429

 
$
10,696

 
(39.9
)%
 
$
13,643

 
$
27,228

 
(49.9
)%
Operating margins
 
9.5
%
 
11.3
%
 
 
 
9.9
%
 
13.8
%
 
 
Net income attributable to Raven Industries, Inc.
 
$
4,191

 
$
7,719

 
(45.7
)%
 
$
9,046

 
$
18,757

 
(51.8
)%
Diluted earnings per share
 
$
0.11

 
$
0.21

 
 
 
$
0.24

 
$
0.51

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated net sales excluding contract manufacturing sales (b)
 
$
65,990

 
$
88,368

 
(25.3
)%
 
$
134,161

 
$
184,532

 
(27.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating cash flow
 
 
 
 
 
 
 
$
23,701

 
$
31,038

 
(23.6
)%
Capital expenditures
 
 
 
 
 
 
 
$
(7,333
)
 
$
(7,297
)
 
0.5
 %
Cash dividends
 
 
 
 
 
 
 
$
(9,834
)
 
$
(8,826
)
 
11.4
 %
 
(a)The Company's gross and operating margins may not be comparable to industry peers due to the diversity of its operations and variability in the classification of expenses across industries in which the Company operates.
  
(b)Non-GAAP measure reconciled to GAAP in the following table.

The following table reconciles the reported net sales to adjusted sales, a non-GAAP financial measure. Adjusted sales exclude contract manufacturing and represent the Company's sales from proprietary products.
 
 
Three Months Ended
 
Six Months Ended
(dollars in thousands)
 
July 31,
2015
 
July 31,
2014
 
%
Change
 
July 31,
2015
 
July 31,
2014
 
%
Change
Applied Technology
 
 
 
 
 
 
 
 
 
 
 
 
Reported net sales
 
$
20,411

 
$
36,247

 
(43.7
)%
 
$
52,821

 
$
82,535

 
(36.0
)%
Less: Contract manufacturing sales
 
(1
)
 
1,267

 
(100.1
)%
 
546

 
2,782

 
(80.4
)%
Applied Technology net sales, excluding
    contract manufacturing sales
 
$
20,412

 
$
34,980

 
(41.6
)%
 
$
52,275

 
$
79,753

 
(34.5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Aerostar
 
 
 
 
 
 
 
 
 
 
 
 
Reported net sales
 
$
11,328

 
$
19,257

 
(41.2
)%
 
$
17,882

 
$
36,922

 
(51.6
)%
Less: Contract manufacturing sales
 
1,529

 
7,817

 
(80.4
)%
 
3,084

 
16,034

 
(80.8
)%
Aerostar net sales, excluding contract
    manufacturing sales
 
$
9,799

 
$
11,440

 
(14.3
)%
 
$
14,798

 
$
20,888

 
(29.2
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Raven
 
 
 
 
 
 
 
 
 
 
 
 
Reported net sales
 
$
67,518

 
$
94,485

 
(28.5
)%
 
$
137,791

 
$
196,995

 
(30.1
)%
Less: Contract manufacturing sales
 
1,528

 
9,084

 
(83.2
)%
 
3,630

 
18,816

 
(80.7
)%
Plus: Aerostar sales to Applied Technology
 

 
2,967

 
(100.0
)%
 

 
6,353

 
(100.0
)%
Consolidated net sales, excluding contract
    manufacturing sales
 
$
65,990

 
$
88,368

 
(25.3
)%
 
$
134,161

 
$
184,532

 
(27.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 


#17


For the fiscal 2016 second quarter, net sales were $67.5 million, down $27.0 million, or 28.5%, from $94.5 million in the comparative period. The Company's operating income was $6.4 million, down $4.3 million, or 39.9% from $10.7 million in the fiscal 2015 second quarter. All divisions reported lower net sales and operating income. The decline was principally due to weakness in Applied Technology and Engineered Films as each division is facing weak end-market demand conditions. For Aerostar, the timing of orders and contract wins relative to the prior year within the Vista radar business, lower volumes of stratospheric balloon sales, and the planned exit of contract manufacturing business led to lower sales and operating income. In the second quarter of fiscal 2016, net sales excluding contract manufacturing sales decreased $22.4 million, or 25.3%, to $66.0 million as compared to $88.4 million in the prior year second quarter. Net income attributable to Raven decreased $3.5 million from $7.7 million ($0.21 per diluted share) for the fiscal 2015 second quarter to $4.2 million ($0.11 per diluted share) for the fiscal 2016 second quarter.

For the six-month period, net sales were $137.8 million compared to $197.0 million, down 30.1% from one year earlier. The Company’s operating income was $13.6 million, down 49.9% from the prior year period. Like the second quarter results, the fiscal 2016 first half results were heavily impacted by weakness in Applied Technology and Engineered Films due to weak end-market demand conditions and in Aerostar the planned exit of contract manufacturing business and lower sales of proprietary products. For the six-month period, net sales excluding contract manufacturing sales decreased $50.4 million, or 27.3%, to $134.2 million as compared to $184.5 million in the prior year. For the same period, net income attributable to Raven was $9.0 million, or $0.24 per diluted share, down 51.8% from $18.8 million, or $0.51 per diluted share, in fiscal 2015.

Engineered Films’ fiscal 2016 second quarter net sales decreased $6.5 million, or 15.4%, to $35.8 million, compared to the fiscal 2015 second quarter. Fiscal 2016 first half net sales decreased $17.4 million, or 20.6%, to $67.1 million as compared to the prior year. The decline in sales in both periods was driven primarily by the continuation of the substantial decline in energy market demand 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).

Engineered Films’ operating income decreased 7.8% and 15.8%, respectively, for the second quarter and year-to-date fiscal 2016 results as compared to the fiscal 2015 comparable periods. While value engineering efforts, favorable raw material comparisons, and expense reductions benefited operating income, they were not enough to offset the impact of lower sales volume.

Applied Technology's fiscal 2016 second quarter net sales decreased $15.8 million, or 43.7%, compared to the fiscal 2015 second quarter and operating income decreased $4.8 million, or 54.2%, to $4.0 million. For the six-month period, net sales declined $29.7 million, or 36.0%, to $52.8 million from $82.5 million and operating income decreased $11.9 million, or 48.2%, to $12.8 million. These declines in sales were driven by a significant contraction in end-market demand. Sales to original equipment manufacturer (OEM) and aftermarket customers declined by 48.8% and 34.3%, respectively, for the three months ended July 31, 2015 and 45.4% and 23.9%, respectively, for the first half of fiscal 2016.

Applied Technology’s operating income decreased 54.2% and 48.2%, respectively, for the second quarter and year-to-date fiscal 2016 results as compared to the fiscal 2015 comparable periods. These declines in operating income were primarily due to lower volume, partially offset by savings from cost reduction actions beginning in March 2015.

Aerostar's fiscal 2016 second quarter net sales were $11.3 million compared to $19.3 million in the fiscal 2015 second quarter, a 41.2% decrease. Fiscal 2016 year-to-date net sales were $17.9 million compared to $36.9 million, down $19.0 million. These net sales decreases were due primarily to a shift away from Aerostar's contract manufacturing business. In addition, the timing of contract wins within Vista and lower sales of stratospheric balloons also contributed to the decline in sales for the division. Excluding contract manufacturing sales, Aerostar's net sales for second quarter fiscal 2016 were down $1.6 million, or 14.3%, to $9.8 million as compared to $11.4 million in the prior year. On a year-to-date basis, Aerostar’s net sales excluding contract manufacturing sales decreased 29.2%, or $6.1 million, to $14.8 million in fiscal 2015.

Aerostar’s operating income decreased by $0.3 million and $1.2 million, respectively, from the prior year quarter and year-to-date results primarily due to the lower sales volume of proprietary products.

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, precisely control inputs, and improve yields for the global agriculture market.

#18


 
 
Three Months Ended
 
Six Months Ended
(dollars in thousands)
 
July 31,
2015
 
July 31,
2014
 
$ Change
 
% Change
 
July 31,
2015
 
July 31,
2014
 
$ Change
 
% Change
Net sales
 
$
20,411

 
$
36,247

 
$
(15,836
)
 
(43.7
)%
 
$
52,821

 
$
82,535

 
$
(29,714
)
 
(36.0
)%
Gross profit
 
7,507

 
15,272

 
(7,765
)
 
(50.8
)%
 
20,758

 
36,860

 
(16,102
)
 
(43.7
)%
Gross margins
 
36.8
%
 
42.1
%
 
 
 
 
 
39.3
%
 
44.7
%
 
 
 
 
Operating expenses
 
$
3,466

 
$
6,443

 
$
(2,977
)
 
(46.2
)%
 
$
7,976

 
$
12,175

 
$
(4,199
)
 
(34.5
)%
Operating expenses as % of sales
 
17.0
%
 
17.8
%
 
 
 
 
 
15.1
%
 
14.8
%
 
 
 
 
Operating income
 
$
4,041

 
$
8,829

 
$
(4,788
)
 
(54.2
)%
 
$
12,782

 
$
24,685

 
$
(11,903
)
 
(48.2
)%
Operating margins
 
19.8
%
 
24.4
%
 
 
 
 
 
24.2
%
 
29.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Applied Technology net sales, excluding contract manufacturing sales
 
$
20,412

 
$
34,980

 
$
(14,568
)
 
(41.6
)%
 
$
52,275

 
$
79,753

 
$
(27,478
)
 
(34.5
)%

The following factors were the primary drivers of the three- and six-month year-over-year changes:

Market conditions. Deteriorating conditions in the agriculture market put pressure on Applied Technology during the first half of fiscal 2016. End-market demand has deteriorated from the beginning of the year and we believe these conditions will continue through our fiscal year 2016, and may persist well into next year. Corn prices have continued to slide since the beginning of the year, despite a short-lived increase during the second quarter, and are at 8-year lows. Farmer sentiment is weak and productivity investments are being delayed. With the world’s population growing toward nine billion and income growth in emerging economies, greater demand for food will ultimately support healthy growth.
Sales volume. Second quarter fiscal 2016 net sales decreased $15.8 million, or 43.7%, to $20.4 million compared to $36.2 million in the prior year second quarter. Year-to-date sales declined 36.0% to $52.8 million as compared to $82.5 million in the prior year. Virtually all of Applied Technology’s product lines were impacted by deteriorating end-market demand. The sales decline was driven by this continued lower demand, OEM shutdowns, and customers managing down inventory levels. Sales in the OEM and aftermarket channels were down about 48.8% and 34.3%, respectively, for the fiscal 2016 second quarter and 45.4% and 23.9% for the six months ended July 31, 2015.
Strategic Sales. Applied Technology’s net sales, excluding contract manufacturing sales, for fiscal 2016 second quarter were $20.4 million, a decrease of $14.6 million, or 41.6%, compared to fiscal 2015 second quarter net sales, excluding contract manufacturing sales, of $35.0 million. Fiscal 2016 year-to-date net sales, excluding contract manufacturing sales, were $52.3 million compared to $79.8 million in the prior year period, a 34.5% decrease,
International sales. For the three-month period, international sales totaled $5.5 million, down 51.3% from the prior year comparative period and represent 27% of segment revenue compared to 31% of segment revenue in the comparative period. Year-to-date international sales totaled $14.4 million, a decrease of $6.4 million from a year ago. Primary drivers of this year-over-year decline were lower sales in Brazil and Canada, partially offset by $3.4 million of European revenue growth due to the acquisition of SBG in fiscal 2015 second quarter. Year-to-date net sales outside the U.S. accounted for 27% of segment sales compared to 25% in the comparable prior year period.
Gross margins. Gross margins decreased to 36.8% for the three months ended July 31, 2015 from 42.1% for the three months ended July 31, 2014. Fiscal 2016 first-half gross margins declined to 39.3% from 44.7% in the comparative period in fiscal 2015. Lower sales volumes and a reduced leverage of fixed manufacturing costs contributed to these lower margins.
Restructuring expenses. Fiscal 2016 first half 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. There were no impairments recorded as a result of the exit of this business and gains of $0.2 million and $0.6 million were recorded in the three and six-month periods ended July 31, 2015, respectively. No restructuring or exit costs were incurred in the three- or six-month periods ended July 31, 2014.
Operating expenses. Fiscal 2016 second quarter operating expense as a percentage of net sales was 17.0%, down from 17.8% in the prior year second quarter. Year-to-date operating expenses as a percentage of net sales was 15.1% compared to 14.8% for fiscal 2015. Lower spending levels in both research and development (R&D) and selling expense as a result of the costs savings initiatives were not enough to offset the lower sales volumes for the year-to-date comparison. However, operating expenses in the fiscal year 2016 second quarter were 46.2% lower while sales volumes were 43.7% lower.


#19


Engineered Films
Engineered Films manufactures high performance plastic films and sheeting for energy, agricultural, construction, geomembrane, and industrial applications.

The Company acquired Integra in November 2014. This acquisition expanded Engineered Films’ production capacity, broadened its product offerings, and enhanced converting capabilities. Adding Integra's fabrication and conversion skill sets with Raven's ability to develop value-added innovative products enhanced customer service and expanded the converting capabilities of the division.
 
 
Three Months Ended
 
Six Months Ended
(dollars in thousands)
 
July 31,
2015
 
July 31,
2014
 
$ Change
 
% Change
 
July 31,
2015
 
July 31,
2014
 
$ Change
 
% Change
Net sales
 
$
35,789

 
$
42,299

 
$
(6,510
)
 
(15.4
)%
 
$
67,110

 
$
84,506

 
$
(17,396
)
 
(20.6
)%
Gross profit
 
7,283

 
7,200

 
83

 
1.2
 %
 
13,561

 
14,401

 
(840
)
 
(5.8
)%
Gross margins
 
20.3
%
 
17.0
%
 
 
 
 
 
20.2
%
 
17.0
%
 
 
 
 
Operating expenses
 
$
1,918

 
$
1,384

 
$
534

 
38.6
 %
 
$
3,725

 
$
2,722

 
$
1,003

 
36.8
 %
Operating expenses as % of sales
 
5.4
%
 
3.3
%
 
 
 
 
 
5.6
%
 
3.2
%
 
 
 
 
Operating income
 
$
5,365

 
$
5,816

 
$
(451
)
 
(7.8
)%
 
$
9,836

 
$
11,679

 
$
(1,843
)
 
(15.8
)%
Operating margins
 
15.0
%
 
13.7
%