Annual Report (10-k)

Date : 03/22/2019 @ 2:23PM
Source : Edgar (US Regulatory)
Stock : Raven Industries Inc (RAVN)
Quote : 35.295  0.0 (0.00%) @ 12:00AM

Annual Report (10-k)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2019
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)

CORPORATELOGO2017A15.JPG
 
South Dakota
 
46-0246171
 
 
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
 
205 E. 6th Street, P.O. Box 5107, Sioux Falls, SD
 
57117- 5107
 
 
(Address of principal executive offices)
 
(Zip Code)
 
 
Registrant's telephone number including area code (605) 336-2750
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class:
 
Name of each exchange on which registered
 
 
Common Stock, $1 par value
 
The NASDAQ Stock Market
 
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
þ
Yes
o
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o
Yes
þ
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
þ
Yes
o
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
þ
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “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
 
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
The aggregate market value of the registrant's common stock held by non-affiliates at July 31, 2018 was approximately $1,379,477,313. The aggregate market value was computed by reference to the closing price as reported on the NASDAQ Global Select Market, $38.80, on July 31, 2018, which was as of the last business day of the registrant's most recently completed second fiscal quarter. The number of shares outstanding on March 19, 2019 was 36,960,588.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrant's Annual Meeting of Shareholders, to be held May 21, 2019 is incorporated by reference into Part III to the extent described therein.
 
 
 
 
 



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

 


                           

PART I
 
 
 
ITEM 1.
BUSINESS
Raven Industries, Inc. (the Company or Raven) was incorporated in February 1956 under the laws of the State of South Dakota and began operations later that same year. The Company is a diversified technology company providing a variety of products to customers within the industrial, agricultural, geomembrane, construction, commercial lighter-than-air and aerospace/defense markets. The Company markets its products around the world and has its principal operations in the United States of America. Raven began operations as a manufacturer of high-altitude research balloons before diversifying into product lines that extended from technologies and production methods of this original balloon business. The Company employs 1,304 people and is headquartered at 205 E. 6th Street, Sioux Falls, SD 57104 - telephone (605) 336-2750. The Company's Internet address is http://www.ravenind.com and its common stock trades on the NASDAQ Global Select Market under the ticker symbol RAVN. The Company has adopted a Code of Conduct applicable to all officers, directors and employees, which is available on its website. Information on the Company's website is not part of this filing.

The Company makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available, free of charge, in the “Investor Relations” section of the Company's Internet website as soon as reasonably practicable after the Company electronically files these materials with, or furnishes these materials to, the Securities and Exchange Commission (SEC). Information on or connected to the Company's website is neither part of, nor incorporated by reference into, this Form 10-K or any other report filed with or furnished to the SEC.

You may also find these materials on the SEC Internet site at www.sec.gov. This site contains reports, proxy statements and other information regarding issuers that file electronically with the SEC.

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

BUSINESS SEGMENTS

The Company has three unique operating units, or divisions, that are also its reportable segments: Applied Technology Division (Applied Technology), Engineered Films Division (Engineered Films), and Aerostar Division (Aerostar). Product lines have been generally grouped in these segments based on technology, manufacturing processes, and end-use application; however, a business segment may serve more than one of the product markets identified above. The Company measures the profitability and performance of its segments primarily based on their operating income excluding general and administrative expenses. Other income or 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.

Applied Technology
Applied Technology designs, manufactures, sells, and services innovative precision agriculture products and information management tools, which are collectively referred to as precision agriculture equipment, that help farmers reduce costs, more precisely control inputs, and improve farm yields for the global agriculture market. The Applied Technology product families include application controls, GPS-guidance steering systems, field computers, automatic boom controls, information management tools, and injection systems. Applied Technology's services include high-speed in-field Internet connectivity and cloud-based data management. The Company's investment in the continued build-out of the Slingshot® platform has also positioned Applied Technology as an information platform that improves decision-making and achieves business efficiencies for its agriculture retail partners. Applied Technology acquired the assets of AgSync, Inc. (AgSync), an agriculture logistics software company, in January 2019. This acquisition enhances the division's Slingshot® platform by delivering a logistics solution for ag retailers, custom applicators and enterprise farms.

Applied Technology sells its precision agriculture equipment to both original equipment manufacturers (OEMs) and through aftermarket distribution partners within agricultural markets both domestically and internationally. The Company's competitive

3

                           

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

Engineered Films
Engineered Films produces high-performance plastic films and sheeting for geomembrane, agricultural, construction, and industrial applications and also offers design-build and installation services of these plastic films and sheeting. Plastic film and sheeting can be purchased separately or together with installation services.

Engineered Films sells both direct to end-customers and through independent third-party distributors. The majority of products sold into the construction and agriculture markets is through distributors, while sales into the geomembrane and industrial markets are more direct in nature. The Company extrudes a significant portion of the film converted for its commercial products and believes it is one of the largest sheeting converters in the United States in the markets it serves. Engineered Films' ability to extrude and convert films, along with offering installation services for its geomembrane products, allows it to provide a more customized solution to customers. A number of film manufacturers compete with the Company on both price and product availability.

Aerostar
Aerostar serves the aerospace/defense and commercial lighter-than-air markets. Aerostar's core products include high-altitude stratospheric balloons and radar systems. These products can be integrated with additional third-party sensors to provide research, communications, and situational awareness capabilities to governmental and commercial customers. Aerostar’s growth strategy emphasizes the design and manufacture of proprietary products in these markets. Aerostar also pursues product and support services contracts with agencies and instrumentalities of the U.S. government as well as sales of advanced radar systems in international markets.
 
Aerostar sells to government agencies as both a prime contractor and subcontractor, and to commercial users primarily as a sub-contractor. Further, sales to government agencies often involve large contracts subject to frequent delays because of budget uncertainties, and protracted negotiation processes. The timing and size of contract wins can create volatility in Aerostar’s results.

OUTLOOK

The Company achieved strong financial results, including record sales in fiscal 2019, while investing strategically for long-term growth. Each division accomplished this in ways that are unique to their specific market position and strategy.

During fiscal 2019, Applied Technology continued its growth in sales and achieved a significant year-over-year increase in operating profit. In the fourth quarter of fiscal 2019, the division closed on the acquisition of AgSync. The Company believes the division is well positioned to execute on its long-term strategy during fiscal 2020 leveraging this acquisition and the continual investment in research and development to provide a consistent cadence of new product innovation delivered to the market. Additionally, Applied Technology is diligently entering year two of driving international growth through its Latin American headquarters in Brazil.

Engineered Films achieved a strong financial performance in fiscal 2019 despite the anticipated decline in hurricane recovery film sales compared to the prior fiscal year. The division began the commissioning process for Line 15 at the end of fiscal 2019 and is expected to leverage the additional capacity and capabilities it brings to serve the growing demand within the industrial and geomembrane markets starting in the first quarter of fiscal 2020. Leveraging its past investments in production capacity and acquisitions, Engineered Films is positioned to execute and capitalize on the opportunities within each of the markets it serves in fiscal 2020.

Aerostar increased net sales significantly and nearly doubled operating income year-over-year. This growth was achieved while significantly increasing the division's investment in research and development activities to drive future growth. Aerostar achieved significant performance milestones in the advancement of its stratospheric balloon platform and broadened the base of government and commercial customers for its core stratospheric balloon and radar product lines. The division is focused on winning new contracts in order to build on the strong performance achieved in fiscal 2019.

Overall, the Company's investments in manufacturing capacity and technology development along with its strong balance sheet and access to additional funding for strategic acquisitions has positioned Raven Industries for long-term success. The Company's long-term strategic goal is to generate annual earnings growth of 10 percent.

MAJOR CUSTOMER INFORMATION

No customers accounted for 10% or more of consolidated net sales in fiscal years 2019 , 2018 or 2017 .

4

                           

SEASONAL WORKING CAPITAL REQUIREMENTS

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

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

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

RAW MATERIALS

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

PATENTS

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

RESEARCH AND DEVELOPMENT

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

ENVIRONMENTAL MATTERS

The Company believes that, in all material respects, it is in compliance with applicable federal, state and local environmental laws and regulations. Expenditures incurred in the past relating to compliance for operating facilities have not significantly affected the Company's capital expenditures, earnings, or competitive position. The Company is unaware of any potential liabilities as of January 31, 2019, for any environmental matters that would have a material effect on the Company's results of operations, financial position, or cash flows.


5

                           

BACKLOG

The Company's backlog represents open customer orders and funded portions of signed government contracts. As of February 1, 2019 , the Company's backlog totaled approximately $38 million . Backlog amounts as of February 1, 2018 and 2017 , were approximately $40 million and $26 million , respectively. Because the length of time between order and shipment varies considerably by business segment and customers can change delivery schedules or potentially cancel orders, the Company does not believe that backlog, as of any particular date, is necessarily indicative of actual net sales for any future period. However, the Company expects that any revenue generated from its backlog, as of February 1, 2019, will be recognized during fiscal year 2020.

EMPLOYEES

As of January 31, 2019, the Company had 1,304 employees (including temporary workers). A summary by segment of these active employee include the following: Applied Technology - 450 ; Engineered Films - 496 ; Aerostar - 244 ; and Corporate Services - 114 . Management believes its relationship with its employees is good.


6

                           

EXECUTIVE OFFICERS OF THE REGISTRANT
 
 
 
 
 
Name, Age, and Position
 
Biographical Data
Daniel A. Rykhus, 54
 
Mr. Rykhus became the Company's President and Chief Executive Officer in 2010. He joined the Company in 1990 as Director of World Class Manufacturing, was General Manager of the Applied Technology Division from 1998 through 2009, and served as Executive Vice President from 2004 through 2010.
President and Chief Executive Officer
 
 
 
 
 
 
Steven E. Brazones, 45
 
Mr. Brazones joined the Company in December 2014 as its Vice President, Chief Financial Officer, and Treasurer. From 2002 to 2014, Mr. Brazones held a variety of positions with H.B. Fuller Company. Most recently, he served as H.B. Fuller's Americas Region Finance Director. Previously, he served as the Assistant Treasurer and the Director of Investor Relations. Prior to his tenure with H.B. Fuller, Mr. Brazones held various roles at Northwestern Growth.
Vice President and Chief Financial Officer
 
 
 
 
 
 
Anthony D. Schmidt, 47
 
Mr. Schmidt was named Division Vice President and General Manager of the Engineered Films Division in 2012. He joined the Company in 1995 in the Applied Technology Division performing various leadership roles within manufacturing and engineering. He transitioned to the Engineered Films Division in 2011 as Manufacturing Manager.
Division Vice President and General Manager - Engineered Films Division
 
 
 
 
 
 
Brian E. Meyer, 56
 
Mr. Meyer was named Division Vice President and General Manager of the Applied Technology Division in May 2015. He joined the Company in 2010 as Chief Information Officer. Prior to joining the Company, Mr. Meyer was an Information and Technology Executive in the health insurance industry and Vice President of Systems Development in the property and casualty insurance industry.
Division Vice President and General Manager - Applied Technology Division
 
 
 
 
 
 
Scott W. Wickersham, 45
 
Mr. Wickersham was named Division Vice President and General Manager of the Aerostar Division in January 2018. He joined the Company in 2010 as the Director of Product Development and Engineering Manager and has been the General Manager for the Aerostar Division since November 2015. Prior to joining the Company, Mr. Wickersham held a range of engineering and operational roles with various technology companies.
Division Vice President and General Manager - Aerostar Division
 
 
 
 
 
 
Lee A. Magnuson, 63
 
Mr. Magnuson joined the Company in June 2017, as Vice President and General Counsel and also became the Company's Secretary in August 2017. Prior to joining the Company, Mr. Magnuson was managing partner of Lindquist and Vennum Law Firm's in the Sioux Falls, SD, office for five years, practicing in the areas of commercial transactions, mergers and acquisitions, corporate matters, real estate and regulatory matters.
General Counsel and Vice President, Corporate Secretary
 
 
 
 
 
 
Janet L. Matthiesen, 61
 
Ms. Matthiesen joined the Company in 2010 as Director of Administration and has been the Company's Vice President of Human Resources since 2012. Prior to joining Raven, Ms. Matthiesen was a Human Resource Manager at Science Applications International Corporation from 2002 to 2010. Ms. Matthiesen will be retiring effective April 2019.
Vice President of Human Resources (Former)
 
 
 
 
 
 
Nicole Freesemann, 36
 
Ms. Freesemann was named Vice President of Human Resources in February of 2019. She started at Raven in 2008 and served in several human resources roles, including Human Resources Generalist, Human Resources Manager and Director. During her tenure at Raven, Ms. Freesemann specialized in areas of due diligence and integration, performance management strategies and staffing strategies.
Vice President of Human Resources (Current)
 
 
 


7



ITEM 1A.
RISK FACTORS

RISKS RELATING TO THE COMPANY

The Company's business is subject to many risks, which by their nature are unpredictable or unquantifiable and may be unknown. In an attempt to provide you with information on potential risks the Company may encounter, the Company has provided below, what it believes are the most significant risks the Company could potentially face, based on its knowledge, experience, information and assumptions. The risks provided below should be assessed contemporaneously with other information contained in this Form 10-K, including Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the risks and uncertainties addressed under "Forward-Looking Statements" on page 29, the Notes to the Consolidated Financial Statements on page 39, and other information presented in or incorporated by reference into this Annual Report on Form 10-K. The risks contained herein, as well as other statements in this Form 10-K are forward-looking statements and, as such, are uncertain. Such statements are not guarantees of future performance and undue reliance should not be placed on them. The indeterminate nature of risk factors makes them subject to change, and certain risks and uncertainties could potentially cause material changes to actual results. Some of these risks may affect the entire Company, where others may only affect particular segments of the Company's business, or may have no material affect at all.

The Company, except as required by law, disclaims any obligation to update or revise the risk factors contained herein, regardless of changes, whether as a result of new information, developments or otherwise. The risks provided in this Form 10-K and in other documents filed with the SEC are not exclusive in nature and, as such, there are other potential risks and uncertainties that the Company is not aware of, or does not presently consider material in nature that could feasibly cause actual results to vary materially from expectations.

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

Weather conditions and natural disasters may also adversely affect sales in the Company's Engineered Films Division. To the extent weather conditions or natural disasters impact agriculture, construction, or geomembrane installation activity, sales of the division's plastic sheeting would likely decrease.

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

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

The loss, disruption, or material change in the Company's business relationship with single source suppliers for particular materials, components or services, could cause a disruption in supply, or substantial increase in cost of any such products or services, and therefore could result in harm to the Company's sales, profitability, cash flows and financial condition.
The Company obtains certain materials, components, or services from suppliers that serve as the only source of supply, or that supply the majority of the Company’s requirements of the particular material, component, or service. While these materials, components, services, or suitable replacements, could potentially be sourced from other suppliers, in the event of a disruption or loss of supply of relevant materials, components, or services for any reason, the Company may not be able to immediately find alternative sources of supply, or if found, may not be found on similar terms. If the Company’s relationship with any of these single source suppliers became challenged, or is terminated, the Company could have difficulty replacing these sources without causing disruption to the business.


8



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

Electronic components used by both the Applied Technology Division and Aerostar Division are sometimes in short supply, which may impact the ability to meet customer demand or provide products at a price the customer prefers. If a supplier of raw materials or electronic components were to significantly increase pricing or was unable to deliver due to shortage or financial difficulty, any of the Company's segments could be adversely affected.

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

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

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

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

Failure to develop and maintain partnerships, alliances, and other distribution or supplier relationships could adversely impact the Company's financial results.
In certain areas of the Company’s business, continued success depends on developing and maintaining relationships with other industry participants, such as original equipment manufacturers, ag retailers, dealers and distributors. If the Company fails to develop and maintain such relationships, or if there is disruption of current business relationships due to actions of the Company, the ability to effectively market and sell certain products could be harmed. The Company’s relationships with other industry participants are complex and multifaceted, and evolve over time. Often, these relationships contribute to substantial ongoing business and operations in particular markets; therefore, changes in these relationships could have an adverse impact on sales and revenue.

Additionally, the Company uses dealer/distributor networks, some of which are affiliated with strategic and industry partners. Enlisting and retaining qualified dealers/distributors and training them in the use and selling of product offerings requires substantial time and resources. If the Company were to lose a significant dealer or distributor relationship, and were forced to identify new channels, the time and expense of training new dealers or distributors may make new-product introduction difficult. This may

9



hinder end-user sales and adoption, which could result in decreased revenues. Additionally, the interruption of dealer coverage within specific regions or markets could cause difficulties in marketing, selling or servicing the Company's products and could harm the Company’s business, operating results or financial condition.

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

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

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

Aerostar’s future growth relies on sales of high-altitude stratospheric balloons, as well as advanced radar systems to international markets. In limited cases, such sales may be direct commercial sales to foreign governments rather than foreign military sales through the U.S. government. Direct commercial sales to foreign governments often involve large contracts subject to frequent delays because of budget uncertainties, regional military conflicts, political instability, and protracted negotiation processes. Such delays could adversely affect the Company's results of operations. The nature of these markets impact Aerostar's advanced radar systems and aerostats as these products are particularly susceptible to fluctuations in market demand. Demand fluctuations and the likelihood of delays in sales involving large contracts for such products also increase the risk of these products becoming obsolete, increasing the risk associated with expected sales of such products. The total value of certain advanced radar systems and aerostat inventory was approximately $2 million at the end of fiscal year 2019. This valuation is based on an estimate that market demand for these products will be sufficient in future periods such that these inventories will be sold at a price greater than their carrying value and related selling costs. Write-downs or impairment of the value of such products carried in inventory could adversely affect the Company's results of operations. To the extent products become obsolete or anticipated sales are not realized, expected future cash flows could be adversely impacted. This could also lead to an impairment, which could adversely impact the Company's results of operations and financial condition.
 
Sales of certain of Aerostar’s products into international markets increase the compliance risk associated with regulations such as International Traffic in Arms Regulations and Foreign Corrupt Practices Act, as well as others, exposing the Company to fines and its employees to fines, imprisonment, or civil penalties. Potential consequences of a material violation of such regulations include damage to the Company's reputation, litigation, and increased costs.

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

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


10



The Company derives a portion of its revenues from foreign markets, which subjects the Company to business risks, including risk of changes in government policies and laws or changes in worldwide economic conditions.
The Company's consolidated net sales to locations outside of the U.S. were $48.3 million in fiscal 2019, representing approximately 12% of consolidated net sales. The Company's financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations, along with changes in worldwide economic conditions. These conditions include, but are not limited to, changes in a country's or region's economic or political condition; trade regulations affecting production, pricing, and marketing of products; local labor conditions and regulations; reduced protection of intellectual property rights in some countries; changes in the regulatory or legal environment; restrictions on currency exchange activities; the impact of fluctuations in foreign currency exchange rates, which may affect product demand and may adversely affect the profitability of the Company's products in U.S. dollars in foreign markets where payments are made in the local currency; taxes and tariffs; and other trade barriers. International risks and uncertainties also include changing social and economic conditions, terrorism, political hostilities and war, difficulty in enforcing agreements or collecting receivables, and increased transportation or other shipping costs. Any of these such risks could lead to reduced sales and reduced profitability associated with such sales.

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

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

Total goodwill and intangible assets accounted for $ 67.2 million , or approximately 19% , of the Company's total assets as of January 31, 2019. The Company evaluates goodwill and intangible assets for impairment annually, or when evidence of potential impairment exists. The annual impairment test is based on several factors requiring judgment. Principally, a significant decrease in expected cash flows or changes in market conditions may indicate potential impairment of recorded goodwill or intangible assets. These expected future cash flows are dependent on several factors, including revenue growth in certain product lines, and could be adversely impacted if anticipated revenue growth is not realized. Reductions in cash flows could result in an impairment of goodwill and/or intangible assets, which could adversely impact the Company's results of operations and financial condition.

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

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


11



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

The Company could be impacted by unfavorable results or material settlement of legal proceedings.
The Company is sometimes a party to various legal proceedings and claims that arise in the ordinary course of business. Regardless of the merit of any such claims, litigation is often very costly, time-consuming, and disruptive to the operations and business of the Company, and a distraction to management and other personnel. While these matters generally are not material in nature, it is possible a matter may arise that is material to the Company’s business.

Although the Company believes the probability of a materially adverse outcome is remote, if one or more claims were resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements may be materially adversely affected. Further, such an outcome could result in significant compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief against the Company that could have a material adverse effect on its businesses, financial condition, results of operation, and cash flows.
 
Technology failures or cyber-attacks on the Company's systems could disrupt the Company's operations or the functionality of its products and negatively impact the Company's business.
The Company increasingly relies on information technology systems to process, transmit, and store electronic information. In addition, a significant portion of internal communications, as well as communication with customers and suppliers, depends on information technology. Further, the products in Applied Technology and Aerostar segments depend upon GPS and other systems through which products interact with government computer systems and other centralized information sources. The Company is exposed to the risk of cyber incidents in the normal course of business. Cyber incidents may be deliberate attacks for the theft of intellectual property or other sensitive information or may be the result of unintentional events. Like other companies, the Company's information technology systems may be vulnerable to interruption due to a variety of events beyond the Company's control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers, foreign governments, and other security issues. Further, attacks on centralized information sources could affect the operation of the Company's products or cause them to malfunction. The Company has technology security initiatives, education and training programs, and disaster recovery plans in place to manage the Company's risk to these vulnerabilities, but these measures may not be adequate, or implemented properly, or executed timely to ensure that the Company's operations are not significantly disrupted. Potential consequences of a material cyber incident include damage to the Company's reputation, litigation, and increased cyber security protection and remediation costs. Such consequences could adversely affect results of operations.

The implementation of a new enterprise resource planning (ERP) system may result in short term disruption to the Company’s operations and business, which could adversely impact the Company and damage customer relationships and brand reputation.
The Company depends heavily on its management information systems for several aspects of its business. The Company launched a company-wide initiative during the fiscal 2018 third quarter called "Project Atlas." This is a strategic long-term investment to replace the Company’s existing ERP platform. Project Atlas is being implemented in a phased approach and is expected to take approximately three years to complete. If the new ERP system or legacy system are disrupted, in any material way, during implementation, the Company may incur additional expenses and loss of data. Additionally, if improvements or upgrades are required to meet the evolving needs of the Company's business operations, the Company may be required to incur significant capital expenditures or expenses in the pursuit of improvements or upgrades to the new system. These efforts could potentially increase the amount of time for implementation of the new ERP platform, require expenditures above the anticipated amounts, demand the use of additional resources, distract key personnel and potentially cause short-term disruptions to existing systems and business. Any of these outcomes could impair the Company’s ability to achieve critical strategic initiatives and could adversely impact sales, profitability, cash flows and financial condition. Project Atlas went live in February 2019 for Engineered Films and the remaining divisions are expected to go live in fiscal years 2020 and 2021.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.


12

                           

ITEM 2.
PROPERTIES

Most of the Company's properties are located in Sioux Falls, South Dakota. This real estate is owned by the Company and used by all three divisions for sales, manufacturing and other functions. In addition, the Company owns or leases properties in: Midland and Sulphur Springs, Texas (USA); and Netherlands, Brazil and Canada (internationally).

The following is the approximate square footage of the Company's owned or leased facilities by segment: Applied Technology - 187,000; Engineered Films - 789,000; Aerostar - 275,000; and Corporate - 150,000 . The Company believes that its properties are suitable and adequate to meet existing production needs.

ITEM 3.
LEGAL PROCEEDINGS

The Company is involved as a party in lawsuits, claims, regulatory inquiries, or disputes arising in the normal course of its business, the potential costs and liability of which cannot be determined at this time. Management does not believe the ultimate outcomes of its legal proceedings are likely to be material to its results of operations, financial position, or cash flows.

The Company has insurance policies that provide coverage to various degrees for potential liabilities arising from legal proceedings.

ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

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

COMPANY STOCK PERFORMANCE

The Company's common stock is traded on the NASDAQ Global Select Market under the ticker symbol RAVN. Daily market activity along with quoted prices and other trading information are readily available for the Company's common stock on numerous websites including www.nasdaq.com. The graph and table below compares the cumulative total shareholder return of the Company's stock in relation to the cumulative return of the Russell 2000 and S&P Small Cap 600 indices. These two indices were selected as they are comparable benchmarks and the Company is a component of each index. Investors who hypothetically purchased $100.00 in the Company's stock on January 31, 2014 , held the stock for five years and reinvested the dividends, would have seen their value increase to $109.41 . Stock performance on the graph is not necessarily indicative of future share price performance.



















# 13

                           

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG RAVEN INDUSTRIES, INC., RUSSELL 2000 INDEX, AND THE S&P SMALL CAP 600 INDEX.

RAVN2019001.JPG

 
 
Years Ended January 31,
 
5-Year
Company / Index
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
 
CAGR (a)
Raven Industries, Inc.
 
$
100.00

 
$
58.31

 
$
42.01

 
$
71.96

 
$
112.51

 
$
109.41

 
1.8
%
Russell 2000 Index
 
100.00

 
104.41

 
94.05

 
125.58

 
147.16

 
141.97

 
7.3
%
S&P Small Cap 600 Index
 
100.00

 
106.15

 
101.18

 
135.92

 
158.43

 
156.46

 
9.4
%
(a) Compound annual growth rate (CAGR)
 
 
 
 
 
 
 
 
 
 
 
 

ISSUER PURCHASES OF EQUITY SECURITIES
As of January 31, 2019 , the Company had approximately 12,500 beneficial holders, which includes a substantial amount of the Company's common stock held of record by banks, brokers, and other financial institutions.

On November 3, 2014, the Company announced that its Board of Directors (Board) had authorized a $40.0 million stock buyback program. Since that time, the Board has provided additional authorizations to increase the total amount authorized under the program to $75.0 million.
 
The Company did not repurchase any shares of the Company's common stock in fiscal 2019. During fiscal 2018, the Company made purchases of 348,286 common shares under this plan at an average price of $28.71 equating to a total cost of $10.0 million. None of these common shares were repurchased during the fourth quarter of fiscal 2018. There is $28.0 million still available for share repurchases under this Board-authorized program which remains in place until such time as the authorized spending limit is reached or is otherwise revoked by the Board.

DIVIDENDS

The Company has a long-standing history of paying cash dividends to its shareholders. In each of the previous three fiscal years the Company has paid dividends of approximately $19 million, or $0.52 per share. The Company currently expects that comparable cash dividends will continue to be paid in the future; however, there can be no assurance as to the payment of future dividends as such payment depends on results of operations, financial condition, cash flows, potential business prospects, capital requirements, and other factors that the Board of Directors deems relevant.


14

                           

ITEM 6.
SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations", Item 8. "Financial Statements and Supplementary Data", and previously filed annual reports (Form 10-K). Historical results are not necessarily indicative of future results.

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

 
2019
 
2018
 
2017
 
2016
 
2015
OPERATIONS
 
 
 
 
 
 
 
 
 
 
 Net sales (a)
 
$
406,668

 
$
377,317

 
$
277,395

 
$
258,229

 
$
378,153

 Gross profit (b)
 
132,549

 
121,565

 
78,190

 
66,974

 
103,246

 Operating income (b)(c)
 
55,133

 
59,170

 
28,413

 
4,391

 
43,801

 Income before income taxes (b)(d)
 
61,570

 
58,986

 
27,853

 
4,081

 
43,501

 Net income attributable to Raven Industries, Inc. (e)
 
51,794

 
41,022

 
20,191

 
4,776

 
31,733

 Net income % of sales
 
12.7
%
 
10.9
%
 
7.3
%
 
1.8
%
 
8.4
%
 Net income % of average equity (f)
 
17.7
%
 
15.3
%
 
7.7
%
 
1.7
%
 
11.4
%
FINANCIAL POSITION
 
 
 
 
 
 
 
 
 
 
 Cash and cash equivalents
 
$
65,787

 
$
40,535

 
$
50,648

 
$
33,782

 
$
51,949

 Property, plant and equipment
 
106,615

 
106,280

 
106,324

 
115,704

 
117,513

 Total assets
 
360,245

 
326,803

 
301,509

 
298,688

 
362,873

 Total debt (including capital lease obligations)
 
284

 
448

 

 

 

 Raven Industries, Inc. shareholders' equity
 
308,955

 
276,064

 
259,426

 
264,155

 
305,153

 Net working capital (g)
 
100,276

 
100,777

 
77,012

 
77,870

 
100,183

 Net working capital percentage (h)
 
28.5
%
 
26.3
%
 
27.9
%
 
36.9
%
 
27.9
%
 Long-term debt / total capitalization
 
0.1
%
 
0.2
%
 
%
 
%
 
%
CASH FLOWS PROVIDED BY (USED IN)
 
 
 
 
 
 
 
 
 
 
 Operating activities
 
$
65,952

 
$
44,961

 
$
48,636

 
$
44,008

 
$
60,083

 Investing activities
 
(16,444
)
 
(25,675
)
 
(4,642
)
 
(11,074
)
 
(29,986
)
 Financing activities
 
(23,755
)
 
(29,721
)
 
(27,151
)
 
(50,684
)
 
(30,665
)
 Change in cash and cash equivalents
 
25,252

 
(10,113
)
 
16,866

 
(18,167
)
 
(1,038
)
COMMON STOCK DATA
 
 
 
 
 
 
 
 
 
 
 EPS — basic
 
$
1.44

 
$
1.14

 
$
0.56

 
$
0.13

 
$
0.86

 EPS — diluted
 
1.42

 
1.13

 
0.56

 
0.13

 
0.86

 Cash dividends per share
 
0.52

 
0.52

 
0.52

 
0.52

 
0.50

 Stock price range during the year
 
 
 
 
 
 
 
 
 
 
   High
 
$
49.80

 
$
40.85

 
$
26.90

 
$
22.85

 
$
40.06

   Low
 
31.45

 
23.75

 
12.88

 
13.87

 
20.75

   Close
 
36.99

 
38.55

 
25.05

 
15.01

 
21.44

OTHER DATA
 
 
 
 
 
 
 
 
 
 
 Price / earnings ratio (i)
 
26.0

 
34.1

 
44.7

 
115.5

 
24.9

 Average number of employees
 
1,219

 
1,054

 
907

 
936

 
1,251

 Sales per employee
 
$
334

 
$
358

 
$
306

 
$
276

 
$
302


# 15



(a) The Company acquired Colorado Lining International, Inc. in September of fiscal year 2018. Refer to Note 6 "Acquisitions and Investments in Businesses and Technologies" of the Notes to the Consolidated Financial Statements for further details. Fiscal year 2019 and 2018 included $14,494 and $24,225, respectively of recovery film sales related to the hurricane recovery effort. In addition, the Company divested its client private business in the first quarter of fiscal 2019. Net sales related to this business in fiscal 2019 and 2018 were $283 and $5,592, respectively.
(b)  Fiscal 2017 included inventory write-downs of $2,278 for Aerostar as a result of discontinuing sales activities for a specific radar product line within its business, as further described in Note 7 "Goodwill, Long-Lived Assets, and Other Charges" of the Notes to the Consolidated Financial Statements. Fiscal 2016, included pre-contract cost write-offs of $2,933, a goodwill impairment loss of $11,497, and a long-lived asset impairment loss of $3,826, partially offset by a reduction of $2,273 of an acquisition-related contingent liability for Aerostar.
(c) Fiscal 2019 operating income included a $4,503 expense related to the previously announced gift to South Dakota State University further described in Note 12 "Commitments and Contingencies" of the Notes to the Consolidated Financial Statements. Fiscal 2019 operating income included $4,033 of expenses related to Project Atlas. Project Atlas related expenses were approximately $900 in fiscal 2018.
(d)  Fiscal 2019 included a gain of $5,785 from the divestiture of the Company's ownership interest in SST, further described in Note 1 "Summary of Significant Accounting Policies".
(e)  The Tax Cuts and Jobs Act had a favorable impact to the Company. Refer to Note 10 "Income Taxes" of the Notes to the Consolidated Financial Statements for further details.
(f) Net income attributable to Raven Industries, Inc. divided by average equity. Average equity is the sum of Raven Industries, Inc. shareholders' equity for the beginning and ending of the fiscal year divided by two.
(g)  Net working capital is defined as accounts receivable, (net) plus inventories less accounts payable.
(h)  Net working capital percentage is defined as net working capital divided by fourth quarter net sales times four for each of the fiscal years, respectively.
(i) Closing stock price on last business day of fiscal year divided by EPS — diluted.

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

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

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

The MD&A is organized as follows:
Executive Summary
Results of Operations - Segment Analysis
Liquidity and Capital Resources
Off-Balance Sheet Arrangements and Contractual Obligations
Critical Accounting Policies and Estimates
Accounting Pronouncements

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

Management uses a number of measures to assess the Company's performance including:
Consolidated net sales, gross margin, operating income, operating margin, net income and diluted earnings per share.
Cash flow from operations and shareholder returns.
Return on sales, average assets and average equity.
Segment net sales, gross profit, gross margin, operating margin and operating income. At the segment level, operating income does not include an allocation of general and administrative expenses.

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Vision and Strategy
Raven's 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 its platform for success. Raven's 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 diverse market segments with strong short- and long-term growth prospects.
Diversified portfolio of businesses provide balance, opportunity and risk mitigation.
Invest in market-leading technologies and manufacturing capabilities.
Balance sheet strength and stability enables strategic investments and acquisitions to enhance shareholder returns.
Corporate responsibility is a top priority, it attracts great team members, customers and opportunities.
Continuous process improvements and value engineering.

The following discussion highlights the consolidated operating results for the years ended January 31, 2019 , 2018 and 2017 . Segment operating results are more fully explained in the Results of Operations - Segment Analysis section.
 
 
For the years ended January 31,
(dollars in thousands, except per-share data)
 
2019
 
% change
 
2018
 
% change
 
2017
Results of Operations
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
406,668

 
7.8
 %
 
$
377,317

 
36.0
%
 
$
277,395

Gross margin (a)
 
32.6
%
 
 
 
32.2
%
 
 
 
28.2

Operating income
 
$
55,133

 
(6.8
)%
 
$
59,170

 
108.2
%
 
$
28,413

Operating margin (a)
 
13.6
%
 
 
 
15.7
%
 
 
 
10.2
%
Net income attributable to Raven Industries, Inc.
 
$
51,794

 
26.3
 %
 
$
41,022

 
103.2
%
 
$
20,191

Diluted income per share
 
$
1.42

 
25.7
 %
 
$
1.13

 
101.8
%
 
$
0.56

 
 
 
 
 
 
 
 
 
 
 
Cash Flow and Shareholder Returns
 
 
 
 
 
 
 
 
 
 
Cash flow from operating activities
 
$
65,952

 
 
 
$
44,961

 
 
 
$
48,636

Cash outflow for capital expenditures
 
$
14,127

 
 
 
$
12,011

 
 
 
$
4,796

Cash dividends
 
$
18,753

 
 
 
$
18,685

 
 
 
$
18,839

Common share repurchases
 
$

 
 
 
$
10,000

 
 
 
$
7,702

 
 
 
 
 
 
 
 
 
 
 
Performance Measures
 
 
 
 
 
 
 
 
 
 
Return on net sales (b)
 
12.7
%
 
 
 
10.9
%
 
 
 
7.3
%
Return on average assets (c)
 
15.1
%
 
 
 
13.1
%
 
 
 
6.7
%
Return on average equity (d)
 
17.7
%
 
 
 
15.3
%
 
 
 
7.7
%
 
(a)  The Company's gross and operating margins may not be comparable to industry peers due to variability in the classification of expenses across industries in which the Company operates.
(b)  Net income attributable to Raven Industries, Inc. divided by net sales.
(c)  Net income attributable to Raven Industries, Inc. divided by average assets. Average assets is the sum of Total Assets for the beginning and ending of the fiscal year divided by two.
(d)  Net income attributable to Raven Industries, Inc. divided by average equity. Average equity is the sum of Total Raven Industries, Inc. shareholders' equity for the beginning and ending of the fiscal year divided by two.
Results of Operations - Fiscal 2019 compared to Fiscal 2018
The Company's net sales in fiscal 2019 were $406.7 million , an increase of $29.4 million , or 7.8% , from the prior year's net sales of $377.3 million . All three divisions achieved growth in net sales year-over-year, led by Aerostar attaining growth of 27.4% . Engineered Films achieved 6.2% growth year-over-year despite a significant reduction in hurricane recovery film sales. Net sales of hurricane recovery film were $14.5 million and $24.2 million in fiscal 2019 and 2018, respectively. Applied Technology grew net sales 4.1% year-over-year.

Operating income in Fiscal 2019 was $55.1 million , a decrease of $4.1 million, or 6.8% , from the prior year's operating income of $59.2 million . Fiscal 2019 operating income was reduced by the following:

Expense of $4.5 million related to a gift to South Dakota State University (SDSU), further described in Note 12

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"Commitments and Contingencies " of the Notes to the Consolidated Financial Statements.
Project Atlas related expenses of $4.0 million, which is an increase of $3.1 million compared to $0.9 million in fiscal 2018 when the project began.
Higher investment in research and development activities within Applied Technology and Aerostar.
Lower operating leverage within Engineered Films due to significantly lower hurricane recovery film sales.

Partially offsetting these unfavorable impacts to operating income were lower legal expenses, which included favorable legal recoveries in fiscal 2019 as compared to the prior year.

Net income for fiscal 2019 was $51.8 million , or $1.42 per diluted share, compared to net income of $41.0 million , or $1.13 per diluted share, in fiscal 2018. In addition to the significant items noted above impacting operating income, net income for the twelve-month period ended January 31, 2019, included a non-operating gain on the divestiture of the Company's ownership interest in Site-Specific Technology Development Group, Inc. (SST) of $5.8 million ($4.6 million after-tax, or $0.13 per diluted share). Refer to Note 1 "Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements for further information regarding the sale of this ownership interest.

Additionally, net income benefited from a lower effective tax rate due to the U.S. Tax Cuts and Jobs Act (TCJA) and favorable discrete tax items. The Company's effective tax rate for fiscal 2019, excluding the impact of discrete items, declined by approximately 10 percentage points compared to fiscal 2018, resulting in a benefit to net income in the amount of approximately $6 million or $0.17 per diluted share.

Applied Technology Division
Fiscal 2019 net sales increased $5.0 million, or 4.1% , from $124.7 million in fiscal 2018 to $129.7 million in fiscal 2019. The increase in net sales was driven by growth of both new and existing products. Geographically, domestic and international sales were up 5.0% and 0.9% year-over-year, respectively. The Company does not specifically model comparative market share position for any of its operating divisions, but based on the sales developments in fiscal 2019, the Company believes that Applied Technology, in aggregate, has maintained or increased its global market share position during the year.

Applied Technology's operating income increased by 24.9% to $39.0 million from $31.3 million in the prior year. The increase was due primarily to increased leverage on higher sales volume and lower legal expenses which included favorable legal recoveries. Throughout fiscal 2019, the division continued to invest in research and development activities to drive innovation and future sales growth.

Engineered Films Division
Fiscal 2019 net sales were $226.6 million , an increase of $13.3 million , or 6.2% , compared to fiscal 2018. Net sales increased despite a significant reduction in hurricane recovery film sales. Net sales of hurricane recovery film were $14.5 million and $24.2 million in fiscal 2019 and 2018, respectively. Excluding hurricane recovery film sales, the division's net sales increased significantly more than reported results year-over-year. Additionally, the acquisition of Colorado Lining International, Inc. (CLI), which occurred in September of fiscal year 2018 as further described in Note 6 "Acquisitions and Investments in Businesses and Technologies" of the Notes to the Consolidated Financial Statements, contributed a total of $21.6 million in sales for the first seven months of fiscal 2019. For the first seven months of fiscal 2018 the division generated $4.1 million in sales to CLI as a customer. Although the Company does not specifically model comparative market share position for any of its operating divisions, based on the sales developments in fiscal year 2019 the Company believes that Engineered Films, in aggregate, has maintained or increased market share in its core business.

Engineered Film's operating income decreased by 16.1% to $39.7 million from $47.3 million in the prior year. The decrease in operating income was led by lower plant utilization from the reduction in hurricane recovery film sales and approximately $2 million of cost over-runs on a large geomembrane installation project that was completed in the fourth quarter of fiscal 2019.

Aerostar Division
Fiscal 2019 net sales were up 27.4% to $50.9 million compared to $39.9 million in fiscal 2018. The increase in sales for the division was principally driven by higher sales of lighter-than-air products and services. Aerostar divested its client private business in the first quarter of fiscal 2019. Net sales from the client private business were $0.3 million and $5.6 million in fiscal 2019 and 2018, respectively. Excluding client private business sales, the division's net sales increased significantly more than reported results year-over-year. While it is particularly challenging to measure market share information for the Aerostar division and the Company does not specifically model comparative market share position for any of its operating divisions, the Company believes that Aerostar’s sales growth was driven by market share gains and overall growth in the markets served.


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Aerostar's operating income increased 98.4% to $8.2 million from $4.1 million in the prior year. The improved profitability was primarily due to increased leverage on higher sales volume, strong margins on aerostat contract deliveries and higher utilization of engineering support on service contracts.

Results of Operations - Fiscal 2018 compared to Fiscal 2017
The Company's net sales in fiscal 2018 were $377.3 million , an increase of $99.9 million , or 36.0% , from the prior year's net sales of $277.4 million . All three divisions achieved double-digit growth, with Engineered Films achieving growth of 53.6% year-over-year. Delivery of hurricane recovery film to support relief efforts and the recent acquisition of CLI contributed sales of $24.2 million and $13.1 million, respectively.

Operating income for fiscal year 2018 was $59.2 million compared to $28.4 million in fiscal year 2017. The operating income increase year-over-year was principally driven by operating leverage on higher sales volumes in Engineered Films and Applied Technology, as well as improved profitability within Aerostar. Project Atlas began in the third quarter of fiscal 2018, and the related costs incurred were $0.9 million in fiscal year 2018.

Net income for fiscal year 2018 was $41.0 million , or $1.13 per diluted share, compared to net income of $20.2 million , or $0.56 per diluted share, in fiscal year 2017. Net income was up $20.8 million year-over-year, or $0.57 per diluted share, in fiscal 2018. The TCJA was enacted on December 22, 2017 and reduced the U.S. federal statutory tax rate to 21 percent effective January 1, 2018. This change caused the Company’s fiscal 2018 U.S. federal statutory tax rate to be reduced by 1.2 percentage points, benefiting fiscal year 2018 net income by $0.7 million.

Applied Technology Division
Fiscal 2018 net sales increased $19.5 million , or 18.5% , to $124.7 million from $105.2 million in fiscal 2017. This increase in sales was driven by new product introductions and market share gains. Geographically, domestic and international sales were up 25.0% and 1.5% year-over-year, respectively. The Company does not specifically model comparative market share position for any of its operating divisions, but based on the sales developments in fiscal 2018, the Company believes that Applied Technology's global market share position improved during the year as a result of new product sales and building on key OEM relationships.

Applied Technology's operating income increased by 17.3% to $31.3 million from $26.6 million in the prior year due primarily to higher sales volume and lower manufacturing expenses. Throughout fiscal 2018, the division continued to invest in research and development activities to position itself for incremental new product sales and market share gains in future years.

Engineered Films Division
Fiscal 2018 net sales were $213.3 million , an increase of $74.4 million , or 53.6% , compared to fiscal 2017. The geomembrane and construction markets had the largest increases in net sales, but all markets were up year-over-year. Although the Company does not specifically model comparative market share position for any of its operating divisions, based on the sales developments in fiscal year 2018 the Company believes that Engineered Films achieved sales growth due to improved end-market demand and increased market share. Delivery of hurricane recovery film to support relief efforts and the recent acquisition of CLI contributed net sales of $24.2 million and $13.1 million, respectively.

Engineered Film's operating income increased by 106.1% to $47.3 million from $23.0 million in the prior year due primarily to strong operating leverage on higher sales volume. Operational efficiency gains developed throughout the year and higher sales volume improved capacity utilization and resulted in fixed cost leverage.

Aerostar Division
Fiscal 2018 net sales were $39.9 million compared to $34.1 million in fiscal 2017, up $5.8 million . The increase in sales for the division was principally driven by higher sales of lighter-than-air products and services. While it is particularly challenging to measure market share information for the Aerostar division and the Company does not specifically model comparative market share position for any of its operating divisions, the Company believes that Aerostar’s sales growth was primarily the result of continuing to develop capabilities for and interest in the emerging stratospheric balloon market rather than capturing existing market share from others.

Aerostar reported operating income of $4.1 million in fiscal 2018 compared to an operating loss of $1.6 million in fiscal 2017. The improved profitability was driven by higher sales volume, and the absence of inventory write-downs, which lowered prior year results by $2.3 million as discussed in more detail in Note 7 "Goodwill, Long-Lived Assets, and Other Charges" of the Notes to the Consolidated Financial Statements.


# 19

                           

RESULTS OF OPERATIONS - SEGMENT ANALYSIS
Applied Technology
Applied Technology designs, manufactures, sells, and services innovative precision agriculture products and information management tools, which are collectively referred to as precision agriculture equipment, that help farmers reduce costs, more precisely control inputs, and improve farm yields for the global agriculture market.

 
For the years ended January 31,
(dollars in thousands)
 
2019
 
% change
 
2018
 
% change
 
2017
Net sales
 
$
129,749

 
4.1
%
 
$
124,688

 
18.5
%
 
$
105,217

Gross profit
 
65,778

 
20.3
%
 
54,682

 
25.8
%
 
43,476

Gross margin
 
50.7
%
 
 
 
43.9
%
 
 
 
41.3
%
Operating expense
 
$
26,734


15.4
%
 
$
23,166

 
37.6
%
 
$
16,833

Operating expense as % of sales
 
20.6
%
 
 
 
18.6
%
 
 
 
16.0
%
Long-lived asset impairment loss
 
$

 
 
 
$
259

 
 
 
$

Operating income (a)
 
39,044

 
24.9
%
 
31,257

 
17.3
%
 
26,643

Operating margin
 
30.1
%
 
 
 
25.1
%
 
 
 
25.3
%
(a)  At the segment level, operating income does not include an allocation of general and administrative expenses.


For fiscal 2019 , net sales increased $5.0 million, or 4.1% , to $129.7 million as compared to $124.7 million in fiscal 2018 . Operating income increased $7.7 million, or 24.9% , to $39.0 million as compared to $31.3 million in fiscal 2018 .

Fiscal 2019 comparative results were primarily driven by the following factors:

Market conditions. Corn surplus remains near an all-time high, and U.S. farm income has decreased over the last five years. Offsetting these general ag market challenges is the growing demand for machine replacements that have been deferred for several years. In order to drive growth in these challenging market conditions, the division continues to invest in the development and acquisition of market leading technologies. Applied Technology continually makes a significant investment in research and development to drive innovation and maintain a cadence of new product introductions to the market. Additionally, the division completed the acquisition of AgSync on January 1, 2019. Applied Technology will leverage this acquisition to enhance its Slingshot® platform by delivering a logistics solution for ag retailers, custom applicators and enterprise farms. This strategic expansion of the Slingshot® platform is an effort to provide further value to the end customer and grow the division's subscription-based service model.
Sales volume and selling prices. Geographically, domestic and international sales were up 5.0% and 0.9% year-over-year, respectively. Higher sales volume of both new and existing products, rather than an increase in selling price, was the primary driver of this increase.
International sales. Net sales outside the U.S. accounted for 22.9% of segment sales in fiscal 2019 compared to 23.6% in fiscal 2018. International sales of $29.7 million in fiscal 2019 increased $0.3 million, or 0.9%, compared to fiscal 2018. The year-over-year increases in Europe and Latin America were mostly offset by a decrease in Canada.
Gross margin. Gross margin increased from 43.9% in fiscal 2018 to 50.7% in fiscal 2019 . The year-over-year increase in profitability was primarily driven by increased leverage on higher sales volume and a reduction of manufacturing related engineering support. Engineering support related expenses may be allocated to overhead, and thus cost of sales, or research and development expenses based on the focus of the engineering effort.
Operating expenses. Fiscal 2019 operating expenses were 20.6% of net sales compared to 18.6% for the prior year. Operating expenses as a percentage of sales increased primarily due to higher investment in research and development activities and approximately $2 million in selling expenses related to the establishment of the division's Latin American headquarters in Brazil. The greenfield project to establish a direct presence in Latin America resulted in higher operating expenses while sales development activities increased. The division expects this investment to provide strong organic growth over the long-term. Partially offsetting this year-over-year increase in operating expenses were lower legal expenses, which included favorable legal recoveries.

For fiscal 2018, net sales increased $19.5 million , or 18.5% , to $124.7 million as compared to $105.2 million in fiscal 2017. Operating income increased $4.6 million , or 17.3% , to $31.3 million as compared to $26.6 million in fiscal 2017 .

Fiscal 2018 comparative results were primarily driven by the following factors:

Market conditions. Conditions in the agriculture market remained subdued; however, Applied Technology's marketplace

# 20

                           

strategy has capitalized on new product introductions in fiscal 2018 . While OEM and aftermarket sales channel demand remained challenging, Applied Technology achieved fourth quarter and year-to-date sales growth compared to the prior year primarily due to market share gains driven by new product introductions and building on key OEM relationships. These were the primary growth drivers both domestically and internationally.
Sales volume and selling prices. Geographically, domestic and international sales were up 25.0% and 1.5% year-over-year, respectively. Higher sales volume and growth in new product sales, rather than an increase in selling price, were the primary drivers for these increases.
International sales. Net sales outside the U.S. accounted for 23.6% of segment sales in fiscal 2018 compared to 27.6% in fiscal 2017. International sales increased $0.4 million, or 1.5%, to $29.4 million in fiscal 2018 compared to fiscal 2017. Higher sales in Latin America and Europe, partially offset by a decrease in Canada, were the primary drivers of the increase. European revenue growth included strong growth at SBG Innovatie BV (SBG) in fiscal 2018 .
Gross margin. Gross margin increased from 41.3% in fiscal 2017 to 43.9% in fiscal 2018 . Higher sales volume and lower manufacturing costs increased operating leverage and drove the increase in gross margin. Due to the existing available capacity of the manufacturing facilities, the increase in sales volume did not require a commensurate increase in costs in fiscal 2018.
Operating expenses. Fiscal 2018 operating expenses were 18.6% of net sales compared to 16.0% for the prior year. Throughout fiscal 2018 , the division continued to invest in research and development activities to position itself for incremental new product sales and market share gains in future years.

Engineered Films
Engineered Films produces high-performance plastic films and sheeting for geomembrane, agricultural, construction, and industrial applications and also offers design-build and installation services of these plastic films and sheeting. Plastic film and sheeting can be purchased separately or together with installation services.
 
 
For the years ended January 31,
(dollars in thousands)
 
2019
 
% change
 
2018
 
% change
 
2017
Net sales
 
$
226,574

 
6.2
 %
 
$
213,298

 
53.6
%
 
$
138,855

Gross profit
 
47,641

 
(15.3
)%
 
56,255

 
91.3
%
 
29,407

Gross margin
 
21.0
%
 
 
 
26.4
%
 
 
 
21.2
%
Operating expenses
 
$
7,927

 
(11.2
)%
 
$
8,931

 
38.7
%
 
$
6,441

Operating expenses as % of sales
 
3.5
%
 
 
 
4.2
%
 
 
 
4.6
%
Operating income (a)
 
$
39,714

 
(16.1
)%
 
$
47,324

 
106.1
%
 
$
22,966

Operating margin
 
17.5
%
 
 
 
22.2
%
 
 
 
16.5
%
(a)  At the segment level, operating income does not include an allocation of general and administrative expenses.


For fiscal 2019 , net sales increased $13.3 million , or 6.2% , to $226.6 million as compared to fiscal 2018 . Operating income was $39.7 million , down 16.1% for fiscal 2019 as compared to $47.3 million for fiscal 2018 .

Fiscal 2019 comparative results were primarily driven by the following factors:

Market conditions. The division's end-market conditions improved throughout most of fiscal 2019, with the exception of significantly lower demand for hurricane recovery film compared to fiscal 2018. While oil prices dipped into the $50 per barrel range at the end of fiscal 2019, they averaged approximately $64 per barrel throughout fiscal 2019 which drove a 12.6% increase in Permian Basin rig counts from January 2018 to January 2019. Lastly, the division began the commissioning process for Line 15 at the end of fiscal 2019 and will start selling product in the first quarter of fiscal 2020. Line 15 is a new extrusion line designed to expand production capacity and capitalize on the growing end-market demand.
Sales volume and selling prices . As expected, the year-over-year comparison was impacted by a reduction in hurricane recovery film sales. Net sales of hurricane recovery film were $14.5 million and $24.2 million in fiscal 2019 and 2018, respectively. Additionally, the acquisition of CLI, which occurred in September of fiscal year 2018, contributed a total of $21.6 million in sales for the first seven months of fiscal 2019. For the first seven months of fiscal 2018 the division generated $4.1 million in sales to CLI as a customer. Excluding the impact from hurricane recovery film sales and the impact of CLI prior to the anniversary of the acquisition, net sales of the underlying business achieved growth year-over-year. In the underlying business, pounds sold did not change significantly but there was a modest increase in average selling price per pound.
Gross margin. Fiscal 2019 gross margin was 21.0% , 5.4 percentage points lower than the prior fiscal year. The decrease in gross margin percentage was led by lower plant utilization from the reduction in hurricane recovery film sales, a higher

# 21

                           

proportion of installation service revenue, and approximately $2 million of cost over-runs on a large geomembrane installation project that was completed in the fourth quarter of fiscal 2019.
Operating expenses. Fiscal 2019 operating expenses, as a percentage of net sales, decreased to 3.5% , from 4.2% in the prior year. The division reduced selling expenses while sales grew year-over-year.

For fiscal 2018 , net sales increased $74.4 million , or 53.6% , to $213.3 million as compared to fiscal 2017. Operating income was $47.3 million , up 106.1% for fiscal 2018 as compared to $23.0 million for fiscal 2017.

Fiscal 2018 comparative results were primarily driven by the following factors:

Market conditions. Engineered Films produces high-performance plastic films and sheeting for geomembrane, agricultural, construction, and industrial applications. End-market conditions for Engineered Films exhibited significant year-over-year improvement throughout fiscal 2018. U.S. land-based rig counts have increased 34.6% from January 2017 to January 2018 . Additionally, as discussed in more detail in Note 6 "Acquisitions of and Investments in Business and Technologies" of the Notes to the Consolidated Financial Statements, Engineered Films acquired the assets of CLI in September 2017. This acquisition enhanced the division's geomembrane market position through extended service and product offerings with the addition of new design-build and installation service components. The acquisition of CLI advanced Engineered Films’ business model into a vertically-integrated, full-service solutions provider for the geomembrane market. CLI contributed $13.1 million in net sales in fiscal 2018. Additionally, driven by the unusually devastating hurricane season, delivery of hurricane recovery film during fiscal 2018 resulted in sales of $24.2 million. It had been several years since the Company received a substantial increase in demand for hurricane recovery film, and sales of such film are generally less than $2.0 million on an annual basis.
Sales volume and selling prices . Primary drivers of the increase in net sales were the improved end-market conditions, the acquisition of CLI, and the delivery of hurricane recovery film, which added $2.3 million, $7.9 million and $15.8 million, in the fourth quarter of fiscal 2018, and $34.9 million, $13.1 million and $24.2 million, in the 2018 full fiscal year, respectively.
Gross margin. Fiscal 2018 gross margin was 26.4% , 5.2 percentage points higher than the prior fiscal year. During fiscal 2018 fourth quarter, the gross margin was 26.3% compared to 20.5% in the prior year fourth quarter. The increase for both periods was primarily the result of operational efficiency gains developed throughout the year and higher sales volume that improved capacity utilization and resulted in fixed cost leverage. Due to the existing available capacity of the facilities, the increase in sales volume did not require a commensurate increase in costs in fiscal 2018.
Operating expenses. Fiscal 2018 operating expenses, as a percentage of net sales, decreased to 4.2%, from 4.6% in the prior year. The year-over-year decrease in operating expenses was led by lower selling expenses.

Aerostar
Aerostar serves the aerospace/defense and commercial lighter-than-air markets. Aerostar's core products include high-altitude stratospheric balloons and radar systems. These products can be integrated with additional third-party sensors to provide research, communications, and situational awareness capabilities to governmental and commercial customers.
 
 
For the years ended January 31,
(dollars in thousands)
 
2019
 
% change
 
2018
 
% change
 
2017
Net sales
 
$
50,867

 
27.4
%
 
$
39,915

 
17.0
 %
 
$
34,113

Gross profit
 
19,165

 
80.7
%
 
10,608

 
99.4
 %
 
5,319

Gross margin
 
37.7
%
 
 
 
26.6
%
 
 
 
15.6
 %
Operating expenses
 
$
10,986

 
69.4
%
 
$
6,486

 
(4.5
)%
 
$
6,792

Operating expenses as % of sales
 
21.6
%
 
 
 
16.2
%
 
 
 
19.9
 %
Long-lived asset impairment loss
 
$

 
 
 
$

 
 
 
$
87

Operating income (loss) (a)
 
8,179

 
98.4
%
 
4,122

 
(364.2
)%
 
(1,560
)
Operating margin
 
16.1
%
 
 
 
10.3
%
 
 
 
(4.6
)%
(a)  At the segment level, operating income (loss) does not include an allocation of general and administrative expenses.

Net sales for fiscal 2019 increased 27.4% to $50.9 million from last year’s net sales of $39.9 million . Operating income increased $4.1 million to $8.2 million in fiscal 2019 compared to $4.1 million in fiscal 2018.
  

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Fiscal 2019 comparative results were primarily driven by the following factors:

Market conditions . Aerostar's markets are subject to significant variability in demand due to government spending uncertainties and the timing of contract awards. During fiscal 2019, the division continued to develop its capabilities in the emerging stratospheric balloon market beyond those developed in collaboration with Google on Project Loon. The division also remained focused on radar products and services and during fiscal year 2019 the division was awarded a new five-year $36 million radar systems contract with the U.S. Naval Air Warfare Center Aircraft Division. Deliveries for this contract are expected to begin in fiscal 2020.
Sales volume. The increase in sales for the division was driven primarily by higher sales of lighter-than-air products and services. In the first quarter of fiscal 2019 the division divested its client private business. The client private business generated net sales of $0.3 million and $5.6 million in fiscal 2019 and 2018, respectively. Excluding net sales associated with the client private business, the division's net sales increased significantly year-over-year when compared to reported results.
Gross margin. For fiscal 2019 , gross margin increased 11.1 percentage points compared to the prior fiscal year. The improved profitability was primarily due to increased leverage on higher sales volume, strong margins on aerostat contract deliveries and higher utilization of engineering support on service contracts. Given the contract-based nature of this division, gross margin for Aerostar can vary considerably based on the timing and magnitude of contracts.
Operating expenses. Operating expenses as a percentage of net sales increased 5.4 percentage points compared to the prior year. Fiscal 2019 operating expenses were $11.0 million , or 21.6% of net sales, compared to operating expenses of $6.5 million , or 16.2% of net sales in fiscal 2018. The increase in operating expenses as a percentage of net sales was primarily driven by higher investment in research and development activities as compared to the prior year.

Fiscal 2018 net sales increased 17.0% to $39.9 million from last year’s net sales of $34.1 million . Operating income was $4.1 million , up $5.7 million , compared to the fiscal 2017 operating loss of $1.6 million . Higher sales volume and the absence of inventory write-downs, which lowered prior year results by $2.3 million, drove the improved profitability.

Fiscal 2018 comparative results were primarily driven by the following factors:

Market conditions . Aerostar's markets are subject to significant variability due to government spending and the timing of contract awards. During fiscal 2018, Aerostar was pioneering new markets with leading-edge applications of its stratospheric balloons and was in active collaboration with Google on Project Loon. Project Loon is a program to provide high-speed wireless Internet accessibility and telecommunications to rural, remote, and under-served areas of the world. During fiscal 2018 Aerostar had several new contract wins further expanding the market for its stratospheric balloons.
Sales volume. The increase was principally driven by higher sales of stratospheric balloons and radar systems.
Gross margin. For fiscal 2018 , gross margin increased 11.0 percentage points compared to the prior fiscal year. The improved profitability was driven by higher sales volume, and the absence of inventory write-downs, which lowered prior year results by $2.3 million.
Operating expenses. Operating expenses as a percentage of net sales decreased 3.7 percentage points compared to prior fiscal year. Fiscal 2018 operating expenses were $6.5 million , or 16.2% of net sales, compared to operating expenses of $6.8 million , or 19.9% of net sales in fiscal 2017.

Corporate Expenses (administrative expenses; other income (expense), net; and effective tax rate)
 
 
For the years ended January 31,
(dollars in thousands)
 
2019

2018
 
2017
Administrative expenses
 
$
31,769

 
$
23,553

 
$
19,624

Administrative expenses as a % of sales
 
7.8
%
 
6.2
%
 
7.1
%
Other income (expense), net
 
$
6,437

 
$
(184
)
 
$
(560
)
Effective tax rate
 
15.7
%
 
30.5
%
 
27.5
%

Administrative expenses increased $8.2 million in fiscal 2019 compared to fiscal 2018 . The increase was driven primarily by a $4.5 million one-time gift to SDSU and a $3.1 million increase in Project Atlas related expenses. Project Atlas related expenses were $4.0 million and $0.9 million in fiscal 2019 and fiscal 2018, respectively.

Other income (expense), net consists primarily of activity related to the Company's equity investments, interest income, foreign currency transaction gains or losses, amortization of debt issuance costs, and other fees related to the Company's credit facility further described in Note 11 " Financing Arrangements" of the Notes to the Consolidated Financial Statements. In fiscal 2019 other income (expense), net included a $5.8 million gain on the divestiture of the Company's equity interest in SST.

# 23

                           


The Company's fiscal 2019 effective tax rate was 15.7% compared to 30.5% in the prior year. Approximately 10 percentage points of the decline year-over-year was due to the TCJA. The remaining decrease is a result of net favorable discrete tax items in fiscal 2019 compared to the prior year. For further information regarding the change in effective tax rates, refer to Note 10 "Income Taxes" of the Notes to the Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

The Company's balance sheet continues to reflect significant liquidity and a strong capital base. Management focuses on the current cash balance and operating cash flows in considering liquidity, as operating cash flows have historically been the Company's primary source of liquidity. Management expects that current cash, combined with the generation of positive operating cash flows, will be sufficient to fund the Company's normal operating, investing and financing activities beyond the next twelve months. Additionally, the Company has a credit facility of up to $125.0 million with a maturity date of April 15, 2020.

The Company’s cash balances and cash flows were as follows:
 
 
As of January 31,
(dollars in thousands)
 
2019
 
2018
 
2017
Cash and cash equivalents
 
$
65,787

 
$
40,535

 
$
50,648

 
 
For the years ended January 31,
(dollars in thousands)
 
2019
 
2018
 
2017
Cash provided by operating activities
 
$
65,952

 
$
44,961

 
$
48,636

Cash used in investing activities
 
(16,444
)
 
(25,675
)
 
(4,642
)
Cash used in financing activities
 
(23,755
)
 
(29,721
)
 
(27,151
)
Effect of exchange rate changes on cash and cash equivalents
 
(501
)
 
322

 
23

Net increase (decrease) in cash and cash equivalents
 
$
25,252

 
$
(10,113
)
 
$
16,866


Cash and cash equivalents totaled $65.8 million at January 31, 2019 , compared to $40.5 million at January 31, 2018 , an increase of $25.3 million . The year-over-year increase in cash was primarily driven by the continued strength in operating cash flows, cash proceeds from the sale of non-core assets, a reduction in cash outlays for business acquisitions, and the absence of share repurchases.

At January 31, 2019, the Company held cash and cash equivalents of $4.6 million in accounts outside the United States. These balances included undistributed earnings of foreign subsidiaries. As of January 31, 2019, the Company has no deferred tax liability recognized relating to the Company’s investment in foreign subsidiaries where the earnings have been indefinitely reinvested. The TCJA generally eliminates U.S. federal income taxes on dividends from foreign subsidiaries, and as a result, the accumulated undistributed earnings would only be subject to other taxes, such as withholding taxes and state income taxes, on distribution of such earnings. No additional withholding or income taxes has been provided for any remaining undistributed foreign earnings not subject to the one-time deemed repatriation tax, as it is the Company’s intention for these amounts to continue to be indefinitely reinvested in foreign operations. The Company’s liquidity is not materially impacted by the amount held in accounts outside of the United States as the Company's operating cash flows are primarily driven by U.S. sources.

Operating Activities
Operating cash flows result primarily from cash received from customers, which is offset by cash payments for inventories, services, employee compensation, and income taxes. Cash provided by operating activities was $66.0 million in fiscal 2019 , $45.0 million in fiscal 2018 and $48.6 million in fiscal 2017. The $21.0 million increase in operating cash flows in fiscal 2019 as compared to fiscal 2018 is primarily due to the increase in net income and consistent net working capital levels. The $3.6 million decrease in operating cash flows in fiscal 2018 as compared to fiscal 2017 is primarily due to an increase in net working capital demands.

The Company's cash needs have minimal seasonal trends. As a result, the discussion of trends in operating cash flows focuses on the primary drivers of year-over-year variability in net working capital. Net working capital and net working capital percentage are metrics used by management as a guide in measuring the efficient use of cash resources to support business activities and growth. The Company's net working capital for the comparative periods was as follows:

# 24


 
 
As of January 31,
(dollars in thousands)
 
2019
 
2018
 
2017
Accounts receivable, net
 
$
54,472

 
$
58,532

 
$
43,143

Plus: Inventories
 
54,076

 
55,351

 
42,336

Less: Accounts payable
 
8,272

 
13,106

 
8,467

Net working capital (a)
 
$
100,276

 
$
100,777

 
$
77,012

 
 
 
 
 
 
 
Annualized net sales (b)
 
$
352,088

 
$
383,292

 
$
275,660

Net working capital percentage (c)
 
28.5
%
 
26.3
%
 
27.9
%
(a)  Net working capital is defined as accounts receivable, (net) plus inventories less accounts payable.
(b)  Annualized net sales is defined as fourth quarter net sales during the applicable fiscal year multiplied by four.
(c)  Net working capital percentage is defined as net working capital divided by annualized sales.

Net working capital percentage deteriorated from 26.3% at January 31, 2018 , to 28.5% at January 31, 2019 . This year-over-year change is heavily influenced by hurricane recovery film demand and the related impacts to inventory, accounts receivable, and net sales. Excluding these estimated impacts, the Company believes the underlying inventory and accounts receivable balances increased in-line with the underlying increase in net sales year-over-year in the fourth quarter; however, accounts payable significantly decreased from fiscal 2018 to fiscal 2019 and drove the year-over-year increase in net working capital percentage.

Inventory levels were down $1.3 million or 2.3% from $55.4 million at January 31, 2018, to $54.1 million at January 31, 2019. In comparison net sales decreased $7.8 million or 8.1% year-over-year in the fourth quarter. Excluding the estimated impact of hurricane recovery film demand from inventory levels and net sales, the Company believes the underlying inventory balance increased in-line with the underlying increase in net sales year-over-year in the fourth quarter. Inventory levels increased $13.1 million, or 30.7% from $42.3 million  at January 31, 2017 to $55.4 million at January 31, 2018, driven by the increase in sales. In comparison net sales increased $26.9 million or 39.0% year-over-year in the fourth quarter.

Accounts receivable levels decreased $4.0 million, or 6.9% from $58.5 million at January 31, 2018, to $54.5 million at January 31, 2019. In comparison net sales decreased $7.8 million or 8.1% year-over-year in the fourth quarter. The decrease in accounts receivable was generally in-line with the decrease in sales. Accounts receivable levels increased $15.4 million , or 35.7% , from $43.1 million at January 31, 2017, to $58.5 million at January 31, 2018, due primarily to increased sales volume. In comparison net sales increased $26.9 million or 39.0% year-over year in the fourth quarter.

Accounts payable decreased $4.8 million , or 36.9% to $8.3 million at January 31, 2019, from $13.1 million at January 31, 2018. Accounts payable were actively reduced prior to Engineered Films' go-live on Project Atlas to mitigate the risk of late payment during the cut-over process. Additionally, timing of purchases and related payments in the fourth quarter of fiscal 2019 as compared to the fourth quarter of fiscal 2018 led to a further decrease in the accounts payable balance year-over-year. Accounts Payable increased $4.6 million , or 54.8% , year-over-year from $8.5 million at January 31, 2017, to $13.1 million at January 31, 2018, primarily due to improved timing of payments to suppliers, as well as additional purchases of raw materials to support the increase in sales year-over-year.
 
Investing Activities
Cash used in investing activities totaled $16.4 million in fiscal 2019 , $25.7 million in fiscal 2018 , and $4.6 million in fiscal 2017 . Capital expenditures totaled $14.1 million in fiscal 2019 compared to $12.0 million in fiscal 2018 and $4.8 million in fiscal 2017. The primary drivers of the decrease in cash outflows in fiscal 2019 were proceeds from the sale of non-core assets and a reduction in cash used for acquisitions. The primary drivers of the increase in cash outflows in fiscal 2018 were the payment related to the acquisition of CLI and increased capital expenditures.

Management anticipates capital spending of approximately $15 million in fiscal 2020.

Financing Activities
Financing activities consumed cash of $23.8 million in fiscal 2019 compared with $29.7 million in fiscal 2018 and $27.2 million in fiscal 2017 .

Dividends paid were $18.8 million , $ 18.7 million and $18.8 million in fiscal years 2019, 2018, and 2017, respectively, or $0.52 per share in all three years.


25


In fiscal 2016, the Company began to repurchase common shares as part of the $40.0 million share repurchase plan authorized by the Company’s Board of Directors. Since that time, the Board has provided additional authorizations bringing the total amount authorized under the plan to $75.0 million at January 31, 2019. The Company made no share repurchases in fiscal 2019. The Company paid $10.0 million and $7.7 million for share repurchases in 2018 and 2017, respectively. Approximately $28 million of the total authorization remains available for share repurchases under this plan as of January 31, 2019.
 
No borrowings or repayments have occurred on the Company's credit facility discussed further in Note 11 "Financing Arrangements" of the Notes to the Consolidated Financial Statements and below during any of fiscal periods reported.

Other Liquidity and Capital Resources
The Company entered into a credit facility on April 15, 2015, (Credit Agreement) which provides for a syndicated senior revolving credit facility up to $125.0 million with a maturity date of April 15, 2020. This Credit Agreement is more fully described in Note 11 "Financing Arrangements" of the Notes to the Consolidated Financial Statements. There were no borrowings outstanding for any of the fiscal periods covered by this Form 10-K. Availability under the Credit Agreement for borrowings as of January 31, 2019, was $124.5 million .

Letters of credit (LOC) totaling $0.5 million and $1.1 million were outstanding at January 31, 2019 and 2018. Any draws required under the LOCs would be settled with available cash or borrowings under the Credit Agreement.

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

The Company launched a company-wide initiative during the third quarter of fiscal 2018 called Project Atlas. This is a strategic long-term investment to replace the Company’s existing enterprise resource planning platform. This investment will drive efficiencies across the enterprise, enable faster integration of future acquisitions, automate a significant portion of internal controls, and enhance the Company's execution of its long-term growth strategy. Subsequent to the fiscal 2019 year end, Engineered Films went live on Project Atlas. The remaining divisions are expected to go live in fiscal years 2020 and 2021. The total project is expected to cost approximately $10 million. The company recognized $4.0 million of expenses for Project Atlas in fiscal 2019 and $0.9 million in fiscal 2018. Project Atlas spending is expected to be approximately $3 million in fiscal year 2020.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

As of January 31, 2019 , the Company is obligated to make cash payments in connection with its non-cancelable operating leases for facilities and equipment, capital lease obligations and unconditional purchase obligations, primarily for raw materials. Additionally, the Company's known off-balance sheet debt and other unrecorded obligations at January 31, 2019, are listed in the table below.
(dollars in thousands)
 
Total
 
Less than
1 year
 
2-3
years
 
4-5
years
 
More than
5 years
Credit facility
 
$
275

 
$
212

 
$
63

 
$

 
$

Capital lease obligations
 
330

 
182

 
146

 
2

 

Operating leases
 
5,376

 
2,213

 
2,666

 
497

 

Unconditional purchase obligations
 
31,373

 
31,373

 

 

 

Postretirement benefits
 
17,980

 
330

 
690

 
706

 
16,254

Acquisition-related contingent payments
 
5,838

 
2,138

 
3,700

 

 

Contractual Gift Agreement
 
3,570

 
715

 
1,430

 
1,425

 

Uncertain tax positions
 
2,670

 

 

 

 

 
 
$
67,412

 
$
37,163

 
$
8,695

 
$
2,630

 
$
16,254


26


Credit facility
The Company's Credit Agreement provides for a syndicated senior revolving credit facility up to $125.0 million with a maturity date of April 15, 2020 . The loan proceeds may be utilized by Raven for strategic business purposes such as acquisitions and for working capital needs. 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 of $0.2 million .

Capital lease obligations
The Company's capital lease obligations are related to a fleet of vehicles held under capital leases to support business operations.

Operating Leases
The Company leases certain vehicles, equipment, and facilities under operating leases. These future obligations primarily support sales efforts.

Unconditional purchase obligations
Unconditional purchase obligations consist of those for inventory and other obligations that arise in the normal course of business operations. The majority of these are related to the purchase of raw material inventories in the Applied Technology and Engineered Films divisions.

Postretirement Benefit Obligation,
The Company previously provided postretirement medical and other benefits to certain senior executive officers and senior managers. In fiscal 2016, the Company eliminated this benefit and obligation for all of its active senior executive officers and their spouses except two officers who had over 20 years of service at that time. At January 31, 2019, seventeen participants remained eligible to receive postretirement medical and other benefits for their lifetimes. Postretirement benefit amounts presented in the table above represent expected payments on the accumulated postretirement benefit obligation before it is discounted. This benefit obligation is unfunded and is further described in Note 8 "Employee Postretirement Benefits" of the Notes to the Consolidated Financial Statements .

Acquisition-related obligations
The Company has future obligations for earn-out payments associated with the acquisition of Aerostar Technical Solutions, Inc. (ATS), formerly named Vista Research, Inc. or "Vista," completed in fiscal 2012; SBG, completed in fiscal 2015; CLI, completed in fiscal 2018; and AgSync, completed in fiscal 2019. The total liability recorded on the Consolidated Balance Sheet as of January 31, 2019, related to these future obligations was $4.2 million of which $1.8 million was classified as "Accrued liabilities" and $2.4 million as "Other liabilities." These liabilities recorded represent the present value of earn-out payments classified as consideration at the acquisition date.

Contractual Gift Agreement
The Company has future obligations related to a gift agreement with the South Dakota State University Foundation, Inc. (the Foundation) effective in January 2018. This gift will be used by SDSU, located in Brookings, SD, for the establishment of a precision agriculture facility to support SDSU's Precision Agriculture degrees and curriculum. This facility will assist the Company in further collaboration with faculty, staff, and students on emerging technology in support of the growing need for precision agriculture practices and tools. The Company will make a $5.0 million gift to the Foundation in annual installments throughout the term of the agreement. The fair value of this contingency at January 31, 2019, was $3.2 million (measured based on the present value of the expected future cash outflows) of which $0.7 million was classified as "Accrued liabilities" and $2.5 million was classified as "Other liabilities" on the Consolidated Balance Sheet. To date the Company has gifted $1.4 million.

Uncertain tax positions
Raven reported a total liability for uncertain tax positions of $2.7 million at January 31, 2019. The Company is not able to reasonably estimate the timing of future payments relating to these non-current tax benefits. This obligation is retired when the uncertain tax position is settled or the applicable tax year is no longer subject to examination by the tax authorities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies are those that require the application of especially challenging, subjective, or complex judgment when valuing assets and liabilities on the Company's balance sheet. These policies and estimates are discussed below because a fluctuation in actual results versus expected results could materially affect operating results and because the policies require significant judgments and estimates to be made. Accounting related to these policies is initially based on best estimates at the time of original entry in the accounting records. Adjustments are periodically recorded when the Company's actual experience differs from the expected experience underlying the estimates. These adjustments could be material if experience were to change significantly.

27

                           

Revenue Recognition
Revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those goods or providing services. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. 

When determining whether the customer has obtained control of the goods or services, the Company considers any future performance obligations. Generally, there is no post-shipment obligation on products sold other than warranty obligations in the normal and ordinary course of business. In the event significant post-shipment obligations were to exist, revenue recognition would be deferred until the Company has substantially accomplished what it must do to be entitled to the benefits represented by the revenue. Estimated returns, sales allowances, and warranty charges, if applicable, are recorded at the same time revenue is recorded. 

Goodwill Impairment
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. 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).

The Company performs impairment reviews of goodwill by reporting unit. For fiscal years 2017 through 2019, the Company determined it had three reporting units: Engineered Films Division; Applied Technology Division; and Aerostar Division.

During the annual impairment review process the Company first performs a step zero qualitative impairment assessment over relative events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Although not all inclusive, these events and circumstances assessed include the Company's stock price, macroeconomic conditions, industry and market considerations, change in cost factors and adverse changes in financial performance such as declines in projected revenues, earnings and cash flows. If events and circumstances indicate the fair value of a reporting unit is less than its carry value a step one quantitative analysis is performed. The Company also has the option of bypassing the step zero qualitative impairment assessment by proceeding directly to the step one quantitative goodwill impairment test during the annual review process.
In step one of the goodwill impairment analysis (quantitative analysis), the fair value of each reporting unit is determined using a discounted cash flow analysis. Projecting discounted future cash flows requires the Company to make significant estimates and assumptions regarding future revenues and expenses, projected capital expenditures, changes in net working capital, and the appropriate discount rate.
In developing the discounted cash flow analysis, assumptions about the revenue growth rate, operating profit margin percentage, capital expenditures, and changes in net working capital reference both the Company's annual operating plan (budget) and long-term strategic plan for each of the Company’s reporting units; however, they also reflect the best available information at that time and as appropriate reflect market participant assumptions if such amounts might differ from the Company-specific assumptions for each of the Company’s reporting units.
Discount rate assumptions for each reporting unit include the Company's estimated weighted average cost of capital, derived using both known and estimated customary market metrics, and management’s assessment of risks inherent to the future cash flows of the respective reporting unit. One of the metrics considered by the Company in its selection of a discount rate is the relevant small company size premium appropriate to the reporting unit for which the valuation is being assessed. Generally, the lower the revenues associated with a reporting unit, the higher the small company premium and the higher the discount rate for that reporting unit. Other factors, such as the optimal capital structure assumed for the reporting unit, will likely result in a different discount rate assumption for each reporting unit being evaluated and may result in the discount rate for each reporting unit to vary year-over-year.
For goodwill impairment tests prior to fiscal 2018, the estimated fair value of the reporting unit was then compared with the book value of its net assets. If the estimated fair value of the reporting unit was less than the book value of the net assets of the reporting unit, an impairment loss was possible and a more refined measurement of the impairment loss took place. This was the second step of the goodwill impairment testing (step two), in which management used market comparisons and recent transactions to assign the fair value of the reporting unit to all of the assets and liabilities of that unit. The valuation methodologies in both steps of goodwill impairment testing used significant estimates and assumptions. Management evaluated the merits of each significant assumption and the overall basket of assumptions used to determine the fair value of the reporting unit.

28

                           

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 removed step two of the former goodwill impairment test, which required a hypothetical purchase price allocation. Under the new guidance, a goodwill impairment is now measured as the amount by which a reporting unit’s carrying value exceeds its fair value. This amendment was applied on a prospective basis, and as such step two was applied as appropriate in fiscal 2017.

During fiscal 2019 there were no triggering events with respect to any of the Company's reporting units. Based on the Company’s annual qualitative assessment for its three reporting units, the Company determined a quantitative analysis was not necessary for fiscal 2019. No goodwill impairment losses were recorded for fiscal year 2019.
During fiscal 2018 there were no triggering events with respect to any of the Company's reporting units. Based on the Company’s annual qualitative assessment for the Applied Technology and Engineered Films reporting units, the Company determined a quantitative analysis was not necessary for fiscal 2018. For the Aerostar reporting unit, the Company determined the excess of the fair value of the reporting unit over its carrying value in the previous year's annual impairment assessment was not significant enough based upon the then current macroeconomic conditions to perform a qualitative analysis. As such, the Company performed a quantitative analysis for the annual impairment assessment of the Aerostar reporting unit. In determining the estimated fair value of the Aerostar reporting unit, the Company was required to estimate a number of factors, including projected revenue growth rates, projected operating income results, terminal growth rates, economic conditions, anticipated future cash flows, and the discount rate. This analysis indicated that the estimated fair value of the Aerostar reporting unit exceeded the net book value by approximately $12 million, or approximately 41%, therefore, no goodwill impairment losses were recorded for fiscal year 2018 for the Aerostar reporting unit.
The discount rate and terminal growth rate used in determination of the Aerostar reporting unit's fair value in fiscal year 2018 were 13.0% and 3.0%, respectively. Using the discount rate and terminal growth rate to illustrate sensitivity on this estimated fair value, a one-half percentage point increase in the discount rate or a one-half percentage point decrease in the terminal growth rate would have reduced the fair value of the Aerostar reporting unit by $1.5 million and $0.5 million, respectively.
During fiscal 2017, there were no triggering events with respect to the Applied Technology or Engineered Films reporting units. Based on the Company’s annual impairment assessment (step zero) for the Applied Technology reporting unit, no quantitative or step two analysis were determined to be necessary for fiscal 2017. The Company determined that there was a triggering event with respect to the Aerostar reporting unit in the third quarter of that year, which resulted in a goodwill impairment test. The Company also completed a quantitative analysis during the annual goodwill impairment process on the Engineered Films and Aerostar reporting units. The annual impairment analysis indicated that the fair value of Engineered Films and Aerostar reporting units exceeded their carrying value by approximately $105 million and $9 million, or approximately 90% and 30%, respectively. Therefore; no goodwill impairment losses were recorded for fiscal year 2017.

ACCOUNTING PRONOUNCEMENTS

See Note 1 "Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for a summary of recent accounting pronouncements.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future, not past or historical events. Without limiting the foregoing, the words "anticipates," "believes," "expects," "intends," "may," "plans," "should," "estimate," "would," "will," "predict," "project," "potential," and similar expressions are intended to identify forward-looking statements. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. The Company intends that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act.

Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions when made, there is no assurance that such assumptions are correct or that these expectations will be achieved. Assumptions involve important risks and uncertainties that could significantly affect results in the future. These risks and uncertainties include, but are not limited to, those relating to weather conditions, which could affect sales and profitability in some of the Company's primary markets, such as agriculture and construction and oil and gas drilling; or changes in raw material availability, commodity prices, competition, technology or relationships with the Company's largest customers, risks and uncertainties relating to development of new technologies to satisfy customer requirements, possible development of competitive technologies, ability to scale production of new products without negatively impacting quality and cost, risks of operating in

29



foreign markets, risks relating to acquisitions, including risks of integration or unanticipated liabilities or contingencies, and ability to finance investment and net working capital needs for new development projects, any of which could adversely impact any of the Company's product lines, risks of litigation, as well as other risks described in Item 1A "Risk Factors" of this Annual Report on Form 10-K. The foregoing list is not exhaustive and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The exposure to market risks pertains mainly to changes in interest rates on cash and cash equivalents. The Company's only outstanding debt as of January 31, 2019, is an immaterial amount of capital lease obligations. As a result, the Company does not expect net income or cash flows to be significantly affected by changes in interest rates.

The Company's subsidiaries that operate outside the United States use their local currency as the functional currency. The functional currency is translated into U.S. dollars for balance sheet accounts using the period-end exchange rates and average exchange rates for the statement of income. Cash and cash equivalents held in foreign currency (primarily Euros and Canadian dollars) totaled $4.6 million and $4.1 million at January 31, 2019 and 2018, respectively. Adjustments resulting from financial statement translations are included as cumulative translation adjustments in "Accumulated other comprehensive income (loss)" within shareholders' equity. Foreign currency transaction gains or losses are recognized in the period incurred and are included in "Other income (expense), net" in the Consolidated Statements of Income and Comprehensive Income. Foreign currency fluctuations had no material effect on the Company's financial condition, results of operations, or cash flows.

The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. However, the Company does utilize derivative financial instruments to manage the economic impact of fluctuation in foreign currency exchange rates on those transactions that are denominated in currency other than its functional currency, which is the U.S. dollar. Such transactions are principally Canadian dollar-denominated transactions. The use of these financial instruments had no material effect on the Company's financial condition, results of operations, or cash flows in any of the three previous years.


# 30

                           

ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
 
 
 
 
Index to Financial Statements
 
 
 
 
Page
Management's Report on Internal Control Over Financial Reporting
 
Report of Independent Registered Public Accounting Firm - Deloitte & Touche LLP
 
Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP
 
Consolidated Financial Statements
 
 
 
Consolidated Balance Sheets
 
 
Consolidated Statements of Income and Comprehensive Income
 
 
Consolidated Statements of Shareholders' Equity
 
 
Consolidated Statements of Cash Flows
 
 
Notes to Consolidated Financial Statements
 
 
 
 
 


# 31

                           

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has assessed effectiveness of the Company's internal control over financial reporting as of January 31, 2019 . In making its assessment of effectiveness of internal control over financial reporting, management used the criteria described by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based on this assessment using those criteria, we concluded that, as of January 31, 2019 , the Company's internal control over financial reporting was effective at a reasonable assurance level.

The effectiveness of our internal control over financial reporting as of January 31, 2019 has been audited by Deloitte & Touche, LLP, an independent registered public accounting firm, as stated in their report, which appears on the next page.

/s/ DANIEL A. RYKHUS
 
/s/ STEVEN E. BRAZONES
Daniel A. Rykhus
 
Steven E. Brazones
President and Chief Executive Officer
 
Vice President and Chief Financial Officer


March 22, 2019










# 32

                           

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Raven Industries, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Raven Industries, Inc. and subsidiaries (the "Company") as of January 31, 2019 and 2018, the related consolidated statements of income and comprehensive income, consolidated statements of shareholders’ equity, consolidated statements of cash flows, for each of the two years in the period ended January 31, 2019, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of January 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2019, and 2018 the results of its operations and its cash flows for each of the two years in the period ended January 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying managements report on internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 22, 2019
We have served as the Company's auditor since 2017.

# 33

                           

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Raven Industries, Inc.

In our opinion, the consolidated statements of income and comprehensive income, shareholder’s equity and cash flows for the year ended January 31, 2017 present fairly, in all material respects, the results of operations and cash flows of Raven Industries, Inc. and its subsidiaries for the year ended January 31, 2017, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the year ended January 31 2017 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 31, 2017


# 34

                           

RAVEN INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except per-share amounts)
 
As of January 31,
 
2019
 
2018
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
65,787

 
$
40,535

Accounts receivable, net
54,472

 
58,532

Inventories
54,076

 
55,351

Other current assets
8,736

 
5,861

Total current assets
183,071

 
160,279

 
 
 
 
Property, plant and equipment, net
106,615

 
106,280

Goodwill
50,942

 
46,710

Amortizable intangible assets, net
16,293

 
10,584

Other assets
3,324

 
2,950

TOTAL ASSETS
$
360,245

 
$
326,803

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
8,272

 
$
13,106

Accrued liabilities
23,478

 
21,946

Other current liabilities
1,303

 
1,890

Total current liabilities
33,053

 
36,942

 
 
 
 
Other liabilities
18,235

 
13,795

 
 
 
 
Commitments and contingencies (see Note 12)


 


 
 
 
 
Raven Industries, Inc. shareholders' equity
 
 
 
Common stock, $1 par value, authorized shares 100,000; issued 67,289 and 67,124, respectively
67,289

 
67,124

Paid-in capital
59,655

 
59,143

Retained earnings
285,969

 
252,772

Accumulated other comprehensive loss
(3,556
)
 
(2,573
)
Less treasury stock at cost, 31,332 and 31,332 shares, respectively
(100,402
)
 
(100,402
)
Total Raven Industries, Inc. shareholders' equity
308,955

 
276,064

Noncontrolling interest
2

 
2

Total shareholders' equity
308,957

 
276,066

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
360,245

 
$
326,803

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




# 35



RAVEN INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands, except per-share amounts)
 
For the years ended January 31,
 
2019
 
2018
 
2017
Net sales
$
406,668

 
$
377,317

 
$
277,395

Cost of sales
274,119

 
255,752

 
199,205

Gross profit
132,549

 
121,565

 
78,190

 
 
 
 
 
 
Research and development expenses
26,174

 
16,936

 
16,312

Selling, general and administrative expenses
51,242

 
45,200

 
33,378

Long-lived asset impairment loss

 
259

 
87

Operating income
55,133

 
59,170

 
28,413

 
 
 
 
 
 
Other income (expense), net
6,437

 
(184
)
 
(560
)
Income before income taxes
61,570

 
58,986

 
27,853

 
 
 
 
 
 
Income tax expense
9,697

 
17,967

 
7,661

Net income
51,873

 
41,019

 
20,192

 
 
 
 
 
 
Net income (loss) attributable to the noncontrolling interest
79

 
(3
)
 
1

 
 
 
 
 
 
Net income attributable to Raven Industries, Inc.
$
51,794

 
$
41,022

 
$
20,191

 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
    Basic
$
1.44

 
$
1.14

 
$
0.56

    Diluted
$
1.42

 
$
1.13

 
$
0.56