Quarterly Report (10-q)

Date : 05/30/2019 @ 1:56PM
Source : Edgar (US Regulatory)
Stock : Raven Industries Inc (RAVN)
Quote : 35.1  0.18 (0.52%) @ 7:57PM

Quarterly Report (10-q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2019
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to
Commission File Number: 001-07982
RAVEN INDUSTRIES INC
(Exact name of registrant as specified in its charter)
BLOCKLOGOBW04.JPG
South Dakota
(State or other jurisdiction of incorporation or organization)
 
46-0246171
(I.R.S. Employer Identification No.)
205 East 6th Street, P.O. Box 5107, Sioux Falls, SD 57117-5107
(Address of principal executive offices)
(605) 336-2750
(Registrant’s telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $1 par value
RAVN
The Nasdaq Global Select Market
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
As of May 24, 2019 , there were 36,026,302 shares of common stock, $1 par value, of Raven Industries, Inc. outstanding. There were no other classes of stock outstanding.
 



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




PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RAVEN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars and shares in thousands, except per-share data)
April 30,
2019
 
January 31,
2019
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
61,370

 
$
65,787

Accounts receivable, net
67,792

 
54,472

Inventories
58,042

 
54,076

Other current assets
7,263

 
8,736

Total current assets
194,467

 
183,071

 
 
 
 
Property, plant and equipment, net
105,236

 
106,615

Goodwill
50,845

 
50,942

Amortizable intangible assets, net
15,978

 
16,293

Other assets
7,624

 
3,324

TOTAL ASSETS
$
374,150

 
$
360,245

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
16,179

 
$
8,272

Accrued liabilities
19,437

 
23,478

Other current liabilities
2,839

 
1,303

Total current liabilities
38,455

 
33,053

 
 
 
 
Other liabilities
23,012

 
18,235

 
 
 
 
Commitments and contingencies (see Note 12)

 

 
 
 
 
Shareholders' equity
 
 
 
Common stock, $1 par value, authorized shares 100,000; issued 67,417 and 67,289, respectively
67,417

 
67,289

Paid-in capital
57,369

 
59,655

Retained earnings
294,450

 
285,969

Accumulated other comprehensive income (loss)
(3,872
)
 
(3,556
)
Treasury stock at cost, 31,393 and 31,332 shares, respectively
(102,683
)
 
(100,402
)
Total Raven Industries, Inc. shareholders' equity
312,681

 
308,955

Noncontrolling interest
2

 
2

Total equity
312,683

 
308,957

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
374,150

 
$
360,245


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

# 3

                           

RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
 
Three Months Ended
(dollars in thousands, except per-share data)
April 30,
2019
 
April 30,
2018
Net sales
$
98,178

 
$
111,129

Cost of sales
63,112

 
71,131

Gross profit
35,066

 
39,998

 
 
 
 
Research and development expenses
7,271

 
5,285

Selling, general, and administrative expenses
12,674

 
13,182

Operating income
15,121

 
21,531

 
 
 
 
Other income (expense), net
(69
)
 
5,679

Income before income taxes
15,052

 
27,210

 
 
 
 
Income tax expense
1,842

 
5,063

Net income
13,210

 
22,147

 
 
 
 
Net income (loss) attributable to the noncontrolling interest

 
12

 
 
 
 
Net income attributable to Raven Industries, Inc.
$
13,210

 
$
22,135

 
 
 
 
Net income per common share:
 
 
 
      ─ Basic
$
0.37

 
$
0.62

      ─ Diluted
$
0.36

 
$
0.61

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
Net income
$
13,210

 
$
22,147

 
 
 
 
Other comprehensive income (loss):
 
 
 
Foreign currency translation
(304
)
 
(480
)
Postretirement benefits, net of income tax benefit of $4 and $2 respectively
(12
)
 
(6
)
Other comprehensive income (loss), net of tax
(316
)
 
(486
)
 
 
 
 
Comprehensive income (loss)
12,894

 
21,661

 
 
 
 
Comprehensive income (loss) attributable to noncontrolling interest

 
12

 
 
 
 
Comprehensive income (loss) attributable to Raven Industries, Inc.
$
12,894

 
$
21,649


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

# 4

                           

RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
 
$1 Par Common Stock
Paid-in Capital
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Raven Industries, Inc. Equity
Non- controlling Interest
Total Equity
(dollars in thousands, except per-share amounts)
Shares
Cost
Balance January 31, 2018
$
67,124

$
59,143

31,332

$
(100,402
)
$
252,772

$
(2,573
)
$
276,064

$
2

$
276,066

Net income




22,135


22,135

12

22,147

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





(480
)
(480
)

(480
)
Postretirement benefits reclassified from accumulated other comprehensive income (loss) after tax benefit of $2





(6
)
(6
)

(6
)
Reclassification due to ASU 2018-02 adoption





280

(280
)



Cash dividends ($0.13 per share)

50



(4,708
)

(4,658
)

(4,658
)
Shares issued on stock options exercised, net of shares withheld for employee taxes
12

(129
)




(117
)

(117
)
Shares issued on vesting of stock units, net of shares withheld for employee taxes
41

(694
)




(653
)

(653
)
Share-based compensation

787





787


787

Balance April 30, 2018
$
67,177

$
59,157

31,332

$
(100,402
)
$
270,479

$
(3,339
)
$
293,072

$
14

$
293,086

 
 
 
 
 
 
 
 
 
 
Balance January 31, 2019
$
67,289

$
59,655

31,332

$
(100,402
)
$
285,969

$
(3,556
)
$
308,955

$
2

$
308,957

Net income




13,210


13,210


13,210

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





(304
)
(304
)

(304
)
Postretirement benefits reclassified from accumulated other comprehensive income (loss) after tax benefit of $4





(12
)
(12
)

(12
)
Cash dividends ($0.13 per share)

47



(4,729
)

(4,682
)

(4,682
)
Shares issued on stock options exercised, net of shares withheld for employee taxes
26

(693
)




(667
)

(667
)
Shares issued on vesting of stock units, net of shares withheld for employee taxes
102

(2,422
)




(2,320
)

(2,320
)
Shares repurchased


61

(2,281
)


(2,281
)

(2,281
)
Share-based compensation

782





782


782

Balance April 30, 2019
$
67,417

$
57,369

31,393

$
(102,683
)
$
294,450

$
(3,872
)
$
312,681

$
2

$
312,683


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


# 5

                           

RAVEN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Three Months Ended
(dollars in thousands)
April 30,
2019
 
April 30,
2018
OPERATING ACTIVITIES:
 
 
 
Net income
$
13,210

 
$
22,147

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
4,082

 
3,683

Change in fair value of acquisition-related contingent consideration
94

 
152

Gain from sale of equity method investment

 
(5,785
)
Deferred income taxes
1,511

 
(293
)
Share-based compensation expense
782

 
787

Other operating activities, net
32

 
(2,102
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable
(13,510
)
 
(8,893
)
Inventories
(4,092
)
 
134

Other assets
1,373

 
(42
)
Operating liabilities
5,280

 
3,815

Net cash provided by operating activities
8,762

 
13,603

 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(1,570
)
 
(4,164
)
Proceeds from sale or maturity of investments

 
6,556

Purchases of investments
(843
)
 
(79
)
Proceeds (disbursements) from sale of assets, settlement of liabilities

 
832

Other investing activities
(28
)
 
40

Net cash (used in) provided by investing activities
(2,441
)
 
3,185

 
 
 
 
FINANCING ACTIVITIES:
 
 
 
Dividends paid
(4,682
)
 
(4,658
)
Payments for common shares repurchased
(2,281
)
 

Payments of acquisition-related contingent liability
(620
)
 
(295
)
Restricted stock unit issuances
(2,320
)
 
(653
)
Employee stock option exercises
(667
)
 
(117
)
Other financing activities
(95
)
 
(52
)
Net cash used in financing activities
(10,665
)
 
(5,775
)
 
 
 
 
Effect of exchange rate changes on cash
(73
)
 
(231
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(4,417
)
 
10,782

Cash and cash equivalents at beginning of year
65,787

 
40,535

Cash and cash equivalents at end of period
$
61,370

 
$
51,317


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

# 6

(dollars in thousands, except per-share amounts)


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

(1) BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

Raven Industries, Inc. ("the Company" or "Raven") is a diversified technology company providing a variety of products to customers within the industrial, agricultural, geomembrane, construction, commercial lighter-than-air and aerospace/defense markets. The Company is comprised of three unique operating units, or divisions, classified into reportable segments: Applied Technology, Engineered Films, and Aerostar.

The accompanying interim unaudited consolidated financial statements, which includes the accounts of Raven and its wholly-owned or controlled subsidiaries, net of intercompany balances and transactions, has been prepared by the Company in accordance with generally accepted accounting principles in the United States (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present this financial information have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2019 .

Financial results for the interim three -month period ended April 30, 2019 , are not necessarily indicative of the results that may be expected for the year ending January 31, 2020. The January 31, 2019, consolidated balance sheet was derived from audited financial statements but does not include all disclosures required in an annual report on Form 10-K. Preparing financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Noncontrolling interests represent capital contributions, income and loss attributable to the owners of less than wholly-owned consolidated entities. The Company owns a 75% interest in an entity consolidated under the Aerostar business segment. Given the Company's controlling financial interest, the accounts of the business venture have been consolidated with the accounts of the Company, and a noncontrolling interest has been recorded for the noncontrolling investor interest in the net assets and operations of the business venture.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2019, other than described in the Accounting Standards Adopted section below.
Accounting Pronouncements
Accounting Standards Adopted
In the fiscal 2020 first quarter, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-02, "Leases (Topic 842)" (ASU 2016-02), issued in February 2016 and the subsequently-issued codification improvements to Topic 842. The primary difference between previous GAAP and ASU 2016-02 is the recognition of lease assets and liabilities by lessees for leases classified as operating leases under previous GAAP. The guidance requires a lessee to recognize a lease liability (to make lease payments) and a right-of-use asset (representing its right to use the underlying asset for the lease term) on the balance sheet with terms greater than 12 months. The Company adopted ASU 2016-02 on a modified retrospective basis for all agreements existing as of February 1, 2019. Prior comparative periods have not been adjusted and continue to be reported and disclosed under ASC Topic 840. This adoption did not have a material impact to the Company. As of February 1, 2019, the Company recognized a right-of-use asset for finance leases and operating leases of $233 and $3,807 , respectively and a current and non-current lease liability of $1,446 and $2,571 , respectively. As part of the adoption of ASU 2016-02, the Company elected the following practical expedient: short-term recognition exemption for all leases that qualify. Note disclosures required in Topic 842 are reported in Note 11 Leases of the Notes to the Consolidated Financial Statements in this Form 10-Q.

New Accounting Standards Not Yet Adopted
In November 2018, the FASB issued ASU No. 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606" (ASU 2018-18). The amendments in ASU 2018-18 clarify that certain transactions between participants in collaborative arrangements should be accounted for as revenue under Topic 606, "Revenue from Contracts with

# 7

(dollars in thousands, except per-share amounts)


Customers," and precludes certain transactions that are not with a customer from using Topic 606. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption of this guidance is permitted in any interim period. The amendments should be applied retrospectively to the date Topic 606 was adopted. The Company is examining specific collaborative agreements to determine the impact, if any, the new guidance will have on the Company's consolidated financial statements.  

In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement" (ASU 2018-13). The amendments in ASU 2018-13 remove, modify and add disclosures for companies required to make disclosures about recurring or nonrecurring fair value measurements under Topic 820. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption of this guidance is permitted; however, the Company has the option to delay the adoption of the additional disclosures required until the effective date. Certain amendments in this guidance are required to be applied prospectively, and others are to be applied retrospectively. The Company is evaluating the amendments in ASU 2018-13 to determine when it will adopt this guidance and the impact the guidance will have on the Company's disclosures for assets and liabilities reported at fair value on a recurring or nonrecurring basis.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments" (ASU 2016-13). Current GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring. The amendments in this guidance eliminate the probable initial recognition threshold and, instead, reflect an entity’s current estimate of all expected credit losses. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. The new standard is effective for annual reporting periods beginning after December 15, 2019. All entities may elect to early adopt ASU 2016-13 for annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact the adoption of ASU 2016-13, including all subsequent amendments and improvements to ASC Topic 326 issued by FASB, will have on its consolidated financial statements and associated disclosures.


# 8

(dollars in thousands, except per-share amounts)


(3) SELECTED BALANCE SHEET INFORMATION

Following are the components of selected items from the Consolidated Balance Sheets:
 
 
April 30, 2019
 
January 31, 2019
Accounts receivable, net:
 
 
 
 
     Trade accounts
 
$
62,539

 
$
53,820

     Unbilled receivables
 
6,033

 
1,391

     Allowance for doubtful accounts
 
(780
)
 
(739
)
 
 
$
67,792

 
$
54,472

Inventories:
 
 
 
 
Finished goods
 
7,980

 
7,629

In process
 
1,219

 
1,103

Materials
 
48,843

 
45,344

 

$
58,042


$
54,076

Other current assets:
 
 
 
 
Insurance policy benefit
 
318

 
336

     Income tax receivable
 
1,418

 
1,045

Receivable from sale of investment
 
1,014

 
1,055

     Prepaid expenses and other
 
4,513

 
6,300

 
 
$
7,263

 
$
8,736

Property, plant and equipment, net: (a)
 
 
 
 
Land
 
$
3,234

 
$
3,234

Buildings and improvements
 
81,527

 
81,381

Machinery and equipment
 
156,745

 
155,463

Right-of-use assets - finance
 
665

 

     Accumulated depreciation
 
(136,935
)
 
(133,724
)
 
 
105,236

 
106,354

Property, plant and equipment subject to capital leases:
 
 
 
 
Machinery and equipment
 

 
510

Accumulated amortization for capitalized leases
 

 
(249
)
 
 
$
105,236

 
$
106,615

Other assets:
 
 
 
 
Equity investments
 
$
1,223

 
$
345

Right-of-use assets - operating
 
3,420

 

Deferred income taxes
 
60

 
16

Other
 
2,921

 
2,963

 
 
$
7,624

 
$
3,324

Accrued liabilities:
 
 
 
 
Salaries and related
 
$
3,360

 
$
8,244

Benefits
 
5,097

 
4,751

Insurance obligations
 
1,856

 
1,963

Warranties
 
1,391

 
890

Income taxes
 
831

 
328

Other taxes
 
940

 
2,434

Acquisition-related contingent consideration
 
1,306

 
1,796

Lease liability
 
1,978

 

Other
 
2,678

 
3,072

 
 
$
19,437

 
$
23,478

Other liabilities:
 
 
 
 
Postretirement benefits
 
$
7,652

 
$
7,678

Acquisition-related contingent consideration
 
2,650

 
2,376

Lease liability
 
2,648

 

Deferred income taxes
 
3,211

 
1,659

Uncertain tax positions
 
2,681

 
2,670

Other
 
4,170

 
3,852

 
 
$
23,012

 
$
18,235

(a) The amount of assets held for sale at April 30, 2019, and January 31, 2019, were not material.


# 9

(dollars in thousands, except per-share amounts)


(4) NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted average common shares and fully vested stock units outstanding. Diluted net income per share is computed by dividing net income by the weighted average common and common equivalent shares outstanding, which includes the shares issuable upon exercise of employee stock options (net of shares assumed purchased with the option proceeds), stock units and restricted stock units outstanding. Performance share awards are included in the diluted calculation based upon what would be issued if the end of the most recent reporting period was the end of the term of the award.
Certain outstanding options and restricted stock units were excluded from the diluted net income per share calculations because their effect would have been anti-dilutive under the treasury stock method. The options and restricted stock units excluded from the diluted net income per share calculation were as follows:
 
Three Months Ended
 
April 30,
2019
 
April 30,
2018
Anti-dilutive options and restricted stock units
29,796

 
16,304


The computation of earnings per share is presented below:
 
Three Months Ended
 
April 30,
2019
 
April 30,
2018
Numerator:
 
 
 
Net income attributable to Raven Industries, Inc.
$
13,210

 
$
22,135

 
 
 
 
Denominator:
 
 
 
Weighted average common shares outstanding
35,962,066

 
35,826,096

Weighted average fully vested stock units outstanding
105,341

 
87,716

Denominator for basic calculation
36,067,407

 
35,913,812

 
 
 
 
Weighted average common shares outstanding
35,962,066

 
35,826,096

Weighted average fully vested stock units outstanding
105,341

 
87,716

Dilutive impact of stock options and restricted stock units
325,831

 
466,768

Denominator for diluted calculation
36,393,238

 
36,380,580

 
 
 
 
Net income per share ─ basic
$
0.37

 
$
0.62

Net income per share ─ diluted
$
0.36

 
$
0.61



(5) REVENUE
Disaggregation of Revenues
Revenue is disaggregated by major product category and geography, as we believe these categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following table includes a reconciliation of the disaggregated revenue by reportable segments. Service revenues are not material and are not separately disclosed.

# 10

(dollars in thousands, except per-share amounts)


 
Revenue by Product Category
 
Three Months Ended April 30, 2019
 
Three Months Ended April 30, 2018
 
ATD
EFD
AERO
ELIM (a)
Total
 
ATD
EFD
AERO
ELIM (a)
Total
Lighter-than-Air
 
 
 
 
 
 
 
 
 
 
 
    Domestic
$

$

$
7,029

$

$
7,029

 
$

$

$
6,548

$

$
6,548

    International


34


34

 


454


454

Plastic Films & Sheeting
 
 
 
 


 
 
 
 
 


    Domestic

41,762


(29
)
41,733

 

55,297


(194
)
55,103

    International

2,530



2,530

 

4,695



4,695

Precision Agriculture Equipment
 
 
 
 


 
 
 
 
 


    Domestic
29,584




29,584

 
29,525




29,525

    International
12,141




12,141

 
10,905




10,905

Other
 
 
 
 


 
 
 
 
 


    Domestic


5,122


5,122

 


3,899


3,899

    International


5


5

 





Totals
$
41,725

$
44,292

$
12,190

$
(29
)
$
98,178

 
$
40,430

$
59,992

$
10,901

$
(194
)
$
111,129

(a) Intersegment sales for both fiscal 2020 and 2019 were primarily sales from Engineered Films to Aerostar.

Contract Balances
Contract balances consist of contract assets and contract liabilities. Contract assets primarily relate to the Company’s rights to consideration for work completed but not yet billed for at the reporting date, or retainage provisions on billings that have been issued. Contract liabilities primarily relate to consideration received from customers prior to transferring goods or services to the customer. Contract assets and contract liabilities are reported in "Accounts receivable, net" and "Other current liabilities" in the Consolidated Balance Sheets, respectively. 

During the three months ended April 30, 2019, the Company’s contract assets and liabilities increased by  $4,642 and $1,536 , respectively. The increase was primarily a result of the contract terms which include timing of customer payments, timing of invoicing, and progress made on open contracts. Due to the short-term nature of the Company’s contracts, substantially all contract liabilities are recognized as revenue during the twelve months thereafter. Changes in our contract assets and liabilities were as follows:
 
April 30,
2019
 
January 31,
2019
 
$ Change
% Change
Contract assets
$
6,669

 
$
2,027

 
$
4,642

229.0
%
 
 
 
 
 
 
 
Contract liabilities
$
2,839

 
$
1,303

 
$
1,536

117.9
%


Remaining Performance Obligations
As of April 30, 2019, the Company did not have any remaining performance obligations related to customer contracts with an original expected duration of one year or more. Revenue recognized during the three-month period ending April 30, 2019, from performance obligations satisfied in the prior period were not material.

(6) ACQUISITIONS AND DIVESTITURES OF AND INVESTMENTS IN BUSINESSES AND TECHNOLOGIES

Fiscal year 2020
There were no significant business acquisitions and divestitures or purchases of technologies in the three-month period ended April 30, 2019.

Fiscal year 2019
On January 1, 2019 , the Company completed the acquisition of substantially all of the assets ("AgSync Acquisition") of AgSync Inc. ("AgSync"), an Indiana corporation, headquartered in Wakarusa, Indiana. This acquisition was aligned under the Company’s Applied Technology Division and is expected to enhance its Slingshot® platform by delivering a more seamless logistics solution

# 11

(dollars in thousands, except per-share amounts)


for ag retailers, aerial applicators, custom applicators and enterprise farms. The AgSync Acquisition constitutes a business and, as such, was accounted for as a business combination; however, the business combination was not significant enough to warrant pro-forma financial information.

The purchase price was approximately $9,700 , which includes potential earn-out payments with an estimated fair value of $2,052 . The earn-out is contingent upon achieving certain revenue milestones. The purchase price of the business acquired was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair value of the identifiable assets acquired and liabilities assumed is reflected as goodwill, which is fully tax deductible. The Company completed the valuation and the purchase price allocation during the first quarter of fiscal 2020. This resulted in an adjustment in the fiscal 2020 first quarter that increased the purchase price and the estimated fair value of the contingent earn-outs payments by approximately $300 . The goodwill and identifiable intangible assets recorded as part of the purchase price allocation at April 30, 2019, were $4,526 and $5,700 , respectively.

During the first quarter of fiscal 2019, Aerostar sold its client private business for $832 , which resulted in an immaterial gain in the three-months ended April 30, 2018. In fiscal 2018, Aerostar actively marketed the sale of its client private business and as such, classified it as held for sale.

In the first quarter of fiscal 2019, the Company sold its ownership interest of approximately 22% in Site-Specific Technology Development Group, Inc. ( SST ) with a carrying value of $1,937 . This investment was being accounted for as an equity method investment. Raven received $6,556 in cash at closing which was reported as "Proceeds from sale or maturity of investments" in the Consolidated Statements of Cash Flows. The Company recognized a gain on the sale of $5,785 for the three-months ended April 30, 2018. The gain was reported in "Other income (expense), net" in the Consolidated Statements of Income and Comprehensive Income. The gain included a fifteen percent hold-back provision held in an escrow account and is expected to be paid in fiscal 2020.

Acquisition-related Contingent Consideration
The Company has contingent liabilities related to the acquisition of AgSync in fiscal 2019 as well as prior acquisitions of Colorado Lining International, Inc. (CLI) in fiscal 2018; SBG Innovatie BV and its affiliate, Navtronics BVBA (collectively, SBG) in fiscal 2015; and Aerostar Technical Solutions, Inc. (ATS), formerly named Vista Research, Inc. or "Vista," completed in fiscal 2012. The fair value of such contingent consideration is estimated as of the acquisition date, and subsequently at the end of each reporting period, using forecasted cash flows. Projecting future cash flows requires the Company to make significant estimates and assumptions regarding future events, conditions, or revenues being achieved under the subject contingent agreement as well as the appropriate discount rate. Such valuation techniques include one or more significant inputs that are not observable (Level 3 fair value measures).

Changes in the fair value of the liability for acquisition-related contingent consideration are as follows:
 
Three Months Ended
 
April 30,
2019
 
April 30,
2018
Beginning balance
$
4,172

 
$
3,046

Fair value of contingent consideration acquired
310

 

Change in fair value of the liability
94

 
152

Contingent consideration earn-out paid
(620
)
 
(295
)
Ending balance
$
3,956

 
$
2,903

 
 
 
 
Classification of liability in the consolidated balance sheet
 
 
 
Accrued liabilities
$
1,306

 
$
1,483

Other liabilities, long-term
2,650

 
1,420

Balance at April 30
$
3,956

 
$
2,903



For the AgSync Acquisition, the Company entered into a contingent earn-out agreement, not to exceed $3,500 . The earn-out is to be paid annually over three years after the purchase date, contingent upon achieving certain revenue milestones. The Company has made no payments on this potential earn-out liability as of April 30, 2019.

In the acquisition of CLI, the Company entered into a contingent earn-out agreement, not to exceed $2,000 . The earn-out is paid annually for three years after the purchase date, contingent upon achieving certain revenues and operational synergies. To date, the Company has paid a total of $667 of this potential earn-out liability.

# 12

(dollars in thousands, except per-share amounts)


In connection with the acquisition of SBG, Raven is committed to making additional earn-out payments, not to exceed $2,500 , calculated and paid quarterly for ten years after the purchase date, contingent upon achieving certain revenues. To date, the Company has paid a total of $1,564 of this potential earn-out liability.

Related to the acquisition of ATS in 2012 , the Company was committed to making annual payments based upon earn-out percentages on specific revenue streams for seven years after the purchase date. The Company made the final payment in the first quarter of fiscal 2020 and has no further contingent obligations related to acquisition of ATS.

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

Goodwill
Management assesses goodwill for impairment annually during the fourth quarter and between annual tests whenever a triggering event indicates there may be an impairment. Impairment tests of goodwill are done at the reporting unit level. Management performed an assessment in the first quarter of fiscal 2020 and determined that no triggering events had occurred for any of the Company's reporting units. There were no goodwill impairment losses reported in the three -month periods ending April 30, 2019 and 2018, respectively.

The changes in the carrying amount of goodwill by reporting unit were as follows:
 
 
Applied
Technology
 
Engineered
Films
 
Aerostar
 
Total
Balance at January 31, 2019
 
$
17,076

 
$
33,232

 
$
634

 
$
50,942

Changes due to business combinations
 
(33
)
 

 

 
(33
)
Foreign currency translation adjustment
 
(64
)
 

 

 
(64
)
Balance at April 30, 2019
 
$
16,979

 
$
33,232

 
$
634

 
$
50,845



Long-lived Assets and Other Intangibles
The Company assesses the recoverability of long-lived assets, including definite-lived intangibles and property plant and equipment, if events or changes in circumstances indicate that an asset might be impaired. For long-lived and intangible assets, management performs impairment reviews by asset group. Management periodically assesses for triggering events and discusses any significant changes in the utilization of long-lived assets. For purposes of recognition and measurement of an impairment loss, a long-lived asset is grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

When performing long-lived asset testing, the fair values of assets are determined based on valuation techniques using the best available information. Such valuations are derived from valuation techniques in which one or more significant inputs are not observable (Level 3 fair value measures). An impairment loss is recognized when the estimated undiscounted cash flows used in determining the fair value of the asset are less than its carrying amount.

Fiscal 2020 and 2019
Management performed an assessment in the fiscal 2020 and fiscal 2019 first quarter and determined that there were no impairment indicators identified for any of the Company's asset groups. There were no long-lived asset impairment losses reported in the three -month period ending April 30, 2019 and 2018, respectively.

The following table provides the gross carrying amount and related accumulated amortization of definite-lived intangible assets:
 
April 30, 2019
 
January 31, 2019
 
 
Accumulated
 
 
 
Accumulated
 
 
Amount
amortization
Net
 
Amount
amortization
Net
Existing technology
$
9,179

$
(7,345
)
$
1,834

 
$
9,203

$
(7,216
)
$
1,987

Customer relationships
16,076

(5,848
)
10,228

 
15,791

(5,508
)
10,283

Patents and other intangibles
5,941

(2,025
)
3,916

 
5,908

(1,885
)
4,023

Total
$
31,196

$
(15,218
)
$
15,978

 
$
30,902

$
(14,609
)
$
16,293




# 13

(dollars in thousands, except per-share amounts)


(8) EMPLOYEE POSTRETIREMENT BENEFITS

The Company provides postretirement medical and other benefits to certain current and past senior executive officers and senior managers. These plan obligations are unfunded. The components of the net periodic benefit cost for postretirement benefits are as follows:
 
Three Months Ended
 
April 30,
2019
 
April 30,
2018
Service cost
$
7

 
$
7

Interest cost
83

 
79

Amortization of actuarial losses
24

 
32

Amortization of unrecognized gains in prior service cost
(40
)
 
(40
)
Net periodic benefit cost
$
74

 
$
78


Postretirement benefit cost components are reclassified in their entirety from accumulated other comprehensive loss to net periodic benefit cost. Net periodic benefit costs are reported in net income in accordance with ASU 2017-07 "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Postretirement Benefit Cost." Service cost is reported in net income as “Cost of sales” or “Selling, general, and administrative expenses” in a manner consistent with the classification of direct labor and personnel costs of the eligible employees. Interest cost, amortization of actuarial gains or losses, and amortization of prior service cost are classified as a non-operating expense in "Other income (expense), net" on the Consolidated Statements of Income and Comprehensive Income.

(9) WARRANTIES

Accruals necessary for product warranties are estimated based on historical warranty costs and average time elapsed between purchases and returns for each division. Additional accruals are made for any significant, discrete warranty issues. Changes in the warranty accrual were as follows:
 
Three Months Ended
 
April 30,
2019
 
April 30,
2018
Beginning balance
$
890

 
$
1,163

Change in provision
822

 
157

Settlements made
(321
)
 
(223
)
Ending balance
$
1,391

 
$
1,097



(10) FINANCING ARRANGEMENTS

The Company entered into a credit facility on April 15, 2015 , with JPMorgan Chase Bank, N.A., Toronto Branch as Canadian Administrative Agent, JPMorgan Chase Bank, National Association, as administrative agent, and each lender from time to time a party thereto (the Credit Agreement). The Credit Agreement provides for a syndicated senior revolving credit facility up to $125,000 with a maturity date of April 15, 2020 . Loan proceeds may be utilized by Raven for strategic business purposes, such as business acquisitions, and for net working capital needs. The Company expects to enter into a new credit facility prior to the Credit Agreement maturing in fiscal 2021.

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

The unamortized debt issuance costs associated with this Credit Agreement were as follows:
 
April 30, 2019
 
January 31, 2019
Unamortized debt issuance costs (a)
$
105

 
$
132

(a) Unamortized debt issuance costs are amortized over the term of the Credit Agreement and are reported as "Other assets" in the Consolidated Balance Sheets.


# 14

(dollars in thousands, except per-share amounts)


Loans or borrowings defined under the Credit Agreement bear interest and fees at varying rates and terms defined in the Credit Agreement based on the type of borrowing as defined. The Credit Agreement includes annual administrative and unborrowed capacity fees. The Credit Agreement also contains customary affirmative and negative covenants, including those relating to financial reporting and notification, limits on levels of indebtedness and liens, investments, mergers and acquisitions, affiliate transactions, sales of assets, restrictive agreements, and change in control as defined in the Credit Agreement. Financial covenants include an interest coverage ratio and funded indebtedness to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement.

Letters of credit (LOC) issued and outstanding were as follows:
 
April 30, 2019
 
January 31, 2019
Letters of credit outstanding (a)
$
314

 
$
514

(a) Any draws required under the LOC would be settled with available cash or borrowings under the Credit Agreement.

There were no borrowings under the Credit Agreement for any of the fiscal periods covered by this Quarterly Report on Form 10-Q. Availability under the Credit Agreement for borrowings as of April 30, 2019 , was $124,736 .

(11) LEASES

The Company enters into operating and finance lease contracts related to facilities, vehicles and equipment. Operating leases are primarily related to facilities to support production, research and development, and sales efforts. Finance leases are primarily related to vehicles and equipment to support general business operations. Lease payments are typically fixed and carry lease terms of one to six years , some of which have an option to terminate or extend up to an additional ten years . For purposes of the quantitative disclosures below related to the calculation of operating and finance leases, lease terms did not include options to terminate or extend, as the Company is reasonably certain it would not exercise the options. Most of the Company's leases do not contain a purchase option, material residual value guarantee, or material restrictive covenants.

The Company is primarily a lessee in all lease arrangements but may become a lessor and lease or sublease certain assets to other entities if not fully utilized. These lessor activities are not material and are not separately disclosed.
To determine whether a contract is or contains a lease, the Company assessed its right to control the use of the identified asset, whether explicitly or implicitly stated, for a period of time while considering all facts and circumstances for each individual arrangement. The Company also has leases with non-lease components which are separately stated within the agreement and not included in the recognition of the right-of use asset and lease liability balances.
The discount rate used to calculate the present value of the lease liabilities is based upon the implied rate within each contract. If the rate is unknown or cannot be determined, the Company uses an incremental borrowing rate, which is determined by the length of the contract, asset class, and the Company's borrowing rates as of the commencement date of the contract.
 
Components of Company lease costs, including operating, finance, and short-term leasing are included in the table below. Depreciation of right-of-use assets, operating leases cost, and short-term lease costs are reported in net income as "Cost of sales," "Research and development expenses," or "Selling, general, and administrative expenses," depending on what business function the asset primarily supports. Interest on lease liabilities are classified as a non-operating expense in "Other income (expense), net" on the Consolidated Statements of Income and Comprehensive Income.

# 15

(dollars in thousands, except per-share amounts)


 
Three Months Ended
April 30, 2019
Lease Costs:
 
Finance Leases
 
Depreciation of right-of-use assets
$
95

Interest on lease liabilities
5

Total finance lease cost
$
100

 
 
Operating Leases
 
Operating lease cost
$
360

Short-term lease cost
105

Total operating lease cost
$
465

Total finance and operating lease cost
$
565


Supplemental unaudited balance sheet information related to operating and finance leases include:
 
April 30, 2019
Operating Leases
 
Operating lease right-of-use assets
$
3,420

 
 
Current lease liability
$
1,689

Non-current lease liability
2,367

Total operating lease liabilities
$
4,056

 
 
Finance Leases
 
Property, plant and equipment, at cost
$
665

Accumulated depreciation
(95
)
Property, plant and equipment, net
$
570

 
 
Current lease liability
$
289

Non-current lease liability
281

Total finance lease liabilities
$
570


Weighted average remaining lease terms and discount rates include:
 
April 30, 2019
Weighted Average Remaining Lease Term:
 
Operating leases
3 years

Finance leases
2 years

Weighted Average Discount Rate:
 
Operating leases
3.5
%
Finance leases
3.5
%



# 16

(dollars in thousands, except per-share amounts)


Supplemental unaudited cash flow information related to operating and finance leases include:
 
Three Months Ended
April 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
360

Operating cash flows from finance leases
5

Financing cash flows from finance leases
95

 
 
Right-of-use assets obtained in exchange for lease obligations:
 
Finance leases
$
190

Operating leases



Future operating and finance lease obligations that have not yet commenced as of April 30, 2019, were immaterial and excluded from the lease liability schedule below accordingly.
 
 
Three Months Ended
April 30, 2019
 
 
Operating Leases
 
Finance Leases
Remainder of Fiscal 2020
 
$
1,353

 
$
284

Fiscal 2021
 
1,844

 
184

Fiscal 2022
 
679

 
101

Fiscal 2023
 
315

 
36

Fiscal 2024
 
99

 
6

Thereafter
 

 

Total lease payments
 
$
4,290

 
$
611

Less imputed interest
 
(234
)
 
(41
)
Total lease liabilities
 
$
4,056

 
$
570



Prior to the Company's adoption of ASU 2016-02 in the first quarter of fiscal year 2020, future minimum lease payments reported in the Company’s Annual Report on Form 10-K for the year ended January 31, 2019, were as follows:
 
 
Twelve Months Ended
January 31, 2019
 
 
Operating Leases
 
Capital Leases
Fiscal 2020
 
$
2,213

 
$
182

Fiscal 2021
 
1,939

 
102

Fiscal 2022
 
728

 
44

Fiscal 2023
 
356

 
2

Fiscal 2024
 
140

 

Thereafter
 

 

Total lease payments
 
$
5,376

 
$
330

Less amount representing estimated executory costs such as taxes, license and insurance including profit thereon.
 

 
(14
)
Less amounts representing interest
 
 
 
(32
)
Present value of net minimum lease payments
 

 
$
284




# 17

(dollars in thousands, except per-share amounts)


(12) COMMITMENTS AND CONTINGENCIES

The Company is involved as a party in lawsuits, claims, regulatory inquiries, or disputes arising in the normal course of its business; potential costs and liabilities 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. In addition, the Company has insurance policies that provide coverage to various degrees for potential liabilities arising from legal proceedings.
 
The Company entered into a Gift Agreement ("the Agreement") effective in January 2018 with the South Dakota State University Foundation, Inc. ("the Foundation"). This gift will be used by South Dakota State University (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 Agreement states that the Company will make a $5,000 gift to the Foundation, conditional on certain actions. Management concluded that the contingencies related to this gift were substantially met during the three-month period ended April 30, 2018, and a liability had been incurred. As such, $4,503 of selling, general, and administrative expense was recognized in the three-month period ending April 30, 2018, with interest expense to be recognized in periods thereafter. The fair value of this contingency at April 30, 2019 , was $3,230 (measured based on the present value of the expected future cash outflows), of which $697 was classified as "Accrued liabilities" and $2,533 was classified as "Other liabilities." As of April 30, 2019, the Company has made payments related to the commitment totaling $1,430 .

In addition to commitments disclosed elsewhere in the Notes to the Consolidated Financial Statements, the Company has other unconditional purchase obligations that arise in the normal course of business operations. The majority of these obligations are related to the purchase of raw material inventory for the Applied Technology and Engineered Films divisions.

(13) INCOME TAXES

The Company’s effective tax rate varies from the federal statutory rate, primarily due to state and local taxes, research and development tax credit, foreign-derived intangible income deduction, and tax-exempt insurance premiums. The Company’s effective tax rates were as follows:

Three Months Ended
 
April 30,
2019
 
April 30,
2018
Effective tax rate
12.2
%
 
18.6
%

 
The decrease in the effective tax rate year-over-year is primarily due to discrete items in the current year. The Company’s effective tax rates, excluding discrete items, in the three-month periods ended April 30, 2019, and 2018, were 20.0 percent and 19.5 percent , respectively.

The Company’s total discrete tax items for both three-month periods in the table below relate to the vesting or settlement of equity awards.

Three Months Ended
 
April 30,
2019
 
April 30,
2018
Total discrete tax benefit
$
1,168

 
$
243



The Company operates both domestically and internationally. As of April 30, 2019, undistributed earnings from the Company's foreign subsidiaries were considered to have been reinvested indefinitely.


# 18

(dollars in thousands, except per-share amounts)


(14) DIVIDENDS AND TREASURY STOCK

Dividends paid to Raven shareholders were as follows:
 
Three Months Ended
 
April 30,
2019
 
April 30,
2018
Dividends paid (a)
$
4,682

 
$
4,658

 
 
 
 
Dividends paid per share (in cents per share) (a)
13.0

 
13.0

(a) There were no declared and unpaid shareholder dividends at April 30, 2019 or 2018.

On November 3, 2014, the Company announced that its Board of Directors ("Board") had authorized a $40,000 stock buyback program. Since that time, the Board has provided additional authorizations to increase the total amount authorized under the program to $75,000 . This authorization remains in place until the authorized spending limit is reached or such authorization is revoked by the Board.

Pursuant to these authorizations, the Company repurchased 60,700 shares for $2,281 in the three-month period ended April 30, 2019 . There were no shares repurchased in the three-month period ended April 30, 2018 . There were  no  share repurchases unpaid at April 30, 2019, or April 30, 2018. The remaining dollar value authorized for share repurchases at April 30, 2019 , is $25,679 .

(15) SHARE-BASED COMPENSATION

Share-based compensation expense is recognized based on the fair value of the share-based awards expected to vest during the period.

The share-based compensation expense was as follows:
 
Three Months Ended
 
April 30, 2019
 
April 30, 2018
Cost of sales
$
76

 
$
80

Research and development expenses
35

 
31

Selling, general, and administrative expenses
671

 
676

Total stock-based compensation expense
$
782

 
$
787



(16) SEGMENT REPORTING

The Company's operating segments, which are also its reportable segments, are defined by their product lines which have been generally grouped based on technology, manufacturing processes, and end-use application. The Company's reportable segments are Applied Technology Division, Engineered Films Division, and Aerostar Division. Separate financial information is available for each reportable segment and regularly evaluated by the Company's chief operating decision-maker, the President and Chief Executive Officer, in making resource allocation decisions for the Company's reportable segments. The Company measures the performance of its segments based on their operating income excluding administrative and general expenses. Other income, interest expense, and income taxes are not allocated to individual operating segments. Segment information is reported consistent with the Company's management reporting structure.


# 19

(dollars in thousands, except per-share amounts)


Business segment financial performance and other information is as follows:
 
Three Months Ended
 
April 30,
2019
 
April 30,
2018
Net sales
 
 
 
Applied Technology
$
41,725

 
$
40,430

Engineered Films (a)
44,292

 
59,992

Aerostar
12,190

 
10,901

Intersegment eliminations (b)
(29
)
 
(194
)
Consolidated net sales
$
98,178

 
$
111,129

 
 
 
 
Operating income (c)
 
 
 
Applied Technology  
$
13,236

 
$
15,948

Engineered Films
6,363

 
13,196

Aerostar
1,996

 
2,805

Intersegment eliminations  
1

 
(15
)
Total reportable segment income
21,596

 
31,934

General and administrative expenses (c)
(6,475
)
 
(10,403
)
Consolidated operating income
$
15,121

 
$
21,531


(a) Hurricane recovery film sales for the three-month period ended April 30, 2019 and 2018, were $17 and $8,919 , respectively.
(b) Intersegment sales for both fiscal 2020 and 2019 were primarily sales from Engineered Films to Aerostar.
(c) At the segment level, operating income does not include an allocation of general and administrative expenses and, as a result, "General and administrative expenses" are reported as a deduction from "Total reportable segment income" to reconcile to "Operating income" reported in the Consolidated Statements of Income and Comprehensive Income.

(17) SUBSEQUENT EVENTS

The Company has evaluated events up to the filing date of this Quarterly Report on Form 10-Q and concluded that no subsequent events have occurred that would require recognition or disclosure in the Notes to the Consolidated Financial Statements.


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

The following commentary on the operating results, liquidity, capital resources, and financial condition of Raven Industries, Inc. (the Company or Raven) should be read in conjunction with the unaudited Consolidated Financial Statements in Item 1 of Part 1 of this Quarterly Report on Form 10-Q (Form 10-Q) and the Company's Annual Report on Form 10-K for the year ended January 31, 2019 .

The Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is organized as follows:

Executive Summary
Results of Operations - Segment Analysis
Outlook
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.

# 20



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

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

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 our 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 three-month period ended April 30, 2019 and 2018. Segment operating results are more fully explained in the Results of Operations - Segment Analysis section.
 
 
Three Months Ended
(dollars in thousands, except per-share data)
 
April 30,
2019
 
April 30,
2018
 
% Change
Net sales
 
$
98,178

 
$
111,129

 
(11.7
)%
Gross profit
 
35,066

 
39,998

 
(12.3
)%
Gross margin ( a )
 
35.7
%
 
36.0
%
 
 
Operating income
 
$
15,121

 
$
21,531

 
(29.8
)%
Operating margin ( a )
 
15.4
%
 
19.4
%
 
 
Other income (expense), net
 
$
(69
)
 
$
5,679

 
 
Net income attributable to Raven Industries, Inc.
 
$
13,210

 
$
22,135

 
(40.3
)%
Diluted earnings per share
 
$
0.36

 
$
0.61

 
 
 
 
 
 
 
 
 
Cash flow from operating activities
 
$
8,762

 
$
13,603

 
(35.6
)%
Cash outflow for capital expenditures
 
$
(1,570
)
 
$
(4,164
)
 
(62.3
)%
Cash dividends
 
$
(4,682
)
 
$
(4,658
)
 
0.5
 %
Common share repurchases
 
$
(2,281
)
 
$

 


 
(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.

Consolidated Results
For the fiscal 2020 first quarter, net sales were $ 98.2 million , down $13.0 million , or 11.7% , from $ 111.1 million in last year’s first quarter. Hurricane recovery film sales declined $8.9 million in the first quarter of fiscal 2020 compared to the first quarter of fiscal 2019. Both Applied Technology and Aerostar achieved year-over-year sales growth, but the decline in net sales from Engineered Films drove the consolidated result. Engineered Films' net sales were adversely impacted in the first quarter by temporary operational inefficiencies associated with the go-live on a new enterprise resource planning (ERP) platform and weather related impacts which forced production shutdowns and delayed delivery of certain raw materials. The Company estimates these factors negatively impacted Engineered Films' net sales in the first quarter by approximately $4.5 million.


# 21


The Company's operating income for the first quarter of fiscal 2019 was $ 15.1 million , down $6.4 million , or 29.8% , compared to the first quarter of fiscal 2019. The year-over-year decrease was primarily due to negative operating leverage as a result of lower sales volume. Sales volume was down significantly in Engineered Films due to prior year abnormally high hurricane recovery film sales, the post go-live temporary operational inefficiencies, and weather related impacts to production. Increased investment in research and development activities in both Applied Technology and Aerostar also negatively impacted operating income versus the prior year.

Net income for the first quarter of fiscal 2020 was $13.2 million , or $0.36 per diluted share, compared to net income of $22.1 million , or $0.61 per diluted share, in the prior year comparative period. Included in the prior year's first quarter results on a pre-tax basis was an expense associated with a gift to South Dakota State University of $4.5 million ($3.7 million after-tax, or $0.10 per diluted share) and a non-operating gain on the sale of the Company's ownership interest in Site-Specific Technologies (SST) of $5.8 million ($4.7 million after-tax, or $0.13 per diluted share). The net impact of these two non-recurring events to the prior year's first quarter was a favorable $0.03 per diluted share. In addition, this year's first quarter net income benefited from approximately $1 million ($0.03 per diluted share) in favorable discrete tax items which reduced the Company's effective tax rate by approximately 6 percentage points year-over-year.

Applied Technology Division Results
Applied Technology's net sales in the first quarter of fiscal 2020 were $41.7 million , up $1.3 million from last year's first quarter. Geographically, international sales were up 11.3% year-over-year, and domestic sales were flat year-over-year. International sales growth was driven primarily by strong growth in Latin America, particularly Brazil.

Operating income for Applied Technology was $13.2 million , down $2.7 million or 17.0% compared to $15.9 million in the first quarter of fiscal 2019. Increased research and development investment along with integration and acquisition expenses related to the acquisition of AgSync, Inc. (AgSync) drove the year-over-year decrease. In addition, first quarter operating income in the prior year benefited from favorable legal recoveries which did not repeat in the first quarter of this year.

Engineered Films Division Results
Engineered Films’ fiscal 2020 first quarter net sales were $44.3 million , a decrease of $15.7 million , or 26.2% , compared to fiscal 2019 first quarter net sales of $60.0 million . Included in the prior year's first quarter net sales was $8.9 million of hurricane recovery film sales which did not reoccur in the first quarter of fiscal 2020. During the first quarter, the division went live on its new ERP platform and experienced a temporary reduction in operating efficiencies. This resulted in delays in processing and fulfilling certain orders during the first quarter. The Company estimates that approximately $2.5 million in sales were pushed into future quarters as a result. Additionally, power outages caused by an ice storm resulted in an unexpected two-day plant shutdown in the first quarter. The Company estimates this shutdown reduced division sales in the first quarter of fiscal year 2020 by approximately $2 million. Together, these temporary operational challenges are estimated to have negatively impacted the division's first quarter net sales by approximately $4.5 million.

Operating income for Engineered Films in the first quarter of fiscal 2020 decreased 51.8% to $6.4 million as compared to $13.2 million in the prior year first quarter. The year-over-year decrease was driven primarily by lower sales volume, including the significant reduction in hurricane recovery film sales, and the corresponding negative operating leverage. In addition, the temporary operational challenges also had an unfavorable impact to division operating income.

Aerostar Division Results
Aerostar net sales in the first quarter of fiscal 2020 were $12.2 million , an increase of $1.3 million , or 11.8% , compared to fiscal 2019 first quarter net sales of $10.9 million . This increase was driven by improved stratospheric balloon and radar sales. Deliveries on the previously announced five-year $36 million radar contract drove growth in radar sales in the first quarter.

Operating income for Aerostar in the first quarter of fiscal 2020 was $2.0 million compared to $2.8 million in the first quarter of last year. The division achieved year-over-year growth in gross profit on higher sales volume; however, division profit decreased due to purposeful increased investment in research and development activities to further advance its engineering services and flight operations capabilities.

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.


# 22


 
 
Three Months Ended
(dollars in thousands)
 
April 30,
2019
 
April 30,
2018
 
$ Change
 
% Change
Net sales
 
$
41,725

 
$
40,430

 
$
1,295

 
3.2
 %
Gross profit
 
21,337

 
21,186

 
151

 
0.7
 %
Gross margin
 
51.1
%
 
52.4
%
 
 
 
 
Operating expenses
 
$
8,101

 
$
5,238

 
$
2,863

 
54.7
 %
Operating expenses as % of sales
 
19.4
%
 
13.0
%
 
 
 
 
Operating income (a)
 
$
13,236

 
$
15,948

 
$
(2,712
)
 
(17.0
)%
Operating margin
 
31.7
%
 
39.4
%
 
 
 
 
(a) At the segment level, operating income does not include an allocation of general and administrative expenses.

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

Market conditions. The U.S. ag market is experiencing a very challenging start to the 2019 growing season. Wet, cool weather and abnormal flooding in North America have delayed and shortened the 2019 planting season. This has unfavorably impacted Applied Technology, as the division's core customers, ag retailers, were limited in the amount of field application activities that could be performed during the first quarter of fiscal 2020. Due to these challenging field conditions, some ag retailers expect to experience double-digit declines in sales during calendar year 2019, and this will likely impact the amount they invest in new machines or technology upgrades in the aftermarket. We expect this to impact the planned number of new machine builds for some OEMs this year. While unfavorable, these circumstances are expected to be short-term in nature, as the long-term demand for precision agriculture technology is expected to grow considerably.
Sales volume and selling prices. First quarter fiscal 2020 net sales increased $1.3 million or 3.2% , to $41.7 million compared to $40.4 million in the prior year. Higher sales volume of both new and existing products, rather than a change in selling price, was the primary driver of this increase. Geographically, international sales were up 11.3% year-over-year, and domestic sales were flat year-over-year. International sales growth was driven primarily by strong growth in Latin America, particularly Brazil. The Company does not generally model comparative market share position for its divisions, but the Company believes Applied Technology has increased its market share in the first quarter of fiscal 2020.
International sales. For the first quarter of fiscal 2020, international sales totaled $12.1 million , up 11.3% from $10.9 million in the prior year comparative period. International sales represented 29.1% of segment revenue compared to 27.0% of segment revenue in the prior year comparative period. Strong growth in Latin America, particularly Brazil, drove the year-over-year increase. Sales to this key agricultural region are growing largely due to the investment in and establishment of the division's Latin America headquarters in Brazil in the first quarter of last year.
Gross margin. Gross margin decreased from 52.4% in the prior year first quarter to 51.1% in the first quarter of fiscal 2020. The year-over-year decrease in profitability for the three-month period was driven primarily by higher material related expenses.
Operating expenses. Fiscal 2020 first quarter operating expense as a percentage of net sales was 19.4% , up from 13.0% in the prior year comparative period. The increase for the three-month period was driven primarily by increased research and development investment along with integration and acquisition expenses related to the acquisition of AgSync. Additionally, prior year operating expenses benefited from favorable legal recoveries which did not repeat in the first quarter of this year.

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.


# 23


 
 
Three Months Ended
(dollars in thousands)
 
April 30,
2019
 
April 30,
2018
 
$ Change
 
% Change
Net sales
 
$
44,292

 
$
59,992

 
$
(15,700
)
 
(26.2
)%
Gross profit
 
8,847

 
15,186

 
(6,339
)
 
(41.7
)%
Gross margin
 
20.0
%
 
25.3
%
 
 
 
 
Operating expenses
 
$
2,484

 
$
1,990

 
$
494

 
24.8
 %
Operating expenses as % of sales
 
5.6
%
 
3.3
%
 
 
 
 
Operating income (a)
 
$
6,363

 
$
13,196

 
$
(6,833
)
 
(51.8
)%
Operating margin
 
14.4
%
 
22.0
%
 
 
 
 
(a) At the segment level, operating income does not include an allocation of general and administrative expenses.

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

Market conditions. Oil prices have remained relatively strong since the start of 2019, and although Engineered Films is more diversified and less dependent on the energy market compared to recent years, the energy market still plays an important role in the division's overall success. One of the leading indicators, other than oil prices, is Permian Basin rig counts, which were relatively flat year-over-year in the first quarter. If strength in oil prices is sustained and rig counts follow, this is expected to favorably impact the division's growth in the geomembrane market in fiscal 2020. The Company does not generally model comparative market share position for its divisions, but the Company believes Engineered Films has maintained its market share in the first quarter of fiscal 2020.
Sales volume and selling prices . First quarter net sales were $44.3 million , a decrease of $15.7 million , or 26.2% , compared to fiscal 2019 first quarter net sales of $60.0 million . A larger decrease in sales volume, measured in pounds sold, rather than the change in selling price was the primary driver of this year-over-year decline. Included in prior year's first quarter net sales was $8.9 million of hurricane recovery film sales which did not reoccur in the first quarter of fiscal 2020. The division also went live on its new ERP platform and experienced temporary operating inefficiencies. This resulted in delays in processing and fulfilling certain orders during the first quarter of fiscal 2020 and the Company estimates that approximately $2.5 million in sales were pushed into future quarters as a result. Additionally, power outages caused by an ice storm resulted in an unexpected two-day plant shutdown in the first quarter. The Company estimates this shutdown reduced division sales in the first quarter of fiscal year 2020 by approximately $2 million. Together, these temporary operational challenges are estimated to have negatively impacted first quarter net sales by approximately $4.5 million.
Gross margin. For the three-month period ended April 30, 2019, gross margin was 20.0% . Gross margin for the three-month period ended April 30, 2018, was 25.3% . The year-over-year decrease in gross margin for the three-month period was primarily driven by lower sales volume, including the significant reduction in hurricane recovery film sales, and the corresponding negative operating leverage. In addition, the temporary operational challenges had an unfavorable impact to division gross margin.
Operating expenses. As a percentage of net sales, operating expenses were 5.6% in the current year three-month period as compared to 3.3% in the prior year comparative period. The year-over-year increase was led by higher legal expenses and a decrease in sales volume.

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.


# 24


 
 
Three Months Ended
(dollars in thousands)
 
April 30,
2019
 
April 30,
2018
 
$ Change
 
% Change
Net sales
 
$
12,190

 
$
10,901

 
$
1,289

 
11.8
 %
Gross profit
 
4,881

 
3,641

 
1,240

 
34.1
 %
Gross margin
 
40.0
%
 
33.4
%
 
 
 
 
Operating expenses
 
$
2,885

 
$
836

 
$
2,049

 
245.1
 %
Operating expenses as % of sales
 
23.7
%
 
7.7
%
 
 
 
 
Operating income (a)
 
$
1,996

 
$
2,805

 
$
(809
)
 
(28.8
)%
Operating margin
 
16.4
%
 
25.7
%
 
 
 
 
(a) At the segment level, operating income does not include an allocation of general and administrative expenses.

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

Market conditions. Aerostar’s business consists of proprietary products and services to the aerospace/defense and commercial lighter-than-air markets. The Company does not generally model comparative market share position for its divisions, but the Company believes Aerostar has maintained its market share in the first quarter of fiscal 2020.
S ales volume. Net sales increased 11.8% from $10.9 million for the three-month period ended April 30, 2018, to $12.2 million for the three-month period ended April 30, 2019. This increase was driven by improved stratospheric balloon and radar sales. Deliveries on the previously announced five-year $36 million radar contract drove growth in radar sales in the first quarter.
Gross margin. For the three-month period, gross margin increased from 33.4% to 40.0% . The increase in profitability for the three-month period was primarily due to increased leverage on higher sales volume.
Operating expenses. First quarter fiscal 2020 operating expense was $2.9 million , or 23.7% of net sales, an increase from 7.7% of net sales in the first quarter of fiscal 2019. The division increased investment in research and development activities to further enhance its engineering services and flight operations capabilities.
 
Corporate Expenses (administrative expenses; other (expense), net; and income taxes)
`
 
 
Three Months Ended
(dollars in thousands)
 
April 30,
2019
 
April 30,
2018
Administrative expenses
 
$