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, 2018
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to
Commission File Number: 001-07982
RAVEN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
South Dakota
 
46-0246171
 
 
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
 
205 E. 6th Street, P.O. Box 5107, Sioux Falls, SD
 
57117- 5107
 
 
(Address of principal executive offices)
 
(Zip Code)
 
 
Registrant's telephone number including area code (605) 336-2750
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class:
 
Name of each exchange on which registered
 
 
Common Stock, $1 par value
 
The NASDAQ Stock Market
 
Securities registered pursuant to Section 12(g) of the Act: None
 
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ
Yes
o
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
þ
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
Emerging growth company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
o
Yes
þ
No
The aggregate market value of the registrant's common stock held by non-affiliates at July 31, 2017 was approximately $1,231,707,927. The aggregate market value was computed by reference to the closing price as reported on the NASDAQ Global Select Market, $34.40, on July 31, 2017, 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 16, 2018 was 35,796,857.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrant's Annual Meeting of Shareholders, to be held May 22, 2018, is incorporated by reference into Part III to the extent described therein.
 
 
 
 
 



PART I
 
 
Item 1.
BUSINESS
 
Item 1A.
RISK FACTORS
 
Item 1B.
UNRESOLVED STAFF COMMENTS
 
Item 2.
PROPERTIES
 
Item 3.
LEGAL PROCEEDINGS
 
Item 4.
MINE SAFETY DISCLOSURES
 
 
 
 
 
PART II
 
 
Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 
Quarterly Information
 
 
Stock Performance
 
Item 6.
SELECTED FINANCIAL DATA
 
 
Five-year Financial Summary
 
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
Executive Summary
 
 
Results of Operations - Segment Analysis
 
 
Liquidity and Capital Resources
 
 
Off-Balance Sheet Arrangements and Contractual Obligations
 
 
Critical Accounting Policies and Estimates
 
 
Accounting Pronouncements
 
 
Forward-Looking Statements
 
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
Management's Report on Internal Control Over Financial Reporting
 
 
Report of Independent Registered Public Accounting Firm - 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
 
INDEX TO EXHIBITS
 
SIGNATURES
 
SCHEDULE II
 





 
PART I
 
 
 
ITEM 1.
BUSINESS
Raven Industries, Inc. (the Company or Raven) was incorporated in February 1956 under the laws of the State of South Dakota and began operations later that same year. The Company is a diversified technology company providing a variety of products to customers within the industrial, agricultural, geomembrane, construction, and aerospace/defense markets. The Company markets its products around the world and has its principal operations in the United States of America. Raven began operations as a manufacturer of high-altitude research balloons before diversifying into product lines that extended from technologies and production methods of this original balloon business. The Company employs 1,157 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.

We make our 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 our Internet website as soon as reasonably practicable after we electronically file these materials with, or furnish these materials to, the Securities and Exchange Commission (SEC). Information on or connected to our 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 read or copy any materials that we file with the SEC at its Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain additional information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, you will 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 our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance, and business.  All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Important factors that could cause actual results to differ materially from our expectations and other important information about forward-looking statements are disclosed under Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Forward-Looking Statements” in this Form 10-K.

BUSINESS SEGMENTS

The Company has three unique operating units, or divisions, that are also its reportable segments: Applied Technology Division (Applied Technology), Engineered Films Division (Engineered Films), and Aerostar Division (Aerostar). Product lines have been generally grouped in these segments based on technology, manufacturing processes, and end-use application; however, a business segment may serve more than one of the product markets identified above. The Company measures the profitability performance of its segments primarily based on their operating income excluding general and administrative expenses. Other expense and income taxes are not allocated to individual operating segments, and assets not identifiable to an individual segment are included as corporate assets. Segment information is reported consistent with the Company's management reporting structure.
Business segment financial information is found on the following pages of this Form 10-K:
Results of Operations – Segment Analysis
Note 16 Business Segments and Major Customer Information

Applied Technology
Applied Technology designs, manufactures, sells, and services innovative precision agriculture products and information management tools that help growers reduce costs, more precisely control inputs, and improve farm yields.  The Applied Technology product families include field computers, application controls, GPS-guidance steering systems, automatic boom controls, injection systems, and planter and seeder controls. Applied Technology's services include high-speed in-field Internet connectivity and cloud-based data management. The Company's investment in the continued build-out of the Slingshot™ platform has also

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positioned Applied Technology as an information platform that improves decision-making and achieves business efficiencies for its agriculture retail partners.

Applied Technology sells its precision agriculture control products to both original equipment manufacturers (OEMs) and through aftermarket distribution partners in the United States and in most major agricultural areas around the world. The Company's competitive advantage in this segment is designing and selling easy to use, reliable, and innovative value-added products that are supported by an industry-leading service and support team.

Engineered Films
Engineered Films produces high-performance plastic films and sheeting for geomembrane, agricultural, construction, and industrial applications. Engineered Films acquired the assets of Colorado Lining International, Inc. (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.

Engineered Films sells both direct to end-customers and through independent third-party distributors. The majority of product sold into the construction and agriculture markets is through distributors, while sales into the geomembrane and industrial markets are more direct in nature. The Company extrudes a significant portion of the film converted for its commercial products and believes it is one of the largest sheeting converters in the United States in the markets it serves. Engineered Films' ability to 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. Engineered Films is the Company's most capital-intensive business segment, and historically has made sizable investments in new extrusion capacity and conversion equipment. This segment's capital expenditures were $8.1 million in fiscal 2018, $2.8 million in fiscal 2017, and $10.8 million in fiscal 2016.

Aerostar
Aerostar serves the aerospace/defense, radar and lighter-than-air markets. Aerostar's primary products include high-altitude (stratospheric or lighter-than-air) balloons, tethered aerostats, 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 and aerostats in international markets. In previous years, Aerostar also provided contract manufacturing services. The Company largely exited this business and the planned reduction of contract manufacturing activities was completed in fiscal 2016.
  
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 is very pleased with the performance achieved by all three operating divisions throughout fiscal 2018. All three divisions achieved double-digit sales growth and the Company believes it is well positioned for the year ahead.

In fiscal 2018 Applied Technology achieved strong results in the face of challenging agricultural market conditions. The Company expects to continue to drive growth and will continue to strategically fund several long-term investments. Subsequent to the end of the fourth quarter, the division launched a strategic initiative to grow its local presence in Brazil and drive organic growth in Latin America, in order to better capitalize on one of the largest agricultural markets in the world.

Engineered Films demonstrated impressive operational discipline and sustained high plant utilization throughout fiscal 2018. The division grew sales by approximately $75 million year-over-year, and prior investments in acquisitions and manufacturing capacity drove strong growth in every market served. The division continues to see opportunities for growth and is investing in additional capacity in fiscal 2019. As for hurricane recovery efforts, the delivery of hurricane recovery film will result in sales of approximately $9 million in the first quarter and then return to significantly reduced levels consistent with prior years. 

During the year, Aerostar improved its financial performance and achieved more consistency and stability in its results. The division continues to sharpen its focus on the stratospheric balloon platform, and has divested of a few non-strategic portions of its business during and subsequent to the end of fiscal 2018. Strong performance on existing programs is driving confidence for continued growth with Aerostar’s stratospheric balloon platform.

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Overall, the Company is well positioned as it enters fiscal 2019 because of the actions taken and investments made to preserve and strengthen our core business. Furthermore, the Company is evaluating strategic acquisitions and will continue to invest in additional manufacturing capacity and technology development to enhance its core product lines. The Company's goal remains to generate 10 percent annualized earnings growth over the long-term, excluding unusual and generally non-recurring items.

MAJOR CUSTOMER INFORMATION

No customers accounted for 10% or more of consolidated sales in fiscal years 2018, 2017, or 2016.

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

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

RAW MATERIALS

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

PATENTS

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

RESEARCH AND DEVELOPMENT

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


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ENVIRONMENTAL MATTERS

The Company believes that, in all material respects, it is in compliance with applicable federal, state and local environmental laws and regulations. Expenditures incurred in the past relating to compliance for operating facilities have not significantly affected the Company's capital expenditures, earnings, or competitive position. The Company is unaware of any potential liabilities as of January 31, 2018 for any environmental matters that would have a material effect on the Company's results of operations, financial position, or cash flows.

BACKLOG

As of February 1, 2018, the Company's order backlog totaled approximately $40.3 million. Backlog amounts as of February 1, 2017 and 2016 were $25.7 million and $18.6 million, respectively. Because the length of time between order and shipment varies considerably by business segment and customers can change delivery schedules or potentially cancel orders, the Company does not believe that backlog, as of any particular date, is necessarily indicative of actual net sales for any future period.

EMPLOYEES

As of January 31, 2018, the Company had 1,157 employees (including temporary workers). Following is a summary of active employees by segment: Applied Technology - 394; Engineered Films - 471; Aerostar - 195; and Corporate Services - 97. Management believes its relationship with its employees is good.


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EXECUTIVE OFFICERS
 
 
 
 
 
Name, Age, and Position
 
Biographical Data
Daniel A. Rykhus, 53
 
Mr. Rykhus became the Company's President and Chief Executive Officer in 2010. He joined the Company in 1990 as Director of World Class Manufacturing, was General Manager of the Applied Technology Division from1998 through 2009, and served as Executive Vice President from 2004 through 2010.
President and Chief Executive Officer
 
 
 
 
 
 
Steven E. Brazones, 44
 
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
 
 
 
 
 
 
 
 
Lee A. Magnuson, 62
 
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 Sioux Falls, SD office for 5 years, practicing in the areas of commercial transactions, mergers and acquisitions, corporate matters, real estate and regulatory matters.
General Counsel and Vice President
 
 
 
 
 
 
Janet L. Matthiesen, 60
 
Ms. Matthiesen joined the Company in 2010 as Director of Administration and has been the Company's Vice President of Human Resources since 2012. Prior to joining Raven, Ms. Matthiesen was a Human Resource Manager at Science Applications International Corporation from 2002 to 2010.


Vice President of Human Resources
 
 
 
 
 
 
Brian E. Meyer, 55
 
Mr. Meyer was named Division Vice President and General Manager of the Applied Technology Division in May 2015. He joined the Company in 2010 as Chief Information Officer. Prior to joining the Company, Mr. Meyer was an information and technology executive in the health insurance industry and vice president of systems development in the property and casualty insurance industry.

Division Vice President and General Manager - Applied Technology Division
 
 
 
 
 
 
Anthony D. Schmidt, 46
 
Mr. Schmidt was named Division Vice President and General Manager of the Engineered Films Division in 2012. He joined the Company in 1995 in the Applied Technology Division performing various leadership roles within manufacturing and engineering. He transitioned to Engineered Films Division in 2011 as Manufacturing Manager.
Division Vice President and General Manager - Engineered Films Division
 
 
 
 
 
 
Scott W. Wickersham, 44
 
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
 
 
 

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, we have provided below, what we believe are the most significant risks the Company could potentially face, based on our 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 35, the Notes to the Consolidated Financial Statements on page 45, 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 10-K are forward-looking statements and, as such, are uncertain. Such statements are

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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 our 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 of the Company's markets, such as agriculture and construction, or the Company's primary manufacturing facilities.
The Company's Applied Technology Division is largely dependent on the ability of farmers, agricultural service providers, and custom 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 crop prices or farm incomes, sales in the Applied Technology Division may be adversely affected.

Weather conditions and natural disasters can also adversely affect sales in the Company's Engineered Films Division. To the extent weather conditions or natural disasters curtail construction or agricultural 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 while inventory has been built and operating expenses incurred, financial results could be negatively impacted.

The Company’s primary manufacturing facilities for each of its operating divisions are located on contiguous properties in Sioux Falls, South Dakota. If weather-related natural disasters such as tornadoes or flooding were to occur in the area, such conditions could impede the manufacturing and shipping of products and potentially adversely affect the Company’s sales, transactions processing, and financial reporting. The Company has disaster recovery plans in place to 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 our results of operations, financial condition, liquidity, and cash flows.

The loss, disruption, or material change in our 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 our 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, we could have difficulty replacing these sources without causing disruption to the business.

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 our 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 materials availability or higher costs, financial results could be adversely affected, which in turn could adversely affect our results of operations, financial condition, liquidity, and cash flows.

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

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

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

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

Failure to develop and market new technologies and products could impact the Company's competitive position and have an adverse effect on the Company's financial results.
The Company's operating results in Applied Technology, Engineered Films, and Aerostar depend upon the ability to renew the pipeline of new 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, 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, its partners or competitors, our 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 our 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 and distributors and training them in the use and selling of product offerings necessitates substantial time and resources. If we 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 and also may 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 our 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 our results of operations. Start-up costs and inefficiencies can adversely affect operating results and such costs may not be recoverable in a proprietary product environment because the Company may not receive reimbursement from its customers for such costs.

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

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

9



Aerostar’s future growth relies on sales of high-altitude balloons, as well as advanced radar systems and aerostats to international markets. In limited cases, such sales may be direct commercial sales to foreign governments rather than foreign military sales through the U.S. government. Direct commercial sales to foreign governments often involve large contracts subject to frequent delays because of budget uncertainties, regional military conflicts, political instability, and protracted negotiation processes. Such delays could adversely affect our results of operations. The nature of these markets for certain of Aerostar's advanced radar systems and aerostats makes these products particularly susceptible to fluctuations in market demand. Demand fluctuations and the likelihood of delays in sales involving large contracts for such products also increase the risk of these products becoming obsolete, increasing the risk associated with expected sales of such products. The value of certain advanced radar systems and aerostat inventory at January 31, 2018 was $1.6 million and $3.4 million, respectively. This valuation is based on an estimate that the market demand for these products will be sufficient in future periods such that these inventories will be sold at a price greater than carrying value and related selling costs. Write-downs or impairment of the value of such products carried in inventory could adversely affect our results of operations. To the extent products become obsolete or anticipated sales are not realized, our expected future cash flows could be adversely impacted. This could 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 our reputation, litigation, and increased costs.

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

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

The Company derives a portion of its revenues from foreign markets, which subjects the Company to business risks, including risk of changes in government policies and laws or changes in worldwide economic conditions.
The Company's consolidated net sales to locations outside of the U.S. were $41.6 million in fiscal 2018, representing approximately 11% of consolidated net sales. The Company's financial results could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar organizations, along with changes in worldwide economic conditions. These conditions include, but are not limited to, changes in a country's or region's economic or political condition; trade regulations affecting production, pricing, and marketing of products; local labor conditions and regulations; reduced protection of intellectual property rights in some countries; changes in the regulatory or legal environment; restrictions on currency exchange activities; the impact of fluctuations in foreign currency exchange rates, which may affect product demand and may adversely affect the profitability of our products in U.S. dollars in foreign markets where payments are made in the local currency; burdensome taxes and tariffs; and other trade barriers. International risks and uncertainties also include changing social and economic conditions, terrorism, political hostilities and war, difficulty in enforcing agreements or collecting receivables, and increased transportation or other shipping costs. Any of these such risks could lead to reduced sales and reduced profitability associated with such sales.

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.


10



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

Total goodwill and intangible assets accounted for $57.3 million, or approximately 18%, of the Company's total assets as of January 31, 2018. The Company evaluates goodwill and intangible assets for impairment annually, or when evidence of potential impairment exists. The annual impairment test is based on several factors requiring judgment. Principally, a significant decrease in expected cash flows or changes in market conditions may indicate potential impairment of recorded goodwill or intangible assets. Our expected future cash flows are dependent on several factors, including revenue growth in certain of our product lines. Our expected future cash flows could be adversely impacted if our anticipated revenue growth is not realized or if pricing in commodities markets does not recover in future periods. Reductions in cash flows could result in an impairment of goodwill and/or intangible assets, which could adversely impact the Company's results of operations and financial condition.

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

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 our 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 affect on its businesses, financial condition, results of operation, and cash flows.
 

11



Technology failures or cyber-attacks on the Company's systems could disrupt the Company's operations or the functionality of its products and negatively impact the Company's business.
The Company increasingly relies on information technology systems to process, transmit, and store electronic information. In addition, a significant portion of internal communications, as well as communication with customers and suppliers, depends on information technology. Further, the products in our Applied Technology and Aerostar segments depend upon GPS and other systems through which our products interact with government computer systems and other centralized information sources. We are exposed to the risk of cyber incidents in the normal course of business. Cyber incidents may be deliberate attacks for the theft of intellectual property or other sensitive information or may be the result of unintentional events. Like 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 our products or cause them to malfunction. The Company has technology security initiatives 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 our reputation, litigation, and increased cyber security protection and remediation costs. Such consequences could adversely affect our 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 our 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. Project Atlas is being implemented in a phased approach and is expected to take approximately three years. If the new ERP system or legacy system are disrupted, in any material way, during implementation, the Company may occur additional expense and loss of data. Additionally, if improvements or upgrades are required to meet the evolving needs of our business, we 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 system, require expenditures above the anticipated amounts, demand the use of additional resources, distract key personnel and potentially cause short-term disruptions to our existing systems and our business. Any of these outcomes could impair the Company’s ability to achieve critical strategic initiatives and could adversely impact our sales, profitability, cash flows and financial condition.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

ITEM 2.
PROPERTIES

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

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

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

Most of the Company's manufacturing plants also serve as distribution centers and contain offices for sales, engineering, and manufacturing support staff. The Company believes that its properties are suitable and adequate to meet existing production needs. The Company also owns approximately 70 acres of undeveloped land adjacent to the other owned property, which is available for expansion.


12

                           

The following is the approximate square footage of the Company's owned or leased facilities by segment: Applied Technology - 154,000; Engineered Films - 761,000; Aerostar - 285,000; and Corporate - 150,000.

ITEM 3.
LEGAL PROCEEDINGS

The Company is involved as a party in lawsuits, claims, regulatory inquiries, or disputes arising in the normal course of its business, the potential costs and liability of which cannot be determined at this time. 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 previously disclosed patent infringement lawsuit in which Capstan Ag Systems, Inc. made certain infringement claims against the Company has been settled on a confidential basis.

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.

# 13




PART II
 
 
 
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is traded on the NASDAQ Global Select Market under the ticker symbol RAVN. The following table shows quarterly unaudited financial results, quarterly high and low trade prices per share of the Company's common stock, as reported by the NASDAQ Global Select Market, and dividends declared for the periods indicated:
QUARTERLY INFORMATION (UNAUDITED)
(Dollars in thousands, except per-share amounts)
 
Net Sales
Gross Profit
Operating Income (Loss)
Pre-tax Income (Loss)
Net Income (Loss) Attributable to Raven
Net Income (Loss) Per Share(a)
 
Common Stock Market Price
 
Cash Dividends Per Share
 
 
Basic
Diluted
 
High
Low
FISCAL 2018
 
 
 
 
 
 
 
 
 
 
 
 
First Quarter
$
93,535

$
31,956

$
18,219

$
17,989

$
12,348

$
0.34

$
0.34

 
$
31.60

$
23.75

 
$
0.13

Second Quarter
86,610

26,513

11,700

11,637

8,235

0.23

0.23

 
37.40

29.80

 
0.13

Third Quarter(b)
101,349

33,333

17,829

17,795

11,998

0.33

0.33

 
35.80

26.70

 
0.13

Fourth Quarter(b)(c)
95,823

29,763

11,422

11,565

8,441

0.24

0.23

 
40.85

32.06

 
0.13

Total Year
$
377,317

$
121,565

$
59,170

$
58,986

$
41,022

$
1.14

$
1.13

 
$
40.85

$
23.75

 
$
0.52

 
 
 
 
 
 
 
 
 
 
 
 
 
FISCAL 2017
 
 
 
 
 
 
 
 
 
 
 
 
First Quarter
$
68,360

$
20,117

$
8,050

$
7,953

$
5,517

$
0.15

$
0.15

 
$
16.86

$
12.88

 
$
0.13

Second Quarter
67,598

18,915

6,696

6,487

4,495

0.12

0.12

 
21.58

15.01

 
0.13

Third Quarter(d)
  
72,522

19,839

7,389

7,116

5,741

0.16

0.16

 
25.47

20.21

 
0.13

Fourth Quarter
68,915

19,319

6,278

6,297

4,438

0.12

0.12

 
26.90

20.80

 
0.13

Total Year
$
277,395

$
78,190

$
28,413

$
27,853

$
20,191

$
0.56

$
0.56

 
$
26.90

$
12.88

 
$
0.52

 
 
 
 
 
 
 
 
 
 
 
 
 
FISCAL 2016
 
 
 
 
 
 
 
 
 
 
 
 
First Quarter
$
70,273

$
20,359

$
7,214

$
7,170

$
4,855

$
0.13

$
0.13

 
$
22.85

$
16.91

 
$
0.13

Second Quarter
67,518

17,858

6,429

6,163

4,191

0.11

0.11

 
22.36

18.52

 
0.13

Third Quarter(e)
  
67,611

16,972

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

15.77

 
0.13

Fourth Quarter
52,827

11,785

571

694

1,918

0.05

0.05

 
19.61

13.87

 
0.13

Total Year
$
258,229

$
66,974

$
4,391

$
4,081

$
4,776

$
0.13

$
0.13

 
$
22.85

$
13.87

 
$
0.52

(a) Net income per share is computed discretely by quarter and may not add to the full year.
(b) Fiscal year 2018 third and fourth quarters include net sales of $5.2 million and $7.9 million, respectively, related the acquisition of Colorado Lining International, Inc., as further described in Note 6 "Acquisitions of and Investments in Businesses and Technologies" of the Notes to the Consolidated Financial Statements.
(c) The Tax Cuts and Jobs Act, effective January 1, 2018, lowered the Company's federal statutory rate by 1.2 percentage points and benefited net income approximately $0.7 million for the fiscal year, as further described in Note 10 "Income Taxes" of the Notes to the Consolidated Financial Statements.

(d) The fiscal year 2017 third quarter includes inventory write-downs of $2,278 for Vista as a result of discontinuing sales activities for a specific radar product line within its business, as further described in Note 7 "Goodwill, Long-Lived Assets, and Other Charges " of the Notes to the Consolidated Financial Statements.
(e) The fiscal year 2016 third quarter includes pre-contract cost write-offs of $2,933 (which is comprised of $2,075 of costs capitalized as of July 31, 2015 and additional costs of $858 capitalized during August and September 2015), a goodwill impairment loss of $11,497, a long-lived asset impairment loss of $3,813, and a reduction of $2,273 acquisition-related contingent liability for Vista. For further information regarding these impairments and other charges refer to Note 7 "Goodwill, Long-Lived Assets, and Other Charges" of the Notes to the Consolidated Financial Statements.

As of January 31, 2018, the Company had approximately 12,400 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.
 
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. During

# 14


fiscal 2017, the Company made purchases of 484,252 common shares under this plan at an average price of $15.91 per share for a total cost of $7.7 million. None of these common shares were repurchased during the fourth quarter of fiscal 2017. During fiscal 2016, the Company made purchases of 1,602,545 common shares under this plan at an average price of $18.31 per share for a total cost of $29.3 million. None of these common shares were repurchased during the fourth quarter of fiscal 2016. There is $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.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG RAVEN INDUSTRIES, INC.,
S&P 1500 INDUSTRIAL MACHINERY INDEX, RUSSELL 2000 INDEX, AND THE S&P SMALL CAP 600 INDEX.
ravn2018v7.jpg
The above graph compares the cumulative total shareholders return on the Company's stock with the cumulative return of the S&P 1500 Industrial Machinery Index, Russell 2000 Index, and S&P Small Cap 600 Index. The S&P 1500 Industrial Machinery Index is being replaced by the S&P Small Cap 600 Index as the Company determined that the S&P Small Cap 600 Index more closely represents similar companies. The S&P 1500 Industrial Machinery Index remains on this chart in the year of transition for comparative purposes. Investors who bought $100 of the Company's stock on January 31, 2013, held this for five years and reinvested the dividends would have seen its value increase to $158.77. Stock performance on the graph is not necessarily indicative of future price performance.
 
 
Years Ended January 31,
 
5-Year
Company / Index
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
 
CAGR(a)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Raven Industries, Inc.
 
$
100.00

 
$
141.12

 
$
82.29

 
$
59.29

 
$
101.55

 
$
158.77

 
9.7
%
S&P 1500 Industrial Machinery Index
 
100.00

 
125.99

 
130.62

 
119.14

 
170.46

 
223.32

 
17.4
%
Russell 2000 Index
 
100.00

 
127.03

 
132.63

 
119.47

 
159.53

 
186.94

 
13.3
%
S&P Small Cap 600 Index
 
100.00

 
128.44

 
136.34

 
129.95

 
174.58

 
203.49

 
15.3
%
(a) compound annual growth rate (CAGR)
 
 
 
 
 
 
 
 
 
 
 
 


15

                           

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

 
2018
 
2017
 
2016
 
2015
 
2014
OPERATIONS
 
 
 
 
 
 
 
 
 
 
 Net sales(a)
 
$
377,317

 
$
277,395

 
$
258,229

 
$
378,153

 
$
394,677

 Gross profit(b)
 
121,565

 
78,190

 
66,974

 
103,246

 
119,354

 Operating income(b)(c)
 
59,170

 
28,413

 
4,391

 
43,801

 
63,994

 Income before income taxes(b)(c)
 
58,986

 
27,853

 
4,081

 
43,501

 
63,623

 Net income attributable to Raven Industries, Inc.(d)
 
41,022

 
20,191

 
4,776

 
31,733

 
42,903

 Net income % of sales
 
10.9
%
 
7.3
%
 
1.8
%
 
8.4
%
 
10.9
%
 Net income % of average equity(e)
 
15.3
%
 
7.7
%
 
1.7
%
 
11.4
%
 
18.2
%
FINANCIAL POSITION
 
 
 
 
 
 
 
 
 
 
 Cash and cash equivalents
 
$
40,535

 
$
50,648

 
$
33,782

 
$
51,949

 
$
52,987

 Property, plant and equipment
 
106,280

 
106,324

 
115,704

 
117,513

 
98,076

 Total assets
 
326,803

 
301,509

 
298,688

 
362,873

 
301,819

 Total debt (including capital lease obligations)
 
448

 

 

 

 

 Raven Industries, Inc. shareholders' equity
 
276,064

 
259,426

 
264,155

 
305,153

 
251,362

 Net working capital(f)
 
100,777

 
77,012

 
77,870

 
100,183

 
97,184

 Net working capital percentage(g)
 
26.3
%
 
27.9
%
 
36.9
%
 
27.9
%
 
26.2
%
 Long-term debt / total capitalization
 
0.2
%
 
%
 
%
 
%
 
%
CASH FLOWS PROVIDED BY (USED IN)
 
 
 
 
 
 
 
 
 
 
 Operating activities
 
$
44,961

 
$
48,636

 
$
44,008

 
$
60,083

 
$
52,836

 Investing activities
 
(25,675
)
 
(4,642
)
 
(11,074
)
 
(29,986
)
 
(31,615
)
 Financing activities
 
(29,721
)
 
(27,151
)
 
(50,684
)
 
(30,665
)
 
(17,354
)
 Change in cash and cash equivalents
 
(10,113
)
 
16,866

 
(18,167
)
 
(1,038
)
 
3,634

COMMON STOCK DATA
 
 
 
 
 
 
 
 
 
 
 EPS — basic
 
$
1.14

 
$
0.56

 
$
0.13

 
$
0.86

 
$
1.18

 EPS — diluted
 
1.13

 
0.56

 
0.13

 
0.86

 
1.17

 Cash dividends per share
 
0.52

 
0.52

 
0.52

 
0.50

 
0.48

 Stock price range during the year
 
 
 
 
 
 
 
 
 
 
   High
 
$
40.85

 
$
26.90

 
$
22.85

 
$
40.06

 
$
42.99

   Low
 
23.75

 
12.88

 
13.87

 
20.75

 
25.46

   Close
 
38.55

 
25.05

 
15.01

 
21.44

 
37.45

OTHER DATA
 
 
 
 
 
 
 
 
 
 
 Price / earnings ratio(h)
 
34.1

 
44.7

 
115.5

 
24.9

 
32.0

 Average number of employees
 
1,054

 
907

 
936

1,251

1,251

 
1,264

 Sales per employee
 
$
358

 
$
306

 
$
276

 
$
302

 
$
312

 
 
 
 
 
 
 
 
 
 
 
(a) Fiscal year 2018 includes $13.1 million in net sales related to the acquisition of Colorado Lining International, Inc., further described in Note 6 "Acquisitions of and Investments in Businesses and Technologies" of the Notes to the Consolidated Financial Statements.
(b) The fiscal year ended January 31, 2017 includes inventory write-downs of $2,278 for Vista as a result of discontinuing sales activities for a specific radar product line within its business, as further described in Note 7 "Goodwill, Long-Lived Assets, and Other Charges " of the Notes to the Consolidated Financial Statements.
(c) The fiscal year ended January 31, 2016 includes pre-contract cost write-offs of $2,933, a goodwill impairment loss of $11,497, and a long-lived asset impairment loss of $3,826, partially offset by a reduction of $2,273 of an acquisition-related contingent liability for Vista. For further information regarding these impairments and other charges refer to Note 7 "Goodwill, Long-Lived Assets, and Other Charges" of the Notes to the Consolidated Financial Statements.
(d) The Tax Cuts and Jobs Act, effective January 1, 2018, lowered the Company's federal statutory rate by 1.2 percentage points and benefited net income approximately $0.7 million for the fiscal year, as further described in Note 10 "Income Taxes" of the Notes to the Consolidated Financial Statements.

(e) Net income attributable to Raven Industries, Inc. divided by average equity. Average equity is the sum of Raven Industries, Inc. shareholders' equity for the beginning of the fiscal year plus Raven Industries, Inc. shareholders' equity for the end of the fiscal year divided by two.

(f) Net working capital is defined as accounts receivable (net) plus inventories less accounts payable.
(g) 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.
(h) Closing stock price on last business day of fiscal year divided by EPS — diluted.

# 16



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

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

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

The MD&A is organized as follows:

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

EXECUTIVE SUMMARY
Raven is a diversified technology company providing a variety of products to customers within the industrial, agricultural, geomembrane, construction, aerospace/defense, radar and 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:

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

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

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

Information reported as net sales excluding contract manufacturing sales on both a consolidated and segment basis exclude sales generated from contract manufacturing activities and do not conform to generally accepted accounting principles (GAAP). As such, these are non-GAAP measures. As the reduction of contract manufacturing was largely completed in fiscal 2016, these additional measures are not utilized for comparisons to periods after fiscal 2016 and are excluded from the tables in this MD&A for fiscal 2018 and 2017.

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

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


# 17

                           

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

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

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

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

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


























# 18

                           

The following discussion highlights the consolidated operating results for the years ended January 31, 2018, 2017, and 2016. 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)
 
2018
 
% change
 
2017
 
% change
 
2016
Results of Operations
 
 
 
 
 
 
 
 
 
 
Net sales(a)
 
$
377,317

 
36.0
%
 
$
277,395

 
7.4
%
 
$
258,229

Gross margin(b)
 
32.2
%
 
 
 
28.2
%
 
 
 
25.9
%
Operating income
 
$
59,170

 
108.2
%
 
$
28,413

 
547.1
%
 
$
4,391

Operating margin(b)
 
15.7
%
 
 
 
10.2
%
 
 
 
1.7
%
Net income attributable to Raven Industries, Inc.(c)
 
$
41,022

 
103.2
%
 
$
20,191

 
322.8
%
 
$
4,776

Diluted income per share
 
$
1.13

 
101.8
%
 
$
0.56

 
330.8
%
 
$
0.13

Adjusted net income attributable to Raven Industries, Inc.(d)
 
$
41,022

 
103.2
%
 
$
20,191

 
34.1
%
 
$
15,053

 
 
 
 
 
 
 
 
 
 
 
Cash Flow and Shareholder Returns
 
 
 
 
 
 
 
 
 
 
Cash flow from operating activities
 
$
44,961

 
 
 
$
48,636

 
 
 
$
44,008

Cash outflow for capital expenditures
 
$
12,011

 
 
 
$
4,642

 
 
 
$
13,046

Cash dividends
 
$
18,685

 
 
 
$
18,839

 
 
 
$
19,426

Common share repurchases
 
$
10,000

 
 
 
$
7,702

 
 
 
$
29,338

 
 
 
 
 
 
 
 
 
 
 
Performance Measures
 
 
 
 
 
 
 
 
 
 
Return on net sales(e)
 
10.9
%
 
 
 
7.3
%
 
 
 
1.8
%
Return on average assets(f)
 
13.1
%
 
 
 
6.7
%
 
 
 
1.4
%
Return on average equity(g)
 
15.3
%
 
 
 
7.7
%
 
 
 
1.7
%
 
(a) Fiscal year 2018 includes $13.1 million in net sales related to the acquisition of Colorado Lining International, Inc. further described in Note 6 "Acquisitions of and Investments in Businesses and Technologies" of the Notes to the Consolidated Financial Statements.

(b) 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.
(c) The Tax Cuts and Jobs Act, effective January 1, 2018, lowered the Company's federal statutory rate by 1.2% and benefited net income approximately $0.7 million for the fiscal year, as further described in Note 10 "Income taxes" of the Notes to the Consolidated Financial Statements.

(d) Non-GAAP measure reconciled to GAAP in the applicable table below.
(e) Net income divided by net sales.
(f) Net income attributable to Raven Industries, Inc. divided by average assets. Average assets is the sum of Total Assets for the beginning of the fiscal year plus Total Assets for the end of the fiscal year divided by two.
(g) Net income attributable to Raven Industries, Inc. divided by average equity. Average equity is the sum of Total Raven Industries, Inc. shareholders' equity for the beginning of the fiscal year plus Total Raven Industries, Inc. shareholders' equity for the end of the fiscal year divided by two.

# 19

                           

The following table reconciles the reported net sales to adjusted sales, a non-GAAP financial measure. Adjusted sales excludes contract manufacturing and represents the Company's sales from proprietary products. As the reduction of contract manufacturing was largely completed in fiscal 2016, adjusted sales excluding manufacturing is not a meaningful measure in subsequent fiscal periods. As such fiscal 2018 and 2017 has been excluded from this table.
 
 
For the year ended January 31,
(dollars in thousands)
 
2016
Applied Technology
 
 
Reported net sales
 
$
92,599

Less: Contract manufacturing sales
 
546

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

 
 
 
Aerostar
 
 
Reported net sales
 
$
36,368

Less: Contract manufacturing sales
 
4,701

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

 
 
 
Consolidated Raven
 
 
Reported net sales
 
$
258,229

Less: Contract manufacturing sales
 
5,247

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

The following table reconciles the reported operating (loss) income to adjusted operating income, a non-GAAP financial measure. On both a segment and consolidated basis, adjusted operating income excludes the goodwill impairment loss, long-lived asset impairment loss, pre-contract cost write-offs, and an acquisition-related contingent consideration benefit all of which relate to the Vista business within the Aerostar Division and all of which occurred in the fiscal 2016 third quarter. These are described in more detail in Note 7 Goodwill, Long-lived Assets, and Other Charges and Note 6 Acquisition of and Investments in Businesses and Technologies of the Notes to the Consolidated Financial Statements.
 
 
For the years ended January 31,
(dollars in thousands)
 
2018
 
% change
 
2017
 
% change
 
2016
Aerostar
 
 
 
 
 
 
 
 
 
 
Reported operating income (loss)
 
$
4,122

 
(364.2
)%
 
$
(1,560
)
 
(89.5
)%
 
$
(14,801
)
Plus:
 
 
 
 
 
 
 
 
 
 
Goodwill impairment loss
 

 
 
 

 
 
 
11,497

Long-lived asset impairment loss
 

 
 
 

 
 
 
3,813

Pre-contract costs written off
 

 
 
 

 
 
 
2,933

Less:
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent liability benefit
 

 
 
 

 
 
 
2,273

Aerostar adjusted operating income (loss) (a)
 
$
4,122

 
(364.2
)%
 
$
(1,560
)
 
(233.4
)%
 
$
1,169

Aerostar adjusted operating income (loss) % of net sales
 
10.3
%
 
 
 
(4.6
)%
 
 
 
3.2
%
 
 
 
 
 
 
 
 
 
 
 
Consolidated Raven
 
 
 
 
 
 
 
 
 
 
Reported operating income
 
$
59,170

 
108.2
 %
 
$
28,413

 
547.1
 %
 
$
4,391

Plus:
 
 
 
 
 
 
 
 
 
 
Goodwill impairment loss
 

 
 
 

 
 
 
11,497

Long-lived asset impairment loss
 

 
 
 

 
 
 
3,813

Pre-contract costs written off
 

 
 
 

 
 
 
2,933

Less:
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent liability benefit
 

 
 
 

 
 
 
2,273

Consolidated adjusted operating income
 
$
59,170

 
108.2
 %
 
$
28,413

 
39.5
 %
 
$
20,361

Consolidated adjusted operating income % of net sales

 
15.7
%
 
 
 
10.2
 %
 
 
 
7.9
%
(a) At the segment level, adjusted operating income (loss) does not include an allocation of general and administrative expenses.

# 20

                           

The following table reconciles the reported net income to adjusted net income, a non-GAAP financial measure. Adjusted net income excludes the goodwill impairment loss, long-lived asset impairment loss, pre-contract cost write-off, an acquisition-related contingent consideration benefit, and the income tax effect of these items, all of which relate to the Vista business within the Aerostar Division and all of which occurred in the fiscal 2016 third quarter. These are described in more detail in Note 7 Goodwill, Long-lived Assets, and Other Charges and Note 6 Acquisition of and Investments in Businesses and Technologies of the Notes to the Consolidated Financial Statements.
 
 
For the years ended January 31,
(dollars in thousands)
 
2018
 
% change
 
2017
 
% change
 
2016
Consolidated Raven
 
 
 
 
 
 
 
 
 
 
Reported net income attributable to Raven Industries, Inc.
 
$
41,022

 
103.2
%
 
$
20,191

 
322.8
%
 
$
4,776

Plus:
 
 
 
 
 
 
 
 
 
 
Goodwill impairment loss
 

 
 
 

 
 
 
11,497

Long-lived asset impairment loss
 

 
 
 

 
 
 
3,813

Pre-contract costs written off
 

 
 
 

 
 
 
2,933

 
 
 
 
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent liability benefit
 

 
 
 

 
 
 
2,273

Net tax benefit on adjustments
 

 
 
 

 
 
 
5,693

Adjusted net income attributable to Raven
   Industries, Inc.
 
$
41,022

 
103.2
%
 
$
20,191

 
34.1
%
 
$
15,053

 
 
 
 
 
 
 
 
 
 
 
Adjusted net income per common share:
 
 
 
 
 
 
 
 
 
 
      ─ Basic
 
$
1.14

 
103.6
%
 
$
0.56

 
40.0
%
 
$
0.40

      ─ Diluted
 
$
1.13

 
101.8
%
 
$
0.56

 
40.0
%
 
$
0.40

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 last year's net sales of $277.4 million. All three divisions achieved double-digit growth, with Engineered Films achieving growth of 53.6 percent 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 U.S. Tax Cuts and Jobs Act (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 approximately $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. Sales in the original equipment manufacturer (OEM) channel were up 32.4% while sales in the aftermarket channel increased 6.3%. 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.


# 21

                           

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 stratospheric balloons and radar systems. 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.

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

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

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

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

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

Engineered Films Division
Fiscal 2017 net sales were $138.9 million, an increase of $9.4 million, or 7.3%, compared to fiscal 2016. The increase in sales was driven by increases in the industrial, geomembrane, and construction markets, partially offset by a decrease in the agricultural market. Although the Company does not specifically model comparative market share position for any of its operating divisions,

# 22

                           

based on the sales developments in fiscal year 2017 the Company believes that Engineered Films’ market share position improved during the year in all of the end markets served, with the exception of the agriculture market.

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

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

Aerostar reported an operating loss of $1.6 million in fiscal 2017 compared to an operating loss of $14.8 million in fiscal 2016. The fiscal 2016 results were impacted by the Vista goodwill and long-lived assets impairments and associated financial impacts. Excluding these specific Vista related items, adjusted operating income in fiscal 2016 was $1.2 million, compared to an operating loss of $1.6 million for fiscal 2017, a decline of $2.8 million on an adjusted basis. This decline in operating income was primarily driven by lower sales volume and $2.3 million of inventory write-downs related to certain radar systems, discussed in more detail in Note 7 Goodwill, Long-lived Assets, and Other Charges of the Notes to the Consolidated Financial Statements, and lower sales volume.

RESULTS OF OPERATIONS - SEGMENT ANALYSIS
Applied Technology
Applied Technology designs, manufactures, sells, and services innovative precision agriculture products and information management tools that help growers reduce costs, more precisely control inputs, and improve yields for the global agriculture market. Applied Technology's operations include operations of SBG Innovatie BV and its affiliate, Navtronics BVBA (collectively, SBG), based in the Netherlands.

 
For the years ended January 31,
(dollars in thousands)
 
2018
 
% change
 
2017
 
% change
 
2016
Net sales
 
$
124,688

 
18.5
%
 
$
105,217

 
13.6
%
 
$
92,599

Gross profit
 
54,682

 
25.8
%
 
43,476

 
28.0
%
 
33,969

Gross margin
 
43.9
%
 
 
 
41.3
%
 
 
 
36.7
%
Operating expense
 
$
23,166


37.6
%
 
$
16,833

 
7.6
%
 
$
15,650

Operating expense as % of sales
 
18.6
%
 
 
 
16.0
%
 
 
 
16.9
%
Long-lived asset impairment loss
 
259

 
 
 
$

 
 
 

Operating income(a)
 
$
31,257

 
17.3
%
 
$
26,643

 
45.4
%
 
18,319

Operating margin
 
25.1
%
 
 
 
25.3
%
 
 
 
19.8
%
Applied Technology net sales,
    excluding contract manufacturing
    sales(b)
 
NMF
 
NMF
 
NMF

 
NMF

 
$
92,053

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

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



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 fourth quarter net sales increased $4.6 million, or 17.6%, to $30.5 million and operating income decreased $0.6 million, or 8.7%, to $5.8 million compared to the fourth quarter of fiscal 2017.

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

Market conditions. Conditions in the agriculture market remain subdued; however, Applied Technology's marketplace strategy has capitalized on new product introductions in fiscal 2018. While OEM and aftermarket sales channel demand

# 23

                           

remains challenging, Applied Technology achieved fourth quarter and year-to-date sales growth compared to the prior year primarily due to market share gains driven by new product introductions and building on key OEM relationships. These were the primary growth drivers both domestically and internationally.
Sales volume and selling prices. Sales in the OEM and aftermarket channels were up 32.4% and 6.3%, respectively, in fiscal 2018. Fiscal 2018 domestic sales were up 25.0% while international sales were up 1.5%. Higher sales volume, rather than an increase in selling price, was the main driver 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 in fiscal 2018. For the fourth quarter, international sales totaled $6.3 million, an increase of 6.2% from the prior year comparative quarter.
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.

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

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

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

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

# 24

                           

Engineered Films
Engineered Films manufactures high performance plastic films and sheeting for geomembrane, agricultural, construction, and industrial applications. Engineered Films’ ability to develop value-added innovative products is expanded by its fabrication, conversion, design-build and installation capabilities.
 
 
For the years ended January 31,
(dollars in thousands)
 
2018
 
% change
 
2017
 
% change
 
2016
Net sales
 
$
213,298

 
53.6
%
 
$
138,855

 
7.3
 %
 
$
129,465

Gross profit
 
56,255

 
91.3
%
 
29,407

 
17.3
 %
 
25,076

Gross margin
 
26.4
%
 
 
 
21.2
%
 
 
 
19.4
%
Operating expenses
 
$
8,931

 
38.7
%
 
$
6,441

 
(10.3
)%
 
$
7,184

Operating expenses as % of sales
 
4.2
%
 
 
 
4.6
%
 
 
 
5.5
%
Operating income(a)
 
$
47,324

 
106.1
%
 
$
22,966

 
28.4
 %
 
$
17,892

Operating margin
 
22.2
%
 
 
 
16.5
%
 
 
 
13.8
%
(a) At the segment level, operating income does not include an allocation of general and administrative expenses.


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.

For fiscal 2018, fourth quarter net sales increased $21.1 million, or 61.0%, to $55.6 million as compared to $34.5 million in the fiscal 2017 fourth quarter. Operating income was up $6.6 million, or 125.2%, to $11.9 million as compared to $5.3 million in the prior year fourth quarter.

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. Each of these markets had significant growth in fiscal 2018, with the geomembrane and construction markets growing most significantly. Geomembrane 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 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. For fiscal 2018, sales into the geomembrane market increased 103.3% year-over-year. The growth in the construction market was driven by delivery of hurricane recovery film. Due to the unusually devastating hurricane season, delivery of hurricane recovery film during fiscal 2018 resulted in sales of $24.2 million. It has 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. For fiscal 2018, sales into the construction market increased 46.8% year-over-year.
Sales volume and selling prices. Primary drivers of the increase in net sales were the improved conditions within the geomembrane and industrial markets, 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. Operating expenses increased less than revenues due primarily to continued cost control measures and resulted in a lower percentage of sales year-over-year.

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


# 25

                           

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

Fiscal 2017 comparative results were primarily driven by the following factors:
  
Market conditions. End-market conditions have improved in the geomembrane market in the second half of fiscal 2017 for Engineered Films. U.S. land-based rig counts have increased approximately 17.0% from January 2016 to January 2017. For fiscal 2017, sales into the geomembrane market increased 16.9% year-over-year.
Sales volume and selling prices. Fiscal 2017 net sales were up 7.3% to $138.9 million compared to fiscal 2016 net sales of $129.5 million. Sales volume, measured in pounds, for fiscal 2017 was up 11.4%. Primary drivers of the increase in sales volume included the improved market conditions within the geomembrane market and new sales into the industrial and geomembrane markets as a result of successfully selling capacity of the division's new production line that was commissioned in the fiscal 2017 first quarter. Average selling prices for the same period were down approximately 3.7% compared to the prior fiscal year primarily due to product mix and the competitive landscape in the geomembrane market. Fourth quarter fiscal 2017 sales volume was up 34.0% compared to fourth quarter fiscal 2016. Fourth quarter average selling prices increased 1.3% year-over-year.
Gross margin. Fiscal 2017 gross margin was 21.2%, 1.8 percentage points higher than the prior fiscal year. During fiscal 2017 fourth quarter, the gross margin was 20.5% compared to 15.0% in the prior year fourth quarter. The increase for both periods was primarily the result of higher sales volume. Due to the existing available capacity of the facilities, the increase in sales volume did not require a commensurate increase in costs in fiscal 2017. In addition, benefits from value engineering, reformulation efforts, pricing discipline, and favorable raw material cost developments also benefited gross margin.
Operating expenses. Fiscal 2017 operating expenses, as a percentage of net sales, decreased to 4.6%, from 5.5% in the prior year. Sales volume increased while selling expense decreased compared to fiscal year 2016 as a result of cost control measures and lower bad debt expense.

Aerostar
Aerostar serves the aerospace/defense, radar and lighter-than-air markets. Aerostar had also provided significant contract manufacturing services in the past, but largely exited this business in fiscal 2016. Aerostar designs and manufactures proprietary products including high-altitude (stratospheric) balloon systems, tethered aerostats, 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 pursues product and support services contracts for agencies and instrumentalities of the U.S. and foreign governments.
 
 
For the years ended January 31,
(dollars in thousands)
 
2018
 
% change
 
2017
 
% change
 
2016
Net sales
 
$
39,915

 
17.0
 %
 
$
34,113

 
(6.2
)%
 
$
36,368

Gross profit
 
10,608

 
99.4
 %
 
5,319

 
(32.1
)%
 
7,838

Gross margin
 
26.6
%
 
 
 
15.6
 %
 
 
 
21.6
 %
Operating expenses
 
$
6,486

 
(4.5
%)
 
$
6,792

 
(7.2
)%
 
$
7,316

Operating expenses as % of sales
 
16.2
%
 
 
 
19.9
 %
 
 
 
20.1
 %
Goodwill and long-lived asset impairment loss
 
$

 
 
 
$
87

 
 
 
$
15,323

Operating (loss) income(a)
 
4,122

 
(364.2
)%
 
(1,560
)
 
(89.5
)%
 
(14,801
)
Operating margin
 
10.3
%
 
 
 
(4.6
)%
 
 
 
(40.7
)%
Aerostar net sales, excluding
    contract manufacturing sales(b)
 
NMF
 
NMF
 
NMF

 
NMF

 
$
31,667

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



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 fourth quarter net sales increased $1.0 million, or 11.8%, to $9.8 million. Aerostar's operating income for the fiscal 2018 fourth quarter was essentially break-even. This is down $0.2 million compared with the prior year fourth quarter.

# 26

                           

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. Aerostar is also pioneering new markets with leading-edge applications of its stratospheric balloons and remains in active collaboration with Google on Project Loon. Project Loon is a program to provide high-speed wireless Internet accessibility and telecommunications to rural, remote, and under-served areas of the world. 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.

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

Fiscal 2017 fourth quarter net sales declined $0.2 million, or 2.5%, to $8.8 million compared to fiscal 2016 fourth quarter results. Aerostar reported a fiscal 2017 fourth quarter operating income of $0.2 million, flat compared with the prior year fourth quarter.

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

Market conditions. Aerostar is experiencing delays and uncertainties regarding certain opportunities important to the division's growth strategy, and some of Aerostar's markets are subject to significant variability due to government spending and the timing of contract awards. Aerostar is pioneering new markets with leading-edge applications of its high-altitude balloons and remains in active collaboration with Google on Project Loon. Project Loon is a program to provide high-speed wireless Internet accessibility and telecommunications to rural, remote, and under-served areas of the world.
Sales volume. Fiscal 2017 net sales decreased $2.3 million from the prior year, a year-over-year decrease of 6.2%. The decline was principally driven by lower aerostat sales due to the timing of deliveries. This was partially offset by higher sales of stratospheric balloons for Project Loon and other customers newly established in fiscal 2017.
Gross margin. For fiscal 2017, gross margin decreased 6.0 percentage points compared to the prior fiscal year. Fiscal 2017 gross margin decline was primarily driven by lower sales volume and $2.3 million of inventory write-downs related to certain radar systems discussed in more detail in Note 7 Goodwill, Long-lived Assets, and Other Charges of the Notes to the Consolidated Financial Statements, offset somewhat by a $1.3 million reduction in depreciation and amortization expense due to the long-lived asset impairment charges recorded in fiscal 2016.
Goodwill and long-lived asset impairment loss. In fiscal 2016, Aerostar recorded a goodwill impairment loss of $11.5 million and a long-lived asset impairment loss of $3.8 million. These impairment charges were recorded in the Vista reporting unit and are described more fully in Note 7 Goodwill, Long-lived Assets, and Other Charges of the Notes to the Consolidated Financial Statements. As also described in Note 7 Goodwill, Long-lived Assets, and Other Charges, a $0.1 million long-lived asset impairment loss was recorded in fiscal 2017 on the Radar asset group. Expense control measures executed throughout fiscal year 2017 reduced operating expenses year-over-year.
Operating expenses. Operating expenses as a percentage of net sales was essentially flat year-over-year. Fiscal 2017 operating expenses of $6.8 million were 19.9% of net sales compared to operating expenses of $7.3 million, equivalent to 20.1% of net sales in fiscal 2016.
Aerostar adjusted operating income. Aerostar reported an operating loss of $1.6 million in fiscal 2017 compared to an operating loss of $14.8 million in fiscal 2016. The fiscal 2016 results were impacted by the Vista goodwill and long-lived asset impairments and associated financial impacts. Excluding these Vista related items, adjusted operating income in fiscal 2016 was $1.2 million, compared to an operating loss of $1.6 million for fiscal 2017, a decline of $2.8 million on an adjusted basis. This decline in operating income was primarily driven by lower sales volume and $2.3 million of inventory write-downs related to certain radar systems, offset somewhat by a $1.3 million reduction in depreciation and amortization expense due to the long-lived asset impairment charges recorded in fiscal 2016.


# 27

                           

Corporate Expenses (administrative expenses; other (expense), net; and effective tax rate)
 
 
For the years ended January 31,
(dollars in thousands)
 
2018

2017
 
2016
Administrative expenses
 
$
23,553

 
$
19,624

 
$
17,110

Administrative expenses as a % of sales
 
6.2
%
 
7.1
%
 
6.6
 %
Other (expense), net
 
$
(184
)
 
$
(560
)
 
$
(310
)
Effective tax rate
 
30.5
%
 
27.5
%
 
(18.8
)%

Administrative expenses increased $3.9 million in fiscal 2018 compared with fiscal 2017. The increase is primarily due to higher head count and incentive compensation, due diligence related expenses for CLI and the evaluation of other acquisition targets, and costs incurred for Project Atlas. Project Atlas is a strategic long-term investment to replace the Company’s existing enterprise resource planning platform. Costs incurred related to Project Atlas were $0.6 million and $0.9 million for the three- and twelve-month periods ended January 31, 2018.
   
Other (expense), net consists primarily of activity related to the Company's equity investments, interest income, foreign currency transaction gains or losses, amortization of debt issuance costs, and other fees related to the Company's credit facility further described in Note 11 Financing Arrangements of the Notes to the Consolidated Financial Statements. It declined $0.4 million in fiscal 2018 due to a combination of higher interest income and lower amortization expense related to an equity method investment.

The Company's fiscal 2018 effective tax rate was 30.5% compared to 27.5% in the prior year. The difference in the effective tax rate is primarily due to higher pre-tax income in the current year and the recognition of discrete tax expense related to the Company's adoption of ASU 2016-09 in fiscal 2018 as further discussed in Note 1 Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements. This ASU requires that the tax effects resulting from the settlement of stock-based awards be recognized as a discrete income tax expense or benefit in the income statement in the reporting period in which they occur. Additionally, the TCJA, effective January 1, 2018, lowered the Company's U.S. federal statutory tax rate by 1.2 percentage points for the fiscal year. The TCJA reduces the U.S. federal statutory tax rate to 21% for fiscal 2019.

The effective tax rate and other items causing the effective tax rate to differ from the statutory tax rate are more fully described in Note 10 Income Taxes of the Notes to the Consolidated Financial Statements. For fiscal year 2019, the Company expects a consolidated effective tax rate of approximately 21%, excluding discrete items.

LIQUIDITY AND CAPITAL RESOURCES

The Company's balance sheet continues to reflect significant liquidity and a strong capital base. Management focuses on the current cash balance and operating cash flows in considering liquidity, as operating cash flows have historically been the Company's 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)
 
2018
 
2017
 
2016
Cash and cash equivalents
 
$
40,535

 
$
50,648

 
$
33,782

 
 
For the years ended January 31,
(dollars in thousands)
 
2018
 
2017
 
2016
Cash provided by operating activities
 
$
44,961

 
$
48,636

 
$
44,008

Cash used in investing activities
 
(25,675
)
 
(4,642
)
 
(11,074
)
Cash used in financing activities
 
(29,721
)
 
(27,151
)
 
(50,684
)
Effect of exchange rate changes on cash and cash equivalents
 
322

 
23

 
(417
)
Net increase (decrease) in cash and cash equivalents
 
$
(10,113
)
 
$
16,866

 
$
(18,167
)


# 28


Cash and cash equivalents totaled $40.5 million at January 31, 2018 compared to $50.6 million at January 31, 2017, a decrease of $10.1 million. The decrease from fiscal 2017 year-end was primarily driven by cash outlays for the acquisition of CLI and share repurchases, partially offset by strong operating cash flows.

At January 31, 2018 the Company held cash and cash equivalents of $4.1 million in accounts outside the United States. These balances included undistributed earnings of foreign subsidiaries. As of January 31, 2018, the Company has recorded United States income taxes of $0.3 million on $3.2 million of undistributed earnings from its Canadian and European subsidiaries. As a result of the TCJA, we can repatriate our cumulative undistributed earnings back to the U.S. when needed with minimal U.S. income tax consequences other than the transition tax.  We plan to reinvest our foreign earnings internationally, but will continue to assess if there is a need in the future to bring back a portion of foreign cash which was subject to the transition tax. Our 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 $45.0 million in fiscal 2018 compared with $48.6 million in fiscal 2017. The $3.6 million decrease in operating cash flows year-over-year is primarily due to the 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:
 
 
As of January 31,
(dollars in thousands)
 
2018
 
2017
 
2016
Accounts receivable, net
 
$
58,532

 
$
43,143

 
$
38,069

Plus: Inventories
 
55,351

 
42,336

 
45,839

Less: Accounts payable
 
13,106

 
8,467

 
6,038

Net working capital(a)
 
$
100,777

 
$
77,012

 
$
77,870

 
 
 
 
 
 
 
Net working capital percentage(b)
 
26.3
%
 
27.9
%
 
36.9
%
(b) Net working capital is defined as accounts receivable (net) plus inventories less accounts payable.
(b) Net working capital percentage is defined as net working capital divided by fourth quarter net sales times four for each of the fiscal years, respectively.

The net working capital percentage decreased from 27.9% at January 31, 2017 to 26.3% at January 31, 2018. The decrease was
driven by an increase in accounts payable balances as well as managing inventory levels and receivables terms proactively with the substantial increase in sales versus the prior year. The Company has placed emphasis on managing efficient levels of inventory. Similar emphasis was placed on managing accounts payable terms and to a lesser extent, accounts receivable terms and collections.

Inventory levels decreased from $45.8 million at January 31, 2016 to $42.3 million at January 31, 2017 driven by focused inventory reduction actions in the Applied Technology and Engineered Films divisions as well as the inventory write-downs for certain radar inventory in the third quarter of fiscal 2017. Conversely, inventory levels increased $13.0 million, or 30.7% from $42.3 million at January 31, 2017 to $55.4 million at January 31, 2018. In comparison net sales increased $26.9 million or 39.0% year-over year in the fourth quarter. The increase in inventory was primarily driven by growth in net sales and backlog in the Engineered Films Division, offset somewhat by actions to reduce inventory levels in all three divisions.

Accounts receivable levels increased $5.1 million, or 13.3%, from $38.1 million at January 31, 2016 to $43.1 million at January 31, 2017 due primarily to increased sales volume. 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. In comparison net sales increased $26.9 million or 39.0% year-over year in the fourth quarter.

Accounts Payable increased $2.4 million, or 40.2%, year-over-year from $6.0 million at January 31, 2016 to $8.5 million at January 31, 2017, primarily due to improvement in the timing of payments to suppliers. Accounts payable increased $4.6 million, or 54.8% to $13.1 million at January 31, 2018 from $8.5 million at January 31, 2017. This increase was 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.


29


Investing Activities
Cash used in investing activities totaled $25.7 million in fiscal 2018, $4.6 million in fiscal 2017, and $11.1 million in fiscal 2016. Capital expenditures totaled $12.0 million in fiscal 2018 compared to $4.8 million in fiscal 2017 and $13.0 million in fiscal 2016. The primary drivers of the increase in fiscal 2018 cash outflows were payments related to the acquisition of CLI, as further described in Note 6 Acquisitions of and Investments in Businesses and Technologies of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K, and increased capital expenditures. Net capital outlay related to the CLI business acquisition was $13.3 million. There were no businesses acquired in fiscal year 2017 or 2016. Capital expenditures in fiscal year 2018 included $1.7 million for the Pleasanton, Texas facility purchased by Engineered Films in the first quarter. In addition, $3.3 million of costs were capitalized in the fourth quarter for a new extrusion line to expand capacity within the Engineered Films division. The installation of this line will continue throughout most of fiscal 2019.

Fiscal 2017 spending primarily related to maintenance activities. Due to the existing available capacity of the facilities as the result of meaningful capacity additions in prior years, the increase in sales volume in fiscal 2017 did not require capital expenditures for new capacity. Fiscal 2017 also benefited from $1.2 million in cash provided by the disposal of assets, most of which related to selling the Company's idle St. Louis, Missouri facility. There was $2.1 million of cash flows from the disposal of assets in fiscal 2016.

Management anticipates capital spending of approximately $22 million in fiscal 2019. The increase over fiscal 2018 will primarily be driven by installation of a new production line for Engineered Films.

Financing Activities
Financing activities consumed cash of $29.7 million in fiscal 2018 compared with $27.2 million in fiscal 2017 and $50.7 million in fiscal 2016.

Quarterly dividends paid in fiscal 2018 were $18.7 million, or $0.52 per share, compared to $18.8 million, or $0.52 share, in fiscal 2017 and $19.4 million, or $0.52 share, in fiscal 2016.

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, 2018. The Company paid $10.0 million, $7.7 million and $29.3 million for share repurchases in fiscal 2018, 2017 and 2016, respectively. Approximately $28.0 million of the total authorization is remains available for share repurchases under this plan as of January 31, 2018.

The Company made $0.4 million, $0.4 million, and $0.8 million of acquisition-related contingent liability payments related to the Vista and SBG acquisitions in fiscal 2018, 2017, and 2016, respectively.
 
During fiscal 2016, the Company paid $0.5 million of debt issuance costs associated with the Credit Agreement discussed further in Note 11 Financing Arrangements of the Notes to the Consolidated Financial Statements and below. No debt issuance costs were paid during fiscal 2018 or fiscal 2017. No borrowings or repayment have occurred on the Credit Agreement during any of fiscal periods reported.

Financing cash outflows included $0.2 million, $0.3 million and $0.5 million, of employee taxes in relation to the net settlement of restricted stock units (RSUs) that vested during fiscal years 2018, 2017 and 2016, respectively.

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, 2018 was $124.0 million.

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.


30


Letters of credit (LOC) totaling $1.1 million and $0.5 million were outstanding at January 31, 2018 and 2017. Any draws required under the LOCs would be settled with available cash or borrowings under 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 enterprise’s execution of its long-term growth strategy. Project Atlas is expected to take approximately three years to complete and cost between $8 and $10 million. The company recognized $0.6 million and $0.9 million of expenses for Project Atlas in the three- and twelve-month periods ended January 31, 2018. Project Atlas spending is expected to be approximately $1 million per quarter in fiscal year 2019.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

As of January 31, 2018, 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, 2018 are listed in the table below.
(dollars in thousands)
 
Total
 
Less than
1 year
 
1-3
years
 
3-5
years
 
More than
5 years
Credit facility(a)
 
$
485

 
$
211

 
$
274

 
$

 
$

Capital lease obligations
 
528

 
237

 
259

 
32

 

Operating leases
 
6,655

 
2,012

 
3,705

 
938

 

Unconditional purchase obligations
 
33,874

 
33,874

 

 

 

Postretirement benefits(b)
 
18,066

 
313

 
655

 
688

 
16,410

Acquisition-related contingent payments(c)
 
3,835

 
1,278

 
2,518

 
39

 

Uncertain tax positions(d)
 
2,634

 

 

 

 

 
 
$
66,077

 
$
37,925

 
$
7,411

 
$
1,697

 
$
16,410