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Consolidation
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(Registrant’s telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered
pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
iCommon
Stock, $1 par value
iRAVN
iNASDAQ
Global Select Market
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þiYeso No
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þiYeso No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). i☐Yes þ No
As of November 22, 2019, there were i35,760,477
shares of common stock, $1 par value, of Raven Industries, Inc. outstanding. There were no other classes of stock outstanding.
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
i12,124
i11,273
Change
in fair value of acquisition-related contingent consideration
i343
i585
Gain
from sale of equity method investment
i—
(i5,785)
Deferred
income taxes
i1,706
i869
Share-based
compensation expense
i3,539
i3,108
Other
operating activities, net
(i229)
(i2,327)
Change
in operating assets and liabilities:
Accounts receivable
(i8,406)
(i11,456)
Inventories
i1,932
i1,932
Other
assets
i2,592
i428
Operating
liabilities
i1,568
i4,757
Net
cash provided by operating activities
i47,078
i52,308
INVESTING
ACTIVITIES:
Capital expenditures
(i6,143)
(i10,421)
Proceeds
from sale or maturity of investments
i993
i7,334
Purchases
of investments
(i934)
(i502)
Proceeds
(disbursements) from sale of assets, settlement of liabilities
i3,459
i832
Other
investing activities
(i3,208)
(i2,042)
Net
cash used in investing activities
(i5,833)
(i4,799)
FINANCING
ACTIVITIES:
Dividends paid
(i14,001)
(i14,000)
Payments
for common shares repurchased
(i10,781)
i—
Payments
of acquisition-related contingent liability
(i1,308)
(i1,220)
Restricted
stock unit issuances
(i2,358)
(i774)
Employee
stock option exercises
(i706)
(i2,635)
Other
financing activities
(i716)
(i151)
Net
cash used in financing activities
(i29,870)
(i18,780)
Effect
of exchange rate changes on cash
(i68)
(i571)
Net
increase in cash and cash equivalents
i11,307
i28,158
Cash
and cash equivalents at beginning of year
i65,787
i40,535
Cash
and cash equivalents at end of period
$
i77,094
$
i68,693
The
accompanying notes are an integral part of the unaudited consolidated financial statements.
7
RAVEN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per-share amounts)
(1) iBASIS
OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Raven Industries, Inc. ("the Company" or "Raven") is a diversified technology company providing a variety of products to customers within the industrial, agricultural, geomembrane, construction, commercial lighter-than-air and aerospace/defense markets. The Company is comprised of ithree
unique operating units, or divisions, classified into reportable segments: Applied Technology, Engineered Films, and Aerostar.
The accompanying interim unaudited consolidated financial statements, which includes the accounts of Raven and its wholly-owned or controlled subsidiaries, net of intercompany balances and transactions, has been prepared by the Company in accordance with generally accepted accounting principles in the United States (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present this financial information have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2019.
Financial results for the interim three- and nine-month period ended October 31, 2019, are not necessarily indicative of the results that may be expected for the year ending January 31, 2020. The January 31, 2019, consolidated
balance sheet was derived from audited financial statements but does not include all disclosures required in an annual report on Form 10-K. Preparing financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Noncontrolling interests represent capital contributions, income and loss attributable to the owners of less than wholly-owned consolidated entities. The Company owns a i75%
interest in an entity consolidated under the Aerostar business segment. Given the Company's controlling financial interest, the accounts of the business venture have been consolidated with the accounts of the Company, and a noncontrolling interest has been recorded for the noncontrolling investor interest in the net assets and operations of the business venture.
(2) iSUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the Company's significant accounting policies as described in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2019, other than described in the Accounting Standards Adopted section below.
Accounting Pronouncements
i
Accounting
Standards Adopted
In the fiscal 2020 first quarter, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-02, "Leases (Topic 842)" (ASU 2016-02), issued in February 2016 and the subsequently-issued codification improvements to Topic 842. The primary difference between previous GAAP and ASU 2016-02 is the recognition of lease assets and liabilities by lessees for leases classified as operating leases under previous GAAP. The guidance requires a lessee to recognize a lease liability (to make lease payments) and a right-of-use asset (representing its right to use the underlying asset for the lease term) on the balance sheet with terms greater than 12 months. The Company adopted ASU 2016-02 on a modified
retrospective basis for all agreements existing as of February 1, 2019. Prior comparative periods have not been adjusted and continue to be reported and disclosed under ASC Topic 840. This adoption did not have a material impact to the Company. As of February 1, 2019, the Company recognized a right-of-use asset for finance leases and operating leases of $i233
and $i3,807, respectively and a current and non-current lease liability of $i1,446 and $i2,571,
respectively. As part of the adoption of ASU 2016-02, the Company elected the following practical expedient: short-term recognition exemption for all leases that qualify. Note disclosures required in Topic 842 are reported in Note 11 Leases of the Notes to the Consolidated Financial Statements in this Form 10-Q.
/
i
New
Accounting Standards Not Yet Adopted
In November 2018, the FASB issued ASU No. 2018-18, "Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606" (ASU 2018-18). The amendments in ASU 2018-18 clarify that certain transactions between
8
(dollars in thousands, except per-share amounts)
participants in collaborative arrangements should be accounted for as revenue under Topic 606, "Revenue from Contracts with Customers,"and precludes certain
transactions that are not with a customer from using Topic 606. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption of this guidance is permitted in any interim period. The amendments should be applied retrospectively to the date Topic 606 was adopted. The Company is in its final stages of evaluating the impact the adoption of this new guidance will have on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurement" (ASU 2018-13). The amendments in ASU 2018-13 remove, modify and add disclosures for companies required to make disclosures about recurring or nonrecurring fair value measurements under Topic 820. The amendments in this update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption of this guidance is permitted. Certain amendments in this guidance are required to be applied prospectively, and others are to be applied retrospectively. The amendments in ASU 2018-13 are disclosure-related only and as such the Company does not expect the adoption of this guidance to have a significant impact on the balances reported in the
Company's consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments" (ASU 2016-13). Current GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring. The amendments in this guidance eliminate the probable initial recognition threshold and, instead, reflect an entity’s current estimate of all expected credit losses. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss. The new standard is effective for annual reporting periods beginning after December 15, 2019. All entities may elect to early adopt ASU 2016-13 for annual reporting periods beginning
after December 15, 2018. The adoption of ASU 2016-13 is not expected to have a significant impact on the Company's consolidated financial statements or its note disclosures.
9
(dollars in thousands, except per-share amounts)
(3) iSELECTED
BALANCE SHEET INFORMATION
i
Following are the components of selected items from the Consolidated Balance Sheets:
Basic net income per share is computed by dividing net income by the weighted average common shares and fully vested stock units outstanding. Diluted net income per share is computed by dividing net income by the weighted average common and common equivalent shares outstanding, which includes the shares issuable upon exercise of employee stock options (net of shares assumed purchased with the option proceeds), stock units and restricted stock units outstanding. Performance share awards are included in the diluted calculation based upon what would be issued if the end of the most recent reporting period was the end of the term of the award.
Certain outstanding options and restricted stock units were excluded from the diluted net income per share calculations because their effect would have been anti-dilutive under the treasury stock
method. iThe options and restricted stock units excluded from the diluted net income per share calculation were as follows:
Weighted
average fully vested stock units outstanding
i128,604
i104,649
i120,691
i98,235
Denominator
for basic calculation
i35,914,064
i36,057,337
i36,014,405
i35,988,873
Weighted
average common shares outstanding
i35,785,460
i35,952,688
i35,893,714
i35,890,638
Weighted
average fully vested stock units outstanding
i128,604
i104,649
i120,691
i98,235
Dilutive
impact of stock options and restricted stock units
i176,850
i414,542
i236,222
i450,429
Denominator
for diluted calculation
i36,090,914
i36,471,879
i36,250,627
i36,439,302
Net
income per share ─ basic
$
i0.28
$
i0.36
$
i0.89
$
i1.36
Net
income per share ─ diluted
$
i0.28
$
i0.36
$
i0.88
$
i1.34
/
(5)
iREVENUE
i
Disaggregation of Revenues
Revenue is disaggregated
by major product category and geography, as we believe these categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following table includes a reconciliation of the disaggregated revenue by reportable segments. Service revenues are not material and are not separately disclosed.
Contract balances consist of contract assets and contract liabilities. Contract assets primarily relate to the Company’s rights to consideration for work completed but not yet billed
for at the reporting date, or retainage provisions on billings that have been issued. Contract liabilities primarily relate to consideration received from customers prior to transferring goods or services to the customer. Contract assets and contract liabilities are reported in "Accounts receivable, net" and "Other current liabilities" in the Consolidated Balance Sheets, respectively.
12
(dollars in thousands, except per-share amounts)
During
the nine months ended October 31, 2019, the Company’s contract assets and liabilities increased by $i4,971 and $i874,
respectively. The increase was primarily a result of the contract terms which include timing of customer payments, timing of invoicing, and progress made on open contracts. Due to the short-term nature of the Company’s contracts, substantially all contract liabilities are recognized as revenue during the twelve months thereafter. iChanges
in our contract assets and liabilities were as follows:
As of October 31, 2019, the Company has ino remaining performance obligations related to customer contracts with an original expected duration of one year or more. Revenue recognized from performance obligations satisfied in the prior period during the three- and nine-month
period ending October 31, 2019, were not material.
(6) iACQUISITIONS AND DIVESTITURES OF AND INVESTMENTS IN BUSINESSES AND TECHNOLOGIES
Fiscal year 2020
There were ino
significant business acquisitions and divestitures or purchases of technologies in the three- and nine-month period ended October 31, 2019.
i
On October 31, 2019, the Company entered into an agreement to acquire a majority ownership of iDot
Technology Corp., ("DOT®"). DOT® is located in Regina, Saskatchewan, Canada, and designs autonomous agriculture solutions and manufactures a unique U-shaped agriculture platform to autonomously handle a large variety of agriculture implements. The Company has the option to purchase the remaining noncontrolling interest of DOT® in ten years following the close of the transaction. The Company deposited approximately $i3,000
towards the purchase price of DOT® in the third quarter of fiscal 2020 and the deposit is reported in "Other assets" and "Other investing activities" on the Consolidated Balance Sheet and Consolidated Statements of Cash Flows, respectively. This transaction closed on November 13, 2019.
In addition, subsequent to October 31, 2019, the Company acquired iSmart
Ag, Inc., ("Smart Ag®"). Smart Ag® is a technology company located in Ames, Iowa, that develops autonomous farming solutions for agriculture. This transaction closed on November 1, 2019.
Both acquisitions will align under the Company's Applied Technology Division and will complement the division's suite of precision ag products and solutions. The aggregate purchase price was approximately $i62,000
and will primarily be allocated to intangible assets and goodwill. The Company anticipates completing a majority of the purchase accounting for both acquisitions in the fourth quarter of fiscal 2020.
/
Fiscal year 2019
On January 1, 2019, the Company completed the acquisition of substantially all of the assets ("AgSync Acquisition") of iAgSync
Inc. ("AgSync"), an Indiana corporation, headquartered in Wakarusa, Indiana. This acquisition is aligned under the Company’s Applied Technology Division and is expected to enhance its Slingshot® platform by delivering a more seamless logistics solution for ag retailers, aerial applicators, custom applicators and enterprise farms. The AgSync Acquisition constitutes a business and, as such, was accounted for as a business combination; however, the business combination was not significant enough to warrant pro-forma financial information.
The purchase price was approximately $i9,700,
which included potential earn-out payments with an estimated fair value of $i2,052. The earn-out is contingent upon achieving certain revenue milestones. The purchase price of the business acquired was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair value of the identifiable assets acquired and liabilities assumed is reflected as goodwill, which is fully tax deductible. The
Company completed the valuation and the purchase price allocation during the first quarter of fiscal 2020. This resulted in an adjustment in the fiscal 2020 first quarter that increased the purchase price and the estimated fair value of the contingent earn-out payments by approximately $i300. The goodwill and identifiable intangible assets recorded as part of the purchase price allocation at October
31, 2019, were $i4,526 and $i5,700,
respectively.
13
(dollars in thousands, except per-share amounts)
During the first quarter of fiscal 2019, Aerostar sold its client private business for $i832, which resulted in an immaterial gain in the three-months
ended April 30, 2018. In fiscal 2018, Aerostar actively marketed the sale of its client private business and as such, classified it as held for sale.
In the first quarter of fiscal 2019, the Company sold its ownership interest of approximately i22 percent in Site-Specific Technology Development Group, Inc. (iSST)
with a carrying value of $i1,937. This investment was being accounted for as an equity method investment. Raven received $i6,556 in
cash at closing which was reported as "Proceeds from sale or maturity of investments" in the Consolidated Statements of Cash Flows. The Company recognized a gain on the sale of $i5,785 for the three-months ended April 30, 2018. The gain was reported in "Other income (expense), net" in the Consolidated Statements of Income and Comprehensive Income. The gain included a
fifteen percent hold-back provision held in an escrow account which was received in the second quarter of fiscal 2020.
Acquisition-related Contingent Consideration
The Company has contingent liabilities related to the acquisition of AgSync in fiscal 2019 as well as prior acquisitions of Colorado Lining International, Inc. (CLI) in fiscal 2018; Raven Europe B.V. (Raven Europe), formerly named SBG Innovatie BV and its affiliate, Navtronics BVBA (collectively, SBG), in fiscal 2015; and Aerostar Technical Solutions, Inc. (ATS), formerly named Vista Research, Inc. (Vista), completed in fiscal 2012. The fair value of such contingent consideration is estimated as of the acquisition date, and subsequently at the end of each reporting period, using forecasted cash flows.
Projecting future cash flows requires the Company to make significant estimates and assumptions regarding future events, conditions, or revenues being achieved under the subject contingent agreement as well as the appropriate discount rate. Such valuation techniques include one or more significant inputs that are not observable (Level 3 fair value measures).
i
Changes in the fair
value of the liability for acquisition-related contingent consideration are as follows:
Classification
of liability in the consolidated balance sheet
Accrued liabilities
$
i813
$
i1,764
$
i813
$
i1,764
Other
liabilities, long-term
i2,143
i647
i2,143
i647
Balance
at October 31
$
i2,956
$
i2,411
$
i2,956
$
i2,411
/
For
the AgSync Acquisition, the Company entered into a contingent earn-out agreement, not to exceed $i3,500. The earn-out is to be paid annually over ithree
years after the purchase date, contingent upon achieving certain revenue milestones. The Company has made ino payments on this potential earn-out liability as of October 31, 2019.
In the acquisition of CLI, the Company
entered into a contingent earn-out agreement, not to exceed $i2,000. The earn-out is paid annually for ithree years
after the purchase date, contingent upon achieving certain revenue milestones and operational synergies. To date, the Company has paid a total of $i1,333 of this potential earn-out liability.
In connection with the acquisition of Raven Europe, the Company entered into
a contingent earn-out agreement, not to exceed $i2,500, calculated and paid quarterly for iten years after
the purchase date, contingent upon achieving certain revenue milestones. To date, the Company has paid a total of $i2,146 of this potential earn-out liability.
Related to the acquisition of ATS in 2012, the Company was committed to making annual payments based upon earn-out
percentages on specific revenue streams for iseven years after the purchase date. The Company made the final payment in the first quarter of fiscal 2020 and has ino
further contingent obligations related to acquisition of ATS.
14
(dollars in thousands, except per-share amounts)
(7) iGOODWILL, LONG-LIVED ASSETS,
AND OTHER CHARGES
Goodwill
Management assesses goodwill for impairment annually during the fourth quarter and between annual tests whenever a triggering event indicates there may be an impairment. Impairment tests of goodwill are done at the reporting unit level. There were ino goodwill impairment losses reported in the three- and nine-month periods ending October 31, 2019 and 2018,
respectively.
i
The changes in the carrying amount of goodwill by reporting unit were as follows:
The Company assesses the recoverability of long-lived assets, including definite-lived intangibles and property, plant, and equipment, if events or changes in circumstances indicate that an asset might be impaired. For long-lived and intangible assets, management performs impairment reviews by asset group. Management periodically assesses for triggering events and discusses any significant changes in the utilization of long-lived assets. For purposes of recognition and measurement of an impairment loss, a long-lived asset is grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
When performing long-lived asset testing,
the fair values of assets are determined based on valuation techniques using the best available information. Such valuations are derived from valuation techniques in which one or more significant inputs are not observable (Level 3 fair value measures). An impairment loss is recognized when the carrying amount is not recoverable and exceeds the fair value of the asset.
i
The following table provides the gross carrying amount and related accumulated amortization of definite-lived intangible assets:
There
were ino long-lived asset impairment losses reported in the three- and nine-month period ending October 31, 2019 and 2018, respectively.
(8) iEMPLOYEE
POSTRETIREMENT BENEFITS
The Company provides postretirement medical and other benefits to certain current and past senior executive officers and senior managers. These plan obligations are unfunded. iThe components of the net periodic benefit cost for postretirement benefits are as follows:
Amortization
of unrecognized gains in prior service cost
(i40)
(i40)
(i120)
(i120)
Net
periodic benefit cost
$
i74
$
i78
$
i223
$
i234
15
(dollars
in thousands, except per-share amounts)
Postretirement benefit cost components are reclassified in their entirety from accumulated other comprehensive loss to net periodic benefit cost. Service cost is reported in net income as "Cost of sales" or "Selling, general, and administrative expenses" in a manner consistent with the classification of direct labor and personnel costs of the eligible employees. The components of the net periodic benefit cost, other than the service cost component, are classified as a non-operating expense in "Other income (expense), net" on the Consolidated Statements of Income and Comprehensive Income.
(9) iWARRANTIES
Accruals
necessary for product warranties are estimated based on historical warranty costs and average time elapsed between purchases and returns for each division. Additional accruals are made for any significant, discrete warranty issues. iChanges in the warranty accrual were as follows:
The Company entered into a credit facility on iSeptember
20, 2019, with Bank of America, N. A., as administrative agent, and Wells Fargo Bank, National Association (the Credit Agreement). The Credit Agreement provides for a syndicated senior revolving credit facility up to $i100,000 with a maturity date of iSeptember
20, 2022. Loan proceeds may be utilized by Raven for strategic business purposes, such as business acquisitions, and for net working capital needs.
This new Credit Agreement replaces the Company's previous Credit Agreement which was scheduled to mature in April 2020. The Company was able to take advantage of more favorable pricing with the new Credit Agreement. iThe
unamortized debt issuance costs associated with the Credit Agreement were as follows:
(a)
Unamortized debt issuance costs are amortized over the term of the Credit Agreement and are reported as "Other assets" in the Consolidated Balance Sheets.
Loans or borrowings defined under the Credit Agreement bear interest and fees at varying rates and terms defined in the Credit Agreement based on the type of borrowing as defined. The Credit Agreement includes annual administrative and unborrowed capacity fees. The Credit Agreement also contains customary affirmative and negative covenants, including those related to financial reporting and notifications, limits on levels of indebtedness and liens, investments, mergers and acquisitions, affiliate transactions, sales of assets, restrictive agreements, and change in control as defined in the Credit Agreement. Financial covenants include an interest coverage ratio and funded indebtedness to earnings before
interest, taxes, depreciation, and amortization as defined in the Credit Agreement.
i
Letters of credit (LOC) issued and outstanding were as follows:
(a)
Any draws required under the LOC would be settled with available cash or borrowings under the Credit Agreement.
There were ino borrowings under the new or prior Credit Agreement for any of the fiscal periods covered by this Quarterly Report on Form 10-Q. Availability under the Credit Agreement for borrowings as of October 31, 2019, was $i100,000.
16
(dollars
in thousands, except per-share amounts)
(11) iLEASES
The Company enters into operating and finance lease contracts related to facilities, vehicles and equipment. Operating leases are primarily related to facilities to support production, research and
development, and sales efforts. Finance leases are primarily related to vehicles and equipment to support general business operations. Lease payments are typically fixed and carry lease terms of one to isix years, some of which have an option to terminate or extend up to an additional iten
years. For purposes of the quantitative disclosures below related to the calculation of operating and finance leases, lease terms did not include options to terminate or extend, as the Company is reasonably certain it would not exercise the options. Most of the Company's leases do not contain a purchase option, material residual value guarantee, or material restrictive covenants.
The Company is primarily a lessee in all lease arrangements but may become a lessor and lease or sublease certain assets to other entities if not fully utilized. These lessor activities are not material and are not separately disclosed.
To
determine whether a contract is or contains a lease, the Company assessed its right to control the use of the identified asset, whether explicitly or implicitly stated, for a period of time while considering all facts and circumstances for each individual arrangement. The Company also has leases with non-lease components which are separately stated within the agreement and not included in the recognition of the right-of use asset and lease liability balances.
The discount rate used to calculate the present value of the lease liabilities is based upon the implied rate within each contract.
If the rate is unknown or cannot be determined, the Company uses an incremental borrowing rate, which is determined by the length of the contract, asset class, and the Company's borrowing rates as of the commencement date of the contract.
i
Components
of Company lease costs, including operating, finance, and short-term leases are included in the table below. Depreciation of right-of-use assets, operating lease costs, and short-term lease costs are reported in net income as "Cost of sales,""Research and development expenses," or "Selling, general, and administrative expenses," depending on what business function the asset primarily supports. Interest on lease liabilitiesare classified as a non-operating expense in "Other income (expense), net" on the Consolidated Statements of Income and Comprehensive Income.
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
i360
$
i1,082
Operating
cash flows from finance leases
i5
i16
Financing
cash flows from finance leases
i106
i305
Right-of-use
assets obtained in exchange for lease obligations:
Finance leases
$
i13
$
i411
Operating
leases
i—
i—
/
18
(dollars
in thousands, except per-share amounts)
i
Future operating and finance lease obligations that have not yet commenced as of October 31, 2019, were immaterial and excluded from the lease liability schedule below accordingly.
Prior
to the Company's adoption of ASU 2016-02 in the first quarter of fiscal year 2020, future minimum lease payments reported in the Company’s Annual Report on Form 10-K for the year ended January 31, 2019, were as follows:
Less
amount representing estimated executory costs such as taxes, license and insurance including profit thereon
(i14)
Less amounts representing interest
(i32)
Present
value of net minimum lease payments
$
i284
/
(12) iCOMMITMENTS
AND CONTINGENCIES
The Company is involved as a party in lawsuits, claims, regulatory inquiries, or disputes arising in the normal course of its business; potential costs and liabilities of which cannot be determined at this time. Management does not believe the ultimate outcomes of its legal proceedings are likely to be material to its results of operations, financial position, or cash flows. In addition, the Company has insurance policies that provide coverage to various degrees for potential liabilities arising from legal proceedings.
The Company
entered into a Gift Agreement ("the Agreement") effective in January 2018 with the South Dakota State University Foundation, Inc. ("the Foundation"). This gift will be used by South Dakota State University (SDSU), located in Brookings, SD, for the establishment of a precision agriculture facility to support SDSU's Precision Agriculture degrees and curriculum. This facility will assist the Company in further collaboration with faculty, staff and students on emerging technology in support of the growing need for precision agriculture practices and tools.
The Agreement states that the Company will make a $i5,000
gift to the Foundation, conditional on certain actions. Management concluded that the contingencies related to this gift were substantially met during the three-month period ended April 30, 2018, and a liability had been incurred. As such, $i4,503 of selling, general, and administrative expense was recognized in the three-month period ending April 30, 2018, with interest expense to be recognized in periods thereafter. The fair value of this contingency at October 31,
2019, was $i3,292 (measured based on the present value of the expected future cash outflows), of which $i710 was classified as "Accrued liabilities"
and $i2,582 was classified as "Other liabilities." As of October 31, 2019, the
19
(dollars in thousands, except per-share amounts)
Company has made payments related to the commitment
totaling $i1,430.
In addition to commitments disclosed elsewhere in the Notes to the Consolidated Financial Statements, the Company has other unconditional purchase obligations that arise in the normal course of business operations. The majority of these obligations are related to the purchase of raw material inventory for the Applied Technology and Engineered Films divisions.
(13)
iINCOME TAXES
The Company’s effective tax rate varies from the federal statutory rate primarily due to state and local taxes, research and development tax credit, foreign-derived intangible income deduction, and tax-exempt insurance premiums. iThe
Company’s effective tax rates were as follows:
Timing of discrete items was the primary driver of the year-over-year volatility in the effective tax rate for the three- and nine-month periods ended October 31, 2019.
The Company’s effective tax rates, excluding discrete items, in the three-month periods ended October 31, 2019 and 2018, were i15.3
percent and i18.7 percent, respectively. This 3.4 percentage point decrease was driven primarily by a decrease in the Company’s effective tax rate, excluding discrete items, from 19.6 percent for the six-month period ended July 31, 2019, to 18.3 percent for nine-month period ended October 31, 2019.
The
Company’s effective tax rates, excluding discrete items, in the nine-month periods ended October 31, 2019 and 2018, were i18.3 percent and i19.3
percent, respectively. This 1 percentage point decrease was driven primarily by a decrease in current year profitability that caused a higher research and development tax credit as a percentage of pre-tax income.
The Company's net favorable discrete tax benefits for the nine-month periods ended October 31, 2019 and 2018 were primarily related to the vesting or settlement of equity awards. The Company's total net favorable discrete tax benefits were as follows:
The
Company operates both domestically and internationally. As of October 31, 2019, undistributed earnings from the Company's foreign subsidiaries were considered to have been reinvested indefinitely.
(14) iDIVIDENDS AND
TREASURY STOCK
i
Dividends paid to Raven shareholders were as follows:
(a)There
were ino declared and unpaid shareholder dividends at October 31, 2019 or 2018.
/
On November 3, 2014, the Company announced that its Board of Directors ("Board")
had authorized a $i40,000 stock buyback program. Since that time, the Board has provided additional authorizations to increase the total amount authorized under the program to $i75,000.
This authorization remains in place until the authorized spending limit is reached or such authorization is revoked by the Board.
Pursuant to these authorizations, the Company repurchased i169,474 shares for $i5,000
in the three-month period ended October 31, 2019. The Company repurchased i332,651 shares for $i10,781
in the nine-month period ended October 31, 2019.
20
(dollars in thousands, except per-share amounts)
There were ino shares repurchased in the three- and nine-month periods ended October 31,
2018. There were ino share repurchases unpaid at October 31, 2019, or October 31, 2018. The remaining dollar value authorized for share repurchases at October 31, 2019, is $i17,179.
(15)
iSHARE-BASED COMPENSATION
Share-based compensation expense is recognized based on the fair value of the share-based awards expected to vest during the period.
i
The
share-based compensation expense was as follows:
The Company's operating segments, which are also its reportable segments, are defined by their product lines which have been generally grouped based on technology, manufacturing processes, and end-use application. The Company's reportable segments are Applied Technology Division, Engineered Films Division, and Aerostar
Division. Separate financial information is available for each reportable segment and regularly evaluated by the Company's chief operating decision-maker, the President and Chief Executive Officer, in making resource allocation decisions for the Company's reportable segments. The Company measures the performance of its segments based on their operating income excluding administrative and general expenses. Other income, interest expense, and income taxes are not allocated to individual operating segments. Segment information is reported consistent with the Company's management reporting structure.
i
Business
segment financial performance and other information is as follows:
(a)
Hurricane recovery film sales were $i1,833 and $i10,429
for the nine-month periods ended October 31, 2019 and 2018. Hurricane recovery film sales were not significant in the three-month periods ended October 31, 2019 and 2018, respectively.
(b) Intersegment sales for both fiscal 2020 and 2019 were primarily sales from Engineered Films to Aerostar.
(c) At the segment level, operating income does not include an allocation of general and administrative expenses and, as a result, "General and administrative expenses" are reported as a deduction from "Total reportable segment income" to reconcile to "Operating income" reported in the Consolidated Statements of Income and Comprehensive
Income.
/
21
(17) iSUBSEQUENT EVENTS
The
Company has evaluated events up to the filing date of this Quarterly Report on Form 10-Q and concluded that no subsequent events have occurred other than those events disclosed in Note 6 Acquisitions and Divestitures of and Investments in Businesses and Technologies that would require recognition or disclosure in the Notes to the Consolidated Financial Statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary on the operating results, liquidity, capital resources, and financial condition of Raven Industries,
Inc. (the Company or Raven) should be read in conjunction with the unaudited Consolidated Financial Statements in Item 1 of Part 1 of this Quarterly Report on Form 10-Q (Form 10-Q) and the Company's Annual Report on Form 10-K for the year ended January 31, 2019.
The Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is organized as follows:
•Executive Summary
•Results of Operations - Segment Analysis
•Outlook
•Liquidity
and Capital Resources
•Off-Balance Sheet Arrangements and Contractual Obligations
•Critical Accounting Policies and Estimates
•Accounting Pronouncements
EXECUTIVE SUMMARY
Raven is a diversified technology company providing a variety of products to customers within the industrial, agricultural, geomembrane, construction, aerospace/defense and commercial lighter-than-air markets. The Company is comprised of three unique operating units, classified into reportable
segments: Applied Technology Division (Applied Technology), Engineered Films Division (Engineered Films), and Aerostar Division (Aerostar). Segment information is reported consistent with the Company's management reporting structure.
Management uses a number of metrics to assess the Company's performance:
•Consolidated net sales, gross margin, operating income, operating margin, net income, and diluted earnings per share.
•Cash flow from operations and shareholder returns.
•Return on
sales, average assets and average equity.
•Segment net sales, gross profit, gross margin, operating income and operating margin. At the segment level, operating income and margin does not include an allocation of general and administrative expenses.
Vision and Strategy
Raven's purpose is to solve great challenges. Great challenges require great solutions. Raven’s three unique divisions share resources, ideas and a passion to create technology that helps the world grow more food, produce more energy, protect the environment and live safely.
The Raven business model is our platform for success. Raven's business model is defensible, sustainable, and gives us a consistent approach in the pursuit
of quality financial results. This overall approach to creating value, which is employed across the three business segments, is summarized as follows:
•Intentionally serve diverse market segments with strong short- and long-term growth prospects.
•Diversified portfolio of businesses provide balance, opportunity and risk mitigation.
•Invest in market-leading technologies and manufacturing capabilities.
•Balance sheet strength and stability enables strategic investments and acquisitions to enhance shareholder returns.
•Corporate responsibility is a top priority; it attracts great team members, customers
and opportunities.
•Continuous process improvements and value engineering.
22
The following discussion highlights the consolidated operating results for the three- and nine-month periods ended October 31, 2019 and 2018. Segment operating results are more fully explained in the Results of Operations - Segment Analysis section.
(a)
The Company's gross and operating margins may not be comparable to industry peers due to variability in the classification of expenses across industries in which the Company operates.
Consolidated Results
For the fiscal 2020 third quarter, net sales were $100.5 million, down
$4.3 million, or 4.1%, from $104.8 million in last year’s third quarter. Each division experienced a modest year-over-year decline in net sales. Applied Technology was unfavorably impacted by the continued challenges in the North American ag market while the decline in Engineered Films' net sales was primarily driven by lower sales into the industrial market. Aerostar achieved growth in its radar platform but prior year net sales of approximately $2 million in aerostats along with unfavorable timing of stratospheric balloon contracts resulted in a year-over-year decrease in net sales.
The Company's operating income for the third quarter of fiscal 2020 was $11.3 million, down $2.3 million, or 16.7%, compared to the
third quarter of fiscal 2019. The year-over-year decline was primarily driven by increased investments in research and development, selling activities and negative operating leverage as a result of lower sales volume. Operating income included a pre-tax gain of $1.9 million on the sale of Applied Technology's facility in Austin, Texas.
Net income for the third quarter of fiscal 2020 was $9.9 million, or $0.28 per diluted share, compared to net income of $13.0 million, or $0.36 per diluted share, in the prior year comparative period. The Company's effective tax rate, excluding discrete items, was 15.3%. This was approximately 3 percentage points lower than the third quarter of last year.
For
the nine-month period ended October 31, 2019, net sales were $296.8 million compared to $318.6 million, down 6.9% versus the prior year comparative period. In addition to Engineered Films' lost market share in the industrial market, prior year net sales included $10.4 million of hurricane recovery film. Applied Technology also experienced a modest year-over-year decline in net sales primarily driven by challenging conditions within the agricultural market.
The Company's operating income was $37.0 million, down 28.5% from the prior year nine-month period. The year-over-year decrease was primarily due to negative operating leverage as a result of lower sales volume. Operating income also included increased investment in research and development and higher
selling expenses in both Applied Technology and Aerostar compared to the first nine months of the prior year.
Net income for the first nine months of fiscal 2020 was $31.9 million, or $0.88 per diluted share, compared to net income of $48.8 million, or $1.34 per diluted share, in the prior year comparative period. Results for the nine-month period ended October 31, 2018, included, on a pre-tax basis, a non-operating gain on the sale of the Company's ownership interest in SST of $5.8 million ($4.6 million after-tax, or $0.13 per diluted share) and an expense associated with the previously announced gift to South Dakota State University of $4.5 million ($3.6 million after-tax, or $0.10 per diluted share). Net income for the first nine months of fiscal 2020
included a $1.9 million gain from the sale of Applied Technology's Austin, Texas, facility ($1.5
23
million after-tax, or $0.04 per diluted share).
Applied Technology Division Results
Applied Technology's net sales in the third quarter of fiscal 2020 were $28.5 million, down $1.2 million from last year's third quarter. Geographically, domestic and international sales were down 3.4% year-over-year and 7.2% year-over-year, respectively. Unfavorable weather and poor yield conditions during this year's growing season in North America negatively impacted end market demand more than the
Company had anticipated. This weakness in end market demand resulted in additional OEM plant shutdowns during the third quarter, which drove a 13.5% decrease in sales to the OEM channel. Despite these end market challenges, the Aftermarket channel showed signs of strength and grew 4.8% year-over-year aided by the first shipments of VSN™, the Company’s best-in-class visual guidance technology.
Operating income for Applied Technology was $7.0 million, down $0.7 million or 9.1% compared to $7.7 million in the third quarter of fiscal 2019. The year-over-year decrease was driven by negative operating leverage as a result of lower sales volume, temporarily higher warranty expenses and increased investments in research and development to support the division's continued commitment to innovation. Operating income also
included a pre-tax gain of $1.9 million from the sale of Applied Technology's facility in Austin, Texas.
Net sales for Applied Technology in the first nine months of fiscal 2020 were $97.6 million, down 2.9% compared to the first nine months of fiscal 2019. Geographically, international sales were up 4.4% year-over-year and domestic sales were down 5.2% year-over-year. International sales growth was driven primarily by strong growth in Latin America as a result of the division's investment in the region. Domestic sales were negatively impacted by unfavorable weather and poor yield conditions during this year's growing season which impacted end market demand in North America.
Operating income for the first nine months of fiscal 2020 was $25.1 million, down 22.6% compared to the first nine months of fiscal
2019. Operating income includes increased investments in research and development and higher selling expenses compared to the prior year to further support the integration and growth of the recently acquired AgSync business and to continue the division's commitment to innovation.
Engineered Films Division Results
Engineered Films’ fiscal 2020 third quarter net sales were $56.4 million, a decrease of $1.8 million, or 3.1%, compared to fiscal 2019 third quarter net sales of $58.2 million. The division achieved gains in the agriculture, construction and installation end markets; however, these gains were offset by lower sales into the industrial market and challenges in the geomembrane market (specifically in the energy sub-market).
Operating income for Engineered Films in
the third quarter of fiscal 2020 decreased 8.3% to $8.5 million as compared to $9.2 million in the prior year third quarter. Negative operating leverage on lower sales volume reduced operating income as compared to the prior year.
Net sales for Engineered Films in the first nine months of fiscal 2020 were $158.2 million, a decrease of $18.9 million, or 10.7%, compared to the first nine months of fiscal 2019. Hurricane recovery film sales were down $8.6 million in the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019. During the first nine months of this fiscal year the division experienced end market challenges in the geomembrane market and lower sales into the industrial market.
Operating income for the first nine months of fiscal 2020 decreased 24.8% to $25.0 million
as compared to $33.2 million in the prior year comparative period. The year-over-year decrease in operating income was driven primarily by negative operating leverage on lower sales volume, which included the significant reduction in hurricane recovery film sales.
Aerostar Division Results
Aerostar net sales in the third quarter of fiscal 2020 were $15.7 million, a decrease of $1.3 million, or 8.0%, compared to fiscal 2019 third quarter net sales of $17.0 million. The division achieved growth in its radar platform; however, the year-over-year decrease of approximately $2 million in aerostat sales and the unfavorable timing of stratospheric balloon contracts resulted in a year-over-year decrease in net sales for the division. Aerostar's sales to government
agencies often involve large contracts subject to frequent delays and protracted negotiation processes. The timing and size of aerostat contract wins can create volatility in Aerostar's results.
Operating income for Aerostar in the third quarter of fiscal 2020 was $2.5 million compared to $3.8 million in the third quarter of last year. Higher selling expenses and increased investment in research and development drove a reduction in operating income as the division continued its investment in advancing its radar and stratospheric balloon technologies. Additionally, operating income was unfavorably impacted by negative operating leverage on lower sales volume year-over-year.
24
Net
sales for Aerostar in the first nine months of fiscal 2020 were $41.0 million, a decrease of $0.4 million, or 1.0%, compared to the first nine months of fiscal 2019. Current year net sales for the division included over $5 million of incremental radar related sales year-over-year; however, the $6.6 million decrease in aerostat sales year-over-year resulted in divisional sales being down slightly year-to-date.
Operating income for the nine-month year-to-date period of fiscal 2020 was $7.4 million compared to operating income of $10.5 million in the prior year comparative period. Operating income decreased due to increased investment in research and development and selling expenses to advance the division's radar and stratospheric balloon technologies and was significantly impacted by lower aerostat sales and associated profit.
RESULTS
OF OPERATIONS - SEGMENT ANALYSIS
Applied Technology
Applied Technology designs, manufactures, sells, and services innovative precision agriculture products and information management tools, which are collectively referred to as precision agriculture equipment, that help farmers reduce costs, more precisely control inputs, and improve farm yields for the global agriculture market.
(a) At the segment level, operating income does
not include an allocation of general and administrative expenses.
The following factors were the primary drivers of the three- and nine-month year-over-year changes:
•Market conditions. The North American ag market continues
to be negatively impacted by unfavorable weather and low commodity prices, while the U.S.-China trade developments continue to drive uncertainty in the marketplace and negatively impact farmer sentiment. These factors have reduced farm income, and OEMs have responded with lower production of new machines. In the short term, the Company does not anticipate improvement in ag market conditions nor an increase in demand for precision agriculture equipment. The Company does not generally model comparative market share position for its divisions, but the Company believes Applied Technology maintained its market share in the third quarter of fiscal 2020.
•Sales volume
and selling prices. Third quarter fiscal 2020 net sales decreased $1.2 million or 4.2%, to $28.5 million compared to $29.7 million in the prior year. Year-to-date sales decreased 2.9% to $97.6 million compared to $100.5 million in the prior year. Lower sales volume, rather than a change in selling price, was the primary driver of this decrease. Unfavorable weather during the planting season in North America and poor yield conditions during this year's growing season continued to impact end market demand in North America.
•International sales. For the third quarter of fiscal 2020, international sales totaled $5.5 million, down 7.2% from $6.0 million in the prior year comparative period. International sales represented 19.4% of segment revenue compared to 20.1% of segment revenue in the prior year comparative period. Year-to-date, international sales totaled
$24.7 million, an increase of $1.0 million from a year ago. Year-to-date international sales represented 25.3% of segment sales compared to 23.5% in the prior year comparative period. The year-to-date increase in international sales was driven primarily by significant growth in Latin America as a result of the division's continued investment in the region.
•Gross margin. Gross margin decreased from 49.2% in the prior year third quarter to 46.3% in the third quarter of fiscal 2020. Year-to-date fiscal 2020 gross margin decreased from 51.4% to 48.7% compared to the prior year comparative period. The year-over-year decrease in profitability for the three- and nine-month periods was driven primarily by lower sales volume and a corresponding reduction in operating leverage as well as an increase in warranty expenses.
25
•Operating
expenses. Fiscal 2020 third quarter operating expenses as a percentage of net sales was 21.6%, down from 23.2% in the prior year comparative period. Third quarter operating expenses included a $1.9 million pre-tax gain from sale of the division's facility in Austin, Texas, which primarily drove the favorable year-over-year comparison. Year-to-date operating expenses as a percentage of net sales were up from 19.1% to 23.0%. The year-over-year increase in operating expenses for the nine-month period was driven primarily by incremental investments in research and development and higher selling expenses. A large driver of this increase is related to the continued integration and growth of the recently acquired AgSync business to ensure the division capitalizes on the benefits of product integration and adoption into the marketplace. In addition, current year operating expenses benefited from a $1.9 million pre-tax gain from the sale of the division's
facility in Austin, Texas. The prior year's operating expenses benefited from favorable legal recoveries which did not repeat in fiscal 2020.
Engineered Films
Engineered Films produces high-performance plastic films and sheeting for geomembrane, agricultural, construction, and industrial applications and also offers design-build and installation services of these plastic films and sheeting. Plastic film and sheeting can be purchased separately or together with installation services.
(a) At the segment level, operating income does not include an allocation of general and administrative expenses.
The
following factors were the primary drivers of the three- and nine-month year-over-year changes:
•Market conditions. The energy market in the third quarter experienced slower demand compared to prior year's third quarter, as West Texas Intermediate (WTI) oil prices and Permian Basin rig counts were down 21% and 14% year-over-year, respectively. The Company expects energy market related demand for Engineered Films to follow Permian Basin rig count trends for the remainder of the year. The Company does not generally model comparative market share position for its divisions, but the Company believes
Engineered Films maintained its market share in most of its end markets in the third quarter of fiscal 2020.
•Sales volume and selling prices. Third quarter net sales were $56.4 million, a decrease of $1.8 million, or 3.1%, compared to fiscal 2019 third quarter net sales of $58.2 million. The division achieved gains in the agriculture, construction and installation end markets; however, these gains were offset by lower sales into the industrial market and challenges in the geomembrane market (specifically in the energy sub-market) during the third quarter. The nine-month fiscal 2020 net sales were down $18.9 million, or 10.7%, to $158.2 million compared to $177.1 million in the nine-month period for fiscal 2019. A year-over-year decrease in sales volume, as opposed to a decrease in selling price, was the driver for the decline in net sales. Sales volume, measured in pounds sold,
decreased approximately 8% and 11% year-over-year for the three- and nine-month periods ending October 31, 2019, respectively. For the nine-month period, lower sales into the industrial market and challenges in the geomembrane market (specifically in the energy sub-market) drove net sales down year-over-year. In addition, hurricane recovery film sales were down $8.6 million in the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019.
•Gross margin. For the three-month period ending October 31, 2019 and 2018, gross margin was relatively flat at 19.0% and 19.5%, respectively. Gross profit in the prior year third quarter was negatively impacted by nearly $2 million of cost overruns related to a large geomembrane
installation project. The year-over-year decrease in gross margin was led by a higher proportion of installation revenues which carry a lower margin than film sales. For the nine-month period ending October 31, 2019 and 2018, gross margin was 20.4% and 22.2%, respectively. The year-over-year decrease in gross margin was driven by lower sales volume including the reduction in hurricane recovery film sales and corresponding negative operating leverage.
26
•Operating expenses. As a percentage of net sales, operating expenses were 4.0% in the current year three-month period as compared to 3.6% in the prior year comparative period.
Year-to-date operating expenses were 4.6% as a percentage of net sales as compared to 3.4% in the prior year comparative period. The year-over-year increase was driven primarily by lower sales volume and higher legal expenses in both the three- and nine-month periods.
Aerostar
Aerostar serves the aerospace/defense and commercial lighter-than-air markets. Aerostar's core products include high-altitude stratospheric balloons and radar systems. These products can be integrated with additional third-party sensors to provide research, communications, and situational awareness capabilities to governmental and commercial customers.
(a) At the segment level, operating income does not include an allocation of general and administrative expenses.
The
following factors were the primary drivers of the three- and nine-month year-over-year changes:
•Market conditions. Aerostar’s business consists of proprietary products and services to the aerospace/defense and commercial lighter-than-air markets. These markets are subject to significant variability in demand due to government spending uncertainties and the timing of contract awards. The Company does not generally model comparative market share position for its divisions, but the Company believes Aerostar has maintained its market share in the third quarter and first nine months of fiscal
2020.
•Sales volume. Net sales decreased 8.0% from $17.0 million for the three-month period ended October 31, 2018, to $15.7 million for the three-month period ended October 31, 2019. The division achieved growth in its radar platform but the year-over-year decrease of approximately $2 million in aerostat sales and the unfavorable timing of stratospheric balloon contracts drove the year-over-year decrease in net sales. Year-to-date sales were $41.0 million, down $0.4 million year-over-year, or 1.0%. Net sales for the prior year nine-month period included significant aerostat sales which did not repeat in the current year.
•Gross
margin. For the three-month period, gross margin increased from 39.3% to 40.8% and for the nine-month period, gross margin increased for the current year from 39.4% to 41.2%. Despite a decrease in sales, the division achieved a modest increase in gross margin from operational efficiencies attained by focusing on its core products.
•Operating expenses. Third quarter fiscal 2020 operating expense was $3.9 million, or 25.0% of net sales, an increase from 16.7% of net sales in the third quarter of fiscal 2019. Year-to-date operating expense as a percentage of net sales was 23.1%, up from 14.2% in the prior year. Higher selling expenses and increased investment in research and development drove the increase in operating expenses as the division continued its investment in the advancement of its radar and stratospheric balloon technologies.
Corporate
Expenses (administrative expenses; other (expense), net; and income taxes)
Administrative spending for the three-month period of fiscal 2020 was down $0.5 million compared to fiscal 2019. Administrative spending for the nine-month period of fiscal 2020 was down $3.9 million compared to fiscal 2019 as prior year's spending included an expense of $4.5 million
related to a gift to South Dakota State University.
27
Other income (expense), net consists primarily of activity related to the Company's equity method investments, interest income and expense, and foreign currency transaction gains or losses. There were no significant items in other income (expense), net for the three- and nine-month periods in fiscal year 2020. Fiscal 2019 other income (expense), net for the nine-month period included a $5.8 million gain on the sale of the Company's equity interest in SST.
The
Company’s effective tax rates for the three-month periods ended October 31, 2019 and 2018, were 13.0% and 8.6%, respectively. The Company’s effective tax rates for the nine-month periods ended October 31, 2019 and 2018, were 14.7% and 15.6%, respectively. The year-over-year volatility in the effective tax rate for the three- and nine-month period was primarily due to the timing of discrete tax items related to the settlement and vesting of equity compensation awards. Refer to Note 13 Income Taxes of the Notes to the Consolidated Financial Statements included in Item 1 of this Form 10-Q for more information on the impact of discrete tax items
to the effective tax rate.
OUTLOOK
Applied Technology and Engineered Films performed well in the midst of lower demand, while Aerostar continues to win new contracts and position itself for strong growth. Despite the short-term challenges the Company is experiencing this fiscal year, the fundamentals within each of its divisions remain very strong, and the Company is well positioned to leverage its market leading technology to capitalize on business development opportunities. Additionally, the
Company recently announced two new strategic platforms for growth, Raven Autonomy™ and Raven Composites™, which are logical extensions of the Company's current technology portfolio and are expected to provide significant incremental growth over the long-term.
Applied Technology began executing on its strategic platform for growth, Raven Autonomy™, by acquiring Smart Ag® and a controlling ownership in DOT®. The Company is very excited about its unique position to execute and deliver value-added autonomous agriculture solutions to the marketplace. Additionally, the division's existing core business remains strong and is performing well considering
the lower end market demand.
Engineered Films achieved mixed results across its end markets but continues to position itself for significant growth opportunities within its existing markets. Raven Composites™ will be incremental to that growth, and there are near-term opportunities to execute on for Raven Composites™. The division is aggressively pursuing strategic acquisitions and expansions in both equipment and facilities, and will provide details as these investments are completed in the near-term.
Aerostar has been executing on its strategic plan for growth and is delivering expected results. The two newly-awarded aerostat contracts provide further evidence of the momentum and strength of Aerostar's contract
pipeline, and the division continues to position itself for significant success in the aerospace and defense market in the near future.
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. In addition, the Company recently entered a new, three-year, $100 million senior revolving credit facility which includes a $100 million borrowing availability expansion feature. This allows the Company’s total borrowing capacity to reach $200 million. This new credit facility has a maturity date of September 20, 2022.
The Company’s cash balances and cash flows were as follows:
Effect of exchange rate changes on cash and cash equivalents
(22)
(168)
(68)
(571)
Net
increase (decrease) in cash and cash equivalents
$
7,963
$
3,254
$
11,307
$
28,158
Cash and cash equivalents totaled $77.1 million at October 31, 2019, an increase of $11.3 million from $65.8 million
at January 31, 2019. Cash and cash equivalents as of October 31, 2018 was $68.7 million. The sequential increase in cash was primarily driven by improved net capital working capital and also benefited from proceeds from the sale of Applied Technology's facility in Austin, Texas.
Operating Activities
Cash provided by operating activities was primarily from cash received from customers, which were offset by cash payments for inventories, services, employee compensation, and income taxes. Cash provided by operating activities was $47.1 million for the first nine months of fiscal 2020 compared with $52.3 million in the first nine months of fiscal 2019. The decrease in operating cash flows year-over-year was driven primarily by lower net income.
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:
(a) Net working capital is defined as accounts receivable, (net)
plus inventories less accounts payable.
(b) Annualized net sales is defined as the most recent quarter net sales times four for each of the fiscal periods, respectively.
(c) Net working capital percentage is defined as net working capital divided by annualized net sales.
Net
working capital percentage was flat year-over-year in the third quarter of fiscal 2020.
Inventory levels decreased $1.2 million, or 2.3%, year-over-year from $53.2 million at October 31, 2018, to $52.0 million at October 31, 2019. In comparison, consolidated net sales decreased $4.3 million, or 4.1%, year-over-year in the third quarter. The decrease in inventory was primarily driven by the Engineered Films division improving operational efficiency and aligning inventory levels with corresponding expected sales.
Accounts receivable decreased $4.1 million or 6.2%, year-over-year to $62.1 million at October 31, 2019, from $66.2 million at October 31,
2018. In comparison, consolidated net sales decreased $4.3 million, or 4.1%, year-over-year in the third quarter. Lower sales volume and the timing of cash receipts were the primary drivers of the year-over-year decrease in accounts receivable.
Accounts payable decreased $1.1 million, or 9.1%, year-over-year from $12.1 million at October 31, 2018, to $11.0 million at October 31, 2019. The decrease in accounts payable year-over-year was primarily due to lower inventory purchases and timing of purchases and cash payments.
Investing Activities
Cash used by investing activities was $5.8 million for the first nine months of fiscal 2020 compared with cash used
of $4.8
29
million in the first nine months of fiscal 2019. Prior year investing cash flows included cash receipts of $6.6 million from the sale of the Company's ownership interest in SST in fiscal 2019. In addition, capital expenditure spending was down $4.3 million compared to the prior year nine-month period primarily due to prior year investments related to Engineered Films' Line 15 that was placed into service in fiscal 2020.
Financing Activities
Cash used for financing activities for the first nine months of fiscal 2020 increased $11.1 million compared to
the first nine months of fiscal 2019. The increase in cash outflows was driven by $10.8 million of share repurchases in the first nine months of fiscal 2020. There were no share repurchases in the first nine months of fiscal 2019. Dividends per share for the first nine months of fiscal 2020 and 2019 were consistent at 39.0 cents per share. Total cash outflows for dividends in the nine-month periods ended October 31, 2019 and 2018, were $14.0 million for both periods.
No borrowing or repayment occurred on the Credit Agreement during the first nine months of fiscal 2020 or fiscal 2019.
Other Liquidity and Capital Resources
The
Company entered into a new $100 million credit agreement on September 20, 2019, with a maturity date of September 20, 2022. This agreement (Credit Agreement) is more fully described in Note 10 Financing Arrangements of the Notes to the Consolidated Financial Statements included in Item 1 of this Form 10-Q. This new Credit Agreement replaced the Company's previous $125 million credit agreement which had a maturity date of April 15, 2020. Cost savings associated with the new Credit Agreement will be approximately $0.2 million annually.
The Credit Agreement contains customary affirmative and negative covenants,
including those relating to financial reporting and notification, limits on levels of indebtedness and liens, investments, mergers and acquisitions, affiliate transactions, sales of assets, restrictive agreements, and change in control as defined in the Credit Agreement. Financial covenants include an interest coverage ratio and funded indebtedness to earnings before interest, taxes, depreciation, and amortization as defined in the Credit Agreement. The Company is in compliance with all financial covenants set forth in the Credit Agreement.
Letters of credit (LOCs) totaling $0.3 million and $0.5 million were outstanding at October 31, 2019 and October 31, 2018, respectively. Any draws required under the LOCs
would be settled with available cash or borrowings under the Credit Agreement.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
There have been no material changes in the Company’s known off-balance sheet debt and other unrecorded obligations since the fiscal year ended January 31, 2019, other than item discussed below.
The Company entered into a new Credit Agreement on September 20, 2019,
further described in Part I Item 2 Liquidity and Capital Resources of this Form 10-Q.
Raven is eligible to receive earn-out payments related to the fiscal 2019 dispositions of Aerostar's client private business and the Company's ownership interest in SST if certain post-closing performance benchmarks are satisfied. The Company will recognize the earn-out payments as income in the period they are realized under the terms of the respective agreement.
CRITICAL ACCOUNTING ESTIMATES
Critical
accounting policies are those that require the application of judgment when valuing assets and liabilities on the Company's balance sheet. For a description of our critical accounting policies and estimates, see Critical Accounting Policies and Estimates in Item 7 of our Annual Report on Form 10-K for the year ended January 31, 2019, filed with the SEC. There have been no material changes to our critical accounting policies during the three- and nine month periods ended October 31, 2019.
ACCOUNTING PRONOUNCEMENTS
See Note 2 Summary of Significant Accounting Policies of
the Notes to the Consolidated Financial Statements included in Item 1 of this Form 10-Q for a summary of recent accounting pronouncements.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are "forward-looking statements" within the meaning of Section 27A of the
30
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future, not past or historical events. Without limiting the foregoing,
the words "anticipates,""believes,""expects,""intends,""may,""plans,""should,""estimate,""predict,""project,""would,""will,""potential," and similar expressions are intended to identify forward-looking statements. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. The Company intends that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act.
Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions when made, there is
no assurance that such assumptions are correct or that these expectations will be achieved. Assumptions involve important risks and uncertainties that could significantly affect results in the future. These risks and uncertainties include, but are not limited to, those relating to weather conditions, which could affect sales and profitability in some of the Company's primary markets, such as agriculture and construction and oil and gas drilling; or changes in raw material availability, commodity prices, competition, technology or relationships with the Company's largest customers, risks and uncertainties relating to development of new technologies to satisfy customer requirements, possible development of competitive technologies, ability to scale production of new products without negatively impacting quality
and cost, risks of operating in foreign markets, risks relating to acquisitions, including risks of integration or unanticipated liabilities or contingencies, and ability to finance investment and net working capital needs for new development projects, any of which could adversely impact any of the Company's product lines, risks of litigation, as well as other risks described in Item 1A., Risk Factors, of the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2019. The foregoing list is not exhaustive and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such
statements. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The exposure to market risks pertains mainly to changes in interest rates on cash and cash equivalents, and short-term investments. The Company
has no outstanding long-term debt but does have an immaterial amount of finance lease obligations as of October 31, 2019 and capital leases as of January 31, 2019. The Company does not expect operating results or cash flows to be significantly affected by changes in interest rates.
The Company's subsidiaries that operate outside the United States use their local currency as the functional currency. The functional currency is translated into U.S. dollars for balance sheet accounts using the period-end exchange rates, and average exchange rates for
the statement of income. Cash and cash equivalents held in foreign currency (primarily Euros and Canadian dollars) totaled $4.2 million and $4.6 million at October 31, 2019 and January 31, 2019, respectively. Adjustments resulting from financial statement translations are included as cumulative translation adjustments in "Accumulated other comprehensive income (loss)" within shareholders' equity. Foreign currency transaction gains or losses are recognized in the period incurred and are included in "Other income (expense), net" in the Consolidated Statements of Income and Comprehensive Income. Foreign currency fluctuations had no material effect on the Company's financial condition, results of operations, or cash flows.
The
Company does not enter into derivatives or other financial instruments for trading or speculative purposes. However, the Company does utilize derivative financial instruments to manage the economic impact of fluctuation in foreign currency exchange rates on those transactions that are denominated in currency other than its functional currency, which is the U.S. dollar. Such transactions are principally Canadian dollar-denominated transactions. The use of these financial instruments had no material effect on the Company's financial condition, results of operations, or cash flows.
ITEM
4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of October 31, 2019. Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures are designed to ensure that information
31
required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Based on their evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of October 31, 2019.
Changes in Internal Control over Financial Reporting
In
fiscal year 2018, the Company began a multi-year transition from its legacy enterprise resources planning (ERP) system to a new ERP system. At the start of fiscal year 2020, the Company completed the migration of its Engineered Films Division to the new ERP system. In connection with this implementation, the Company updated the processes that constitute its internal control over financial reporting, as necessary, to accommodate related changes in its business processes.
The Company believes it has maintained appropriate internal controls during its initial implementation
period and will continue to evaluate, test and monitor its internal controls over financial reporting for effectiveness.
There were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three- and nine-month periods ended October 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
RAVEN INDUSTRIES, INC.
PART II — OTHER INFORMATION
Item 1.
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 significant to its results of operations, financial position, or cash flows.
The Company has insurance policies that provide coverage to various degrees for potential liabilities arising from legal proceedings.
Item 1A.
Risk Factors:
The Company’s business is subject to a number of risks, including those identified in Item 1A "Risk Factors" of the Company’s Annual Report on Form 10-K for the year ended January 31, 2019, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from fiscal period to fiscal period. The risks described in the Annual Report on Form 10-K are not exhaustive. Additional risks we currently deem to be immaterial or are unknown to us at this time also could materially affect our business, results of operations, financial condition, and/or liquidity.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds:
Issuer purchases of equity securities
On November 3, 2014, the Company's Board of Directors (Board) 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. This authorization remains in place until such time as the authorized spending limit is reached or is revoked by the Board.
32
(dollars
in thousands, except per-share amounts)
The Company made purchases of its own equity securities during the third quarter of fiscal year 2020 (recorded on trade date basis) as follows:
Period
Total
number of shares purchased under the plan
Weighted average price paid per share (or unit)
Total amount purchased including commissions
Dollar value of shares (or units) that may be purchased under the plan
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Instance
Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Cover
page Interactive Data File is formatted in Inline XBRL and is contained in Exhibits 101
† Management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
