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RAVEN INDUSTRIES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 26, 2014

The following commentary on the operating results, liquidity, capital resources and financial condition of Raven Industries, Inc. (the Company or Raven) should be read in conjunction with the unaudited Consolidated Financial Statements in Item 1 of Part 1 of this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended January 31, 2014. There have been no material changes to the Company's critical accounting policies discussed therein. EXECUTIVE SUMMARY Raven is a diversified technology company providing a variety of products to customers within the industrial, agricultural, energy, construction and situational awareness markets. The Company is comprised of three unique operating units, classified into reportable segments: Applied Technology Division, Engineered Films Division and Aerostar Division. While each segment has distinct characteristics, the products and technologies are largely extensions of durable competitive advantages rooted in the original research balloon business. As strategic actions have changed the Company's business over the last several years, Raven has remained committed to providing high-quality, high-value products. The Company's performance reflects our ongoing adjustment to conditions and opportunities.



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

Consolidated net sales, gross margins, operating income, operating

margins, net income and earnings per share

Cash flow from operations and shareholder returns

Return on sales, assets and equity

Segment net sales, gross profit, gross margins, operating income and operating margins Vision and Strategy At Raven, there is a singular purpose behind everything we do. It 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; and

Make corporate responsibility a top priority.

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

#14 -------------------------------------------------------------------------------- Results of Operations Consolidated financial highlights for the fiscal second quarter and six months ended July 31, 2014 and 2013 include the following: Three Months Ended Six Months Ended (dollars in thousands, except July 31, July 31, July 31, July 31, per-share data) 2014 2013 % Change 2014 2013 % Change Net sales $ 94,485$ 93,421 1 % $ 196,995$ 197,101 - % Gross profit 25,658 26,735 (4 )% 57,424 61,651 (7 )% Gross margins(a) 27.2 % 28.6 % 29.1 % 31.3 % Operating income $ 10,696$ 12,568 (15 )% $ 27,228$ 33,502 (19 )% Operating margins 11.3 % 13.5 % 13.8 % 17.0 % Net income attributable to Raven Industries, Inc. $ 7,719$ 8,333 (7 )% $ 18,757$ 22,336 (16 )% Diluted earnings per share $ 0.21$ 0.23



$ 0.51$ 0.61

Operating cash flow $ 31,038$ 29,737 Capital expenditures $ (7,297 )$ (13,746 ) Cash dividends $ (8,826 )$ (8,727 )



The Company's gross and operating margins may not be comparable to industry (a) peers due to the diversity of its operations and variability in the

classification of expenses across industries in which the Company operates.

Net income attributable to Raven for the three months ended July 31, 2014 was $7.7 million, or $0.21 per diluted share, compared to $8.3 million, or $0.23 per diluted share, in the prior year second quarter. For the second quarter, net sales were $94.5 million, up $1.1 million from $93.4 million in the comparative period. The Company's Engineered Films Division delivered double-digit net sales and operating income growth while the Applied Technology Division posted lower net sales and operating income. Aerostar sales declined 7% but operating income increased as an increasing percentage of sales from proprietary products improved gross margins. For the six-month period, net sales of $197.0 million were essentially flat compared to $197.1 million one year earlier. For the same period, net income attributable to Raven was $18.8 million, or $0.51 per diluted share, down 16% from $22.3 million, or $0.61 per diluted share, in fiscal 2014. Engineered Films' double-digit growth was not enough to offset lower net sales and operating income at both Applied Technology and Aerostar. Raven's growth strategy focuses on its proprietary product lines and the Company has made an intentional choice to move away from non-strategic product lines such as contract manufacturing. Raven continued to show growth in these strategic proprietary product lines, which represent all of the Company excluding contract manufacturing. These revenues increased $8.2 million, or 10%, reaching $88.4 million as compared to $80.2 million in the prior year quarter. For the six-month period strategic revenues increased $14.7 million, or 9%, to $184.5 million as compared to the prior year. Applied Technology Second quarter fiscal 2015 net sales were $36.2 million, down $2.8 million, or 7%, as compared to the prior year comparative period and operating income decreased $3.0 million, or 26%, to $8.8 million. For the six-month period, net sales declined $7.8 million, or 9%, to $82.5 million from $90.3 million and operating income decreased $6.3 million, or 20%, to $24.7 million. The sales decline reflects persistent weakness in the precision agriculture market and the anticipated decline of sales to non-strategic legacy customers. Lower operating income is primarily the result of the sales decline as well as continued strategic investment in pursuing growth through international market expansion, new product development and broadening original equipment manufacturer relationships to secure future growth. As described more fully in Note 5. Acquisitions of and Investments in Businesses and Technologies of the Notes to Consolidated Financial Statements in Item 1. of this Quarterly Report on Form 10-Q, the Company completed the purchase of all issued and outstanding shares of SBG Innovatie BV and its affiliate, Navtronics BVBA (collectively, SBG) in the second quarter. The acquisition broadens Applied Technology Division's guided steering system product line by adding high-accuracy implement steering applications. #15 -------------------------------------------------------------------------------- Engineered Films For the second quarter, net sales grew $5.0 million, or 14%, to $42.3 million as compared to the second quarter of last year. Second quarter operating income of $5.8 million increased 22% year-over-year. Fiscal 2015 first half net sales increased $12.7 million, or 18%, to $84.5 million and operating income of $11.7 million was up 23% from the prior year period. Higher selling volumes and price increases passed along for higher material costs contributed to the overall net sales in both periods. Higher sales of barrier films for agriculture applications, construction and industrial film sales drove the second quarter and year-to-date results. Despite higher resin costs compared to fiscal 2014, operating income rose during both the three- and six-month periods.



Aerostar

Fiscal 2015 second quarter net sales were $19.3 million compared to $20.7 million in the fiscal 2014 second quarter, a $1.5 million decrease. Operating income increased by $0.7 million, or 69%, to $1.6 million from the prior year second quarter results. Fiscal 2015 year-to-date net sales of $36.9 million were down $5.5 million from $42.4 million and operating income was $1.6 million - down $1.1 million, or 41%, from fiscal 2014 year-to-date comparative results. The net sales decrease was due primarily to a shift away from Aerostar's contract manufacturing business. Increased sales of proprietary products like lighter-than-air products, aerostat products and Vista radar system sales partially offset these expected decreases. This change in product mix and lower operating expenses were the main drivers of the operating income improvement for the three-month period ended July 31, 2014 over the prior year comparative period. These improvements were not enough to offset the operating income declines during the first quarter in 2015, resulting in lower year-to-date operating income.



RESULTS OF OPERATIONS - SEGMENT ANALYSIS

Applied Technology Applied Technology designs, manufactures, sells and services innovative precision agriculture products and information management tools that help growers reduce costs, precisely control inputs and improve farm yields around the world. Three Months Ended Six Months Ended (dollars in July 31, July 31, July 31, July 31, thousands) 2014 2013 $ Change % Change 2014 2013 $ Change % Change Net sales $ 36,247$ 39,091$ (2,844 ) (7 )% $ 82,535$ 90,272$ (7,737 ) (9 )% Gross profit 15,272 17,660 (2,388 ) (14 )% 36,860 42,443 (5,583 ) (13 )% Gross margins 42.1 % 45.2 % 44.7 % 47.0 % Operating expenses $ 6,443$ 5,790$ 653 11 % $ 12,175$ 11,416$ 759 7 % Operating expenses as % of sales 17.8 % 14.8 % 14.8 % 12.6 % Operating income $ 8,829$ 11,870$ (3,041 ) (26 )% $ 24,685$ 31,027$ (6,342 ) (20 )% Operating margins 24.4 % 30.4 %



29.9 % 34.4 %

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

Market conditions. Continued softness in the agriculture market put

pressure on Applied Technology through the first half of fiscal 2015. With

falling commodity prices eroding grower sentiment, demand remained subdued

for precision agricultural equipment. With the world's population growing

toward nine billion and income growth in emerging economies, greater

demand for food will ultimately support healthy growth. The Company

continues to invest in growth internationally for the long term. Emerging

agriculture markets abroad are at varying life cycle stages providing

opportunities for Raven's precision agriculture products to meet market

needs.

Sales volume. Second quarter fiscal 2015 net sales decreased $2.8 million,

or 7%, to $36.2 million compared to $39.1 million in the prior year second

quarter. Lower demand for boom controls and the anticipated decline of

sales to non-strategic legacy customers of the Company's former Electronic

Systems Division (ESD) were partially offset by sales contributed by SBG.

Year-to-date sales declined 9% to $82.5 million as compared to $90.2

million in the prior year. The sales decline reflects lower international

sales and weakness in the North American precision agriculture equipment

market. Applied Technology also saw a year-to-date decline of $3.5 million

in non-strategic, non-agriculture sales to ESD's legacy customers. International sales. For the three-month period, international sales



totaled $11.2 million, flat as compared to the prior three-month period,

and represent 31% of segment revenue compared to 29% of segment revenue in

the comparative period. Year-to-date international sales totaled $20.7

million, a decrease of $4.2 million from a year ago. Lower sales in Brazil

and Canada were the main drivers of the decline, partially offset by

increased sales in Europe due to the SBG acquisition which contributed

$1.1 million during the fiscal 2015 second quarter. Year-to-date net sales

outside the U.S. accounted for 25% of segment sales compared to 28% in the

comparable prior year period. #16

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Gross margins. Gross margins decreased to 42.1% for the three months ended

July 31, 2014 from 45.2% for the three months ended July 31, 2013. First

half gross margins declined to 44.7% from 47.0%. These decreases primarily

reflect the lower sales volume and unfavorable overhead absorption.

Operating expenses. Second quarter operating expense as a percentage of

net sales was 17.8%, up from 14.8% in the prior year second quarter.

Year-to-date operating expenses as a percentage of net sales was 14.8%

compared to 12.6% for fiscal 2014. The increase is attributable to higher

spending in research and development (R&D) on lower sales volumes. Engineered FilmsEngineered Films manufactures high performance plastic films and sheeting for industrial, energy, construction, geomembrane and agricultural applications. Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, (dollars in thousands) 2014 2013 $ Change % Change 2014 2013 $ Change % Change Net sales $ 42,299$ 37,264$ 5,035 14 % $ 84,506$ 71,757$ 12,749 18 % Gross profit 7,200 6,253 947 15 % 14,401 12,636 1,765 14 % Gross margins 17.0 % 16.8 % 17.0 % 17.6 % Operating expenses $ 1,384$ 1,483$ (99 ) (7 )% $ 2,722$ 3,112$ (390 ) (13 )% Operating expenses as % of sales 3.3 % 4.0 % 3.2 % 4.3 % Operating income $ 5,816$ 4,770$ 1,046 22 % $ 11,679$ 9,524$ 2,155 23 % Operating margins 13.7 % 12.8 %



13.8 % 13.3 %

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

Market conditions. Despite the overall slowness in the agricultural

equipment market served by Applied Technology, demand has continued to

strengthen for agriculture barrier films used in high-value crop

production. The addition of new extrusion capacity in fiscal 2014 was a

key factor in meeting demand for these high-tech films. Improving demand

for pit liners in our energy market beginning in the second half of fiscal

2014 has continued into fiscal 2015. Environmental and water conservation

projects impact demand for the division's containment liners in the geomembrane market.



Sales volume and selling prices. Second quarter net sales were up 14% to

$42.3 million compared to prior year second quarter net sales of $37.3

million driven by higher agricultural market sales of barrier films for high-value agriculture applications and strength in the construction and



industrial films markets. Along with these drivers, energy market sales

pushed first half fiscal 2015 net sales up $12.7 million, or 18%, to $84.5

million compared to $71.8 million first half fiscal 2014 net sales.

Agricultural market sales were the main driver of the year-over-year

growth increasing $7.4 million, or 66%, to $18.6 million. Further,

construction and energy market sales increased 30% and 9%, respectively.

Sales volume and selling prices for the fiscal 2015 six-month period were up 9% and 8%, respectively, compared to the prior-year periods. Gross margins. For the three- and six-month periods, margins were consistent at 17%, continuing the trend of higher gross margins than the



second half of fiscal 2014. These margins reflect the impact of overall

selling prices rising and higher sales of more profitable value-added

films.

Operating expenses. Second quarter operating expenses as a percentage of

net sales decreased to 3.3% compared to 4.0% in the prior three-month

period. Year-to-date operating expenses of $2.7 million were down $0.4

million, or 13%, from the prior year due to lower R&D project spending -

decreasing year-to-date operating expenses as a percentage of net sales to

3.2% compared to 4.3% in the prior comparable year.

Aerostar

Aerostar designs and manufactures proprietary products including high-altitude balloons, tethered aerostats and radar processing systems. These products can be integrated with additional third-party sensors to provide research, communications and situational awareness to government and commercial customers. Aerostar has historically produced products such as military parachutes, uniforms and protective wear as a contract manufacturing services provider as well as being a total solutions provider of electronics manufacturing services. These contract businesses have been declining as Aerostar emphasizes proprietary products. Through Vista Research, Inc. (Vista) and a separate business venture that is majority-owned by the Company, Aerostar pursues potential product and support services contracts for agencies and instrumentalities of the U.S. government. Vista positions the Company to meet growing global demand for lower-cost detection and tracking systems used by government and law enforcement #17 --------------------------------------------------------------------------------



agencies. As a leading provider of surveillance systems that enhance the effectiveness of radar using sophisticated algorithms, Vista products and services enhance Aerostar's security solutions.

Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, (dollars in thousands) 2014 2013 $ Change % Change 2014 2013 $ Change % Change Net sales $ 19,257$ 20,722$ (1,465 ) (7 )% $ 36,922$ 42,437$ (5,515 ) (13 )% Gross profit 3,268 2,839 429 15 % 6,183 6,610 (427 ) (6 )% Gross margins 17.0 % 13.7 % 16.7 % 15.6 % Operating expenses $ 1,640$ 1,875$ (235 ) (13 )% $ 4,544$ 3,840$ 704 18 % Operating expenses as % of sales 8.5 % 9.0 % 12.3 % 9.0 % Operating income $ 1,628$ 964$ 664 69 % $ 1,639$ 2,770$ (1,131 ) (41 )% Operating margins 8.5 % 4.7 %



4.4 % 6.5 %

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

Market conditions. Certain of Aerostar's markets are subject to

significant variability due to U.S. federal spending. Uncertainty and

sluggish demand in these markets continued into fiscal 2015. Aerostar's

planned growth strategy emphasizes proprietary products over contract

manufacturing focusing on proprietary technology opportunities, including

advanced radar systems, high-altitude balloons and aerostats to

international markets. Aerostar is pioneering leading-edge applications of

its high-altitude balloons in collaboration with Google on Project Loon, a

pilot program to provide high-speed wireless Internet accessibility to

rural, remote and underserved areas of the world. While still in its early

stages, the program is ramping successfully, positioning Aerostar for

significant growth potential.

Sales volumes. Net sales for the current quarter did not reach last year's

second quarter levels, declining 7% from $20.7 million to $19.3 million.

Year-to-date sales were $36.9 million, down $5.5 million, a year-over-year

decrease of 13%. The primary drivers of the sales declines for the quarter

and year-to-date were lower sales of parachutes and planned declines in

avionics sales and other contract manufacturing sales. These decreases

were partially offset by additional Project Loon revenues, higher Vista

revenues for support activities under existing contracts and increased

aerostat product and service revenues associated with a government contract.



Proprietary revenues. As discussed previously, Aerostar's growth strategy

centers on proprietary products. For the fiscal 2015 six-month period,

revenues for proprietary products were $20.9 million; a $6.1 million, or

41%, increase from the prior year period while contract manufacturing

revenues declined $11.6 million, or 42%, from $27.6 million to $16.0 million.



Operating expenses. Second quarter operating expense was $1.6 million, or

8.5% of net sales, a decrease from 9.0% of net sales in the second quarter

of fiscal 2014. Year-to-date operating expense as a percentage of net sales was 12.3%, up from 9.0% in the prior year period. Increased R&D



spending associated with Project Loon and Vista radar solutions as well as

business development costs associated with international aerostat

opportunities over lower sales volumes drove the percentage higher in the

current year. Operating spending has been constrained during the second

quarter as the division focuses on strategic initiatives.

Corporate Expenses (administrative expenses; other (expense), net; and income taxes) Three Months Ended Six Months Ended July 31, July 31, July 31, July 31, (dollars in thousands) 2014 2013 2014 2013 Administrative expenses $ 5,495$ 5,019$ 10,755$ 9,781 Administrative expenses as a % of sales 5.8 % 5.4 % 5.5 % 5.0 % Other (expense), net $ (59 )$ (219 )$ (138 )$ (417 ) Effective tax rate 27.2 % 32.5 % 30.7 % 32.5 % Administrative expenses for the three- and six-month periods ended July 31, 2014 increased $0.5 million, or 9%, and $1.0 million, or 10%, respectively, compared to the three-and six-month periods ended July 31, 2013. Both period increases reflect higher depreciation charges associated with the now-completed renovation of the Company's headquarters and expenses related to the acquisition and integration costs of SBG. #18 --------------------------------------------------------------------------------



Other (expense), net consists mainly of activity related to the Company's equity investment, interest income and foreign currency transaction gains or losses.

The Company's year-to-date effective tax rate decreased to 30.7% compared to 32.5% in the prior year due to recognition of a $0.7 million R&D tax credit in the fiscal 2015 second quarter based upon a tax study undertaken in July for fiscal years 2011 to 2014. OUTLOOK At Raven our enduring success is built on our ability to balance the Company's purpose and core values with necessary shifts in business strategy demanded by an ever-changing world. Raven continues to become a more technology-focused Company - centered on solving the specific great challenges of hunger, security, energy independence and natural resource preservation and serving our core markets. This vision brings meaning to the work of the organization and ensures our focus on profitable opportunities with strong fundamentals.



While Raven is facing marketplace challenges in the fiscal 2015 second half, the Company continues to pursue its long-term objectives:

Measurably growing revenues from situational awareness and lighter-than-air product lines; Driving Applied Technology through international market expansion, new products and broadening OEM relationships; and,



Bringing high-value plastic film applications to Engineered Films markets.

For the fiscal 2015 third quarter, management expects to see:

Continued solid growth in Engineered Films revenues from multiple end markets;

A difficult quarter for Aerostar stemming from the transitional impact of

moving to higher scale production of Project Loon balloons and a deferred

ramp up of aerostat and radar deliveries

Difficult market conditions in Applied Technology; and

Continued contract manufacturing declines.

For the third quarter, Applied Technology is expected to see year-over-year percentage declines in revenue and operating income similar to the second quarter percentage declines. Despite expected growth in Engineered Films and conservative management af corporate resources, management expects double-digit declines in net income for the third quarter compared to the record third quarter last year. Growth is expected to resume in the fourth quarter, but not at a rate to produce higher earnings for the full year. Despite expected challenging market conditions that are expected to persist for the next four quarters, Raven's long-term view of the precision ag market remains optimistic. A growing global population and greater demands for food will ultimately support healthy growth and Raven is well positioned to leverage its technology, expertise and product portfolio.



Going forward, Raven will continue to focus on executing its strategy and generating profitable revenue from our existing core markets while driving growth in closely adjacent opportunities.

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 Raven'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. Sufficient borrowing capacity also exists if necessary for a large acquisition or major business expansion. Raven's cash needs are seasonal, with working capital demands strongest in the first quarter. As a result, the discussion of trends in operating cash flows focuses on the primary drivers of year-over-year variability in working capital. Cash and cash equivalents totaled $62.2 million at July 31, 2014, an increase of $9.2 million from $53.0 million at January 31, 2014. The comparable balance one year earlier was $55.7 million. The increase was driven by positive cash flows from operating activities, partially offset by cash outflow for dividends paid to shareholders and capital expenditures. #19 -------------------------------------------------------------------------------- Raven has an uncollateralized credit agreement that provides a $10.5 million line of credit and expires November 30, 2014. There is no outstanding balance under the line of credit at July 31, 2014. The line of credit is reduced by outstanding letters of credit totaling $0.9 million as of July 31, 2014. The credit line is expected to be renewed during fiscal 2015. 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. Management evaluates working capital levels through the computation of average days sales outstanding and inventory turnover. Average days sales outstanding is a measure of the Company's efficiency in enforcing its credit policy. The inventory turnover ratio is a metric used to evaluate the effectiveness of inventory management, with further consideration given to balancing the disadvantages of excess inventory with the risk of delayed customer deliveries. Cash provided by operating activities was $31.0 million for the first six months of fiscal 2015 compared with $29.7 million in the first six months of fiscal 2014. The increase in operating cash flows is the result of less cash consumed by the change in inventory. These increases were partially offset by lower company earnings. While the Company's earnings were lower, these earnings reflected the impact of higher depreciation and amortization expense. Changes in inventory and accounts receivable generated $8.4 million of cash in the first six months of fiscal 2015 compared to consuming $1.2 million one year ago. The Company's inventory turnover rate decreased from the prior year due to higher average inventory levels at Engineered Films (trailing 12-month inventory turn of 5.1X in fiscal 2015 versus 5.2X in fiscal 2014). Inventory levels have decreased from $54.9 million at January 31, 2014 to $51.3 million at July 31, 2014. Cash collections continue to be efficient as the trailing 12 months days sales outstanding was 51 days at both July 31, 2014 and July 31, 2013. Investing Activities Cash used in investing activities totaled $12.4 million in the first six months of fiscal 2015 compared to $14.3 million in the first six months of fiscal 2014. Capital expenditures totaled $7.3 million in the first six months of fiscal 2015 compared to $13.7 million in the first six months of fiscal 2014. The change from the prior year is due to higher spending in fiscal 2014 for expansion of Engineered Films' capacity and lower spending for the recently completed renovation of the Company's headquarters.



Net capital outlay related to the SBG business acquisitions was $4.7 million during fiscal 2015.

Management anticipates fiscal 2015 capital spending of approximately $18-20 million. Expansion of Engineered Films' capacity, Aerostar's build-out for Project Loon production levels and Applied Technology's capital spending to advance product development and customer support are expected to continue. In addition, management will evaluate strategic acquisitions that result in expanded capabilities and solidify competitive advantages.

Financing Activities Cash used in financing activities was $9.4 million for the six months ended July 31, 2014 compared to $9.0 million one year ago. Dividends of $8.7 million, or 24.0 cents per share, were paid to Raven shareholders in both the current year and prior year. During the six months ended July 31, 2014 and July 31, 2013, the Company made payments of $0.5 million and $0.4 million, respectively, on acquisition-related contingent liabilities.



Long-term debt of $0.6 million, consisting of a bank note and debts to the former owners assumed in the acquisition of SBG, was repaid in fiscal 2015. There was no SBG bank debt outstanding at July 31, 2014.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

There have been no material changes since the fiscal year ended January 31, 2014.

ACCOUNTING PRONOUNCEMENTS Accounting Standards Adopted During the three and six months ended July 31, 2014 there were no accounting pronouncements adopted or effective that are of significance, or potential significance, to the Company. Pending Accounting Standards In June 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period" (ASU 2014-12). ASU 2014-12 affects entities that grant their employees stock-based payments in which terms of the award provide that a performance target that affects vesting #20 -------------------------------------------------------------------------------- could be achieved after the requisite service period. The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and specifies that a reporting entity should apply existing guidance in FASB Accounting Standards Codification (ASC) Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. ASU 2014-12 is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted. The Company does not believe the guidance applies to any awards that have been granted under the Company's share-based compensation plan. Accordingly, the Company does not expect the adoption of this guidance to have a material impact on its consolidated financial position, results of operations or cash flows. In May 2014 the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 provides a comprehensive new recognition model that requires recognition of revenue when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to receive in exchange for those goods or services. This guidance supersedes the revenue recognition requirements in FASB ASC Topic 605, "Revenue Recognition," and most industry-specific guidance. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, companies will need to use more judgment and make more estimates than under the current guidance. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This guidance will be effective for the Company for fiscal 2018 and interim periods therein. The guidance may be applied using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is not permitted. The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Company's consolidated financial statements and disclosures. In April 2014 the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" (ASU No. 2014-08). ASU No. 2014-8 changes the criteria for determining which disposals should be presented as discontinued operations and modifies the related disclosure requirements. Additionally, the new guidance requires that a business that qualifies as held for sale upon acquisition should be reported as discontinued operations. The new guidance is effective for the Company on February 1, 2015 and applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The Company does not expect adoption of this guidance to have a material impact on its consolidated financial statements. In January 2014 the FASB issued ASU No. 2014-05, "Service Concession Arrangements" (ASU No. 2014-05). ASU No. 2014-05 specifies that an operating entity entering into a service concession arrangement with a public-sector entity grantor within the scope of this guidance should not account for such arrangement as a lease in accordance with FASB ASC Topic 840, "Leases." This guidance is effective for annual periods beginning after December 15, 2014. Early adoption is permitted. The Company does not expect adoption of this guidance to have a material impact on its consolidated financial position, results of operations or cash flows. FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. Without limiting the foregoing, the words "anticipates," "believes," "expects," "intends," "may," "plans" and similar expressions are intended to identify forward-looking statements. The Company intends that all forward-looking statements be subject to the safe harbor provisions of the Private Securities Litigation Reform Act. Although management believes that the expectations reflected in forward-looking statements are based on reasonable assumptions, there is no assurance that these 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 and commodity prices, which could affect sales and profitability in some of the Company's primary markets, such as agriculture, construction, and oil and gas drilling; or changes in competition, raw material availability, 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, and ability to finance investment and working capital needs for new development projects, any of which could adversely impact any of the Company's product lines, as well as other risks described in the Company's 10-K for the fiscal year ended January 31, 2014 under Item 1A. 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 are made. 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. #21



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