

NOTE 5	ACQUISITIONS OF AND INVESTMENTS IN BUSINESSES AND TECHNOLOGIES

Integra

On November 3, 2014 the Company acquired all of the issued and outstanding shares of Integra Plastics, Inc. (Integra). Integra, which was a privately-held company headquartered in Madison, South Dakota, specialized in the manufacture and conversion of high-quality plastic film and sheeting. This acquisition expanded Raven's Engineered Films Division's production capacity with additional extrusion and lamination operations in Brandon, South Dakota and fabrication locations in Madison, South Dakota and Midland, Texas, as well as broadened Engineered Films' product offerings and enhanced its converting capabilities. Integra's results of operations subsequent to acquisition are included in the Engineered Films segment.

At the acquisition date, the total purchase price was valued at approximately $48,200 net of an estimated working capital adjustment included in the terms of the merger and acquisition agreement. These terms provided for payment through the issuance of 1,541,696 shares of the Company's common stock valued at $39,252, based on the closing stock price on the date of acquisition and cash payments of $9,361. The Company received $351 in settlement of the working capital adjustment to the purchase price and finalized deferred tax calculations in fiscal 2016 first quarter. These transactions resulted in an adjustment of about $20 to the purchase price allocation.

The fair value of the business acquired was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value acquired over the identifiable assets acquired and liabilities assumed is reflected as goodwill. The fair value of the goodwill recorded as part of the purchase price allocation was $27,422. None of this goodwill is tax deductible. Goodwill resulting from this business combination is largely attributable to the experienced workforce of the acquired business and synergies expected to arise after integration of Integra products and operations into Engineered Films. Identifiable intangible assets acquired as part of the acquisition included definite-lived intangibles for customer relationships and other intangibles valued at $10,000 and $200, respectively. These intangible assets are being amortized using the straight-line method over their estimated useful life as follows: customer relationships - twelve years and other intangibles - two years. Liabilities assumed from Integra included a revolving line of credit and long-term notes with Wells Fargo Bank N.A. (Wells Fargo). The Company had a related party relationship with Wells Fargo described in Note 10 Financing Arrangements. This debt was repaid by the Company in fiscal 2015 and there was no debt outstanding at January 31, 2015.

The purchase price was finalized in the fiscal 2016 first quarter after the working capital adjustment was settled. The total purchase price allocated to the estimated fair values of assets acquired and liabilities assumed was as follows:



Cash	$	1,600
Accounts receivable	4,808
Inventory	7,575
Deferred income taxes	543
Other current assets	24
Property, plant and equipment, net	17,088
Goodwill	27,422
Customer relationships and other definite-lived intangibles	10,200
Short-term and long-term debt	(11,341		)
Current liabilities	(4,084		)
Other liabilities	(5,573		)
Total purchase price	$	48,262

Integra net sales and net loss recognized in fiscal 2015 from the acquisition date to January 31, 2015 were $5,627 and $(874), respectively. The operations of Integra were fully integrated into Engineered Films’ existing operations at the beginning of fiscal year 2016. The Company does not manage such operations or report these results separate and apart from the Engineered Films segment.

SBG

On May 1, 2014 the Company completed the purchase of all issued and outstanding shares of SBG Innovatie BV and its affiliate, Navtronics BVBA (collectively, SBG). SBG has operations in the Netherlands just outside of Amsterdam and at Navtronics in Geel, Belgium. The acquisition broadened Applied Technology Division’s guided steering system product line by adding high-accuracy implement steering applications. Additionally, SBG’s headquarters have become the home office for Raven in Europe, expanding the Company’s global presence and reach into key European markets.

In connection with the purchase, the Company paid $5,000 and agreed to pay up to $2,500 in additional earn-out payments calculated using the undiscounted cash flows and paid quarterly over the next 10 years contingent upon achieving certain revenues. Projecting discounted future cash flows requires the Company to make significant estimates and assumptions regarding future revenues under the subject contingent agreement and the appropriate discount rate. Such valuations techniques include one or more significant inputs that are not observable (Level 3 fair value measures).

At January 31, 2017, the fair value of this contingent consideration was $1,409 of which $247 was classified as "Accrued liabilities" and $1,162 was classified as "Other liabilities." At January 31, 2016, the fair value of this contingent consideration was $1,499 of which $249 was classified as "Accrued liabilities" and $1,250 was classified as "Other liabilities." The fair value of this contingent consideration at January 31, 2015 was $1,432, of which $236 was classified as "Accrued liabilities" and $1,196 was classified as "Other liabilities." The Company has paid a total of $583 of this potential earn-out liability including $275, $229 and $79 in earn-out payments during fiscal 2017, 2016, and 2015 respectively.

The fair value of the business acquired was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value acquired over the identifiable assets acquired and liabilities assumed is reflected as goodwill. Goodwill recorded as part of the purchase price allocation was $3,250, none of which is tax deductible. Identifiable intangible assets acquired as part of the acquisition were $2,104, and included definite-lived intangibles, such as customer relationships and proprietary technology. Amortization is being computed over the estimated useful life using the undiscounted cash flows method as follows: twelve years for customer relationships and five years for proprietary technology. Liabilities acquired included debts to the former owners, a long-term note with a third-party bank, and deferred income taxes. As further described in Note 10 Financing Arrangements, this debt was repaid by the Company and there was no debt outstanding at January 31, 2015.

SBG net sales and net income recognized in fiscal 2015 from the acquisition date to January 31, 2015 were $3,245 and $152, respectively. The operations of SBG were integrated into the existing operations of the Applied Technology Division at the beginning of fiscal year 2016.

The following pro forma consolidated condensed financial results of operations are presented as if the fiscal year 2015 acquisitions described above had been completed at the beginning of the period presented (unaudited):



	(Unaudited)
	For the year ended January 31, 2015
Net sales	$	408,906
Net income attributable to Raven Industries, Inc.	34,424

Earnings per common share:
Basic	$	0.90
Diluted	$	0.90

These unaudited pro forma consolidated financial results have been prepared for comparative purposes only and include certain adjustments such as amortization and acquisition cost. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had these business combinations occurred at the beginning of the period presented, or of future results of the consolidated entities.

Acquisition-related contingent consideration

In addition to the contingent consideration related to the acquisition of SBG, the Company has contingent liabilities related to prior year acquisitions. Related to the acquisition of Vista in 2012, the Company is committed to make annual payments based upon earn-out percentages on specific revenue streams for seven years after the purchase date, not to exceed $15,000. Projecting discounted future cash flows requires the Company to make significant estimates and assumptions regarding future revenues under the subject contingent agreement and the appropriate discount rate. Such valuations techniques include one or more significant inputs that are not observable (Level 3 fair value measures).

As a result of the triggering event that occurred in the third quarter of fiscal 2016, the Company performed an impairment analysis for the Vista reporting unit in fiscal 2016. The triggering event and the result of this analysis is more fully described in Note 6 Goodwill, Long-lived Assets, and Other Charges. Related to this analysis, the Company evaluated the fair value of the remaining assets and liabilities including acquisition-related contingent consideration. The analysis resulted in a reduction of $2,273 in the fair value of this contingent consideration for which the benefits were recognized in "Cost of sales" in the Consolidated Statements of Income and Comprehensive Income for the three-month and nine-month periods ended October 31, 2015 and the twelve-month period ended January 31, 2016. The fair value of the contingent consideration for the Vista acquisition at January 31, 2017 was $332 of which $98 was classified in "Accrued liabilities" and $234 as "Other liabilities" in the Consolidated Balance Sheet. At January 31, 2016, the fair value of the contingent consideration for the Vista acquisition was $560, of which $78 was classified in "Accrued liabilities" and $482 as "Other liabilities" in the Consolidated Balance Sheet. At January 31, 2015, the fair value of the contingent consideration for the Vista acquisition was $2,989 of which $554 was classified in "Accrued liabilities" and $2,435 as "Other liabilities" in the Consolidated Balance Sheet. These fair values were estimated using forecasted discounted cash flows. The Company has paid a total of $1,471 of this potential earn-out liability including $79, $585, and $454 in earn-out payments in fiscal year 2017, 2016, and 2015, respectively.

Equity Method Investments

The Company has owned interests in two affiliates accounted for as equity method investments: AgEagle and SST.

AgEagle

In February 2016, the Applied Technology Division acquired an interest of approximately 5% in AgEagle. AgEagle is a privately held company that is a leading provider of unmanned aerial systems (UAS) used for agricultural applications. Contemporaneously with the execution of the stock purchase agreement, AgEagle and the Company entered into a distribution agreement whereby the Company was appointed as the sole and exclusive distributor worldwide of the existing AgEagle system as it pertains to the agriculture market. This investment and distribution agreement will allow the Company to expand into the UAS market for agriculture, enhancing its existing product offerings to provide actionable data that customers can use to make important input decisions.

The Company’s owned interest in AgEagle is accounted for using the equity method. The Company determined that the exclusivity of the distribution agreement resulted in an intangible asset. The purchase price was allocated between the equity ownership interest, classified as "Other assets" in the Consolidated Balance Sheet, and this intangible asset, classified as "Amortizable intangible assets, net" in the Consolidated Balance Sheet, which will be amortized on a straight-line basis over the four-year life of the distribution agreement.

SST

The Company’s owned interest of approximately 22% in SST is accounted for using the equity method. SST is a privately-held agricultural software development and information services provider. Raven and SST are strategically aligned to provide customers with simple, more efficient ways to move and manage data in the precision agriculture market.

Changes in the net carrying value of the Company's equity investments was as follows:



	As of January 31,
	2017			2016			2015
Balance at beginning of year	$	2,805		$	3,217		$	3,684
Purchase price of equity investment	135			—			—
(Loss) income from equity investment	(72		)	83			28
Amortization of intangible assets	(497		)	(495		)	(495		)
Balance at end of year	$	2,371		$	2,805		$	3,217