Raven Industries Inc. Annual Report 2006

Plain-text annual report

D R A C Y L P E R S S E N S U B I D S S L L A F X U O S I 3 8 5 O N T M R E P I L I A M S S A L C - T S R F I E G A T S O P O N Y R A S S E C E N D E L I A M F I E H T N I S E T A T S D E T I N U E G A T S O P O N Y R A S S E C E N D E L I A M F I E H T N I S E T A T S D E T I N U D R A C Y L P E R S S E N S U B I D S S L L A F X U O S I 3 8 5 O N T M R E P I I L A M S S A L C - T S R F I Raven Industries P.O. Box 5107 Sioux Falls, SD 57117-5107 RAVEN 8 7 8 9 - 7 1 1 7 5 D S S L L A F X U O S I I S E R T S U D N I N E V A R I S N O T A L E R R O T S E V N I 7 0 1 5 X O B O P 8 7 8 9 - 7 1 1 7 5 D S S L L A F X U O S I I S E R T S U D N I N E V A R I S N O T A L E R R O T S E V N I 7 0 1 5 X O B O P I E E S S E R D D A Y B D A P E B L L I W E G A T S O P I E E S S E R D D A Y B D A P E B L L I W E G A T S O P OLD VALUES OLD VALUES OLD VALUES OLD VALUES NEW IDEAS NEW IDEAS NEW IDEAS NEW IDEAS 5 0 Y E A R S O F I N N O VAT I O N5656 191956561919561919 RAVEN RAVEN 06ANNUAL REPORT ANNUAL REPORT for the ﬁ scal year ended January 31 for the ﬁ scal year ended January 31 F i n a n c i a l H i g h l i g h t s Dollars in thousands, except per-share data For the years ended January 31 2006 2005 change OPERATIONS Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $204,528 37,284 24,262 $168,086 27,862 17,891 PER SHARE Net income – diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.32 0.28 4.67 $ 0.97 0.22(a) 3.67 PERFORMANCE Operating income margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on beginning shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.2% 11.9% 24.9% 36.7% 16.6% 10.6% 21.3% 26.9% Shares outstanding, year-end (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,072 17,999 (a) Excludes a special dividend of $.625 per share that was paid during the second quarter of ﬁ scal 2005. 21.7% 33.8% 35.6% 36.1% 27.3% 27.2% 9.6% 12.3% 16.9% 36.4% 0.4% NET SALES (dollars in millions) EARNINGS PER SHARE (dollars) SALES PER EMPLOYEE (dollars in thousands) 200 150 100 50 0 1.40 1.05 0.70 0.35 0.00 240 180 120 60 0 2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006 Table of Contents Business Proﬁ le ................................................... 1 Letter to Shareholders ......................................... 2 Operating Unit Results ....................................... 6 50 Year Anniversary ............................................ 14 Eleven-Year Summary ........................................ 16 Business Segments .............................................. 18 Financial Review and Analysis ........................... 19 Stock and Quarterly Performance ...................... 30 Management’s Report on Internal Control over Financial Reporting .......................... 31 Financial Statements .......................................... 32 Report of Independent Registered Public Accounting Firm ............................ 43 Directors, Ofﬁ cers and Senior Management ...... 44 Investor Information ................. Inside Back Cover INVESTOR INFORMATION Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP Minneapolis, MN Stock Transfer Agent & Registrar Wells Fargo Bank, N.A. 161 N. Concord Exchange P.O. Box 64854 South St. Paul, MN 55164-0854 Phone: 1-800-468-9716 Form 10-K Upon written request, Raven Industries, Inc.’s Form 10-K for the ﬁ scal year ended January 31, 2006, which has been ﬁ led with the Securities and Exchange Commission, is available free of charge. Direct inquires to: Raven Industries, Inc. Attention: Investor Relations P.O. Box 5107 Sioux Falls, SD 57117-5107 Phone: 605-336-2750 Raven Website www.ravenind.com Stock Quotations Listed on the Nasdaq Stock Market—RAVN Annual Meeting May 23, 2006, 9:00 a.m. Ramkota Hotel and Conference Center 3200 W. Maple Avenue Sioux Falls, SD Raven Industries, Inc. is an Equal Employment Opportunity Em- ployer with an approved afﬁ rmative action plan. Dividend Reinvestment Plan Raven Industries, Inc. sponsors a Dividend Reinvestment Plan whereby shareholders can purchase additional Raven common stock without the payment of any brokerage commission or fees. For more information on how you can take advantage of this plan, contact your broker, our stock transfer agent or write: Investor Relations; P.O. Box 5107, Sioux Falls, SD 57117-5107 SIC Codes: 3672, 3081, 3829 s m e t s y S g n i n i L l a t n e m n o r i v n E W M B : t i d e r c o t o h P , 9 e g a P r e n g a W y r r a L , r e h p a r g o t o h P : ) o t o h p e g r a l ( 3 1 e g a P L I , o g a c i h C , d r a o B n g i s e D e v i t a e r C : n g i s e D FORWARD-LOOKING STATEMENTS Certain statements contained in this report 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 the Company believes that the expectations reﬂ ected in such forward-looking statements are based on reasonable assump- tions, there is no assurance that such assumptions are correct or that these expectations will be achieved. Such assumptions involve important risks and uncer- tainties that could signiﬁ cantly affect results in the future. These risks and uncertainties include, but are not limited to, those relating to weather conditions, which could affect certain of the Company’s primary markets, such as agriculture and construction, or changes in competition, raw material availability, technology or relationships with the Company’s largest customers, 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 under Item 1A. The foregoing list is not exhaustive and the company disclaims any obligation to subsequently revise any forward-looking statements to reﬂ ect events or circumstances after the date of such statements. P h o n e ( ) C i t y A d d r e s s C o m p a n y N a m e a n d T i t l e ( p l e a s e p r i n t )  N e w s r e l e a s e s P l e a s e s e n d m e t h e f o l l o w i n g :  P l e a s e a d d m e t o t h e R a v e n m a i l i n g l i s t .    2 0 0 6 F o r m 1 0 - K L a t e s t q u a r t e r l y r e p o r t I n f o r m a t i o n o n y o u r D i v i d e n d R e i n v e s t m e n t P l a n F a x ( S t a t e ) Z i p + 4 I h a v e b e e n a s h a r e h o l d e r o f R a v e n s i n c e  P l e a s e a d d m e t o t h e R a v e n m a i l i n g l i s t . M y b r o k e r i s M y a d d r e s s i s M y n a m e i s L o c a t e d i n ( c i t y ) H i s / H e r c o m p a n y i s F a x ( ) D e a r S h a r e h o l d e r : t a i n a n a c c u r a t e m a i l i n g l i s t . S o t h a t w e a r e a b l e t o k e e p y o u i n f o r m e d , p l e a s e p r o v i d e t h e r e q u i r e d i n f o r m a t i o n . T h i s w i l l e n a b l e u s t o m a i n - b o t h o f y o u a r e c u r r e n t o n o u r f i n a n c i a l c o n d i t i o n . K e e p i n g y o u a n d y o u r s t o c k b r o k e r i n f o r m e d o f o u r c o r p o r a t e a c t i v i t i e s i s t h e b e s t w a y f o r u s t o m a k e s u r e t h a t R a v e n I n d u s t r i e s , I n c . I w o u l d l i k e m o r e i n f o r m a t i o n o n B r o k e r I d e n t i t y C a r d : R a v e n I n d u s t r i e s , I n c . We are developing distributors worldwide who can successfully sell and service our products. FCD is currently focused on distribution in South America, Europe, Canada and Australia. International sales have grown from $3.5 million to $6.7 million in the last three years and will become increasingly important to the success of this division. New products continue to be the lifeblood in FCD. During the past year we spent $2.4 million in product development, up 26% from the previous year and double three years ago. We introduced several new agricultural products including a sub-decimeter accuracy tractor steering system; a digital map display to highlight the field being worked; and a new injection pump for pumping farm chemicals in their undiluted form. Our injection system is gaining greater acceptance for environmental, safety and cost reasons. The Electronic Systems Division (ESD) showed dramatic improvement this past year. General Manager David Bair and his staff provided strong leadership, improving all aspects of the business, resulting in a doubling of operating income. ESD provides electronics manufacturing services to customers needing low-volume, high-mix production with high levels of engineering and customer service support. By focusing on this strategy, we avoid direct competition with cheap-labor, offshore suppliers. Growing demand from Fortune 500 companies who seek the manufacturing capabilities of a reliable source plus our continued investment in advanced manufacturing technology will drive growth. This is not a high-margin business, but it’s a solid one that fits our overall corporate strategy. Aerostar International struggled during the year. The U.S. Army contract for cargo parachutes ran out last year and new contracts were delayed. We continue to be optimistic about long-term prospects for parachute orders, starting in the third quarter of this year. Aerostar, together with Southwest Research Institute and the U.S. Air Force Research Lab, successfully launched and flew a powered stratospheric airship. The project is focused on developing near-space airships for inexpensive tactical communi- cations, intelligence, surveillance and reconnaissance applications. This is part of Aerostar’s ongoing technology roadmap to develop high-altitude, lighter-than-air-platforms for military and commercial use. Under the leadership of Mark West, Aerostar continues its transition from low-tech sewn products to high-tech scientific balloons and aerostats, military parachutes, and specialty outerwear for security forces. Optimizing Long Term Value Operational excellence and innovation continue to be the growth drivers at Raven. Productivity Improvement We measure productivity at Raven by dividing total sales by total employee compensation. That number is then compared to the previous year’s productivity ratio. Our goal every year is to improve by 6%, or approximately twice the national average. Page 3 RAVEN 2006 Annual Report Only when every employee commits to continuous improvement and a “total quality – no waste” mentality can we be conﬁ dent that we are optimizing operating margins. We constantly assess all of our businesses to assure long-term value, and prune low-growth, low-proﬁ t product lines and markets. Our goal is to drop the weakest 10% each year. We have pursued a Total Quality/Six Sigma program for 15 years and it is now part of our corporate DNA. Adherence to these powerful tools has made us a better company, building higher quality products at a lower cost and becoming more proﬁ table. There is an unending supply of process and quality issues that can be improved upon. Innovation For Raven to grow, we must continue to innovate and execute at a higher level. I consider this to be one of my principal responsibilities as CEO. Innovation at Raven is a culture. It ﬂ ourishes in an environment of rigorous “give and take” where all ideas are listened to. In a digital world where e-mail rules, the most productive discussions still take place face-to-face. As we grow larger, this becomes more challenging. We work hard to tear down the walls that separate us and keep us from engaging in robust dialogue. Growth Once a business is in a “lean” condition and margins and growth prospects are strong, we invest heavily in plant, equipment, marketing and new product development. Even in a slow growth environment, our goal is to increase earnings 15% a year on average. Each of our four business units has a unique role to play in that growth. It starts with a business model that emphasizes niche markets and avoids production based on cheap labor. We call this “China-prooﬁ ng” the business and it is a strategy that has served us well. This somewhat limits growth but it allows us to earn above-average returns on invested capital. We don’t make a lot of acquisitions because there aren’t many good ones that would beneﬁ t our shareholders, but we never shy away from making an investment when it makes long-term sense. We have a disciplined approach to investing and only commit resources to projects when we are convinced the opportunity is real and Raven has a high potential to succeed. Cash Management Our balance sheet is strong, with virtually no debt, allowing us to pursue a wide range of strategic options, while returning cash to our shareholders. We will continue to raise the dividend, with a target of approximately 30% of earnings, and to buy back our shares, although at a somewhat reduced rate. Annual EPS Growth Return on Equity Return on Assets Return on Sales FY2006 FY2005 FY2004 FY2003 FY2002 36.1% 36.7% 24.9% 11.9% 29.3% 26.9% 21.3% 10.6% 25.0% 23.8% 18.2% 9.7% 29.0% 21.5% 15.9% 9.3% 50.0% 18.4% 13.3% 7.5% Page 4 RAVEN 2006 Annual Report Governance Strong corporate governance is a real asset. We believe that a small but effective Board of Directors that is totally engaged best serves our shareholders. The role of Raven’s Board is to oversee how management serves the interests of shareholders and other corporate stakeholders. Our philosophy is to have all members of the Board, except the CEO, be independent under the NASDAQ definition of independence. We also believe that splitting the functions of the Chairman of the Board and the CEO best suits our current needs. This Report is the second one covered by the Sarbanes-Oxley Act of 2002. While I never felt that Raven needed more regulation to do the right thing, Section 404 of the Act has brought increased emphasis to process discipline and shows our shareholders we are doing things right. Tom Iacarella, Raven’s Chief Financial Officer, and his team do an outstanding job putting together our Annual Report. We are proud to present the numbers and analyses in this Report and hope we have done it in a way that is meaningful and easy to understand. Old Values, New Ideas Old Values, New Ideas refers to “our core” and “our competitive edge. ” Our core at Raven is performance with integrity. When you are running a company for the long haul, these core values complement each other. Achieving results ethically is fundamental to how we do business. Our competitive edge – the highly focused, carefully structured approach to the marketplace – is the strong business model and effective game plan that we execute every day. We play off our strengths and stay on target. We have profitable niche market positions, a flow of innovative new products, expanding international markets, and a talented management team. Leadership is the key differentiator in business. The people you have managing investments are more important than the dollars invested. To ensure we have a strong group of future leaders moving through all levels of the company, Barb Ohme, Vice President Administration, has us focused on a plan to hire well, sort out the best, then mentor and provide opportuni- ties for personal development. We believe we’re growing the best group of leaders in Raven’s history. Raven 2006 has been 50 years in the making. We’ve come a long way since our founders started the company in February 1956. Those four men: Joseph Kaliszewski, J.R. Smith, Duwayne Thon and Paul (Ed) Yost left their jobs and homes in Minnesota to follow their dream. My sincere gratitude to them and to all the dedicated men and women who over the past 50 years helped build Raven into a great company. They started with a dream and a vision. Our current 900 employees follow that heritage and tradition. Ronald M. Moquist President & CEO March 29, 2006 Page 5 RAVEN 2006 Annual Report FLOW CONTROLS SALES (dollars in millions) 50 40 30 20 10 0 2001 2002 2003 2004 2005 2006 a five-layer line. A new laminator helped EFD manufacture additional disaster films so as to meet the needs created by another violent hurricane season as well as grow its industrial and construction markets. Sales functions were restructured, separating new product sales from recurring orders for our established products. The repositioning allows the division to continue to focus on development of new films specifically tailored to the needs of its customers while providing quick response to customer demand. Prospects Three new state-of-the-art extrusion lines will come on-line during the coming year. Mono-line, three-layer and seven-layer extruders will expand the division’s product capabilities. EFD capital spending is expected to exceed $13 million in this new fiscal year. Other investments will include printers, winders, tables and robotic equipment. The division recently purchased a new warehouse and will begin construction of a new extrusion tower and manufacturing floor space. These investments will support the growth in the division as it continues to diversify and develop its product offerings. Electronic Systems Division Electronic Systems Division (ESD) sales for the last fiscal year climbed 19% to $56 million while operating profits almost doubled, reaching $8.9 million. The year started off strong, with increases in business coming from several existing customers. This type of growth allowed the division to bring startup costs under control as compared to the previous year. ESD’s model of high-mix, low-volume manufacturing continues to be successful in a highly competitive global industry. The division expanded its utilization of the six-sigma methodology to improve processes; recent efforts included upgrading Production Process Control and New Product Introduction processes. ESD added a new customer in the fourth quarter of this past year. Lead-free manufacturing techniques were successfully undertaken across the division as a result of extensive design-of-experiments efforts by Engineering and Manufacturing personnel. ENGINEERED FILMS SALES (dollars in millions) 80 60 40 20 0 2001 2002 2003 2004 2005 2006 ESD’s model of high-mix, low-volume manufacturing continues to be successful in a highly competitive global industry. Page 8 RAVEN 2006 Annual Report ELECTRONIC SYSTEMS SALES (dollars in millions) 60 45 30 15 0 ESD expects to be ready for lead-free manufacturing in the first quarter—well in advance of the July 2006 deadline for products used in Europe. Prospects ESD is focused on improving customer relations and providing additional value-added services in test, design, manufacturability-analysis and component-obsolescence tracking. The division follows a model of adding one to two select clients each year. Efforts continue to focus on improving operational excellence in the areas of manufacturing cycle time, increasing inventory turns, and in making technical support processes more robust. 2001 2002 2003 2004 2005 2006 Aerostar Aerostar sales and profits sagged as deliveries under its major military contract for cargo parachutes wound down during the year and ended in October 2005. Sales of $18 million were down 17% and operating income declined 41% to $2.1 million. No new parachute contracts have been let with the military’s shift to total support of deployed ground forces. Additionally, other high-tech military protective gear manufactured by Aerostar was overtaken by the need for basic uniforms and body armor. Aerostar nevertheless has continued developing streamlined manufacturing methods to set the standard in parachute manufacturing. It also is building on its high-altitude, heavy-payload parachute capability with added parachute-design capabilities. Aerostar has fully integrated the scientific ballooning group, which was added to Aerostar in May 2004. While the traditional high-altitude balloon market remains steady, emerging markets in “Near Space”—above 50,000 feet—offer a nearly untapped environment for long-distance communications, data relay, and intelligence gathering. Partnering with Physical Science Lab and Southwest Research Institute has strengthened our prowess as Emerging markets in “Near Space”— above 50,000 feet—offer a nearly untapped environment. Page 10 RAVEN 2006 Annual Report By this spring, Raven’s Electronic Systems Division expects to be shipping lead-free electronics to Europe. The division beats the deadline that most products shipped to Europe be lead-free beginning in July 2006. the leading scientific balloon manufacturer in the world. Two significant tests were done in November 2005. A powered airship was flown in the stratosphere—the HiSentinel, under contract with the U.S. Army. This flight was the first step in developing platforms with increased capabilities to meet ever-changing battlefield needs. A second test involved the use of free-floating balloons for communications and/or intelligence gathering. High-tech protective gear is another emerging market for Aerostar. Anti-exposure suits for military fliers and tactical swimmers keep users dry and alive when exposed to extremely cold water. Aerostar is now in the process of qualification to manufacture such suits, and we are positioned to become a major supplier of these products for the military. Prospects Significant progress was made this year in development of new products and capabilities. Because the U.S. Army has developed new parachute systems to replace all personnel parachutes in inventory over the next seven years, the industry will go from nearly record low production to levels significantly higher than traditional production. Aerostar also continues to develop flight packages for military payloads operating in the harsh environment of the stratosphere. An underlying key to Aerostar’s exceptional quality and reputation for producing the industry’s highest quality products is Aerostar’s ISO 9001-2000 certification. This standard has become a cultural process for company employees across the various product families, and will continue to serve Aerostar’s future growth and development. AEROSTAR SALES (dollars in millions) 30 20 10 0 2001 2002 2003 2004 2005 2006 Page 12 RAVEN 2006 Annual Report 5 0 Y e a r A n n i v e r s a r y We were started by a group of people with a dream and a vision. They have passed the torch to the generations that came after them. We proudly follow that heritage and tradition. tradition. tradition. tradition. tradition. tradition. tradition. tradition. tradition. tradition. tradition. tradition. tradition. tradition. 56 56565656 1956191956191919561919 56 19 19191919 19 19 The year was 1955 and what a year it was in American history. Elvis Presley made his ﬁ rst television appearance, and Rosa Parks was arrested for refusing to give up her seat on a city bus. A little-known restaurateur named Ray Kroc started the fast food chain, McDonalds, and the theme park, Disneyland, opened its gates for the ﬁ rst time. That same year, the idea for another company was quietly beginning to take form, fueled by the dreams of four forward-thinking men who worked at the General Mills Aeronautical Research Laboratory. On the eve of 1956, Richard (J.R.) Smith, Paul (Ed) Yost, Duwayne Thon and Joseph Kaliszewski began meeting after hours to explore the idea of starting their own company. It was an idea born of individual inspiration and cooperative endeavor. These were practical, tough-minded businessmen — for which building a business was simply the next logical step in their careers. With the ﬁ nancial backing of Cyrus Hoigaard, a Minneapolis businessman, Raven was launched in February 1956, and quickly built a reputation as an innovative manufacturer of scientiﬁ c balloons. The Air Force, Ofﬁ ce of Naval Research and various universities began placing orders with Raven; the ﬂ ight services group provided customers with superior balloon launching and recovery operations. These high-altitude balloons with capsules carrying mice, monkeys and cosmic ray measuring devices, extended our knowledge of space. Business was stable, but not outstanding, for the ﬁ rst year. With sales of $95,000, Raven lost $13,000 that year, the only loss in the history of the company. Ed Owen became the company’s ﬁ rst full-time president in 1961. During his tenure, sales rose to a high of $12.3 million. In a news- paper article on his retirement, Owen attributed “the growth, image and reputation of the company to the many loyal Raven employees.” 1962 Raven is chosen by the National Center for Atmospheric Research to manage the National Scientiﬁ c Balloon Flight Station in Palestine, TX. 1966 Raven builds its ﬁ rst satellite production facility in Huron, SD to manufacture parachutes. 1967 Raven introduces a heavy-lift balloon for logging. Enters sportswear ﬁ eld with the manufacture of insulated snowmobile clothing. 1971 Ed Owen retires and David A. Christensen becomes President. 1986 Applied Technology Division is restructured, creating Engineered Films and Aerostar. 1972 Raven declares its ﬁ rst cash dividend. Dividends per share have increased every year since 1972, with only two exceptions. 1973 New plastic sheet material, RUFCO, is introduced to the marketplace. 1980 Raven listed on the American Stock Exchange. Raven buys Glasstite, Inc. a manufacturer of ﬁ berglass pickup-truck toppers. 1987 Raven named one of the “Best Small Companies in America” by Forbes Magazine. 1990 Raven adopts Total Quality Management (TQM). 1956 J.R. Smith, Ed Yost, Duwayne Thon and Joseph Kaliszewski leave the employ of General Mills, Inc. to form Raven Industries, using capital they receive from Cyrus Hoigaard. 1960 Raven invents the modern hot-air balloon and also starts manufacturing ﬁ berglass tanks. 1961 Ed Owen becomes Raven’s ﬁ rst full-time President. The Manchester Building in downtown Sioux Falls is bought for $156,000 and becomes corporate headquarters. Page14 RAVEN 2006 Annual Report 5 0 Y e a r A n n i v e r s a r y With Owen’s retirement, Dave Christensen was named President of Raven Industries in 1971 and remained in that position until 2000. During his term, Raven was three times named by Forbes Magazine as one of the “Best Small Companies in America.” Raven reached an important goal in 1992 – $100 million in sales, a major accomplishment since it represented a doubling of sales over the previous ﬁ ve years. Ron Moquist became the third Chief Executive Ofﬁ cer of the com- pany in 2000 and executed an aggressive strategy for success. The “Shrink, Fix, Grow” strategy as it was called was designed to get Raven Industries out of low-margin businesses like pickup-truck toppers and focus on more proﬁ table products such as high-tech farm equipment. As a result, Raven was able to return more than $64 million to shareholders through cash dividends and stock repurchases from ﬁ scal 2000 through 2005 while improving the balance sheet and reducing debt. Today Raven Industries has passed the $200 million revenue threshold. With the company no longer dependent on labor- intensive, commodity-type products, the business is focused on growth. The company’s 900 employees take pride in celebrating Raven’s 50th anniversary and salute the dedicated men and women who came before them. 1991 Ag electronics product line is spun out of the Electronic Systems Division, to create a new division, Flow Controls. 1992 Raven reaches $100 million in sales - represents a doubling of sales over the previous ﬁ ve years. Begins trading on the Nasdaq Stock Market as RAVN. 1995 Company purchases high-altitude balloon manufacturing assets of Winzen International of Texas. 1996 Raven introduces a new variable-rate controller with global-positioning satellite (GPS) technology for agricultural applications. 2001 Flow Controls Division acquires GPS technology leader Starlink, Incorporated. Sportswear Division is merged into Aerostar. 1999 Glasstite, Inc. sold. 2000 David Christensen retires. Ronald Moquist becomes chief executive of Raven. Plastic Tank Division sold to Norwest Equity Partners. 2002 Three-layer ﬁ lm extruder built for $4 million. 2004 Raven Precision Solutions Center opens. 0606 06 2005 Aerostar International successfully launches and ﬂ ies the second airship in history to achieve powered ﬂ ight in the stratosphere. The ﬁ rst one, which ﬂ ew in 1970, was also a Raven product. 2006 Raven announces ﬁ fth year of consecutive record proﬁ ts with a 30% per year average growth and reaches $200 million in sales. Page15 RAVEN 2006 Annual Report ELEVEN-YEAR FINANCIAL SUMMARY Dollars in thousands, except per-share data OPERATIONS FOR THE YEAR Net sales Ongoing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sold businesses(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income Ongoing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sold businesses(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income % of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income % of beginning equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FINANCIAL POSITION Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt / total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory turnover (CGS / year-end inventory) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOWS PROVIDED BY (USED IN) Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COMMON STOCK DATA Net income per share – basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per share – diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock price range during year High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares outstanding, year-end (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of shareholders, year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER DATA Price / earnings ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average number of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales per employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the years ended January 31 2005 2006 $204,528 — 204,528 53,231 37,363 (79) 37,284 37,494 $ 24,262 11.9% 36.7% $ 5,056 $ 71,345 20,050 $ 51,295 3.56 $ 25,602 106,157 9 $ 84,389 0.0% 5.4 $ 21,189 (11,435) (6,946) 2,790 $ 1.34 1.32 0.28 4.67 $ 33.15 16.54 $ 31.60 18,072 9,263 23.9 819 $ 250 $ 43,619 $168,086 — 168,086 43,200 27,862 — 27,862 27,955 $ 17,891 10 .6% 26 .9% $ 15,298(b) $ 61,592 20,950 $ 40,642 2 .94 $ 19,964 88,509 — $ 66,082 0 .0% 5 .4 $ 18,871 (7,631) (19,063) (7,823) $ 0 .99 0 .97 0 .85(b) 3 .67 $ 26 .94 13 .08 $ 18 .38 17,999 6,269 18 .9 807 $ 208 $ 43,646 All per-share, shares outstanding and market price data reflect the October 2004 two-for-one stock split, the January 2003 two-for-one stock split and the July 2001 three-for-two stock split. All other figures are as reported. Price / earnings ratio is determined as closing stock price divided by net income per share-diluted. Book value per share is computed by dividing total shareholders’ equity by the number of common shares outstanding. (a) In fiscal 2003, 2001, 2000 and 1996, the company sold its Beta Raven Industrial Controls, Plastic Tank, Glasstite and Astoria businesses, respectively. (b) Includes a special dividend of $.625 per share that was paid during the second quarter of fiscal 2005. Page 16 RAVEN 2006 Annual Report 2004 $142,727 — 142,727 33,759 21,981 (355) 21,626 21,716 $ 13,836 9 .7% 23 .8% $ 3,075 $ 55,710 11,895 $ 43,815 4 .68 $ 15,950 79,508 57 $ 66,471 0 .1% 6 .5 $ 19,732 (4,352) (6,155) 9,225 $ 0 .77 0 .75 0 .17 3 .68 $ 15 .23 7 .56 $ 14 .11 18,041 3,560 18 .8 770 $ 185 $ 47,120 2003 2002 2001 2000 1999 1998 1997 1996 $119,589 1,314 120,903 27,515 16,861 204 17,065 17,254 $ 11,185 9 .3% 21 .5% $112,018 6,497 118,515 23,851 13,788 (613) 13,175 13,565 $ 8,847 7 .5% 18 .4% $113,360 19,498 132,858 21,123 7,417(c) 3,331(d) 10,748 10,924 $ 6,411(c)(d) 4 .8% 11 .8% $ 2,563 $ 2,371 $ 2,399 $ 49,351 13,167 $ 36,184 3 .75 $ 16,455 72,816 151 $ 58,236 0 .3% 4 .4 $ 12,735 (9,166) (5,830) (2,261) $ 0 .61 0 .60 0 .14 3 .21 $ 9 .20 4 .38 $ 7 .91 18,133 2,781 13 .2 758 $ 160 $ 42,826 $ 45,308 13,810 $ 31,498 3 .28 $ 14,059 67,836 280 $ 52,032 0 .5% 5 .0 $ 18,496 (13,152) (8,539) (3,195) $ 0 .48 0 .47 0 .13 2 .82 $ 5 .88 3 .02 $ 5 .64 18,424 2,387 12 .1 838 $ 141 $ 33,834 $ 51,817 13,935 $ 37,882 3 .72 $ 11,647 65,656 2,013 $ 47,989 4 .0% 5 .9 $ 9,441 9,752 (14,227) 4,966 $ 0 .31 0 .31 0 .12 2 .53 $ 3 .48 1 .88 $ 3 .04 18,956 2,460 9 .8 1,043 $ 127 $ 38,239 $107,862 42,523 150,385 24,217 7,971 2,606(e) 10,577 10,503 $ 6,762(e) 4 .5% 10 .9% $ 2,895 $ 55,371 14,702 $ 40,669 3 .77 $ 15,068 74,047 3,024 $ 54,519 5 .3% 5 .2 $ 10,375 6,323 (16,326) 372 $ 0 .26 0 .26 0 .11 2 .32 $ 3 .04 2 .25 $ 2 .40 23,496 2,749 9 .2 1,320 $ 114 $ 44,935 $108,408 46,798 155,206 24,441 8,220 1,453 9,673 9,649 $ 6,182 4 .0% 10 .0% $104,489 47,679 152,168 24,929 9,555 1,007 10,562 12,540(f) $ 8,062 5 .3% 14 .2% $101,869 39,576 141,445 25,287 9,321 2,650 11,971 11,915 $ 7,688 5 .4% 15 .6% $ 2,944 $ 2,709 $ 2,367 $ 60,279 15,128 $ 45,151 3 .98 $ 19,563 83,657 4,572 $ 62,293 6 .8% 4 .9 $ 8,326 (3,127) (2,714) 2,485 $ 0 .22 0 .22 0 .10 2 .21 $ 3 .79 2 .54 $ 2 .67 28,164 3,014 12 .4 1,445 $ 107 $ 47,431 $ 57,285 17,816 $ 39,469 3 .22 $ 19,817 82,066 1,128 $ 61,563 1 .8% 4 .8 $ 9,274 (4,979) (4,884) (589) $ 0 .28 0 .28 0 .09 2 .13 $ 4 .29 3 .27 $ 3 .77 28,944 3,221 13 .7 1,511 $ 101 $ 47,154 $ 56,696 20,016 $ 36,680 2 .83 $ 18,142 80,662 3,181 $ 56,729 5 .3% 4 .5 $ 7,088 (5,090) (2,363) (365) $ 0 .27 0 .27 0 .08 1 .96 $ 3 .92 2 .67 $ 3 .75 29,016 3,011 13 .9 1,387 $ 102 $ 38,102 (c) Includes $2.6 million of business repositioning charges, net of gains on plant sales, primarily in Electronic Systems Division and Aerostar. (d) Includes the $3.1 million pretax gain ($1.4 million net of tax) on the sale of the company’s Plastic Tank Division. (e) Includes the $1.2 million pretax gain ($764,000 net of tax) on the sale of assets of the company’s Glasstite subsidiary. (f) Includes the $1.8 million pretax gain ($1.2 million net of tax) on the sale of an investment in an affiliate. $ 84,379 38,010 122,389 22,660 7,692 1,869 9,561 9,566 $ 6,197 5 .1% 13 .6% $ 2,130 $ 45,695 14,771 $ 30,924 3 .09 $ 18,069 67,553 2,816 $ 49,151 5 .4% 4 .1 $ 9,687 (4,158) (4,029) 1,500 $ 0 .22 0 .22 0 .08 1 .74 $ 3 .46 2 .58 $ 3 .21 28,296 3,190 14 .9 1,368 $ 89 $ 32,539 Page 17 RAVEN 2006 Annual Report BUSINESS SEGMENTS Dollars in thousands 2006 2005 2004 2003 2002 2001 For the years ended January 31 FLOW CONTROLS DIVISION Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,506 13,586 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,047 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 938 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . . . . . . . . . . . . 1,085 ENGINEERED FILMS DIVISION Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82,794 19,907 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,512 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,359 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . . . . . . . . . . . . 2,436 ELECTRONIC SYSTEMS DIVISION Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,219 8,916 Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . 20,191 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,612 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . . . . . . . . . . . . 871 AEROSTAR Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,009 2,133 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,837 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . . . . . . . . . . . . 359 REPORTABLE SEGMENTS TOTAL Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $204,528 44,542 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,587 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,088 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation & amortization . . . . . . . . . . . . . . . . . . . . . 4,751 CORPORATE & OTHER(a) Sales from sold businesses . . . . . . . . . . . . . . . . . . . . . . . . $ — (79) Operating income (loss) from sold businesses . . . . . . . . (7,179) Operating (loss) from administrative expenses . . . . . . . 15,570 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 Depreciation & amortization . . . . . . . . . . . . . . . . . . . . . TOTAL COMPANY Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $204,528 37,284 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,157 Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,358 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,151 Depreciation & amortization . . . . . . . . . . . . . . . . . . . . . $ 40,726 10,516(b) 23,701 1,372 876 $ 58,657 15,739 25,181 3,960 1,403 $ 47,049 4,492 17,382 1,201 880 $ 21,654 3,609 7,492 542 389 $ 35,059 8,254 19,304 341 1,004 $ 42,636 10,563 15,941 712 1,611 $ 44,307 5,797 14,975 841 850 $ 20,725 3,092(c) 7,756 1,130 436 $168,086 $142,727 34,356(b) 73,756 7,075 3,548 27,706(c) 57,976 3,024 3,901 $ — — (6,494) 14,753 466 293 $ — (355) (5,725) 21,532 306 244 $168,086 $142,727 27,862(b) 88,509 7,541 3,841 21,626(c) 79,508 3,330 4,145 $ 28,496 6,897 21,483 729 948 $ 35,096 10,030 17,244 4,080 1,475 $ 38,589 4,022 14,528 395 978 $ 17,408 1,012 7,032 570 374 $119,589 21,961 60,287 5,774 3,775 $ 1,314 204 (5,100) 12,529 259 191 $120,903 17,065 72,816 6,033 3,966 $ 23,178 5,509(d) 20,313 677 443 $ 35,796 8,257 13,691 3,178 1,001 $ 32,289 2,264 13,910 774 1,101 $ 20,755 2,907(e) 7,150 256 347 $ 16,758 3,985 9,578 327 353 $ 35,403 7,397 11,520 633 946 $ 32,039 (542)(f) 15,359 1,492 1,089 $ 29,160 2,996 8,872 163 367 $112,018 $113,360 18,937(d,e) 55,064 4,885 2,892 13,836(f) 45,329 2,615 2,755 $ 6,497 (613) (5,149) 12,772 209 253 $ 19,498 3,331(g) (6,419) 20,327 475 912 $118,515 $132,858 13,175(d,e) 67,836 5,094 3,145 10,748(f,g) 65,656 3,090 3,667 (a) Operating income from sold businesses includes administrative expenses directly attributable to the sold businesses. Assets are principally cash, investments, deferred taxes and notes receivable. (b) Includes a $1.3 million pretax writeoff of assets related to the Fluent Systems product line (See Note 5). (c) Includes $182,000 of pretax gain on plant sale. (d) Includes a $550,000 in-process research and development charge related to the Starlink acquisition. (e) Includes $414,000 of pretax gains on plant sales. (f) Includes $1.8 million of business repositioning charges in the Electronic Systems Division and $2.6 million for the total company. (g) Includes a $3.1 million pretax gain on the sale of the company’s Plastic Tank Division. Page 18 RAVEN 2006 Annual Report FINANCIAL REVIEW AND ANALYSIS RESULTS OF OPERATIONS The following table presents comparative financial performance for the past three years: Dollars in thousands, except per-share data Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on disposition of businesses & assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per share – diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $204,528 53,231 15,868 79 37,284 37,494 13,232 $ 24,262 $ 1.32 35.3% EXECUTIVE SUMMARY Raven Industries, Inc . is an industrial manufacturer providing a variety of products to customers within the industrial, agricultural, construction and military/aerospace markets, primarily in North America . The company operates in four business segments: Flow Controls, Engineered Films, Electronic Systems and Aerostar . Consolidated Operating Results The company delivered record sales and profits in fiscal 2006, exceeding fiscal 2005 record-setting results . Net income rose to $24 .3 million, an increase of $6 .4 million, or 35 .6% over last year’s results . Earnings per diluted share of $1 .32 topped the prior fiscal year’s record of $ .97 by 36 .1% . Net sales reached $204 .5 million, surpassing fiscal 2005 by $36 .4 million, or 21 .7% . The Engineered Films, Electronic Systems, and Flow Controls segments all contributed to the company’s sales and profit growth for fiscal 2006, with the higher sales levels in each of these segments driving the increase in company profits . In fiscal 2006, the company increased its quarterly dividend from 5 1/2 cents per share paid in fiscal 2005 to 7 cents per share . During fiscal 2005, the company split its stock two- for-one and paid a one-time special dividend of 62 1/2 cents per share, which totaled $11 .3 million . Capital expenditures 2006 % Sales 100.0 26.0 7.8 18.2 18.3 6.5 11.9 % Change +21.7 +23.2 +12.9 +33.8 +34.1 +31.5 +35.6 +36.1 – 1.9 For the years ended January 31 2005 % Sales 100 .0 25 .7 8 .4 16 .6 16 .6 6 .0 10 .6 % Change +17 .8 +28 .0 +17 .5 +28 .8 +28 .7 +27 .7 +29 .3 +29 .3 – 0 .8 $168,086 43,200 14,056 1,282 27,862 27,955 10,064 $ 17,891 $ 0 .97 36 .0% 2004 % Sales 100 .0 23 .7 8 .4 15 .2 15 .2 5 .5 9 .7 % Change +18 .1 +22 .7 +12 .5 +26 .7 +25 .9 +29 .8 +23 .7 +25 .0 + 3 .1 $142,727 33,759 11,960 173 21,626 21,716 7,880 $ 13,836 $ 0 .75 36 .3% totaled $10 .4 million for fiscal 2006 and were made primarily in the company’s Engineered Films segment for additional manufacturing capacity and facilities . Fiscal 2005 capital spending totaled $7 .5 million and included increased spending for additional capacity in the Engineered Films segment . The company has planned for continued investment in the expansion of Engineered Films manufacturing capacity to exceed $13 million in fiscal 2007 . The company also completed the strategic acquisition of Montgomery Industries, Inc . in its Flow Controls segment at the beginning of fiscal 2006 . Management expects another year of record sales and profits in fiscal 2007 . The additional Engineered Films manufacturing capacity will enable the segment to satisfy customer demand in the upcoming year . New product introductions and continued demand for the company’s precision agriculture products in the Flow Controls segment are expected to aid in the company’s fiscal 2007 sales and profit growth . The following discussion highlights the consolidated operating results . Operating results are more fully explained in the segment discussions that follow . Page 19 RAVEN 2006 Annual Report Fiscal 2005 versus fiscal 2004 Fiscal 2005 net sales reached $168 .1 million, 17 .8% higher than fiscal 2004, with all segments recording increases over their fiscal 2004 revenue levels . Operating income of $27 .9 million was $6 .2 million over the $21 .6 million reported for fiscal 2004 . Profit gains were a result of significant sales increases in the company’s higher-margin product lines, including Flow Controls’ precision ag products and Engineered Films’ plastic sheeting . In fiscal 2005, a strong agricultural economy and new product introductions resulted in a net sales increase of $5 .7 million, or 16 .2% for the Flow Controls’ segment, with revenue reaching $40 .7 million . Flow Controls’ operating income rose 27 .4% to $10 .5 million . Engineered Films posted the largest revenue gain, increasing net sales by 37 .6%, or $16 .0 million . This segment also recorded the largest operating income gain of $5 .2 million, a 49 .0% increase over fiscal 2004 results . Electronic Systems’ net sales of $47 .0 million were $2 .7 million higher than fiscal 2004, although the increase in revenue did not result in positive profit growth . Electronic Systems’ operating income decreased $1 .3 million from the prior year due to unfavorable product mix and start-up issues with a new customer contract . Aerostar recorded a modest net sales increase over fiscal 2004 of 4 .5%, while operating income of $3 .6 million rose 16 .7% . Fiscal 2004 results included an operating loss of $355,000 for ongoing environmental and legal liabilities associated with previously sold businesses . FISCAL 2006 PERFORMANCE MEASURES The company has set ambitious goals for achieving higher growth, better returns on invested capital, and increased shareholder value . The company’s net income as a percent of net sales has steadily risen over the last several years . Net income was 11 .9% of sales in fiscal 2006, which exceeded fiscal 2005’s record of 10 .6% . Net income as a percent of average assets was 24 .9% as compared to 21 .3% in fiscal 2005 . As a percent of beginning equity, fiscal 2006 net income was 36 .7%, up almost 10 percentage points from fiscal 2005 . 2002 2006 2004 2005 2003 2001 Net income as % of Net sales . . . . . . . . . . . . Average assets . . . . . . . . Beginning equity . . . . . 11.9% 24.9% 36.7% 10 .6% 21 .3% 26 .9% 9 .7% 18 .2% 23 .8% 9 .3% 15 .9% 21 .5% 7 .5% 13 .3% 18 .4% 4 .8% 9 .2% 11 .8% Fiscal 2006 versus fiscal 2005 Net sales for the fiscal year ended January 31, 2006, surpassed the $200 million mark, exceeding fiscal 2005 by $36 .4 million, or 21 .7% . The record fiscal 2006 sales performance followed a strong fiscal 2005, which recorded a 17 .8% increase over fiscal 2004 . The Flow Controls, Engineered Films, and Electronic Systems segments reported increased revenues over one year earlier, with the Engineered Films segment posting the largest sales gain of $24 .1 million, or 41 .1% to reach $82 .8 million . Fiscal 2006 revenue levels topped the prior year in all of Engineered Films’ markets, reflecting the segment’s additional manufacturing capacity, high demand for oil and pond liners, and higher selling prices due to increased resin costs . Flow Controls’ net sales reached $47 .5 million, a 16 .6% increase over last year . Increased demand for the segment’s standard sprayer control systems and sales of automatic boom height control systems (“Autoboom™”), which was acquired during the year as part of the Montgomery Industries, Inc . acquisition, boosted revenue levels for the fiscal year . Electronic Systems reported a 19 .5% increase in annual sales due to increased demand from its existing customer base . Aerostar’s net sales of $18 .0 million fell short of last year’s twelve-month period by $3 .6 million due primarily to an expected cargo parachute revenue decrease and lower uniform contract sales . For the year ended January 31, 2006, operating income rose to $37 .3 million, a 33 .8% increase over one year earlier . Higher sales levels in the company’s Flow Controls and Engineered Films segments drove the profit growth, with the Electronic Systems segment contributing to the increase in company profits through higher sales and increased manufacturing efficiencies on existing customer contracts . Flow Controls’ operating income of $13 .6 million was $3 .1 million, or 29 .2% higher than the previous fiscal year . Fiscal 2006 operating income of $19 .9 million reported in the Engineered Films segment rose $4 .2 million, while Electronic Systems’ operating income of $8 .9 million almost doubled that of the previous year . Aerostar operating income of $2 .1 million fell short of the prior year by $1 .5 million, or 40 .9%, and reflects the segment’s lack of a follow-on military parachute order in fiscal 2006 . Page 20 RAVEN 2006 Annual Report SEGMENT ANALYSIS SALES AND OPERATING INCOME BY SEGMENT 2004 2006 2005 Dollars in thousands amount % change % change amount amount % change SALES Flow Controls . . . . . . . $ 47,506 +16.6 82,794 +41.1 Engineered Films . . . . 56,219 +19.5 Electronic Systems . . . –16.8 Aerostar . . . . . . . . . . . 18,009 Total . . . . . . . . . . . . . . $204,528 +21.7 $ 40,726 +16 .2 58,657 +37 .6 +6 .2 47,049 +4 .5 21,654 $168,086 +17 .8 $ 35,059 +23 .0 42,636 +21 .5 44,307 +14 .8 20,725 +19 .1 $142,727 +18 .1 2006 2005 2004 Dollars in thousands amount OPERATING INCOME (LOSS) Flow Controls . . . . . . . $ 13,586 Engineered Films . . . . 19,907 Electronic Systems . . . 8,916 Aerostar . . . . . . . . . . . 2,133 (79) Sold businesses . . . . . . Corporate expenses . . (7,179) Total . . . . . . . . . . . . . . $ 37,284 % sales 28.6 24.0 15.9 11.8 18.2 amount % sales amount $ 10,516 15,739 4,492 3,609 — (6,494) $ 27,862 25 .8 26 .8 9 .5 16 .7 16 .6 $ 8,254 10,563 5,797 3,092 (355) (5,725) $ 21,626 % sales 23 .5 24 .8 13 .1 14 .9 15 .2 FLOW CONTROLS The Flow Controls Division (FCD), including Raven Canada, provides electronic and Global Positioning System (GPS) products for the precision agriculture, marine navigation and other niche markets . Fiscal 2006 versus fiscal 2005 Net sales in fiscal 2006 were $47 .5 million, up 16 .6%, or $6 .8 million over fiscal 2005 levels . The segment’s standard sprayer control systems and the acquired Autoboom™ product line accounted for the majority of the sales growth on a fiscal year-to-date basis . Sprayer control system sales were up from one year earlier due to increased original equipment manufacturer orders, while acceptance of the Autoboom™ product line also generated revenue growth . As a percentage of net sales, gross profit margins improved slightly to 37 .0% from the 36 .7% reported for the prior year’s comparable period due to the impact of the increased sales level on fixed costs . Fiscal 2006 fourth-quarter sales, hampered by a weakening agricultural economy, increased only 3 .6% to $10 .2 million while operating income rose 36 .0% to $2 .7 million . The higher operating income level was a result of reduced spending levels and lower warranty expense in the current year’s fourth quarter . Fiscal 2006 operating 48 Net Sales (dollars in millions) FLOW CONTROLS Operating Income (dollars in millions) income of $13 .6 million increased $3 .1 million, or 29 .2% as compared to the year ended January 31, 2005 . Included in the prior year’s operating income is a $1 .3 million pretax write-off of assets related to the segment’s fiscal 2004 Fluent Systems acquisition . Excluding the write-off, fiscal 2006 operating income increased $1 .8 million, or 15 .2% . The fiscal 2006 operating income increase over fiscal 2005, excluding the Fluent write-off, reflects the segment’s higher sales level, tempered by increases in product development and distribution investments . Fiscal 2006 selling expenses were $3 .9 million, a $784,000, or 25 .1%, increase over fiscal 2005 . Higher selling expenses related to the segment’s precision agriculture distribution plan and expenses incurred to leverage the segment’s product offerings in Canada contributed to the fiscal 2006 selling expense increase . 2004 2005 2006 2004 2005 2006 12 24 36 12 16 0 0 8 4 Fiscal 2005 versus fiscal 2004 Fiscal 2005 net sales reached $40 .7 million, an increase of 16 .2% over fiscal 2004 despite the decrease of $6 .0 million in sales recorded one year earlier under a special order for chemical injection systems . An improved farm economy, new product sales, and an increase in market share contributed to the fiscal 2005 revenue growth . Increased sales volume and value-engineering activities were the main contributors to a gross profit margin increase from 30 .4% of net sales in fiscal 2004 to 36 .7% in fiscal 2005 . Fiscal 2005 operating income of $10 .5 million grew 27 .4% due to the higher sales level, high-margin product sales, and value-engineering activities . The operating income growth was tempered by a $1 .3 million write-off of Fluent Systems assets, which were acquired in December 2003 . Fiscal 2005 selling expenses rose $729,000, or 30 .4%, due to increased investment in the segment’s precision agriculture distribution plan . Page 21 RAVEN 2006 Annual Report estimated to be 12 – 16%. Fiscal 2006 fourth-quarter sales as compared to the prior year’s fourth quarter increased 45.5%, resulting in additional operating income of $1.6 million. As with the fiscal year, the pit lining segment posted the largest sales increase for the quarter and disaster film sales were up $1.2 million. Fiscal 2006 operating income climbed to $19.9 million, increasing 26.5% over the prior year. The positive profit impact of the higher sales level was partially offset by higher resin costs, as reflected in the current fiscal year’s gross profit as a percent of sales, which fell from 31.4% in fiscal 2005 to 27.6% for fiscal 2006. Selling expenses rose 10.5% during fiscal 2006, reaching $2.9 million mainly due to increased personnel costs to support the segment’s higher sales level. Fiscal 2005 versus fiscal 2004 The segment’s net sales exceeded fiscal 2004 net sales by $16.0 million, or 37.6%, to reach $58.7 million. Disaster film sales of $9.4 million boosted the sales level for fiscal 2005 together with net sales gains in the pit lining, manufactured housing, and agricultural markets. Fiscal 2005 operating income climbed to $15.7 million, a $5.2 million, or 49.0%, increase over fiscal 2004 results. Increased selling expenses, which rose $461,000, or 21.3%, due to higher personnel and advertising expenses partially offset the profit impact of the segment’s higher sales level. Gross profit as a percentage of net sales increased from 30.0% to 31.4%. The fiscal 2005 gross profit rate reflects favorable plant utilization due to the higher sales level that was partially offset by higher raw material costs. Prospects Management expects that continued capital investment in the upcoming year will enable EFD to sustain its revenue growth above 15%, with additional manufacturing capacity for its current products as well as the ability to develop and produce new products. Volatility in resin prices could impact product selling prices as well as gross profit rates in fiscal 2007. A drop in disaster film sales could negatively impact the segment. Prospects FCD continues to focus on gaining market share, domestically and internationally, in the precision agriculture market. New product offerings, together with reaching international markets in Europe, South America, and Australia, is expected to help offset weakness in the North American agricultural market. These efforts are also expected to increase selling expense in fiscal 2007. The company expects revenue growth in the upcoming fiscal year to be under 10%. ENGINEERED FILMS The Engineered Films Division (EFD) produces rugged reinforced plastic sheeting for industrial, construction, manufactured housing and agriculture applications. 80 Net Sales (dollars in millions) ENGINEERED FILMS Operating Income (dollars in millions) Fiscal 2006 versus fiscal 2005 A strong sales performance in fiscal 2006 resulted in revenues rising to $82.8 million, an increase of 41.1% over fiscal 2005. All of EFD’s market segments achieved higher sales levels in fiscal 2006, with the pit and pond lining segment posting the largest revenue growth of $7.9 million, or 60.1%. Increased oil drilling activity due to high oil prices throughout the year boosted sales volume for this particular market category. Engineered Films also reported significant sales growth in its agricultural, industrial and construction markets. Fiscal 2006 disaster film sales of $11.4 million were $2.0 million, or 21.6%, higher than fiscal 2005. EFD’s additional manufacturing capacity that was brought online during the latter part of fiscal 2005 and the beginning of fiscal 2006 2004 2005 2006 2004 2005 2006 15 10 20 40 60 20 0 5 0 enabled the division to fulfill increased customer demand. Increased product pricing resulting from higher raw material prices also positively impacted the overall sales level for fiscal 2006. The increase in the segment’s fiscal 2006 sales resulting from higher product pricing due to increased resin costs is Page 22 RAVEN 2006 Annual Report ELECTRONIC SYSTEMS The Electronic Systems Division (ESD) is a total-solutions provider of electronics manufacturing services, primarily to North American original equipment manufacturers. Fiscal 2006 versus fiscal 2005 ESD ended fiscal 2006 with sales of $56.2 million, up from fiscal 2005 by $9.2 million, or 19.5%. The fiscal 2006 sales growth was due to increased deliveries to long-term customers on existing contracts. This segment sought to improve gross ELECTRONIC SYSTEMS Net Sales (dollars in millions) Operating Income (dollars in millions) 60 40 20 0 9 6 3 0 2004 2005 2006 2004 2005 2006 profit rates by increasing manufacturing efficiencies in fiscal 2006 and successfully attained that goal. Fiscal 2006 operating income of $8.9 million almost doubled that of the prior year, reflecting the increased sales level and better operational execution on current contracts, which contrasts to fiscal 2005’s start- up inefficiencies and customer-driven delays. As a percentage of sales, the gross profit rate climbed to 17.4% as compared to fiscal 2005’s gross profit rate of 11.3%. Fiscal 2006 selling expenses of $885,000 were up 7.5% compared to fiscal 2005. Fiscal 2005 versus fiscal 2004 Electronic Systems increased sales 6.2%, or $2.7 million over fiscal 2004 to reach $47.0 million. Operating income fell behind fiscal 2004 results, decreasing by $1.3 million. Fiscal 2005 net sales were positively impacted by shipments made to a new customer, although low profit margins due to high start-up costs did not result in a corresponding increase in operating income. Higher personnel costs in fiscal 2005 accounted for selling expenses increasing 6.9% to $823,000. As a percentage of sales, gross profits declined to 11.3% as compared to 14.8% for fiscal 2004, reflecting the segment’s start-up costs related to new contracts. Prospects ESD is expected to build on its revenue growth achieved in fiscal 2006 with increases coming from existing accounts and the addition of one or two new customers. Fiscal 2007 sales growth for this segment is targeted to reach the 15-20% range. ESD will continue to strive for operational excellence in all of its manufacturing areas in order to maintain its level of fiscal 2006 profitability; however, a higher percentage of new business is expected to reduce gross profits as a percent of sales. AEROSTAR The Aerostar segment manufactures military cargo parachutes, government service uniforms, custom-shaped inflatable products, and high-altitude balloons for government and commercial research. 4 18 24 AEROSTAR Net Sales (dollars in millions) Operating Income (dollars in millions) Fiscal 2006 versus fiscal 2005 Fiscal 2006 net sales dropped to $18.0 million from the fiscal 2005 sales level of $21.7 million, with the majority of the decrease due to lower military parachute shipments. New government contracts for parachute products were not obtained in fiscal 2006 and Aerostar faced lower sales levels and under-utilization of plant capacity. Partially offsetting the decline in parachute sales and lower contract uniform deliveries was an increase in high-altitude research balloon revenue. For the full year, operating income of $2.1 million was $1.5 million behind the prior fiscal year. An increase in high-altitude research balloon profits due to the higher sales level was offset by lower parachute product and uniform contract profits. As a percentage of sales, gross profits decreased from 21.1% for fiscal 2005 to 16.9% for the current fiscal year. Selling expenses of $910,000 were down slightly in fiscal 2006, decreasing $40,000 from the prior year. 2004 2005 2006 2004 2005 2006 12 6 0 3 1 0 2 Page 23 RAVEN 2006 Annual Report EXPENSES, INCOME TAXES AND OTHER Corporate expenses increased 10 .5% over fiscal 2005 reaching $7 .2 million for fiscal 2006 . Higher personnel costs, increased investment in information technologies, and a higher level of corporate giving accounted for the $685,000 fiscal 2006 increase . As a percentage of sales, corporate expenses were 3 .5% of net sales for fiscal 2006 as compared to fiscal 2005’s 3 .9% of net sales . Fiscal 2005 corporate expenses of $6 .5 million increased 13 .4% over fiscal 2004 . Higher professional service fees and increased personnel costs contributed to the $769,000 increase . 15 18 NET OPERATING MARGIN (percent) Fiscal 2006 interest expense of $35,000 was even with fiscal 2005 and consisted of interest on short-term borrowings and capital leases . Seasonal short-term borrowings of $4 .5 million were required during the first quarter of fiscal 2006, but were repaid by April 30, 2005 . No borrowings were made in fiscal 2005 . Fiscal 2006 other income of $245,000 increased from $128,000 in fiscal 2005 . The main component of other income is interest income, which increased in fiscal 2006 due to higher interest rates received on the company’s cash balances and short-term investments . Fiscal 2006’s effective income tax rate of 35 .3% decreased from fiscal 2005’s effective rate of 36 .0% and was one percentage point lower than the fiscal 2004 rate of 36 .3%, reflecting the impact of the U .S . Federal tax deduction for income attributable to manufacturing activities . 2006 2004 2005 2001 2002 2003 12 6 0 3 9 Fiscal 2005 versus fiscal 2004 Fiscal 2005 net sales of $21 .7 million increased $929,000, or 4 .5%, above fiscal 2004 net sales due to sales growth in parachute products, military decoys, and uniforms . Partially offsetting these increases were declines in the segment’s sales of hot-air balloons, commercial inflatable products, and high-altitude research balloons . Fourth-quarter sales of $4 .0 million were down 16 .0% from the prior year . The lower fourth-quarter sales reflect a reduced shipping schedule for Army cargo parachutes and resulted in a $97,000 fourth- quarter operating loss . Fiscal 2005 operating income was up $517,000, or 16 .7%, from fiscal 2004 results due to relatively high profitability realized on the parachute products and military decoys . Gross profit as a percentage of sales increased from 18 .1% for fiscal 2004 to 21 .1% for fiscal 2005 . Selling expenses rose to $950,000 in fiscal 2005, an increase of $117,000, or 14 .0% . Most of the selling expense increase was due to an increased emphasis on attaining government contract business . Prospects Fiscal 2007 revenue growth will depend on obtaining new government and uniform contracts where Aerostar can leverage its capacity and experience . If a new military parachute order is obtained, Aerostar would not expect any material impact on sales and profits until the second half of fiscal 2007 . Aerostar results are expected to be down through the first half of the year . DIVESTITURES AND OTHER REPOSITIONING ACTIVITIES Fiscal 2004 divestiture activities included the sale of a sewing plant closed in fiscal 2003 . The sale of that plant and its related equipment resulted in cash proceeds of $196,000 and a pretax gain of $182,000 . This gain was offset by a $355,000 loss from increased liabilities for environmental and legal issues related to previously sold businesses, as estimated by the company and its advisors . During fiscal 2006, a $79,000 pretax loss was incurred from increased liabilities for these environmental issues . Page 24 RAVEN 2006 Annual Report LIQUIDITY AND CAPITAL RESOURCES The following table summarizes cash provided by (used in) the company’s business activities for the past three fiscal years: Dollars in thousands 2004 2006 2005 Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . $21,189 (11,435) (6,946) $18,871 (7,631) (19,063) $19,732 (4,352) (6,155) OPERATING ACTIVITIES AND CASH POSITION The company’s cash flow from operations totaled $59 .8 million over the past three years compared to net income of $56 .0 million over the same period . Net cash provided by operating activities in fiscal 2006 totaled $21 .2 million, a $2 .3 million increase as compared to operating cash inflows in fiscal 2005 . The cash impact of the company’s strong earnings performance and higher accrued liabilities at fiscal 2006 year-end were tempered by higher accounts receivable and inventory levels and a lower accounts payable balance . Fiscal 2006 net income was $6 .4 million higher than fiscal 2005 while accrued operating liability balances increased by $3 .0 million . Fiscal 2006’s ending accounts receivable balance was $29 .3 million, an operating increase of $3 .8 million from fiscal 2005 . Accounts receivable balances for the company’s Engineered Films, Flow Controls, and Electronic Systems segments were higher at fiscal 2006 year-end as compared to their fiscal 2005 year-ending balances due to higher sales levels . The fiscal 2006 ending inventory balance of $27 .8 million exceeded fiscal 2005 by $4 .5 million . In support of higher delivery levels, January 31, 2006 inventory balances in Engineered Films, Electronic Systems, and Flow Controls were up as compared to one year earlier, with Engineered Films accounting for over half of the increase . Fiscal 2005 operating cash flows were $18 .9 million as compared to cash flows of $19 .7 million for fiscal 2004 . Fiscal 2005 net income was $4 .1 million higher than fiscal 2004 while accounts payable increased by $6 .6 million due to higher inventory levels and to the extension of payment terms on certain vendor invoices . Cash, cash equivalents and short-term investments totaled $11 .4 million at January 31, 2006, an increase of $1 .8 million from one year earlier . The higher company earnings helped finance the fiscal 2006 increase in working capital requirements, additional capital expenditures, and the Flow Controls’ Canadian acquisition in February 2005 . The company expects that cash and short-term investments, combined with continued positive operating cash flows, will continue to be sufficient to fund day-to-day operations . The company utilized its short-term credit facility to fund the Flow Controls’ Canadian acquisition in February 2005 and to help with short-term seasonal cash needs during the first quarter of fiscal 2006 . All of these short-term borrowings were repaid by April 30, 2005 . 15 20 CASH FLOWS FROM OPERATIONS (dollars in millions) INVESTING ACTIVITIES Net cash used in investing activities in fiscal 2006 totaled $11 .4 million versus $7 .6 million in fiscal 2005 . Fiscal 2006 capital expenditures of $10 .4 million increased by $2 .8 million from fiscal 2005, with $7 .4 million being invested in the Engineered Films segment for additional manufacturing capacity and facilities . In February 2005, the company acquired substantially all of the assets of Montgomery Industries, Inc . for $2 .7 million in cash . A quarterly payment of six percent of Montgomery product sales was contained in the asset purchase agreement of which $149,000 was paid in fiscal 2006 . A $650,000 investment in an unconsolidated real estate affiliate was sold in fiscal 2006, resulting in no material gain or loss on the sale and $1 .0 million of short-term investments were liquidated . The company used $7 .6 million of cash for investing activities in fiscal 2005 versus $4 .4 million one year earlier . Fiscal 2005 investing activities included $7 .5 million of capital expenditures, $1 .0 million of short-term investment sales, and the $650,000 real estate investment . The company plans to continue its capital investment in additional Engineered Films capacity, with fiscal 2007 capital expenditures expected to reach $13 million for this segment . Total company capital expenditures are planned to be over $17 million in fiscal 2007 . 2006 2002 2005 2003 2004 2001 10 0 5 Page 25 RAVEN 2006 Annual Report FINANCING ACTIVITIES Net cash used in financing activities in fiscal 2006 of $6 .9 million decreased $12 .1 million from the $19 .1 million used in fiscal 2005 . The decrease in cash used was due primarily to the $11 .3 million special dividend paid in fiscal 2005 and lower treasury stock purchases in fiscal 2006 as compared to fiscal 2005 . The company’s main financing activities continue to be the payment of dividends and the repurchase of company stock . The company increased its quarterly dividend on a per-share basis for the nineteenth consecutive year . Fiscal 2006 quarterly dividend payments of 7 cents per share increased 27 .3%, excluding the special 62 1/2 cent dividend paid in fiscal 2005 . Purchases of 67,800 treasury shares were made during fiscal 2006 at an average share price of $24 .91 . In fiscal 2005, 186,500 treasury shares were purchased at an average price of $18 .87, while 288,350 shares were repurchased at an average price of $10 .64 during fiscal 2004 . Short-term borrowings on the company’s line of credit facility totaled $4 .5 million for fiscal 2006 . These borrowings were used for seasonal cash needs and to fund the Montgomery Industries, Inc . acquisition . The borrowings were repaid by April 30, 2005, and there were no borrowings outstanding as of January 31, 2006 . The debt of the company consists of a capital lease utilized by the Raven Canada operation and is scheduled to be repaid by fiscal 2008 . Contractual obligations consist of capital leases and non- cancelable operating leases for facilities and equipment, and unconditional purchase obligations primarily for raw materials . Letters of credit have been issued for workers’ compensation insurance obligations that remain from the period of self-insurance (February 1, 2001, and prior) . In the event the bank chooses not to renew the company’s line of credit, the letters of credit would cease and alternative methods of support for the insurance obligations would be necessary that would be more expensive and require additional cash outlays . The company believes the chances of such an event are remote . In fiscal 2005, the company entered into an agreement to purchase for $1 .8 million a building to be used in the Engineered Films segment . The agreement required an earnest payment of $25,000 at signing with the remainder due upon closing . On February 1, 2006, the company purchased the building for $1 .8 million . A summary of the obligations and commitments at January 31, 2006, and for the next five years is shown below . Dollars in thousands Contractual Obligations: Line of credit(a) . . . . . . . . . . . . . . . . . . . . . Capital leases . . . . . . . . . . . . . . . . . . . . . . Operating leases . . . . . . . . . . . . . . . . . . . . Unconditional purchase obligations(b) . . Real estate purchase agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Commercial Commitments: Letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total FY 2007 FY 2008- FY 2009 FY 2010- FY 2011 $ — 16 557 29,293 1,756 31,622 $ — 7 272 29,293 1,756 31,328 2,032 $33,654 2,032 $33,360 $ — 9 279 — — 288 — $288 $ — — 6 — — 6 — $ 6 (a) $8.0 million line bears interest at 7.25% as of January 31, 2006, and expires June 2006. The line of credit is reduced by outstanding letters of credit. (b) Unconditional purchase obligations include $5.2 million for Engineered Films capital equipment investments. CAPITAL REQUIREMENTS The company maintains an excellent financial condition and capacity for growth . Management continues to look for opportunities to expand its core businesses through acquisitions or internal growth . The company has the capacity to assume additional financing and will do so if the appropriate strategic opportunity presents itself . Capital expenditures for fiscal 2007 are planned to be over $17 million, with $13 million of these expenditures supporting Engineered Films with extrusion equipment and facilities capacity . The company intends to return approximately 30% of its earnings to shareholders in the form of dividends . Stock repurchases are anticipated to continue, although at a somewhat reduced level, as a means to return additional cash to shareholders and increase the leverage of the company’s balance sheet . Cash generated from operations and the availability of cash under existing credit facilities is anticipated to be sufficient to fund these initiatives . Page 26 RAVEN 2006 Annual Report CRITICAL ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS CRITICAL ACCOUNTING POLICIES Critical accounting policies for the company are those policies that require the application of judgment when valuing assets and liabilities on the company’s balance sheet . These policies are discussed below because a fluctuation in actual results versus expected results could materially affect the company’s operating results and because the policies require significant judgments and estimates to be made . Accounting related to these policies is initially based on best estimates at the time of original entry in the accounting records . Adjustments are periodically recorded when our actual experience differs from the expected experience underlying the estimates . These adjustments could be material if experience were to change significantly in a short period of time . The company, other than utilizing operating leases, does not enter into off-balance sheet financing or derivatives . Inventories The company’s most significant accounting judgment is determining inventory value at the lower of cost or market . The company estimates inventory reserves on a quarterly basis . Typically, when a product reaches the end of its life cycle, inventory value declines slowly or the product has alternative uses . Management uses its manufacturing resources planning data to help determine if inventory is slow-moving or has become obsolete due to an engineering change . The company closely reviews items that have balances in excess of the prior year’s requirements or that have been dropped from production requirements . Despite these reviews, technological or strategic decisions, made by management or the company’s customers, may result in unexpected excess material . In the Electronic Systems Division, the company typically has recourse to customers for obsolete or excess material . When ESD customers authorize inventory purchases, especially of long lead-time items, they are required to take delivery of unused material or compensate the company accordingly . In every operating unit of the company, management must manage obsolete inventory risk . The accounting judgment ultimately made is an evaluation of the success that management will have in controlling inventory risk and mitigating the impact of obsolescence when it does occur . Warranty Estimated warranty liability costs are based upon historical warranty costs and average time elapsed between purchases and returns for each business segment . Warranty issues that are unusual in nature are accrued for individually . Allowance for Doubtful Accounts Determining the level of the allowance for doubtful accounts requires management’s best estimate of the amount of probable credit losses based on historical write-off experience by segment and an estimate of the collectibility of any known problem accounts . Factors which are considered beyond historical experience include the length of time the receivables are outstanding, the current business climate, and the customer’s current financial condition . RETURN ON AVERAGE ASSETS (percent) 24 16 0 8 Revenue Recognition The company recognizes and records revenue when there is persuasive evidence of an arrangement, delivery has occurred, the sales price is determinable, and collectibility is reasonably assured . Revenue is typically recognized at time of shipment because sales terms are FOB shipping point . Estimated returns, allowances or warranty charges are recognized upon shipment of a product . The company sells directly to customers or distributors who incur the expense and commitment for any post-sale obligations beyond stated warranty terms . 2006 2005 2002 2004 2003 2001 Page 27 RAVEN 2006 Annual Report Self-insurance Reserves The company purchases insurance with deductibles for product liability; general insurance, including aviation product liability; and workers’ compensation . Third party insurance is carried for what is believed to be the major portion of potential exposure . The company has established accruals for potential uninsured claims, including estimated costs and legal fees . Management considers these accruals adequate, although a substantial change in the number and/or severity of claims would result in materially different amounts . Goodwill and Long-lived Asset Impairment The company periodically assesses goodwill and other long- lived assets for impairment, or more frequently if events or changes in circumstances indicate that an asset might be impaired, using fair value measurement techniques . For goodwill, the company performs impairment reviews annually by reporting units, which are the company’s reportable segments except for Aerostar’s high-altitude research balloon operation, which is evaluated independently from Aerostar’s other operations . Estimates of fair value are primarily determined using discounted cash flows, market comparisons and recent transactions . These valuation methodologies use significant estimates and assumptions, which include NEW ACCOUNTING STANDARDS In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No . 123 (Revised 2004), Share-Based Payment, or SFAS No . 123(R), which is a revision of SFAS No . 123 . SFAS No . 123(R) supersedes APB Opinion No . 25, Accounting for Stock Issued to Employees, and amends SFAS No . 95, Statement of Cash Flows. SFAS No . 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values . SFAS No . 123(R) is effective for the company beginning February 1, 2006 . The company began expensing stock options in fiscal 2003 utilizing the modified prospective method and does not expect adoption of this revised statement will have a significant effect on consolidated results of operations or financial position . Beginning February 1, 2006, the company will change its cash flow presentation in accordance with SFAS 123(R) which requires the cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows, instead of operating cash flows . The company expects to provide certain disclosures required by SFAS 123(R) but are not required by SFAS 123, beginning in the first quarter of fiscal 2007 . projected future cash flows, including timing and the risks inherent in future cash flows, perpetual growth rates and determination of appropriate market comparables . BOOK VALUE PER SHARE (dollars) 5 4 3 2 1 0 2001 2002 2003 2004 2005 2006 Page 28 RAVEN 2006 Annual Report In May 2005, the FASB issued FASB Statement No . 154, Accounting Changes and Error Corrections. This new standard replaces APB Opinion No . 20, Accounting Changes, and FASB Statement No . 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so . The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005 . The adoption of this statement is not expected to have an effect on the company’s consolidated results of operations or financial position . In June 2005, the FASB Emerging Issues Task Force (EITF) reached a final consensus on EITF 05-6, Determining the Amortization Period for Leasehold Improvements. EITF 05-6 addresses the determination of the amortization period for leasehold improvements in operating leases that are either (a) purchased subsequent to the inception of the lease or (b) acquired in a business combination . The provisions of EITF 05-6 are effective for periods beginning after June 30, 2005, and are not expected to have an effect on the company’s consolidated results of operations or financial position . Page 29 RAVEN 2006 Annual Report MONTHLY CLOSING STOCK PRICE AND VOLUME e c i r P e m u l o V QUARTERLY INFORMATION (UNAUDITED) Dollars in thousands, except per-share data FISCAL 2006 First Quarter . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . Total Year . . . . . . . . . . . . . . . . . FISCAL 2005 First Quarter . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . Total Year . . . . . . . . . . . . . . . . . . . FISCAL 2004 First Quarter . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . Total Year . . . . . . . . . . . . . . . . . . . Net Sales Gross Profit Operating Income Pretax Income Net Income Net Income Per Share(a)(b) Diluted Basic Common Stock Market Price(b) Low High Cash Dividends Per Share(b) $ 50,704 45,304 54,135 54,385 $204,528 $15,161 10,882 14,213 12,975 $53,231 $11,136 7,299 10,568 8,281 $37,284 $11,098 7,391 10,635 8,370 $37,494 $7,157 4,774 6,869 5,462 $24,262 $0.40 0.26 0.38 0.30 $1.34 $0.39 0.26 0.37 0.30 $1.32 $22.28 27.78 31.99 33.15 $33.15 $16.54 18.68 21.75 26.75 $16.54 $0.070 0.070 0.070 0.070 $0.280 $ 38,408 37,077 48,597 44,004 $ 168,086 $ 36,942 36,110 36,081 33,594 $ 142,727 $ 11,678 8,759 12,962 9,801 $ 43,200 $ 9,437 7,811 9,219 7,292 $ 33,759 $ 8,451 5,651 8,099(d) 5,661 $ 27,862 $ 8,475 5,677 8,115(d) 5,688 $ 27,955 $ 5,415 3,642 5,194(d) 3,640 $ 17,891 $ 0 .30 0 .20 0 .29 0 .20 $ 0 .99 $ 6,544 4,937 6,121 4,024 $ 21,626 $ 6,556 4,976 6,126 4,058 $ 21,716 $ 4,183 3,163 3,902 2,588 $ 13,836 $ 0 .23 0 .17 0 .22 0 .14 $ 0 .77 $ 0 .29 0 .20 0 .28 0 .20 $ 0 .97 $ 0 .23 0 .17 0 .21 0 .14 $ 0 .75 $ 17 .17 19 .43 23 .89 26 .94 $ 26 .94 $ 9 .50 11 .00 13 .73 15 .23 $ 15 .23 $ 13 .65 13 .08 17 .41 17 .05 $ 13 .08 $ 7 .56 7 .90 10 .62 11 .89 $ 7 .56 $ 0 .055 0 .680(c) 0 .055 0 .055 $ 0 .845 $ 0 .040 0 .040 0 .045 0 .045 $ 0 .170 (a) Net income per share is computed discretely by quarter and may not add to the full year. (b) All per-share and market price data reflect the October 2004 two-for-one stock split. (c) A special dividend of $.625 per share was paid during the second quarter of fiscal 2005. (d) Includes a pretax $1.3 million ($845,000 net of tax) writeoff of assets related to the Fluent Systems product line (See Note 5). Page 30 RAVEN 2006 Annual Report MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 . Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles . Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements . Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements . Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate . Management has assessed our internal control over financial reporting in relation to criteria described in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission . Based on this assessment using those criteria, we concluded that, as of January 31, 2006, our internal control over financial reporting was effective . Our management’s assessment of the effectiveness of our internal control over financial reporting as of January 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page 43 of this Annual Report . Ronald M . Moquist President & Chief Executive Officer March 23, 2006 Thomas Iacarella Vice President & Chief Financial Officer Page 31 RAVEN 2006 Annual Report CONSOLIDATED BALANCE SHEETS Dollars in thousands, except per-share data ASSETS Current assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,409 2,000 29,290 27,819 1,746 1,081 71,345 25,602 6,401 2,809 $106,157 $ 7 8,179 11,147 717 20,050 Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities, primarily compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1,709 Commitments and contingencies As of January 31 2006 2005 2004 $ 6,619 3,000 25,370 23,315 1,465 1,823 61,592 19,964 5,933 1,020 $88,509 $ 57 10,322 9,716 855 20,950 — 1,477 $14,442 4,000 18,454 16,763 1,313 738 55,710 15,950 6,776 1,072 $79,508 $ 72 3,666 7,784 373 11,895 57 1,085 Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common shares, par value $1 .00 per share 84,389 66,082 66,471 Authorized – 100,000,000 Outstanding – 2006: 18,072,369; 2005: 17,999,468 2004: 18,041,088 (9,020,544 pre-split) Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $106,157 $88,509 $79,508 The accompanying notes are an integral part of the consolidated financial statements. Page 32 RAVEN 2006 Annual Report CONSOLIDATED STATEMENTS OF INCOME Dollars in thousands, except per-share data Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 $204,528 151,297 2005 $168,086 124,886 2004 $142,727 108,968 For the years ended January 31 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,231 Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on disposition of businesses and assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,868 79 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,284 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (245) Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,494 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,232 43,200 14,056 1,282 27,862 35 (128) 27,955 10,064 33,759 11,960 173 21,626 70 (160) 21,716 7,880 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,262 $ 17,891 $ 13,836 Net income per common share – basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.34 $ 1.32 $ 0 .99 $ 0 .97 $ 0 .77 $ 0 .75 The accompanying notes are an integral part of the consolidated financial statements. Page 33 RAVEN 2006 Annual Report CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME Dollars in thousands, except per-share data Balance January 31, 2003 . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends ($ .170 per share)(a) . . . . . . . . . . Purchase of stock . . . . . . . . . . . . . . . . . . . . . . . . Purchase and retirement of stock . . . . . . . . . . . Employees’ stock options exercised . . . . . . . . . . Stock compensation expense . . . . . . . . . . . . . . . Tax benefit from exercise of stock options . . . . . Balance January 31, 2004 . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends ($ .220 per share) . . . . . . . . . . . Cash dividend – Special ($ .625 per share) . . . . Two-for-one stock split . . . . . . . . . . . . . . . . . . . . Purchase of stock . . . . . . . . . . . . . . . . . . . . . . . . Purchase and retirement of stock . . . . . . . . . . . Employees’ stock options exercised . . . . . . . . . . Stock compensation expense . . . . . . . . . . . . . . . Tax benefit from exercise of stock options . . . . . Balance January 31, 2005 . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in cumulative foreign currency translation adjustment . . . . . . . . . Cash dividends ($ .280 per share) . . . . . . . . . . . Purchase of stock . . . . . . . . . . . . . . . . . . . . . . . . Purchase and retirement of stock . . . . . . . . . . . Employees’ stock options exercised . . . . . . . . . . Stock compensation expense . . . . . . . . . . . . . . . Tax benefit from exercise of stock options . . . . . Balance January 31, 2006 . . . . . . . . . . . . . . . $1 Par Common Stock $ 15,856 Paid-in Capital $ 340 Accumulated Other Treasury stock Retained Comprehensive Shares Earnings Cost (6,789,268) $ (35,113) $ 77,153 Income $— Total $ 58,236 — — — (39) 137 — — 15,954 — — — 15,954 — (40) 185 — — 32,053 — — — (804) 435 282 531 784 — — — (411) — (646) 327 309 402 765 — — (144,175) — — — — (6,933,443) — — — (6,933,443) (186,500) — — — — (14,053,386) — — (3,068) — — — — (38,181) — — — — (3,519) — — — — (41,700) 13,836 (3,075) — — — — — 87,914 17,891 (3,971) (11,327) (15,543) — — — — — 74,964 — — — — 24,262 — — — (27) 168 — — — (5,056) — — — — — $32,194 $1,401 (14,121,186) $(43,389) $94,170 — — (67,800) — — — — — — (1,689) — — — — — — — (689) 410 485 430 — — — — — — — — — — — — — — — — — — — 13,836 (3,075) (3,068) (843) 572 282 531 66,471 17,891 (3,971) (11,327) — (3,519) (686) 512 309 402 66,082 24,262 13 — — — — — — $13 13 (5,056) (1,689) (716) 578 485 430 $84,389 (a) Reflects the October 2004 two-for-one stock split. The accompanying notes are an integral part of the consolidated financial statements. Page 34 RAVEN 2006 Annual Report CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended January 31 2005 2006 2004 $24,262 $17,891 $13,836 Dollars in thousands Cash flows from operating activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for losses on accounts receivable, net of recoveries . . . . . . . . . . . . . . . . . . . . Loss on disposition of businesses and assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in operating assets and liabilities, net of effects from acquisition and 4,684 467 78 79 (809) 485 disposition of businesses and assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operating activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,086) 29 21,189 Cash flows from investing activities Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sale of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of businesses and assets, net of cash sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sale of (investment in) unconsolidated affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities Proceeds from borrowing under line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment on borrowing under line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt principal payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other financing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,358) (4,500) 5,500 (2,828) — 650 101 (11,435) 4,500 (4,500) (63) (5,056) (1,689) (138) (6,946) 3,410 431 34 1,282 (31) 309 (4,669) 214 18,871 (7,541) (3,000) 4,000 (414) — (650) (26) (7,631) — — (72) (15,298) (3,519) (174) (19,063) 3,674 471 67 173 254 282 850 125 19,732 (3,330) (4,000) 4,000 (1,038) 257 — (241) (4,352) — — (141) (3,075) (3,068) 129 (6,155) Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18) — — Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,790 6,619 $ 9,409 (7,823) 14,442 $ 6,619 9,225 5,217 $14,442 The accompanying notes are an integral part of the consolidated financial statements. Page 35 RAVEN 2006 Annual Report NOTES TO FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Raven Industries, Inc . and its wholly owned subsidiaries (the “company”) . The company is an industrial manufacturer providing a variety of products to customers within the industrial, agricultural, construction and military/aerospace markets, primarily in North America . The company operates three divisions (Flow Controls, Engineered Films and Electronic Systems) in addition to two wholly owned subsidiaries, Aerostar International, Inc . (Aerostar) and Raven Industries Canada, Inc . (Raven Canada) . All significant intercompany balances and transactions have been eliminated in consolidation . The company sold its 50% ownership in Zip City Partners, LLC in fiscal 2006 . The equity method was used to account for this investment . USE OF ESTIMATES The preparation of the company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that 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 periods . Actual results could differ from these estimates . FOREIGN CURRENCY The Canadian dollar is considered the functional currency of the Canadian operations . The balance sheet of the Canadian subsidiary is translated into U .S . dollars at period-end exchange rates, while the statement of income is translated at average rates . 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) in the Consolidated Statements of Income . CASH AND CASH EQUIVALENTS The company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents . Cash and cash equivalent balances are principally concentrated in checking and savings accounts with Wells Fargo Bank . Page 36 RAVEN 2006 Annual Report SHORT-TERM INVESTMENTS The investments consist of certificates of deposit with varying maturities, all less than 12 months from the balance sheet date . Rates on the deposits at January 31, 2006, are 4 .10% . ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS Trade accounts receivable are recorded at the invoiced amount and do not bear interest . The allowance for doubtful accounts is the company’s best estimate of the amount of probable credit losses based on historical write-off experience by segment and an estimate of the collectibility of any known problem accounts . INVENTORY VALUATION Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out basis . Market value encompasses consideration of all business factors including price, contract terms and usefulness . PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and are depreciated over the estimated useful lives of the assets using accelerated methods . The estimated useful lives used for computing depreciation are as follows: Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 to 39 years 3 to 7 years Maintenance and repairs are charged to expense in the year incurred and renewals and betterments are capitalized . The cost and related accumulated depreciation of assets sold or disposed of are removed from the accounts and the resulting gain or loss is reflected in operations . INTANGIBLE ASSETS Intangible assets, primarily comprised of technologies acquired through acquisition, are recorded at cost and are presented net of accumulated amortization . Amortization is computed on a straight- line basis over estimated useful lives ranging from 3 to 20 years . The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in each reporting period . GOODWILL The company recognizes the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed, as goodwill . Goodwill is tested for impairment on an annual basis during the fourth quarter, and between annual tests whenever there is an impairment indicated . Fair values are estimated based on future cash flows and are compared with the corresponding carrying value of the related asset . LONG-LIVED ASSETS The company periodically assesses the recoverability of long-lived and intangible assets using fair value measurement techniques, where fair value is calculated based upon anticipated future earnings and undiscounted operating cash flows . If the fair value is less than the carrying amount of the asset, an impairment loss is recognized to the extent the carrying value exceeds the fair value of the asset . INSURANCE OBLIGATIONS The company employs insurance policies covering workers’ compensation and general liability costs . Liabilities are accrued related to claims filed and estimates for claims incurred but not reported . To the extent these obligations will be reimbursed by insurance, the expected reimbursement is included as a component of other current assets . CONTINGENCIES The company is involved as a defendant in lawsuits, claims or disputes arising in the normal course of business . An estimate of the loss on these matters is charged to operations when it is probable that an asset has been impaired or a liability has been incurred, and the amount of the loss can be reasonably estimated . The settlement of such claims cannot be determined at this time; however, management believes that any liability resulting from these claims will be substantially mitigated by insurance coverage . Accordingly, management does not believe that the ultimate outcome of these matters will be significant to its results of operations, financial position or cash flows . REVENUE RECOGNITION The company recognizes revenue and records revenues upon shipment of products . The company sells directly to customers or distributors who incur the expense and commitment for any post- sale obligations beyond stated warranty terms . Estimated returns, allowances or warranty charges are recognized upon shipment of a product . The company does not typically require collateral from its customers . Shipping and handling costs are classified as a component of cost of goods sold . WARRANTIES Accruals necessary for product warranties are estimated based upon historical warranty costs and average time elapsed between purchases and returns for each division . Additional accruals are made for any significant, discrete warranty issues . RESEARCH AND DEVELOPMENT Research and development expenditures of $2 .5 million in fiscal 2006, $2 .0 million in fiscal 2005, and $1 .7 million in fiscal 2004 were charged to cost of goods sold in the year incurred . Expenditures are principally composed of labor and material costs . STOCK-BASED COMPENSATION The company records compensation expense related to its stock- based compensation plan using the fair value method permitted by SFAS No . 123, Accounting for Stock-Based Compensation under the modified prospective method outlined by SFAS No . 148, Accounting for Stock-Based Compensation-Transition and Disclosure. INCOME TAXES Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities and reserves . Judgmental reserves are maintained for income tax audits and other tax issues . Deferred income taxes reflect temporary differences between assets and liabilities reported on the company’s balance sheet and their tax bases . These differences are measured using enacted tax laws and statutory tax rates applicable to the periods when the temporary differences will impact taxable income . Deferred tax assets are reduced by a valuation allowance to reflect realizable value, when necessary . Under the guidance in FASB Staff Position No . FSP 109-1, Application of FASB Statement No. 109, “Accounting for Income Taxes,” to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, the deduction is treated as a “special deduction .” As such, the special deduction has no effect on deferred tax assets and liabilities . Rather, the impact of this deduction is reported in the period in which the deduction is claimed on the company’s tax return . STOCK SPLITS The company completed a two-for-one stock split effected in the form of a 100% stock dividend on October 15, 2004 . All share and per-share information reflects the effect of this stock split . Page 37 RAVEN 2006 Annual Report NOTES TO FINANCIAL STATEMENTS (continued) Note 2. Selected Balance Sheet Information Following are the components of selected balance sheet items: As of January 31 2005 2004 2006 Dollars in thousands Accounts receivable, net: Trade accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,547 (257) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,290 Inventories, net: Allowance for doubtful accounts . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,504 In process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,652 20,663 Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,819 Property, plant and equipment, net: Building and improvements . . . . . . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . . . . . . . . Accumulated depreciation . . . . . . . . . . . . . . . . . . . Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,084 16,662 43,256 (35,400) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,602 Other assets, net: Amortizable assets: Purchased technology . . . . . . . . . . . . . . . . . . . . . . $ 3,380 1,265 Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . (2,300) Accumulated amortization . . . . . . . . . . . . . . . . . . 2,345 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Investment in unconsolidated affiliate . . . . . . . . . 318 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,809 Accrued liabilities: Salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . . $ 2,167 2,119 Vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,049 401(k) contributions . . . . . . . . . . . . . . . . . . . . . . . 1,632 Insurance obligations . . . . . . . . . . . . . . . . . . . . . . 808 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,168 Profit sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 569 Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,635 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,147 $25,635 (265) $25,370 $18,719 (265) $18,454 $ 3,538 2,820 16,957 $23,315 $ 2,500 2,120 12,143 $16,763 $ 1,084 15,184 36,486 (32,790) $19,964 $ 1,110 13,049 32,479 (30,688) $15,950 $ 1,080 946 (1,831) 195 650 — 175 $ 1,020 $ 1,992 1,852 980 1,541 567 900 452 1,432 $ 9,716 $ 1,250 1,136 (1,494) 892 — — 180 $ 1,072 $ 1,875 1,638 906 524 267 544 263 1,767 $ 7,784 NEW ACCOUNTING STANDARDS In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No . 123 (Revised 2004), Share-Based Payment, or SFAS No . 123(R), which is a revision of SFAS No . 123 . SFAS No . 123(R) supersedes APB Opinion No . 25, Accounting for Stock Issued to Employees, and amends SFAS No . 95, Statement of Cash Flows. SFAS No . 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values . SFAS No . 123(R) is effective for the company beginning February 1, 2006 . The company began expensing stock options in fiscal 2003 utilizing the modified prospective method and does not expect adoption of this revised statement will have a significant effect on consolidated results of operations or financial position . Beginning February 1, 2006, the company will change its cash flow presentation in accordance with SFAS 123(R) which requires the cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows, instead of operating cash flows . The company expects to provide certain disclosures required by SFAS 123(R) but are not required by SFAS 123, beginning in the first quarter of fiscal 2007 . In May 2005, the FASB issued FASB Statement No . 154, Accounting Changes and Error Corrections. This new standard replaces APB Opinion No . 20, Accounting Changes, and FASB Statement No . 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so . The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005 . The adoption of this statement is not expected to have an effect on the company’s consolidated results of operations or financial position . In June 2005, the FASB Emerging Issues Task Force (EITF) reached a final consensus on EITF 05-6, Determining the Amortization Period for Leasehold Improvements. EITF 05-6 addresses the determination of the amortization period for leasehold improvements in operating leases that are either (a) purchased subsequent to the inception of the lease or (b) acquired in a business combination . The provisions of EITF 05-6 are effective for periods beginning after June 30, 2005, and are not expected to have an effect on the company’s consolidated results of operations or financial position . Page 38 RAVEN 2006 Annual Report Note 3. Supplemental Cash Flow Information Dollars in thousands Changes in operating assets and liabilities, net of effects from the acquisition and sale of businesses: For the years ended January 31 2004 2005 2006 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . $(3,821) (4,356) Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (103) Prepaid expenses and other assets . . . . . . . . . . . (2,688) Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 3,021 Accrued and other liabilities . . . . . . . . . . . . . . . . (139) Customer advances . . . . . . . . . . . . . . . . . . . . . . . $(8,086) $(6,950) (6,704) 150 6,576 1,777 482 $(4,669) $(2,072) 4,603 (16) (1,625) 187 (227) 850 $ Cash paid during the year for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,806 $ 77 $ 9,596 $ 50 $ 7,014 Note 4. Montgomery Industries Acquisition On February 17, 2005, the company acquired substantially all of the assets of Montgomery Industries, Inc ., a privately held Canadian corporation, for $2 .7 million in cash plus the assumption of certain liabilities and a quarterly payment of six percent on future sales of Montgomery products up to a maximum payment of $1 .825 million . Montgomery has developed and sold an automatic boom height control system under the name “Autoboom™” for agricultural sprayers designed to successfully maintain optimum boom height in uneven terrain without compromising the speed with which the sprayer can be operated . Of the purchase price, $289,000 was allocated to current assets, $82,000 was allocated to property, plant and equipment, $2 .560 million was allocated to amortizable intangible assets (to be amortized over approximately seven years), $539,000 to current liabilities assumed and $285,000 to goodwill, which is deductible for tax purposes . For the year ended January 31, 2006, the earn-out on the sales of Montgomery products was $183,000, which was recorded as an increase in goodwill . The operation is a component of the Flow Controls segment . The results of operations for the acquired business have been included in the consolidated financial statements since the date of acquisition . Pro forma earnings are not presented due to the immateriality of the effect of the acquisition to the company’s consolidated operations . Note 5. Fluent Systems On December 19, 2003, the company acquired substantially all of the assets of Fluent Systems, LLC for $1 .0 million in cash and a payment deferred until December 2004, which was valued at $60,000 . This start-up company had developed a wireless liquid level monitoring system used with anhydrous ammonia tanks . Of the purchase price, $79,000 was assigned to equipment, $195,000 was assigned to intangible assets, $19,000 to current liabilities assumed and $848,000 to goodwill, which was fully deductible for tax purposes . The operation was assigned to the Flow Controls segment . Pro forma earnings are not presented due to the immateriality of the effect of the acquisition to the company’s consolidated operations . The results of operations were included in the consolidated financial statements from the date of acquisition . In the third quarter of fiscal 2005, Flow Controls decided to abandon the Fluent Systems product line resulting in a $1 .3 million pretax writeoff of inventory, equipment, intangible assets and goodwill . Note 6. Divestitures and Other Repositioning Activities A $79,000 pretax loss was incurred during fiscal 2006 from increased liabilities for environmental issues related to the company’s fiscal 2000 sale of its Glasstite subsidiary . Fiscal 2004 divestiture activities were limited to the sale by the company’s Aerostar subsidiary of a sewing plant closed in fiscal 2003 . The sale of that plant and its related equipment resulted in cash proceeds of $196,000 and a pretax gain of $182,000 . This gain was offset by a $355,000 loss from increased estimated liabilities for environmental and legal issues related to previously sold operations . At January 31, 2006, the company had an undiscounted accrual remaining of $151,000 for environmental monitoring and clean-up costs of sold operations . Note 7. Goodwill and Other Intangibles Goodwill The changes in the carrying amount of goodwill by reporting segment are shown below: Dollars in thousands Balance at January 31, 2003 . . . . . . . Goodwill acquired during year . . Balance at January 31, 2004 . . . . . . . Adjustment . . . . . . . . . . . . . . . . . . Writeoff of Fluent Systems . . . . . . Balance at January 31, 2005 . . . . . . . Goodwill acquired during year . . Acquisition earn-outs . . . . . . . . . . Flow Controls $4,940 5,783 Engineered Electronic Systems $433 — 433 — — 433 — — $433 Films $96 843 — 96 5 — (848) — 96 4,940 285 — 183 — $96 Aerostar $464 — 464 — — 464 — — $464 Total $5,933 843 6,776 5 (848) 5,933 285 183 $6,401 Balance at January 31, 2006 . . $5,408 Intangible Assets Estimated future amortization expense based on the current carrying value of amortizable intangible assets for fiscal periods 2007 through 2011 is $433,000, $377,000, $366,000, $365,000 and $351,000, respectively . Page 39 RAVEN 2006 Annual Report NOTES TO FINANCIAL STATEMENTS (continued) Note 8. Employee Retirement Benefits The company has a 401(k) plan covering substantially all employees and contributed 3% of qualified payroll . The company’s contribution expense was $892,000, $836,000 and $817,000 for fiscal 2006, 2005 and 2004, respectively . In addition, the company provides postretirement medical and other benefits to senior executive officers and senior managers . The company accounts for these benefits in accordance with SFAS No . 106, Accounting for Postretirement Benefits Other Than Pensions. There are no assets held for the plans and any obligations are covered through the company’s operating cash and investments . The accumulated benefit obligation for these benefits is shown below: For the years ended January 31 Dollars in thousands 2004 2005 2006 $2,235 $2,607 Benefit obligation at beginning of year . . . . . . . . . . . . . . . $2,722 36 58 80 Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 186 259 Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380 27 2,014 Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (206) (156) (147) Retiree benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,607 2,722 4,928 Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . (1,395) (1,275) Less: unrecognized actuarial losses . . . . . . . . . . . . . . . . . . . (3,045) $1,212 $1,447 Ending liability balance . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,883 The liability and expense reflected in the balance sheet and income statement are as follows: For the years ended January 31 Dollars in thousands 2004 2005 2006 $1,102 $1,212 Beginning liability balance . . . . . . . . . . . . . . . . . . . . . . . . . $1,447 316 391 583 Employer expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (206) (156) (147) Retiree benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,212 1,447 1,883 Ending liability balance . . . . . . . . . . . . . . . . . . . . . . . . . . . (200) (180) Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (174) Long-term portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,709 $1,012 $1,267 Assumptions used: Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wage inflation rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.75% 4.00% 7 .00% 4 .00% 7 .00% 4 .00% The discount rate is based on matching rates of return on high- quality fixed-income investments with the timing and amount of expected benefit payments . No material fluctuations in retiree benefit payments are expected in future years . The assumed health care cost trend rate for fiscal 2006 was 9 .39% as compared to 7 .00% assumed for fiscal 2005 and 2004 . The impact of a one-percentage-point change in assumed health care rates would not be significant to the company’s income statement or balance sheet . The rate to which the fiscal 2006 health care cost trend rate is assumed to decline to is 4 .25%, which is the ultimate trend rate . The fiscal year that the rate reaches the ultimate trend rate is expected to be fiscal 2026 . Page 40 RAVEN 2006 Annual Report Note 9. Warranties Changes in the warranty accrual were as follows: Dollars in thousands 2006 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $452 958 Accrual for warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (841) Settlements made (in cash or in kind) . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $569 As of January 31 2005 $263 932 (743) $452 2004 $156 863 (756) $263 Note 10. Income Taxes The reconciliation of income tax computed at the federal statutory rate to the company’s effective income tax rate is as follows: Tax at U .S . federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . State and local income taxes, net of U .S . federal benefit . . . . Tax deduction on qualified production activities . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the years ended January 31 2005 35 .0% 0 .9 — 0 .1 36 .0% 2006 35.0% 1.1 (1.0) 0.2 35.3% 2004 35 .0% 0 .9 — 0 .4 36 .3% Significant components of the company’s income tax provision are as follows: Dollars in thousands Income taxes: Currently payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,041 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (809) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,232 $10,095 (31) $10,064 $7,626 254 $7,880 For the years ended January 31 2004 2006 2005 Significant components of the company’s deferred tax assets and liabilities are as follows: Dollars in thousands Current deferred tax assets: As of January 31 2005 2006 2004 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88 220 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 680 Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282 Insurance obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 476 Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,746 Non-current deferred tax assets (liabilities): $ 93 237 591 161 383 1,465 $ 93 182 532 183 323 1,313 598 Accrued compensation and benefits . . . . . . . . . . . . . . . (439) Depreciation and amortization . . . . . . . . . . . . . . . . . . . 159 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318 Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,064 443 (771) 118 (210) $1,255 354 (502) 75 (73) $1,240 Pre-tax book income for the U .S . companies was $37,380,000 and $114,000 for the Canadian subsidiary . As of January 31, 2006, undistributed earnings of the Canadian subsidiary were considered to have been reinvested indefinitely and, accordingly, the company has not provided United States income taxes on such earnings . Note 11. Financing Arrangements The company has an uncollateralized credit agreement providing a line of credit of $8 .0 million with a maturity date of June 1, 2006 bearing interest at 0 .25% under the prime rate . Letters of credit totaling $2 .0 million have been issued under the line, primarily to support self-insured workers’ compensation bonding requirements . No borrowings were outstanding as of January 31, 2006, 2005 or 2004, and $6 .0 million was available at January 31, 2006 . The credit agreement contains certain restrictive covenants that, among other things, require maintenance of certain levels of net worth and working capital . Borrowings on the credit line bore interest as of January 31, 2006, 2005 and 2004 at 7 .25%, 5 .25% and 4 .00%, respectively . The weighted-average interest rate for borrowing under the short-term credit line in fiscal 2006 was 5 .63% . There were no borrowings under the credit line in fiscal years 2005 or 2004 . The debt of the company consists of a capital lease utilized by the Raven Canada operation and is scheduled to be repaid by fiscal 2008 . Wells Fargo Bank, N .A . provides the company’s line of credit and holds the company’s cash and cash equivalents . One member of the company’s board of directors is also on the board of directors of Wells Fargo & Co ., the parent company of Wells Fargo Bank, N .A . The company leases certain vehicles, equipment and facilities under operating leases . Total rent and lease expense was $381,000, $305,000, and $355,000 in fiscal 2006, 2005 and 2004, respectively . Future minimum lease payments under non-cancelable operating leases for fiscal periods 2007 to 2010 are $272,000, $228,000, $51,000, and $6,000 with all leases scheduled to expire by fiscal 2010 . Note 12. Stock Options Senior officers and key employees of the company have been granted options to purchase stock under the company’s 2000 Stock Option and Compensation Plan (“Plan”) . The Plan, administered by the board of directors, allows for either incentive or non-qualified options with terms not to exceed ten years . There are 580,500 shares of the company’s common stock reserved for future option grants under the plan at January 31, 2006 . Options are granted with exercise prices not less than market value at the date of grant . These stock options vest over a four-year period and expire after five years . The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions by grant year . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . Expected dividend yield . . . . . . . . . . . . . . . . . . Expected volatility factor . . . . . . . . . . . . . . . . . Expected option term (in years) . . . . . . . . . . . For the years ended January 31 2006 4.36% 0.90% 39.25% 4.25 2005 3 .51% 1 .07% 34 .92% 4 .50 2004 3 .02% 1 .33% 35 .89% 4 .50 Weighted average grant date fair value . . . . . . $ 10.90 Stock compensation expense . . . . . . . . . . . . . . $485,000 $ 5 .91 $309,000 $ 4 .11 $282,000 Information regarding option activity is as follows: For the years ended January 31 2005 2006 2004 weighted average exercise price weighted average exercise price options weighted average exercise price options options Outstanding at beginning of year . . . . . . . . . . 612,176 $ 9.02 31.05 3.44 (1,300) 17.93 Granted . . . . . . . . . . . 76,500 Exercised . . . . . . . . . . (167,962) Forfeited . . . . . . . . . . . Outstanding at 723,676 86,600 (184,600) (13,500) $ 5 .89 22 .00 2 .77 9 .79 872,112 129,000 (274,436) (3,000) $ 3 .72 13 .50 2 .61 2 .65 end of year . . . . . . 519,414 $14.05 612,176 $ 9 .02 723,676 $ 5 .89 Options exercisable at end of year . . . . 282,383 $ 8.66 323,076 $ 5 .27 326,608 $ 3 .57 The following table contains information about stock options outstanding at January 31, 2006: Exercise Price $ 4 .38 7 .00 13 .50 22 .00 31 .05 Remaining Contractual Life (Years) 0 .75 1 .75 2 .75 3 .75 4 .75 Number Outstanding 91,489 146,075 120,000 85,350 76,500 519,414 Number Exercisable 91,489 109,556 60,000 21,338 — 282,383 Page 41 RAVEN 2006 Annual Report NOTES TO FINANCIAL STATEMENTS (continued) Note 13. Net Income Per Share Basic net income per share is computed by dividing net income by the weighted-average common shares outstanding . Common shares outstanding represent common shares issued less shares purchased and held in treasury . Share and per-share data in the net income per share computation have been restated to reflect the October 15, 2004, two-for-one stock split . 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 . Certain outstanding options were excluded from the diluted net income per-share calculations because their exercise prices were greater than the average market price of the company’s common stock during those periods . For fiscal 2006, 2005 and 2004, 19,125, 21,650, and 32,250 options, respectively, were excluded from the diluted net income per-share calculation . Details of the computation are presented below . For the years ended January 31 Dollars in thousands, except per-share amounts Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,262 Weighted-average common 2006 shares outstanding . . . . . . . . . . . . . . . . . . . 18,055,439 259,104 Dilutive impact of stock options . . . . . . . . . . . Weighted-average common and common-equivalent shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . 18,314,543 Net income per common share: — basic . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.34 — diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.32 2005 $ 17,891 2004 $ 13,836 18,066,223 344,104 18,081,712 407,868 18,410,327 18,489,580 $ 0 .99 $ 0 .77 $ 0 .97 $ 0 .75 Note 14. Comprehensive Income Pursuant to the provisions of SFAS No . 130, Reporting Comprehensive Income, comprehensive income includes all changes to shareholders’ equity during a period, except those resulting from investment by and distributions to shareholders . Components of comprehensive income for the company include net income and changes in foreign currency translation adjustments . Total comprehensive income was as follows: Dollars in thousands Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,262 13 Foreign currency translation adjustments . . . . . . . . . . Total comprehensive income . . . . . . . . . . . . . . . . . . . . $24,275 2006 As of January 31 2005 $17,891 — $17,891 2004 $13,836 — $13,836 Note 15. Business Segments and Major Customer Information The company’s reportable segments are defined by their common technologies, production processes and inventories . These segments reflect the organization of the company into the three Raven divisions, each with a Divisional Vice President, and its Aerostar subsidiary . Raven Canada is consolidated with the Flow Controls Division . The company measures the performance of its segments based on their operating income exclusive of administrative and general expenses . The accounting policies of the operating segments are the same as those described in Note 1, Summary of Significant Accounting Policies . Other income, interest expense and income taxes are not allocated to individual operating segments, and assets not identifiable to an individual segment are included as corporate assets . Segment information is reported consistent with the company’s management reporting structure as required by SFAS No . 131 Disclosures about Segments of an Enterprise and Related Information. No customer accounted for more than 10% of the company’s consolidated sales or accounts receivable in fiscal 2006, 2005 or 2004 . The company had sales of $16 .8 million for the year ended January 31, 2006, to countries outside the United States, primarily to Canada . These sales were included in the Flow Controls, Engineered Films, Electronic Systems and Aerostar segments and totaled $6 .7 million, $1 .3 million, $8 .0 million and $779,000, respectively . Market and segment information for 2006, 2005 and 2004 is presented on pages 1 and 18 of this annual report . Note 16. Subsequent Event In fiscal 2005, the company entered into an agreement to purchase for $1 .8 million a building to be used in the Engineered Films segment . The agreement required an earnest payment of $25,000 at signing with the remainder due upon closing . On February 1, 2006, the company purchased the building for $1 .8 million . Note 17. Quarterly Information (Unaudited) The company’s quarterly information is presented on page 30 . Page 42 RAVEN 2006 Annual Report REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Raven Industries, Inc: We have completed integrated audits of Raven Industries, Inc .’s 2006 and 2005 consolidated financial statements and of its internal control over financial reporting as of January 31, 2006, and an audit of its 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) . Our opinions, based on our audits, are presented below . Consolidated financial statements In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of shareholders’ equity and comprehensive income and of cash flows present fairly, in all material respects, the financial position of Raven Industries, Inc . and its subsidiaries at January 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2006 in conformity with accounting principles generally accepted in the United States of America . These financial statements are the responsibility of the Company’s management . Our responsibility is to express an opinion on these financial statements based on our audits . We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) . Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement . An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation . We believe that our audits provide a reasonable basis for our opinion . Internal control over financial reporting Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing on page 31 of the 2006 Annual Report to Shareholders, that the Company maintained effective internal control over financial reporting as of January 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria . Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO . The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting . Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit . We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States) . Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects . An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances . We believe that our audit provides a reasonable basis for our opinions . A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles . A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements . Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements . Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate . PricewaterhouseCoopers LLP Minneapolis, Minnesota March 23, 2006 Page 43 RAVEN 2006 Annual Report B O A R D O F D I R E C T O R S Anthony W. Bour President & Chief Executive Ofﬁ cer, Showplace Wood Products, Inc., Sioux Falls, SD; Director since: 1995 Ronald M. Moquist President & Chief Executive Ofﬁ cer, Raven Industries, Inc., Sioux Falls, SD; Director since: 1999 Conrad J. Hoigaard Chairman of the Board, Raven Industries, Inc.; Chairman of the Board, Hoigaard’s Inc., Minneapolis, MN; Director since: 1976 David A. Christensen Former President & Chief Executive Ofﬁ cer, Raven Industries, Inc., Sioux Falls, SD; Director since: 1971 Mark E. Grifﬁ n President & Chief Executive Ofﬁ cer, Lewis Drugs, Inc., Sioux Falls, SD; Director since: 1987 Cynthia H. Milligan Dean, College of Business Administration, University of Nebraska, Lincoln, Lincoln, NE; Director since: 2001 Thomas S. Everist President, The Everist Company, Sioux Falls, SD; Director since: 1996 The Raven Board held four regular meetings and one special meeting in Fiscal Year 2006. In April 2005, it increased the quarterly dividend for the 19th consecutive year. Audit Committee Thomas S. Everist, Chair Anthony W. Bour Cynthia H. Milligan The Audit Committee held two meetings to review the activities and independence of Raven’s external auditors. It also reviewed the auditor’s ﬁ ndings regarding Raven’s ﬁ nancial reporting process, related internal and disclosure controls and compliance with applicable standards. Personnel and Compensation Committee David A. Christensen, Chair Mark E. Grifﬁ n Conrad J. Hoigaard The Personnel and Compensation Committee held two meetings to review and approve executive compensation plans, policies and practices, and key succession plans. Governance Committee Cynthia H. Milligan, Chair Anthony W. Bour David A. Christensen Thomas S. Everist Mark E. Grifﬁ n Conrad J. Hoigaard The Governance Committee held two meetings to review corporate bylaws, corporate governance standards, and assess the Board’s effectiveness. This Committee is responsible for the Board nomination process. Senior Executive Ofﬁ cers Ronald M. Moquist Thomas Iacarella President & Chief Executive Ofﬁ cer, Age: 60, Service 30 years Vice President & Chief Financial Ofﬁ cer, Age: 52, Service 14 years Senior Management David R. Bair James D. Groninger Barbara K. Ohme Daniel A. Rykhus Mark L. West Page 44 RAVEN 2006 Annual Report Division Vice President & General Manager–Electronic Systems Division, Age: 49, Service 7 years Division Vice President & General Manager–Engineered Films Division, Age: 47, Service 19 years Vice President–Administration, Age: 58, Service 18 years Executive Vice President, General Manager–Flow Controls Division, Age: 41, Service 16 years President–Aerostar International, Inc., Age: 52, Service 24 years F i n a n c i a l H i g h l i g h t s Dollars in thousands, except per-share data For the years ended January 31 2006 2005 change OPERATIONS Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $204,528 37,284 24,262 $168,086 27,862 17,891 PER SHARE Net income – diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.32 0.28 4.67 $ 0.97 0.22(a) 3.67 PERFORMANCE Operating income margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on beginning shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.2% 11.9% 24.9% 36.7% 16.6% 10.6% 21.3% 26.9% Shares outstanding, year-end (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,072 17,999 (a) Excludes a special dividend of $.625 per share that was paid during the second quarter of ﬁ scal 2005. 21.7% 33.8% 35.6% 36.1% 27.3% 27.2% 9.6% 12.3% 16.9% 36.4% 0.4% NET SALES (dollars in millions) EARNINGS PER SHARE (dollars) SALES PER EMPLOYEE (dollars in thousands) 200 150 100 50 0 1.40 1.05 0.70 0.35 0.00 240 180 120 60 0 2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006 Table of Contents Business Proﬁ le ................................................... 1 Letter to Shareholders ......................................... 2 Operating Unit Results ....................................... 6 50 Year Anniversary ............................................ 14 Eleven-Year Summary ........................................ 16 Business Segments .............................................. 18 Financial Review and Analysis ........................... 19 Stock and Quarterly Performance ...................... 30 Management’s Report on Internal Control over Financial Reporting .......................... 31 Financial Statements .......................................... 32 Report of Independent Registered Public Accounting Firm ............................ 43 Directors, Ofﬁ cers and Senior Management ...... 44 Investor Information ................. Inside Back Cover INVESTOR INFORMATION Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP Minneapolis, MN Stock Transfer Agent & Registrar Wells Fargo Bank, N.A. 161 N. Concord Exchange P.O. Box 64854 South St. Paul, MN 55164-0854 Phone: 1-800-468-9716 Form 10-K Upon written request, Raven Industries, Inc.’s Form 10-K for the ﬁ scal year ended January 31, 2006, which has been ﬁ led with the Securities and Exchange Commission, is available free of charge. Direct inquires to: Raven Industries, Inc. Attention: Investor Relations P.O. Box 5107 Sioux Falls, SD 57117-5107 Phone: 605-336-2750 Raven Website www.ravenind.com Stock Quotations Listed on the Nasdaq Stock Market—RAVN Annual Meeting May 23, 2006, 9:00 a.m. Ramkota Hotel and Conference Center 3200 W. Maple Avenue Sioux Falls, SD Raven Industries, Inc. is an Equal Employment Opportunity Em- ployer with an approved afﬁ rmative action plan. Dividend Reinvestment Plan Raven Industries, Inc. sponsors a Dividend Reinvestment Plan whereby shareholders can purchase additional Raven common stock without the payment of any brokerage commission or fees. For more information on how you can take advantage of this plan, contact your broker, our stock transfer agent or write: Investor Relations; P.O. Box 5107, Sioux Falls, SD 57117-5107 SIC Codes: 3672, 3081, 3829 s m e t s y S g n i n i L l a t n e m n o r i v n E W M B : t i d e r c o t o h P , 9 e g a P r e n g a W y r r a L , r e h p a r g o t o h P : ) o t o h p e g r a l ( 3 1 e g a P L I , o g a c i h C , d r a o B n g i s e D e v i t a e r C : n g i s e D FORWARD-LOOKING STATEMENTS Certain statements contained in this report 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 the Company believes that the expectations reﬂ ected in such forward-looking statements are based on reasonable assump- tions, there is no assurance that such assumptions are correct or that these expectations will be achieved. Such assumptions involve important risks and uncer- tainties that could signiﬁ cantly affect results in the future. These risks and uncertainties include, but are not limited to, those relating to weather conditions, which could affect certain of the Company’s primary markets, such as agriculture and construction, or changes in competition, raw material availability, technology or relationships with the Company’s largest customers, 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 under Item 1A. The foregoing list is not exhaustive and the company disclaims any obligation to subsequently revise any forward-looking statements to reﬂ ect events or circumstances after the date of such statements. P h o n e ( ) C i t y A d d r e s s C o m p a n y N a m e a n d T i t l e ( p l e a s e p r i n t )  N e w s r e l e a s e s P l e a s e s e n d m e t h e f o l l o w i n g :  P l e a s e a d d m e t o t h e R a v e n m a i l i n g l i s t .    2 0 0 6 F o r m 1 0 - K L a t e s t q u a r t e r l y r e p o r t I n f o r m a t i o n o n y o u r D i v i d e n d R e i n v e s t m e n t P l a n F a x ( S t a t e ) Z i p + 4 I h a v e b e e n a s h a r e h o l d e r o f R a v e n s i n c e  P l e a s e a d d m e t o t h e R a v e n m a i l i n g l i s t . M y b r o k e r i s M y a d d r e s s i s M y n a m e i s L o c a t e d i n ( c i t y ) H i s / H e r c o m p a n y i s F a x ( ) D e a r S h a r e h o l d e r : t a i n a n a c c u r a t e m a i l i n g l i s t . S o t h a t w e a r e a b l e t o k e e p y o u i n f o r m e d , p l e a s e p r o v i d e t h e r e q u i r e d i n f o r m a t i o n . T h i s w i l l e n a b l e u s t o m a i n - b o t h o f y o u a r e c u r r e n t o n o u r f i n a n c i a l c o n d i t i o n . K e e p i n g y o u a n d y o u r s t o c k b r o k e r i n f o r m e d o f o u r c o r p o r a t e a c t i v i t i e s i s t h e b e s t w a y f o r u s t o m a k e s u r e t h a t R a v e n I n d u s t r i e s , I n c . I w o u l d l i k e m o r e i n f o r m a t i o n o n B r o k e r I d e n t i t y C a r d : R a v e n I n d u s t r i e s , I n c . D R A C Y L P E R S S E N S U B I D S S L L A F X U O S I 3 8 5 O N T M R E P I L I A M S S A L C - T S R F I E G A T S O P O N Y R A S S E C E N D E L I A M F I E H T N I S E T A T S D E T I N U E G A T S O P O N Y R A S S E C E N D E L I A M F I E H T N I S E T A T S D E T I N U D R A C Y L P E R S S E N S U B I D S S L L A F X U O S I 3 8 5 O N T M R E P I I L A M S S A L C - T S R F I Raven Industries P.O. Box 5107 Sioux Falls, SD 57117-5107 RAVEN 8 7 8 9 - 7 1 1 7 5 D S S L L A F X U O S I I S E R T S U D N I N E V A R I S N O T A L E R R O T S E V N I 7 0 1 5 X O B O P 8 7 8 9 - 7 1 1 7 5 D S S L L A F X U O S I I S E R T S U D N I N E V A R I S N O T A L E R R O T S E V N I 7 0 1 5 X O B O P I E E S S E R D D A Y B D A P E B L L I W E G A T S O P I E E S S E R D D A Y B D A P E B L L I W E G A T S O P OLD VALUES OLD VALUES OLD VALUES OLD VALUES NEW IDEAS NEW IDEAS NEW IDEAS NEW IDEAS 5 0 Y E A R S O F I N N O VAT I O N5656 191956561919561919 RAVEN RAVEN 06ANNUAL REPORT ANNUAL REPORT for the ﬁ scal year ended January 31 for the ﬁ scal year ended January 31

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